Week ahead: China GDP, Biden Inauguration, ECB meeting, UK retail sales, public finances

China Q4 GDP/Retail Sales (Dec) – 18/01 - retail sales growth in China returned to positive territory in August last year and since then has continued to improve month on month. The lack of a second wave has certainly helped, and while demand still remains well below the levels we saw at the end of 2019, we have seen three consecutive months of gains since September. This week’s December numbers are expected to continue that trend, with a rise of 5.5%, up from the 5% gain seen in November, which were helped by Singles Day and the Golden Week holiday. The lack of a second wave appears to be prompting Chinese consumers to slowly reopen their purse strings, and as such also means that the performance of the Chinese economy as a whole through H2 is likely to see strong performance after a weak first half of the year.  In Q3 the Chinese economy expanded 4.9% Y/Y after the big -6.8% decline seen in Q1, and in Q4 is expected to post a rise of 6.2%, which would be a decent rebound after the early year lockdowns and disruptions. Industrial production is also expected to remain resilient; it is already back at pre-pandemic levels at 7%.

ECB meeting – 21/01 – over the past 12 months the ECB has shown it is prepared to shift policy when required in order to support the European economy, despite the lack of urgency from EU policymakers in taking fiscal actions of their own. They’ve not been helped by a weaker US dollar which has pushed the Euro up above the 1.2000 level against the US dollar and added to the deflationary pressure on an economy that has tipped back into recession and is unlikely to recover much before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look to get extended into Q2 of this year. In December the central bank expanded its Pandemic Emergency Asset Purchase program for the second time in 2020, from €1.35trn to €1.85trn, as well as extending it another 9 months until March 2022. While this helps buy time, along with new loan programs in the form of TLTRO’s the ECB can’t act alone given it is already operating at the limits of its mandate. It needs help on a much bigger fiscal scale, which at the moment is only just coming in a fairly limited form in the form of the EU recovery fund, and only €390bn of the €750bn of that fund, in the form of grants, far too low to really make much of a difference. On the plus side manufacturing appears to be holding up fairly well, however services PMIs are still well into contraction territory, with little prospect of a strong rebound due to the continuation of restrictions in France, as well as Germany. While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause. We are now finally seeing fiscal stimulus on a large scale on a country level with Germany leading the way in that regard, with the temporary suspension of the fiscal compact, however this stimulus is being delivered very much on a localised basis, as opposed to being on a pan-European level, with Italy, Spain and Greece in the most economic need. With the damage from the pandemic likely to extend well into 2021, Europe really needs to get its act together, otherwise further economic schisms could open up further over the next 12 months  

France/German flash PMIs (Jan) – 22/01 – In the most recent December PMIs, the numbers continued to paint a mixed picture for the German economy, with services remaining into contraction territory at 47, a slight improvement from 46 in November, while manufacturing remained resilient rising to 58.3, from 57.8, and close to levels last seen in March 2018. January is likely to be a similarly bleak story for services given that German Chancellor Angela Merkel more or less cancelled Christmas by imposing a harder lockdown well into this year against a backdrop of a death count which rose to over 1,000 a day. In France the situation has improved a little with services improving to 49.1 in December from a slide to 38.8 in November. With restaurants and bars in France set to remain closed until next year it is hard to see the case for any type of decent recovery any time soon, which means January is likely to see the fifth consecutive month of contraction. Despite the positive vaccine news, lifting the mood from a market point of view, it is clear that there will be no similar uptick in economic activity until such times as restrictions start to get eased, perhaps sometime in the spring. On the plus side manufacturing has been a strong performer for both Germany and France, helping to offset some of the slowdown on other parts of their economies.  

UK Retail Sales (Dec) – 22/01 – Since the in April lockdown last year UK retail sales growth saw 6 consecutive months of gains, however these came to a shuddering halt in the November numbers due to the lockdown restrictions that were put in place from the 5th November. A decline of -3.8% shouldn’t have come as too much of a surprise given that the boost to October was a result of some pull forward effect from November as consumers tried to do all their November pre-Christmas shopping before the lockdown began due to concerns it might get extended up until Christmas. The biggest drag to retail sales is likely to be from closing bars and restaurants which have seen big declines in spending there, though as recent retail numbers have shown the boom in on-line and digital sales could help to compensate. Sales of electronic items are likely to be have seen a boost with the rollout of the new Xbox and PlayStation 5, which suggests that despite pessimism around the end of year numbers, we might see an upside surprise. Expectations are for a rise of 1% given that the tighter restrictions didn’t really kick in until mid-December. We also have the latest flash PMI’s for manufacturing and services which are expected to weaken slightly to 53 and 45 respectively.

UK Public Finances (Dec) – 22/01 – there has been a lot of chatter in recent months over the explosion in UK public debt as a result of the pandemic and the emergency measures taken by the UK government to support the economy. This probably goes someway to explaining the rather erratic government response to the pandemic as the innate caution of Rishi Sunak comes up against the eye-wateringly high numbers the government is spending on a month-to-month basis. In November the government borrowed £30.8bn, bringing the total amount borrowed for this fiscal year to £245bn, with the very real prospect that the total sum could well rise to well over £300bn by year end. While it is entirely understandable for there to be a debate about these unprecedented levels of public borrowing, one has to question whether now is the right time to do it, given that we haven’t as yet defeated the virus, even with the vaccine program now in full swing. It’s not as if the UK is unique in the challenges it faces, it isn’t, as a quick look across the English Channel or the Atlantic will tell us. Every other country in the world is facing the same seismic issues, which means that if the government is sensible the sums being spent can be paid back over decades in the same way the money spent in World War 2 was repaid. This pandemic should be viewed through a similar lens, with the money repaid gradually over decades. It’s not as if borrowing costs are high, they are not, with bond markets fairly sanguine about the levels borrowing taking place not only here, but all over the world. Borrowing for December is expected to rise by another £31bn.

UK/EU CPI (Dec) – 20/01 – with all the problems facing the UK and broader European economy these past 12 months inflation has been fairly subdued thus far, though in Europe the deflationary bias has been much more noticeable. In the UK inflation has also been fairly benign though core prices have been higher than the more generally used headline number. It has also been tougher to track UK inflation in the past 12 months due to the unavailability of some products which are normally used to calculate prices in the inflation basket. Nonetheless price pressures have been subdued with November prices falling back to 0.3%, though core prices are higher at 1.1%. This week’s December numbers could well see a modest rise in prices as a result of higher fuel prices to 0.5% and 1.3%, though weak demand is likely to limit the upside. In Europe, there is little to no evidence of rising prices with the final December numbers showing a decline of -0.3% in headline CPI and core prices at an annualised 0.2%, a number which is likely to heap further pressure on the ECB to try and guide inflation expectations higher, using forward guidance. 

Burberry PLC Q3 21 – 20/01 – 2020 wasn’t a great year for Burberry, share price wise, the company falling 16% on the year, despite some improvements to its Asia business after the initial hit in the early part of 2020 due to coronavirus. In its previous full year numbers, the company had to contend with the disruption of its Hong Kong business, as well as the fallout from weaker Chinese demand and the spread of coronavirus. Last May the company reported full-year numbers that saw operating profits slide 57% to £189m. Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m. This year’s performance hasn’t been that much better. In Q1 sales fell 45% and while Q2 sales did improve that didn’t prevent pre-tax profits falling 62% in the first half of the financial year, coming in at £73m, down from £193m a year before. The company has taken steps to shore up its finances, while the lack of a second wave in China and its other Asia business helped an outperformance there which looks set to translate into this week’s Q3 numbers. There is likely to be a trade-off however with the tighter restrictions in Europe, the UK and US over the past few weeks likely to act as a drag, though the digital business could well go some way to offsetting any weakness here.

US Presidential Inauguration – 20/01 – all eyes are set to be on Capitol Hill this week with the inauguration of Joe Biden as the 46th President of the United States. Four years ago, President Trump marked his inauguration with a speech which set the tone for the next four years in terms of its tone and belligerence. This week’s speech is unlikely to be as divisive in tone, however it will certainly give a decent indication as to what sort of program the new US administration is likely to implement over the next four years, from trade policy with China, as well as domestic policy when it comes to investment in energy, renewables and other infrastructure, where Federal spending has been rather lacking in recent years. Last week the President-elect outlined a new fiscal aid program of $1.9trn worth of support in a variety of areas, specifically in the form of $350bn in state aid, an increase in the minimum wage, and a further $1,400 in stimulus payments to US workers. There was little in the way of detail about future longer term spending commitments on infrastructure and other types of investment including education, energy and green investment, however this is likely to come once he has got his feet under that desk in the Oval office.

Dixons Carphone Q3 21 – 20/01 – another retailer hit hard by the store shutdowns in the spring, Dixons Carphone posted a 51% fall in full year profits in the summer, largely as a result of higher costs from store closures as a result of Covid-19, but also restructuring. Looking at the overall revenue numbers the picture was more positive with a big increase in on-line sales, which helped offset some of the hit. The biggest impact revenue wise was on mobile revenue which saw a decline of £409m, sliding to a loss of £104m. These losses are expected to widen in this fiscal year, however mobile only makes up just under 20% of total revenues. In the other areas of the business, which accounts for the other 80% there was decent growth across the board. Since the record March lows the shares have recovered a good proportion of their lost ground year to date, but still remain 20% down on the year, however a good pre-Christmas period and the news about a vaccine means that the outlook is much more positive than it was a couple of months ago, despite the November lockdowns

Goldman Sachs/Bank of America Q4 20 – 19/01 – after some decent numbers from JPMorgan and the Fed opening the door to the resumption of buybacks and dividends last month investors will be looking at the Goldman Sachs in particular for any signs that it will look at resuming pay-outs. In Q3 the bank generated $3.62bn in profits blowing through market expectations, as well as posting a 30% rise in revenues to $10.78bn. The banks trading division generated $4.55bn of that total, helped by a strong performance in bond trading. CEO David Solomon is undergoing a modest restructuring of the bank with a greater focus on wealth management. Expectations for Q4 are for profits of $6.877 a share. Bank of America’s most recent Q3 numbers were slightly disappointing coming in short on revenue at $20.45bn while profits fell 16% to $4.9bn, as a result of weaker net interest margins. The bank also set aside $1.4bn in the form of loan loss provisions in Q3, down from the $5.1bn in Q2, and pushing the total for loan losses up to $11.2bn year to date. As we look to Q4 the big question in light of the recent slowdown in the US economy as the end of last year is whether this figure is likely to be increased, and if so, by how much. Profits for Q4 are expected to come in at $0.53c a share.  

Netflix Q4 20 – 19/01 – one of the big winners of the last 12 months has been online streaming platforms, with Netflix the market leader in this space, with the shares up over 50% in the last 12 months. In terms of subscriber numbers, the first half of its fiscal year saw an explosion in the number of people using its service. This growth slowed sharply in Q3 with only 2.2m new subscribers, after the 25.8m new customers it added in the first half. Even allowing for the very modest growth seen in Q3 Netflix has still managed to add more subscribers in the first three quarters of 2020, than it did in the whole of 2019. Revenues in the first half came in at $11.92bn a record number. The return of live sport to TV screens may have had had something to do with the slowdown in subscriber numbers in Q3, along with some modest price increases to its subscription model. For Q4 Netflix said it expected revenues to come in at $6.57bn, while adding another 6m new subscribers, both of which at the time were below what investors had been hoping for. For the last three months the shares have traded sideways, still fairly close to last year’s record highs, with investors slightly cautious that recent Netflix momentum may start to struggle as Apple and Disney start to get their act together in what is a highly competitive market. Netflix is still the market leader in the sector, and it also leads the way in non-English content which also sets it apart from its peers internationally. It also has a strong content slate with season 3 of Star Trek Discovery, and season 4 of The Crown, while production has started on the fourth season of Stranger Things, which lands later this year. The continued closure of cinemas into this year is likely to keep these subscriber numbers fairly buoyant, with most attention on its international markets for future growth prospects.