April 24, 2018

Pegler’s market report – 24.04.18: A change of tone on UK interest rates

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (24.04.18) Business section under the title Pegler’s Market Report:

A change of tone on UK interest rates

With positive sentiment around a strong Q1 earnings season continuing to support equities any talk of a trade war appeared to be well and truly on the backburner. The market’s reaction to the recent coordinated strikes on chemical weapon facilities in Syria was fairly muted. The missile attack was reportedly one of the most restrained options crafted by the Pentagon.

UK inflation slowed to 2.5pc in March, easing pressure on the Bank of England (BoE) to raise interest rates in May.

The 2.5pc annual change in the consumer price index (CPI) was down from 2.7pc in February. The decline suggests the inflationary effect of the weaker pound after the Brexit vote is dropping out of the figures faster than anticipated.

After the sudden lurch lower for inflation, the BoE Governor, Mark Carney changed his tone somewhat. In a BBC interview, Carney said the public should prepare for a few interest rate rises over the next few years, but emphasised financial markets are wrong to assume a May rise is a foregone conclusion. The chance of a rate rise has now fallen from 93.4pc to below 50pc.

Carney acknowledged the importance of looking through short-term volatility in economic data, which was giving the BoE pause for thought, adding that there were other meetings over the course of the year when it can consider rates. Sterling fell sharply on the news, which helped to push the main index of leading UK companies northwards.

Wage growth was also weaker than expected at 2.8pc in the quarter to February against the same time last year, according to the Office for National Statistics (ONS).

While wages have started to grow by more than the rate of inflation for the first time in over a year, analysts had been predicting higher wage growth of 3pc.

Strong employment data again accompanied the wage news. The number of people in work increased by 55,000 in the three months to February compared to the quarter before, with 427,000 more than a year ago. The UK employment rate is now 75.4pc, the highest since records began. Unemployment fell to a new 45-year low of 4.2pc.

Sales at Bonmarché continued to deteriorate in the final quarter of its financial year, against a backdrop of distress on the UK high street. The retailer, which sells clothing for women over the age of 50, reported an 11.1pc decline in same-store sales in the 13 weeks to the end of March. This was worse than the 9.7pc slump in the previous quarter and comes at a time of difficulty for British retailers.

On a sombre, albeit positive, note, Dignity shares were given a new lease of life as a 7pc jump in the number of deaths in the UK helped revive the funeral service provider’s fortunes. The company unveiled a strategy shift in January to help it claw back sales from its lower-cost competition but early signs indicated that fewer customers than expected were opting for its reduced-price simple funeral.

By David Pegler, Brighton Capital Management