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Disappointing retail sales place more question marks over consumer spending

UK DATA
  • Looking more at the retail sales release, it was a pretty broad-based decline in sales in December. The ONS notes that this is the largest monthly fall since January 2021.
  • Non-food store sales (which saw the bulk of the positive surprise in November with a revised +2.7%M/M increase) fell -3.9%M/M in December. The ONS notes "Department stores, clothing shops and household goods retailers reported sluggish sales too as consumers spent less on Christmas gifts, but had also purchased earlier during Black Friday promotions, to help spread the cost."
  • Food sales fell -3.1%M/M in December (after a +1.1%M/M increase in November). Steepest fall since May 2021.
  • Non-store retailing fell -2.1%M/M in December (-1.1%M/M in November).
  • Fuel sales fell -1.9%M/M in December (after a +0.8%M/M rise in November).
  • In terms of implications for policy, as we noted this is a very volatile series and the November data was stronger than expected and saw some small positive revisions. However, overall it cannot be denied that this December reading was disappointing.
  • We don't think it will be enough to really change the mind of any MPC members going into the February MPC meeting, however, where we think there will be probably one of Haskel or Greene changing to vote for unchanged rates, Mann continuing to vote for a hike and we see around a 40% probability of a Dhingra vote for a rate cut. We also don't think it will really change the argument around whether the tightening bias is removed or not.
  • Nethertheless, this does increase questions over the medium-term strength of consumer spending and so we would expect to see the SONIA strip open higher this morning.
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