Proactive Investors -
11.45am: US markets set for lower start
Wall Street is expected to open lower, with corporate earnings season in full swing as traders return following the extended weekend break and also look ahead to tomorrow’s producer inflation release after last week’s more benign Consumer Price Index.
Futures for the Dow Jones Industrial Average fell 0.2% in Tuesday pre-market trading, while those for the broader S&P 500 index were down 0.3% and contracts for the Nasdaq-100 shed 0.4%.
Banks set the ball rolling on Friday, with mixed fourth-quarter earnings reports from JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C).
“Last week’s inflation data may offer stocks something of a tailwind but given the extent of the collective provisions we have seen made by banks already against bad debts, there’s clear concern that a recession is coming,” said James Hughes at Scope Markets. “Macroeconomic data today is limited but there is a speech by the president of the New York Fed later this evening. If this offers any clues over monetary policy then expect markets to react to this on Wednesday morning.”
Today's earnings highlights include Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) before the bell, with United Airlines following after the close.
“The banks may well dominate, but any guidance from the travel industry will again be welcome, specifically whether the current upbeat trajectory can be maintained,” Hughes added.
December's Producer Price Index is expected to show a decline as lower gasoline prices helped ease production costs. Consensus is for a moderation in the PPI to 6.8% from 7.4% in November.
Back in the UK, the FTSE 100 remains lower, down 18.64 points or 0.24% at 7841.43.
10.50am: Ocado (LON:OCDO) expects "marginally positive" full year earnings
More on Ocado Group PLC, which has disappointed the market with its update on its retail joint venture with Marks and Spencer Group PLC (LON:MKS).
It said it was likely that EBITDA would be negative in the first half of 2023 and positive in the second half.
For the full year it expected "marginally positive EBITDA", which as the FT's Jonathan Eley points out, could be significant:
I strongly suspect that "marginally positive" is way short of the threshold for the paymentOcado said there'll be an update at FY results in Feb and that it's in talks with M&S - presumably arguing that the pandemic changed everything
— Jonathan Eley (@JonathanEley) January 17, 2023
10.30am: Business sentiment picks up in euro area - ZEW institute
Economic optimism in the Eurozone picked up sharply in January, moving into positive territory for the first time since February 2022.
The indicator of economic sentiment for the euro area jumped by 40.3 points to 16.7, according to research institute ZEW.
Looking at Germany specifically, the index increased by 40.2 points to 16.9 points, also the best performance for almost two years.
"For the first time since February 2022, i.e. the month in which the Ukraine war began, they are signaling a noticeable improvement in the economic situation over the next six months," said ZEW president Professor Achim Wambach.
"The more favorable situation on the energy markets and the federal government's energy price brakes have contributed to this. In addition, the export opportunities for the German economy are improving as a result of the lifting of the Covid restrictions in China. Accordingly, the earnings expectations of the export-oriented and energy-intensive sectors have improved significantly. The prospect of a further decline in the inflation rate leads to an improvement in expectations for consumer-related sectors."
10.02am: Footsie continues to tread water
Among the fallers in the leading index, Ocado Group PLC continues to take the wooden spoon.
Its shares are now down 5.27% after a disappointing trading statement from its retail joint venture with Marks and Spencer Group PLC, up 0.34%.
Unilever PLC (LON:ULVR) is 1.19% lower at 4179.5p after analysts at Bernstein moved from market perform to underperform, with a 3500p price target.
And Experian has fallen 1.02% after an update.
Overall the FTSE 100 is down 13.89 points or 0.18% at 7846.18.
“The FTSE 100 fell just short of its record highest close on Monday night and was treading water on Tuesday after Chinese fourth quarter growth figures showed the impact Covid had on the world’s second largest economy,” said AJ Bell investment director Russ Mould.
“China has particular influence over the FTSE 100 thanks to a heavy weighting for commodity stocks of which the country is a rapacious consumer. Rio Tinto’s latest update saw the miner warn of potential supply chain issues and labour shortages in China.
“This runs counter to the narrative that a reopening of the Chinese economy would help to improve the flow of goods in and out of the country and reduce disruption, but Rio’s warning suggests that in the short-term surging Covid cases will bring their own difficulties.
“China’s 2022 growth may have been no worse than expected but it was still the slowest pace since the mid-1970s as Covid restrictions took their toll – and that’s before you factor in the suspicion in some quarters that China doesn’t always paint the full picture with its official data.”
Back with the UK labour market, and both unemployment and wage growth could pick up later this year, says the Resolution Foundation.
A cooling labour market, with vacancies falling and youth unemployment rising to 9.8 per cent, suggest that further job losses could be on the way, followed by the far more welcome return of real wage growth - says @nyecominetti in response to today's @ONS labour market stats. pic.twitter.com/7PDpczRnVb— Resolution Foundation (@resfoundation) January 17, 2023
9.36am: Global growth will pick up next year - IMF
Leading shares continue to slip back, depite a slightly more optimistic outlook from the boss of the International Monetary Fund.
Global growth will bottom out this year and start to pick up in 2024, according to the IMF's managing director Kristalina Georgieva.
The IMF has downgraded its growth forecast three times since October 2021, but speaking at Davos, Georgieva told CNBC : “I don’t see a downgrade now, but growth in 2023 will slow down.
“Our projection is that we will go by half a percentage point down vis-a-vis 2022. The good news though is that we expect growth to bottom out this year and 2024 to be a year in which we finally see the world economy on an upside."
She believed interest rates would continue to rise in the short term due to continuing high inflation.
“Central banks have to be careful not to pull their foot from the brake too early,” she said.
IMF chief: Growth will bottom out in 2023 and bounce back next year @CNBC @hannahswg https://t.co/ov2IpC6GuM— John Ashcroft (@jkaonline) January 17, 2023
Markets are pretty unmoved by all that, with the FTSE 100 now down 12.57 points or 0.16% at 7847.5.
8.56am: Diageo on the rum
Drinks giant Diageo PLC (LON:DGE) has hit the acquistion trail by snapping up Don Papa Rum, a super-premium, dark rum from the Philippines.
It will pay an initial €260mln, funded from its cash reserves, with a further potential consideration of up to €177.5mln depending on performance.
Don Papa Rum was launched in 2012 by entrepreneur Stephen Carroll - a former Remy Cointreau executive - together with Andrew John Garcia, and is currently available in 30 countries, with France, Germany and Italy being its largest markets.
John Kennedy, president of, Diageo Europe and India, said: "This acquisition is in line with our strategy to acquire high growth brands with attractive margins that support premiumisation, and enables us to participate in the fast growing super-premium plus segment."
On an uncertain day in the markets, Diageo shares have edged up 2.68p to 3704.18.
Victoria Scholar, head of investment at interactive investor, said: "While Diageo owns over 200 brands, it has just one rum brand, Captain Morgan, so Don Papa will add to its rum portfolio and allow the drinks giant to focus on premiumisation within the rum category, which it says is still ‘in the early stages’.
"Premiumisation has been a major theme for Diageo which aims to focus on quality over quantity to tie in with drink awareness campaigns and to appeal to increasingly health-conscious consumers. Hand-in-hand with this is the explosion of low and no-alcohol drinks which is the fastest growing segment of the drinks market.
"Today’s acquisition will add to Diageo’s already extensive and varied brand offering that should help it weather the economic downturn."
Overall the FTSE 100 remains in the doldrums, down 9.48 points or 0.12% at 7850.59.
Scholar said: “The FTSE 100 is trading in the red, underperforming a mixed performance across broader European bourses. The UK index is weighed down by Ocado which has sunk..after sales fell short of expectations. High level conversations at the World Economic Forum in Davos continue to dominate the business headlines with focus on slowing global growth, elevated inflation levels, the war in Ukraine and climate change."
8.18am: Weak start for UK markets
Leading shares are edging lower, pausing for breath after the recent tilt at a new record high.
The FTSE 100 is down just 8.85 points at 7851.22 amid mixed signals about future prospects, as the World Economic Forum raised concerns about the global outlook at the annual Davos meeting while China's economy grew by more than expected but still showed a decline.
Ocado Group PLC has dropped sharply after an update from its retail joint venture with Marks and Spencer Group PLC.
It said sales from the partnership rose 0.3% in the fourth quarter, but the average basket value was down 1.3% as customers bought fewer items in the run up to Christmas amid the cost of living crisis.
Richard Hunter, head of markets at interactive investor, said: "Revenues climbed by just 0.3% in the quarter, although average orders per week grew by 1.9%. Active customers also grew by 12.9% year on year to 940000, although tellingly this also represents a marginal drop from the 946000 reported at the third-quarter update. However, the average basket size declined by 1.3% - prices rose (although Ocado points out that the amount of cost inflation passed on to the customer was the lowest among its competitors) but the number of items bought declined...
"The group has yet to turn a sustained profit, and the competitive pressure on the Retail business is unlikely to abate. Meanwhile, frustration has long been in evidence for the Solutions part of the group [not included in this update] to make a meaningful contribution, even if a steady direction of travel is at last being established with further partnerships. In the meantime, the stock may have become the perennial “jam tomorrow” play and the volatility of the share price shows widely differing reactions to prospects."
In response to the update, Ocado has dropped 8.49% while Marks is down just 0.44%.
7.58am: Bank likely to raise rates by 50 basis points following data
The rise in average earnings is likely to persuade the Bank of England to raise interest rates by 50 basis points next month, despite signs of the labour market starting to cool.
Simon Harvey, Head of FX Analysis at Monex Europe, said "More importantly for the Bank of England in the short term is that both measures of wage growth continued to tick higher. Average weekly earnings rose from an upwardly revised 6.2% in October to 6.4% 3M/YoY in November, while excluding bonuses increased from 6.1% to 6.4%.
"Although wage growth tends to be a lagging indicator of overall labour market conditions, the uptick in wage pressures follows forward-looking evidence from the Bank’s latest Decision Maker Panel, which saw businesses' expectations for wage growth in the coming twelve months accelerate by half a point to 6.3%.
"Following a speech by Bank of England’s Chief Economist Huw Pill, who last week placed increased emphasis on wage growth as a source of persistent inflation over the medium term, the Bank of England is unlikely to place too much emphasis on leading indicators of a cooling labour market before the picture becomes overwhelmingly clear across all measures
"For this reason, although today’s data alludes to a cooling in labour market conditions and a future softening in wage pressures, the Bank of England is unlikely to count its chickens before they’ve hatched. We think the consensus will remain for a 50bp hike at February’s meeting."
Paula Bejarano Carbo, associate economist at the National Institute of Economic and Social Research, said: "Today’s ONS estimates suggest that total and regular average weekly earnings grew by 6.4 per cent in the three months to November, representing the strongest growth rate in regular pay observed outside of the pandemic period. Nonetheless, workers continued to face real income falls due to elevated inflation as real total and regular pay both fell by 2.6 per cent.
"Last month, we estimated that steep wage growth in the fourth quarter of this year would be driven by the public sector. November data indicates that, while the public sector saw a significant growth in average regular pay of 3.3 per cent in the three months to November, the private sector saw growth of 7.2 per cent, adding to the concern that high inflation expectations have embedded themselves in the UK labour market."
7.45am: Earnings rise but unemployment rate rises
UK wages rose at their fastest rate since records began in 2001- excluding at the height of the pandemic - but real earnings are still falling thanks to the high levels of inflation.
Average earnings including bonuses rose by 6.4% in three months to November, higher than the expected 6.3%. Excluding bonuses the figure was also 6.4%, compared to 6.2% expected.
But according to the Office for National Statistics, real wages fell by 2.6%.
After taking inflation into account, average pay fell by 2.6% in the year to September to November 2022, both including and excluding bonuses.➡️ https://t.co/JtxSD4qZpz pic.twitter.com/07MVqU9MNH
— Office for National Statistics (ONS) (@ONS) January 17, 2023
The unemployment rate came in at 3.7% as expected, up from 3.5% in the previous three month period.
The ONS also said there were 467,000 days lost to strikes in November.
The public sector strikes come as wages there rose by just 3.3% compared to 7.2% in the private sector.
Headline indicators for the UK labour market for September to November 2022 show that:▪️ employment was 75.6%
▪️ unemployment was 3.7%
▪️ economic inactivity was 21.5%
➡️ https://t.co/o5G002ietv pic.twitter.com/aZS0nqtkJ5
— Office for National Statistics (ONS) (@ONS) January 17, 2023
6.59am: Little change expected in markets
FTSE 100 is seen little changed as investors await the latest UK unemployment and average earnings figures today and look ahead to inflation numbers tomorrow.
Spread betting companies are calling London’s blue-chip index down by around 5 points.
With US markets closed for Martin Luther King day direction has come from Asia where markets were mixed with the Nikkei up but the Hang Seng down.
Economic growth in China was 3% in 2022, official data showed, one of the weakest rates in 40 years owing to the Covid-19 pandemic and a real estate crisis with a quarter four advance of 2.9%, down from 3.9% in quarter three.
Back in London and investors will be eyeing wage growth figures which are expected to rise to slightly from last month’s 6.1% level.
On the corporate front results are due from Crest Nicholson PLC (LON:CRST) while trading updates are expected from Ocado PLC (LON:OCDO), Experian PLC (LON:EXPN) and Hays PLC (LON:HAYS).