The Week Ahead: US core PCE, UK mortgage approvals; ABF, Nike results

Much of this week’s focus will be on the US Federal Reserve’s preferred measure of inflation, core personal consumption expenditure (PCE), which should offer insight into whether the central bank’s hawkish view on interest rates is justified. Closer to home, UK mortgage approvals for May will be closely watched, after April’s figure dropped back under 50,000 following a pickup in March. We also have final Q1 GDP readings from both the US and UK. 

On the earnings front, Primark owner Associated British Foods releases its Q3 numbers on Monday, and will be hoping to follow Next’s lead, after the clothing retailer’s recent profit upgrade following a strong spring season. Over the Atlantic, look out for updates from cruise liner Carnival, Walgreens Boots Alliance and Nike. The latest US banks‘ stress test results are also timely, following the regional banking meltdown in March. 

Our top three economic and company events are: 

1. US core PCE deflator (May) – Friday

The core PCE deflator data could go some way to pouring further cold water on the Federal Reserve’s claims that it has another two rate rises in its locker. A couple of weeks ago the US central bank warned that while it had taken the decision to implement a rate increase pause, it still felt that the inflation risk was skewed to the upside, and that the market should prepare itself for a terminal rate of 5.6%. This was a little unexpected given the direction of travel over the past few months.

When the core PCE deflator figures were released in April, headline inflation edged up from 4.6% to 4.7%, while the deflator itself pushed up to 4.4% from 4.2%, begging the question as to whether central bank officials are right to be cautious. Friday’s core PCE and personal spending numbers ought to offer markets additional insight as to whether these concerns are valid, or whether the Fed’s recent hawkishness is justified. 

2. UK mortgage approvals (May) – Thursday

Since the start of the year there’s been a modest improvement in mortgage approvals, after they hit a low of 39,600 in January. The slowdown towards the end of last year was due to the sharp rise in interest rates, which weighed on demand for property as well as house prices. As energy prices have come down, along with lower mortgage rates, demand for mortgages picked up again, with March approvals rising to 51,500, before slipping back to 48,700 in April. This could be as good as it gets for a while, with the renewed increase in gilt yields over the past few weeks prompting weaker demand for new borrowing. Net consumer credit has also started to improve after similar weakness. 

Although inflationary pressures are starting to subside, the increase in wages is prompting concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty, consumer credit numbers could well increase further, while net lending may decline further, after April lending fell by -£1.4bn, the weakest number since July 2021. 

3. Associated British Foods Q3 – Monday 

The recovery in the Associated British Foods share price since 10-year lows in October appears to have ground to a halt, having hit 15-month highs in April, just before the release of its half-year results. H1 group revenue rose by 21% to £9.56bn, while adjusted profit before tax came in at £667m. Sales across all ABF businesses were higher from the previous year, partly due to higher prices, while its Primark has seen an expansion in the US perform particularly well. 

The company is also hoping to expand its new UK click-and-collect scheme. Primark sales rose 19% to £4.23bn, while margins came in at 8.3%. Food business revenue rose to £5.33bn, up 23%, with the ingredients business posting strong profit growth. 

On the outlook, management warned that input costs are a priority, even as some have started to reduce, saying they expect adjusted operating profit in the food business to be ahead of last year. On Primark, management expressed concern about consumer spending holding up in the face of rising interest rates, and the higher cost of living. The margin in the second half is still expected to in line with the first six months, at 8.3%, while annual adjusted operating profit is expected to be in line with last year  

More key events

Our calendar of selected upcoming economic and company announcements:

MONDAY 26 JUNE

Carnival Corp Q2 results

The travel and leisure sector has been one of the hardest hit from the Covid-19 shutdowns, and the journey back for the cruise ship sector has taken longer than most, with the industry still struggling to turn a profit, even as revenue start to return to pre-Covid levels. For Carnival, the journey has been a long one, given that in the first year of lockdowns annual revenue fell from $20.8bn in 2019 to a mere $1.9bn in 2021, with the industry undergoing a near death experience. Last year the company managed to turnover $12.17bn in revenue, with management optimistic that the new fiscal year would see a return to normal for the first time in four years. In Q1, revenue came in at $4.43bn as losses narrowed to -$690m, against a forecast of -$759.7m. 

On the outlook, management said cruises are well booked for the remainder of the year at higher prices, however, the higher cost of fuel and other costs is acting as a headwind. On annual EBITDA, Carnival expects a figure of around $4bn, which includes a $500m impact from higher fuel prices. For Q2, revenue is expected to come in at $4.75bn, while losses are expected to come in at -$0.35 a share. Annual revenue is expected to exceed pre-Covid-19 levels this year. On the downside, while total operating expenses are only forecast to rise modestly from $12.9bn to $13.8bn, interest expenses have surged from $206m in 2019, to over $2bn. 

TUESDAY 27 JUNE

Walgreens Boots Alliance Q3 results

Walgreens' share price has performed poorly year to date, with the shares down over 10%. When the company reported in Q2, revenue slid by 3% to $34.9bn, although profit came in above expectations at $1.16 a share. In Q1 the company also posted profit of $1.16 a share, however this was wiped out by a $5.2bn provision in relation to opioid litigation after several US states alleged the retailer mishandled prescriptions by overprescribing. 

Walgreens has found that its business has suffered through a decline in footfall since the pandemic, a situation it has struggled to adapt to. It has invested into the provision of primary healthcare, paying $3.5bn towards the acquisition of Summit Health, by VillageMD, putting it near the top of the pack in primary care provision. Walgreens reaffirmed its full-year earnings forecast of mid-$4.55 a share, with Q3 profit expected to come in at $1.08 a share on revenue of $34.15bn. 

WEDNESDAY 28 JUNE

US bank stress test results 

These stress tests couldn’t be timelier given the meltdown in the US regional banking sector in March. In February, the US central bank released its criteria which included a severe recession, with stress in commercial and residential real-estate markets, as well as corporate debt. One of the main criticisms of these tests was a lack of a scenario that factored in a sharp rise in interest rates, which brought down Silicon Valley Bank as well as First Republic. Also, US regional banks were not covered under the stress-test scenario as they were considered too small and not systemically important enough. 

As recent experience in Europe and particularly Spain has taught us, where a large cohort of Spanish cajas (savings banks) nearly brought the economy to its knees, and resulted in a banking bailout. Just because a bank is small doesn’t mean it won’t cause a financial meltdown if its troubles spread. The problems in US regional banks were well known at the time, however, there appears to have been a serial underestimation of the risks that a sharp rise in rates would have on some of the smaller parts of the US banking sector, none of which are covered by this week’s stress test results. 

THURSDAY 29 JUNE 

Nike Q4 results

In February, Nike shares hit their highest level in 10 months, but have slipped back since then, despite a significant pick-up in their Greater China business. When they reported in Q3, revenue came in at $12.39bn, well above forecasts, however a bigger-than-expected build up in inventory served to drag on margins, which fell more than forecast to 43.3%. Inventory levels were 16% higher compared with last year at $8.9bn, while their forecasts for Q4 were also relatively conservative, with an expectation of flat to low single digit revenue growth. 

Given the lacklustre nature of recent Chinese consumer spending, even these forecasts could miss expectations, while Nike sales may have also taken a hit due to recent publicity over its new brand ambassador Dylan Mulvaney, and the company’s recent advertising campaign. Q4 revenue is expected to come in at $12.57bn, pushing annual revenue to a record $50.9bn, with direct-to-consumer revenue expected to rise to $21bn. Annual gross margins are expected to slip back to 43.5%, with Q4 profit expected to come in at $0.66 a share.  

US Q1 GDP (final) 

The first iteration of US Q1 GDP was disappointing, with the economy growing more slowly than anticipated at 1.1%, largely due to a bigger-than-expected scaling down in inventories. This was subsequently revised up to 1.3%, helped by an upward revision to 3.8% in personal consumption, which was a strong rebound from 1% in Q4, as US consumers went out on a new year splurge. 

Slightly more concerning was a rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We’re not expecting to see much of a change in this week’s revisions, although the headline number might get revised up to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. 

FRIDAY 30 JUNE 

UK Q1 GDP (final) 

In the recent interim Q1 GDP data, the UK economy managed to avoid a contraction after posting growth of 0.1%, although it was touch and go after a disappointing economic performance in March, where a monthly contraction of -0.3% acted as a drag. 

The reason for the poor performance in March was due to public sector strike action from healthcare and transport, which weighed heavily on the services sector, leading to a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity, which rebounded strongly to 0.7%. 

There is a risk that this modest expansion could get revised away, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile. 

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SELECTED COMPANY RESULTS

Note: While we check all dates carefully to ensure that they are correct at the time of writing, company announcements are subject to change.

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