The Week Ahead - China Q2 GDP, retail sales, US CPI, retail sales, UK CPI, US banks Q2 results

UK CPI (Jun) – 14/07 – One of the main concerns that has been worrying investors this year has been the potential for a sharp rise in inflationary pressures, and these concerns have become more amplified this year in the wake of supply chain, as well as Brexit related disruption, along with similarly big surges in US and Chinese inflation as well. These concerns have served to push bond yields up from where they were at the beginning of this year, with a lot more talk about when central banks might look at paring back some of their monetary policy support measures. Rising factory gate and commodity prices have merely served to reinforce these concerns, and we are already starting to see early evidence of having to pay higher prices, notably in terms of higher air fares and other transport costs, however these appear to be merely a symptom of normalisation from the big falls we saw a year ago when the economy went into lockdown, and as such are unlikely to be repeated which means they are transitory in nature, a trend that appears to be being reflected in recent moves lower in bond yields. Food prices more generally haven’t been showing any signs of upward pressure which is probably the more important narrative. That’s not to say we won’t start to see sharp upward moves in headline CPI over the coming months. We’ve already started to see it in PPI which has been trending higher since the end of last year when it was at 0.2% and in April hit 9.9%. If this translates into a leading indicator for CPI, we could start to see a move towards 2% CPI in fairly short order. In April headline CPI jumped to 1.5, from 0.7%, while core prices rose to 1.3%. If the US experience last week is any guide, we can expect to see further jumps in both of these numbers, towards the Bank of England mandated target of 2%, with headline CPI expected to jump to 2.3%.

UK Unemployment (May) – 15/07 - The pound has spent the last few weeks treading water, with the rise in Delta variant cases seeing a little bit of a pause to the reopening process until July. This shouldn’t be reflected in the latest ILO unemployment numbers for May which are expected to show the number of people on furlough continuing to reduce as the economy continues its reopening process. This week’s May numbers look set to mark a slight rise in the UK ILO rate to 4.8%. In April the UK ILO unemployment slipped back to 4.7%, having been as high as 5.1% back in December. It remains clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic, which means the very real effects on the UK labour market won’t start to be seen until Q3 at the earliest, as the furlough scheme continues to wind down. For now, the outlook continues to remain positive despite the one-month delay to a full reopening. The monthly jobless claims numbers are also reflecting this improving trend, falling back to 6.2% in May, a sharp fall from the 7.2% we saw in March. This trend of lower claims may slow in June after the delay to reopening into July.  The outlook for unemployment continues to look more positive than negative, as we come into the middle of the summer, however we do need to prepare for a move back higher as furlough measures start to unwind. A lot of jobs that were around over a year ago, may still not come back, and the missing of the June deadline, could well be the final straw for some businesses. The Bank of England has already indicated that it expects unemployment to go higher, but not by as much as they thought in February when their projections were for a peak of 7.7%. This was adjusted lower at the last inflation report, to 5.2% for this year, and then down to 4.7% in the second quarter of 2022.

US Retail Sales – (Jun) - 16/07 – US retail sales have been fairly stop-start this year, with the significant amounts of fiscal stimulus, helping to drive a rebound in consumption, but the recovery has been patchy with significant numbers of US consumers choosing not to spend all of their stimulus windfalls. This is borne out by recent personal spending data which apart from a couple of decent months has been fairly muted. May retail sales saw a decline of -1.3%, a much bigger decline than expected, following on from a 0.9% rise in April. This year alone we’ve seen two negative months and three positive months, with the two strong positive months driven by the stimulus payments that were delivered in January and March. This appears to be a confidence thing for US consumers, and while we are seeing an improvement in the labour market the lower-than-expected number of job gains in the monthly payrolls numbers does raise questions as to what is going on in the US economy. Home sales are weak and prices are rising across a range of products. Against this backdrop and with inflationary pressures rising we could see another weak figure when this week’s June figures get published. While the US is doing well on the vaccine rollout plans and the reopening of the economy, with theme and holiday parks also reopening, there still seems to be an overriding feeling of caution around consumer spending patterns which appears to be tempering retail sales. Higher fuel prices probably aren’t helping either with an expectation of a decline of 0.5% for June.       

US CPI (Jun) – 13/07 – markets have been quite choppy over the last few weeks with the recent sharp rise in inflation exerting upward pressure on short term rates. There is a concern that while the US Federal Reserve may consider the sharp rise in prices as being transitory and being subject to base effects, there are a growing number of investors who fear that these pressures might become more persistent, though this has subsided somewhat in the past few days. Over the last few months, we’ve seen US CPI jump sharply from 1.4% at the end of last year to 5% in May, significantly above expectations, with the threat there could be more to come if PPI prices are any guide. Core prices have also surged to 3.8%, from a similarly low level. A big component of the recent increases was a big rise in used car and truck prices which have risen sharply along with higher energy costs. In the aftermath of these numbers, as well as a big rise in PPI prices there has been much debate as to how much of this will drop out of the numbers and thus be transitory. If the recent May PPI numbers are any guide, we could well see an even higher number, given how much PPI tends to be a leading indicator for CPI, as we look towards this week’s June numbers. While Fed officials have admitted that inflation has been higher than initially anticipated, they still remain confident that these pressures will subside. As a reminder May PPI jumped to 6.6%, its highest annual level in over 10 years. Expectations are for headline CPI to remain steady at 5%, with core CPI which excludes food and energy expected to rise to 4%, from 3.8%.   

China economy - Q2 GDP/Retail Sales (Jun) – 15/07 – earlier this year there was some surprise that China’s estimates for 2021 GDP growth were set at around 6%, with some arguing it was too optimistic and others saying it was too conservative, particularly since there has been little signs of a second wave. The jury remains out on how well the Chinese economy is actually doing, with retail sales showing some signs of gaining traction, although all of this year’s numbers have to be set in the context of an enormous skew, due to the shock of the pandemic lockdowns a year ago. On Friday the People’s Bank of China cut its banks reserve requirement ratio by 50bps in a sign that the world's second biggest economy may not be anywhere near as robust as first thought, which could be an arbiter of concern for this week’s economic numbers for June. While industrial production has managed to rebound fairly easily over the past few months’ consumer sentiment has been much more cautious, and it could be this that has Chinese authorities worried. In Q1 the Chinese economy grew by 0.6%, a number that was surprising in terms of the strength seen at the end of Q4 which showed growth of 3.2%. On an annualised basis this was still a decent rebound of 18.3%, however it needs to be set in the context of a -6.8% decline in Q1 2020. This week’s Q2 GDP numbers are expected to see an expansion of 1%, while June retail sales are expected to rise by 10.9%, down from May’s 12.4% gain. Industrial production is expected to come in lower as well, down from 8.8% to 8%.

ASOS Q3 21 – 15/07 – the last few months have seen ASOS share price trade sideways despite a decent H1 trading update from April. Having acquired the brands of Topshop, Topman, Miss Selfridge and HIIT brands for £265m, in February, fully funded from cash reserves, the company now has a host of other brands to add to its catalogue, while the integration costs came in lower than expected. in the first half ASOS reported a rise in gross profits of 19% to £890m on revenues of £1.98bn. This has resulted in adjusted profits before tax rising by 275% to £112.9m, despite slightly higher costs of £15m due to Brexit, a number which was reported back in January. Part of the reason for the lack of upside could well be down to the fact that most of its business is online and with the UK economy on a reopening trajectory more people are likely to be keen to go out and shop having spent all the winter indoors. This may well affect trading for Q3 although management remained confident that despite the easing of restrictions full year forecasts were still in line with expectations.    

Dunelm Q4 21 – 14/07 – another retailer that has been able to ride out the worst effects of the pandemic, despite the various store closures and restrictions it has had to contend with over the last 15 months. When the company reported back in April total sales were down 16% from this time last year, at £236.6m. This shouldn’t be a surprise given that stores will have been closed for all of its Q3. To offset that digital sales rose 92.4% with total sales year to date up by 10% at £956m. This Q4 will have seen all of its store real estate reopen and with that the potential for a huge jump in pent-up demand. Management said they expect to end the year modestly ahead of full year profit estimates of £120m-£125m even with the repayment of the furlough money which was announced in February. Having paid an interim dividend of 12p a share, could management be tempted to pay a final dividend as well?

Burberry Q1 22 – 16/07 – at the end of last month Burberry CEO Marco Gobbetti announced he was stepping down after four years at the helm and returning to Italy as CEO of Salvatore Ferragamo, based in Florence. Tasked with turning the business around back in May 2017 he appears to have largely succeeded although challenges still remain, with the share price only modestly higher from when he took over, over concerns as to who would replace him. This is a real concern given the problems the company faced when Angela Ahrendts left with shareholders perhaps fearing a similar outcome. When Burberry reported their full year numbers back in May the results were a mixed bag, largely as a result of store closures due to covid restrictions. Full year revenues came in at £2.34bn, as adjusted pre-tax profits came in at £365.7m, both above expectations, as China sales improved. There was disappointment over its guidance with respect to margins for the upcoming year, with management citing headwinds in the form of increased investment and expenses normalisation.   

US Bank earnings Q2 21 – JPMorgan 13/07 - at its last set of numbers JPMorgan blew away consensus expectations on both profits and revenues for the second quarter in succession. Revenue for the Q1 period came in at $33.12bn, topping the $30.4bn estimate.  Investment banking revenue came in above expectations at $2.85bn, as did equities and trading revenue which rose to $3.29bn, while the steeper yield curve helped fixed income rise to $5.76bn. The bank also released another $5.2bn in loan loss reserves having released $2.9bn in Q4 as non-performing loans proved to be much less onerous. With the US economy increasingly looking more resilient, and these provisions now at a still elevated $25.5bn, there is the chance that we could see further declines in provisions given the Federal Reserve’s recent decision to allow the resumption of buybacks and dividends from 30th June. This is already raising expectations of seeing more cash released from reserves in the form of extra dividends and cash. The biggest problem facing JPMorgan right appears to be too high expectations, something that CEO Jamie Dimon appeared keen to stress last month when he warned that the banks Q2 performance was unlikely to match that of Q1. Trading revenue could well be lower than the consensus estimates of $6.5bn as lower yields and volatility impact turnover. Dimon also played down expectations over loan demand and income after a bumper Q1. The trend over loan demand was also notable in its Q1 numbers which the bank said was likely to remain challenged, while deposits rose 24% year on year to $2.3trn. While having so much cash on its balance sheet is a nice problem to have, it also speaks to a difficult lending environment. It would appear that higher long-term rates are impacting on housing loan demand, a trend currently being reflected in the latest housing numbers, while small business lending was down 50% compared to the same quarter a year ago. While the shares appear to be rising on the basis of expectations of higher pay outs in the coming quarters, it may well also be worth noting to see whether the underlying Q2 numbers point to challenges for the US economy due to concerns about higher interest rates. CEO Jamie Dimon also warned last month 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, however the bank still seems confident enough to promise to boost its quarterly dividend to $1 a share. Profits are expected to come in at $3 a share.

Goldman Sachs Q2 - 13/07 – also followed a crushing performance in Q4 with a similarly crushing performance in Q1, with profits coming in at $18.60c a share, well above expectations of $10, while revenues also surged, coming in at $17.7bn, $5bn more than expected. The bank exhibited outperformance in all areas, with equities revenue up 68% to $3.69bn, and FICC revenue up by 31% to $3.89bn. There was some concern about possible losses in light of the blow up of Archegos Capital, however these proved to be misplaced. The bank appears to be leaning its future focus towards a greater focus on risk management, however like JPMorgan the lack of volatility on Q2 could well see expectations pared back. Like JPMorgan they have also promised to boost the dividend to $2 a share, from $1.25c. Profits are expected to come in at $9.35s a share. 

Citigroup Q2 - 14/07 - Citigroup had a decent start to its new financial year, posting profits of $3.62c a share in Q1, though revenues were softer at $19.3bn. The main headline however was that Citigroup announced it was retreating from retail banking in 13 markets across Asia and Europe, including in China, India, Russia and South Korea. Income also got a boost after Citi rotated $3.9bn out of loan loss reserves back into the business, as the bank upgraded its outlook for the US economy. Like JPMorgan last month Citigroup also issued a warning over its trading revenues for the latest quarter. The lower levels of volatility relative to last year was always going to be a challenge, for all of the US banks, however Citigroup also pointed to slower loan growth due to consumers sitting on the proceeds of their stimulus payments. This was an issue that JPMorgan also pointed to at its numbers in Q1. Profits are expected to come in at $2 a share, while management have promised to pay a dividend of at least $0.51c a share, which is a little disappointing given that it appears to be the only US bank not to increase its payout. 

Morgan Stanley Q2 - 15/07 - at the end of last year Morgan Stanley saw full year net revenues hit a record of $48.2bn, while net income rose to $11bn, from $9bn the year before. A strong Q4 helped drive these record numbers with revenues coming in at $13.64bn, well over $2bn above estimates. The outperformance was once again driven by investment banking as well as the equities trading division, which saw revenues surge by $350m above estimates. The new fiscal year and Q1 saw this trend continue with profits coming in at $2.22c a share, on net revenues of $15.7bn. The equities and FICC divisions both posted better than expected top line numbers, with the acquisition of E*TRADE more than likely helping to boost the numbers here, when compared to a year ago. The bank was also exposed to the Archegos Capital collapse which cost it $911m in provisions, a figure that could increase further. With the Fed relaxing its dividend and buyback restrictions we could see profits boosted by releases from credit reserves. Q2 profits are expected to come on at $1.64c a share, with the bank promising to double the quarterly dividend to $0.70c a share, and buying back $12bn of its shares.

Coinbase Q2 21 – 15/07 – it’s been three months since Coinbase listed on the Nasdaq back in April and to say the share price performance has been less than impressive would be an understatement, with the shares languishing just above $200. On the first day of trading the shares shot up above their $250 reference price peaking at $381, before sliding back. In their prospectus the company said it expected to make between $730m to $800m in Q1. The company also said it had 56m verified users and that it expected to turn over $1.8bn in the first three months of its fiscal year. When the company confirmed these numbers in its May update, they were pretty much in line, but the market reaction was disappointing. Q1 net income came in at $771.5m, while revenues rose to $1.8bn, which was still more than the company turned over in the whole of 2020. It was a little lower than market expectations and probably helps explain why the shares have struggled a little. With all the volatility being seen across the crypto space maybe expectations were a little on the high side. The number of verified users was confirmed at over 56m. In terms of the outlook, management were somewhat cautious predicting flat transaction volume for Q2, though they did revise up their guidance on the number of monthly transacting users to 7m from 5.5m. Talk of crackdowns and increased regulation could also weigh on the numbers in Q2, along with recent declines in bitcoin and cryptos in general this week’s Q2 numbers could be at risk of missing expectations. Profits are expected to come in at $2.41c a share.