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- Federal Reserve rate meeting – 02/11 – there is unlikely to be too many surprises this week when the Federal Reserve is expected to raise the Fed Funds rate by another 75bps, following on from three similar moves in June, July and September. In September Fed chair Jay Powell indicated that the FOMC were “strongly committed” to driving inflation lower while signalling that more rate rises are on the way. Powell went on to say that there was no painless way to drive inflation lower, with the prospect that we could well see another 100bps by the end of this year at the bare minimum. The tone was also markedly different, with the Fed downgrading its annual GDP target to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025. Since then, we’ve had a succession of Fed speaks talking up the prospects of even more aggressive tightening, with the prospect that we might see another 150bps by year end which would put the Fed Funds rate at 4.75% by year end. At the end of last month there was some chatter that some Fed officials were becoming uneasy at the pace of the current hiking cycle. That would seem eminently sensible but for the fact that apart from Fed vice chair Lael Brainard there has been precious little articulation of that line from any Fed official in recent public speeches. Even the likes of Neel Kashkari of the Minneapolis Fed have shown little sign of the need for a pause or a pivot at this point, commenting back in October that the Fed would be in no position to slowdown the pace of rate rises if inflation was still rising. Having said that we could be starting to see signs of cracks in the consensus after San Francisco Fed President Mary Daly said that after November the time could be ripe for talk about stepping down the pace of rate hikes. Thus, the Powell press conference is likely to be just as important in the context of whether he comes across as hawkish as he did in September.
- Bank of England rate meeting – 03/11 – the weakness of the pound in recent weeks, along with the political turmoil has had a significant upward impact when it comes to UK inflation, whether it be in terms of a lower pound raising import costs, but also higher borrowing costs pushing up mortgage rates. The various downgrades from the ratings agencies won’t have helped but they are unlikely to have moved the dial that much. The bigger question now is whether we get a 50bps rate rise this week or a 75bps move. With fiscal policy now set to be a lot tighter despite warnings about raising tax rates into a slowdown, the scope for the Bank of England to be more aggressive is now said to be more limited, due to concerns about the impact on demand. It seems a little bit late for that at this point in time, given that the actions of the government in raising taxes is likely to mean any recession is now likely to be much more prolonged, which in turn could mean that the pound stays under pressure for longer. It still seems more likely than not that we’ll see 50bps from the Bank of England this week, given rising concerns about slowing growth, with any rate increases after that likely to be much slower. The Bank of England will also have to deliver its latest economic forecasts for inflation and GDP. Let’s hope they are more accurate than they have been so far this year.
- US non-farm payrolls (Oct) – 04/11 – the US labour market has continued to hold up well despite concerns over slowing consumer spending and increased costs on the part of some US businesses. We have started to see reports of job losses from some companies in the most recent earnings reports which may at some point start to work its way into the headline numbers. At the moment that isn’t happening with job vacancies still high and weekly jobless claims still at a very low 230k a week. The September payrolls numbers were decent, coming in at 263k, while the unemployment rate fell to 3.5%, although that was largely down to a similar drop in the participation rate to 62.3% from 62.4%. This continues to be a puzzle given the continued rising cost of living and the fact it is 1% below the levels it was pre-pandemic. Wage growth at 5% isn’t exactly ripping up any trees either, falling to its lowest level this year. Expectations are for another slowdown in jobs growth to 200k which would be the lowest number this year, along with the unemployment rate ticking back up to 3.6%.
- BP Q3 22 – 01/11 – despite oil and gas prices slipping back from their recent highs the BP share price has shown some decent resilience hitting new two-year highs earlier this month, despite the imposition of a windfall tax on their UK profits by the UK government. The unexpected bonus of higher profits has been a significant benefit to BP, which has undergone significant challenges over the past 12 years, after the events in the Gulf of Mexico, and which it is still paying for, as well as the write down of its Rosneft stake in Q1 by $29bn, pushing the company into a loss for the quarter of $20bn. In Q2 BP managed to post underlying replacement cost profits of $8.45bn, beating expectations of $6.73bn. Profit attributable to shareholders in Q2 was $9.3bn, equating to a H1 loss of $11.1bn when the Rosneft impairment is included. Despite that loss the company announced a sizeable $3.5bn share buyback, as well as a 10% increase in the dividend to just over 6p a share. The company has also made great strides in reducing its debt levels, where it is now down to $22.8bn, a significant fall from where it was 2 years ago when it was over $50bn. While the boost to profits has had politicians chomping at the bit to tax the likes of BP and Shell even more it’s important to remember that with the windfall tax included the oil companies pay an effective tax of 65%. BP’s other large problem is that the huge boost to revenues that are driving these profits can’t disguise the fact that the company is spending pitifully low amounts of money on renewables. When looking at the numbers BP makes all of its profits through its oil production and operations business which saw adjusted profit before tax and interest rise to $5.9bn, comfortably beating the performance of Q1. Its gas and low carbon energy division saw profits of $3.1bn, slightly down from Q1, but illustrating how important these areas of the business are in terms of cashflow. At the end of Q2 BP had spent $5.8bn in terms of capex year to date, with an end of year target of $14bn to $15bn, however very little of that has gone into the area of renewables. $823m of that spending came in its gas and low carbon energy division, $681m of which was spent on gas, and $142m of which was on low carbon energy. Year to date BP has spent a total of $361m on low carbon energy which is a pitifully low number. As a result of the windfall tax BP said it would take an $800m charge in this week’s Q3 numbers.
- Next PLC Q3 23 – 02/11 – Next shares haven’t had a good year so far, down over 40% the share price hit their lowest levels since April 2020, back in October, even as their H1 numbers showed a retailer that was still performing relatively well, despite the weaker economic outlook. At the beginning of August Next said that full price sales were up 5% and £50m ahead of previous guidance, with the retailer saying that the unusually warm temperatures during June and July prompting a jump in spending on summer clothing. Sales in retail stores managed to recover, while online sales reverted towards their longer-term average. The company retained its full price sales guidance for the year; however, it raised its full year profit guidance by £10m to £860m. This proved to be somewhat premature after August trade slowed sharply prompting Next to downgrade their target for full year sales growth for H2 to between 1% to 1.5%, while reducing profit guidance to £840m, a rise of 2.1% year on year. This seems optimistic given that H1 full brand sales rose 12.4%, while profits before tax came in at £401m. What Next is saying is it expects profits to improve significantly in H2, relative to H1. With the shares already back close to levels seen just after the first lockdown shareholders will be hoping that they are correct.
- BT Group H1 23 – 03/11 – has seen a big fall in its share price since July, down over 20%, to its lowest levels since December 2020, as pessimism around the UK economy has increased, and underperformance in its Enterprise operation, which saw a 7% decline in revenues during Q1 which has cast doubt over whether the company will be able to meet its EBITDA guidance. BT was at pains to reaffirm its full year outlook when it reported that Q1 EBITDA came in line with forecasts at £1.9bn. Q1 revenue rose to £5.13bn as the rollout of fibre connections continued at pace, with a record quarterly number of 763k. In October, the company updated its outlook in respect of its Sports joint venture with BT Sport and Eurosport which saw it downgrade its revenue forecasts for the current year by around £350m this year, although BT did say that they didn’t expect to see a material impact on their full year adjusted EBITDA outlook of £7.9bn. Over the quarter BT has also had to contend with strike action amongst its employees over the rising cost of living, with any stoppages likely to impact on its broadband rollout timetable as well as its costs.
- Rolls-Royce Q3 22 – 03/11 – while Rolls-Royce shares are still above their 2020 lows their performance year to date has been woeful, despite a much more optimistic outlook than was the case at the beginning of the year. The resumption of global air travel should have been a positive catalyst for a pickup in revenues, and revenues have certainly picked up, however the diversification away from civil aviation hasn’t been as smooth as perhaps investors would have liked. When the company reported in H1 there was general disappointment at a £111m loss, which has seen the shares slip to 23-month lows at the end of September. We’ve subsequently seen the sale of ITP Aero go through generating sales proceeds of €1.6bn, which will help reduce the debt from £5.4bn. Total revenues for H1 came in at £5.3bn which was a modest increase on last year, however the company slipped to a bigger than expected underlying loss before tax of £111m, as higher costs impacted on margins. Gross margins fell from 21% last year to 17.7%, while financing costs rose to £236m from £174m. Civil Aerospace which accounts for the bulk of the company’s revenue saw an 8% rise in underlying revenue to £2.34bn, with large engine flying hours still at 60% of 2019 levels, with an expectation that this will rise to 70% by year end and return to pre-pandemic levels in 2024. The power systems part of the business also performed well with revenues coming in at £1.37bn, a rise of 20%, and comfortably beating expectations. Order intake here was £2.1bn, a 53% rise from the prior period and a record quarter as well. The biggest disappointment was in its defence division with revenues falling 9% to £1.61bn with the company blaming delays in the timing of the next tranche of the F-35B, and lower spare engine sales. The company’s new markets division has thus far failed to generate any revenue and saw losses rise to £48m. The deterioration in margins appears to be investors biggest concern and something that new CEO Tufan Erginbilgic will need to get to grips with when he replaces Warren East at the end of the year.
- Sainsbury H1 23 – 03/11 – last month we saw the Sainsbury share price hit a record low of 168.70p, and although we’ve seen a modest recovery since then its been a little lacklustre in nature. There is no question the outlook for retailers remains challenging, Sainsbury is having to absorb higher costs in terms of energy prices, while it has also given its own staff a 10% pay rise, but it remains a very profitable business, despite concerns over its sales growth outlook and losing market share to the likes of Aldi and Lidl. In Q1 Sainsbury’s reported a 4.5% decline in year on year sales growth from 2021, however when compared to pre-pandemic the numbers showed a 5.4% gain. This was primarily driven by grocery sales, which is its core business, with broad based weakness in General Merchandise, in both Argos as well as Sainsbury supermarkets. Despite the challenges facing its Argos business and general merchandise in general Sainsbury kept its full year outlook unchanged with underlying profit before tax of between £630m and £690m, which in the current environment still looks a decent outcome, and in line with the profits seen last year. The big challenge facing Sainsbury given the recent Kantar numbers and grocery price inflation of 14% will be in sticking to that guidance, as pressure on costs continues.
- Pfizer Q3 22 – 01/11 – Over the last two years Pfizer revenues have surged due to its role in the rollout of the covid-19 vaccine it developed in conjunction with BioNTech. Full year revenues are expected to rise to a record $102bn this fiscal year, helped by the company raising its prices, with over half of that sum expected to come from its new Covid pill as well as the vaccine, to the tune of $54bn. In Q2 revenues rose to $27.74bn, $16.97bn of that being coming from the vaccine and covid pill, the covid pill making up $8.12bn of that total, almost half. Pfizer reaffirmed its revenue guidance, but upgraded the lower end of its EPS guidance to $6.30 to $6.45c a share. Since those Q2 numbers in July Pfizer shares have slipped back hitting a one year low last month on concerns that we might see lower demand for its vaccine and its covid pill. With all that extra revenue Pfizer appears to have shown little appetite to look at new areas to leverage its new mRNA technology. What other new products does Pfizer have in the pipeline or is it a one-trick pony? The decision by Moderna to sue Pfizer over its Covid vaccine hasn’t helped sentiment either. Profits are expected to come in at $1.43c a share.
- Uber Q3 22 – 02/11 – have we got to a stage where Uber can put in a base on its share price after hitting lows of $20 in June. In July the shares managed to push higher after reporting revenue of $8.1bn in Q2, with gross bookings rising to a record high of $29.1bn, which was at the top end of company guidance. For Q3 the company expects to see gross bookings between $29bn to $30bn. Despite the improvements in revenues the company still posted a loss of $2,6bn due writing down its stakes in Grab Holdings and Aurora Innovation. Since those numbers came out the shares have broadly traded sideways, however the focus is likely to remain very much on rising costs, while we could see GTV start to slow as the cost-of-living squeeze continues to bite. Uber is expected to post a loss of $0.17c a share.
- Robinhood Q3 22 – 02/11 – it’s been an awful year for Robinhood Markets share price, we saw a record low in June, and although the shares have recovered modestly since then its shift towards crypto currencies at the start of the year was timing of the worst kind. In Q2 revenues came in at $318m with a net loss of $295m. With full year operating expenses expected to be in the region of $1.7bn the company was haemorrhaging cash. This prompted another round of job losses on top of the 9% job cuts it announced in Q1, with a decision to cut 23% of its workforce, as it looked to stabilise the business. These cuts do appear to have stemmed the bleeding helping to lift the share price, but it doesn’t change the challenging outlook for the business. The move away to crypto and away from stocks backfired spectacularly, with revenues in that business falling by 75% year on year. Monthly users have also slumped year on year, down from 21.3m to 14m. We have seen slightly more volatility this quarter which may have boosted the numbers; however losses are still expected to come in at $0.18c a share
- Paramount Global Q3 22 – 02/11 – its not been a good quarter share price wise for Paramount Global with the launch of their new streaming service sparking a slide to two year lows back in October. It’s not as of the company isn’t increasing its revenue on a year-on-year basis. Q2 revenues rose 19% from 2021 levels, however profits have dropped quite sharply. Paramount’s entry into the streaming market in competition with the likes of Netflix, Amazon Prime and Disney+ seems like a streaming service too far when you consider that Apple is also spending huge amounts of money on online content. It’s not as if Paramount’s content isn’t good, it is, however they are coming at the market from a standing start and lagging well behind its more established peers. Netflix latest Q3 numbers gave the sector a lift, but the shift towards ad-based subscriptions isn’t good news for margins for anyone in the streaming space. The Paramount+ service has 43.3m subscribers, while the Walmart deal will help add numbers in Q3. Nonetheless losses from streaming are still expected to approach $2bn this year and probably increase in 2023. That simply isn’t sustainable. Consensus is for about 3.5m new subscribers in Q3. On TV and film production the numbers are expected to be good, helped by the global release of Top Gun: Maverick which is expected to continue to perform well, and help lift overall revenues. Profits are expected to come in at $0.47c a share, down from the $0.64c a share in Q2.
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2022-10-29
The Week Ahead: Federal Reserve, Bank of England, US non-farm payrolls, BP, Rolls-Royce results
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