The week ahead: ECB meeting, UK autumn budget, UK banks, Facebook, Microsoft and Apple

ECB rate meeting – 28/10 – With all the chatter about possible rate rises before the end of the year from other central banks, one central bank looks set to remain on the side lines for some time to come. In September the ECB announced it was slowing the pace of its monthly PEPP bond buying program, over the next three months, which is currently at €80bn a month. There will be a wider discussion on its future in December, but it was made clear that the number could be moved in either direction if required. There has certainly been an increase in anxiety levels amongst some parts of the governing council due to recent sharp rises in CPI levels. In Germany they are back at levels last seen in the 1990’s above 4%, which is prompting a lot of disquiet about an overheating housing market. It is certainly true that headline CPI is at a ten year high of 3.4%, however core prices are much lower, and still below the ECB’s inflation target of 2% at 1.9%. Despite this a number of ECB policymakers have expressed concern that the governing council is underestimating the inflation risk, according to the last set of minutes. As far as the economy is concerned President Lagarde expressed concern at the beginning of October, that growth was likely to be impacted by the rise in energy prices and disruption to supply chains, and as such any exit from pandemic measures would need to be handled carefully. This week’s upcoming CPI numbers aren’t likely to soothe these concerns, especially if they continue on their upward trajectory.

UK Autumn Budget – 27/10 – What else can we expect from this week’s Autumn budget in addition to the 1.25% National Insurance hike that’s coming next year? The Chancellor of the Exchequer no doubt has a tricky balancing act to navigate at a time when the National Debt is at a record high and government borrowing is already trending at around £20bn a month. Inflation is surging with the price of energy and food leading the way higher at a time when furlough is ending and government support from the pandemic is coming to an end as the Universal Credit uplift rolls off. We could see the government offer additional support to help vulnerable households over the winter period, though it’s unlikely they will go as far as the French government who have just announced a one-off €100 voucher scheme to 38m low- and middle-income families aimed at offsetting the impact of rising energy prices, which will go to everyone who earn less than €2k a month. It should be remembered that next year is an election year next year for Macron. The government is already coming under increasing pressure to deal with climate change, and with COP26 next month has embarked on a pledge to reform the energy sector, as well as unveil a plan to get to net zero. We could hear about how the government intends to go about encouraging households to replace gas boilers with heat pumps, as well as help motorists transition to electric vehicles. While a noble sentiment we haven’t heard anything about how the government intends to plug the gap between transitioning away from fossil fuels and building grid capacity to support the increased use of electric powered transportation. As we have seen, when the wind doesn’t blow and the sun doesn’t shine, we need something else to plug the shortfalls if gas goes the way of oil and coal in powering the country. The government’s current strategy seems to be based on the hit and hope variety where they set out a goal without any idea of how to get there. The government also needs to look at business rates which are now completely archaic and no longer fit for purpose with traditional retail stores getting clobbered at the expense of the online retailers who have cleaned up these past 18 months. At his last budget Rishi Sunak trumpeted his so called 130% “super deduction” for the investment in plant and machinery assets. He’ll need to do something similar when it comes to investment in green energy, as well as investing in apprenticeships and steering young people away from useless degrees. 

US Q3 GDP – 28/10 – As we look ahead to the first iteration of US Q3 GDP, the main question is how much of a slowdown we’ve seen since the confirmation of 6.7% growth in Q2. Consensus is for a slowdown to 2.3% in Q3, as a combination of rising delta variant cases, weaker demand, and supply chain disruptions act as a brake on the economic rebound. A collapse in consumer confidence, higher prices, and a slowdown in hiring in the US jobs market appears to have contrived to prompt a bit of a pause for US consumers, after the fairly strong start to 2021. One notable takeaway from the first two quarters of this year has been the resilience in personal consumption which rose 11.4% in Q1 and 12% in Q2. If we do get a substantially weaker reading in this week’s Q3 numbers it is here that it is likely to manifest itself, although the number could well be skewed by the tough comparatives of a year ago which saw personal consumption rise by 41%.

EU Q3 flash GDP - 29/10 – Its set to be a similar picture for EU Q3 GDP, with the preliminary releases for France, Germany, and Italy also due to show a slowdown in economic activity, in the wake of this week’s ECB rate meeting. Having seen a decent Q2 rebound as lockdown restrictions got gradually eased it seems quite likely that we’ll see a stabilisation in Q3, and perhaps a little bit of a slowdown as well.  Recent PMI data has shown that economic activity peaked in Q2, and while we’ve seen a bit of a slowdown, the fall off hasn’t been that bad, with consumers across the EU appearing reluctant to spend their excess savings all at once. Political uncertainty in Germany hasn’t helped while the rebound in services elsewhere has been hindered by slower vaccine rollouts, as well as various travel restrictions.  

EU CPI (Oct) flash – 29/10 – In the past few months EU CPI has jumped sharply there has been a significant increase in chatter amongst some ECB policymakers that the central bank needs to start calling time on its PEPP program, given the sharp rises we’ve started to see in the headline CPI numbers. This increase in volume was prompted by a sharp rise in August CPI to 3% from 2.2% in July. This remains well below the levels in the UK and the US, however the does have form when it comes to acting prematurely when it comes to inflation. It is true that headline CPI shot up to 3% in August, and a ten year high, however core CPI is much lower at 1.6%, and has generally been a much more accurate reflection of EU inflation over the past ten years. If we get another pop higher in this week’s September flash numbers, then we can probably expect the volume to go up a notch when it comes to a slowdown in the pace of monthly PEPP purchases. ECB President Christine Lagarde did make a nod to this at the recent meeting at the beginning of the month by announcing it was slowing the pace of its monthly PEPP bond buying program, over the next three months, which is currently at €80bn a month. There will be a wider discussion on its future in December, but it was made clear that the number could be moved in either direction if required. On current numbers the EU has a lesser inflation problem than others, however the recent surge in energy prices will certainly help to sow further debate amongst the hawks and the doves on the ECB governing council, with expectations of another new high of 3.7%, while core CPI is expected to rise to 2%, from 1.9%.

Bank of Japan rate meeting – 28/10 – Another central bank unlikely to be in a hurry to tighten monetary policy is the Bank of Japan. They’ve been trying for nearly 40 years to try and engineer some sort of price inflation and growth. At the last meeting the central bank painted a bleaker outlook for exports and output, due to the various supply chain disruptions, and factory shutdowns which have blighted the economy in the past few weeks. Whether it be low vaccination levels and high infection rates the Japanese economy remains in a difficult place. While inflation is rising in the rest of the world the latest Japanese CPI numbers have remained stubbornly in negative territory for all but one month this year, sliding -0.4% in August. With a new Prime Minister and an election pending in November, the bank will carry on as normal, as well as likely cutting its inflation forecasts and GDP forecasts, although the slow easing of restrictions at the end of September should offer some respite, to what remains a difficult outlook, and a backdrop of rising costs.

HSBC Q3 21 – 25/10 – When HSBC reported its H1 numbers back in August the numbers were quite impressive, although it was notable that revenues were lower, which may help explain why the share price reaction has been rather underwhelming this year. Compared to its UK peers the shares have underperformed, although the performance in recent weeks has seen a marked improvement. A lot of this underperformance, particularly in Q2 is likely to be down to concerns about its Asia business and worries about its exposure to the Chinese property sector, as well as the crackdown on various parts of the Chinese economy, which has seen a sharp slowdown in economic activity across the region. Since the lows in September the shares have managed to rebound over 10%, and while they are in positive territory year to date, they are still below the highs of the year. These May peaks came in the aftermath of its Q1 numbers back at the end of April, which saw the UK’s largest bank, and one of the biggest in Europe, report profits after tax of $4.6bn. Most of the bank’s profits came from its Asia business with the improvement in Q1 seeing the bank recycle $400m of last years $8.8bn of loan loss provisions back onto the balance sheet. Management cited an improvement in the economic outlook of its UK business as part of the reason for the return to profit with mortgages doing particularly well. The UK business was able to generate profits of $1bn in Q1 because of this improved demand, a trend that continued in Q2, with another $1.1bn in profits. In Q2 profits after tax improved again, coming in at $3.9bn, a much better than expected outcome, despite lower revenues. The headline numbers were helped by the bank releasing another $300m from provisions for non-performing loans, on top of the $400m released in Q1. This saw H1 profits after tax come in at $8.4bn with the bank announcing an interim dividend of $0.07c a share. The 4% decline in revenues was largely down to lower interest margins across all of the bank’s global operations, which fell from 1.43% a year ago to 1.21%. In common with its peers HSBC reported a decent increase in lending over the period, rising $21.5bn in the first half. As we look to this week’s Q3 numbers and the strong performance of the major US banks the main focus for HSBC will be whether the various problems in China’s property sector, and the fall out around Evergrande has impacted its business in a material fashion, or whether the actions to limit its exposure has had a material cost. Other considerations will be whether the bank is able to release further reserves, and whether its margins have improved after dropping to 1.21% at the end of the previous quarter.

Lloyds Banking Group Q3 21 – 28/10 – The banking sector has been a notable outperformer this year, with Lloyds share price up close to 40% year to date. In July when the bank released its H1 numbers, profits came in at £3.9bn, helped by a strong performance in Q2. The bank also released another £333m from loan loss reserves, on top of the £323m in Q1 taking the total on H1 to £656m. The performance of the underlying business also saw improvements as net interest margin rose to 2.51%. In Q1 Lloyds said they expected NIM to be more than 245 basis points, up from 240 at the end of the previous quarter, so the Q2 upgrade to 250bps for the rest of the year was very welcome, although it’s still below last year’s 2.59%, although the recent steepening of the yield curve could see margins improve further. On the customer side mortgages saw an increase of £7.5bn to £447.bn, for H1 while deposits also grew to £474.4bn, a rise of £23.7bn. In terms of the wider economy the loan book structure saw declines over the quarter in SME and corporate lending, suggesting that while consumers appear to be spending again, businesses are a little bit more reluctant to open the purse strings. The hope was that this would improve as the reopening of the economy continued apace however it has become clear that in recent weeks economic activity has slowed, while higher prices are starting to affect consumer behaviour. As we look to this week’s Q3 numbers its quite likely, given the slowdown in the UK economy, that mortgage demand will have slowed as the various tax measures to support the housing market roll-off. The bank has already resumed dividends and given how well it has been doing the bank could look at buying back some of its shares or issue a special dividend. One notable announcement earlier this year was the acquisition of Embark which is a wealth management and pensions company and is due to complete in Q4. This will add another £35bn of assets under management and complement its Scottish Widows business.    

NatWest Group Q3 21 - 29/10 – Has been leading the way when it comes to share price performance year to date, although it is a very low bar given the problems the bank has faced over the past few years. The share price has gone from strength to strength this year, building on its gains this year, as it continued to improve its profitability in H1. Last year the bank set aside large provisions in respect of non-performing loans, which like its peers it is now drip feeding back onto the balance sheet. In Q1 the bank was able to release £102m back on to the balance sheet. This was followed by another £605m in Q2 helping to boost H1 profits by £707m, due to the low levels of loan defaults. As a result, Q2 pre-tax profit came in at £946m, helping to push H1 profits to £1.84bn, with the bank taking the decision to resume the dividend, declaring an interim payment of 3p per share. The bank also said it plans to buy back £750m of its own shares in the second half, after the Bank of England removed restrictions on payouts in the summer. Over the year the bank has seen customer deposits increase, with £5bn being added over Q2, and £12.1bn over the first half, while also seeing loans increase due to higher levels of mortgage lending, which rose by £7bn in the first half. This is expected to slow and possibly decline in Q3 as normal life returns to a semblance of normal, and various government support measures for the UK economy get removed. A major weak point for NatWest has been net interest margins which are amongst the thinnest in the UK banking sector and slipped back to 1.61% in Q2, well below last year’s 1.89%. These should improve in the coming months with the recent increases being seen in UK rate markets. The bank said it expects to distribute a minimum of £1bn per annum to shareholders from 2021 to 2023 via a combination of ordinary and special dividends.

Whitbread H1 22 - 26/10 – The hotel and hospitality has borne the brunt of the various lockdowns over the course of the past 18 months, with the owner of Premier Inn seeing a 71.5% plunge in revenues in 2021 to £589.4m. As we come to the first half of its new fiscal year the company has the added advantage of having bolstered its balance sheet to the tune of a £1bn rights issue last year, and a £550m green bond in March. With overseas travel this year pretty much off limits to most people Premier Inn is in the perfect position to take advantage of a resurgent summer season. The company’s packaging of rooms on an individual basis, supplemented with various meal deal opportunities ought to offer a decent platform for its more touristy locations to offset the low occupancy rates in city centres. The company has also been expanding in Germany, and while it’s not making a profit there yet, there is plenty of scope to do so. At the end of Q1 the company said that total like for like sales were down 70.9%, compared to 2020, with UK accommodation sales down 60.9%. Post May 17th when lockdown restrictions started to get eased demand in tourist locations started to pick up strongly and Q2 ought to see a much stronger performance, with much higher prices likely to be obtained. The company left its full year guidance for the year unchanged in Q1, and despite the delay in the full reopening of the UK economy, it would be surprising if management weren’t slightly more optimistic about the outlook than they were in June.   

Facebook Q3 21 – 25/10 – When Apple made a series of changes to its operating system to allow iOS users greater control of how they could be tracked earlier this year Facebook warned that it was likely to face “ad targeting headwinds in 2021 from regulatory and platform changes”. That didn’t stop the company from seeing a 56% rise in Q2 revenues to just over $29bn, with profits also beating forecasts at $10.3bn or $3.61c a share. Monthly active users also rose 7% year on year to 2.9bn. The company has come in for some hefty criticism in recent weeks for prioritising profits over people with various Senate hearings focussing on the company’s impact on younger adults and children. We also saw last week Snap’s share price get absolutely rinsed after missing expectations on revenues and warn that the privacy changes made by Apple were hurting its business, as it downgraded its expectations for full year earnings. Could Snap be the canary in the coal mine for a Facebook miss? Profits for Q3 are still expected to come in at a relatively healthy $3.16c a share.       

Robinhood Markets Q3 21 – 26/10 – After the volatility seen in the days after its IPO launch earlier this year Robinhood shares have settled down in a steady range, with a fairly decent base between $39 and $40 a share. In Q1, the company posted a loss of $1.4bn, largely because of the $3.4bn of new debt that was raised in February, which it used in order to ensure the business met deposit thresholds required by the various clearing houses that handle the trading orders on its platform. For Q2 the company reported a net loss of $502m, or $2.16c a share, despite revenues rising 131% to $565m, which along with Q1 revenues of over $500m means that for 2021 Robinhood has already exceed revenues for the whole of 2020. Total funded accounts came in at 22.5m for Q2 in line with forecasts, and up from 17.7m in Q1, with monthly active users at 21.3m, and total funds rising to $102bn. Crypto has become a significant driver of Robinhood’s revenues, which is just as well given the slowdown seen in equities trading. In Q2 crypto revenues came in at $233m, making up 41% of the total. This can’t disguise the fact that meme stock income appears to have dropped back quite sharply, with equities trading declining to $52m during the quarter. This looks set to continue in Q3, with crypto set to continue the heavy lifting, and while management warned about that in their Q2 numbers, investors will also need to prepare for higher spending in regulatory and compliance functions as well. In Q2 alone operating expenses rose to $501m, a sign of its success, but also the shape of things to come, while stock-based compensation costs could also increase. Losses are expected to come in at $0.84c a share.

Microsoft Q1 22 – 26/10 – It’s been a decent year for Microsoft’s share price with steady gains since January, and the shares trading at record highs. In July the company managed to put the cherry on top of a record year. In April the company saw its revenues come in above $40bn for the second quarter in succession, posting $41.7bn for Q3, slightly down from the previous quarters $43.1bn, while profits came in at $14.8bn, a 38% rise from the same period last year. The company saw decent gains across all its segments, with cloud computing up 23% to $15.1bn, productivity and workplace subscription services, up by 15% to $13.6bn, while personal computing and gaming saw a rise of 19% to $13bn helped by the launch of the new Xbox X gaming console. In Q4 it was a more mixed picture despite another record revenue number of $46.15bn, driven by a 51% rise in Azure, which competes with Amazon, and helped drive Intelligent Cloud segment revenue to $17.38bn. There was a downside, with sales of Microsoft branded Surface PC’s declining 20%, largely due to supply concerns, while licence revenues from consumer PCs also saw declines due to supply constraints. This slowdown could also have been a consequence of a big pull forward in demand which boosted the numbers in Q3, as well as a wait and see approach ahead of the launch of Windows 11, which is now being rolled out. For this quarter Microsoft said it expects revenues to come in between $43.3bn and $44.2bn. Profits are expected to come in at $2.06c a share.

Amazon Q3 21 – 28/10 - Has been one of the big gainers from the shift to home working over the past 12 months, its full year numbers for last year seeing a big jump in revenues, to $386bn, while profits rose to $21.3bn an 84.1% increase on 2019. This has come about despite a huge increase in costs with the company adding 175k new employees in Q4, as it expanded its grocery delivery capability by 160%. The increase in sales still managed to outstrip rising costs, with total costs for 2020 coming in at $11.5bn for the year. Amazon Web Services has also seen huge growth in revenues and accounted for $45.37bn last year, which when looked at through the prism of total revenues is still quite a small slice of the overall pie. Its retail business still accounts for the lion’s share of the company’s total revenue, which saw a 37.6% increase from the previous year to $386bn. Amazon managed to carry this theme into its new fiscal year by smashing expectations in Q1, with revenues of $108.5bn and profits of $15.79 a share, crushing estimates of $9.54c. The online stores business saw net sales of $52.9bn, while Amazon Web Services saw revenues of $13.5bn in Q1 and $14.81bn in Q2. Despite this Q2 revenues fell short of expectations, coming in at $113.08bn, prompting some short-term weakness in the share price, as the company lowered its guidance for Q3 to between $106bn and $112bn of sales, against an expectation of $119.2bn. This was always likely to happen post pandemic, simply on the basis that growth rates of 35% aren’t sustainable. Costs are still likely to be a factor for Amazon given that in the last 12 months staffing levels have risen 52% to over 1.3m people worldwide. In the streaming space Amazon continues to ramp up its Prime Video offering in an attempt to take on Netflix, spending $500m on a new Lord of the Rings TV series, while also adding Starz, Britbox and Discovery+ as add-ons, as well as acquiring MGM studios for $9bn. Amazon said its operating profits for Q3 would be somewhere between $2.5bn and $6bn, while EPS is expected to come in at $9 a share.

Apple Q4 21 – 28/10 – Apple’s share price has seen a bit of a dip from the record highs set just prior to its September product launch, which was a little bit of a damp squib. In Q3 Apple once again managed to beat expectations posting a 36% rise in revenues at $81.41bn, while profits came in at $1.30c a share. iPhone sales came in at $39.57bn, a 50% rise on the same quarter a year ago, as Apple fans upgraded to new 5G handsets. Services also beat expectations coming in at $17.48bn, a 33% rise year on year. Mac revenue was up 16%, while iPad revenue also saw a decent increase year on year. Gross margins came in at 43.3%, up from 41.9%. These numbers helped push the shares to new record highs, however they have since slipped back in the aftermath of concern over supply chain disruptions, and an underwhelming reaction to the latest upgrades and enhancements announced in September. The event started with a new low-cost iPad, which got a faster A13 chip processor, and a better front-facing camera, and more storage capacity, at 64GB. Apple also announced a new iPad mini with a smaller screen. The upgrade to the mini was somewhat of a surprise, although very welcome, coming with support for 5G wireless, and a slightly larger 8.3-inch screen, and the new A15 chip, and we also got a new Apple Watch series 7, with a bigger screen. Apple declined to offer any guidance for Q4, in line with the previous 6 quarters, though management did say that it wouldn’t be as good as Q3, but that growth would still be in the double digits. Profits are expected to come in at $1.23c a share. 

Alphabet Q3 21 – 26/10 – Had an outstanding and record quarter in Q2, as total revenues rose 61.6% to $61.9bn. Profits came in at a hugely impressive $18.5bn, driven by a huge 69% surge in advertising revenue to over $50bn, on its Google search engine. YouTube revenue almost doubled coming in at over $7bn. The only cloud, pun intended was the performance of Google Cloud, which posted an operating loss of $591m, although these losses are narrowing as Alphabet looks to take on the market leaders of Microsoft and Amazon. Alphabet’s other business bets of Waymo, Fiber, Verily and the like, also continue to lose money, despite rising revenues. Losses here rose to $1.4bn on revenues of $192m. For the business as a whole, profits are expected to come in at $23.45c a share.

Boeing Q3 21 – 27/10 – Despite the various problems Boeing has had over the past few years, its perhaps surprising that its share price isn’t lower. From the fallout from of the two crashes involving the 737 MAX 8, and the resulting order cancellations and loss of confidence in the aircraft, to the wholesale grounding of civil aviation in early 2020, because of the pandemic, the companies cashflow has taken a huge hit. In Q2 the company managed to reverse a sequence of 6 successive quarterly losses with a small profit of $567m, after an increase in revenues of 44% to $17bn. A rebound in the civil aviation market because of new orders from United Airlines and Southwest Air has helped, however margins are still under pressure. The company is also having to deal with production issues around its 787 Dreamliner. While the prospects for air travel are now starting to look a little brighter the prospect for aircraft sales still looks fraught with uncertainty. Purchasing new aircraft is a big undertaking for airlines who are dealing with cashflow problems of their own, and with climate change front and centre of policymakers thinking no airline is going to commit to such a big outlay until emissions targets become clearer. The company is expected to post another small profit in Q3 of $0.09c a share.