European markets have opened lower, taking their cues from a drop in the major averages on Wall Street after the Federal Reserve kept rates on hold but signalled that another hike could be on the cards this year. The FTSE 100 is giving back some of yesterday’s gains, which were fuelled by a much softer than expected inflation print that drastically reduces the probability of a hike from the Bank of England at lunchtime today.
Risk-off sentiment has prompted oil prices to ease back after Brent crude topped $95 a barrel this week. However, according to the FT, hedge funds are betting on further gains in the oil market with the potential for prices to surpass the psychological $100 a barrel milestone soon, underpinned by production cuts from Saudi Arabia and Russia.
BANK OF ENGLAND
In one of the most uncertain decisions in a while, the Bank of England could either raise interest rates for the 15th consecutive time today by another 25 basis points to 5.5%, or keep rates on hold for the first time in two years. On Tuesday there was only a 20% chance of no change to the bank rate with economists widely anticipating a hike. However, an unexpected cooling in August’s inflation reading on Wednesday both in terms of CPI and core CPI shifted the balance of probabilities to around a 50-50 split.
On the one hand, inflation is still at 6.7%, sharply above the Bank of England’s 2% target, wage growth remains extremely strong and oil prices have been surging, all supporting the case for further tightening. On top of that, the Federal Reserve (which is often a trendsetter in terms of monetary policy as the central bank to the world’s largest economy) suggested it is likely to raise rates again this year as part of its hawkish hold decision.
On the other hand, UK economic data has been softening, with weak PMI readings, an uptick in the unemployment rate and a disappointing GDP reading for July, highlighting the fragility of the UK economy. Overtightening has the potential to push the UK into a recession, which supports the case for a hold today. This of course would be the preferred outcome for equities, with the FTSE 100, FTSE 250, and the UK housebuilders in particular rallying on Wednesday after the Swaps markets drastically wound back their probability of a hike.
The pound has hit the lowest level since April against the US dollar this morning, while the FTSE 100 and FTSE 250 are also under pressure, reflecting the broader risk-off mood following the Fed’s decision last night.
UK PUBLIC SECTOR NET BORROWING
UK public sector net borrowing hit £11.6 billion in August, up £3.5 billion year-on-year but below the OBR’s forecast for £13 billion. That was thanks to higher central government tax receipts which hit £76.6 billion, rising year-on-year and topping the OBR’s estimate.
However, public sector net borrowing reached £69.6 billion between April and August, £19.3 billion higher than a year ago with a larger-than-expected budget deficit for August, in fact the fourth highest borrowing for that month since records began in 1993.
Inflation has boosted the government’s tax receipts through price rises and wage increases. The government has also been focused on fiscal prudence, limiting spending increases and refraining from tax cuts, also helping to improve the state of the public purse, with less reliance on borrowing. However there is growing pressure from Conservative MPs on Chancellor Jeremy Hunt to cut taxes ahead of the next general election. He will outline his plans for spending and taxation in his autumn statement in November.
JD Sports Fashion (LSE:JD.) said it is on track to reach its annual earnings forecast for pre-tax profit to rise by 5% year-on-year to over £1 billion. The sportswear giant also delivered first half organic sales growth of 12% with particular strength in Europe, up 27% and North America, up 15%. It is also expanding in the Middle East with plans to target 50 franchised stores by 2028 across UAE, Saudi Arabia, and Egypt.
JD Sports has benefitted from strong partner relationships with global players like Nike and Adidas as well as growing brands like New Balance and On Running. This has helped the retailer to navigate the macroeconomic storm clouds such as cost of living pressures and squeezed household budgets. Where possible, it looks like consumers appear to be prioritising their ‘little luxuries’ such as spending on trainers and sportswear.
The stock is surging in today’s session by over 7%, lifting the stock to a year-to-date gain of around 10%. JD Sports is at the top of the FTSE 100, lifting other retailers like Next (LSE:NXT) and Marks & Spencer Group (LSE:MKS) with it.
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