The week ahead – Fed minutes, UC CPI, China trade, easyJet and US bank results

1) Fed minutes (Sep) – 11/10 – There were no surprises from last month’s Fed meeting at least as far as the decision to keep rates on hold was concerned. The surprise came with the hawkish guidance when it came to the prospect of a November rate rise. The clear shift towards not only higher for longer, but possibly even more hikes has seen long term yields surge higher along with the US dollar. Rate cut expectations for 2024 were also scaled back sharply as the FOMC raised its 2024 rate guidance for the Fed Funds rate to 5.1% from 4.6% while keeping their guidance for 2023 unchanged at 5.6%, while 2025 rate guidance was also revised higher. The Fed also revised its guidance for 2023 GDP higher, to 2.1% as well as revising its unemployment guidance lower to 3.8%. It's important to remember that the Fed continued to make the case that it remained data dependent when it comes to further rate rises, however the resilience of the US economy isn’t doing the markets any favours keeping alive the prospect that the Fed remains far from done. This week’s minutes should offer the markets further clues as to how concerned Fed officials are when it comes to the risk of overtightening. It was notable that Powell emphasised that the Fed was going to be careful when it came to further policy moves, which suggests a good deal of uncertainty about the risks of doing too much on rates. One other thing the dot plots told us about 2024 was that Fed officials were much less dovish about where rates were likely to go over the next 12-18 months, with the Friday payrolls report justifying the Fed’s decision to up its 2024 rate guidance..    

2) US CPI (Sep) – 12/10 – This week’s September CPI data is likely to be the final guide as to whether we’ll see another US rate hike on November 1st when the Federal Reserve next meets for its penultimate policy meeting for 2023. Recent economic data would appear to suggest that one more rate rise is more likely than not, especially since headline CPI has started to tick higher again, although it is also notable that core CPI has continued to drift lower. While the market has been focussing on the recent rebound in headline CPI from the June lows of 3% to current levels of 3.7% it’s important to understand what’s driving the rebound in headline inflation, which has also pulled headline PPI off lows of 0.2%. On core prices these continue to drift lower, and it is here that the Fed’s attention is likely to lay. Core CPI in August fell to 4.3% and is expected to slow further in September to 4.1%, while core PPI also slowed to 2.2% in August. If the weaker trend of slowing core continues in September, the Fed may well look through the stickiness in headline inflation and decide to sit on its hands in November. Headline inflation is expected to remain steady at 3.7% for September.  

3) China Trade/CPI (Sep) – 13/10 – There’s been little sign in recent trade numbers that the Chinese economy is close to achieving a significant pick-up in economic activity. The sharp slowdown in the recent Caixin manufacturing and services PMIs appears to suggest that confidence remains low, and that the modest improvement seen in August may well have been a one-off. Imports have fallen for every month this year highlighting the challenges facing the Chinese government in stimulating domestic demand. With the woes in its property sector far from resolved, and youth unemployment well above 20% there appears to be little sign that will see an economic pickup any time soon. Not only has domestic demand been weak, but global demand for Chinese goods has slowed sharply since April with declines in exports every month since then. This weakness has been reflected in price pressures in the Chinese economy with the economy slipping into deflation in July, although we have seen a modest uptick in headline CPI since then to 0.1%. PPI, on the other hand, has been in negative territory since October last year. Exports declined -8.8% in August and are expected to slide further by -7.5% in September, while imports are also expected to decline -6%, a modest improvement on the -7.3% seen in August.     

4) UK GDP (Aug) – 12/10 – Having seen the ONS update its GDP methodology for the last few years we’ve discovered that the UK economy is in much better shape than first thought, and that the UK economy has outperformed both France and Germany since 2020, undermining a political narrative that had claimed that the UK economy has been a basket case since Brexit. That’s not to say the UK economy doesn’t face its challenges, however the challenges aren’t that much different to its European peers when it comes to trying to combat the effects of higher energy prices, and elevated inflation. We didn’t get off to a good start to Q3 in July with the economy contracting by -0.5% reversing the 0.5% gain seen in July. The rise in petrol pump prices is also likely to have acted as a brake on consumption in August and which continues to act as a drag in Q3 even as headline CPI slowed to its lowest level since February 2022.  

5) easyJet Q4 23 – 12/10 – The easyJet share price got off to a flyer in the early part of this year, the share pushing up to their highest levels since May 2022 back in April, however all of that early momentum has dissipated as the shares have struggled. Since those H1 peaks the shares have slipped back by around 10%. When the airline reported in Q2 the numbers showed a solid increase in revenues with the expectation that this could push up to a record £8bn by fiscal year end. Ancillary revenue has been a core driver of this improvement, while its guidance for H2 was for a 9% rise in seats to 56m, with expectations high that we could see an end of year profit. In Q3 headline profit before tax rose to £203m with revenue per seat rising 23%. easyJet holidays continued to do well and is expected to deliver £100m in profits before tax for 2023. For Q4 FY23 RPS is expected to be around 10% Y/Y. easyJet’s biggest problem in Q4 is the number of flight cancellations that it has had to implement as a result of air traffic control restriction issues that have hit most airlines out of Gatwick. Q4 capacity was expected to be 29m, however this could well come in lower. easyJet also said it expected to add 15% more capacity this winter, however this now looks in doubt given recent events with respect to air traffic control constraints at Gatwick. Group revenue in Q3 rose 34% to £2.36bn, however fuel costs were higher by 40% at £585m, while costs were also higher by 7%. For Q4 revenue is expected to rise to £3.2bn, while pre-tax profits are expected to surge to £691m.  

6) JPMorgan Chase Q3 23 – 13/10 – JPMorgan Chase has continued to set itself apart as the outlier as far as US banks are concerned, it has been the main beneficiary of the regional bank crisis of earlier this year with its share price over 30% higher from the October lows of last year, the shares hitting their highest levels since January 2022 back in July, although we have slipped back a touch since then. The collapse of Silicon Valley Bank and Signature Bank saw JPMorgan win over $50bn of new deposits from SVB as it took over the banks deposit base, with the main challenge being able to hang onto this cash base. The turmoil in rates markets also proved to be a boon as revenues surged in both Q1 and Q2. Q2 saw record revenues of $42.04bn, blowing through expectations of $39.34bn, and profits of $4.75c a share, or $14.5bn, an increase of 67% a year ago. Consumer banking was a notable outperformer with banking & wealth management performing really well, up 68% on revenues. On a quarterly basis card services and autos revenues slowed from Q1, but still higher year over year. The corporate and investment bank was more of a mixed bag, with FICC revenue down 3% and equities down 2.5%. The bank also raised its guidance for net interest income to $87bn, as the gap between loans and deposit margins blew out even further. Put simply JPMorgan has more deposits than it knows what to do with, and remains the biggest winner from the March regional banking crisis.

7) Wells Fargo Q3 23 – 13/10 – As one of the biggest US retail banks Wells Fargo is generally considered a decent bellwether of the US consumer given its position as one of the US biggest mortgage lenders. Back in March the shares slipped to two-year lows in the aftermath of the meltdown in the US regional banking sector, before rebounding modestly to current levels. When the bank reported in Q2 the numbers showed that overall lending was starting to slow as higher rates started to bite into US consumer spending. Q2 revenues came in at $20.53bn, while profits came in at $1.25c a share, or $4.9bn, both coming in ahead of forecasts. In a sign that lending was starting to slow, total average loans came in below expectations at $945.9bn, while provision for credit losses came in at $1.71bn, a big increase from last year’s $580m. Net interest income was higher than expected at $13.2bn, with the bank raising its target for the full year as higher rates helped to boost margins. For Q3 revenues are expected to rise to $20.16bn, however profits are forecast to slow to $1.25c a share, with investors likely to keep an eye on the amount of money being set aside in respect of impairments. Expectations are for another $1.35bn, which would be slightly lower than the $1.7bn set aside in Q2.   

8) Citigroup Q3 23 – 13/10 – With a share price languishing close to one-year lows, Citigroup CEO Jane Fraser last month announced another plan to reorganise the bank that she has been in charge of since 2021. Citi has been struggling for a while and is one of the least profitable US banks with multiple layers of management that Fraser is keen to strip away. The bank has already shed 5,000 positions year to date, with Fraser intent on stripping away more layers of senior management. Last year Citigroup said they would focus on 5 key business areas, including wealth management and investment banking. Her plan is to have five senior managers overseeing these two areas along with trading, services and retail all of which would report to her. In Q2 Citigroup saw revenues slow to $19.4bn and profits of $1.33c a share, or $2.9bn. The decline in revenues was down 1% from a year ago and a 9% decline from Q1, while profits fell 36% from $4.5bn. FICC revenue fell 13% to $3.53bn, while equities trading fell 10% to $1.1bn. Operating expenses were higher by 9% to $13.57bn, with credit losses rising to $1.5bn, a 77% rise on Q2 last year. This is the area which Fraser needs to take a scalpel to given that staff costs are significantly higher as a percentage of income than the likes of JPMorgan Chase. Q3 revenues are forecast to come in at $19.2bn and profits of $1.21c a share. Citigroup reaffirmed its full year forecasts of $78bn to $79bn in revenue, and expenses of $54bn.