Federal Reserve rate decision – 14/06 – when the Federal Reserve last met at the beginning of May, raising rates by 25bps as expected, the market reaction was relatively benign. There was little in the way of surprises with a change in the statement that saw the removal of the line that signalled more rate hikes were coming a welcome sign that the US central bank was close to calling a halt on rate hikes. Despite this signalling of a possible pause, US 2-year rates are higher now than they were at the time of the last meeting. This is due to markets repricing the likelihood of rate cuts well into next year due to resilience in the labour market and core inflation. Recent briefings from some Fed officials do suggest that a divergence of views is forming on how to move next, with a slight bias towards skipping June and looking to July for the next rate hike.  With the jobs market still looking strong and wages now trending at above headline CPI the Fed may well be concerned at the message a holding of rates might send, especially given that the RBA and BoC both unexpectedly hiked rates this past few days. Nonetheless there does appear to be increasing evidence that a pause is exactly what we might get this week. The problem is in what sort of message that sends. If the message you want to send is that another hike will come in July, why wait when the only extra data of note between now and then is another CPI and payrolls report? Is the US economy likely to be in significantly different place between now and then?

US CPI (May) – 13/06 – one of the more notable trends we’ve seen in recent months has been how quickly headline inflation in the US has been declining. In June last year US CPI peaked at 9.1% and has been on a downward path ever since. This downward trend has accelerated in the last few months, after ending last year at 6.5%. In April, US CPI fell to 4.9% and a 2-year low, while core prices slowed to 5.5%.  Sharp falls in energy prices, as well as other commodity prices have accelerated this trend even as food prices have remained sticky. Nonetheless the slowdown in headline inflation has prompted speculation that the Federal Reserve might be minded keeping rates on hold this week, having raised rates at every meeting since March last year. Factory gate or PPI prices have also been falling, with core prices at 3.2%, having been as high as 9.7% over a year ago. This week’s May CPI numbers are expected to see another big slowdown in the headline number, to 4.1%, with core prices expected to slow from 5.5% to 5.3%.         

ECB rate decision – 15/06 – there appears to be little doubt that we will probably see another 25bps rate hike from the European Central Bank at this week’s rate meeting. Nonetheless this would be a notable shift from some of the recent narrative that has accompanied recent discussions about the likely rate path for the ECB. The change of emphasis appears to have come about because of recent sharp falls in the headline rate of CPI, as well as evidence that core prices may well have also seen a peak. In the latest flash CPI numbers for May, headline inflation fell to 6.1%, a sharp fall from the 7% we saw in April, as well as the 9.2% we were seeing at the end of last year. The big concern in recent months has been core prices which hit a record high of 5.7% in March and fell to 5.3% in the most recent numbers released earlier this month. We’ve also seen sharp falls in PPI as well which tends to act as a leading indicator for future inflation trends with German PPI now in negative territory. The German economy is also in recession, along with the rest of the eurozone, and the ECB needs to tread carefully given concerns that wave of deflation is now starting to ripple out across the global economy.     

China Retail Sales (May) – 15/06 – the Chinese consumer saw a relatively subdued bounce back in the aftermath of the decision by the authorities to relax lockdown restrictions back in December. There are growing signs that this rebound appears to have run out of steam if recent economic data is any guide. In the first three months of this year retail sales have rebounded strongly, but recent PMI data appears to suggest that this rebound may be stalling. While we saw a big rebound in April retail sales of 18.4%, which was also the biggest year on year gain since March 2021, the numbers came in below forecasts. It also needs to be set in the context of the Chinese economy being subject to various restrictions at the same time last year, when retail sales crashed by -11.1%, so the bar was quite low. Industrial production also disappointed, rising by 5.6%, against an expectation of a 10.9% increase, underlining how the Chinese economy has continued to struggle with low confidence and weak demand. This week’s May numbers aren’t expected to be any different with a 13.9% rebound in retail sales and industrial production forecast to slow to 3.8%.

Bank of Japan rate decision – 16/06 – so far this year we’ve seen plenty of speculation that the Bank of Japan would be forced to row back on its current easy monetary policy settings in the face of ever rising inflation. With core inflation at 4.1% and at the highest levels since the 1980’s there has been little sign that the Japanese central bank is even leaning in that direction, as it remains a clear outlier from its other central bank peers. Consequently, the Japanese yen has weakened from the 130.00 levels we saw at the start of the year to move back above the 135.00 levels that prompted one round of intervention towards the end of last year. When Kuroda left as governor in the early part of this year and was replaced by Kazuo Ueda in April there was plenty of speculation that the new governor would use this meeting to signal some early tweaks to the current policy of yield curve control, and a bank rate of -0.1%. Nothing was forthcoming, apart from a slight tweaking of their forward guidance, prompting the latest bout of Yen weakness, however in May Ueda gave the first signs that this might be about to change when he warned that Japan’s companies were acting in a way that might embed inflation into any economic rebound as rising prices forced them to pass on price rises in the form of higher wages and services costs. The Bank of Japan’s forecast continues to predict that core inflation will fall below its 2% target by the end of this year, even though currently it is more than double that number. Could this week be that start of a slight shift in the narrative for a central bank that has had loose monetary policy for over 30 years.   

UK wages/unemployment (Apr) – 13/06 – while the problems in the UK economy are well documented one of the factors that has tempered the worst effects of the cost-of living crisis has been the resilience of the labour market, with unemployment which is still even now close to 40-year lows, although in the 3 months to March we did see it tick higher to 3.9%, having been as low as 3.5% back in August last year. While unemployment has been edging higher so have wages which rose to 6.7% in March the highest levels in over 30 years outside of the pandemic. This resilience in wages has prompted concerns of a wage/price spiral on the part of some economists, and while some would acknowledge that this is a real concern that real factor driving sticky wages is higher prices and food price inflation. It’s not wages driving prices but prices driving wages when you have grocery price inflation at 17.2%. You can hardly blame people for asking for higher wages if they can’t afford to eat, and the failure to spot this inflationary surge early enough lies squarely with the Bank of England. This week’s numbers for April are expected to see wages come in at %, and unemployment to come in at 3.9%.

Tesco Q1 24 – 16/06 – when Tesco reported its full year results back in April the shares pushed higher, hitting a 12-month high in early May before slipping back to their current levels. Total revenue saw a modest rise of 7.2%, coming in at £65.76bn as consumers were forced to pay more for everyday products, although it is notable that the rise was much lower than the current rate of inflation at the time which was 10.4%, and the even higher food price inflation levels of 17%. This mismatch serves to offer an insight into how much of the rise in food and other related costs are being absorbed by Tesco along with its suppliers and blows a huge hole in those who claim that the supermarkets are gouging prices. This increase in costs was also reflected in the fall in operating profits which fell over 40% to £1.5bn, and profits before tax which fell 50% to £1bn. Since then, the supermarkets have announced further cuts in the prices of a few staples including milk, while Tesco also said it was locking in the price of 1,000 other everyday products until July 5th, as it continues to increase the pressure on its competitors. For 2024, Tesco said it was optimistic it would be able to deliver the same level of adjusted operating profit, as last year, despite the ongoing pressure on its margins, while keeping retail free cash flow in the region of £1.4bn to £1.8bn. The biggest risk is the prospect of political interference in the form of price caps in the latest in a long line of misguided political interventions to try and help with the cost-of-living.

Ashtead Group FY 23 – 13/06 – Ashtead Group shares briefly hit 12-month highs earlier this year, in the wake of the publication of their Q3 numbers. Since the shares have slipped back, but the industrial rental equipment maker is well positioned to take advantage of the US governments new infrastructure investment program, in the form of its US business which trades under the name of Sunbelt Rentals and has been the main driver of the group’s outperformance, the company raising its full-year guidance for rental revenue to 23% to 25% from 20% to 23% in March. In Q3 the company saw a 23% rise in revenue, to $2.42bn, driven mainly by rental revenues of $2.19bn. Profits before tax rose by 29% to $505m, pushing year-to-date profits up to $1.69bn, a rise of 33%.  For this week’s full year numbers, annual revenues are expected to rise to $9.6bn, driven by rental revenues of $8.46bn, and annual profits before tax of $2.15bn.

Adobe Q2 23 – 15/06 - since Adobe reported its Q1 numbers back in March the shares have gone from strength to strength. Q1 revenues came in ahead of forecasts at $4.66bn, a rise of 9% on the previous year, while profits were also better at $3.80c a share. The company’s Digital Media segment contributed the bulk of the revenue growth, with the company raising its Q2 as well as full year guidance. The company now expects Q2 revenues to come in at around $4.76bn, and profits for the full year to come in between $15.30c and $15.60c a share. On its stalled deal with Figma, Adobe said it was engaging with regulators on both sides of the Atlantic to help push the deal through, after the recent reports that the US DOJ was looking at blocking the deal. The UK’s CMA is also looking at the deal.

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