UK retail sales slump could help ease inflation outlook

• Geopolitical fears see traders reduce exposure ahead of the weekend
• GBP weakens on retail sales decline
• Powell comments see yields surge, as focus turns to earnings

Markets are on the back foot once again today, as rising yields and geopolitical concerns continue to dent market confidence. Last week saw selling pressure take hold on Friday as traders removed exposure in anticipation of potential escalation in the Middle East, and we are likely to see the same today ahead of an impending Israeli ground offensive. Crude oil has found itself back in the driving seat despite the US decision to lift sanctions on Venezuelan oil, with the short-term uncertainty in the Middle East helping to drive WTI into new highs for the week.

Sterling has been dealt a blow as weak UK retail sales data signalled a weakening consumption story as we head into the most important time of the year for many retailers. The theme seen over the past four-years has been one of consumers struggling to maintain their quality of living, spending 17% more than they were pre-Covid but receiving 3% less. It appears to be the case that UK consumers have reached their limit and the value has finally flatlined, with inflation instead meaning that retailers simply sell less. September weakness appeared to be driven primarily by non-food stores, department stores and white good retailers losing ground. From a monetary standpoint, the Bank of England requires consumers to bring an end to their incessant willingness to pay more for goods, with todays weak retail sales figure helping signal the potential for a lower inflation figure going forward.

Market sentiment continues to be tilted towards the downside, with US 10-year yields rising to a 16-year high in the wake of Jay Powell’s testimony in New York. In a speech that clearly aimed to provide a concoction of both hawkish and dovish rhetoric, the warning over potential additional tightening in the face of an economic resilience served to drive down risk assets once again. Nonetheless, with yields on the rise, it is worthwhile noting the continued theme that such upside could essentially negate the need for further monetary action. Looking ahead, earnings from American Express look to provide a fresh insight in US consumption in the face of rising interest rates. US earnings season looks set to dial up next week, with bulls hoping that big tech can help lift sentiment and erase some of the jitters. However, with US indices heavily reliant on big tech to support an otherwise floundering market, there is a fear that any underperformance in tech could lead to a sharp pullback for equity markets.