Michael Hewson MSTA CFTe
CMC Markets
- Bank of England rate meeting – 22/09 – put off by a week as a period of national mourning takes place due to the death of Queen Elizabeth II the UK central bank could follow in the footsteps of the ECB two weeks ago by raising interest rates by 75bps, although UK policymakers have been slightly more silent about the need to hike aggressively. Whether this is by accident or design only they know, but with the battle for the UK Prime Minister position putting the central bank right at the forefront of the affray, their competence has never been more scrutinised. It’s been no secret amongst a lot of people in financial markets that the Bank of England has been notably one-dimensional when it comes to dealing with the problems of the UK economy since 2008. The consistent groupthink, and the unwillingness to acknowledge its mistakes mean that it’s inevitable that questions are raised about its competence. These same questions are being directed at its peers overseas as well, and yet these same financial markets who have criticised the central bank approach of the last ten years are now freaking out that these mandates could be changed. The problem isn’t so much the mandates, but that central banks have singularly been unable to meet them. This week the Bank of England will in all likelihood raise rates again with the market split between the prospect of another 50bps rate move, or a more aggressive 75bps hike. How much will the new fiscal measures to freeze energy bills, announced by the UK government influence the latest decision? While this month’s move is likely to cap the upside and prevent the sort of double-digit numbers touted by Citigroup and Goldman Sachs, it still won’t make it any easier to bring inflation levels down, even with last week’s modest decline to 9.9% in the August numbers. What was slightly more worrying is the increase in core prices which would appear to show inflation becoming stickier. The challenge the Bank of England faces now is not so much trying to stop inflation rising, they also need to drive it lower, and that arguably is likely to be a lot harder. Current market pricing is tilted slightly toward 75bps than 50bps, however with the Fed set to do 75bps the night before the Bank may well have to match that in order to help keep the value of the pound above the 1.1000 level.
- UK Mini Budget – 23/09 - new Chancellor of the Exchequer Kwasi Kwarteng is set to deliver a mini budget this week in the wake of the recent decision to impose a price cap on gas and electricity prices for the next two years. This week’s event should also give us an indication of how much taking this action could cost, and what other measures the new Truss government might take when it comes to resetting the economic agenda, over the next two years. Will we see the reversal of the rather misguided increase in National Insurance in April, and will the increase in corporation tax, which is set to kick in next year, be reversed. These should be easy wins as they were criticised extensively at the time, which means that reversing them should be an easy win. The bigger question is whether Kwarteng goes further, and more importantly what measures he takes to protect business from the same energy price rises that consumers are protected from. A failure to act decisively here could prompt a tsunami of unemployment in the coming months, so the stakes are high.
- US Federal Reserve rate decision – 21/09 – the last 2 months have seen US CPI fall back quite sharply from 40-year highs of 9.1% in June, to 8% in August, although core prices have proved to be slightly stickier. A few months ago, such a decline in US inflation would prompt a considerable amount of speculation about the prospect of a Fed pivot, and the prospect of that the US central bank might embark on a set of smaller interest rate rises. The fact that it hasn’t says much to the change of tone by Fed chair Jay Powell at Jackson Hole at the end of August when he indicated that the central bank was in any mood to pivot on rate hikes yet. The consensus from various Fed policymakers is that the Fed will continue hiking until the job is done. When you have the likes of a typical Fed dove like Minneapolis Fed President Neel Kashkari talk about the unlikely prospect of rate cuts in 2023, it’s hard to envisage a scenario of anything other than a 75bps rate hike this week, as the Fed continues to insist that their priority is to keep going on rates until the job is done. This also ties in with several FOMC members indicating they expect to see the Fed Funds rate at between 3.5% and 4% by year end. With US economic data continuing to look resilient and a number of US policymakers talking about front loading rate hikes you have to think that after last week’s CPI numbers, and the jump in core CPI, that the Fed will do another 75bps rate hike at the very least this week. The softer option of a 50bps rate move is now very much off the table, with some suggesting that a 100bps move could be on the cards, which some eminent voices appear to be calling for. This would be unwise as it would indicate that the Fed is panicking and could send completely the wrong message to markets. The Fed needs to show it is in control of events and raise rates by 75bps but also indicate that further substantial rate rises would be forthcoming until there is clear evidence that inflation is starting to come down at a sustainable rate.
- Bank of Japan rate decision – 22/09 – the monetary policy stance of the Bank of Japan this year has been very much a global outlier and has contributed to the decline of the Japanese yen to a 24 year low against the US dollar. While other central banks have been tightening policy the Bank of Japan has been leaning in the opposite direction pledging to keep rates firmly negative at -0.1%. Its therefore not that surprising the yen has been in decline, prompting endless speculation that the Bank of Japan might feel compelled to intervene to stem the decline in the currency. Last week it did just that by checking rate levels in a sign that it was becoming concerned at the speed of the decline in the yen. This intervention was a significant escalation to recent statements that they were assessing recent currency moves, raising the question as to what might be coming next. Headline inflation levels in Japan are still well below the levels seen in Europe and the US, although they are now above 2%, rising to 2.9% in August. For the Bank of Japan to even consider a pivot we would probably need to see CPI move above 3% on a more permanent basis, however last week’s rate check does change the importance of this week’s meeting. Will the BoJ indicate that it might be prepared to raise the upper limit on 10-year yields which are currently capped at 0.25%. The reality is that the yen will continue to decline unless or until the Bank of Japan announces a policy shift or the Fed indicates it might be close to a pivot. Neither looks likely now which means the yen could well decline further to 150 against the US dollar.
- UK/Germany/France flash PMIs (Sep) – 20/09 – we continued to see weakness in the headline PMI numbers for August with UK economic activity seeing a significant hit, as manufacturing slipped to 47.3, while services was slightly more resilient although it still slipped from 52.6 to 50.9. The increase in energy prices along with consumer confidence at record low levels is weighing on consumer spending and broader economic activity. Uncertainty about a government policy response to the prospect of an 80% rise in the energy price cap for October appears to be having a chilling effect on economic activity. The announcement of a 2-year prize freeze is likely to add some certainty to consumer budgets and perhaps prompt an uplift in the coming weeks. In Germany both manufacturing and services activity slipped into contraction territory of 49.1 or manufacturing and 47.7 for services. Will we see an improvement here or is there worst to come? In France economic activity has been slightly more resilient with manufacturing at 50.6 in August and 51.2 in services. This is because the French government has been protecting French consumers from the worst effects of the spike in prices, albeit at a huge cost as it had to bailout EDF Energy.
- Kingfisher H1 23 – 20/09 – the Kingfisher share price has traded sideways since the company posted its Q1 trading update back in May. Earlier this month the shares briefly traded at their lowest levels since July 2020 but have since recovered some ground on the back of the recently announced energy price package that was announced by the UK government. Expectations in Q1 were quite low given the tougher comparatives from the year before, and while like for like sales fell by 5.8%, to £3.25bn, this was much better than the -8.1% predicted. A lot of the outperformance was due to a strong performance from its Poland operation, which saw a 50% rise in sales. On a pre-pandemic basis sales are still significantly above the levels seen at the time, a rise of 16.2%. Full year guidance was left unchanged, with adjusted pre profits expected to be in the region of £770m, and the retailer announcing a £300m share buyback, the first tranche of which was completed in July.
- Cineworld H1 22 – 22/09 – what to make of the slow train wreck that has been the Cineworld share price, as it files for Chapter 11 bankruptcy protection in the US. In August Cineworld shares fell sharply after the cinema chain announced that recent admission levels had come in below expectations, and that it may well have to take action to bolster its balance sheet and restructure its finances. This turned out to be code for possible bankruptcy with management blaming a limited film slate that is expected to continue until November 2022, potentially impacting the company’s liquidity position in the near term. This reasoning rang a little hollow given that its sector peer AMC Entertainment posted a much better than expected quarter, citing record admissions. This raises all sorts of questions over the competence of the current management, who just over a year ago courted controversy with a pay and bonus scheme, which given the problems facing the business suggests a skewed sense of priorities. This week’s H1 update is likely to give an indication of how bad things are, and which bits of the business are likely to be sold off to raise extra funds as it looks to cut its huge debts.
- JD Sports Fashion – H1 23 – 22/09 – it’s not been a great year for JD Sports share price despite the retailer finally getting round to publishing its full year results in June. Revenues of £8.56bn came in line with expectations, while profits before tax more than doubled rising to a record £654.7m. The delay to the numbers was due to a number of factors largely around the impact that the forced sale of Footasylum would have on its numbers. For 2023 the company said it expected pre-tax profits to be at a similar record level to this year, with the focus securing the replacement of Peter Cowgill, which was achieved in July with the appointment of Andy Higginson who used to be chairman of Morrisons. In July JD Sports said that current trading for the first 5 months of the year saw total sales up by 5% on last year. Despite recent weakness the shares do appear to be finding a bit of a base at around the 100p level, with the recent energy price fiscal package announced by the UK government helping to put a floor under the sector in recent days.
- Carnival Corp – Q3 22 - 23/09 – the cruise industry like most in the travel sector has had a difficult two years. Pre-pandemic in 2019, annual revenues were $20.8bn, and don’t look like getting anywhere near that much before 2023. At the end of its 2021 fiscal year annual revenues collapsed to $1.9bn, and while we’re on course to beat that number quite comfortably, as well as the 2020 number of $5.6bn, it will be some time before normal service is resumed. For Q2 the company posted a bigger than expected loss of $1.9bn, while revenues fell short at $2.4bn. While disappointing the numbers were still much better than Q1, while occupancy rates rose to 69% from 54% in Q1, as booking volumes almost doubled. Carnival said it still expects to post a net loss of in Q3 as well as for the full year, while occupancy rates are expected to return to historical norms in 2023. Against such an improvement in the outlook, it was surprising a month later when Carnival announced it was raising another $1bn in share capital, so soon after doing the same thing in May. This prompted the shares to fall back sharply, however they soon recovered as investors took the view that it was better late than never, and at last management appeared to be serious in looking to reinforce the capital position of the company given its high debt levels. Losses are expected to come in at $0.21c a share.
- Darden Restaurants Q1 23– 22/09 – when Darden Restaurants posted its Q4 numbers back in June, the shares were trading close to 18-month lows, as rising prices and collapsing consumer confidence raised concerns that footfall could see a decrease as customers prioritised grocery and fuel spend over the luxuries of eating out. Somewhat surprisingly, the owner of the Olive Garden, and Longhorn Steakhouse managed to confound the pessimism as revenues beat expectations coming in at $2.6bn, while profits slipped back to $2.24c a share, which was better than forecast. The decision to raise prices by 3% also helped and didn’t affect same store sales which rose by 11.7%, helped largely by its fine dining business at “The Capital Grille” which has seen sales rebound to 2019 levels. Its revenue outlook for the new fiscal year is for $10.2bn to $10.4bn, assuming an inflation rate of 6%, although the profits outlook fell short of analyst expectations, coming in between $7.40c and $8 a share. The company also announced a $1bn buyback program. Profits are expected to come in at $1.56c a share.
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