Must read: UK house prices, shop prices, BP, Diageo

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS

As August’s trading begins, European markets have opened mixed. After a strong performance in July, the FTSE 100 is extending gains this morning driven by strong earnings for Weir Group (LSE:WEIR), HSBC Holdings (LSE:HSBA) and Diageo (LSE:DGE) which are at the top of the UK index.

Miners like Fresnillo (LSE:FRES), Endeavour Mining (LSE:EDV) and Rio Tinto Registered Shares (LSE:RIO) are preventing even stronger gains, stuck at the bottom of the blue-chip index after China’s factory activity contracted in July. Its manufacturing PMI reading hitting 49.2, falling short of analysts’ expectations and shrinking for the first time in three months. 

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UK investors are on tenterhooks this week awaiting the Bank of England’s rate decision on Thursday. Overnight the Reserve Bank of Australia kept its official cash rate on hold at 4.1% for the second month in a row, meeting analysts’ expectations. Earnings season stateside is in full swing with key results due from Uber Technologies Inc (NYSE:UBER) after the bell and from Apple Inc (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN) on Thursday.”

UK NATIONWIDE HOUSE PRICE INDEX

UK Nationwide house prices fell by 3.8% year-on-year in July and 0.2% month-on-month. The average house price stands at £260,828, down from £262,239 last month. According to Nationwide, a typical first-time buyer with a 20% deposit is required to spend 43% of their take-home pay on mortgage payments, up sharply from 32% last year and above the long-run average of 29%. 

The annual reading suffered its largest decline since 2009 as rising mortgage rates and the cost-of-living crisis dampen demand for properties in Britain. The housing market is in the doldrums with sellers struggling to achieve desired offers and therefore are less willing list their properties, particularly over the seasonally quiet summer period. 

For buyers, the affordability crisis has intensified as borrowing becomes significantly more expensive. For homeowners, weaker house prices have resulted in a negative wealth effect by reducing the value of their prized assets. For first time buyers, weaker house prices are a positive, however prices are yet to come down significantly enough to offset the pressures from rising mortgage rates. 

With the Bank of England poised to raised interest rates again on Thursday, the housing market is likely to continue to cool this year as mortgage rates remain elevated.

UK BRC SHOP PRICE INDEX

The British Retail Consortium’s index of shop prices fell by 0.1% in July month-on-month, falling for the first time in two years. Annual inflation retreated from 8.4% in June to 7.6% in July. Food price inflation slowed to its lowest level since December, hitting 13.4% in July versus 14.6% in June. 

In an encouraging sign, shop inflation is showing incipient signs of retreating. The BRC figure echoes the latest official ONS inflation rate which saw inflation finally dropping below 8%. Similarly, Kantar’s latest figures also saw food inflation, which has been particularly sticky, fall back below 15% in July. 

Shops have been offering lower prices via discounts and offers to lure customers amid the cost-of-living crisis, helping to lower the inflation rate. After Russia’s invasion of Ukraine last year, energy prices have retreated, reducing businesses’ fixed costs. Several supermarket bosses have said that food inflation is past its peak with supermarkets responding to commercial competition by lowering prices of essential items like bread and milk to get customers through the door. However, food price inflation may endure for longer with the BRC warning of rising global commodity prices on the back of supply issues in Russia and India.

BP

BP (LSE:BP.) reported second quarter profit down 70% year-on-year to $2.6 billion, below analysts’ expectations. A closely watched earnings metric in the sector, underlying replacement cost profit, hit $3.5 billion, also shy of forecasts and below $8.5 billion in the same period in 2022. 

Despite this, BP is still returning cash to shareholders by raising its dividend by 10%. However, this comes after BP lowered its share buyback programme in May. 

BP’s results echo those of its rivals like Shell (LSE:SHEL), suffering from lower profits amid tough year-on-year comparables following last year’s blockbuster period for oil when energy prices soared on the back of the war in Ukraine. Since the highs in June 2022, global oil prices have been struggling, weighing on BP’s refining margins and trading income. 

However oil prices have been picking up lately, hitting fresh three-month highs this week, supported by resilient global demand and expectations that Saudi Arabia will extend its voluntary production cuts in September. This is likely to support earnings for BP and other oil majors such as Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX) in the current quarter. 

Despite weaker earnings, shares in BP are trading higher today lifted by its increased dividend and encouraging outlook relating to oil’s recent rally. Longer-term, shares have rallied by around a quarter over the past 12 months. 

DIAGEO 

Diageo (LSE:DGE) reported a 7% jump in organic operating profit, beating expectations for growth of 6.3%. Organic sales increased by 6.5%, also topping forecasts. The drinks giant enjoyed double-digit organic net sales growth in scotch, tequila, and Guinness in the first set of earnings with new CEO Debra Crew who took over the top job in June. 

Quality over quantity has been a strategy that is successfully driving Diageo’s growth. Premium spirits, which command much higher consumer prices, have been responsible for over half of Diageo’s net sales growth, a trend that emerged during Covid lockdowns and has managed to persist beyond the pandemic. But while alcohol tends to offer resilience against macroeconomic pressures, cost inflation and global uncertainty continue to be headwinds to be mindful of for Diageo.

Shares are trading higher today, supported by the top and bottom line beat but the stock has struggled since the April highs and has underperformed the FTSE 100 so far in 2023.