The week ahead – Bank of England, ECB and US non-farm payrolls, BT group, shell and Vodafone results

Bank of England rate meeting – 03/02 – the Bank of England’s December decision to unexpectedly raise the base rate by 15 basis points to 0.25%, by an 8-1 majority, came as a bit of a surprise, after the decision not to act in November by 7-2. Nonetheless it did appear to mark a significant shift in mindset from where they were only a few weeks before. One can only presume what prompted the change of heart, but it was still a welcome change from the groupthink narrative that appears to be becoming increasingly embedded in the economic discourse right now. Two interventions may well have been crucial, firstly the IMF urging the Bank of England to get on with it, and UK CPI hitting 5.1% and RPI hitting its highest levels in 30 years at 7.1%. Since those November numbers came out, we’ve seen December CPI move even higher, to 5.4%, with an expectation that we could hit 6% by April. This expectation could well see another rate rise this week, this time nudging rates up to 0.5%, from 0.25%. While some have suggested that this won’t do anything to curtail the effect of supply chain disruptions, that rather misses the point. Interest rates can’t stay at zero forever, at some point central banks will need to pull them off the floor if only to buy themselves some space to cut them again at a later stage. No-one is suggesting for one moment that central banks go on a rate hiking spree, however if they are to retain any degree of credibility when it comes to their core mandate, they need to start by taking the risk of more embedded inflation much more seriously. Bank of England Governor Andrew Bailey has gone on record as stating it isn’t his job to steer financial markets on interest rates, which comes across as remarkably naïve thing to say. Maybe he needs to look closer at his job description, and talk to his peers at the Federal Reserve and the ECB, because it is his job, and the sooner he realises that the better.

ECB rate meeting – 03/02 – despite EU CPI hitting a record high of 5% in its latest monthly numbers, ECB President Christine Lagarde has continued to insist that the central bank is not inclined to look at raising rates this year. In January Lagarde said that there was less urgency for the ECB to act because the EU recovery was well behind that of the US, and that most of the rise in prices was likely to be temporary in nature. This comes across as incredibly naïve especially when you look at PPI prices across the region, which are at record highs in some cases. In Germany, December PPI rose by 5% in a single month, and by 24.2% year on year. These levels are higher in Spain and Italy, at 33.1% and 27.1% respectively and its unrealistic to expect none of that not to filter down into headline CPI. Nonetheless the main focus for investors will be how the ECB manages its messaging around the end of its PEPP program next month, and whether it looks at increasing its APP program to compensate. This is currently running at €20bn a month. One other thing to keep an eye on will be new Bundesbank President Joachim Nagel after he fired a broadside at the ECB last month warning that the bank needed to be vigilant given his concern that inflation risks are very much elevated to the upside and could last a lot longer than expected.

US non-farm payrolls (Jan) – 04/02 – what is happening with US payrolls, with the last two months of 2021 posting very weak headline numbers, although on every other measure the jobs report have been decent ones. In December, the US economy added 199k jobs, an 11 month low, and well below the 450k consensus. It was also well below the ADP report of 807k. The November number saw a modest revision higher to 249k, however unemployment continued to fall back, coming in at 3.9%, and back to the levels it was pre-pandemic, while the participation rate came in at 61.9%. Wages were also more resilient, rising 4.7%, well above expectations of 4.2%, while the November numbers were revised up to 5.1% from 4.8%, and helped to drive the early year rise in yields we saw at the beginning of last month. The key takeaway from the December report would appear to be that, while there are plenty of vacancies, there appears little appetite to fill them. In both November and December, the number of jobs added has been disappointing, which would suggest that even with US employers having to pay up to get people back into the workforce, workers don’t appear to be in a hurry to return, despite over 10m vacancies, and only 3m fewer workers. As we look ahead to this week’s January report, there appears to be a lot more caution around consensus estimates, with expectations of around 178k, and the unemployment rate set to remain steady at 3.9%.

EU flash CPI (Jan) – 02/02 – currently at a record high of 5%, another move higher will increase the pressure on the ECB to modify its message when it comes to inflation risk. The high levels of inflation are already causing howls of protest from some of the thriftier parts of northern Europe, and while the ECB can reasonably argue that core prices are much lower, even these are well above the ECB’s inflation target of 2%, at 2.6%. Having seen supply chain pressures increase further in December it wouldn’t be a surprise to see this week’s flash CPI numbers rise even further away from the central bank’s inflation target. This week’s estimates for January are also likely to be influenced by events a year ago which saw a big jump in the January 2021 inflation numbers, due to the reintroduction of regular VAT rates and additional climate measures which boosted German CPI by over 2%. That means that we could well see headline CPI fall from 5% to 4% due to one-off effects from last year, with core prices set to fall from 2.6% to 1.7%. The ECB will inevitably paint this as evidence of their argument that inflationary pressure is transitory, and now falling, even though it is nothing of the sort, as can be seen from how PPI has continued to rise to record levels.

European PMIs (Jan) – 01/02- 3/02 – despite evidence that the German economy slowed by -0.7% at the end of last year, we did see evidence that sentiment could be turning in the latest flash PMI numbers for January. In December German services activity slipped into contraction territory, and its lowest level since February last year, however January activity rebounded back into expansion territory of 52.2. Manufacturing also improved, rebounding to 60.5 from 57.4 in a move that feels very counterintuitive given all the reports of supply chain disruptions caused by Omicron. Economic activity in France in January was a little more mixed in the latest flash numbers with services activity slipped back to 53.1, from 57, while manufacturing remained steady at 55.5.

UK Services PMIs (Jan) 03/02 – December saw a sharp fall in UK services sector activity, to 53.6 from 58.5 in November, a trend that continued in January due to the Plan B restrictions brought in by the UK government half way through the month due to concerns about the Omicron variant. A slide to 53.3 and an 11-month low was still disappointing, but it was still much better than what we saw over 12 months ago when the economy was locked down for all of January and February. The restrictions on the hospitality sector clearly hit pubs and restaurants, as well as some retail outlets, and with weak consumer confidence amidst surging inflation, we could find that the next two to three months struggle to move back to the levels we saw at the end of Q3. Manufacturing, which is due on the 1st is expected to come in at 56.9, a slight fall from December’s 57.9.

BT Group Q4 22 – 03/02 – since BT reported back in November the shares have slowly edged their way back to levels last seen in mid-July after the Telecoms giant said it delivered on its cost-savings program ahead of schedule, and that Q2 EBITDA came in at £1.88bn, with revenues coming in line at £5.24bn, bringing total revenues for H1 in at £10.3bn. This was a decline of 3% from a year ago. Enterprise and Global remains the weak spot for BT. The Openreach fibre to the premises (FTTP) network has now reached 6m premises, with average expected build costs lowered to £250 to £350 per premises, helping to keep profits just above £1bn, a decline of 5%. There has also been chatter about potential bid interest for its Openreach division, which on the face of it isn’t new, but is also starting to get a bit boring. There is very little upside in selling off the one part of the business that is likely to drive growth over the next few years. Nonetheless the underperformance in the share price has already seen a £2bn investment from Altice back in June, and which was topped up to an 18% stake in December, which many have suggested could be a prelude to a takeover bid sometime in the next few months. While Altice President Patrick Drahi said that he wasn’t interested in making a bid in the short term, that certainly doesn’t preclude him getting more involved if he feels certain things could be done differently, or more effectively. BT has already taken steps to free up extra cash by reportedly agreeing a deal to offload its BT Sport channel for around £580m to DAZN. Negotiations are still ongoing and there is interest from other parties, with Discovery said to be interested in a joint venture.

Shell Q4 22 – 03/02 – Royal Dutch Shell shares, now known as Shell, have been one of the early winners at the start of this year, getting off to flier, pushing up to their best levels since February 2020 last month. The rebound in oil and gas prices has certainly helped its overall position after the shock of its huge write-downs and losses of 2020, however a disappointing Q3 update prompted calls for the company’s break up from activist shareholder Dan Loeb’s Third Point Group. This appears to have come about from frustration amongst some shareholders with respect to the underperformance of the business, with the argument being that Shell is trying to serve two masters and that you can’t be all things to all people. In September Shell sold its Permian Basin business to ConocoPhillips for $9.5bn, promising to return $7bn to shareholders, and pay down its debt which fell to $57.5bn. Adjusted earnings for Q3 came in at $4.13bn, well below expectations of $5.42bn, and also sharply below Q2’s $5.53bn. The number was a particularly poor outcome, even accounting for the disruptions from Hurricane Ida, which cost the business $400m, as well as higher costs elsewhere. With natural gas prices at record highs in Europe, and at multi-year highs in the US, shareholders appear to think the company should be doing better, and they would be right. Shell management said they expected to see a much better performance in Q4. They had better be right or we could see other shareholders join Third Point in ramping up the pressure on senior management.

Vodafone Q3 22 – 02/02 – Vodafone shares have had a sticky few months since reporting some decent H1 numbers back in November. Last week the shares hit their highest levels since June last year on reports that it was discussing a deal with Iliad to merge their respective Italian operations. European telecom providers have had to deal with a considerable hit to their revenues over the past 2 years due to weaker roaming revenues due to lower levels of cross border travel, while at the same time having to plough billions of euros into 5G to support the future growth potential of the wider business. In November Vodafone reported Q2 revenues of €11.39bn pushing H1 revenues up to €22.49bn, beating expectations of €22.1bn. This was a 5% improvement on the same period last year driven primarily by a decent performance in Germany which saw a rise of 1.2% in service revenue. Vodafone guided expectations to full year adjusted EBITDA to the top end of its forecast range, moving to between €15.2bn to €15.4bn, while adjusting its free cash flow forecast upwards to €5.3bn, however the risks to this come from a slowdown in its German business which accounts for a good chunk of revenue, and where the economy struggled at the end of last year.

Amazon Q4 21 – 03/02 – the slide in the Nasdaq 100 these past few days has seen Amazon share price fall to its lowest level since the summer of 2020, with the shares down over 20% from the record highs seen back in November. When the company reported back in Q3 there were increasing signs that Amazon was starting to see a slowdown in profits growth due to sharply rising costs. Sales have remained strong coming in at $110.8bn, slightly below the $111.8bn expected, in Q3, however profits came in at $6.12c a share, well below expectations of $8.96c a share. A large part of the reason for the profits miss was a significant increase in costs, which rose by an extra $2bn, with half of that in wages. Amazon Web Services was a bright spot in Q3, revenues came in at $16.1bn, increasing quarter on quarter this year, and well above expectations. In Q2 they were $14.8bn and Q1 $13.5bn. The online store saw a drop in revenue from Q2, falling below $50bn to $49.94bn, down from $52.9bn. For Q4 Amazon said it expected to see much higher sales than Q3 – between $130bn to $140bn, with the holiday period helping to drive up sales, however they also warned that costs were also likely to go up significantly, by an extra $4bn, raising the prospect that the company might not make a profit in Q4. The reason for the big increase in costs is wages as the business looks to hire an extra 250k people globally for the holiday period, with various incentives like signing on bonuses. This would take overall annual expenses close to $20bn, a big increase from the $12bn expected back in the first quarter for this year. Profits are expected to come in at $3.89c a share.

Alphabet Q4 21 – 01/02 – has also seen a fall in its share price in recent weeks, falling below its 200-day MA for the first time since April 2020, earlier this month. In Q3 the company had another decent quarter, generating record profits, despite fears that Apple’s privacy changes might hit its advertising income. Total revenues came in at $65.12bn while profits rose to $18.9bn or $27.99c a share. Google’s cloud division was a notable outperformer as it continued its trend of reducing the level of its losses, as it attempts to play catch-up to the market leaders of Amazon and Microsoft in this space. Google was able to shrug off the worst effects of the Apple privacy changes due to its heavier focus on its own Android operating system which hasn’t been affected by those changes, although its revenues from YouTube did see a modest drag because of the iOS changes. Revenue from advertising came in at $53.6bn and helped offset the shortfall in YouTube ad revenue and Google Cloud Sales. YouTube revenue came in at $7.2bn, below the consensus of $7.5bn, while cloud revenues came in at $4.99bn, below consensus of $5.04bn. Nonetheless, this comes across as nit-picking at a time when costs have gone up sharply due to the recruitment of 18,000 extra staff over the last 12 months. The rise in costs appears to be a recurring theme for a lot of companies, however it’s not expected to be such a big issue for the likes of Alphabet with expectations that we could see Q4 profits of $27.38c a share.