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The Week Ahead: Fed, BoE, RBA rate decisions; BP, Shell results

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

Interest rate decisions are a key theme of the coming week, with central banks in the US and the UK set to raise rates. Macroeconomists will also be keeping tabs on Friday’s US jobs report, which is expected to show that 400,000 jobs were added to non-farm payrolls in April. 

It’s also another busy week for corporate earnings, with UK energy giants BP and Shell due to announce their Q1 results. Also reporting this week are British retailer Next, airline operator IAG, and the US owner of the Odeon cinema chain, AMC Entertainment. 

OUR TOP THREE EVENTS FOR 2-6 MAY:

Tuesday – BP Q1 results

Shares in BP, like those in fellow oil and gas company Shell, have been among the FTSE 100’s best performers so far this year. This is welcome news for shareholders who endured punishing losses in 2020, when demand for fossil fuels collapsed amid Covid restrictions, and oil companies cut production as energy storage capacity ran out. BP posted a $20.3bn loss in 2020, as it sought to cut its debt levels and adapt its business model for the challenges of diversifying away from its legacy oil and gas business. 

In 2021, BP set out a 10-year plan to meet its climate goals, pledging to cut its oil and gas production by 40% and boost spending on low-carbon energy to $5bn a year. This suggests that renewables still only make up around a third of its total capital expenditure, although it says it expects energy-transition spending to increase to around 40% by 2025. This still seems low if BP is to meet its target of generating 50GW of renewable energy by 2030. 

BP posted an annual profit of $12.8bn last year, prompting calls for a windfall tax – a one-off levy that the UK government is now said to be considering, having previously opposed it. Despite BP’s bumper profits last year, the company has still lost more than $8bn over the last two years, a fact that tends to get forgotten. 

There is a case for arguing that the oil majors should use their profits to invest more in transitioning away from fossil fuels. BP says that it expects to spend between $14bn and $15bn on capex in 2022, which seems a little on the low side. But the big question is how much of that will go towards renewables, which tend to offer lower returns. When BP reported back at the end of last year, CEO Bernard Looney said that in the short term more investment in natural gas was needed, which some see as controversial. 

The upcoming Q1 numbers will be boosted by higher oil and gas prices, but the gains are set to be outweighed by BP’s writing down of its 20% stake in Russian energy company Rosneft following Russia’s invasion of Ukraine. Looney stepped down from Rosneft’s board with immediate effect in February. Bp’s involvement in Russia always had the potential to become an albatross, and so it has proved. Without a potential buyer, the write-down of its Rosneft stake could cost BP up to $25bn, pushing the company into a loss – not only for Q1, but for the year as well.  

Wednesday – US Federal Reserve interest rate decision

The US Federal Reserve is widely expected to raise interest rates by half a percentage point in May, taking the upper end of the Fed Funds rate to 1%. The bigger question now surrounds the speed of the Fed’s balance sheet reduction programme, and the pace of further rate hikes. 

Fed chair Jay Powell hinted a week ago that the Fed could move harder and faster on rate hikes, prompting concern that the Fed could overtighten monetary policy at a time when the global economy is slowing amid China’s game of Covid whack-a-mole. While markets will be looking for signals on the likelihood of further half-point rate rises, we’re also keeping tabs on balance sheet cuts. There is a growing consensus that the Fed could trim $95bn of assets a month from its balance sheet, of which $60bn is likely to be in treasuries, with $35bn in mortgage-backed securities. 

The minutes from the Fed’s March meeting made it clear that some officials wanted no limits on how fast the balance sheet run-off is carried out. This suggests that policymakers are poised to announce not only a half-point rate rise on Wednesday, but could also start shedding assets. That would mark quite an about-turn, as the Fed only stopped adding to its balance sheet in March. 

Thursday – Bank of England interest rate decision

With UK inflation soaring to 7% in March and retail sales volumes plunging 1.4% during the same month, the Bank of England faces a tough task. Some members of the Bank’s Monetary Policy Committee, including Sir Jon Cunliffe, are concerned about the negative impact that a further interest rate rise could have on the UK economy, demand and consumer confidence. However, it’s equally hard to ignore the impact of rising prices, which are now becoming embedded across areas including clothing, furniture, groceries and restaurants. Meanwhile, a sinking pound is adding further pressure. With input prices running at 19.2%, headline inflation is certain to come under further pressure. 

The Bank of England is likely to have little choice but to raise rates on Thursday, if only to keep pace with the US Federal Reserve and maintain rate differentials. Some may argue that the UK’s central bank could get away with a series of quarter-point rate rises. However, others may counter that such an approach could appear timid if not tied to strong forward guidance, potentially signalling weakness in the Bank’s efforts to meet its government-set 2% inflation target. It seems that the bigger risk would be to do nothing. Most economists are expecting a quarter-point rise, bringing the base rate to 1%.

MORE KEY EVENTS (2-6 MAY):

Monday 2 May

No major announcements

Tuesday 3 May

Reserve Bank of Australia interest rate decision

With an election looming later this month it would be a surprise if the RBA were to raise rates this week, but a hike is coming with the most probable timing being next month. In April, the central bank removed the word “highly” when referring to supportive monetary conditions, as well as removing the word “patient” when it comes to reacting to changes in the factors that are driving inflation higher. This suggests the central bank is becoming much more concerned about rising prices which means that we can probably expect a move imminently, after quarterly CPI jumped to 2.1% from 1.3%.

A move on rates this week is also unlikely because of concerns about the politics of such a move so near to the vote, though I also wouldn’t rule it out. That said the delay in acting also points to the folly of its stubbornness in being too dovish early on this year when it became plain that it would probably need to move sooner rather than later. The RBA has found itself well behind the curve when it comes to its own rate-hiking cycle, held hostage by an overly cautious approach to inflation in contrast to the RBNZ which is well out in front. Like the ECB, the RBA had been at pains to insist a rate rise this year was unlikely, a position that was never remotely credible. With the Federal Reserve set to go with a 50bp move later in the week, and the Bank of England also set to move with another 25bp move, this week’s meeting should at least allow Governor Philip Lowe to set the scene for a move next month.

BP Q1 results

See top three events, above

Pfizer Q1 results

As we come out the other side of Covid the share prices of various vaccine makers have started to slide back from the record highs of last year. Pfizer has done particularly well given its position at the top of the vaccine supply chain, as well as its decision to partner with BioNTech SE to distribute its MRNA vaccine. Last year was a record year for the company as it generated $81.3bn in revenues, compared to $41.9bn in 2020. For 2022 annual revenues are expected to rise to a record $102bn, after the company increased its prices, with over half expected to come from its new Covid pill and the vaccine, to the tune of $54bn, an absolutely eye-watering sum, while profits for 2022 are expected to rise to $6.35-$6.55 a share. Pfizer says it expects to spend $11.5bn in R&D this year. 

Wednesday 4 May

US Federal Reserve interest rate decision

See top three events, above

Uber Q1 results

Uber’s diversified business model helped it beat expectations on its Q4 numbers as revenues rose to $5.8bn, above consensus expectations of $5.4bn. Its Uber Eats business managed to turn over more revenue than the rides business with a 78% increase to $2.42bn, helping it to generate a positive return on an adjusted EBITDA basis of $86m. Ride hailing still generated $2.28bn, though it is becoming clear that the pandemic is a double-edged sword for Uber. While Omicron is hampering the rebound in its mobility business, the deals to include groceries and alcohol on top of restaurant orders is boosting the delivery business no end. For Q1 the company expects gross bookings to remain steady at $26bn, slightly below consensus, and adjusted EBITDA of $100m to $130m. Losses are expected to come in at $0.28 a share. 

Thursday 5 May

Bank of England interest rate decision

See top three events, above

Shell Q1 results

The rise in oil and gas prices has helped Shell’s share price recover after a difficult 2020, which saw the company post huge losses. The oil company also enjoyed a decent rebound in profitability in 2021, prompting management to announce that it will increase the number of shares it is buying back by $3.5bn, bringing the total buyback to $8.5bn. Profits for 2021 bounced back to $17.07bn, a decent improvement, but still not enough to offset the $19.9bn losses posted in 2020. In Q4 most of its profits boost came from its integrated gas business, which delivered more than $4bn. The refining and trading business slipped to a loss of $251m in Q4, largely due to higher costs and maintenance shutdowns

In the short-term profits are likely to remain a tail wind for the oil and gas industry, as the reluctance to invest in transitional capacity as we move towards renewables continues to underpin prices, but we should also be aware that Shell, like BP, is set to take a hit on its Russian business, albeit a slightly more modest one of around $5bn. Back in March Shell announced that it would be pulling back from its involvement in all Russian hydrocarbons, including its 27.5% stake in the LNG Sakhalin gas field, and that doing so would cost it a total of $4bn to $5bn, across all its businesses. On capex Shell is spending a much higher amount than BP at between $23bn and $27bn. Shell has also been spending money in the area of renewables, completing the purchase of solar and energy storage developer Savion in the US at the end of last year, as well as winning bids with Scottish Power to develop 5GW of floating wind power in the UK in January this year. However, like BP’s results, Shell’s numbers this week are likely to be overshadowed by the losses and write-downs in its Russia exposures.         

Next Q1 results

With the cost-of-living crisis set to get worse, the decline in the Next share price since the end of last year speaks to a concern on the part of investors that retail is entering a challenging business environment. In March, Next downgraded its estimates for 2023 profit growth by £10m to £850m, and lowered its revenue guidance by 2%. The downgrade is mainly down to the closure of its websites in Ukraine and Russia, as well as the prospect of lower sales due to the rising cost of living.

Despite the lowering of revenue guidance, profits are still expected to rise by 3.3%, while full-price sales are predicted to rise by 5%. With the shares already down over 20% year-to-date there is an argument for asking whether there is worse to come during the summer months. Despite the downgrade, the profit estimate still compares well to last year's profit of £823.1m, which was an increase of 10% on 2020 levels. With the latest CPI numbers showing that clothing and household goods prices are rising sharply, shareholders will be hoping that there are no further downgrades linked to rising costs. This seems unlikely given recent data on retail sales and headline inflation. 

Friday 6 May

US non-farm payrolls (April)

The last jobs report was a strong one across the board, with 431,000 jobs added in March, slightly below expectations of 490,000. This was more than offset by an upward revision to the February number, when 750,000 jobs were added, up from an initial estimate of 678,000. The unemployment rate fell to 3.6% in March, down from 3.8%.

Adding fuel to the fire was a rise in the labour market participation rate to 62.4%, while growth in average hourly earnings climbed from 5.2% to 5.6%, the highest level since May 2020.

Since then, there has been little sign that the US economy is slowing, with the latest surveys still showing fairly strong demand, although pricing pressures have started to turn higher again which could start to weigh on consumer sentiment. Vacancies in the US are still at elevated levels and this week’s April jobs report is expected to continue to show strong hiring trends given weekly jobless claims are at levels last seen in the late 1960s.

Expectations are that 400,000 jobs were added in April, with the unemployment rate expected to have remained steady at 3.6%, with wage growth also stable at 5.6%. As an interesting aside, it’s also worth keeping an eye on the March consumer credit numbers, later in the day, after February’s blow-out number of $41.8bn. 

IAG Q1 results

The recent updates from US airlines prompted a decent uplift in expectations for IAG's revenues and profits over the course of the rest of this year. Last month we heard from the likes of Delta, United Airlines and American Airlines, who said they expect to return to profit this year, as business and leisure travel started to return to more normal levels of activity.

In February British Airways owner IAG reported a full-year loss after tax of €2.9bn, following on from 2020's €7.45bn deficit. While this was a significant improvement, it highlighted the extent of the challenges facing the sector. The return of transatlantic travel in November last year did improve Q4 performance, with a loss of €278m, compared to a €1.48bn loss over the same period a year earlier.

Current passenger capacity forecasts for 2022 were for 65% of 2019 levels for Q1, rising to 85% over the rest of the year. With respect to the outlook the airline said it expects to return to operating profit in Q2, assuming no further Covid-19 restrictions or other setbacks, although higher fuel prices might delay that. Finances continue to be a concern, with some speculation that the airline might need to raise additional funds. There is also pressure from the likes of France and Germany over the ownership structure of the business since Brexit. This could force it to consider the sale of its British Airways brand to address these concerns, which would be no bad thing given that under IAG’s ownership the brand has become tired and tatty.  

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Selected company results

MONDAY 2 MAY RESULTS
Avis Budget Group (US) Q1
Chegg (US) Q1
Expedia Group (US) Q1
Global Payments (US) Q1
Loews (US) Q1
MGM Resorts International (US) Q1
TUESDAY 3 MAY RESULTS
Airbnb (US) Q1
Amcor (US) Q3
BP (UK) Q1
Card Factory (UK)  Full-year
Cazoo Group (US)  Q1
Denny's (US) Q1
Estee Lauder (US) Q3
Gartner (US) Q1
Lear (US) Q1
Lyft (US) Q1
Pfizer (US) Q1
S&P Global (US) Q1
Starbucks (US) Q2
WEDNESDAY 4 MAY RESULTS
Aston Martin Lagonda Global (UK) Q1
boohoo Group (UK) Full-year
Harvard Bioscience (US) Q1
iRobot (US) Q1
Lumen Technologies (US) Q1
MetLife (US) Q1
New York Times (US) Q1
TripAdvisor (US) Q1
Twilio (US) Q1
Uber Technologies (US) Q1
Vimeo (US) Q1
Wingstop (US) Q1
THURSDAY 5 MAY RESULTS
Dolby Laboratories (US) Q2
Dropbox (US) Q1
Endeavour Mining (UK)  Q1
GoPro (US) Q1
Helios Towers (UK)  Q1
Kellogg (US) Q1
Next (UK)  Q1
Papa John's International (US) Q1
Portillo's (US) Q1
SeaWorld Entertainment (US) Q1
Shake Shack (US) Q1
Shell (UK)  Q1
SunPower (US) Q1
Trainline (UK)  Full-year
Virgin Galactic Holdings (US) Q1
Virgin Money (UK)  Half-year
Wayfair (US) Q1
Yelp (US) Q1
FRIDAY 6 MAY RESULTS
International Consolidated Air (UK)  Q1

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


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