The Week Ahead: US CPI, China Trade, Tesco, Sainsbury, M&S and US Bank earnings

US CPI (Dec) – 12/01 – the last few months have seen US CPI fall from peaks of 9.1% in June to levels of 7.1% in November. This was well below expectations of 7.3% and a sharp fall from October’s 7.7%, offering a boost to those who think that the Federal Reserve may not have to go as hard, or as far on rate hikes this year. Core prices also subsided from 6.3% to 6% and could well slide further this week to 5.7%. Since then, some of that optimism has undergone a bit of a reset due to firmer wages numbers which do appear to offer some two-way risk to a narrative that wants to see the FOMC slow the pace of rate hikes to 25bps when they next meet on February 1st. Fed officials including Chairman Powell have insisted that rates need to go much higher and while markets remain sceptical of that narrative the calculation also needs to be made that many on the FOMC would rather err on the side of doing too much than too little and as such might be tempted to ignore the warnings signs of a hard landing.
ECB Minutes – 12/01 – December’s ECB meeting caught a lot of people off guard when President Christine Lagarde signalled that while the 50bps rate hike signalled a slowdown in the pace of the rate hiking cycle it did not signal a sign the ECB was going soft on its inflation fight. On the contrary she spooked the markets by saying that the intention was to hike rates at successive meetings by at least 50bps for the next 3 meetings. This sparked a sharp rise in European bond yields amidst concerns that the ECB was about to make another big mistake, only 10 years after it made a similar error, hiking aggressively into a downturn. It is clear from the narrative coming from several ECB Governing council members that they want to put the inflation genie back in its bottle with several members arguing for a terminal rate in excess of 3%. While Lagarde acknowledged that there were sizeable differences on the governing council about how high rates need to go, there is a risk that the ECB might well overplay its hand. This could in turn provoke an even steeper downturn in order to assuage the deep concerns in Northern European countries about the stickiness around current levels of inflation and where there is a deep-rooted fear about high inflation levels. The publication of the latest minutes ought to give a deeper insight into how deep these splits are, and how much the ECB is prepared to push rates higher.
China Trade (Dec) – 13/01 – having seen the Chinese government do a screeching U-turn on its zero-Covid policy last month, there is little sign that this change is likely to have an imminent material impact in the short term. In November the various shutdowns, had a chilling effect on domestic demand, as well as China’s ability to act as the workshop to the world. Exports plunged in November by -8.9%, with some of the reasons well documented, with the unrest at the Foxconn plant in Zhengzhou being one well-documented example. Imports also plunged by more than expected at -10.6%, the worst month since May 2020, as Chinese domestic demand continued to struggle in the face of over 2 years of perpetual restrictions and lockdowns. The decision to ease restrictions in the face of rising popular discontent has had the effect of making the Covid problem worse in terms of infection as well as death rates as a largely unvaccinated population suddenly finds the virus ripping through it. This is likely to see further weakness in the December trade numbers, with exports set to slow by -12% and imports set to decline by -10%.
Sainsbury Q3 23 – 11/01 – post Christmas trading numbers are generally a decent bellwether when it comes to consumer spending patterns, and are likely to be even more so given how much tighter peoples budgets are now with the soaring cost of energy. When Sainsbury reported in November the UK’s number 2 supermarket reported that H1 revenues rose 4.4% to £16.4bn, while profits before tax slid 29% to £376m. Total grocery sales rose 0.2% in H1, with all the gain coming in Q2, which saw sales rise by 3.8%. When general merchandise is included, the picture is less bright, with declines in Argos and Sainsbury GM and clothing. This was offset by a big increase in fuel sales. Total retail excluding fuel saw a decline of -1.3%, and including fuel, an increase of 4.4%. As we look ahead to this week’s Q3 updates it is worth noting that grocery price inflation of over 15% is likely to keep the pressure on margins even more, although the World Cup may have provided a boost. Last month, Sainsbury committed to set aside another £50m between now and March, on top of the original £500m outlined in May, in an attempt to better compete with the discounters and help its customers through the rising cost of living. Sainsbury said in November it is halfway through a £1.3bn cost saving program with management keeping full year profit guidance unchanged at between £630m and £690m.
Tesco PLC Q3 23 - 12/01 – despite lowering its profits guidance back in October, a move that briefly sent the share price to 6-year lows, below the 200p level, the shares have managed to bounce back, in a year that has seen margins shrink quote sharply. Nowhere is that better illustrated than in the supermarkets statutory operating profits, which have fallen 43.6% during H1 to £736m on the back of a 6.7% rise in revenues of £32.5bn. Profits before tax fell 63.9% from £1.14bn a year ago to £413m. On a retail adjusted operating profit basis Tesco saw £1.3bn on an H1 basis. Retail like for like sales saw a 3.2% rise year on year, with the operation in the UK accounting for 0.7%, and the Booker operation seeing a rebound of 13.9%, on the back of weaker post Covid comparatives a year ago. Tesco went on to warn that full year profit expectations were likely to come in at the lower end of expectations for the full year with retail adjusted operating profit expected to come in between £2.4bn to £2.5bn
M&S Q3 23 – 12/01 - It’s not been a good year for the M&S share price, down over 40%, and wiping out all its gains from 2021. Having found a short-term base in October, the shares managed to hold above their November 2020 lows, with markets pricing in a significant slowdown in consumer spending. The H1 results in November have seen profits before tax fall to £205.5m with the Ocado side of the business recording a £0.7m loss, compared to a profit of £28.1m a year ago. Ocado revenues also saw a decline of 4.2%. Total revenues rose 8.5% to £5.54bn, with general merchandise finally appearing to be delivering the goods so to speak, with sales up 14% and adjusted operating profits of £171.4m. Food sales were higher by 5.6%, with M&S saying that as they enter what is generally their best quarter of the year, trading is in line with forecasts, with clothing and home sales up 4.2%, food sales up 3% in the first four weeks of H2, although they expect Q4 to be particularly challenging. Costs have risen over the past 12 months contributing to a decline in operating profits from £124m to £71.8m, excluding £19.7m of business rates relief. Overall costs have seen a rise of 8.4% resulting in a 70bps reduction in margins. It is hoped that the acquisition of Gist will help ameliorate some of this increase in costs, particularly in the food business, which M&S is devoting quite a lot of resources to. While the shares have rallied modestly since the publication of these H1 numbers, a lot of the recent pessimism seems somewhat overdone given the changes that have taken place over the last few years under the tenure of previous CEO Steve Rowe, with the current Marks & Spencer a very different animal from the business two to three years ago. The hope is that new CEO Stuart Machin will be able to pick up where Rowe left off and complete the job. So far, the signs look promising in what is set to be a challenging economic environment. In October M&S announced it would be speeding up the closure of some of its main stores, while opening more food halls. This process is expected to happen over the next 3 years, instead of the previous 5-year timeframe.
Whitbread Q3 23 – 12/01 – at a time of stretched consumer budgets who would think that Premier Inn owner Whitbread would be seeing some measure of outperformance. Like a lot of companies in October the share price hit an 18-month low on the back of the sharp sell-off prompted by the UK mini-budget. While the shares have rebounded since then the business is still likely to face challenges due to the Chancellor’s decision to raise corporation tax levels from April to 25%, with little indication that he is inclined to reform the business rates regime, although we could see some government help with elevated energy costs outlined at some point between now and April. When the company reported in October there was optimism that the long hot summer in the UK would have seen a significant uplift in revenues. While some will quibble, that statutory revenues came in slightly short of forecasts, we've still seen a strong rebound, as profits came in better than expected, after the losses of last year. A strong UK market helped to push H1 revenues up to £1.35bn. The revenue numbers were more than double the same period last year, and also 25% above where they were pre-pandemic, while statutory profits before tax came in at £233.9m, yet the shares have struggled to move higher. Occupancy rates in the UK came in at 84.8%, while in Germany they were lower at 63.4%, although both beat forecasts. Costs have been rising and Whitbread did warn that margins would be lower in the second half of the year than in H1, which this week’s Q3 numbers could reinforce. The increase in costs for the full year is expected to be in the region of £60m.
JPMorgan Chase Q4 22 – 13/01 – it’s been a disappointing year for US banks in terms of share price performance, although the declines need to be set in the context of a decent 2021, when the shares were boosted by buybacks and improved pay-outs as loan loss provisions from Covid disruption were added back to the balance sheets. This trend has reversed in 2022, with the rising cost of living prompting banks to adopt a more cautious strategy in retail, while the volatility in financial markets has seen investment banking revenue fall back sharply in certain areas, as deal activity slips back sharply. In Q3 JPMorgan shares hit an 18-month low, and while we’ve seen a modest recovery since then, challenges over the outlook for 2023 remain very much front of mind. In Q3 JPMorgan reported revenues of $33.49bn, beating expectations of $32.35bn, while profits came in at $3.12c a share, above the $2.91c a share. Digging into the details, Q3 investment banking and FICC sales and trading beat expectations, coming in at $1.71bn and $4.47bn, while equities and sales trading revenue came in short at $2.3bn. One notable item, and it was something that was expected, was a big increase in provisions of credit losses to $1.54bn. This was well above expectations and appears to indicate that JPMorgan expects to see trouble ahead. This week’s Q4 numbers should go some way to determining whether those concerns are valid, and whether we get further provisions. JPMorgan also reported losses of $959m on sales of US treasuries with CEO Jamie Dimon saying that he expects to be able to resume stock buybacks in the next fiscal year. Profits are expected to come in at $3.12c a share.
Citigroup Q4 22 – 13/01 – while JPMorgan Chase saw a relatively decent performance in its Q3 numbers Citigroup was much more of a mixed bag, and the share price performance last year reflects that relative weakness. Both revenues and profits beat expectations, revenues coming in at $18.5bn, while profits came in at $1.63c a share. While profits were better than expected, there was some disappointment around FICC Sales and trading revenue which came in at $3.06bn slightly shy of expectations. Q3 investment banking revenue was also disappointing coming in at $631m, well below forecasts of $1.07bn. The improvement in revenues appears to have come about through improvements in its consumer business, with increases in its branded and retail services business, which handles credit cards, as well as wealth management. Personal banking and wealth management revenue rose to $6.2bn, while branded credit cards saw a 10% rise in revenues to $2.3bn. Provisions came in at $1.4bn which was in line with expectations. Profits are expected to come in at $1.30c a share.
Bank of America Q4 22 – 13/01 – the performance in Bank of America’s share price has been notably poor in 2022, with consistent underperformance in its investment banking division which has seen revenues undershoot two quarters in a row. The bank has also seen operating expenses come in higher than expected, and as such we could well start to see management outline cost saving measures over the next few quarters. Q3 revenues came in at $24.5bn, with investment banking revenue coming in line with expectations of $1.17bn. On a more positive note, trading revenue did beat expectations, coming in at $4.1bn, with FICC revenue rising to $2.57bn, and equities trading to $1.57bn. It was also notable that provisions for credit losses were increased to $898m. The bank appears to be benefitting from the higher interest rate environment with higher-than-expected revenues in its consumer division, with deposits up 7% and loans up 5%. Expenses were also higher as well rising to $15.3bn. Demand for loans could well have seen a drop off in Q4 as rising mortgage rates bear down on the housing market. Profits are expected to come in at $0.82c a share.
Bed Bath and Beyond Q3 23 – 10/01 - last week time appeared to be running out for the beleaguered business after it was reported the company was filing for Chapter 11 bankruptcy protection saying it may no longer be able to continue as a going concern. The writing has been on the wall for several months now since Ryan Cohen, the company’s biggest investor back in August used a big short squeeze to sell his entire 9.8% stake in the business, with the shares collapsing below $10. Since the shares have been on a slow downward spiral with the strategic update announced at the end of August failing to restore confidence in the business model. The strategic update saw the company announce that it saw a Q2 sales decline of 26%, while announcing the closure of 150 stores and significant job losses, including senior management positions, including the COO and chief store officer. It also said it reserved the right to sell and issue new shares from time to time in order to help it to pay down its debt levels, as well as for other general corporate purposes. As part of the August update the company also said it had agreed new financing deals of more than $500m as it looks to cut down on admin costs by around $250m. Its Q2 numbers were equally as bad as feared with revenue declining 28% to $1.44bn with losses coming in well above expectations of $1.85c a share at $3.22c a share, or $366m. Last week’s news that the company is exploring various options appears to be the final straw for a business that appears to have had its day and which expects to see a Q3 loss of $385.8m when it reports later this week, on revenues of $1.26bn, well below forecasts of $1.4bn.

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The Week Ahead: US CPI, China Trade, Tesco, Sainsbury, M&S and US Bank earnings

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