Must read: German recession, Fed minutes, Ofgem, Pets at Home

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS 

After a sharp slump of 1.75% for the FTSE 100 on Wednesday, European markets look set to open flat to higher, recouping some of those losses. 

In Germany, first quarter GDP was revised lower from 0% to -0.3%, following a contraction of 0.5% in the previous quarter, landing Europe’s largest economy in a technical recession over winter. 

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In the latest meeting minutes from the Federal Reserve after it raised rates for a tenth consecutive time in May, policymakers said they had become ‘less certain’ about the need for additional interest rate increases, adding ‘further policy firming after this meeting may not be necessary.’ However, the Fed still warned about upside risks to inflation, suggesting that while it may hold off from raising rates in June, there could be further rate increases at a later date. 

Rating agency Fitch has placed the US AAA rating on negative watch, citing concerns about the looming US debt ceiling deadline. In 2011, S&P cut the US rating to AA-plus, which triggered a major market sell-off. The Democrats and Republicans have yet to find common ground and reach a deal, with hopes that the stalemate will finally end in the days ahead so that a catastrophic US default can be averted. However, time is ticking, prompting a bout of market nervousness as the deadline draws closer. 

OFGEM 

From 1 July, Ofgem is setting the UK energy price cap at an annual level of £2,074 from July, falling from £3,280. The energy regulator says this represents both a reduction in the last quarter’s cap and a reduction in how much customers will pay on their bills. While the price cap has dropped from its winter peak, it remains well above the pre-2021 average. In the medium term, Ofgem says it is unlikely to see prices return to the levels seen before the energy crisis. Cornwall Insights expects another drop in the price cap in October. 

In March’s Spring Budget, the government announced a three-month extension to the £2,500 Energy Price Guarantee (EPG) support scheme until the end of June, saving a typical household £160. At the end of next month, the EPG will expire as wholesale energy prices retreat from last year’s highs following Russia’s invasion of Ukraine which sent commodity prices soaring. 

The decline in wholesale energy prices could provide a fillip to consumers and businesses, both of which have been struggling with elevated gas and electricity bills, fuelling cost-of-living and cost of doing business pressures. A reduction in energy costs will also help the Bank of England with its mission to bring inflation back down under control. 

However, there is likely to be a lagged effect given that companies purchase energy in advanced in order to hedge their energy risk and smooth out costs. Ofgem recently changed its process so that it updates the price cap every three months instead of six so that cost changes can take effect more quickly.

PETS AT HOME 

Pets at Home Group (LSE:PETS) reported full-year group revenue growth of 6.6% to £1.4 billion with underlying profit before tax up 4.8% to £136.4 million. It said current trading remains strong, but it is proactively managing cost pressures related to foreign exchange, energy, and wages. It completed its £50 million share buyback programme and has announced a further £50 million for the year ahead. It expects 2024 underlying profit before tax of £136 million, in line with analysts’ expectations. 

Vet services was a particular bright spot, up 13.3% in terms of revenue, highlighting the resilience of this part of its business amid cost of living pressures. Pets at Home CEO Lyssa McGowan said this was a ‘record performance over the past year’, with the group managing to expand its market share thanks to strong demand from pet owners. After the Covid-era boom in pet-related spending, the company has managed to defy the economic doom and gloom to deliver an impressive set of annual results and return cash to shareholders, proving that pet spending is an economically resilient category amid the macro headwinds. 

The stock has been outperforming this year, up around 28% until Wednesday’s close and is up by more than 190% over the past five years. There is a bullish assessment on the stock from the analyst community, with eight buy recommendations, two holds and just one sell and an average price target up 10% from the current share price.