The Week Ahead - Fed, BOE, ECB rate meetings, Shell, BT, Apple, Amazon and Alphabet results

FOMC rate decision – 01/02 – as we look ahead to 2023 the question being asked is how much further we have to go when it comes to additional rate rises from central banks this year. Over the past month or so we’ve seen splits open up on the FOMC as to whether we’ll see a step down to 25bps rate hike, or whether we follow up the 50bps hike seen in December, with another 50bps rate move. As things stand markets are continuing to price in at least 50bps of rate cuts this year, which seems optimistic with unemployment at 3.5% and a 50 year low. Something must give to reset the narrative with the market pricing in a 25bps rate hike this week. Both Patrick Harker of the Philadelphia Fed, and Lori Logan of the Dallas Fed stated they would be comfortable with a 25bps rate move. Both are voting members on the FOMC committee this year, while Fed governor Christopher Waller, who has in the past leant towards the hawkish side, echoing those sentiments. This suggests that there is a growing caucus on the committee for a slowdown in the pace of rate hikes, which has pushed market expectations of the terminal rate below the Feds target of 5% or above. With the Fed funds rate currently between 4.25% and 4.5%, and financial conditions loosening there is a risk that inflation could become slightly stickier in the coming months unless the Fed resets market expectations. They can do this any number of ways, including hiking by 50bps this week, pushing the upper bound up to 5%, or hiking by 25bps and delivering hawkish guidance by saying that more hikes are coming, and they will be staying at current levels for some time to come. They could also increase the pace of balance sheet reduction or QT.
Bank of England rate decision – 02/02 – the Bank of England is on the horns of a dilemma as the UK economy continues to struggle with double digit inflation, although the economy may well not be as bad as perhaps was thought at the end of last year. The slide in energy prices in recent months has alleviated some of the pressure on wage packets, when it comes to petrol prices, however with food price inflation still at 16%, they will also be acutely aware that a weak pound will make headline inflation much sticker than it needs to be if they show any indication, they are going soft when it comes to hit its inflation target. There will be the usual concerns about the impact on mortgage costs from another 50bps move but 5-year gilt yields have barely moved since the lows set back in November, although 2-year yields are higher. Whatever we get this week we are likely to see a split again, with the likes of Tenreyro and Dhingra likely to be the most averse to another hike given that they voted for no change in December. The likes of Catherine Mann are likely to push for another 50bps, while the rest of the committee are expected to split between 25bps and 50bps, from the current 3.5%. Whatever we get from the MPC is unlikely to help the pound in the short term given the Bank of England’s propensity to talk the pound lower whenever they meet.
ECB decision – 02/02 – it seems more than likely we will see another 50bps rate hike this week, with a raft of ECB governing council members coming out more aggressively in favour of multiple 50bps rate hikes in the coming months. ECB President Lagarde doubled down on that in the wake of the Davos Economic forum, saying that inflation is still way too high, and markets are underestimating the ECB’s resolve to drive prices back towards their 2% inflation target. While the ECB did step down to a 50bps hike in December, there were a number on the governing council who wanted another 75bps hike. These people haven’t gone away even as headline inflation in the euro area falls back below 10%. When the ECB met in December, Lagarde more or less pre-committed the ECB to at least another 3 50bps rate hikes at the next 3 meetings, in a move that has seen the euro push higher, but thus far has failed to see it follow through. This would suggest that markets are unconvinced the ECB will be able to follow through on such guidance given the risks it might pose to the borrowing costs of the more highly indebted members of the euro area.
US non-farm payrolls (Jan) – 03/02 – as the consensus continues to a downshift in US rate rise expectations, and a 25bps rate hike this week, there is likely to be an increasing focus on the unemployment rate as we head into 2023 and the news cycle starts to feature further headlines about job losses in the coming weeks. Thus far there has been little evidence of a slowdown in the US labour market with weekly jobless claims dropping below 200k earlier this month. In the December payrolls numbers, we saw 223k new jobs added, while the unemployment rate fell to 3.5% from 3.6%. Encouragingly for those of a less hawkish persuasion average hourly earnings came in below expectations, rising by 4.6%, while the November numbers were revised down from 5.1% to 4.8%, playing down concerns about upward pressure on wages. There continues to be a sense that the market is becoming complacent about how quickly we might see the Federal Reserve pivot when it comes to interest rates, however while the unemployment rate remains at multi year lows the US central bank has little incentive to cut rates when inflation still remains almost 3 times higher than its 2% target. January payrolls is expected to come in at 175k, with the unemployment rate set to edge higher to 3.6%. Participation levels edged back up in December to 62.3% from 62.1%, and just below the 62.4% peak we saw during 2022.
Shell FY 22 – 02/02 – this week’s full year numbers from Shell are once again likely to trigger the usual tired political carping when it comes to “obscene” profiteering on the part of the big oil companies, when it comes to the huge amounts of money that are being generated by not enough supply and high demand for oil and gas. This trend of high prices is only likely to get worse if oil companies continue to get penalised for making too much money, and the political imperative continues to be in not incentivising new sources of supply. In this regard the oil companies don’t help themselves when they take the decision to continue to buyback billions of US dollars in their own shares, rather than increase the amount of investment in renewable sources of energy. These types of pay-outs have helped push the shares to their highest levels since August 2019 back in November. When the company reported in Q3 Shell saw adjusted profits come in at $9.45bn, slightly below market expectations, with the company announcing yet another share buyback program, this one being to the tune of $4bn, and which should be completed by Q4. The dividend is also rising by 15%. While this move is likely to please shareholders it is likely to bring down the red mist elsewhere when it comes to what Shell is doing with its excess cash. $18.5bn in share buybacks so far year to date and a 15% rise in dividends indicates where management priorities lie, however as an exercise in PR is likely to invite a firestorm of criticism from the usual suspects, even as Shell’s effective tax rate on UK profits now sits at 75%. As in previous quarters the bulk of its profits have come from its upstream business and integrated gas business, although the gas business suffered on the back of a disappointing performance in its trading unit, with profits seeing a decline of 38% from the numbers we saw in Q2. At the start of the year Shell said its Q4 numbers would be affected by the various windfall taxes levied by European and the UK governments to the tune of $2bn. The company also said that its integrated gas trading numbers, which have traditionally been a key revenue earner, were going to be significantly better than they were in Q3. This year’s capex spend is expected to come in between $23bn and $27bn, however spending on renewables continues to be tiny relatively speaking to its investment elsewhere, although new CEO Wael Sarwan could change this narrative, but he also needs to extol the virtues of natural gas as a transition fuel as well. Taking over from Ben van Buerden the focus will be on Sarwan and how he accelerates a process that has seen Shell fall behind the likes of BP.
BT Group Q3 23 – 02/02 – despite a rebound off 2-year lows in December last year, BT Group shares are still down over 30% from their peaks of last year. In November, the company reported a 1% rise in H1 revenues to £10.36bn. Due to industrial action the number of broadband connections at Openreach fell 89k during Q2, with 40k customers lost as a result. Due to the strike action reported profit before tax is expected to be lower by 18% or £800m due to higher costs and depreciation from network build, although the company has raised prices to compensate for some of this. In November, the company announced a pay settlement of up to 16% on all staff earning less than £50k a year. It also said it was looking to merge its global services division with its enterprise arm in order to cut costs amidst rising inflation. Full year capex is expected to be in the region £5bn.
Apple Q1 23 – 02/02 – in the weeks since Apple reported its Q4 numbers in October the shares hit their lowest levels since May 2021, before recovering to their current levels. As we look towards this week’s Q1 numbers which tend to be the company’s best quarter expectations are starting to be tempered given the problems with respect to its China supply chains and production shutdowns at Foxconn at the end of last year, which caused Apple to issue a warning over its iPhone production, and a potential shortfall of up to 6m handsets. When the company reported in Q4 all the numbers were in line with expectations albeit with a slight negative bias after services revenue fell short, as did iPhone revenue. Overall Q4 revenue beat expectations, at $90.15bn, helped by strong beats on Mac and Wearables, however on iPhone revenue this fell fractionally short at $42.63bn, as did services at $19.19bn, below $19.65bn. iPad sales also missed at $7.2bn. Mac revenue came in at $11.51bn, exp $9.25bn, wearables $9.65bn, exp, $8.8bn. The Greater China region continued to be a drag with revenues of $15.47bn. When Apple reported last year Q1 revenue came in at $123.95bn with iPhones contributing $71.6bn of that total, as profits came in at $2.10c a share. Will Q1 this year get anywhere near close to the levels of sales we saw this time last year, or will investors get a reality check. In both of its biggest markets at the end of last year retail sales in US and China contracted sharply in a sign that consumers were cutting back sharply. Profits for this Q1 are expected to come in at $1.95c a share.
Amazon Q4 22 – 02/02 – when Amazon reported in Q3 not only did net sales fall short of expectations despite seeing a 15% increase on the year before, but the decision also to cut Q4 guidance sent the shares sharply lower, with the shares hitting their lowest levels since March 2020 at the start of this year. Q3 sales came in at $127.1bn, but higher operating costs meant that operating income came in lower at $2.15bn, with only AWS improving its operating income with a modest increase to $5.4bn on sales of $20.5bn. Operating margins also came in lower at 2%. While the Q3 numbers were disappointing, it’s the guidance which is doing the damage with Amazon estimating sales of between $140bn to $148bn for the pre-Christmas period, well below forecasts of $155.5bn. Part of the reason for the miss on revenue appears to be being blamed on FX effects, i.e., a strong US dollar. Costs have also risen sharply over the last nine months, currently at $355.27bn, up from $311bn a year ago, an increase of 14% year on year. Amazon has taken steps to address this with the announcement of thousands of jobs cuts over the last few weeks, however these still pale into insignificance when you consider the company has increased its headcount by almost 1m people since 2019. Amazon also said it could struggle to turn a profit for Q4, in a year that has seen the company register huge losses during the year due to its stake in Rivian. Amazon is also investing huge amounts of money into its AWS business over the next few years, saying it intends to spend an extra $35bn by 2040 to boost capacity. Profits are expected to come in at $0.17c a share.
Alphabet Q4 22 – 02/02 – in the wake of its Q3 earnings numbers Alphabet shares fell to their lowest levels since November 2020, after missing expectations across all of its core businesses. We’ve seen a modest recovery since then, however the downtrend that has been in place since the record highs a year ago remains very much intact. Q3 ad revenue came in at $54.48bn, below expectations of $56.98bn, although at least the numbers were higher than the same quarter a year ago. The same can't be said for YouTube which saw revenues decline to just over $7bn, down from $7.2bn a year ago. The only silver lining was its cloud business which saw revenues rise to $6.87bn from $4.99bn. Operating margins also declined to 25% from 32%. The last 3 months have seen the company also announce thousands of job cuts as it faces up to the challenges of falling revenues and rising costs. Profits are expected to come in at $1.21c a share.
Meta Platforms Q4 22 – 01/02 – since plunging sharply back in October, Meta shares have managed to find a base, rebounding from 7-year lows in November, and have recovered over 50% since then, as they look to close in on the 200-day SMA and September highs. When the company reported back in October, the company missed expectations on profits, and lowered its guidance on Q4 revenues to between $30bn to $32.5bn. The Reality labs division continued to haemorrhage cash in Q3, with revenues coming in at $285m, and losses coming in higher than expected at $3.67bn. Facebook is also facing an additional challenge from the likes of TikTok which is pulling users away from Instagram, as well as rising costs with operating expenses expected to come in at $86bn this year and rise to almost $100bn for year 2023. The size of these losses and increase in expenses appears to have finally triggered a reality check after Meta announced that it was cutting 11k jobs back in November, which also appears to have coincided with the rebound in the share price. On the plus side at least, its daily active users have remained resilient, however Meta continues to plough money into its Reality Labs business which year to date has already lost $9.4bn and looks set to lose even more. Profits are expected to come in at $2.25c a share.
Peloton Q2 23 – 01/02 – over the last 6 months Peloton shares have managed to stabilise in a range between the record lows at $6.66c a share and peaks just below $13.50c as it looks to break out of its long-term downtrend, and 200-day SMA. The fall from grace for this lockdown winner has been alarming in its speed, falling from record highs of $171 in January 2021. With rumours continuing to circulate over a possible takeover, revenues have continued to come under pressure. In Q1 came in short of expectations sliding 16% to $616.5m, well below $641m, as they slumped to a loss of $1.20c a share, almost double what was forecast. Peloton also downgraded its outlook for Q2 revenue to $700m to $725m from $868.6m, with the company admitting there were downside risks to that forecast. On the plus side Q1 subscription revenue was up by 36% to $412.3m, but as far as equipment sales are concerned the recent decision to reverse the price cuts appears not to have had the effect management might have expected. The reality is the company continues to struggle to shift its equipment, not surprising when you consider how much it costs. At a time when many people are struggling with the cost of living, paying over the odds for what is to all intents and purposes an exercise bike with an iPad strapped on the front is a luxury that many people are happy to forego. If they are to make any money at all then subscription revenues are likely to be the most likely area, however even with a hefty marketing spend, and the announcement of the cutting of another 500 jobs in August, the company is still expected to return losses of $0.60c a share.

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The Week Ahead - Fed, BOE, ECB rate meetings, Shell, BT, Apple, Amazon and Alphabet results

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