The week ahead: Fed meeting, Bank of England, Canada and Germany elections, Kingfisher, Nike, Fedex

Fed meeting – 22/09 – just prior to the August payrolls report being released there was a widespread expectation that this week’s September meeting would be the opportunity for the US central bank to outline the timeline for the reduction of its $120bn a month bond buying program. A payrolls report of 235k appears to have put paid to that narrative, however it doesn’t mean that a tapering of bond purchase won’t happen, it just may take a little while longer to unfold, with most of the smart money on it starting in December. The reality is there is little reason why it couldn’t happen sooner given where the US economy is now, relative to where it was in December last year. If the ECB can start reducing the amount of its PEPP program there is absolutely no reason why the Federal Reserve can’t follow suit, despite the poor August report. There is little sign that any of the so-called hawks on the FOMC are starting to dial back their expectations of a reduction, despite the recent mixed messaging from Dallas Fed President Robert Kaplan. The fear is that the Federal Reserve is becoming too complacent about rising inflation risks, especially with consumer prices already at its highest level since the early 1990’s. With many of the Fed members who are calling for a scaling back of bond purchases being voting members next year, the timing of a taper still remains very much a matter of when and not if. In other words, December, or possibly later.

Bank of England - 23/09 – recent comments from Bank of England governor Andrew Bailey, shone an unexpected light on the deliberations of the Monetary Policy Committee when they last met in August and external MPC member Michael Saunders voted against the status quo when it came to the bond buying program, all the while everything else was, as you were, as far as monetary policy was concerned. It now turns out that almost half of MPC members appear much more confident about the UK economy than they were at the previous meeting. In comments to politicians at the beginning of this month, the governor admitted that at least 4 MPC members felt that the recent improvement in basic economic conditions could well be used as justification for a rate rise, although one wasn’t imminent yet. This was quite an unexpected moment of candour, as well as insight into the deliberations on the Monetary Policy Committee at the last meeting, and while it doesn’t suggest that policymakers are itching to pull the trigger on a rate move it can’t be too long before the central bank reins in its bond buying program, with a signal coming as soon as this week. We’ll also get an insight into the stance of the two new members of the MPC, namely new chief economist Huw Pill and external member Catherine Mann, who has replaced Gertjan Vlieghe. Pill’s position especially will be noteworthy given his recent critiques of unlimited central stimulus, which suggests he might lean towards the hawkish side. If this turns out to be the case this would be most welcome given the tendency of most central bankers to get caught up in collective groupthink. No changes are expected, on the rate front, however it wouldn’t be a surprise to see a reduction in the pace of bond purchases, a move that would be most welcome. Even if that doesn’t happen, we could see more dissent on the bond purchase front, with other members joining Michael Saunders.

Germany, France flash PMIs (Sep) – 23/09 – the most recent August PMI numbers from both Germany and France, continued to slip back a touch, although they still remain fairly strong, there are signs of further weakness in the pipeline. Nonetheless the readings still remain in the high 50s for both with French manufacturing and services very much aligned in terms of its resilience. Germany activity is even more resilient despite the disruptions being caused by various industry shutdowns, higher prices, and weaker exports to China, both manufacturing and services activity came in above 60. Whether this state of affairs can continue is up for debate given the recent deterioration in business confidence. German IFO business activity has been on the decline in recent months, slipping to a three-month low in August. All of these could fall further in September, especially given the uncertainty over this week’s German election which is likely to kick off a long-winded tug of war to form a new government as Angela Merkel departs the political scene after 16 years at the helm. Never underestimate the incumbency premium which will no longer be there post the 26th September landscape.

UK flash PMIs (Sep) – 23/09 – there’s been an increasing disconnect in recent months between what the PMI numbers are telling us and what is happening in the ONS numbers when it comes to manufacturing and industrial production, as well as construction output. The PMI numbers do appear to be starting to reflect some of that weakness, however they are still coming in at fairly decent levels, well above 50. Manufacturing activity only slowed modestly from the July levels of 60.4 to 60.3albeit, down from 63.9 in June. Services, on the other hand have shown a much sharper slowdown from the May peaks of 62.9, falling back to 55 in August, largely because of the so-called “pingdemic” which resulted in staff shortages, and various business disruptions, which crimped economic activity in July as well. With the easing of self-isolation restrictions om 16th August, this should improve for September, although it’s also important to remember that certain sectors like travel, are still struggling as a result of consumer behaviour which is much more cautious than it would have been pre-pandemic. Another trend to keep a close eye on will be higher cost prices as businesses struggle to source the necessary materials for their various goods and services.

Canada election – 20/09 – a few weeks ago Canadian Prime Minister rolled the dice on calling a snap election, hoping it would give him a renewed mandate to oversee the government’s response to the Covid-19 pandemic. His calculation that the vaccine program would see him returned to power with a working majority appears to have blown up in his face, as his polling numbers slid sharply. Voters it appears took his decision on the basis of what it was, a piece of cynical opportunism, and could well punish him accordingly for his arrogance. A number of polls have questioned the timing of the decision to call an election with the consensus being one of timing. At the time of national crisis voters would rather their politicians focus on the key problems of the day, and with thousands dying and getting sick as a result of a virus, Trudeau appears to have been found out, with many thinking that his administration is more focussed on style than substance.

German election - 26/09 – the upcoming German election has all the hallmarks of a symbolic moment in German politics, as Angela Merkel steps down as leader of Europe’s largest economy after four terms as German Chancellor. Having been Chancellor of Germany since 2005 Merkel has been able to navigate the intricacies of German, as well as EU politics with enormous dexterity, and political skill. Her departure however also leaves a huge hole which will be difficult to fill with the array of current incumbents seeking to replace her. It remains to be seen what her legacy will be, given that for the last ten years, the problems she has confronted have as yet not been adequately dealt with. Depending on where you sit on the political divide, she is either a political colossus who has kept Germany as Europe’s most efficient economy, or a political procrastinator who, while keeping the train on the tracks, has failed to address the enormous challenges facing, not only Germany, but the EU as a whole. Whichever side of the fence you sit, one thing is certain, the political void she leaves will make German politics much more complicated, as well as potentially shifting the balance of power in Europe, when it comes to shaping EU policy. To read more on the German election click here.

Kingfisher H1 22 – 21/09 – despite all the doom and gloom around the retail sector over the past eighteen months, some have done very well indeed. Kingfisher is one such name, with the share price of the owner of B&Q and Screwfix higher than it was pre-pandemic, and over 25% higher year to date. Classed as an essential retailer during the first lockdown, the business has been able to remain open and while there have been higher costs, these appear to have been more than offset by even higher sales volumes. Whether this is still the case in Q2 remains to be seen, with its last trading update in Q2 pointing to a slowdown is sales growth. When the company reported in March full year sales rose 6.8% to £12.34bn, driven largely by an increase in e-commerce which saw an increase of 158%, and now account for 18% of total group sales, compared to 8% a year ago. Trading in the UK and Ireland was particularly robust with Screwfix exceeding £2bn in sales for the first time ever, with the company paying a total dividend of 8.25p per share last year. When the company reported in Q1 in May, the company upgraded its guidance for H1 from low double digit LFL sales growth to the mid to high teens, as well as raising its profit outlook to £580m to £600m. They followed this in July with another upgrade to LFL sales, growth, raising it to 22%, and raising its profit outlook to between £645m to £660m. With the Q2 trading update pointing to a lower pace of sales growth the wider question is whether the slowdowns which appeared to be affecting its France and Iberian businesses were temporary, or part of a wider pattern of weaker demand. In terms of the bigger picture and rising costs in raw materials like lumber, investors will be looking for further rises in the cost base, and whether the company has been able to pass some of these on to its customers, and whether the business mix has seen a change in consumer buying patterns. The group as a whole saw total Q1 sales rise 60%, to £3.45bn, with UK reported sales rising 66.8%. The B&Q business saw an 82.7% rise, with Screwfix contributing 42.5%.

Harbour Energy H1 21 – 23/09 – rebranded as Harbour Energy on 1st April, after changing its name from Premier Oil, the shares slipped back despite updated guidance of 2021 production of 200kboepd to 215kboepd, with operating costs expected to be in the region of $15 a barrel. The new net debt figure stands at $2.9bn, with current liquidity of $700m. The change of name and restructuring doesn’t appear to have markedly changed sentiment towards the business, although the shares have managed to recover of the lows in July. This recovery appears to have come about from the recent operational update, which saw the business announce that its Tolmount gas platform would likely go operational around year end. As a result of the delay production guidance for the year was revised lower to between 185kboedpd to 195kboepd, with full year operating costs unchanged at $15 a barrel. The company has also been at the forefront of speculation that Neptune Energy, which is backed by private equity groups Carlyle and CVC, might be exploring possible merger options, at a time when the focus on green energy is making life more difficult for the independent energy sector, at a time when their debt levels are already high.

FedEx Q1 22 – 21/09 - parcels and logistics companies are generally good bellwethers of an economy, and US delivery company FedEx isn’t an exception, however the shares have been in decline since the record highs set in May. The company has also been a key cog in the US governments vaccination program, as it ships doses of the vaccine across the country. In June the company announced Q4 revenue of $22.6bn, another increase on the previous two quarters, and a rise of 30% on the previous year. FedEx Express made 50% of that quarterly revenue number at $11.3bn, an increase of 32% from the previous year, as operating income rose to $737m. Average package volume at FedEx Ground which counts Walmart as a partner saw a rise of 9% in shipments in Q4, with revenues rising to $8.1bn. Since those record-breaking numbers in June, the shares have continued their recent declines from their May record highs. While pandemic safety measures have seen costs rise, and margins shrink, there is a concern that higher costs along with shortages of workers could well start to dilute margins. Total operating expenses rose 23% in Q4, which is fine if volumes also increase. However, the slowdown seen in the US economy during the last few weeks could well start to impact margins which might mean profits start to take a hit, as supply chain costs increase. Expectations are for Q1 profits to match those in Q4 at $5 a share.

Nike Q1 22 – 23/09 - Nike shares had underperformed this year; however, the Q4 results in June helped give them a huge lift, pushing them above the previous record highs that we saw back at the end of last year. although margins have come under the same amount of pressure as its peers. The turnaround in fortunes has been quite startling, from posting a Q4 loss in 2019 of $790m or $0.51c a share due to the lockdowns across Europe and the US, which followed on from the disruption in China, the company bounced back in 2020. Driven by direct sales from its own stores, which rose to an annual $16bn and, which represented 32% of total revenue profits bounced back strongly, with annual profits rising 196%, pushing them to well in excess of pre-pandemic levels as well, to the tune of 42%. Gross profit margins for the year also rose to 44.8% in 2021, with Q4 margins coming in at 45%, helped by a strong performance in its US market, which represents 41% of global sales. There is little doubt that the stimulus cheques played a part in this Q4 recovery, as revenues rose to $12.34bn, which means Q1 could well see a slowdown, given recent weakness in the US economy. We also need to be aware of supply chain issues, which Nike had to contend with in Q3 last year, and are once again becoming a wider problem. Nonetheless profit expectations for Q1 are still high, with expectations of $1.11c a share, a decent increase on Q4s $0.93c a share. For 2021/22, Nike said it expected to see annual revenues this year to surpass the $50bn mark, with the first half of its new fiscal year expected to grow faster than the second half.

Darden Restaurants Q1 22 – 23/09 – like most popular restaurant chains the owner of the ubiquitous Olive Garden and Longhorn restaurant chains has been able to offset the effect of a lot of the shutdown period by offering a takeaway service to its clients. To cut costs the company embarked on a $35m restructuring program as a result of the lower footfall that is expected to be the norm going forward, as it looks to reduce its debt load. With the stimulus acting as a boost to its Q3 and Q4 numbers the shares hit record highs in August, helped in some part perhaps by a brand name check from Taylor Swift, expectations appear a little on the frothy side. In Q4 sales rose 80% compared to the year before, which was a pretty low bar given the comparatives. With upward pressure on hiring costs likely to continue over the rest of the year, and while summer sales might well show a continued uplift the real test is likely to come in Q2, as we look to the autumn, or fall. Profits are expected to come in at $1.64c a share, however the real challenge is likely to come from the outlook, especially with the share price at current levels. Bank of England Bank of England