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The Week Ahead: Fed, BoE, ECB interest rate decisions; Shell, BT, US tech results

Strap yourself in for the first truly action-packed week of the year. Top of the list of key economic events are a trio of interest rate decisions, with the US Federal Reserve, the Bank of England and the European Central Bank all set to raise the cost of borrowing. After that, Friday’s US non-farm payrolls print is expected to show that the world’s largest economy added fewer jobs in January than in December. 

In a busy week for earnings announcements on both sides of the Atlantic, look out for updates from oil major Shell, telecoms company BT and a quartet of US tech giants: Apple, Amazon, Google owner Alphabet, and Facebook parent company Meta Platforms

KEY ECONOMIC AND COMPANY EVENTS (30 JANUARY - 3 FEBRUARY):

Monday 30 January

No major scheduled announcements

Tuesday 31 January

No major scheduled announcements

Wednesday 1 February

US Federal Reserve interest rate decision

How much further will the Federal Reserve raise interest rates? In December the Fed raised rates by half a percentage point, ending a run of four consecutive 0.75-point increases, to bring the federal funds rate to a target range of 4.25% to 4.5%. Policymakers now seem split over whether to raise rates by a further 0.5 percentage points or step down to a quarter-point increase. 

Meanwhile, markets continue to expect rates to fall in 2023. As things stand, markets are pricing in at least half a percentage point of rate cuts this year, which seems optimistic especially with unemployment at a 50-year low of 3.5%. Clearly, something will have to give in the months ahead.  

Most observers expect the Fed to raise rates by 0.25 percentage points on Wednesday. Patrick Harker of the Philadelphia Fed and Lori Logan of the Dallas Fed, both of whom are voting members on the Federal Open Market Committee (FOMC), have stated that they would be comfortable with a quarter-point hike. Siding with this view is Fed governor Christopher Waller, who has previously favoured more aggressive rate rises. This suggests that there may be a growing caucus of FOMC members who support a slowdown in the pace of rate hikes. 

With markets expecting a terminal rate below the Fed’s target of 5% or above, and with financial conditions loosening, there is a risk that inflation could become stickier in the coming months unless the Fed resets expectations. They could do this in any number of ways. One way would be to raise rates by 0.5 percentage points on 1 February, pushing the upper end of the fed funds target range to 5%. Another approach could be to increase rates by 0.25 points but deliver hawkish guidance to let markets know that further hikes are coming and that rates will remain elevated for some time.

Meta Platforms Q4 results

Since hitting a seven-year low of $88.09 in November, Meta shares have risen more than 60% to their current level around $147, closing in on the 200-day simple moving average in the process. However, when the company reported its Q3 results in October, the owner of Facebook, Instagram and WhatsApp missed expectations on profits and lowered its guidance for Q4 revenue to between $30bn and $32.5bn. During Q3, Meta’s Reality Labs division, which produces virtual and augmented reality equipment, continued to haemorrhage cash. Although the unit generated revenue of $285m, losses came in higher than expected at $3.67bn. 

Meta faces other challenges, too. Apps such as TikTok are pulling users away from Instagram, while operating costs are expected to have risen to $86bn in 2022 and could rise to almost $100bn in 2023. Large losses and rising costs have acted as a wake-up call. In November, the company announced that it was cutting 11,000 jobs, which helped push up the share price. One plus point in the Q3 results was that daily active users remained stable. Profits for Q4 are expected to come in at $2.25 a share.  

Peloton Q2 results

Over the last six months Peloton shares, which hit a peak of more than $170 in January 2021, have traded in a range between the record low of $6.66 and the August highs around $13.50. This period of relative stability brought an end to the long-term downtrend, with the share price now approaching the 200-day simple moving average. 

The fall from grace for this lockdown winner has been alarming in its speed. Amid ongoing rumours of a possible takeover, revenues have continued to come under pressure. In Q1 revenue fell 16% to $616.5m, well below expectations of $641m. Losses came in at $1.20 a share, almost double what was forecast. Peloton also downgraded its Q2 revenue outlook to between $700m and $725m, down from $868.6m, adding that there were downside risks to its revised forecast. On the plus side, subscription revenue increased 36% to $412.3m in Q1. 

As far as equipment sales are concerned, management’s recent decision to reverse their price cuts appears to have had little impact. The company is still struggling to shift its products, which tend to be at the pricier end of the home-gym market. At a time when many consumers are grappling with the rising cost of living, paying over the odds for what is essentially an exercise bike with an iPad strapped to the front is a luxury that many are happy to forego. 

With the company continuing to spend big on marketing, even as it laid off another 500 staff last August, the company is expected to post a Q2 loss of $0.60 a share.

Thursday 2 February

Bank of England interest rate decision

The Bank of England is on the horns of a dilemma after it raised its base rate by 0.5 percentage points to 3.5% in December. Some Monetary Policy Committee (MPC) members, such as Catherine Mann, are likely to push for a further half-point rise to tackle rising prices. Inflation is still running at double digits and the British economy has proven somewhat more resilient in the face of higher rates than perhaps some had feared, with GDP growing a better-than-expected 0.1% month-on-month in November. Although the recent slide in energy prices has helped ease inflationary pressures, with food price inflation still at 16% the Bank will not want to appear to go soft in its battle against inflation. 

However, some MPC members may be tempted to raise the cost of borrowing by a gentler 0.25 percentage points, perhaps citing familiar concerns about the impact of higher rates on mortgage payers. These concerns may be somewhat overdone, since gilt yields, which help shape mortgage costs, have barely changed since the November low for the five-year gilt, although two-year yields have risen. In any case, this camp could include external MPC members Silvana Tenreyro and Swati Dhingra, both of whom voted to keep the base rate unchanged in December. 

Whether committee members end up raising interest rates by 0.25 or 0.5 percentage points on Thursday, the vote is likely to see a split decision. Any rate hike is also unlikely to boost the pound in the short term, given the Bank’s propensity to talk sterling down at seemingly every meeting. 

European Central Bank interest rate decision

In all likelihood the ECB will raise interest rates by a further 0.5 percentage points on Thursday. Several governing council members have come out in support of multiple half-point rate hikes over the coming months and ECB president Christine Lagarde, speaking at the World Economic Forum in Davos in January, pledged to “stay the course” on rate rises until inflation returns to the ECB’s 2% target.

Last year the ECB raised interest rates by a total of 2.5 percentage points to curb soaring prices, though it slowed the pace of its December increase to 0.5 points, down from 0.75 points in November. However, governing council members who wanted another 0.75-point hike in December haven’t necessarily become less hawkish, even though eurozone inflation has dipped below 10%. 

At the December meeting, Lagarde signalled that three further half-point rate hikes were in the pipeline – a move that pushed the euro higher. However, markets appear unconvinced that the ECB will follow through on its guidance, given the risks that ramping up the cost of borrowing could bring for the bloc’s more highly indebted members, such as Greece, Italy and Portugal. 

Shell full-year results

With Shell likely to report another round of bumper profits, it seems inevitable that the oil major will draw accusations of profiteering on high prices for oil and gas during a period of short supply and high demand. However, high prices are likely to rise even higher if oil companies continue to get penalised for making too much money and politicians fail to incentivise a ramping up of supply. True, the oil companies don’t do themselves any favours when they buy back billions of US dollars’ worth of their own shares rather than boosting their investment in renewable energy. In November these payouts helped push Shell’s shares to their highest levels since August 2019. 

Shell’s Q3 adjusted profit come in at $9.45bn, slightly below market expectations, with the company announcing another share buyback programme worth $4bn. Shell also increased its dividend by 15%. While these moves may please shareholders, they also attract criticism. By the end of Q3, Shell had bought back $18.5bn of its own shares, perhaps exposing where the company’s priorities lie. A fact that is sometimes forgotten, however, is that Shell’s effective tax rate on its UK profits now sits at 75%. As in previous quarters, the bulk of Shell’s Q3 profits came from its upstream operations and integrated gas business. That said, the latter suffered on the back of a disappointing performance in its trading unit, where profits fell 38% versus Q2. 

At the start of the year, Shell warned that its Q4 numbers would be affected by windfall taxes in both the EU and the UK to the tune of $2bn. The company also said that its integrated gas trading results, which have previously been a key revenue driver, would improve in Q4 versus Q3. This year’s capex spend is expected to be between $23bn and $27bn, though spending on renewables remains relatively small. New CEO Wael Sarwan could increase spending on clean energy, but he also needs to extol the virtues of natural gas as a transition fuel. Sarwan, who took over from former CEO Ben van Buerden in 2022, will likely be keen to catch up with BP in the shift to renewables. 

BT Group Q3 results

Despite a rebound off 2 year lows in December last year, BT Group shares are still down over 30% from their peaks of last year. In November the company reported a 1% rise in H1 revenues to £10.36bn. Due to industrial action the number of broadband connections at Openreach fell 89k during Q2, with 40k customers lost as a result. Due to the strike action reported profit before tax is expected to be lower by 18% or £800m due to higher costs and depreciation from network build, although the company has raised prices to compensate for some of this. In November the company announced a pay settlement of up to 16% on all staff earning less than £50k a year. It also said it was looking to merge its global services division with its enterprise arm in order to cut costs amidst rising inflation. Full year capex is expected to be in the region £5bn. 

Apple Q1 results

After Apple reported its Q4 numbers in October, its shares hit their lowest level since May 2021 before recovering to current levels. While the stock is down 10% over the last 12 months, it has already risen 14% this year. The Q1 results, which cover the three months to Christmas and tend to be Apple’s best quarter, often give the shares a lift.

However, investor expectations have been dampened by problems with supply chains in China. The Taiwanese firm Foxconn, which supplies iPhones to Apple, reported that production at its factory in Zhengzhou in mainland China was disrupted by a Covid-19 outbreak in November. That led Apple to warn of a shortfall of up to 6m iPhones. 

Apple – the largest US company by market capitalisation – reported Q4 results that were broadly in line with expectations, though revenue from services, iPhones and iPads fell short. Headline revenue came in at a better-than-expected $90.15bn, up 8% year-on-year, driven by strong sales of Macs and Wearables. While net sales increased year-on-year in the Americas and Europe, sales fell in Greater China and Japan. 

A year ago, Q1 revenue came in at $123.95bn, with iPhones contributing $71.6bn, as profits hit $2.10 a share. Will this year’s Q1 figures get anywhere near those levels, or are investors heading for a reality check? The latter seems more likely. In addition to supply chain issues, consumers in the US and China have cut back on spending. These factors partly explain why consensus estimates are for Apple’s Q1 profits to fall year-on-year to $1.95 a share.

Amazon Q4 results

When Amazon reported its Q3 results, the e-commerce behemoth not only revealed that net sales had fallen short of expectations, despite a 15% year-on-year increase, but it also cut its Q4 guidance. The news weighed on the Amazon share price, which fell to $81.43 on 6 January – its lowest level since March 2020. 

Sales in Q3 came in at $127.1bn, but higher operating costs meant that operating income fell to $2.15bn. Web services, the only division where operating income improved, posed a modest increase to $5.4bn on sales of $20.5bn. Operating margins also came in lower at 2%. While the Q3 numbers were disappointing, guidance caused most of the share price damage as Amazon estimated sales of between $140bn and $148bn for the pre-Christmas period, well below forecasts of $155.5bn. 

Amazon’s costs rose to $355.27bn in the first nine months of 2022, up 14% from $311bn a year earlier. To cut costs, the company has announced thousands of jobs cuts over the last few weeks, though these layoffs pale into insignificance when you consider that it has increased its headcount by almost 1 million people since 2019. The business is also investing in its Amazon Web Services unit, with plans to spend an extra $35bn by 2040 to boost capacity, and in electric vehicle maker Rivian. 

Profits for Q4 are expected to come in at $0.17 a share.       

Alphabet Q4 results

After Alphabet missed expectations across its core businesses in Q3, shares in Google’s parent company fell to their lowest levels since November 2020. The shares have staged a partial recovery since then, though the downtrend that has been in place since the record highs a year ago remains very much intact.

Ad revenue in Q3 came in at $54.48bn, below expectations of $56.98bn, but up from $53.13bn in the year-ago period. In contrast, YouTube revenue declined to just over $7bn, down from $7.2bn a year ago. One silver lining was the cloud business, where revenue rose to $6.87bn, up from $4.99bn. 

Operating margins declined to 25%, down from 32%. The last three months have seen the company announce thousands of job cuts as it deals with falling revenues and rising costs. Profits for Q4 are expected to come in at $1.21 a share. 

Friday 3 February

US jobs report (January)

Amid expectations that the Federal Reserve will slow the pace of interest rate hikes to 0.25 percentage points on Wednesday, there is likely to be an increasing focus on the unemployment rate in Friday’s US jobs report for January. Put simply, as long as the unemployment rate remains at multi-year lows and inflation sits at more than three times the official 2% target, the Fed will have little incentive to cut interest rates.

The US labour market has remained robust in recent months. The number of Americans filing new jobless claims dropped below 200,000 in the week ending 14 January, then fell to 186,000 in the week to 21 January. Moreover, in December the US economy added 223,000 jobs beating market expectations of 200,000, while the unemployment rate fell to 3.5%, down from 3.6% in November. 

Pay is still rising at a slower rate than inflation. Average hourly earnings rose 4.6% in the year to December, below expectations for growth of 5%, while the November figure was revised down from 5.1% to 4.8%. 

Economists estimate that the US economy added 175,000 jobs in January, and that the unemployment rate edged higher to 3.6%. The labour force participation rate is expected to tick up slightly, having risen to 62.3% in December from 62.2% in November.

INDEX DIVIDEND SCHEDULE

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

SELECTED COMPANY RESULTS

MONDAY 30 JANUARY RESULTS
SThree (UK) Full-year
Whirlpool (US) Q4
TUESDAY 31 JANUARY RESULTS
Amgen (US) Q4
Caterpillar (US) Q4
Electronic Arts (US) Q3
General Motors (US) Q4
ITM Power (UK) Half-year
Match (US) Q4
McDonald's (US) Q4
Mondelez International (US) Q4
Moody's (US) Q4
Pentair (UK) Q4
Pfizer (US) Q4
Stryker (US) Q4
United Parcel Service (US) Q4
WEDNESDAY 1 FEBRUARY RESULTS
Altria (US) Q4
Dynatrace (US) Q3
GSK (UK) Full-year
Meta Platforms (US) Q4
MetLife (US) Q4
Netgear (US) Q4
Peloton Interactive (US) Q2
Thermo Fisher Scientific (US) Q4
T-Mobile (US) Q4
THURSDAY 2 FEBRUARY RESULTS
Airtel Africa (UK) Q3
Alphabet (US) Q4
Amazon (US) Q4
Apple (US) Q1
BT Group (UK) Q3
Columbia Sportswear (US) Q4
ConocoPhillips (US) Q4
Dolby Laboratories (US) Q1
Eli Lilly & Co. (US) Q4
Estee Lauder (US) Q2
Gilead Sciences (US) Q4
GoPro (US) Q4
Harley-Davidson (US) Q4
Hershey (US) Q4
Honeywell International (US) Q4
Janus Henderson Group (US) Full-year
NCC Group (UK) Half-year
Qualcomm (US) Q1
Renishaw (UK) Half-year
Shell (UK) Full-year
Skechers (US) Q4
Starbucks (US) Q1
World Wrestling Entertainment (US) Q4
FRIDAY 3 FEBRUARY RESULTS
Aon (US) Q4
Cigna (US) Q4
Regeneron Pharmaceuticals (US) Q4

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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