FTSE steady after Wall Street weakness on inflation and Fed minutes, PZ Cussons cleans up and Tesco takes hit on margins

“The FTSE 100 made a solid start on Thursday morning despite weakness in the US overnight as investors responded to minutes from the Federal Reserve and US inflation figures,” says AJ Bell Investment Director Russ Mould.

“While inflation is easing across the Atlantic, core inflation (stripping out more volatile food and energy costs) is remaining as stubbornly sticky as some stray super glue on a finger. Insights into the Fed’s thinking will have done little to calm investors as they revealed concern about financial stability in the wake of the banking crisis as well as about tackling rising prices.

“The sceptre of recession in the world’s largest economy continues to loom in the near distance and could cloud sentiment for some time.

“The UK economy ground to a halt in February with zero growth and while industrial action was a big culprit, the threat of further strikes means this cannot just be dismissed as a short-term issue.

“Imperial Leather maker PZ Cussons cleaned up in its third quarter as it demonstrated some pricing power which underpinned higher margins.

“This suggests innovation and investment behind its brands is paying off – the one fly in the ointment was a weaker showing from the important Nigerian market, where bank note changes and an election in February disrupted demand.”

Tesco

“Holding on to customers in a cost-of-living crisis is no joke, even for a company with the scale and purchasing power of Tesco. The company is having to take a hit on profit and margins to keep the tills ringing and customers heading through its doors.

“This hit is even more acute because Tesco is itself exposed to higher labour and energy costs. Online groceries, which finally started to make a positive contribution during the pandemic will also be heavily impacted by smaller basket sizes as the costs for Tesco of delivering the goods don’t change in proportion to the amount ordered.

“Tesco seems to be making the calculation that it can absorb some pain now to maintain and even improve its market share, particularly from the German discounters Aldi and Lidl, and emerge in a stronger position once the economic outlook starts to pick up.

“There is merit to this strategy, particularly at a time when rivals, most notably Morrisons, are really struggling and don’t have Tesco’s financial strength.

“What Tesco doesn’t want to be drawn into is a race to the bottom on prices which cuts margins right to the bone for a prolonged period. For now, this is the tricky tightrope the supermarket must walk, while rewarding investors for their patience with steady dividends.”

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