Monday, May 20, 2024

Wall Street at record high after US inflation falls to 3.4%; takeover offer for Royal Mail raised – as it happened

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US inflation slows to 3.4%

Newsflash: Inflation across the US has slowed, bringing some relief to American families and perhaps reassuring America’s central bankers that price pressures are easing.

The consumer price index rose by 3.4% in the year to April, down from 3.5% in March.

That’s in line with Wall Street forecasts.

In April alone, prices rose by 0.3%, a slowdown on March when they increased by 0.4%.

Rising costs of housing, and fuel, were both key factors behind inflation last month.

The Bureau of Labor Statistics says:

The index for shelter rose in April, as did the index for gasoline. Combined, these two indexes contributed over seventy percent of the monthly increase in the index for all items.

The energy index rose 1.1 percent over the month. The food index was unchanged in April. The food at home index declined 0.2 percent, while the food away from home index rose 0.3 percent over the month.

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Key events

More takeover drama in the City: Oil services company John Wood Group has rejected a second takeover approach.

John Wood told shareholders that Dubai-based Sidara has raised its previous offer – which it turned down – by 3% yesterday.

However, John Wood’s board has concluded that it continued to fundamentally undervalue Wood and its future prospects, and unanimously rejected it today.

Ben Bernanke then explains to MPs that central banks in general made a collective mistake, by thinking supply chain disruption would be swiftly resolved.

He tells the Treasury committee:

[They thought] the supply chain disruptions would be taken care of relatively quickly by profit-maximising firms, who would finding replacement inputs or alternative ways to make their products.

In fact, the supply chain disruptions took a lot longer than most people – including experts in the field – thought would happen.

Wall Street at record highs

Back in New York, stocks are at record highs after US inflation dropped in April.

The S&P 500 and the tech-focused Nasdaq both hit record highs in early trade on Wednesday, as the fall in US CPI to 3.4% bolsters hopes of interest rate cuts from the Federal Reserve this year.

The Dow Jones industrial average is up 0.5% at 39,755 points, closing in on the 40,000 mark….

Ronald Temple, chief market strategist at Lazard, says:

“The Fed can breathe a sigh of relief after today’s CPI. This report alone is insufficient to generate a rate cut at the June or July FOMC meeting, but it lays the groundwork for 25 bps of easing at the September meeting on the back of decelerating shelter and services ex-shelter price pressures.”

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Bernanke: UK’s inflation shock was unavoidable

Britain’s surge in inflation would still have happened even if the Bank of England’s processes had been better, says former Federal Reserve chair Ben Bernanke.

He has been asked by the Treasury committee whether the recent painful rise in inflation could have been avoided, if the recommendations made in his new review of the BoE had been implemented a couple of years ago.

Bernanke suggests not, pointing out to MPs that the inflation surge was due to global shocks, from the impact of pandemic lockdowns to the Ukraine war – which pushed up oil and food prices and caused supply chain disruption.

He explains:

Avoiding inflation entirely would have been essentially impossible without throwing the economy into essentially a depression.

Significant inflation was unavoidable, and every market economy experienced that.

But… Bernanke adds that the MPC might have understood the modelling aspects of the inflation shock better, had his recommendations (which include modernising its software) been implemented.

But either way, “significant inflation was inevitable”, he adds.

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Bernanke: concerns about underlying infrastructure at Bank of England

Over in parliament, former Federal Reserve chair Ben Bernanke is briefing MPs about his review of the Bank of England.

The Bernanke review, published last month, reported that the BoE’s economic model needed revamping, and that key systems were out of date.

Testifying to the Treasury Committee today, Bernanke says he was concerned about some aspects about the Bank’s modelling and the software it uses; it may be possible to improve the use of its economic forecasts.

But Bernanke says he was also impressed by many elements of how the Bank worked – including the collaboration between its Monetary Policy Committee and its staff on drawing up those forecasts.

Full story: Royal Mail owner backs £3.5bn takeover offer by Czech billionaire

Alex Lawson

The owner of Royal Mail has accepted a £3.5bn bid for the postal company from a Czech billionaire after he ramped up the value of the takeover, creating a political headache for the government.

Last month, Royal Mail’s parent company, International Distributions Services (IDS), rejected a preliminary offer worth 320p a share, or £3.1bn, from Daniel Křetínský, an energy tycoon whose company, EP Group, is its largest shareholder.

However, on Wednesday IDS said it was recommending an improved 370p a share offer to its investors. More here.

Today’s increased offer for Royal Mail came just a few hours before the deadline for Daniel Křetínský to either make a firm bid, or walk away.

And having raised the value of his proposal to £3.5bn, the PUSU (put-up or shut up) deadline has been extended by two weeks, to 5pm on 29 May 2024.

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IDS shares jump

Shares in IDS have jumped to a two-year high, after the company announced that Daniel Křetínský has raised his takeover offer to £3.5bn.

They’re up 20% at 325p per share, the highest since May 2022.

That’s still some way short of Křetínský’s offer, which is worth 370p per share in total.

Today’s new offer is a 72.7% premium to IDS’s share price on 16 April, the day before his first offer was revealed.

IDS chair: We’re minded to accept this offer

Keith Williams, chairman of IDS plc, has criticised the government, as he explains why Royal Mail’s parent company is minded to recommend Daniel Křetínský’s new £3.5bn takeover proposal:

“The Board is minded to recommend this offer price, which it considers to be fair and reflects the value of GLS’ current growth plans and the progress being made on change at Royal Mail to adapt the business to a significant fall in the demand for letters and growth in parcels.

“It is however regrettable that despite four years of asking, the Government has not seen fit to engage in reform of the Universal Service and thus improve our financial position and ensure that Royal Mail could provide an economically sustainable service to the British public.

“The Board believes that the proposed contractual undertakings to be offered by EP Group should ensure that IDS continues to deliver the key elements of the Universal Service in the UK and protect the interests of the workforce at both Royal Mail and GLS.”

IDS adds that “There can be no certainty that any offer will be made”…

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Křetínský raises takeover offer for Royal Mail

Czech billionaire Daniel Křetínský has raised its takeover offer for Royal Mail.

Křetínskýs investment vehicle, EP Group, is now offering to pay around £3.5bn for Royal Mail’s parent company International Distributions Services.

That’s an increase on last month’s offer, of £3bn.

Kretinsky’s new offer is worth 370p per IDS share – 360p per share in cash, plus a 2p dividend and an 8p special dividend.

Kretinsky currently owns around 27.6% of IDS’ issued share capital.

IDS’s board say they have indicated to EP Group that it would be minded to recommend the offer to IDS shareholders, should it be formally made.

IDS adds that it has sought “a set of contractual undertakings to protect key public interest factors and recognise Royal Mail’s status as a key part of national infrastructure”, which EP Group has agreed to offer.

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Odds of UK interest rate cut in June rise

The slowdown in US inflation appears to be lifting confidence that British interest rates could be cut soon.

The money markets now indicate that a June cut to UK interest rates is now a 58% chance, up from about 50% last night.

🔅 US short-term fed fund-rate futures jumped as traders increased bets on Fed rate cuts following the CPI report.
🔅 This reaction is due to the April CPI figures, which showed a YoY inflation rate of 3.4% (3.5% previous month), in line with expectations, but still elevated.…

— Ankit Chheda (AKC) (@akc_trading) May 15, 2024

Thames Water directors to quit board

Alex Lawson

Alex Lawson

Back in the UK, a clutch of directors are reportedly ready to resign from the board of Thames Water’s owner, as the uncertainty over the debt-laden utility company’s future continues.

A number of board members of Kemble Water Finance, the ultimate parent of Thames Water, are poised to quite in the coming days, Sky News reported.

The directors have looked to be in a difficult position since Thames’s owners pulled the plug on £500m of emergency funding in late March, and indicated that they were unprepared to stump up more funds to invest in Thames’s infrastructure. The company’s investors – a consortium of funds from Canada, Abu Dhabi, Australia, Britain and China – had deemed the company “uninvestible”, arguing that the industry regulator, Ofwat, had been too stringent.

Kemble then defaulted on a debt interest payment last month. Thames could ultimately fall into a special administration, effectively a temporary nationalisation by the government to ensure service is maintained for the company’s 16 million customers.

Ofwat’s draft view of English and Welsh water companies’ five-year business plans, due next month, is seen as a crucial moment in determining the immediate future of Thames Water.

U.S. retail sales were unexpectedly flat in April, in a sign that American consumer spending is weakening.

Economists had expected a 0.4% rise, month-on-month, in retail sales – but new data shows that spending was “virtually unchanged”, and 3% higher than a year ago.

The report shows that spending on gasoline was up 3.1% month-on-month, and 4% higher than a year ago.

That suggests higher gasoline prices ate into consumers’ pockets, leaving less to spend elsewhere.

Spending at motor vehicle & parts dealers fell by 0.8% in the month, with spending at furniture stores down 0.5%.

Neil Birrell, chief investment officer at Premier Miton Investors, says:

“The usual excitement over US inflation ended up being a damp squib, as it came in exactly as expected.

However, retail sales were weaker than expected and the core rate is back to levels not seen for quite some time, which might well see optimists calling for rate cuts and markets rallying.”

Richard Flynn, managing director at Charles Schwab UK, says the financial markets wil be reassured by the drop in US inflation last month.

However, Flynn doesn’t believe it will prompt the Federal Reserve to rush to lower interest rates.

“Today’s figures show that the rate of inflation has fallen, compared to last month. Although this will offer reassurance to markets after an unwelcome uptick in CPI figures last month, the figures are unlikely to prompt an imminent change in interest rates.

Patience has been the Fed’s core message lately. Officials have been fairly consistent in stating that current interest rates are sufficiently restrictive to bring inflation under control and that the next move will be a cut.

However, it is also clear that they are in no rush to make that move. Whether we see rates reduced in July, September, or December will depend on how inflation changes in the coming months, how the economy performs, and whether any issues arise in the financial system or jobs market. In the meantime, we watch and wait.”

Dollar hits one-month low as inflation slowdown lifts interest rate cut hopes

The US dollar is weakening, as April’s inflation report lifts hopes that the US Federal Reserve will cut interest rates this year.

The greenback has dropped to a one-month low against a basket of other major currencies:

This has pushed the pound up by half a cent, to $1.2645, the highest since 10 April.

The euro has climbed to its highest level against the dollar in a month too, at $1.086.

Traders are cheered that US inflation rose by less than expected during April alone. Economists polled by Reuters had forecast the CPI gaining 0.4% on the month – but in the event, it only rose by 0.3%.

Initial reaction following this morning’s CPI, Retail Sales, and Empire Manufacturing reports:

Equity futures 🔼
Treasury yields 🔽
US Dollar 🔽
Bitcoin 🔼
Gold 🔼

— Bespoke (@bespokeinvest) May 15, 2024

US energy prices rose by 2.6% in the year to April, today’s CPI report shows.

Food prices rose by 2.2% over the last year, including a 4.1% increase in ‘food away from home’ (ie, eating out at restaurants).

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