Market Commentary: Week to 1 August 2023

1 August 2023

Market News

The FTSE 100 rose by approximately 0.4% last week to finish the week slightly below 7,700 as interest rate and inflation forecasts continue to lead markets. A Reuters poll of economists showed that the majority of participants expect the Bank of England (“BoE”) to raise rates by 0.25% to 5.25% this Thursday. Although some economists and market participants anticipate a repeat of June’s 0.5% increase, as inflation remains higher in the UK than in other developed economies. Markets previously priced in a peak terminal rate of 6.5% on 11 July after data showed record wage inflation, however expectations have since dropped to 5.75% after a larger than expected decline in inflation a couple of weeks ago. 

UK Treasury advisors expressed concerns that the BoE may overtighten and potentially push the UK into an unnecessary recession. The majority of UK Chancellor Jeremy Hunt’s Economic Advisory Council believe that the BoE should slow the pace of rate increases after the better than expected inflation data. The BoE have been criticised for underestimating inflation in recent months and it seems the Monetary Policy Committee remain focussed on continuing aggressive monetary tightening to further tame inflation, particularly as concerns regarding second-round effects rise. It appears the BoE would therefore like to see further evidence inflation is slowing before altering the pace of monetary tightening, particularly in the largest areas of concern which currently includes high wage growth and services inflation. 

The UK flash Purchasing Managers Index (“PMI”) for July was also announced which showed the economy is close to stalling with the composite reading showing a six month low of 50.7. This was versus a consensus of 52.3 and a prior reading of 52.8 after services sector PMI fell to its lowest level since January 2023. The pace of contraction in manufacturing accelerated with the latest PMI at a 38 month low of 45.0 versus a consensus of 46.0 and prior reading of 46.5. The primary driver for the slowdown was due to no pickup in new orders after a five-month expansion and a sharp reduction in backlogs of work. Average cost burdens increased sharply in July due to high wages, but the overall rate of inflation was the weakest since February 2021.

The housing market experienced some positive signs as the Financial Times reported that three of the UK’s largest lenders and several smaller institutions cut mortgage rates due to the updated BoE base rate expectations. This led to a decline in swap rates which meant that mortgage rates declined between 0.15% and 0.55% across the various lenders. Although this is a step in the right direction, the impact on households refinancing expired fixed rate mortgages is still likely to be severe. Property portal Zoopla announced that they expect a return of modest falls in prices and in its latest update highlighted that 7% of sellers reduced the asking price in July, more than half above the five-year average. Zoopla is forecasting a 5% fall in prices by the end of the year, which still leaves it 15% above pre-Covid levels.

Stock Focus

Ocado Plc, the UK based technology-led software and robotics platform, features again in this week's market commentary as its share price surged approximately 42.1% last week. The company has received a wave of positive news recently including rumours of a potential bid from Amazon, better than expected earnings and a positive settlement hearing which have all contributed to the strong share price performance. The £200 million settlement appears to have reassured investors and prospective partners of the continued unique access to Ocado’s technology and patent protection. 

Croda International Plc, the life sciences and consumer care company, saw its share price increase by approximately 4.9% last week after announcing its half year results. The company announced a fall in first-half sales and adjusted pretax profit, but stated that it was still on track to hit its full-year profit target. The results showed that the company’s consumer-care business did better than expected, whereas its life sciences and performance technologies operations fell short. Croda also quantified the extent of destocking challenges experienced in all three of its sectors during the first half of 2023, providing analysts with greater clarity.

Centrica Plc, the energy services and solutions company, announced its interim results last week as its shares finished the week approximately 5.8% higher. Centrica announced a return to profit for the first half of 2023 alongside increasing its revenue. The company also announced an extension of its current share repurchase programme by £450 million, taking it to a total of £1 billion. The launch of the extra buyback will commence after the initial £550 million scheme, launched in November 2022, is completed in October 2023. The company expects to reach the £1 billion buyback target within 12 months after already completing buybacks of £4

Market Commentary prepared by Walker Crips Investment Management Limited.

Important information

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