Wall Street finished predominantly higher overnight as more evidence of a strong US economy poured in and as corporate updates impressed. The S&P 500 ended the session at a 5-month high and the Dow with a fifth straight positive close, as solid earnings boosted financial and industrial stocks, reinforcing hopes of a strong second quarter earnings season. Sentiment remained buoyant even as Google parent Alphabet (NASDAQ:GOOGL) was handed a €4.3 billion fine by the EU.
Asian markets were happy to continue where Wall Street’s positivity left off; European bourses are also pointing to a stronger start on the open.
With trade war concerns fading from view, optimism is returning. The markets are interested in two points right now. Firstly, interest rates; an upbeat assessment on the US economy from Fed Chair Jerome Powell and a broadly encouraging Beige Book update, has seen the market gaining confidence that the Fed will hike 4 times across this year. The second point is earnings. Data shows that, of the companies reported so far 90% have beaten profit forecasts. As earnings and interest rate expectations are in a good place right now, traders are buying in.
Retail sales, another reason to sell the pound?
This week has been another rocky week for the pound, which dipped to a 10-month low, of $1.3068 in the previous session. Moving into the Thursday, the pound was seen clawing back lost ground ahead of retail sales later this morning.
With inflation sitting at a one year low and wage growth slipping, traders will be watching closely to see if some encouragement for an August rate hike can be drawn from retail sales data. Expectations are not that great, fitting in nicely with the running theme for UK data this week. On a monthly basis, retail sales are expected to have increased by a rather lacklustre 0.2%, compared to April’s 1.3% month on month gain. On an annualised basis, sales are expected to fall from a strong 4.4% to a more mediocre 3.7%.
A weaker than forecast print, making a hattrick of disappointments, would throw more doubt over the BoE’s ability to hike rates in August. Even if economic growth has picked up in the second quarter, it hasn’t done so at a sufficiently strong pace to boost inflation, and if consumers are still under pressure from lacklustre wage growth, keeping the lid on spending then retail sales could disappoint.
To Hike or Not?
With the market pricing in around a 72% chance of the BoE hiking rates, a surprise to the downside in retail sales could see that percentage fall further. In this scenario the pound could head back towards support at $1.30. A weaker pound would be expected to boost the FTSE as we saw in the previous session.