The Week Ahead: US non-farm payrolls, Bank of Canada, EU CPI, Dr Martens and Broadcom earnings
- US non-farm payrolls (May) – 03/06 – there’s a great deal of uncertainty about how resilient the US economy is when it comes to some of the underlying numbers. A sharp contraction in economic output in Q1 doesn’t appear to be altering the dynamics around the labour market, which is struggling with weak participation levels. This weakness in the participation rate contrasts to over 11m job vacancies, although we are expecting to see this pick up in May to 62.3%. 428k new jobs were added in April, while the March figure was revised lower to 428k, so a nice bit of symmetry there. Average hourly earnings remained steady at 5.5% which again seems counterintuitive with so many unfilled vacancies, while unemployment remained steady at 3.6%. This trend isn’t expected to improve significantly in the May payrolls numbers, with job creation set to slow to 329k, while unemployment is expected to fall to 3.5%. Neither of these numbers is expected to move the dial that much, however wages growth might well offer clues to central banks tightening pace. If wages growth continues to remain lacklustre, with an expectation of a fall to 5.2%, then we could see more urgency go out of the central bank tightening timeline.
- European Services PMIs (May) – 03/06 – recent PMI numbers, especially out of Europe have been rapidly losing credibility in terms of the headline numbers at least, when it comes to assessing the resilience or otherwise of the French, German and UK economies. In terms of the wider economy, it is quite apparent that economic growth is struggling across the bloc as well as here in the UK. Yet to look at the PMI numbers it would be tempting to think that all is well. Nothing could be further from the truth with rising energy prices and supply chain disruptions posing significant challenges to business, large and small. This week’s services PMIs are all expected to slow from the numbers we saw in April, all of which were in the mid 50’s for all three of the UK, Germany and France. PMIs in China look even worse with private surveys in the mid-30s.
- UK lending data (Apr) – 30/05 – rather surprisingly we saw UK retail sales rebound strongly in April. House price growth has also remained resilient despite rising inflationary pressures and 4 rate rises in succession from the Bank of England. So far consumer credit and mortgage lending numbers have remained resilient throughout the first quarter of 2022, with net lending rising to £7bn in March and a six-month high. Net consumer credit has also recovered after a slow start to the year, coming in at £1.3bn. As we look apprehensively ahead to Q2 the mortgage approvals numbers might start to show signs of slowing, while consumer credit numbers could go either way, rising as struggling consumers borrow more to pay for everyday items, or slowing as consumers tighten their belts and dip into savings.
- EU CPI flash (May) – 31/05 – with EU CPI currently at a record high of 7.5%, and core prices less than half of that at 3.5%, there has been some talk that inflation in the euro area is plateauing. This view seems dangerously misguided given what is happening with PPI with the latest German numbers posting a new recorded high earlier this month. We also have the ECB starting to prep the markets for a possible 25bps rate hike at the July meeting in response to this inflation surge, however it’s doubtful that such a small move when rates are already negative at -0.5% will do that much good. CPI is already much higher in other parts of the EU. While its lower in France, at 4.8%, due to the French government capping energy prices, in places like Estonia its 18.8%, and 16.8% in Lithuania. Expectations are for EU CPI to come in at a new record high of 7.6%.
- Bank of Canada rate decision – 01/06 – after spending most of Q1 procrastinating about whether to raise interest rates, the Bank of Canada finally bit the bullet in April pushing its headline rate up to 1% from 0.5% against a backdrop of falling unemployment and surging inflation. The central bank also announced it would be ending its purchase of government bonds by 25th April. This was entirely predictable given that the Federal Reserve was going to be raising raise rates by a similar amount a few weeks later, and that there was little sign that inflation pressures were abating. In the most recent CPI numbers Canada inflation rose to 6.8% and its highest levels since 1990. With unemployment also low at 5.2% this week’s Bank of Canada decision is likely to see the central bank mulling a further tightening of monetary policy, from 1% to 1.5%. With the Fed likely to go with another 50bps in June, the Bank of Canada is likely going to have to match that, by 50bps at the bare minimum this week, or even be tempted to go harder and do 75bps to get rates back to somewhere close to what is considered neutral.
- B&M European Retail FY 22 – 31/05 – it’s not been a great year for UK retailers thus far, with B&M shares following the wider trend of sharp declines in share price values despite upgrading its full year guidance back in January. A stronger than expected performance in Q3 which covered the Christmas trading period saw B&M say that underlying profit for the full year to come in between £605m to £625m on an adjusted EBITDA basis, a significant upgrade from the previous figure of £578m. On a full year basis 2022 revenues were running slightly ahead of 2021 run rate, at £3.66bn, despite a modest slowing in Q3 from the same period a year before. If this is replicated in Q4 then there is a chance we could see revenues exceed 2021’s £4.8bn number. The group has opened 20 new stores in the UK, and while UK growth appears to be plateauing its French business has been performing better albeit from a lower base. The shares also came under further pressure in early April after it was announced that CEO Simon Arora intends to step down and retire from the position, he has held for the last 17 years.
- Dr Martens FY 22 – 01/06 – when Dr Martens went public back in January 2021 there was optimism that the decision by private equity owner Permira to sell off some of its stake in the business it bought in 2013, would kick off a good year for IPOs for the London market. After some initial early gains this optimism proved somewhat misplaced. It is true that annual revenues have improved steadily from the £672m seen in 2020, rising to £773m in 2021, however profits after tax fell back by 52% to 35.7m in 2021. A large part of this decline was IPO related expenses of £80.5m. At the end of its previous fiscal year management expressed optimism that they would be able to pay a dividend in the upcoming fiscal year. Despite this optimism the shares have slowly lost ground after initially peaking above 500p in early 2021. In early January Permira sold another 6.5% of its stake in the business, reducing its stake to 37%, with an expectation that it could reduce it further. While it would be easy to blame the current bout of weakness in the share price on concerns over further sales, the macro-outlook hasn’t helped. As with all retailers it is facing supply chain disruptions and rising costs, with lockdown restrictions in Vietnam hitting its facilities there. Port backlogs haven’t helped either, with prices of its goods likely to rise in line with costs elsewhere. This could well present a challenged to its revenue targets. When the company reported in January revenues year to date were at £676.9m hindered by a weak Q1, with full year revenues expected to come in at £907.5m, a rise of 17%. This comes across as a big ask given the numbers at the end of Q3, with the shares trading at record lows of 175p at the beginning of May, with the shares down over 50% year to date.
- HP Inc Q2 22 – 31/05 – a surge in PC sales over the past couple of years has helped the HP share hit record highs in recent months, with the shares hitting a record high back in April, after it was revealed that Warren Buffett had taken a $4.2bn stake in the business. HP has been looking to acquire new businesses after agreeing to buy audio and video accessories maker Poly for $1.7bn. At its most recent trading update HP recorded net sales of $17bn, with most of that coming from sales of personal systems, which includes laptops and PCs, amounting to $12.2bn. Printing sales were slightly disappointing, falling by 23%. HP also said it was pulling out of Russia although it did offer an optimistic outlook upgrading its full year guidance to $4.28c a share. For Q2 guidance for profits sits between $1.02c and $1.08c a share. That continues to be the market consensus which currently sits at $1.05c a share, however continued supply chain disruptions and rising costs present a clear threat to the company meeting these expectations.
- Broadcom Q2 22 – 02/06 – another company that has done well from the chip shortage, Broadcom shares have slipped back from the record highs of last year, although its losses have been more modest than the likes of its peers like Nvidia. Broadcom is a much more diversified business than your average chip maker, not only making components for iPhones and industrial equipment, it also has a data centre business, and a software services business, while last week the company agreed to pay $61bn for cloud company VMware as part of a strategy to reduce its reliance on the surge in semiconductor revenues which, according to Broadcom CEO Hock Tan won’t last as more capacity gets added to the market. There is a $1.5bn break clause in the deal if either side backs out. At the end of Q1 Broadcom reported a profit of $8.39c a share, on sales of $7.7bn, beating expectations on both top and bottom lines. For Q2 the company also raised its guidance to $7.9bn in revenues, although since that update the shares have struggled hitting 6-month lows earlier this month. Q2 profits are expected to come in at $8.3c a share.
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