The Week Ahead - Bank of England, US bank stress test results, US PCE, flash PMI's, DS Smith, Nike
|- Bank of England – 24/06 – as the Bank of England gets set for its fourth meeting of 2021 the economic picture has improved further from its inflation report update from May. What was particularly notable was the central bank’s decision to announce it was reducing the amount of bonds it was buying on a weekly basis to £3.4bn, as well as raising its annual GDP forecast for the UK economy from 5% to 7.5%. At the time Governor Andrew Bailey insisted that this was an operational decision and not a tapering of asset purchases, however its hard to describe it any other way. If it walks like a duck and quacks like a duck, it’s a duck, and it would be hard to imagine the Bank of England embarking on such an action if the economy were struggling, as opposed to about to start on a growth spurt. Recent economic data has reinforced this optimistic outlook, and while there is some disappointment around the extension of some restrictions into July, this merely pushes any resultant economic rebound into July and August, assuming there aren’t any virus variant setbacks. On the unemployment front the bank also revised its estimates for that to the downside, although they acknowledged the headline rate still has room to move higher as furlough measures get eased back. Furthermore, it is also Andy Haldane’s last meeting as chief economist and he could well go out with a bang given his recently articulated concerns that the UK economy probably needs a tap on the brakes in case it careers off the road. His comments that the recovery is going “gangbusters” has seen markets start to price in the prospect of a rate hike in 2023, a not unreasonable position given that rates are still well below the levels they were at the beginning of 2020.
- US bank stress test results – 24/06 – the Federal Reserve will be releasing the latest results of its 2021 stress tests on the US banking system. Last year the central bank stopped all bank buybacks and dividends to ensure the US banking system had enough to cope with the economic fallout from the various lockdowns and restrictions placed on the US economy. At the start of this year that rule was altered so that banks that passed the various stress test scenarios could resume this process on a limited basis. All US banks that pass these latest tests will see all of these restrictions lifted from June 30th. JPMorgan Chase has already started down this road when at the end of its Q1 it announced it would be restarting its own $30bn buyback program. With bank earnings season for Q2 set to get under way in the coming weeks all eyes will be on which US banks pass this week’s stress tests and which ones will look to resume shareholder pay-outs on a more generous basis. Before one gets too carried away it is noteworthy that JPMorgan has warned that its revenues and income for Q2 could well fall short of the levels we saw in Q1 as a result of lower revenue from its trading division and lower credit card balances. CEO Jamie Dimon also warned the bank was looking to build up its cash levels over concerns about higher inflation. This could also limit the scope of returns to shareholders in the medium term.
- US PCE (May) – 25/06 – amidst all of the recent concern about rising inflation, it’s important to remember that for all of the big increases seen in recent CPI and PPI data over the past month, with CPI hitting its highest levels since 2008, that the Fed doesn’t look at either when assessing the inflation outlook. The US central banks twin mandate of unemployment and inflation uses the core PCE as its main inflation benchmark, which in April doubled from the 1.8% seen in March coming in at 3.6%, and the highest level since June 2008. This month’s May number is not expected to be immune to the continued move higher in price pressure, and further increases in the PCE deflator could well reignite market concerns about a less than transitory inflation environment. Expectations are for a sharp rise to 4%, which if it happens would be the highest level since the early 1990’s. Core PCE deflator is expected to a similarly sharp increase from 3.1% to 3.5%.
- US Personal Spending/Income (May) – 25/06 - if the retail sales numbers for May are any guide, then this week’s spending number could well be on the weak side. Since the numbers in March were boosted by the stimulus payments which also helped boost consumer personal incomes, we’ve seen a marked slowdown in both. Some of the slowdown in spending can be put down to higher fuel prices which may well have deterred unrelated consumer discretionary spending. Nonetheless for all of the optimism about the US economic rebound it is notable that retail sales growth has been patchy on a month-to-month basis. This was borne out by a flat April retail sales number suggesting a fair amount of residual uncertainty followed by a -0.6% decline in May. Personal incomes for April were also weaker, declining by -13.1% after the big March jump as the boost effects of the stimulus payments got washed through. These are expected to decline again, this time by -3%. Personal spending is likely to see a modest uptick to 0.4% in May, after the 0.5% rise seen in April, however there is a risk of a miss here given the weaker than expected retail sales number, as well as the slower rates of jobs growth seen in the past couple of months.
- UK flash PMIs (Jun) – 23/06 – In May the reopening of the UK economy took another leg to the upside building on the resilience seen in the April numbers, as optimism built up over a Q2 economic rebound that continues to gain traction. The May UK composite PMI hit a record high, along with prices paid, showing that while prices are looking a little on the hot side, they aren’t for now acting as a brake on the reopening trade. The manufacturing sector appears to have been leading this rebound, however as the recent industrial production and manufacturing numbers for April from the ONS showed, a decent PMI number doesn’t always translate into positive economic activity with declines seen in both of the official readings from these official numbers. The May services PMIs also painted a robust picture with services activity hitting a 24 year high at 62.9, while manufacturing rose to 65.6, a record high. UK companies were reporting higher demand for both goods and services, which in turn was seeing some cost push inflation, while the jobs market was also looking good with firms being encouraged to take on extra staff at a rate not seen in over three and a half years. All in all, optimism was high with the only question being whether or not what we are seeing is sustainable. This weeks June numbers could well be similarly positive, however with the extension of some restrictions into July we could we see a bit of a drop off when we get the final adjusted number at the beginning of July.
- France/Germany flash PMIs (Jun) – 23/06 - we’re starting to see slow improvements here, particularly in services PMI’s however the picture is patchy. Manufacturing continues to stand apart with both Germany and France maintaining recent resilience in April with only a modest softening to 66.2 and 58.9 respectively. Services still remains very much the laggard and while there have been attempts at reopening some parts of their economy the high levels of infection still continue to act as a drag. Fortunately, the vaccination program, particularly in Germany is starting to gain traction, however that hasn’t stopped economic activity from slipping back in the most recent April numbers which saw modest declines to 49.9, while French economic activity improved slightly from 48.2, to 50.3. With large parts of the German economy locked down until June it’s hard to see too much in the way of an improvement in the May numbers, while France is expected to underperform as well.
- Berkeley Group FY21 – 23/06 – the housing market has been on fire over the last few months, with the stamp duty holiday, as well as people’s desire for more space during lockdown driving a tidal wave of demand outside the city centres. This trend has hurt Berkeley more than most due to its predominant London exposure, where it has over 70% exposure, which has seen below trend price gains. In March Berkeley announced that it remains on track to deliver a similar profit as last year, of around £504m and forward sales expected to come in above £1.7bn for the end of the financial year. The performance of its share price appears to reflect this in that we still remain well below the 2020 pre-pandemic peaks, and have struggled to break above the 4,900p level at least three times this year alone, despite investors becoming much more optimistic about the overall outlook for 2021, with the shares being described as undervalued by the likes of JPMorgan. Despite this optimism London saw its worst quarter for home sales since 2012 earlier this year according to a report by Molior produced in April, due to a decline in demand for luxury apartments. The company said it remains committed to return up to £280m a year to shareholders by way of dividends or buybacks.
- DS Smith FY 21 – 22/06 – in February packaging company DS Smith was in the news after reportedly being subject to a £5bn bid from rival Mondi, which has seen the shares slowly edge higher these past few weeks to the best levels since late 2018. While it has gone quiet on this front, as far as trading is concerned the company has been performing well. In March the company reported a strong period of trading over the Christmas and New Year period with higher costs being passed on to customers. The company supplies packaging to the like of Amazon, Nestle and Unilever and while profits in the first half of the year halved due to higher costs the outlook for the second half was more optimistic with management pledging to resume paying the dividend as cashflow picks up. This outlook was borne out by the pre close trading statement in April that said revenues and profits were expected to be in line with expectations, due to a better-than-expected performance from its US operations.
- Fedex Q4 21 – 24/06 – parcels and logistics companies are generally good bellwethers of an economy, and US delivery company FedEx is no different. The company has also been a key cog in the US governments vaccination program, as it ships doses of the vaccine across the country. The last two quarters saw big jumps in revenues as a result of a big increase in e-commerce, as more consumers shopped on-line. Revenues in Q2 came in at $20.6bn, almost $1.2bn above expectations, while in Q3 they rose even further to $21.5bn, a rise of 23% on an annualised basis, despite freezing weather hitting some of its business. Daily package volume at FedEx Ground which counts Walmart as a partner saw a rise of 25% in shipments to 13.2m in Q3. For the full year the company expects to see profits come in between $17.60 and $18.20 a share. The shares hit new record highs at the end of May but have slipped off a touch since then. While pandemic safety measures have seen costs rise, and margins shrink, expectations are for Q4 profits to come in at $4.90, which would be a big jump on what we saw in Q3.
- Nike Q4 21 – 24/06 – Nike shares have underperformed this year; they’ve slowly slipped lower these past six months from the record highs seen back at the end of last year. The company has managed to ride out most of what the pandemic has thrown its way, although margins have come under the same amount of pressure as its peers. In Q4 last year the company posted a loss of $790m or $0.51c a share in Q4 on revenues of $6.31bn, a decline of 38% from a year before, due to the lockdowns across Europe and the US, which followed on from the disruption in China. The resilience in the share price has been primarily driven by sharp rises in digital sales which saw a rise of 82%, in Q1, and an 84% rise in Q2, helping to push revenues up 9% to $11.2bn, Q3 revenues were slightly disappointing, coming in lower at $10.36bn due to shipment delays in the US. This was offset somewhat by a 60% rise in online sales in EMEA, as profits rose to $0.90c a share. As we come to the year end expectations for Q4 are similarly elevated as the summer months approach and restrictions get eased across EMEA, while Chinese demand is expected to remain fairly decent. Expectations are for Q4 profits to be slightly softer at $0.496c share, while full year revenues are predicted to rise over 15% to $43.25bn.
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