Inflation concerns stoke wariness, Shein’s IPO doubts and M&S Christmas cheer
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Inflation concerns have stoked fresh wariness on the markets, with worries that a pressure cooker of prices increases is heating up again. The FTSE 100 has opened slightly higher but gains are likely to be held back as investors assess data indicating that interest rates may have to stay higher for longer. Indices in Asia also traded lower after a sharp slide in stocks on Wall Street. Cold buckets of caution have been thrown around as multiple data points indicate that higher inflation is becoming persistent.
The Institute for Supply Management’s monthly survey of the US Services sector showed prices jumped to the highest level since last January. Job vacancies also rose, by more than expected, reaching a six-month high. Although S&P futures indicate a small rebound, nervousness is set to remain, and all eyes will be on Friday’s closely watched jobs number. It’s expected to be robust, indicating persistent strength of the US economy. Although such a show of strength might be seen as good news, it’s leading to concerns that the Fed will go even slower on interest rate cuts. Already the Fed had warned there is likely to be only two reductions this year, down from four forecast in September, but speculation is brewing that there this could be reduced to just one if price pressures persist. The unpredictability of the incoming Trump administration and the potential impact of his tariff plan on inflation is also adding to concerns. Amid expectations of a higher for longer rate environment, Treasury yields have risen to around 4.67% the highest level in eight months.
Long-term dated UK government bonds are hovering near highs not seen since 1998, with 30-year gilts trading around 5.24%. 10-year gilts have also crept higher, above levels seen in October 2023 after the Trussenomics mini-Budget. In the UK, there is also particular concern brewing about stagflation taking hold, given that inflation has been creeping up and pay growth is still hot, while the economy has been stagnating. There are concerns this may limit the interest rate reductions this year. It’s unclear to what extent the UK government’s investment in infrastructure will provide a boost to growth over the longer term. It seems appetite to buy long-term dated UK government debt has fallen amid this uncertainty.
Higher fuel prices are among the inflationary pressures weighing on economies, and Brent Crude, the benchmark has gained more strength, rising above $77 dollars a barrel. Industry API data showed US oil stocks fell by more than 4 million barrels last week, way more than the 250,000 drop expected. Prices are also being driven up by expectations of tighter supply amid sanctions on Russia and China, with Saudi Arabia increasing prices for Asia customers for the first time in three months. There is also an expectation of higher energy demand from China going forward, given bigger stimulus moves forecast from authorities to boost the economy. These increases are set to filter through to the pumps, adding to the headaches for central bank policymakers. But despite the crude gains, Shell shares have dipped back as investors show disappointment after guidance was revised lower for its gas division. Maintenance at the Pearl Gas to Liquids plant in Qatar is proving to be a spanner in the works, with natural gas volumes set to be reduced.
British luxury car maker Rolls-Royce is counting on rising demand from its ultra wealthy customers as it plans an expansion of its Goodwood plant to focus on bespoke models. Although the company, which is now a BMW subsidiary, sold 5% fewer cars globally in 2024 than in 2023, it’s seeing specific appeal for highly personalised detailing. Driving further up the luxury route is now firmly on the roadmap at Rolls Royce. With the Chinese economy expected to be looking up this year, thanks to stimulus expectations, the hope is that rich Asian buyers will demand super high end trim, with the investment meaning that more customers will be able to use its Bespoke services enabling them to craft original cars.
Shein may be a juggernaut in the apparel world but its ambitions to list in London could hit a roadblock following sharp criticism from MPs investigating its supply chain. Its general counsel for the EMEA region, Yinan Zhu, provoked the ire of British lawmakers for repeatedly failing answer questions about the origins of its cotton, with the chair of the Business and Trade committee saying they were horrified by the lack of evidence. Shein is currently going through an approval process with the FCA as part of its listings application and it looks likely that given the concerns of MPs, that there will be further hold-ups. Fast fashion has increasingly become an ESG risk for investors and one the regulator will be alert to, particularly given how the committee hearing has gone. The sector raises serious concerns about the sustainability of low-cost materials, the environmental impact of production, and the human rights of the labour force behind the low price tags.
It wasn’t just any Christmas, it was an M&S Christmas, in terms of winning market share in the grocery sector. M&S not only saw its food and drink sales rise 8.7% but its partnership with Ocado has also clearly found a winning formula. Ocado’s sales rose 9.6% for the last three months of the year, and its Marks and Spencer food offering is likely to have been a big part of the appeal. M&S has expanded its offering into more value ranges, to attract more customers while at the same time finessing the luxury food treats it’s become famous for at Christmas. The tie-up has turned a big corner, with Ocado now boasting more than a million customers and volumes showing impressive growth. The Kantar snapshot bodes well for Marks and Spencer’s Christmas trading update and Ocado’s numbers next week.’’
