The Week Ahead - Fed, ECB and Bank of Japan decisions, Lloyds, NatWest, Shell and Microsoft results

1) Fed decision – 26/07 – this week’s expected 25bps Fed rate hike looks set to be the last rate rise this year, whatever Fed policymakers would have you believe. We may hear officials try and make the case for at least one more between now and the end of the year but given recent trends around US inflation its quite likely that PPI will go negative in July. It would be highly unlikely for the Fed to continue to hike rates against such a backdrop. Nonetheless the Fed will be keen to prevent the market pricing in rate cuts which was one of the key challenges earlier this year. As things stand markets are already pricing in the prospect that this will be the last rate rise in the current hiking cycle given recent declines in the US dollar and US yields. With the next Fed meeting coming in September the market will have to absorb two more inflation reports and two more jobs’ reports. With inflation slowing and the jobs market resilient the US economy is currently in a bit of a goldilocks moment. This will be the challenge for Powell this coming week, not forgetting off course that we will get fresh messaging at the end of August at the Jackson Hole annual symposium.            

 

2) ECB decision – 27/07 – If the Fed is close to the end of its rate hiking cycle which appears to be looking increasingly likely then the pressure for the ECB to be more aggressive in its own battle against inflation could recede. We’ve already seen the euro rise sharply against the US dollar which is in itself deflationary and will help. Furthermore, factory gate prices in German and Italy have been in freefall for months now, so while core CPI has remained sticky and close to record highs, it’s also important to remember that the ECB has pushed rates from 2% to 4% this year already. We expect to see another 25bps this week, however the consensus that was so prevalent at the start of this year of more aggressive rate hikes is already starting to fray on the governing council, with the Stournaras of the Bank of Greece pushing back strongly against the idea of more aggressive action. He hasn’t been the only one however, and we’ve also started to see more vocal political opposition to further tightening from Italian Prime Minister Giorgia Meloni who has been publicly critical of the ECB when it comes to recent rate hikes.               

 

3) Bank of Japan decision – 28/07 – the US dollar has traded in a fairly wide range against the Japanese yen in recent days, with whispers abounding that the Bank of Japan could be about to tweak its yield curve control policy, with a view to targeting shorter term rates. The BoJ has been the major outlier this year in terms of tightening policy, making the yen the worst performer year to date for the first half of this year. This appears to have gone into reverse this month on the basis that the market is convinced a policy change is coming, whether it be now or in October. Recent whispers suggest a move may now be deferred until October, however as with anything with Japan the currency may also have a part to play if we head back towards 150.00. Of course, it’s also important to remember there is a US dollar element here, and the fact that the market thinks the Fed is done after this week’s July rate rise is another factor behind the recent volatility in the Japanese currency. Whatever happens this week with the BoJ, with Japanese core CPI already above 4% and at a 40-year high a policy tweak is coming, and that could see further yen gains in the coming months. 

 

4) US Q2 GDP – 27/07 – one of the key themes this week has been the resilience of the US economy, despite the sharp rise in rates over the last 12 months. Notably the resilience of the labour market has surprised with little sign of a slowdown on hiring, while inflation has been slowing quite sharply. This has helped consumers stay resilient with a solid rebound in personal consumption in Q1 to 4.2% after a weak end to last year. This rebound in consumer spending helped Q1 GDP get revised up from 1.2% to 2% in the final revision of Q1 GDP. The key test in this week’s first iteration of US Q2 GDP will be whether this momentum was maintained. Judging by recent consumer confidence numbers, spending patterns and a resilient labour market there is little reason to suppose otherwise, although manufacturing is likely to be a weak spot. It’s also worth keeping an eye on inventories to see whether these are being maintained, or being run down.          

 

5) Vodafone Q1 24 – 24/07 – it’s been one way traffic for the Vodafone share price so far this year, with declines on declines, with the shares at 25-year lows. The departure of Nick Read as CEO hasn’t been enough to stop the rot with new CEO Margherita Della Valle seemingly unable to convince markets she has a coherent plan to turn the business around. In May the telecoms company announced it was looking to cut 11k jobs over the next 3 years, as it announced its full year number. Full year group revenues rose 0.3% to €45.7bn. The Germany business continues to underperform, posting a decline of 1.6%, driven by the loss of broadband customers, while the UK did much better, seeing an increase of 5.6%, which was driven by an 8% increase in mobile service revenue. Its other markets in Spain and Italy also saw declines in organic service revenue of 5.4% and 2.9%. Full year pre-tax profit for the year rose to €12.82bn, however most of this was down to the gains from the disposal of the Vantage Towers business, of €8.6bn. Vodafone also generated an additional €689m from the completion of the sale of its Ghana business, as well as a loss of €69m on its disposal of Vodafone Hungary. Investor concern remains primarily around the company’s debt level at a time when the company seems to lack a growth strategy. On the plus side the company has announced that it is working through the final details of the merger of its British operations with Hong Kong’s Hutchison Holdings, which runs the Three network.

 

6) Lloyds Banking Group H1 23 – 26/07 – since cresting at one-year highs in February this year Lloyds share price has been trending lower, with the shares now down on the year, despite numbers that by and large have been broadly positive. Since May and another positive update Lloyds shares have continued to slide back falling to 7-month lows over concerns that the improvement in margins could well grind to a halt. In Q1 statutory profit pre-tax profits came in at £2.26bn, a £716m increase on the same quarter last year, on net income of £4.65bn. Net interest margin remained steady at 3.22% unchanged from Q4, and up from 2.68% in Q1 last year. The bank set aside a further £243m in respect of impairments, a modest increase from the £177m set aside in Q4, but well below the £465m set aside in Q1 last year. Customer deposits fell slightly during the quarter from £475.3bn to £473.1bn and are down 2% from a year ago. Operating costs did see a modest increase over the quarter to £2.17bn but are still lower than this time last year. When Lloyds set its guidance in in February the bank said it expects 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. This guidance was kept unchanged despite expectations on further rate rises from the Bank of England. This higher rate/margin outlook appears to be being tempered by an expectation that savers are more likely to start moving their money around to achieve higher returns in the higher inflation environment in order to create a stickier deposit base. Lloyds has already seen an £8bn fall in its deposit base over the last 12 months and will be keen to ensure this doesn’t deteriorate any further. Q1 also saw a slowdown in loans and advance to customers, which fell to £452.3bn, a number that has been trending lower since June of last year, although it is still above the levels of Q1 last year.  

 

7) Barclays H1 23 – 27/07 – Barclays has had a patchy quarter share price wise, although it hasn’t as yet traded below the 2 and a half year lows it hit back in March at 128p. It has found it difficult to push back above the highs seen back on May at 161.50p. In April the bank reported total revenues of £7.2bn, driven by a strong performance in its investment banking division which saw revenues come in higher than expected at £3.97bn, an increase of 1% from a year ago. FICC was a particular standout, generating £1.79bn, however equities trading was disappointing at £704m. The bank also performed well in its consumer division which saw a 47% increase in revenues to £1.3bn. The bank set aside £524m in respect of credit impairment charges. Even though total operating expenses didn’t change that much from last year, with last year’s costs boosted by a £523m impairment, it is notable that operating costs this year increased by 15% to £4.1bn. Net interest margin increased to 3.18%, with the bank saying they expected to see a full year NIM in excess of 3.2%. Profits attributable to shareholders rose 27% to £1.78bn. H1 revenues are expected to see an increase to £13.88bn, from £13.2bn a year ago. Further impairments are expected in Q2, with another £581m set to be added taking H1 impairments to £1,182m.    

 

8) Shell H1 23 – 27/07 – oil companies have continued to remain at the forefront of politician’s ire, even as oil and gas prices have slipped back from the record highs we saw during the middle of last year. With new CEO Wael Sarwan striking a much more belligerent as well as pragmatic tone when it comes to Shell’s production targets there is a sense that big oil has become less cowed by the political discourse over renewables as well as the threats of higher taxation that has seen the size of their tax take go up. In Q1 Shell reported a much better than expected set of profits of $9.6bn, only a modest decline from Q4’s $9.8bn, on revenues of $86.96bn. This is well above the same quarter last year, with integrated gas contributing $4.9bn to the overall profit numbers, a $1.1bn decline from Q4, but still the second highest number ever. Shell also maintained its dividend at 28.75c a share and announced another $4bn share buyback for the quarter. Other key areas of outperformance were in chemicals and products which saw a big jump in profits of over $1bn to $1.78bn, primarily due to a big jump in margins. Renewables and energy solutions saw profits rise to $400m, from $300m in Q4. On the tax front Shell paid $3.1bn during the quarter although there was no detail as to how this was broken down. In June Shell announced that they would be increasing the dividend by 15% as well as spending another $5bn in share buybacks during H2 of 2023. Shell also said it was planning to invest $10-15 billion across 2023 to 2025 to support the development of low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and CCS. New CEO Wael Sarwan also pushed back on the narrative of renewables at any cost, saying that "We need to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system. We will invest in the models that work – those with the highest returns that play to our strengths" in a broadside at the some of the recent reckless narrative and almost hysterical calls to cut back on fossil fuel use whatever the cost. Spending on capex would be reduced to $22bn-$25bn for 2024/2025, with an enhanced focus on performance, and discipline. In a recent trading update Shell said that it expects Q2 trading to be weaker as lower demand and lower prices impacts on its operations. Shell also said that its chemicals division is likely to make a loss during the quarter.  

 

9) NatWest Group H1 23 – 28/07 – after starting the year on a fairly solid base, UK banks have seen their share prices slide back to levels last seen in the aftermath of the Kwarteng budget in the past few weeks. The sharp rise in UK interest rates, along with an anticipation that rates could go even higher is fuelling concerns over rising defaults and higher loan loss provisions as fixed rate mortgages expire and get re-fixed at higher rates. When the bank reported its Q4 and full-year numbers the bank was cautious saying it expects to generate full-year income of £14.8bn, and a full-year NIM of 3.2%, based on a base rate of 4%. They retained this caution in their Q1 guidance, despite many expecting the base rate to go much higher. The base rate is now at 5% and looks set to go higher, the concern isn’t so much about income, but about economic conditions over the course of the rest of the year, along with demand for loans, pressure on margins, as well as higher costs. Profits in Q1 came in higher than expected at £1.28bn, comfortably above the same quarter last year of £841m, but net revenues have come in higher than expected at £3.87bn. The numbers were also above Q4’s £1.26bn, while impairments came in lower at £70m, while net interest margin rose to 3.27% for Q1. Operating expenses did come in sharply higher than the same quarter last year, rising 12.5%, with most of that attributable to higher staff costs due to a £60m cost of living payment to help staff with the high inflation environment. Customer deposits did see a fall of £11.1bn during the quarter to £421.8bn, due to tougher liquidity conditions and increased competition for deposits. Net loans saw an increase to £352.4bn.     

 

10) Microsoft Q4 23 – 26/07 – has seen strong gains so far this year the company is widely tipped to become the next $3trn company after Apple set the bar earlier this year. The catalyst for these continued gains is set to be AI, with the shares building on the gains that we have seen in the wake of their Q3 numbers and disappointment over the knockbacks being faced with respect to its Activision Blizzard deal, which has been rejected by UK regulators and is currently going through the US courts. Microsoft reported Q3 revenues of $52.9bn, above estimates of $51bn, with commercial cloud revenue coming in at $28.5bn. Profits also came in ahead of expectations at $18.3bn or $2.45c a share. All business areas beat expectations, intelligent cloud revenue came in at $22.1bn, a rise of 16%, and subscription products revenues rose 11% to $17.5bn. Personal computing revenue was the only area of decline, falling 9% to $13.3bn, it still comfortably came in above consensus, although Windows OEM and devices revenue saw a sharp decrease of 28% and 30% respectively. What this tells us is that consumers and businesses have continued to feel the squeeze in terms of new hardware, but that the online business appears to be slowdown-proof for now. Q4 revenues are expected to come in at $55.45bn and profits of $2.56c a share.  

 

11) Meta Platforms Q2 23 – 26/07 – having seen some chunky share price losses in 2022, this year has seen a face-ripping rally in the share price, with the shares up over 140% year to date. The rebound came in two parts with its Q1 numbers prompting further gains, after strong Q1 numbers and an upgrade to guidance for Q2. Q1 revenues came in at $28.1bn, a rise of 3% and easily beating expectations of $26.76bn, while profits came in at $2.20c a share, or $5.71bn, a fall of 24% but also above expectations. Costs and expenses rose by 10% to $21.4bn. Q2 revenue guidance was adjusted higher to between $29.5bn to $32bn, while full year operating expenses are now expected to come in between $86-$90bn, a decline of $5bn, and a sum that includes $3bn to $5bn in restructuring costs. Profits for Q2 are expected to come in at $2.90c a share. The Reality Labs segment or Metaverse continued to bleed cash, losing just shy of $4bn as revenues fell to $339m. The launch of “Threads” a competitor to Twitter has also seen lots of headlines and helped to drive the share price higher, adding millions of users, however, there has been little sign thus far that it has driven traffic away from Twitter in a sustainable fashion.  

 

12) Alphabet Q2 23 – 26/07 - Google owner Alphabet also reported a solid set of Q1 results, driven by an uptick in advertising and increased demand for its cloud services. Total revenues of $69.8bn, and profits of $15.05bn, a modest decline from the same quarter last year, but above forecasts of $1.07c at $1.17c a share. Cloud services saw an increase in revenue to $7.45bn, which helped offset modest declines in advertising and YouTube revenues. YouTube revenue fell 2.6% to $6.69bn, while advertising came in at $54.55bn. The company also announced a $70bn share buyback, while also announcing it was taking a $2bn charge in respect of severance costs for the 12,000 job losses reported earlier this year, as well as another $564bn on top in relation to reduced office space.