Michael Hewson MSTA CFTe
Independent Analyst
- Fed rate decision – 16/03 – in essence this week’s Federal Reserve rate decision is probably the easiest one it will have to make this year. With US headline inflation at 7.9%, and likely to go higher it’s pretty much certain that we will see an interest rate rise this week of 0.25%. There are some on the FOMC who are probably in the camp that want to see a 50bps rate rise, however in light of the Russian invasion of Ukraine and the resultant surge in global commodity prices we could well see a bit of caution. The most recent payrolls numbers showed that wages growth slowed from 5.5% to 5.1% in February, which while still quite strong doesn’t suggest that wages are about to explode higher yet. The Fed’s bigger problem is how it manages its messaging for future rate rises against a backdrop of surging input prices which are likely to slow the US economy over the course of the rest of the year. St. Louis Fed President James Bullard has been particularly vocal about the need for a 1% rise in interest rates by 1st July, and with the Fed’s unemployment mandate more or less met, the main focus is set to be on inflation and the prospect that we could see headline CPI hit 10% by the middle of the summer. This week’s growth and inflation forecasts are likely to be significant in that context as markets look to price the prospect of how aggressively the Fed might tighten monetary policy over the next few months. Before the Russia invasion of Ukraine some market pricing was suggesting we might see 7 rate rises this year, and while some are suggesting that might not happen now, there is an argument that it might be the lesser of two evils. The transitory playbook seems so last year now with the Fed having to balance the risks of tightening too quickly and tipping the economy into recession or allowing inflation to do it for them by letting it rip.
- Bank of England decision – 17/03 – in some respects, despite its muddled guidance over the last few months, the Bank of England has been ahead of the game when it comes to rate rises. Two rate rises since December has put base rates back to 0.5%, still below the levels they were pre-pandemic. With unemployment still low, and average wages still subdued the central bank must be looking with some concern over how much further this run high in inflation is likely to go. With CPI already at 5.5%, and RPI even higher the Bank of England is already expecting prices to rise further with a target of 7.25% by April. In light of recent events and the surge we’ve seen in commodity prices, both energy and agricultural this level is likely to get surpassed in the coming months with the very real prospect we could see a move into double figures and above 10% by the summer. Like the Federal Reserve this will present the Bank of England with very real problems when it comes to meeting its inflation mandate. A weaker pound is unlikely to help either, which means the Bank of England will probably have to hike many more times by the time the year is out. This is likely to have significant consequences for the UK economy, and more specifically for the housing market, and those not currently on fixed rates mortgages. As we look ahead to this week’s rate decision it’s hard to see how the Bank of England can avoid raising rates again by 0.25% and put the base rate back where they were pre-pandemic.
- China retail sales (Feb) – 15/03 – back in December China retail sales fell back sharply coming in at 1.7%, well below expectations of 3.8%, although industrial production came in slightly better at 4.3%. In a sign that the central bank is concerned about the weakness in the economy, the medium-term lending rate was cut by 10 bps to 2.85% on its one-year medium term lending facility. Since then, we’ve had little indication of how well or otherwise the Chinese economy has been doing, although with Chinese New Year you would expect to see a pickup as we look ahead to this week’s retail sales numbers for both January and February combined. Last week’s trade data showed that export growth was resilient, although it still slowed, rising 16.3% compared to a year earlier, and down from 29.9% in December. Imports were also subdued, rising 15.5%, and down from 19.5% in December. This weakness suggests that higher prices and supply chain disruptions are continuing to have an effect, while various covid restrictions are likely to remain a brake on demand. Retail sales for the two months to February are expected to increase by 3%, while industrial production is forecast to rise by 4.1%. Both of these are significant falls from the same period a year ago.
- UK wages/unemployment (Jan) – 15/03 – UK unemployment stayed at its lowest levels since July 2020 back in December at 4.1% and is expected to remain at or around this level when the January numbers are released later this week. The number of vacancies continues to remain high, which probably isn’t too surprising when you see that wages growth showed little signs of picking up. Excluding bonuses, we’ve seen a fall from 5% in September to 3.7% at the end of the quarter. This is disappointing, however it should be remembered that none of these numbers will yet reflect the various pay increases announced by retailers over the past few months, where we’ve seen the likes of Sainsbury announce a 10% increase, Tesco a 5.5% increase, while Lidl has also announced similar in line with inflation pay rises in recent months. This should help underpin wage growth over the next few months with pay growth including bonuses expected to come in at 4.3%.
- US retail sales (Feb) – 16/03 – US retail sales saw a big rebound in January after a big decline of -1.9% in December. January retail sales showed that, despite weak consumer confidence, spending rebounded at its fastest rate in 10 months, rising by 3.8%, well above expectations of 2%. The biggest gains were in online sales, as well as furniture, autos and building materials as US consumers spent money on improving their homes and upgrading their cars, without too much in the way of concern about rising energy prices and a higher cost of living. US consumers are coming at the looming wages squeeze from a slightly better place financially due to the various stimulus packages of the last 18 months, however in the longer term these savings are likely to decline, as input prices continued to rise. Expectations are for US retail sales to rise by 0.5% in February.
- Cineworld - FY 21 – 17/03 – Cineworld’s share price has had a shocker over the last 12 months. This time last year the shares had managed to rally as high as 120p over optimism that it would see a decent rebound in revenues as cinemas reopened. That optimism has disappeared despite some improvement in revenues in the last six months. Its H1 numbers saw revenues of $292.8m, well below the same period a year before. Admissions were also down to 14.1m, from 47.5m, a reduction of 70.3% from the same period in 2020, which saw the chain experience similar restrictions to its business, albeit on a shorter time frame. The company also said it was looking to explore the possibility of a US listing, as well as the exploring the prospect of listing its Regal operations in the US to shore up its finances further. It will certainly need to given it lost its court case with Cineplex. The Ontario court ordered Cineworld to pay Cineplex damages C$1.23bn for lost synergies and C$5.5m for lost transaction costs. Cineworld says it will appeal, which is a no brainer given its already high current debt levels, but one has to question where they will find the money if they lose. In January in a much more encouraging sign for its H2 numbers, Cineworld reported that Group December revenue came in at 88% of 2019 levels, up from 56% in November despite the various restrictions that were imposed as a result of Omicron. Its US operation led the way posting 91%, and the UK at 89% of 2019 levels. As a result of the improvements in December Cineworld said it was able to be cash-flow positive in Q4. All of this is very welcome, however with debts of $8.4bn already, it’s hard to see a road back to recovery without a reduction in these debt levels, and a big improvement in revenues. This week’s guidance is likely to be key in that regard, however the sharp rises we’ve seen in inflation over the last few weeks are likely to be a huge headwind to recovery if big increases in the cost of living hit consumers ability to spend on discretionary items like this.
- JD Wetherspoon H1 22 – 18/03 – the last few days has seen JD Wetherspoon shares drop to a 23-month low over concerns about the effect higher energy costs and other commodity price rises are likely to have on its margins. In its last financial year Wetherspoon posted a record loss of £154.7m. The most notable statistic was an almost 40% drop in revenues to £772.6m from £1.26bn in 2020, and down from £1.8bn in 2019. In the first quarter of 2022 the pub chain reported an 8.9% decline in sales compared to a year ago, although this also needs to be set in the context of the record numbers in 2020 when “Eat Out to Help Out” boosted the numbers to record levels. In January, CEO Tim Martin confirmed that the pub chain would be incurring an H1 loss due to the Plan B Covid restrictions implemented by the government just before Christmas. CEO Tim Martin did express confidence that H2 would be much better once all restrictions are removed and the weather warms up, however this didn’t stop Mr Martin taking the opportunity to eviscerate the government over “Partygate”, take aim at investment manager Blackrock, and criticise UK tax policy relative to other outlets.
- Deliveroo FY21 – 17/03 – Deliveroo hasn’t been able to catch a break since launching its IPO back at the end of March last year. The shares have been on a slow decline since managing to briefly recover back to its IPO price of 390p back in August last year. With the shares sitting near to 100p it’s been a painful journey for shareholders, and while the company is well on course to beat its £1.2bn in revenues that we saw in 2020, the shares have struggled to gain any sort of traction. Consensus estimates for full year revenues are for an increase of 56% to £1.9bn. In Q3 Deliveroo raised its guidance for this number to between 60% and 70%, while leaving gross profit margins unchanged at 7.5% to 7.75%. The Q4 update we saw in January saw Deliveroo reaffirm full year proforma GTV of 70%, at £6.63bn, at the top end of its updated guidance in Q3 of 60% to 70%. Q4 orders saw a rise of 42% to 80.8m, equating to a rise of 36% GTV, beating consensus estimates. This in turn helped to push orders for 2021 to 300.6m, a rise of 73%. The main concern for investors is rising costs and while Deliveroo has seen orders surge due to its deals with Amazon and Morrisons the competitive nature of the delivery market, and falls in the share prices of its nearest competitors, like Just Eat hasn’t helped sentiment around the sector.
- Ocado Q1 22 – 17/03 – the last 12 months haven’t been great ones for the Ocado share price, with the shares now back at levels just before the very first lockdown. Since posting record highs back in February 2021, the shares have lost over half their value. This decline has taken place despite reporting full year revenues of £2.5bn, a modest rise from the year before. While revenues have grown, so have losses and this is what shareholders are unhappy about. A big increase in costs saw EBITDA fall to £61m, while losses increased to £176.9m, a big fall from last year’s £52.3m deficit. Higher capital expenditure of £680.4m over the year, along with higher expected spending of £800m for 2022, has raised concerns as to the timeline of when shareholders are likely to see the business return a profit. Management have insisted that the increased spending is essential to safeguard its future revenues, however that has been a familiar refrain for a while now and it appears that investors are losing patience. Profits can’t always be a manana thing, and they have been for a while now for Ocado.
- Williams-Sonoma Q4 22 – 18/03 – it’s been a familiar story for Williams-Sonoma with the US retailer also finding its share price under pressure over the last few weeks for similar reasons to other retail stocks. Concerns over rising costs and falling margins has seen the shares decline from the record highs back in November, and are down over 25% since then. In Q3 the company reported revenues of just over $2bn, while profits beat expectations, coming in at $3.32c a share. Sales rose 16.9% year on year, while the retailer said it expects to see a rise in full year revenues of 22-23%. Once again, its ecommerce sales have been a solid driver behind the resilience of the business, accounting for 67% of sales. There has also been decent sales growth across all its brands, with West Elm and Pottery Barn standing out. Full year revenues are expected to come in at $8.32bn and full year EPS of $14.26c share. Q4 profits are expected to come in at $4.84c a share.
- FedEx Q3 22 – 17/03 - FedEx has been a key cog in the US vaccination effort as well as a decent bellwether of US consumer demand the past few months. After warning on profits in Q1 and saying it was increasing prices, Q2 saw the company post revenues of $23.5bn, and profits of $4.83c a share, both well in excess of expectations. The company did say that costs were still increasing, but that the increase in prices was helping to absorb those, as it reinstated its 2022 profit target to an upper target of $21.50c a share, which it cut in Q1. Since reporting in Q2 the shares have fallen back, which isn’t altogether surprising given that so has pretty much everything else. The big rises in energy prices which we’ve seen the past few weeks are likely to hammer its margins, and while it will probably be able to pass on some of these costs, it won’t be able to pass on all of them. This suggests its full year profit target could well come under threat again. Q3 profits are expected to come in at $4.68c a share.
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