LONDON, Jan 19 (Reuters) – The pound sagged and UK
government bond prices rose on Friday, after a shock drop in
British consumer spending in December raised the risk of
recession, putting a stop to the currency’s recent gains.
The Office for National Statistics said people doing their
Christmas shopping earlier than usual – especially for food –
contributed to retail sales volumes shrinking 3.2% between
December and November.
Sterling eased, down 0.16% on the day against the
dollar $1.2685 and fell 0.18% against the euro, to
85.76.
That was a reversal of recent moves. The pound on Thursday
hit its strongest in a month on the euro, and while the dollar
has strengthened across the board this year, sterling has fallen
the least among G10 currencies.
Part of the strength of the pound over the past year has
come from the belief among investors that the BoE is unlikely to
cut rates as quickly as the European Central Bank or the Federal
Reserve.
Friday’s data on retail sales, which fell by the most in
three years, did not shake that view – not least because of
figures earlier in the week that showed an unexpected rise in
inflation in December – but they did complicate the rate
outlook.
“The release has thrown cold water on the sterling rally
after the CPI-induced gilt sell-off this week,” ING strategist
Francesco Pesole said, adding that service-sector inflation was
a higher priority for the BoE.
“This means that a further repricing lower in BoE rate
expectations would require markets to make a conviction call
that the December CPI surprise was just a blip,” he said.
Markets currently indicate roughly a 50% chance the BoE cuts
rates in May.
Two-year gilt yields, which tend to be more
sensitive to changes in expectations for interest rates, fell 6
basis points on the day to 4.247%, outperforming both two-year
German yields and U.S. Treasury yields.
Where gilts and the pound go next depends on how investors
think the Bank of England will try to square the circle of a
slowing economy and stubborn inflation.
“Retail sales are desperately weak, but services do seem to
be showing some signs that growth is still happening and yes, it
does put the Bank of England in a difficult situation,” said
City Index strategist Fiona Cincotta.
“Broadly speaking, inflation is at the level that it is and
they’re not going to take the risk of taking their foot off the
gas too early,” said.
Economists pinned the decline on consumers front-loading
their holiday shopping in November, when retail sales rose by a
surprisingly large 1.3%, to spread the cost.
A number of major retailers this week have reported robust
Christmas sales figures, predominantly for food, with
supermarkets Sainsbury’s and Tesco upbeat.
The problem lies more with spending beyond the essentials,
as evidenced by sportswear retailer JD Sports Fashion
issuing a profit warning this week.
(Editing by Louise Heavens)
