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Sticky inflation and a strong pound appear to drag on the FTSE 100

It’s been another broadly positive session for markets in Europe, after US inflation and retail sales pointed to a slowing economy, and the prospect of a slower path in rate hikes. 

Europe

The FTSE 100 has once again underperformed, after the latest UK inflation numbers served to put upward pressure on the pound, after month-on-month inflation came in above expectations at 0.4%, and annual core inflation remained steady at 6.3%. This yield divergence is no better displayed than in 2-year gilt yields, which have slipped by 1 basis-point (bps), and US 2-year yields, which are lower by 11bps.

On the plus side, on the UK benchmark, basic resource stocks are leading the way higher, as copper prices rise to their highest levels since June last year, pulling the likes of Glencore, Antofagasta and Anglo American higher. On the downside, soaring food price inflation, which came in at 16.9%, along with a stronger pound, appears to be weighing on consumer staples and retailers, with declines from the likes of Unilever, Reckitt Benckiser, Haleon, JD Sports, and Next

Smiths Group shares is also higher, rising to levels last seen in early 2020, after raising its full-year guidance for organic revenue growth to 7%, with improvements to margins as well. The company expects to complete its £742m share buyback programme by the end of the current fiscal year.

Luxury retail has been one sector that has managed to outperform the wider market when it comes to share price performance over the past 12 months. Burberry shares hit their highest levels in three years last week despite an acknowledgement that its China business was likely to be a drag on its sales numbers for the foreseeable future. Q2 was notable for a decline of 19% in mainland China sales, even as H1 sales rose by 5%, helped by outperformance in Europe, Middle East, and India, with an increase of 34% in H1 sales. Today’s Q3 numbers have seen a similar pattern play out, as China sales fell 23%. As in Q2, EMEIA outperformed with a 19% increase in sales, while US sales fell 1%. Across the entire business, same-store sales rose by 1%.

Just Eat Takeaway shares have soared despite seeing a 12% drop in orders during Q4, and a modest decline of 2% in GTV to €7.1bn. Full-year GTV is down 5% at €28.22bn, however the rise in profits appears to have offered encouragement that management have finally got a handle on costs, with an expectation of delivering adjusted EBITDA of €225m for the full year, a significant upgrade from previous estimates. Just Eat also said it is still looking to offload its US Grubhub unit.  

US

US markets opened higher after US PPI for December came in at a lower than expected at 6.2%, while core prices rose by 5.5%, down from 6.2% in November. In a sign that the US consumer is starting to feel the effects of rising prices, retail sales fell by 1.1%, while the November data was revised lower from -0.6% to -1%.

Bond markets appear to be reacting to the weaker than expected PPI numbers, ratcheting higher and sending yields sharply lower, as markets continue to price in a possible Fed pivot later this year, and 25bps rate hike in February.

Moderna shares have jumped sharply higher after the company said that a new MRNA vaccine that prevents lung disease in older people was highly effective in 84% of cases in phase 3 trials, as it looks to pave the way for approval in the coming months.

There’s been little movement in Microsoft shares after the company became the latest tech giant to announce a raft of job losses, as well as taking a $1.2bn charge in Q2, as it looks to cope with a slowdown in PC sales, as well as its gaming division. 

Amazon is also in the news after the company announced the start of another 18,000 job cuts, although in the wider scheme of things the job cuts are still small when compared to where headcount was pre-Covid-19. Since then, the headcount has more than doubled from 789,000 to 1.6m at the end of 2021. 

FX

The US dollar has found itself under pressure again today after December retail sales and PPI numbers pointed to a slowdown in consumer spending as well as weaker inflation.

The greenback slid to its lowest level against the euro since April last year, but lacked any significant follow through, failing again to push through the 1.0900 area. The euro continues to be wracked by indecision after France central bank governor De Villeroy pushed back on yesterday’s headlines that the ECB might consider slowing the pace of any rate rises post a 50bps February rate hike, saying that Lagarde’s guidance from December of three more 50bps hikes by the end of Q1 was still valid.

On the basis of today’s data, the Federal Reserve and the market are still going in opposite directions when it comes to rate policy, with St. Louis Fed President James Bullard continuing to push the line of getting to the neutral rate as soon as possible and arguing the case for a 50bps hike in February.

It’s been a day of two halves for the Japanese yen, initially slipping back after the Bank of Japan left monetary policy unchanged and pushed back on market expectations of further measures to tweak their monetary policy settings. JGB yields fell back from the upper 0.5% bound in the wake of this morning’s announcement.

The central bank said it would continue with its large-scale bond buying program, briefly pushing the USD/JPY rate back above 130.00. Governor Kuroda went on to say that a further widening of the YCC band wasn’t needed yet, and while today’s move has helped finesse the central banks messaging it was never likely to stop the yen from strengthening further given that the US dollar remains under pressure and looks set to weaken further in the coming weeks as the Fed comes closer to the end of its own hiking cycle.

This weaker US dollar sentiment has been underlined today after US PPI for December came in below expectations, and retail sales declined fort the second month in a row.

The pound has pushed above 1.2400 after headline CPI fell modestly in December to 10.5%. While this was in line with expectations there was little in any of the other related data to suggest inflation was likely to fall back sharply. Core prices remained at 6.3%, while RPI which is probably a better gauge of what ordinary consumers are feeling, slipped back to 13.4%. While the Bank of England won’t want to admit it they will probably have to hike rates by another 50bps when they meet next at the beginning of February, while the weaker US dollar saw a retest of the December peaks at 1.2440. 

Commodities

Crude oil prices have edged up to their highest levels since early December as markets continue to price in a V-shaped rebound during the first half of this year.

Gold prices look set to break a two-day losing streak on the back of a slide in yields, and the weakness of the US dollar.

Volatility

Earnings news once again resulted in elevated levels of price action, with heavyweight Goldman Sachs in focus on Tuesday. The bank posted its worst earnings miss in a decade, with both deal-making and the consumer side of the business taking a hit. Underlying shares fell by more than 6% in the wake of the news, driving one day vol to 76.6%, up from 37.03% on the month.

Luxury goods stocks have been in focus too, with the promise of China’s reopening driving support across the board. LVMH broke above the €400bn market cap valuation for the first time during yesterday’s trade, but upside was seen across most of the sector. That was played out in CMC’s proprietary Luxury Lifestyle basket of stocks, which this week hit fresh 12-month highs and printed one day vol of 27.86%, against 22.34% on the month.

Sentiment across the crypto market continues to improve, fuelled by that recent US inflation data with bitcoin making fresh progress towards the September 2022 highs. However, the more exaggerated levels of price action are being seen elsewhere in the asset class with Avalanche continuing to attract attention after the announcement of its deal with AWS last week. One day vol on the token came in at 106.39% against 70.92% on the month. 

And rounding out with fiat currencies, more hints that the ECB is looking at taking a more dovish path than previously predicted with regard to monetary policy has resulted in a degree of weakness for the euro. Sitting against a backdrop of slightly better than expected UK wage growth, the euro fell back to late December lows against sterling on Tuesday night. One day vol sat at 8.99% against 7.83% for the month.


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