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FTSE 100 pushes above 8,000 level, as sterling slips on weaker CPI

London skyline

Markets in Europe have seen another positive session today, and although the FTSE 100 has underperformed due to weakness in the banking sector, we’ve still managed to post another record high above 8,000, as a combination of a sharp decline in headline January CPI and a weaker pound has helped to boost consumer discretionary, even as Barclays posted disappointing Q4 revenues and profits numbers. 

Europe

Starting with the gainers, a bigger than expected drop in headline CPI has helped lift house builders, as well as retailers in the hope that the Bank of England could be close to the end of its current rate hiking cycle. Consequently, we’ve seen gains for the likes of Persimmon and Barratt Developments, while the likes of Premier Inn owner Whitbread are higher along with retailers Frasers Group and JD Sports.

In the last few months Barclays share price had enjoyed a solid rebound from 18-month lows back in October but is still well below the highs we saw at the start of 2022. The provisions the bank had to set aside in respect of losses on the over issuance of debt securities has dragged on its performance, and today’s miss on its Q4 numbers have seen the shares slide sharply. Total impairments along with higher operating expenses has meant that the bank has struggled, and today’s full year numbers appear to reflect a bank that has had a difficult year. 

For Q4, pre-tax profits came in short of expectations as did revenues. Q4 attributable profit came in at £1bn, pushing full year group attributable profit to £5bn. The corporate and investment bank saw a 2% decline in Q4 revenues to £2.57bn with a disappointing performance across the board. Operating expenses over the year came in as expected at £16.7bn, with £1.6bn of that related to litigation and conduct charges. Credit impairment charges were £1.2bn, with another £700m set aside in Q4. The dividend was increased to 7.25p from 6p, with the bank pledging a buyback of £500m. 

With NatWest results due on Friday, HSBC, and Lloyds next week, the banking sector has acted as a drag on the FTSE 100 today.

Also sharply lower, Hargreaves Lansdown shares initially edged higher after seeing a 20% rise in H1 revenues to £350m, and a 30% increase in underlying profits before tax to £211.9m. These gains soon reversed during the analyst call over concerns around higher costs, and the sustainability of its earnings flows and market share over the second half of the year. 

Glencore shares have slipped back despite posting an adjusted EBITDA profit of $34bn and saying it plans to $7.1bn to shareholders through a dividend and buyback. Full year revenues came in at $256bn.

Dunelm Group shares are higher despite seeing a 16.4% decline in H1 profits to £117.4m, on revenues that increased by 5% to £ 835m. An increase in operating costs helped to push down margins, however the payment of a special dividend of 40p appears to have taken the edge off. Expectations for full year profits were kept unchanged, with the consumer outlook unpredictable.

US

US markets opened sharply lower after US retail sales surged by 3% in January more than reversing the end of year falls seen in November and December of last year, with strong gains across all parts of the retail sector. The milder weather in January appears to have driven strong growth across the country with restaurant sales seeing an increase of 7.2%. While it is good news for the US economy that we’re seeing a solid rebound from the slowdown at the end of last year, it’s also bad news for those who think the Fed will have to slow the pace of its rate hiking cycle. The resilience being seen in recent data means the Fed will likely have to do more when it comes to raising rates, increasing the risk that if they move rates too high, something might break.  

Tesla shares are in focus after the electric car company said it would halt some production at its China factory as it looks to upgrade it so that it is able to rollout a revamped version of its Model 3.

Roblox shares have surged on the open despite reporting Q4 revenues of $579m, which fell short of expectations. A surge in bookings appears to be the cause of much of today’s optimism with January bookings trending above expectations, coming in at $899.4m. 

TripAdvisor shares are also doing well on the back of their Q4 numbers, with revenues up 47% to $354m and adjusted EBITDA also ahead of forecasts at $43m, a rise of 48%.

Airbnb shares are also higher after raising its outlook for the current quarter to between $1.75bn and $1.82bn.

FX

The US dollar appears to have undergone a bit of a delayed reaction to yesterday’s CPI numbers, pushing higher across the board, with the six-month treasury yield pushing to its highest level since 2007, above 5%, with the best gains being against the commodity currencies of the Australian and New Zealand dollar, as well as hitting a 6-week high against the Japanese yen. 

Today’s move higher has been given extra gas by the latest January retail sales numbers which saw a gain of 3%, well above expectations of 2%, more than reversing the declines seen in the November and December numbers at the end of last year.

The pound has come under pressure today, dropping below the 1.2000 level against the US dollar, and UK gilt yields have slipped back after headline CPI fell more than expected in January, dropping -0.6% month on month, and rising 10.1% year on year. Core prices also fell back from 6.3% to 5.8%, as markets looked to price out the prospect of more aggressive rate hikes from the Bank of England.

While the fall in headline inflation is welcome, it’s important not to lose sight of the fact that we’re still in double digit territory on the headline number, while RPI, which includes mortgage costs remained steady at 13.4%.

If you then start to price in the fact that wages growth is still trending higher, currently at an average of 6.7%, and in a lot of sectors much higher than that, its perhaps a little early to start hanging out the bunting when it comes to a peak in UK rates.

Today’s decline in CPI is still welcome but inflation is still squeezing consumer incomes to the tune of over 3% in real terms, and the jobs market is still tight. Wage pressure, which the Bank of England is starting to become a lot more worried about isn’t going to subside soon, and could well go much higher, as evidenced by the recent 18% pay deal agreed with London bus drivers, which means that rates may well have quite a bit further to go. When you think about it in these terms, it makes the idea of keeping rates where they are even more mind boggling, which is the current position of at least 2 MPC members.

Commodities

Crude oil prices look set to fall for the second day in a row after the latest API inventory showed a big jump of 10.5m barrels in data released yesterday, well above expectations. This was followed by a similar 16.5m barrel build in EIA inventories. Gasoline stocks also rose indicating that demand was starting to taper off, as higher interest rates continued to bite. With the US also releasing extra supply from its SPR pressure on prices could well increase.

Gold prices have slid to one-month lows on the back of yesterday’s rebound in yields and today’s firmer US dollar, with the sharp rebound in US January retail sales of 3%, helping to keep the pressure on the downside. 


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