London midday: Stocks maintain gains but Ocado tumbles on Kroger worries

(Sharecast News) - London stocks were still firmer by midday on Friday amid growing expectations of a US rate cut next week, as investors mulled uninspiring UK GDP data.

The FTSE 100 was up 0.4% at 9,331.94, while sterling was 0.2% lower against the dollar at 1.3553.

Derren Nathan, head of equity research at Hargreaves Lansdown, said: "Wall Street closed at yet another record high. Accelerating US inflation, and initial jobless claims jumping to a near four-year high hardly sound like reasons to be cheerful. But core CPI, the preferred measure of the Federal Reserve Bank, was steady at 3.1% and bang in line with expectations.

"Taken together with the growing signs of deterioration in the jobs market, investors are choosing to focus on the outlook for US base rates where markets are now pricing in a fall of 0.7 percentage points by the end of 2025, with at least a quarter point cut expected next week."

On home shores, figures from the Office for National Statistics showed the economy stagnated in July, weighed down by weakness in the production sector.

There was no growth in the month of July, in line with consensus. GDP grew by a higher-than-expected 0.4% in June, and fell 0.1% in May.

However, in the three months to July - the ONS's preferred measure - GDP grew by 0.2%, down on June's 0.3% but in line with forecasts.

The services sector grew by 0.4% over the three months, while the construction sector expanded by 0.6%. In contrast, production fell 1.3%.

Liz McKeown, director of economic statistics at the ONS, said: "Within services, health, computer programming and office support services all performed well, while the falls in production were driven by broad-based weakness across manufacturing industries."

Kathleen Brooks, research director at XTB, said: "This report suggests that the UK economy is in a fragile position as we lead up to the Budget. It is also a reminder that the Labour government does not have a grip on growth and that their relentless tax and spend policies are having a detrimental impact on the economy. Let's hope the chancellor heeds the advice of the Barclays boss, her one-time city pal, in the FT today.

"This data is unlikely to give investors confidence in the UK economy, and we could see the pound extend losses later today. The bond market could also be impacted, when public sector debt is rising at the same time as growth is faltering and inflation is rising, this tends to be bad news for the UK economy.

"The Bank of England could be the UK's last hope, although MPC members have sounded wary of cutting rates in recent weeks due to stubbornly high levels of inflation. There is less than one full rate cut priced in by the BOE for this year, however, we could see some recalibration of rate cut expectations on the back of this report, which could also undermine sterling.

"Overall, the spectre of stagflation continues to hang over the UK economy, which is not ideal leading up to the Budget."

There was no FTSE 350 corporate news of note out, but precious metals miner Fresnillo and gold miners Hochschild and Endeavour shone as gold prices rose.

Upper Crust owner SSP rallied after an upgrade to 'buy' from 'hold' at Berenberg.

On the downside, Ocado tumbled after key US partner Kroger flagged a possible change in direction.

Investors were reacting to comments made by Kroger - the UK firm's biggest partner for its warehouse technology - during a second-quarter earnings call on Thursday. Kroger, which is carrying out a strategic review, told analysts it would take a "hard look" at some of its automated facilities and carry out a full, site-by-site analysis of its existing network.

It also noted it could offer delivery in under two hours from 97% of its shops, and flagged its "conveniently located store network".

Neil Wilson, UK investor strategist at Saxo Markets, said: "The comments are clearly a negative for Ocado as Kroger seems likely to move away from the kind of large customer fulfilment centres provided by the British company, and instead seems to be looking to lean on local stores to fill orders."

Morgan Stanley agreed, noting the "negative readacross" from Kroger's comments for Ocado.

According to Bloomberg, the bank pointed to an "increasing risk" that some of Ocado's existing sites with Kroger could be closed, while the heightened focus on store delivery put "a question mark on where the long-term CFC network fits in".