The Week Ahead: UK CPI, Unemployment, Fed minutes, Persimmon and Walmart results
- UK CPI (Jul) – 17/08 – UK CPI hit another record high in June, rising to 9.4%, and although core prices slipped back to 5.8%, the further rise in PPI input and output prices suggested that more pain was coming down the line. PPI input prices rose to an eye-watering 24% in June. Now that the Bank of England has belatedly recognised that more needs to be done to try and counter the surge in prices by raising rates by 50bps earlier this month, another strong number this week could raise the prospect of another 50bps rate rise in September. It is true that there is little the central bank can do about the rise in food and energy prices, however even with food and energy stripped out, core prices are still well above the banks headline target of 2%. Last week we saw US CPI retreated from 40-year peaks, however this doesn’t seem likely here in the UK with most forecasts suggesting we could see 10% in the July numbers this week. Core prices are expected to move above 6%.
- China retail sales (Jul) – 15/08 – the recent China trade numbers may have been lauded for seeing a strong recovery in exports, however the weak imports number still gives the impression that domestic demand remains weak. The weakness comes against a backdrop of an economy that is struggling to adapt to a zero-covid policy, and problems in the property sector. In June we saw the effects that the various lockdowns had had on the Chinese economy, with a -2.6% contraction for Q2. Retail sales in June improved slightly coming in at 3.1%, however this needs to be set in the context of a -11.1% decline in April and a May decline of -6.7%. Having been locked down for most of April and May, the Chinese consumer ventured out and did a little bit of catchup spending, but confidence still remains weak, with restrictions still remaining in place in certain parts of the country. Industrial production has been more robust and recovered much better, but it is still only expected to rise by 4.5% in July after a 3.9% rise in June. Retail sales spending is also forecast to improve from the 3.1% in June, to a one year high of 5%.
- UK Unemployment (Jun) – 16/08 – with prices rising steadily on a month-to-month basis it is perhaps fortunate that unemployment is so low. More than that the labour market is very tight in terms of the number of job openings that are currently unfilled. What is perhaps more surprising is that wages growth has been so subdued, relative to inflation. Last month the most recent unemployment data showed that hiring in the 3 months to May rose by 296k as the rising cost of living prompted a large-scale return to the workforce, with unemployment remaining steady at 3.8%. While this is welcome news, it is not having the desired effect on wages that it might be, although we did see a modest rise in weekly earnings from 4.2% to 4.3% for the same period. Including bonuses, the number was higher at 6.2% as employers make one-off payments in order to help their work force ride out the surge in prices. With food price inflation up at around 10% this squeeze on real incomes looks set to continue.
- UK Retail sales (Jul) - 19/08 – retail sales in June unexpectedly came in better than expected, although it was clear that rising fuel prices were impacting on consumers driving habits. The consumer outlook continues to be challenging with consumer confidence rooted at a record low of -41, although there was a silver lining in the June retail sales numbers with a sharp rebound in food and drink sales of 3.1%, prompting 0.4% rise. With fuel sales included the picture was a little starker, as these fell -4.3%, dragging the month-on-month number to -0.1%. The May numbers which had already been disappointing, were revised lower as well. So, what to expect for July with the start of the school holidays. One of the more notable takeaways from recent earnings numbers from Next was the resilience in clothing sales as the hot weather prompted consumers to spend money on summer clothing as well as trying to remain cool. The most recent BRC retail sales numbers appeared to confirm that trend with strong sales of clothing, food and drink and electric fans. Spending data from Barclaycard was also solid rising 7.7% in July.
- US retail sales (Jul) – 17/08 – with the US economy now confirmed in a technical recession, one area that has been shown to be quite resilient has been the US consumer. US retail sales have been positive every single month this year, apart from a modest -0.1 fall in May. If higher prices are deterring consumer spending, it’s not immediately obvious in these numbers. In June, US retail sales rose 1%, beating expectations of 0.9%, with the control group measure rising to 0.8%, after a decline of -0.3% in May. With the US labour market continuing to add positions in monthly payrolls data there is no reason to suppose that this trend of positive retail sales won’t continue, with forecasts of 0.3% in this week’s July numbers. There is one note of caution in that consumer confidence is fragile and consumer credit has been soaring. Is consumer credit fuelling this resilience in retail sales?
- Fed minutes – 17/08 – as expected the Federal Reserve raised rates by 75bps in July, to 2.25% to 2.5%, however the Powell press conference posed more questions than answers. Fed chair Jay Powell’s comments that the Fed still sees inflation as way too high, and that the committee was highly attentive to inflation risks was all very much on point. However, he then went on to say that at current levels the Fed Funds rate is in the range of what they think is neutral, which raised more than a few eyebrows, and prompted yields to fall quite sharply. With inflation already well above target, this tack on neutral seems at odds with the end of year June projections for a policy rate of 3.4% by year end, and Powell’s insistence that they want to see clear evidence that inflation is under control, which it clearly isn’t. He went on to insist that the US economy was definitely not in recession, and that despite concerns over rising prices the Fed would be guided by the data. Since that dovishly construed press conference, we’ve had a series of Fed speakers from San Francisco Fed President Mary Daly to St. Louis Fed President James Bullard push back on that interpretation with Daly saying the Fed is “nowhere near” done when it comes to tackling inflation while Bullard says he sees a Fed funds rate of 3.75% to 4% by year end. This week’s minutes will be interesting for many reasons, but the main one is likely to be where the majority of policymakers see the neutral rate given Powell’s comments. He has come under a lot of criticism for that comment, given where headline CPI is, which rather begs the question as to where it came from. Was he freewheeling, or was there a general discussion about where policymakers think the neutral rate is?
- Persimmon H1 22 –17/08 – despite the resilience in house prices over the last two years the performance of the house building sector has been anything but. Since pushing back to within touching distance of its pre-pandemic highs in June last year, the shares have fallen over 40% and are down over 30% year to date. Last month Persimmon said that it had sold 6,652 properties in H1, slightly below expectations. Total revenues fell to £1.69bn from £1.84bn a year ago, reinforcing concerns about a slowdown in the UK housing market. Average selling prices have remained resilient, currently at £245,600 a rise of 4% a year ago, however rising costs and energy prices are proving to be a challenge. Persimmon said it has been able to pass these increased costs on, however this could prove to be challenging if house price inflation starts to slow or go into reverse as interest rates rise. Forward sales were up on a year ago to the tune of £1.87bn, compared to £1.82bn. It was also noted that some of the company’s plots were being stalled due to delays in the planning system, which is holding up construction on 120k plots in England. H1 profits are expected to come in ahead of guidance, with the average selling price of forward sold homes at £280,700. Despite this resilience investors appear to be more concerned about the outlook, if recent share price weakness is any sort of indicator.
- Balfour Beatty H1 22 – 17/08 – the first quarter of this year was a bit of a disappointment share price wise for Balfour Beatty with the shares hitting a 15-month low in early March. The performance since then has been pretty good after the construction business. Full year underlying pre-tax profits of £187m, beat expectations of £172m, while its order book fell from £16.1bn in December to £15.6bn in March. Full year revenues were slightly disappointing, coming in below expectations at £8.28bn, down from £8.59bn in 2020, however the improvement in profits suggests that margins continue to be the main driver of the business, while average net cash rose by 27% to £671m, from £527m a year ago. In May the company said it was trading in line with expectations and that it expected to deliver 1% to 2% margin on its US operations, 2% to 3% margins in its UK business and in support services 6% to 8%. In July Balfour Beatty announced it has sold off its 67% interest in Aspire, the on-campus student accommodation at Purdue University in Indiana for £122m, with the company securing a sum of £50m after various liabilities have been settled. The company is in the process completing its £150m share buyback by the end of this year.
- Walmart Q2 23 – 16/08 – for most of last year Walmart had been able to confound expectations that higher costs would start to impact profitability, however in Q1 that luck ran out. Q1 revenues did come in ahead of expectations, coming in at $141.6bn, however profits missed, coming in below forecasts of $1.48c at $1.30c a share. At the end of last year Walmart had predicted sales growth of 4%, which at a time of rising prices seemed a touch optimistic. In May they reduced that target to 3.5%, as well as cutting its EPS view for Q2. The notable shift was consumers spending less on higher margin items and spending more on groceries. In July Walmart had more worrying news about the outlook when it downgraded its operating margins and below 4% for the rest of the year, although sales are expected to be higher, 7.5% for Q2 and 4.5% for the rest of the year. Walmart said that spending on food and energy was now making up a much higher proportion of basket spend, leaving less money for higher value and margin items.
- Target Q2 23 – 17/08 – another big box US retailer that is feeling the pressure, Target also missed expectations on Q1 profits with the shares dropping to a 52-week low in the aftermath of the Q1 miss. Q1 revenues were decent at $25.2bn, while comparable sales rose by 3.3%. On profits the picture was somewhat different, coming in below expectations at $2.19c a share. The consensus was $3.07c a share. Target said it expected operating margins for the year to slip back to 6%, down sharply from the previous 8% or higher, due to unexpectedly higher costs of fuel and freight, higher inventory costs, as well as higher wage costs. The company however reiterated its revenue forecast for 2023 which is for annual revenue growth of between 5-8%, however it didn’t provide a profits forecast. At the end of last year Target said that labour costs would see an increase of an extra $300m on wages and health care benefits over the next 12 months, while also continuing to spend up to $5bn in capex in opening new stores.
- Cisco Systems Q4 22 – 18/08 – Cisco shares hit their lowest levels since November 2020 back in May after the company issued a surprise earnings downgrade. The shares have recovered modestly since then, perhaps on the basis that the guidance may well have been too pessimistic. The company slashed its Q4 revenue outlook to between -1% to -5.5%, against an expectation of +5.7%, as it reduced its full year forecasts. The company cited the effect of Chinese lockdowns and other supply chain disruption for the shock downgrade. Its Q3 numbers showed revenues come in light at $12.84bn, which was little changed from the year before. The war between Russia and Ukraine reduced revenue by $200m, while also increasing costs. With the lifting of some of the most onerous restrictions in the Chinese economy in June, the hope is that the guidance issued in Q3 may have been too pessimistic, with the main areas of weakness in the business also manifesting itself in software sales which was also soft in Q3. Profits are expected to come in at $0.81c a share.
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