FTSE 100 pushes higher despite sharper-than-expected drop in U.K. December retail sales

By Louis Goss

British retailers suffered their sharpest drop in sales in nearly three years in December, according to new government figures, which signal that high interest rates and the slowdown in the U.K.'s jobs market are now starting to impact consumer demand.

U.K. retail sales fell 3.2% in December 2023, marking the sharpest month-on-month drop in spending since January 2021 when sales were heavily impacted by the measures aimed at slowing the spread of COVID-19, the U.K.'s Office for National Statistics (ONS) said.

The sharper-than-expected drop in retail sales saw shares in top British retailer Marks & Spencer (UK:MKS) drop 1% on Friday and shares in food delivery service Ocado (UK:OCDO) fall 1%, as the ONS figures showed a 3.1% drop in December food sales compared to the previous month. Shares in Deliveroo also fell 3%

Analysts had previously forecast the U.K.'s December retail sales would fall by just 0.5%, according to a Reuters poll and they suggested the drop was partly due to customers having shifted their spending to November to take advantage of Black Friday and Cyber Monday.

"Raising the cost of borrowing was supposed to hurt, it was designed to stop us from spending, and it seems to have worked. But there will be casualties and the retail sector looks likely to be one of the biggest," AJ Bell's head of financial analysis Danni Hewson said.

The underwhelming ONS retail sales figures, in turn, saw the value of Britain's pound drop as investors' predicted the slowdown in the U.K.'s retail sector may pressure the Bank of England to make interest rate cuts.

This saw the value of the British pound drop 0.2% compared to the U.S. dollar, to rates of $1.27 per GBP1 (USDGBP). U.K. government bond yields also fell in a drop that saw the U.K.'s 10-year Gilt BX:TMBMKGB-10Y drop 0.05%.

The U.K.'s stocks were up though on Friday as Britain's FTSE 100 UK:UKX index was boosted by a rally in U.S. technology stocks on Thursday, on the back of a spate of optimism around artificial intelligence (AI) that saw the Nasdaq Composite turn positive for the first time in 2024.

The U.S. tech stock rally followed a positive set of results from computer chip maker Taiwan Semiconductor Manufacturing Company (TSMC) (TW:2330), which predicted a 20% increase in its 2024 revenues from demand for the high-tech chips used in AI.

"Chip makers are cyclical, so the fact TSMC is providing a positive outlook for this year is good news for the global economy. Its growing confidence in AI and its contribution to its future revenues is also encouraging for this key theme that may continue to be a big driver of market gains this year," XTB's research director Kathleen Brooks said.

High hopes for the possibility of interest rate cuts also bolstered the FTSE 100's performance, following an underwhelming performance on Thursday that saw the index make some of the weakest gains across markets Europe-wide.

In Europe, shares in shipping company A.P. Moller - Maersk (DK:MAERSK.B) fell 4% amid continued troubles in the Red Sea that saw Houthi forces launch a missile strike against a U.S. flagged vessel on Thursday. Shares in phone companies Nokia (FI:NOKIA) and Ericsson (SE:ERIC.B) also fell after both companies were downgraded by analysts.

-Louis Goss

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01-19-24 0826ET

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