Ear to the Ground

20 October 2023

It has been a week of mixed data for the UK.  At the beginning of the week we saw the release of the latest average earnings data to August.  This was weaker than the consensus forecast, coming in at 8.1% versus 8.3% including bonuses.  Excluding bonuses the actual was bang on consensus forecast, at 7.8%.  Both represented a fall from the July reading.  It was the public sector where the largest gains were seen, affected by the payments made to the NHS and civil service.  Whilst moving in the right direction, the actual rate remains high relative to history.  There is clearly further to go, therefore, before the Bank of England are likely to feel comfortable.

Consumer price inflation to September meanwhile remained stubborn.  Market participants had been expecting a fall to 6.6%.  Instead the rate remained steady on last month at 6.7%.  The movement in prices for underlying items within the basket was mixed.  The weaker price inflation for items such as food and beverages was offset by a smaller decline in energy costs, in particular petrol.  Whilst not going in the right direction as far as the Bank of England is concerned, they perhaps can take comfort that it isn’t heading in the other.

Where weakness has been seen is in retail sales figures to September.  Here a sharper fall in activity was posted compared to forecast.  Month on month we saw a fall of 0.9% versus an expected fall of 0.2%.  Year on year therefore retail sales fell 1% versus a forecast fall of 0.1%.  When we look at longer term data, however, moves of this magnitude are not uncommon.  Activity around and after COVID lockdowns are the clear anomaly.

Tying the retail sales figures into the latest Asda Income Tracker (no this doesn’t track how much money has been spent in Asda stores), it is perhaps of no surprise to see this latest fall.  Whilst annual gross income growth has been positive across all income quintiles, the same can not be said for discretionary income.  The research shows that spending power within the third, fourth and fifth quintile continues to fall.  The top two quintiles, meanwhile, continue to see meaningful growth.  I guess, therefore, moving forward much will depend on the willingness of these two quintiles to spend, unless we are to see an uptick in the consumer credit numbers.

So where does that leave interest rate expectations?  There has been some change in expectations since the start of October, using Bank of England Overnight Index Swaps (OIS) as our reference.  The market is yet to rule out a further hike from the current level of 5.25%, but its chances have diminished.  What we have seen however is a general shift up in the interest rate curve, implying that rates could be a little higher in the future than what was originally thought.  As always, especially in a market and economic environment which we are currently witnessing, things are ‘subject to change’.