Michael Hewson MSTA CFTe
CMC Markets
- UK CPI (Dec) – 18/01 – after the peak of 11.1% in October, headline CPI fell back to 10.7% in November in a welcome sign that we could well be past the peak. Recent falls in oil and gas prices are also likely to start to feed into the underlying numbers, while PPI inflation has also been falling in recent months, though given problems with the PPI calculations we haven’t had clear visibility on that in the past couple of months, as the ONS reviews the calculation on that. This week’s December inflation numbers are expected to show that inflationary pressures continue to subside, however they are still forecast to remain in double digit territory. We already know that food price inflation is trending in the mid-teens, which means that headline CPI is expected to remain above 10%. This means that we can expect to see another significant rate hike from the Bank of England when it meets in just over 2 weeks’ time.
- UK Wages/Unemployment (Nov) – 17/01 – one of the few bright spots as the UK grapples with the rising cost of living has been that wage growth has been shown to be strong, although we did see a small uptick on October unemployment to 3.7%. Putting that to one side the number of payrolled employees for November rose by 107k to a new record high of 29.9m, which should be reflected in this week’s ILO numbers. Wage growth also saw a healthy increase, pushing up to 6.1%, and the three months to October, and the highest level outside the pandemic since 2001. Looking behind the headline numbers for wages there have been sizeable localised variations in wage increases, with some areas of the UK seeing average hourly pay rising by over 20%. The increase in payrolled employee numbers in November also appears to suggest that people are returning to the labour market as the rising cost of living alters the economic calculus when it comes to paying the bills.
- China Retail Sales/Q4 GDP (Dec) – 17/01 – the last 2 months China trade numbers have shown a Chinese economy that has seen economic activity and demand collapse in the face of surging Covid cases, as well as popular revolt against its zero-covid policy. The decision to drop the policy in the face of this opposition while welcome is likely to have other unwelcome side effects in an explosion in infection rates, which is likely to hamper any recovery. With Chinese New Year approaching there is concern that this could be exacerbated in the coming months which means any recovery is demand is likely to be patchy. It also means that any prospect of a rebound in December is likely to be premature with the possibility we could see the economy contract by -0.8%. We already know that October retail sales fell by -0.5%, the first negative print since May, followed by a -5.9% decline in November. This week’s retail sales numbers for December are forecast to see a -8.3% decline with industrial production expected to slow from 2.2% in November to 0.5%.
- Bank of Japan – 18/01 – in the wake of its last meeting the Bank of Japan surprised the market by widening the band of its yield curve control to between -0.5% and +0.5%, from +/-0.25% sending the yen surging in a move that caught the markets completely off balance. The recent weakening of the US dollar had been a welcome boost for the BoJ and had put the Japanese yen beyond the previous intervention levels of just below 150.00 meaning that Japanese policymakers were expected to be much more relaxed about where the yen is, than they were two months ago. It would appear that with current governor Kuroda set to leave in April that the BoJ wanted to start seeding the ground for a possible shift in the coming months especially since the new PM Kishida had indicated he might be open to tweaking the central bank’s mandate. This week’s meeting is therefore likely to be much more of a focus even as the 10-year JGB rate tested the upper bound of the YCC band as the markets tested the BoJ’s resolve in the wake of last month’s policy tweak. The central bank has been consistent in maintaining that they aren’t in any rush to make major adjustments to its yield curve control policy for now, but the sharp rise in the Japanese yen in the past few days to 6-month highs, suggests markets want to test this resolve as we look to see whether the Japanese central banks resets market expectations.
- US Retail Sales (Dec) – 18/01 – US retail sales saw a bigger than expected decline in November of -0.6%, their biggest fall in 11 months, even as consumer confidence starts to rise in the wake of falling energy prices. It was notable that the biggest falls came in the more expensive categories of cars, electronics, and furniture, while sales in restaurants and bars rose, the fourth successive month that we’ve seen an increase. The sharp slide in spending does suggest that higher rates are starting to have an impact despite a resilient labour market. For most of last year US retail sales have been strong, so a slowdown was long overdue with the wider question being whether we’re starting to see an increase in caution as we head into the Christmas period. The unseasonably cold weather during December could also have hit US consumer spending with an expectation that we could see another negative print of -0.5%.
- Ocado Q4 23 – 17/01 – had an awful 2022 share price wise, sliding to 5-year lows back in October at 380p, although since then the shares have undergone a decent rebound, peaking at 938p in November before slipping back. While its business with M&S has been struggling and is now expected to see a small sales decline over the full year 2022, with core earnings set to come in at about break-even, the company has been adding extra capacity, with the Bicester fulfilment centre now fully open, adding 30k orders a week at maximum capacity, against a backdrop of rising costs. In Q3 customer numbers were up 23% to 946k, while retail revenue came in at £531.5m. The number of average orders per week rose by 10.7% to 374k. Ocado said Q4 sales were likely to be affected by energy cost headwinds, which would in due course weigh on profitability. Average basket sizes however were lower, down 6% from £123 to £116, as customers traded down to cheaper items. The announcement of a partnership deal with South Korea’s Lotte Shopping saw the shares surge during November. Lotte Group is one of the biggest businesses in South Korea with total annual revenues of around £45bn, while the shopping arm has annual revenue of £9.5bn. Ocado will be supplying the knowhow to improve the groups online business offering in South Korea
- Burberry Q3 23 – 18/01 – luxury retail has managed to outperform the wider market when it comes to share price performance, Burberry managed to eke out a gain in 2022, despite the impact of a weak sales in its China business due to covid lockdowns and other restrictions. The shares are back at levels last seen in the summer of 2021. A strong performance in Q2 outweighed weakness in Q1 with comparable store sales for Q2 improving to 11% from 1% in Q1, pushing H1 sales up by 5%. Asia Pacific was the underperformer declining 4% in H1, with mainland China sales declining 19% during the first half. The Americas was also a poor performer seeing a decline in same store sales of 3%. Europe, Middle East, and India came to the rescue with H1 sales of 34%. Adjusted operating margins improved by 150bps to 17.7%. Pre-tax profits increased to £251m from £191m a year ago. This weeks Q3 numbers are expected to repeat the pattern of Q2 with underperformance in Asia Pacific, although the Americas could improve on the back of the recent weakness in the US dollar.
- Deliveroo Q4 22 – 18/01 – the Deliveroo share price does appear to have found some sort of a base at around the 75p level, and the lows in October. It has struggled to maintain momentum above the recent highs in November at 104p, but there is some optimism that the worst may well be behind it, even though at its Q3 numbers, management downgraded expectations for Q4 sales growth. Gross Transaction Value (GTV) saw an increase of 8% year on year, with the UK operation outperforming international markets, rising by 11%. Consequently, Deliveroo downgraded its full year guidance on GTV growth to between 4% to 8%, due to concerns about consumer disposable income, and the squeeze on disposable incomes. There was some good news as EBITDA margins were revised higher to between -1.2% and -1.5%, which suggests the company is making progress on reducing its costs by way of lower marketing spend. The company also took the decision in November to exit its operations in Australia.
- Goldman Sachs Q4 22 – 17/01 – since the lows of June last year Goldman Sachs share price has risen steadily, rallying to just shy of $390 in November. A combination of rising rates and a more resilient US economy has helped to underpin the shares in recent weeks, however there are some signs that some areas of the business are struggling with reports of thousands of job losses starting to emerge in recent weeks. In Q3 revenues beat expectations, coming in at $11.98bn, with most areas of the business outperforming. Trading was an area which stood out with Q3 revenues coming in at $6.2bn, well above forecasts of $5.69bn. FICC sales was the main outperformer in this area, generating $3.53bn of that total, well above forecasts of $3.04bn. Investment banking fell short at $1.54bn and this is an area which might see the majority of the job cuts. Goldman set aside another $515m in respect of credit losses, while costs also increased during Q3 with large losses expected to be seen in its new retail operation. Profits beat expectations in Q3, coming in at $8.25c a share, but are expected to be much lower in Q4, at $6.05c a share.
- Netflix Q4 22 – 19/01 – the last few months have been positive ones for the Netflix share price, finding a base last May the shares have risen by more than 75% since then. In Q3 the shares got a further lift after paid memberships rebounded by 2.41m, well above expectations of 1m. Total subscribers are now at a new record high of 223.09m with Netflix saying that they expect this to rise 4.5m to 227.59m in Q4. Q3 revenues also beat expectations coming in at $7.93bn, beating forecasts of $7.85bn, while profits came in at $1.398bn, or $3.10c a share, helped no doubt by the finale of Stranger Things 4 which ended on a bit of a cliff-hanger. Non-English programming has also continued to act as a big revenue earner with APAC and LATAM revenue both showing a 19% increase. APAC saw 1.4m adds there with Latin America adding 0.3m. Q4 revenues are expected to come in at $7.78bn, while net income is expected to fall to $163m or $0.36c a share, while operating margin is expected to fall to 4.2%, down from 8.2% a year ago. Netflix appears to be blaming the strength of the US dollar for the headwinds with respect to its Q4 expectations. From the tone of the shareholder letter, it’s clear that Netflix doesn’t expect a material contribution from the new ad tier in Q4, which started on November 3rd, and recent indications do suggest it has got off to a slow start. On the other hand, the recent weakness of the US dollar should help on the revenue front. As the company looks ahead to 2023 Netflix has said it would no longer be publishing guidance of subscriber numbers, and that they wanted investors to focus on the key metrics of revenue, operating income, margin and net income.
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