Fed ditches laggard reputation with bold rate cut, markets respond favourably, Next upgrades guidance after bumper first half and Ocado Retail shines in third quarter

“Central banks have a reputation of moving at a snail’s pace, spending too long analysing data and subsequently playing catch-up with their monetary policy decisions. It feels as if the Federal Reserve has had enough of this criticism and wants to be seen in a different light. A half-percentage point interest rate cut is certainly not messing around and shows it is serious about getting ahead of events and not being behind the curve,” says Russ Mould, investment director at AJ Bell.

“The tone of the Fed’s comments makes this cut feel like a calm and collected decision, not one of panic. That’s reassuring for the markets as there was a danger that such a big rate cut could send the wrong message. However, there is a lot to digest and it’s understandable the market reaction was initially mixed. US indices went up on the news, then pulled back and stayed flat, and now futures prices imply another leg up when Wall Street opens on Thursday.

“Having had time to process the news, it now feels as if the market is taking the big rate cut as a positive. Asian and European markets certainly reacted positively, with all of the major equity indices pushing ahead. The FTSE 100 was firmly in a risk-on mood as commodity producers led the way, while more defensive sectors like utilities and tobacco were out of favour.

“Rate cuts should, in theory, encourage companies and consumers to spend more money and stimulate economic activity. Lower rates ease the pressure on companies with debt to service, it makes it cheaper for companies to borrow, and it can give them confidence to invest, including in job creation.

“Traditionally, one might expect a quarter percentage point change when a central bank cuts rates. The Fed cutting by twice this amount therefore implies this is not a normal event. If the Fed is worried about the economy, companies and consumers could be spooked by the bold action and this could produce the opposite result to what a rate cut is designed to do – it could actually make people more nervous about spending. For now, the Fed just says the economic outlook is ‘uncertain’, essentially raising the worry level up a notch but not sounding an alarm bell.

“Keeping rates high over the past year has been about fighting inflation, now the Fed’s thinking seems to be more skewed to protecting the labour market. That means each release of new jobs data could have an even greater impact on equities and bonds than before.

“It’s worth considering that the market priced in the benefits of rate cuts a long time ago. We’ve already seen a strong run for equities this year as the market is forward-looking. Now we’ve had the pivot, the narrative could change direction towards maintaining rates as being good news and further cuts as being bad.

“It’s the Bank of England’s turn to decide on interest rates later today and it isn’t expected to go down the same path as the Federal Reserve. There aren’t currently enough reasons to cut again, with markets pricing in a 79% probability of no change today.”

Next

“Next often feels like it is running a showcase in how to run a public company – clear, transparent reasoning for the way it allocates its money, detailed guidance and, crucially, a real skill at managing expectations.

“That was in evidence again as the company upgraded full-year guidance after a better-than-anticipated first half, the second upgrade in a matter of weeks. This followed a fairly gloomy assessment in May that took account of the particularly warm weather in the comparative 2023 period and predicted a resulting drop in sales year-on-year.

“In under-promising and over-delivering, Next has helped drive its share price to new record highs with sales doing well – suggesting its mid-market customer base is feeling sufficiently confident to begin loosening the purse strings. The 4.4% increase in full-price sales shows Next is not having to slash prices to get stock off the shelves. The company is now on the brink of joining the £1 billion annual profit club which is quite an achievement considering the difficult backdrop for retailers in the UK.

“Next is also benefitting from the change in the retail landscape in recent years with many competitors either falling on hard times or disappearing altogether. It has also opportunistically taken stakes in brands such as FatFace and Reiss, which are helping to supplement sales.”

Ocado

“Ocado’s joint venture with Marks & Spencer has reported strong third-quarter sales, potentially helping to smooth what has been a fairly fractious relationship between the two partners.

“Sales may be benefitting from an uptick in demand for online groceries as people’s lives return to a busier pattern post-Covid and from households feeling more confident and able to trade up from rivals.

“However, there are signs that in order to achieve this improvement in sales the Ocado joint venture is making compromises on price and this means the impressive growth in sales will not necessarily be reflected in better earnings, with margins pretty skinny. Such a strategy may be worth it over time if the company achieves stronger market positioning but it may temper some of the enthusiasm for the firm’s evident progress.

“Still, after a torrid time, today’s news is a boon for the wider Ocado group which recently reported a big narrowing of first-half losses and progress on its partnerships with global supermarkets.”

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