Retail sales and UK inflation take centre stage this week, as the earnings season finally winds down.
Quite apart from retail sales releases in China and the UK, US retail sales will be an important barometer given the importance of the consumer to the US economy.
A release last week suggested that consumer sentiment had dropped to a 10-year low, as the spectre of inflation dampened spirits. Job openings also remain high as the US grapples with containing not only the Delta variant but also encouraging a more widespread return to normality.
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In the meantime, the strength of third-quarter corporate earnings is now leading to early speculation on the strength of performances in the final quarter. Expectations are being downgraded following doubts that there is sufficient pricing power for companies to avoid passing on rising costs to customers, with the majority of companies beating forecasts currently seen as being unattainable in the last quarter.
Even so, after a difficult week the major indices staged something of a recovery, maintaining the strong growth trajectory. In the year to date, the Dow Jones is now ahead by 18%, the S&P500 by 24.7% and the Nasdaq by 23.1%.
Sentiment across Europe as a whole has suffered due to the possibility of new lockdowns in the likes of France, Germany and Holland following a new surge in cases. This in turn has hit the previously recovering travel sector, where restrictions on international travel could stop the return to normality in its tracks.
Meanwhile, following the Monetary Policy Committee’s recent volte-face on interest rate hikes, the UK inflation number due later in the week will provide further colour to the current pressures. Inevitably energy prices will have continued to make their contribution to higher prices, which are also being exacerbated by supply chain blockages leading to, inter alia, higher raw material costs.
Retail sales will also be in focus. Investors will be looking forward to signs of festive purchases being brought forward as consumers move early in an effort to head off any potential delays in the delivery of goods. While this could have implications down the line in terms of weaker actual Christmas figures, any boost to the reading would at least assuage some of the retreating sentiment which has recently been in evidence given the uneven path of the UK’s economic recovery to date.
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In early exchanges, UK indices saw a lacklustre open, with some weakness in cyclical stocks offset by a drift to defensives to render the indices flat.
Any sustained weakness could, however, tempt institutional international investors back into the fray with the UK market having underperformed some of its global peers on a relative basis. Even so, the gains in the year to date have been rewarding, with the FTSE100 up by 13.7% and the more domestically-focused FTSE250 by 15%.
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