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The Week Ahead: UK inflation; US banks’ stress test; ABF, Carnival results

Has UK inflation hit double digits? We’ll find out on Wednesday with the release of the May reading of the consumer price index (CPI), which rose 9% in the year to April. Then on Thursday we’ll get the results of the Federal Reserve’s bank stress test, which the 34 US banks involved are expected to have passed comfortably. 

In a subdued week for company earnings, we’ve highlighted a few names to look out for, including Associated British Foods, cruise operator Carnival, and FedEx

OUR TOP THREE EVENTS FOR 20-24 JUNE:

Monday – Associated British Foods Q3 results

It’s been a tough 12 months for ABF, which owns Primark, Twinings, Kingsmill and other brands. Its shares slid to a nine-year low in April, before picking up slightly. The group, which divides its business into grocery, sugar, agriculture, ingredients, and retail divisions, was negatively affected by the pandemic as it lacks a business-to-consumer online operation. However, the business has proved resilient, recovering well in recent months – not that you’d know it from the share price performance. 

In April the group reported half-year revenue of £7.9bn, a rise of 25%, while adjusted profit before tax rose to £666m, up 109%. Primark was the main growth driver, with sales there rising to £3.54bn, spurred by the reopening of stores in the UK. Performance in Europe was more muted, with consumer footfall still weak, though stores in the US are trading well. 

The four food divisions saw a sharp rise in input costs, which reduced adjusted operating profits in that area by 9% to £330m. This theme is likely to continue, with CEO George Weston warning in April that price increases were likely to be necessary on a range of items at Primark. That said, he still expects to deliver on full-year adjusted operating profit targets. This could be challenging in the current inflationary environment, though in the past Primark has thrived in tough economic conditions. The company also announced in April that it will pay an interim dividend of 13.8p per share on 8 July.

Wednesday – UK CPI (May)

UK consumer prices soared 9% in the year to April, fuelled by sharp increases in the price of gas, electricity and petrol. Concerns are mounting that high levels of inflation could endure for several months, with the Bank of England now forecasting that inflation will peak at more than 11%. 

Given that high producer and factory gate prices are likely to be passed on to consumers, CPI inflation is unlikely to ease any time soon. Input prices rose 18.6% in April, more than double the rate of headline CPI. On top of this, the pound has weakened 14% against the US dollar in the last year, making goods priced in dollars more expensive. 

In a fresh bid to tame inflation, the Bank of England raised interest rates by a quarter of a percentage point to 1.25% on Thursday – the fifth rate hike since December. However, the modest rise – especially when compared to the Fed’s decisive 75-basis-point rate hike on Wednesday – suggests that the Bank’s heart wasn’t in it. They should have gone for 50 basis points, but they have once again opened themselves up to accusations of bottling the big decisions. 

If the Bank of England were looking for reasons why people have so little confidence in them, they need look no further than the events of the last few days. 

Thursday – US banks’ stress test results

As prices in the US surge and consumer confidence plummets, the results of the Federal Reserve’s bank stress test, carried out to determine US banks’ readiness for various financial situations, couldn’t come at a better time. Fortunately, with unemployment at 3.5%, its lowest level since February 2020, the results are not expected to raise any major concerns. Indeed, the results are likely to underscore the resilience of the US banking sector. 

The latest test examined how 34 US banks would perform under a hypothetical global recession. The test postulated US unemployment rising to 10% over the next two years, a 40% decline in commercial real estate values, widening corporate bond spreads, and a sharp rise in market volatility. Banks with large trading operations also underwent tests to see how they would cope if their largest counterparty were to collapse.  

MORE KEY EVENTS (20-24 JUNE):

Monday 20 June

France, Germany, UK flash PMIs (June)

Analysts expect further declines in the latest manufacturing and services purchasing managers’ index (PMI) readings, which have remained in positive territory over the past few months. Manufacturing has been the more resilient sector, posting decent numbers in the mid-50s, but downside risk remains, particularly in the UK, where April tax hikes have yet to fully impact businesses. 

The UK’s services PMI reading dropped sharply to 53.4 in May, down from 58.9 in April, as the rising cost of living impacted overall activity. Although France and Germany registered smaller declines, that doesn’t mean rising energy prices won’t impact sentiment. 

Associated British Foods Q3 results

See top three events, above

Tuesday 21 June

No major announcements

Wednesday 22 June

UK CPI (May)

See top three events, above

Berkeley Group full-year results

While the UK housing market has boomed over the past two years, the housebuilding sector has languished. Shares in FTSE 100-listed property developer Berkeley have slipped more than 20% since reaching a 52-week high last July, and they remain well below their pre-Covid highs. The stock has, however, rebounded from the March lows that resulted from the sell-off in the aftermath of Russia’s invasion of Ukraine. 

The share price’s struggles belie the company’s actual performance. Half-year revenue rose by 36.3% to £1.22bn, while profits before tax rose 26% to £290.7m. The housebuilder raised its annual pre-tax profit guidance by 5% for the next three years, with the aim of delivering profits of £625m by 2025. In Q3 the company reiterated its guidance, adding that forward sales are expected to be above £1.7bn at year end, while net cash is forecast to be £900m. Full-year revenue is expected to be £2.5bn.

Thursday 23 June

US banks’ stress test results

See top three events, above

Darden Restaurants Q4 results

The restaurant sector is feeling the burn of rising food and energy prices. In Q3, Darden, which owns the Olive Garden and LongHorn Steakhouse restaurant chains, reported revenue of $2.45bn and earnings per share of $1.93, missing expectations on both mainly because of Omicron-related disruptions. The company pointed to decent revenue growth in Q3, but also revised its inflation expectations upwards to 6% – an estimate which now looks hopelessly optimistic, as US CPI soared to 8.6% in May. 

The company plans to raise its prices by 3% to combat surging inflation, though that may not be enough to offset higher costs. Bosses have downgraded full-year profit forecasts to between $7.30 and $7.45 a share, and lowered revenue forecasts to between $9.55bn and $9.62bn. Q4 profits are expected to come in at $2.22 a share.     

FedEx Q4 results

FedEx has had a challenging year, with profit expectations frequently chopping and changing. The company started Q1 with a profits downgrade, followed by a profits upgrade in Q2. In Q3 the company changed tack again, highlighting the impact of rising costs on its overall performance. Higher wages and energy costs saw the company miss on profits in Q3, although revenue beat expectations, coming in at $23.6bn. 

The spread of the Omicron variant didn’t help either, leading to staff shortages, higher costs and other disruptions. FedEx raised its fuel surcharge fees across all shipping services from 4 April, but these higher prices didn’t completely offset the hit to profitability.

The company kept full-year profits guidance unchanged at between $20.50 and $21.50 a share, but rising costs may have put this target in doubt. Q4 profits are expected to come in at $6.87 a share.

Friday 24 June

Japan CPI (May) 

With the Japanese yen down 14% against the dollar year-to-date and the country’s central bank adopting a hands-off policy in response, there is the potential for a sharp rise in Japanese inflation which, for over 30 years, has seldom strayed above 2%. Until this year, the only time headline CPI rose above 2.5% in the last three decades was for five months in 2014. 

With Japan a net importer of crude oil and other commodities, it is extremely likely that we’ll see a further increase in headline inflation, which could prove much more persistent than it was eight years ago. Further weakening of the yen will present a challenge to the Bank of Japan’s easy monetary policy, whose do-nothing approach is in stark contrast to an increasingly aggressive Federal Reserve

Carnival half-year results

It’s been a difficult couple of years for P&O Cruises owner Carnival, with cruises one of the travel industry’s hardest-hit sectors during the pandemic. In the last pre-pandemic year of 2019, Carnival’s annual revenue was $20.8bn. This year’s total is unlikely to come close to that. Revenue in the 2021 fiscal year collapsed to $1.9bn, and while the company is on course to beat that number quite comfortably, it will be some time before normal service is resumed. 

With so little revenue coming in over the past two years, losses have been astronomical. In Q1 the company posted a loss of $1.49bn. The company said it expects to make a smaller loss in Q2, adding that bookings have started to recover as the summer cruise season gets underway. 

As of March, 75% of ships were sailing again, with CEO Arnold Donald suggesting the company could be EBITDA-positive by Q3. The sharp rise in fuel prices since he spoke may have altered the picture, but in the absence of any new travel restrictions there is a sense that the worst may be over. Again, though, the company faces a long journey back. Q2 Losses are expected to come in at $1.14 a share.

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Selected company results

MONDAY 20 JUNE RESULTS
Associated British Foods (UK) Q3
TUESDAY 21 JUNE RESULTS
DS Smith (UK) Full-year
Gear4Music (UK) Full-year
La-Z-Boy (US) Q4
Lennar (US) Q2
Safestore (UK) Half-year
Telecom Plus (UK) Full-year
WEDNESDAY 22 JUNE RESULTS
Berkeley Group (UK) Full-year
KB Home (US) Q2
Liontrust Asset Management (UK) Full-year
Micro Focus International (UK) Half-year
Steelcase (US) Q1
Worthington Industries (US) Q4
THURSDAY 23 JUNE RESULTS
Alpha Financial Markets Consulting (UK) Full-year
Apogee Enterprises (US) Q1
CalAmp (US) Q1
Darden Restaurants (US) Q4
FactSet Research Systems (US) Q3
FedEx (US) Q4
GMS (US) Q4
Rite Aid (US) Q1
Smith & Wesson Brands (US) Q4
Volex (UK) Full-year
FRIDAY 24 JUNE RESULTS
CarMax (US) Q1
Carnival (UK) Half-year
Manolete Partners (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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