Wednesday May 1 2024 09:03
8 min
The FTSE 100 index was flat and up a bit this morning in contrast to sharper falls across equity markets ahead of the Federal Reserve decision today. In fact, it’s been a much better time for the UK market.
The FTSE 100 index rallied 3% through April and notably hit fresh record highs. Miners led the way with Anglo American up 40% on the BHP takeover bid. Fresnillo rallied 25% and Antofagasta was 12% to the good. Year-to-date, the FTSE 100 index is up over 5.6% as of May 1.
This morning sees a slew of company updates. Hip hip hooray – medical equipment maker Smith and Nephew rose to the top of the FTSE 100 with a bullish Q1 update. Hip and knee replacements are booming.
Next is down a touch despite reporting full price sales ahead of estimates in the quarter to the end of April. Sales +5.7% were above the 5% guided – sticks to profit guidance pf £960mn – but did say sales in Q2 to be a bit lighter than last year due to “weather.” GSK shares rose more than 1% as it upped guidance on improved vaccine sales. Total sales rose 10%, or +13% ex-Covid. Aston Martin remains an absolute car crash, shares dipping as much as 13% this morning with SUV sales falling flat and pre-tax losses almost doubling.
Wickes was lower as the soft trends from Q4 continued and saw sales in the first 16 weeks of the year declining by 4.2%. No wonder given the property market – people don’t get a new kitchen every year if they are not moving house. Management said DIY sales remain in moderate decline overall; “customers continue to be enthusiastic about home improvement but are focusing on smaller projects”. Post-Covid trends still sees consumers prioritising travel and leisure over investing in their homes.
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European shares fell for a second day on Tuesday to end the month on a sour note, the DAX shipping more than 1% on soft numbers from the likes of Volkswagen. Mainland Europe is shut for the May Day holiday, so focus is on London and New York.
Wall Street tumbled to end an ugly month – the Dow closing down 1.6% for the session and 5% for the month, its worst monthly performance since Sep 2022. The S&P 500 index and Nasdaq both fell by more than 4% as investors pushed back expectations for rate cuts. Tech had another bad day, with Tesla stock down more than 5% as Musk fired his supercharger team. Amazon fell over 3% but bounced afterhours as profits trebled. AMZN numbers are encouraging for the Street with ad revenues +24% and AWS +17%. Gains for the shares capped by management saying they expect the company's spending for the year ahead to increase "meaningfully" from last year.
Yesterday the market was rocked by a hotter-than-expected Employment Cost Index from the US, which climbed to 1.2%, its highest in a year. Here is BMO to explain: The acceleration in the ECI supports the narrative that the last leg down in inflation is going to be slow and uneven and reinforces our call for the Fed to remain on hold until September.”
The implication is that the labour market is still too hot for the Fed to cut. And it confirmed the emerging story painted by three hot CPI prints and the quarterly core PCE beat. Treasury yields jumped – the 2yr back above 5% and 10yr towards 4.7%. That gave more support to the dollar, which rallied to its best against major peers in six months.
The gold price fell to its lowest in a month and crude prices also declined further after breaching the 50-day SMA yesterday. Copper, which had been rallying hard all year, fell sharply with a big reversal candle.
Elsewhere, the USD to JPY pair remains volatile at 158 and shows signs of retesting 160 to test the Bank of Japan’s resolve. The government is said to be mulling tax breaks to boost yen repatriation.
It will be a wait-and-see meeting – no change is expected. I detailed this a bit more thoroughly on Monday, but in short it’s about what is the Fed’s reaction function to higher & prolonged inflation. To ease or not to ease?
There is a line in a statement to watch which has for the last three months has stated that “inflation has eased over the past year but remains elevated”. If they revert to “inflation remains elevated” or some other comment about disinflation stalling, then we know where they are.
A big question for the market is whether the Fed sticks to its belief that inflation is coming down, or whether it throws in the towel and says “yeah, we got it wrong again, we are going to have to stay higher for longer”.
Which takes to the all-important data, which could be about to surprise again. Morgan Stanley expects inflation data “to reverse to downside surprises in April [...] Several data series indicate a rapid deceleration in rents [...] Financial Services inflation is linked with stock market returns, and the reversal in the SPX in April will likely push this volatile component of inflation indices down ... Continued China deflation should keep US goods prices broadly in deflation.”
We don’t have a fresh Summary of Economic Projections this time so the focus is on Powell. A couple of weeks ago, after three hot CPI prints on the bounce, Powell warned that recent inflation data indicated that “it’s likely to take longer than expected" for the FOMC have confidence inflation is returning to 2%.
Expect movement today – Citi says the implied 1% move in the S&P 500 today is the biggest FOMC-inspired volatility since May 2023.
Ahead of the Fed statement we have ADP employment numbers, manufacturing PMIs and the JOLTS report.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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