BoJ holds rates as UK Retail Sales shine

European stock markets are set to open lower on Friday morning after a turbo-charged week centred around the Fed’s cut to interest rates. Stocks indices rallied strongly on Thursday, led by the tech-heavy Nasdaq index. European indices were also higher across the board. Currently, stock markets in the US and Europe are set to register decent gains for the week. The S&P 500 is higher by more than 2% in the last 5 days, the Eurostoxx index is up by 3.56% on a currency adjusted basis, and the FTSE 100 is higher by more than 2% on a currency adjusted basis, as the weakening of the dollar boosts their returns. Thus, some profit-taking as we end the week is to be expected and US stock index futures are also pointing to a lower open.

BoJ takes cautious stance, but will Ueda signal an October rate hike?

The Bank of Japan remained on hold today as expected, however, the statement suggests that further rate hikes could be coming up. The statement referenced rising inflation expectations and economic strength, with the economy expected to grow above its potential growth rate for some time. The BOJ is maintaining its cautious stance, it mentioned global forces and exchange rates as a key consideration for inflation growth. While not a direct reference to the Fed’s decision on Wednesday, it suggests that the bank is laser focused on USD/JPY. The yen is higher by more than 1% vs. the USD so far this week. However, a stronger yen is unlikely to bother the BOJ at this stage, as the Japanese currency is still lower vs. the USD by 0.83% so far this year. Thus, we expect that Governor Ueda will stick to his mildly hawkish rhetoric when he holds his press conference later today.

Right now, the market does not expect a BOJ rate hike in October, and instead there is a 41% chance of a rate hike in December currently priced in by the market. The market sees Japanese interest rates ending the year at 0.35%, up from 0.25% today. However, if Ueda hints that a rate hike next month could be on the cards, then the yen could strengthen, and USD/JPY may return to the 140.0 support zone.

UK: Confidence down but sales up

Shock, horror, the UK economy has been impacted by the weather! Headline retail sales for August rose by 1% between July and August, and core retail sales, excluding fuels, rose by 1.1%. The annual rate of sales growth excluding motor fuel is now 2.3%, vs. a 1.4% annual rate for July. However, taking the shine off the good news was the collapse in consumer confidence for September. The GfK measure of UK consumer confidence fell to -20 from -13 in August, which is the lowest level since March. Consumers were less confident about their own personal financial position in Sept compared to August, and they reported that they are less likely to make a large purchase, compared to the previous month. Worryingly for the government, consumers’ view of the economic outlook also deteriorated sharply in September.

Why Consumer Confidence is falling

A drop in confidence is to be expected. The unemployment rate is rising, the BOE is less dovish than other central banks and is expected to take longer to cut interest rates, and levels of service price inflation remain strong. However, the prospect of a painful Budget on 30th October and more tax increases could also be weighing on consumer confidence. Will Rachel Reeves react to this news and soften her message after the UK Treasury received an unexpected £10bn windfall from the Bank of England? Reports today suggest that she is holding firm on her pledge to scrap the winter fuel allowance and instead will bank the money in an attempt to reduce the UK’s huge debt pile, which may not boost consumer confidence.

Sales boost is not all good news for retailers

Retail sales might be defying consumer gloom, but it is not all good news for retailers. Although the late summer heat wave fueled sales, some of these sales were also heavily discounted, which could compress retailer margins when they report their Q3 results. UK stocks to watch at three end of the week include Rolls Royce, which has been on a tear higher so far this year and was higher by more than 5% on Thursday. JD Sports, was also up by more than 4%. Will the stronger retail sales figure boost JD Sports further and could it list Sainsbury’s, which was one of the weaker performers on the FTSE 100 and fell 1.35%? That’s one question investors may want answered later today.