The week ahead: US payrolls, Fed minutes, RBA rate meeting, Sainsbury results

The week ahead – 4th July 2022

1. US non-farm payrolls (Jun) – 08/07 – now that the Federal Reserve has decided to focus exclusively on combatting inflation, the main focus of the payrolls report from here on in will be on how long before higher rate expectations start to feed into lower hiring patterns. Currently the US labour market has over 11m vacancies which higher wages seemingly cannot fill. All the while the participation rate continues to stay stubbornly low at 62.3%, despite rising inflation and general cost of living. The unemployment rate currently sits at 3.6% just above the 2019 lows, while wages growth is holding steady at just above 5% at 5.2%. Will rising prices pull people back into the labour market, will those 11.2m vacancies start to disappear? How long before non-farm payrolls start to see negative prints? All of these are valid questions when looking at a Fed funds rate that could double by the end of Q3. Weekly jobless claims have been slowly rising over the last few weeks, while the latest June payrolls is expected to see jobs growth slow from 390k in May to 300k. It was notable that ADP slowed to 128k in May, the weakest number since December 2020
2. RBA rate meeting – 05/07 – the RBA caught a number of people on the hop when the central bank raised rates in June by 50bps. The decision to follow up its May decision of a 25bps rise really shouldn’t have been a surprise given that it was becoming increasingly apparent that the RBA was behind the curve, and its counterpart the RBNZ was becoming increasingly more aggressive in its monetary policy stance. It also made sense in the context of RBA governor Philip Lowe’s determination to get the cash rate up to 1.5% by year end. This target could well shift in the coming months if the Fed follows through on its pledge to continue hiking its own headline rate aggressively. With the RBNZ likely to hike rates by another 50bps at its own July meeting next week, to 2.5%, we can probably expect to see at the very least a further 50bps hike by the RBA this week, to 1.35%. There is the possibility that the RBA could go even harder than that, pushing the headline rate up to 1.5%. 
3. Services PMIs (Jun) – 05/07 – recentPMI numbers, have proved to be remarkably resilient despite the challenges being posed by rising energy prices and supply chain disruptions across the board. As evidenced from the recent flash PMI numbers this sector of the global economy is likely to continue to feel the pressure in the coming months, the longer prices remain highs. It is quite apparent that economic growth is struggling across Europe as well as here in the UK, yet to look at the PMI numbers one would think that things aren’t that bad. This comes across as a stretch with all of the June PMI numbers slowing sharply from the numbers we saw in May, all of which were in the low to mid 50’s for UK, Germany, France and Italy. All of these are expected to weaken further, with the Jubilee Bank holiday in the UK likely to skew the UK numbers more positively. PMIs in China look set to improve marginally from the levels we saw in May as the economy there tries to get back on its feet, after the recent lockdowns and restrictions.
4. Fed minutes – 06/07 – the sudden shift in the Federal Reserve’s thinking in the wake of the May CPI number of 8.6% is likely to be revealed in this weeks Fed minutes. The ripping up of its guidance playbook over the blackout period did not go down well with a lot of people in the market, and while the decision to hike rates by 75bps was almost unanimous, with one exception, it will be interesting to understand the nature of the discussions that took place over the decision to leak the change in expectations, and shift the guidance to a much more aggressive stance.
5. Sainsbury Q1 23 – 05/07 – it was less than a year ago that the Sainsbury share price spiked up close to 3-year highs on speculation that it might be in play from an M&A point of view. This speculation soon came to nothing, and since then the shares have lost almost a third of their value. Even a decent set of full year numbers in April haven’t been enough to restore confidence with the share price slipping back to levels last seen in November 2020. Investors appear to be more concerned about the growth outlook than the actual numbers themselves, after management guided down profit expectations for the new fiscal year to £630m to £690m. Last year Sainsbury reported full year pre-tax profits of £854m on record revenues of £29.9bn. Sales growth saw a bit of a slowdown from last years elevated levels with digital sales down 11%, but up 80% on a 2-year basis. Ordinary retail sales declined 2.6%, on a year-on-year basis, but were up 4.6% on a 2-year basis. While no one wants to see profits decline it should also be noted that profit pre-pandemic was much lower at £586m, at a time when the cost base was also lower. There is no question the outlook for retailers remains challenging, Sainsbury is having to absorb higher costs in terms of energy prices, while it has also given its own staff a 10% pay rise. When Tesco reported a few weeks, ago like for like sales in the UK fell by 1.5%, and it seems likely that Sainsbury will see similar underperformance as the likes of Aldi and Lidl benefit from increasingly cash strapped consumers. This week’s Q1 numbers are likely to point to an increasingly uncertain economic outlook, but at some point, one has to question how much of this is already priced in.
6. Persimmon Q2 22 – 07/07 – one of the worst performing sectors this year confidence in UK housebuilders has been in decline, despite UK house price growth showing little signs of slowing, according to Rightmove, currently trending at around 10% a year for the last five months. Over that same period Persimmon’s share price has lost around a third of its value year to date, despite recent trading showing that Q1 forward sales came in at £2.8bn, although H1 forward sales expected to be slightly softer, with a pickup expected in H2. Last year Persimmon was making record profits per house of around £66k, and were upbeat about the outlook for 2023. The slightly downbeat assessment of H1 completions back in April appears to have spooked some investors, with concerns over higher mortgage rates, prompting some apprehension about the ability of housebuilders to meet their margin targets on future sales, despite higher average selling prices which rose to £266k. Concerns about higher interest rates appear to be being reflected in lower mortgage approvals numbers and this appears to be weighing on the wider sector, with sharp falls being seen in the aftermath of the recent decision by the Bank of England to raise rates on the 16^th June. In Q1 the house builder said that it expects to deliver volume growth of 4-7% for the full year, while maintaining its margins, and was generally optimistic about the supply and demand dynamics of the market. It will be interesting if it still feels that way given recent events.
7. Currys PLC – FY22 – 07/07 – when Currys reported back in January the company which was formerly Carphone Warehouse said it expected to see pre-tax profits of £155m, a modest downgrade from £160m, due to problems in supply chains adding to its costs. The chip shortage had hit availability of some of its products meaning it wasn’t able to sell as many as it would have liked, the PS5 being a case in point. Since that January update, Currys shares have slipped back to two-year lows as cost-of-living concerns impact wider sentiment around the retail sector, especially when it comes to high ticket items like TVs, gaming consoles and white goods. On a pre-pandemic basis, group sales are still higher than they were, two years ago, however year on year they are in negative territory. Online sales have seen the biggest improvement with a 29% gain from 2020 levels.
8. Levi Strauss Q2 22 – 08/07 – in May Levi shares hit an 18-month low, despite increasing evidence that its profit margins were improving. At the end of last year profit margins improved to 57.8% while full year revenues rose 29% to $5.76bn. For the new fiscal year Levi said it expected to grow net revenues by 11% to 13%, to $6.4bn, and its Q1 numbers, back in April suggest the business is just about on course to do that, as net revenues rose to $1.6bn. Q1 earnings numbers saw profits of $0.46c a share, beating expectations of $0.41c a share. The weak economic outlook remains a key challenge to its ambitions of meeting its targets, given the recent profits warnings announced by a raft of US retailers, including Target, as well as Macy’s who stock Levi’s apparel, although sales from its own online store have been growing and make up for at least 39% of sales. As we look ahead to this week’s Q2 numbers, profits are expected to halve from their Q1 levels to $0.23c a share.