The week ahead - Fed, Bank of England, BOJ, US payrolls, BP, Shell, HSBC and Apple results

Federal Reserve rate decision – 01/11 – Having overseen a pause in September the US Federal Reserve looks set to undertake a similar decision this week, although they still have one more rate hike in their guidance for this year, which markets now appear to be pricing for December. Fed chair Jay Powell in comments made just before the blackout appeared to indicate that a status quo hold is the most likely outcome this coming week, with the key message continuing to be higher for longer. Most policymakers appear to be of the mind that more time is needed to assess the effects that previous rate hikes have had on the US economy. While the unemployment rate has remained stubbornly low, US consumption patterns have remained resilient while the US economy grew strongly in Q3, however there is this nagging doubt that it could be on the cusp of a sharp slowdown in Q4. US mortgage rates are already at 8% and there comes a point when further increases could destabilise the housing market as well as increase the pressure further when it comes to tightening financial conditions.     

Bank of England rate decision – 02/11 – Having unexpectedly kept rates on hold at the last meeting in a finely balanced decision the Bank of England to all intents and purposes would appear to be done when it comes to further rate hikes. Having hiked 14 times in a row it seems that the bar to further hikes is high indeed and as such we’ve seen a switch in narrative that articulates a policy of higher for longer. There is certainly concern among some of the more hawkish members of the MPC that higher rates are needed, and we can expect the likes of Catherine Mann to push this line. She is likely to be in a minority in the short term if inflation continues to look sticky, however if as expected inflation falls further in October the prospect of further rate hikes is likely to diminish further. We need to remember that the energy price cap comes down again in October, and on comparative alone there should be a sharp drop from where we were a year ago. Sticky wage growth is likely to be a concern for the central bank, however even here there is a sense that this has seen a peak, remaining at 7.8% for the last 3-months, even as headline inflation continues to slow. There ought to be enough evidence this week for a majority decision to hold rates, with perhaps one or two of the 4 hawks who voted for a hike in September deciding to uphold the status quo, while downgrading their GDP forecasts. The most likely to switch to a hold would probably be external members Megan Greene and possibly Jonathan Haskel. although it has been suggested that the lone dove on the MPC, Swati Dhingra could lean towards a rate cut, which really would put the fox in the hen house as far as the pound is concerned. Given how sticky inflation currently is that would be a huge mistake when all the recent messaging has been of higher for longer.     

Bank of Japan rate decision – 31/10 – There’s been a lot of speculation in the past few days as to whether the Japanese central bank might tweak monetary policy from its current settings. Even with USD/JPY trading close to the 150.00 area there has been little sign that the BoJ is even considering a change to monetary policy while some measures of core inflation have been easing. There has been some chatter that the central bank might be considering a modest tweak to its yield curve control policy but that appears largely due to concerns that US rates are dragging yen rates higher. Japanese officials have thus far given little indication that they are leaning in the direction of a change in policy even with a 10-year JGB yield currently at 0.85%, well above the upper boundary at 0.5%.

US employment report (Oct) – 03/11 – With the Federal Reserve expected to keep rates on hold this week, the US labour market continues to hold up well. Jobless claims fell back below 200k earlier this month for the first time since January in a sign that the US economy remains reasonably resilient. In September we saw yet another bumper payroll report with another 336k jobs added, while August was revised up to 227k, which pushed US long term yields higher on the day to new 16-year highs. Wage growth was slightly softer than expected at 4.2%. Another notable factoid was a big jump in part-time positions which rose 151k and could also explain why wage growth showed little sign of racing higher. The unemployment rate remained steady at 3.8%. Expectations are for October payrolls to come in at 185k.  

EU flash CPI (Oct) – 31/10 – Inflation in the euro area has been slowing sharply in recent months with core CPI slowing to 4.5% in September, which made the September decision to hike rates even more surprising. Last week the ECB decided to leave rates unchanged perhaps mindful that with economic data in France and Germany looking increasingly awful that further rate hikes might be counterproductive. Headline CPI also slowed sharply in September, falling from 5.3% in August to 4.3%. Expectations are for a further softening in headline inflation.

HSBC Q3 23 –30/10 – Having seen its peers report last week, it’s now the turn of one of Asia’s biggest banks HSBC to report their Q3 results. In the wake of their Q2 and H1 results the shares popped above 660p and a 4-year high before slipping back to their current levels on concern over the resilience of the Chinese economy, as well as the banks exposure to the struggling property sector. Pre-tax profits for Q2 came in at $8.8bn, on the back of a 36% increase in revenues to $16.7bn, driven by a strong performance in both commercial banking, as well as in wealth services. The bank set aside a further $0.5bn in respect of non-performing loans. In a sign that higher interest rates are influencing loan demand, customer lending decreased by $9bn in Q2, with $6bn of that coming from the UK bank. Customer account balances in Europe also fell by about $13bn, while net interest margin improved to 1.72%. The bank also announced a $2bn share buyback. On guidance HSBC raised their outlook for net interest income to above $35bn.

BP Q3 23 – 31/10 – With sector peer Shell’s share price hitting record high over the last quarter, BP’s share price has struggled to keep up although it did manage to get close to the highs of earlier this year. Like Shell, BP also has a new CEO although not for the same reasons as Shell. Previous incumbent Bernard Looney was forced to step down after failing to disclose details of past relationships with colleagues. A few weeks after Looney stepped down the boss of BP’s US operation Dave Lawler also resigned. This uncertainty at the top of the UK’s second biggest oil company perhaps helps explain why BP’s share price has underperformed, while the jury remains out as to whether any new CEO will persevere with the “Performing while Transforming” of Bernard Looney. When BP reported in Q2 it was widely expected to come in short of expectations, however with the bar lowered it still failed to clear it. Q2 revenue came in at $48.54bn, while underlying replacement cost profit slid to $2.59bn, missing estimates by almost $1bn, helping to lift profits for H1 up to $7.6bn. To offset this disappointment BP took the decision to announce a bigger than expected buyback of $1.5bn, while raising the dividend by 10% to 7.27c a share. This appears to have come about by increasing the company’s net debt by $2bn to $23.7bn, pushing its net gearing up to 21.7%. When it comes to the underlying business, its gas and low carbon energy business outperformed with only a modest fall in profits to $2.23bn, while oil production and operations saw profits decline to $2.78bn. The decline in profits in the oil business was much more marked, with profits sliding by more than half, from the same quarter a year ago when they came in at $5.9bn. Customers and profits also saw a big fall in profits of 80% to $796m. total tax paid during the quarter came in at $2.1bn. On guidance for Q3 BP said it expects upstream production to be broadly flat compared to Q2, with oil production output expected to be lower, and gas and lower carbon energy to be higher.    

Shell Q3 23 – 02/11 – Earlier this month Shell’s share price hit a new record high, with those gains accelerating after new CEO Wael Sarwan pushed back on the previous strategy of renewables at any cost, back in June, 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. While this has caused some unease in some parts of the Shell business it appears to be an acknowledgment of the reality that the transition to renewables will be a gradual process especially given the current levels of geopolitical uncertainty. It is a little worrying that politicians have been unable to grasp this reality, as the silent majority push back at the prospect that this transition will be ruinously expensive if done too quickly. When Shell reported its Q2 numbers in July profits fell short due to the sharp falls in both natural gas and crude oil prices that occurred over that quarter. Since then both gas and crude oil prices have rallied sharply which suggests that Q3 is likely to be better than Q2. Q2 saw adjusted profits fall to $5.07bn, below expectations of $5.61bn, and well below the $9.6bn in Q1. The company blamed lower prices, volumes as well as margins, along with weaker trading for the slowdown. Its chemicals division had a difficult quarter sliding to a loss of $468m, although this was offset by a $917m profit on the products side, nonetheless the fall in profitability in this area was quite marked to the tune of 80% year on year. Profits in its integrated gas division fell to $2.5bn, a 34% decline from the same quarter last year and an almost 50% decline from Q1. Upstream the decline in profits was even more marked, with a 66% decline in adjusted profits to $1.68bn, from the same quarter last year, and a 40% decline from Q1. On renewables profits also fell to $228m, a 69% decline from the same period last year, and a 41% fall from Q1. The decline in profitability here serves to highlight the problems the big oil companies face with respect to the energy transition and the role the legacy business serves in funding this important area. On the outlook Shell downgraded its expectations for capital expenditure by $1bn to between $23bn to $26bn, as well as announcing a 15% dividend increase as well as a $3bn buyback program for Q3.

Sainsbury – H1 24 – 02/11 – Since Sainsbury’s share hit 15-month highs back in May the shares have broadly struggled to recover back to those sorts of levels, as concerns grow over the resilience of the UK economy at a time when supermarket costs are rising, and margins remain under pressure, from the intense competition in the UK supermarket sector. We saw a solid set of numbers in Q1 with like for like sales excluding fuel rose 9.8%, with grocery sales seeing an increase of 11%. The one area of decline was in clothing sales which fell 3.7% with the supermarket reiterating its full year outlook of underlying profit of between £640m and £700m. Fuel sales also fell 21.4%, however the comparatives from the same quarter last year have likely played a part here. On an encouraging note, Sainsburys also said that food inflation is starting to fall, and that any savings would be passed on to customers. With food price inflation continuing to show signs of slowing over the last 3 months this should offer some relief for hard pressed shoppers, however there is a risk that we could see a weak performance in its clothing as well as its Argos operation if the recent trends we’ve seen in UK retail sales are any guide. This was an area that UBS drew attention to in a recent note on Sainsbury back in September. 

Apple Q4 23 – 02/11 – Since pushing up to record highs during the summer and briefly achieving a $3trn market cap the shares have slipped back and are currently trading just above their 200-day SMA. Since its recent event which announced the launch of the new iPhone 15 there have been various reports of overheating problems as well as slow uptakes of the device in its Chinese market which makes up 20% of its overall revenue. At its last set of numbers Apple saw a strong rebound in Chinese demand with revenue there of $15.8bn. Can we expect to see a similar return in Q4 or will the new Huawei device cannibalise this number. On the plus side Apple’s move into India could well provide an offset with CEO Tim Cook saying that performance there had exceeded expectations. Another notable feature of its Q3 numbers was that demand for iPhones fell in the US and Japan while inventory levels rose by 49%. This perhaps isn’t so surprising given that September generally tends to see the launch of new products as well as upgrades, which is precisely what happened, so we could see some catch up here. For Q3 revenues came in at $81.8bn which was higher than expected, although down from last year. iPhone revenue fell $39.67bn, while revenues for iPads also disappointed, coming in at $5.79bn., while wearables also fell short at $8.28bn. On the plus side services revenue rose to a new record of $21.21bn, while Mac revenue beat forecasts at $6.84bn, although it was still below the same quarter last year. On its guidance for Q4 Apple said it expects to see further declines in revenue with iPad and Mac revenue expected to see double digit percentage falls. Q4 revenue is expected to fall modestly to $89.29bn although profits are expected to rise to $1.39c a share. On an annual basis revenues are expected to fall to $383bn, and profits to $6.07c a share.

Peloton Q1 24 - 02/11 – The problems have continued for Peloton with the shares dropping to fresh record lows in September. Losses have shown little sign of slowing, dropping to a Q4 loss of $0.68 a share, although Q4 sales did manage to beat forecasts at $642m. The costs of a seat post recall in May proved to be much higher than predicted and that served to weigh on profits and looks set to continue to do so. The company also said it doesn’t expect to remain free cashflow positive over the next 2 quarters. Q1 revenues are expected to slow to $590.6m, while losses are expected to come in at $0.32 a share. Connected fitness revenue is a key area that the company is struggling to see grow, as this is expected to fall from last year’s $204m to $170m, while subscription revenue is expected to remain steady at around $410m. 

Palantir Q3 23 –02/11 – Palantir shares have done very well so far year to date, not altogether surprising given its position as a key military contractor for the US government, although the shares are still well off their post IPO highs back in 2021. When the company reported back in August, we saw an increase in Q2 revenue to $533m, a solid increase from last year’s $473m, with revenue from government agencies rising 15%. For 2023 Palantir raised its guidance, for the year, saying it expects to see annual revenue of $2.21bn, with profits expected to rise to $576m. The company says its new AI platform will be at the forefront of its future strategy. Earlier this month the company announced a new $250m contract with the US army to support AI capabilities.