Retail and Gilts in Focus 

UK Retail Sales for July have come in considerably lower-than-expected, marking the first contraction since March as households continue to grapple with the rising cost of living. Retail sales dropped 1.2% between June and July while slumping 3.2% on an annualised basis.

Correlations between spending habits and weather was again drawn, with the ONS citing July’s wet weather as a key driver behind the drop in sales and consumers switching to online shopping. Here, sales volumes at ‘non-store retailers’ (which is dominated by the online space), rose 2.8% over the month with the ONS also suggesting that online promotions help boost spending in the space.

Supermarkets similarly reported that the poor weather reduced summer clothing sales as retailers more generally said that footfall reduced. This trend hit the Highstreet particularly hard as department stores sales volumes fell just under 3% over July. Markets will continue to closely monitor consumer spending as analysts consider the impact of an increasing number of households reaching the end of their fixed rate mortgage deals.

With the ONS citing the poor weather as a factor behind the drop in retail sales, it’s worth looking at just how wet last July was. According to the Met Office’s monthly climate summary, the UK had 170.0% of the average rainfall for the month. This made it provisionally the wettest July since 2009 and the sixth wettest July on record since 1836.

With markets reacting to Wednesday’s UK inflation print, yields on 10-year UK government bonds rallied yesterday, hitting fresh 15-year highs. Earlier this week we saw the UK’s core inflation index stay unchanged from June’s figure, hitting 6.9%. This was slightly above forecasts and demonstrates the prevalence of ‘sticky’ inflation, as the Bank of England tries to bring it back down to its 2% target level. As such, markets upwardly revised their rate hike expectations, feeding into yields rising across the UK gilt market.

The yield on the UK 10-year has now risen from around 4.6% to 4.74% over the last three sessions while rising 102% in the last year. The UK 10-year yield is now 204bps above the German Bund, while being 43bps over the US’ T-note. According to implied projections, money markets have fully priced in a 25bps rate hike from the BoE on 21 September with around a 25% chance of a 50bps rate hike. This comes as money markets price in a terminal rate of just under 6%.

PwC are expected to shed some light on the fate of Wilko, as administrators consider bids on the table to acquire some or all or their stores. One major newspaper is reporting that B&M, Poundland, The Range and Home Bargains are potentially interested in the distressed store. Many commentators are however suggesting that it may prove too much for a buyer to be interested in all of the stores, indicating that jobs may be on the line.

The anticipated announcement from PwC comes after Wilko filed a Notice of Intention on 3 August warning that they were on the verge of collapse after failing to find sufficient investment. Wilko employ 12,000 jobs across 400 stores, meaning that their collapse would mark the largest UK retailer to go under since McColl’s last year (which was eventually recused by Morrisons).

The distress of Wilko comes as retailers battle with rising interest rates, high energy costs, lower levels of discretionary spending and wider concerns over the health of the high street. Shop vacancy rates are also concerningly high, having risen from 13.8% in Q1 2023 to 13.9% in Q2.