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- ECB meeting – 27/10 – at its last meeting in September, it was widely expected that the ECB would raise rates, with the only uncertainty being around whether they would go by 75bps or 50bps. The decision to raise rates by 75bps was dictated by the upgrading of the banks inflation forecasts, which were adjusted higher to 8.1% in 2022 and 5.5% in 2023. These targets now look incredibly dated given that we now have German inflation well above 10% and the EU headline rate also into double figures with core prices at 4.8% and likely to move higher. A growing number of ECB policymakers have been increasingly vocal about the need for much higher rates, despite an acknowledgment that GDP is likely to fall quite sharply. The ECB cut its 2023 and 2024 forecasts, to 0.9% and 1.9% respectively, it raised its forecast for 2022 to 3.1%. These GDP forecasts seem extraordinarily optimistic given the energy backdrop, and perhaps speaks to a certain amount of cognitive dissonance on the part of ECB officials. The ECB said it expects to continue hiking in subsequent meetings, albeit probably at a slower pace than the Federal Reserve, although we’ve heard from a number of governing council members of the need to front load rises and move the headline rate back to 3%. This would be a huge move given where rates are now, at 1.25%. If the ECB does another 75bps this week the effect on countries like Italy could well be problematic and while the governing council of the TPI program there are still many unanswered questions as to how it might work. There is also the added problem that an aggressive tightening is precisely the wrong medicine at a time when demand is cratering and the blocs largest economy, Germany is likely to tip into recession by year end.
- Bank of Japan – 28/10 – with the Japanese yen set to fall to 32-year lows against the US dollar the focus remains firmly on the Bank of Japan and its apparent unwillingness to alter course on its own monetary policy settings. We’ve already seen the first round of intervention which saw the yen initially strengthen, however until such time as we see some sort of pivot from the Japanese central bank then further weakness towards 150 and 160 looks increasingly likely. The Bank of Japan’s CPI forecast is expected to be pushed up from its current 2.3%, especially given that we’re already at 3%, and an 8 year high, and there is little sign that price pressures are diminishing.
- US Q3 GDP and Core PCE – 27/10 and 28/10 – with the US economy currently coming off the back of two negative quarters, aka, a technical recession, it seems almost counterintuitive that we can expect to see the economy rebound when the latest Q3 numbers are released later this week. Q3 GDP is expected to show a rebound of 2.2%, with most of the rebound expected to come about on the back of inventory rebuilding. Personal consumption, which showed growth of 2% in Q2 despite the 0.6% contraction is expected to be much weaker at 0.8% given the weaker trend seen in recent retail sales numbers and higher food and energy prices. Core prices have shown in recent weeks to be much stickier than anticipated as services inflation start s to bleed into the economy along with higher wages. Core PCE is expected to show an additional uplift in data released the day after the US Q3 GDP numbers with a jump to 5.2% expected in September, from 4.9% and reinforcing the probability that the Fed will move by another 75bps when they meet next week, as well as increasing the risk that another 75bps could come in December.
- Bank of Canada meeting – 26/10 – are we near to peak rate hikes for the Bank of Canada. It seems unlikely given the direction of travel from the Federal Reserve. We saw the Bank of Canada raise rates by another 75bps, following on from the 100bps seen in July. There is already increasing evidence that wages are starting to rise in response to this recent inflation surge, however headline CPI does appear to be showing signs of slowing with headline CPI falling to 7% in August, from the June peaks of 8.1%. This suggests we could well see 50bps at this week’s meeting rather than the customary bumper hikes we’ve become used to. The increased focus on core prices appears to be driving the dynamics here and while lower they are much stickier at around 5.7%.
- UK banks Q3 results – HSBC 25/10 – HSBC shares hit their lowest levels this year earlier this month on the back of the sharp rise in yields cause by the UK mini-budget, as well as concern over the health of the Chinese economy against a backdrop of zero-covid. In the aftermath of its H1 numbers the shares briefly hit 5-month highs, and up over 20% year to date before slipping back, amidst concerns over growth in its Asia markets. While just about still in positive territory for the year its likely that H2 for HSBC is likely to be a much tougher half than the positive outlook seen in H1. Despite concerns at the end of Q1 that the weaker economic outlook would weigh on its performance in Q2, the bank was able to report a much stronger set of numbers. Q2 reported profits before tax rose to $5.8bn, helped by a $1.8bn deferred tax gain, and an increase of $500m in impairment charges to $1.1bn for the first half. Consequently, this saw H1 reported profits after tax rise to $9.2bn, while reported revenues for the same period slipped slightly to $25.2bn. The Asia business, as expected, returned the bulk of the bank’s profits in H1, with $6.3bn, despite the disruption caused by Covid restrictions in the greater China region. The UK operation also performed well with a 15% rise in profits to $2.5bn. The bank cited the impact of higher interest rates as it improved net interest margin to 1.35%, up from 1.2% a year ago. On the wider numbers it was interesting to note that net loans and advances to customers fell from the same period a year ago to £1.03bn, not altogether surprising perhaps that its biggest market has been hit by covid restrictions for most of this year. In terms of the outlook the bank raised its guidance for net interest income for this year, and that it expected to return to paying quarterly dividends in 2023 with the intention of improving the payout ratio of 50% in 2023 and 2024. This appears to be in response to criticism from shareholders like Ping An who were unhappy about the bank's decision to suspend the dividend in 2020 due to the pandemic. Management has continued to push back on the calls by Ping An to break up the business
- Barclays Q3 – 26/10 – Barclays recent H1 numbers were underwhelming, and it’s not hard to see why. Attributable profit for H1 was £2.5bn, down sharply from the same period a year ago, with £1.1bn of that coming in Q2. The bank had to take a charge of £600m in respect of over issuance of securities, which it had to buy back. On the wider numbers investment bank revenue for Q2 came in at just over £4bn, beating expectations of £3.7bn, with FICC seeing a modest slowdown from Q1 to £1.5bn. Its equity and debt capital markets division saw a big drop in revenues over the first half, although advisory performed slightly better in Q2, after a poor Q1. The UK bank saw a 16% fall in H1 profits from a year ago to £854m, mainly due to last year’s numbers receiving a boost from a loan loss release, while this year included a £48m set aside for loan loss provisions. On the wider numbers, operating expenses for this year are expected to rise sharply due to the various litigation costs, pushing the total up to £16.7bn, well above the previous outlook of £15bn.
- Lloyds Q3 – 27/10 – continues to underperform despite being in a much better state of financial health than was the case 5 years ago. Retested its March lows in the aftermath of the UK mini budget the shares are down over 10% year to date. In Q2 the bank posted a strong set of revenues and profits, despite concerns over the effects of a slowdown in H2. Q2 statutory pre-tax profits came in at over £2bn, well above expectations of £1.71bn, and a decent improvement on Q1’s £1.6bn, while also setting aside another £200m of impairments in Q2, pushing the total net underlying impairment for H1 to £377m. During Q2, the bank saw an increase in loans and advances to customers of £4.3bn to £456.1bn, driven by modest increases in credit card balances and unsecured loans. This trend is likely to have slowed in Q3 with higher interest rates and concerns about rising inflation likely to have acted as a brake on consumer confidence. Against such a backdrop the last thing the sector needs is the prospect of a windfall tax, a measure that was touted last week as a possibility by the new Chancellor of the Exchequer Jeremy Hunt. With the UK economy slowing down and a slowdown in the housing market potentially impacting demand for mortgages, the bank may well have to look at increasing provisions for non-performing loans. UK banks already pay an 8% banking subsidy on top of the headline corporation tax rate, which is going up to 25% next year. The bank also needs to keep an eye on operating costs which rose slightly to £2.15bn from £2.1bn in Q1, with the bank expecting to see total costs for the year of £8.8bn. Lloyds also boosted its guidance on net interest margin to 2.7% as well as raising the return on tangible equity to above 11%. The bank increased the dividend to 80p per share in Q2.
- NatWest Q3 – 28/10 – back in July NatWest offered up a fairly decent set of numbers announcing an interim dividend of 3.5p, as well as a 16.8p special dividend, after reporting a solid set of H1 numbers. Attributable profit to shareholders rose to just over £1bn, pushing H1 profits up to £1.89bn, as net interest margins improved from 2.46% in Q1 to 2.72% in Q2, taking H1 NIM to 2.59%. It was notable that the retail side of the business did see H1 impairments of £26m, however this was more than offset by addbacks in other parts of the business. Net loans to customers rose to £188.7bn, from £184.7bn in Q1, and up by £6.5bn in the first half of the year. £5.9bn of this was by way of mortgages, with lending evenly split between Q1 and Q2, with the remaining £600m being made up of credit card and loan balances. Customer deposits increased to £190.5bn. The share price has also been hit in recent weeks from the turmoil in UK bond markets, as well as speculation of a windfall tax on their profits. With the UK government already a big shareholder politicians need to understand the NatWest success is their success, in terms of a higher profits and a bigger dividend.
- Shell Q3 22 – 27/10 – Shell, like all of the oil majors has seen a big jump in revenues and profits this year, although it has still had its fair share of problems as it looks to disentangle itself from Russia. Q2 saw another record quarter for the oil major. On an underlying basis Q2 adjusted profits more than doubled from a year ago to a new record of $11.47bn, pushing H1 profits to $20.6bn. Integrated gas contributed $3.76bn, while upstream contributed $4.9bn to the Q2 numbers. This inevitably raises the question is to whether Shell can continue to maintain this level of profitability in the second half of the year, given that oil and gas prices have both fallen from their peaks of the last 3 months? Shell has continued to make big strides in reducing its net debt which pre-pandemic was over $75bn. With the release of today’s numbers, they’ve cut that further from $48.5bn in Q1 to $46.4bn, as well as lowering their gearing to below 20%. In the last year alone, debt has fallen by $20bn. The company announced another $6bn in share buybacks in Q2 inviting further criticism when compared to their meagre investment in renewables, while the dividend was kept unchanged at $0.25c a share. For Q3 the company maintained its guidance on capex at between $23bn and $27bn this year, spending $5bn in Q1, and $7bn in Q2, however of that $7bn, only $321m was spent on renewables down from $985m in Q1. The amount of profit renewables contribute to the bottom line is also tiny, $725m in the last quarter, and just over $1bn for the half year. During Q2 Shell announced the final investment decision to develop the Jackdaw gas field in the North Sea, as well as approving a deal in Australia to approve a natural gas field there. They also signed a deal with QatarEnergy in the expansion of the North Field natural gas project. There has also been further talk of a windfall tax on top of the already high 65% tax rate on their UK profits.
- Whitbread H1 23 – 25/10 – it feels almost counterintuitive that at a time when consumer incomes are shrinking and the cost of going abroad is getting higher that Premier Inn owner Whitbread’s share price should be slowly drifting lower. With all the headlines about disruptions at airports the outlook for staycations would expect to be more positive, however the shares are still down over 15% year to date, with the shares hitting their lowest levels since November 2020 in early October. In June when the company reported its Q1 numbers the picture was a decent one. Q1 sales were above expectations, helped by a reopening dividend compared to the same period a year before. The UK hotels saw accommodation sales rise 235.6%, ahead of last year and 31% above 2020 levels. UK like for like sales were also higher by 21.3% from the same levels in 2020, although food sales were lower by 4.3%. Management also pledged to spend a further £20m to £30m on labour costs, and investment in 2023. This is a number that could edge higher given rising prices over the course of the past few months.
- Unilever Q3 22 – 27/10 – after the shambles of earlier this year when CEO Alan Jope decided it was a good idea to try and bid £50bn for the consumer health care business of Glaxo, which eventually IPO’d in July at well below that number, Unilever shares have gone from strength to strength. It was Jope’s good fortune that GSK rejected that bid, however he won’t be around much longer to enjoy the fruits of the recent rebound in the share price that has taken place since the shares hit 5-year lows in March. Last month it was announced that Jope would be stepping down at the end of next year, with some investors calling for a review of the company’s brands, in the wake of recent share price weakness. There was some good news at its Q2 numbers which saw the company report a 14.9% rise in revenues to €29.6bn, largely due to its ability to raise prices. Costs have gone up and that has hit margins to a certain extent, but the effect has been minimal with underlying margins slipping 180bps to 17% in H1. Underlying sales during the first half rose by 8.1%, while underlying earnings per share rose by 1%, with the company raising its full year guidance for sales growth to above the previous range of 4.5% to 6.5%, with Q2 showing strong gains across all three business areas, Home Care, Foods and Refreshment and Beauty and Personal Care. The bigger question is whether the optimism shown at the end of H1 can be maintained through the second half of the year.
- Microsoft Q1 23 – 25/10 – Microsoft brought the curtain down on another record year back in July, by reporting revenues and profits which fell short of market expectations. Nonetheless Q4 revenues still rose by 12% to $51.87bn, which was still a record number. Total revenues for the year were just shy of $200bn at $198.37bn, with Microsoft pointing to a strong US dollar and a slowing PC market as a bit of a drag. Since then, the US dollar has continued to rise so expect this to continue to act as a drag, along with a slowing PC market, with the shares currently trading around 20-month lows. The Intelligent cloud segment, which includes Azure saw a 20% increase in revenue to $20.91bn, while its office division which includes LinkedIn saw $16.6bn in revenue. PC’s and gaming revenue was only slightly above the levels a year ago at $14.36bn, with negative sales growth in Xbox and content of -6%, and Windows OEM of -2%. This is likely to continue to be a theme in Q1. As far as the outlook was concerned Microsoft said it expected to see Q1 revenues come in between $49.25bn and $50.25bn, which would still be 10% higher than a year ago, and still not exactly what could be described as slowdown territory, however it was markedly lower from where they finished last year. Profits are still expected to come in at $2.32c a share.
- Apple Q4 22 – 27/10 – Apple’s Q3 numbers were eagerly awaited after they took the decision to offer discounts in China on its highest spec iPhone 13 which raised more than a few eyebrows at the time raising the prospect that more discounting might be coming in markets that are likely to struggle in the face of stop/start lockdowns. In what was somewhat of a surprise for a company that usually beats expectations Q3 revenues came in at $83bn, pretty much on the money, while profits came in at $1.20c a share, a slight beat. When broken down the picture was mixed, with only the iPhone and iPad products beating expectations on revenues, and only the iPhone showing any revenue growth from last year. iPhone revenues came in at $40.67bn, while the iPad saw $7.22bn. Mac revenue fell over $1bn short at $7.38bn, as did wearables and home accessories, which came in at just under $8.1bn. Services revenue did show strong gains from last year but came in below expectations at $19.6bn. By region both Greater China and Japan saw a decline in sales, which raises the question as to whether we could also see discounting extended to Japan having seen Apple already do it for China. Apple didn’t offer any guidance in line continuing a trend that has been in place for the last two years. In September Apple set out its stall for what generally tends to be its best quarter of the year, which covers Thanksgiving and the pre-Christmas period. In its “Far Out” production launch we got to hear about a number of new updates to the iPhone, with the release of the iPhone 14, and the Apple Watch Ultra. The iPhone update turned out to be a minor one, with the company announcing updates to the two regular and two Pro phones, while phasing out the mini. There was some surprise that the prices for the new phones were left unchanged, which suggests that Apple are acutely aware that the price points for its products are also susceptible to the cost-of living crisis, with the new iPhones going on sale on 16th September. These concerns appeared to be justified after it was reported last week that Apple was cutting back its iPhone 14 production due to low demand and focussing attention on the iPhone 14 Pro, where demand seems to be holding up better. Profits are expected to come in at $1.26c a share.
- Amazon Q3 22 – 27/10 – when Amazon reported its Q2 numbers back in July the main attention was on whether it would show signs of suffering from similar problems to Walmart with respect to shrinking margins and rising costs. We know costs have been rising, last year Amazon spent $445bn, up from $363bn in 2020. For Q2, revenues came in slightly above expectations at $121.1bn, with the decision to raise prices on Prime not having the negative effect a lot of people though it might have. Revenues here rose 14% to $8.7bn, as Amazon spent big on new TV content, including sport, as well as the new mini-series “The Rings of Power”, a Lord of the Rings prequel, which has had mixed reviews. On the downside the company reported its second consecutive quarterly loss, this time due to another $3.9bn write down of its stake in Rivian. In Q1 it posted a $3.8bn net loss due to a $7.6bn write down on the very same stake. There were other bright spots as AWS posted another record quarter of $19.74bn, while operating margins came in at 2.7%, well above expectations of 1.65%. There was also evidence that costs were starting to level out as operating expenses came in at $117.9bn which was below expectations, with Amazon shedding over 100k employees during the quarter, mainly through attrition in its warehouse network. There was some chatter a few weeks ago that Amazon might be interested in video game maker Electronic Arts, however this was denied quite quickly, however in cases like these there’s usually no smoke without fire. For Q3 Amazon raised its revenue guidance to $125bn to $130bn, while profits are expected to come in at $0.24c a share assuming no more Rivian write-downs.
- Alphabet Q3 22 – 25/10 – with Alphabet shares at 18-month lows, there has been growing concern that the slowdown in global markets will cause a fall in advertising revenues, along with the fact that the recent Apple iOS changes when it comes to data collection have adversely affected all social media companies and their ad targeting efforts. In Q2 total revenue fell marginally short at $69.7bn, with YouTube falling short at $7.34bn. Search was more resilient with ad revenues coming in at $56.3bn, coming in line with forecasts, although profits fell short at $1.21c a share. As the market leader, a big miss here would have been troubling, so the fact that the numbers held up was encouraging, however that hasn’t stopped the shares from slipping lower over the past few weeks. Profits are expected to come in at $1.26c a share.
- Meta Platforms Q3 22 – 26/10 – had a shocker of a year share price wise, with the shares down over 60%, and close to levels last seen in late 2018. The big drop came in its February numbers which saw it get off to an awful start to its financial year. The shares tanked after a decline in daily and monthly active user numbers, as the various Apple privacy changes started to hit revenues, which saw Facebook downgrade its Q1 outlook to between $27bn and $29bn in revenue. In Q2 revenues did marginally improve to $28.82bn while profits came in slightly below expectations at $2.46c a share. Active users were a mixed bag, with daily active users slightly above expectations at 1.97bn, however monthly users came in at 2.93bn. for Q3 guidance was nudged lower to between $26bn to $28.5bn, well below what markets had hoped. Facebook is also facing an additional challenge from the likes of TikTok which is pulling users away from Instagram. Meta is also facing rising costs with its headcount up by over 30% from a year ago, with operating expenses expected to be between $85bn and $88bn. The focus on the Metaverse is also eating into profits with its investment there showing few signs of paying off in terms of profits in the short term. It’s Meta Reality Labs unit lost $2.8bn in Q2, while only bringing in sales of $452m. Profits are expected to come in at $1.91c a share.
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2022-10-22
The Week Ahead: ECB, Bank of Japan, UK banks results, Apple, Meta, Microsoft earnings
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