The Week Ahead: UK inflation; Fed minutes; Aviva, Walmart results

Here’s our pick of the coming week’s key economic and company events:

1) UK CPI (July) – 16/08: Will the Bank of England be forced to raise interest rates again in September? Much will depend on Wednesday’s consumer price index (CPI) reading for July, as well as the inflation numbers for August which will be released just prior to the September meeting. With several members of the rate-setting Monetary Policy Committee saying that interest rate policy is now restrictive, there is a sense that we could be done on the rate hike front, whatever market swap pricing is indicating. That does not mean we should be starting to price in rate cuts, given current levels of inflation. However, the sharp fall in inflation to 7.9% in June, from 8.7% in May, does offer hope that we could see a further drop in the July print as the energy price cap reduction gets included in the headline number. This badly designed policy has been one of the main reasons why UK inflation has proved to be so sticky – despite PPI inflation falling rapidly to the extent that it is now even in negative territory when it comes to input costs. We should see headline inflation fall to 6.7% for July, although core prices are expected to remain sticky at 6.8%.                      

2) UK average earnings, unemployment (June) – 15/08: The UK unemployment rose to 4% in the three months to May, its highest level since the last three months of 2021. At the same time, pay excluding bonuses increased 7.3% year-on-year in the three months to May. The Bank of England and other policymakers have expressed concern that this sharp rise could make it more difficult to rein in core inflation, advising workers to refrain from asking for large pay rises. This somewhat ignores the Bank of England’s role in this in that the reason people are asking for pay rises is because of the central bank’s failure to nip inflation in the bud when it became apparent to almost everyone except them that the rise in prices was anything but transitory. There is a sense now, however, that inflation has peaked, although it remains elevated, and that upward pressure on wages should start to slow. However, it’s not likely to happen quickly, with inflation still over three times the central bank’s 2% target.       

3) Fed minutes – 16/08: As expected the Federal Reserve raised rates by 25bps at the July meeting after pausing in June. There were no real surprises from the statement or from chairman Jay Powell’s press conference as he reiterated his comments from June that additional rate rises will be needed, although he also insisted that the Fed’s decisions would remain data-dependent. The statement restated that inflation remained elevated, and that the committee was highly attentive to the risk that prices might remain high. Powell was non-committal on whether the Fed would raise rates again at its next meeting in September, merely restating that if the data warranted it, the central bank would do so. Recent commentary from several FOMC policymakers appears to suggest growing splits between those who think that a lengthy pause is appropriate now, and those who want further tightening. It will be interesting to see whether these differences of opinion come to the fore in the minutes, given how they are already manifesting themselves in recent commentary. Hawks like Fed governor Michelle Bowman continue to push the line that the Fed needs to do more. In contrast, Atlanta Fed President Raphael Bostic thinks the Fed needs to pause.      

4) China retail sales (July) – 15/08: After a strong start to the year Chinese retail sales have struggled to match the performance seen in April when retail sales rose 18.4%. Since that solid gain spending patterns have struggled, despite the weak comparatives of an economy that was, for the most part, subject to lockdowns and restrictions. The May numbers saw a gain of 12.7%, while June saw another slowdown to 3.1%, as the Chinese economy showed lacklustre growth of 0.8% in Q2, a sharp slowdown from the 2.2% seen in Q1. As Q3 gets underway we can expect to see a modest improvement of 3.8%, but it’s quite clear that demand remains weak. This is supported by recent inflation numbers that showed PPI inflation in June falling 5.4%, its fastest rate of decline since 2015, while CPI in July slipped into deflation territory, falling 0.3%.     

5) UK retail sales (July) – 18/08: While we’ve heard plenty of alarmist headlines over the effects of global warming in the past few months, at least the weather gave UK consumers a reason to go out and spend in June, beating expectations of a gain of 0.2% with a rise of 0.7%. Not only did sales in supermarkets and food outlets see a decent rebound, but we also saw a strong showing from department stores and furniture outlets. Retail sales have proved to be remarkably resilient in the past few months with gains over the course of April, May, and June. The resilience in wages growth over the past few months may also have played a part in this resilience, but heading into Q3 the big question is whether this can be sustained. Recent spending data from Barclaycard showed entertainment spending rose 15.8% in July on the back of an uptick in spending on live events, including concerts by Taylor Swift, as well as bookings for holidays after a warm June. There were also four big movie releases in the form of Indiana Jones, Mission Impossible Dead Reckoning, Barbie and Oppenheimer. On the flip side, spending on clothing saw a decline due to the wet weather. If we see another positive month for July retail sales, could we call it a Barbie bounce? July retail sales are expected to fall by 0.7%. 

6) Aviva half-year results – 16/08: It’s not been a great year so far for the Aviva share price. The shares are just above one-year lows, despite a strong start to the year back in May when the insurer reported Q1 results. The performance was driven by higher demand for private health care due to the NHS strikes, helping to drive strong gains in general insurance and health. Private healthcare sales rose by 25%, while workplace pensions also performed well; however, a 15% decline in wealth net flows, along with a decision to leave its full-year guidance unchanged, underwhelmed shareholders who may have been looking for a better performance. 

7) Balfour Beatty half-year results – 16/08: One of the UK’s biggest construction companies, Balfour Beatty is a useful bellwether of the UK economy and has been a significant success story over the past few years under the careful stewardship of CEO Leo Quinn. As the company refocuses its efforts on higher-margin work in its core markets of the UK and US, the shares hit their highest levels since June 2008 back in May, although they have slipped back to the lows of the year since then. When the company reported back in May management reaffirmed their full-year guidance, saying that trading was in line with expectations, with profits expected to be in line with 2022 levels. At the end of March, the order book was at £17bn, down from £17.4bn at the end of last year, with new orders added including a £297m road maintenance project in East Sussex, and a $230m design build for a data centre operation in the US Northwest.

8) Walmart Q2 results – 17/08: After hitting five-month lows in the March sell-off, shares of Walmart are trading close to record highs. The largest retailer in the US has managed not only to maintain healthy sales growth, but also returned record revenues at the end of last year. In Walmart’s Q1 numbers there was little sign that US consumers were feeling the pinch of higher prices. Revenue in Q1 rose by 7.6% to $152.3bn and profits came in at $1.47 a share, beating forecasts of $1.30. The e-commerce division saw solid growth of 27% in the US, while international sales also performed well as gross margin increased by 12bps, led by Flipkart and China. Walmart also beat on its quarterly comparable sales forecast of 5%, with a sales increase of 7%. The company raised its full-year profit guidance to $6.20 a share, up from $6.05 a share previously. For Q2 Walmart said it expects adjusted EPS of $1.63 to $1.68 a share. 

9) Target Corp. Q2 results – 16/08: While Walmart has managed to go from strength to strength despite the squeeze on consumer incomes, Target has struggled over the last 18 months. In June its shares fell to their lowest levels since mid-2020. Over the past few months there have been several cuts to guidance, with management warning of “shrinkage” impacting margins, which is a euphemism for theft. Revenue in Q1 came in at $25.32bn, while profit beat consensus at $2.05 a share. Target went on to warn that theft was running rampant in certain areas, and that it could cost the business up to $1.1bn over the year. The company went on to say that the problem could prompt store closures in those problem areas. For Q2 Target said it expects to see profit slip to between $1.30 and $1.70 a share, although its full-year profit guidance of $7.75 to $8.75 a share was kept unchanged.  

10) Home Depot Q2 results – 16/08: DIY retailer Home Depot’s share price fell to six-month lows back in May, though they’ve seen a modest rebound since then, with US consumers taking the view it’s better to spend money on their existing property than move and have to pay a higher mortgage rate when they refinance a move to a new property. The slide to the May lows came in the wake of a disappointing set of Q1 numbers after the retailer downgraded its full-year outlook again. In February, the retailer downgraded its outlook to forecast flat sales growth for 2023, and in May they moved the bar even lower, predicting a full-year sales target of between -2% to -5%, while Q1 revenue also came in light at $37.26bn. The underperformance over the quarter was blamed on poor weather and lumber deflation, but with the bar so low for Q2 there is a chance that the numbers could see a substantial improvement. Q2 revenues are expected to come in at $42.08bn, down from $43.8bn, with profits expected to come in at $4.45 a share.

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SELECTED COMPANY RESULTS

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