The Week Ahead: ECB rate meeting; US CPI; Arm IPO; Apple event

Here's our pick of the top three economic and company events in the week commencing Monday, 11 September 2023:

Apple “Wonderlust” event

Tue 12 Sep: Every year at about this time Apple sets out its stall, launching new products and upgrades ahead of the last three months of the year, typically the tech giant’s strongest quarter. As usual, there has been a lot of speculation ahead of this year’s event, titled “Wonderlust”, with many commentators expecting Apple to unveil several new devices, including the iPhone 15, Apple Watch Series 9 and the latest iPad. While the new iPhone will probably grab the headlines, the main upgrades are likely to be confined to the chipsets and camera. Besides that, the new USB-C charging connector is likely to replace the old lightning connector, in line with recent EU legislation that adopted USB-C as a common charging standard. There may also be an update on the Vision Pro headset that was unveiled in June. Despite a slowdown in smartphone sales this year, Apple’s shares have outperformed rival tech stocks, rising more than 45% year to date. 

Arm IPO 

Wed 13 Sep: Arm Holding’s initial public offering “roadshow”, which began on 5 September and has seen the company pitch its IPO to potential investors, is expected to lead into the UK chip designer’s floatation on the Nasdaq this week. Pricing is set to be determined on 13 September, with trading set to start the next day. It will be interesting to see how the listing plays out, with owner SoftBank’s roughly $50bn valuation of Arm set to test investor appetite for IPOs at a time when sentiment remains cautious following recent interest rate rises.

Cambridge-based Arm plans to price its IPO at between $47 and $51 a share, which would raise up to $4.9bn and value the business at up to $52bn. This is a lower valuation than had previously been predicted, with some forecasts having estimated a valuation of up to $70bn. The lower list price suggests that SoftBank harbours some doubt as to whether there will be sufficient interest in a company that faces significant near-term challenges, particularly with respect to its China business which accounts for about 25% of revenue.

In the quarter to 30 June, Arm’s total net sales declined 10.8% to $641m, with most of the drop attributed to a 19.3% fall in royalty revenue. Sales slowed because Arm generates a lot of its revenue from licensing its IP, and sales of mobile phones and other electronic devices have decreased. With artificial intelligence playing a greater role in the strategically important chip sector, Arm is looking to develop new chipsets that use machine learning. Earlier this year it introduced two new products – a CPU called Cortex-4 and a GPU called G720 which uses 22% less memory bandwidth than the chip it is replacing, as well as offering better performance. As a fully functioning business Arm should do well when it comes to generating cashflow. The bigger question surrounds market appetite for a company that has reported falling revenue at a time when stock markets look toppy. Investors will certainly want a piece of a business that could grow its revenue quickly as the enthusiasm for AI increases. But the price has to be right – investors won’t want to pay an arm and a leg.

ECB interest rate meeting

Thu 14 Sep: The European Central Bank’s governing council is likely to remain split on the question of whether to raise interest rates this month. Bundesbank president Joachim Nagel insists that further rate rises are needed to combat German inflation of 6.4%, rebutting those who argue that the German economy is on its knees. Belgium’s national bank governor Pierre Wunsch also sees a need for further rate hikes, while on the other side of the debate more dovish members of the council, like Greece’s Yannis Stournaras and Italy’s Ignazio Visco, push for restraint. ECB president Christine Lagarde’s comments at the July press conference were particularly telling as she undermined the central message of keeping all options open and acting on the data by suggesting that she doesn’t think the ECB needs to lift rates even higher. Since those comments, economic data from the eurozone has been disappointing, with the picture in Germany looking even worse. With PPI still in negative territory, recent figures beg the question: are further hikes needed? If the ECB votes to keep rates unchanged, it is likely to be spun as a pause rather than a full stop. That might be a tricky message to sell.

Here's our pick of the rest of the week's major economic and company events:

UK average earnings, unemployment (July)

Tue 12 Sep: There was some rather unwelcome news for the Bank of England when wage data for June was released last month. Average weekly earnings excluding bonuses for the three months to June rose by a record 7.8%, while for the three months to May growth was revised up to 7.5%. When bonuses were included, earnings increased by 8.2%, in the process pushing well above core CPI inflation. The jump to 8.2% was primarily due to NHS staff’s bonus one-off payments in June. The rise in wages saw public sector pay rise by 6.2%, while private sector pay rose 8.2% for the three months to June. On the broader employment picture there was a 97,000 increase in payrolled employees in July. The overall UK employment rate fell back to 75.7% and is still 0.8% below its pre-pandemic peak, with the economic activity rate also falling slightly to 20.9% on the quarter. Total hours worked also declined, while unemployment rose to its highest level since October 2021 at 4.2%. The Bank of England must navigate a tricky outlook. Pay growth is likely to remain sticky for some months, even though inflation is starting to slow. The Bank also needs to be mindful of the fact that the 14 rate rises already implemented in this cycle have yet to make themselves fully felt. Indeed, that process could take several more months. BoE chief economist Huw Pill has suggested he might consider a pause to monetary tightening in September, which would buy some to assess the economic outlook. Average earnings growth in the three months to July is expected to have remained steady at 7.8%, while the unemployment rate is expected to edge higher to 4.3%.

Associated British Foods Q4 results

Tue 12 Sep: Despite the challenging retail outlook, shares of Primark owner Associated British Foods have performed well this year, climbing 21% year to date. However, the gains have only served to reverse last year’s losses, taking the share price back to where it began 2022. In Q3 ABF upgraded their full-year guidance after announcing Q3 revenue of £4.72bn, with the food business showing resilience across all areas. Total food revenue rose by 18% to £2.7bn, while the Primark business saw revenue rise by 13% to just shy of £2bn, helped by strong performance across all its regions. Like-for-like sales for the quarter rose by 6% in the UK and by 7% in Europe. Total revenue year to date has increased 17% to £14.29bn, with operating profits for the current year expected to come in moderately ahead of last year. 

US CPI (August)

Wed 13 Sep: US consumer prices rose 3.2% in the year to July, up from 3% in June – the first increase in 12 months. CPI had eased every month since peaking at 9.1% in June last year. Meanwhile, core price growth slowed to 4.7% in July, down from 4.8% a month earlier. The uptick in headline CPI was a reminder that the path to 2% is unlikely to be straightforward. Moreover, with producer price inflation also edging higher, there is a growing sense that interest rates are likely to remain higher for longer as the Federal Reserve looks to push inflation back to its mandated target level. Ahead of the Fed’s interest rate meeting later this month, the CPI reading for August could cast doubt over whether a pause is appropriate. Expectations are for headline CPI to rise to 3.5%, though further weakness in core price growth – which is expected to ease to 4.3% – could offset concerns about another rate increase. 

UK GDP (July)

Wed 13 Sep: Earlier this month the Office for National Statistics made a host of revisions to how it calculates UK GDP, effectively revising away criticism that Brexit had severely damaged the UK economy. Not only did the economy not shrink as much as previously thought in 2020, it also rebounded more strongly in 2021, regaining its pre-pandemic size at the end of that year. It also showed the UK recovery was well ahead of Germany’s, meaning that the UK is not at the bottom of the list of G7 nations In fact, the extent of the rebound since 2021 leaves the UK behind only the US and Canada. The ONS also revealed that the services sector drove the rebound in 2021, with food services and hotels leading the way. This sector grew by a staggering 31.3%. This good news means the economy is much larger than a lot of the doomsayers had claimed. Nevertheless, the economy still faces huge near-term challenges. In June the British economy grew 0.5%, driven by services as the hot weather prompted consumers to go out and spend money on travel, hotels and restaurants, as well as other leisure pursuits. The wetter weather in July is likely to have put a dampener on that, although it’s not as if consumers didn’t have other things to do. A full slate of film releases gave the leisure economy a boost as cinemagoers flocked to see Indiana Jones and the Dial of Destiny, Mission Impossible: Dead Reckoning Part One, and – above all – Barbie and Oppenheimer. The start of the school holidays is also likely to have prompted an uptick in leisure activities. However, manufacturing and construction are likely to have lagged. Overall, estimates are for 0% growth in July.        

Adobe Q3 results

Thu 14 Sep: It’s been a solid quarter for Adobe shares, which are now touching their best levels since January 2022. The gains were driven by a solid set of numbers in Q2, followed by optimism that the AI side of the business could help power the shares up by another 25% towards $660. In Q2 the company reported a 9.8% rise in revenue to $4.82bn, while profit came in at $3.91 a share. For Q3 the company said it expects to see revenue of $4.83bn to $4.87bn and profit of between $3.95 and $4 a share, driven by growth in its AI products. On an annual basis, Adobe expects revenue of between $19.25bn and $19.35bn, and a profit of $15.70 a share.

China retail sales (August)

Fri 15 Sep: Chinese retail sales have struggled to match April’s 18.4% growth. Since that solid gain, growth has faded, despite the weak year-ago comparatives when the economy was restricted by Covid lockdowns. Hopes of a recovery in spending were dashed by the release of a poor set of numbers for July, which showed that retail sales increased just 2.5% year-on-year, versus expectations of a 4% increase. Industrial production also came up short, rising 3.7% instead of the 4.3% expected. In a sign that China’s economy is slowing more sharply than the government might like to admit, the statistics bureau stopped reporting figures for youth unemployment, which has risen sharply in recent months. Unemployment among the 16-24 cohort reached 21.3% in June. Was the omission a one-off or will these stats continue to be withheld? Time will tell. Ahead of the release of the August figures, the government has engaged in some minor policy tweaking, including piecemeal rate cuts, in a bit to boost spending. But as the recent August trade numbers showed, demand has remained weak. That said, there is some optimism that we might see an improvement, with retail sales expected to have risen by 2.9% year-on-year in August. Industrial production is expected to have risen by 4.1%.

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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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