Week ahead: Federal Reserve and Bank of England set to meet as economic outlook darkens

Fed Meeting – 19/03 – When the Fed left rates unchanged at its January meeting, there wasn’t much in the way of surprise given concern over headline inflation, which has continued to look sticky, having rebounded from lows of 2.4% in October, and having already cut rates by 100bps since September last year officials seem keen to see the how much of the effects of these reductions have had on the US economy. One of the key takeaways from the publication of the recent minutes was uncertainty caused by the effect of the imposition of President Trump’s tariffs on the US supply chain which gave officials pause about further cuts in the short term. While the US President is keen to see further rate cuts, officials are right to be cautious given that we already appear to be seeing upward pressure on underlying inflation if recent ISM survey data for prices paid is any guide, which jumped sharply in February. Manufacturing prices rose at their fastest rate since July 2022 at 62.4, while services prices also came in above 60 at 62.6. This surge in prices offers up a dilemma to central bank officials at a time when fears are rising that the US economy might be about to slow. It is these concerns that appear to be behind recent stock market falls, amidst concern over a sharp slowdown in the US labour market as hordes of Federal employees come onto the jobs market, having been forced out by the reported culls by Elon Musk’s DOGE. Recent consumer led data has also shown signs of weakness, however this series of data tends to be volatile. For now, though it would appear that further rate cuts appear unlikely, they could come later in the year, but not for the reasons Trump would like, namely due to a slowdown in the US jobs market and possibly the wider economy. Recent comments from Fed officials suggest little appetite for further rate cuts in the short term with Fed governor Christopher Waller indicating that while he sees the potential for further rate cuts this year, he doesn’t support a cut in March. This view appears to align with fellow Fed governor Michelle Bowman along with Cleveland Fed President Beth Hammack. Even Fed Chair Jay Powell indicated in recent comments that he saw no need to consider further rate moves at this point in time, which means this week’s Fed meeting will be important in the context of how Fed officials see the US economy as well as whether they move their dots.     

Bank of England meeting – 20/03 – While the Bank of England doesn’t have a Trump problem it does have a Reeves problem in that it has a Chancellor of Exchequer who has boxed herself into a corner, due to a budget that has helped to kneecap UK businesses, and sent the UK economy into a sharp slump. Having seen her budgetary fiscal headroom disappear in the space of a few months, and with headline inflation remaining sticky, with little sign that is likely to come down quickly the MPC can adjust to the quickly changing economic outlook. With wage inflation already 3 times above the central bank’s 2% inflation target, and unemployment at its highest level since the new government took office at 4.4%, it wouldn’t take much to push it higher, and to its highest levels in 4 years, given recent headlines on employers cutting back on hiring, as well as shedding jobs. At the last meeting policymakers voted to cut rates 25bps by a 7-2 margin, however the 2 dissenters wanted an even bigger cut of 50bps in a major twist, with external MPC member Catherine Mann the main surprise. Mann’s pivot was more remarkable as she had previously been one of the more hawkish members of the MPC last year calling for more aggressive tightening. Giving her reasons for her abrupt pivot in recent comments she cited the weak UK economy, as well as the recent actions by UK businesses in response to the recent budget which responded to a recent Bank of England survey which showed that employers were going into full hunker down mode, with an expectation that they would have employ fewer workers, as well as put up prices. Mann’s views on cutting rates quicker currently appears at odds with the Bank of England governor Andrew Bailey who stated in recent testimony that further cuts would be gradual. It’s easy to understand Bailey’s reticence when headline inflation is 3%, core CPI at 3.7%, and services inflation is 5%, and April is set to see prices hikes in excess of 5% across a range of services including water, energy, council tax, broadband and rail fares to name but a few.        

Bank of Japan decision - 19/03 – While every other central bank in the world is looking to cut rates, the Bank of Japan is on the opposite course, having raised rates at its last meeting to the heady heights, (by Japanese standards) to a 17 year high of “around 0.5%” in response to core consumer prices rising to 3% in December. This rate hike was the second increase in borrowing costs since raising rates in July last year, and would appear to show that after decades of deflation Japan appears to have solved its deflation problem. At its January meeting the BOJ signalled that further rate hikes were coming in the hope they can get the headline rate back to 1.5% in the next 12-18 months. On the outlook the central banks inflation forecasts for 2025 and 2026 were also nudged higher to 2.5% and 2% respectively. No changes to policy are expected this week, after January’s surprise hike, however the focus will be on how policymakers see the future given recent gyrations in global financial markets.     

UK wages data (Jan) - 20/03 – With the Bank of England set to meet only hours of this latest data set, this month’s wages and unemployment numbers can only serve to underline the challenges facing the MPC, although the decision on rates will have already been made the day before. When the wages numbers were released last month they surprised to the upside, pushing up to 5.9% in the 3 months to December, up from 5.6%, and to 6% when bonuses are included. While a welcome boost to a hard-pressed consumer, a little more worrying was that vacancy rates were continuing to weaken further as employers cut back in anticipation of higher costs starting from April. With unemployment already near multi-year highs at 4.4% it wouldn’t take much to push it up to 4.5% and the highest level since 2021. There is also the added fact that while on the face of it unemployment remains low, economic inactivity levels is still painfully high at 21.5%, while the number of payrolled employees continues to trend lower.

US Retail Sales (Feb) – 17/03 – Fears of a slowdown in the US economy have gained traction in recent weeks after consumer confidence dropped sharply in February to a 10-month low of 98.3, and January retail sales fell sharply by -0.4%, against an expectation of a rise of 0.7%. These sharp reversals have raised concerns that the US economy is about to slow sharply. While that may be true its hard to deduce too much from these sorts of datasets given, they tend to be quite volatile. For context the January slump could well be a symptom of a consumer pause after 4 months of strong pre-Christmas gains. Furthermore, January retail sales generally tend to be a weak month for US consumers, last year saw a similar sharp fall, with very cold weather weighing on consumer demand, last year and this year as well. The main concern will be if the weakness seen in January spreads into February and the US labour market starts to weaken. There are few signs of that at the moment, however with the job losses being announced in the Federal government it could well be coming. We’ve already seen weakness in global stock markets and treasury yields start to slide back on concerns the US economy is slowing, a fear that gained traction after the Atlanta Fed’s widely watched GDPNow tracker fell sharply into negative territory earlier this month.         

JD Wetherspoon H1 25 – 21/03 – Having updated the market in January with its Q2 numbers the shares have continued to drift lower, slipping to a 2 year low earlier this month. Chairman Tim Martin cited an outlook that meant that the pub chain’s costs would rise by £60m due to the recent budget changes to the minimum wage, as well as national insurance rates. He reserved his most strident criticism for the so-called “dinner party” set, calling on Keir Starmer to redress the balance urging him to remove VAT from pub food sales, arguing that supermarkets don’t pay VAT on food sales, allowing them to be able to subsidise their beer and alcohol sales. All that aside the pub chain reported that LFL sales were 5.1% up over the year, with bar sales up 4.5% and food sales up 5.6%. Total sales were up 4% with the pre-Christmas period enjoying a decent bump of 6.1%. 9 new pubs are planned for the upcoming fiscal year, including sites at key transport locations, London Bridge station, Manchester Airport and Fulham Broadway underground station.  It would appear that concerns over rising costs, as well as the economic outlook have helped undermine what on the surface are likely to be a solid set of numbers, and it is this uncertainty that is behind a reluctance on the part of the market to drive the shares higher.    

Travis Perkins and Wickes FY 24 – 18th and 20/03 – companies like Travis Perkins and Wickes ought to be UK success stories, given that you can reasonably compare them to the likes of Home Depot in the US. When Travis Perkins spun Wickes off in 2021, having originally acquired it in 2005, the hope was that it would allow it to focus on its own core business and enhance shareholder value accordingly. The reality sadly has been somewhat different with Travis Perkins shares going downhill since the spin off, sliding from peaks of 1,900p to be trading below their Covid lows of 645p earlier this month, after it was announced that newly appointed Peter Redfern was stepping down due to ill-health. Redfern, who has been CEO at Taylor Wimpey, was brought on board to try and turn around the fortunes of a business which has struggled consistently over the past few years. Soon after taking over in September, Redfern warned that the profits outlook was likely to fall short again, guiding that annual profits were likely to be 25% lower to £135m, from £180m in 2023. Q3 like for like revenues fell by 6.8%. Total group revenue fell by 5.7%, with the bulk of that coming from the merchandising division. On the plus side the Toolstation business has performed well over the year, in the same way Screwfix helps B&Q’s numbers, with the company citing the uncertain economic outlook as a reason for the underperformance of its main builder’s merchant’s unit. Perhaps selling off the Wickes business wasn’t such a smart move after all, although it hasn’t exactly been ripping up trees either. In September the company reported a 25% drop in H1 profits at £23.4m, while revenues fell 3.4% to £799.9m. In January, the picture appeared slightly better with total revenues for the year expected to decline 1% to £1.54bn, helped by a 1.8% bump in revenues in H2. The biggest drag on the business appears to be in Design and Installation which is expected to see an 8.4% decline in like for like revenue growth. Adjusted profit before tax is expected to be at the upper end of the £39.7m and £44m consensus range. It is clear that the uncertainty prevailing around the UK economy is weighing on demand when it comes to big ticket spending amongst UK business and consumers. Red tape around planning and home improvements, as well as a reluctance to spend big on home improvements isn’t helping either.   

FedEx Q3 25 – 20/03 – A key bellwether as to the overall health of any economy is how well delivery companies are doing. If the consumer is confident and buying goods and services then companies like FedEx should also be doing well, delivering these same parcels. Since FedEx reported in Q2 the shares have drifted lower, after revenues slipped 1% to $22bn and adjusted net income declined to $990m. The reason for the weakness appears to be down to a modest downgrade to its full year outlook saying that it now expects revenues to be flat on the year with EPS guided lower, from $17.9 to $18.9 a share to $16.45 to $17.45 a share. Management also announced that they would be looking to spin off the Freight division, creating a separate business which is expected to be completed in the next 18 months. Profits expected to be $4.63 a share.  

Nike Q3 25 – 20/03 – Despite reporting an 8% decline in Q2 revenue and downgrading its outlook for Q3 Nike shares haven’t moved much from where they were just before Christmas, although they did slide to their lowest levels since March 2020, back in January. Since those lows, they have seen a modest recovery in the expectation that they might see a bit of a bump in the lead-up to Chinese New Year. In February the shares extended to their highest levels since October last year before sliding back. The shares still haven’t recovered since the sharp plunge seen in the summer of last year when management warned that quarterly sales would fall 10% in Q1, and cut their full year guidance for the new fiscal year. The slowdown in revenue the company warned about was expected to be due to a sharp slowdown of sales in China which is one of its biggest markets. The recent rebound seen in the past few weeks may be predicated on a Chinese New Year bounce. Whether that happens remains to be seen given that the slump appears to be across all of its businesses, with Nike Direct seeing sharp falls in revenues, along with the rest of its businesses with margins also taking a hammering, down to 43.6% in Q2, a fall of 100bps. Net income in Q2 fell 26% to $1.16bn. Profit expectations for Q3 are for 32c a share.