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LONDON (Alliance News) - UK stock indices were extending their recent run of gains midday Thursday after the minutes from the Federal Reserve on Wednesday added evidence that a US interest rate hike is very much on the cards for December.
The minutes of the Federal Open Market Committee's October meeting revealed most members expect economic conditions to justify an interest rate hike next month.
Some members of the FOMC believed that the US economy was strong enough already last month to end the near-zero benchmark interest rate in place since December 2008. However, a few Fed voters remain unconvinced about the wisdom in raising rates this year, saying it is unlikely that the information available by the December 15-16 meeting would justify such as move.
UBS economist Paul Donovan said a December rate increase has to be considered a "done deal" now, especially with the likely trend towards some significant increases in the consumer price index during the next couple of months albeit for base-effect reasons.
"The question of the pace of 2016 tightening of monetary policy was less explicit, but we are comfortable with a quarter point rate increase every quarter," Donovan said.
The European Central Bank will now be in focus ahead of the release of its October policy meeting accounts at 1230 GMT. The October press conference by ECB President Mario Draghi was considered to be dovish, with Draghi suggesting the possibility of cutting European interest rates further into negative territory.
Since the meeting, expectations for monetary easing from the ECB at its December 3 meeting have ramped up, with some analysts expecting the central bank to cut its deposit rate by 10 basis points. The ECB's deposit rate currently stands at -0.2%. Many analysts also expect Draghi to announce an extension to the bank's quantitative easing programme past the current minimum period to September 2016.
"As recently as last week ECB President Mario Draghi underlined that with any further measures, the focus would be on changes to the QE programme. However, according to reports it would be easier to find a majority among council members for a rate cut than for changes to the asset purchasing programme," said analysts at Commerzbank.
"The rate market is fully pricing in a 10 [basis point] rate cut for December. As a result it will be interesting to see how open the council members really were towards a rate cut," the bank added.
In the equity markets, the FTSE 100 index traded up 1.3% to 6,358.13 points at midday, the FTSE 250 was up 0.6% at 17,184.91 and the AIM All-Share was up 0.2% to 730.94.
In Europe, the CAC 40 in Paris was up 0.9% and the DAX 30 in Frankfurt was up 1.6%.
US futures were pointing to a higher open as well. The Dow Jones Industrial Average was pointed up 0.3%, while the S&P 500 and Nasdaq 100 indices were both indicated 0.4% higher.
The pound dipped against other major currencies after figures from the Office for National Statistics showed UK retail sales declined by more than expected in October. Retail sales decreased 0.6% month-on-month in October, reversing a 1.7% rise in September. Economists had forecast a 0.5% fall. On a yearly basis, growth in retail sales including auto fuel slowed to 3.8% in October from 6.2% in September. Sales were expected to expand 4.5%.
Excluding auto fuel, retail sales advanced 3% year-on-year, slower than the 5.7% increase seen in September and the 3.9% rise forecast by economists.
"Retailers may be busy planning for Black Friday, but these figures suggest that shoppers are preparing too. Whereas there was a sudden fall in sales in the days running up to the event last year, that dip started more than a month in advance this time around," said Keith Richardson, head of retail at Lloyds Bank Commercial Banking.
"Now, the run in to Christmas becomes really serious. Falling prices and rising wages mean there's still reason to be cheerful, but these figures suggest that today's new generation of extra-savvy shoppers still know how to get a bargain," Richardson added.
Ahead of the Black Friday sales on November 27, discount retailer Poundland was the worst FTSE 250 performer, down 16% at 233.80 pence and hitting a low of 215.82p, its lowest price since its initial public offering in March 2014. The company said pretax profit fell in the first half due to higher costs and said like-for-like also declined due in part to tough comparatives, though it said the acquisition of 99p Stores Ltd has progressed in line with its expectations.
Poundland said its pretax profit for the 26 weeks to September 27 was GBP5.3 million, down from GBP9.3 million a year earlier, mostly due to exceptional distribution and administrative expenses it incurred in the half. Total revenue rose to GBP561.1 million, up from GBP528.2 million, with underlying sales rising 5.6% in constant currencies but like-for-like sales down 2.8%, compared to a 4.7% rise a year earlier.
The group said it will pay an interim dividend of 1.65 pence per share, up from 1.50p a year earlier.
Bovis Homes traded down 7.8% after it warned its operating profit margin for the full year is likely to be only marginally ahead as its overall mix of homes it more weighted to existing sites than previously anticipated. The housebuilder said that, following planning delays on a number of higher margin sites, its revenue mix will be weighted further towards existing sites than it had originally planned.
Bovis said delivering an increasing in production in the short-term remains constrained by a shortage of sub-contract labour, which has pushed up its costs, though this is showing signs of moderating. As a result of this revenue bias and the higher costs, the company expects its operating profit margin for the full year will only slightly improve on the 17.0% it delivered in 2014.
Liberum said it is more cautious on the entire UK housing sector, expecting industry-wide margins to come under pressure.
"At the moment this margin pressure has been limited to Bovis, but it could become more widespread if house price inflation moderates in the coming years, in our view," said Liberum analyst Charlie Campbell.
FTSE 100-listed housebuilders dominated the worst performers in the index. Berkeley Group Holdings was down 1.7%, Persimmon down 1.2%, Taylor Wimpey down 0.4% and Barratt Developments down 0.3%.
Elsewhere in the blue-chip index, specialty chemicals and platinum group metals company Johnson Matthey said it will pay a special dividend to shareholders following the disposal of assets in the first half, as its pretax profit and revenue both rose despite mixed conditions in most of its markets, offset by a strong performance in its emission control unit.
The group said it will pay an interim dividend of 19.5 pence per share, flat year-on-year, but said it also will pay a special dividend for the half of 150.0p, following the disposal of businesses during the half. The total distribution to shareholders from the special payout will be GBP305.0 million.
Johnson Matthey said pretax profit for the six months to the end of September rose to GBP330.2 million, up from GBP207.8 million a year earlier, as revenue rose to GBP5.78 billion from GBP4.80 billion. The company was the best performer in the FTSE 100, up 9.3%.
CRH was up 5.5% after the Irish building materials company said it continues to expect its 2015 earnings to be well ahead of the previous year as it continued to deliver good sales growth in the first nine months.
The group said total sales grew 16% year-on-year in the nine months to the end of September, though growth did slow to 14% in the third quarter. Europe sales growth for the third quarter was only 1.0%, amid mixed trading in the region, albeit with conditions stable overall. Sales growth continues to be driven by its Americas operation, CRH said, where third-quarter sales rose 23%, a slowdown from the 32% growth in the first half.
Royal Mail was up 5.4%. The postal operator said its pretax profit fell in the first half of its financial year due to an acceleration of its cost-cutting plans in the UK, though revenue also declined and the group reiterated its full-year performance, as in the past, would be heavily dependent on the Christmas period.
The company said its pretax profit for the half year to September 27 fell to GBP116.0 million from GBP167.0 million in the half to September 28, 2014, mainly due to more costs being booked from its restructuring plan in the UK and reflecting a higher number of voluntary redundancies. Nearly 3,000 net employees left the company in the first half. Royal Mail said it will pay an interim dividend of 7.0 pence per share, up from 6.7p a year before.
Still ahead in the economic calendar, US weekly jobless claims data are scheduled to be released at 1330 GMT, with the US Conference Board's leading indicator reading for October and the Philadelphia Federal Reserve's manufacturing survey for October at 1500 GMT. Investors will also be keeping an eye on a speech by Federal Reserve Bank of Atlanta President Dennis Lockhart at 1730 GMT.
By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1
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