Unsettled sentiment due to Fed’s defensive stance, BofE rate decision and JD Sports profits race ahead

by | Sep 21, 2023

  • FTSE 100 opens lower as investors show nerves due to Fed’s hawkish stance on inflation.
  • Expectations that the Bank of England will hike interest rates again later have dipped but one last increase could still be on the cards.
  • UK public sector borrowing comes in below forecasts in August offering the government some room for manoeuvre.
  • JD Sports races ahead with new store openings after pre-tax profits jump.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘’Nervousness is pervading sentiment as investors assess the prospects of interest rates staying higher for longer. The mood is being driven by the US Federal Reserve taking a defensive stance in the fight against inflation, pausing for now but signalling a fresh rate hike to come. While Fed officials are keeping the boxing gloves on ready to spring into action again, there is increased speculation the Bank of England may call time on hikes although it is still expected to keep interest rates at elevated levels until later next year. 

Earlier this week another hike from the Bank of England looked highly, but yesterday’s surprise fall in inflation, has made the decision too close to call. On one end of the scale of uncertainty is hot wage inflation, and on the other signs the UK economy is already shrinking, with demand now being squeezed out of the mighty services sector. Policymakers will have to weigh up the risk of pressing pause now and potentially allowing inflation to creep up again or hiking once more which could push the economy into a deeper downturn. Either way the vote is likely to be a fractured one. While on the face of it, the faster than expected fall in inflation should provide relief amid the cost-of-living crisis, it’s another big indicator that the economy is struggling. Companies are more reticent to hire staff, lockdown savings are dwindling, more homeowners are being swiped by higher mortgage costs and it’s all adding up to a picture of fragility, which may well put consumer discretionary stocks under more pressure. 

The latest public sector finances snapshot doesn’t offer as much good news as hoped. Borrowing still came in at the fourth highest level for August, £11.6 billion. It was below the original forecasts made by the Office for Budget Responsibility of £13 billion, but there had been recent expectations it would dip by a little more. Tax receipts came in at £76.6 billion, slightly more than the OBR predictions while VAT takings of £16.8 billion also came in above forecasts, with the government able to benefit from rising wages and the higher costs charged by companies. This might give the government a sliver more room for manoeuvre for potential tax cuts or increases in budgets, but it’s not going to move the dial that much. Spending may be the priority,  given the pressing structural problems facing the UK right now, particularly in health and education, with labour disputes ongoing and schools crumbling. The risk is that the economy continues to contract, unemployment ticks up again and wage demands slow, and government finances worsen again.

The revision to the US growth snapshot comes in stark contrast to the UK’s prospects. Fed policymakers have flagged that they expect fewer cuts than forecast in 2024 because of the buoyancy of the economy. Policymakers reckon economic activity is going to step up between now and the end of the year, with growth for 2023 now forecast to come in at 2.1%, more than doubling the forecast it made in June of 1%. Although this softer landing for the economy is welcome, a prolonged period of higher rates is less so. 

JD Sports Fashion is benefiting from the resilience of US consumers, with sales in its US division growing by 15%. The lure of a new pair of trainers still clearly holds sway over household budgets even if purse strings are tightened elsewhere. JD Sports Fashion is benefitting from big brand power, and it’s not just teenage pestering that keeps revenues rolling in, as wearing the latest sneakers and trending athleisurewear now appears to be a priority for all ages.  The company is on track to deliver annual pre-tax profit growth of 5% and it is sprinting ahead with its plans to open 200 new stores globally by next January.

Although shoppers’ enthusiasm for the right product has been holding up stateside, there is still the prospect of fresh fragility ahead for the American economy. Consumer spending has until recently been more resilient than expected, despite the rapid ratcheting up in rates, but as pandemic savings and stimulus cheques have dwindled fast, weakness is showing signs of seeping in. A resumption of student debt payments in October is also set to weigh more heavily on consumer sentiment with many borrowers set to divert spending from elsewhere to pay what they owe every month. Already bigger ticket items like used cars and furniture have borne the brunt of the caution, and lower demand has seen prices falling back. So, the presumed softer landing might end up being a rather thin cushion, and the Fed may well be forced to cut rates more quickly than its current forecast suggests.’’

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