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The Week Ahead: US non-farm payrolls; RBA rate decision; Tesco, Greggs results

The Week Ahead: CMC Markets' Michael Hewson analyses key upcoming economic and company events.

The key economic event this week is the release of the closely watched US non-farm payrolls report, with estimates suggesting that the world’s largest economy added 250,000 jobs in September. On Tuesday, Australia’s central bank is set to decide whether to raise interest rates again, while on the earnings front, we’ll be looking out for the latest results from Tesco, Greggs and JD Wetherspoon.

OUR TOP THREE EVENTS FOR 3-7 OCTOBER:

Tuesday – Reserve Bank of Australia interest rate decision

On 6 September Australia’s central bank raised interest rates for the fifth month in a row as it increased its cash rate by 50 basis points to 2.35%. The central bank said that further rate rises would be needed in the months ahead, adding that they remained committed to lowering inflation to 2-3% over the medium term. The RBA expects inflation to peak at 7.75% this year before dropping to around 4% in 2023.

The big question now is whether policymakers continue to lift rates with the Australian dollar down more than 5% from its September peaks, and the housing market slowing. RBA governor Philip Lowe admitted earlier this month that higher rates were an issue, and that the case for large rate hikes had “diminished”. His remarks could shape the upcoming rate decision. The RBA might be tempted to raise rates by just 25 basis points on Tuesday, even though its US counterpart, the Federal Reserve, has shown little sign of slowing down on rate rises.

Wednesday – Tesco half-year results

The Tesco share price is down over 30% year to date, with its position as the UK’s leading food retailer by market share doing little to protect it from the cost-of-living crisis. Although Tesco last year generated adjusted operating profits of £2.83bn, up 58.9% year-on-year at constant rates, the shares have fallen to a five-year low and been downgraded by Goldman Sachs. When the Q1 results came out in June, Tesco warned that high inflation could see profits this fiscal year dip to between £2.4bn and £2.6bn. Even this range seems somewhat optimistic. The fall in the share price suggests that investors might agree.

Although some shoppers may be turning to cheaper alternatives such as Lidl and Aldi, Tesco retained a 26.9% share of the UK grocery market in the 12 weeks to 4 September, according to data from researcher Kantar. That put it way ahead of second-placed Sainsbury’s on 14.6%. Tesco’s determination to compete with Aldi and Lidl on price shows little sign of diminishing. Although this will continue to put further downward pressure on margins, Tesco has enough in its locker to keep up the pressure. Tesco extended its Aldi price match scheme to 650 products in April and continues to run various discounts and promotions for holders of its Clubcard, its customer loyalty scheme.

In Q1 – the three months to the end of May – UK like-for-like sales fell 1.5% a bigger drop than was forecast, while like-for-like sales in Ireland fell 2.4%. The retailer said that customer behaviour seemed to be changing, with shoppers favouring lower-margin, own-brand items over branded goods. Booker, Tesco’s wholesale subsidiary, stood out as sales increased 19.4% year-on-year to £2.1bn, partly thanks to the loosening of lockdown restrictions.

Higher staffing and energy costs are likely to put further pressure on margins at the half-year stage. In July Tesco raised wages for supermarket staff from £9.55 to £10.10 an hour. The chain is also offering a range of free food products and toiletries to staff, and is giving Clubcard holders discounts of up to 50% on own-brand products. Meanwhile, rising fuel prices are adding to delivery and logistics costs. Tesco is taking measures to mitigate some of these rising costs, with the retailer carrying out a three-year cost saving programme that aims to deliver £1bn in efficiency savings.

Friday – US non-farm payrolls (September)

Despite economic headwinds, the US labour market remains strong. The country’s economy added 315,000 jobs in August, less than July’s downwardly revised tally of 526,000 jobs, but more than the 298,000 new positions that economists had expected. Annual growth in hourly earnings remained stable at 5.2%, and although the unemployment rate rose to 3.7% in August from 3.5% in July, it remains close to 50-year lows. The labour market participation rate increased to 62.4% from 62 1%, suggesting that people are returning to the workforce due to the rising cost of living.

While the government will be disappointed to see the unemployment rate rise, it’s rising for the right reason – namely, because people want to get back into work. The US economy still has over 11m vacancies that it needs to fill. Until that figure starts to fall, or the economy shows significant signs of stress, the Federal Reserve is likely to continue raising interest rates. Although US inflation appears to be easing, the Fed may implement a fourth successive 75-basis-point rate hike in November.
Estimates suggest that 250,000 jobs were added to the US economy in September, while the unemployment rate is expected to be unchanged at 3.7%.

KEY EVENTS OVERVIEW (3-7 OCTOBER):

Monday 3 October

Joules Group full-year results

A few weeks ago it was reported that Next was in talks to buy a 25% stake in Joules, but the collapse of discussions saw Joules’ shares plunge to new record lows. At its last business update in August the lifestyle group reported “significant pressure on gross margins with consumer appetite weighted towards mark-downs amidst a heavily promotional environment”. This situation was blamed on the warm and dry summer’s negative impact on full-price sales of rainwear, knitwear and wellington boots.

Retail sales for the most recent trading period showed an 8% decline in retail sales compared to the year before, while margins have dipped by 6% year-on-year. The results for the fiscal year ending 31 May 2022 are unlikely to reveal much about the troubled business that we don’t already know. The only question that really needs answering is how big a loss we should expect to see in the first half of the current fiscal year, and whether an improvement is likely in the second half.

Tuesday 4 October

Reserve Bank of Australia interest rate decision

See top three events, above

Greggs Q3 results

The cost of energy for a company like Greggs is a big part of the company’s business model, so the news that the government is capping energy costs for businesses for six months is welcome news. Nonetheless the shares have fallen back to their lowest levels since late 2020 on concerns that lower footfall and slimmer margins will impact profitability.

Back in August, Greggs reported a 27.1% rise in half-year sales versus the year-ago period, which lifted revenues to £694.5m. This improvement helped to push pre-tax profits up to £55.8m. Cost of sales rose by 32% to £260.7m, and while some of this has been absorbed by higher prices, the company still maintained that they were confident in their full-year outlook.

Wednesday 5 October

Services PMIs (September)

The slowdown in services activity since the summer months has been quite notable, especially in Germany where the recent IFO business sentiment survey highlighted deepening pessimism about the outlook across all areas of the economy.

France and Italy managed to post a modest pickup in economic activity in September, with preliminary services purchasing managers’ index (PMI) readings rising to 53 and 50.5, respectively, in a sign that businesses are adapting to rising energy costs and challenging economic conditions. In Germany, however, the services PMI print fell to 45.4 in September based on a flash estimate, its lowest level since May 2020.

With all sorts of questions being asked about the new UK government’s fiscal plans, the announcement of the new energy price cap for consumers and businesses ought to have bought some short-term reassurance. However, the period of mourning as well as the extra bank holiday in September for the funeral of Queen Elizabeth II may well have impacted UK economic output. In September, the UK’s services PMI reading fell to 49.2 according to a flash estimate, its lowest level since June 2020.

Tesco half-year results

See top three events, above

Thursday 6 October

Imperial Brands Q4 results

Shares in tobacco company Imperial Brands have risen more than 13% this year. So-called “sin stocks” tend to perform better in risk-averse economic environments. The half-year numbers, released in May, showed a 1.3% fall in revenue to £15.36bn. Pre-tax profits fell to £1.2bn, largely due to a charge of £201m for exiting Russia. However, better-than-expected performance in its Next Generation division provided a revenue boost as the company looks to diversify towards e-cigarettes and vaping products. Despite the Russia write-down, the company said it was on course to meet its full-year guidance for constant currency net revenue growth of 0-1%.   

Constellation Brands Q2 results

The last three months have seen the Constellation Brands share price tread water, despite a decent set of Q1 numbers. The alcoholic drinks company’s net sales grew 17% year-on-year to $2.36bn, while adjusted earnings came in at $2.66 a share.

At the end of 2021, the maker of Corona beer said that, for the new fiscal year, it expected to generate earnings per share of between $11.20 and $11.50, with net sales growth in the beer segment expected to be 7-9%, while wine and spirits are expected to decline 1-3%. The EPS target was reaffirmed in the Q1 numbers, as were all other targets. Profits for Q2 are expected to come in at $2.82 a share.

Friday 7 October

US non-farm payrolls (September)

See top three events, above

JD Wetherspoon full-year results

The pub chain’s Q4 results suggested that the Queen’s platinum jubilee in June might give the hospitality sector a boost as people celebrated over an extended bank holiday weekend. That made a 0.4% decline in like-for-like sales compared to Q4 2019 a difficult pill to swallow. Concerns over rising costs, especially energy prices, sent the shares below their pandemic low to levels last seen in 2012.

The upcoming full-year results look set to see the pub chain post a loss of £30m, with repair costs expected to come in at £99m, up from £76.9m in 2019. The outlook for 2023 is likely to be even darker. While the energy price cap may have brought some certainty to the next six months, the overall near-term future of the pub sector has probably never been more uncertain than it is now.

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 3 October Results
Joules Group (UK) Full-year
Quadrise Fuels International (UK) Full-year
Tuesday 4 October Results
Acuity Brands (US) Q4
Greggs (UK) Q3
Saratoga Investment (US) Q2
SMART Global (US) Q4
Wednesday 5 October Results
Byrna Technologies (US) Q3
Helen of Troy (US) Q2
Lamb Weston (US) Q1
Resources Connection (US) Q1
RPM International (US) Q1
Tesco (UK) Half-year
Vertu Motors (UK) Half-year
Thursday 6 October Results
Accoldare (US) Q2
Aehr Test Systems (US) Q1
AngioDynamics (US) Q1
Conagra Brands (US) Q1
Constellation Brands (US) Q2
IDT (US) Q4
Imperial Brands (UK) Q4
Levis Strauss Q3
N Brown Group (UK) Half-year
Stolt-Nielsen (UK) Q3
Volution Group (UK) Full-year
Friday 7 October Results
JD Wetherspoon (UK) Full-year

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

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