Fed and Bank of England meeting, UK public finances, Wetherspoon, Ocado, Greggs trading updates

Fed meeting – 17/03 – for most of the last few weeks Federal Reserve officials have come across as being quite relaxed about the recent move higher in yields at the long end of the US bond market. At the beginning of the year the consensus wasn’t quite so cosy with the likes of some members including Atlanta Fed President Raphael Bostic suggesting that the current pace of bond buying might be pared back if inflation started to edge higher as new fiscal measures started to boost prices. This thought process was quickly stamped on by the likes of Fed chair Jay Powell and vice chairman Richard Clarida, however the cat was out of the bag so to speak. Since then, US 10-year yields have continued to rise, and while 2-year yields have remained well anchored, markets don’t appear to be necessarily convinced that the Fed won’t be forced to act on possible sharp rise in prices before 2024. Fed chair Jay Powell has maintained that the recent rise in yields is a natural consequence of optimism over the prospects of a strong economic rebound in the wake of an economic reopening and another $1.9trn of fiscal stimulus. This belief may be well founded; however, the Fed’s relaxed attitude is likely to be tested further if yields continue their current upward march, with many predicting we could well see a move to 1.8% in the coming weeks on the US 10 year. The biggest concern the likes of Powell and Clarida et al may have is if more Fed officials shift their forecasts for the first-rate hikes into 2023, from 2024, given the strong growth outlook. Let’s face it, given the much more positive outlook how can Fed officials not shift their forecasts in a positive way? If they do shift their forecasts its likely to make it much more difficult for Powell to manage the message, if a growing number of Fed officials move their dot plot estimates from 2024 to 2023. Jay Powell can insist as much as he likes that rates won’t move before 2024, but if the market thinks otherwise there won’t be much he can do to change that shift in perception.

US Retail Sales (Feb) – 16/03 – when it comes to the last 12 months of US consumer spending, its resilience has largely been driven by the US government and the issuance of stimulus payments. The initial rebound in the aftermath of the first lockdown was one such instance, before a slowdown into year-end as the expiry of certain unemployment benefits, uncertainty over the US election, along with the imposition of tighter coronavirus restrictions started to weigh on consumer confidence. This consumer slowdown along with the political deadlock on Capitol Hill over a stimulus package saw retail sales in November and December slide back quite sharply, by -1.4% and -1% respectively. Since then, the economic data has picked up markedly, helped in some part by the new $900bn stimulus plan that was agreed at the end of last year, thus prompting a big rebound in January retail sales of 5.3%, to a seven-month high. The big question now is whether February sees this positive momentum sustained or whether we see a slight pause. The US labour market has certainly seen the positive trend continue which suggests that sentiment ought to remain positive, though there could also be a negative bias due to the cold weather snap, which kept people indoors. Expectations are a for a slowdown to 0%, however this is likely to be followed by a March/April surge as new stimulus payments start to get rolled out.

China retail sales (Feb) – 15/03 – retail sales growth in China returned to positive territory in August last year and since then has continued to improve month on month. The lack of a second wave has certainly helped, and while demand still remains well below the levels we saw at the end of 2019, we have seen four consecutive months of gains since September with December seeing a rise of 4.6%, a slight decline from November’s 5% rise, and below expectations. This is a little disappointing given that China appears to have avoided a second wave. This caution amongst Chinese consumers suggests that they might have been holding back spending ahead Chinese New Year, and towards the first anniversary of China’s own full-scale lockdown. For now, the low number of cases is seeing Chinese consumers to slowly reopen their purse strings; however, we are still well below the levels of retail sales seen at the end of 2019, suggesting that Chinese consumers remain cautious when it comes to reopening the purse strings. This week’s numbers for January and February are expected to show a huge contrast to a year ago when the February lockdown in China hammered demand. Compared to last year we can expect to see a rise of 32%, as domestic demand and Chinese New Year sees a ramp up in spending.

Bank of England rate meeting – 18/03 – when the Bank of England last met in February the tone was a little different from previous meetings despite the economy being in lockdown since the beginning of January. There wasn’t any change in policy, however the tone on negative rates appeared to shift towards the unlikely prospect of them ever being introduced. The bank continued to hedge its bets by saying that UK banks still needed to prepare for the prospect of them being implemented, in the next six months. With the prospect that the vaccine rollout plan will be much further advanced and various restrictions are likely to have been eased the likelihood of them becoming a reality appeared to have diminished further. The central bank did acknowledge that the hit to Q1 GDP growth would be significant, with expectations of a 4% contraction, however a number of members, including chief economist Andy Haldane were more bullish suggesting the potential for a strong consumer led rebound as a result of pent-up demand being uncoiled. It will be particularly notable how far forward the recovery story has progressed with some evidence of a divergence of opinion opening up between some MPC members over the strength of any recovery. No changes to monetary policy are expected, though the recent moves higher in 10 gilt yields might start to cause concerns giving how much money the UK government is borrowing to fund its pandemic response.

UK Public Finances (Feb) – 19/03 – while the success of the UK’s vaccine rollout program continues to attract headlines as optimism grows over the reopening of the economy the pressure on the public finances is unlikely to diminish in the short term after the recent budget extended the range of support measures that have been in place for most of the last 12 months. A major plus point has been that the amount being borrowed has been a lot less than initially projected a few months ago. This has been down to a number of factors including a much better than expected tax take in January prior to the end of year self-assessment deadline. The Chancellor has also been helped by a raft of companies repaying their business rates support. All of that aside the government is still set to borrow a record post war amount and while interest rates are still at record lows, the recent sharp rise in UK government gilt yields is likely to be a cause for concern, especially if they start to move above 1%. It is no secret that Chancellor of the Exchequer Rishi Sunak would rather rein back on the extraordinary support measures sooner rather than later, however it remains highly likely that it will be quite some time before normal service is resumed, with the likes of hospitality unlikely to return to pre-pandemic levels of activity until next year at the earliest. This focus on the public finances, and the growing levels of public debt is certainly a concern, and is a little bit of a distraction to the wider issues facing the UK economy. It is true that borrowing is already at a post war record, and that it will continue to go higher, however with gilt yields still below 1% long-term borrowing costs still remain very low. In January, when tax revenue normally puts government expenditure in surplus, the government borrowed £8bn, compared to a surplus of £12.4bn a year ago. February also tends to be a decent month on a historical basis; however, this time is likely to be different, and with the UK economy set to be in some form of lockdown until the end of this quarter the headline borrowing figure is likely to come in well above £300bn by year end, with expectations for another £10bn of borrowing or so for February, due to some year-end tax payments ahead of the end of year tax deadline.

Ocado Q1 21 – 18/03 – it’s been a fairly decent 12 months for Ocado in terms of share price performance, pushing the value of the company to within touching distance of Tesco, the UK’s number one food retailer. Last month the company delivered full year EBITDA of £73.1m, as well as growing full year revenues to £2.33bn. Fees from its international partners also boomed, jumping 52% to £123.9m. The company has continued to invest in its technology paying a combined £287m to acquire Kindred Systems and Haddington Dynamics in December, both companies that specialise in robotics manufacture. These types of deal and capex are part of the company’s strategy to streamline the picking functions in its automated fulfilment centres in order to improve efficiencies across the business. Since those full year results just over a month ago the share price has lost ground, no doubt over concern that Ocado might lose out as the UK economy starts to reopen, given that it has been a big pandemic winner. While these concerns are no doubt justified it doesn’t change the fact that Ocado’s business is likely to see further growth whatever happens as it continues to sign new deals and gets the benefit from the deals it signed with the likes of Marks and Spencer. The biggest concern for shareholders is the gap currently between its current valuation and its prospects for future revenue growth. This week’s Q1 numbers will be an early indication of how well the business is shaping up for a new fiscal year.

JD Wetherspoon H1 21 – 19/03 – Tim Martin is one of those CEOs who has tended to divide opinion but one thing that generally gets forgotten is the durability of his Wetherspoon pub chain, as well as its popularity. In January the company raised £93.7m in the form of an equity placing to help it through until the end of March. This money is on top of the £139.1m in liquidity available on 14th January. The company also set out a number of scenarios for its 2021 fiscal year, with a worst-case assumption of £159m pre-tax loss, with a return to profit in 2022. In its last trading update the pub chain saw like for like sales fall by 27.6%. Over the past few weeks, the share price has seen an uplift on the basis that we’ll see pubs reopen sometime during the second quarter of this year, however as far as Wetherspoons own Q2 is concerned it’s really a matter of minimising cash burn, with 99% of its employees currently on furlough, and the costs of non-furloughed employees estimated to be at £800m per week. With other general costs including maintenance set at around £1.4m per week the unlock can’t come soon enough so that the likes of Wetherspoon and other hospitality firms can make the most of the extension of the VAT tax cuts that were announced in the budget. Currently the shares are up over 60% from their September lows.

Greggs FY20 – 16/03 – at Greggs last trading update at the beginning of the year, management estimated that full year totals sales would come in at £811m, down from the £1.17bn in 2019. When one considers the challenges facing food retail over the period of the pandemic, this can be considered a fairly solid performance. Greggs still managed to open 28 new shops in the reporting period. The company still expects to post a full year loss of up to £15m. With a lot of shops restricted to take-away service only sales were always likely to be lower, but to come in at just over 80% of the previous year has to be considered a win. In terms of the outlook management said they didn’t expect that profits would return to pre-Covid levels until 2022 at the earliest. On the plus side the expectation was for another 100 net new stores in the year ahead. Currently the shares have risen over 75% from their September lows, and within touching distance from their pre Covid peaks of January last year.

FedEx Q3 21 – 18/03 - parcels and logistics companies are generally good bellwethers of an economy, and FedEx is no different. In September the company reported higher than expected profits as a result of lower fuel costs, and a big rise in shipments as a result of a big increase in e-commerce, as more consumers shopped on-line. In Q2 this momentum was sustained despite a slowdown on US consumer spending towards the end of last year. This momentum is likely to continue given it is also a key cog in the US governments vaccination program, as it ships doses of the vaccine across the country. Revenues in Q2 came in at $20.6bn, almost $1.2bn above expectations. The shares hit record highs in December but have slipped off a touch since then. While pandemic safety measures have seen costs rise, and margins shrink, expectations are for Q3 profits to come in at $3.32c a share which would be a significant slowdown from the $4.83c seen in

Q2. Nike Q3 21 – 18/03 – another US company that has seen its shares hit record highs despite the pandemic, Nike has managed to ride out most of what the pandemic has thrown its way. In Q4 last year the company posted a loss of $790m or $0.51c a share in Q4 on revenues of $6.31bn, a decline of 38% from a year before, due to the lockdowns across Europe and the US, which followed on from the disruption in China. The resilience in the share price has been primarily driven by sharp rises in digital sales which saw a rise of 82%, in Q1, an increase in the 75% rise in Q4. This improved further in Q2 with a 84% rise in digital sales, helping to push revenues up 9% to $11.2bn, well above estimates, while profits came in at $0.78c a share. It has also been apparent that even though consumers are finding it more difficult to shop traditionally, that retail sales growth has been fairly strong in most of its major markets since lockdown was relaxed back in May. With the Chinese economy also recovering strongly now its Greater China business is back up and running, we should see its China business continue to do well, as Chinese consumers loosen their purse strings. Expectations are for Q3 profits to come in at $0.755c a share.

Williams-Sonoma Q4 21 – 17/03 – another decent bellwether of the US economy this upcoming week is Williams Sonoma, who specialise in a range of household cookware, bakeware, and furniture. It is one of the biggest retailers in this space. The company also owns the Pottery Barn and West Elm brands and in January saw its shares hit record highs on the back of optimism that it would continue to see consistent gains in operating margins. With further stimulus payments already rolled out at the beginning of the year, and more on the way this particular US brand should continue to go from strength to strength. The shares have bounced back massively since the lows in March last year, up more than 300%, and as we look ahead to this week’s Q4 numbers profits are expected to continue to come in well above what we saw in Q3. Back then revenues rose by 22.4% to $1.765bn with decent gains across all brands with e-commerce revenues rising 49.3%, accounting for almost 70% of total revenues. Despite this outperformance, management have continued to withhold guidance, though they maintained the dividend, and more importantly said they would look to increase its next dividend to $0.53c a share. Expectations are for profits of $3.375c a share.