The week ahead - Federal Reserve and Bank of England set to outline possible rate cut path

1) Federal Reserve rate decision – 07/05 – It's no secret that President Trump wants the Federal Reserve to cut interest rates, his criticism of Jerome Powell reflects that desire, however up until recently none of the economic data pointed to a US economy that is struggling. Sure, consumer confidence data has been weak, however the labour market appears to be holding up well, while inflation appears to be drifting back to target. That was until the publication of US GDP numbers which showed the US economy contracted by -0.3% in Q1. This sudden slowdown when compared to the 2.4% seen in Q4 of last year was a major surprise, however the numbers were massively skewed by a huge jump in imports as US companies bulk bought ahead of the imposition of steep tariffs in April, while government spending also slowed. Other measures like consumption and investment held up well. Given that this import effect is likely to reverse in Q2 it's highly likely that the Federal Reserve will look through this distortion when it meets later this week. Another factor that might be worth bearing in mind is that US company costs are likely to have increased in the short term given that all of this inventory will have to be stored before being unwound. There’s another factor at play in this month’s Fed decision and that is the desire of the US central bank to not appear influenced by political noise from the sidelines as it looks to navigate the minefield which is the uncertainties facing the US economy, and the politics that is taking place on the sidelines. No change is expected but we could see a dovish message coming from the press conference.For the sake of everyone, and to use a cricketing metaphor that few of our US friends will understand, he should dead bat them all.                             

2) Bank of England rate decision – 08/05 – Will this week see the rate cut that a lot of people are calling for? Despite all the doom and gloom around the UK economy the underlying GDP numbers haven’t been too bad, although the PMIs tell a different story. That rather raises the question as to whether the ONS, which is currently struggling to issue reliable unemployment data, and has also added trade numbers to that list is fit for purpose when it comes to analysing the health of the UK economy. In mid-March the ONS delayed the release of trade data due to errors in its methodology dating back to 2023. This is a big deal given that GDP numbers rely on accurate trade data and without them they can’t paint an accurate picture of how the UK economy is doing, which suggests that recent GDP numbers ought to be taken with a pinch of salt. With doubts already swirling about the reliability of ONS unemployment and other related data, Bank of England rate setters are faced with an even more difficult task than the one they have already when it comes to whether another rate cut is needed at this point in time. Rates markets appear to think that we will see multiple rate cuts in the months ahead, especially in light of the latest manufacturing PMI numbers which have been bad for the last few months. The problem is it might not be the done deal many think that it is, and that’s before we even think about the idea that headline inflation might peak at 3.7% later this year, and that’s by the Bank of England’s own estimates, although this week could see these estimates revised lower. If these estimates are revised lower, which might happen, that could be a dovish signal. Last month we saw headline CPI slow to 2.6%, however core inflation remains higher at 3.4%, and services inflation sits at 4.7%. While the Bank of England may well cut rates by 25bps this month the reality is it might not make much difference to gilt yields in the short term. This is because even now 5-year gilt yields are still well above the levels they were in August last year when the Bank of England announced its first rate cut. All that aside, some of the thinking on the MPC may be starting to shift if recent comments from external MPC member Megan Greene are any guide. As one of the more hawkish members of the MPC, her comments in a recent interview that tariffs could be deflationary could prompt a shift in her position, as well as the rest of the committee when it comes to rate cuts in the months ahead. This means that any shift in thinking here could see the bank revise its inflation estimates lower at the May meeting. Her argument is that the UK could become an alternative destination for cheaper goods from Asia and the EU, which in turn would put downward pressure on prices, and thus shift the central banks thinking on the timing and pace of future cuts this year. It’s a plausible argument, notwithstanding the impact on demand of recent sharp price rises in various services which have kicked in this month.                   

3) Next Q1 26 - 08/05 – When Next PLC reported its full year numbers at the end of March the shares jumped higher and have been trading higher ever since after becoming the latest UK retailer to generate annual profits in excess of £1bn, an increase of 10.1%, albeit before tax is paid. The retailer saw a 5.8% increase in full price sales, pushing total group sales up to £6.3bn. Profits after tax rose 8.2% to £761m. The main thrust of these sales gains came from the online part of the operation, which saw sales growth of 5%. This figure includes brands that Next has equity stakes in like Fat Face and Joules. In terms of guidance for the new fiscal year Next upgraded its full price sales guidance for H1 to 6.5% from 3.5%, while pushing full year sales guidance up to 5%. Pre-tax profit guidance was also increased by £20m to £1.06bn. Over the last few years Next has been one of the few retailers that has been able to push up its guidance at every single quarterly trading update. Will this run of guidance upgrades continue? Recent UK retail sales data would suggest that it might, however with the shares already up 20% since the end of March, and already at record highs, there is a chance that a lot of good news may already be priced in.

4) IAG Q1 25 – 09/05 – In the aftermath of British Airways owner IAG reporting its full year numbers back in February the shares fell to their lowest levels since November last year, despite an initial pop higher. So why the fall? It's not immediately clear given that the numbers were positive. A 9% increase in total revenue to €32.1bn helped push profits after tax to €2.7bn a 2.9% increase, with operating profits surging 22% to €4.28bn. Operating margins were also strong at 13.8%. An increase in the dividend to €0.06 per share pushed the final dividend to €0.09 per share with the airline also pledging to buyback €350m of its own shares, with the option of another €1bn over the next 12 months. With BA also announcing a year ago it was looking to spend £7bn on a program of improvements to its Airbus A380 and Airbus A320neo and A321neo cabins, the airline still has some way to go before it is able to match the big Gulf carriers which appear to be setting the standard when it comes to aircraft cabin design. One other reason for recent weakness is that the carrier has a lot of US routes and perhaps there is a loss of appeal of the US as a travel destination for UK and European travellers. There may be some truth in this, however, that says more about people on this side of the pond than anything else. Choosing to punish the working people of the US who value your custom for the actions of a President who will be gone in 4-years seems rather petty.  Nonetheless it may be a factor and could mean IAG misses its revenue targets.

5) JD Wetherspoon Q3 25 - 07/05 – We’ve seen a decent recovery in the Wetherspoon share price in recent weeks, the pub chain had a decent April, its shares up 98p on their March close of 556p. In the aftermath of its H1 update the shares fell sharply, however since then we’ve seen a decent rebound. The fall in the share price felt a little counterintuitive in any case given that the numbers released were a fairly decent set of figures. We already know the pub industry is facing a difficult time with the recent changes to national insurance and the minimum wage adding £60m to the company’s costs, or £1,500 per pub per week. On all other metrics the pub chain is doing well. Like for like sales rose 5% in the seven weeks to March 16th according to Tim Martin, while H1 profits before tax rose came in at £32.9m., a modest fall from the £36m the previous year. Revenue was also higher, up 3.9% to just over £1.02bn. Over the half year LFL sales rose 4.8%, with food seeing a 5.4% increase and bar sales of 4.3%.

6) DoorDash Q1 25 – 07/05 – Before last week no one outside of the US would have heard of DoorDash, however last month's audacious bid for Deliveroo has changed that. While Deliveroo’s share price has gone one way since it IPO’d the same can’t really be said of DoorDash. Coming to market at $102 the shares spiked higher before plunging in the wake of loosening lockdown restrictions to as low as $42 in 2022 before rebounding strongly to a record high of $210 earlier this year. At its most recent set of quarterly numbers revenues rose to $2.87bn, a 25% increase on the same quarter the previous year. The company, like Deliveroo has only just recently managed to turn a profit, with Q3 of last year it was able to generate a return, a feat it repeated in Q4. In Q3 profits came in at $162m, followed by $141m in Q4. Marketplace Gross Order Value (GOV) is expected to come in at $22.6bn to $23bn in Q1, up from $19.24bn a year ago. While DoorDash didn’t offer any EPS guidance, markets are expecting another profit of about 68c a share.      

7) Disney Q2 25 – 07/05 – It’s not been a great start to the year for the Disney share price, the shares slipping back towards $80 in March and its lowest level since October 2023. We’ve seen a modest recovery since then but as a business the company appears to be struggling. Even allowing for a better-than-expected set of Q1 numbers wasn’t enough to offer a respite to a struggling share price. While its streaming business is now running a profit, the second quarter in a row it has done so there was still a decline in subscriber numbers, with the company saying it expected to see a further decline in Q2. Total Disney+ subscribers fell to 124.6m in Q1 with the international business providing the major drag. Q1 revenue came in at $24.69bn an increase of 4.8%, with entertainment seeing a 9% increase in revenue, helped by the likes of Moana 2. The parks, cruises and resorts business also saw a strong quarter with a 3% increase in revenues to $9.42bn. Profits for Q1 also beat expectations however that hasn’t been enough to prevent recent weakness in the share price. The hope is that Q2’s numbers will be able to put a base under the recent weakness in the share price and prompt a move back towards and through $100. Profits for Q2 are expected to come in at $1.20 a share.  

8) Uber Q1 25 – 07/05 – For most of the last 12 months Uber shares have traded in a $20 price range between $60 and $80 a share, having rallied from lows of $20 a share back in the summer of 2022 as it put its record of big losses behind it to start returning regular quarterly profits. In its most recent financial year the company recorded a 18% increase in passenger revenue to $43.98bn generating a 152% increase in operational income to $2.8bn. Gross bookings also increased by 18% to $162.77bn. Mobility was the main revenue generator, in Q4 accounting for $6.9bn in revenue, out of a total of $12bn, with delivery pitching up next with $3.8bn, making up a 23% increase year on year. For the outlook for Q1 Uber said it expects to see growth in gross bookings of 17% to 21%, with adjusted EBITDA growth of between 31% and 37%, roughly $1.82bn.