Halister News

(Bloomberg) -- Marmite shortage may just be the beginning. The extended rally in U.K. inflation markets underscores the risks British retailers face on their margins because of a weaker pound, Bloomberg strategist Tanvir Sandhu writes.

• See chart here of FTSE 350 retail equities vs spread between CPI and PPI, and GBP TWI
• Tesco’s recent Brexit-inspired price dispute with supplier Unilever caused products like Marmite spreads to get pulled temporarily from the U.K. retailer’s online store; the situation has been resolved, Unilever said yesterday

INFLATION RALLY

• U.K. 10y breakevens have risen 67bp since the EU referendum to nearly 3% and 2y ZC inflation swap +55bp at 3.23% amid concerns about the pass-through effects of the pound’s plunge; the currency has tumbled more than 18% since the Brexit vote
  • GBP 5s30s inflation curve has flattened to 6bp from 83bp in Feb. while GBP 3y 3% cap has surged to 188bp from Jan. low of 33bp
• Beyond the currency pass-through, front-end inflation breakevens are also underpinned by import tariff risks and Brexit-induced supply-side weakeness
• Household real incomes most likely to be squeezed as import prices rise and terms of trade deteriorate
• Retail margins already remain squeezed in highly competitive sector and input price pressures will further compress margins
• Possible relief may be seen at autumn budget; for example, a U.K. VAT cut that could improve gross margins if not passed through to consumers
• BOE official Kristin Forbes’ 2015 paper had concluded that exchange-rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks
• Rise in long-end gilt yields should provide some relief to those stocks with high pension liabilities vs market cap, such as Tesco

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.