UK retail sales in August increased by 0.5% compared to the expected 0.3% rise, according to the latest data from the ONS. The previous figure of a 0.6% increase was revised down to 0.5%. Year-on-year, retail sales increased by 0.7%, slightly above the expected 0.6%, with the prior figure revised from 1.1% to 0.8%.
Excluding automobiles and fuel, retail sales rose by 0.8% month-on-month against an expected 0.7%, with previous figures corrected from 0.5% to 0.4%. Year-on-year, this category saw a 1.2% rise, beating expectations of 1.0%, with former figures adjusted from 1.3% to 1.0%. Despite this increase, in the three months to August, retail sales volumes still saw a decrease of 0.1%, an improvement over the 0.6% drop in the preceding three months to July.
Pre Pandemic Levels
Compared to pre-pandemic levels in February 2020, retail sales volumes are down 2.1%. All categories, including food, department, non-food, and textile stores, noted modest increases in sales, which were partially offset by a decline in automotive fuel sales. Overall, although the month saw a modest uptick, high prices continue to affect UK consumer spending.
This modest beat in August retail sales offers some immediate, but likely temporary, support for the pound sterling. We might see some short-term buying in GBP options and futures, but the downward revisions for July and weak three-month trend suggest this strength will be short-lived. Traders should consider that any rallies in GBP/USD above 1.2800 could present selling opportunities.
This data complicates the picture for the Bank of England, making a rate cut before the end of the year less likely. With the latest inflation data from earlier this month showing CPI is still sticky at 3.2%, this consumer activity gives the MPC reason to hold rates steady. We believe traders in SONIA futures should be cautious about pricing in any significant easing in the coming months.
Implications for FTSE 250
For the FTSE 250, the implications are mixed, suggesting a strategy of using options to trade volatility may be prudent. While specific consumer-facing stocks might see a small lift, the broader market remains constrained by the prospect of borrowing costs staying elevated. We have seen this same pattern since the interest rate hiking cycle began back in 2022, where domestic-focused companies struggle with tight credit conditions.
The key takeaway is that the UK consumer is not yet in a strong position, with sales volumes remaining 2.1% below their pre-pandemic levels of February 2020. This indicates the economic recovery is fragile and susceptible to any new shocks, a lesson we learned during the energy crisis a few years ago. This underlying weakness suggests that any derivatives positions based on a robust UK recovery are premature.
