Retailers, pubs groups and banks were among a swathe of domestic stocks that rose strongly yesterday, buoyed by the prospect of Liz Truss announcing an emergency energy support package for households and businesses.
The plans, expected to be detailed tomorrow after concerns about months of political paralysis, raised investors’ hopes that they would alleviate the pressure on consumers, lifting both confidence and discretionary spending.
The prime minister, who is under pressure to move quickly to tackle the energy crisis, is expected to freeze household energy bills at about £2,500 a year under multibillion-pound support measures to protect people from soaring prices.
The bond markets honed in on the scale of extra debt issuance likely to be required if Truss goes ahead with loans to energy suppliers. Benchmark ten-year gilt yields pushed past a previous high of 3.092 per cent set in 2014 to peak at 3.147 per cent, their highest since July 2011, before falling back to stand 13 basis points higher on the day at 3.070 per cent.
Economists said a freeze on domestic gas and electricity prices could curb inflation and the extent of the looming recession. Neil Shearing, group chief economist at Capital Economics, said inflation may peak at about 11 per cent in October this year, rather than 14.5 per cent in January next year as forecast at the moment.
Shearing added that although the economy was still likely to enter recession, “the peak-to-trough fall in real GDP may be more like 0.5 per cent than our current forecast of 1 per cent”.
Equity markets reacted positively to news of a possible freeze on energy bills on the grounds that it could ease pressure on family finances and boost consumer confidence. Shares in Greggs and Domino’s Pizza, the takeaway chains, jumped on the FTSE 250 mid-cap index, which is more exposed to the UK economy, rising by 7.1 per cent and 6.4 per cent, respectively. Mitchells & Butlers, the group behind All Bar One and Browns, and JD Wetherspoon, the pubs company, rallied by a respective 7.4 per cent and 5.5 per cent.
Retailers and airlines also recovered, with Moonpig Group, the online gifts retailer, gaining 6.6 per cent and easyJet 4.2 per cent. Meanwhile, JD Sports Fashion gained 3 per cent, Lloyds Banking Group 4.5 per cent and International Consolidated Airlines Group, the owner of British Airways, 3.2 per cent on the FTSE 100. Kingfisher, the retail group behind B&Q and Screwfix, the second most heavily shorted stock on the London exchange, also rallied by 2.8 per cent on the leading index.
The latest signs of people cutting back on purchases of clothes and other non-essential items was shown in a survey from the British Retail Consortium, which found that the value of total sales at its members had risen by 1 per cent last month compared with August last year, softer than the 2.3 per cent increase in July.
The rally helped to lift the FTSE 250 by 191.16 points, or 1.03 per cent, to 18,820.84. The FTSE 100, which has a greater exposure to the global economy, closed up 13.01 points, or 0.2 per cent, at 7,300.44, extending gains into a third straight session.
The promise of tax cuts has alarmed some investors, raising concerns that it could inflame inflation and accelerate the Bank of England’s interest rate rises and a worsening recession, which Threadneedle Street has forecast to begin this year and to not end until 2024.
Saxo Bank said that freezing energy bills was a “recipe for ballooning fiscal deficits, an issue that is already an ingredient in sterling’s steep fall this year, so an even steeper recession is in the wings”.
Traders have positioned themselves for a 66.7 per cent chance of a 75-basis-point rise at next week’s meeting of the Bank’s monetary policy committee.
Sterling, which on Monday fell to its weakest level since March 2020, rose to $1.15, but analysts warned its recovery could be brief. Commerzbank said the pound’s rise was “unlikely to last”, as an expansionary fiscal policy would boost inflation and government debt; UniCredit said “sterling is now more sensitive to the difficulties the Bank of England is facing in getting rocketing UK inflation back on track”.
Brokers also questioned the boost to consumer stocks. Jefferies, downgrading several UK retail shares “ahead of multiplying consumer pain”, estimated that at today’s energy prices the income available for discretionary spending would contract by more than 6 per cent in 2023-24, despite modelling 5.5 per cent earnings growth and a “major hike in energy subsidies from the new government”.
James Grzinic, at Jefferies, said politicians were “starting to grasp the gravity of the challenges ahead” and that an “ever-increasing resolve to prevent an unprecedented level of economic destruction could have surprising political consequences in the weeks ahead”.