Michael Hewson MSTA CFTe
Independent Analyst
- UK wages/unemployment (May) – 11/07 – just over a month ago the latest UK wages numbers reinforced the challenge facing the Bank of England, after April wage growth surged to 7.2% and a record high outside of the pandemic, prompting a surge in UK 2-year gilt yields which took them above their October peaks of last year in the wake of the ill-fated Kwarteng budget. The failure of the Bank of England to act early enough is now starting to be seen in the wage numbers, as workers already being squeezed on all sides agitate for bigger pay rises in order to close the real wages gap. Short term yields have continued to rise in anticipation of further rate rises in the coming months, and if this week’s wage numbers for May continue to look sticky, the central bank may find it has no good options when it comes to getting prices under control. The number of people in employment also rose to a record 76% as high food inflation forced people back into work, forcing the unemployment rate down to 3.8%. It’s also important to note that the wages numbers are average numbers which means in a lot of cases, pay rises are much higher in certain areas of the economy, trending at between 10% to 20%.
- Bank of Canada rate decision – 12/07 – having decided to signal a pause in their recent rate hiking cycle when they hiked rates in January, the Bank of Canada surprised markets in June by deciding to hike rates again, by 25bps to 4.75%. The decision followed a similar decision by the RBA days before on concerns that inflation was proving to be much stickier than feared. The Bank of Canada also tweaked its guidance about the need for further rate hikes giving them more flexibility when it comes to raising rates or choosing to hold them. Any decision could well be tempered by the current business outlook which in Q2 fell to its lowest levels since Q3 of 2020. That said unemployment remains low while core inflation has slowed to 3.9% in May from 4.3% in April.
- US CPI (Jun) – 12/07 – US inflation appears to be heading in the right direction, after sliding to a 2-year low last month of 4%, from 4.9% in April. A year ago, US CPI hit its peak at 9.1%. Core prices have continued to look sticky slipping back to 5.3% from 5.5%, however the continued hawkishness of the Federal Reserve has seen the slide in yields that came about as a result of these numbers reverse sharply. With another rate rise due later this month this week’s CPI numbers won’t impact how the Federal Reserve is likely to act in 2 weeks’ time, but the numbers might shine a light in whether we can expect another rate hike in September. June CPI is expected to slow further to 3.1% and core prices to slow to 5%.
- China Trade (Jun) – 13/07 – we’ve seen a slow improvement in China trade numbers over the course of the last few months, however the nature of the rebound has been somewhat lacklustre to say the least, and has started to run into trouble, due to a lack of internal demand, as well as concern over global demand. This was reflected in the recent May numbers, which saw exports drop into negative territory for the first time in 3 months, falling by -7.5% to a one year low. Imports were also disappointing sliding by -4.5%, raising the prospect that Chinese authorities may have to do more to support the economy. We have seen some minor measures in the context of small rate reductions, however with factory gate inflation continuing to fall sharply and recent PMI numbers also looking weak the outlook for the Chinese economy continues to look uncertain. Exports are expected to decline by 10% and imports by 4.4%.
- Burberry Q1 24 – 14/07 – when Burberry reported its full year numbers back in May the shares were already on the decline, having hit record highs only a few weeks before in April after its peers in the luxury sector posted record Q1 sales numbers from their markets in Japan and China. Once it became apparent that the China recovery story was starting to run out of steam, a lot of the froth also started to come out of the luxury brands, with the end result that Burberry’s shares had fallen over 20% from the record highs set in April. Will this week’s Q1 numbers help to arrest the recent share price weakness. On the full year Burberry saw a 10% rise in revenues to £3.1bn, with same store sales rising 7%, with a strong performance in Q4 on the back of the return of the Chinese consumer, which saw mainland sales rise by 13%. The only disappointment in terms of sales growth was in the Americas which saw a 7% decline in Q4 sales. For 2024 guidance was kept unchanged, which at the time was a little surprising given the strong recovery that we’d seen in the Chinese consumer. Of course, it might also suggest that management don’t think the Chinese demand rebound is sustainable, a concern that has only increased in the weeks since then. Q1 revenues are forecast to come in at £632m.
- Wells Fargo Q2 23 – 14/07 – the shares have had an indifferent quarter since a solid set of Q1 numbers. Revenues came in at $20.73bn, an increase of $3bn over the same period last year. Profits came in at $1.23c a share, also although the bank set aside another $643m in respect of credit losses, $379m of which is down to (CRE) commercial real estate. Despite the March banking turmoil that was caused by the rise in interest rates Wells Fargo saw NIM rise more than expected, coming in at 3.2%. On the loan side of the ledger, it was notable that total average loans came in below consensus forecasts, perhaps not surprising for a bank that has a big mortgage presence. Q2 revenues are expected to come in at $20.1bn and profits of $1.21c a share.
- JP Morgan Chase Q2 23 – 14/07 – while there was a lot of concern over the banking volatility that roiled the US banking sector, the bigger US banks appeared to come out of rather well, largely due to the perception that bigger means safer. The collapse of Silicon Valley Bank and Signature Bank saw JPMorgan win over $50bn of new deposits, from SVB as it took over the banks deposit base, with the challenge in the coming months in being able to hang onto them. The turmoil in rates markets also proved to be a boon as revenues surged in Q1, coming in at $39.3bn, helped by a better-than-expected performance from FICC sales and trading with $5. 7bn.The big jump was in net interest income which rose by $6.8bn over the year, helped by the rise in rates. Total deposits also received a lift coming in at $2.38trn, however in a sign of concern about the US economy, the bank raised its provisions by a $1.1bn build in its reserves. Net Interest margin saw a big improvement rising to 2.63%, well above the consensus of 2.39%. In spite of all the recent uncertainty JPMorgan CEO Jamie Dimon painted an upbeat outlook, saying that consumer spending “remained healthy”. The bank raised its full-year outlook for net interest income from $73bn to $81bn, with Dimon saying that he expects inflation to remain higher for longer, which could weigh on the economic outlook. The shares have seen solid gains since the Q1 numbers pushing up to their highest levels since February 2022. Q2 revenues are expected to come in at $39.6bn while profits are forecast to come in at $3.76c a share.
- Citigroup Q2 23 – 14/07 – like its peers Citigroup comfortably passed the latest stress tests carried out by the US Federal Reserve, however the Fed has imposed changes to the way investment bank operations will be able to value trading desk exposures and other operational risks. As a result of the tests Citigroup board said it would be looking to increase its dividend to $0.53c a share, even as its minimum capital requirement ratio will increase to 12.3%. Since the publication of their Q1 numbers the shares have struggled to make gains, despite a broadly solid set of numbers, although slightly higher provisions took some of the gloss off. Q1 revenues rose 12% to $21.45bn, while profits came in at $1.86c a share, with the rates and trading business helping to boost the numbers to the tune of $4.45bn. On the flip side the equities business underperformed, while the bank took the decision to set aside another $2bn in respect of provisions. For Q2 expectations have been tempered with revenues forecast to come in at $19.61bn, and profits of $1.44c a share.
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