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Sainsbury’s and JD Sports Hint at Upside Surprises against Euro and Dollar

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Incoming results from major UK retailers suggest the UK economy might be doing better than economists had expected, raising the prospect for upside surprises in UK economic data and the British Pound.

Retailers including J. Sainsbury’s and JD Sports join Next and Card Factory in reporting better-than-expected results for the festive season.

The trading updates hint that the release of official data next week could come in better than expected and challenge a consensus amongst economists that the UK is set for an extended recession.

Upside surprises in the data would, in turn, prove supportive of Sterling which continues to underperform its major peers: the Pound to Euro exchange rate has retreated to its lowest level since September at 1.1280, and the Pound to Dollar exchange rate’s advance has stalled, although it still holds an advance above 1.21 at the time of writing courtesy of the broader USD retreat.

John Stepek, editor of the Money Distilled newsletter for Bloomberg says, “flicking through UK trading updates this AM does not yet scream “consumer recession”.

He says he is seeing solid or strong figures from Sainsbury’s, JD Sports, Ten Entertainment (bowling alleys), Warpaint (make-up), car dealer Lookers, Topps Tiles and Grafton (DIY).

The earning seasons could challenge a consensus expectation amongst economists that the UK will be the worst-performing of the major economies in 2023 because of a cost of living crisis. This assumption informs a widespread pessimism towards the Pound.

UK economic expected to underperform

Above: A survey of economists reveals the UK is expected to shrink by more than peer nations in 2023.

“We remain cautious on the pound… the UK growth outlook remains bleak for several reasons. On the back of high energy prices and Brexit-induced supply bottlenecks, the UK currently experiences the steepest rise in consumer prices within the group of G10 economies,” says Dr. Claudio Wewel, FX Strategist at J. Safra Sarasin.

But the incoming trading results suggest scope for positive surprises.

Sainsbury’s CFO said the spiralling price pressures seen in 2022 are now easing and look set to come down this year.

The supermarket reported a record Christmas with sales over the festive season, not only driven by higher prices but the volume of goods sold too.

Retail chain JD Sports Fashion said annual profits will be towards the top end of expectations after cheering festive sales growth of more than 20%.

The chain said the performance in the six weeks to December 31 was “particularly impressive”.

The evidence would back the predictions of some foreign exchange forecasters who are expecting the Pound to put in a better performance in 2023 than was the case in 2022.

MUFG, the global investment bank and lender, says peak pessimism towards the British Pound may be close to passing. “Our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism,” says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

MUFG reckons there are a number of factors that could see GBP turn a corner:

  1. The blowout in the UK trade deficit has halved from its nadir
  2. Energy price declines point to a further improvement in the trade deficit
  3. A resolution to public sector strike actions looks more likely than not
  4. The new government has adopted a credible plan to deal with the country’s finances
  5. Progress continues to be made with the EU on the outstanding issues concerning the Northern Ireland protocol

Finally, political certainty is set to make a return following a tumultuous 2022 that saw three Prime Ministers occupy 10 Downing Street.

“PM Sunak looks to have restored some order and credibility to the office of PM after his two predecessors and our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism and this year could be a year of better sentiment toward the UK,” says Halpenny.

The predictive abilities of Christmas trading updates from UK-focussed retailers will be challenged next week when the ONS releases a bevvy of official data, including retail sales for December.

Following a quiet start to the year the data calendar hots up with the release of employment and wage data on Tuesday, inflation data on Wednesday and retail sales data on Friday.

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