Week ahead: US payrolls, Fed, BoE, RBA rate meetings, IAG, BP, Next, Sainsbury and BT group results

US non-farm payrolls – 05/11 – The last two payrolls’ reports have been somewhat of a let-down to those who thought that the impending roll off in stimulus measures on the 6th September would herald a strong rebound in the US labour market. That this hasn’t happened has prompted quite a bit of head-scratching, even as weekly jobless claims have continued to decline, not only on a weekly basis but also in terms of continuing claims, which are now at 2.2m, over 500k below the levels seen in August. More to the point continuing claims are only 500k above where they were pre-pandemic, when they were trending at 1.7m. When Fed chair Jay Powell talked that an even-half decent jobs report could be the final piece of the jigsaw for tapering to start in November, I’m sure he didn’t have a number of 194k in mind, which was also the weakest US jobs report this year. Nonetheless by the time we get to see the numbers for the October report the Federal Reserve will already have met and announced the timetable for the imminent scaling back of the monthly $120bn of asset purchases. While the September number came in at 194k, we did get to see an upward revision to the August numbers to 366k, although it is hard to escape the feeling that the recovery in the US labour market has been running out of steam in recent months. Unemployment did see a big fall from 5.2% to 4.8%, however we also saw a fall in the participation rate as well, back to 61.6%. There still appears to be an expectation that October will see a catch up in hiring trends, and that the various problems in September have merely delayed a return to work in key sectors like education and the care industries. The fairly strong September ADP report of 568k helps to reinforce this narrative, that the slowdown in a return to work appears to be driven by factors that are sector specific. Expectations for October are still fairly subdued however with 425k jobs expected to be added, and unemployment set to remain steady at 4.8%.

Bank of England meeting – 04/11 – Over the last few weeks UK 2-year gilt yields have more than tripled from 0.2% at the beginning of September to over 0.7%, over concerns that inflation might not be as transitory as central bankers might have us believe. There was always a risk that central banks were being slightly that the various problems being experienced around the world in terms of surging energy prices and supply chain disruptions might become more persistent, in terms of pushing up prices. Before he left his post as Chief economist at the Bank of England Andy Haldane was already arguing that the central bank’s asset purchase program might need to be scaled back, along with external MPC member Michael Saunders, who was the remaining lone dissenter at the last meeting. Since then, the narrative has shifted sharply with Bank of England governor Andrew Bailey expressing concern about rising inflation expectations and that the central bank might have to act to counter an increase in pessimism about the inflation outlook. These concerns have been echoed by new Chief economist Huw Pill, and Haldane’s successor, in much more assertive terms. This has prompted markets to price in the prospect of multiple possible interest rate rises on the part of the Bank of England, by the end of next year, amidst talk that the central bank might be on the cusp of making a policy mistake. The argument goes that amidst concerns about various supply chain disruptions and surging energy prices, the last thing the economy needs is a rate hike. That argument rather overlooks the fact that the market has already tightened policy in anticipation of a move by the central bank and that for the bank to not act with a modest rate increase by the end of this year would damage what credibility it has left. A rate increase of 0.15% to 0.25% would not be the end of the world and would be entirely consistent with the recovery in the UK economy seen since the emergency measures were implemented back in March 2020. It will be how the central bank manages the message when it comes to further rate rises that will be key, and not whether they raise rates this week, or at next month’s meeting. The central bank will likely have to raise its outlook for inflation, while at the same time adjusting its growth forecasts as part of this week’s inflation report.  

Federal Reserve meeting – 03/11 – While we’ve seen rising concern that the Bank of England might be on the cusp of a policy mistake by raising interest rates, the debate around the Federal Reserve appears to be the reverse in that there are an increasing number of voices who say they are moving too slowly. This weeks Fed meeting is widely expected to see the central bank layout a timetable to start the tapering of its asset purchase program, against a backdrop of surging energy prices, as well as factory gate prices which are at multi year highs. There does appear to be a growing recognition amongst some Fed officials that inflation is likely to be much more persistent than was previously envisaged. It is clear that the Fed’s narrative for acting has shifted away from the labour market, and there is a wider acknowledgement about rising inflation risk, however once the taper timetable has been outlined Fed officials will then come under increasing pressure to outline a timetable for an increase in interest rates, a move that Fed Chair Jay Powell has already indicated is not imminent and could be as long as a year away. At its last meeting, the number of FOMC members who saw the potential for a rate rise next year, increased from 7 in June to 9, meaning the committee are evenly split. Once the taper starts that is likely to change if the data evolves as expected, which means that a rate hike for 2022 could well become a majority view by the end of this year, which is a big shift in thinking from earlier this year. A faster taper however could also bring this date forward, especially if policymaker thinking were to shift as we head into 2022.   

Services PMIs- 03/11 – The latest flash PMIs from France, Germany and the UK were a bit of a mixed bag.  We saw an improvement in France, the UK, and the US, while German services activity slipped to its lowest levels since February. While the numbers were broadly better than expected, 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, it is now much more noticeable in supply chains in France and Germany. As an example, German PPI rose by 14.7% in September, the highest levels since the 1970’s, while CPI is also continuing to rise sharply. The extent of these price rises is prompting some alarm amongst policymakers in major central banks, and with the Bank of England and US Federal Reserve due to meet this week, we could see a reaction to this. We are already starting to hear louder rumblings from some members of the ECB, however with a core CPI rate at around 2%, less than half of what is in the UK and US, the European Central Bank is likely to remain behind the curve.

RBA rate meeting – 02/11 – Back in September 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, due to the various lockdowns that were 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. Instead, we saw the central bank extend the horizon for tapering into February next year from November, reflecting the belief that any recovery was likely to be merely delayed due to the various lockdowns. As we look to this week’s November meeting the outlook for the economy as summer approaches and lockdowns get relaxed looks a lot better than it did a month ago, amidst concern about sharply rising prices. With the RBNZ raising rates last month attention has shifted towards the RBA potentially doing something similar, hence the recent surge in the Australian dollar. With rates at a record low of 0.1%, markets appear to be betting that we could see a rate rise as soon as this week. Three-year yields have already moved up to 0.75% compared to the RBA’s target rate of 0.1%. This suggests that rates are likely to move before the end of this year, which means we could see a move this week. It’s a remarkable turnaround from two months ago when markets were speculating about a delay to the RBA’s tapering announcement. A middle ground for the RBA would be to go down the Bank of Canada route and end their asset purchase program, which they originally intended to do in November and only extended into February when the Australian government implemented a new lockdown.

BP Q3 21 – 02/11 – The turnaround in the BP share price since August has seen the shares hit their highest levels since June 2020, however they remain well below their pre-pandemic levels of over 400p. There is still a long way to go before CEO Bernard Looney can convince shareholders that his plans to transition to a more renewables focussed business can deliver the same sort of returns than was the case during the fossil fuel era, and even now. In one sense the surge in oil and gas prices has been a lifeline for the oil giants as the aftershock of the pandemic slump in prices fades into the background. In August BP reported $2.8bn underlying replacement cost profit, compared to a $6.7bn loss a year ago. It also helped to boost H1 replacement cost profit to $5.4bn, thus building on the underlying replacement cost profit of $2.6bn in Q1 and posting its best performance since 2019. The company also increased its dividend to 5.46c a share, as well as announcing a $1.4bn share buyback from its H1 surplus cash flow. BP went on to say that with oil prices at $60 there was scope to deliver buybacks of $1bn a quarter, and to have capacity to increase the dividend by 4%. Cashflow was lower than in Q1, though this was largely expected due to the $1.2bn Gulf of Mexico oil spill payment which was flagged in Q1, down by $700m to $5.4bn. The jury remains out on whether the plans for a 40% reduction in oil and gas production is achievable without hammering margins, given that most of BP’s profit in H1 came from its oil production and operations business to the tune of $3.8bn. Gas and low carbon energy was next with $3.5bn, which suggests that this week’s Q3 numbers should be even better, supply chain considerations notwithstanding. Now, with energy prices where they are, the company is in a sweet spot for cashflow and profit potential. It needs to use that time well. Talking about “Performing while Transforming” is all well and good, but it needs to prove to shareholders and the markets that it can transition to renewables in a way that doesn’t hammer its margins. BP can certainly point to bidding for wind leases, investment in solar, as well as infrastructure like EV charging stations, signing an MOU with Piaggio to explore charging stations in India, however the real challenges lie in augmenting grid capacity, and there appears to be little or no investment in that, from any of the oil majors, or anyone else for that matter     

Next PLC Q3 22 – 03/11 – When listening to all the woes that are impacting on the retail sector it is also important to note that some have been doing very well, with those that have strong online operations able to withstand the headwinds of Covid. Next share price hit a new record high at the end of September after the retailer reported half year results that were better than expected, as well as raising its full year guidance for the fourth time this year, having done so for the third time in July. Full price sales for the last eight weeks rose 20%, well above expectations, while for the whole period the company saw an 8.4% increase in sales compared to 2019. This outperformance has seen profits before tax rise by 5.9% to £347m, compared to 2019 levels, prompting management to upgrade full year guidance up to £800m, and a five year high. This was up from £764m, although this did come with a caveat, that some areas of its business were coming under pressure from rising costs, and staff shortages which might prolong its delivery times in the lead-up to Christmas. Next CEO Lord Simon Wolfson pointed to this as a potential pinch point for the second half of this year, saying that Next stock levels were down 12% compared to pre-pandemic, but that they were coping, although costs could well go up, as warehouse space becomes more expensive.       

BT Group H1 22 – 04/11 – It’s not been a great quarter for the BT share price, after peaking at just over 205p in June the shares have slid back over 30%, falling below 150p in October, as concerns grow over its ability to compete in the increasingly competitive space of fibre and 5G as it looks to fund a long-term infrastructure rollout plan. This plan includes accelerating the build of its FTTP network, with a target of 25m homes by December 2026, and a target of over 5m in 2021/2022.The company also announced long term 5G network plans that would cover 90% of the UK by 2028, as well as 4,500 square miles of new rural 4G coverage by 2025. Revenues in Q1 fell 3% to £5.07bn, largely due to underperformance in its Global Enterprise division, although adjusted EBITDA rose to £1.87bn. Reported profits after tax came in at £446m, while capex rose 63% to £1.5bn. Of all its divisions Consumer and Openreach saw revenues rise 1% and 5% respectively, however the biggest concern for BT is around its debt levels, and its pension deficit, which are both quite high. There has been talk that BT is open to offers for its BT Sport unit, by way of an outright sale, or a partial sale, with CEO Philip Janssen saying he is openminded on the issue, however, there haven’t been much in the way of nibbles thus far with ITV ruling itself out in the summer, although streaming service DAZN is said to be in the frame. The division certainly adds value to its consumer business, but it’s not adding subscribers as quickly as management would like and with its main competition being Sky doesn’t have as broad a range of content, and sports rights aren’t exactly cheap these days. It also remains an expensive luxury for a company that needs to spend a lot of money boosting its infrastructure in the coming years. There is also the added wrinkle of the recent £2bn investment in BT by Altice back in June, which could be a prelude to a takeover bid sometime next year. While Altice said they weren’t interested in making a bid, that certainly doesn’t preclude getting more involved if they feel certain things could be done differently, or more effectively. CEO of Altice Patrick Drahi isn’t generally known to be the type of investor to sit back and observe.

Sainsbury H1 22 - 04/11 – The recent tug of war over Morrisons has seen interest in the UK supermarket sector ramp up in recent months. In August Sainsbury share price hit a three year high to the levels they were soon after the ill-fated Asda deal was first mooted. Since then, the shares have underperformed, with the eventual blocking of the Asda takeover helping to set the business back, with the shares drifting down from those 2018 peaks, to lows of 172p in March 2020 before rebounding. In the years since then there has been other interest from other external parties who appear to see value in the business, and which could provide an obstacle to any potential sale. Czech billionaire Daniel Kretinsky is one such shareholder, increasing his stake in the business over the past few months to just shy of 10%. A few years ago, there was also speculation that the Qatar Investment Authority, might make a bid, and who are currently the biggest institutional shareholder with a 15% holding, although this is down from its peaks of just over 20% a few years ago, with Kretinsky the main buyer. As we look ahead to this week’s H1 numbers, the recent Q1 numbers showed total like for like sales rose 1.6%, with grocery sales up 0.8%. Given how strong sales were for the same quarter in 2020, this was a pretty decent performance, and was also a 11.3% increase on 2019 levels. Online sales were a key driver with a 29% increase year on year and up 142% on 2019 levels. Sales in Argos were somewhat disappointing, down 3.7% year on year, which dragged on the overall numbers, however that didn’t stop Sainsbury from upgrading their underlying profit before tax forecasts for the year from £620m to £660m, with most of the improvement expected to be weighted towards the first half of the year. This week’s numbers are likely to face several cross currents, notably a boost from Euro 2020 on the back of increased food and beer sales, while on the flip side the latest Kantar numbers showed that grocery sales slowed in the 12 weeks to 3rd October. The petrol shortages also saw shoppers limit the number of visits to supermarkets, while online sales crept up, with some starting to buy Christmas related products already. For now, there appears to be little sign that rising prices might be acting as a brake on sales, however that could change as we head into year end.     

IAG Q3 21 – 05/11 – It continues to be a challenging environment for airlines in general, with good news and bad news in equal measure. At the beginning of September optimism was high that the prospect of the lifting of restrictions on overseas travel would be the catalyst for some optimism about the outlook, and some light at the end of a very long tunnel, as they look to ramp up capacity to accommodate pent up demand from travellers between Europe and the US. Unfortunately for the airlines, the light at the end of the tunnel has turned out to be the train of rising fuel costs, higher airport charges, and the prospect of further Covid restrictions coming in the other direction. In Q2 IAG reported an operating loss of €1.05bn, which was slightly higher than expected. The airline said that the reopening of the UK to US visitors was a positive development, but that the airline was still only planning on resuming 45% of its 2019 capacity in Q3. CEO Luis Gallego also declined to offer a financial outlook for the rest of the year, and even though US, UK travel restrictions are due to disappear this month, and travel restrictions have been simplified confidence in air travel continues to remain patchy, with infection rates, and restrictions being reimposed across Asia starting to rise again.              

AMC Entertainment Q3 21 – 02/11 – From being a meme stock at the beginning of the year AMC Entertainment’s share price has settled down a lot after the volatility seen in the first half of this year. Cinemas are another area that has borne the brunt of the pandemic and while AMC owes its survival to its Reddit fans the company remains some way short of turning a profit, even as its share price still sits well above the levels, we saw back in 2016 when its finances were in much better shape. The rise in the share price this year has allowed the business to raise $1.8bn in cash and $2bn in liquidity. The improvement in US vaccination rates saw many more people return to the cinema in Q2, 22.1m compared to 100k a year ago. The performance in Q2, which saw revenues of $444.7m and losses narrow to $344m was also a marked improvement on Q1, which saw a loss of $567m on revenues of $148.3m. Q3 is expected to see another improvement, with the James Bond film “No Time to Die” likely to have prompted a rush back to the box office. AMC said that it still expects to be cash flow negative for at least the next two quarters, and while management will be hoping for an improvement in the second half of the year, its biggest problem will be persuading those cinemagoers who used to like an evening out at the cinema to come back on a more regular basis. Losses are expected to come in at $0.54c a share.

Pfizer Q3 21 – 02/11 – Has been at the forefront of the vaccine program along with its partner BioNTech, and in earnings terms it has been cleaning up, although in share price terms since its record highs in August we’ve seen a drop of over 10%. At its last set of numbers, the company raised its forecast for vaccine sales to $33.5bn this year from $26bn, which is extraordinary. When you consider that its total revenue for all of 2020 was $41.9bn that’s quite a sum, and just goes to show what a money earner the vaccine has been. Next year is likely to be even better given that it is increasing its prices to the EU from €12 to €19.5 per dose in 2022/2023, with revenue estimates for 2021 lifted to $73.87bn, with adjusted net income expected to double to $21bn. It does rather make you question how much profit is too much profit, when a lifesaving vaccine is concerned.

Moderna Q3 21 – 04/11 – Continued to reap the benefits of its own vaccine candidate, the shares hit new record highs after their Q2 numbers which showed revenue of $4.4bn, well above expectations, with the vaccine contributing $4.2bn of that number. Profits in Q2 came in at $6.46c a share with the company announcing a $1bn share buyback program of $1bn over 2 years. We also saw the latest vaccine data which showed that the second Covid jab was still 93% effective 6 months after being delivered. Twelve months ago, Q2 revenue was a mere $67m, illustrating how far this company has come in the space of a year. Full year capex for 2021 is expected to be in the region of $450m and $550m as the company strives to add additional capacity. Since those heady August peaks, the share price has slipped back a touch, over concerns about the vaccines use in adolescents, due to concerns about myocarditis. There was also the announcement in October by Merck that they produced an anti-viral pill which had seen successful trial results. A year ago, Moderna generated $157.9m in revenue, while this year we can expect to see a number in excess of $6.2bn while profits are expected to rise to $9.33c a share. 

Uber Q3 21 – 04/11 - Uber shares drifted down to a ten-month low in the wake of their Q2 earnings numbers back in August, despite beating on revenues and bookings, before finding a base in September and starting to push back towards the $50 level. Gross bookings in Q2 rose to $21.9bn, while decent growth in its delivery business saw revenues rise to $8.6bn. Losses increased from $108m in Q1 to $509m due to having to spend more money on recruiting drivers back onto the platform as demand for delivery capacity rose sharply. Uber said it expected losses to narrow to $100m in Q3 and was hopeful of a profit in Q4. As unemployment benefits expire in September the expectation is that driver costs may well moderate as more people are forced back into the workforce. Last year the business posted an annual loss of $6.77bn, which while better than expected was still only a 20% improvement on the previous year's $8.51bn losses. Given that the company’s ride sharing business has been decimated over the last 12 months and is only starting to recover one could argue that this is a small victory. The company appears to be looking to upsize its delivery capacity, with deals to move into grocery as well. This improvement in its delivery business appears to be behind the recent resilience, with the company closing the deal for alcohol e-commerce platform Drizly in October. The company is also looking to move into freight with the recent deal to buy Transpace for $2.25bn. As we look ahead to the current quarter, we hope to be able to see a further increase in bookings as more people leave home as confidence improves on the back of rising vaccination rates, although deliveries might fall for the same reason. On the flip side we could see an increase in costs after the company was forced to classify all its drivers as workers, meaning they are all entitled to minimum wage protections and other employment rights after various rulings against the business earlier this year. Losses are expected to come in at $0.33c a share, on revenues of $4.5bn.

Peloton Q1 22 – 04/11 – After being one of the star performers in 2020, the chain and wheels have come off a little bit this year, with the shares down just over 30% year to date. The company has had its fair share of problems this year, from recent problems with respect to its Tread+, treadmill which the company belatedly recalled back in May. It has also been having problems with its supply chain and completing deliveries in a timely fashion. The company’s Q4 numbers were fairly decent, as revenues beat expectations, coming in at $936.9m, while subscribers rose to 2.33m. The guidance on the other hand was another matter, with the company downgrading its Q1 revenues to $800m below expectations of $1bn, as well as announcing that they would be cutting the price of the original bike by $400, which means that the company would probably make a loss of $285m in Q1. The company also said it had identified weaknesses in its internal controls with respect to the identification of inventory. In essence the company didn’t know how many bikes and treadmills it had in stock, which isn’t a great look. Revenues are expected to come in at $810m, while earnings consensus is for a loss of just over $1 a share.