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Investors have had a tough ride in recent weeks, and it doesn’t look like the jitters are going to end any time soon.
US consumer price inflation for May rose in line with expectations – but the core measure, which excludes food and energy prices, rose by a forecast-beating 0.3%. That means it’s a near-certainty that US interest rates will rise again at the end of this month.
We’ll return to that later. Back on this side of the Atlantic, we had our own bad news to contend with.
You know that times are hard when even the mighty Tesco comes out with disappointing results…
Supermarket giant Tesco saw like-for-like sales – that is, sales excluding new openings – rise 4.5% in the 13 weeks to May 27 (excluding petrol sales). You might think that’s pretty good, considering the amount of pressure the UK consumer is under.
But no. The results were at the bottom end of analysts’ forecasts. Sales growth was at its slowest for two and a half years – the fourth quarter of 2005 saw like-for-like sales rise 4.9%.
The group’s international units continue to do well, with sales up 15.3%, or 15.1% accounting for exchange rate changes. But as Tesco still makes almost 80% of its sales in the UK, the upbeat news from abroad did little to help its share price.
Meanwhile, prices in-store fell by 1.4%, despite rising costs. For all the complaints about Tesco’s dominant market position, the supermarket sector is still one of the most competitive around. And it’s tougher than ever just now, with Tesco facing a revived Sainsbury’s, and continued pressure from second-placed UK supermarket group Asda.
The supermarket giant wasn’t the only retailer reporting. While disappointment is a relatively rare experience for Tesco investors, it’s pretty much par for the course over at Woolworths.
The high street chain, which sells everything from sweets to electrical goods, saw like-for-like sales fall 6.7% in the 19 weeks to June 10th, compared to last year. The results were even worse than had been expected, with Seymour Pierce retail analysts Richard Ratner describing them as “awful.”
Woolworths also pointed out the downside of the World Cup. Amid all the excitement about beer and flat-screen TV sales, retail optimists seem to have forgotten that if people are glued to their big new TVs with cans in their hands, that means they’re not out shopping.
As Woolworths points out “in the short-term, we expect England’s participation in the World Cup to reduce overall high street footfall.”
Woolies’ pessimism is backed up by recent figures from market research company Experian. The group said that the number of people hitting the high street fell 8.2% last week compared to the same week in 2005. That’s the worst reading so far for 2006.
But don’t expect any big recovery once the football’s all over. Unemployment continues to grind steadily higher. The number of people out of work and claiming benefits rose 5,800 in May to 950,900, the highest level in four years.
Meanwhile, the unemployment rate rose to 5.3% in the three months to April, its highest level since October 2000, according to Bloomberg.
You might think that evidence of slowing growth in the UK would make it less likely that interest rates will rise here. But it’s not quite as simple as that.
As interest rates rise in other countries, the pressure is on the Bank of England to keep up or risk importing inflation as the currency becomes weaker. And, as we mentioned above, another rise in US interest rates now looks like a foregone conclusion.
US consumer price inflation rose 0.4% in May – but the real concern was the 0.3% rise in core inflation, compared to a forecast for 0.2%. The core measure is now up 2.4% on last year, well ahead of the Federal Reserve’s unofficial 1%-2% “comfort zone”.
But at the same time, US growth appears to be slowing. One of the main reasons for the rise in consumer price inflation is that the cost of renting a house has increased as more people look to rent rather than buy. Ironically, the main reason for the shift in favour of renting has been the rapid slowdown in the US housing market.
As consultancy Capital Economics points out, this trend is set to continue. Higher interest rates will make buying a home even less affordable, which in turn will drive up rental demand. That means rental prices will keep rising, which will in turn keep pushing up inflation.
Meanwhile, a separate report showed that wage growth is also faltering in the States. Real weekly earnings have actually fallen by 0.2% over the past year.
So is the global economy facing the worst of all possible worlds – stagflation? We’ll return to this in a future Money Morning – but if you can’t wait, you might want to read a piece from Morgan Stanley economist Stephen Roach, which we ran on the website earlier this week. We don’t always agree with his conclusions, but his work is always worth reading. See what you think, by clicking here: Is the world facing stagflation?
Turning to the wider markets…
The FTSE 100 was down again, losing 12 points to close at 5,506 after a volatile day. Drugs giant AstraZeneca was the main riser, gaining 3% to close at £30.16 on vague bid rumours. Oil companies were among the main losers as crude oil prices fell back. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 fell 2 points to 4,615, while the German Dax rose 13 to close at 5,305.
Across the Atlantic, US stocks rallied sharply, despite higher-than-expected inflation data. The Dow Jones Industrial Average surged 110 points to 10,816, while the S&P 500 rose 6 to 1,230. The tech-heavy Nasdaq gained 13 to 2,086, snapping an eight-session losing streak.
Overnight in Asia, the strong performance on Wall Street helped sentiment, with investors hoping that the turmoil in global equity markets may be coming to a close. The Nikkei 225 rose 161 points to 14,470.
This morning, oil was higher in New York, trading at around $69.90 a barrel. Brent crude was also higher, trading at around $66.90.
Meanwhile, spot gold was trading at around $571 an ounce, after falling as far as $553.75 in early Asian trading hours. Silver was a little higher, trading at $9.72 an ounce.
And in the UK, the Goldman Sachs-led consortium chasing Associated British Ports has raised its bid for the group to £2.58bn after a rival suggested it may counterbid. The offer is equivalent to 840p a share, compared to yesterday’s 810p-a-share offer.
And our two recommended articles for today…
The best ways to invest in Africa
– You might assume – logically enough – that the best investments in African countries would be mining, agriculture or tourism stocks. After all, these are among the main drivers of most African economies. But you’d be wrong, says Michael Power at Investec Asset Management. In fact, the best sectors to invest in are – well, why not find out for yourself, by clicking here: The best ways to invest in Africa
The real stock market panic is yet to begin
– The current stock market retreat has been caused by central banks across the world threatening to pull the plug on easy money. But the real panic won’t begin until private investors start selling out, says Richard Benson of Specialty Finance Group. All stocks will suffer in a general market crash – but to find out which ones already look like good value, click here: The real stock market panic is yet to begin