FTSE has mild hangover after hot US inflation, Barclays disappoints and Dunelm navigating inflationary pressures

“After a US inflation number which proved a mild disappointment to the market, price rises easing a little less than hoped, the UK’s own inflation reading came in lower than expected,” says AJ Bell Investment Director Russ Mould.

“The US data caused a mild hangover for the FTSE 100 on Wednesday after a sluggish performance on Wall Street and weakness in Asia overnight.

“Investors are trying to work out how the US Federal Reserve might react as they desperately look towards the milestone of the final rate hike in this cycle. For now, markets are retaining some confidence that this pivot isn’t too far away.

“The divergence in inflation figures, relative to expectations, on either side of the Atlantic did result in weakness for the pound. This in turn helped provide support to the FTSE 100 by boosting the relative value of its dominant overseas earnings.

“US retail sales figures will be closely watched later. The US is a nation of shoppers and this is the main gauge of consumer spending which accounts for most of the economic activity in the world’s largest economy.”

Barclays

“It wouldn’t be a set of banking results without adjustments for one thing or another, and Barclays is true to form with its latest results. Fourth quarter profits were depressed by a £498 million credit impairment charge linked to a worsening economic outlook. On a full year basis, earnings were also hit by £1.6 billion of litigation and conduct charges from over-issuance of securities in the US.

“While the UK has so far avoided a technical recession, things are bleak out there for many consumers and businesses, which suggests some loans may not be paid back in full unless the economy picks up. Barclays also has overseas operations and economic conditions in other parts of the world where it does business aren’t exactly rosy.

“Deals are drying up with regards to mergers and acquisitions and stock market flotations, which means Barclays’ investment banking arm saw profits tumble. That will be bad news for all the bankers currently on the ski slopes expecting fat bonuses.

“In a buoyant market, this part of Barclays would be charging hefty fees to help companies raise money. This type of work can be very lucrative, so a dearth of deals will be as painful to Barclays as having a tooth extracted with no anaesthetic.

“To make matters worse, investors expecting a bumper share buyback will have their hopes dashed as the bank only intends to buy a further £500 million worth of stock in its current programme. In an environment where banks are one of the few beneficiaries of rising interest rates, one might have expected Barclays to dig deep and buy back a lot more shares, which would in turn boost shareholder returns.

“Overall, there isn’t much to get excited about beyond the performance of its consumer lending business which was boosted by higher interest rates.”

Dunelm

“A drop off in first-half profit at Dunelm isn’t causing undue alarm. The impact of inflationary pressures was hardly an unknown for investors and the company was competing with strong post-Covid trading as well as being affected by the timing of its big sale.

“More importantly the company is sticking with its full-year forecast and delivered meaningful sales growth during the period – suggesting it is picking up market share from struggling rivals.

“Dunelm’s proposition is not particularly complicated but it has been honed over time and is now very well attuned to consumer needs and trends.

“Its products are affordable but not so low quality as to prove a false economy. In recent years it has sorted out the digital side of its business – just in the nick of time before the pandemic hit as it turned out.

“It has also got the basics of retail right. Things like making sure it has the right stock in the right place and carefully managing its cash.

“Undoubtedly the consumer backdrop is challenging, but Dunelm’s strengths should help cushion any cost-of-living blow.”

These articles are for information purposes only and are not a personal recommendation or advice.