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- Jackson Hole Symposium – 25/08 – this year’s annual central bank Jackson Hole Symposium is entitled “Reassessing Constraints on the Economy and Policy” and will be closely scrutinised for evidence of a Federal Reserve, and central banks more broadly that might be concerned about the risks of overtightening monetary policy at a time when the challenges facing the global economy are numerous. Markets have been rising for several weeks on the basis that for all the Fed’s hawkish rhetoric the central bank will be forced to adopt a dovish pivot when it becomes apparent that inflation has started to top out. We’ve already seen in recent data that US inflation may well have peaked, however markets appear to be betting that it will somehow fall back quite quickly to the 2% target, at the same time as the Fed signals that rate rises are close to their end game. This seems unlikely given that CPI is still at 8.5% and the Fed Funds rate is between 2.25% and 2.5%. Furthermore, the Fed will want to be sure that inflation is falling at a sustainable enough pace before it signals any sort of dovish shift or pivot, especially if inflation proves to be sticky and stalls at around 5%. If inflation finds a base at this sort of level its highly unlikely the Fed will lean into any sort of guidance that suggests a rate cut is coming, which means that further rate rises are much more likely between now and year end, with consensus on a Fed funds rate of between 3.5% to 4%. If markets are looking for Powell to give any indication that the Fed might be about to go soft on inflation, they are likely to be disappointed. The idea that the Fed would start to reverse its rate hiking cycle if inflation is still well above 2% comes across inconceivable and its surprising that the market is even pricing it. This week Powell has the opportunity to prick that misconception.
- US Q2 GDP – 25/08 – with the US now in a technical recession, having seen a -0.9% contraction, following on from a -1.6% contraction in Q1, this week’s numbers aren’t expected to tell us anything new about the state of the US economy. The decline in output was a symptom of sharp falls in inventories and gross private domestic investment, which appear to have been hobbled by sky high inflation. Gross private domestic investment also fell sharply falling by 13.5%, while personal consumption rose by 1%, with spending focussed on lower margin items as durable good spending fell by 2.6%.
- US PCE Core Deflator (Jul) – 26/08 – having fallen back from a record 5.3% in March to 4.7% in May, we edged back up to 4.8% in June, while Core PCE jumped up to a record high of 6.8%. This jump higher appears to show that inflation is started to become much more embedded into the US economy, and will be something the Fed won’t want to see. It is these numbers that are likely to dictate the Fed’s reaction function on whether it chooses to go with another 75bps move or 50bps when it next meets in September, with the odds favouring a 50bps move. The likelihood of the Fed slowing the pace from 75bps at its last two meetings to 25bps is less likely than a 50bps move. Given the current tone amongst Fed policymakers the bias is more likely to lean towards a tendency to overtighten in the short term and ease off towards year end, than the other way around.
- UK flash PMIs (Aug) – 22/08 – have remained in positive territory all of this year despite the combined challenges of rising prices and weakening economic activity. Hiring patterns have remained robust, and while costs have been rising businesses have been able to pass on the increase in costs. At the most recent PMI numbers enthusiasm about the economic outlook was starting to wane and with August being a slow period due to holidays we could well start to see economic activity on the PMI level start to slide into contraction territory.
- Germany IFO Business Climate (Aug) – 24/08 – with water levels in the Rhine sliding below the minimum levels that can see trade up and down the river carry traffic and energy rationing already taking place in some German states it would be surprising to see any sort of recovery in German business confidence in August. In July the business climate index fell to 88.6 from 92.2 and the lowest levels since June 2020. The expectations index fell to 80.3 and levels last seen in May 2020, post the pandemic lockdown low of 69.4 in April 2020.
- Harbour Energy H1 22 – while politicians continue to talk tough about the “obscene profits” being made by the big oil and gas companies due to surging oil and gas prices it almost gets forgotten that for smaller oil and gas companies, recent years have been much more challenging. One such company is Harbour Energy which was formed out of the ashes of Premier Oil and Chrysaor, and which is still carrying the legacy of that debt to the tune of £2.8bn as at the end of last year. The announcement of the windfall tax saw the shares in Harbour fall over 25% from their April peaks at 538p to just below 300p in July. Last year the company managed to generate annual revenues of £3.48bn, while this year it expects that to rise to £5.18bn. Unlike BP and Shell, all of its profits would be taxed at the higher rate of 65%, given that 90% of that production takes place in the UK through 5 key hubs. The company does have interests in Indonesia, Vietnam, Mexico and Norway but they are tiny in comparison. With such a strong cashflow and such an unfriendly investment environment in the UK it wouldn’t surprise to see the company target future investment efforts towards its smaller interests in order to diversify its revenue streams. In a sign that the company was already leaning in this direction CEO Linda Cook said that the tax breaks afforded by the levy did nothing to help Harbour who have invested in new projects like the Tolmount Gas field, and which increases UK gas output by 5%. In July the company reported some good news from its Indonesian Timpan exploration well, in which it reported a 390-foot gas column, with the prospect that it could be commercially profitable with the right amount of investment. At a time when the UK needs all the investment it can get when it comes to its energy security, they seem intent on driving that investment away.
- Zoom Video Communications – Q2 23 – 22/08 – having slid back to two-year lows just below $80 back in May, Zoom’s share price has slowly recovered above $100, despite seeing a halving of profits, from a year ago when it reported back in Q1. Despite the slide in profits, which was unexpected given the tough comparatives, revenues have continued to rise, last year seeing total revenue of $4.1bn. Profits also came in better than expected at $1.03c a share. Total revenue in Q1 came in at $1.07bn, a rise of 12%. For Q2 Zoom said it expected to see revenue of about $1.12bn, and profits of $0.90c a share. It also raised its guidance for the full year to $4.55bn, despite competing against the likes of Microsoft Teams, Skype, and Webex, with full year profits expected to come in between $3.70 and $3.77 a share.
- Nvidia Q2 23 –24/08 – having seen the share price more than halve since the record highs seen back in November last year, we may have found a short-term base after the one-year lows set back in July. The big question now is whether the current rebound can be sustained. Back in May the company back downgraded its Q2 forecasts. Its Q1 numbers were still strong with revenues beating expectations at $8.29bn, however Q2 revenue was downgraded to between $7.94bn to $8.26bn from a consensus estimate of $8.45bn. Nvidia said that events in China, as well as the Russia situation, were playing a part in the downgrade to the outlook. These two factors are expected to cost in the region of $500m. This was followed by another downgrade earlier this month, to $6.7bn, while gross margins were likely to fall to 43.7% from 65.1%, potentially impacting profits as well. The downgrade was attributed to a big drop in gaming revenue which is down 44% from Q1, to just over $2bn. Profits are expected to come in at $0.50c a share.
- Snowflake Q2 23 – 24/08 – another pandemic winner that has seen a reversal of fortunes in recent months. In June the shares hit record lows in the aftermath of its Q1 numbers, which saw the shares slide sharply, but they have enjoyed a solid rebound since then. The company posted a bigger than expected loss of $166m, or $0.53c a share, although revenues beat expectations, coming in at $422.37m. Its Q2 revenue forecast was in line with expectations, between $435m to $440m, however a deterioration in operating margins appears to be weighing on its ability to generate a profit. Snowflake has made great strides in growing its client base, which was up to 6,322, from 5,944 at the end of last year. The company’s growth in the last two years has been remarkable, more than doubling its revenues last year to just over $1.2bn, it expects that to rise to over $2bn for the current fiscal year. Losses are expected to improve to $0.02c a share.
- Williams-Sonoma Q2 23 – 25/08 – US retail shares have also taken quite a battering in recent months with the likes of Target and Walmart warning that consumers appetite for high margin goods is declining in the face of higher food and energy prices. This shift puts retailers like Williams-Sonoma very much in the firing line, with the owner of Pottery Barn seeing its shares drop sharply from the record highs seen in November last year. In Q1 the company posted record revenues of $1.89bn, up from $1.75bn a year ago, helping to drag the shares off 2-year lows to a recovery which has seen the shares recover back to levels last seen in March. The resilience of the US consumer has been one of the more surprising aspects of this year, however as a purveyor of more high-end goods there is a risk that Williams-Sonoma may start to see early signs of a US consumer that may well start to cut back on higher value of discretionary items. Gross margins are currently at 43.8% rising 80bps in Q1, while operating margins came in at 17.8%. The company kept its full year guidance unchanged of mid to high single digital annual net revenue growth, with the goal of increasing annual revenues to $10bn by 2024. This seems a tall order especially when you consider that at the end of the last fiscal year annual revenues came in at $8.25bn, and are expected to come in at $8.6bn for this year. Profits are expected to come in at $3.49c a share.
- Peloton Q4 22 – 25/08 – has seen solid gains in the past two weeks, after the share price hit a record low in July. After a dismal Q2, the company cut its estimate for full revenue to $3.7bn to $3.8bn, a big reduction from the $5.4bn which it was at the end of its last fiscal year. The company also adjusted its Q3 revenue estimates lower to a number just below $1bn, at $971.6m, with an EBITDA loss of between $125m to $140m. Even with such a low bar the company still managed to miss out, reporting $964.3m, and EBITDA losses of $194m, while for Q4 the company said it expects to see $675m to $700m, well below previous estimates of $821m. Peloton also said it expects EBITDA losses in Q4 of $115m to $120m. Peloton’s biggest problem was its inventory, it simply had too many products it couldn’t shift, with little sign of a demand pickup. To address this the company cut its prices modestly, while at the same time agreeing a $750m long term funding deal with its bankers. Earlier this month Peloton took the decision to reverse these price cuts, while at the same time announcing it would be cutting 800 jobs, outsourcing all its deliveries, as well as raising its prices by 25% to 30%. This seems rather strange decision given that its bikes and treadmills are already extremely expensive, and with inflation still rising consumers are going to be even more price sensitive than they are now. That doesn’t appear to concern new CEO Barry McCarthy who said that the price cuts cheapened the perception of the brand, and that reversing them was necessary to restore that perception. At a time when price pressures are likely to remain elevated for consumers globally this seems like an unnecessary risk, and ultimately perception doesn’t sell bikes and treadmills, affordability does and raising prices while consumer incomes are shrinking doesn’t seem wise. Losses are expected to come in at $0.75c a share.
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2022-08
2022-08-20
The Week Ahead: Jackson Hole Symposium, US PCE and Q2 GDP, Harbour Energy, Nvidia and Peloton results
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