The Week Ahead – ECB rate decision, US Q3 GDP, Barclays, Lloyds, NatWest, Amazon, and Microsoft earnings

UK Unemployment (Sep) – 24/10 – Having been delayed from last week the latest UK ILO unemployment numbers for September are expected to remain unchanged after edging up to 4.3% for the 3-months to August. The ONS said the reason for the change of date was down to delays in collating responses and that the extra time would be used craft better estimates of the UK labour market. In the 3-months to August unemployment rose 159k, employment dropped by 207k, and the number of vacancies fell below 1m for the first time since the summer of 2021. September is expected to see a 200k decline in employment for the 3-month period, with unemployment forecast to remain unchanged at 4.3%.     

ECB rate decision – 26/10 – Is the ECB done hiking? The decision to hike rates back in September to a record high of 4.5% was somewhat of a surprise given some of the narrative that had been coming from ECB President Christine Lagarde in the lead-up to the decision. It is becoming apparent that there are clear divisions on the governing council on the future path of monetary policy with the northern part of the euro area, and specifically Germany keen to keep the pressure on lest inflation run higher, despite the recent falls in the headline rate. In comments made a week after the decision to raise rates Bank of Latvia Governor Martins Kazaks argued that the September increase was appropriate and that future increases couldn’t be ruled out given the upside risks posed by higher energy costs and real income growth. Nonetheless the tone of the September press conference was one of a possible wait and see approach from here on in given the downgrade to growth forecasts, which saw 2023 moved down to 0.7% from 0.9%, and in 2024 from 1.5% to 1%, while inflation was revised upwards to 5.6% in 2023 and 3.2% in 2024. Given how poor recent economic data has continued to be the most likely outcome this week is for pause. 

France/Germany flash PMIs (Oct) – 24/10 – It’s unlikely that this week’s flash PMIs will move the dial much when it comes to the ECB rate decision later this week. Its already reasonable to suggest that the ECB won’t move on rate this week, with the October flash PMIs merely serving to underscore how weak the European economy remains, and with the recent sharp rise in energy prices this weakness is likely to endure. The September PMIs for France, Germany and the UK saw further economic weakness in the services sector. France slipped to 43.9 from 46 despite hosting the Rugby World Cup, although Germany did see a modest pickup from 47.3 to 49.8. The UK also slowed to 47.2 from 49.5, while manufacturing for all 3 remained in the doldrums, at 44.2, for France, 39.6 for Germany and 44.3 for the UK. We’re not expecting to see a significant improvement in the October numbers given the recent surge in energy prices.          

US core PCE (Sep) – 27/10 – This week’s core PCE inflation numbers could help inform next week’s decision by the Federal Reserve on whether to hike rates again by another 25bps. With the latest economic projections citing a Fed funds rate of 5.6% by year end and another spike in oil prices exerting further upward pressure on prices as well as wages there is a risk that we might see another rate rise next week. With a resilient US jobs market and wage growth looking sticky we do appear to be starting to see a split opening up on the FOMC, despite recent data showing that on the Fed’s core measure, inflation is starting to ease. The core PCE deflator inflation numbers showed a further easing of inflationary pressure in August, slipping to 3.9% from 4.3%. This is welcome news for those who worry that inflation in the US is proving sticky, with personal spending also slowing to 0.4% from 0.9%. This week’s September numbers may show a further slowing which could stay the Feds hand, with a further slowdown to 3.7% expected. 

US Q3 GDP – 26/10 – Away from the slowdown in inflation pressures the US economy has continued to hold up well with recent evidence showing that Q3 could be the best quarter this year, as we head into the final quarter of 2023, and the prospect of a US government shutdown on November 17th. In Q1 the US economy grew by 2.2%, followed by 2.1% in Q2. The final revision in Q2 saw personal consumption revised substantially lower to 0.8% from 1.7%, while the headline number was left unchanged at 2.1%. The slowdown in consumer spending during Q2 was a little worrying given how much of the US economy is driven by consumption, however the retail sales numbers during the summer suggest a strong rebound. Nonetheless there was also a sharp revision higher for business investment in factories as the trickle-down effect of the inflation reduction act started to kick in. Growth estimates for Q3 are higher, with some estimates as highs as 4.5%, given how strong retail sales have been between July and September, which would be the best quarter since Q4 of 2021. With a strong labour market and US earnings also looking strong there is a considerable upside risk that a big number this week could prompt the Fed to hike one more time between now and the end of the year. 

Barclays Q3 23 – 24/10 – After a choppy first half of the year the Barclays share price has settled into a tighter range since July, with the shares trading broadly between 140p and 160p per share, although they haven’t regained the levels, they were prior to the US regional banking crisis which saw the shares hit their lowest levels since November 2020, before rebounding. In the wake of the bank’s Q2 numbers there was a common theme, that of a downgrade to net interest margin for all of the UK players. Q2 income was disappointing falling by 6% to £6.28bn, however profits after tax were higher, rising by 25% year on year to £1.6bn. Breaking the numbers down the bank saw an increase in impairments of £372m in Q2, pushing H1 impairments across the group up to £896m. The bank said that they expected NIM to come in below 3.2% to around 3.15% as the bank looks to offset the impact of dynamic deposit balances as clients go in search of higher rates. The Corporate and Investment Bank accounted for the bulk of the fall in Q2 revenue, falling 22% to £3.16bn, while the UK business benefitted from the higher rate environment with a 14% increase to £1.96bn. Q3 revenues are expected to come in at £6.35bn, with close attention likely to be on the investment bank given the strong numbers that we’ve seen from US banks in this area.

Lloyds Banking Group Q3 23 – 25/10 – After an initially positive start to the year which saw Lloyds shares reach a one year high, the shares have fallen back sharply, dropping to 9-month lows in September. Concern over the health of the UK economy, particularly a second half slowdown have weighed on the shares struggling to rally meaningfully from their September lows, over concerns that rising impairment provisions could outweigh any improvement in net interest margin. When Lloyds set its guidance in in February the bank said it expected to see net annual interest margin to improve to greater than 3.05%, up from its previous estimate of 2.8%, while operating costs are set to remain static at £9.1bn, rising to £9.2bn in 2024. The bank raised this guidance to above 3.1% in Q2, after the bank disappointed the markets on its profits. The miss on profits was down to an increase in provisions for non-performing loans, which came in at £419m, and a fall in Q2 NIM to 3.14% down from 3.22% in Q1. Statutory profit before tax in Q2 came in a £1.6bn, pushing H1 profits up to £3.87bn on revenues of £9.54bn. On the underlying business customer deposits fell by £5.5bn, an improvement on the £8bn fall in Q1, helped by an increase in retail savings balances. In a sign that loan demand is slowing lending to customers fell by £1.6bn in Q2 and by £4.2bn from a year ago. This will be another key area given recent weakness in mortgage approvals.   

NatWest Group Q3 23 – 27/10 – NatWest shares haven’t had a good 2023 so far, even as the shares managed to post their best levels since May 2018 in early February this year. Since those peaks the shares have lost around 25%, coming under pressure due to a combination of factors, including concern over the management of the bank after the departure of CEO Alison Rose after it was revealed she was the source of a leak over the details of the bank’s relationship with Nigel Farage. The row over the saga also raised serious questions over the governance of the bank and more specifically the Coutts business. It also raised questions over the judgement of outgoing NatWest chairman Howard Davies, and the oversight of GDPR and other client confidentiality rules. As we look towards the upcoming Q3 numbers there is still the small matter of Alison Rose’s payoff package which could overshadow the results, if the bank doesn’t cancel millions of pounds worth of share awards and bonuses in the wake of the scandal. Anything other than the minimum legal payoff which Rose is entitled to could well invoke a huge political storm. It’s certainly a headache that new CEO Paul Thwaite could do without as he looks to take the bank forward. In Q2 NatWest was forced to issue a downgrade to its full year guidance even as attributable profits to shareholders came in at just over £1bn, a slight fall from the same period last year, as well as being lower than the £1.28bn in Q1, pushing H1 profits up to £2.3bn. Net interest margin slipped back in Q2 to 3.13%, from 3.27% in Q1, with the bank cutting full year forecast to 3.15% from 3.2%, although this could well get reduced further given it was based on an assumption of a Bank of England base rate of 5.5%. NatWest also said it was planning to buyback another £500m of its own shares, while paying an interim dividend of 5.5p a share. On the business itself, net loans saw an increase to £352.7bn during the first half of the year, with £5.9bn of that being new mortgage lending, however most of that growth came in Q1. This could slow further in Q3, given the weakness in house prices and in mortgage approvals seen in recent economic data. The bank added another £153m in respect of non-performing loans in Q2 to add to the £70m it added in Q1. Customer deposits declined by £11.8bn during the first half, although we did see a modest rise in deposits of £2bn in Q2, as customers put money back into their accounts as the bank raised savings rates to help stop the outflow.

Microsoft Q1 24 – 24/10 – The move higher in the Nasdaq this year has seen the wider tech sector drive most of the gains in US markets year to date. Microsoft along with the rest of the so-called “Magnificent 7” has seen strong gains since the October lows of last year, with the shares hitting a new record high back in July, after reporting a strong set of Q4 and annual numbers. Q4 revenues saw an increase of 8% to $56.2bn, a new record for an individual quarter, pushing total annual revenues to $211.9bn, with profits coming in at $2.69c on the quarter and $9.68c on an annualised basis. The various business segments saw a strong performance from Intelligent Cloud which rose to $24bn, an increase of 15%, while cloud services revenue from commercial and consumer products for Microsoft 365 and Office 365 saw strong gains.  On the downside, revenue from personal computing fell by 4% to $13.9bn. This was mainly down to weak Windows OEM revenue, which fell 12%, and devices revenue which fell 20% on the quarter. Xbox content and services revenue on the other hand managed to perform well, rising 5%, with hopes high at the time that the Activision deal would complete by October 18th with the company hoping that the deal would get approved by UK regulators, which it now subsequently has been. The shares have slipped back a touch since those July peaks with some concern that revenue growth in Azure might slow which is expected to rise between 25% and 26% in Q1. This compares to 42% last year and 48% revenue growth the year, with some disappointment that the move into its OpenAI hadn’t delivered a higher estimate. Q1 revenues are expected to come in at $54.5bn, with commercial cloud expected to deliver $30.7bn, up from $25.7bn a year ago.

Alphabet Q3 23 – 24/10 – Has also seen strong gains from the October lows of last year having seen a big drop from the record highs of January 2022, and as one of the so-called “Magnificent 7” has managed to reverse a good proportion of the decline seen in 2022. Since the announcement of its Q2 numbers the shares have continued to maintain a steady momentum with the shares rising to 18-month highs last month. In Q2 total revenues rose by 7% to $74.6bn with a strong performance from Google Search which posted an increase to $42.63bn, with YouTube also posting a strong quarter, and an increase in revenue to $7.66b, compared to a weak Q1 of $6.69bn. Q2 profits were also strong, coming in at $21.83bn, comfortably beating last years $19.45bn. One of the main reasons for the underperformance in Q1 was down to a $2bn charge in relation to severance costs for 12,000 job losses. In Q2 the company set aside a further $69m in relation to optimising office space, on top of the $564m set aside in Q1. For Q3 total revenues are forecast to increase to $75.5bn, with YouTube set to increase to $7.7bn and Google Search to increase to $43.2bn. Profits are expected to come in at $1.45c a share. Losses in other bets is expected to slow to $1.2bn.

Meta Platforms Q3 23 – 25/10 – Has been one of the best share price performers so far, year to date after a disastrous 2022 which saw the shares lose over 70% of their value as they slipped from the 2021 record highs of $384 to as low as $88 in October 2022. We’ve seen a solid rebound since then in spite of the business still haemorrhaging cash from its Reality Labs unit. In the aftermath of its Q2 results the shares pushed up to their highest levels in 18-months with the social media giant’s share price slightly exceeding those peaks last month. Revenues in q2 rose 11% to almost $32bn, pushing net income up by 16% to $7.79bn, or $2.99c a share. Ad impressions and price per ad were also higher to the tune of 34% as daily active users rose 7% year on year. For Q3 Meta said they expect to see revenues of between $32-34.5bn, with total annual expenses of between $88-91bn, which was slightly higher than the previous $86-90bn. On the downside the Reality Labs unit is expected to see an increase in operating losses over the next year. Revenues here fell to $276m from $452m, while losses rose to $3.7bn, pushing total losses for H1 in this area to $7.7bn.   

Amazon Q3 23 – 26/10 – Share price wise the Amazon share price has undergone an underwhelming quarter, despite seeing a decent spike higher in the aftermath of its Q2 numbers back in August. The shares went on to reach a 1-year high in September but have struggled somewhat since then. Its Q2 results saw revenues come in at $134.38bn, an increase of 11%, with outperformance coming from the online stores side of the business as well as AWS. Profits also comfortably beat expectations, coming in at $0.63c a share. Online stores saw $52.97bn, while Amazon Web Services saw a 12% increase in sales at $22.14bn. Amazon also saw decent gains in its online subscription services, revenues rising to $9.89bn from $8.7bn with shows like Citadel and the film Air helping to boost traction in this business. Amazon also added to its international content, as well as sporting events. Over the past 12 months Amazon has been cutting headcount after over hiring during covid and said that 5,000 jobs had been cut during Q2. Amazon also upgraded its Q3 guidance for sales to between $138bn and $143bn. Investors will be looking for revenue growth in both online stores as well as AWS which is expected to see revenues increase to $23.2bn. Recent numbers would appear to suggest that Amazon has managed to bounce back from a disappointing 2022 when it reported significant losses, prompting significant cost cutting measures as well as headcount reduction. Looking ahead to Q4 Amazon is likely to face challenges from a consumer slowdown, while the business is also looking to the future having invested up to $4bn in AI startup Anthropic. Profits are expected to come in at $0.58c a share.