Closing post
Time to wrap up... here’s today’s main stories:
US jobless claims has risen to a three-month high, after the Omicron variant hit the US economy.
A majority of UK firms have reported that turnover dropped in December as Plan B restrictions kept customers away...
...while households have reported that the cost of living has pushed up, led by pricier food, energy and fuel.
The government has been urged to provide “helicopter money” to support households hit by escalating energy bills, as inflation hits the economy.
Expectations of higher UK interest rates have pushed the pound to a 23-month high against the euro.
Companies, such as Citi, have started calling staff back to the office now that pandemic restrictions are being lifted, leading to busier public transport.
And there could be a rush of delayed Christmas parties in the next few months, after corporate clients rebook events cancelled in December.
European Commission president Ursula von der Leyen has warned the World Economic Forum that Russia will face massive economic and financial sanctions if it attacks Ukraine.
Grocery, retail and food ingredients business Associated British Foods said inflationary pressures are intensifying. The firm is facing higher raw material costs, supply chain challenges and steeper energy bills, which will be passed onto customers.
ABF is also cutting hundreds of jobs at Primark, where the Omicron variant disturbed its recovery.
Aldi is ditching grocery deliveries via Deliveroo to focus on its own home shopping service as consumers return to stores in greater numbers.... while Deliveroo reported sales growth again in the last quarter.
Almost £1.2bn worth of fruit, veg and bread is binned in the UK every year, with one in five consumers stating the reason they waste so much is they “don’t know what to cook”.
Unilever continued to face criticism over its £50bn attempt to buy GSK’s consumer healthcare arm, with a top shareholder calling it a “near-death experience”.
China cut mortgage rates in a new effort to prop up its economy, and bolster the property sector.....
... while a group of international bondholders in the embattled Chinese property developer Evergrande have hired an offshore law firm and warned of legal action if the company continues to refuse “substantive engagement” over its finances and restructuring plans.
Goodnight. GW
The billionaire entrepreneur Elon Musk’s brain chip startup is preparing to launch clinical trials in humans.
Musk, who co-founded Neuralink in 2016, has promised that the technology “will enable someone with paralysis to use a smartphone with their mind faster than someone using thumbs”.
The Silicon Valley company, which has already successfully implanted artificial intelligence microchips in the brains of a macaque monkey named Pager and a pig named Gertrude, is now recruiting for a “clinical trial director” to run tests of the technology in humans.
European market close
European stock markets have closed, with the UK lagging behind other major bourses today.
The FTSE 100 has closed 5 points lower at 7595.
Associated British Foods was the top faller, down 4%, after reporting that inflationary pressures were rising, and that omicron had disrupted the recovery at its Primark retail arm. Banks and oil companies also dipped.
GSK fell 1.8% after Unilever said it wouldn’t raise its £50bn offer for its consumer healthcare division, following criticism from some shareholders.
Michael Hewson of CMC Markets says:
We could be seeing an element of profit taking on the likes of Royal Dutch Shell and BP after a decent run of gains and a solid start to the year. Even with today’s declines BP is still up over 17% year to date, and Shell is up 12%. Lloyds and NatWest group are also softer as well.
Also weighing on the UK benchmark is GlaxoSmithKline after Unilever said it wouldn’t be raising its £50bn bid for the company’s consumer healthcare division.
Unilever shares initially bounced higher, after confirming that they wouldn’t be raising their offer for GlaxoSmithKline’s consumer business, drawing a sigh of relief from their shareholders over a concern that they might have been saddled with high levels of debt, or be diluted by a possible fundraising.
Even so this morning’s early gains were short-lived, with shareholders entitled to ask how an attempt to try and boost the profitability of a business that is struggling to boost its margins, has resulted in the shares falling to their worst weekly decline since July last year.
Across Europe, the Stoxx 600 index gained 0.5% today, with Germany’s DAX (+0.6) and France’s CAC (+0.3%) picking up.
Global trade policy makers should try to build a more resilient and sustainable trading system that supports higher living standards, rather than recreating the pre-pandemic set-up.
So argued U.S. Trade Representative Katherine Tai on a virtual panel held by the World Economic Forum today.
Tai cautioned against a backward-looking “return to normalcy” after two years of COVID-19-induced disruptions, saying:
“I think that it is time for us to acknowledge that our goal really shouldn’t be to try to go back to the way the world was, say in 2019, but to take lessons, very hard earned lessons, very painful lessons that we have experienced over the past two years and take this opportunity to build toward something that is different and better.
The government should adopt a programme of “helicopter money” to support households hit by escalating energy bills, according to a leading thinktank with Labour and Tory MPs on its advisory board.
The Social Market Foundation (SMF) said the chancellor, Rishi Sunak, should support millions of low- and middle-income households through the cost of living crisis with a simple programme of US-style one-off cash payments worth £8.5bn. The proposal comes two weeks before the energy regulator, Ofgem, announces a rise of as much as £500 on the annual price cap on energy bills from April.
In a blog written by the SMF chief economist, Dr Aveek Bhattacharya, the thinktank urged Sunak to reject the overcomplicated solutions being put forward by the energy industry that would encourage people to use more energy and prop up ailing suppliers.
Bhattacharya said a cheque for £300 should be sent to households that did not have a higher rate taxpayer, with an additional £200 for those on universal credit or legacy benefits, helping those who rely on the basic state pension or disability benefits.
He said:
“An emergency cash payment would also have the benefit of being a clear one-off intervention, whereas other proposals would risk committing the government to costly ongoing subsidies, that it would find politically difficult to end.”
It’s a timely intervention, with two-thirds of households reporting the cost of living squeeze tightened in the last month.
A leading Unilever shareholder has called the company’s failed £50bn offer for GSK’s consumer healthcare division a “near-death experience” and said management should focus on improving its core business – or step down.
Terry Smith, the founder of Fundsmith, lambasted Unilever in a “postmortem” letter to investors in his £29bn asset management business.
The letter comes a day after Unilever said it would not increase its bid for a fourth time, leaving GSK free to float its consumer arm as planned this summer.
The letter, which was co-written by Fundsmith’s head of research, Julian Robins, said:
“[This is] about a near death experience as it now appears that Unilever’s attempt to purchase the GSK consumer business is now thankfully dead rather than the value of our investment in Unilever.”
Existing homes sales in the US dropped in December for the first time in four months.
Sales of previously-owned homes fell by 4.6% last month, to an annualised rate of 6.18m units.
With inventories of unsold homes at record lows, shortages of property are keeping some buyers out of the market.
#EEUU
— Datoeconomia (@datoeconomia) January 20, 2022
US Existing Home Sales Change Dec: 6.18M (est 6.42M; prev R 6.48M)
- Existing Home Sales (M/M): -4.6% (est -0.6%; prev R 2.2%)
- Median Home Price (USD): 358.0K or +15.8% (prev 353.9K or +13.1%) pic.twitter.com/Vl8HLwh1yi
Pound hits 23-month high against euro
Sterling has hit its highest level against the euro in almost two years.
Expectations that the Bank of England will raise interest rates this year to combat inflation pushed the pound up to €1.2030 against the euro, the highest since February 2020.
Matthew Ryan, CFA, senior market analyst at Ebury, says yesterday’s rise in UK inflation to 5.4% makes a February interest rate rise very likely.
“The reaction among currency traders has been to send sterling higher against its peers. All yesterday’s data has done is confirm the market’s suspicion that the Bank of England will need to raise interest rates at a rather aggressive pace this year.
Futures are now placing a near certainty of a hike in February, with 110 basis points priced in before the end of the year. BoE governor Andrew Bailey continued to stubbornly call some of the aspects of inflation ‘transitory’ during his speech yesterday, although he did raise concerns about tightness in the UK labour market and warn that the bank will do everything it can to control inflation.
While Bailey has already proved himself to be a worthy successor to Mark Carney ‘unreliable boyfriend’ mantra, this rhetoric ought to all but confirm that another hike is on the way when the monetary policy committee next convenes early next month.
Back in the UK, there are signs of a growing return to office working in London, with 8% more journeys recorded on the London underground network compared with a week ago.
The increase came after the government ended work-from-home guidance immediately on Wednesday afternoon, with Sajid Javid claiming the Omicron coronavirus variant was “in retreat”, despite the number of new infections running at more than 100,000 a day.
Transport for London said 1.09m entry and exit “taps” with contactless cards or Oyster were recorded up to 10am on Thursday on the tube – about 80,000 more than last Thursday’s morning peak. Bus journeys were up 3% week on week, with 1.19m boarding taps recorded this morning.
Stocks in New York have made a brisk start to trading.
The Dow Jones industrial average of 30 major US companies has risen 355 points, or 1%, to 35,384 points.
The technology-focused Nasdaq has jumped by 1.5% to 14,563 points, having sunk into correction territory earlier this month.
After struggling in the last few weeks due to anxiety over looming interest rate rises, markets may be regaining some calm ahead of next week’s Federal Reserve meeting.
Fawad Razaqzada, analyst at Think Markets, says;
So far this year, volatility has been quite high as investors respond to high levels of inflation around the world, central bank policy tightening and another wave of coronavirus.
We have seen some global indices fall sharply, especially in the US, while others have continued higher or consolidated. US technology and small cap shares have taken the brunt of the sell-off due to rising bond yields, while banks and industrials have outperformed.
So, it has been quite a mixed start to the new year. With some of the major indices now testing key support levels, it is possible we may be heading for a period of relative calm as dip buyers take advantage of downbeat stocks and sectors.
10-year Treasury yield has stopped going up -- for now -- but remains 3x what it was in August 2020 and higher than any point in 2021.
— Brian Chappatta (@BChappatta) January 20, 2022
A breather here before FOMC meeting takes center stage next week. pic.twitter.com/tx8rZCj4Ns
The four-week average of US jobless claims, which smooths out weekly volatility, rose by 20,000 to 231,000, highest since late November.
Associated Press points out that if claims remain elevated, it could deter central bank policymakers from lifting interest rates as quickly as expected:
“We could see one more week of notably higher claims before they should top out,″ analysts with Contingent Macro Advisors predicted. “This bears close watching going forward.″
The Federal Reserve might reconsider plans to ease its massive support for the economy if claims stay above 250,000 as the Fed’s March policy meeting approaches, Contingent said.
US jobless claims rise to 286,000, highest since October (from @AP) https://t.co/V8bmg4F00a
— darlene superville (@dsupervilleap) January 20, 2022
"Claims hit by Omicron; near-term outlook uncertain" @IanShepherdson on U.S. #JoblessClaims/ Philly Fed #PantheonMacroUS
— Pantheon Macro (@PantheonMacro) January 20, 2022
US jobless claims rise: reaction
Robert Frick, corporate economist at Navy Federal Credit Union, says Omicron seems to have led to the 55,000 increase in layoffs in the US last week:
“Weekly unemployment claims jumped 55,000 in the most recent week, and even with the usual noise in the numbers they seem to reflect the record rise in Coved-19 cases from Omicron.
Fortunately Omicron is peaking and if past patterns hold, claims should drop quickly in the next two to three weeks.”
Danel Zhao of Glassdoor says that demand for workers is still high, despite omicron slowing the recovery:
UI claims SA surged last week to 286,000, the highest since October. The seasonally-adjusted rise is due to a smaller-than-expected seasonal drop, so should wait for a few more weeks of data, but this also coincides w/ the Omicron surge slowing the job market#joblessclaims 1/ pic.twitter.com/CoQ3fKpYzR
— Daniel Zhao (@DanielBZhao) January 20, 2022
Continuing claims rose modestly but still remain below pre-crisis levels. Demand for workers remains high as employers are likely holding out hope that the Omicron wave is temporary amid ongoing difficulty hiring.#joblessclaims 2/2 pic.twitter.com/KTOOBr7PeL
— Daniel Zhao (@DanielBZhao) January 20, 2022
Mohamed El-Erian, chief economic advisor to Allianz, also blames Omicron.
Per the Bloomberg chart below:
— Mohamed A. El-Erian (@elerianm) January 20, 2022
Weekly US #jobless claims jumped to 286.000, the highest since October and well above both the median forecast (225,000) and the prior reading (231,000)
This is likely to be Omicron related rather than indicating a weakening of labor market dynamics pic.twitter.com/mMinzrM4ds
Omicron has caused significant disruption in the US, as cases hit record levels above one milion per day. Supply chains have struggled leading to empty shelves, schools closed, flight were cancelled, and hospitals and emergency response departments were left understaffed.
Economists had expected a small fall in US jobless claims, not a 55k increase....
#NEW Weekly jobless claims rise unexpectedly for 3rd straight week@USDOL reports 286k Americans filed initial unemployment claims last week
— Greta Wall (@GretaLWall) January 20, 2022
That’s up 55k from previous week vs expectations for claims to fall to 225k
Continuing claims rose to 1.64mn vs 1.56mn estimate
US jobless claims jump after Omicron hits economy
More Americans filed new unemployment claims last week, after the Omicron variant hit the US economy late last year.
The number of ‘initial claims’ for unemployment benefit jumped to 286,000 in the week to Saturday January 15th, the highest level since October.
That’s an increase on the 231,000 initial claims filed in the previous week. It indicates that more Americans lost their jobs at the end of 2021, and were signing on for unemployment insurance.
Initial claims fell to their lowest since 1969 late last year, as the tight labor market encouraged firms to hold onto staff.
They are still much lower than earlier in the pandemic, despite rising this month.
Initial claims surged to 6 million in late March 2020, but fell back to pre-Covid levels as the economy reopened and vaccines were rolled out.
New unemployment insurance claims edge up slightly for the 5th week out of last 6.
— Aaron Sojourner (@aaronsojourner) January 20, 2022
This seems like a very muted response to the large #omicron surge, consistent with employers trying to ride out the wave & retain staff. pic.twitter.com/KrzjykiyiQ
Initial claims for the week ending Jan 15 increases to 286K which almost certainly is linked to Omicron. Firms saw a decrease in demand & likely let some employees go. Given tight labor market there is not likely going to be a further surge here.
— Joseph Brusuelas (@joebrusuelas) January 20, 2022
Ryanair has 'sea change' in confidence as Omicron threat eases.
Ryanair has experienced a “sea change” in its confidence in recent weeks, a senior executive said today.
Perceptions that the threat from the Omicron COVID-19 variant is easing and public attitudes to travel are improving are lifting the budget airline’s morale.
Reuters has the story:
Fares are also likely to rise across the European short-haul sector this summer due to lower available capacity, said Eddie Wilson, chief executive at Ryanair DAC, the largest airline in the Ryanair Group.
Wilson did not give specific guidance about Ryanair’s prospects, citing reporting restrictions ahead of the company’s third-quarter financial results on Jan. 31, but he did say the airline’s focus was “all about next summer”.
“There is a sea change, based on what we believe will be customer confidence and the timing of the peaking of Omicron,” Wilson told Reuters in an interview when asked if the airline was a lot more confident than a few weeks ago.
“I think people’s mindset has moved as well in terms of ‘I’m traveling’, ‘I’m going’,” Wilson said. “They can see the summer. They are not in the darkest days of where we were the previous year.”
Turkey’s central bank has left interest rates on hold today, ending a series of rate cuts that sent the lira tumbling and helped drive inflation dramatically high.
The Central Bank of the Republic of Turkey decided to leave its policy rate unchanged at 14% today.
It had previously cut rates steadily in recent months, down from 19% in August, under pressure from president Recep Tayyip Erdoğan to lower borrowing costs to help the eoncomy.
The CBRT sat on its hands after Erdoğan struck a softer tone on interest rates this week, telling reporters that rates would fall slowly, gradually and without hurry” to make 2022 “our brightest year,”.
But the year has begun with inflation surging to 36% (!), as the slump in the lira pushed up import costs. Food and drink prices are up nearly 44% year-on-year, while consumer prices jumped by 13.58% in December alone.
Turkey's central bank keeps interest rates on hold (with the benchmark rate at 14%) after four consecutive rate cuts in four months. Analysts say this month's decision will do little to contain Turkey's rampant inflation.
— Jared Malsin (@jmalsin) January 20, 2022
Von der Leyen warns of "massive economic and financial sanctions" if Russia invades Ukraine
European Commission president Ursula von der Leyen has warned the World Economic Forum that Russia will face massive economic and financial sanctions if it attacks Ukraine.
In a special address to WEF’s Davos Agenda event, von der Leyen said that “tragically”, we again face the interference of some powers in their neighbours’ affairs.
Europe will not accept Russian attempts to divide the region into “spheres of influence”, she insisted, adding that “we reaffirm our solidarity with Ukraine and our European partners that are threatened by Russia”.
She’s speaking a day after US president Joe Biden caused alarm by admitting Nato was divided on how to respond if Russia makes a “minor incursion” into Ukraine, where Russian troops have been gathering.
Europe, von der Leyen says, continues to stand behind the fundamental principle that Ukraine is free to decide as a sovereign state.
She declares:
To be clear: We want this dialogue; we want conflicts to be solved in the bodies that have been formed for this purpose. But if the situation deteriorates, if there are any further attacks on the territorial integrity of Ukraine, we will respond with massive economic and financial sanctions.
The transatlantic community stands firm on this. The EU is by far Russia’s biggest trading partner, and by far the largest investor. And yes, this trading relationship is important to us, but it is far more important to Russia. We hope an attack will not happen, but if it does, we are prepared.
Von der Leyen also announced that the European Chips Act will be proposed in early February, to strengthen the EU’s semiconductor industry.
Our semiconductors supplies come from a few producers outside the EU. This is a dependency we cannot afford.
— Ursula von der Leyen (@vonderleyen) January 20, 2022
The #EuropeanChipsAct in early February will aim to make Europe a strong global player.
Let's create more balanced interdependencies, for supply-chains we can trust. pic.twitter.com/4a9SuORkcS
Updated
Dr Jackie Mulligan, founder of the local shopping platform, Shopappy, says the increase in firms reporting lower turnover shows the devastating impact of Omicron on UK businesses:
“The move to Plan B holed many businesses under the waterline, just when they needed a festive lift.
“Around the country towns became ghost towns in December and 2022 has started on an equally sombre note.
“Inflation at a 30-year high is hitting small high street businesses from all angles.
“Customers have less to spend, raw materials are costing more, supply chains are being squeezed, interest rates are on the up and the cost to heat their premises is skyrocketing.
Mulligan adds that people should support their local retailers, to help them through the economic pain.
Two-thirds of UK report higher living costs
Two-thirds of UK households have reported that the cost of living has jumped this month.
Rising food prices, energy and fuel bills were the main reasons, highlighting how the jump in inflation is hurting people.
The Office for National Statistics’ latest data on economic activity and social change found that 66% of adults say their cost of living increased over the last month.
Among those, 87% cited rising food shop prices, as retailers passed on higher costs to their customers.
Rising energy bills were cited by 79%, following the increase in the UK fuel price cap last autumn, and 71% pointed to increases to the price of fuel, after petrol and diesel hit record prices at the pumps.
That’s another sign that the cost of living squeeze is hurting, after higher cost of clothes, food and footwear pushed up UK inflation to its highest in 30 years in December.
Updated
Full story: Primark to cut 400 managers to offset rising costs
Primark is to axe 400 jobs across its UK business as the fast fashion retailer cuts back its store management roles in response to rising cost pressures, despite a significant bounceback in trading in recent months.
Primark, which operates 191 stores in the UK and more than 400 in total internationally, said it was creating a new management level role as part of the reorganisation but overall expected the changes to leave it with about 400 fewer retail managers in the UK.
The company added that although supply chain pressures had now eased it still expected that longer shipping times would “continue for some time”.
Primark said that while sales at its UK stores in the 16 weeks to 8 January had been “well ahead” of last year, despite an impact from the spread of Omicron, they remained 10% below pre-pandemic levels.
UK firms report biggest sales fall since April 2020
The Omicron variant has left many UK companies nursing a drop in sales in December, but there are signs the economy could be picking up again.
In December 2021, a net 6% of firms reported decreasing turnover compared with the previous month, the Office for National Statistics reports.
That means that more firms saw falling turnover than rising turnover last month. It’s the highest proportion reporting a fall in monthly turnover since April 2020, when the first Covid-19 lockdown hit the economy.
A net 6% of firms reported decreasing turnover in December 2021, compared to the previous month, according to data from @HMRCgovuk VAT returns.
— Office for National Statistics (ONS) (@ONS) January 20, 2022
This is the highest proportion reporting a fall in monthly turnover since April 2020 https://t.co/H9yTqRmsYJ
The ONS’s latest real-time economic indicators showed that average company turnovers fell between late November 2021 (when the Omicron variant was identified as a threat) and early January 2022.
That’s an early indication of the economic damage caused by Omicron at the end of 2021, after the economy had achieved strong growth in November, back to its pre-pandemic levels.
Between late November 2021 and early January 2022 the BICS standardised turnover balance estimate fell by 1.4%. pic.twitter.com/etuxSt24lW
— Office for National Statistics (ONS) (@ONS) January 20, 2022
Hospitality firms and retailers were badly hit by the Plan B move in December, as we’ve already heard this morning from Revolution, and Primark.
But there are signs that business has picked up in January, as Covid-19 cases fell back from record levels.
Restaurant bookings jumped by 5% in the week to Monday 17th January, and credit card spending also increased.
Transactions at Pret A Manger stores across the UK jumped by 16 percentage points last week, the ONS adds. That left them at 72% of the average level in January 2020, still “notably” below levels in the four months before Christmas.
Updated
Firms are gearing up for staff to return to the office again, after the UK government announced the end of its Plan B Covid measures next week.
Citigroup has asked its London staff to come into the office at least three days a week, Bloomberg reports.
It’s an early indication of the determination of finance firms to return to offices after the U.K. government said people no longer needed to work from home.
“We are now free to gather in our offices, without restriction, where we are better able to generate the energy and collaborative spirit on which Citi thrives,” EMEA Chief Executive Officer David Livingstone and U.K. head James Bardrick said in an email to staff seen by Bloomberg.
“Everyone is expected to be in the office at least three days per week.”
More here: Citi Asks London Staff to Return to Office as U.K. Guidance Ends
Citi Asks London Staff to Return to Office as U.K. Guidance Ends https://t.co/mcIZjqAaZH
— Shakir Khaja (@KhajaShakir) January 20, 2022
Eurozone inflation confirmed at record high
It’s official, eurozone inflation is running at its highest level since the single currency was created.
The euro area annual inflation rate was 5.0% in December 2021, up from 4.9% in November, Eurostat reports (confirming its flash reading).
Energy prices were the biggest factor, surging by 25.9% year-on-year as the surge in gas and electricity prices hit household budgets.
But price pressures were broader than just energy; Food, alcohol & tobacco was up 3.2%, industrial goods prices were up 2.9%, while services cost 2.4% more.
Euro area annual #inflation up to 5.0% in December https://t.co/M0jjnIv9kh pic.twitter.com/5fHHCJtrdf
— EU_Eurostat (@EU_Eurostat) January 20, 2022
In the wider European Union, prices rose by 5.3% in the year to December, Eurostat adds.
In the UK, inflation hit 5.4% while in the United States it soared to 7%.
Property shares surge after China rate cut
China has eased monetary policy again, as Beijing tries to prop up its slowing economy.
China’s central bank lowered mortgage lending benchmark rates on Thursday, after data earlier in the week showed that its property sector was struggling.
The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by People’s Bank of China to its short- and medium-term lending rates on Monday.
The PBoC acted after China’s construction sector shrank in the last quarter of 2021, as developers such as troubled Evergrande were hit by crackdown on credit.
The downturn hit developers’ sales, investments, land purchasing and financing activities in December.
Share prices of Hong Kong-listed Chinese property developers rose sharply today, recovering some of their recent losse.
Sunac China rallied by over 15.2%, while Evergrande gained 4.6%.
Updated
ABF/Primark: what the experts say
Primark could benefit from the return to normal life this year, if it can overcome supply chain problems that are driving up costs, says Freetrade’s senior Analyst Dan Lane.
Restrictions easing and office life returning are two major boons for footfall-oriented businesses like Primark.
It’s never been short on fans and if it insists on not letting them buy online, it only has one way to serve them. The queues have mazed up various UK high streets during lockdown’s less restrictive periods, but appetite has been even more pronounced away from built-up areas. Now that employers look set to crack the whip and get us back to city centre offices, we’re likely to socialise and shop there too. That could mean 2022 is the year Primark and AB Foods really get the engine back to firing on all cylinders.
One thorn in the side that’s likely to continue is shipping. Supply chains are finally coming back online but an almighty backlog in global freight means ABF will need to be tactical in getting the public in but having the goods there to sell them.
Retail analyst Nick Bubb says Primark’s lack of an e-commerce arm meant it suffered from Omicron. So sales were still below pre-pandemic levels, with UK like-for-like sales 10% below two-years ago.
Well, Primark was again disadvantaged by the swing back to Online spending in the Omicron surge, but its stores are still popular shopping venues…
Laura Hoy, equity analyst at Hargreaves Lansdown, says ABF could ride out its inflationary pressures better than other companies.
While Primark’s lack of digital presence leaves something to be desired in a global pandemic, we’re impressed by the group’s stock management. Last year’s autumn and winter stock made it to the shelves this year with very little discounting, which should be a welcome tailwind for cashflow.
Inflationary headwinds are an unavoidable storm cloud hanging over just about everyone right now, but we think ABF is well-placed to ride it out. The group’s low-cost retail business will appeal to shoppers tightening the purse strings, and improved efficiency across all areas of the business together with price hikes in the grocery business look likely to offset the bulk of the pain for now. But if costs continue to balloon, it could become a problem for Primark as the group has very little space to increase costs due to its position as a discount retailer.”
Mr Kipling celebrates biggest ever Christmas
UK manufacturer Premier Foods has hiked its profit forecasts after its Mr Kipling cake brand recorded its best-ever Christmas sales.
Premier Foods benefitted from a jump in spending during the festive season, helped by an increased number of family gatherings over the festive period, and demand for less sugary treats.
Its ‘Sweet Treats’ arm grew sales of branded baked goods by 6.3% year-on-year in the last quarter (to 1st January) and were 11.6% up on the last three months of 2019.
It says:
Cadbury cake grew sales across its range of existing and new product ranges, the latter driven by Fudge and Crunchie cake bars.
Mr Kipling enjoyed its best ever Christmas trading period, due to increased sales across all its core cake ranges and also healthier products such as reduced sugar Angel Slices. In overall terms, the Group’s healthier product ranges grew ahead of the wider market, up +13%.
Total group sales were 7% higher than two years ago, but 1.8% lower than last year (when lockdowns led to more eating at home).
It now expects to make a trading profit of at least £145m, up from consensus forecasts of around £140.7m. Shares have jumped by 6.5%, to the top of the FTSE 250 leaderboard.
Mr Kipling is now heading across the Atlantic, Premier Food says.
Following the successful test in Canada, the first shipments of the Mr Kipling cake test in the US have now been made and will go instore during the fourth quarter [January-March 2022].
Deliveroo has posted another jump in orders in the last quarter of 2021, as the pandemic continued to boost demand for home food deliveries
The gross transaction value (GTV) of orders on Deliveroo’s platform rose 36% year-on-year in the fourth quarter, compared to 2020 when lockdowns helped demand.
For the full year, GTV grew 70% in constant currency terms -- the top end of Deliveroo’s upgraded guidance from October.
Deliveroo sees the value of orders on its platform grow faster than expected in the fourth quarter, driving the company to hit the top end of its full-year guidance https://t.co/Aq3MuE3m3I
— Bloomberg UK (@BloombergUK) January 20, 2022
On a quarterly basis, GTV rose 12% in the UK compared with Q3 while orders were up 13%, meaning the average order size dipped.
Will Shu, founder and CEO of Deliveroo, said the company finished 2021 with a strong Q4 performance:
I am proud of what we achieved in 2021; despite a challenging backdrop, we continued to strengthen our customer proposition, widen our customer base and execute against our strategy.
We are excited about the opportunity ahead and look forward to making further progress in 2022.”
Deliveroo’s shares have risen 2.5% this morning. But at 173p, they are still less than half the level at which they floated last year (at 390p).
Deliveroo reports 36% rise in gross value of Q4 orders https://t.co/aAJX5DVHtF pic.twitter.com/JNGzyxpRrz
— Reuters (@Reuters) January 20, 2022
German factory prices rise at record pace
Costs are also surging in Germany, as inflationary pressures grow.
Producer prices surged by 5% in December alone, a very sharp increase.
It means Germany’s factories were charging 24% more for their wares than a year ago, a record annual increase in PPI.
On average, price rose by 10.5% in 2021 compared to 2020, which will have a knock-on impact on consumers in Germany and abroad as these escalating costs are passed on.
Energy prices surged by 69.0%, and there were also significant price increase on intermediate goods, including metals, wooden containers, fertilisers and nitrogen compounds and sawn timber.
Good Morning from #Germany where inflation pressures intensify. German PPI jumps 24.2% YoY in Dec and smashes all estimates. This was the highest increase ever since start of the stats in 1949. Compared w/preceding month Nov2021 the overall index rose by 5.0% in Dec2021. pic.twitter.com/OJLNSqU8n3
— Holger Zschaepitz (@Schuldensuehner) January 20, 2022
Revolution Bars: cancelled corporate parties rebooked for early 2022
Bar operator Revolution was also hit by Omicron in the crucial festive period.
Revolution’s like-for-like sales in the last six weeks of 2021 were 23% lower than two years ago, it told the City, as concerns over the Covid-19 variant caused a flurry of cancellations.
Sales over the Christmas period were impacted by the move to ‘Plan B’ including the return to the ‘Work From Home’ instruction, implementation of Vaccine Passports for late night bars and government messaging which unhelpfully encouraged the limiting of social interactions.
Office parties were particularly hit, with ‘pre-booked revenue’ such as corporate hospitality slumping by almost 40% in the six weeks to January 1st, compared to 2019.
But total bookings were 19% higher, with younger customers still keen to enjoy Christmas.
Revolution, which runs 67 bars, adds that many of those cancelled corporate parties have already been rebooked for early in 2022, as companies look to hold late Christmas festivities.
Rob Pitcher, CEO of Revolution Bars Group, said:
‘I am so proud of our team’s resilience in the face of the confusing government messaging and the disappointment of the wave of corporate booking cancellations it caused during December.
The only comfort is that many of these parties have already been rebooked and it was pleasing to see the number of general guest bookings significantly up versus 2019 demonstrating that our young guest base remains as enthused and excited about our offering as we are.
Yesterday’s news of the scrapping of the work from home guidance and the cancellation of all other restrictions is very welcome for our business and will actively help rebuild consumer confidence. It is imperative that going forward there are no further restrictions as we all learn to live alongside Covid 19.
Shares in Associated British Foods have dropped 1.8% in early trading in London.
But the wider FTSE 100 has opened around 0.3% higher, touching a fresh two-year high of 7619 points.
Unilever is among the risers, up 1.7% after saying it won’t increase its offer for GlaxoSmithKline’s consumer healthcare division above £50bn. City concern about Unilever’s ambitions hit its shares earlier this week.
Primark cutting 400 jobs in store management shake-up
Around 400 jobs are being cut across Primark as it shakes up its store management.
The fashion retailer has launched a consultation with staff as part of its plans to simplify its UK store retail management structure (see previous post).
It is looking to make the management structure consistent across its estate of over 190 stores in the UK, and those changes are likely to leave it with around 400 fewer retail managers.
Kari Rodgers, Primark retail director for the UK, said:
“The changes we’re proposing will deliver a simplified and more consistent management structure across all of our stores, provide more opportunities for career progression and offer greater flexibility, all of which are designed to help us provide the best possible experience for both our customers and our colleagues.
“We are now focused on supporting our colleagues who are affected by these proposed changes and will be going through the consultation process.”
Updated
Introduction: ABF sees escalating costs
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Rising raw materials and commodity costs, supply chain tensions and the energy price crunch are all hitting businesses, adding to the cost of living crisis facing households this year.
Associated British Foods, which owns Primark plus grocery, sugar, agriculture and ingredients businesses, has reported this morning that all its businesses have seen inflationary pressures in the last few months.
ABF, which makes Twinings tea, Ovaltine, Patak’s curry pastes and sauces, Kingsmill bread and Jordans biscuits, has lifted some grocery prices to absorb these rising costs.
In a trading update this morning, ABF says these rising costs are eating into its profit margins too:
In our Grocery, Sugar, Ingredients and Agriculture businesses we have seen an escalation in the cost of energy, logistics and commodities.
We have been implementing plans to offset these through operational cost savings and, where necessary, the implementation of price increases. We expect an increase in the adjusted operating profit for Sugar. We expect reduced adjusted operating profit margins in Grocery and Ingredients at the half year, due to phasing in fully recovering cost but a recovery in the run rate of these margins by the financial year end.
World food prices hit 10-year high last year, according to the UN, pushing up inflation, with rising demand, weak harvest and pandemic disruption all driving up costs.
Primark is now seeing a rise in footfall in UK and Ireland, after Omicron caused some disruption as shoppers stayed away from the high street.
The improving trend in customer footfall was interrupted in December by the rapid rise in Covid-19 cases of the Omicron variant but we are now seeing a recovery in UK and Ireland footfall.
Primark sales were 36% ahead of last year in the 16 weeks to 8th January (in November 2020, some stores had to lock down, which hit Christmas trading that year), with operating profit margins ahead of expectations.
Like-for-like sales at Primark’s UK stores were still 10% below two years ago, before the pandemic.
ABF explains that cost cuts have helped Primark absorb higher costs - and is proposing further job cuts:
The effect of inflationary pressure on raw materials and supply chain in this first quarter has been broadly mitigated by a favourable US dollar exchange rate compared to last year and a reduction in store operating costs and overheads.
We are proposing to simplify our in-store UK retail management structure as part of our ongoing programme to improve the efficiency of our store retail operations.
Yesterday, Bank of England governor Andrew Bailey warned that inflation pressures may last longer than first thought. Bailey told the Treasury Select Committee that financial markets don’t expect energy prices to start easing back until the second half of 2023, which could mean inflation says higher for longer than expected.
UK inflation hit 5.4% in December, the highest in three decades, meaning prices are rising faster than wages:
The agenda
- World Economic Forum’s Davos Agenda
- 9.30am GMT: Weekly economic activity and social change in the UK indicators
- 10am GMT: Eurozone inflation rate for December (final reading)
- 12.30pm GMT: ECB Monetary Policy meeting accounts
- 1.30pm GMT: US weekly jobless figures
- 3pm GMT: US existing home sales
Updated
