Deflation?

Say what? Deflation?  

Any search for deflation only throws up China CPI, falling pork prices and Cathie Wood’s Bitcoin hedge...but now seeing just a few nascent signs of retail deflation being mentioned in company reports. Here was JPM on European food retail in September: "We take a cautious stance on the sector, reflecting our analysis of grocery pricing deflation prospects as we approach 2024.” Builders merchant Travis Perkins warned on deflation last month. Do they mean disinflation? As the Fed’s Waller said yesterday: “What people have in mind now is for prices to return to earlier levels, and that is not going to happen.” Outright deflation is going to be problematic for food retailers…MKS is no exception but today’s numbers are great. 

Sleeves Rolled Up 

MKS shares up 9% after M&S reported a better-than-expected 75% rise in first half profits but cautioned for the future – weather, geopolitics, interest rates...but none of that is really going to stop people topping up their pants drawer or buying a turkey this Christmas, is it? Maybe taking a bit of a Wolfson approach to the guidance here. The numbers don’t lie though and it caps a very strong year for the shares which are up almost 100% YTD. The reset has been a great success… back in May I said that LFL food sales +5.4% seems OK but not excessive…margins compressed, 3.4% in food vs 4% management target. Clothing and home margins +8.7%, above 2019/20 levels, but below the 10% target. Online margin down to 5% from 9.1% due to investment and cost pressures. Fast forward to today: Food LFLs are +11.7%, with growth in volume and market share, with margins up to 4.3%. Clothing & Home LFLs up 5.5% with margins rising to 12.1%, online margins to 9%...very impressive stuff.   

Greener Pastures 

Stocks were steady in Europe at the open on Wednesday, Asia so-so after Wall Street managed to notch its best rally in two years – the S&P 500 and Nasdaq both completing their best daily win streaks since Nov 2021. Crude oil fell hard yesterday, with WTI futures back below the 200-day SMA. 

Mixed Fed Reactions 

Fed speakers offered a range of views – Bowman favours another hike should the data require it. Goolsbee talked about a “golden path” in getting “inflation down without a recession”. Waller said the hot labour market is “clearly calming down” and described he rise in 10-year yields as an “earthquake”. Not a huge amount to really drive markets here – the US 10yr yield sits around the 4.60% mark. So, look for a steer from Fed chair Jerome Powell today, who is due to speak to the Division of Research and Statistics' centennial conference before the market opens. Cook, Williams, Barr and Jefferson are also due on the wires.  

In Forex 

Sterling slid for a third day after running up against the 200-day line – markets now pricing in three 25bps cuts by the Bank of England in 2024 after some dovishness from chief economist Pill. Governor Bailey is due to speak at 09:30 (GMT) is he still not leaning against the curve? Sharp rise in people looking for a job reported today by recruiters points to more slack in the labour market. GBPUSD testing the 50-day line after failing at the 200-day.