Housebuilders and retailers react to Bank of England warning

A bad year for the FTSE 250 index shows little sign of improving after the latest interest rate decision and a grim outlook for consumers and homebuyers.

Beleaguered UK-focused stocks including Persimmon (LSE:PSN) and JD Sports Fashion (LSE:JD.) were dealt another blow today after the Bank of England warned of a two-year recession.

The Bank’s dire projections and biggest interest rate hike in 33 years did little for recent hopes that sectors such as retail or housebuilding are close to oversold territory.

Mid-cap investors were particularly rattled as sterling fell 2% against the US dollar following rate decisions at Threadneedle Street and in the US over the past 24 hours.

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A weaker pound typically benefits overseas earners in the FTSE 100 index, helping the top flight to remain near its opening mark. In the FTSE 250, however, the UK-focused benchmark lost 100 points in the moments after the UK central bank’s gloomy forecasts.

Some of the pressure on sterling related to suggestions from governor Andrew Bailey that markets may be going too far by pricing an eventual base rate as high as 5.25%.

Capital Economics is unconvinced, however, and thinks that the Bank may have to raise interest rates by 0.75% in December and by 0.5% in both February and March

UK economist Ruth Gregory added: “With price/wage expectations still elevated, we think the inflation battle is far from won and that rates will peak at 5% rather than the 4.25% expected by most economists.”

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Shares in property companies including Hammerson (LSE:HMSO) all fell sharply today and cyber security firm Darktrace (LSE:DARK) was among other high-profile casualties, having warned last month about the drag from an “unusually strong” US dollar.

Today’s developments meant another setback for recovery hopes in the housebuilding sector, with Persimmon (LSE:PSN) 55% lower for the year to date after retreating another 3% or 33p to 1,288p. Barratt Developments (LSE:BDEV) fell 8.3p to 372.8p, leaving it 51% lower in 2022.

Deutsche Bank recently told clients that the recent sell-off for the sector had been “brutal” and that much of the industry’s anticipated hard landing looked to be in valuations.

The prospect of spending power being further squeezed by higher mortgage costs has also left JD Sports Fashion (LSE:JD.) back at levels last seen in the weeks after the start of the pandemic.

The trainers and sportswear business recovered to 233p by November 2021, but now stands at 97.9p after falling 3p today. Elsewhere in the retail sector, Marks & Spencer (LSE:MKS) slipped to below 108p after losing 3p in the minutes after the Bank decision and economy update.

And despite yesterday’s reassuring third-quarter trading update, Next (LSE:NXT) shares were this afternoon back below 5,000p after falling 88p across the session.

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Howden Joinery Group (LSE:HWDN) was one of the few consumer-focused stocks still in positive territory after the FTSE 250-listed kitchens supplier nudged up full-year profits guidance.

Like Next yesterday, Howden gave a reassuring update on the state of consumer spending as it reported year-on-year sales growth of 6.6% during its busiest trading period.

Chief executive Andrew Livingston said: “Trade customers have remained busy into the autumn with a good pipeline of work, as consumers continue to invest in and improve their homes.”

The shares rose 18.2p to 536.8p, having dropped 42% this year to leave Howden trading at around 9.6 times forecast 2022 earnings. Peel Hunt believes this is too low for a well-run business that continues to take market share.

It has a price target of 700p, adding: “The shares are assuming a very difficult 2023, which may be overly pessimistic. For those prepared to look further ahead, now is the time to be thinking about adding Howdens to portfolios.”