The week ahead: US CPI, Fed minutes, Tesco, and JPMorgan chase results

Fed minutes – 12/04 – Despite the turmoil rippling through the US banking system in March the Federal Reserve went ahead and raised rates by 25bps, however, the tone in the statement came across as much more dovish with the removal of the reference to “ongoing increases will be appropriate”, with “some additional policy firming may be appropriate”. This change helps to give the Fed wriggle room to pause at the next meeting, if the data permits, as well as indicating that the end of rate rises could be close. This week’s minutes are also likely to be instructive as to how seriously the option of a pause on rates was discussed, and whether in going down that route may have sent a signal that the Fed was more concerned with the current situation than markets would have liked. Powell did admit that a rate pause was considered due to the banking crisis, however, the challenge for the Fed would always have been how to present this change without spooking the markets even more. Powell did go on to say that the prospect of rate cuts this year was not being considered, which some had touted might have been an option. A cursory analysis of the latest dot plot chart confirmed that Fed officials were not considering cutting rates, even as markets continued to price that very possibility. Expect the minutes to focus on the uncertainty around recent events while also outlining the data dependence component of any further moves on interest rates.   

US CPI (Mar) – 12/04 – US headline inflation has been coming down steadily since the record peaks of June last year of 9.1%. since then, prices have been slowing steadily, falling to 6% in February, and the lowest levels since October 2021, down from 6.4% in January. Core prices on the other hand have been slowing much more gradually slipping to 5.5% in February, and still well above the levels seen through all of 2021. In a sense this slowdown is encouraging given the pickup in consumer spending seen at the start of the year, however, in other areas of the economy, US inflation has continued to remain stubbornly high. This week’s core numbers are predicated to tick back up to 5.6% which might deal a blow to expectations of an imminent Fed pause when the central bank next meets in May.

US retail sales (Mar) – 14/04 – After a strong start to the year US retail sales stalled in February slipping -0.4%, in the aftermath of the 3.2% surge seen in January. Personal spending also saw a similar slowdown in the same months, slowing from 2% in January to 0.2% in February. With all the concerns over bank runs in the US during March and consumers shifting their funds from smaller US banks to the biggest ones, consumer confidence managed to hold up pretty well. That doesn’t necessarily mean that we’ll see a similar pickup in retail sales. Expectations are for another weak reading of -0.4%, however, the caveat in that regard is that the US labour market continues to hold up well, while gasoline prices slipped to a 15-month low. This may help support spending in other areas of the US economy.

China Trade (Mar) - 13/04 – Recent PMI data in China has shown a big pickup in service sector activity during March as economic activity returns to normal after Chinese New Year. In March, non-manufacturing PMI surged to its highest levels in over a decade, as the Chinese economy continued its post-Covid reopening process. In the two months of January and February China trade saw an improvement in the wake of the sharp slowdown seen in the last 2 months of 2022, which saw the various rolling restrictions and lockdowns impact the Chinese economy markedly. While the numbers were still in negative territory, given that they came against the comparatives of a pre-Covid lockdown economy, they were still better than expected. Exports slid by -6.8%, which was slightly better than expected, while imports slid by -10.2% which was more than expected so it was somewhat of a mixed bag. As we look to this week’s China trade numbers, we have seen reports of a rebound in electric car sales which points to a bout of revenge spending that could help boost the Chinese economy in the short term. March exports are expected to show a decline of -7.4% while imports are expected to decline by -6.9%.   

UK GDP (Feb) – 13/04 – Having seen the UK economy revised up to 0.1% GDP growth in Q4, thus avoiding the ignominy of a technical recession, the economic data since the end of last year has started to show further signs of an improvement. This has been particularly notable in the services sector, which after a weak Q4 has seen recent monthly PMI numbers recover strongly in February and March. Consumer spending has also picked up sharply with a lot of the recent retail updates showing that while consumers do have money to spend, they are spending it more judiciously. In January the UK economy grew by 0.3%, despite sky high inflation, as consumer spending rebounded with retail sales gaining 0.9%. This was followed by a 1.2% gain in February, although sales volumes have lagged due to higher prices.  Against such a backdrop, another positive GDP number for February could well go some way to increasing the odds of a positive Q1 GDP print for 2023. 

Tesco FY 23 – 13/04 – Since issuing a profits warning back in October the Tesco share price has gone from strength, despite margins that have continued to come under pressure over the last 12 months. When Tesco reported its post-Christmas numbers back in January total group sales rose by 5.7% quarter to date. This accelerated to 7.9% in the weeks leading up to Christmas, with the UK and Ireland business seeing sales growth of 5.2%. Central Europe also performed well seeing like for like sales growth of 12.3%. Its Booker business also saw a decent performance with a 19.2% increase on the catering side. The UK’s number 1 supermarket maintained its market share position of 27.5% despite the increasing competition from the likes of Aldi and Lidl, while reconfirming its full year guidance or adjusted operating profit of between £2.4bn and £2.5bn. In the most recent Kantar sales survey, Tesco enjoyed 12-week sales growth of 6.9%, however with food price inflation still at record levels of 17.5%, and the supermarket agreeing a further increase in wages for its staff, costs look set to continue to remain under pressure, although a recent decline in fuel prices may well have helped when it comes to deliveries.        

AO World Q4 23 – 14/04 – Has had its share of problems after getting a huge lift during the pandemic as business for electrical goods shifted online. These growing pains presented problems of their own in terms of scaling its operations so when the inevitable slowdown happened the business struggled to cope as costs surged. Back in 2021 the shares rose to a record high of 443p, as a pandemic buying frenzy pushed the shares up from lows of 48.5p in the space of 9 months. It’s taken a little bit longer to round-trip that journey with the shares hitting a record low back in August of 39p. We’ve seen a slow recovery since then helped by two guidance upgrades this year, one on January which saw full year EBITDA guidance increased to between £30m and £40m, with the focus on reducing costs with revenues set to see a 17.2% decline from last year. In March EBITDA guidance was raised again, to between £37.5m and £45m, with management citing further margin improvements.      

JPMorgan Chase Q1 23 – 14/04 – it’s been a difficult quarter for US banks with the collapse of Silicon Valley Bank, Signature Bank and the attempts to stabilise the regional banking sector in the US. When JPMorgan reported its Q4 results in January the bank painted a cautious outlook for the US economy, despite a strong end of year showing. The headline number saw a beat of $35.57bn in revenues, while profits came in at $3.57c a share, or $11bn. Digging into the details, investment banking and FICC and sales trading came in below expectations at $1.39bn and $3.74bn respectively, while equities also came in light at $1.93bn, against a forecast of $1.98bn. Higher interest rates have helped boost net interest income by 48% to $20.3bn, and it is here where we’ve seen the real revenue and profit gains. These higher rates appear to have come at a cost elsewhere in the US banking system the effects of which may well continue to be felt over the rest of this year. The bank set aside a rather large reserve build of $1.4bn, as a result of a big increase in credit costs to $2.3bn on the back of a deterioration in the economic outlook, with the bank saying that they have a baseline assumption of a mild recession. These concerns can only have risen further in light of recent events with the main focus on this US bank earnings season on how much the recent turmoil has hit the sectors profit numbers, not only in terms of the impact of loan demand but also in terms of deposit inflow. A lot of SVB’s clients moved their funds to JPMorgan and other US banks on the back of the collapse. Q1 profits are expected to come in at $3.40c a share. 

Citigroup Q1 23 – 14/04 – Citigroup share price slipped back towards its October lows on the back of the March turmoil in the US banking sector. Here we can also expect to see some deposit inflow as US customer’s steer their funds towards the bigger and safer US banks. The share price has seen a modest recovery over the last couple of weeks, but the gains have been limited. When the bank reported in Q4 they echoed their peers by warning on the various risks to the outlook. On revenues in Q4 the bank managed to beat expectations, coming in at $18bn, a rise of 6%, although profits came in short at $1.16c a share, below an expected $1.30c a share, and a 21% decline from a year ago. FICC was better than expected at $3.16bn, but that was overshadowed by steep falls in equities trading revenue which fell back by 22% from Q3 to $789m. Investment banking was also disappointing, down 58% from a year ago at $645m. In line with its peers Citigroup added another $640m to its reserves, as the bank booked $1.18bn in loan losses during the quarter. Profits are expected to come in at $1.17c a share.

Wells Fargo Q1 23 – 14/04 – Wells Fargo is another US bank that will have seen some deposit inflow as a result of the recent turbulence in the US banking sector. A much more domestically focused back the shares saw a much bigger decline on the back of the recent turmoil sliding to 2-year lows before rebounding. Back in January the bank reported a disappointing set of Q4 numbers, however this was largely expected due to various legacy issues around litigation and regulatory issues. Q4 revenues fell short at $19.66bn, while incurring losses of $3.3bn during the quarter. Stripping that away, profits came in at $0.67c a share, or $2.86bn. Net interest income was solid, up 11% on the quarter and up 45% from the same period last year to $13.4bn. On home lending, one of the bank's core businesses, this was lower by 57% due to higher interest rates, and a more challenging housing market. On the outlook there is evidence of a worsening outlook on consumer credit, as delinquency rates start to edge higher, while write-offs rising to $525m. Across the whole business the company added a total of $957m in respect of additional provisions. Operating costs also rose to $16.2bn. Profits are expected to come in at $1.14c a share.