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Market Outlook

The Week Ahead: US non-farm payrolls; BP, IAG results

Read our pick of the main stories to look out for in the coming week (1-5 November), and view our key company earnings schedule.

This week, Michael looks forward to a busy week for central banks, with the US Federal Reserve set to outline a taper timeline, and the Bank of England and Reserve Bank of Australia eyeing a possible rate hike. He also looks ahead to the latest US non-farm payrolls data, and previews a fresh round of corporate results from the likes of BP, IAG, Sainsbury's, BT, Moderna and Pfizer.

TOP 3 EVENTS:

US non-farm payrolls (Fri 05/11)

The last two US jobs reports have been somewhat weaker than expected, disappointing those who had hoped to see the US labour market make a speedy post-Covid recovery. Employers in the US added just 194,000 jobs in September, down from 366,000 in August and well below this year’s monthly average of 561,000. The labour market participation rate was almost static in September, at 61.6%. However, the unemployment rate fell from 5.2% in August to 4.8% in September. Jobless claims have also continued to decline, with the number of continuing claims falling to 2.48m in the week ending 16 October, down from almost 3m in the last week of July. 

When US Federal Reserve chair Jay Powell said that even a half-decent jobs report in September could allow the Fed to begin scaling back its $120bn-a-month stimulus measures in November, it’s unlikely he had a number of 194,000 in mind – the weakest US jobs report this year. Nonetheless, by the time we get to see the October numbers, the Fed will have announced its tapering timetable.

It is expected that October will see an improvement in hiring trends, after headwinds in September delayed a return to work in the education and care sectors. The report from payroll processing firm ADP, which showed that private jobs rose by 568,000 in September, was a positive sign, supporting the notion that the hiring slowdown may be driven by sector-specific factors. For October, early indications are that non-farm payrolls grew by about 390,000 jobs, with unemployment stable at 4.8%. 

BP Q3 results (Tues 02/11) 

BP posted its best results since 2019 in the first half of this year, helped by the recent surge in oil and gas prices, which has been a lifeline for the oil giants after the pandemic-induced price slump. On 3 August, BP reported an underlying replacement cost profit of $2.8bn for Q2, up from $2.6bn in Q1, marking a turnaround from the $6.7bn loss posted a year earlier and helping BP increase its dividend to 5.46 cents a share. The company also announced its intention to use half-year surplus cash flow to execute a $1.4bn share buyback. Based on its forecast of a Brent crude oil price of around $60 a barrel, BP said that there is scope to increase the dividend by 4% a year through to 2025, and deliver share buybacks of around $1bn a quarter on average. As expected, cash flow in Q2 was lower than in Q1, decreasing $700m to $5.4bn. That latter figure includes a $1.2bn payment for the Gulf of Mexico oil spill in 2010. 

Since August, BP’s share price has climbed more than 20% to reach 350p, its highest level since June 2020 but below pre-pandemic levels of more than 400p, suggesting that CEO Bernard Looney still has some way to go in convincing shareholders that a shift in focus towards renewable energy can deliver similar returns to fossil fuels. Talking about “performing while transforming” is all well and good, but BP needs to prove to shareholders and the markets that it can transition to renewables without hammering margins. BP can highlight bids for wind power leases, investment in solar, and infrastructure projects such as its EV charging stations and an MoU with Piaggio – owner of the Vespa motorcycle brand – to explore opportunities for collaboration on charging stations in India. However, the real challenge lies in augmenting grid capacity, and there appears to be little to no investment in that from the oil majors or anyone else. 

At the same time, the jury remains out on whether BP’s plan to cut oil and gas production by 40% is feasible. Half-year profits from oil production and operations totalled $3.8bn, while gas and low carbon energy came next, contributing $3.5bn. Profits from these areas in Q3 should be even better, as higher energy prices are likely to outweigh the impact of supply chain issues.

IAG Q3 results (Fri 05/11)

Business conditions remain a challenge for airlines, though the announcement in September that the US plans to reopen its borders to vaccinated UK and European travellers from November offered a few rays of optimism. When British Airway-owner IAG reported its half-year results at the end of July, it cushioned the blow of an operating loss of $2.18bn by highlighting the reopening of the transatlantic travel corridor as a positive development for the months ahead. Indeed, across the industry it was hoped that the lifting of overseas travel restrictions would provide a much-needed fillip to airlines, as they look to ramp up capacity to meet pent-up demand. Unfortunately for the airlines, the light at the end of a very long tunnel seems to be the train of rising fuel costs, higher airport charges and the prospect of further Covid restrictions. 

Unsurprisingly, IAG’s CEO Luis Gallego declined to offer a financial outlook for the second half of the year, citing uncertainty over travel restrictions and the ongoing impact of Covid-19. Although the US and the UK are in the process of removing travel restrictions, uncertainty persists. Consumer confidence in air travel remains patchy, while in Asia infection rates are rising again, bringing another round of travel restrictions. IAG said that Q3 capacity would rise to 45% of pre-pandemic levels. It will be interesting to see if this target was met when the company announces its Q3 results. 

OTHER KEY EVENTS:

TUESDAY 2 NOVEMBER

Reserve Bank of Australia rate meeting

In September, many analysts thought that the RBA might delay its decision to taper its weekly bond-purchase programme from A$5bn to A$4bn a week, after lockdowns were imposed in various parts of the country. While the RBA pressed ahead with its cautious scaling back of stimulus measures, the bank also extended the timeline for tapering into February next year from November, apparently acknowledging that economic recovery will likely take longer as a result of the various lockdowns. As we look to this week’s November meeting, the outlook for the economy as summer approaches and restrictions are lifted looks much better than it did a month ago, despite concerns about rising prices. With the Reserve Bank of New Zealand raising rates last month, attention has shifted towards the RBA potentially doing something similar, hence the recent surge in the Australian dollar. With rates at a record low of 0.1%, markets appear to be betting that we could see a rate rise as soon as this week. Three-year yields have already moved up to 0.75% compared to the RBA’s target rate of 0.1%. This suggests that rates are likely to move before the end of this year, supporting the notion that we could see a move this week. It’s a remarkable turnaround from two months ago when markets were speculating about a delay to the RBA’s tapering plan. A middle ground for the RBA would be to go down the Bank of Canada route and end their asset-purchase program, as they originally planned to do in November.

Pfizer Q3 results

Pfizer has been at the forefront of the vaccine program along with its partner BioNTech, and in earnings terms it has been cleaning up. However, in share price terms we’ve seen a drop of over 10% since its record highs in August. At its last set of numbers, the company raised its forecast for vaccine sales to $33.5bn this year from $26bn, which is extraordinary. When you consider that its total revenue for all of 2020 was $41.9bn that’s quite a sum, and just goes to show what a money-spinner the vaccine has been. Next year is likely to be even better for Pfizer given that the company is increasing its prices to the EU from €12 to €19.5 per dose in 2022/2023. Revenue estimates for 2021 have been lifted to $73.87bn, with adjusted net income expected to double to $21bn. It does rather make you question how much profit is too much profit, where a lifesaving vaccine is concerned.

WEDNESDAY 3 NOVEMBER

US Federal Reserve meeting 

While we’ve seen rising concern that the Bank of England might be on the cusp of a policy mistake by raising interest rates, the debate around the US Federal Reserve appears to be the reverse in that there are an increasing number of voices who say they are moving too slowly. This week's Fed meeting is widely expected to see the central bank lay out a timetable to start the tapering of its asset-purchase program, against a backdrop of surging energy prices. Factory-gate prices are also at multi-year highs. There does appear to be a growing recognition amongst some Fed officials that inflation is likely to be much more persistent than was previously envisaged. It is clear that the Fed’s narrative for acting has shifted away from the labour market, and there is a wider acknowledgement about rising inflation risk. However, once the taper timetable has been outlined, Fed officials will then come under increasing pressure to outline a timetable for an increase in interest rates, a move that Fed Chair Jay Powell has already indicated is not imminent and could be as much as a year away. At its last meeting, the number of Federal Open Market Committee members who saw the potential for a rate rise next year increased to 9, up from 7 in June, meaning that the committee is now evenly split. Once the taper starts, that even split is likely to change if the data evolves as expected, which means that a rate hike for 2022 could well become a majority view by the end of this year, which is a big shift in thinking from earlier this year. A faster taper, however, could also bring this date forward, especially if policymaker thinking were to shift as we head into 2022.    

Services PMIs

The latest flash PMIs from France, Germany and the UK were a bit of a mixed bag.  We saw an improvement in France, the UK, and the US, while German services activity slipped to its lowest levels since February. While the numbers were broadly better than expected, it appears that increasing concern about higher prices – not only in energy but also more broadly, as companies pass on higher costs – is continuing to weigh on economic activity. While rising costs have been most notable in the UK and the US, it is now much more noticeable in supply chains in France and Germany. As an example, German PPI rose by 14.7% in September, the highest levels since the 1970’s, while CPI is also continuing to rise sharply. The extent of these price rises is prompting some alarm among policymakers at major central banks. And, with the Bank of England and US Federal Reserve due to meet this week, we could see a reaction to this. We are already starting to hear louder rumblings from some members of the European Central Bank. However, with core CPI just above 2% in the eurozone –  half that of the UK and US – the ECB is likely to remain behind the curve.

Next Q3 results

When listening to all the woes that are impacting the retail sector it is also important to note that some have been doing very well, with those that have strong online operations able to withstand the headwinds of Covid. Next's share price hit a new record high at the end of September after the retailer reported better-than-expected half-year results and raised its full-year guidance for the fourth time this year. Full-price sales for the last eight weeks rose 20%, well above expectations, while for the whole period the company saw an 8.4% increase in sales compared to 2019. This outperformance has seen profits before tax rise to £347m, up 5.9% from 2019 levels, prompting management to upgrade full-year guidance from £764m to £800m, a five-year high. However, this came with the caveat that some areas of its business were coming under pressure from rising costs and staff shortages which might prolong its delivery times in the lead-up to Christmas. Next CEO Lord Simon Wolfson pointed to this as a potential pinch point for the second half of this year, saying that Next stock levels were down 12% from the pre-pandemic period, but that they were coping, although costs could well go up as warehouse space becomes more expensive.

THURSDAY 4 NOVEMBER

Bank of England meeting

Over the last few weeks UK two-year gilt yields have more than tripled, from 0.2% at the beginning of September to more than 0.7%, over concerns that inflation might not be as transitory as central bankers might have us believe. There was always a risk that central banks could appear slightly complacent if they did nothing while global issues of rising energy prices and supply chain disruptions continued to push up prices. Before he left his post as chief economist at the Bank of England, Andy Haldane was already arguing that the central bank’s asset-purchase program might need to be scaled back, along with external Monetary Policy Committee member Michael Saunders, who was the remaining lone dissenter at the last meeting. Since then, the narrative has shifted sharply with Bank of England governor Andrew Bailey expressing concern about rising inflation expectations, adding that the central bank might have to act to counter an increase in pessimism about the inflation outlook. These concerns have been echoed by new chief economist Huw Pill, Haldane’s successor, in much more assertive terms. This has prompted markets to price in the prospect of multiple possible interest rate rises by Bank of England before the end of next year, amid talk that the central bank might be on the cusp of making a policy mistake. The argument goes that amid concerns about various supply chain disruptions and surging energy prices, the last thing the economy needs is a rate hike. That argument overlooks the fact that the market has already factored in a move by the central bank and that for the bank not to introduce a modest rate increase by the end of this year would damage what credibility it has left. A rate increase of 0.15% to 0.25% would not be the end of the world and would be entirely consistent with the recovery in the UK economy seen since the emergency measures were implemented back in March 2020. It will be how the central bank manages the message when it comes to further rate rises that will be key, and not whether they raise rates this week, or at next month’s meeting. The central bank will likely have to raise its outlook for inflation, while at the same time adjusting its growth forecasts as part of this week’s inflation report.   

BT half-year results

It’s not been a great quarter for the BT share price. After peaking at just over 205p in June the shares have slid back more than 30%, falling below 150p in October, as concerns grow over BT's ability to compete in the increasingly competitive space of fibre and 5G as it looks to fund a long-term infrastructure rollout plan. This plan includes accelerating the build of its FTTP network, with a target of 25m homes by December 2026, and a target of over 5m in 2021/2022.The company also announced long-term 5G network plans that would cover 90% of the UK by 2028, as well as 4,500 square miles of new rural 4G coverage by 2025. Revenue in Q1 fell 3% to £5.07bn, largely due to underperformance in its global enterprise division, although adjusted EBITDA rose to £1.87bn. Reported profits after tax came in at £446m, while capital expenditure rose 63% to £1.5bn. Its consumer and Openreach divisions saw revenue rise 1% and 5% respectively, however the biggest concern for BT is around its debt levels, and its pension deficit, which are both quite high. There has been talk that BT is open to offers for its BT Sport unit, by way of an outright sale, or a partial sale, with CEO Philip Janssen saying he is open-minded on the issue. However, there haven’t been many nibbles thus far, with ITV ruling itself out in the summer, although streaming service DAZN is said to be in the frame. The division certainly adds value to BT's consumer business, but it’s not adding subscribers as quickly as management would like. Compared to Sky, its main competitor, BT doesn’t have as broad a range of content, and sports rights aren’t exactly cheap these days. It also remains an expensive luxury for a company that needs to spend a lot of money boosting its infrastructure in the coming years. There is also the added wrinkle of the recent £2bn investment in BT by Altice back in June, which could be a prelude to a takeover bid next year. While Altice said they weren’t interested in making a bid, that certainly doesn’t preclude getting more involved if they feel certain things could be done differently, or more effectively. Altice CEO Patrick Drahi isn’t generally known to be the type of investor to sit back and observe.

Sainsbury's half-year results

The recent tug of war over Morrisons has seen interest in the UK supermarket sector ramp up in recent months. In August, Sainsbury's share price hit a three-year high, reaching the levels they hit when the ill-fated Asda deal was first mooted. Since then, the shares have underperformed, with the eventual blocking of the Asda takeover setting the business back. The shares fell from those 2018 peaks to lows of 172p in March 2020, before rebounding. In the years since, there has been interest from other external parties who appear to see value in the business, which could provide an obstacle to any potential sale. Czech billionaire Daniel Kretinsky is one such shareholder, increasing his stake in the business over the past few months to just shy of 10%. A few years ago, there was also speculation about a bid from the Qatar Investment Authority, currently the biggest institutional shareholder with a 15% holding, though this proportion is down from its peak of just over 20% a few years ago, with Kretinsky the main buyer.

As we look ahead to this week’s half-year numbers, it was worth casting an eye over Q1 numbers. In Q1, total like-for-like sales rose 1.6%, with grocery sales up 0.8%. Given how strong sales were for the same quarter in 2020, this was a pretty decent performance, and was also up 11.3% on 2019 levels. Online sales were a key driver, up 29% year-on-year and up 142% on 2019 levels. Sales at Argos were somewhat disappointing, down 3.7% year-on-year, which dragged on the overall numbers. However, that didn’t stop Sainsbury's upgrading their underlying profit before tax forecasts for the year from £620m to £660m, with most of the improvement expected to be weighted towards the first half of the year. This week’s numbers are likely to face several cross-currents: notably, a boost from Euro 2020 on the back of increased food and beer sales, while on the flip side the latest Kantar numbers showed that grocery sales slowed in the 12 weeks to 3 October. The petrol shortages also forced shoppers to limit supermarket visits, while online sales crept up, with some starting to buy Christmas-related products already. For now, there appears to be little sign that rising prices might be acting as a brake on sales, but that could change as we approach year-end.      

Moderna Q3 results

Moderna continues to reap the benefits of its vaccine. Its shares hit new record highs after the release of Q2 numbers, which showed revenue of $4.4bn, well above expectations, with the vaccine accounting for $4.2bn of the total. Profits in Q2 came in at $6.46 a share, with the company announcing a share-buyback programme of $1bn over two years. We also saw the latest vaccine data, which showed that the second Covid jab was still 93% effective six months after being administered. A year earlier, Q2 revenue was a mere $67m, illustrating how far this company has come in a short space of time. Full-year capital expenditure for 2021 is expected to be in the region of $450m to $550m, as the company strives to add additional capacity. Since those heady August peaks, the share price has slipped back a touch over concerns about the vaccine's use in adolescents. There was also Merck's announcement in October that they had produced an anti-viral pill, which had produced successful trial results. A year ago, Moderna generated $157.9m in revenue, while this year we can expect to see a number in excess of $6.2bn, with profits expected to rise to $9.33 a share.  

Uber Q3 results

Uber shares drifted down to a ten-month low in the wake of their Q2 results in August, despite beating on revenue and bookings, before finding a base in September and starting to push back towards the $50 level. Gross bookings in Q2 rose to $21.9bn, while decent growth in its delivery business saw revenue rise to $8.6bn. Losses increased from $108m in Q1 to $509m, partly because of increased costs, as the company spent more money on driver recruitment amid increased demand for delivery capacity. Uber said it expected losses to narrow to $100m in Q3 and was hopeful of a profit in Q4. As unemployment benefits expire in September the expectation is that driver costs may well moderate as more people are forced back into the workforce. Last year the business posted an annual loss of $6.77bn, which, while better than expected, was still only a 20% improvement on the previous year's $8.51bn losses. One could argue that this is a small victory, given that the company’s ride sharing business was severely impacted by the pandemic and is still recovering. The company appears to be looking to upsize its delivery capacity, with deals to move into grocery as well. This improvement in its delivery business appears to be behind the recent resilience, with the company closing the deal for alcohol e-commerce platform Drizly in October. The company is also looking to move into freight with the recent deal to buy Transpace for $2.25bn. As we look at the current quarter, we may see a further increase in bookings as more people leave home with a sense that it is safe to do so, thanks to the vaccination programme. That said, deliveries might fall as more people venture out. We could also see an increase in costs after the company was forced to classify all its drivers as workers, meaning they are all entitled to minimum wage protections and other employment rights after various rulings earlier this year. Losses are expected to come in at $0.33 a share, on revenues of $4.5bn.

Peloton Q1 results

After being one of the star performers in 2020, the wheels have come off a little bit this year, with the shares down just over 30% year-to-date. The company has had its fair share of issues, from recent problems with respect to its Tread+ treadmill which the company belatedly recalled in May. It has also had problems with its supply chain, affecting its ability to complete deliveries on time. The company’s Q4 numbers were fairly decent – revenue beat expectations, coming in at $936.9m, while subscribers rose to 2.33m. Guidance was a different matter, with the company downgrading its Q1 revenue to $800m, below expectations of $1bn. The company also announced that it would cut the price of the original Peloton bike by $400, likely leading to a loss of $285m in Q1. The company also said it had identified weaknesses in its internal controls with respect to the identification of inventory. In other words, the company didn’t know how many bikes and treadmills it had in stock, which isn’t a great look. Revenue is expected to come in at $810m when it reports Q1 results this week, while earnings consensus is for a loss of just over $1 a share.

Index dividend schedule

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Selected company results

Monday 1 November Results
ON Semiconductor (US) Q3
K3 Capital (UK) Full-year
Lok'nStore (UK) Full-year
Tuesday 2 November Results
Activision Blizzard (US) Q3
Amcor (UK) Q1
BP (UK) Q3
Caesars Entertainment (US) Q3
ConocoPhillips (US) Q3
Estee Lauder Cos (US) Q1
Lyft (US) Q3
Match (US) Q3
Pfizer (US) Q3
Ralph Lauren (US) Q2
Standard Chartered (UK) Q3
Under Armour (US) Q3
Wednesday 3 November Results
Amryt Pharma (UK) Q3
Capri Holdings (UK) Q2
Concentric (UK) Q3
Esken (UK) Half-year
Etsy (US) Q3
Liberty Global (UK) Q3
LivaNova (UK) Q3
Marriott International (US) Q3
MGM Resorts International (US) Q3
Nanoco (UK) Full-year
Next (UK) Q3
Playa Hotels & Resorts (US) Q3
QUALCOMM (US) Q4
Trainline (UK) Half-year
Venator Materials (UK) Q3
Thursday 4 November Results
Adaptimmune Therapeutics (UK) Q3
AIG  (US) Q3
Airbnb (US) Q3
Aston Martin Lagonda Global (UK) Q3
BT (UK) Half-year
Dropbox  (US) Q3
Electrocomponents (UK) Half-year
Expedia (US) Q3
First Solar (US) Q3
J Sainsbury (UK) Half-year
Moderna (US) Q3
Peloton Interactive (US) Q1
Shake Shack (US) Q3
Smiths News (UK) Full-year
Tate & Lyle (UK) Half-year
Uber Technologies (US) Q3
Friday 5 November Results
DraftKings (US) Q3
International Consolidated Airlines Group [IAG] (UK) Q3

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


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