The Week Ahead: Fed minutes, US payrolls; Darktrace, Next results

Read our preview of upcoming economic and company events, including the US Federal Reserve's latest rate-meeting minutes, and Friday's first non-farm payrolls print for 2023, with the latest US jobs data covering December. Also look out for company earnings reports from the likes of Darktrace, Next, and Walgreens Boots Alliance. 

Tuesday 3 January 

Darktrace Q2 results 

Back in August, Darktrace’s share price jumped sharply on reports that it was in talks with private equity fund Thoma Bravo, although no figure was attributed to the discussions. In September, it was confirmed that these talks had ended with no prospect of an offer being made in the near future, although the option was left open for this to be revisited after six months. Since then, the shares have slipped to record lows, with the investment community split as to the sustainability of its business model. 

Last year, full-year revenue came in at $415.5m, a rise of 45.7% from the previous year’s restated $285.1m, and slightly below expectations. This shortfall appears to be down to $3.8m of revenue which had been reported in this fiscal year being re-allocated to the 2021 results. 

Darktrace went on to reiterate its previous guidance set out in July, that it expects to see recurring revenue rise between 31% and 34% for the upcoming financial year. This is down from the 42.6% rise last year, which took the sum to $514.4m. The company posted an operating profit of $7.6m, compared with a loss of $34.7m. After tax and other expenses, this number fell to a net profit of $1.5m, compared with a loss of $145.8m. 

In December the shares came under further pressure when management warned that FX effects had created a $17.1m headwind in the Q1 numbers, which are likely to impact annual recurring revenue for the rest of 2023. Other than that, the overall numbers look good, after Q1 revenue rose 37% to $126.3m, while the company reiterated its target for year-on-year revenue growth of between 30% to 33%. 

Wednesday 4 January

FOMC rate-meeting minutes 

Last month, the US Federal Reserve's federal open market committee surprised no one when it raised rates by 50 basis points to 4.5% on the upper bound, while adjusting upwards its rate-rise expectations for 2023, despite increasing evidence that inflation in the US has peaked. This hawkishness came across as somewhat jarring, as it runs contrary to the evidence from US economic data. 

We already know that a number of US policymakers are becoming increasingly concerned about the effects of policy lags on what has been an aggressive pace of rate rises since March, when the US central bank stopped adding to its balance sheet. Recent pronouncements from Fed officials show little sign that it will stop hiking this year, with the real debate increasingly not whether the Fed will hike in February, but by how much. At the moment the markets are pricing a split between 25bps and 50bps, with the needle slightly favouring another 50bps rise, however that really depends on the economic data – and on that front the outlook remains mixed. 

If wages slip back in this week’s payrolls data, and headline inflation continues to fall, then expectations around a terminal rate of below 5.25% are only likely to increase, and keep the US dollar on the back foot. Will this week’s minutes emphasise the prospect of any future splits for where the final terminal rate is likely to end up, and more importantly, how long will rates stay at their current levels?

Thursday 5 January

Global services purchasing manager indices 

Recent flash PMI numbers have shown mixed fortunes across global services sectors. In the US, the sector slid even lower in the recent flash data, to 44.7, while the UK and German indices revealed a decent pickup in economic activity, after significant weakness in October and November. 

What has been particularly notable is that cost prices have continued to rise, even as headline economic activity has improved; however the recent cold weather across the UK and Europe could show improvements in the flash numbers slightly tempered when we get the final readings on Wednesday.

B&M European Value Retail Q3 results

It’s not been a great year for UK retailers, with concerns about shrinking margins and higher costs leading to a significant slide across the sector. With consumer incomes likely to remain tight, the likes of B&M would be expected to do better than the more established names due to its focus on lower prices and a broad range of products. That hasn’t been the case though, with the company reporting a fall in first-half profit in November. Half-year pre-tax profit fell 17% to £201m, despite a modest increase in revenue to £2.31bn. Revenue in its UK business fell modestly to £1.89bn, while a decent performance from its French business helped to offset that, as revenue there jumped from £155m to £184m. 

On guidance the outlook was more positive, with B&M management optimistic that the period leading up to Christmas would help it achieve its full year EBITDA target of between £500m and £600m. This week we’ll find out if that optimism is well founded. 

Next Q4 results

Next shares hit two-year lows in October, as concerns about the health of the UK consumer and shrinking margins has weighed on the sector. This time last year the shares were close to record highs, and despite a resilient trading performance the shares at one point were almost 50% down on the year. We’ve seen a modest recovery since those October lows, after Next posted a better-than-expected Q3 update. Full price sales rose by 0.4% during the quarter, with the retailer maintaining its full-year guidance for profit-before-tax at £840m. 

The resilience of its retail operation helped drive the sales improvement, rising 3.1%, while online sales declined by -1.9%. Since then, Next has completed the acquisition of Made.com for £3.4m, and Joules for £34m, closing 19 stores in the process, while incorporating the websites and online operations into the Next technology architecture. 

This week’s post-Christmas trading update will show whether the various rail and postal strikes, as well as the earlier cold snap, have put a dent in expectations over its profit guidance, and how Next sees the outlook for its fiscal year 2024. 

Constellation Brands Q3 results

As share price performance goes, Constellation Brands has had an indifferent year, but it’s held up reasonably well relative to its peers. In October, the company reported another strong performance from its beer, wines and spirits business. Net sales rose to $2.66bn, comfortably beating forecasts of $2.51bn, however the company slipped to a Q2 loss largely due to continued underperformance in its Canopy business, which dragged profit in its primary business into a net loss of $1.15bn. 

Excluding losses on its Canopy business, profit comfortably beat forecasts. For its full-year guidance excluding Canopy, the company said it expects earnings per share to come in between $11.20 to $11.60, while full-year sales are also expected to beat forecasts. Beer sales are now expected to see net sales growth of 8-10%. Q3 profit is expected to come in at $2.91 a share.  

Walgreens Boots Alliance Q1 results

When Walgreen’s reported its end of year figures in October, the shares rallied off 10-year lows, to hit six-month highs in December. The catalyst was Q4 results which came in ahead of expectations, although its 2023 guidance was cautious on a combination of tough comparatives and a strong US dollar. Its full-year guidance was for profit of $4.45 to $4.65 a share. Q4 revenue came in at $32.45bn, with profit of $0.80 share, although when a $780m impairment charge in relation to its UK Boots business was included, this resulted in a net loss of $415m. Walgreens had been hoping to sell its UK operation, however these plans were scrapped due to a lack of interest. Quite simply, the £8bn asking price was way too high for a chain of stores that has been allowed to become a little tired and tatty. If Walgreens wants to achieve a premium price, it needs to invest in its UK business and not allow it to wither in the vine. 

Walgreens is currently undergoing a transition into a much more streamlined and focused primary healthcare business in its US market, and is looking to make $3.3bn in savings by next year. Earlier in 2022, the company paid $5.2bn for VillageMD, as it looks to branch out into point-of-contact healthcare services. This expansion is designed to diversify focus away from its pharmacy business, which saw lower sales as Covid-19 vaccine demand slowed.  Q1 profit is expected to come in at $1.12 a share. 

Friday 6 January

EU flash CPI inflation (December) 

Does the recent sharp fall in the producer price index (PPI) mark a turning point for inflation expectations in the euro area? The recent pivot by the European Central Bank seems particularly ill-timed when there is a good chance that the headline consumer price index (CPI) in Europe may well have peaked. 

In November, headline inflation fell from 10.6% to 10.1%, while core prices remained steady at a record high of 5%. Many ECB policymakers appear unconvinced by this slowdown, and it’s not hard to understand why given it’s one number, however PPI does offer some clues around this and it has been slowing since August. If it plays out in a similar fashion to the US, then the headline numbers are likely to go the same way, however central banks have become increasingly concerned about embedded core inflation, albeit a little bit too late. This means that irrespective of what PPI is doing – and it’s expected to fall further in November to 27.9% – a weaker December flash CPI print is unlikely to see the ECB soften its recently hawkish pivot of another three 50bps rate rises. A modest weakening in core prices, however, might mark a shift in that narrative. Flash headline inflation is expected to slow to 9.6%. 

US jobs report (December) 

December’s non-farm payrolls report for November surprised a lot of people in the context of a surprise in average hourly earnings. It helped to undermine a narrative that US inflation was on a downward path, and probably wouldn’t be as sticky as was being priced in at the time. While it didn’t undermine the prospect of a 50bps rate at the December meeting, it did undermine the possibility that we might get a further step down to 25bps when the Federal Reserve next meets in February. 

Not only did November earnings growth jump to 5.1%, but October’s earnings were revised up to 4.9%, from 4.7%. There is a case for arguing that temporary hiring for Thanksgiving and the Christmas period helped this uplift at a time when the US labour market is extraordinarily tight, along with the 263,000 jobs that were added. What was slightly more worrying was another jump in the participation rate to 62.1%, while unemployment rose to 3.7%. 

A total of 223,000 jobs are expected to have been added in December, while earnings are expected to slip back to 4.9%.

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SELECTED COMPANY RESULTS

Note: Company announcements are subject to change. Dates correct at the time of writing.