The big news overnight was the jump in the British Retail Consortium March sales monitor. This timely gauge of UK retail sales jumped to 3.5% for total sales, and 3.2% for same store sales, which is the strongest level since August 2023. The rise was driven by food sales, which rose by 6.8%, while non-food sales fell by 1.9%. The timing of Easter may have contributed to the sale of food, while the wet weather could have hampered sales of other goods.

Why the picture might not be so good for the UK consumer

While the top line figure for the BRC data is strong, if you dig a bit deeper it may not paint such a pretty picture of the UK consumer. The BRC data measures the actual value of sales and does not adjust for price changes. Thus, it is worth noting that the rise in food sales could be down to higher food price inflation, and that will be worth watching in the March CPI report for the UK. In February, the ONS reported that retail sales ex vehicle fuel costs fell by 0.5% on a YoY basis. The sharp decline in the non-food sales in the BRC measure may be an indicator that non-fuel ONS retail sales might also fall in March; we get the ONS figure on 19th April. Overall, this data does not suggest that the UK consumer is in good shape, and we will be watching consumer behavior closely, as it could hamper the UK’s recovery from recession if the consumer is once again burdened by high levels of food and energy price inflation.

What Tesco can tell us about the UK consumer

We will also watch Tesco’s full year sales closely on Wednesday morning to get a better picture of UK consumer spending trends. Adjusted profit is expected to come in at £2.75bn, after the company raised its profit target due to a strong Christmas season. The forward guidance will be of interest to traders as they try and gauge what the UK’s largest grocer by market share feels about the resilience and strength of the UK consumer.

Oil rises once again, as Shell surges to a record high

In the commodity space, the oil price is rising once again, and Brent crude is close to $90.50 per barrel. This is also leading to concerns about future inflation rates. However, from the stock market perspective, the rising oil price is triggering positive earnings revisions for energy stocks. The 20% rise in Brent this year has had a positive impact on UK energy shares, BP is higher by more than 14% since reaching a low in mid-January. Shell is also higher by nearly 20% in the same period. Shell’s share price reached a record high on Monday after reports that it was considering leaving the FTSE 100 and relisting in the US to benefit from higher valuations for oil companies stateside. This would be a major loss to the UK index, so we shall have to see if these gains can be extended in an effort to make the top brass at Shell reconsider.

Industrial metals are also rising after a pickup in global manufacturing, we saw German industrial production also jump by 2.1% in February, its largest monthly increase for more than a year.

Investors wait for US inflation data before they make their next move

US inflation is still the main focus for investors this week. The CPI report is released on Wednesday, and the market expects an uptick in the headline rate of price growth to 3.4% from 3.2%. The core rate is expected to moderate slightly to 3.7% from 3.8%. There is not too much in the calendar for the Eurozone, the UK or the US on Tuesday, which could keep markets range bound.

As we lead up to the European open, S&P 500 futures are up slightly but are mostly moving sideways, after a decent performance for Asian shares. The Nikkei is higher by nearly 1%, while the Hang Seng is up by 0.7%. TSMC, the Taiwanese chip maker, jumped by 2%, after the US government said that it would award the company $6.6bn in grants and $5bn in loans to build a chip factory in Arizona. TSMC’s suppliers in the Asian region also rose in overnight trading. For example, Tokyo Electron rose by 3.4%. The CSI 300, China’s main trading index, fell on Tuesday as the market waits for new loan and money supply data. The US Treasury secretary, who has been in China for a 4-day trip, also warned Chinese banks that they would face US sanctions if they facilitated transactions that channel military or other aid to Russia. China is a large buyer of Russian oil, the US Treasury secretary acknowledged that China and Russia do a lot of trade that is non problematic. However, this is a warning shot from the US and also highlights how the US and China are on different sides of geopolitical fault lines, which could widen further if Donald Trump wins the US election in November.

Inflation rises across the world

Elsewhere, Treasury yields retreated slightly on Tuesday morning, and the 10-year Treasury yield remains at the crucial 4.40% level as we wait for the CPI report on Wednesday. There is nervousness in the market ahead of this report, especially after Friday’s extremely strong payrolls reading. This means that markets could be range bound as we wait for this crucial data release. Inflation surprises are rising across the world right now, only three months ago inflation was falling broadly. This reverse course in price pressure has knocked the shine off of markets since the start of Q2, as doubts set in that the Fed may not be as quick to cut rates as the market thought they would be, even if Fed chair Jerome Powell maintained his loosening bias in recent speeches.

The market reduces Fed rate cut expectations to two for 2024

The concern about rising inflation is felt in the breakeven inflation rate. This is the Treasury yield minus the real yield of inflation, the result is the implied inflation rate for the maturity of the Treasury yield. The 2-year Breakeven rate has climbed in recent weeks to its highest level since March 2023. This means that the implied 2-year inflation rate is now 2.8%. While this is not miles away from the Fed’s two-year inflation target, it is much higher than the 2% rate from January. Ahead of Wednesday’s CPI report, the market is now fully pricing for the first rate cut to come from the Fed in September. The market is now also expecting 2 rate cuts for 2024, less than the Fed’s median estimate of 3 cuts that were included in the most recent dot plot.

The shift in Fed expectations is impacting EM FX

The recalibration in the US interest rate outlook and the increase in the breakeven rate, has put upward pressure on the dollar, which has made strong gains vs. the euro and the pound in recent weeks and is the strongest currency in the G10 so far this year, after overtaking the pound. The strong dollar is being felt acutely by some emerging markets and Asian currencies, which can be impacted more by Fed rate expectations than even the American economy. For example, in Thailand, the baht has fallen more than 2.4% vs. the USD so far this year. Although inflation is trending lower, the Thai central bank may not cut rates this week, in part to ensure the currency does not fall further. We could see similar behavior across other markets, as global central banks react to the Fed’s stance.