Morning Note

UK inflation slips, M&S profits slide, indices hold trading ranges

It’s widely accepted that the pandemic is a profoundly deflationary shock to the global economy. No surprise then that UK consumer price inflation slowed to 0.8% in April from 1.5% in March. In fact, the bulk of the decline was due to lower oil prices.

Schemes to keep the economy on life support continue to support purchasing power – it may take some months for inflation to bottom as the economy goes through a painful readjustment.  Input prices for manufacturers declined 5.1%, whilst factory gate prices were 0.7% lower.  What comes next is anyone’s guess, but inflation could be round the corner as central banks and governments deal with vast debts.

M&S sales drop, but cash flow better than feared

Retailers will be at the coalface when it comes to inflation. Big discounts are expected as shops reopen over the summer – better to clear the old lines than having a bunch of shorts and bikinis to scrap. Marks & Spencer has been a bellwether for the UK high street, but lately its crown has slipped.

Results today indicate it’s had a tough time coping with the pandemic – in the six weeks to May 9th clothing sales tumbled 75% , while food sales declined 8.8%. But management are happy that they’ve outperformed their Covid-19 scenario with £150m better cash flow after six weeks than they had feared. Dividends of course are out of the question – MKS will not pay a final dividend for 2019/20 and it does not plan paying one for 2020/21.

Overall full year profits before tax declined around 20%. Free cash has halved over the year to £225m and after tax profits were down 40%. We knew it was going to be tough for M&S, so the focus for investors is the transformation plan, which is accelerating with more cost savings planned. Covid-19 has accelerated lots of consumer trends and it may just be the catalyst required to accelerate Marks & Spencer’s transformation into a 21st century retailer.

In particular it looks as though M&S has learnt just how important online is – so it’s making its Ocado venture more central to the business, introducing 1,600 Clothing & Home lines to be available online via Ocado. Much smaller store footprint, more focus on food, leverage the Ocado platform – there is at last a lot to be said for the MKS approach. Of course, we’ve talking about Marks’ recovery and transformation plans for many a year.

The pound eased back from the day’s highs on the weaker inflation numbers, with GBPUSD retreating under 1.2250, eyeing a potential retest of yesterday’s swing low at 1.2220.

Stock markets soft as scientists question Moderna vaccine data

Wall Street snapped a three-day win streak after doubts were raised about Moderna’s potential vaccine. Some scientists asked by health news website Stat queried the data, or lack thereof. Stocks ran up against the bad news as energetically as they ran with the good. It just shows how the market is clinging to any kind of sort of good news.

European shares followed lower again on Wednesday. The FTSE 100 just held onto the 6,000 level yesterday but opened lower this morning. Basic resources, financials and banks were the leading losers. Indices are within recent ranges as the tug-o-war between the economic reality on the one side and the twin hopes of stimulus and scientific research on the other play out.

API data shows surprise draw, WTI clings to $32

Oil was steady in its recent consolidation pattern as API figures showed a draw on US crude stocks. Inventories fell 4.8m barrels in the week to May 15th, vs expectations for stockpiles to build by 1.5m barrels. EIA figures are due later today and are seen showing a build of 1.7m barrels. With WTI trading above $30 again shale producers are already seen coming back on stream, which could tilt the balance back towards oversupply.

Nevertheless, demand is picking up and shut-ins have resulted in a little more supply being taken off. Reports suggest Chinese oil demand has almost returned to where it was before the pandemic. WTI (Aug) is just about holding above $32 but has a look like it wants to pull back – EIA figures today may provide the catalyst.

The risk-off tone supported gold bulls, with prices making steady progress back to $1750, having struck a low of $1725 yesterday. The recent 7-year high at $1764 struck earlier in the week is the upside target.

The S&P 500 quickly retreated from the area of the late Apr swing high around 2954 and closed below the 61.8% retracement. Futures indicate it will open around this level.

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