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- Federal Reserve rate meeting – 27/07 – its certain that the Federal Reserve will be hiking rates again this week by another 75bps, with the only question being what comes in September, and whether we see 50bps or another 75bps. The most recent US inflation numbers jumped again in June to 9.1% on the CPI measure, although core prices did slip back. This jump once again highlights how far behind the curve the US central bank is, however, we are now starting to see signs that the US economy is starting to slow sharply in certain areas. For now, we can expect to see the Fed lean into the narrative that they need to get inflation under control even if it pushes headline unemployment quite a bit higher. Nonetheless, there does appear to be a concern that the Fed doesn’t want to overdo it even if the unexpectedly sharp increase in headline CPI did raise concerns that the FOMC might move by 100bps this week. An aggressive 100bps is by no means off the table, but it became less probable after two of the most hawkish Fed members, Christopher Waller, and St. Louis Fed President James Bullard pushed back on that, saying that 75bps remained their favoured option, prompting a modest pullback in the US dollar which briefly hit a 20 year earlier this month. Another factor weighing on the US dollar was a weaker than expected University of Michigan 5-year inflation expectations survey, which fell to a one year low of 2.8%, suggesting that we might be close to a near term peak for inflation, while a sharp drop in services PMI this week could prompt some concerns about an economic softening.
- US Q2 GDP – 28/07 – is the US already in a technical recession? This week we’ll find out with the first iteration of Q2 GDP. In Q1 the US economy contracted by -1.6%, largely down to a big fall in net trade which contributed to a -3.2% drag, while inventories saw a -0.8% decline, on the back of supply chain disruption, as well as purchases being brought forward into Q4 which resulted in a big inventory built-up into Q1. This isn’t likely to be repeated in Q2 and as such we should see a recovery, however that doesn’t mean we can expect to see a strong rebound. With the labour market still looking resilient and consumer spending holding up reasonably well despite the cost-of-living pressures, expectations are for a GDP growth of 0.5%, driven primarily by personal consumption and some inventory bounce back.
- US Core PCE Deflator (Jun) – 29/07 – while headline CPI and PPI for June both saw unexpected rises in the headline numbers, it was notable that on the core number, both fell back. That’s been the overall trend for core prices since February and March, however the rise in food and energy prices is starting to create ripple out effects that could call a halt to the recent declines from the current peaks we saw in March. Core PCE deflator, peaked at 5.3% in February, and has declined every month since then, coming in at 4.7% in May. What will the June numbers tell us? Are we nearing a peak, and even if we are does the Fed even look at its preferred measure of inflation targeting? For the moment it doesn’t appear that the Fed is that interested, instead focussing on headline CPI to shape policy decisions.
- EU Flash CPI (Jul) – 29/07 – having seen the ECB raise rates for the first time since 2011 last week, it’s unlikely that this will have a marked effect on how quickly inflationary pressures have been rising across the region. With inflation as high as 20% in some parts of the euro area, whether the headline rate is at -0.5% or -0.25% is neither here nor there. Having seen June CPI confirmed at 8.6%, only last week, the persistently high readings we’ve been seeing in respect of PPI, which is at over 30% in several parts of the EU, means we probably haven’t seen the peak yet. As such we could well see headline inflation rise closer to 9% in this week’s flash CPI for July.
- easyJet Q3 – 26/07 – this year was supposed to be the year that airlines were supposed to break free from the problems of covid, as the loosening of travel restrictions and increase in flying hours prompted a return to normal service. As far as the share price is concerned it’s been anything but, with rising costs and significant travel disruption hindering the path to recovery, and the shares sliding to 10-year lows earlier this month. In the airline’s H1 numbers, group headline costs rose by 117% to just over £2bn, while revenues rose 524% to £1.5bn. The headline loss before tax came in at £545m which was in line with expectations. Load factor for the first half rose to 77%, up from 63.7% a year ago with Easter seeing load factors rise to 90%. For the second half of the year load factors were expected to be 90% of 2019 levels, rising to 97% in Q4, with capacity above the levels seen in 2019, pre Covid. This was cut to 87% in Q3, while Q4 was cut to around 90%, as a result of having to cancel flights due to lack of airport capacity, as well as staffing problems internally, due to sickness absences, as well as localised strike action. On fuel costs the airline improved its hedging capacity to 71% for H2 at $619 and 49% hedged for H1 of 2023 at $701.
- Lloyds Banking Group H1 22 – 27/07 – earlier this year Lloyds Banking Group share price managed to move back to levels last seen in February 2020, briefly reversing all of its post pandemic losses. Since the shares have slipped back with the Russian invasion of Ukraine knocking the shares to one-year lows in March. After an initial rebound, the shares have struggled since then, slipping back on a combination of concern over the economic outlook, and higher interest rates putting pressure on one of its key business areas, namely the housing market. Its Q1 numbers were still pretty decent with statutory profit after tax coming in at £1.2bn, a modest fall from the same quarter last year. We also saw the bank increase impairment provisions of £177m, which was in relation to possible impacts related to higher inflation. This could well be added to in this week’s Q2 and H1 numbers given the deterioration in the economic outlook and increasing pressure on consumer incomes and budgets. Operating costs also rose modestly from a year ago, to just shy of £2.1 bn, although they were down on Q4 levels. On the outlook, Lloyds said it was boosting its guidance on net interest margin to 2.7%, and raising the return on tangible equity to above 11%. Given recent events and the flattening of the yield curve that could prove to be challenging.
- Shell H1 22 – 28/07 – the rise in oil and gas prices has made the oil and gas sector one of the big winners so far this year, although the boom in revenues and profits has created problems of its own after the Chancellor of the Exchequer imposed a windfall levy on the sectors profits in the wake of the Q1 numbers. The strength of these numbers pushed the shares up to their highest levels in two years in May, although since June and the announcement of the new windfall levy the shares have slipped back, along with the oil price. Underlying profits in Q1 came in at $9.1bn, a 43% increase on the numbers for Q4, and beating expectations of $8.2bn, the best quarterly performance in over a decade. Shell also said they would be taking a $3.9bn charge in relation to its Russian assets. Shell made a lot of money from its trading division, $1.1bn, a part of the business that struggled in Q4 losing $251m. Shell has made big strides in reducing its net debt which pre-pandemic was over $75bn. In the last two years they’ve managed to cut that to $48.5bn. On capex Shell is spending between $23bn and $27bn this year, spending $5bn in Q1, and has also been spending money in the area of renewables, completing the purchase of solar and energy storage developer Savion in the US at the end of last year, as well as winning bids with Scottish Power to develop 5GW of floating wind power in the UK in January this year. Shell also said it would be looking to spend £25bn in renewables projects in the UK by the end of the decade, however the new tax arrangements might prompt a rethink given that the tax is expected to be levied annually until 2025. Earlier this month Shell shares also received a boost after the company announced it was revising up its oil and gas assets, on the back of higher refining margins, as it generates higher returns from higher prices. Improvements in refining margins in its chemicals and products division are expected to boost EBITDA by between $800m and $1,200m in Q2.
- Barclays H1 22 – 28/07 – having seen some strong gains from 10-year lows back in 2020, Barclays shares hit their highest levels since 2018 earlier this year. Since those peaks the air has come out of the banking sector in so much that the shares hit one-year lows back in April, where they have struggled to recover against a deteriorating economic backdrop. When the bank reported its Q1 numbers management were not only combatting a difficult economic outlook, but were also dealing with questions about the competence of new CEO Venkat. The bank is facing a regulatory investigation over some of its trading products in the US, when he was in charge of controlling the banks risk environment. The mistake appears to have come about after it was realised that the bank sold nearly £28bn of exchange traded notes that track commodity prices over a three-year period and only registered £16bn of them with the SEC. It now has to repurchase the balance, which it is estimated will cost it over £500m, with the bank setting aside £540m in respect of the matter. In respect of its Q1 numbers the bank showed a decent performance with total revenues rising 10% to £6.5bn. Offsetting that was the fact that costs also rose by 15% to £4.1bn, however over £500m of that increase was in respect of the litigation factors above. Consequently, attributable profits declined 18% to £1.4bn. The Barclays UK business saw profits rise to £594m on revenues of £1.65bn, pointing to an improved interest rate environment which has seen net interest margins improve to 2.62%. Despite the cost-of-living squeeze there’s little evidence of an increase in credit card arrears. Customer deposits were stable at £260.3bn. The corporate and investment bank has seen profits before tax decline 13%, again primarily due to an increase in costs of 23% to £3bn, while investment banking fees fell 25% to £648m. Total revenues in CIB were £3.94bn, consisting of £1.6bn FICC, a solid 37% increase, a 13% rise in equities trading to £1.05bn. At the time the bank said it expected to be able to resume its buyback program some time towards the end of this quarter. This doesn’t seem likely now given that this quarter is likely to be equally as challenging if the recent numbers for US banks are any guide, where buybacks have been suspended, as banks there set aside higher loan loss provisions and battle against a fall in investment banking fees.
- NatWest Group H1 22 – 29/07 – NatWest shares have also had a difficult year share price wise the shares dropping to one-year lows in the wake of Russia’s invasion of Ukraine. More encouragingly the shares have recovered slightly better, relative to its peers. At the end of last year, the bank saw total profits for the year come in at £2.95bn, compared to a loss of £753m a year ago. The numbers were flattered enormously by the adding back of £1.28bn in loan losses reserves from 2020, nonetheless there was plenty to cheer from shareholders, of which the UK government is the main one, although since those numbers were released the government stake has fallen to 48.1% after the sale of £1.2bn worth of shares at the end of March. CEO Alison Rose said the bank expects to maintain ordinary dividends of around 40% of attributable profit, and to distribute a minimum of £1bn in each of 2022 and 2023, via a combination of ordinary and special dividends. Attributable profits in Q1 rose to £841m, helped by the release of £38m in credit impairments, with total income rising to over £3bn. Net interest margin rose to 2.46% in Q1, helped in no small part by the recent rises in interest rates, although whether this is sustained into Q2 remains to be seen. With other banks starting to add back into their impairment funds due to the rising cost of living any boost here runs the risk of being reversed. Mortgage lending was a key growth area in Q1 rising by £2.6bn but could slow in Q2.
- Unilever H1 22 – 26/07 – sometimes in life timing is everything and Unilever CEO Alan Jope dodged a bullet earlier this year when GlaxoSmithKline rejected his £50bn offer for the consumer health care business as he attempted to engineer a change in fortunes for the Unilever share price. Notwithstanding the fact it was a terrible idea, it was Jope’s good fortune that Glaxo didn’t snap his hand off. Most shareholders hated the idea, sending the shares to 5-year lows, and increasing the pressure on him further. Over the last two years the spreads business has gone, as has the tea business, with management under pressure to do more to improve margins and profitability. A steep rise in costs has hit its operating margins, some of which has been mitigated by the company raising prices. Nonetheless Jope is under pressure to improve performance further, with notable criticism from influential shareholders to be less activist and more focussed on performance. This focus on cultural issues saw Unilever embroiled in a spat with Ben & Jerry’s ice cream, one of its major brands over the ice cream makers boycott of Israel, which Unilever quite rightly over-ruled. The ice cream brand is known for its activist stance on a lot of controversial polarising political issues. This has caused problems and will probably continue to do so given Ben and Jerry’s increasingly controversial approach. Given these issues it might serve Unilever better if they were to sell the business off. It’s not as if they don’t have an ice cream business already. In Q1 the company reported a 7.3% rise in underlying sales growth, well above estimates. Revenues also beat estimates, coming in at €13.78bn, a rise of 11.8% helped by an 8.3% rise in underlying pricing. Since the failure of the Glaxo bid the share price has recovered, back to the levels predating the bid, helped in some part by the appointment of activist investor Nelson Peltz to the board, who was instrumental in turning around Procter and Gamble. Nonetheless rising costs are expected to be a challenge going forward, something that shareholders were warned about in Q1, with the board warning that input cost inflation is likely to push up costs to around €2.7bn in the second half of the year, up from €2.1bn in H1.
- Apple Q3 22 – 28/07 – last week Apple surprised the markets by announcing it was planning on slowing hiring and spending heading into 2023, due to an increasing uncertain economic outlook. There is no question that Apple, along with a host of other companies is facing an uncertain economic outlook due to various supply chain disruptions, as well as the covid enforced shutdowns in China. In April Apple said that these problems could cost it as much as $8bn in Q3, while the suspension of its sales in Russia is also likely to have impacted. In Q2 Apple once again reported a strong set of numbers reporting revenues of $97.3bn, of which iPhones made up $50.57bn, services $19.82bn and Mac products of $10.43bn. Profits came in at $1.52c a share or $25bn, with the company authorising $90bn in share buybacks. As has been the case for several quarters now Apple refused to offer guidance for Q3, however expectations are for revenues of $83bn, and profits of $1.15c a share.
- Microsoft Q4 22 – 26/07 – it’s been an indifferent quarter for Microsoft shares as it comes to its year end results, and a record year for revenues. The shares are over 20% below the record highs. Revenues year to date to the end of Q3 were at $146.5bn, which puts the prospect that Microsoft could push annual revenues close to the $200bn level for the first time ever, which would be an 18.6% rise on last year. Q3 revenues slipped back slightly after a record Q2 performance of $51.73bn, coming in at $49.36bn, slightly higher than expected. Profits were also better than expected at $2.22c a share. Personal computing saw revenues of $14.52bn, helped by decent sales of Windows 11 and Xbox, while its intelligent cloud business, which includes Azure, generated $19.1bn in revenue. Its intelligent cloud business has been a key revenue driver the past two year and is likely to remain a key growth area. In Q4 last year this segment added $17.38bn a rise of 51% on the previous year and will be hoping to crack generate $21.1bn and $21.35bn, as it looks to put that business on course to contribute 50% of overall revenue. On guidance, Microsoft said it expected to see record revenues of $52.4bn, however this was recently lowered to $51.94bn on the low side, which would still be a record number. The main reason for this appears to be concern over FX effects and the strength of the US dollar. Profits are expected to come in at $2.30c a share.
- Amazon Q2 22 – 28/07 – Amazon shares slid sharply after it revealed its Q1 numbers back at the end of April. The reason for the decline was a lower-than-expected Q2 revenue forecast. For Q1 revenues beat expectations, coming in at $116.44bn, with Web Services helping to drive the improvement with another record quarter of $18.44bn, up from $17.8bn in Q4. Despite this Amazon fell to a $3.8bn net loss due to recording a $7.6bn hit on its investment in Rivian. It was notable that advertising missed forecasts as companies pared back ad spend in the face of a tougher economic environment. For Q2 Amazon said it expects to see revenue come in between $116bn and $121bn, below market expectations of $125bn. Amazon has been raising its prices to combat the effect of higher costs, whether it be the cost of labour or energy prices, however margins are being pinched, falling to 3.2% in Q1, 5% lower than the same period a year ago. To give an indication of how much costs have risen in the space of a year, operating expenses in 2020 were $363bn, and rose to $445bn in 2021, and could well increase further in 2022. In the US, its US Prime subscription rose to $139 from $119, while it has also started to surcharge some of its US sellers. In terms of new content, Amazon has also been spending large sums of money with a new Lord of the Rings series “Ring of Power” set to launch in September, as well as streaming rights for Thursday night football. It is also looking to monetise its purchase of MGM with a pay subscription channel on Prime Video. The recent stock split appears to have done little to support the share price, just above two-year lows. Profits are expected to come in at $0.16c a share.
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Meta Platforms Q2 22 – 27/07 – Meta’s share price performance has been a shocker so far this year, the shares down over 50% since last year’s record highs. In February, 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. This proved to be fairly accurate as Q1 revenues came in at $27.91bn, although profits were slightly better at $2.72c a share. Average revenue per user was slightly better than expected at $9.54c a share, while daily active users came in at 1.96bn beating expectations of 1.95bn and were better than the previous quarter of 1.93bn. Monthly active users went the other way however, coming in lower at 2.94bn. For this quarter Meta said it expects to see revenues to improve to between $28bn to $30bn, while investors ought to expect lower monthly active users due to the loss of its Russia user base. The regulatory outlook in Europe is also set to remain challenging, while Snap’s Q2 miss earlier this week could be a taste of things to come. Profits are expected to come in at $2.56c a share.
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Alphabet Q2 22 – 26/07 – it’s been a difficult year for tech stocks year to date, although we are off the lows of the year so far. The last 3 months have seen Alphabet’s shares trade sideways. With the stock split now done it will be interesting to see whether there is renewed appetite for the shares at these sorts of levels. The Q1 numbers weren’t too disappointing, despite missing on YouTube ad revenues which contributed $500m. Advertising still makes up the majority of the company’s earnings with services revenue coming in short at $61.47bn, below expectations of $62.58bn. Total revenues did beat expectations, rising to $68.01bn, while operating margins came in at 30%. The key advertising market is likely to be the main standout, as companies pare back their ad spend in response to a slowing economy. The Google cloud business has been a key growth area with the total global cloud market reaching $126bn in Q1. Google will be hoping for a big slice of that, along with Microsoft and Amazon as the three big players in that market, however any gains in this segment will need to be significant to offset concerns about future revenues in advertising services. Profits are expected to come in at $26.50c a share.
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2022-07-23
The Week Ahead: Fed rate decision, UK banks, Shell, Unilever, Apple, Microsoft results
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