Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Rising CPI Could Weigh On UK Retailers

By FOREX.com (Kathleen Brooks)Market OverviewFeb 14, 2017 06:05
uk.investing.com/analysis/rising-cpi-could-weigh-on-uk-retailers-200175576
Rising CPI Could Weigh On UK Retailers
By FOREX.com (Kathleen Brooks)   |  Feb 14, 2017 06:05
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

On Tuesday 14th February the Office for National Statistics is scheduled to release UK CPI data for January. The market expects the annual rate to rise to 1.9%, just shy of the Bank of England’s 2% inflation target.

Interestingly, the monthly CPI data is expected to show a 0.5% decline for January, but this is likely to be a one off, largely due to a drop in gas prices. Don’t be fooled by the monthly inflation data, UK consumer prices are set to rise over the course of this year, and could peak at 3% by the end of this year.

It’s the pace of price rises that matters…

While the market has been well-prepared for higher prices in the UK due to rising energy prices - oil prices have risen nearly 20% since early December - and the effects of 2016’s sharp drop in the pound starting to impact price pressures, this month’s data is a key gauge of how quickly price pressures are building.

Also released alongside CPI data is UK producer prices and the retail price index (RPI). The RPI, excluding mortgage repayments, is expected to rise from 2.7% to 3.1%, its highest level since 2013. This is worth watching, as higher than expected retail prices could suggest that CPI may peak above 3% in the coming months. Producer prices are also worth watching, with annual input prices expected to rise to 18.5%, its fastest rate since 2008.

The extent of the market reaction will be driven by a data shock, so if price rises are roughly in line with market expectations for last month then we wouldn’t expect to see a big market reaction. However, if prices are higher or lower than expected, then markets are likely to be extremely volatile.

The impact if CPI is higher than expected:

If prices jump above the BOE’s target rate of 2% in January, this could cause a major reaction in the pound, the UK bond market, and it may also hit the share price of some UK retailers. Expectations for UK rate hikes have been scaled back in the past two weeks, as the market reassess the BOE’s willingness to hike interest rates as political and Brexit uncertainty continue to threaten growth. There is also concern that one of the BOE’s more “hawkish” members, Kate Forbes, is leaving the Bank in June, which could tip the balance in favour of the “dovish” members. However, if price pressures are rising at a significantly faster rate than expected, then rate hike expectations could be brought forward, which could see upward pressure on UK bond yields and thus GBP/USD, which could trade back above 1.25, towards the 1.27 highs from earlier this month.

A stronger reading could also impact the UK retailers. One of the big macro themes for 2017 is rising price pressures choking off consumption later this year. The UK’s biggest retailers include the top supermarkets, John Lewis (LON:JLH), M&S (LON:MKS), Home Retail (LON:SBRY), Boots (NASDAQ:WBA) and Kingfisher (LON:KGF), below we show how two UK retailers could be impacted from faster than expected CPI data on Tuesday.

Two retailers to watch out for:

The UK’s largest retailer, Tesco (LON:TSCO), has seen its share price come under pressure this year, its share price is already down by nearly 5%. Rising inflation could weigh further on Tesco’s margins, as it may encourage even more discounting and squeeze consumption later this year. If CPI is stronger than expected on Tuesday, then it could trigger further downside in Tesco’s share price, potentially back to the 187p low from 24th January. This could also be exacerbated by weak UK retail sales due for release on Friday.

Marks & Spencer is also worth watching, as its share price has been trading sideways since September. Aside from price pressures and stress on the consumer, the market has been disappointed with M&S’s strategy review and there doesn’t seem to be a simple solution to the retailer’s long-held problems. M&S is also pushing further into the competitive food-retail market as part of its turnaround strategy, due to this rising prices could hurt sales and margins even more in the coming months. Thus, we wouldn’t be surprised to see some potential weakness in M&S’s share price on the back of stronger CPI; 322p, the low from November, is key support in the medium-term.

What if price pressures are weaker than expected?

Although we view a weaker than expected CPI reading as a low probability event, it could have a big impact if it does happen. We would expect an immediate scaling back of rate hike expectations, potentially into 2019, which could drive GBP/USD back towards 1.22. It would also be good news for the retailers we mentioned above, as weaker than expected price pressures could sustain the UK’s consumption-led growth for some time longer.

Overall, this data is worth watching closely on Tuesday, since a larger or smaller reading relative to expectations may trigger a decent market reaction.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Original post

Rising CPI Could Weigh On UK Retailers
 

Related Articles

Neil Wilson
Travel Stocks Lead Gains In Europe By Neil Wilson - Sep 17, 2021

European markets on a firmer footing on Friday – FTSE 100 made a bold move at the open to recapture the week’s intraday high at 7,093 struck on Monday before pulling back, still...

Rising CPI Could Weigh On UK Retailers

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email