The Week Ahead - UK CPI, wages, China Q3 GDP, Whitbread, Tesla and Netflix earnings
|- UK CPI (Sep) – 18/10 – the Bank of England caught a lot of people on the wrong foot when they decided by a narrow majority to keep interest rates unchanged at 5.25% last month. One of the reasons why they decided to call a halt to 14 successive rate rises may well have been the sharp slowdown in core CPI that we saw in data released the day before the announcement. In September, core CPI slowed from 6.9% to 6.2% while headline CPI slipped to 6.7% when most people had been expecting an increase. One of the major leading indicators in recent months for a slowdown in inflation has been the sharp slowdowns being seen in the headline PPI numbers since the start of the year. These have been in negative territory for both input and output prices over the last 2-months, which ought to bode well for further weakness in CPI inflation going forward, although higher fuel prices are likely to keep underlying inflation sticky. This will be a challenge for the Bank of England when they meet in just over two weeks’ time, however with new forecasts due at the November meeting it would be a brave central bank if they decided to resume hiking when the economy continues to look weak.
- UK Wages (Sep) – 17/10 – wages growth is an area that is likely to continue to cause headaches for the Bank of England going forward given that for the last 2 months it’s been trending at a record high of 7.8%, although with the addition of one-off bonuses the actual number has been well above 8%. This ought not to be a problem in the short term given the massive hit to consumer incomes over the past 18-months that has made consumers worse off. It will take some time for the cumulative effect of the rate hikes of the last few months to be felt fully so the Bank of England will have to exercise patience when it comes to seeing how their monetary medicine has been absorbed by the patient. This means that while rates may not need to rise further, they will need to stay higher for longer with little prospect of a rate cut much before the second half of 2024. The latest ILO unemployment figures saw a modest increase from 4.2% to 4.3%. This is expected to remain unchanged in the latest set of numbers.
- China GDP Q3 – 18/10 – there’s been little to no indication that the Chinese economy will see a significant improvement when it reports its Q3 GDP numbers later this week. In Q2 the economy expanded by 0.8% which was slightly higher than the 0.6% expected, and the numbers for Q3 are expected to see a slight improvement to 1%. While there is an enormous amount of scepticism about the accuracy of Chinese economic numbers there is little doubt, given how poor recent trade data has been, that the Chinese economy is being hit by a slowdown in global demand, as well as domestic demand. Industrial production has been steady over the past 3-months averaging just over 4% a month, although retail sales have also struggled. In Q2 we were seeing double digit gains in retail sales, although the comparatives were weak. Q3 has seen retail sales slow sharply, with gains of 2.5% and 4.6% in July and August. September retail sales are expected to remain steady at 4.6%, while recent PMI data has shown that the service sector performance has also been patchy.
- US Retail Sales (Sep) – 17/10 – the US consumer has continued to show remarkable resilience in the second half of this year. After a slow start to the year US retail spending has got stronger as the year has progressed, driven mainly by a strong labour market and low unemployment. The rise in gasoline prices will no doubt cause some slowdown on discretionary spending however both July and August saw resilient levels of retail sales of 0.5% and 0.6%, with this week’s September retail sales figures expected to see a modest slowdown to 0.2%. The recent US consumer credit numbers showed that US consumers pulled back spending quite sharply in September which raises the risk that we might see a downside surprise.
- Whitbread H1 24 – 18/10 – Premier Inn owner Whitbread shares have seen some solid gains so far year to date as the UK business continues to show a strong recovery from the impacts of the Covid pandemic. In June the company reported a 19% increase in total revenue for Q1. The UK performed strongly with total sales growth of 16%, with accommodation seeing an 18% rise, as consumers managed to absorb higher prices. Food and drink sales were also strong with an increase of 10%. The German market also continued to improve with a 124% increase in sales. On the outlook, forward bookings for Q2 have been trending well ahead of last year with management keeping full year guidance unchanged. Since those numbers were released, the shares hit their highest level since February 2020 back in September but have since retreated from those 3-year highs, on the back of concerns that higher inflation will impact the second half of the year. H1 revenues are expected to rise to £1.5bn with revenue per room expected to rise by £7.08p. Occupancy rates in the German business is expected to rise to 68%, while in the UK occupancy rates are at 84%.
- Deliveroo Q3 23 – 19/10 – has seen strong gains so far year to date having spent most of last year flirting with the 80p level. Since March the shares have seen strong gains pushing up to one-year highs in the summer. To try and narrow its losses and focus on moving into profit the company has shifted its focus to improving its revenues rather than focussing on the number of orders. In H1 Deliveroo reported a 5% increase in revenues to just over £1bn, despite a 6% decline in orders. Despite lower orders Deliveroo managed to deliver a 10% improvement in GTV per order to £24.20, while boosting gross profit to £365.1m. Losses narrowed to £82.9m from £153.8m a year ago. Deliveroo also raised its full year adjusted EBITDA guidance from £20-£50m to £60-£80m, with its expansion into grocery likely to continue the positive momentum that has been generated over the past 9 months in terms of revenue growth. Bank of America recently restarted its coverage of Deliveroo with a buy rating and a 151p price target, saying it expects to deliver greater density of orders and further efficiency of fulfilment.
- Goldman Sachs Q3 23 – 17/10 – share price wise, Goldman Sachs hasn’t done well year to date with the shares trading close to their lows of the year. Their Q2 numbers were disappointing with profits falling short of market expectations, even as revenues came in ahead of forecasts at $10.9bn. The shortfall in profits, which fell 58% was partly due to a $584m impairment tied to its GreenSky operation while there was also a $485m in respect of real estate write-downs. CEO David Solomon has come under increasing scrutiny for his stewardship of the bank at a time when Goldmans most important revenue earners of investment banking and trading are struggling, while the venture into retail banking has run into the sand. Fixed income trading revenue fell by 26% in Q2, although equities trading managed to hold its own. Last week Goldman Sachs finally bit the bullet on Green Sky, agreeing a deal to sell it to a private equity group which they said would impact next week’s Q3 numbers by knocking $0.19c a share off its profits. As we look towards this week’s Q3 numbers the recent volatility in bond markets may well have offered a boost, however revenues are still expected to see a decline to $11.3bn while profits are expected to fall to $6.35c a share.
- Bank of America Q3 23 – 18/10 – with the shares at their lowest levels since October 2020 the Bank of America share price has been on a slow slide lower since the bank released its Q2 results back in July. The decline in the share price has come about despite a positive set of Q2 results which saw the bank report a 19% rise in profits to $7.41bn or $0.88c a share. Revenues were also strong, rising 11% to $25.33bn, with the improvement in both being driven by strong gains in net interest income from higher rates. Given this backdrop it is surprising that we’ve seen the share price decline begging the question as to why the shares aren’t performing. Are investors pricing in concern about future earnings or is there something else at play. It’s been notable that we’ve seen notable shareholder sales over the past few months. There are also concerns over unrealised losses on US treasuries on the back of the recent sharp rise in yields. These losses could be as high as $100bn and although this seems high the bank still has high levels of liquidity which suggests that these concerns may be overblown. For Q3 revenues are expected to come in at $25.17bn and profits of $0.82c a share.
- Tesla Q3 23 – 18/10 – when Tesla reported its Q2 numbers back in July the shares fell sharply despite reporting record revenues over the quarter. Q2 revenues came in at $24.93bn, while profits came in at $0.91c a share, however operating margins were lower, slipping back to 9.6%. The declines gathered pace after CEO Elon Musk said that vehicle production was likely to slow in Q3 due to factory shutdowns. There was also little detail on when investors would see the unveiling of the new Cybertruck. Musk kept the full year target of 1.8m vehicle deliveries even as Tesla confirmed that 466,140 cars were delivered during Q2. Earlier this month Tesla confirmed that vehicle deliveries slowed to 435,059, well below forecasts with production downtime at the Shanghai and Austin gigafactories accounting for most of the shortfall. This week’s numbers are once again expected to be focussed on margins as the price war continues. As far as its other businesses are concerned which include energy generation and storage these have seen strong growth over the past 12-months with Q2 seeing at 74% increase in revenue to $1.51bn. Q3 revenues are expected to fall modestly from the numbers seen in Q2 to $24.6bn while profits are expected to come in at $0.77c a share.
- Netflix Q3 23 – 18/10 – in the period leading up to its Q2 numbers Netflix shares hit their highest levels since February 2022, however, have slipped back since then after revenues came in short of expectations at $8.19bn, however profits were much better than expected coming in at $3.29c a share. The crackdown on password sharing doesn’t appear to be hurting subscriber numbers too much so far, where we saw 5.9m new customers during the quarter. Netflix continued its reluctance to break down the revenues for its ad-supported tier, although it did say it had 5m active users so far as it rolls out its crackdown. For Q3 it expects to see revenues of $8.5bn, and that it expects to see a similar rise in new subscribers for Q3. Profits are expected to come in at $3.52c a share or $1.58bn. The streaming industry is also having to contend with the impact of the writers and actors strikes, and while Netflix said it expects to see better cashflow because of the strikes due to not having to pay out as much on new content, any impact from the strike isn’t likely to be felt when it comes to new content until next year. Operating margin is also expected to improve to 22%, with full year operation margin forecast to be between 18-20%.
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