Week ahead: RBA, Fed and ECB minutes, ASOS and THG results

RBA rate meeting – 05/04 – The RBA has been uncharacteristically dovish in recent months despite rising evidence that inflation is running well ahead of expectations. Governor Philip Lowe has gone to great lengths to play down the prospect of a rate rise this year, although at the last meeting he was careful not to rule it out. Unemployment has been falling while wages, as well as inflation pressures, have been increasing. As a major commodity exporter, the rise in wheat, oil and metals prices is likely to exert significant upward pressure on inflation in the coming months, which is a significant shift from the start of this year, when the RBA was insisting that a rate rise this year was unlikely. Events have moved on since then and the RBNZ has already started raising rates, leaving the RBA in its wake. This suggests the RBA could be closer to moving rates off their current 0.1% than at any time in the last six months. Expectations are still for a possible hike in June, however this still seems some way off and given the fluidity of the current situation it wouldn’t be impossible for the RBA to move at their April meeting, if only to anchor inflation expectations.

Global Services PMIs (Mar) – 05/04 – The recent flash PMIs from Germany and France showed that despite rising prices services activity has remained resilient. This has come about as a result of the easing of covid restrictions more than any immunity from rising costs, which have shown little signs of slowing down. The rise in costs has also been exacerbated by the war in Ukraine, which is manifesting itself in rapid increases in the costs of doing business. Because of this companies will be faced with the prospect of passing these costs on, and while for the moment they seem able to do so that is likely to change as we move into Q2. Business and consumer confidence is already on the decline, and is likely to deteriorate further. As such this week’s services PMI reading could well be the last hurrah for the rebound in economic activity we’ve seen since the start of the year. France services PMI is expected to rise to 57.4 from 55.5, while Germany services is expected to come in at 55. In the UK services activity is expected to remain steady at 61, however in a worrying sign for the sector for Q2 inflation pressures in the sector are at a record high, and look set to rise further. Business optimism on the other hand saw a sharp drop in the recent flash PMI numbers suggesting that there is rising concern about the growth outlook over the rest of the year. A lot of the recent improvement in the last two months has been as a result of inventory rebuilding as businesses get ahead of rising prices by restocking while prices are lower.

Fed minutes – 06/04 – As expected the Federal Reserve raised rates at its March meeting, by 25bps, although the decision wasn’t unanimous in that St. Louis Fed President James Bullard argued for a 50bps rate rise. His argument was that the Fed funds rate needed to be at 3% by year end due to core PCE being over 4% higher than the Feds target rate of 2%. While he is probably in a minority on this point at the moment, the Fed has indicated it wants to see another 6 rate rises this year, and that at minimum one of these is likely to be a 50bps move, probably in May. This week’s minutes should give us an indication as to how much events in Ukraine tempered the Fed’s response in terms of the increase in rates and whether there was a temptation to go harder than 25bps. The FOMC also 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. The upward adjustment to the inflation forecast while significant is still well below the current level of 6.1%. Various Fed policymakers have indicated that a 50bps move is likely to be on the table in future meetings, and when you have the likes of a dove like Neel Kashkari of the Minneapolis Fed arguing the Fed would probably need to be more aggressive, then the calculus could well shift rapidly in the coming months if inflation proves to be much more persistent. US bond markets have already shifted sharply in pricing future rate hike expectations; however, they appear to be pricing the prospect that the Fed could well overtighten in its desire to rein in inflation risk. The nature of this week’s minutes could well reinforce that fear.

ECB minutes – 07/04 – At the most recent ECB meeting the central bank signalled contrary to expectation that it would be tapering its asset purchase program steadily over the summer, with a view to ending it in Q3. This was a little unexpected as was the ECB removing the language that rates could be lower than they currently are. The move helps to open the central banks options with respect to potentially raising rates by the end of this year, although it doesn’t mean that they will. This hawkish pivot merely serves to underline what a bind the European Central Bank finds itself in. We’ve subsequently seen government bond yields push higher across the bloc, however it’s difficult to really see what else the ECB can do at this point. We are already hearing from the Northern European countries about their concerns over rising inflation with Joachim Nagel the head of the Bundesbank amongst may governing council members talking about the need for tighter policy. Recent comments from a number of ECB policymakers suggest there is rising concern that the ECB is behind the curve and this week’s minutes could well offer insights as to how significant this concern is.

ASOS H1 22 – 08/04 – The last 12 months have been ones to forget for the ASOS share price, with the shares down over 70% from their March highs last year. The reopening of the economy post pandemic has seen sales growth slow with the company warning of between 10% to 15%, while profits were also expected to decline due to higher freight, delivery and labour costs, as well as a huge increase in returns costs. In Q1 the company said that total group revenue rose by 5%, to £1.39bn, helped by a 13% increase in the UK business. Full year guidance was left unchanged with revenue growth expected to be in the range of 10% to 15% and adjusted profits before tax expected to be between £110m and £140m. on the 21st February ASOS delisted from the AIM market and was admitted to the main market. Management said this would incur costs of between £10m and £15m. On the 2nd March, the company issued a profits warning as it suspended sales in Ukraine as it became impossible to serve customers there, and also suspended sales in Russia. These two regions represent 4% of revenue and about £20m of group profit.

THG FY21 – 06/04 – Just under a year ago, Softbank turned out to be the biggest participant in a fund-raising process by management to help fund the next leg of its expansion program. The $1.6bn investment was intended for its Ingenuity business which will be separated into a subsidiary operation, standing separate from the rest of its operations. Since then the share price has plunged over concerns about the wider governance of the business, as the current management team fell out with investors over how the business was being run. Softbank must have mixed feelings given how much the share price has plunged since they put in their investment. THG needs to articulate a vision for unlocking value in its various business and more than anything else move the share price off its recent record lows. In terms of performance the business is growing revenues. In September the company posted a 44.7% rise in H1 revenues to £958.8m, with the beauty division being a notable outperformer, contributing a 59% rise year on year, while nutrition was the weakest division with a 30.2% gain. At the time THG said they might look to spin off the beauty business sometime in 2022 in order to maximise shareholder value, as well as starting the process of creating separation for all of its trading divisions. There has been little to no progress on this, and management need to lay out a process for this. While revenues have seen a big uplift, H1 losses increased to £81.3m, compared to a loss a year ago of £49.9m. for Q4 the trend of outperformance continued with the Beauty business once again leading the way, growing revenues by 36.7% to £407.9m. For the full year revenues are expected to rise 35% to £2.18bn, with the CEO Matt Moulding saying that full year revenue growth for 2022 is expected to rise by 22%-25%.

Levi Strauss Q1 22 – 08/04 – When Levi Strauss reported its Q4 numbers back in January, net revenues saw an increase of 22% to $1.7bn, while also citing a 350bps improvement in profit margin of 57.8%. For the full year, revenues came in at $5.8bn, a 29% rise on 2020, while net income rose to $554m. Despite those solid numbers the shares have declined to their lowest levels in 15 months, largely due to concerns about the retail outlook, as well as declining consumer confidence. For the new fiscal year Levi said it expected to grow net revenues by 11% to 13%. Profits are expected to come in at $0.41c a share for Q1.

Constellation Brands Q4 22 – 07/04 – Constellation Brands profits beat expectations in Q3, coming on at $3.42c a share, however the losses in its Canopy business knocked up to $0.31c a share off that headline number. Net sales also beat expectations, coming in at $2.32bn, although they were still below the levels seen the year before. The numbers continued to be driven primarily by its beer business, which saw sales growth of 4.5%. Sales in the wine and spirits segment were disappointing, with shipment volume declining 38.6% in Q3. Despite this the company raised its comparable EPS guidance for 2022, with the company saying it expected net sales growth of 10-11% for the beer segment, while wine and spirits is expected to decline 21-22%. The company also announced a partnership with Coca Cola to launch FRESCA mixed cocktails in the US. Profits are expected to come in at $2.12c a share for the quarter, and full year profits of $10.50-$10.65c a share excluding the Canopy business.