The Week Ahead - US Nonfarm Payrolls, Fed minutes, RBA decision and Sainsbury results

US non-farm payrolls (Jun) – 07/07 – the US jobs market has continued to confound expectations for all this year, and it is this factor that is making the Federal Reserve’s job in trying to return inflation to its target rate much harder to achieve. When the May payrolls report was released a month ago, we once again saw a bumper number, this time of 339k, with April revised up to 294k. The resilience of the jobs market has also been a little embarrassing for the economics profession, comfortably beating forecasts for the 14^th month in succession. It also presents a problem for the Federal Reserve in the context of whether to to stick or twist when it comes to more rate hikes in the coming months. We’ve already seen a pause in June, however the commitment to raise rates by another 50bps by year end has got markets a little nervous, driving yields higher at the short end of the yield curve. For June, forecasts are again for a number below 300k, at 213k. We did see a rise in the unemployment rate from 3.4% to 3.7% while the participation rate remained steady at 62.6%. Wages also remained steady at 4.3%, however we also know that job vacancies after briefly dipping below 10m in March, rose strongly again in April to 10.1m. Against this sort of backdrop the Federal Reserve had to downgrade its forecast for end of year unemployment from 4.5% to 4.1%. Even with this adjustment it’s hard to see how this will play out unless we see a significant rise in the participation rate, and vacancies start to disappear.      

RBA rate decision – 04/07 – having paused earlier this year when it came to their own rate hiking cycle the RBA now appears to be playing catchup. Having caught the markets by surprise in April by hiking rates by 25bps, they followed that up in May by another 25bps rate increase pushing the cash rate up to 4.1%. The sudden hawkish shift in stance appears to have been prompted by stinging criticism over its failure to spot early enough the inflation surge seen at the end of 2021, and through 2022. They were hardly unique in this, with other central banks being similarly caught out, however their response has been fairly tepid, in comparison to the likes of the RBNZ where rates are much higher at 5.5%. This suggests that the RBA might feel it has to overcompensate in the opposite direction, running the risk of them tightening too hard and unsettling the housing market. Will the RBA raise rates again or decide to wait and see.            

Manufacturing PMIs (Jun) – 03/07 –. recent flash PMI numbers suggest that the underperformance in manufacturing has continued in June with activity in Germany falling to its lowest level since March 2020, at 41, and the initial Covid lockdowns. In France we saw similar weakness albeit slightly higher at 45.5. Of slightly great concern has been weakness in Chinese economic activity with weak demand there feeding into a global narrative that the economy is slowing, weighed down by higher costs and varying degrees of supply chain disruption. Economic activity in Italy and Spain has also been weak, however on the plus side they have managed to outperform France and Germany. If the eurozone is to avoid a 3^rd quarter of negative growth then it is Italy and Spain that might allow them to do it. 

Services PMIs (Jun) – 05/07 - despite the dire start of manufacturing activity, services have held up well but even here we are seeing pockets of weakness with France seeing a sharp drop in the flash numbers a few days ago, sliding from 52.5 to 48, while activity in the rest of the euro area remains broadly positive. This is an area that could help boost economic activity in Italy and Spain now we’re in the holiday season and which may help avert a 3^rd quarter of weakness. We’re also expected to see positive readings from the UK and the US.

Fed minutes – 05/07 – recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, as well as in the coming months, and while the commitment to a pause in June was well flagged the commitment and guidance did pose a bit of a problem to the Fed given the strong economic data only days before the meeting in question. Powell managed to overcome that with a strongly hawkish message at his press conference along with an upgrade to the central banks key economic forecasts. A number of members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July looking increasingly likely.  This was somewhat surprising given markets were pricing one more rate hike, however key in amongst this is the Fed’s determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets. This slowly appears to be being priced out, as is the possibility that the Federal Reserve, along with other central banks, looks to prioritise pushing inflation down at the risk of raising the level of unemployment. This week’s minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of further rate rises. 

AO World FY 23 – 05/07 – 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 decent recovery since then, helped by a number of guidance upgrades this year, one on January, 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. In April this was followed by a Q4 trading update which predicted UK revenues of £1.13bn while updating its profit guidance to the top end of its recent range upgrade of EBITDA of between £37.5m to £45m. In a sign of confidence regarding AO’s turnaround plan, in June Mike Ashley’s Fraser Group acquired a 19% stake in the business at 68p per share in a welcome boost for the online retailer.  

Sainsbury Q1 24 – 04/07 – despite posting a solid set of full year results in April the Sainsbury share price fell back before edging up to 14-month highs in May. Since those May peaks the shares have slipped back, with the March lows the next key area of support. Underlying full year profit before tax came in at £690m right at the top end of its guidance, down 5% from the previous year on revenues that were 5.3% higher at £31.49bn. Profits after tax saw a larger fall of 69% to £207m, but these are still 15% above pre-Covid levels. Cost of sales was 7% higher at £29.4bn, up from £27.5bn a year ago, pushing back against political accusations that supermarkets are profiting from the cost-of-living crisis. The main areas of outperformance were in grocery which saw annual sales rise 3%, and fuel which saw a rise of 23.4%. Clothing and GM was more of a drag declining 3% year on year. For 2024 Sainsbury says it expects to repeat and possibly exceed underlying profit before tax target of this year, guiding between £640m and £700m. The board proposed a final dividend of 9.2p per share.  The recent Kantar survey showed grocery price inflation eased slightly in June; however, it will be small comfort to consumers given it is still an eye-wateringly high 16.5%, with eggs and frozen potatoes showing the biggest increases. Kantar went on to say that the biggest winners in terms of sales growth were Aldi and Lidl. Tesco and Sainsbury maintained their position as UK’s number one and two supermarkets by market share. Tesco Q1 results have given us a decent indication of the challenges facing the sector even as grocery price inflation has been showing signs of slowing.

Levi Strauss Q2 23 – 06/07 - when Levi Strauss reported back in April the shares fell sharply, eventually sliding to levels last seen in September 2020, before finding a base in May. The reason for the sell-off was due to caution over its Q2 outlook. For Q1 the company posted a 6% rise in revenue to $1.69bn and profits of $115m or $0.29c a share. All in all, the numbers beat expectations however there was some disappointment that the company left its full-year guidance unchanged, which was for annual revenue of between $6.3bn to $6.4bn. For Q2, revenues are expected to come in at a fairly lacklustre $1.34bn, before picking up in Q3 to $1.6bn. Investors will be hoping that this doesn’t change, while profits for Q2 are expected to slow to $0.03c a share.