The week ahead: US Nonfarm Payrolls, Tesco and Greggs earnings, RBA

US Non-farm payrolls - 08/10 – while there was an expectation that we were going to see a dip in US hiring in the August payrolls report, few people expected to see a sharp slowdown to 235k. While there was an upward revision for July to over 1m, the initial reaction was such that any thoughts of a taper were quietly getting shifted into the beginning of next year. The fall in the unemployment rate was welcome, falling to 5.2%, while wages data edged higher to 4.3%. What was particularly concerning about the August report was the sudden stop in hiring in the hospitality sector, which ground to a halt, due to surging cases of the delta variant across the country. A sharp drop in consumer confidence as well as warnings from US airlines of falling passenger numbers also weighed on sentiment, all the while weekly jobless claims have continued to fall. With the expiry of emergency unemployment benefits on 6th September, expectations are high that this week’s September report will see a significant improvement on the August numbers. Job vacancies still remain at record levels of over 10m, while the Fed’s focus appears to have shifted to concerns about rising inflationary pressures. Fed chair Jay Powell, at the most recent Fed meeting, even went as far as saying that a semi- decent payrolls number this week needn’t be a barrier to the start of taper this year, and as early as next month. This of course raises the question as to what a “semi-decent” report is? 400k, 500k, or a repeat of August? The hawkish shift at the September Fed meeting has certainly shifted the bar when it comes to what might prevent the Fed from starting the tapering process, however with prices already running higher, there are some concerns that the Fed may well be playing catchup. Expectations are for 510k jobs and for the unemployment rate to fall to 5%. It’s also worth keeping an eye on the ADP report two days before, which also saw a low reading in August of 374k.

Services PMIs – 05/10 – the latest flash PMIs from France, Germany and the UK saw further sharp slowdowns in September, with rising costs and weaker consumer confidence leading to weaker economic activity. The US economy also saw further weakness in its services sector during September, despite falling jobless claims, however it appears that increasing concern about higher prices, not only in energy, but also more broadly as companies pass on higher costs is continuing to weigh on economic activity. While rising costs have been most notable in the UK and the US, and we are now starting to see it seep into French and German supply chains as shown by sharp rises in the headline CPI rate since July. These concerns already appear to be causing concern at the Bank of England and US Federal Reserve. It probably won’t be too long before we start to hear louder rumblings at the European Central Bank.

RBA rate meeting – 05/10 – there had been a widespread expectation that the RBA might look at delaying its decision to start tapering its weekly bond purchase program from A$5bn to A$4bn a week last month, due to the various lockdowns being imposed by the Australian government. While this didn’t happen, the bank was careful not to rule out the prospect if economic conditions worsened further. The central bank instead extended the horizon for tapering into February next year from November, reflecting the concerns that any recovery was likely to take longer due to the various lockdowns. As we look to this week’s October meeting the outlook for the economy hasn’t markedly improved, although that isn’t surprising given that a lot of restrictions still remain in place. This suggests that nothing much will change this week, with the bank likely reiterating that it will remain supportive of the economy, and that we would see a bounce back once vaccination rates increase and restrictions get eased as the weather gets warmer.

Tesco H1 22 – 06/10 – supermarkets have been front and centre over the past three months, from takeover speculation in the wake of the Morrisons private equity tug of war, they have also been front and centre around supply chain problems, shortages of delivery drivers, to their stores, as well as their petrol forecourts. Costs for the major supermarkets have already risen sharply over the past 18 months as a consequence of Covid-19, as well as employing extra staff to upscale the online delivery part of the business, margins look likely to get squeezed further. While food sales have slowed as restaurants, pubs and cinemas reopen, Tesco is in the enviable position of seeing this effect offset at its Booker operation, which caters to this part of the economy. One of the main growth areas for Tesco has been online sales, which have seen a doubling of capacity to 1.5m slots per week over the past 12 months, while sales grew by 77%. In Q1 this demand remained high at 1.3m orders per week, with two-year sales growth of 81.6%. Group like for like sales rose £13.36bn in Q1 with the UK operation contributing £10bn of that number. Despite this outperformance in Q1 management adopted a cautious tone for the remaining quarters, perhaps mindful of what might happen over the rest of the year. This didn’t appear to sit well with investors with the shares struggling to rally in the days afterwards. This negativity didn’t last long, and since early July the shares have risen strongly by over 10%, with the potential for further upside. As we look towards this week’s H1 numbers the latest Kantar sales figures showed that food sales continued to fall in the 12 weeks to September 5th, all the while prices were starting to rise, up by 1.3% from the same period a year ago. Only Tesco and Waitrose saw their sales numbers rise for the period, and even then, Tesco sales only rose by 0.2%.

Greggs Q3 21 – 05/10 – Greggs is another retailer that has done well from the pandemic, its shares hitting record highs earlier this year. In August the company reported a H1 pre-tax profit of £55.5m, a significant improvement on the £65.2m loss from the same period in 2020. The numbers were also better than the numbers seen in 2019 pre-pandemic, with the company expanding the number of its stores, as well as improving its offering in terms of its digital operation. 48 new stores opened in the first half of the year, with the baker saying it expected to open another 52 stores over the rest of the year, with delivery sales now accounting for 8.5% of shop sales. Total sales in the first half were almost back at pre-pandemic levels with management saying that they expect full year profits to come in ahead of previous expectations. The recent decline in consumer confidence might see sales slow during Q3, however consumer appetite for pasties, sausage rolls as well as doughnuts generally tends to be resilient even when times are difficult. We should also be aware of higher costs with Greggs saying that some products containing chicken were missing from its shelves at the end of August, and that it had seen some temporary interruptions in its supply chain.

Carnival Q3 21 – 08/10 – like airlines the cruise ship industry has had a torrid time of it in the last 18 months with many false dawns when it comes to a resumption of normal service. In April the company reported a Q1 loss of $1.95bn, a slightly bigger loss than was expected. Despite this management said that they have enough liquidity to get back to full operations fairly quickly, with bookings 90% higher in Q1 than they were in Q4 of last year. More encouragingly bookings for 2022 were ahead of what was a very strong performance in 2019. In Q2 the company reported a bigger loss of $2.1bn, however Q3 is expected to see an improvement due to the resumption of cruises at a number of its brands in the summer months, with the company also hosting a number of UK cruises this summer. In July, Carnival said it hoped to have over half its fleet sailing by the end of October, for vaccinated travellers only, a number it reiterated in September, and 65% by the end of the year. For Q3 the company expects to see losses stay at recent levels of $2bn, with the proviso they could go higher in Q4 on the back of additional spending being incurred as spending on restarting operations rises. The company is still expecting to see cash burn of $510m a month, a slight increase on the levels we saw in June. Losses are expected to come in at $1.385c a share

Levi Strauss Q3 21 – 06/10 – after seeing two quarters of decent on-line sales, and struggling instore business due to people staying at home, Levi Strauss Q2 numbers came in much better than expected. Revenues for Q2 came in at $1.28bn, a rise of 156% from the previous year, while profits came in at $0.23c a share, both of which were much better than expectations, as strong demand in the US and China helped to generate a decent quarter. The company also upgraded its full year revenue and profit outlook, assuming no further deterioration in the Covid outlook. Management said they expected Q3 sales to move above pre-pandemic levels. For this quarter management were much more optimistic raising their outlook back in July. E-commerce sales have been a notable outperformer, up 75% on a like for like basis, and which now accounts for about 25% of all sales. For the second half of the year sales expectations are for a rise of 28% on a like for like basis. Profits are expected to come in at $0.37c a share.

Pepsico Q3 21 – 05/10 – when Pepsico reported Q2 numbers in July, the numbers came in well above expectations. Net sales rose over 20% to $19.22bn as the reopening of restaurants, bars and leisure venues, prompted a surge in demand. Profits also surged, coming in at $1.72c a share, or over $2.36bn. In response to rising costs the company said it would probably have to raises prices after Labor Day, although it also raised its guidance for the year. In August, the shares hit record highs after Pepsico said it had agreed to sell its Tropicana and Naked juice brands to private equity firm PAI Partners for $3.3bn, although it would still be retaining a 39% stake in the business. It seems the rationale behind the deal is a focus away from sugary drinks towards the more low-calorie drinks market, as well as healthier snacks. Profits are expected to come in at $1.37c a share.

Constellation Brands Q2 22 – 06/10 – the closure of bars, pubs and restaurants has hit sales across all of its brands, even accounting for increased sales from supermarkets, off-licences and liquor stores, as a result of the various lockdowns. Sales in Corona beer have also recovered after initially falling back at the beginning of 2020. In Q1 beer sales improved 14% to $1.57bn, which was slightly down from Q4’s 16% growth. Excluding Canopy Growth profits came in at $2.51c a share, however when this as included the company slipped to a loss of $0.18c a share. Sales in its wine and spirits segment was disappointing with sales decreasing 22% to $454.5m, although operating margins have improved, rising 50bps to 35.7% across the business, led by the beer segment. The company has been divesting various parts of its wine and spirits portfolio. In June the company outlined that it hoped to achieve 7% to 9% in net sales growth for the beer segment and 2% to 4% in the wine segment for the new fiscal year, while updating its earnings guidance. The shares are currently trading down near to their lowest levels this year, with consensus estimates for profits of $2.79c a share for Q2.