Morning Note: Market news and an update from housebuilder Bellway.

Market News

Germany's 10-year bond yield increased by five basis points to 2.56% on Thursday following the ECB’s interest rate decision. The ECB lowered its key interest rates by 25bps in June, as expected, bringing the main refinancing operations rate to 4.25% and the deposit facility rate to 3.75%. However, the central bank’s caution about persistent inflation risks led traders to reassess their expectations for future rate cuts this year.

Today, it’s the US non-farm payroll data, which is expected to point to a cooling economy, with the consensus calling for an increase of 180,000 in May. The whisper number is 165,000. The jobless rate is forecast to remain at 3.9%. The 10-year Treasury currently yields 4.3%, while gold has moved up to $2,380 an ounce.

US equity markets were little changed last night – S&P 500 (-0.1%), Nasdaq (-0.1%). This morning in Asia, markets were also fairly subdued: Nikkei 225 (-0.1%); Hang Seng (-0.6%); Shanghai Composite (+0.1%). China exports increased faster than predicted in May, raising confidence that the world’s second-largest economy can sustain its momentum by depending on overseas markets. TSMC’s sales rose by 30% in May as countries race to secure AI chips.

The FTSE 100 is currently little changed at 8,278. UK rents rose 6.6% in April, the lowest growth since October 2021, Zoopla said. Meanwhile, Britain’s local authorities expect a budget shortfall of £6.2bn. Sterling currently buys $1.2795 and €1.1745.

Source: Bloomberg

Company News

Bellway has this morning released a trading update covering the important spring selling season. Trading has been good, and the group has raised its guidance for average selling price. In response, the shares have been marked up by 2% in early trading.

Bellway is one of the UK’s leading housebuilders with a widespread geographical presence, comprising operations across England, Scotland, and Wales. The company operates under three brands: Bellway Homes, Ashberry (used on larger sites), and Bellway London (targeting the more affordable outer boroughs).

In the four months to 2 June 2024, trading has been robust, with a sustained improvement in private reservations compared to the previous six months. Customer demand has benefitted from an improvement in affordability, driven by a moderation of both mortgage interest rates and consumer price inflation and an increase in wages.  Overall, the backdrop of market stability has led to headline pricing and the level of targeted incentives remaining stable across the group’s regions.

The private reservation rate increased from an average of 139 per week to 152, driven by stronger demand and an increase in outlet numbers (from 239 to 245). The private reservation rate per outlet per week increased by 6.9% to 0.62. The improvement in customer confidence also led to a reduction in the cancellation rate to a normalised level of 11%, down from 15% last year.

Reflecting the improvement in trading and growth in outlet numbers, the forward order book has increased from 4,411 homes at the start of the current financial year (end July 2023) to 5,346 homes, with a value of £1,446m. Given prevailing reservation rates and the anticipated profile of completions in the coming months, the company continues to expect a year-on-year increase in the forward order book as at 31 July 2024, which will serve as a platform for a return to growth in financial year 2025.

There are presently good levels of building material and subcontractor availability across the group, with limited overall cost inflation on new tenders. That said, the higher levels of inflation experienced on costs incurred in earlier periods and carried in the group’s work-in-progress will be realised through the income statement for legal completions in the months ahead.

Investment in strategic land has continued during the period with increased activity in the shorter-term market. The group has contracted to purchase 3,906 owned and controlled plots since 1 August 2023 across 21 sites with a total contract value of £277m.

The company has a strong and well-capitalised balance sheet, with net debt of £57m as at 2 June 2024. It continues to expect to end the financial year with low adjusted gearing and underlying dividend cover of 2.5 times.

Looking to the full financial year to 31 July 2024, the group is on track to deliver around 7,500 homes and a reduction in the underlying operating margin of at least 600 basis points versus the previous year. The overall average selling price is now expected to be around £305,000, £10k above the previous guidance, mainly due to changes in product mix. Overall, the group has a strong outlet opening programme and a healthy forward order book and work-in-progress position and, if market conditions remain stable, management believes the company is well positioned to return to growth in financial year 2025.

Source: Bloomberg