The Week Ahead: China Trade, US PPI, Bank of Canada, GameStop results
|- China Trade (Nov) - 07/12 – it doesn’t seem that long ago that markets were getting all excited over the prospect that China was looking at options to reopen its economy. Putting to one side how unlikely that was to happen in the near term with the onset of winter and China’s own zero-covid strategy, the economic numbers still point to a deep malaise, not only in the Chinese economy but also more globally. Even if the Chinese economy is underperforming the exports part of the equation had until recent been performing well. Unfortunately, even here we are now starting to see weakness as global consumers cut back on higher prices, and a weaker economic outlook. The October China trade numbers showed the extent which China’s zero covid policy is having on its economy as imports declined -0.7% showing once again that internal demand remains weak. What was especially surprising was a complete collapse in exports which had been expected to remain resilient after rising 4.5% in September. In October exports declined -0.3%, which was the worst performance this year, as well as the worst performance in two and a half years. The surprise slump also speaks to falling global demand for Chinese goods, as well as the continued disruption in supply chains caused by China’s zero-covid curbs. This effect looks set to be compounded in this week’s November numbers with exports expected to slide -4.2% and imports -6.7%.
- RBA rate decision – 06/12 – the Australian central bank appears to be already getting cold feet when it comes to its own inflation busting strategy, even as the RBNZ hiked rates again by another 75bps at its most recent meeting. Kiwi rates now sit at 4.25%, in comparison to where the RBA is at 2.75% after hiking rates in November by 25bps. With CPI at 7.3% on a quarterly basis the central bank appears to have one eye on the Australian housing market even as it admits that inflation won’t fall back to its target level until 2025. The bank also revised down its growth target to 3% in 2022, while 2023 was revised to 1.5%. Governor Philip Lowe said that the RBA wanted to slow the pace in order to better judge the lag effects of previous hikes which could take time to trickle down. Expectations are for another 25bps rate hike this week as the RBA looks to navigate a path through trying to bring inflation down, and knocking the housing market harder than it is already doing.
- Bank of Canada – 07/12 – when the Bank of Canada last met at the end of October, they surprised the markets with a 50bps rate hike, which was less than the 75bps that had originally been priced in. This followed on from a similar move a few weeks earlier from the RBA who also decided on a lower-than-expected move with many asking the question as to what was the common denominator from this more cautious approach. In the case of these two economies, one doesn’t have to look to far as concerns rise that too aggressive rate rises could do more harm than good. Canada’s housing market may also have had a part to play in the more cautious approach from the Bank of Canada with that starting to show signs of buckling under the strain of higher rates. Inflation in Canada has also started to come down, with October prices coming in unchanged at 6.9%, while further declines in oil prices should also translate into weaker numbers in the coming months. That’s not to say we won’t see another 50bps rate hike this week, but we can still be sure that the days of 75bps moves are probably in the rear-view mirror for now. Jobs growth has continued to be resilient and wage growth is trending at 5.6%, with the Bank of Canada predicting inflation won’t fall back to 3% by the end of next year.
- US PPI (Nov) – 09/12 – the most recent US CPI and PPI reports have helped shape a narrative that inflation in the US has peaked, thus prompting a sharp fall in yields and pulling the US dollar away from its recent 20-year peaks. The October PPI report helped to reinforce that notion after inflation came in at 8% on the headline rate, while core prices fell to 6.7% from 7.2%. Both CPI and PPI have been rising at a progressively slower rate since the summer peaks. The big question is whether this trend can be maintained against a US central bank that doesn’t want to be seen as going soft on inflation. Given Powell’s comments at the Brookings Institute last week it seems certain that the Fed will be slowing the pace of rate rises next week to a 50bps hike. This week’s numbers are expected to confirm this narrative with a further slowdown to 7.1% on the headline and 5.8% on core prices.
- Services PMIs (Nov) – 05/12 – the recent flash PMIs from the UK, France, Germany and the US all pointed to much more muted activity in the services sector during November as rising prices in Europe constrained demand. The slide in US services sector activity was slightly more surprising given that headline inflation has been slowing in recent months, however that has come on the back of a much more aggressive central bank and a sharply slowing housing market. This week’s final services PMI numbers are expected to highlight the challenges facing central banks when tightening monetary policy into the teeth of a squeeze on consumer incomes.
- British American Tobacco Q4 22 – 08/12 – one of the better performers on the FTSE100 this year, however since their H1 numbers in July the shares have traded sideways above what looks like decent support at 3,150p. On the numbers themselves H1 revenues beat expectations, coming in at £12.87bn with new category revenue rising to £1.28bn, a 45% increase on 2021. Operating profits were down by 25% to £3.68bn, while the company maintained its full year guidance. There was also a £957m impairment charge to reflect their departure from Russia, and ongoing costs from a DOJ investigation. As we look towards their Q4 numbers and a sneak look into H2 the shares have struggled with reports that the EU is looking at implementing a levy on vaping products, as well as additional duties on cigarettes. Any levy on vaping products, it is said, could be brought into line with the duties on cigarettes, which could be highly controversial as it might diminish the incentives for consumers to migrate away from cigarettes which are more health damaging.
- Broadcom Q4 22 – 08/12 - Broadcom was in the news earlier this year after agreeing a deal to pay $61bn for cloud company VMWare as part of a strategy to reduce its reliance on the surge in semi-conductor revenues which according to Broadcom CEO Hock Tan won’t last as capacity gets added to the market. This appears to be part of a strategy to make Broadcom a an even more diversified business than your average chip maker. Broadcom not only makes components for iPhones and industrial equipment, it also has a data centre business, and a software services business. At the end of Q1 Broadcom reported a profit of $8.39c a share, on sales of $7.7bn, beating expectations on both top and bottom lines. For Q2 the company beat expectations on revenues with $8.1bn, which did little to help stem the decline in the share price in the short term. In the wake of its Q3 numbers which beat lowered expectations quite comfortably in September, the shares slid below its July lows, before rebounding from $415, which was a full 50% retracement of the up move from its 2020 low to the record highs seen at the end of last year. The rebound from those 18-month lows in early October has tracked the wider US markets with revenue for Q4 expected to rise to $8.9bn, and profits to come in at $10.25c a share, while its order book has grown to $31bn with a 50-week lead time.
- GameStop Q3 23 – 08/12 – with the air finally coming out of the meme stock bubble this year GameStop shareholders have had a rude awakening from the highs of 2021, although for now the shares do appear to have found a base at $20. When GameStop reported in Q2 the shares initially popped higher after losses came in below expectations at $108.7m or -$0.35c a share. This was mainly due to a $77m inflow due to the sale of some digital assets. The sales numbers, on the other hand were disappointing, coming in short at $1.14bn, well below expectations of $1.28bn. The retailer saw inventory levels rise to $734.8m at the end of Q2, which was a sizeable increase on this time last year. The company still appears to want to reposition itself for the digital era, and a move into online streaming. There was also the announcement of a new collaboration with cryptocurrency exchange FTX initially helped boost the share price as the company continued its move into the NFT marketplace. Given the recent collapse of FTX, the shares did take a bit of a dive in early November but have since bounced back. Its ambitions around the NFT space do appear a little late given how this area of the market has imploded in recent months. GameStop’s biggest problem apart from its aging business model is that its share price is still way too high, when you consider that the company isn’t expected to turn an annual profit much before 2025. Losses are expected to come in at -$0.29c a share.
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