Market update report from Investment Director, Steven Lloyd

As I write (on Wednesday 3rd May) markets are once again braced for another interest rate rise from the US Federal Reserve (Fed). A further 0.25% hike is widely expected but market participants will be closely scrutinising comments in the announcement for any hints to the future path of interest rate rises. Given the recent pressures on the US banking system, many will be hoping for a signal that the Fed will take a pause from raising rates in June.

The US labour market has been somewhat stronger than many anticipated although recent data is showing tentative signs that job openings may be slowing. The March Job Openings and Labour Turnover Survey (JOLTS) noted that there were 9,590K job openings in the US in March, which was less than the expected 9,640K and below February’s 9,974K openings. The Fed, in its war on inflation, may welcome the continued decline in job openings as this indicates a softening labour market which, in turn, bodes well for the future path of inflation. Therefore, a pause in interest rate rises could well be on the cards in summer. 

The potential effect on markets is likely to be fairly muted, in my opinion. This is because the market is looking for reasonably aggressive rate cuts later this year. For the time being, with inflation still too high (albeit slowing) I don’t believe that the Fed can cut interest rates without risking its inflation fighting credibility.

Supermarket profiteering?

Other news of note is that the Liberal Democrats have called for an investigation into alleged profiteering by supermarkets in the UK. This comes as the British Retail Consortium (BRC) released data showing that food prices were up 15.7% in April, compared to April 2022. While overall food inflation rose in the year to April, according to the figures from the BRC-NielsenIQ shop price index, fresh food prices accelerated last month to 17.8%.

It is alleged that supermarkets have been raising prices more than they need to, in the knowledge that consumers expect higher prices, to protect their margins. Particularly, wholesale food prices have started to come down of late and yet prices on the shelves continue to rise.

The supermarkets argue that wholesale prices are not the only factor determining what you and I pay at the till. The cost of labour, shipping and fuel all contribute and so, they argue, there is a lag of up to 9 months before falling wholesale costs are reflected on the shelves.

Nonetheless, some will be sceptical of this argument as two of the major supermarkets, Sainsbury's and Tesco reported annual profits of £690 million and £753 million respectively. However, it should be noted that Sainsbury’s profit margin had slipped due to rising input costs and Tesco's profits were around half that of the previous year. So, whilst calls for investigations into profiteering might resonate with disgruntled voters, the underlying picture is nuanced.

Scrutiny over bumper profits

BP’s results have also drawn a lot of attention since being announced on Tuesday 2nd May. The company announced $5 billion of profits for the first quarter of 2023 alone. Inevitably some political figures are up in arms over the oil major making vast profits whilst the cost of energy remains so high for consumers. There have already been renewed calls for a change to the windfall tax introduced last year.

Investors in BP were also not best pleased as, despite huge profits, BP bought back less of its own stock than expected. To briefly explain, a company can choose to “buy back” its own shares for various reasons. Most commonly, this is done to increase the value of the equity shares and to make their balance sheets appear more attractive. Fewer share buy backs mean less support for the share price and BPs shares fell 4-5% in the hours after the announcement.

Share price falls accelerated as BP’s chairman noted that oil demand in Northern Europe was “a little soft” and that the expectation is for oil demand to slow globally. Softer oil demand might be attributed to a slowing economy.

These comments, combined with the weaker JOLTS report led to renewed concerns of US recession. Markets seem to be waking up to the recession risk and so my view is that volatility could remain elevated for the rest of the year.

Until next time, stay well.