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FTSE 100 buckles after Bank of England’s rate hike

FTSE 100 price chart is on the decline

After raising interest rates to a 13-year high of 1.25%, the Bank of England warned that inflation could hit 11% in the autumn.

The news piled more misery on the FTSE 100 as London’s main index fell 4.1% last week to close at 7,016.25 on 17 June – its third straight weekly loss. The index is down over 6.6% in the last month and 4.9% this year. The FTSE 100 is trading just above its lowest level in well over a year.

The FTSE 100’s biggest underperforming constituents last week included Associated British Foods [ABF], Tesco [TSCO] and Ashtead [AHT], while HSBC managed to buck the downtrend.

FTSE 100 operating on thin margins

As the cost-of-living rises, Britons are feeling the pinch and the FTSE 100 is being weighed down by investors worried about consumers reducing their spending.

In theory, consumers tightening their belts should be good news for budget retailers such as Primark, but they often operate on very thin margins. When Primark’s parent company Associated British Foods reported half-year earnings in April, both sales and operating profit returned to pre-pandemic levels. But it warned that high inflation was hampering efforts to cut costs.

“The result will be margin pressure and price increases across the autumn and winter stock. We still have a few months to see whether Primark’s price-sensitive customers will be receptive to larger price tags,” noted Hargreaves Lansdown equity analyst Laura Hoy on 17 June

The Associated British Foods share price closed the week ending on 17 June less than a percentage point higher. At 1,608p, the stock is trading just above its lowest level in five years.

Feeling the pressure

Despite the Tesco share price closing the week marginally higher, the grocer reported on 17 June that sales for the three months to the end of May fell 1.5% year-on-year.

“Although difficult to separate from the significant impact of lapping last year’s lockdowns, we are seeing some early indications of changing customer behaviour as a result of the inflationary environment,” said CEO Ken Murphy in a statement.

In a bid to stave off inflationary pressures and keep costs down, Tesco has reportedly resorted to so-called ‘back margin’ tactics, where suppliers are charged for promotional spots, according to industry publication The Grocer.

Falling wages in the UK

Real wages for workers in the UK fell 3.4% in the year to April, according to data released last week by the Institute for Employment Studies – the largest drop since comparable records began in 2001.

This is contributing to higher staff churn rates in almost every sector, with hospitality particularly badly hit. Premier Inn owner Whitbread [WTB] plans to hike wages to avoid hiring difficulties amid a tight job market.

The Whitbread share price was down more than 7% between 10 and 14 June last week, but was boosted briefly by its Q1 trading update on 15 June. The share price ended the week down 2.6%.

Sales for Q1 came in 11% above pre-pandemic levels, driven by Premier Inn. Whitbread CEO Alison Brittain said the UK brand “continues to be ahead of expectations”. She is confident on margins given the strong performance in key markets, even though full-year costs are expected to rise by between £20m and £30m.

Low interest rates on savings

The HSBC share price closed the week ending 17 June up 1.9%, while the Lloyds share price closed 3.3% lower.

Banks can expect their balance sheets to be boosted by future rate rises. Lloyds Banking Group makes its money from interest earned on deposits, but rates for savers remain low. An increase in capital should lead to more customer deposits.

Nonetheless, Hargreaves Lansdown analysts are impressed by how the “traditional high street bank without fee-based investment banking income” is looking for alternative ways to generate fees rather than rely on interest income.

“The new strategy plans to build out the bank's small business offer and increase the focus on larger corporate and institutional clients,” they noted.

Macroeconomic concerns across the pond

One of the biggest fallers to weigh on the FTSE 100 last week was Ashtead, whose shares fell by more than 10%.

The international equipment rental group reported on Tuesday 14 June that it expects to benefit from businesses opting to hire tools and machinery due to the shortage of supply for sale. Nevertheless there are “macroeconomic concerns that North America is going to slow down and possibly go into recession,” Peel Hunt analyst Andrew Nussey told the Financial Times. “It’s this concern that is outweighing Ashtead’s continuing strong delivery.”

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