The week ahead – US payrolls, Bank of England, RBA, HSBC, BP, ITV and Cineworld earnings

US Employment Report – 07/08 – after the loss of a record 20.7m jobs in April, the US labour market has enjoyed a fairly modest rebound, with 7.5m jobs coming back in May and June. This rebound was mainly down to furloughed workers returning to the workforce, helping pull the unemployment rate down from 14.7% to 11.1%. This month’s July payrolls report is expected to see another 1.9m people return to the labour force, in the process pulling the unemployment rate down to 10.5%. While this is welcome news, these job gains won’t reflect the events of the last two weeks, where we’ve seen a host of US states re-impose lockdown measures, and which has seen the latest weekly jobless claims numbers start to edge back up again. Having bottomed out at 1.3m two weeks ago these are now rising at a faster rate, with continuing claims back above 17m again. The big question now is not whether the rebound in jobs can continue in July, but whether the secondary spikes in cases we’ve seen in the past two to three weeks, sees the recent rebound in the payrolls data grind to a halt, when the August numbers get released in September.

Bank of England rate meeting – 06/08 – there’s been a lot of chit chat from various Bank of England policymakers in recent weeks about the likelihood of further rate cuts at this meeting, or more likely at the September meeting. This talk of a potential rate move into negative territory may well be the MPC’s way of keeping its options open when it comes to monetary policy, however it is also extremely damaging to the UK financial sector which makes up such an important part of the UK economy. This impulse on the part of some central bankers to keep trying the same thing time after time, even when it has been shown to have little to no impact points to a lack of imagination, or wanting to be seen to be doing something even if you know that any action taken is likely to be of little use. For now, there is little evidence that the UK economy needs any extra support, and even if it were offered, consumers are unlikely to want to take on extra liabilities, at a time of such great uncertainty, having repaid £16bn in consumer credit in the last four months, more than the entire sum borrowed in 2019. This stat alone shows the propensity for the consumer to hunker down and conserve cash, and not go out and spend it.

Global Services PMIs (Jul) – 05/08 – the recovery in services sector activity in July is expected to gain further traction with the release of the latest PMI numbers from the likes of Europe, Asia and the US. The flash PMIs from Germany, France and the UK two weeks ago would appear to bear this out, despite concerns about a second wave of infections. The biggest fear remains around the tourism sector for Spain and Italy, who rely so much on tourism in their services sector, and who are accelerating the opening of their economies to try and generate some form of revenue this year. The recent quarantines imposed on Spain by the UK, France and Norway bear out these risks quite starkly, and could impact on the August numbers, rather than this week’s July numbers. The flash PMIs in Germany, France and the UK showed a continuation of the improvements from June, and are expected to come in at 56.7, 52 and 56.6 respectively for Germany, France and the UK, though there could be upward adjustments. Spain and Italy are also expected to improve from 50.2 and 46.4 respectively in June.

Global Manufacturing PMIs (Jul) – 03/08 – The manufacturing sector didn’t quite see the lows in activity that the services sector saw at the start of the lockdowns, nonetheless we’ve still seen a significant impact in terms of jobs losses and cut backs in investment these past few months. The rebound here is expected to be steady given that while services sector activity has been quite robust there is likely to be order backlogs which will need to be worked off.  Backlogs of existing products, such as unsold cars and other manufactured products, will need to be worked off before manufacturing can restart in earnest. There should be improvements from the levels in June, if the recent flash PMIs from the US, UK, Germany and France, are any guide.

RBA rate meeting – 04/08 - with Australian interest rates already at record lows of 0.25% there has been speculation that we could see more QE from the RBA, in the event the economic picture deteriorates further. This now looks much more likely given the rising infection rate across the state of Victoria. The impact of this is likely to exert further upward pressure on the unemployment rate which is already at its highest level since 1999, at 7.4%, and is expected to move up to 9.25% by year end. Despite this rise in unemployment there has been little indications so far that the RBA appears inclined to do more than it already has done in terms of supporting the economy, while the recent re-lockdown of Melbourne appears to have had little impact on slowing the recent spread of the virus. This may change in the coming days given the recent rise in the Australian dollar, which is over 20% off its lows set earlier this year in March, as it gets dragged higher by the collapse in the US dollar.

BP H1 20 – 04/08 – in June BP took a $15bn write down, on top of the announcement of 10,000 job losses, across the organisation as it seeks to bolster its balance sheet against the sharp slide in oil prices, as it seeks to avoid cutting the dividend. This write-down also came on top of the $4.4bn net loss it announced in April, a large part of which was down to a repricing of its inventory. Unlike its UK peer Royal Dutch Shell, BP has striven to keep its pay-out intact despite a much higher gearing and debt level. This seems odd, and also a little foolhardy, given the challenges facing the industry. At the end of June, the company also announced the sale of its petrochemicals business to Ineos for $5bn in a further attempt to free up cash, as well as meet its target of $15bn of disposals by year end. New CEO Bernard Looney did say he would set out his intention to give more detail on how the company intends to make itself fit for a new lower carbon economy, as part of a new long-term strategic carbon neutral plan, when the company updates the market this week. The sale of the petrochemicals business is likely to have been part of that plan, given that it makes plastics and polymers for plastic packaging and bottles. He needs to come across as convincing, which means it will be surprising if he doesn’t bow to the inevitable, and take a cut to the payout, given that recent share price declines have seen it move well above 10%.

Metro Bank H1 20 – 05/08 – having posted a £130m loss at the end of its last financial year, the new management of Metro Bank were probably hoping that the current year would bring about a change of fortune. The departure of chief risk officer Graham McGirr a week before he was even due to take up the role, only added to the concerns about the governance of the company as it seeks to restore trust under new CEO Dan Frumkin. In its Q1 update there was little change from its Q4 numbers, with a 1% decline in loans and a 1% rise in deposits. In June the bank announced it was in exclusive talks to buy unsecured lending company RateSetter which specialises in car financing as well as peer to peer lending. This comes across as a rather risky move at a time when there is a much higher degree of risk of these sorts of loans going bad in these uncertain times. As the bank comes up to its ten-year anniversary the current management will need to up their game significantly if the bank is to get through the next ten years. In its defence the bank scores well on customer service, which means they must be doing something right. All they have to do now is restore confidence in the governance. The bank isn’t expected to return to profit much before 2022, and with loan demand set to remain weak, there is a risk the bank may have to set aside further provisions for non-performing loans.

ITV H1 20 – 06/08 – when ITV reported its Q1 numbers in May we saw a 42% decline in advertising revenue, as large advertisers pulled back in the wake of the economic lockdown at the end of March, and through April. Q2 is unlikely to be any different, with the cancellation of some big sporting events including Euro 2020 likely to be reflected in this quarter’s numbers, while the big travel companies have also pared back their spending. Despite having more viewers ITV has had to settle for running lots of repeats due to a limited number of new shows. Its ITV studios operations which traditionally picks up the slack is also likely to disappoint given the shutdown of productive capacity due to social distancing constraints. CEO Carolyn McCall said she would be looking at cutting another £60m of costs by year end, as the broadcaster looks to adapt to the latest paradigm. The company appears to be getting some decent subscriptions from the rollout of BritBox, with the addition of Channel 4 content this Q2, likely to help, however this is likely to be small comfort, given it is competing with the likes of Netflix, Amazon Prime and Disney+. The second half of this year is not expected to be much better though there has been a pickup in advertising for holiday destinations in recent weeks.

Cineworld H1 20 – 07/08 – the recent decision by Cineworld management to back out of the $2.1bn Cineplex deal has prompted some controversy, and put the cinema chain at threat of legal action. The logic of the deal was already questionable even before the outbreak of the Covid-19 pandemic, given the already high debt levels of the business, due to the Regal acquisition a few years before, against a backdrop of already weakening footfall. With their UK cinemas already being delayed in their re-opening plans, the last thing business needed was the decision by a number of major studios to delay a host of their summer films over concerns that no-one would go and see them. The US market in particular is in disarray after US states reopened their economies too early, only to have to lock them down again. Disney has delayed the release of its latest Star Wars and Avatar films, while the latest James Bond film isn’t due to be released until November. It’s currently costing Cineworld almost $50m a month in spite of furloughing its staff, and the fear is that any further delays in terms of reopening, or film studios further delaying their latest releases, could see the business start to run out of cash. 

HSBC H1 20 – 03/08 – the recent controversy around the Hong Kong National Security law, and Huawei has put HSBC in the centre of a number of political storms. The bank has been criticised by the US and others for appearing to endorse the crackdown in Hong Kong, while it has also been accused by Chinese media of assisting in the investigation into Huawei’s business practices. Some investors were already unhappy that the bank pulled its dividend in response to Bank of England pressure earlier this year, especially since 80% of its profits come from Asia. This response prompted some chatter about moving out its HQ to Hong Kong from London, however given recent events that has also presented a quandary. There appears to be a growing realisation that the bank may well have to decide which way to jump if US, China tensions continue to escalate. This may call in question its US business, where there have already been reports of a disposal being lined up, however it also calls into question the HSBC UK retail business, as well as its First Direct brand. The bank is already in the middle of a big cost cutting cycle, which was announced at the end of last fiscal year, and at the end of Q1 set aside £2.4bn in respect of non-performing loans, and said this could rise by another £7bn over the rest of the year.   

Disney Q3 – 04/08 - the success of Disney+ with over 50m subscriptions in the first few months, and the launch in the UK on 24th March is likely to have prompted a big uptake in revenue, assuming all of those stumped up the cash after the 7-day trial. Disney’s biggest problem is around the closure of their theme parks, movie production and the length of time they may have to wait until they can reopen and restart. Even then footfall is likely to be much lower as consumers avoid large scale events in crowded places. The new streaming service Disney+ is unlikely to fill the gap given the small margins and the fact that it’s also one of the cheapest and the content is quite limited in its scope. Any subscription boost from the lockdown is likely to be fairly short-lived, as Netflix indicated in a recent earnings announcement.  Expectations are for revenues to come in at $17.5bn and profits of $0.91c a share. The revenue number in particular seems optimistic given its much higher than this time last year, when all of their businesses were up and running and revenues came in at $14.9bn