Recent analysis produced by Peel Hunt on the food & agribusiness sectors indicates that recent trading updates from UK primary producers and grocers have been “mildly encouraging” despite volume decline and tightening margins.
The broker points out that commodity prices for some softs have pulled back appreciably from their recent peaks, partly due to the reduction in transportation costs, although this has yet to translate into moderating ingredient prices for UK food producers.
Any price falls for soft commodities may be short-lived anyway, as the broker correctly notes that “there remains considerable doubt on the scale of next year’s harvest given the breadth of the warzone”. To make matters worse, “politicians continue to be more focussed on meeting environmental standards rather than answering the immediate problem of major food shortages”.
Brother can you spare a dime?
Few will be surprised that the latest Begbies Traynor (BEG) Red Flag Alert showed a marked rise in the number of businesses in critical financial distress over the last year, with a 37 per cent increase in Q2 from a year earlier. That’s in addition to a sizeable increase in the use of County Court Judgements to collect outstanding corporate debt.
The corporate restructuring and insolvency practitioner made the point that businesses continue to be hit by rising inflation “far exceeding the official rate of more than 9 per cent”. That’s obvious to everyone except perhaps the good burghers at the Office for National Statistics, as many householders would vouch that the actual rate is nearer to the forward projection of 17.7 per cent rate recently floated by the National Institute of Economic and Social Research. Real wages are almost certain to pull back further through Q4 of this year and beyond, so it would be safe to assume that businesses will be forced to dig deep as pay demands intensify, with all the attendant implications for industrial relations.
We all know the upshot for equities. If, as Bank of England supremo Andrew Bailey recently warned, that upward price pressure would persist for longer than previously expected, we are likely to witness a further contraction in corporate operating margins. Higher material, labour and transportation costs would be central to the squeeze and there must be a limit to the extent to which companies can pass on price increases to consumers.
With central banks now putting the screws on, the resultant restrictive liquidity measures provide less support for risk assets such as equities, a far cry from events over the past 12-years or so. You are left with the feeling that the market would find a short, sharp shock far more agreeable than a protracted bout with inflation. The only solace lies in the fact that Bailey was woefully off the mark midway through last year, when he posited that upward price pressures would prove temporary. Let’s hope his crystal ball proves as opaque this time around.
Putting out the fire with gasoline
Across the pond, US Senators have pushed through the Inflation Reduction Act – a flagship measure of the Biden administration aimed at tackling climate change, tax avoidance and healthcare. The bill, which commits a further $739bn (£611bn) in federal expenditure, was finally passed with the aid of vice president Kamala Harris exercising her casting vote as the Senate itself was evenly matched.
Though the bill has been heavily scaled down from the $3.5 trillion package presented to Congress in the early days of the administration, it still represents a leap of faith. Modern Monetarist Theory seems to have taken hold of the collective psyche either side of the Atlantic, as trying to curb inflationary pressures by injecting more money into the economy seems almost perverse. More likely is that the bill is simply a misnomer, cooked-up to try and convince US voters that concrete measures are being taken to dampen price hikes as we approach the mid-term elections in November.
However, the bill does include a provision which increases the budget of the US Internal Revenue Service by around $80bn, thereby enabling it to employ another 80,000 agents to increase its tax auditing capabilities. Washington is trying to sell this as move against multinational firms which routinely circumvent tax legislation, although the most likely targets will be small-business owners and upper-middle-income workers – low-hanging fruit.
Takin’ care of business
The Biden administration can take some heart from the latest jobs figures from the US which showed that employers had taken on another 0.58mn workers in June, double the rate of analyst forecasts. Contrary to the Orwellian denials of the administration, the US economy is already in recession, having registered two consecutive quarters of negative economic growth, so the figures should be welcomed if they point to a shorter and shallower pitch for the US economy.
Treasury yields moved higher on the news, while the S&P 500 closed slightly down after the jobs data was disseminated, as considerations over interest rates remain to the fore. Beyond the US, there were few clues for London investors provided by overnight trading in Asia, as the positive news on US jobs is set against the prospect of further interest rate rises. Shanghai and Tokyo advanced in early trading, albeit on relatively modest volumes, with the former market buoyed by a double-digit increase in Chinese exports as the nation emerges from its latest round of Covid-19 restrictions.
