British Consumer keeps stiff upper lip - retail sales

A whirlwind of deleveraging in asset markets continued yesterday amidst growing concern that global deflation is becoming a real and vicious danger to economies from Japan to the UK. Worries over the potential efficacy of the US Troubled Asset Relief Programme also continued to plague the markets as equities were sold off, oil dropped below the pivotal 50 Dollar mark and the Dollar continued to strengthen across the board. The principal concern in this area at the moment is that, even with its deluge of interest rate cuts over the last couple of months and continued desperate fiscal measures from its government, the US may not be in time to escape a drastic growth slump rolling well into 2010. If this plays out, which is the current feeling in the markets, then investors are worried that anything other than the international funding currency (the US Dollar) will be a very risky buy.

Adding to the global risk to growth, yesterday also saw the monthly index of US leading economic indicators (essentially a high-profile measure of growth in principal industries) down by more than expected at a -0.8% monthly drop. This also added to a significantly negative Unemployment Claims figure from the US which was announced at 542k for the last week. This was over ten percent higher than anticipated and, adding to what looks to be an impending collapse in the American automobile market, the jobs market over there now looks like a creaking dam ready to burst. Again, to repeat what was noted above, anything that is overwhelmingly negative for the US in the current climate is seen as negative for the World and can be expected to strengthen the Dollar as a result. As seen yesterday, GBP/USD is very sensitive to Dollar strength and equity sentiment, pulling back from the 1.50 level to the 1.48 region. GBP/EUR also took a battering as UK fixed income instruments continue to look paltry next to those in the Eurozone, bearing in mind the current interest rate differential between the two regions. The pair finished the day fairly unchanged and with little volatility, around the 1.18 level.

There may be some slight glimmer of hope on the horizon for the UK though. Monthly Retail Sales figure were revealed yesterday as being much more positive than expected at -0.1% compared to a possible -0.9%. Whilst some analysts will argue that much of the slack has been taken by mammoth pre-Christmas sales which, inevitably, only have a short staying power in terms of coaxing people to spend, this is still news that has been taken well and could prove to hint some small resilience from the good old British consumer. Today should look for some small upside on Sterling pairs as very little data is scheduled to hit the market.

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CFX Team
Tel: 0800 587 8722 | cfx@raphael.co.uk | www.raphaelsbank.com/cfx