Michael Hewson MSTA CFTe
Independent Analyst
- Federal Reserve rate decision – 03/05 – a lot has happened since the Fed last raised rates by 25bps in March in the teeth of concern over financial stability and the US banking system. While this is still reverberating it seems to be being contained and there is little evidence it is materially affecting the US economy. While some of the recent manufacturing data has shown increasing signs of disinflation, the same can’t be said to the same extent in services and food prices. This is likely to temper any sort of guidance that Fed officials might deign to offer in the aftermath of this week’s decision. The consensus would appear to be that the jobs market is starting to slow but not by enough to suggest that it is likely to see a drag on demand. The recent earnings numbers from the likes of JPMorgan Chase and Bank of America suggest that the consumer remains in decent shape and one year inflation expectations did show a sharp rise in March. This would suggest that we are likely to see a 25bps rate hike this week, with the main challenge facing Powell set to be keeping his options open about further moves. It’s unlikely that Powell will row back on his view that there won’t be any rate cuts this year.
- US non-farm payrolls (Apr) – 05/05 – last month’s jobs report reset the bad data narrative of a slowing US economy that had driven US 2-year yields to a low of 3.65% in early April, with the March payroll numbers seeing 236k jobs added, while the unemployment rate fell to 3.5% even as the participation rate rose to 62.6%. The March jobs data appeared to suggest that people are finally returning to the workforce as the cost of living continues to squeeze consumer finances. It also suggests that the JOLTs numbers will continue to come down, as more people return to the work force, having seen these numbers fall below 10m for the first time since May 2021 in February. Wages data fell from 4.6% to 4.2%. With the Federal Reserve expected to announce another 25bps rate hike this week, the April payrolls report should inform whether we can expect to see another 25bps in June or whether the Fed is done.
- ECB rate decision – 04/05 – Tuesday’s EU flash CPI numbers for April could be the swing factor as to whether we get a 25bps move or a 50bps move by the ECB when it meets this week. We’ve had a raft of ECB officials over the past few weeks say that there remains a long way to go before the ECB starts to consider a pause in its rate hiking cycle, and this week’s core CPI print could prompt a continued aggressive approach. There is a risk that the ECB could over play its hand given what is already happening with PPI, having seen sharp falls from highs of 43.3% back in August last year, and are now down at 13.2%, with month-on-month readings now starting to come in negative.
- EU flash CPI (Apr) – 02/05 – In March, headline CPI fall sharply from 8.5% to 6.9%, and the lowest level since February 2022, however the picture on core prices wasn’t as cheery, with prices rising to a new record high of 5.7%. Any continued stickiness here is likely to embolden the hawks on the governing council later this week with a further 50bps rate hike along with a commitment to continue to hike by another 50bps in the summer. There are signs that we could well be near to a peak when it comes to core prices if the more forward-looking PPI numbers are any guide. These have been slowing for several months now and should start to feed into core prices soon.
- BP Q1 23 – 02/05 – this week we are likely to get the usual cacophony of quarterly pearl clutching from politicians about the “obscene” profits being made by the evil oil and gas companies, completely deaf to the fact that it is the same policies enacted by these politicians over the last 20 years that have prompted energy prices to rise in the manner that they have. We start the week with BP’s Q1 numbers and given the sharp fall in gas prices as well as lower oil prices we aren’t likely to see the same level of profits that we saw last year. In February BP reported a record set of full year numbers, raised the dividend and announced another $2.75bn share buyback for Q1. Q4 saw underlying replacement cost profits of $4.8bn, a step down from Q3’s $8.15bn, due to underperformance in its oil and gas trading division, but still pushed total profits for the year of $27.65bn, a big jump from the $12.8bn in 2021. While that number was the one that grabbed the headlines on a full year basis, the profit attributable to shareholders saw the company slide to a $2.48bn loss, when the Rosneft write down costs were taken into account. Capital expenditure rose to $16.33bn, a significant rise from $12.85bn in 2021. Over the last 12 months BP has also reduced its net debt levels from $30.6bn to $21.4bn. BP also announced that it would be splitting its investment this year of between $14bn and $18bn evenly between “transition growth engines” and oil and gas, with spending of up to $8bn a year. This is welcome given the low amounts BP spent in renewables last year. The big question is how BP defines “transition growth engines” given that LNG could easily be described as a transition energy source, given its cleaner than coal and oil. The hope is that research and development into hydrogen and other biofuels as clean energy sources will start to advance more rapidly due to the limitations around battery technology. We also saw the first signs that the oil companies were pushing back on the prevailing narrative of no new capacity by saying that new gas resources will be needed to help the energy transition and keep energy prices low. Last year BP paid $2.2bn in UK taxes.
- HSBC Q1 23 – 02/05 – when HSBC reported a solid set of full year numbers back in February the shares finished the day at their highest levels since August 2019. Since then, the shares have slipped back, along with the rest of the banking sector in the aftermath of the collapse of Silicon Valley Bank, and the takeover by UBS of Credit Suisse. We’ve managed to see a modest recovery since then with HSBC shares rebounding from the 512p level as sentiment has stabilised. To recap those Q4 numbers adjusted pre-tax profits rose 92% year on year, coming in at $6.83bn. Full year adjusted pre-tax profits also rose by 3.4% to $24.01bn. Full year revenues were also higher, coming in at $51.7bn while net interest margin for the year rose to 1.48% from 1.2% a year ago. Total provisions for non-performing loans came in at $3.95bn, with an extra $1.4bn being set aside in Q4. As we look to this week’s Q1 numbers the Chinese economy has started to reopen more fully with a strong Q1 GDP number, while Chinese consumers have started to spend again. The bank has also acquired the UK assets of Silicon Valley Bank for £1, so we could see a mixed bag of numbers this week. A tightening of financial conditions in its UK market, while its Asia markets could well start to see a pick-up.
- Lloyds Banking Group Q1 23 – 03/05 – Lloyds has also had a difficult quarter share price wise, pushing up to one-year highs in early February in the aftermath of its full year numbers, before sliding to its lowest levels since November last year as the March turmoil in the banking sector clobbered valuations. The bank has been a serial underperformer over the past 5 years despite being more profitable than it was when it was trading above 70p back in 2019. Lloyds full year numbers showed statutory pre-tax profit of £6.9bn, despite £1.51bn in impairments, and is still very profitable. Net interest margin rose to 3.22% in Q4, up from 2.98% in Q3, pushing annual interest margin up to 2.94%, a 40bps increase from 2021. A final dividend of 1.6p was announced, pushing total dividend per share to 2.4p, an increase from 2p last year, with the bank implementing a new £2bn share buyback. If there was a weakness it was in costs, which are rising, coming in at £9.1bn in 2022, and are set to rise over the next 2 years. On the outlook Lloyds 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. On taxes the bank paid £1.37bn and expects to pay a 27% effective tax rate for 2023, which includes the impact of the rate of the banking surcharge and the increase in corporation tax, from 19% to 25%, which are set to come into effect in April.
- Shell Q1 23 – 04/05 – following on from BP earlier in the week the focus will shift to Shell whose share price has, like BP’s, slipped back from the highs seen in early March, primarily over demand concerns and lower energy prices. In February annual profits rose to a record $39.87bn, over double the numbers returned in 2021, and comfortably beating the previous record set in 2008 of $28.4bn. The integrated gas division performed the best during the Q4, with profits of $5.97bn, followed by the upstream business with $3.06bn. The renewables part of the business contributed $293m in profits to the Q4 numbers, down from $400m in Q3. For 2023 Shell said that it expects to invest between $23bn and $27bn, while looking to integrate its oil and gas and LNG divisions as part of a broader effort to streamline the business. The renewables operation will be rolled into the oil refining and marketing operations and will take place from 1st July. Shell set aside $1.9bn in its Q4 numbers in respect of provision for the EU solidarity contribution and the UK’s Energy Profits Levy, pushing total charges for the year to $2.3bn. When broken down into its component parts Shell paid a total of $802m for the year in respect of the UK windfall tax. As we look to this weeks Q1 numbers revenues are likely to be lower than they were in Q4 given weaker demand and lower prices.
- Apple Q2 23 – 04/05 – Apple shares have held up reasonably well over the last quarter and has been notable in being one of the few tech companies that hasn’t announced widespread job cuts, with the shares trading at their highest levels this year, with very little dip in the sell-off seen in March. Its almost behaving like a safe haven asset than a tech company. Its Q1 numbers helped push the shares up through $150 and up through the 200-day SMA even as the company reported Q1 revenues of $117.15bn, below the previous record of $123.95bn the year before. This was still a solid performance even with the various supply chain disruptions that affected the business at the end of last year. Profits also came in lower at $1.88c a share. When the numbers were broken down, there was weakness across the board, iPhone sales fell well short at $65.78bn, against an expectation of $68.3bn. Mac revenue was also disappointing at $7.74bn, $2bn below expectations, although iPad revenue beat forecasts, coming in at $9.40bn, above the $7.78bn estimate. Wearables also fell short of expectations, despite the release of 3 new Apple watches and the new AirPods Pro, suggesting that consumer appetite for incremental upgrades is waning. For the upcoming quarter Apple said they also expected to see a similar 5% decline in their Q2 revenue numbers, the first time we’ve seen such declines since 2016. On a side note, Apple may have benefited from the recent banking turmoil after it launched a banking service and a new savings account with a 4.15% interest rate, although you need to have an Apple credit card to qualify. Q2 profits are expected to come in at $1.43c a share and revenues at $92.56bn.
- Uber Q1 23 – 02/05 – Uber shares hit one-year highs in the aftermath of their Q4 numbers when they were released in February. In Q4 they saw $8.6bn in revenues, an increase of 49%, on gross bookings of $30.7bn, which was a record quarter. Q4 net income came in at $595m, however annual losses were still an eye watering $9.14bn, due to large H1 write-downs in its investments into Grab, Aurora and Didi. Mobility continued to the main driver of its revenue at $4.1bn, however delivery is quickly playing catchup at $2.9bn, and freight at $1.54bn. On a full year basis bookings were up 28% at $115.5bn, with annual revenues of $31.87bn a rise of 83%. On guidance Uber was also optimistic projecting gross bookings of $31bn to $32bn for fiscal year 2023. Last month its sector peer Deliveroo reported that orders in the most recent quarter fell back due to the continued squeeze on consumer incomes, although GTV rose due to higher prices. Could we see a similar trend here? Q1 GTV is expected to see $31.47bn, and revenues of $8.7bn equating to a small loss of $0.08c a share.
- Paramount Global Q1 23 – 04/05 – when Paramount reported its Q4 numbers back in February, the shares fell back before finding a short-term base in March, after posting Q4 revenues of $8.13bn, slightly shy of expectations with direct-to-consumer revenue of $1.4bn. Paramount+ added 9.9m new subscribers during the quarter taking the total to 56m globally. Pluto, which is its free ad-supported service, had 78.5m users. For Q1 Paramount said it expects to post an EPS loss due to a charge of $1.3m due to integration costs of Showtime and Paramount+. In response, subscription prices are expected to rise by $2 a month for the premium tier. At the end of March, the shares got a brief lift on reports that some parts of the business could be put up for sale. Profits are expected to come in at $0.10c a share on revenues of $7.45bn. Total subscribers are expected to rise by 2.7m.
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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