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News

Sterling dumps after the Bank of England stays on hold

Bank of England

European markets have seen an altogether more positive session today, with the FTSE100 rebounding strongly after the Bank of England wrong footed the markets by not nudging interest rates higher when they met earlier today.

Europe

A rate rise had been widely expected, given earlier briefings by senior central bank officials, and when this didn’t happen the FTSE100 underwent a sharp jump into positive territory, although the pound got absolutely pummelled, while gilt yields also fell sharply.

JD Sports share price has shrugged off losing its appeal to hold onto its Footasylum business. This is despite the CMA agreeing that its closest competitors were now the Direct-to-Consumer operations of international brands, rather than its Footasylum business which now has a market share of less than 5%.

While it finally draws a line under this long running saga, the fact it has taken this long to arrive at this decision, and furthermore be completely at odds to all the available logic available, rather begs the question as to what useful purpose the Competition and Markets Authority actually serves. If it can’t get a decision like this right, then one has to reason as to whether it is even fit for purpose. 

Having seen a boost earlier this week after announcing it had delivered on its cost savings program ahead of schedule BT Group, latest numbers have seen the company’s share price rise even further after overseeing another beat on expectations.

Q2 EBITDA came in at £1 88bn, with revenues coming in line at £5.24bn, bringing total revenues for H1 in at £10.3bn, a decline of 3% from a year ago. Enterprise and Global remains the weak spot for BT. Profits before tax declined 5% to just over £1bn, but the company also brought forward its cost savings target of £2bn for 2025 into 2024.

The Openreach fibre to the premises (FTTP) network has now reached 6m premises, with average expected build costs lowered to £250 to £350 per premises.

Sainsbury’s share price has slipped to the bottom of the FTSE100 after unveiling H1 numbers which has seen the business post grocery sales of 0.8% versus a year ago, when comparatives were extremely tough due to the surge in sales due to lockdowns. Compared to 2019, the numbers showed a 9.1% rise.

As far as general merchandise is concerned the picture was less positive, with sales down 5.8%, but were still higher than the same period in 2019 by 1.1%.

Digital sales remained strong coming in at £5.8bn with underlying profit before tax of £371m, a rise of 23% on last year, and more importantly the business remains on course for full year underlying profit before tax of £660m.

CEO Simon Roberts was slightly more cautious about the challenges facing the business going forward, pointing to the challenges over logistics, but confident that the measures were in place to navigate their way through them for best possible Christmas.

Today’s share price decline is even more inexplicable given that today’s numbers are still very good, with any further weakness likely to prompt renewed takeover interest now that Morrisons has followed Asda into private hands.

Banks unsurprisingly have also been sold off hard in the wake of the Bank of England to follow through on what had been widely expected to see a moderate rise in the base rate, with Lloyds Banking Group and NatWest Group getting hit the hardest.

US

US markets have picked up where they left off yesterday, hitting new record highs after weekly jobless claims fell further to 269k, while continuing claims fell to 2.1m, and are now only 400k higher than they were pre-pandemic. This continued improvement in the labour markets bodes well for tomorrow’s US payrolls report, as well as this month’s numbers when they drop in early December. 

Semi-conductor maker Qualcomm has seen its shares surge after upgrading its revenue forecasts for Q4 to well over $10bn, from an average of $9.7bn. It also upgraded its profit forecasts.

On the other side of the coin Moderna has seen its share price slide sharply after the vaccine maker missed on revenues and guided its outlook lower. Revenues came in at $4.8bn missing expectations of $5.86bn, with the company delivering 208bn doses. The company also lowered its vaccine production forecasts for this year to between 700m and 800m doses. Moderna said it was now expecting sales of $15bn and $18bn for the year, down from $20bn, with an increase to between $17bn to $22bn next year. 

FX

On FX markets the pound has plunged after the Bank of England unexpectedly left rates unchanged, and while there was some dissent, with two members voting for a hike, seven of the MPC voted to keep rates unchanged.

This was surprising given that Governor Andrew Bailey had briefed on more than one occasion in recent weeks that a hike was coming due to rising inflation expectations. This view was reinforced by new chief economist Huw Pill although he did soften those comments a touch, but certainly not by enough to rein in market expectations that the Bank might disappoint either today, or next month. Even more puzzling was that neither Bailey nor Pill voted for a hike, although Bailey did admit it was a close call, which is also a bit of a distortion of the truth. 7-2 is not a close call. If my team lose 7-2 in a football game, that’s not a close call. 5-4 is a close call. Again, words matter, and it seems Andrew Bailey appears to have a real problem with this part of his new role. 

In short what we’ve seen today is a failure to communicate by the Bank of England. That isn’t a good thing for price stability, and to see Bailey’s rather jolly demeanour at today’s press conference suggests he doesn’t understand the importance of central bank communications.

He, and the Bank of England in general needs to take some lessons from the Federal Reserve, and how markets reacted to last night’s decision in Washington. There are certainly plenty of reasons to criticise the US central bank, but on communications they do tend to be much better.

To be clear the decision to hold fire can certainly be justified, on the grounds of wanting more time and data. The failure here is the Bank allowed the markets to believe and price in a certain narrative and didn’t push back on it. That is a clear failure in policy.

The US dollar is also higher, hitting a three-week high and shrugging off yesterday’s post FOMC weakness, with traders using the weakness to buy the dip.

Commodities

Crude oil prices have rebounded after yesterday’s losses and ahead of today’s OPEC+ meeting, where members pushed back on US demands to loosen the taps further, voting to increase output by the 400k barrels previously agreed.

Gold prices have also recovered after yesterday’s dovish outcome, with the Federal Reserve pushing back on imminent rate rises, while the Bank of England’s dovish about face hasn’t hurt it either.


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