FTSE 100 higher ahead of rates decision, US default fears, Lloyds enjoys profit boost, Barratt sees signs of recovery and Haleon faces margin squeeze

“The FTSE 100 made a strong start on Wednesday ahead of the latest news on US interest rates,” says AJ Bell Investment Director Russ Mould.

“The Fed is widely expected to deliver what could be its final rate hike in this cycle of 25 basis points so barring any big shock on that score, the focus will fall on the comments which accompany the decision.

“Confirmation that rates will be put on hold after today, while largely anticipated in the market, could nonetheless give sentiment a bit of a boost. The reverse, on the other hand, could really knock confidence.

“The continuing sell-off in US regional banks highlights to the Fed the risks of stretching the financial system to breaking point if it remains in hawkish mode.

“All the while the threat of a debt ceiling crisis in Washington looms over everything. There have been panics like this before and everything has ultimately been resolved at the eleventh hour. Some sort of fudge remains the most likely outcome.

“Still, a highly partisan political backdrop across the Atlantic means the risk of the US defaulting on its debts is possibly as high as it’s ever been.”

Lloyds

“Lloyds has enjoyed the sharp rise in interest rates over the past year as this has put a rocket under its profits. It has earned more thanks to the wider gap between the interest it pays on deposits and the amount it charges customers to borrow money.

“That’s fine for now, but it is hard not to ignore the £2.2 billion reduction in customer deposits during the first quarter of 2023. Part of this was down to a more competitive market for deposits – higher rates mean consumers are shopping around more to get a better deal on their money, and that means banks are having to work harder to lure them in.

“Unlike the regional US banks, some of which are facing a deposit crisis, Lloyds’ decline in deposits is not a reason to panic, particularly as the company remains well-capitalised.

“Providing some relief to the bank will be the Office for Budget Responsibility’s prediction that the UK should avoid a recession this year. Lloyds has subsequently revised its assumptions for key economic indicators versus what it had predicted at its full-year results in February.

“For 2023, it now expects UK GDP to slip 0.6% versus previous expectations of a 1.2% decline; house prices are now expected to fall by 5.3% compared with its earlier forecast of a 6.9% decline; and CPI inflation is expected to be 6.4% versus an earlier prediction of 8.3% for this year. They suggest a more favourable backdrop for the company on a relative basis to previous forecasts, albeit not necessarily one where the company can be complacent.

“While the backdrop is not as gloomy as a few months ago, the lack of positive economic activity still means the bank must keep a close eye on bad debts.

“Lloyds predicts that the Bank of England base rate will remain at 4.25% for the rest of 2023 before progressively declining next year. However, many people think the base rate could go up at the next Bank of England meeting on 11 May. In either situation, rates staying at these elevated levels will continue to put pressure on consumers and businesses, meaning that banks in general will need to stay focused on customer arrears rather than simply look at the profit line.”

Barratt Developments

“Barratt is the latest UK housebuilder to hint at a recovery in the housing market. Sales rates have picked up after an extremely difficult end to 2022, driven by the mini-Budget and the resulting surge in borrowing costs for potential purchasers.

“A muted share price reaction on its latest update should be seen in the context of strong gains last month on a read-across from other housebuilders’ cautious optimism and a recent positive shift in UK property prices.

“The shares have also benefited from apparent Conservative plans floated in the media to introduce a replacement for the Help to Buy scheme.

“This could be really important as it would boost the first-time buyer market which Barratt, like others, notes is under significant pressure.

“Ultimately a healthy property market needs people to be able to join the ladder, so Barratt will hope the proposals prove to be more than just hot air.”

Haleon

“Consumer health firm and recent GSK spin-off Haleon came under pressure as earnings missed expectations amid a squeeze on margins.

“Only someone who had spent the last 18 months living in a cave would be unaware of the inflationary pressures facing all businesses. However, the drop in Haleon’s profitability suggests it has struggled to pass increased prices on to consumers. Or it has made the decision to preserve volumes over protecting its margins.

“There is no right or wrong answer to this conundrum, but it may see investors reappraise the business and suggests the competitive threat posed by own-brand alternatives is a real one.

“Another issue weighing on the shares is news Pfizer will start selling down its 32% stake within months. While the US drugmaker says it will do this in a slow and strategic way, it represents a pretty big overhang for Haleon.”

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