The UK retail sales release will be one of the main items to watch out for in the economic calendar today, especially after the latest inflation and labour market figures have given the BOE plenty to think about ahead of its November meeting.
For the September report, retail sales are expected to fall by 0.1% on the month, following a 0.5% increase in August. Meanwhile, retail sales are expected to rise by 1.0% annually – a slowdown from 2.4% previously. The numbers might not be all too interesting on the surface, but they will matter to the broader context in shaping the BOE outlook.
UK headline annual inflation climbed to 3.5% in September, with core annual inflation also picking up to 2.8%. That is hardly reassuring for the BOE, especially with policymakers already having to contend with elevated energy prices and the risk of more persistent price pressures.
Meanwhile, the labour market gave us a bit of a surprise earlier this week. The unemployment rate surprisingly fell to 4.7%, while real wage growth nudged slightly higher to 3.7%. The numbers might be affected by data quality issues with the ONS but they reflect a modest bounce in labour market conditions regardless. Having said that, the details are less rosy with job vacancies continuing to decline, suggesting that hiring demand is losing momentum.
And in any case, one report doesn’t make a trend. The UK labour market has been showing signs of softness this year and I would be remiss if I didn’t point out that fact.
So, it’s not to say everything is pointing to one direction for the BOE. The central bank still has a balancing act to manage.
On one hand, more stubborn inflation pressures are making a stronger case for tighter monetary policy. But on the other, a cooling jobs market and weaker consumer spending could raise concerns that the economy is struggling to cope with higher prices and borrowing costs.
So, what can we expect from the retail sales release today?
As things stand, traders are pricing in roughly 98% odds of a rate hike in November. Meanwhile, the probability of another move in December is sitting at around 45%.
Now, I don’t think the retail sales numbers today will do much of anything to change the outlook for November – even on any major surprises. Markets are already firmly positioned for the rate hike and policymakers have done little to dissuade traders from that narrative.
But for December? That is where things could get interesting as the odds are more or less a coin flip at this stage.
A stronger-than-expected report would reinforce the argument that consumer demand remains resilient enough for the BOE to keep tightening. On the flip side, a big disappointment could cast further doubt on how much more tightening the economy can withstand at this juncture.
So, that is the more important takeaway when viewing the retail sales release today. It’s all about looking to see how this might affect the December outlook or even for next year.
This article was written by Justin Low at investinglive.com.