Key events
China’s outlook cut: what the experts say
Fitch’s downgrading of China’s credit outlook today highlights the dilemma that policymakers are facing, as they try to stimulate growth and cut debt levels, explains Lynn Song, chief economist for Greater China at ING:
On one hand, there is certainly a need to support economic growth in the near term, and fiscal support in our view is important in order to avoid falling into a so-called “Japanisation” trap, where the economy enters into a negative feedback loop of weak confidence, falling asset prices, and slower economic growth. This will cause government debt levels to rise in the near term.
On the other hand, long-term fiscal consolidation efforts remain important. In China’s case, finding a viable alternative for land sales is an important step to take in the medium term, but the obvious solutions to this – like increasing other taxes – are unpalatable at the moment given the current state of the economy. Nonetheless, the land sale driven model of government financing will also need to change as China’s economy transitions.
The downgrade doesn’t mean China is going to default any time soon, though, explains Gary Ng, Natixis Asia-Pacific senior economist, adding:
“Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt.”
Dan Wang, chief economist of Hang Seng Bank China, says Fitch’s move reflects “fundamental concern” over China’s fiscal health and its ability to drive long-term growth.
Wang adds:
“With lagging private investment, state-backed funding has become even more important in driving growth, either in terms of infrastructure spending or in local government guidance funds for high tech industries.”
Paul Donovan, chief economist at UBS Global Wealth Management, sounds relaxed about Fitch’s move, though, telling clients this morning:
A credit rating agency (it does not matter which) has done something (it does not matter what) to China’s rating outlook. Investors will already be aware of the underlying economics behind this move.
Britain’s air traffic services provider has turned to the former chief of Rolls-Royce, after last summer’s meltdown which caused thousands of flights to be cancelled.
Warren East will take over as chairman of NATS in September, it announced this morning.
Chief Executive Officer, Martin Rolfe says East’s knowledge and insight into the aviation sector, and his experience of technology-led transformation, will be “enormously valuable”.
East left Rolls-Royce on New Year’s Eve 2022 after an eight-year stint at the jet engine manufacturer, having previously run Arm, the Cambridge-based chip designer.
Tech expertise will be welcome, as NATS is currently modernising its systems, upgrading the technology its controllers use to manage air traffic.
NATS was under fire last year after its service was disrupted by a wrongly input flight plan which led to hundreds of thousands of passengers’ flights being disrupted.
In the City, the FTSE 100 share index has risen in early trading, as investors anticipate this afternoon’s inflation report from the US.
The Footsie, which contains the largest hunded companies listed in London, is up 43 points or 0.5% at 7977 points.
That takes it near last week’s one-year high, and not too far from the alltime high of 8,047 points set in February 2023.
Grocery firm Ocado are the top riser, up 4%, amid a general rally in tech stocks.
Shares in Tesco have jumped 1% in early trading, to 290p.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, says this morning’s results have lifted optimism:
Tesco has shown once again that it deserves its best-in-class crown. Underlying retail profit has come in a smidge above upgraded guidance at £2.76bn, as the group’s efforts to beat rivals on price pays dividends.
Crucially, the supermarket is seeing volumes pick up once more, which is a saving grace as inflation tempers. If prices can’t rise, you need customers to buy a higher number of items if margins are to stay intact.
The group’s stellar proposition has meant it’s been able to increase the full year dividend by 11%, thanks to the substantial levels of cash pumping through Tesco’s veins
Sarah Butler
Tesco is planning to make £500m in efficiency savings in the year ahead.
It will cut costs with new techniques, including a robot-led distribution centre for fresh produce and fitting 100 stores with solar panels over the next three years. More here.
Tesco predicts that food inflation will stabilise in low single digits for the rest of the year.
CEO Ken Murphy is speaking to reporters now, and explains:
“I see that stabilising, that kind of low single digit for the rest of the year is our planning assumption.”
Murphy adds that inflation is still sticky for some products, such as cocoa (where poor harvests in extreme weather conditions have led to a tripling of prices), potatoes and coffee.
UK union Unite has taken a swipe at Tesco for growing its profits in a cost of living crisis.
Unite general secretary Sharon Graham says:
“Tesco is raking in mountains of cash while families struggle to put food on the table because of sky high prices. Many companies have used the cost-of-living crisis to grab excessive profits.
“There is an epidemic of profiteering in our economy – the government has been missing in action and failed to curb it.”
Tesco would doubtless deny accusions of profiteering.
Today’s financial results show it ran operating profit margins of 4.2% in the UK and Ireland in the last financial year – which is 42 basis points higher than the previous year.
Tesco adds that its current year operating margin is now similar to pre-pandemic levels.
China says Fitch rating outlook downgrade “regrettable”
China’s Ministry of Finance has said Fitch’s move to downgrade the country’s sovereign credit rating outlook is “regrettable”, news agency Xinhua reports.
Xinhua adds:
Fitch’s rating system has failed to effectively reflect the positive effects of China’s fiscal policies on boosting economic growth and stabilizing the macro leverage ratio in a forward-looking manner, the ministry said in a statement.
Tesco: inflationary pressures have lessened substantially
Britain’s largest supermarket chain has declared that inflationary pressures have “lessened substantially”, as it reports a jump in profits.
Tesco has posted a 12.8% rise in adjusted operating profit for the last financial year, up to £2.8bn, and a 7.4% rise in group sales.
CEO Ken Murphy says the group is encouraged by signs that consumer sentiment is improving, and offers hope that the worst of the cost of living squeeze may be over.
Murphy says:
Inflationary pressures have lessened substantially, however we are conscious that things are still difficult for many customers, so we have worked hard to reduce prices and have now been the cheapest full-line grocer for well over a year.
We have continued to invest in helping customers where it matters most, cutting prices on more than 4,000 products and doubling down on our powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices.
Recent data suggests Murphy is right – inflation in shop prices in the UK fell to a two-year low in March, amid a fall in food price inflation across major economies.
Tesco is expecting to grow its profits this year; telling shareholders it expects retail adjusted operating profit of at least £2.8bn in 2024-25.
On a statutory basis, Tesco’s pre-tax profits swelled to £2.3bn from £882m in 2022, up 159.5%.
Introduction: Fitch cuts outlook on China to negative
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Credit rating agency Fitch has fired a shot across Beijing’s bows, by cutting the outlook on China’s debt.
Fitch has revised the outlook on China’s Long-Term Foreign-Currency Issuer Default Rating to Negative from Stable today, warning that risks to China’s public finance outlook are rising.
China, Fitch points out, is facing “more uncertain economic prospects” as it transitions away from growth based on its property sector, where a construction boom has burst.
Fitch also kept China’s credit rating at A+, which is the fifth-highest investment grade rating, but the new negative outlook implies this rating could be cut in coming months.
Fitch identifies several threats to China’s fiscal stability, including a rising deficit, increasing government debts, and risks posed by the “Local Government Financing Vehicles” used to fund property projects.
It says:
Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective.
Fitch believes that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend. Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.
Fitch also warns that China faces “near-term growth headwinds”, predicting growth will slow to 4.5% in 2024, from 5.2% in 2023. It adds that deflation “remains a concern”.
Also coming up today
Investors around the world are poised for the latest US inflation report, due this afternoon. It is expected to show a small pick-up in the pace of price rises, lifting the US CPI rate to 3.4% from 3.2%.
But core inflation could keep slowing, perhaps down to 3.7% from 3.8%.
The US central bank, the Federal Reserve, wants to push inflation lower, so today’s data will influence how soon it can cut interest rates.
Dan Coatsworth, investment analyst at AJ Bell, says:
The central bank wants to see sustained evidence of inflation coming down and that doesn’t appear to be on the menu. The signs are clear for investors to see, but many have been choosing to ignore them.
The Fed putting it into black and white could be a difficult pill for investors to swallow, so brace yourself for turbulence on the market this week.”
The agenda
7am BST: Sweden’s GDP report for February
Noon BST: US weekly mortgage applications
1.30pm BST: US inflation report for March
2.45pm BST: Bank of Canada interest rate decision
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