Week ahead – Fed and BoE rate decision, US Payrolls, Shell, Apple, Microsoft, and Amazon results

Fed rate decision – 31/01 – This week could see the Federal Reserve look to put a pin in the idea that they might look at cutting rates when they meet in March. Since Powell’s December press conference when he admitted that the committee had discussed rate cuts, only 2 weeks after dismissing the idea out of hand at the beginning of December markets have decided that March is a live meeting. In December the FOMC returned the 2024 dots to 4.6% back to where they had been in September, while forecasting core PCE to decline to 2.4%. Having signalled the death of higher for longer the debate has now switched to when rate cuts are likely to begin, with the markets running away with the idea that we could see the first cut in March. This still seems unlikely irrespective of what markets are pricing and the record highs seen in US markets so far this year. Bond markets appear to be more cautious caught between the two stools of long-term rates staying higher for longer, and short-term rates which may not fall as quickly as originally anticipated. While the 5-year yield has finally managed to sustain a fall below the 10-year yield, the 2-year yield has remained inverted. If the Fed is minded to deliver a rate cut in March, then this week would be the perfect opportunity to signal its intention or prick the markets enthusiasm once and for all. 

Bank of England rate decision – 01/02 – 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 the right one given the challenges facing the economy as we head into year end, and which were borne out by the -3.2% decline seen in December retail sales at the end of last year. At the December meeting there was a 6-3 split on rates with the 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel all voting for another 25bps rate hike due to concerns over higher levels of domestically driven inflationary pressures. Their caution is understandable given the high levels of services inflation which slowed to 6.1% in December and wages growth which slowed to 6.6% in the 3-months to November. In the aftermath of the December hold and the deterioration in some of the recent economic numbers there had been some expectation that the Bank of England might cut sooner rather than later, however the recent rhetoric from the likes of Governor Andrew Bailey suggests that isn’t the case. The December uplift in UK inflation to 4% serves to highlight the challenges facing the Bank of England in returning inflation to its 2% target and show that the process is unlikely to be linear. No changes are expected to monetary policy this week with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. The main debate now is not whether we see rate cuts this year, it is when we see rate cuts.    

US Nonfarm Payrolls – 02/02 – Despite recent pushback on the idea of a US rate cut in March, markets still seem keen to assign the possibility such a move might happen when the Federal Reserve meets in March. With the central bank due to meet 2 days before the January payrolls report we can probably expect to see the US central bank push back hard on the idea that this might happen given the ongoing strength of the US economy, with jobless claims below 200k and a Q4 economic expansion of 2%. At the end of last year, the US economy saw 216k jobs added in December, while wages edged up to 4.1%. The unemployment rate slipped to 3.7% undermining the idea that the Federal Reserve would be forced to cut rates in March, however the resilience of the payrolls numbers jarred against a weak set of ISM services numbers which showed that part of the economy was less resilient than the headline payrolls data suggested. There were some other weak spots in the December numbers with a sharp fall in the participation rate to 62.5% from 62.8%. January payrolls are expected to show a slowdown to 185k. ADP payrolls are also expected to see slowdown to 150k after a better-than-expected 164k in December.   

EU CPI flash (Jan) – 01/02 – Last month saw several ECB policymakers push back on the idea of an early rate cut from the central bank, with the most vehement opposition coming from the usual hawkish suspects of Joachim Nagel of the German Bundesbank and Robert Holzmann of the Austrian central bank. Other governing council members were more amenable to the idea that a rate cut could come as early as the summer, with ECB President Christine Lagarde suggesting a move in June might be appropriate if the data supported such a move. The case for a cut was undermined somewhat by a sharp pickup in inflation in December after headline CPI jumped from 2.4% to 2.9%, although core prices continued to ease, slowing to 3.4%, from 3.6%. A further easing of inflationary pressures on the back of lower energy prices will only add to calls for an earlier rate cut despite last week’s ECB meeting indicating there was little chance of an imminent cut in rates.

Germany Q4 GDP – 30/01 – With inflation coming down sharply over the last 12 months there have been calls for the ECB to signal it is prepared to cut rates sooner rather than later given that manufacturing in Germany, as well as the euro area, has been in recession for more than the last 12 months. If that wasn’t enough the services sector has also been struggling while the Germany economy shrank by -0.8% last year. It also hasn’t seen any significant quarterly growth since Q3 of 2022. In Q3 the economy shrank by -0.1% with this week’s Q4 numbers expected to show a similar contraction in economic activity.        

BT Group Q3 24 – 01/02 – Enthusiasm around the BT Group share price has been rather lukewarm over the last 12 months with the shares broadly trading sideways since dropping to one-year lows back in October. We did see a welcome uplift in the aftermath of the publication of its Q2 numbers with the shares rising to 6-month highs in December, but the enthusiasm proved short lived with the shares sliding back in the weeks since then. The H1 numbers showed that BT had been making progress on its goals to improve margins after it raised its guidance on full year cash flow to the upper end of its £1bn to £1.2bn guidance.  H1 revenues came in at £10.4bn, while reported profit before tax rose 29% to £1.1bn. The Openreach business appears to be performing strongly with net adds of 364k in Q2 with average revenue per user rising 10% Y/Y. Consumer broadband also saw a 4% increase in ARPU. An interim dividend of 2.31p per share was in line with expectations. 

Shell FY 23 – 01/02 – Since the Shell share price hit new record highs back in October, we’ve seen a significant pullback with the decline in oil and gas prices since that update helping in some part to explain that weakness. A few weeks ago, Shell reported that it expected to see a much better performance from its gas trading business when it announces its Q4 and full year numbers later this week. Any uplift here though is expected to be offset by weakness in its chemicals business which has struggled this year and reported a loss of $468m in Q2. After the record revenues and profits seen in 2022 this year was always likely to see a slowdown, even accounting for improvements in refining margins. In Q3 Shell reported profits of $6.22bn which was in line with market expectations, as well as increasing its buyback to $3.5bn. The integrated gas part of the business saw profits remain steady and were in line with Q2 at $2.5bn, while upstream profits came in at $2.22bn, a significant fall from the same quarter last year. Shell’s chemicals and products division also did better in Q3, returning to profit of $1.38bn. The change of focus announced by CEO Wael Sarwan last summer to focus on returns and “invest in the models that work” and “those with the highest returns” has seen a shift towards a practical approach to renewables and an acknowledgement that this process is likely to be more gradual due to surging costs. This was no better illustrated by the fact that Shell’s renewables business sink to a loss of -$67m in Q3, due to lower margins and seasonal impacts in Europe, as well as higher operating expenses. Q4 profits are expected to come in at $6.2bn, with integrated gas expected to account for $3.2bn and upstream $2.4bn, with the key focus likely to be on its margins due to higher shipping costs due to events in the Red Sea.  On an annual basis full year profits are forecast to slow to $27.4bn, down from last year’s record $39.87bn. 

Microsoft Q2 24 – 30/01 – The Microsoft share price has gone from strength to strength over the past 12 months seemingly immune to concern that it is priced to perfection. The gains have been so strong it is now vying with Apple as the most valuable company in the world, as it approaches a $3trn valuation. When the company reported in Q1 revenues came in at $56.5bn, a rise of 13%, comfortably above forecasts of $54.5bn, with revenue growth in Azure and other services rising 29%, above forecasts of 25% to 26%. Profits came in at $2.99, an increase of 27%. Revenue in personal computing rose 3% to $13.7bn, helped by an increase in Windows revenue of 5%, while Xbox content and services rose 13%, although devices proved to be a drag with a decline of 22%. Investment in AI solutions is also likely to be a key area for Microsoft as it develops solutions for business as well as its Copilot chatbot getting integrated into its Windows operating system as it looks to replace Cortana. Q2 revenues are expected to surge by almost 20% to $61.1bn, with commercial cloud revenue expected to account for $32.2bn of that total. Profits are forecast to come in at $2.77 a share.  

Meta Q4 23 – 01/02 – Recouped all off its 2022 losses when the shares made a new record high last month, roundtripping from the $88 lows of October 2022 it’s been quite the turnaround for the Facebook owner, despite little prospect that its Reality Labs will turn a profit in the near term. Revenues in this area have been slowing and in the first half of the current fiscal year rose to $7.7bn. Total Q3 revenues came in at the top end of forecasts at $34.15bn, while profits came in at $11.58bn or $4.63c a share, and Q4 revenue guidance was nudged up to between $36.5-$40bn, although this was tempered by a warning that ad revenue might slow due to uncertainty around the global economy. Full year operating expenses were also revised lower to between $87-$89bn. Full year revenue forecast to be $133.7bn and profits of $14.37 a share.

Alphabet Q4 23 – 30/01 – Has continued to reverse the decline that we saw in 2022 with steady gains over the past 12 months although it hasn’t managed to regain the record levels we saw 2 years ago, although it is not far off. In the aftermath of its Q3 numbers the shares saw a sharp fall to 3-month lows, but the declines proved short-lived. There wasn’t much to dislike about the Q3 numbers, apart from a miss on cloud revenue which came in at $8.4bn, slightly below forecasts of $8.6bn, even though it was still well above last years $6.87bn. On all other metrics the results were strong with an 11% increase in revenue to $76.7bn, and profits of $1.55c a share or $19.69bn. On all other measures we saw comfortable beats, with YouTube seeing $7.95bn, Advertising $59.65bn, and other revenue $8.34bn, taking total services to $67.99bn. For Q4 revenues are expected to come in at $85.3bn, with cloud expected to come in at $8.95bn, and profits of $1.59 a share.   

Amazon Q4 23 – 01/02 – Having traded sideways for most of Q3, Amazon’s share price slipped to a 5-month low in the leadup to its Q3 results, however since that low the shares have rallied strongly, rising to 20-month highs last month. 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 has also been investing in AI pushing $4bn into AI startup Anthropic. The main catalyst for the turnaround over the past few months was a crushing quarter in Q3 and a solid upgrade to its Q4 revenue forecasts. Q3 revenues comfortably beat expectations at $143.1bn, as did profits which came in at $0.94c a share, or $9.88bn. This included a gain of $1.2bn from its stake in Rivian. There was a strong performance from online stores with net sales of $57.27bn, while AWS saw revenues of $23.06bn which was slightly below expectations of $23.2bn. Operating margin was also better than expected at 7.8%. For Q4 Amazon expects net sales of $160-167bn, while the company said it is going to hire 250k full and part-time employees to cover the holiday periods of Thanksgiving and Christmas. Amazon also said it expects to see operating income rise to between $7bn and $11bn with profits expected to come in at 78c a share. Annual revenues are expected to rise to $570bn, a sizeable lift from last year’s $514bn.

Apple Q1 24 – 01/02 – Set a marginal new record high back in December, Apple is currently vying with Microsoft for the title of the world’s biggest company, flirting with a $3trn market cap, with its recent progress to new record highs becoming interrupted by concern over sales growth in its Chinese market as Huawei’s new 5G phone starts to eat into its sales. The Chinese government has also played a role in this by forbidding government employees and state-owned firms from bringing their iPhones into work. This prohibition appears to have resulted in a slowdown in sales in the China region, which saw a 2.5% revenue decline in to $15.08bn in Q4. Overall Q4 revenues slowed to $89.5bn while profits came in at $1.46c a share. Q1 tends to be Apple’s most lucrative quarter when it comes to revenues and profits, however the slowdown in China, which is expected to continue with some estimates suggesting a 30% decline in sales, could impact the wider numbers, although Apple will be hoping that any slowdown in China will be offset by growth in its India market. The company is also facing problems over its Watch and a US ban on 2 of its Smartwatch models due to a dispute over its blood oxygen feature. In Q4 iPhone revenue came in at $43.8bn, a 2.8% increase on last year, while Mac revenue fell 34% to $7.61bn and iPad revenue fell 10% to $6.44bn. Wearables were also disappointing, slipping 3.4% to $9.32bn, while services revenue rose 16% to a record $22.31bn. For the full year Apple posted a modest decline in sales to $383.28bn, while profits came in just shy of $97bn, down from $99.8bn a year ago. For Q1 Apple said they expect similar total revenues to last year of about $117bn, and that iPhone revenue is expected to grow from last year, although the price cuts announced last month in China to try and address slowing sales might see this target revised lower. We could also see how optimistic Apple is regarding sales targets of its new $3,500 Vision Pro virtual reality headset. Profits are expected to come in at $2.11 a share.