After a sea of red was seen yesterday amongst FTSE 100 constituents, Britain's main index opened comfortably in the green this morning. This comes on the back of better-than-expected BRC retail sales data, lower food inflation, and positive US markets on Monday.
According to BRC, retail sales in the month of September came in at a decent 2.8%, better than the 2.0% forecast. While the figure did slow from August's 4.8%, it's worth noting that BRC's retail sales data isn't inflation-adjusted. As such, the impact of the cost-of-living and high inflation means volume growth remains negative with higher prices propping the overall index up.
As expected, big-ticket items such as furniture and electrical continued to weaken, while apparel had a surprisingly weak showing at this time of the year due to the unusually warm weather bogging down demand for autumn clothing. In turn, this turned online sales negative, with the exception of health, beauty, and jewellery.
On the other hand, food and drink sales saw positive momentum as it did in August. Consequently, food sales grew 7.4% on-year over the three months to September, with non-food sales going the other way, shrinking 1.2%.
Nonetheless, BRC Chief Executive, Helen Dickinson is optimistic about the near term, shrugging off potential deflation fears by stating, “With sales volumes down, growth has been artificially boosted by high inflation over the last two years. As inflation eases, so too will longer-term sales growth prospects”.
John Choong, Senior Equity Research Analyst at InvestingReviews said:
“The commentary provided by Dickinson on volumes returning serves as an encouraging point as it means that retailers' top and bottom lines should continue to grow moving forward. And with real wages now trending positive, this remains a strong possibility. As such, it's no surprise to see food retail stocks buoyant today as investors continue to shrug off deflation concerns."
Meanwhile, Kantar's latest grocery report also gave investors reasons to celebrate. Food inflation continued to fall in the four weeks to 1 October, cooling to 11% — the lowest figure since July 2022. Kantar's Strategic Insight Director, Tom Steel said, “For the first time since last year, the prices of some staple foods are now dropping and that’s helping to bring down the wider inflation rate".
These are certainly encouraging points worth celebrating. However, investors alike ought to be equally cautious about a potential surprise to oil prices in September's CPI inflation print undermining the progress being made on mortgage rates.
Justin Moy, Managing Director at EHF Mortgages commented:
“There are significant positives within these figures, especially the fall in food prices that have taken time to get under control. However, the cost of fuel is increasing steadily, and world atrocities will unfortunately heap pressure on oil outputs, which will influence inflation too."
Bob Singh, Founder of Chess Mortgages also shared the same sentiment:
“A spoonful of sugar helps the medicine go down! Some occasional good news helps the economy to remain positive about the outlook. Retail and food inflation figures have definitely set the mood for the markets as we look forward to the Bank of England's rate decision. There is a good chance that inflation will fall. However, the latest conflict in Israel could lead to a slight rise in inflation due to escalating oil prices, putting to an end the rate drops we’ve seen of late.”
Even so, the positive news comes as a bit of a double-edged sword with Stephen Perkins, Managing Director at Yellow Brick Mortgages stating:
“Positive news for the economy but it could lean the Bank of England towards another small base rate rise.”
Then there's the core reason why markets are up today — US Federal Reserve commentary. Two officials hinted that interest rates may have peaked, with the Fed's vice-chair even going as far as to say that the committee needs to ‘proceed carefully’. Consequently, the odds of another rate hike at the Fed's next meeting have now been slashed to just 12.5%. Therefore, markets are hoping that the Bank of England could take up a similar position.
Wes Wilkes, NTWRK CEO of Net-Worth NTWRK gave his insight on this by saying:
“The FTSE is rather indicative of a more 'risk-on' move in US Equities yesterday following dovish-leaning Fed rhetoric which acknowledged the impact of higher Treasury yields on financial conditions. This led to a more buoyant APAC session after their long weekend and the retail sales data this morning added to the good news. Still, it's important to continue to tread with caution as central banks, particularly the Bank of England are now navigating the most difficult part of the cliff-edge journey as they attempt to avoid recession whilst attempting to keep the screw turned on inflation.”
On that point, Graham Cox, Founder of Self Employed Mortgage Hub is expecting a sooner-than-expected rate cut:
“Inflation could drop like a stone over the next six months, faster I suspect, than many analysts are predicting. I think there's a general underestimation of just how much disposable income is being reduced by surging mortgage and rent payments, and how much that will affect the high street. I think it's extremely unlikely the Bank of England will hold the base rate at 5.25% beyond Q1 next year. My best guess is they'll be forced to cut early to stave off recession and this time next year the base rate will be around 4 per cent.”
Because of the prospects of decreasing affordability, David Robinson, Co-Founder of Wildcat Law expressed his caution too:
“Beware the looming spectre of defaults. Like any addiction, the nation's addiction to low-interest-rate credit will take time to work out of the system. This is being seen from a personal level with households across the country facing steep rises in their mortgage payments, through to an institutional one, with the recent stories about Metro Bank. It is likely that whilst the inflationary pressures are receding regarding interest rates the true effects have yet to be felt. A bit like the Tsunami after the earthquake, the real problems are only just beginning to surface. Many businesses and individuals are still benefiting from very low interest rate debt, once this needs to be financed they will be facing some very tough decisions. Unless a way can be found to ween these borrowers off low rates gradually, many will simply be unable to cope.”