- UK CPI remains unchanged at 2.2%, with higher flight ticket costs offsetting lower prices for hotels and restaurants, alcohol and tobacco.
- Markets price in interest rates being held by the Bank of England but two more cuts by the end of the year.
- Stocks on Wall Street trade near record highs as retail data surprises on the upside.
- Larger than usual 50bps reduction is expected from the Fed later.
- Oil prices slip after US stockpiles rise with Brent trading around $73 a barrel.
- Moonpig trading update shows selling gifts remains tough but its subscriber base grows.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The optimism which had been simmering on financial markets is coming off the boil ahead of crunch interest rate decisions. While inflation in the UK is unchanged at 2.2%, a rise in services inflation mainly due to a big leap in airfare costs is likely to keep policymakers more reticent about reducing rates again on Thursday. The FTSE 100 has fallen back slightly in early trade as uncertainty surrounds central bank policy.
Although headline inflation in the UK remains unchanged, a creeping up in services inflation is causing niggles of concern. Costs in restaurants and hotels have fallen back but transport prices have shot up, particularly air fares. It seems that consumers are still ring-fencing available budgets for holidays and are willing to shell out for higher ticket prices amid a bunfight for seats. After dipping 10.1% in July, airfares jumped 11.9% in August. It means airfares rose by 22.2% on the month, the second biggest rise since records began in 2001. The increase came principally from European routes, an indication of people desperate for a quick escape from the rainy British weather for sunnier climes. The rise in both services and core inflation may make Bank of England policymakers a bit more wary about voting for a back-to-back rate cut. It still seems likely that they will decide to keep interest rates paused this month, and instead wait to cut rates again in November and December. That is the scenario being priced in by financial markets, which see more than a 73% likelihood that rates will be kept on hold but that more cuts will come later in the year.
The hotly anticipated interest rate decision from the US Federal Reserve will set the direction for markets. Stocks on Wall Street are hovering near records, with the S&P 500 and the Dow closing just off the highs reached earlier in the session. With retail sales snapshot coming in stronger than expected, there is optimism that the economy will be heading for a soft landing particularly with an easing of borrowing costs in sight. With a cut looking like a dead cert, it will be the first time in four and a half years that the benchmark rate will be reduced, offering relief to companies and consumers. The current expectation is for the Fed to go with a larger than usual 50bps cut given that inflation is heading down and consumer spending has been buoyant. But there is autumn uncertainty in the air. Inflation has not quite hit target and there may still be some wariness that it could bubble up again if the decision unleashes a wave of optimism, so a 25bps cut is still in play. A smaller than forecast cut may disappoint some investors, but on the other hand it may demonstrate that the Fed is not deeply concerned that the prospect of a damaging downturn is looming. Focus will quickly turn to the likelihood of a deeper cut later in the year, and commentary from the Fed chair for clues about just how many rate reductions will come in succession.
Oil prices have dipped back as more supply appears to be washing through the market. The American Petroleum Institute data showed stocks in the US increased by 1.96 million barrels last week – more than expected. Lower prices of gasoline may well have helped give consumers that extra bit of confidence to spend more. However, if the Fed starts on its monetary loosening path, with a big cut, it could add more downwards pressure on the dollar, making the commodity cheaper to buy and increasing demand. As tensions remain high in the Middle East, particularly given the explosions of pagers in Lebanon, targeting Hezbollah, supply concerns are still bubbling in the background amid worries of a fresh potential escalation. But with China’s economic fortunes not expected to significantly rebound any time soon, it’s still likely to act as a drag on demand.
Moonpig has updated the market on its recent performance ahead of the AGM. There were no big surprises but reassurance was on hand that trading has been in line with expectations, and revenue growth is still expected to land at a mid to high single digit percentage rate. It’s still tough going in terms of the gifting part of the business, particularly offering experience packages for big birthdays. Consumers appear less generous, probably given the ongoing constraints on their finances and are more reluctant to splash out on bigger ticket gifts. Moonpig has been rooting around for other growth levers and has been focusing on building subscribers while demonstrating a more creative streak. It’s also been investing in artificial intelligence technology, helping customers scribe the perfect message in cards appears to have help keep customer coming back. The number of subscriptions offering members discounts on personalised cards continues to rise, with the active customer base seeing month on month growth, which is encouraging as membership can make customers stickier, and less inclined to opt for cheaper options elsewhere. However. as other card retailers offer their own personalised services, it’s set to remain a challenging market to compete in.’’
