The week ahead – Fed, ECB and Bank of England rate decisions

Fed decision – 13/12 – When the Federal Reserve kept rates unchanged back in November for the second meeting in a row there was still the distinct possibility that the final meeting of 2023 would provide the possibility of one more rate rise to round off the year in line with Fed policymakers dot plot forecasts of 5.6%. In the weeks since then the prospect of that now happening has disappeared to almost zero, despite Fed chair Jay Powell insisting at the start of this month that the prospect of more hikes was still a possibility and rate cuts could well follow in the coming months. We do know that Fed policymakers have guidance of a Fed Funds rate of 5% at the end of next year, however markets are increasingly of the opinions that we could see more than that, with the first expected to be delivered in the summer. At his November press conference Powell insisted that no decisions had been made on whether more rate hikes were coming. He went on to say that while financial conditions had tightened, policymakers weren’t confident that policy is sufficiently restrictive, although they had come a long way. While this was a view repeated just prior to the blackout period, other policymakers have already shifted their stance with one hawkish member Fed board member Christoper Waller saying that monetary policy was currently well positioned to slow the economy and get inflation back to target. He went on to say that if disinflation starts to become a concern, then rates could be cut in response, in a sign that the ground is now shifting, and that rates have peaked. The recent bond market reaction could be a cause for concern for some Fed members if the slide in yields prompts financial conditions to loosen just enough to prompt an inflation rebound. That doesn’t mean we will see another rate hike, no change is expected, but it could prompt the FOMC to look at their dot plots for next year and be wary of altering them in any way that could be considered dovish.  

ECB decision – 14/12 – It’s hard to escape the feeling that the ECB erred in September when they decided to hike rates for what looks set to be the final time in this rate hiking cycle, despite both the Federal Reserve and the Bank of England decided to stay on hold. When the ECB met in October President Christine Lagarde said that risks to growth were tilted to the downside, but also that inflation was still too high. There was no commitment either way as to whether the ECB was done on the rate hike front, however when looking at the economic data that has been coming out of Europe since June you would have thought that they should be. In comments made recently German ECB governing council member Isabel Schnabel has now acknowledged that the ECB is done, expressing surprise at how quickly inflation has slowed. Putting to one side that it shouldn’t be given the trend in PPI over the past 12 months a number of other members of the Governing council, including France’s Villeroy, have also admitted that the next move in rates is likely to be lower in 2024. That’s not surprising given that in Q3 the French economy slipped into contraction, and with Germany not having seen much in the way of growth this year markets are now pricing in rate cuts for as soon as April 2024. It was also noteworthy that at the start of this month French ECB member Villeroy said that rate hikes were over based on the current data, thus supporting the view that inflation was returning to target. That is already quite apparent with November CPI falling to 2.4%, having been at 5.3% only 3 months before. No changes in policy are expected with the biggest challenge facing Christine Lagarde in convincing the market that rate cuts won’t begin much before the summer of next year, given how bad the economy in Europe already is.

BoE rate decision – 14/12 – When the Bank of England took the decision to hold rates steady in September it was a close-run thing, but on the balance of risks it was also probably the right one given the challenges facing the economy in the latter part of this year. The switch to what has become a “Table Mountain” approach to rate policy, or a higher for longer approach now appears to be the preferred messaging given that headline inflation, along with wages is much higher in the UK even now. While most of the energy price cap inflation is now out of the headline numbers CPI is now back at a more manageable level of 4.6%, well below last year’s peak of 11.1%, although core prices are still at a lofty 5.7%. The Bank of England’s biggest concern however is wage growth which is currently at 7.9%, while services inflation is at 6.6%, and appears to be behind some of the dissent on the MPC amongst those who still want higher rates, although this number has shifted to 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel. It will be interesting to see if they drop their dissent and opt for the status quo this week, with the markets also already pricing in some rate cuts for next year, although these are likely to come well after the ECB starts cutting with inflation here in the UK still over 2% higher than it is in the EU on an annualised basis.

UK wages (Oct) – 12/12 – For the last 3 months UK wage growth has been up around 8%, and above that if bonuses are included. Some at the Bank of England have been fretting about that but they really shouldn’t be given how badly inflation has impacted the pay packets of consumers these past 2 hours. All that is happening now is that some of the purchasing power that has been lost over the last few months is slowly being clawed back and for the most part will take years to recover back to pre-pandemic levels. With food prices only just recently dropping below 10% for the first time in over a year it can hardly be a wage price spiral if consumers are finally seeing the price/wage ratio finally starting to turn positive in wages favour. Expectations are for wages to slow from 7.9% to %       

UK Monthly GDP (Oct) – 13/12 –. Having just about avoided a contraction in Q3 some of the more recent economic data as we head into Q4 has shown a modest improvement, raising the prospect that the UK economy might avoid a recession at the end of this year. When you consider that a year ago both the IMF and the Bank of England were predicting a long recession that is no small feat. That’s not to say that everything is fine and dandy it isn’t but sometimes its too easy to be bleak. In September the UK economy managed to expand a modest 0.2%, with consumers feeling the squeeze from higher rates throughout the quarter, as well as various public sector strikes. Fortunately, rates have come down from their summer peaks, easing some of the pressure on hard-pressed consumers while recent PMI numbers also offer some hope of optimism. As Q3 gets under way this week’s October GDP numbers will offer an insight into Q4, although various weather-related events may also impact the numbers.               

US CPI (Nov) – 12/12 – US inflation fell to 3.2% in October, down from 3.7% reversing a trend that had seen inflation fall to 3% in June, before gaining ground in subsequent months. Core CPI on the other hand has been steadier, slowing at a more modest pace and coming in at 4%. More importantly super core inflation which the Fed monitors closely also slowed, and with the risk of a US government shutdown postponed until January next year, the economic risks to the US economy appear to have diminished further. There has been some concern that the resilience of the US economy may delay the return to the 2% target, however judging by the latest PPI data there is little sign of inflationary pressure in respect of company’s costs. These also slowed sharply in October declining -0.5%, dragging final demand down from 2.2% to 1.3%, in a sign that we could see further downside in US CPI, with the potential to slip below 3% before the end of the year. Headline CPI for November is forecast to slow to 3.1%, with core prices remaining steady at 4%.  

China Retail Sales (Nov) – 15/12 – The Chinese economy appears to be improving if recent economic data is any guide, however the bar remains low in the context of what it might be capable of. The economy has continued to show signs of weak demand and disinflation, as the problems in the real estate weigh on the economy as Chinese authorities wrestle with the problems posed by Evergrande and Country Garden. In October there was a modest improvement in retail sales while industrial production remained steady at 4.6%. Having seen September retail sales end the quarter with a 5.5% gain, October saw a better-than-expected rise of 7.6%, however this number needs to be set in the context of a 0.5% decline in October 2022, when the economy was still in lockdown, so the numbers may well have flattered to deceive. Chinese consumers do appear to be starting to spend a little more, however as various European luxury brands can attest the products aren’t flying off the shelves. This week’s November numbers should offer a further insight given that they will cover Chinese Singles Day sales

Currys H1 24 – 14/12 – It’s not been a great year for electrical retailer Currys, with the share price briefly dropping to a record low back in October. Back in July Curry’s reported a 7% decline in full year group revenue to £9.51bn, and group adjusted profits before tax of £119m, with its Nordic business acting as the main drag. The UK and Ireland business was a bright spot seeing an increase of 45% in EBIT of £170m, while profits in the Nordic area dropped 82% to £26m. The Greece business also saw profits slow to £18m. The company took a £511m goodwill impairment in respect of the Dixons Carphone merger in 2014, dragging the business into a loss of £450m. For the new fiscal year management said that trading had been in line with expectations, a position that was left unchanged back in September, even though revenue was down on the same period last year. Like for like sales for the group were 4% down with UK and Ireland like for like revenue down 2%, while Nordics was down 8%. In November the decision was taken to offload the Greek and Cyprus business for €200m to Public Power Corporation, with net cash proceeds expected to be in the region of £156m, and is expected to complete early next year.          

Darden Restaurants Q2 24 – 15/12 – If ever there was an example of how resilient the US consumer has been this year it’s in the performance of Darden Restaurants after the share price plunged to its lowest levels since 2009 in the wake of the covid lockdowns, although the last few months have seen the share price drop sharply from its record high July peaks. The fall to one-year lows in October appears to have been driven by concerns over the resilience of the US economy and the impact that this might have on its Olive Garden and Longhorn Steak House brands. Since those October lows we’ve seen a modest rebound having sold off due to a slowdown in its fine dining segment of the business, which saw sales decline by -2.8%. Its Q1 numbers saw net sales rise 11%, while in the summer the company acquired Ruth’s Chris Steak House for $715m, the numbers of which won’t be included in this week’s Q2 numbers or any quarterly numbers for at least another 12 months. Q1 earnings came in at $2.73bn while profits came in at $1.78 a share. For the full year the restaurant chain reiterated its outlook, forecasting net sales of between $11.5bn and $11.6bn, and EPS of $8.55 to $8.85 a share.

Adobe Q4 23 – 13/12 – It’s been a strong year for the Adobe share price kicking on sharply despite briefly falling to 2-month lows in the wake of its Q3 results in mid September. When Adobe reported in Q2 it predicted Q3 revenues would come in between $4.83bn to $4.87bn and profits to come in between $3.95c and $4 a share, driven by growth in its AI products. The company managed to do better than that, posting record revenues of $4.89bn, a 10% increase on the year and profits of $4.09c a share, with the shares rising to their best levels since December 2021 in the last few weeks. Its main revenue earner is in digital media content creation helped by its new AI feature Firefly. For Q4 Adobe said it expects revenues of close to $5bn and profits to rise to between $4.10 and $4.15 a share. On an annual basis Adobe expects to see revenues to come in between $19.25bn and $19.35bn, and profits of $15.70c a share.