European Market Update - Jan UK Retail Sales Fall to Lowest Level in Four Years

- The European indices are currently trading in negative territory in the session. Indices opened slightly higher after a series of mixed earnings reports ahead of the open, but slowly drifted lower during the session.
- European government bonds are currently trading higher after the ECB slightly reduced its 2007 inflation forecast. There was also rumored buying of EGBs and selling of treasuries overnight. In the UK gilts are trading sharply higher after lower than expected retail sales data for the month of January was released. Spain sold €985M in 4.20% 30-Year bonds with an average yield of 4.25%, and a bid-to-cover of 2.8; the neutral bid-to-cover was called at 2.6. France sold €2.19B in 3.5% 2-Year bonds with an average yield of 3.96% and a bid-to-cover of 3.58, and €2.44B in 3.75% 5-Year bonds with an average yield of 4.01% and a bid-to-cover of 3.73.
- Riksbank raised interest rates by 25bps to 3.25% as expected overnight. A Riksbank member said shortly after that the bank sees rates at 3.50% within the next six months, followed by a pause. The member followed saying that Riksbank may need to tighten policy if wage hikes are higher than expected, and loosen policy if international economies weaken and the labor supply is greater. Riksbank also boosted their 2006 GDP forecast to 4.5% from 4.3%, and the 2007 forecast to 3.5% from 3.1%.
- Swedish underlying inflation fell to –1.0% m/m overnight, its lowest level in over 13 years on lower transport costs. Headline CPI was in line at –0.5% m/m and 1.9% y/y, while the unemployment rate was at 5.3%, above estimates of 5.0% as the Swedish government cut its labor market programs in order to make compensate for tax cuts.
- January retail sales in the UK fell well below estimates to –1.8% m/m, dropping to its lowest level since January of 2003, while retail sales were 3.3% y/y, below estimates of 5.4%. The drop in retail sales was led by a drop in clothing and electrical goods sales, suggesting that post-Christmas discounts were not enough to lure shoppers.
- The ECB released its monthly report for the month of February overnight. The report forecasted 2007 inflation at 2.0%, down from the previous forecast of 2.1%, further out forecasting 2008 inflation at 1.9%. The report forecasted 2007 and 2008 GDP growth of 2.1%, up from the previous forecast of 2.0%. The report said that strong vigilance is needed in order to keep inflation in check. Finally the report pointed out that the medium-term outlook is subject to upside risks, reiterating that rates are low and that the policy is accommodative.
- ECB member Bini Smaghi spoke overnight. Bini Smaghi said that wage levels are worrying, and that inflation expectations are securely anchored. Bini Smaghi pointed out that price risks include oil, wages, and taxes. Further more Bini Smaghi said that the ECB must focus on medium-term inflation. Bini Smaghi reiterated that conditions are in place for growth around potential, and that liquidity is ample.
- The ECB’s Constancio said overnight that immediate inflation risks include indirect taxes and wages. Constancio followed saying that it is too soon to update the Euro-Zone GDP outlook for 2007, pointing out that fourth-quarter results were better than expected.
- In a quiet session on the energy front crude oil futures are currently trading in positive territory, breaking back through the $58 handle.

 

January was awful in the U.S., too.

Back in December, all analysts were disappointed with December U.S. sales, but retail insiders said "don't worry, giftcards will take up the slack in January."

Yeah right.


But the market doesn't care about actual data anymore. Rainbows, candy and unicorns.

It's the 'feel good' market again.