Michael Hewson MSTA CFTe
CMC Markets
- UK Spring Budget – 15/03 – the last few months have been challenging ones for the UK economy, in the aftermath of the emergency Autumn budget, with the main narrative from those times being peak pessimism. At the time we had the OBR, IMF, and the Bank of England all doubling down with deeply depressing outlooks for the UK economy. All of them were uniformly pessimistic about the prospects for the UK economy arguing that the economy was already in recession and likely to be so for at least 2 years. Since those dark days in October as well as the political upheaval and market turbulence that followed, inflation has started to come down albeit slowly, while industrial unrest has grown. Consumer spending has been weak with retail sales showing sharp falls at the end of last year. On the plus side tax revenues proved to be extremely resilient, helped by higher-than-expected inflows from self-assessment of £21.9bn, as well as strong inflows from Capital Gains tax, which contributed £13.2bn in January. This is good news for the Chancellor of the Exchequer as it means that the UK government has borrowed £30.6bn less than OBR forecasts. It also potentially gives him more wriggle room in this week’s budget to rethink some of the recent tax hikes, specifically the increase in corporation tax, which has been widely criticised. At a time when the UK economy needs all the help it can get it beggars belief that a UK Chancellor seems to think raising taxes on highly stretched businesses is a good idea. We’ve already seen and heard from several companies taking the decision to postpone or cancel investment programs in the wake of the prospect of higher tax and regulatory burdens, while other companies are looking at moving away from the UK completely. It’s an absolute fallacy that higher tax rates mean higher tax revenue, despite the UK Treasury pushing back on keeping the rate unchanged. Looking at it another way 19% of something is better than 25% of nothing, and that’s the outcome that HMRC and the Treasury might be facing. It’s strange that so many people fail to understand that concept, large companies are mobile, but people are not. There has also been speculation that the Chancellor may well extend the energy support scheme for businesses, as well as freezing the energy price cap for consumers at its current level of £2,500 given the recent sharp decline in energy prices. A further freeze on fuel duty also seems likely. The super deduction which expires in April could well be replaced with measures that allow offsetting against profits. In short, this week’s budget is the ideal opportunity for the government to stop running scared, push back on the Treasury, and start to take measures to stimulate investment and innovation, champion business, push back on the siren calls for more taxes which are self-defeating, and don’t raise the sums claimed.
- US CPI (Feb) – 14/03 – with the Federal Reserve in a blackout period ahead of next week’s FOMC meeting there has been much discussion over whether the Fed got it right when they downshifted their rate hiking cycle in February when they raised rates by 25bps, following on from a similar slowdown in December of 50bps. Since the 25bps rate move, US economic data has shifted up a gear, with retail sales in January surging 3%, and US payrolls growth also showing a strong start to the year. Inflation measures have also ticked higher in contrast to the disinflation narrative that Powell encouraged at his last press conference. While headline inflation slowed in January from 6.5% to 6.4%, markets had been expecting a larger fall, with core prices also proving to be sticker at 5.6%. Since those numbers were released subsequent inflation measures were revised higher, with PPI measures in December revised up, meaning that core PPI instead of coming in at 4.9% in January, came in at 5.4%. This week’s February CPI numbers are forecast to show another slowdown, from 6.4% to 6%, and for core prices to come in at 5.4%. With the Fed due to hike by another 25bps next week, this week’s numbers, along with the PPI numbers due on the 15th could well dictate whether we’re set for another 2 or 3 rate hikes in the next few months.
- UK Unemployment/wages (Jan) – 14/03 – UK labour market has been one of the bright spots of the UK economy, even accounting for the fact that wages are lagging inflation. The most recent wage numbers showed wage growth jumped sharply in the three months to December, rising from 6.5% to 6.7%. What was also notable was that payrolled employees rose by 102k in January which in turn reinforces the tight nature of the UK labour market with headline inflation still in double-digit territory. Private sector pay continues to lead with an average of 7.3%, compared to 4.2% in the public sector. Unemployment remained steady at 3.7%, however given the gains seen in payrolled employees in January, this could see a fall to 3.6% in this week’s January numbers. Furthermore, resilience in wages data will make it much harder for the Bank of England to procrastinate over its rate-hiking policies. Bank of England governor Andrew Bailey may like markets to think that the MPC is almost done when it comes to rate hikes, however with headline CPI still above 10% and core prices and wages growth well above 6% he may be able to kid some of the people some of the time, but he is unlikely to be able to push back against at least another 50bps of hikes between now and the summer.
- US Retail Sales (Feb) - 15/03 – having seen the US consumer retrench at the end of last year, with two successive monthly declines of over -1%, there had been an expectation that January would see a rebound in spending, especially given the strength of the jobs report a few days earlier. What no one was quite prepared for was a 3% gain as the US consumer came roaring back with a vengeance. Even the control group measure which is used to calculate the GDP contribution, rose by 1.7%, meaning that the consumer rebound was broad-based. The big question is whether this was maintained into February and if it has then it will have significant ramifications for Fed policy with respect to guidance next week when the Fed meets to decide on its forward guidance as well as the trajectory of its dot plot guidance for further rate hikes.
- ECB Rate Meeting – 16/03 – we already know that the ECB is set to hike by another 50bps this week, with the wider question being how many more hikes the governing council has in its locker. The hawks on the ECB have been becoming ever more vocal led by Bundesbank head Joachim Nagel who, despite the real prospect that the German economy is in a recession is calling for more aggressive action on sticky inflation. The most recent ECB minutes showed that a number of governing council members wanted to go harder than a 50bps move at the last meeting and wanted to go by 75bps. They only relented because of the pledge to do another 50bps this month, as central bankers weigh up the risks of overtightening, as opposed to doing too little and allowing inflation to become entrenched. These calls for tighter policy have been echoed by other ECB members, like Austria’s Robert Holzmann who has called for 50bps in March, May, June, and July. Markets have already started to price in an ECB terminal rate of over 4% meaning that any further rises in long-term yields in countries like Italy could cause real-term problems in the long run if sustained. With core CPI already at a fresh record high this month of 5.6% and headline inflation back on the increase in Spain, France, and Germany the ECB is continuing to play catchup, while also needing to remain mindful of financial stability.
- China Retail Sales (Feb) – 15/03 – having seen retail sales collapse at the end of last year this week’s Chinese retail sales numbers have the potential to provide a significant upside surprise after lockdown restrictions started to get eased in December. The recent China trade numbers pointed to a modest improvement in domestic demand, and with the period also including Chinese New Year, there would appear to be a decent probability of a bit of so-called revenge spending, as consumers celebrate coming out of lockdown with a bit of a spending spree. A rather modest rebound of 3.5% is expected, following on from two months of declines, while industrial production is expected to also see a rebound to 3.2% from a 1.3% rise in the previous month.
- Deliveroo FY22 – 16/03 – the Deliveroo share price appears to have found a bit of a base around the 80p area. At its last trading update, there was a positive response to its Q3 trading update, despite the company downgrading its full-year guidance on sales growth. The uplift was hugely welcome given that the shares are well below their 390p IPO price, which suggests that a lot of pessimism may be already in the price. Gross Transaction Value (GTV) saw an increase of 8% year on year, with the UK operation outperforming international markets, rising by 11%. Consequently, Deliveroo downgraded its full-year guidance on GTV growth to between 4% to 8%, due to concerns about consumer disposable income. There was some good news as EBITDA margins were revised higher to between -1.2% and -1.5%, which suggests the company is making progress on reducing its costs by way of lower marketing spend. In its Q4 update in January, the shares popped to a 2-month high before sliding back again, after announcing that it generated over £1bn of UK GTV for the first time ever, a rise of 9%, pushing total GTV up to £1.8bn. For the full year Deliveroo said it expects to deliver just over £7bn of GTV across all operations, a rise of 7%, and that its adjusted earnings almost achieved breakeven during the second half of the year. This number is expected to continue to improve into the next fiscal year with EBITDA margins revised up from the previous -1.2% and -1.5%, to -1%. In an attempt to streamline its operations further, Deliveroo also took the decision to exit its Australia operation back in January.
- Balfour Beatty FY 22 – 15/03 – after upgrading its profit expectations for the year back in December the shares have moved up to their highest levels since 2008. It’s been a long road back for a business that was on the brink back in 2013, and also got caught up in the Carillion fallout 5 years ago when it had to take millions of pounds of write-downs. Under the stewardship of CEO Leo Quinn refocussed its efforts on higher margin work in all of its markets, primarily in the US and UK, while disposing of underperforming or non-performing assets. This focus on higher margin work has realised £65m in profits in respect of the disposal of five assets. Its order book is expected to be around 5% ahead of last year, as is full-year revenue. In January Balfour Beatty announced another contract win of £1.2bn in respect of the Lower Thames Crossing which involves the design and delivery of 10 miles of new roads connecting the M25 at junction 19 and the A13 with a river crossing at Tilbury Essex. The company also set out a plan in January to buy back up to a further £50m of shares to be completed by May.
- Adobe Q1 23 – 15/03 – Adobe shares took a swan dive to their lowest levels since March 2020 last September after the company downgraded its Q4 revenue numbers. These came in as expected at $4.53bn in December, while profits beat expectations, coming in at $3.60c a share. On guidance, Adobe said they expected revenues of $4.6bn to $4.64bn for Q1 while keeping its full-year estimates unchanged. The company was on the receiving end of some unwelcome news last month after its $20bn deal to acquire Figma, a mobile web interface design company, was reported to be the subject of an antitrust investigation by the DOJ with a view to blocking the deal. Profits are expected to come in at $3.67c a share.
- Williams-Sonoma Q4 23 – 16/03 – this high-end retailer has seen its share price tread water over the last few months but it remains a popular brand amongst US consumers at the upper end of the income scale. In Q3 the owner of Pottery Barn reported record revenues for the quarter of $2.19bn, beating forecasts. Profits fell slightly short of forecasts, although they were still up from a year ago at $3.72c a share. Due to concerns over the outlook the retailer declined to reiterate its previous full-year guidance of mid to high single digital annual net revenue growth, due to high levels of “macro uncertainty” and elevated inventories, sending the shares lower, although we’ve seen a modest recovery since then. Inventory levels are expected to come down in Q4, however, they are still 33% above the levels they were a year ago. Profits for Q4 are expected to come in at $5.46c a share.
- FedEx Q3 23 – 16/03 – after falling sharply back in September last year to two-year lows, after issuing a surprise profit warning, the shares have slowly clawed back their lost ground, and are up over 40% from that trough. In December FedEx beat those lowered Q2 expectations on profits, returning $3.18c a share, although they missed on revenues, which came in at $22.8bn. The outperformance came about due to the company increasing its prices, as well as announcing widescale cost reductions back in September. FedEx also said it would be cutting another $1bn in costs on top of the $2.7bn it announced previously. FedEx also reinstated earnings guidance for the full year, announcing a new target of between $13 and $14 a share. The big jump in retail sales seen in the US economy at the start of this year augurs well for a decent number for Q3 for FedEx with profits expected to come in at $2.74c a share.
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