Michael Hewson MSTA CFTe
CMC Markets
- Fed minutes – 22/02 – if the market reaction to the recent Fed rate hike is any guide, there appears to be a type of cognitive dissonance when it comes to what the market wants to hear from the Federal Reserve and what the US central bank is trying to say. To borrow a line from the film Cool Hand Luke, “what we’ve got here is a failure to communicate”. Long story short, the market thinks the inflation job is done, or at least close to it, even though the recent non-farm payrolls report appears to have muddied the waters in that regard. For all of Fed chair Jay Powell’s insistence that more rate hikes were coming at his post meeting press conference, and that the Fed was not looking at cutting rates this year, his failure to push back emphatically on direct questions about market expectations of rate cuts this year, created an even greater divergence between market pricing on rates, and the Fed’s expectations of how the economy is likely to evolve. Since that meeting, we’ve had a succession of Fed officials push back on the dovish narrative insisting that rates are likely to stay higher for longer, however the release of the latest minutes also needs to be set in the context of the fact that they came before the recent jobs, and ISM services data. That said, the recent intervention by non-voting member, Cleveland Fed President Loretta Mester that she saw a compelling case for a 50bps move at the last meeting was an unexpected intervention to the cosy consensus that had developed around the 25bps narrative. This was compounded by another non-voting member, James Bullard of the St. Louis Fed who suggested 50bps in March could be a consideration. This raises two questions, one is to how many other Fed members saw a compelling case for a 50bps move at the last meeting, and two, how much could that have shifted over the last few weeks in light of the recent strength of US data. The minutes should answer the first question, the second question will need to see more data. Another key question will be how long Fed officials see rates staying at current levels, and whether they still see the December dots as an accurate representation of future rate hike expectations.
- US Core PCE Deflator (Jan) – 24/02 – in the last 2 months the US Core PCE Deflator has fallen back sharply from 5.2% in September, falling to its lowest level since October 2021 in December at 4.4%. The sharp fall from those peaks has certainly helped drive the disinflation narrative that has got the markets speculating that we might start to see some of the recent rate hikes start to get reversed before the end of this year. As the Fed’s preferred inflation measure, sharp falls in this indicator could help reinforce the narrative surrounding weaker prices growth. Unfortunately, this week’s January numbers may not support this conclusion if the recent payrolls and services data is any indication. We could see a big rebound in prices driven by higher personal spending as a result of the strong jobs data.
- EU CPI (Jan) – 23/02 – inflation in Europe has been falling sharply in recent months, although the recent Germany CPI numbers would appear to suggest that it is a little stickier than perhaps the ECB would like. The most recent flash numbers for January saw headline CPI fall from 9.2% to 8.5% a bigger fall than expected with the month on month decline of -0.4%. Core prices however increased, rising to 5.2% on an annualised basis from 5.1% in a sign that while headline pressures were easing sharply, there is little sign that core prices are going the same way. This week’s January final numbers could see an uptick given that Germany CPI came in higher than expected, in spite of continued weakness in natural gas prices which have slipped to their lowest levels in 18 months.
- US Q4 GDP – 23/02 – despite the rise in interest rates we’ve seen over the past few months, the US economy has held up reasonably well, with strong growth in Q3 as well as Q4, after a weak H1. The first iteration of US Q4 GDP saw the economy expand by 2.9%, which was above expectations of 2.5%. Personal consumption was a little disappointing, slipping back to 2.1%, which wasn’t that surprising given that November and December retail sales contracted. This trend will probably rebound in the January personal spending and income numbers.
- HSBC FY 22 – 21/02 – the rebound since the lows in October has seen HSBC shares rally to their best levels since September 2019, on a combination of rising interest rates as well as optimism over a rebound in China’s economy in 2023. When HSBC reported in Q3 the shares fell back after reporting Q3 revenue of $11.6bn, while profits after tax came in at $2.56bn. This was significantly lower than the numbers in Q2, with profit attributable to shareholders, dropping to $1.9bn, down from $5.77bn in Q2. Part of the reason for the lower profits was an increase of provisions for non-performing loans of $1.1bn, doubling the amount set aside year to date to $2.2bn. On the plus side the banks NIM rose in Q3 to 1.57% from 1.35%, helping to push net interest income to beat expectations, reflecting the higher interest rate environment. A month later the bank announced it had agreed to sell its Canadian operation to Royal Bank of Canada for $10bn in cash. This appears to be the latest example of Asia’s largest bank looking to gravitate away towards its core markets in Asia, and in so doing helping to keep its shareholders onside as it looks to boost the resilience of its core operations, as well as improving pay-outs. This week’s full year numbers should point to a better outlook with the Chinese economy reopening even if Q4 disappoints due to the covid disruption which only started to ease in the middle of December.
- Lloyds Banking Group FY 22 – 22/02 – despite the recovery off its lows in October, the Lloyds share price remains below its highs last year as well as its pre-pandemic peaks set back in December 2019. The shares have underperformed primarily due to concerns over the economic outlook and its heavy reliance on the UK domestic market, particularly mortgages and consumer credit. Despite these concerns the bank has consistently outperformed while increasing profits to the point its more profitable now that it was back in 2019 when the shares were much higher. In Q3 statutory pre-tax profits fell back, coming in at £1.51bn, a 26% decline from the same quarter last year, and down a similar percentage from Q2. A large part of the reason for this was due to a large increase in provisions for non-performing loans, which increased by £668m in a sign that the recent squeeze on customer finances was increasing concern about possible loan losses, pushing impairment provision year to date to over £1bn. In its Q3 numbers the bank also reported that unsecured loan demand remained strong with a 4% increase to £8.8bn, while the open mortgage book saw an increase of 1%. This is expected to see a slowdown in Q4 and into the new fiscal year, even as net interest margins have improved to 2.98% for the quarter, up from 2.55% in Q2, pushing average NIM year to date up to 2.84%. Inevitably this improved profitability has led to calls from certain parts of the political spectrum for a windfall tax on the banks, despite the facts that profits are lower this year than they were last year. Lending to small business also saw a modest decline of 3% to £39.8bn, not altogether surprising given the economic backdrop, and the increases in taxes that are due to come into effect in April.
- Rolls-Royce FY22 – 23/02 – when new CEO Tufan Erginbilgic took over earlier this year he didn’t hold back in the challenges facing the current business. Likening the company to a “burning platform” his words sent the shares off their recent highs, after a rally from the September lows of 70p, which saw the shares hit their highest levels since February last year. There is no question the company has its problems, with its heavy reliance on its civil aerospace division a notable weak spot, although even here there are grounds for optimism as airlines slowly return to their normal pre-Covid flying patterns. In Q3 the company that various problems in its supply chains meant that inventory levels were higher than they should be, due to high demand in its power systems business which was seeing record orders. These problems have caused a higher-than-expected build-up of inventory. Large engine flying hours were also at the lower end of expectations, at 65% of 2019 levels despite the return of long-haul flights last year. The company blamed China’s zero-covid policy for impacting the business particularly in Asia, a trend which should improve in the coming months. The ITP Aero proceeds have been used to pay down a £2bn floating rate loan. As we look ahead to the new fiscal year let’s hope the new CEO paints a more upbeat and more optimistic outlook than the one, he laid out last month. After all, if he can’t paint a positive outlook for the business, why should shareholders.
- BAE Systems FY 22 – 23/02 – over the last 12 months the UK biggest defence contractor has been one of the best performers with the shares hitting record highs earlier this year. The Russian invasion of Ukraine has pushed BAE to the forefront of investors radars given its position as a manufacturer of artillery shells and howitzer rounds, as well as other defence systems and hardware. In Q3 the company announced it had an order book backlog of £52.7bn, with the company seeing £10bn of orders in Q3 alone, on top of the £17.9bn in H1. The company kept its full year guidance of underlying EPS growth of 4% to 6% unchanged.
- IAG FY 22 – 24/02 – airlines have got off to flyer this year, amongst the best performing sector over optimism that as we head into 2023 consumers will start splashing what available cash they have on holiday getaways in what looks set to be the first year since covid that won’t be subject to widespread disruption. The smaller budget airlines have recently reported a huge surge in bookings numbers, which bodes well for the likes of the big carriers as well. In Q3 IAG reported adjusted operating profits of €1.1bn, while revenues beat expectations coming in at €7.33bn, pushing above 2019 levels, despite operating at lower capacity. The higher revenue level, while welcome, simply reflects higher ticket prices, with business travel back at 75% of 2019 levels. Profits after tax for Q3 rose to €853m. For the year-to-date IAG has managed to edge back into the black to the tune of €170m. For Q4 capacity is expected to be at 87% of 2019 levels, with Q1 expected to rise to 95%, which seems a little on the optimistic side given the economic outlook, and how only Ryanair has managed to return to those sorts of levels of load capacity.
- Walmart Q4 23 – 21/02 – since falling sharply to 2-year lows in May last year after reducing their sales growth targets and missing on profits due to higher costs, Walmart shares have slowly recovered most of that lost ground. In Q3 the retailer reported Q3 revenues of $152.8bn, and profits of $1.50c a share, which were both well above expectations. The profit number for the quarter was wiped out by a one-off $3.1bn opioid settlement, meaning that the profit turned into a net quarterly loss of $1.8bn. Despite that Walmart upgraded its full year guidance and posted gross margins of 23.8% also slightly ahead of forecasts, as well as announcing a $20bn share buyback. Walmart has also managed to reduce its inventory level down to 13%, haling it from Q2’s 26%, helped by sales growth of 8.2%. The big question is whether Walmart will be able to meet this target given the slowdown in US retail sales seen at the end of last year. In previous quarters Walmart warned that rising prices were prompting a shift away from higher margin goods to lower margin everyday staples. Profits are expected to come in at $1.51c a share.
- Nvidia Q4 23 – 23/02 – having hit two-year lows back in October last year, Nvidia shares have undergone a decent rally since then, retracing 50% of the decline from the record highs from November 2021. The rebound from those lows appears to have run into a bit of trouble in recent days as concerns over the economic outlook increase. In August Nvidia warned on its margins as well as cutting its revenue outlook. Its Q2 numbers confirmed that downgrade to guidance, with profits coming in at $0.52c a share and revenues coming in at $6.7bn, with the company citing a slowdown in gaming revenue to $2bn. In Q3 revenues came in at a lower $5.93bn, although demand for its data centre chips was better, which offset slowing demand for gaming chips. Profits came in at $680m, slightly below expectations, with the company offering Q4 revenue guidance of $6bn, +/- 2%. Since the start of this year Microsoft indicated that demand for gaming had remained lower, which is likely to be reflected in Nvidia’s revenue on the gaming side. Demand for higher specification AI chips could well offer some hope here with Nvidia a key supplier in this area. Profits are expected to come in at $0.81c a share.
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