The Week Ahead: US Q4 GDP, PCE, HSBC, Barclays, Lloyds, Rolls Royce results and more

It’s set to be a big week for UK banks after NatWest Group’s posted its best set of full year numbers in years. This week the focus turns to the rest of the sector and the strongest annual performance since the financial crisis over a decade ago. While last year’s profits were weighed down by loan loss provisions and negative interest rate concerns, this year has seen these provisions unwound and rates go up, putting the banks in the strongest position they’ve been in for over 10 years. Of course, higher profits will prompt the inevitable pearl clutching about bonuses at a time when the cost of living is exacting the worst squeeze on living standards in years. While the optics of banks paying out large bonuses is never a good one, and likely to prompt further calls for a windfall tax, banks already pay higher rates in the form of a tax surcharge on top of the current corporation tax rate anyway, and that’s before the boost to the exchequer that higher profits bring. It should be welcomed that bank profits are now contributing to tax receipts, after years of being a drain.    

1. US Q4 GDP – 24/02 – although the US economy slowed in Q3, it still did better than initial estimates in the final upgrade to 2.3%, which we saw at the end of last year. The initial Q4 numbers that we saw a few weeks ago saw a much bigger rebound than expected, despite concerns over an uneven recovery and fragile consumer confidence. A rebound in hiring has certainly helped, as well as a strong recovery in both manufacturing and services activity, despite the end of the year Omicron disruption, which saw weekly jobless claims rise sharply. Q4 GDP came in at 6.9%, well above expectations of 5.5%, even though personal consumption rose less than expected, by 3.3%. The main reason for the outperformance was our old friend, supply chain issues. Having used up inventory in Q3 which caused a drawdown, US companies used Q4 as an opportunity to front run these problems by ordering early and front running demand and rebuilding their stock ahead of the Thanksgiving and Christmas period, which saw inventory levels come back higher again. This trend, or pull forward effect could well spill over into this year as well, given that economies all over the world are experiencing shortages in various parts of the global supply chain, semiconductors being a case in point. This week’s revisions are expected to see a modest uptick to 7%.
    
2. France, Germany Flash PMIs (Feb) - 22/02 – the outlook for the French and German economy continues to look uncertain, although after a weak December the German economy did see a modest bounce back in January. In December German services activity slipped into contraction territory, and its lowest level since February last year, as the German economy struggled with the twin challenges of a disjointed regional government response when it comes to restrictions, and sharply rising Delta outbreaks. We saw a modest rebound in January to 52.2, while in France services activity slipped back to 53.1. While the services sector has struggled, German manufacturing activity has proved to be more resilient, pushing up to 59.8 in January. These German economic numbers, while favourable, don’t chime with the industrial production and factory orders numbers which have been poor. Last month the Federal Statistics office estimated that the German economy had shrunk by between 0.5% and 1% in the final quarter of 2021, well behind its peers in France and Italy, due to supply chain disruptions, and higher energy costs, as well as high Covid infection rates. Economic activity has proved to be a little better in France with both services and manufacturing activity remaining steady over the past few months. This trend looks set to continue, although virus levels have been high in the past few weeks, which might constrain the services sector
    
3. UK flash PMIs (Feb) – 22/02 - December saw a sharp fall in UK services sector activity, to 53.6 from 58.5 in November, a move that saw a slight recovery in January despite the Plan B restrictions which were brought in by the UK government half way through the month due to concerns about the Omicron variant. The restrictions on the hospitality sector clearly hit pubs and restaurants, as well as some retail outlets, but we still saw a recovery to 54.1. With the gradual lifting of restrictions midway through January we could see a further rebound, although it is likely to be tempered by caution over the rise in the cost of living. Manufacturing activity in the meantime was steady only slipping modestly to 57.3, however selling price inflation has remained at record levels, a trend that looks set to continue. On the bright side new orders and employment also rose, with the hope that this will continue into Q1.
    
4. US Core PCE (Jan) – 25/02 – with the release of the latest Fed meeting minutes it was clear there was a quorum of Fed policymakers who were reluctant to consider anything other than a 25bps hike in March. Since then the debate has moved on quite a bit. Having seen US CPI come in at 7.5%, and US PPI also rise sharply, then its highly likely that the Fed’s preferred measure of inflation, the core PCE deflator will see a similarly sharp move upwards. In December this rose from 4.7% in November to 4.9%, just falling shy of 5%, a level that is highly likely to move above when this week’s numbers are released. We’ve already seen a number of Fed policymakers express concern that inflation is running out of control, and the recent January numbers are only likely to have amplified those concerns. Add in a strong January jobs report, and retail sales number, and it is clear that the US economy is doing well. As such there is increasing speculation that the Fed might lean even more towards a 50bps hike when they next meet in March. A strong number here will only increase that anxiety, although with geopolitics as it is now, would the Fed really go with such a significant move on rates, even if PCE inflation came in ahead of forecasts?
    
5. US Personal Spending/Income (Jan) – 25/02 - despite the slowdown in the US economy in Q3, consumer spending has remained relatively robust in the past few months. In fact, despite the slowdown in Q3 GDP relative to Q2, the personal spending data has largely been similar on a quarter-on-quarter basis. In October personal spending rose by 1.3%, up from 0.6% in September, despite concerns over higher prices. This trend appears to be being accelerated by concerns over supply chain shortages which is prompting consumers to start their Christmas shopping early. In a way this is encouraging as it suggests that for now consumers appear immune to rising prices, however the big question is to how long that can last if prices continue to move higher, and crimp spending power. Much will depend on personal incomes, and with 11m vacancies in the US labour market you would expect these to remain resilient. Personal spending is expected to rise by 0.6% and personal income by 0.5%.
    
6. HSBC FY 21 – 22/02 – since HSBC reported its Q3 numbers at the end of October the shares have gone from strength to strength, rising over 25%, after breaking above their 2021 peaks at the start of this year. The increasing prospect of higher rates has helped boost the banking sector as a whole with the Hong Kong based bank one of the best performers on the FTSE100 so far this year. Q3 profits after tax rose to $4.2bn, taking total profits year to date to $12.66bn. Q3 revenues came in slightly better compared to a year ago, although there was a slight decline from the levels seen in Q2. All areas of the business showed an improvement, the most notable of which was the UK business which followed up its H1 contribution of $2.1bn with another $1.5bn of profits before tax in Q3. The Asia business contributed $3.3bn, while the headline number of $5.4bn was boosted by another release of credit impairment charges of $700m on top of the $700m released in H1. Management reassured about the banks’ exposure to the Chinese real estate sector saying it had no direct exposure, but would continue to monitor the situation closely. The bank also announced a $2bn share buyback, but unlike in the first half, when it paid a dividend of $0.07c a share, the bank said it wouldn’t be paying a quarterly dividend, although this could be reviewed ahead of this week’s results, with management expressing optimism over the rest of the year. In line with a lot of other banks, lending was subdued during Q3, with a fall in net loans and advances to customers over the quarter, a trend that could well have continued in Q4, with the spread of Omicron. For a bank that generates half of its profits in Asia the current zero-Covid approach of Chinese authorities could act as a drag. Nonetheless profits for 2021 have already exceeded last year’s $8.8bn, with expectations for this year expected to see $18bn. Net interest margins should also see an improvement from their current 1.2%.          
    
7. Lloyds Banking Group FY 21 – 24/02 – having performed so well in 2021 Lloyds has continued to see its share price push higher, although it still remains below its pre-pandemic peaks. Concerns about how UK banks might fare because of the pandemic proved largely unfounded. At the start of this financial year the bank was cautious saying that the outlook was highly uncertain given that more of its customers could well find themselves in financial difficulty in the months ahead, due to the latest lockdown, however it still felt confident enough to resume the dividend. This proved to be a good move as loan demand remained strong and the bank also released loan loss provisions due to the resilience of the UK economy and the consumer. In July Lloyds raised its outlook for the year, recording statutory pre-tax profits of £2bn, for Q2, elevating profits in H1 to £3.9bn, well above expectations, as well as announcing the acquisition of savings and pensions firm Embark Group for £390m. The bank also confirmed it would pay a 0.67p dividend. In Q3 the picture improved further with profits after tax coming in at £1.6bn, almost £1bn higher than a year ago, pushing profits, year to date to just shy of £5.5bn, with the bank adding back another £84m in terms of loan loss provisions, due to the improved economic outlook, taking total impairments added back to £740m year to date. Having resumed dividends at the start of this financial year, and given how well the bank appears to be doing, shareholders could be forgiven for thinking that this week’s full year numbers could see the bank improve its payout, unveil a share buyback, or pay a special dividend. Full year profits are expected to rise to £7.2bn, which in the current febrile political environment could raise eyebrows amongst politicians of a certain persuasion. 
    
8. Barclays FY 21 – 23/02 – earlier this year Barclays shares hit their highest levels since April 2018, before sliding back sharply, and giving most of the gains we’ve seen so far this year. Of all the UK banks it has led the way, along with NatWest, over the last 12 months the shares have more than doubled, from the lows just over a year ago. The current financial year saw the bank adopt a more cautious approach when it came to the releasing of loan loss reserves largely due to an abundance of caution over the wider outlook perhaps and the fact that the bank saw a 6% fall in total income in Q1, to £5.9bn. One thing the Q1 numbers did do was prove that previous CEO Jes Staley was correct to push back on activist shareholder Ed Bramson who had been pushing management to slim down of the investment bank. It is true that the division has its weak spots but the fact that it is there offers Barclays something its more domestically focussed peers do not have, a more diverse revenue stream. With the departure of Jes Staley over his links to Jeffrey Epstein, new CEO CS Venkatakrishnan, or Venkat as he is known will hope to continue the progress of his predecessor. In Q3 pre-tax profits rose to £1.5bn, adding to the £4.9bn seen in H1, where we saw the bank announce a dividend of 2p per share as well as a £500m share buyback. One of the more notable trends seen in Q3 was an increase in credit and debit card spending, which showed a steady increase through the quarter, although it was notable that on the credit card side of things consumers appeared reluctant to add to their liabilities, with borrowings there falling to £8.6bn. This has been reflected in the rise in customer deposits which rose to £193.3bn, up from £173.2bn a year ago, and which have risen steadily quarter on quarter over the last 7 quarters. Business loans also fell back to £35.4bn, falling to their lowest level since Q1 2020. With Omicron impacting consumer demand, as well as businesses this trend may well have continued in Q4, while we could also see an increase in costs. Barclays said that it expects full years costs to come in at £12bn, with the risks likely to be tilted to the upside as rising inflation puts upward pressure on salaries. Q4 profits are expected to come in at a similarly level to Q3, pushing the full year numbers above £8bn.
    
9. Rolls Royce FY 21 – 24/02 – the Rolls Royce share price has struggled over the last 12 months as it continues to be buffeted by the ebb and flow of the pandemic, and the travails of the travel sector. The company has taken significant steps in the last 12 months to reduce head count and cut costs and said it was on course to cut a further £1.3bn this year. In the first half of this year the various measures taken to bolster the finances saw an unexpected H1 profit of £393m. The business still remains heavily reliant for a good proportion of its annual revenue on civil aviation engine flying hours (EFH), and while these have been improving, with the return of transatlantic travel also helping, the company is still set to fall short of its full year target of 55% of 2019 levels for 2021, especially given the Omicron wave disruption we saw at the end of last year, and the beginning of this. There have been some good wins on the defence side of the business in recent months with the £1.9bn deal with the Pentagon for its F-130 engines which will be used to power the B-52 Stratofortress for the next 30 years. The company said it became cashflow positive in Q3 with the result that free cash outflow for 2021 was likely to be less than £2bn previous guidance. The balance sheet is in better shape due to the £2bn of disposals announced in the last few months, including the sale of ITP Aero for €1.7bn which is expected to complete in the first half of this year. Its Small Modular Reactor (SMR) business is also gaining traction after the government put in £210m on top of £145m of private investment as the company ramps up its contribution to the UK economy’s transition to cutting its carbon output. This business diversification continued in December with a £85m deal with Qatar to build new low carbon nuclear power units. It also announced that the company’s Power Systems unit is developing MTU engines that would be able to use eco-friendly methanol fuel for shipping, as the embattled UK company looks to diversify further away from its core business, which is still civil aviation.
    
10. Home Depot Q4 22 – 22/02 – 2021 was a banner year for Home Depot its share price hit record highs in December, although we’ve since slipped back in the last few weeks over concern about high levels of inflation, which could in turn impact US consumer demand. In Q3 the company managed to beat expectations on revenues and profits as they did in Q1 and Q2. Q3 revenues came in at $36.82bn, while profits came in at $4.13bn. Same store sales rose 9.8%, well above expectations of 2%, with the average ticket size rising over 12%, to $82.38c a visit. For Q4 the company said the various supply chain disruptions has impacted its business but that it had managed to receive most of its inventory, while it has also seen its costs rise as it looks to hire an additional 100k people as it gears up for spring. Profits are expected to come in at $3.17c a share, however it will be how the company frames its Q1 guidance that is likely to determine whether we see a rebound, or further declines in the share price.
    
11. Moderna Q4 21 – 24/02 - it’s been a disappointing few months for the Moderna share price, with the shares well below the record highs of August when they got to within touching distance of $500 a share. Since then, they have more than halved over concerns that the advent of new antiviral pills and other treatments will impact on demand for its vaccine. These concerns appeared to be borne out by their Q3 numbers after the vaccine maker missed on revenues and guided its outlook lower. Revenues came in at $4.8bn missing expectations of $5.86bn, with the company delivering 208bn doses. The company also lowered its vaccine production forecasts for this year to between 700m and 800m doses. Moderna said it was now expecting sales of $15bn and $18bn for the year, down from $20bn, with an increase to between $17bn to $22bn next year. Despite the current pullback the shares are still well above the levels they were pre-pandemic, however any further negative news could well see the shares come under further pressure. Profits are expected to come in at $9.90c a share.