The week ahead - US CPI, Sainsbury, Tesco and M&S results, US banks
- US CPI (Dec) – 11/01 – after a brief rebound in June which saw US CPI rebound from lows of 3%, to as high as 3.7% in September, price pressures have once again started to subside in the US economy, slipping to 3.1% in November. With PPI also remaining weak, in November we saw that slow to 0.9% on an annualised basis prompting hopes that the US Federal Reserve would look to cutting rates as soon as March. Various Fed officials have taken steps to pour cold water on those expectations after the market reaction to Powell’s comments last month, and while the US economy continues to perform reasonably well the argument for an early rate cut comes across as difficult to justify. This week’s December inflation numbers have the potential to either add to the expectation of a move in March or push it out until later in the year, with expectations of a tick higher to 3.3%. On core inflation the argument for a cut is harder to make given it is higher at 4%, still double the Fed’s 2% inflation target.
- UK GDP (Nov) – 12/01 – the UK economy saw a big decline in economic output in October, with the economy contracting by -0.3%, more than reversing the 0.2% rise in September. All sectors of the economy struggled in October, with larger than expected falls in industrial and manufacturing production, while the wet weather impacted construction as well. Service sector activity was also disappointing sliding by -0.2%. While disappointing the rolling 3-month GDP number came in at 0%. Despite the disappointing numbers the Bank of England gave little sign of a pivot on monetary policy noting that these monthly numbers are subject to a lot of ebb and flow. The November numbers are unlikely to be anywhere near as poor and should see a modest rebound.
- Sainsbury Q3 24 – 10/01 – the last 3-months have seen Sainsbury reinforce its position as the UK’s number 2 supermarket, after a recent survey from Kantar showed an increase in market share to 15.6%. For the 12-weeks to 26th November the survey showed that the supermarket grew its sales by 10.2% with this week’s pre-Christmas trading numbers expected to show continued resilience as consumers prioritise food and drink over higher price discretionary items which may well impact its Argos numbers. With grocery price inflation trending at levels of 9% even now Sainsburys has been aggressively promoting its Nectar promotions in the same way Tesco has been doing with Clubcard, which has helped it to stem the bleeding from the likes of Aldi and Lidl. There has been talk that the CMA is looking at these loyalty card promotions to ensure they aren’t being abused as a way of misleading consumers when it comes to lower prices. Nonetheless Sainsbury shares have been performing well in recent months rising to 22-month highs in December having upgraded their full year profits guidance towards the upper end of a range between £670m and £700m, with retail free cash flow upgraded from £500m to £600m.
- Tesco Q3 24 – 11/01 – the Tesco share price has also seen steady gains over the past 12 months and while it has lost some market share over the last 12 months it still remains way out in front as the UK’s number 1 supermarket. Tesco also raised its guidance back in October saying 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. All areas of the business appeared to be performing well with the Booker business helping to contribute with a 7.5% increase in sales to £4.7bn, with the only laggard being the Central European business which saw a 0.9% gain in like for like sales. The value of the average basket size rose by 5.2% to £98, however this is still well below underlying food price inflation which serves to indicate that the supermarket is absorbing some of the costs of higher prices. Full year profit is expected to come in at between £2.6bn and £2.7bn while expecting to generate retail FCF of between £1.8bn and £2bn, up from their previous estimate of between £1.4bn and £1.8bn.
- Marks & Spencer Q3 23 – 11/01 – it’s been quite a year for the Marks & Spencer share price after what was a disappointing 2022 saw the shares slide to 2-year lows. This year has seen the retailer regain its sparkle and return to the FTSE100, as well recover all of the 2022 losses, with the shares rising to their best levels since 2019. When the retailer reported in H1 profits before tax rose 56.2% to £325.6m on the back of a 10.8% rise in statutory revenue to £6.13bn. Management also managed to reduce net debt by £370m as well as returning to a positive cash flow situation. On the actual sales numbers themselves, food retail was once again a standout performer, with 11.7% increase in like for like sales, along with an improvement in operating margin, while in general merchandising like for like sales rose 5.5%. The restoration of the dividend was also welcomed although it was only 1p, but it was still a significant milestone nonetheless. Management did warn that H2 was likely to be a more difficult period given the combined impact of a higher interest rates environment, concerns about a slowing economy, and deflationary forces impacting consumer sentiment, along with an uncertain geopolitical outlook. This week’s Q3 numbers could be a mixed bag with food expected to do well, although general merchandise might prove to be a drag.
- JPMorgan Chase Q4 23 – 12/01 - JPMorgan appears to have set itself apart from the rest of the US banking sector, with respect to its share price performance as well as its financial performance. The bank reported record revenues in the first two quarters. The collapse of Silicon Valley Bank and Signature Bank saw JPMorgan win over $50bn of new deposits from SVB as it took over the banks deposit base. The turmoil in rates markets also proved to be a boon as revenues surged in both Q1 and Q2. Q2 saw record revenues of $42.04bn, blowing through expectations of $39.34bn, and profits of $4.75c a share, or $14.5bn, an increase of 67% a year ago. The bank also raised its guidance for full year net interest income to $87bn, as the gap between loans and deposit margins blew out further. In Q3 the bank went further upgrading its NII guidance further to $89bn, after posting revenues of $40.69bn, a solid beat as well as profits of $4.33c a share, or $13.2bn. On the underlying business itself, investment banking and FICC both outperformed, while equities came up short, while the addition of SVB added $1.5bn to NII. In the aftermath of its Q3 numbers the shares slipped to 4-month lows, however since those lows we’ve seen a sharp turnaround with the shares taking out the July peaks to rise to their best levels since January 2022. For Q4 revenues are expected to increase to $40.12bn, taking total revenues for the year to $162.33bn, while profits for Q4 are expected to rise $3.63c a share.
- Citigroup Q4 23- 12/01 – while we’ve seen JPMorgan and Wells Fargo rebound strongly taking out their summer highs and rise above the levels that predated the March sell-off, the Citigroup share price has lagged as CEO Jane Fraser strives to turn around a bank that has struggled with an unwieldy management structure and higher costs. That said we’ve seen a solid rebound since the bank share price slid to 3-year lows in October. The bank has already shed 5,000 jobs this year with more to come. Operating expenses were higher by 9% in Q2 rising to $13.57bn, with credit losses rising to $1.5bn, a 77% rise on Q2 last year. In Q3 revenues were better, coming in $900m above expectations at $20.14bn, and profits of $1.63c a share, although some areas of the business continued to struggle. The equities division, like JPMorgan’s came up short with $918m in revenues, however FICC sales and trading outperformed with $3.56bn. Also notable was lower than expected operating expenses of $13.51bn, a rise of 6% which was a lower increase than Q2. There was a small cloud with the bank saying they expected to see increases in credit losses in Q4. Full year revenue guidance was kept unchanged at between $78bn and $79bn, however Citigroup did revise its forecast for full year NII to $47.5bn from $46bn. This week’s Q4 numbers are expected to see revenues come in at $18.97bn, however profits are forecast to be lower at $0.95 a share. Full year revenues are expected to rise to $79.7bn, however annual profits look set to come in lower at $5.96 a share.
- Wells Fargo Q4 23 – 12/01 – Wells Fargo shares have also performed well over the past 3-months, rebounding strongly from their October lows with the US economy continuing to show surprising levels of resilience. Earlier this month the shares hit their best levels since April 2022. The regional banking crisis of earlier this year created a lot of ripples through the sector, however confidence appears to be slowly returning. When Wells Fargo reported in Q2 the numbers showed that overall lending was starting to slow as higher rates started to bite into US consumer spending. In a sign that lending was starting to slow, total average loans came in below expectations at $945.9bn, while provision for credit losses came in at $1.71bn, a big increase from last year’s $580m. For Q3 this was expected to rise to $1.35bn but came in lower at $1.2bn. Q3 revenues came in at $20.86bn which was higher than expected, while profits were also better than expected at $1.48c a share. The improvement came because of higher rates with net interest income rising to $13.11bn. Loan demand does appear to be slowing with Wells Fargo saying that the bank was seeing the impact of a slowing economy with loan balances declining. Total average loans came in short of forecasts at $943.2bn. For Q4, revenues are expected to come in at $20.29bn, pushing total revenues for the year to $82.5bn, and Q4 profits of $1.15 a share.
Author
Michael Hewson MSTA CFTe
Independent Analyst
Award winning technical analyst, trader and market commentator. In my many years in the business I’ve been passionate about delivering education to retail traders, as well as other financial professionals. Visit my Substack here.
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