UK DATA: October Retail Sales: Decline Expected Following Four Consecutive Rises

• So of the 0.21ppt downside surprise to the BOE's forecast the potential that could get reversed (that wasn't already expected in October CPI forecasts):
• 0.02-0.04ppt or so from transport services (which we estimate is broadly the surprise from that category) and around 0.03ppt from cultural services (if it returns to its 12-month Y/Y mean)
• It's hard to make the argument for other parts "needing" to reverse, although there can be some natural rebounds if there are low prices.
• However, those  parts above only contribute 0.05-0.07ppt - so somewhere betweene a quarter and a third of today's surprise.
• As noted previously, the food downward surprise is significant here. That will alleviate some concerns of passthrough to inflation persistence and may reduce the concerns over consumer inflation persistence amongst the more dovish / neutral members of the MPC.
• That may be enough to see a Q4 cut much more in play with Bailey's vote expected to be very uncertain. We think that Ramsden and Breeden also haven't ruled out voting for cuts. We would still be really surprised if any of August's hawkish dissenters supported a Q4 cut.
• The 9.0bp priced in by November and cumulative 17.1bp priced by December look more appropriate to us (we have long warned we thought the market was underpricing the prospect of cuts).
• We think after this data, its almost 50/50 for the prospect of a November cut.

• Within NEIG which was a 0.06ppt downside surprise to the BOE at 1.49%Y/Y (from 1.61%Y/Y in August), weakness has been seen in furniture (-0.02ppt to headline CPI), household appliances (-0.02ppt to headline CPI), books (-0.02ppt to headline CPI). Clothing was on the stronger side, contributing +0.03ppt to headline CPI
• Within services, maintenance and repairs of vehicles contributed +0.03ppt.
• Telephone equipment and services was soft: due both to sorter mobile phone equipment and also bundled telecomms services (impacting both NEIG and services).
• Within cultural services, the entire downside contribution (worth 0.06ppt to headline CPI) came from "Cinemas, theatres, concerts" which only rose 0.1%Y/Y (down from 7.0%Y/Y in August). The average for that over the past 12 months is now 3.6%Y/Y - so there is some scope for that to rebound next month.
• And within catering services, there is further strength within canteens - which are now up 9.4%Y/Y but have rise 8.7% cumulatively since June (and were negative last year). In contrast "restaurants and cafes" - which we pointed out have not shown any major rises - saw another 4.1%Y/Y print and have now consistently shown 3.9-4.2%Y/Y prints since February and are not responding to wholesale food price increases yet. This suggests to us there is weak pricing power for restaurants with consumers choosing not to eat out as much if prices go up further.

White/Red SONIA futures opened up 7.0-8.5 ticks before taking another leg higher, currently +9.0 (Z5) to +12.0 (M6, U6) . SFIU6 is now at 96.645, its highest since the start of July. 

• The September inflation report was softer-than-expected.
• Core CPI was 3.52% Y/Y, two tenths below consensus and down from 3.59% in August. Food and non-alcoholic beverages presented the largest downside surprise, which is significant given the MPC’s focus on food inflation as a driver of inflation expectations and inflation persistence.
• SONIA-dated OIS now price an indicative ~10bps of cuts priced through November (according to Bloomberg data), around 7bps more dovish than yesterday’s close.
• There are now 61bps of easing priced through the next 12 months, up from just below 50bps yesterday.
• A reminder that October flash PMI data is still to come this week, due on Friday morning.
• There aren’t any more BOE speakers scheduled this week, but we judge there is now an increasing prospect of Governor Bailey (the key swing voter in our view), voting for a Q4 cut.