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The Week Ahead: ECB, RBA rate decisions; US CPI; BAT results

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

Inflation and interest rates are on the agenda again this week. In the US, the release of fresh CPI data on Friday is set to show that inflation eased further in May. Before that, Australia’s central bank is poised to raise its cash rate for the second consecutive month on Tuesday, while the European Central Bank is expected to outline a path towards a July rate hike when it meets on Thursday.

In a light week for company results, we preview earnings updates from British American Tobacco, Workspace Group, Docusign and more. 

OUR TOP THREE EVENTS FOR 6-10 JUNE:

Tuesday – RBA interest rate decision

On 3 May, the Reserve Bank of Australia raised the official cash rate for the first time in more than 11 years, lifting it from 0.1% to 0.35%. The long overdue move, carried out less than three weeks before Australia’s federal election on 21 May in a show of the RBA’s independence, was a response to concerns over rising prices. The bank also raised its inflation forecasts, and reduced its GDP estimates. 

Of course, the RBA wouldn’t have found itself in the awkward position of raising rates in an election month if it hadn’t procrastinated earlier in the year, when it claimed that inflation was transitory. It was clear by then that inflationary pressures were likely to stick around. At the risk of sounding too critical, it should be pointed out that the RBA wasn’t the only central bank that dragged its heels. However, their counterparts at the Reserve Bank of New Zealand recognised sooner than most that all was not as it seemed. 

The RBNZ started its hiking cycle back in October last year, and has been upping rates steadily since then. Since raising its cash rate from 0.25% to 0.5% in October, the RBNZ has raised rates four more times to get to the current level of 2%, with the prospect of another half-point hike in July. 

The current differential of 165 basis points between cash rates in Australia and New Zealand is set to be narrowed when the RBA meets on Tuesday. After the May increase, another hike seems almost nailed-on. The question is how big it will be. The most likely outcomes are either a 50-basis-point rise, taking the cash rate to 0.85%, or a 65-basis-point rise, which would round the cash rate up to 1%. 

Australia’s economy held up well in Q1, supporting the case for rate rises. In Q1, the country’s GDP grew by a better-than-expected 0.8% compared to the previous quarter, and 3.3% compared to the same quarter a year ago. Unemployment is at 3.9%.

Thursday – ECB interest rate decision

Eurozone inflation accelerated to a new record of 8.1% in the year to May, up from 7.4% in the previous month, increasing the pressure on the European Central Bank to raise interest rates at its July meeting. In Spain the consumer price index is up 8.5%, in Germany CPI is up 8.7% and in the Baltic states CPI is running even higher, with Lithuania at 16.8% and Estonia at 18.8%. 

The ECB, reluctant to raise rates from their current sub-zero level, has been dragged kicking and screaming to this point. The bank’s previously stated position that it had no intention of raising rates this year always seemed destined to be called into question. Even before Russia’s invasion of Ukraine, inflation was on the rise. The upcoming June meeting presents an opportunity for the ECB to outline a path towards a quarter-point – or perhaps even a half-point – rate rise in July, and another rate hike in September. Markets have already priced in 90 basis points of rate rises this year. 

A move on Thursday seems unlikely, given that ECB president Christine Lagarde has hinted at a July move. Instead, the focus of Thursday’s meeting will be on whether a move to a 0% interest rate is possible by September. It will be a difficult path for the ECB to navigate. If policymakers signal an aggressive approach to monetary tightening, bond spreads in heavily indebted eurozone countries like Greece and Italy could rise to problematic levels. 

Friday – US CPI (May)

The US consumer price index (CPI) rose 8.3% in the year to April, down from 8.5% in March. Core CPI, which strips out food and energy prices, also slowed, easing to 6.2% in April from 6.5% in March.  Though inflation remains close to 40-year highs, the deceleration in headline and core CPI, alongside a recent softening in the US dollar and bond yields, appears to suggest that US inflation may have peaked.

This view is supported by other measures of inflation. The core personal consumption expenditure (PCE) price index, the Federal Reserve’s preferred measure of inflation, rose 4.9% in the year to April, down from 5.2% in March and 5.3% in February. That said, the producer price index (PPI) has remained resilient. 

Widespread price increases across the economy suggest that it may take a while to bring inflation under control, but the slowdown in headline inflation in April is certainly a step in the right direction. Consensus estimates point to a further slowdown in May, with CPI expected to ease to 8.2% and core CPI forecast to drop to 5.9%.

MORE KEY EVENTS (6-10 JUNE):

Monday 6 June

No major announcements

Tuesday 7 June

RBA interest rate decision

See top three events, above

UK services PMI (May)

Sentiment in the UK services sector plunged last month, according to the purchasing managers’ index (PMI). The flash reading for May slipped to a 15-month low of 51.8, down from 58.9 in April, as surging energy bills, supply chain issues and tax rises combined to curtail economic activity. 

Unlike the jump in energy prices, the tax hikes were avoidable. As such, they are very much a self-inflicted wound on the part of the UK government. The decision to restore business VAT rates to 20% from their Covid-reduced level would have been difficult enough for many smaller companies to swallow, but higher national insurance rates are needlessly adding to the problems they face.

British American Tobacco Q2 results

Shares in British American Tobacco have performed well this year, up over 25% year to date. In February, the company reported full-year revenue of £25.7bn, down 0.4% annually and slightly short of expectations. The shortfall on revenue was partly due to reduced tobacco sales at airports and transport hubs in the first half of the year, when Covid restrictions limited travel. 

On the plus side, revenue from new categories, such as vaping equipment, rose by 42.4% to just over £2.1bn, keeping the company on course to meet its target of £5bn in new category revenue by 2025. The business segment is still loss-making, but losses have continued to shrink, falling 9% to £100m. Vapour revenue was up 59%, and its Vuse brand is the leading vapour brand by value share globally. 

For the company as a whole, full-year pre-tax profits came in at £9.16bn, with management saying it was going to buy back £2bn of its shares. In March, the company announced it was withdrawing from Russia, starting the process of transferring its assets to a local distributor. They also cut their annual revenue growth outlook to between 2% and 4%. At the recent AGM, it was reported that in Q1 the consumer base for non-combustible products, which includes vaping products, had increased by another 1.1m to 19.4m, keeping it on track to meet another target – namely, to reach 50m consumers of non-combustible products across their operations by 2030.  

Workspace Group – full-year results

Over the last year, real estate company Workspace Group has gone on an acquisition spree, even as it recovers from the effects that the pandemic had on its occupancy rates and rental income. At the end of the first half of its fiscal year, the office space provider said trading profit was up 42.5% year-on-year, helped by a 12.3% increase in net rental income. The return to profit was welcome after a loss of £110.4m a year before. 

The company, which not only lets offices but also industrial workplaces to businesses, reported a significant increase in clients returning to their places of work, as utilisation rates soared to 60% of pre-Covid levels. The company also announced the acquisition of The Busworks in Islington, north London for £45m, adding another 104,000 square feet of lettable space to its portfolio. The former Victorian bus factory was already a multi-let business centre, 65% let with a net income yield of 3.4%. 

In March, Workspace acquired a majority stake in REIT McKay Securities for £272m, with McKay shareholders retaining 5% of share capital in the enlarged group. McKay owns a number of smaller residential and commercial real estate developments in and around London and the Thames Valley corridor, including Portsoken House in the City, as well as properties in Reading and Newbury. Having completed the transaction, Workspace management said that they would be looking to spin off some of McKay’s assets that don’t fit its ambitions for the new business. These assets are said to include light industrial assets, such as industrial parks near Gatwick Airport and the Poyle Trading estate near Heathrow Airport. 

Workspace also completed the disposal of Highway Business Park for £23.7m. In the second half of the year, as workers returned to offices in greater numbers, occupancy rates went back up to pre-Covid levels, reaching 89.6% in Q4. Pricing has also improved, with rent per square foot up by 1.3% on a like-for-like basis. Full-year revenue is expected to exceed £130m, still below pre-Covid levels. However, with the new acquisitions of the last 12 months, revenue should pick up over the next 12 months. 

Wednesday 8 June

Brown-Forman Q4 results

Brown-Forman shares have been on a slow decline over the last 12 months, even as the American wine and spirit company increased sales on a quarterly and year-to-date basis. In Q3 net sales rose 14% to $1.03bn, while EPS rose to $0.54 a share. 

On a nine-month basis, net sales were up 11% to $2.94bn, but profits were negatively impacted by rising costs due to supply chain disruptions and rising input costs for grain and agave. Profits were down 12% versus the year-ago period, when sales of Canadian Mist and Collingwood brands provided a boost. 

For the full year, organic income growth is expected to rise 12-16%. Rising costs are also expected to increase organic operating expenses 7-9%. Profits are expected to come in at $0.27 a share. 

Thursday 9 June

ECB interest rate decision

See top three events, above

China trade (May)

China’s zero-Covid policy is hampering efforts to meet the 2022 GDP growth target of 5.5%. Lockdowns have already affected the Q1 GDP numbers, and ongoing restrictions in Shanghai and Beijing are set to slow the economy further in Q2. 

In April, supply chain issues, including transportation difficulties and disruptions at ports, and Covid-related factory closures weighed on economic activity. Imports to China were worth $222.5bn in April, down 2.7% from March, while exports decreased 0.9% on a monthly basis to $273.63bn. That put export growth at 3.9% year-on-year, down sharply from growth of 14.7% a month earlier. 

While there may have been some modest loosening of restrictions in parts of Shanghai, the various backlogs are likely to take time to clear. The trade data for May could indicate that China’s economy is having an even tougher time of it in Q2 than in Q1. 

DocuSign Q1 results

One of the winners of the pandemic, DocuSign has struggled of late. Its stock, which peaked at more than $314 a share last August, is down more than 40% year-to-date, sending it back to pre-pandemic levels. 

In December, shares in the online contracts and e-signature company plunged after it downgraded its Q4 revenue forecast to between $557m and $563m. Even though Q4 revenue eventually surpassed expectations, coming in at $580m, the shares continued to slide. Full-year revenues rose to $2.1bn, up 45% year-on-year. The issue was once again guidance, with the company saying it expected revenues to be flat in Q1 at $580m. This was below consensus estimates of $594m. 

For the full fiscal year, DocuSign expects revenues to grow at a much slower rate to $2.47bn. While that would represent annual growth of more than 17%, it would be a smaller jump than markets were hoping for. As tends to be the case, although DocuSign has a decent chance of beating revenue expectations, it is more than likely to be judged on its guidance. Profits from Q1 are expected to come in at $0.46 a share. 

Friday 10 June

US CPI (May)

See top three events, above

FuelCell Energy Q2 results

For a company that has not turned a profit since 1997 it is perhaps surprising that shares in FuelCell Energy surged more than 2,800% between November 2019 and February 2021 to just above $29. As with many companies that can be described as renewable or low-emission, its shares benefited from a surge of interest. However, one look at the fundamentals tells us that this company’s revenues have shown little sign of progress since 2016. 

As if the spike in the share price through 2020 weren’t jaw-dropping enough, it’s even harder to believe that twenty years ago the shares reached the stratospheric heights of $7,800. While the valuation of the business has become more realistic since then, it still seems no closer to turning a profit. 

Revenue has more than halved from $163.1m in 2015 to $69.6m in 2021. Could 2022 be the start of a long road towards profitability? In Q1 the company got off to a decent start with revenue of $31.8m, up from $14.88m a year earlier, with the improvement driven by $18m of product sales to South Korea. If the numbers can be sustained, the business would appear to be on course to exceed its 2016 revenue of $108.3m. 

Despite the improvement in revenue, in Q1 the company posted a gross loss of $2.89m. Full-year revenue is expected to increase to $134m, although this isn’t yet reflected in the share price, which is down more than 30% year-to-date, despite rebounding from 18-month lows in mid-May. Losses for Q2 are expected to come in at $0.05 a share.

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Selected company results

MONDAY 6 JUNE RESULTS
Gitlab (US) Q1
Jadestone Energy (UK) Q4
TUESDAY 7 JUNE RESULTS
Academy Sports & Outdoors (US) Q1
British American Tobacco (UK) Q2
Casey's General Stores (US) Q4
ReneSola (US) Q1
WEDNESDAY 8 JUNE RESULTS
AVEVA Group (UK) Full-year
Brown-Forman (US) Q4
Campbell Soup (US) Q3
Workspace Group (UK) Full-year
THURSDAY 9 JUNE  RESULTS
CMC Markets (UK) Full-year
DocuSign (US) Q1
Lakeland Industries (US) Q1
Mitie Group (UK) Full-year
Tate & Lyle (UK) Full-year
FRIDAY 10 JUNE RESULTS
FuelCell Energy (US) Q2

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


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