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Consumer resilience helps to push FTSE 100 to 7,800

European markets have continued to push higher after today’s US CPI report came in as expected, with the FTSE 100 pushing above 7,800 for the first time since May 2018, as it looks to close in on its record high of 7,900.

Europe

The sharp fall in inflationary pressures in the US is helping to translate into weakness in UK gilt yields, with the prospect that lower inflation and lower rates will combine to create a faster decline, and thus diminish the longer-term economic damage to consumer wallets.

This is helping to give a broader boost to housebuilders even as Persimmon followed Barratt Developments yesterday in recording a similar slowing in its sales numbers. Private net sales per week fell to 0.19 from 0.61 in the same period a year ago, an even sharper fall than Barratt, however the shares have managed to push to the top of the FTSE100, as yields fall back and raise the hope of lower mortgage rates.

Despite painting a weak demand outlook for the rest of the year, the sector has seen big share price declines over the last 12 months, Persimmon is down over 50% from its peaks this time last year so it could be argued that a lot of negative news is already in the price, with today’s falling inflation numbers pointing to optimism that some of the worst case scenarios might be avoided.

It’s been another bumper day of trading announcements from a raft of UK companies, and by and large they haven’t been as bad as perhaps they could have been. If anything, the challenging economic environment over the past few years has encouraged a focus on reform and innovation, which ought to offer a template for some of our public services which have continued to go from bad to worse.  

Premier Inn owner Whitbread shares have risen to nine-month highs after reporting a strong Q3 performance, helped by a healthy rebound in its Germany business which has gone from strength to strength, as more hotels open there, even though the business is still performing at a loss. Sales growth in Germany saw a rise of 158%, helped by the extra capacity. On a like for like basis it still showed an improvement of 81.7%.

UK sales also performed well with a rise of 19.2%, pushing overall like for like sales growth up by 16.6%. Total like for like sales for the group rose 18.3%. On costs Whitbread kept its guidance unchanged but did say that for 2024 it was expected to see inflation of about 7% and 8%, on its £1.6bn cost base, which the company said were 75% hedged.

Tesco’s Q3 numbers have shown a similar resilience to its smaller peer Sainsbury’s yesterday with total group sales rising by 5.7% quarter to date. This accelerated to 7.9% in the weeks leading up to Christmas, with the UK and Ireland business seeing sales growth of 5.2%. Central Europe also performed well seeing like for like sales growth of 12.3%. Its Booker business also saw a decent performance with a 19.2% increase on the catering side.

The UK’s number one supermarket maintained its market share position of 27.5% despite the increasing competition from the likes of Aldi and Lidl, while reconfirming its full year guidance or adjusted operating profit of between £2.4bn and £2.5bn. The shares have slipped back in early trade pulling back from the three-month highs that we saw earlier this week, however they have recovered into positive territory as we head into the close.

Marks & Spencer share price has seen a decent rebound since its October lows, with the shares up over 40% so today’s Q3 trading statement had high expectations to meet. Today’s update would appear to have met and cleared those expectations, with the food business outperforming, while clothing sales have also done well.

Despite this the shares initially slipped back in early trade on light profit-taking after the shares closed at five-month highs yesterday, however they have recovered into positive territory as we head into the close. With food sales now contributing to the bulk of M&S earnings it is clear that the turnaround strategy started by previous CEO Steve Rowe is bearing fruit. Total food sales rose 10.2%, while on a like for like basis they rose 6.3%, as its food business grew its share of the grocery market. 

More importantly clothing sales also saw decent growth of 8.8%, and 8.6% on a like for like basis, and according to management achieved over 10% market share during the period, the best level since 2015. Total group sales came in at £3.6bn, a rise of 9.9%. Click and collect orders saw a big increase of 20% helped in some part by the Royal Mail strikes as customers collected their own parcels. Despite the strong Q3 performance management maintained their full-year guidance perhaps mindful that Q4 could see a slowdown after a strong Q3.

ASOS shares have had a brutal last 12 months the shares down over 70% and almost 90% down from their pandemic peaks, although we have seen a small rebound from the record lows in October. Today’s numbers will have offered little comfort, with the disruptions caused by Royal Mail strikes and a lack of capacity contributing to a 3% fall in revenues. Four-month sales came in at £1.34bn, below expectations of £1.38bn with adjusted gross margin broadly flat.

UK sales saw a decline of 8%, coming in at £591.3m, down from £645.2m a year ago. On a more encouraging note, management reiterated its full year guidance, saying it expects to see a better performance in the second half of the year as it looks to reduce inventory levels and reduce cash outflow. It still expects to return a loss in H1, and then improve profitability in H2. This appears to have been greeted with relief with the shares pushing strongly higher on relief that things look set to improve.  

British Gas owner Centrica’s shares are also performing well, pushing up to their highest level since October 2019 after reporting a significant upgrade to its full year guidance, saying they expect full year adjusted EPS of above 30p per share, and that net cash is expected to be above £1bn.

With all the doom and gloom around the hospitality sector and the disruption caused by the rail strikes before Christmas, All Bar One owner Mitchell and Butlers reported that like for like sales for the 15 weeks to 7 January rose by 10.4%. while total sales rose by 13.3%. This does need to be set in the context of Omicron disruption which impacted the numbers over the festive period a year ago.

US

US markets opened sharply higher in the wake of today’s US CPI report for December, with the main drag on prices being a sharp fall in gasoline prices which helped pull the headline number down as expected to 6.5% from 7.1%.

Despite the disruption caused to air travel in December, American Airlines said it expects Q4 profits to come in well above consensus at between $1.12c and $1.17c a share, when it reports on 26 January, and that revenue is expected to be over 15% above the same period pre-pandemic.  

Taiwan chipmaker TSMC is also higher despite the company saying they would be looking to cut spending on the back of a slowdown in chip demand. Q1 sales are expected to come in between $16.7bn and $17.5bn, below expectations of $17.9bn, which is a modest decline on the same period a year ago. Despite this, margins are at record levels, rising to 62.2% in the last quarter, however these could fall over the next 12 months as it expands capacity by investing $40bn in Arizona to build a factory there.

Disney shares are in focus as activist shareholder Nelson Peltz looks to try and influence future policy by securing a place on the board. Peltz is unhappy at the effect the Fox acquisition has had on the company’s bottom line, and which has hit the dividend pay-out. 

FX

The US dollar briefly hit an eight-month low in the wake of today’s US CPI numbers for December which came in as expected with a fall in core prices to 5.7%, from 6% and headline CPI to 6.5%, as markets start to price in another downshift to the Fed’s rate-hiking cycle to 25bps. Philadelphia Fed President Patrick Harker who is a voting member this year, commented that moves of 25bps from here on in would be appropriate.

In a sign that high inflation isn’t, yet impacting the labour market, weekly jobless claims came in at 205k, only slightly lower than 206k the week before, helping to push the euro above the 1.0800 level for the first time since April last year.

Against the Japanese yen the US dollar retested the recent lows down near 129.50 but was unable to break below it. If that level gives way, we could well see further falls towards the 126.50 area especially if we see any indication of a shift in monetary policy next week from the Bank of Japan.

Commodities

In the wake of today’s US CPI numbers, gold prices briefly pushed up above $1,900 an ounce for the first time in 8 months, as the US dollar weakened and yields fell back, with the US 2-year yield falling to its lowest levels since early October.

Crude oil prices have continued their slow grind higher after their losses of last week, helped by the weakness in the US dollar and optimism that a more benign inflation outlook will help to mitigate concerns over a sharp slowdown in the coming months.  

Volatility

Stock in British American Tobacco has seen an active week, with downside pressure continuing to build. There are suggestions that the deteriorating global economic outlook will be bad for discretionary consumer stocks like this, with the underlying down 6.5% over the week. One day volatility advanced to 54.15% against 28.63% on the month.

Keeping with single stocks and the US listed online dating site Bumble has had a good run, with analyst upgrades helping lock in recent gains. The share price has advanced by more than 15% since the start of the week, with one day volatility being recorded at 129.09% against 102.6% for the month.

After a barnstorming start to the year, Hong Kong’s Hang Seng index slipped back a little during Wednesday’s trade. That was sufficient to make it the most active of the equity indices, with one day volatility coming in at 35.15% against 33.02% on the month.

Natural Gas prices remain in focus with further losses being seen on Wednesday. The US cash contract briefly traded below $3.50 although some support did follow off the expectation that there’s still more cold weather to come. One day vol printed 120.25% against 90.25% for the month.

And finally, in cryptos, Avalanche saw strong gains in the wake of news that it was partnering with AWS to help scale blockchain adoption. One day vol on AVX/USD advanced to 133.32% against 59.16% on the month.


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