The week ahead: UK CPI and wages, Lloyds and HSBC results

1) UK CPI (Jan) – 19/02 – having cut interest rates by 25bps at its recent meeting the Bank of England will be hoping that the pace of UK CPI continues to weaken after the inflation numbers for December showed that headline inflation slowed to 2.5% from 2.6% previously. With core prices also slowing from 3.5% to 3.2% markets have priced in the prospect that rates may well come down quicker than was originally priced at the start of the year. The only fly in the ointment with respect to that line of thinking is that services inflation, as well as wage inflation, is trending at much higher levels of 4.4% and 5.6% respectively. In a blow to the Bank of England, wage inflation actually increased in the 3 months to November last month to its highest level in 6 months, and with minimum wage rises still to filter through there are concerns that inflation could well remain at elevated levels for some time, particularly services inflation as firms look to cope with the higher cost of employing people. This divergence is likely to be a problem for the central bank and is already causing splits on the MPC after external MPC member Catherine Mann voted for a 50bps cut in stark contrast to her hawkish stance throughout 2024. This about face caused some consternation in markets given it came without warning, and prompted quite a bit of head scratching. How do you go from hawkish to dovish so quickly given that she and Dhingra were in opposing camps this time last year. Could it be that Mann believes that the recent budget has done enormous damage to UK growth prospects and is keen for the MPC to get ahead of an upcoming slump?     

2) UK Wages/Unemployment (Dec) – 18/02 – The Bank of England won’t have been happy to see that wage inflation rose to a 6-month high last month of 5.6%, while unemployment rose to a 6-month of 4.4%. This could well be a trend that is set to continue in the coming months as businesses adapt to the upcoming changes set out in the recent budget in October last year. We’ve already seen a number of companies start raising their minimum wage thresholds ahead of the new tax year, while at the same time these same businesses are shedding jobs as the cost per employee gets set to increase.  Earlier this month supermarket chain Lidl announced it was raising its hourly pay levels from March ahead of the April change, keeping them above its rivals Sainsbury and Aldi, who also announced increases. On the flip side of that Sainsbury also announced the loss of 3,000 jobs as it shuts down its cafes and pizza counters. As we look ahead to this week’s wage growth and unemployment numbers, we can expect to see both measures remain sticky and while there may not be much more in the way of upside where wages are concerned the risk is that unemployment could well rise further.

3)    Fed minutes – 19/02 – with the US economy still looking resilient the Federal Reserve kept rates on hold at its most recent meeting in a move that was widely expected. Unlike the UK and EU whose economies are stagnating at best and could probably do with lower rates. The post meeting statement suggested that the FOMC had a more optimistic view of the economy and labour market. It would appear that the Fed is happy to see how the 3 rate cuts seen since September have affected the economy. Fed chair Jay Powells recent comments to US lawmakers suggest the Fed is in no rush to cut rates further given the apparent strength of the US economy. With inflation still sticky and the labour market holding up reasonably well it would appear that the Fed has room to wait and see, which means that any further rate cuts are likely to face a higher bar. With the prospect of tariffs incoming the US central bank is understandably cautious about giving too much of a lead when it comes to rate policy and there doesn’t appear to be much in the way of dissent on the FOMC when it comes to this approach. Cleveland Fed president Beth Hammack underlined this approach in recent comments citing uncertainty around government policy, and inflation risks skewed to the upside. This week’s Fed minutes look set to underline that approach.  

4) UK Retail Sales (Jan) – 21/02 – retail sales in December were a horrendous number, sliding -0.3% against an expectation of a 0.4% gain, while the November numbers were revised down to 0.1% from 0.2% in a sign that UK consumers had battened down the hatches in the wake of the fallout from the October budget. Combined with a -0.7% decline in October Q4 was a horror show for UK retail spending. Food sales, which ordinarily do well in the leadup to Christmas, fell by 1.9% to the lowest levels since April 2013. While the December GDP numbers showed the UK economy performed well, expanding by 0.4%, most of this increase was driven by the public sector, and certainly not reflective of a buoyant private sector. This is important given that without a robust private sector, public sector revenues won’t be anywhere near as buoyant. A combination of fragile consumer confidence and a darkening economic outlook are never a good combination as the government’s doom-mongering weighed on the UK economy in the second half of 2024. Could January prompt a bit of a rebound. It’s certainly possible given that January tends to be a weaker month in any case. There is a sense of overdoing the economic gloom, however with unemployment starting to edge higher and vacancies also on the decline, consumers could well be a lot more circumspect about their spending plans when it comes to how we see 2025.       

5) Mfg. and Services Flash PMIs (Feb) – 21/02 – services are the one area across Europe and the UK that appears to be propping up economic activity, whether it be in France, Germany and the UK. In January the depression in manufacturing continued with a reading of 45 in both of Europe’s biggest economies, while in the UK economic activity was only slightly better at 48.3. Services is performing better, however even here economic activity is subdued with German seeing 52.5 in January, while France sank to 48.2, as the post Olympics hangover continues. In the UK, services activity slipped to 50.8, down from 51.1 with new work declining for the first time since August 2023. 

6) UK Public Sector Borrowing (Jan) 21/02 – the most recent government borrowing numbers for December saw a big jump in borrowing to £17.8bn and a 4-year high which was more than expected. In previous years we have seen a trend that sees borrowing start to fall as we head towards year end as online returns continue to get filed ahead of the January deadline. This doesn’t appear to be happening this year given the rise in December borrowing, although some of that number was down to the purchase of military accommodation from private equity firm Terra Firma for £6bn, which saw £1.7bn added to the overall numbers.  Local authorities also added an extra £4.1bn in the form of extra borrowing, as the government’s fiscal targets came under further strain, although the decline in gilt yields since then has lessened the pressure on the Chancellors fiscal headroom. This pressure could increase however if this week’s January numbers don’t see a surplus as January returns get filed ahead of the 31st January deadline. Last year saw the highest ever surplus of -£15.6bn, so it will be interesting to see whether we see a similar pattern play out this time as taxpayers look to get ahead of the upcoming tax changes in the next tax year.          

7) HSBC FY24 – 19/02 – with the shares finally back at pre-financial crisis levels, the pressure for a split between its Asia and business and the rest of the bank may well start to subside, although it would probably be wise not to bet against it. When the Anglo-Chinese bank, and Europe’s largest financial institution reported in Q3, pre-tax profit increased by 10% to $8.5bn, helped by 5% increase in quarterly revenue to $17bn. Management also announced a further $3bn share buyback bringing the total this year to $9bn, along with an interim dividend of 10c a share. There has also been talk of a plan to restructure the bank into eastern and western divisions, along with $300m in cost savings which could also be a precursor to some form of split if the political situation deteriorates between China and the rest of the world. For several years now HSBC management has come under pressure from activist investor Ping An, to become more efficient, as well as looking to focus on its domestic markets. The move higher in the share price appears to reflect this growing efficiency drive with new CEO George Elhedery keen to drive profitability in both regions. Given the politics at play the reality is HSBC does make most of its money in Asia, with $16bn in profits so far this year, while the UK bank has seen a return over the last 9 months of $5.56bn, out of a total of $30bn year to date.

8) Lloyds Bank FY24 – 20/02 – last year saw the Lloyds Bank share price underperform relative to its peers, largely due to concerns over its exposure to Black Horse Finance and the payments of commission to motor dealers. In a high court ruling in October against FirstRand Bank and Close Brothers it was stipulated that it was unlawful for lenders to pay hidden discretionary commissions to car dealers without the knowledge of the borrower and which stirred up a hornet’s nest of concerns over possible large scale compensation payments, with some numbers being bandied about being as high as £3bn. These concerns prompted a 20% sharp decline in the share price 6-month lows of 52.5p, with the Supreme Court appeal hearing due to rule next month. Since then, we’ve seen a slow recovery in the share price in the belief that any worst-case scenario is likely to be mitigated, while car financing concerns aside, the underlying business is performing well. Q3 statutory profits after tax fell to £1.3bn, due to lower margins from a year ago, prompting a modest decline in net income to £4.34bn, from £4.5bn, although the profit number was still the best quarter since the same quarter last year. Lloyds saw growth in both loans and deposits, with a £4.6bn increase in both underlying loans and advances to customers over the quarter to £457bn, while loans and deposits also rose by £1bn to £475.7bn. This week’s full year numbers are expected to point to a resilient and profitable bank, however with the UK economic outlook looking gloomy expect any forecasts for 2025 to reflect that. Nonetheless with the share price near to a 4-year high, the barrier for a move towards its December 2019 peaks near 70p remains a large one.       

9) Walmart Q4 25 – 20/02 – if US retail sales are any indication of consumer spending patterns then Walmart generally tends to do well. Not for nothing are Walmart the USA’s number 1 retailer, with expectations high for another strong quarter. In Q3 they once again beat expectations on both revenues and profits. A 5.5% increase in revenues to $169.6bn and earnings per share of 58c a share a13.7% increase on the same period last year, following on from a strong Q2. They also raised their Q4 guidance back in November saying they expect net sales to rise between 4.8% and 5.1%, up from 3.75% to 4.75. With the shares already at record highs the bar is high for a bumper Q4 in the lead up to Thanksgiving and the Christmas period. Net sales last fiscal year came in at $642.6bn. Walmart also raised its annual profits guidance to between $2.42 and $2.47 from $2.35 to $2.43, although for 2025 they warned that any tariffs could have the potential to harm its margins and add to cost of living pressures. Profits are expected to come in at 64c a share.

10) Rivian Q4 24 – 20/02 while Tesla is undoubtedly the leader when it comes to electric car sales Rivian also appears to be finding its feet as it gets its production capabilities up to speed. Having IPOd with great fanfare back in 2021 at an eye wateringly ridiculous share price of $78, the shares are now trading at a much’’ more realistic $12, having been as high as $179 at one point. Back in November it was hoped that the electric car maker would be able to build another 10,250, and 12,250 vehicles in order to hit its lowered annual vehicle production target of between 47k and 49k. Q3 revenue came in at $874m, a 35% drop from the same quarter last year, largely due to supply chain issues, as well as last year being boosted by van deliveries for Amazon. The company is still losing money on a per vehicle basis, although at a much lower rate than was the case 2 years ago. The losses have been reduced from $139k per vehicle to $39k per vehicle. Deliveries guidance for 2024 is between 50k and 52k, so it will be interesting to see if they’ve met that. At the end of Q3 Rivian had $6.7bn in cash and the hope is that its deal with Volkswagen will deliver improvements across the board when it comes to lowering costs, and improving production capability, as it looks to pare its losses. Q4 loss is expected to be 65c a share.