UK retail sales slump helps lift hopes of a May rate cut

• European markets higher after US semiconductor boost
• UK retail sales slump, as consumers refuse to continue paying more for less
• Crude on the rise, as IEA demand revision and Red Sea disruptions help lift sentiment

European markets are looking to close out the week on a positive tone if early price action is anything to go by. Speculation over the timing of the Bank of England’s first rate cut has come back into focus thanks to a disappointing retail sales figure this morning. The renewed optimism seen today looks to be helping drive the dollar lower, with commodities such as gold, palladium, silver, copper, and crude all catching a bid. That positive sentiment also feeds off the gains seen throughout the US tech sector yesterday, with Taiwan Semiconductor Manufacturing citing a strong surge in demand for AI related chips. With all the concern around whether Nvidia has overrun on unrealistic expectations, the continued growth in demand does serve to highlight the fact that we actually have no idea how big this market could become as AI grows in importance.

UK retail sales data finally saw consumer push back after years of paying more for less. While the 3.2% decline in sales volumes represents a quickening of the ongoing trend of consumers receiving less for their money, we finally saw a sharp decline (-3.6%) in the amount of money people are willing to spend. Unfortunately for UK businesses, today’s data also serves as a warning over expectations for Christmas revenues. For markets, the decline in retail sales does reverse some of the repricing around the May rate cut that occurred after Wednesday’s surprise rise in CPI inflation. Markets currently price a 48% chance of a rate cut in May, with today’s retail sales figure only moderately easing back that shift in expectations that saw a sharp swing from the lofty 70% figure seen earlier in the week.

Crude oil has sprung back into lift over the back end of this week, with market concerns over the potential implications of a prolonged period of disruption in trade routes helping to push WTI back up to a one-week high this morning. An upgrade from the IEA’s oil demand forecast for 2024 saw the group cite an improved GDP outlook and falling prices as a cause to raise their outlook for global oil demand this year. For now, markets are yet to respond to the Red Sea disruptions despite the high likeliness of a prolonged breakdown in trade routes. Nonetheless, the gains seen over the past week could be indicative of a market waking up to the reality of a gradual breakdown in energy transportation in a highly globalized marketplace.