The Week Ahead - Jackson Hole Symposium, US PCE, US Q2 GDP, Bridgepoint, Best Buy - 23rd August 2021
- Jackson Hole Symposium – 26/08 – unlike last year’s affair which was held virtually, this year’s event will be a limited in person program. A year ago, the theme was “Navigating the Decade Ahead: Implications for Monetary Policy” with Fed chair Jay Powell outlining the Federal Reserve’s new policy of average inflation targeting or AIT. This policy has been very apparent in the past few months in that the central bank is prepared to tolerate prices rising above 2% for extended periods of time in order to compensate for other periods of time when inflation is running below target. With core PCE rising from levels of 1.5% at the end of last year to current levels of 3.5% already, and little sign that the Federal Reserve is in any mood to slow down its current bond buying program significantly, it’s quite clear where Fed policymakers priorities lie right now, and it’s not in controlling inflation. This week’s symposium could offer guidelines in how the Fed is looking at how to start tapering its bond buying program as we head into the autumn, but it’s important to understand that the discussion won’t be in terms of stopping it, just slowing it down. With talk that some Fed officials are looking to end asset purchases by the middle of next year, the composition of any reduction could also be important. Of course, there is a caveat to all of this. If the slide in equity markets continues, and China continues to undermine confidence in its own recovery story, the Fed may well not taper this year after all.
- France and Germany manufacturing and services flash PMIs (Aug) - 23/08 – it’s quite possible we’ve seen peak PMI for both France and Germany despite last month’s strong reading from both. Germany in particular saw strong readings in both services and manufacturing, however the slowdown in the Chinese economy, as well as the disruptions caused by the flooding could well have impacted economic output and business confidence in August. In July German manufacturing rose to 65.9, and services jumped sharply to 61.8. It would be a surprise if either of these came in anywhere close this month given the various shutdowns of production announced by businesses because of parts shortages. Likewise, in France there has been increasing evidence that business activity has been declining with both manufacturing and services both slipping back in July from their June levels.
- UK manufacturing and services flash PMIs (Aug) – 23/08 – there’s been an increasing disconnect in recent months between what the PMI numbers are telling us and what is happening in the ONS numbers when it comes to manufacturing and industrial production, as well as construction output. The PMI numbers do appear to be starting to reflect some of that weakness, however they are still coming in at fairly decent levels, well above 50. Manufacturing activity did slow in July coming in at 60.4, down from 63.9 in June. Likewise, services have shown a slowdown from the May peaks of 62.9, falling back to 59.6 in July, largely because of the so-called “pingdemic” which resulted in staff shortages, and various business disruptions. It’s also important to remember that while services have seen a decent rebound in the last few months, certain sectors are still struggling as a result of consumer behaviour which is much more cautious than it would have been pre-pandemic. One other trend to keep a close eye on will be higher cost prices being reported by businesses as they struggle to source the necessary materials for their various goods and services
- German IFO business climate (Aug) – 25/08 – for most of this year German business confidence has been rising with both manufacturing output as well as services activity showing much more resilience than was the case at the end of last year. In June, IFO business activity hit its highest levels in two years, however recent events across Western Europe with respect to the floods saw a slowdown in economic activity in the most recent July numbers. The tragic events, along with various factory shutdowns due to component shortages could see further declines in the coming months, while uncertainty over the upcoming German election could also see business start to become more pessimistic about the overall outlook.
- US Q2 GDP – 26/08 – the rebound in the US economy from last year’s slump of -31.4% fall in GDP, has been pretty decent, with four consecutive quarters of expansion, although the extent of the rebound has been slightly less than was anticipated back in April. In Q1 the economy expanded by 6.4%, driven largely by two big stimulus interventions by the US government at the end of last year, as well as in March. The spill over effects of this were expected to accelerate into the Q2 numbers, especially given that the various fiscal interventions are still ongoing and due to expire in September. Manufacturing has been strong in Q2, while the slow recovery in the services sector, along with the return of theme parks has given a boost to economic activity. Nonetheless the extent of the economic rebound in Q2 was somewhat below expectations with initial expectations of 8.5% falling well short at 6.5%. On any measure that headline number is still decent, especially given that personal consumption was stronger than expected at 11.8%, however the fact it fell short suggests that there are headwinds that US businesses are having to contend with. While personal consumption has been strong it would appear that some sectors are still struggling, while supply chain disruptions are also acting as a drag, with shortages of key parts prompting some factory shutdowns and other business disruptions. Expectations are for a slight upward revision to 6.6%
- US Personal Spending/ PCE – (Jul) – 27/08 – US retail sales have been somewhat on the patchy side in recent months, though we did see a decent rebound in June. This in turn translated into a decent rebound in personal spending of 1% in the same month, which was double expectations, although personal income has remained a little on the soft side, after the big gains in March. Since the 4.2% expansion that we saw in the March numbers spending has been a little cautious, not surprising given the uncertainty over vaccine hesitancy in some US states. The ever-changing virus outlook isn’t helping either, even as most parts of the US economy reopen. Some of the slowdown in spending can be put down to higher fuel prices which may well have deterred unrelated consumer discretionary spending. Expectations are for July personal spending to stay fairly resilient and rise by 0.6%, however personal incomes still look a little on the weak side which won’t help, especially with core inflation at a 30-year high. On the plus side, jobs growth is still heading in the right direction and wages do appear to be recovering which means all we probably need to see here is evidence of a direction of travel on the income side. With concerns that higher prices might be acting as a break on other discretionary spending this week’s PCE numbers are likely to be closely watched after coming in at 3.5% in June. While CPI showed signs of plateauing in July, PPI did no such thing pushing even higher, with the wider worry that at some point these price pressures are likely to become more persistent. Core PCE is the Feds preferred measure of inflation and has been trending higher for several months now, and in the space of 8 months has more than doubled from the levels it was at the end of last year when it was at 1.5%. This ought to be a real concern for the US central bank, and while the consensus is now shifting towards the timing of a taper, at some point the discussion will have to move onto the timing of a rate hike if this current trend continues.
- Bridgepoint Group H1 21 – 25/08 – it was only a month ago that Bridgepoint launched itself on the stock market on valuation of £2.9bn, pricing at 350p per share. It was an IPO that didn’t receive that much in the way of publicity, but where the shares have moved well above their initial valuation. The private equity group has investments in Hobbycraft, Fat Face and recently bought a stake in Itsu, the fast-food chain in June. This week the company will be looking to update the market on its latest H1 numbers as well as potentially providing an update on its plans with respect to the Burger King franchise in the UK which it is reported to be looking to sell. The company currently has €27bn of funds under management and a presence across the US, Europe and China. In 2020 the company generated £192m in revenue and profits of just under £50m, on a much lower figure for assets under management, so expectations are high of a decent performance.
- Best Buy Q2 22 – 24/08 – a US electronics retailer, the shares are broadly higher this year, the company saw decent numbers in Q1, as US stimulus payments fuelled a rise in the sale of kitchen appliances as well as other electronic goods. Best Buy said they expected same store sales to grow between 3% to 6% this year, although the optimism was tempered by an acceptance that H2 might be slower than H1. Q1 revenues came in at $11.64bn, with a big jump in online sales of 37.2%, which appears to have prompted the retailer to pare back jobs across its store footprint. Profits for Q2 are expected to come in at $1.90c a share.
- Snowflake Q2 22 - 25/08 – when Snowflake reported in March its annual revenues saw an increase of 120% to $553.8m, and this growth has continued in the first half of this year as well, although its share price performance so far year to date has been less than stellar. Nonetheless it has still seen a decent rebound from its May lows of $185, after a sharp sell off than began in December last year. In May the company reported Q1 revenues of $228.9m up 110% from the same period a year ago, although its losses were also higher at $203.2m. The company now has over 4,500 customers with management expressing optimism that full year revenues would be able to crack the $1bn level for the first time ever. With the share price at current levels, this still represents a lofty valuation when compared to its peers, which means the company needs to continue to bat expectations to justify its current valuation. The company now needs to look at turning a profit and get tighter control of its cost base. This week’s Q2 update will give investors a decent idea of how far along the company is in meeting its full year revenue estimates. A number more than $250m in revenue is needed to meet these expectations, while losses are expected to come in at $0.15c a share.
- Salesforce Q2 22 – 25/08 – another company that has benefited from the shift to working from home, despite being mostly geared towards office working. Its acquisition of Slack which completed during Q2. At its Q1 earnings call management raised their target for 2022 to $25.9bn to $26bn, from $25.7bn, with Slack set to contribute $500m of that. This is a big increase on its last set of full year numbers revenues which came in at $21.25b. Since its elevation into the Dow its shares have traded sideways, although they are up year to date, although down from the record highs from last September. It remains to be seen whether the $27.7bn price tag for Slack will be money well spent, given that Microsoft is also pushing its own Teams product, but for now investors appear content to offer the benefit of the doubt. Time will tell whether this acquisition is a shrewd move by Salesforce, but for now the outlook for the next few months still looks positive, given the upgrades to its guidance. Revenues for Q2 are expected to come in at $6.22bn, net of Slack. Profits are expected to come in at $0.92c a share.
- Williams Sonoma Q2 22 – 25/08 – a solid bellwether of the US economy Williams Sonoma, specialises in a range of household cookware, bakeware, and furniture. It is one of the biggest retailers in this space, and a decent barometer of middle America and consumer confidence. The company also owns the Pottery Barn and West Elm brands and in May this year saw its shares hit new record highs on the back of optimism that it would continue to see consistent gains in operating margins. Robust retail sales and consumer spending in the wake of the various stimulus measures have seen the shares go from strength to strength this year. The shares have bounced back massively since the lows in March 2020, up more than 500%, and as we look ahead to this week’s Q2 numbers. In Q1 the company reported revenues of $1.7bn, a rise of 40.4%, with the best performance in its Pottery barn and West Elm businesses. Earnings per share came in at $3.01c a share, a huge increase over the same quarter the year before. As a result of the decent numbers in Q1 management raised its guidance for the year to low double digit to mid-teen revenue growth. Q2 profits are expected to come in at $2.58c a share, down from the bumper numbers seen in Q1.
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