The Week Ahead: US PCE inflation; UK banks, Rolls-Royce results

Banking and bonuses are set to be key themes of the coming week’s corporate earnings, with HSBC, Barclays and Lloyds due to report their 2021 results, after NatWest announced a pre-tax profit of £4bn on Friday. 

In 2021, England’s big four banks enjoyed their best year since before the financial crisis of 2008 as they emerged from the pandemic in better shape than expected. In 2020 UK banks set aside emergency provisions to cover possible loan defaults, which weighed on profits. But in 2021, as loan losses hadn’t materialised on the scale that was first feared, the banks began drip-feeding the cash back onto their balance sheets, boosting quarterly profits. 

A portion of the banks’ annual profits is now set to be returned to bankers in their bonuses, which may spark criticism at a time when many people are struggling with soaring inflation and the worst squeeze on living standards in several decades. The fact that banks’ increased profits will mean more money going to the exchequer in the form of corporation taxes could get lost in the bank-bashing.

OUR TOP THREE EVENTS FOR 21-25 FEBRUARY 2022:

Lloyds Banking Group full-year results – Thursday

Having resumed dividends at the start of the 2021 financial year, and with full-year profits estimated to rise to £7.2bn, Lloyds’ shareholders might expect this week’s full-year numbers to nudge the bank towards increasing payouts, unveiling a share buyback or paying a special dividend. However, given the cost of living crisis currently affecting the country, the bank may choose to tread carefully.  

Like the rest of England’s big four banks, Lloyds weathered the pandemic better than expected. At the start of 2021, the bank sounded a note of caution, saying that the outlook remained uncertain and warning that the latest lockdown could push some of its customers into financial difficulty in the months ahead. That said, the bank still restored its dividend. This proved to be the right call, as a resilient economy helped maintain loan demand in 2021 and allowed the bank to release some of the money it set aside at the height of the pandemic to guard against bad debt. 

In July, Lloyds reported statutory pre-tax profits of £2bn for Q2, lifting half-year profits above expectations to £3.9bn, and announced a dividend of 67p. The bank also announced the acquisition of savings and pensions firm Embark Group for £390m. In Q3, pre-tax profits came in at £2bn, double the figure from the year-ago period, pushing year-to-date profits to just shy of £5.5bn. The bank released another £84m in loan-loss provisions, taking total impairments added back in the first nine months of the year to £740m. 

At just above 50p, the Lloyds share price is the cheapest of England’s big four banks. Having performed so well last year, Lloyds’ shares have continued to push higher in 2022 – they’re up more than 3% year-to-date – but remain below pre-pandemic levels. 

Rolls-Royce full-year results – Thursday

Rolls-Royce has taken significant steps in the last year to reduce head count and costs, with management saying that they were on course to cut a further £1.3bn by the end of 2022. Measures taken to bolster the finances delivered an unexpected half-year profit of £393m, the company announced in August. However, the jet engine maker’s fortunes remain closely linked to civil aviation engine flying hours (EFH), and while these have improved thanks in part to the return of transatlantic flights, air travel has been severely impacted by coronavirus restrictions and, most recently, the Omicron variant. As a result, the company is set to miss its full-year target for EFH to reach 55% of 2019 levels by the end of 2021. 

Nevertheless, there have been wins on the defence side of the business in recent months, including a £1.9bn deal with the Pentagon which will see Rolls-Royce’s F-130 engines used to power the B-52 Stratofortress for the next 30 years. Rolls-Royce also said it generated positive cash flow in Q3, leading the company to state that cash burn in 2021 was likely to be less than the £2bn previously guided. The balance sheet is in better shape due to the £2bn of disposals announced in the last few months, including the sale of ITP Aero for €1.7bn which should complete in the first half of this year. 

Rolls-Royce’s small modular reactor (SMR) business is also gaining traction after the government put in £210m on top of the £145m raised through private investment, as the company steps up its role in helping the UK cut its carbon output. In December, Rolls-Royce announced that Qatar’s sovereign wealth fund would invest £85m in the nascent mini-reactor business. The company also revealed that its power systems unit is developing low-emission yacht engines powered by methanol amid a drive to diversify away from its core business of civil aviation.

The Rolls-Royce share price is up more than 15% versus a year ago, but has fallen from its late-2021 highs as it continues to be buffeted by the pandemic’s impact on the travel sector.

US core PCE deflator (January) – Friday 

The release on Wednesday of the minutes from the Fed’s January meeting showed that the Fed is ready to raise interest rates in March. The need to rein in rising inflation has become more pressing since that meeting, as the consumer price index (CPI) measure of US inflation rose 7.5% in the 12 months to the end of January, up from 7% in December, while the producer price index (PPI) increased 9.7% in January, down only slightly from December’s 9.8% surge. In light of the uptick in CPI, it seems likely that the Fed’s preferred measure of inflation, the core personal consumption expenditure (PCE) deflator, will also post a rise when the January reading is released on Friday. In December, core PCE rose 4.9% from a year earlier, up from a 4.7% rise in November. 

Fed policymakers’ concerns that inflation is running out of control are likely to have been intensified by the recently released January CPI and PPI numbers. With employment and the economy strong, based on the January jobs report and retail sales data, there is speculation that the Fed might opt for a 50 basis-point interest rate rise in March, though a 25 basis-point hike still appears more likely. An increase in core PCE might add to the Fed’s concerns over inflation, but it would be a bold move to raise rates by more than a quarter of a percentage point in March. 

MORE KEY EVENTS (21-25 FEBRUARY):

Monday 21 February

No major announcements

Tuesday 22 February 

UK flash PMIs (February)

December saw a sharp drop in UK services activity, with the sector’s purchasing managers' index (PMI) falling to 53.6 from 58.5 in November. A recovery in January saw services PMI rise to 54.1, despite restrictions aimed at curbing the spread of the Omicron variant. The rules hit pubs and restaurants particularly hard, while some retail outlets were also negatively impacted. Following the partial lifting of restrictions in January, we could see a further uptick in services activity in February, although it is likely to be tempered by caution over the rising cost of living. 

Meanwhile, UK manufacturing activity was steady, with the sector’s PMI reading coming in at 57.3 in January, down only slightly from 57.9 in December. Selling price inflation has remained at record levels, though – a trend that looks set to continue. On the bright side, new orders and employment also rose, with the hope that this will continue through Q1.

France, Germany flash PMIs (February)

The outlook for the economies of France and Germany remains uncertain, but after a weak December the German economy rebounded in January. In December German services activity slipped into contraction territory, and its lowest level since February last year, as the German economy struggled with the twin challenges of a disjointed regional government response to Covid and rising cases of the Delta variant. January brought a rebound, with services PMI climbing to 52.2. Meanwhile, in France services PMI slipped to 53.1 in January, down from 57.0 in December. 

While services have struggled, German manufacturing activity has proved more resilient, with the sector’s PMI reading pushing up to 59.8 in January, from 57.4 in December. However, these numbers don’t chime with German industrial production and factory orders numbers, which have been poor. Last month the Federal Statistics office estimated that the German economy had shrunk by between 0.5% and 1% in the final quarter of 2021 – a worse performance than the economies of France and Italy – due to supply chain disruptions, rising energy costs and high Covid infection rates. In France, manufacturing activity remained steady, with the PMI reading for January coming in at 55.5, a tick below December’s 55.6. Economic activity in France is set to remain stable, although high virus levels in recent weeks could constrain the services sector.

HSBC full-year results 

Since HSBC reported its Q3 numbers at the end of October, its shares have gone from strength to strength, rising more than 25% and breaking above their 2021 peaks at the start of this year. The prospect of higher interest rates has helped boost the banking sector as a whole, with HSBC one of the best performers on the FTSE 100 so far this year. 

The bank’s Q3 profits after tax rose to $4.2bn, taking year-to-date profits to $12.66bn. Revenue for the quarter came in higher than a year ago, although there was a slight decline compared to Q2. All areas of the business showed an improvement, notably the UK business which followed up its half-year contribution of $2.1bn with another $1.5bn of profits before tax in Q3. The Asia business contributed $3.3bn, while the headline number of $5.4bn was boosted by another release of credit impairment charges of $700m on top of the $700m released in the first six months of the year. Management reassured shareholders about the banks’ exposure to the Chinese real estate sector, saying it had no direct exposure, but would continue to monitor the situation closely. 

HSBC also announced a $2bn share buyback, but unlike at the end of Q2, when it paid a dividend of $0.07 a share, the bank said it wouldn’t pay a quarterly dividend. Management said the situation would be reviewed ahead of the upcoming Q4 and full-year results. In line with a lot of other banks, lending was subdued during Q3, with a fall in net loans and advances to customers over the quarter – a trend that is likely to have continued into Q4 because of the spread of Omicron. 

For a bank that generates half of its profits in Asia, the current zero-Covid approach of Chinese authorities could act as a drag on Q4 results. Nonetheless, profits in the first nine months of 2021 have already exceeded the full-year 2020 total of $8.8bn. Estimates suggest that profits could reach $18bn for the whole of 2021. Net interest margins should also see an improvement from 1.2% in Q3.          

Home Depot Q4 results

Home Depot had an excellent 2021, as its share price hit record highs in December. The stock has since slipped back on concerns that high levels of inflation could impact US consumer demand. In Q3 the company managed to beat expectations on revenue and profits, just as they did in Q1 and Q2. Q3 revenue came in at $36.82bn, while profits came in at $4.13bn. Same store sales rose 9.8%, well above expectations of 2%, with the average ticket size rising over 12% to $82.38 a visit. For Q4 the company said that various supply chain disruptions had impacted its business, but it had received most of its inventory. Costs have risen, though, as the retailer looks to hire an additional 100,000 people as it gears up for spring. Profits in Q4 are expected to come in at $3.17 a share, though the way in which the company frames its Q1 guidance will determine whether we see a rebound or further declines in the share price. 

Wednesday 23 February

Barclays full-year results 

In January Barclays shares hit their highest levels since April 2018, before surrendering most of the recent gains. Along with NatWest, Barclays has led the way for UK banks over the last 12 months, with its shares more than doubling from the lows of just over a year ago. The year just ended saw the bank adopt a more cautious approach when it came to releasing loan-loss reserves, partly due to concerns over the wider outlook but also because the bank’s income in Q1 fell 6% to £5.9bn. 

The Q1 numbers also proved that previous CEO Jes Staley was correct to push back against activist shareholder Ed Bramson, who had been urging management to slim down the investment banking unit. It is true that the division has its weak spots, but it also offers Barclays something its more domestically focused peers lack – a more diverse revenue stream. With the departure of Jes Staley over his links to Jeffrey Epstein, new CEO CS Venkatakrishnan, or Venkat as he is known, will hope to continue the progress of his predecessor. 

In Q3 pre-tax profits rose to £1.5bn, adding to the £4.9bn seen in the first half of the year, when a half-year dividend of 2p per share was paid, on top of a £500m share buyback. One notable trend in Q3 was the steady increase in credit and debit card spending, while on the credit card side of things consumers appeared reluctant to add to their liabilities, with borrowings there falling to £8.6bn. This has been reflected in the rise in customer deposits, which rose to £193.3bn, up from £173.2bn a year ago, and which have risen steadily quarter-on-quarter over the last seven quarters. 

Meanwhile, business loans fell back to £35.4bn, their lowest level since Q1 2020. With Omicron impacting consumer and business demand, this trend may well have continued in Q4, when we could also see an increase in costs. Barclays said that it expects full-year costs to come in at £12bn, with the risks likely to be tilted to the upside as rising inflation puts upward pressure on salaries. Q4 profits are expected to come in at a similar level to Q3, pushing the full-year numbers above £8bn. 

Thursday 24 February

Lloyds Banking Group, Rolls-Royce results (see top three events, above)

US Q4 GDP – Thursday

The first estimate of US Q4 GDP, released on 27 January, indicated that the world’s largest economy grew 6.9% in the final three months of 2021, compared to the year-ago period. That marked a significant acceleration from Q3, when growth came in at an upwardly revised 2.3%. Stronger-than-expected growth in Q4 came despite concerns over an uneven recovery, fragile consumer confidence (personal consumption rose only 3.3%, less than expected), and the spread of Omicron. Growth was driven, in part, by a rebound in hiring and a strong pick-up in both manufacturing and services activity. 

Supply chain issues also spurred growth. Having used up inventory in Q3, US companies ordered goods early in Q4 in a bid to front-run demand and rebuild their stock ahead of the Thanksgiving and Christmas holidays. This pull-forward effect could spill over into Q1, given that economies all over the world are experiencing shortages in various parts of the global supply chain. This week’s second estimate of Q4 GDP is expected to bring a modest uptick to 7%.

Moderna Q4 results

It’s been a disappointing few months for the Moderna share price, with the shares sitting at about a third of the record high they reached in August, when they came within touching distance of $500 a share. The stock has tumbled over concerns that new antiviral pills and other coronavirus treatments will impact on demand for its vaccine. These concerns were borne out by Moderna’s Q3 numbers, as the vaccine maker missed on revenue and cut its guidance. Revenue came in at $4.8bn, below expectations of $5.86bn, with the company delivering 208bn doses of its vaccine. The company also lowered its 2021 vaccine production forecasts to between 700m and 800m doses. Moderna said it was now expecting sales of between $15bn and $18bn in 2021, down from previous analyst forecasts for sales of $20bn. The company expects sales in 2022 to increase to between $17bn and $22bn. Although the share price has fallen recently, it remains well above pre-pandemic levels. That said, further negative news could put the shares under additional pressure. Profits for Q4 are expected to come in at $9.90 a share.

Friday 25 February

US core PCE deflator (January; see top three events, above)

US personal spending, income (January)

While GDP growth slowed on a quarterly basis in Q3, US personal spending has remained robust. In October personal spending rose by 1.3%, up from 0.6% in September, despite concerns over higher prices, as fears of shortages prompted US consumers to start their Christmas shopping early. In a way this is encouraging, as it suggests that consumers are somewhat immune to rising prices, but the big question is how long that can last if prices continue to move higher, crimping spending power. Much will depend on personal incomes – with 11m vacancies in the US labour market, one would expect earnings to remain resilient. For January, personal spending is expected to rise by 0.6% and personal income by 0.5%.

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Selected company results

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

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