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The Week Ahead: US FOMC minutes, UK GDP; Ocado, Sainsbury's results

Read our pick of the top stories to look out for this week (5-9 July), and view our key company earnings schedule.
 

European services PMIs (June)

Monday: The gradual easing of restrictions has made itself felt in the PMI and ISM reports over the past two months, albeit with some exceptions. The UK and US have seen the punchiest numbers in terms of an economic rebound, and although there was a slowdown in the recent flash PMI data, the fall was from very elevated levels. The French and German numbers are also now starting to show signs of rising economic activity as restrictions are eased, which in turn should help Italy and Spain, which, due to their bigger reliance on tourism, have remained behind. This is likely to continue unless travel restrictions are eased further. 

One of the main takeaways from previous reports has been sharp rises in prices paid or input costs, which don’t appear to be completely being passed on. Employment components have also seen a recovery as well, although business activity in Europe has been more subdued, due to higher infection rates. Spain services had a decent improvement in May, rising to 59.4, and should climb further to 59.5. Italy has lagged behind, rising to 53.1 in May, the first expansion since July last year, and only the second expansion since February 2020. Germany and France have been much more positive with France services activity expected to rise to 57.4, and Germany expected to come in at 58.1.

UK services PMI (June)

Monday: In May, the reopening of the UK economy built on the resilience in the April numbers, as optimism rose over a Q2 economic rebound. May’s composite PMI hit a record high, while prices paid also surged, showing that while prices are looking a little on the hot side, they aren’t acting as a brake on the reopening trade. Subsequent data has shown us that price pressures have continued to remain elevated, with services PMI hitting a 24-year peak in May. The recent flash numbers two weeks ago showed that June activity had subsided somewhat, however it remains robust.

The biggest worry remains around inflation, and an element of cost-push inflation. Demand for jobs appears to be less of a problem, with labour shortages in some areas seeing firms being encouraged to take on extra staff at a rate not seen in over three-and-a-half years. Optimism is high, with the only question being whether what we are seeing is sustainable. The June figures will be weaker than May's, largely as a consequence of the extension of some restrictions into July prompting a bit of a drop off, with the flash number declining to 61.7. 

Sainsbury’s Q1 results

Tuesday: Grocery retail has been one sector of the UK economy that has underperformed as a result of the pandemic, despite being able to adapt fairly well to the changing supply and demand challenges of UK consumers' shopping habits in the last 15 months. This underperformance appears to have been as a consequence of much higher costs incurred to the upscaling of delivery costs, as well as safeguarding measures for staff, which has raised costs and cut into profits. While a valid concern, these costs are likely to diminish in line with the easing of lockdown restrictions. 

Nonetheless the value in UK grocery retail appears to have caught the attention of private equity firms, with the recent bid for Morrisons by US buyout firm Clayton Dubilier and Rice, which has also prompted speculation about Sainsbury's being subject to a similar bid. Over the years, Sainsbury's has been no stranger to buyout speculation, with Czech billionaire Daniel Kretinsky increasing his stake in the business over the past few months. A few years ago, there was also speculation about the Qatar Investment Authority, who are currently the biggest institutional shareholder with a 15% holding, and who were supportive of the failed Asda deal. 

Back in April, Sainsbury's slumped to a £280m loss-after-tax, despite an increase in group revenues to just over £29bn. Underlying profit-before-tax fell to £356m, a 39% decline from £586m in 2019. Sainsbury's was more optimistic about the outlook, stating it expects to see profit in 2021 to come in above pre-pandemic levels, at £620m. Tuesday’s Q1 update will tell us a great deal as to whether this optimism is justified. 

Ocado half-year results

Tuesday: At the start of February, Ocado’s share price almost put it within touching distance of Tesco, the UK’s number one food retailer, despite full-year revenues that were a mere fraction of Tesco's at £2.33bn. Since then, the shares have undergone a bit of a reassessment, falling around 30%. The declines appear to have coincided with the expectation of the easing of restrictions and steady reopening of the UK economy.

Ocado has continued to invest in its automation technology, paying a combined £287m to acquire Kindred Systems and Haddington Dynamics at the end of last year; both companies that specialise in robotics manufacture. These types of deal and capex are part of the company’s strategy to streamline the picking functions in its automated fulfilment centres, to improve efficiencies across the business. In April, Ocado took this further, investing £10m into Oxbotica, a company that specialises in software for driverless vehicles, which would be used in and around its warehouses and distribution sites. 

This investment in new technology is key to Ocado’s desire to optimise its growth potential, as it continues to sign new deals. The main concern for shareholders is the gap between its current valuation and its prospects for future revenue growth. However, given recent declines in the share price, this is less of a problem than it was in February.

US FOMC minutes

Wednesday: The last US Federal Reserve meeting caused quite a few ripples, initially pushing yields higher across the curve, and sending equity markets tumbling. This proved to be somewhat short-lived, but the comments the day after from St Louis Fed president James Bullard clearly spooked a few people, as he made the case for a rate rise in 2022, much sooner than by the end of 2023. 

While it’s easy to dismiss Bullard’s comments as he’s not a voting member this year, he will be next year, and as such his vote will count. This intervention appeared to muddy the message further as to when the Fed will move in response to inflation concerns. It fell to Fed chair Jay Powell and the New York Fed’s John Williams to put out fires by saying that while inflation was likely to increase further and is a little higher than expected, policymakers still feel it will be largely transitory and that their main focus is the labour market, where the participation rate has shown little signs of rebounding.

Wednesday’s minutes will give us a clearer insight into the discussions that prompted the moving of the dots, as well as the committee's concerns about possible hysteresis in the labour market. 

Levi Strauss Q2 results

Wednesday: The last two quarters have seen a familiar narrative for Levi Strauss, with decent digital sales, while store traffic struggled as people stayed at home. In Q1 the company reported a double-digit sales decline due to the various store closures across Europe. Despite the weak quarter, the company still managed to beat expectations on both revenue and profit, with $1.31bn in revenue and profit of $0.34 a share. Management was more bullish about the outlook for the first half of the year, largely predicated on restrictions being eased as the weather warmed up and more people get vaccinated. For the first half of the year, sales are expected to grow 25%, with earnings expected to come in at $0.42 a share, which would equate to a $0.08 a share profit for Q2.

Persimmon Q2 results 

Thursday: In April, Persimmon said it had made a strong start to the year, with forward sales 23% ahead of last year at £3bn, ahead of the same period in 2019, before the pandemic. Average selling prices for orders was £252,000, ahead of £244,500 at the same period last year, with the board pledging to pay two dividends of 55p each later this year, one in August and the other in December 2021. Thursday's Q2 update should tell us whether that August dividend is on track. 

In terms of the outlook, Persimmon says it expects new home completion volumes this year to match levels seen back in 2019, and given the level of demand in the housing market, you wouldn’t bet against it, particularly since outside city centres, prices have been rising much faster as more people look for properties with more space. Since those Q1 numbers the shares have slipped back from their recent peaks, with the whole sector underperforming. In the most recent Halifax house price survey, UK prices rose on an annualised basis by 9.5%, while month-on-month prices rose 1.5%, pushing average prices up to £261,743.

UK GDP (May)

Friday: Having seen Q1 GDP confirmed at -1.5% last week, the monthly GDP numbers have shown how the UK economy has been playing catchup after a poor start to the year, as the January lockdown and the Brexit transition period came to an end. Starting with a -2.9% contraction, we’ve seen a slow and steady pickup to economic activity with a 0.4% rebound in February followed by 2.1% in March and then a 2.3% expansion in April, as the first set of restrictions were eased. With the May unlocking proceeding as expected and with services PMI hitting a 24-year high, the latest monthly GDP for May could show another decent jump in economic activity, as the UK economy continues to accelerate out of the traps and into the summer.

UK industrial manufacturing production (May)

Friday: When we look at the recent PMI activity in this sector, you could be forgiven for thinking that the ONS numbers would be equally as robust. This isn’t always the case given that the PMIs don’t cover all the manufacturing sector. It also helps explain why in April we saw big declines in both manufacturing and industrial production of -0.3% and -1.3% respectively, largely as a result of plant closures and a slip in mining and quarrying, while manufacturing slowed due to weakness in the pharmaceuticals sector. 

Construction activity also slowed, falling 2%, though this needs to be put into the context of a big 5.8% rise in March. Despite this weakness, May's data is expected to be much better with gains likely for both, with industry surveys showing output at record levels.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule.

Selected company results

Monday 5 July Results
Porvair (UK) Full-year
Tuesday 6 July Results
Ilika (UK) Full-year
Ocado (UK) Half-year
Pure Cycle (US) Q3
Purplebricks (UK) Full-year
Sainsbury's (UK) Q1
SMART Global Holdings (US) Q3
Wednesday 7 July Results
MSC Industrial Direct (US) Q3
Redde Northgate (UK) Full-year
WD-40 (US) Q3
Thursday 8 July Results
Accolade (US) Q1
Duck Creek Technologies (US) Q3
Helen of Troy (US) Q1
Jet2 (UK) Full-year
Levi Strauss (US) Q2
Persimmon (UK) Q2
PriceSmart (US) Q3
Superdry (UK) Full-year
Watches of Switzerland (UK) Full-year
Friday 9 July Results
AZZ (US) Q1

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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