UK retail sales fall for fourth successive month

Emily Nicol
Chris Scicluna

US bond yields rise following reassuring economic data; Asian equities mixed today with the market now looking ahead to key central bank meetings (including the Fed) next week
US bond yields moved higher yesterday, with the 10Y UST closing up 4bps at 1.34%. The key driver was a much firmer than expected US retail sales report for August, with an especially impressive 1.8%M/M lift in ex-auto spending leading to an unexpected 0.7%M/M lift in headline sales despite a fourth consecutive steep decline in auto sales – the converse of the 0.7%M/M decline that the consensus had expected. More good news also came from the manufacturing sector, with the Philly Fed’s manufacturing index unexpectedly lifting to a three-month high, thus confirming the improved picture indicated by the previous day’s New York Fed survey. This lift in bond yields provided support for the greenback but weighed somewhat on the equity market. With investors perhaps wary of today’s futures and options expiries, the S&P500 fell as much as 0.8% early in the session. However, the majority of that loss proved short-lived, with the index closing down less than 0.2% and the Nasdaq eking out a small gain.

US equity futures have firmed a touch in Asia today and stocks have rebounded modestly in Hong Kong following four days of heavy losses. Bourses in Mainland China have had a better day after the PBoC injected funds, probably partly to calm worries about developments at China Evergrande which has seen its share price continue to sink today. The blue chips captured by the CSI300 are currently up 0.9%, with more modest gains in the Shanghai and Shenzhen composite indices. In Japan, the TOPIX has advanced 0.5%, with the BoJ’s Flow of Funds report for Q2 unsurprisingly continuing to show a larger-than-usual financial surplus in the household and corporate sectors but a sharply higher-than-usual financial deficit in the general government sector. In Japanese political news, Seiko Noda, a former minister for internal affairs and communications who is unaligned to any particular internal faction, announced a late bid to be the LDP’s next leader. This marks the first time that there has been more than one female candidate for the leadership, but also arguably makes it less likely that the LDP will have its first female leader. The addition of a fourth candidate also raises the likelihood that no one candidate obtains more than 50% of votes cast in the first ballot, thus triggering a run-off between the two top candidates that, unlike the first ballot, would give much more weight to the votes of Diet members than to rank and file LDP members. A run-off would thus arguably be detrimental to the leadership prospects of Taro Kono, who surveys show is clearly the preferred choice of ordinary LDP members – who will cast half of the votes in the first ballot – and so adds additional uncertainty about the outcome of the election.

Looking elsewhere, one exception to the firmer theme is Australia’s ASX200, which fell 0.8% today. Rather than reacting to economic data, that decline reflects the ongoing slide in the price of iron ore, which is now at just half of the heady levels reached in May. This slide continues to weigh heavily on resource stocks, with Fortescue Metals declining more than 10% today. However, the Aussie 10Y bond yield has tracked the 4bp pickup of its UST counterpart. And while New Zealand’s manufacturing PMI slumped to a 16-month low in August – with the production index falling 36pts to 27.7 – Kiwi bond yields also increased. News of just 11 new virus cases boosted hopes that Auckland will move out of full lockdown early next week, but tourism operators learned that the suspension of the quarantine-free travel bubble with Australia had been extended for a further eight weeks at least.

Euro area final inflation figures set to confirm jump in August
Today will bring the release of final euro area inflation figures for August. With the equivalent releases from Germany, France and Spain unchanged from their respective flash estimates and only a modest (0.1ppt) downwards revision to the Italian number, we expect today's aggregate release to align with the preliminary figures. In particular, this showed the headline CPI rate rising 0.8ppt to 3.0%Y/Y, the highest since November 2011, with core inflation (excluding energy, food, alcohol and tobacco) up 0.9ppt to 1.6%Y/Y, the highest since July 2012. The upwards pressure will be associated with higher prices of clothing and certain other goods related to the timing of summer discounts, increased prices of package tours, and, of course, energy. This morning will also bring euro area construction activity figures for July, which - not least given growth in Germany and France - are likely to report a modest recovery in output having declined in four out of the past five months.

UK retail sales fall for fourth successive month underscoring need for BoE caution in the face of supply-driven price pressures
After last week’s softer-than-expected UK GDP figures for July, today’s retail sales numbers for August provided a big downside surprise too. Contrasting with expectations of a moderate increase, sales fell 0.9%M/M, following a steeper-than-previously-estimated drop in July (now estimated to be down 2.8%M/M). And this marked the fourth consecutive monthly decline in overall sales – the longest unbroken losing streak on the series – to leave sales more than 5% lower than the pandemic peak (albeit still 4.6% higher than the pre-pandemic level) and so far in Q3 trending a marked 3.8% lower than the Q2 average. Therefore, not least with the government’s furlough scheme coming to an end this month, and almost 6 million recipients of Universal Credit payments set to see their welfare benefits cut from the start of next month, today’s release underscores the need for patience at the BoE despite the big supply-driven jump in inflation earlier in the week.

Within the detail, the weakness in part reflected softer spending at food stores (-1.2%M/M) with evidence suggesting the further easing of hospitality restrictions had supported an increase in social spending. Shortages of many items on supermarket shelves will also likely have been a factor behind the weakness last month. But non-food store sales fell further too (-1.0%M/M), to leave them on average in July and August 5½% lower than the Q2 level, with spending at clothing and household goods stores down 6.6% and 7.1% on an equivalent basis. While the proportion of online retailing remained substantially higher than the pre-pandemic level (27%), non-store sales in August were down by more than 14% from their recent peak and on average so far in Q3 trending 7% lower than in Q2. So, it was only thanks to a pickup in spending on auto fuel in August (+1.5%M/M) – to its highest level since the onset of the pandemic – that the overall drop in sales wasn’t steeper. Meanwhile, in light of Wednesday’s stronger inflation figures, the BoE’s latest inflation attitudes survey might also attract attention today, providing insight into households’ price expectations.

Consumer sentiment the focus in the US today
This week’s US economic diary concludes with the release of the preliminary findings of the University of Michigan’s consumer survey for September. Last month’s survey pointed to a sudden slump in consumer sentiment to even lower levels than at the onset the pandemic – a result that seems especially odd considering the retail spending news released yesterday. Therefore, Daiwa America’s Mike Moran looks for consumer sentiment to have firmed somewhat in September. Ahead of next week’s FOMC meeting, developments in consumers’ expectation of inflation will also be of interest.

Kiwi manufacturing PMI slumps in August as lockdown weighs
In New Zealand, with the whole country in a strict lockdown for part of the survey period, manufacturing PMI slumped 22.1pts to a 16-month low of 40.1 in August. The decline was led by the production index, which collapsed to 27.7 from a very high 63.9 in July, while the new orders index also fell 19pts to 44.4. One a brighter note, the employment index fell just 3.4pts to 54.5, suggesting that firms clearly expect to return to expansionary mode as restrictions ease. For manufacturers of non-essential goods in Auckland, currently shuttered, that easing of restrictions may begin early next week. 

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