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Weekly outlook

The Week Ahead: Jackson Hole symposium; US PCE inflation; Harbour Energy, Nvidia results

Central bankers and economists gather in Jackson Hole, Wyoming from Thursday to “reassess constraints on the economy and policy”, according to the official blurb. Near the top of the agenda will likely be the question of how much higher interest rates need to go in order to rein in soaring inflation. 

On day two of the symposium, delegates will be able to chew over the July reading of the core PCE price index, said to be the Federal Reserve’s preferred measure of inflation, which ticked back up to 4.8% in the year to June, having eased to 4.7% in May. 

On the corporate earnings front, the coming week sees Harbour Energy, Nvidia, Peloton and others wheel out their latest results. 

OUR TOP THREE EVENTS FOR 22-26 AUGUST:

Thursday – Jackson Hole Economic Policy Symposium

Every year, Jackson Hole, a valley in Wyoming in the west of the US, plays host to a symposium sponsored by the Federal Reserve Bank of Kansas City. The title of this year’s forum, which runs from 25-27 August and will be attended by central bankers, policy experts and academics, is “Reassessing Constraints on the Economy and Policy”.

As policymakers raise interest rates to curb inflation, it will be interesting to see whether representatives of the US Federal Reserve and other central banks appear concerned about the risks of overtightening monetary policy at a time when the global economy faces so many challenges. Markets have risen in recent weeks on the basis that, for all the Fed’s hawkish rhetoric on tackling soaring prices, the central bank will pivot to a more dovish stance once inflation is reined in. We’ve already seen signs that US inflation may have peaked, with the country’s consumer price index (CPI) up 8.5% year-on-year in July, having eased from 9.1% growth in June. 

Markets appear to be betting that inflation will quickly return to the Fed’s 2% target, but this seems somewhat optimistic given that CPI remains at an elevated level and the Fed’s benchmark policy rate is set to a target range of 2.25% to 2.5%, which is still low by historical standards. The Fed will want to be sure that inflation is falling at a steady pace before it signals any sort of dovish shift, especially if inflation proves to be sticky and stalls at around 5%. If inflation were to find a base at this sort of level, it’s likely that the Fed would maintain its tough stance on interest rates. 

In the near term, further rate rises are likely. Consensus estimates suggest that the federal funds rate will rise to a target range of 3.5% to 4% between now and year-end. Markets look set to be disappointed if they expect Fed chair Jay Powell to go soft on inflation. In fact, it’s almost inconceivable that the Fed would start to reverse its rate-hiking cycle while inflation remains so far above 2%, so it’s surprising that the market is even pricing it in. The symposium gives Powell an opportunity to clear up that misconception.

Thursday – Harbour Energy half-year results

As politicians continue to talk tough on the bumper profits being made by the oil and gas majors amid surging fossil fuel prices, it’s easy to forget that smaller oil and gas companies haven’t had it quite so easy. One such company is London-headquartered Harbour Energy, which was formed in 2021 when Premier Oil merged with Chrysaor. At the end of last year, the company was carrying legacy debt of £2.8bn. News of the windfall tax saw Harbour Energy’s share price fall more than 40% from an April peak of 538p to just under 300p in July. 

The company generated annual revenue of £3.48bn last year, and expects to bring in £5.18bn this year. Unlike BP and Shell, all of its profits will be taxed at the higher rate of 65%, since 90% of its production takes place at five key hubs in the UK. The remainder comes from its interests in Indonesia, Vietnam, Mexico and Norway. With strong cashflow, and given the unfriendly investment environment in the UK, the company may direct investment overseas in order to diversify its revenue streams. In a sign that the company is already leaning that way, CEO Linda Cook said that the tax breaks afforded by the levy did nothing to help Harbour Energy, which has invested in projects including the Tolmount gas field in the North Sea. That project is expected to increase UK gas output by 5%. 

In July the company reported that its Timpan exploration well in Indonesia had encountered a 390-foot gas column, which could become commercially profitable with further investment. At a time when the UK needs all the energy investment it can get, the windfall tax risks driving investment away. 

Friday – US PCE inflation (July)

The personal consumption expenditures (PCE) price index, a key measure of US inflation, increased 6.8% in the year to June, up from 6.3% in May. Meanwhile, the so-called core PCE price index – which excludes volatile food and energy costs, and is closely monitored by Fed officials in charge of monetary policy – ticked back up to 4.8% in the year to June, having eased to 4.7% in May.  

In contrast to the recent decline in CPI, the PCE data suggest that inflation is becoming embedded in the US economy. The July reading of core PCE is therefore likely to play a crucial role in determining whether the Fed goes for a third consecutive 0.75 percentage point rate hike in September, or opts for a half-point increase. The odds seem to favour the latter, with a quarter-point rise appearing unlikely as things stand. Recent comments from Fed policymakers seem to imply a preference for overtightening in the short term, with a view towards easing off by year-end. 

MORE KEY EVENTS (22-26 AUGUST):

Monday 22 August

UK flash PMIs (August)

Readings of the UK’s services and manufacturing purchasing managers’ indices have remained above 50 all year, indicating expansion in the two sectors. That’s despite the combined challenges of rising prices and weakening economic activity. Hiring has been robust and businesses have been able to pass on cost increases to buyers. 

However, July’s PMI readings fell compared to June, suggesting that sentiment regarding the economic outlook was waning. With August typically being a slow period because of holidays, we could well see PMI prints slide below 50 in to contraction territory.  

Zoom Video Communications Q2 results

After dropping to a two-year low of just under $80 in May, Zoom’s share price climbed back above $100 as Q1 revenue grew 12% year-on-year to $1.07bn. However, Q1 profits fell year-on-year to $1.03 a share. 

In the face of stiff competition from the likes of Microsoft Teams, Skype and Webex, Zoom’s shares have fallen roughly 80% from the peaks they hit in 2020 at the height of the Covid-19 pandemic. 

For Q2, Zoom said it expected to see revenue of about $1.12bn, and profits of $0.90 a share. Bosses also raised full-year revenue guidance to $4.55bn, and forecast full-year profits of between $3.70 and $3.77 a share.     

Tuesday 23 August

No major announcements

Wednesday 24 August

Germany IFO business climate index (August)

This summer’s drought is hampering trade in Germany, as water levels in the Rhine sink below the minimum that is needed for barges to travel up and down the river. On top of that, Russia – in response to western sanctions – has cut the amount of natural gas that it supplies to Europe, leaving heavily reliant Germany particularly badly affected. This has already led to energy rationing in some German states. 

All things considered, then, it would be surprising to see German business confidence improve in August. In July, sentiment – as indicated by the IFO business climate index – fell to 88.6 points, down from 92.2 in June, to reach its lowest level since June 2020. The expectations index fell to 80.3, a level last seen in May 2020. 

Nvidia Q2 results

Chipmaker Nvidia’s share price has halved since the record high of last November, but may have found a short-term base after rebounding from the one-year low it hit in July. The big question now is whether the bounce can be sustained. 

Although revenue in Q1 beat expectations, coming in at $8.29bn, the company downgraded its Q2 revenue forecast to between $7.94bn and $8.26bn, versus a consensus estimate of $8.45bn. Nvidia said that rolling lockdowns in China and Russia’s war in Ukraine had negatively impacted the outlook. These two issues are expected to cost the company somewhere in the region of $500m. 

Nvidia then issued a second downgrade earlier this month, forecasting Q2 revenue of $6.7bn and lowering its guidance on gross margin to 43.7%, down from 65.1%. Profits are likely to be impacted as well. The latest downgrade was attributed to a big drop in gaming revenue, which is down 44% from Q1 at just over $2bn. Profits for Q2 are expected to come in at $0.50 a share.  

Snowflake Q2 results

Shares in cloud computing company Snowflake have more than halved since November, hitting a record low in June after Q1 losses came in at $166m, or $0.53 a share. However, revenues beat expectations, coming in at $422.37m. Management’s Q2 revenue forecast of between $435m and $440m was in line with expectations, though a deterioration in operating margins appears to be weighing on profitability. 

Snowflake has made great strides in growing its client base, which increased to 6,322 customers at the end of last year. The company’s growth in the last two years has been remarkable. It more than doubled its revenues last year to just over $1.2bn, and expects that to rise to over $2bn in the current fiscal year. As for Q2, losses are expected to improve to $0.02 a share. 

Williams-Sonoma Q2 results

US retailers’ stocks have taken a battering in recent months, with the likes of Target and Walmart warning that consumer demand for high-margin goods is declining amid rising prices for food and energy. However, kitchenware and home furnishings store Williams-Sonoma seems to be faring better than most. Although its shares have fallen roughly 24% from last November’s record high, they’re up 2% year to date. 

In Q1 the Pottery Barn owner posted record revenues of $1.89bn, up from $1.75bn a year ago, lifting the shares off two-year lows in May and sending them up to levels last seen in December. The resilience of the US consumer has been one of the more surprising aspects of this year, but as a purveyor of higher-end goods there is a risk that Williams-Sonoma may suffer if customers curb their spending on discretionary items. 

Gross margins widened by 80 basis points to 43.8% in Q1, while operating margins came in at 17.8%. The company maintained its full-year annual net revenue guidance for mid- to high-single-digit growth, with the goal of increasing annual revenue to $10bn by 2024. This seems a tall order, especially when you consider that at the end of the last fiscal year annual revenue came in at $8.25bn, and is expected to grow to $8.6bn this year. Profits in Q2 are expected to come in at $3.49 a share.

Thursday 25 August

Jackson Hole Economic Policy Symposium

See top three events, above 

US Q2 GDP (second release)

After two consecutive quarters of negative GDP growth, the US has met a commonly used definition of a technical recession. The US economy contracted by 1.6% year-on-year in Q1, then shrank by a further 0.9% on an annual basis in Q2, according to the first reading of second-quarter GDP. The second reading of US GDP for the three months to June are not expected to deliver any material change. 

The decline in output during Q2 was mainly due to falls in inventories and domestic investment, which appear to have been hobbled by high inflation. Gross private domestic investment fell by 13.5%. Although overall personal consumption rose by 1% during the quarter, spending on durable goods fell by 2.6%.

Harbour Energy half-year results

See top three events, above 

Peloton Q4 results

Peloton’s share price has risen 30% to more than $12 in the past month, having hit a record low in July. Over the last year, however, the shares are down a whopping 88%. After a dismal Q2, the company cut its full-year revenue estimate to between $3.7bn and $3.8bn, a big reduction from the guidance of $5.4bn which was issued at the end of its last fiscal year. 

In Q3, the company reported lower-than-expected revenue of $964.3m, and EBITDA losses of $194m. For Q4, the treadmill and exercise bike retailer forecast revenue of $675m to $700m, well below previous estimates of $821m. Peloton also said it expects EBITDA losses in Q4 to be between $115m to $120m. 

Peloton’s biggest problem has been inventory. It simply had too many products that it couldn’t shift, with little sign of demand picking up. In response, the company cut its prices and agreed to a $750m long-term funding deal with its bankers. Earlier this month Peloton reversed these price cuts, raising its prices by 25% to 30%. It also announced plans to cut 800 jobs and outsource deliveries. The price hikes seem an odd move given that its bikes and treadmills were already extremely expensive. Plus, with inflation still rising, consumers are going to become even more price-sensitive. 

Inflation doesn’t appear to concern new CEO Barry McCarthy, who said that the price cuts cheapened perceptions of the brand. Reversing them, he said, was necessary to restore Peloton’s reputation. In a global cost of living squeeze, this seems an unnecessary risk. Affordability matters more than brand perceptions, and raising prices while real incomes are shrinking appears unwise. Losses for Q4 are expected to come in at $0.75 a share.

Friday 26 August

US PCE inflation (July)

See top three events, above

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Selected company results

MONDAY 22 AUGUST RESULTS
Flexsteel Industries (US) Q4
Nordson (US) Q3
Palo Alto Networks (US) Q4
Zoom Video Communications (US) Q2
TUESDAY 23 AUGUST RESULTS
Aferian (UK) Half-year
Dick's Sporting Goods (US) Q2
Intuit (US) Q4
John Wood Group (UK) Half-year
Macy's (US) Q2
Nordstrom (US) Q2
WEDNESDAY 24 AUGUST RESULTS
Anglo Pacific Group (UK) Half-year
Costain Group (UK) Half-year
Lookers (UK) Half-year
Nvidia (US) Q2
Salesforce (US) Q2
Snowflake (US) Q2
Splunk (US) Q2
Williams-Sonoma (US) Q2
Zuora (US) Q2
THURSDAY 25 AUGUST RESULTS
Abercrombie & Fitch (US) Q2
Benchmark Holdings (UK) Q3
Dell Technologies (US) Q2
Dollar General (US) Q2
Gap (US) Q2
Harbour Energy (UK) Half-year
Hays (UK) Full-year
Hunting (UK) Half-year
Macfarlane Group (UK) Half-year
Peloton Interactive (US) Q2
Peloton Interactive (US) Q4
VMware (US) Q2
Workday (US) Q2
FRIDAY 26 AUGUST RESULTS
No major announcements  

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


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