Surge in UK Retail Sales in November Challenges Expectations of BoE Interest Rate Reduction

• UK retail sales increased by 1.3% in November, boosted by Black Friday promotions.
• During the third quarter, the UK economy shrank by 0.1%, affecting how the market responded to the retail sales update.
• Later today, the focus will shift to the US Core PCE Price Index and personal income/spending figures, which will bring attention to the Federal Reserve.

UK Retail Sales

UK retail sales and final Q3 GDP figures piqued investor interest on Friday. Weaker-than-expected retail sales following softer UK inflation numbers may bolster the case for a Bank of England interest rate cut in H1 2024.

Instead, UK retail sales saw a notable 1.3% surge in November, with core retail sales also rising by 1.3%. Projections from economists had anticipated a 0.4% increase in both retail and core retail sales.

The Office for National Statistics reported that non-food store sales, supported by Black Friday and broader discounting, grew by 2.3%. In contrast, food store sales rose by 0.8%, compared to a 0.1% uptick in October. Meanwhile, over the three months to November, retail sales fell by 0.8% compared to the preceding three months. Acknowledging falling fuel prices, automotive fuel sales increased by 0.6% in November.

Considering the finalized GDP figures, the UK economy contracted by 0.1% in Q3, following a 0.2% expansion in Q2.

Impact on Bank of England Rate Cut Expectations

The surge in UK retail sales may reinforce the Bank of England's position on interest rates. While three members of the Monetary Policy Committee advocated for a 25-basis point rate hike, an upturn in consumer spending could drive demand-driven inflation and prompt the BoE to postpone discussions on rate reductions. It's worth noting that the spike in sales volume was attributed to Black Friday by the Office for National Statistics, emphasizing the potential for December figures to alter the narrative.

GBP/USD Reaction to UK Retail Sales and GDP Numbers

Before the release of the UK economic data, the GBP/USD peaked at $1.26918 before declining to $1.26730. However, following the data release, the GBP/USD dropped to $1.26804 before climbing to $1.27133. This morning, the GBP/USD rose by 0.05% to $1.26962.

Up Next

The upcoming focus will be on the Core PCE Price Index and personal income/spending figures. Resilient US inflation and better-than-expected personal income/spending numbers could influence expectations regarding a Q1 2024 Fed rate cut. Economists are predicting a 3.3% year-over-year increase in the Core PCE Price Index for November, compared to 3.5% in October. It's notable that upward trends in personal income and spending are expected. Commentary from FOMC members concerning US economic indicators warrants attention.