The Week Ahead: UK CPI, Japan CPI, Associated British Foods and FedEx results - 20th June 2022

1)    UK CPI (May) – 22/06 – having seen UK CPI hit 9% in April largely due to a sharp rise in gas and electricity prices, along with the sharp increases seen in petrol prices which accounted for 4.2% of the increase, there is increasing concern that these sorts of levels are likely to endure for several months. We already know from what is happening with PPI and factory gate prices that there is little sign of a slowdown. Input prices rose at over double the rate of the headline CPI number rising by 18.6% and a record high. The weakness in the pound isn’t helping in this regard, with the currency down over 14% against the US dollar over the last 12 months. Last week the Bank of England raised rates for the fifth meeting in a row, however once again it was done in a manner that suggests the central bank’s heart isn’t in it, raising the headline rate by 25bps when they should have done 50bps. Compare that to the Federal Reserve who markets are convinced will hike rates by another 50bps at least, by the end of Q3, in order to get on top of an inflation surge that poses greater risks to the economy than higher headline rates. If the Bank of England is looking for reasons why people have so little confidence in them the events of the last few days are as good as any when it comes to the reasons why, with headline inflation set to rise by 9.1%, although core CPI may well start to slow. Later in the week we have retail sales for May which are expected to see a sharp slowdown from the big increase of 1.4% in April. A decline of -0.7% is expected.

2)    US bank stress test results – 23/06 – at a time when prices are surging, and consumer confidence is plunging the results of this week’s US bank stress tests could not be timelier. Fortunately, with the unemployment rate at a multiyear low of 3.5%, this week’s results shouldn’t offer too much in the way of concerns over the resilience of the US banking sector. In these latest results 34 US banks will see the results of a severe global recession with heightened stress in commercial reals estate, and corporate debt markets. This year’s test parameters include a 5.75% rise in US unemployment to 10% over the next two years. The test also models a 40% decline commercial real estate values, widening corporate bond spreads and a sharp rise in market volatility. Furthermore, banks with large trading operations will be tested against the collapse of their largest counterparty.  

3)    France, Germany and UK flash PMIs (Jun) – 20/06 – expected to see another weak set of numbers given the economic backdrop, despite both manufacturing and services activity remaining in positive territory over the past few months. Of the two sectors manufacturing has been more resilient, with fairly decent numbers in the mid-50’s. The UK was an outlier in May seeing a sharp drop in the services component from 58.9 to 53.4, as cost of living pressures impacted overall sector activity. France and Germany proved to be more resilient, however that doesn’t mean that rising energy prices won’t have a similarly chilling impact. The risk remains to the downside particularly in the UK given the tax rises brought in during April which have impacted business, as well as consumer confidence.

4)    Japan CPI (May) – 24/06 – a 14% decline in the Japanese yen so far year to date and a central bank policy of neglect when it comes to the currency has the potential to ignite a sharp rise in Japanese inflationary measures which for over 30 years has struggled to see headline CPI rise much above 3%. The only time headline CPI has risen above 2.5%, where it currently sits was for a brief 5-month period during 2014. With Japan being a net importer of crude oil, as well as other commodities, it is inconceivable that we won’t see a further increase in headline inflation this week, which could well be much more persistent than it was 8 years ago. This will present a challenge to the Bank of Japan’s easy monetary policy if the currency continues to weaken, against a backdrop of an increasingly aggressive Federal Reserve. CPI Inflation is expected to remain steady at 2.5%.

5)    Associated British Foods Q3 22 – 20/06 – it’s been a tough 12 months for the Primark owner, with its share price languishing close to two-year lows over the past few weeks, with the shares sliding to 9-year lows and briefly below the March 2020 lows in April. The retailer which also has a food, sugar and agriculture business, has been hit hard by the various covid lockdowns due to not having an online operation, however despite these challenges the business has demonstrated enormous resilience, rebounding strongly, not that you’d know it from the share price performance. In April the company reported a 25% rise in H1 group revenue of £7.9bn, while adjusted profit before tax rose to £666m, a rise of 109%. Its Primark business has been the main driver of this rebound with sales rising to £3.54bn, with the UK business driving the recovery. In Europe, the bounce back has been much more muted with consumer footfall still weak, while the US is trading well. The food division saw a sharp rise in input costs, eroding operating margins, and reducing adjusted operating profits in that area by 9% to £330m. This is likely to be an ongoing theme with CEO George Weston warning in April that price increases were likely to be necessary on a range of different items across its Primark range, while still expecting to deliver on its adjusted operating profits targets for the year. This could be challenging in the current inflationary environment, however in the past Primark has shown itself to be able to thrive when economic conditions are challenging. ABF also announced an interim dividend in April of 13.8p per share, due to be paid on 8th July.

6)    Berkeley Group FY22 – 22/06 – while the UK housing market has been going great guns over the past two years the house building sector has languished in the doldrums. Since peaking well below their pre Covid highs in July last year the shares have slowly slipped lower, although they are still above the lows seen in March this year, in the sharp sell-off seen in the aftermath of the Russia invasion of Ukraine. The share price performances bely the actual numbers which in H1 saw revenue rise by 36.3% to £1.22bn. Profits before tax rose 26% to £290.7m with the company raising its annual pre-tax profit guidance by 5% for the next three years with the aim of delivering profits of £625m by 2024/2025. In Q3 the company reiterated its guidance, while saying forward sales are expected to be above £1.7bn at year end, while net cash is forecast to be £900m. Full year revenues are expected to be £2.5bn.

7)    Carnival H1 22 – 24/06 – the cruise industry like most in the travel sector has had a difficult two years. Pre-pandemic in 2019, annual revenues were $20.8bn, and don’t look like getting anywhere near that much before 2023. At the end of its 2021 fiscal year annual revenues collapsed to $1.9bn, and while we’re on course to beat that number quite comfortably, as well as the 2020 number of $5.6bn, it will be some time before normal service is resumed. With so little revenue coming in over the past two years, losses have been astronomical. In Q1 the company lost $1.49bn, however as the summer cruise season starts to get up to speed these numbers should start to come down. The company said it still expects to make a loss in Q2 but that bookings have started to recover strongly. As of March, 75% of ships were sailing again, with CEO Arnold Donald suggesting the company could be EBITDA positive by Q3. The sharp rise in fuel prices seen since those comments were made, may well impact this assessment, however in the absence of any new restrictions there is a semblance that the worst may be over, but its still likely to be a long road back. Q2 Losses are expected to come in at $1.14c a share.

8)    Darden Restaurants Q4 22 – 23/06 – at a time when food and energy inflation have been surging and consumer confidence has been plunging, the restaurant sector is likely to feel the pain more than most. When the Olive Garden owner reported in Q3 it missed on revenues and profits, coming in at $2.45bn and $1.93c EPS, largely due to disruption caused by the Omicron variant. The restaurant chain still cited decent growth; however, its inflation expectations were revised up to 6%, a number which we now know was too optimistic. To combat this the company said it planned to raise prices by 3%. They also downgraded expectations for full year profits to $7.30c to $7.45c a share, and revenues to between $9.55bn and $9.62bn. Q4 profits are expected to come in at $2.22c a share.     

9)    FedEx Q4 22 – 23/06  – this has been a challenging year for FedEx, with expectations around profits chopping and changing over the year. The company started the year with a profits downgrade in Q1, followed by a profits upgrade in Q2. In Q3 the company changed tack again by highlighting the impact of rising costs on its overall performance. Higher wages as well as rising energy costs, saw the company miss on profits in Q3, although revenues did beat expectations coming in at $23.6bn. Disruptions caused by the Omicron variant caused staff shortages, and although some of this disruption and higher costs was offset by higher prices, the rises haven’t completely offset the hit to profitability. FedEx raised its fuel surcharge fees across all shipping services from 4th April, while the costs of labour saw an increase of $350m in Q3. Last week FedEx announced they would be increasing the dividend to $1.15c a share as well as announcing a board shake-up. When the company reported in Q3 it kept full year profits guidance unchanged, at between $20.50 to $21.50c a share, and while rising costs are likely to be a challenge, last week’s announcement of a dividend policy suggests this week’s Q4 and full year numbers, should meet, or beat expectations. Q4 profits are expected to come in at $6.87c a share.