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US Debt In Focus, M&S Fashion Sales Rebound While Next Scoops Up Made.com

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  • US debt ceiling looms as political gridlock is expected after mid-term elections.
  • Ron DeSantis win by a large margin switches focus on Republican Presidential nominee race
  • Inflation still the focus for investors ahead of Thursday’s US CPI reading.
  • China’s inflation rate falls more sharply than expected as economy falters
  • Marks and Spencer shows resilience with fashion sales rebounding despite fall in first half profits
  • Next scoops up the Made.com name as the furniture retailer falls into administration

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A Looming Debt Ceiling Crisis

America has decided and, as the electorate awaits the final outcome, it looks increasingly likely that Republicans will gain control of the House of Representatives, which could cause political gridlock in this vast country.

With key Senate races still super-close there is a chance the legislative arm could also swing red, while the Executive branch remains blue, which is likely to stymie any major new laws, which may be welcomed by financial markets.

Inflation is still considered to be the big threat, and Biden’s huge stimulus plans, designed to ease voters through the pain of the pandemic, and repair crumbling infrastructure, have added to the price spiral despite helping to maintain economic resilience..

However, with defiant Republicans determined not to see taxes rises or more government borrowing at high levels of interest, a debt ceiling crisis could loom into view. Already Biden is considering various strategies to raise current limits, to try and avoid a standoff, which risks further rattling financial markets.

We’ve been here before in the Obama years, and, although the US has never defaulted on its debts, even the risk of it could lead to a spike in US Treasury yields which would make the financial situation the government faces even more onerous.

Ron DeSantis's Win

As investors wait for the dust to settle on this latest political fight at the polls, many will have an eye on the battle already erupting for the Republican candidacy for President. Ron DeSantis has made huge inroads on his predicted nomination bid, by clinching a second term as Florida governor by a wide margin.

His popularity has already provoked the ire of Donald Trump who warned him off, making a run for the White House Presidency. DeSantis would ride in on a low tax, small government and tough on immigration platform, but, even as he basks in election glory, he is likely to keep his powder dry, cautious not to be seen as a Trump usurper, among MAGA supporters.

The spiral upwards of prices was a key issue in the US election, turning American voters away from Democrats in crucial Congressional seats. Investors are set to stay nervous ahead of the CPI print on Thursday, hoping that it will show signs that interest rate rises are taking more of an effect, which would enable to Fed to ease off monetary tightening.

China's Inflation Rate Falls

In China inflation has fallen sharply, indicative of the economy’s struggles amid onerous Covid curbs and weakening global demand for goods. The annual inflation rate dipped to 2.1% in October from 2.8%, a much bigger fall than predicted, given expectations of 2.4% for the month.

This was the lowest figure since May with falls in food prices and housing costs feeding through. It comes as the nation gears up for the final frenzy of the Singles Day promotion with deals set to come thick and fast at the end of the week.

The Double 11 event officially ends on at midnight on Friday and there are high hopes it could pass the 1 trillion RMB mark in terms of revenues. But with consumers tightening their belts, amid a deteriorating outlook, spending could disappoint as they search for value and prioritise essential purchases.

Marks And Spencer Shows Resilience

In the UK, a cost-of-living crisis may be raging, but Marks and Spencer Group Plc (LON:MKS)’s update shows that plenty of shoppers are still super-resilient and can be persuaded to part with their cash if the offer is right. M&S has done a valiant job of keeping the tills brisk and virtual baskets filled up with the right product mix, offering value ranges interwoven with treats.

However, higher labour and energy costs, the exit from Russia and also the comparison with the same period a year ago when it received pandemic business rates relief meant that it reported a 24% decline in first-half profit.

Its partnership with Ocado Retail is also under pressure, with a loss of £0.7 million ticked up, as the demand for home delivery groceries wanes, at a time when capacity had increased.

But its overall turnaround strategy is showing great strides of progress. The gold star has to be given to clothing and home with sales up by 14%, a remarkable turnaround given that this has been an area where Marks has really struggled in recent years but is now showing signs of winning back its fashion credentials.

Its strategy of closing larger underperforming department stores and concentrating on outlets in more popular retail parks, where food is prioritised with click and collect services alongside, seems to be paying off and it’s little surprise to see this restructure being accelerated.

At a time when shoppers are being so careful about what to put in their trollies, the 5.6% rise in sales in food shows resilience and is a sign that its customers may be replacing expensive meals out at restaurants with dining-in delicacies at home.

However, there are signs in the last four weeks that demand is weakening, as cost-of-living headwinds whip up and with costs set to stay elevated it’s clear the next year will be challenging.

Next Scoops Up The Made.com Name

NEXT plc (LON:NXT)’s strategy in scooping up once sought-after brands, which have struggled as the retail environment has become more difficult has continued with its purchase of the intellectual property and name of Made.com.

The final page in the tale of woe for the furniture retailer was turned as it fell into administration, after it was hit by falling customer demand for big ticket items amid drastic belt-tightening. There had been high hopes that good times would keep rolling and the surge in sofa sales during the pandemic would keep being replicated.

This miscalculation proved to be the downfall of Made.com, as it switched from a Just in Time model of manufacturing furniture on demand to building up large stocks, which it found super-hard to shift as the cost-of-living crisis took hold.

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown