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Markets mark time after US PPI slows less than expected

European markets have spent most of this week slightly on the back foot, perhaps not surprising given the gains we’ve seen over the past few weeks, as an element of caution kicks in ahead of what is likely to be a big week for markets next week.

Europe

With the Federal Reserve, ECB and Bank of England all set to raise rates by 50bps, attention is now shifting to what comes next against a backdrop of slowing growth, and doubts about the sticky nature of inflation, as yields edged back higher after US PPI came in higher than expected for November.  

DS Smith shares have rebounded after finishing the day lower yesterday, a response which diverged from the positive nature of the H1 numbers. A 51% rise in revenues to £4.3bn saw profits before tax rise by 80% to £315m.

Holiday Inn owner InterContinental Hotels Group shares are also higher after an upgrade from Peel Hunt, who say the shares have been left behind and that the UK market is undervalued. This may also help explain why Whitbread shares have edged higher as well, given they own Premier Inn.  

Associated British Foods latest trading update saw the Primark owner keep its full year guidance unchanged, although they did say that inflation to keep upward pressure on input costs, with the shares slipping back slightly.  

House builder Berkeley Group has seen its shares edge higher after reporting a modest 1.6% decline in H1 revenues to £1.2bn, while reporting a 1.2% decline in profit before tax of £284.8m. A 19.1% rise in operating costs to just shy of £90m reflects increased building and input costs, which has only been partially offset by higher prices. Berkeley went on to say that its ability to offset costs may be placed under pressure if costs continue to rise in a rising interest rate environment. The company kept its full year guidance unchanged.

US

After reversing five days of declines yesterday with a positive finish, US markets slipped lower on the open after PPI inflation for November came in slightly hotter than expected at 7.4%, but still down from the 8.1% seen in October. Core prices also fell back to 6.2%, from 6.8%.

The move higher in yields in the wake of the PPI number is acting as a drag on US markets as we look to close the week lower, as attention turns to next week’s CPI report and Fed meeting.

Broadcom shares have moved higher, as it looks to test its November highs, and build on the rally from the October lows, after the company beat forecasts on its Q4 numbers, as well as revising its Q1 revenue guidance to $8.9bn, above expectations of $8.8bn. Q4 revenues came in at $8.93bn, helped by outperformance from its semiconductor unit. Profits came in at $10.45c a share above forecasts of $10.25c.

DocuSign shares have also risen after revenues and profits for Q3 beat expectations. Q3 revenues rose 18% coming in at $645.5m while profits came in at $0.57c a share. The company also upgraded its full year guidance, edging its annual revenue forecast of between $2.49bn to $2.5bn, as gross margins improved in Q3 to 83% from 80.6%.  

Lululemon shares have dropped sharply despite a decent set of Q3 numbers. Net revenues came in at $1.86bn, a rise of 28%, while profits came in at $2 a share. For Q4 the company was much more bullish given the lead-up to Christmas with earnings of $2.61bn to $2.66bn, which was slightly at the lower end of forecasts. Gross margins also slipped during Q3, slipping to 55.9%, while inventory levels rose 19% in the quarter to $1.74bn.

Carvana shares have continued to fall as negotiations continue with respect to sorting out its debt problems   

Netflix shares have edged higher after being on the receiving end of two broker upgrades which raised the price target to circa $400.

FX

The US dollar pushed to the highs of the day after US PPI came in higher than expected for November, at 7.4%. While disappointing that we didn’t see a softer number than forecast, it doesn’t change the fact that the direction of travel remains intact, and that inflation pressures have continued to ease. Just because the speed of the slowdown is lower than expected, it still doesn’t change the direction of travel and with crude oil prices now in negative territory for the year, sometimes it's more about the destination than the speed with which you get there.

Against today’s choppiness we’ve seen the pound and the Japanese yen edge higher, with the pound once again struggling to overcome the 1.2300 area against the US dollar.

The euro also had another crack at the 1.0600 area before slipping back again.    

Commodities

Crude oil prices have rebounded off their lowest levels this year after Russian President Putin said that Russia might look to cut output in response to the energy price cap. Today’s modest rebound however doesn’t change the fact that oil prices are now well below the levels they were at the time of the Russian invasion of Ukraine.

Gold prices have had another quick look above the $1,800 level after the latest US PPI numbers, but have since retreated from the highs of the day as 10-year yields edge up and away from the 3.5% level.


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