YYou know things are bad when the stock price of Next, a company that over the years has made an art of underpromising and overdelivering, falls 13% in a day, even in one weak stock market. The strange thing, however, was that half-year profits were solid and the cut in full-year guidance represented the smallest cut – from £860m to £840m.
So why the nervousness? The response was that CEO Simon Wolfson walked investors through the math of sterling depreciation and how it will prolong inflation in the shops. It wasn’t cheerful: He predicted a second cost-of-living crisis.
The fact that a lower pound raises prices is of course not remotely surprising, particularly in a UK retail industry that buys most of its clothing from overseas factories that price their wares in dollars. Next itself believes prices in its stores have risen 8% this autumn and winter thanks to past pound losses.
It’s the prospect of what’s to come in 2023 that has spooked the market. A 26 percent depreciation against the dollar in one year can be mitigated: actual production costs of factories are not reported in dollars; Goods and shipping costs have probably peaked; and Next can manage its UK costs.
But Wolfson summed it all up, concluding: “Even with these remedial measures, the magnitude of sterling’s recent depreciation means that for us, at least, the greatest pressure on our selling prices can be expected in the autumn and winter of 2023. ”
However, the precision in the projections fizzled out at this point. There are too many uncertainties. Investors probably should have found out for themselves, but clearly hadn’t. Next is a FTSE 100 retail leader. It does not inspire confidence for the remainder of the sector’s earnings season.
“Britain contagion” takes hold
Chalk it up as another triumph for Kwasi Kwarteng’s mini-maxi budget: the phrase “UK Contagion” entered the lexicon of market reports on Thursday as stock markets fell in most places. The broad-based US index S&P 500, for example, fell 2% in morning trade.
And yes, you can see why events in the UK can raise some deeper questions from an overseas perspective. In less than a week, a “fiscal event” in the UK turned into a crisis, requiring the Bank of England to intervene to prevent a run on pension funds. While the budget was unorthodox and poorly presented — and Kwarteng’s efforts were both — it’s quite a deal for a G7 nation’s central bank to speak of a “material risk” to the country’s financial stability.
And with UK financial markets linked to global markets, it’s only natural to ask broader questions about the underlying health. Finally, bond yields are rising everywhere, albeit not quite as fast as in the UK.
Albert Edwards of Société Générale has (as always) an interesting, discordant view of events. It’s too easy, he argues, to blame Kwarteng’s drive for growth as the trigger for the market’s loss of confidence in the British government.
Gilt yields had already spiked the day before, he pointed out, when the bank announced it would sell gilts through its quantitative tightening (QT) program. Investors responded by “pulling the rug out from under the feet of an unsuspecting and overly complacent Chancellor”, although most fiscal measures were announced in advance or, in the case of the 1p property tax rate cut, brought forward by a year.
So maybe it was both the QT and the mini-budget that investors rebelled against. A semblance of calm settled in as the bank became a temporary buyer of gilts in response to the pension crisis. Edwards’ alternate view that “markets are still in charge and just won’t tolerate QT” is one to consider as the Federal Reserve is also taking the same path.
In their own business world
A beleaguered prime minister’s last resort on a local BBC radio station (when she can’t mention Vladimir Putin for the umpteenth time) is to say that the business community is very supportive of her. Evidence of this claim is said to be warm words from the likes of the CBI about proposed supply-side reforms.
What Liz Truss fails to mention is that the CBI also said this week that “the Chancellor needs to take every opportunity to show that he and the Bank of England are coordinating on inflation and that he has a robust plan.” ‘to repay the debt in the medium term’. It is an important qualification.
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