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The Week Ahead: BoE, UK GDP, US inflation, Rolls-Royce results

On Thursday it’s the Bank of England’s turn to decide whether it will raise interest rates from the current base rate of 4.25%. Also on Thursday, we’ll find out if the UK economy grew in the first quarter. Before that, data from the US on Tuesday will reveal whether the headline rate of inflation there continued to ease in April. On the earnings front, one company to look out for is Rolls-Royce, whose share price has jumped more than 50% this year. The jet engine maker reports its Q1 results on Thursday, as does ITV.

Our top three economic and company events in order of importance are:

1. Bank of England interest rate decision – Thursday

The Bank of England’s stewardship of monetary policy over the last 12 months has been about as useful as a chocolate teapot. Not only that, we’ve also had to endure the Bank of England governor Andrew Bailey telling us not to ask for a pay rise, and chief economist Huw Pill’s advice that we should get used to a lower standard of living. 

On Thursday it’s likely the Bank will raise interest rates by 25 basis points given that consumer price inflation is running at more than 10% and core price growth is at 6.2%. While all that may be true, if the Bank of England hadn’t been asleep at the wheel when it became clear that inflation was starting to accelerate at the end of 2021 and had raised rates more aggressively, then perhaps inflation wouldn’t be as high or as entrenched as it is now. 

If rate hikes had matched the pace of those in the US, there is a chance that we would be a lot nearer to rate cuts than we are at the moment. Under current conditions it’s hard to see rates coming down much before the middle of next year, which is bad news for those who are about to come off fixed-rate mortgages. This week’s meeting is expected to see another 25-basis-point rate hike, and another split decision.

2. UK Q1 GDP – Thursday

The UK economy managed to eke out growth of 0.1% in Q4, confounding expectations that the economy was in the midst of a technical recession. The first three months of this year have seen the economy perform better than even the most optimistic of forecasts, leaving egg on the faces of those who were predicting all manner of disasters at the end of last year. 

The OBR, IMF, OECD and Bank of England were overly pessimistic in their assessments of UK inflation and growth. The unexpected weakness in commodity prices, particularly oil and gas prices, and mild weather certainly helped, while consumer spending has proved resilient. That’s not to say that the UK economy doesn’t have its challenges, with its current stewards and political opponents seemingly intent on strapping a ball and chain around its ankle with higher taxes and incoherent economic policies. 

Despite persistently high inflation and a gaffe-prone central bank, economic performance may have improved compared to the end of last year. With retail sales and the services sector showing solid signs of an improvement, economic output is likely to have expanded slightly in Q1. The monthly GDP numbers for the first three months of this year showed growth at 0.4% in January, 0% in February and an estimated 0% in March. Expectations are for 0.2% growth in Q1.

3. Rolls-Royce Q1 results – Thursday

Shares of Rolls-Royce are up over 50% this year, with most of the gains coming since February when the company reported its full-year results and raised profit guidance for the year. Ignoring the comments from new CEO Tufan Erginbilgic that the company was a “burning platform”, the shares have surged higher after the company returned to a modest profit before tax of £206m, after the £1.5bn loss of the previous year. 

Underlying revenue last year rose to £12.69bn, helped by a stronger than expected performance in the company’s civil aerospace division, which saw revenue rise 25% to £5.69bn. Large engine flying hours were at 65% of 2019 levels, with the company expecting this to return to 80-90% of 2019 levels in 2023 as China reopens and new engine orders come in from Malaysia Aviation, Qantas, Norse Atlantic Airways and Air India. Power systems also posted solid returns, with revenue rising 23% to £3.35bn, while defence revenue rose 2% to £3.66bn. Free cash flow returned to positive territory of £505m. The company’s new markets segment, specifically the new electric and small modular reactors division, continued to run at a loss as it awaits its first order from the UK government. 

As for 2023, the company expects profits to increase to between £800m and £1bn, above expectations. The company also expects free cash flow to improve to between £600m and £800m. After the travails of the last three years, investors seem optimistic that the path back to shareholder payouts is drawing closer. 

More key events

Our calendar of selected upcoming economic and company announcements:

MONDAY 8 MAY

No major scheduled events; UK markets closed (public holiday) 

TUESDAY 9 MAY

China trade balance (April)

In an encouraging development for the global economy last month, March China trade numbers showed that the Chinese economy started to gain momentum in the aftermath of Chinese New Year, as exports surged by 14.8%, the first rise since September, while imports declined a less than expected -1.4%, suggesting that domestic demand was starting to recover after months of lockdowns. Recent sales data has also shown strong demand for luxury goods, with strong numbers from several European retailers. The wider question is whether this trend is sustainable or simply a case of catch-up demand or rebound spending. Recent PMIs have suggested a modest slowdown in April. Exports for April are expected to slow to 10.1%, while imports are expected to come in flat.

Rivian Q1 results

It seems a long time ago now, when back in November 2021 Rivian came to market with a $70bn valuation, and the shares briefly pushed above $150. With the shares now at record lows, dropping below $12 in April, the company still shows little sign of being able to turn a profit. Back in March its shares continued to slide after missing on Q4 revenues, which came in at $663m, as the electric car company slumped to a full-year loss of $6.7bn. Total production in Q4 came in at 10,020, delivering 8,054 of them, meeting its 25,000 annual target for full-year production.

For 2023 guidance, Rivian said it expects to double this output to 50,000, which was below what many had been expecting, while narrowing its losses to $4.3bn. The company said it expected to spend $2bn on future capex at Normal, Illinois and its Georgia facility, but that gross margins were likely to remain negative. The company also said it was looking to raise extra capital in the form of $1.3bn in green bonds to help boost the launch of its R2 electric vehicles. Losses are expected to come in at $1.64 a share.

WEDNESDAY 10 MAY

US consumer price index (April)

With the Federal Reserve having raised rates again last week by 25bps, this week’s April CPI inflation data is likely to be a key benchmark feeding into whether the next meeting will see the Fed hit the pause button and keep rates unchanged after several meetings of consecutive hikes. While headline CPI fell to 5% in March from 6% in February, the picture for core prices did little to offer encouragement that inflation would continue to fall sharply. On the core measure, prices rose on an annual basis to 5.6% from 5.5%, putting core inflation above headline inflation for the first time since January 2021. It is this stickiness in core prices, as well as the resilience in the US jobs market, that is making the Fed’s job so difficult.

However, having seen the Fed hike rates at every meeting over the last 12 months, perhaps now is the time for a pause irrespective of how this week’s inflation numbers come out, given that comparable producer price index (PPI) inflation is falling quite sharply, and is already down at 3.4%, having been as high as 9.6% a year ago. Expectations for April CPI are for inflation to remain steady at 5%, while core prices are forecast to slip back from 5.6% to 5.4%. 

Walt Disney Co Q2 results 

Disney shares have slipped back from five-month highs since the company beat expectations on its Q1 numbers in February. The slide appears to have been part and parcel over concerns about CEO Bob Iger’s plan to turn the business around, particularly its loss-making Disney+ operation. Revenue came in at $23.51bn, a rise of 8% from a year ago, while profit came in at $0.99 a share. The streaming side of the business saw subscriber numbers decline to 161.8m, in contrast to Netflix, who saw streaming numbers surge in their latest quarter. Losses in this 'direct to consumer' part of the business came in at just over $1bn, although revenue was higher at $5.3bn. The parks business helped to offset the weakness here, with revenue of $8.74bn, and profit of over $3bn.

New CEO Bob Iger also outlined a turnaround plan to maximise profit, as well as announcing the loss of 7,000 jobs, in an attempt to save up to $5.5bn. The cuts are taking place mainly in the unit which was developing metaverse strategies. The company will be split into three divisions: entertainment which will include Disney+ and the TV and studios business; the ESPN business; and the parks and holidays business. Other costs savings are likely to come in the film and TV businesses, which is where the low hanging fruit are likely to be. Share price reaction since then suggests that investors are far from convinced. Profit is expected to come in at $0.92 a share.

THURSDAY 11 MAY

Rolls-Royce Q1 results; UK Q1 GDP; Bank of England interest rate decision

See our top three events, above

ITV Q1 results

Since ITV reported its full-year results in March, the shares have slipped back after trying and failing to overcome the 90p area. There had been optimism that its new streaming service, ITVX, would help consolidate ITV’s position in the competitive streaming market, as they bring all of their content under a single branding umbrella. Since its launch, ITVX has attracted 1.5m new registrations, pushing total subscriptions to 37m, while total streaming hours grew by 69%, compared to the same period a year ago when users were on other ITV streaming platforms like ITVHub.

ITV’s main strength has been ITV Studios, which is getting closer to contributing to 50% of total revenue, and which rose 19% to £2.1bn. Media and entertainment, or the advertising part of the business, saw a decline of 1% in total advertising revenue (TAR) to £2.25bn. This was at the lower end of expectations and remains the key challenge going forward.

Advertising has proved to be challenging over the last 12 months, however, the launch of ITVX does appear to have helped mitigate some of the worst effects of that slowdown. Total digital revenues rose by 18% to £411m, while total viewing hours also increased, as did UK subscribers. Adjusted full-year pre-tax profit fell by 13% to £672m, with ITV warning that the outlook for Q1 was likely to remain challenging, and that TAR in Q1 was expected to see a decline of 11%. One thing in its favour is that Q1 is a key quarter for holiday travel advertising. ITV also said it remains committed to increasing ITV Studios’ adjusted EBITDA margin guidance to between 13% to 15%. 

FRIDAY 12 MAY

Balfour Beatty Q1 results

Having seen the shares slip back sharply in the aftermath of its full-year figures in March to three-month lows, UK construction company Balfour Beatty's shares hit their highest levels since 2008 last month. It’s been a long road back for a business that was on the brink back in 2013, and also got caught up in the Carillion fallout five years ago, when it had to take millions of pounds of writedowns. Under the stewardship of CEO Leo Quinn, the company refocused its efforts on higher margin work in all of its markets, primarily in the US and UK, while disposing of underperforming or non-performing assets. Underlying revenue came in at £8.93bn, up from £8.28bn in 2021, while underlying profit rose to £279m, and the order book rose to £17.4bn, £8.5bn of which is UK work, and over £6bn in the US. The company paid a final dividend of 7p per share, pushing the total dividend to 10p.

On the outlook, Balfour Beatty said it expected to see a lift because of the $1.2tn Infrastructure Investment and Jobs act, and the Inflation Reduction Act in the US. For 2023, the company says it expects to generate £15-£30m in disposal gains, as well as intending to buy back a further £150m in shares over the course of the rest of the year. The risks to the outlook included elevated inflation levels and an increased recession risk, which might prompt delays to current projects. 

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 8 May Results
PayPal (US) Q1
Tuesday 9 May Results
Airbnb (US) Q1
BuzzFeed (US) Q1
Duolingo (US) Q1
Rivian Automotive (US) Q1
SeaWorld Entertainment (US) Q1
Squarespace (US) Q1
Under Armour (US) Q4
Warner Music Group (US) Q2
WeWork (US) Q1
Wednesday 10 May Results
Asos (UK) Half-year
Beyond Meat (US) A1
Compass Group (UK) Half-year
Groupon (US) Q1
New York Times (US) Q1
Robinhood Markets (US) Q1
Walt Disney Co (US) Q2
Wendy's (US) Q1
Whole Earth Brands (US) Q1
Thursday 11 May  Results
3i Group (UK) Full-year
Getty Images (US) Q1
Grainger (UK) Half-year
IQE (UK) Full-year
ITV (UK) Q1
Rolls-Royce (UK) Q1
US Foods Holding Corp (US) Q1
Friday 12 May Results
Balfour Beatty (UK) Q1
Spectrum Brands (US) Q2

Note: While we check all dates carefully to ensure that they are correct at the time of writing, company announcements are subject to change.


Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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