UK Retail Sales in Surprise Slump, British Pound Looking Heavy as Stock Market Rally Takes a Break

UK retail sales disappoint

Another set of underwhelming economic stats are released adding to evidence that the UK economy is slowing down while a softer tone on European stock markets has the pound sterling trading lower.

  • Bank of England likely to ignore data until after EU referendum
  • Sterling's rally pauses alongside a bout of stock market profit-taking

UK Retail Sales (month-on-month) for March read at -1.3%, well below market expectations for an almost unchanged reading of -0.1%.

Commentators had predicted strong retail sales figures, so today’s data may be hard to swallow for those who’d had a positive outlook.

“Any number of factors could be to blame, from bad weather to poor employment figures, along with the reality that wage growth remains stagnant. Consumers may also be nervous about an uncertain Brexit outcome, ensuring they keep a tight hold on their wallets,” says Dennis de Jong, managing director at

The data comes a day after employment figures from the ONS revealed an unexpected uptick in unemployment and slowing wage increases.

The British pound held its April gains despite this news, however in the wake of the retail sales numbers markets are looking less convinced.

"As we've noted previously the focus in GBP/USD trade remains on political rather than economic factors and the persistent lead of the Remain vote has given traders confidence to bid cable. After dipping to test support at the 1.4300 level cable popped back to trade at 1.4365 by midmorning London dealing as longs continue to buy every dip for the time being," says Boris Schlossberg, analyst with BK Asset Management.

Policy makers at the Bank of England will most probably be unswayed by the data and only once the mid-year EU referendum has passed, assuming without incident, will they start focussing on the economy once again.

Data is Reassuring: Lloyds + Barclays

Putting a positive spin on the numbers are economists at Lloyds Commercial who note that while the rolling quarterly growth picked up to 0.8% from 0.5% last month, it was below the 1.0% recorded for 2015 Q4.

“As such, despite the soft headline, these numbers are still moderately reassuring,” says a flash note from the bank in response to the release.

Following a buoyant January, Lloyds reckon the recorded strength of sales over Q1 as a whole continues to signal that consumers are likely to remain the key driver of growth of the UK economy in 2016.

Andrzej Szczepaniak at Barclays agrees:

"Today’s positive Q1 16 growth print results in a +0.06pp contribution to Q1 16 services output, only marginally down from +0.07pp in Q4 15. Consequently, it appears retailing in Q1 16 has been slightly more resilient than expected."

Consumer momentum is still currently withstanding the increased domestic uncertainty, helped by a still-brisk pace of high street discounting, with the retail deflator – outside of the impact of fuel prices  – unchanged from last month at -2.1% y/y.

However, there are concerns as much of the retail spending could be exacerbating the UK's debt problem.

Barclays believe this resilience is likely supported by strong unsecured credit growth seen over Q1 16 thus far  relative to Q4 15 (an average of 9.1% y/y versus an average of 8.4% y/y, respectively). 

Consumers are also suspected to be eating further into household savings budgets (in Q4 15 it already printed 3.8% of gross disposable income, an historic low since records began), given there has been no significant acceleration in wage growth thus far into Q1 16.

European Markets Flat After Strong Run, GBP Responds

We have been pointing out that over recent weeks the UK currency has been tracking the moves of European stock markets, particularly when up against the dollar, euro and yen.

This is owing to the GBP's new-found status as a 'risky' asset.

So when markets stall, so does the pound.

Global stock markets are finally taking a breather after a sensational rally that has seen the Dow rally to just over 1% below its record high.

"Despite substantial gains yesterday, an element of hesitancy is evident within Europe ahead of a clear event risk with the ECB due to release its latest monetary policy decision this afternoon. Recent stock gains have clearly come on the back of strong energy and metals price, as investors attempt to jump back into mining and oil companies at advantageous prices," says Joshua Mahony, Market Analyst at IG.

Comments from both the IEA and EIA have lit yet another fire under crude prices in the past 24 hours, with EIA US production data in particular showing US output is finally on the wane.

Recent gains in crude have been more to do with sentiment and the knowledge that prices will be better off in the long run