RIP the Fed Put
Macro & Overnight
Publication of the minutes of the last Fed meeting reaffirmed the FOMC’s resolve on inflation, routing Fed pivoter hopes. 17 of 19 officials want to raise the rate above 5% in 2023 and hold it there until 2024. RIP the Fed Put.
In other data, US manufacturing contracted for the second straight month in December. However, the US jobs market remains tight, with vacancies remaining high, further evidence that the Fed will keep interest rates higher for longer.
The House Speaker saga in US politics is another episodic game of US federal government brinkmanship. After a 5th Vote, McCarthy still couldn’t get the votes to be elected. CNBC reported that members could stay all weekend to get this vote done. The longest it has ever taken is two months. Sit tight and grab the popcorn.
In China, covid cases continue to soar, with the WHO warning that the Chinese authorities were under-reporting the number of new cases. On the issue of the validity of official Chinese data, it is worth reminding ourselves that the official Tiananmen Square death toll remains zero.
UK Company News
Trading updates today from two bellwethers of UK retail activity, Next and Greggs. Good case studies on managing guidance in the face of demand uncertainty and cost inflation.
Next’s update on trading in Q4 was positive, with sales guidance raised for 2023. Next, cautiously assumes full-price sales for the year ending January 2024 will be down -1.5% against the current year. Underlying product sales are expected to be -2.2%, with FY24 PBT guidance of £795m. It expects demand to weaken due to the consumer cost-of-living squeeze (energy, rising mortgage costs), with profits also impacted by rising input costs. It expects employment to remain strong, so it is not anticipating a collapse in demand or any increase in bad debt over current expectations.
Greggs updated on a solid Q4 performance despite strikes and adverse weather. Management continues to see inflationary cost pressure. However, cost visibility is starting to improve, given that pay awards for staff are agreed upon, and food input inflation is likely to ease.
Acquisitive asset manager Mattioli Woods expects maintained profit margins through prudent cost management and further operational efficiencies. Of the nine acquisitions the Group has made since July 2020, all are trading in line or ahead of budget and have delivered earnings to support full payment of contingent consideration. Its trading outlook for the remainder of the financial year aligns with expectations.
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