Fed minutes, RBA rate decision, services PMIs, tesco H1 numbers, UK data

1) Global Services PMIs (Sep) – 05/10 – after the slowdown seen in Q2, the manufacturing sector has managed to hold up reasonably well. The recovery in the services sector has been another story with the recent flash PMIs in Germany and France slipping back into contraction territory. This is an increasing concern, particularly for the weaker countries like Italy and Spain who tried to boost economic activity by way of tourism in the summer months, and who now appear to be paying the price for that with increased infection rates, with Spain especially having to impose new stringent lockdowns. The additional imposition of quarantines and other travel restrictions in the last two months is likely to see further economic deterioration in September. In August Spain and Italy saw contractions of 47.7 and 47.1, and it's unlikely that September will be much better, at a time when France services PMI is expected to be confirmed at 47.5. It hasn't been all bad news, as we've seen the UK and US services numbers continue to improve, while Chinese services activity has also held up fairly well. The fear now is that with the European recovery stalling and the quarantines being imposed on travellers across Europe is that the European recovery grinds to a halt, at a time when it appeared to be finally gaining traction.

2) RBA rate decision – 06/10 – given the current economic climate and the weakness seen in the Australian economy there had been some speculation that we might see the RBA cut rates this month from their current record low of 0.25% to 0.1%. This expectation has been dialled back a touch with the recent rally in the US dollar which has pulled the Aussie off its recent peaks at 0.7400. In the absence of a rate cut we might see the RBA lean in the direction of further QE which is likely to be more effective than a nominal rate cut. Unemployment rate is already at its highest level since 1999, at 7.5%, and is expected to move up to 9.25% by year end. Despite this rise in unemployment there has been little indication so far that the RBA appears inclined to do any more than it already has done in terms of supporting the economy, while the lockdowns across the state of Victoria of Melbourne do now appear to be having an effect in slowing the virus. This could help stay the RBA's hand when it comes to further easing, however whether it comes this week or next month markets are now pricing in the possibility of further easing measures by year end.

3) UK Services PMI (Sep) 05/10 - In the UK there appears to be slightly more optimism, though that's because the UK recovery is slightly behind Europe's. The UK showed a continuation of the improvements from July, in August with a figure of 58.8, while the recent flash PMI for September showed a much more resilient 55.1, which, if confirmed would draw a line under an impressive quarterly rebound, after the lows of Q2. This is in marked contrast to the contractions expected to be seen in France and Germany's numbers, however confidence is much lower here after the recent new restrictions announced by the UK government in response to a rise in localised infections.

4) UK GDP (Aug) – 09/10 – since the record -20.4% contraction in April the UK economy has undergone a gradual month on month rebound in economic activity. In May we saw the economy grow by 1.8%, and then 8.7% in June, followed by a 6.6% rebound in July. Due to the slow and gradual re-openings of various businesses we are likely to see a similarly positive reading in August, with "eat out to help out" giving a significant boost to economic activity. This week number may not be quite as good as it gets given that September may well also be a decent month, but economic activity from here on in could well start to tail off significantly as we head into Q4 in the face of tighter restrictions, and concern over a no deal Brexit.

5) UK manufacturing/industrial production (Aug) – 09/10 – as with everything else in recent months we've seen a solid rebound in manufacturing and industrial activity in Q3 and this looks set to continue in August, with the fourth successive monthly gain expected in the manufacturing sector. Recent manufacturing PMIs have been very solid and this week's August numbers are likely to confirm this direction of travel for both manufacturing and industrial production, as well as construction output. The reality is that even with all the economic re-openings that have happened since July it will be enormously difficult to claw back the rest of the lost output quickly given the new restrictions being imposed and while social distancing remains in place, as this will continue to act as a handbrake on further improvements.

6) FOMC Minutes – 07/10 – the most recent Fed meeting didn't really tell us too much beyond what Fed chairman Jay Powell outlined at Jackson Hole. The lack of action did prompt a bit of a market tantrum; however, we did get slightly more detail on their new policy of average inflation targeting. The central bank did pledge to keep rates well anchored until 2023, or at least until inflation has been higher than 2% for quite some time. That's certainly an ambitious bar for their new policy given that over the last 20 years core PCE has only been above 2% twice in the last decade, during a short period in 2012, and for most of 2018, when the bank was in the middle of a series of rate rises. The Fed's main problem was the proximity of the November US election. It also remains far from clear how the Fed will achieve a policy goal that they have already found very difficult to meet over the last 20 years. The discussions between the various MPC members will also be instructive in terms of the dissents of Minneapolis Fed chair Neel Kashkari, and the Dallas Fed's Robert Kaplan standing apart from the consensus, for different reasons. Kashkari dissented because he wanted a stronger commitment to not raising rates for the foreseeable future, while Kaplan dissented because of concerns that the commitment to a lower for longer policy would encourage over excessive risk taking.

7) Tesco H1 21 – 07/10 - when Tesco reported its full year numbers back in April, there was some criticism that it was paying a dividend to shareholders at a time when it was benefitting from a business rates tax cut, along with a host of other measures designed to help the hard pressed retail sector ride out the lockdown in the UK economy as part of the coronavirus pandemic. This may well be a valid criticism, however Tesco, along with the rest of the supermarket sector has faced challenges of its own as a result of the crisis, albeit ones of a different degree. A sharp rise in costs, of up to £840m, as the company added 4,000 new positions since March, along with the risks to its staff of staying open to feed the nation has presented its own challenges not only to its supply chain, but also to its ability to meet and boost its on-line, as well as physical delivery targets. In Q1 the group saw a 7.9% increase in group like-for-like (LFL) sales in the first quarter, with the UK seeing an 8.7% rise. The company also spent £4m in more than doubling its delivery capacity from 600k to 1.3m slots per week. In June the company announced the sale of its loss-making Polish business for £181m which had been one of the key drags on profitability. Tesco Bank has also been a drag with expectations of a full year loss of up to £200m. One main advantage Tesco does have is the size of its stores, which makes social distancing a little bit easier, however its margins have continued to come under pressure from the likes of Aldi and Lidl who have continued to grow their market share, as well as take on new staff. Tesco in response has also announced plans to boost its own delivery capacity with the announcement that it will be adding 16,000 new jobs due to recent changes in customer shopping habits. Before the pandemic Tesco on-line sales amounted to 9% of sales, and this has almost doubled to 16% in the space of 6 months.

8) Electrocomponents Q2 20 – 08/10 – is a distributor of industrial and electronics products, under the umbrella of six separate brands, serving over 1m customers in 80 countries. At its last trading statement, the company reported revenue declines in all of its key markets, largely as a result of the shutdowns in the three-month period to June 2020. Northern Europe saw the biggest fall with a fall of 14%, despite all of the company's distribution centres remaining operational, throughout the period. Asia Pacific saw the smallest decline of 4%, with China and Australia helping with a positive performance during the quarter. The economic re-openings seen in Q2 are likely to see a much-improved performance in Q2, with June likely to see the strongest rebound. The company's RS Pro brand saw a return to growth in June, with management taking steps to maintain and its gross margins. In terms of the current fiscal year management did warn that revenues would probably be £3m lower due to fewer trading days than the previous year.

9) Levi Strauss Q3 20 – 06/10 – this well-known brand has seen its share price struggle since the company was IPO'd at the beginning of last year. The underperformance, has been particularly disappointing given that the company is actually profitable, unlike most of last year's tech stock flotations. In Q2 the company saw sales fall 62% as well as announcing that it was cutting 15% of its global workforce. The company which has a sizeable store foot print saw the company post a Q2 loss of $0.48c a share, excluding one off charges, slightly above market expectations of $0.41c a share, on revenues of $498m. When you compare that to the $1.51bn in revenues posted in Q1 that is quite a sizeable impact This week's Q3 numbers are expected to see a marked improvement, however investors are still expecting to see a loss of $0.22c a share. At its most recent update, the company reported it had total liquidity of up to $2bn, and while its inventory levels are high management remain confident that they will still be able to shift it in the coming months.

10) Delta Airlines Q3 20 – 09/10 - was one of the few airlines at the end of last year, that was having a good year, largely down the fact that it didn't have any Boeing 737 MAX's in its fleet, with record revenues and decent profits, helped largely by sales of Premium class tickets. In the space of three months this had been turned on its head with CEO Ed Bastian having to go cap in hand to the US government, along with the rest of the airlines sector, for a portion of a $25bn bailout of the entire sector. As airlines slowly try to resume operations normal business has struggled to get back to anywhere near normal. Business travel, which was a big earner for Delta has fallen off as companies realise that lots of meetings can take place just as easily on Zoom and other remote conferencing facilities. In Q2 the company reported a net loss of $5.7bn as passenger numbers declined 93%, and revenues dropped 91%. In September the airline announced it was looking to raise $6.5bn in new bonds and loans, backed by its SkyMiles loyalty program in order to help bolster its balance sheet against a slowdown that is likely to last a lot longer than originally envisaged. Airlines globally had been hoping that a resumption of capacity to levels above 60% of normal would take place by the beginning of Q4. This now looks like wishful thinking with September capacity likely to be 60% below last year's levels, and unlikely to pick up quickly any time soon, which means we could start to see the beginning of further accelerated job losses over the rest of the year. In Q2 Delta expected to add 1,000 new flights to be scheduled in July and August, however management quicky had to cut this back to 500. Q3 losses are expected to come in at $2.97c a share.