Must read: FTSE 100 hits 3-month high, shop prices, Royal Mail, Mulberry, H&M

It's been a good start to the day for UK shares, but it's not all good news. Our head of investment explains.

GLOBAL MARKETS 

European markets have opened higher with technology and real estate outperforming. The FTSE 100 is staging gains, while oil prices are also in the green ahead of the OPEC+ meeting this weekend. 

Overnight, China’s official NBS manufacturing PMI fell the most since April, hitting 48 in November versus 49.2 in October and below expectations for 49 as well as below the 50 boom-bust divide as its strict zero-tolerance to Covid approach weighs on factory activity. Meanwhile, protests in China’s manufacturing city of Guangzhou have been escalating amid record daily Covid cases and ongoing strict lockdown measures from the authorities. 

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In terms of the day ahead, the market awaits key economic data including US Q3 GDP (2nd estimate) and inflation figures from the euro zone. Plus Fed watchers will be paying close attention to Chair Jay Powell’s address at the Brookings Institute later today.

BRC SHOP PRICE INDEX 

The BRC-Nielsen IQ Shop Price Index measure of inflation hit the highest level since records began 17 years ago of 7.4% in November up from 6.6% last month. Fresh food inflation also reached a record 14.3% while other food item prices rose by a record 12.4%. 

The index looks as 500 of the most commonly bought times, a slimmer selection than the Office of National Statistics’ official CPI inflation measure, partly explaining why the BRC reading is notably below the headline 11.1% figure for October. Despite this, the data points to record highs all round as rising costs across the board from wages to energy and agriculture are being passed on to consumers in terms of higher prices, especially for meat, eggs, and dairy. Rising essential food prices are adding to the cost-of-living crisis, unfairly impacting those at the lower end of the income spectrum more acutely. Families will be forced to make tough spending choices this festive season, with many opting for a slimmed down version of Christmas this year. 

The Bank of England continues its combat against inflation, with another interest rate hike expected at its next meeting in December as the central bank desperately attempts to slow the rising cost of living.

ROYAL MAIL STRIKES 

Royal Mail workers are staging another 48-hour strikes as the dispute between the postal service and its workers shows no signs of abating. Postal workers already walked out last Thursday and Friday with a further six strike dates planned for December including on Christmas Eve. Last week’s industrial action caused major disruption on Black Friday for retailers while the walkouts just ahead of Christmas are also likely to cause more headaches for retailers at a time when businesses are already struggling with the pressures from cost inflation. However, Royal Mail says that although letters won’t be delivered on strike days, it will try to deliver as many parcels as possible. 

With price levels rising at 11.1%, Royal Mail workers are dealing with pay increases that fall short of inflation, representing a real-terms pay decline, contributing to the cost-of-living pressures. Royal Mail rejected union demands for an inflation matching pay increase this summer, sparking a stalemate between the two sides.

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Earlier this month, Royal Mail’s parent company International Distributions Services (LSE:IDS)s reported a first-half group operating loss of £163 million versus a profit of £311 million a year ago with headwinds from strikes, the end of the pandemic boom in parcel volumes, cost inflation and a long-term decline in demand for letters. Shares in IDS have slumped 56% so far this year.

MULBERRY 

Mulberry Group (LSE:MUL) reported a 1% drop in half-year revenue to £64.9 million and a loss before tax of £3.8 million swinging from a profit in 2021 of £10.2 million, sending shares down by more than 20%. For the eight weeks to 26 November, Mulberry highlighted the ongoing economic and geopolitical uncertainty but said retail revenue saw an improved trend versus the same period last year. 

Traders are selling the shares this morning in response to its disappointing UK sales which slumped 10% year-on-year, damaged by the macroeconomic pressures from rising inflation and slowing growth. Investors are shrugging off the robust performance in China, with sales up 6% despite Beijing’s strict Covid lockdown measures.

Also weighing on the shares are digital revenues which have been struggling with the post-pandemic economic reopening and the return to physical stores. In terms of Mulberry’s bottom line, earnings took a hit from a one-off profit on a disposal of its Paris lease for £5.7 million, also sending shares sharply lower.

H&M 

Hennes & Mauritz AB Class B (OMX:HM B) is cutting 1,500 jobs as part of its global cost and efficiency programme aiming to provide annual savings of around SEK 2 billion. These savings are expected to become visible in the second half of next year but will cost just over SEK 800 million in the final quarter of this year. 

Retailers like H&M are facing a cocktail of pressures including the demise of the high street, cost inflation, a weakening consumer, and the economic slowdown. There is also the bigger issue of the environment that is encouraging eco-conscious shoppers to shift away from buying cheap, fast fashion in high volumes towards fewer second-hand or more expensive longer-lasting purchases instead. As a result, the Swedish fashion brand is being forced to make tough decisions to lower its cost burden, laying off thousands of staff to create efficiency savings. 

Investors are reacting positively, with shares trading slightly higher today, offsetting some of this year’s 34% slide in the shares as the macroeconomic and geopolitical uncertainty as well as the market volatility which has dampened demand for the stock.