The Week Ahead - Fed minutes, UK CPI, retail sales, unemployment, Vodafone, EasyJet, Royal Mail and Squarespace IPO

UK Unemployment (Mar) – 18/05 – The pound has looked quite strong in recent weeks, as optimism grows that the number of people on furlough, still currently in the millions, will start to return to the workforce as the economy continues its reopening process. In February UK ILO unemployment slipped back to 4.9%, having been as high as 5.1% back in December. It is quite clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic, which means the very real effects on the UK labour market won’t start to be seen until Q3 at the earliest, as the furlough scheme starts to wind down. For now, the outlook remains positive, a trend that appears to be manifesting itself in the latest monthly jobless claims numbers which showed a surprise fall in March to 7.3%. This trend of lower claims should continue in April as more businesses reopen, and the economy returns to normal. While the outlook for unemployment appears more positive as we head into the summer months, that doesn’t mean it can’t go higher. A lot of jobs that were around over a year ago, may still not come back. The Bank of England has already indicated that it expects unemployment to go higher, but not by as much as they thought in February when their projections were for a peak of 7.7%. This was adjusted lower a few weeks ago, to 5.2% for this year, and then down to 4.7% in the second quarter of 2022. 
 

UK CPI (Apr) – 19/05 – One of the main concerns that has been worrying investors this year has been the potential for a sharp rise in inflationary pressures, and these concerns have started to gain ever more traction in the last week or so after big surges in US and Chinese inflation last week. These concerns have served to push bond yields back up towards their recent highs in the past few days. Rising factory gate and commodity prices have merely served to reinforce these concerns. We are now starting to see early evidence of having to pay higher prices, notably in terms of higher air fares and other transport costs, however these appear to be merely a symptom of normalisation from the big falls we saw a year ago when the economy went into lockdown, and as such are unlikely to be repeated which means they are transitory in nature. Food prices more generally haven’t been showing any signs of upward pressure which is probably the more important narrative. That’s not to say we won’t start to see sharp upward moves in headline CPI over the coming months. We’ve already started to see it in PPI which has been trending higher since the end of last year when it was at 0.2% and in March hit 5.9%. If this translates into a leading indicator for CPI, we could start to see a move towards 2% CPI in fairly short order. In March, headline CPI came in at 0.7%, while core prices rose to 1.1%. If the US experience last week is any guide, we could see a large jump in both of these numbers, towards the Bank of England mandated target of 2%.
 

UK Retail Sales (Apr) flash PMI’s (May) – 21/05 – retail sales have slowly been recovering since the big -8.2% decline seen in the January numbers, largely as a result of the total lockdown imposed at the beginning of the year. Since then, we’ve seen a slow and steady recovery with a 2.1% rise in February and then a 5.4% rise in March driven primarily as a result of people shopping in garden and DIY centres, as we saw a 16% rise in household goods. March also saw a big rebound in clothing sales as consumers looked towards further easing measures in April, along with higher fuel sales as people started to move around more. The direction of travel for April retail sales is likely to be for a similarly positive number in the wake of the 12th April easing measures, something that was borne out by a big jump in the recent BRC retail sales numbers which showed a decent improvement in April. We also have the latest flash PMIs for May which if the recent April numbers are any guide are likely to be similarly positive. The April PMI’s painted a robust picture with services activity hitting a six and a half year high at 61, while manufacturing rose to 60.9, an 8-month high. UK companies were reporting higher demand for both goods and services, which in turn was seeing some cost push inflation, while the jobs market was also looking good with firms being encouraged to take on extra staff at a rate not seen in over three and a half years. All in all, optimism was high with the only question being whether or not what we are seeing is sustainable.
 

Fed minutes – 19/05 – April’s Fed meeting seems a long time ago now, with the central bank acknowledging the recent improvement in US economic data, but also reiterating that they remained a long way short of the type of outcome-based data needed to alter their current policy stance, nixing any prospect of a taper in the near term. In fact, Powell’s press conference was yet another example of the central bank hedging its bets when it came to outlining the prospect of any sort of near-term policy move. Given the most recent payrolls report this caution was well founded. As Fed chairman Jay Powell indicated when asked one particular question, one bumper jobs report does not a policy change make, when referencing the March jobs report, which saw 770k new jobs added to the economy. As a reminder he went on to say that there were still over 8m more American who were out of a job than there were in February last year, and as such the Fed would need to see “substantial further progress” on its full employment goals, for any change in policy to be considered. The subsequent shock of an April payrolls report of 265k only serves to add more weight to this policy stance. The Fed also believes that the recent increase in inflationary pressures is likely to be transitory, and should fall back as the year progresses, and base effects fall away. This would suggest that the Fed appears to be on autopilot through the summer, however the recent sharp rise in commodity prices, along with significant base effects appears to be creating some uncertainty given the recent sharp rise in inflation expectations. As we get to dissect this week’s minutes it will be interesting to note whether other Fed policymakers share some of the concerns that perhaps there is some complacency around inflationary risk.
 

China Retail Sales (Apr) – 17/05 – China’s economy rebounded strongly in Q1, helped by a slow but steady rebound in consumer spending. The Chinese consumer has struggled to return to the levels of spending we saw at the end of 2019, however there have been encouraging signs in recent months. In March retail sales showed an increase of 34.2% year on year; well above expectations, however, it needs to be remembered that a year ago the same numbers fell -15.7% in the aftermath of the February lockdown of the entire economy. As a result, the March numbers would have had an enormous skew. Even so they were still pretty decent. Industrial production was also strong for the same reason, rising 14.1%. This skew is also likely to be apparent in the April numbers given that last year China retail sales saw a decline of -7.5%. Similarly industrial production was weaker a year ago rising 3.9%, after a -1.1% decline in March. Expectations are for retail sales to rise by 25% and industrial production by 10%.
 

Germany/France flash PMI’s (May) – 21/05 – we’re starting to see slow improvements here, particularly in services PMI’s however the picture is patchy. Manufacturing continues to stand apart with both Germany and France maintaining recent resilience in April with only a modest softening to 66.2 and 58.9 respectively. Services still remains very much the laggard and while there have been attempts at reopening some parts of their economy the high levels of infection still continue to act as a drag. Fortunately, the vaccination program, particularly in Germany is starting to gain traction, however that hasn’t stopped economic activity from slipping back in the most recent April numbers which saw modest declines to 49.9, while French economic activity improved slightly from 48.2, to 50.3. With large parts of the German economy locked down until June it’s hard to see too much in the way of an improvement in the May numbers, while France is expected to underperform as well.
 

Vodafone FY21 – 18/05 – the last 12 months have seen Vodafone’s fortunes slowly start to improve, with its share price hitting an 11 month high earlier this month. In the first half of this year pre-tax profits for the first half came in at just over €2bn, a much-needed improvement on last year when the company wrote down the value of its Indian business. First half revenues saw a modest decline of 2.3% to €21.43bn. This better-than-expected performance helped push H1 earnings up above €7bn, and saw management nudge up its full year guidance to between €14.4bn to €14.6bn for its earnings outlook. In Q3 there was a further improvement as services revenue rebounded from a disappointing Q2, with the company maintaining its full year guidance. The main focus for investors over the last 12 months has been the need to address the company’s cashflow and debt issues, as well as invest in 5G over the next few years, and the upcoming IPO of the company’s Vantage Towers business, which finally took place in Frankfurt in March, at €24 a share. This generated €2.3bn for Vodafone which it said would be used to pay down some of its debt. In another coup for Vodafone earlier this year, the company said it had signed an agreement with Virgin Media to host its own 5G services on the Vodafone network, calling time on its relationship with BT’s EE.  
 

EasyJet H1 21 – 20/05 – last year EasyJet made its ever first annual loss and it doesn’t look like this year will be any better, with the difficult trading environment set to continue for quite a while yet. While the airline still has unrestricted access to £2.9bn of liquidity having raised over £5.5bn since the start of the pandemic the airline is still no nearer to knowing when they can expect to resume any semblance of a normal service, with most of their planes grounded due to travel restrictions. At its most recent trading update EasyJet said it expected to see winter losses of between £690m and £730m, as total revenue fell 90% to £235m. Only 20% of pre pandemic capacity is expected to be flown in the upcoming quarter, and with government restrictions only expected to be eased slowly, any expectations of a quick rebound look increasingly unlikely, despite the recent rise in the share price reflecting rising optimism that the next two quarters could well see a significant improvement. This week’s H1 update should tell us whether EasyJet management are any more confident about the outlook than they were a month ago. Cash burn has been slowed down, in Q2 it fell to £470m, while the airline still has the option to sell more of its aircraft and lease them back if it has to. So far, the airline has sold and leased back around 43 aircraft in order to raise extra cash. This leaves another 141 fully owned and unencumbered aircraft, which represents over 40% of its remaining fleet, so it certainly has plenty of room to boost its liquidity.   
 

Royal Mail FY 21 – 20/05 – just over 12 months ago Royal Mail shares hit a record low of 120p. Since then, they’ve rallied over 400% as it quickly became apparent that it was likely to be a big winner from the pandemic. In the first half of this year revenues increased by 9.8% to £5.67bn, however a sharp rise in costs saw the business slump to an operating loss of £20m, driven by £85m in safeguarding measure as a result of Covid-19. Unsurprisingly, addressed letter volumes were down 28%, with total letter volume down 33%, with adjusted operating losses here coming in at £180m, and revenues falling by 20.5%, however parcel volumes more than compensated with a rise of 31%, and a rise in revenues of 33.2%. In Q3 parcel volume rose 37% year to date, as the business experienced its best ever quarter with 496m parcels handled. As we look ahead to this week’s full year numbers, more of the same is expected in terms of outperformance. Management have already delivered a one-off final dividend of 10p per share, with the business set to deliver a group adjusted operating profit of £700m. Full year revenues for the year are expected to come in £900m higher than last year. The company also said that restructuring costs were expected to be lower at £90m instead of the previously anticipated £140m. The outlook for the business is much more positive now with the company fending off Amazon to win a multimillion-pound contract to deliver millions of Covid-19 testing kits in the UK.
 

Squarespace – Direct Listing – 19/05 – this week Squarespace is looking to widen its shareholder base by making available 40.4m shares in a direct listing. This week’s listing comes in the wake of the company raising another $300m from various investors earlier this year, with estimates that it could well reach a valuation of $10bn. In a highly competitive market with the likes of webhosting services GoDaddy and Shopify, the company appears to be a solid performer, and certainly doesn’t need the money hence why it hasn’t issued new shares. In its last set of accounts revenues rose 28% in 2020 to $621m, while profits fell to $30m, from $58m. The company also has positive cash flow and appears to be growing strongly, also moving into ecommerce with the recent purchase of restaurant services provider Tock for $400m, which is likely to mean the shares could well find some decent demand. The only downside is that all the voting power will be concentrated in the hands of CEO Anthony Casalena who will have 68.2% control of voting rights, through his class B shares, which means that new class A shareholders will have little say in any decisions company management take over the direction of the business.   
 

Home Depot – Q1 22 –18/05 – home improvements have also seen a big jump in the US, although stimulus payments have also helped play a part in the performance of the US’ version of B&Q here in the UK. Its share price has been on fire, trading at record highs on an almost monthly basis this past few months as both new home sales and existing home sales have improved. In Q4 Home Depot saw sales beat expectations, rising 24.5%, with revenues rising to $32.26bn, from $25.78bn a year ago. The company also raised its dividend to $1.65c a share from $1.50c. Despite the outperformance management chose not to offer guidance for 2021, probably down to concerns anything they might say might prompt a correction in the share price. Profits are expected to come in at $2.96c a share.      
 

Target Q1 22 – 19/05 – big box US retailers have managed to adapt far better to the challenges posed by the pandemic, with Target seeing big gains in its own share price over the last 12 months. In Q4 Target posted revenues of $28.3bn a rise of 21.1%, largely due to a good holiday season and stimulus payments. This is likely to see a similar pattern for this quarter as well another round of stimulus payment trickle down into consumer spending. Digital sales in particular have been strong over the past 12 months, with a 118% year on year increase, however this isn’t likely to be sustainable as we head into the summer months and people get out and about more, after being vaccinated. Target has said it intends to invest up to $4bn over the next few years in new stores, and improve its ecommerce offering further. Profits are expected to come in at $2.06c a share, well down from $2.67c in Q4..       
 

Walmart - Q1 22 – 18/05 - Walmart full year revenues hit $559bn in its last fiscal year, driven by a huge increase in e-commerce sales in every single quarter, as more customers stayed at home and ordered on line. With the increasing popularity of on-line services Walmart announced the launch of Walmart+ in Q3 last year, a new membership service in order to better compete with the likes of Amazon and its Prime service. As with other retailer’s business costs ate into the top line as extra staff were hired to help clean stores, stack shelves and get online orders out of the door. In total the company hired in excess of an extra 500k people last year alone. On the plus side Walmart has managed to sell its Asda operation in the UK for £6.7bn, drawing a line under an area of the business that has struggled to keep pace with the ever-competitive nature of UK retail. Some of the exponential growth we saw in the first three quarters of last year showed some signs of slowing in Q4 after profits missed expectations, despite a 7.3% rise in Q4 revenues, with management also guiding net sales estimates lower. As a consequence, the shares have slipped back from last year’s record peaks and have underperformed so far year to date, though this may merely have been a case of lowering expectations. There is no reason why Walmart shouldn’t have done very well this quarter given the amount of fiscal stimulus payments that hit the US economy in March. Profits are expected to come in at $1.21c a share, however online grocery is becoming ever more competitive in the US, which means Walmart is having to run much faster just to stand still. Tougher comparatives from last year are also likely to test shareholder confidence, after the gains of the last few years. Walmart is also looking to diversify away from retail and into health care, acquiring MeMD earlier this month as it looks to widen its scope into health care beyond basic in store pharmacy services.