The week ahead: UK economy stalls, UK CPI, Nvidia, Walmart and JD Sports

UK CPI (Oct) – 20/11 – At the start of this year the Bank of England MPC was split when it came to the direction of interest rates with both Catherine Mann and Jonathan Haskel continuing to push for further 25bps in rate hikes, while Swathi Dhingra broke ranks to call for a 25bps rate cut. This divergence has thankfully subsided with Dhingra continuing to be dovish, while the hawks have retreated, and we are now 2 rate cuts into a rate reduction cycle. This has been helped by the fact that headline CPI has seen a slowdown from the levels we were seeing at the start of the year at 4%. By mid-summer we had slowed to 2%, and in September dipped below the Bank of England’s target rate to 1.7% prompting some to claim that the inflation genie was now back in the bottle and declare victory on rising prices. This would be premature given that the main reason for the slowdown in inflation was the decline in petrol prices which has helped support the economy over the first half of this year. Anyone who bothers to look a little closer can see this might be premature, given that services inflation and core CPI remains almost double the headline rate, although even here price pressures have been abating, although they are still rising, with the recent inflation busting pay awards to public sector workers unlikely to help keep inflation risks anchored. External MPC member Catherine Mann expressed concerns along these lines earlier this week, and while she is in a minority on the MPC it doesn’t necessarily mean she is wrong. Wage growth is still trending above the headline rate of inflation and looks set to remain sticky, while the recent changes in tax and the minimum wage announced by the Chancellor could exert upward pressure on prices in the months ahead. Moreover, the recent weakness in petrol prices is also likely to wash out of the headline inflation numbers in the months ahead. Core CPI is expected to come in unchanged at 3.2% while services inflation is at 3.9%, albeit down from 6.4% at the start of the year. According to the Bank of England headline inflation is expected to increase again in the months ahead and not consistently return to target until 2027, which suggests that rate cuts might be hard to come by in the months ahead. It is also important to remember that amidst all the headlines about falling inflation, prices are still rising. They just aren’t rising anywhere near as quickly as they were at the start of the year.      

UK Retail Sales (Oct) – 22/11 – It’s been a tough quarter for UK consumers with a sharp decline in consumer confidence in July when retail sales slumped by 1.5%, before recovering modestly in August and September. A combination of downbeat rhetoric from the new UK government, along with the shortest honeymoon period for an incoming administration, has seen any optimism that a change of leadership might bring a change of economic fortunes evaporate quicker than a snowflake in a desert, a fact confirmed this morning when Q3 GDP showed the UK economy slowed to 0.1% with the economy in September shrinking by -0.1%. Almost 5 months into a new government, with the budget now in the rear-view mirror and there is little tangible evidence that our new political leaders have any idea how to boost the UK economy other than reverting to a political ideology that is stuck in the 1970’s.   

European flash PMIs (Nov) – 22/11 – While concerns about the UK economy have been well documented things aren’t that much better in Europe where we’ve seen German and French manufacturing in a depression with no evidence of a growth rebound in the last 2 years. The last time we saw an expansion in German manufacturing was back in June 2022, likewise in France. In the UK it’s been slightly more positive despite businesses having to contend with some of the highest energy prices in Europe, with some modest expansion in economic activity in the second quarter of this year, before slowing down in Q3. For France and Germany there appears little prospect of a return to growth in the near term with expectations of continued weakness. Services is slightly more positive and has been a growth driver, however even here we’re seeing some weakness with France slipping into contraction in September, as the Olympics effect faded. Germany has been more positive in its services sector, as has the UK but even here we’re seeing evidence of fading momentum, although both are expected to see positive momentum still.     

EU CPI (Oct) – 19/11 – Three rate cuts in, and there looks like there could be more to come as economic weakness in the euro area continues to outweigh concerns about inflation, with another cut expected next month at the ECB’s December meeting. This week is expected to see headline CPI for October confirmed at 2%, with core prices expected to come in at 2.7%. This week we’ll also get to see Q3 GDP in Germany confirmed at a better than expected 0.2%, however with the German government on the verge of collapse and new elections pending Europe’s biggest economy could do with some welcome good news.            

JD Sports Fashion Q3 25 – 21/11 – Share price wise, it’s not been a great year for JD Sports, the shares haven’t really recovered from the sharp drop seen at the beginning of this year, from 160p after management warned that expectations for profits would be lower at between £915m and £935m down from just above £1bn previously, with margins expected to be lower as well. By February the shares were down at 104p and an 18-month low, but have since recovered some of that ground. They did hit a peak of 162p in September in a sign that things were turning around but have since slipped back. At their last trading update in August the retailer reported an increase in like for like sales of 2.4% driven mainly by growth in North America which saw sales rise by 5.7%. The UK was weaker seeing a slide of 0.8%, although it was an improvement on the previous 2 quarters, although that is likely to be little comfort after the company CEO Andrew Higginson, who is also chairman of the British Retail Consortium warned that the recent tax rises announced by the Chancellor in her Autumn Budget risked becoming too much to bear for already struggling retailers. Gross margins had already seen a decline in the most recent sales update, lower by 30bps although this appears to be down to costs related to its takeover of US sportswear retailer Hibbett for $1.1bn. Full year guidance was left unchanged, however there could be additional warnings about retail performance and rising inflation as we head into 2025.   

Workspace S1 25 – 22/11 – With the performance of UK retailers front and centre in light of the recent budget there are likely to be trickle down effects for real estate investment trusts, if retailers and businesses in general start cutting back, reducing costs and closing stores. At its most recent trading update Workspace Group reported resilient customer demand with a total rental value of £8.5m per annum. Occupancy rates were stable at 88.2% with the company announcing the opening of its first Net Zero building Leroy House in Islington, which took place slightly later than expected, opening this week, instead of the slated date in September. Workspace Group tends to cater for small silo sized types of businesses and start ups so ought to be a decent bellwether for the recent budget changes when it comes to the growth in small businesses.   

British Land H1 25 – 20/11 – British Land on the other hand owns a more extensive real estate portfolio, owning Canada Water, the Broadgate Centre as well as a number of well-known retail parks including Fort Kinnaird in Edinburgh, Teesside Park and Glasgow Fort.  In May the company reported an improving landscape with an expectation that the second half of the year would see property values remaining stable, with total occupancy stable at 97%. Of course, all of this took place on the very same day Rishi Sunak unexpectedly called a July general election which means the economic and political outlook has undergone a marked change. At the start of October British Land announced it had acquired a portfolio of 7 retail parks for £441m from Brookfield, including assets in Telford, Falkirk, Nottingham and Waterlooville, funding it by way of an equity placing of around £300m. At the same time British Land announced that it expected to see underlying profit of between £142m and £144m for the 6-months to 20th November.    

Walmart Q3 25 – 19/11 – Comparing the number one retailer in the US to here in the UK is almost a chalk and cheese comparison when it comes to share price performance. Walmart shares have been on a continued upward trend since dropping to a 2 year low just below $40 back in 2022. Since then, the shares have more than doubled, with the last 2 trading updates in May and August prompting a sharp move higher. On both occasions the move higher was driven by higher revenues and profits than was expected, helped by strong growth in e-commerce of 22% with Walmart appearing to be the main competition to Amazon in the retail space. On both occasions the US’s largest food retailer raised its full year outlook, saying it expects sales to rise by between 3.75% and 4.75% with adjusted earnings to come in around $2.40c a share, although it warned in its Q2 update that the second half of the year was likely to weaker than the first half. On Q3 profits Walmart says it expects earnings of 51c a share, although with Thanksgiving, Black Friday as well as Christmas coming up there is potential for the low-ball expectations warned about in Q2 to come in ahead of expectations.    

Target Q3 25 – 20/11 – Another ubiquitous US brand if you live in the US is Target, or Tarjey, as it is sometimes known, the last few years have been slightly more of a struggle for one of the US largest discount retailers. Since 2020 Target has been struggling with higher costs, and several cuts to their guidance, with management warning of “shrinkage” impacting its margins, given that a number of their stores are in less salubrious geographic locations. Shrinkage, as it has become euphemistically known, that’s shoplifting to you and me, has prompted Target to close some of its worst hit stores, as well as introducing extra security measures for its higher value goods which has added to its costs. In August Target managed to beat expectations for revenues and profits suggesting that it may have turned a corner, however management were cautious when it came to the rest of the year, keeping its full year forecast for comparable sales to between flat and 2%, with ecommerce sales helping to drive a large portion of the improvement in fortunes. Profit guidance was raised at the lower end of forecasts to $9 a share. Q2 revenues were at $25.45bn with profits of $1.19bn or $2.57c a share. Q3 profits are expected to come in at $2.30c a share.    

Nvidia Q3 25 – 20/11 – The improvement in Nvidia’s financial performance over the past 2 years has been nothing short of astonishing, with the growth in AI chips helping to turbo charge not only the share price performance but also the company’s revenue and profit growth. Data Centre growth alone has seen quarterly revenue explode, with revenue in Q2 rising to $26.3bn, an increase of 154% from the same period a year ago, pushing total revenue up to $30bn, above expectations of $28bn. Its previous main revenue earner, which was gaming chips also did well, rising 16% to $2.9bn, however it is in AI, and the performance of its H100, Blackwell B200 and GB200 chips have helped turbocharge its growth into the stratosphere, with gross margins of 75%. The company’s rapid growth has also seen it join the Dow, as well as put it in competition with Apple as the world’s biggest company by market capitalisation. For Q3 Nivida said it expects to see revenues of $32.5bn +/- 2%, on margins of between 74.4% and 75.