Our head of investment rounds up the morning's big news.
European markets have opened cautiously higher while the FTSE 100 is trading flat but remains above 7,400. UK housebuilders are languishing at the bottom of the UK index following a trading update from Barratt Developments (LSE:BDEV), which highlighted the strain on the sector from higher interest rates and build cost inflation.
US markets hit 15-month highs after inflation eased stateside to 3%, potentially paving the way for price pressures to follow suit in Europe.
Overnight China’s disappointing trade data saw exports slump by 12.4% in June, the steepest decline since February 2020, and imports also fell more than estimated. Despite this, the Shanghai Composite closed 1.26% higher after cooling inflation in the US prompted expectations for less aggressive tightening from the Fed.
UK GDP contracted by 0.1% in May month-on-month, beating expectations for a drop of 0.3%, with the production sector mainly contributing to the fall. Year-on-year the economy shrunk by 0.4%, also outpacing forecasts for a reading of -0.7%. GDP is now 0.2% higher than its pre-pandemic level from February 2020, but there was no growth in the whole economy across the three months to May.
There was no change in the total services output in May. However, human health and social work activities outperformed thanks to no industrial action by junior doctors after strikes took place in April. There was increased output in arts, entertainment and recreation, offset by a drop in retail trade and auto sales as well as less demand for recruitment services driven by the drop in job vacancies. Output in consumer facing services fell by 0.2% in May and is stuck 8.8% below pre-coronavirus levels, with a fall in food and beverage services as well as real estate activity in May.
Overall GDP fell slightly on the back of weaker manufacturing, energy generation and construction as well as the three bank holidays during the month. Despite the King’s Coronation, sales in pubs and bars also fell after a strong April.
The stronger-than-expected GDP figure echoes the Bank of England’s comments yesterday that the UK economy is proving to be resilient to the rising rate environment, so far managing to stave off a recession. Perhaps the latest data could embolden the central bank to go further in terms of rate hikes to curtail lingering inflationary pressures. However, Prime Minister Rishi Sunak’s new year pledges for the economy look increasingly difficult to achieve given the macroeconomic headwinds, with sluggish GDP and rampant inflation.
The pound hit a 15-month high this week against the US dollar after US CPI fell to 3% in May, while the UK still struggles with sky-high price pressures, with growing potential interest rate differentials boosting the allure of sterling. GBPUSD is in the green this morning, trading above the key $1.30 handle and the pound is also higher against the euro.
Hays (LSE:HAS) reported like-for-like net fees down 2% in the quarter ended 30 June. Germany was a bright spot while the UK and Ireland, Australia, New Zealand, and the rest of the world suffered. There was growth in temporary hires but a drop in permanent roles. However, Hays reiterated its full-year operating profit to meet expectations for around £196 million.
Temporary and contracting roles are a key growth engine for the white collar recruitment firm at the moment given the macroeconomic headwinds, which are deterring companies from taking on the fixed costs of permanent hires. Hays appears to be struggling alongside Robert Walters (LSE:RWA) and PageGroup (LSE:PAGE) in an industry that ebbs and flows with the economic cycle.
With job vacancies in the UK declining for twelve consecutive months, the appetite for hiring is diminishing, weighing on the recruitment sector. This morning’s UK GDP figures for May similarly suggested there was less demand for recruitment services in May amid the fall in job openings.
Similarly, UK unemployment ticked up to 4% in the latest data, again highlighting the increased strain on the labour market amid the backdrop of inflation and weak economic growth. However, labour shortages and strong wages are tempering an even steeper slide in recruitment.
Shares in Hays are under pressure today, bringing its year-to-date loss to around 13%, underperforming the wider UK market.
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