Daily Commentary

MarketMinder’s View: September UK retail sales volumes fell -0.4% m/m, missing expectations for a -0.1% drop. Pair that with October’s dreary consumer confidence read, and forecasters are penciling in weak Q4 consumer spending. That all seems like a stretch to us. Confidence measures aren’t predictive. And monthly series like sales data are volatile. UK retail sales had plenty of one-off drops that weren’t new, bad trends. This argues consumers are struggling, but that is hard to square with gasoline sales’ rise: Even as prices rose, consumers put more gallons of petrol in their tanks. Generally, when households are struggling, they conserve as prices rise. As for the weak spots, the big one was clothing sales. That seems logical, considering the UK’s September was abnormally warm and all the shops had their fall and winter collections out. You probably won’t buy a tweed overcoat when it still feels like summer. We suspect this report is the kind of noisy reading stocks typically look through. It also helps keep expectations low, building more wall of worry for UK markets to climb.

MarketMinder’s View: UK national debt crossed £3 trillion (~$4.02 trillion) in September. Public debt hitting big, round large numbers often triggers worried headlines. This piece offers some less-frantic perspective, which we appreciate. However, we found the analysis mixed. The first half explains how Britain built its debt load in recent years—and bemoans the failure to rein in spending—before revealing its reason for “optimism.” “Never mind its £3tn debt mountain, the UK has moved off the naughty step in bond markets and is increasingly seen in a relatively positive light. Three trillion makes a good headline, but doesn't in itself mean a great deal. What does count is where borrowing is heading as a proportion of national income. In the past year, the UK has moved out of the 5pc club still occupied by the US and France and is now forecast by the International Monetary Fund to have the lowest deficit by 2029 in the G7, with overall debt as a share of national income on a falling trajectory.” It goes on to note that Britain’s household debt-to-income ratio has tumbled from 157% entering the 2008 financial crisis to 115% now and non-financial corporate debt is down to 64% from 90%. The piece doesn’t say this, but we would note this means the riskier borrowers have deleveraged while the government (which can use taxes and inflation to help buoy revenue) ramped up. Now, beyond that, comparing debt to national income (or GDP or any other national measure) doesn’t tell you much about a country’s ability to service its debt obligations. This matters most to investors. According to the Office for National Statistics, UK tax revenue covers its debt service cost by 11 times. This affordability shows why even the UK’s sovereign debt load isn’t as onerous as feared.

MarketMinder’s View: Not to steal from a popular television show, but winter is coming. Defying gloomy headlines, the UK is ready. “Britain has struck a last-minute deal for extra gas pipeline capacity from Belgium in order to secure this winter’s supplies, illustrating the growing pressure on its energy system. … Britain’s energy regulator, Ofgem, said the country could otherwise have faced ‘a negative supply margin’—where energy supply does not meet demand—on a very cold day when key infrastructure was not operational.” As the article details, the UK’s gas system already looked likely to deliver gas to meet demand. But, “Under national standards, the UK government must ensure that the country’s gas supply can withstand an extreme scenario where the largest pipeline or import terminal fails on an exceptionally cold day.” That is a rare but possible outcome. The deal with a Belgian infrastructure group further decreases the likelihood of that. We share this piece to highlight a broader lesson: Don’t overlook people’s ability to anticipate and adapt. Natural gas and energy supply worries have dominated headlines in Europe and the UK for several years. Public and private entities alike have planned accordingly, decreasing the likelihood of energy shortfalls. Keep stories like this in mind should warnings about energy supply resurge in the coming months.