The week ahead: Federal reserve, Bank of England, ECB and Ocado results

Federal Reserve meeting – 15/12 – after the Federal Reserve announced that it would start tapering its bond-buying program starting in November, the debate swiftly moved on to whether they needed to go faster. The recent Fed minutes showed that there are a few officials who are becoming increasingly anxious about rising prices and their effect on the US economy. Unsurprisingly the pace of the taper was a topic for discussion, with some participants wanting a faster taper than the current $10bn in US treasuries and $5bn in mortgage-backed securities. This shift was also being vocalized from previously dovish voices as well, with Mary Daly of the San Francisco Fed saying she was open to accelerating the pace of the taper program in comments last month. Given this notable shift and Jay Powell’s reappointment as Fed chair for another 4 years, the tone from the US central bank has become a lot more hawkish in recent weeks. Powell’s sudden shift when he gave his testimony on Capitol Hill and his decision to retire the word “transitory” while symbolic was also notable in that the FOMC seems keen to move faster on tapering to give themselves optionality when it comes to rating hikes next year, with two rate rises already priced in. This could become more pressing if inflation continues to remain sticky, with the Omicron variant potentially exacerbating the problems being faced when it comes to high prices. The US economy still looks in decent shape so it wouldn’t be a surprise to see the taper increase to $30bn a month when the Fed meets this week, however, Friday’s hot inflation number of 6.8% could prompt a faster taper and a larger uplift above what is expected, with a number closer to $40bn. It’s not as if the Fed won’t be afraid to act just before Christmas, in 2015 they hiked rates just before Christmas having guided they would in the weeks leading up to the decision.

ECB rate meeting – 16/12 – given the problems seen in Europe with the prevalence of the Delta variant, the last thing the continent needed was the emergence of the Omicron strain. With travel and other restrictions being imposed in the lead up to Christmas, and governments talking about mandated vaccination programs there is concern that any recovery is likely to be subdued against a backdrop of rapidly rising prices. EU CPI in Europe hit a record high earlier this month, coming in at 4.9% for November, with core prices jumping to 2.6% from 2%. The sharp rise in prices is starting to become a huge credibility issue for the ECB, with President Christine Lagarde insistent that there would be no rate hikes next year and that it was still believed that current inflation levels are transitory. That sort of thinking seems completely at odds to what is happening in supply chains in Spain, Italy and Germany where factory gate prices are rising at over 20% on an annualized basis. The ECB is still expected to end its PEPP program at the end of March next year, while its other program the APP of €20bn a month looks set to continue. As far as this week’s meeting is concerned the ECB is unlikely to deliver anything in the way of a surprise, though we could see much louder noises from the hawks on the governing council. The ECB will still have to raise its inflation forecasts given the recent sharp jump in CPI, while it might have to tweak its GDP forecasts for 2021 down.

Bank of England meeting– 16/12 – it’s hard to absolutely definitive when it comes to this week’s Bank of England meeting, after the shambles of November, which saw MPC members bottle the decision to nudge the base rate up from 0.1% to 0.25%. The post-meeting messaging in the wake of the 7-2 decision to keep rates on hold was a communications disaster. Governor Andrew Bailey said that the decision was a close call, which didn’t exactly square with the arithmetic of the decision. It wasn’t so much the decision to hold rates that were the issue for markets, rather the messaging leading up to it which suggested that we’d see a rate increase. The argument that the MPC wanted to see more data was a credible one, however, given the direction of travel when it came to recent employment and prices data it wouldn’t have been a big leap of faith to suggest that we wouldn’t see further improvements in the labor market and further upward pressure on prices. As it turns out that’s exactly what we have seen, and under normal circumstances, one would therefore expect the Bank of England to act this week and nudge the base rate higher. The emergence of Omicron however appears to have thrown this into doubt, after Michael Saunders, who voted for a hike in November, appeared to express reservations about acting this week, and perhaps waiting until February when the picture is clearer. There is a certain logic to that approach, but given what we know about Omicron, and the fact it doesn’t appear to be as deadly as Delta would suggest that there is room for the central bank to look past it. For a start, there will always be new variants, and the underlying economic picture in the longer term hasn’t changed. In fact, the risk is that any delay in raising rates could exacerbate an inflation shock further out, now that workers are pushing for higher wages, a fact Saunders did acknowledge in his recent comments. This week’s unemployment and inflation data are likely to heap further pressure on the central bank to act, however with the implementation of tighter restrictions at the end of last week, the prospect of a move this week is now vanishingly small given the current uncertainty, with the consensus now set for a February move. With the benefit of hindsight, it now looks like the decision not to move in November was a significant missed opportunity for the bank. We know it’s possible to raise rates without causing too much anxiety in markets as the recent decision to hike by the RBNZ showed. Over the years the Bank of England has always managed to find a reason not to make the difficult decisions, whether it be under the previous incumbent, or now, under Governor Andrew Bailey. This indecision rather begs the question as to what we pay these people for if all they ever do is sit on their hands.

UK Unemployment/CPI (Oct/Nov) – 14/12 and 15/12 – If Bank of England governor Andrew Bailey was serious when he said he was looking at UK labor market data for clues as to whether to raise rates, then last month’s unemployment data gave him fewer excuses not to act with a modest rate increase this week. The ILO unemployment measure for the three months to September slipped back to 4.3%, with the monthly September figure falling to 3.9%, while vacancies rose to a new record of 1.17m for the three months to October, a rise of 64k. Coming on top of his uneasiness about higher inflation, this week’s unemployment and inflation data should be the cherry on the top when it comes to a rate hike on Thursday. With UK CPI inflation already well above 4%, and set to go higher on Wednesday, and RPI at 30-year highs above 6% the procrastination on the party of MPC is embarrassing. With recent events around the Omicron variant adding to the uncertainty, there is no guarantee that another decent set of unemployment numbers, and another rise in headline CPI, will tee us up for a Thursday rate increase. Expectations are for ILO unemployment to fall further to 4.2%, while CPI is expected to rise to 4.7%. Under normal circumstances this would trigger some sort of response, from the central bank, however with the implementation of tighter restrictions at the end of last week, it’s now quite likely the Bank of England will wait until February.

Ocado Q4 21 – 14/12 – having seen some decent share price gains in 2020, Ocado shares have struggled year to date. There is no doubt the company has made great strides in boosting capacity, very much to the detriment of returning a profit, and has also made some great deals, with the deal with Marks and Spencer the most notable, and which has been running for over a year now. In Q3 revenue for the retail unit fell 10.6%, compared to the big pandemic induced jump of 54% we saw in the same quarter last year, although customer orders have continued to rise, with orders per week increasing by 22%, although the average basket size remained steady at £124. Q3 was also impacted by the fire at the Erith fulfillment center in mid-August, and which saw revenues fall by 19% in the weeks afterward due to the loss of capacity, and which is estimated to cost the business around £35m in revenue. On the plus side increased capacity at Hatfield and Dordon, the reopening of the Andover facility, and the new center at Purfleet has helped mitigate the problems at Erith, although operating losses due to the fire have been estimated to be around £10m. Operating costs have also been rising as a result of higher wages and which look set to add another £5m to the cost base, which will inevitably hit full-year EBITDA. Revenues for Q3 came in at £517.5m, which when added to the £1.3bn in revenues in H1 still puts Ocado on course to beat last year’s total revenue number of £2.3bn, especially with the addition of Purfleet and Andover, while the expected return to normal of the Erith center in November should also help. Ocado has said it remains optimistic of sustaining revenue growth, with the addition of extra capacity at Bicester, and another new facility in Luton expected to boost delivery capacity to 700k orders per week. The company has also been the subject of bid chatter, with speculation that Marks and Spencer might look at making a bid for the business.

Purplebricks H1 22 – 14/12 – when Purplebricks updated the market back in November its shares plunged after it reported a sharp slowdown in business activity, with the company issuing a profits warning which sent the shares lower by over 30%. Management also warned that trading conditions for H1 had been more challenging with new instructions down 23% from the same period last year, with the expiry of the various housing market tax breaks acting as a brake on supply. Consequently, instructions for the six-month period are expected to fall to 22k, down from over 35k a year ago. The company's cash position is also lower, at £58m, down from £75.8m a year ago. Full-year EBITDA for the year was also revised down. Since then, the business has been in the headlines for all the wrong reasons. It is facing legal challenges from some of its agents over changes made as part of the company restructuring brought in by CEO Vic Darvey. Its lettings business is also under scrutiny on reports some of its clients are facing the risks of fines after an IT error meant that tenancy deposits weren’t registered with the government-approved deposit protection scheme, leaving landlords liable for possible fines. The shares are still above the record lows of March 2020, however any more bad news from this week’s H1 update could well see these levels retested.

FedEx Q2 22 - 16/12 – parcels and logistics companies are generally good bellwethers of an economy, and FedEx isn’t an exception when it comes to the US economy, however, the shares have been in decline since the record highs set in May. The company has been a key cog in the US government's vaccination program, as it ships doses of the vaccine across the country, and which has helped it boost its revenues, during 2021. There was an expectation in Q1 that the business would be able to match its Q4 revenue of $22.6bn, which had been an increase of 30% on the previous year, with FedEx Express making 50% of that quarterly revenue number at $11.3bn, an increase of 32% from the previous year, as operating income rose to $737m. All good so far, however like a lot of businesses FedEx has had to cope with higher costs and staff shortages and in their Q1 numbers, these concerns came home to roost. In September the company announced it was raising prices to help maintain its margins to offset some of this, and this was subsequently followed by a profits warning when the company announced its Q1 numbers a few days later. In Q1 profits fell back to $4.37c, missing expectations of $5 a share, although revenues came in above expectations at $22bn. The company also cut its full-year outlook even as it predicted that revenue would surpass $90bn this year, sending the shares sharply lower eventually hitting one-year lows in October. A rise in costs of $800m from a year ago is the key pressure point with worker shortages and having to pay staff extra for weekend shifts appears to be part and parcel of the pressure on margins. This week’s Q2 numbers are expected to see profits come in at $4.24c a share.

Darden Restaurants Q2 22 – 17/12 – like most popular restaurant chains the owner of the ubiquitous Olive Garden and Longhorn restaurant chains has been able to offset the effect of a lot of the shutdown periods by offering a takeaway service to its clients. To cut costs the company embarked on a $35m restructuring program because of the lower footfall that is expected to be the norm going forward, as it looks to reduce its debt load. The restaurant chain also managed to shrug off the effects of higher costs in its recent Q1 numbers, reporting profits of $1.76c a share, posting sales of $2.31bn, a huge jump from $1.53bn a year ago. Darden says it expects to see higher full-year profits of $7.45c a share, while full-year sales are expected to come in at $9.5bn, which is a lot of breadsticks and pasta. Profits for Q2 are expected to come in at $1.46c a share.