You know things are bad when the share price of Next, a company that has made an art of underpromising and overdelivering over the years, falls 13% in a day, even in a weak stock market. The odd part, though, was that half-year profits were solid and the cut in the full-year forecast represented the lightest of trims – from £860m to £840m.
So why the bout of nerves? The answer was that the chief executive, Simon Wolfson, walked investors through the mathematics of the pound’s devaluation and how it will prolong inflation in shops. It wasn’t cheery: he predicted a second cost of living crisis.
The fact that a lower pound increases prices is not remotely surprising, of course, especially in a UK retail industry that buys most of its garments from foreign factories that price their goods in dollars. Next itself reckons prices in its shops are up 8% this autumn and winter thanks to past falls in the pound.
It’s the prospect of what comes in 2023 that spooked the market. A 26% devaluation against the dollar in a year can be mitigated: factories’ actual production costs aren’t priced in dollars; commodity and shipping costs have probably peaked; and Next can manage its UK costs.
But Wolfson added it all up and concluded: “Even with these mitigations in place, the scale of sterling’s recent devaluation means that, for us at least, the greatest pressure on our selling prices looks like it will come in autumn and winter of 2023.”
Precision in the projections fizzled out at that point, though. There are too many uncertainties. Investors should probably have worked it out themselves, but clearly hadn’t. Next is a FTSE 100 retail bellwether. It does not breed confidence for the rest of the sector’s reporting season.
‘UK contagion’ takes hold
Chalk it up as another triumph for Kwasi Kwarteng’s mini-maxi-budget: the phrase “UK contagion” entered the lexicon of market reports on Thursday as the stock markets fell in most places. The broadly based S&P 500 index in the US, for instance, lost 2% in morning trading.
And, yes, one can see why, viewed from abroad, events in the UK may raise a few deeper questions. In the space of less than a week, a UK “fiscal event” morphed into a crisis where the Bank of England had to intervene to prevent a run on pension funds. Even if the budget was unorthodox and badly presented – and Kwarteng’s effort was both – it’s quite a thing for the central bank of a G7 nation to be talking about a “material risk” to the country’s financial stability.
And, since UK financial markets are plugged into the global markets, it’s only natural to ask broader questions about underlying health. After all, bond yields are rising everywhere, if not quite as fast as the UK’s.
Albert Edwards of Société Générale has an interesting out-of-consensus take on events (as ever). It’s too easy, he argues, to blame Kwarteng’s dash for growth as the trigger for the market’s loss of confidence in the UK government.
Gilt yields were already surging the day before, he points out, when the Bank said it would be selling gilts via its quantitative tightening (QT) programme. Investors then reacted by “pulling the rug out from under an unsuspecting and overly complacent chancellor”, even though most of the fiscal measures were pre-announced, or, in the case of the 1p cut in the basic rate of income tax, brought forward by a year.
So maybe it was the QT, as much as the mini-budget, that investors were revolting against. A semblance of calm, note, was restored when the Bank turned into a temporary buyer of gilts in response to the pension crisis. Edwards’ alternative take that “markets are still in charge and they just won’t tolerate QT” is one to consider, since the US Federal Reserve is also charging down the same route.
In her own business world
The last refuge of a beleaguered prime minister on a BBC local radio station (when she can’t mention Vladimir Putin for the umpteenth time) is to say that the business world is very supportive. The evidence for this claim is meant to be warm words from the likes of the CBI about the proposed supply-side reforms.
What Liz Truss doesn’t mention is that the CBI also said this week that “the chancellor must use every opportunity to show that he and the Bank of England are coordinating on inflation and that he has a robust plan to pay down debt in the medium term”. It is an important qualification.