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- FOMC meeting – 15/06 – as we look ahead to another Federal Reserve meeting it will surprise no-one that the Fed will be raising rates by another 50bps this week to 1.5%, to be followed by another 50bps next month. This month also sees the start of the balance sheet reduction program starting with $47.5bn, rising to $95bn a month after 3 months. In recent weeks, the debate has shifted from the certainty of 50bps rate hikes in June and July and has moved towards the prospect of another 50bps in September. A number of Fed policymakers have indicated they want to see the Fed funds rate back to neutral by the end of this year, with a consensus of around 2.5%, however there is still some divergence where the neutral rate actually is. Kansas City Fed President Esther George has suggested 2.5% as a starting point, while St. Louis Fed President James Bullard put it lower earlier this year at 2%, while calling for rates to rise to 3.5% by year end. Atlanta Fed President Raphael Bostic also appears to be in the camp of a lower neutral rate of between 2% and 2.5% while also floating the idea of a hiking pause in September. Whether we see a pause in September is likely to depend very much on the inflation outlook, with the latest surge in May CPI making that prospect much less likely, which means that all the talk of a 50bps move post Jackson Hole is unlikely to diminish. Much will depend on how the Fed sees fit to update its inflation forecasts which are still well below current levels. In March, the FOMC upgraded their inflation forecast for 2022 to 4.3% from 2.6%, and in 2023 to 2.7% from 2.3%, while downgrading GDP to 2.8% in 2022 and 2.3% in 2023. A further upgrade to the inflation outlook is likely to be considered hawkish, while leaving it unchanged might suggest that the Fed’s concerns over rising prices are diminishing.
- Bank of England decision – 16/06 – the Bank of England has raised rates at every meeting this year, and with headline inflation now at 9% it’s hard to see how they won’t raise rates by 25bps again when they meet later this week. When they met in May three policymakers pushed for a 50bps hike, while the economic forecasts painted a dire outlook for the second half of the year. While this year’s GDP forecast was left unchanged at 3.75%, despite a predicted Q4 contraction of around 1%, the bank revised its 2023 GDP forecasts down to a -0.25% contraction. The MPC also predicted that inflation would start to fall back to target in around 2 years. Another rate increase this week became more likely after the announcement last month of another fiscal aid package, which should go some way to helping support the economy over the course of the rest of the year. We can probably assume that Haskel, Saunders and Mann will vote to hike given they voted for 50bps in May, which means that we only need to see two more members to join them. The bigger question is whether the MPC will go further in their determination to ramp down on future inflation expectations in a fashion similar to the Federal Reserve who have become much more hawkish in recent weeks. Bank of England governor Andrew Bailey has gone to great lengths in recent months to insist there is little the central bank can do about supply chain problems, which is true, but it’s not something the central bank should be admitting. Another communications failure on his part. He still has a responsibility to focus on what the MPC can do, namely inspire confidence that the central bank won’t hesitate to act to underpin inflation expectations, as well as put a floor under the pound’s 10% decline against the US dollar in the past 12 months which has done so much to exacerbate the inflationary impulse hitting the UK economy. Simply proclaiming that it’s not the Bank of England’s fault that inflation is so high is simply not good enough, and also complete nonsense to boot, and runs contrary to the available evidence, which as far back as November last year pointed to the fact that the Bank of England was being complacent about inflation risk. We can expect to see a 25bps move, but we really ought to be matching the Fed with a similar 50bps move.
- Bank of Japan decision – 17/06 – the Bank of Japan has set itself apart from other central banks by pledging to keep rates low despite rising inflationary pressures. The decline in the Japanese yen year to date reflects this policy of neglect on the part of the central bank. The yen is down over 13% year to date, while national CPI has risen from 0.5% in January to 2.5% in April, the first-time headline inflation has moved above the Bank of Japan’s 2% target since 2015. In the last two months we’ve seen a sharp increase in the headline rate, however in the past when this has happened the surge has been short-lived. The bigger question is whether this time is different? At its most recent policy meeting the BoJ stated it expects “short-term and long-term policy rates to remain at their present, or lower levels”. Those last three words are key, the Bank of Japan is signalling in contrast to the Fed that it has no intention of tightening policy at all, despite the sharp weakening of the yen so far this year, although it does appear that are starting to become less relaxed about the prospect of further yen declines, which might signal some sort of policy shift this week.
- China Retail Sales (May) – 15/06 – the last two to three months have been difficult ones for the Chinese consumer, as a result of covid restrictions and lockdown measures as Chinese authorities fight a losing battle to implement their zero-covid strategy. At the beginning of this year there was widespread optimism that the economy would be able to grow by 5.5% this year. This goal now looks highly unlikely given the restrictions that have been in place across China since March. In March, retail sales in China declined by -3.5%, the first decline since July 2020 and the biggest decline since April 2020 when China was coming out of its first nationwide lockdown. In April we saw another steep decline, of -11.1%, an even bigger decline than the -6.6% fall that was expected. Industrial production also slowed sharply, falling -2.9%, against an expectation of a small rise of 0.5%. While we can probably expect to see a small improvement in the coming months, starting this week with the May numbers, and an expectation of a -7% decline for retail sales, it’s unlikely we will see a V-shaped rebound in the coming months. Industrial production is expected to improve to -1% from -2.9%. This is because China is unlikely to alter its zero-covid policy, given the vulnerability of its health service to too many infections, which means that after a poor Q1, Q2 is likely to see an even worst performance.
- UK wages (Apr) – 14/06 – the most recent wages and unemployment numbers for March showed that the labour market remained tight for the 3 months to March, with unemployment falling to 3.7%, the lowest level since 1974. The Office for National Statistics went on to say that for the first time since records began, that there are fewer unemployed people than job vacancies. This tightness did show that upward pressure on wages was starting to rise after average weekly earnings including bonuses rose by 7%, well above expectations of 5.4%, although without bonuses the rise was more modest at 4.2%. This is still well below the headline CPI rate of 9%, however with the recent new fiscal help offered by the Chancellor of the Exchequer which should take some of the pressure off the cost of living any further significant evidence of rising wages here could pile further pressure to raise rates again when they meet on Thursday. This week’s April numbers are also expected to get a big lift from the various pay rises that were announced by retailers as they look to keep their staff in what is expected to become a very competitive labour market in the coming months.
- US retail sales (May) – 15/06 – in contrast to the UK economy, the US economy has seen a strong start to the year if its retail sales numbers are any guide, although its Q1 GDP numbers would beg to differ after the economy contracted in Q1. In January consumer spending rebounded strongly, rising 4.9%, after a -2.5% decline in December. This was followed by a 0.8% gain in February and a 1.4% gain in March. April also saw robust retail sales growth of 0.9%, as continued resilience in the labour market helps to support spending, despite weak consumer confidence. Nonetheless there are some nagging doubts as to how much of this rebound is being driven by consumer credit after big gains in February and March, rising to $52.4bn, from $37.7bn in February, with revolving credit rising by 21.4%. With interest rates currently where they are in the US, one has to question as to whether this sort of credit growth is sustainable. Expectations are for May retail sales to slow modestly to 0.2%, with the potential for a decline at some point as higher food and gasoline prices eat into demand.
- Tesco Q1 23 – 17/06 – despite a decent set of full year numbers back in April the Tesco share price has slipped back. This caution has been dictated by a consumer outlook that has been cautious at best. Since then, we’ve seen UK inflation jump quite sharply, while the outlook for 2023 was for adjusted operating profits to fall modestly from last year’s £2.83bn. Tesco also pledged to continue its Aldi price match scheme and extend it to 650 lines, along with various Clubcard promotions. This determination to increase the pressure on the likes of Aldi and Lidl will inevitably also put downward pressure on margins, with Tesco’s peers of Sainsbury, Asda and Morrisons facing similar challenges. Tesco has already pledged to increase staff wages in its efforts to retain service levels, raising salaries by 6%, while rising fuel prices are likely to increase the costs of maintaining its delivery and logistics operations. Cost saving measures will go some way to offsetting the effects of these pressures with the food retailer in the midst of a three-year cost saving program, with the intention of looking to cut £1bn.
- JD Sports FY 22 – 15/06 – as recently as November last year, the JD Sports share price was trading at record highs, however since those peaks the shares have plunged, losing over half their value and hitting a one-year low last month. In January the shares initially popped high after the retailer said it expected full year profits to come in at £875m, well above consensus of £810m. Since then, we’ve seen two upgrades to that figure, as well as various delays to the publication of the final numbers. In February, estimates for full year profits were nudged higher to £910m, and then again in May to £940m, but it hasn’t been enough to prevent further share price weakness. The initial share price weakness post January appeared to be driven by concern over the outlook, with management expressing caution about margins and sales. The revelation that chairman Peter Cowgill had sold 10m shares at an average price of 213.33p per share also didn’t help sentiment, although it now transpires, he is stepping down. The delay to the publication of the results has been prompted by the Competition and Markets Authority who fined the company £5m for breaching an order that barred it from further integrating Footasylum, with the delay being used to assess the impact of a forced sell off of the Footasylum on its business going forward. Last week the company set aside another £2m after being fined again by the Competition and Markets Authority, this time for reportedly price fixing Glasgow Rangers kit merchandise, along with Elite Sports, to the tune of £2m. In May the retailer announced that Q1 trading was in line with expectations, with total sales rising by 5% from the previous year, with profits expectations for the new financial year to be at least equal to the £940m expected for full year 2022.
- Boohoo Group – Q1 23 – 16/06 – when Boohoo reported its full year numbers back in May the shares slipped back towards their lowest levels this year, although they have rebounded since then. Full year revenues were positive, rising by 14% to £1.98bn, however the impact of higher costs and lower margins showed up in its profit before tax numbers, which saw a 94% decline to £7.8m. CEO John Lyttle blamed a significant increase in outbound carriage costs, and a rise in inbound shipping costs which impacted EBITDA to the tune of £60m. The retailer also paid out £261.5m in capex as it looked to expand and automate its distribution network, with a new centre expected to open in the US in 2024. For 2023 Boohoo said it hoped to consolidate its market share gains, and that it expects to see revenue growth in the low single digits, and adjusted EBITDA margins between 4% and 7%, as it looks to raise prices to combat the erosion in its margins.
- Kroger Q1 23 – 16/06 – Ohio based Kroger share price has held up reasonably well despite the recent selloffs seen in the likes of Target and Walmart. In Q4 Kroger posted revenues of $33bn, which helped push the shares up to a record high. Since then, we’ve slipped back over concern that with the same rising costs that are affecting its peers it will struggle to meet its earnings guidance for the new fiscal year. Kroger’s outperformance has been helped by its recent deal with Ocado which has helped keep costs down and improve delivery costs. The retailer said it expects full year adjusted same store sales to rise in the region of 2% to 3% with full year profits of $3.80c a share.
- Adobe Q2 22 – 16/06 – Adobe shares hit a two-year low last month, but appear to have found a short-term base, having fallen from record highs of just shy of $700 in November, rebounding from $371 last month. Recent revenue and profits numbers have been solid with the company ending its last fiscal year with total fiscal revenue of $15.79bn, a rise of 23% year on year. The company saw decent growth in both of its business segments, Digital Media saw a rise of 25%, while creative revenue rose by 23%. Full year revenue estimates for the current fiscal year are expected to rise to $17.9bn. In Q1, Adobe also beat expectations on revenue with $4.26bn, and a net profit of $3.37c a share. Adobe did say that revenue would be $75m lower this year, due to halting sales to Russia. Profits are expected to come in at $3.30c a share.
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The week ahead: Federal Reserve, Bank of England, BoJ, Tesco and Boohoo results
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