The week ahead – ECB set to cut rates for the fifth time this year, US CPI, UK GDP

1) ECB rate decision (Nov) – 12/12 – It’s hard not to feel an element of sympathy for ECB President Christine Lagarde as she looks out over the economic landscape that is currently the two largest economies in Europe in France and Germany. With the ink on the recent report from her ECB predecessor Mario Draghi barely dry she is having to contend with a depression in manufacturing activity in both Germany and France, against a backdrop of political instability and gridlock in what can only be described as the engine rooms of Europe. While Draghi’s diagnosis of Europe’s ills is no doubt timely, as well as accurate, the ECB is in no position to help to deliver it when the very same politicians who have caused the competitiveness issues it identifies, squabble amongst themselves. The reality is that the problems in Europe are so deep rooted that anything the ECB does this coming week will make little difference to the economic landscape in the medium term. European rates are already well below that of the US and UK, yet the economy is stuck in the mud due to the mind numbingly misguided decision by previous German Chancellor Angela Merkel to close its nuclear power stations and go all in on Russian gas. Since June the ECB has cut its main refinancing rate from 4.5% to 3.4% with little to no effect when it comes to economic activity. With inflation back close to target, and its key export markets struggling a number of ECB officials have indicated that a December rate cut is very much on the cards, however there has been some chatter that we might see a larger than expected cut of 50bps instead of the 25bps that is priced in by the market. When one of the more hawkish members of the governing council suggests that a 50bps cut might be discussed then it pays to sit up and notice. Martins Kazaks, who is the Latvian official on the governing council suggested in recent comments that a bigger cut is a serious possibility, although other ECB officials have been more cautious. Ultimately whether we get a 25bps or a 50bps rate cut is probably neither here nor there, given the likelihood of new elections in both Germany and France in the near future. What we do know is that while the prospect of lower rates may help in the short term, they probably won’t make much difference in the long term given the propensity of our current political leaders to continue with the current set of self-destructive economic policies when it comes to energy prices and the wider economy.

2) US CPI (Nov) – 11/12 – After a solid 227k rebound in US employment for November, after the hurricane and strike affected October numbers prompted a 36k slowdown, attention now shifts to the latest US inflation numbers as the market gears up for the prospect of another Fed rate cut as we head into the Christmas period. While it would be a surprise if the Fed weren’t to cut rates on the 18th, given how well telegraphed such a move has been in recent weeks, there is a case to ask whether the US economy actually needs another rate cut yet. Unemployment is well below the Feds target of 4.4% by year end at 4.2%, and weekly jobless claims recently slipped to a 7-month low recently. There is also some evidence that prices are starting to trickle higher again, after October CPI edged up to 2.6% from 2.4%. We also have to factor in a significant amount of uncertainty as to what effect a Trump presidency might have on inflationary pressures as we head into 2025. Expectations are for headline CPI to tick up further to 2.7%.

3) UK GDP (Oct) M/M – 13/12 – The UK economy has been struggling since the summer, with monthly activity slowing sharply in the wake of the election of the new government. As an exercise in self-immolation the new administration has shown itself to be particularly inept, talking down the economy for its own political and perhaps ideological ends and in the process causing both business and consumer confidence to collapse. In September the economy contracted by -0.1%, and since the budget in October things don’t appear to have improved if recent economic data is any guide. The new tax measures on both taxpayers as well as businesses may not have filtered through into the economy yet, but they have served to undermine any sort of confidence in encouraging businesses to invest in the UK economy in the longer term. Not only has manufacturing activity slipped into contraction, but services activity, which had been keeping the UK economy afloat this year, is also slowing sharply, which suggests the potential for another negative print, even though estimates show an expectation of a 0.2% rebound. If we do see a 2nd month of contraction that would replicate the impact of the economic turmoil, we saw in the aftermath of the so-called Truss budget back in 2022, making it harder to argue that the new government’s behaviour hasn’t acted as an economic headwind in the same way as it did 2 years ago.                       

4) British American Tobacco S1 25 – 11/12 – One of the larger companies on the FTSE100, this UK tobacco giant has been battling against a decline in global smoking trends and a move towards vaping. A year ago, the shares slipped to a 13-year low at 2,230p, after reporting a £25bn impairment charge on some of its US brands in response to the difficulties being faced in its US market. They also downgraded their full year revenue guidance to the lower end at the low end of their 3% to 5% guidance, making it one of the worst performing shares on the FTSE100 in 2023. That appears to have been the low point as since then the shares appeared to have found a base and have since seen a reasonably decent rebound towards 3,000p. The company still makes over 80% of its revenue from tobacco sales with governments increasingly raising barriers to future revenue with advertising bans as well as bans on the sale of its products to younger smokers. This means that new revenue streams are more important than ever, and as such to justify the rebound in the share price, as well as the 8% dividend yield, we need to see progress on NGP revenue growth and future targets.

5) GameStop Q3 25 – 10/12 – GameStop volatility made a comeback earlier this year when in May it was reported that Keith Gill aka “Roaring Kitty” had resurfaced on social media after a 3-year hiatus. The shares had dropped out of the limelight to some extent in the aftermath of the 2021 share price rip which saw the value of this ailing retail business surge from $3 to as high as $120, in the space of 6 months, although these prices reflect the post share split values, which saw a 4:1 stock split take place on July 22nd 2022, immediately making the shares cheaper, as well as helping to boost liquidity. As a benchmark as to the overall health of the business the action of making the shares more affordable doesn’t affect the financial health of the wider business, which has continued to struggle for profitability, as it looks to diversify its business model. An ill-fated dalliance with failed crypto exchange FTX in 2023, along with experimenting in the NFT market at around the same time the bottom fell out of the market saw the shares continue to slide, hitting a 3-year low of $10 back in April this year. Since then, the shares have picked up some steam, surging to as high as $64 on the back of the “Roaring Kitty” tweet. After several weeks of wild swings, the shares have settled down again trading in a broad range between $20 and $32. In their Q2 numbers GameStop reported a sharp drop in quarterly revenue to $798m, down from $1.16bn the previous year, although profits of 4c a share helped to cushion the blow a touch, helping to reduce half year losses to $17.5m or 5c a share. In Q3 the company is expected to break even, while revenues are expected to remain soft, as it looks to mimic its 2023 performance when it was able to post a small profit, despite a fall in annual revenue to $5.3bn. This year could see it struggle to match that.  

6) Broadcom Q4 24 – 12/12 – Another US chip stock that has gone great guns in the past 2 years, it was a strong performer in 2023, and looks set to continue in that vein in 2024. At the beginning of 2023 the shares were trading at $60, and this year alone briefly pushed above $186 where it appears to have found a bit of a ceiling over the last 2 months. The acquisition of VMWare has helped it to boost its annual revenues, as well as its profits, along with the growth in AI. The bulk of its revenue still comes from its semiconductor division, with $7.27bn, however VMWare has added another $5.8bn in sales to that number. In Q3 revenues came in at $13.07bn, an increase of 47% year on year, with an expectation that Q4 revenues will increase to $14bn, a rise of 51%. The company posted a loss of $1.88bn due to a one-off $4.5bn tax provision related to intellectual property rights which were transferred from one company segment to another. Profits for Q4 are expected to come in at $1.39c a share.