According to recently released government data, British retailers encountered their most significant decrease in sales in almost three years during December. This decline suggests that the combination of high interest rates and the slowdown in the UK's job market is now having an impact on consumer demand.

In December 2023, retail sales in the UK fell by 3.2%, marking the most substantial month-on-month drop in spending since January 2021. During that time, sales were heavily affected by measures implemented to slow the spread of COVID-19, as reported by the UK's Office for National Statistics (ONS).

The unexpectedly sharp drop in retail sales caused shares of leading British retailer Marks & Spencer (MKS) to fall by 1% on Friday. Similarly, shares of food delivery service Ocado (OCDO) fell by 1%, while Deliveroo experienced a 3% drop. The ONS figures revealed a 3.1% decline in December food sales compared to the previous month.

Previously, analysts had predicted a much smaller decline of just 0.5% in the UK's retail sales for December, according to a Reuters poll. They hypothesized that this drop could be partially attributed to customers shifting their spending to November to take advantage of Black Friday and Cyber Monday deals.

"Raising the cost of borrowing was intended to have a negative impact on consumer spending, and it appears to have achieved that goal. However, casualties are expected, and the retail sector is likely to face significant challenges," stated AJ Bell's Head of Financial Analysis, Danni Hewson.

The lackluster ONS retail sales figures subsequently led to a decrease in the value of the British pound, as investors speculate that the slowdown in the UK's retail sector may prompt the Bank of England to consider interest rate cuts.

Pound Drops Against Dollar

The value of the British pound dropped 0.2% compared to the U.S. dollar, resulting in rates of $1.27 per £1 USDGBP (+0.19%). Additionally, U.K. government bond yields experienced a decline, with the U.K.'s 10-year Gilt BX:TMBMKGB-10Y dropping 0.05%.

U.K. Stocks Rise Amid Tech Stock Rally

Despite currency fluctuations, U.K. stocks had a positive performance on Friday. Britain's FTSE 100 UK:UKX index was boosted by a rally in U.S. technology stocks on Thursday, driven by excitement surrounding artificial intelligence (AI). This rally even led to the Nasdaq Composite turning positive for the first time in 2024.

Positive Outlook for Chip Maker TSMC

The tech stock rally in the U.S. was triggered by optimistic results from Taiwan Semiconductor Manufacturing Company (TSMC) 2330 (+6.46%). TSMC predicts a 20% increase in its 2024 revenues due to the growing demand for high-tech chips used in AI. Kathleen Brooks, XTB's research director, views this as encouraging news for the global economy and a potential driver of market gains.

Expectations for Interest Rate Cuts Boost FTSE 100

Following a lackluster performance on Thursday, there are high hopes for possible interest rate cuts that may improve the FTSE 100's performance. The index saw weaker gains compared to other European markets.

Decline in Shares of A.P. Moller – Maersk, Nokia, and Ericsson

In Europe, shares of shipping company A.P. Moller – Maersk MAERSK.B (-3.80%) fell by 4% due to ongoing troubles in the Red Sea. Houthi forces launched a missile strike against a U.S. flagged vessel, causing concerns in the market. Additionally, shares of phone companies Nokia NOKIA (-2.66%) and Ericsson ERIC.B (-3.08%) declined after receiving analyst downgrades.

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