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The Week Ahead: UK inflation; China Q2 GDP; Tesla, Netflix results

After US inflation cooled to 3% in June, it’s the UK’s turn to provide an update on price growth this Wednesday. The UK’s consumer price index (CPI) remained stuck at 8.7% in the year to May, well above the Bank of England’s 2% target. China-watchers will be awaiting Monday’s announcement on second-quarter gross domestic product (GDP), which is expected to show that the world’s second-largest economy expanded 0.6% on a quarterly basis, as growth slowed from 2.2% quarter-on-quarter in Q1. And in an eventful week for company earnings, Tesla, Netflix and easyJet are among the household names set to unveil their latest results. 

Our top three economic and company events in order of importance are:

1. UK CPI (June) – Wednesday 

In the year to May the headline rate of inflation in the UK held steady at 8.7%, the same level as in April. Meanwhile, core price growth, which excludes volatile food and energy costs, confounded expectations, rising to a new 30-year high of 7.1%, up from 6.8% in April. Inflation was driven in part by rising prices for recreational and cultural activities, particularly tickets to live music events. Some reports have even attributed so-called “tourflation” to specific artists, suggesting that concerts by the likes of Beyoncé, Taylor Swift and Bruce Springsteen are making inflation worse. 

Rising prices for restaurants and hotels also contributed to the May figures as the Coronation of King Charles III and a total of three bank holidays during the month provided a boost to the leisure sector. Food price inflation slowed to 18.3% in May, and the latest Kantar survey showed that the figure eased further to 16.5% in June. 

Much of the increase in services prices is down to higher wages for staff. Here, the energy price cap is partly to blame. Although the cost of energy has come down, consumers haven’t seen sharp falls in their energy bills straight away. As a result, workers have pushed for higher pay. 

Fortunately, the drop in energy prices should feed in to the July CPI reading which will be released next month. There is also optimism that the recent slowdown in producer price inflation will feed through to headline CPI later this year. 

Crucially, Wednesday’s CPI reading for June could help shape the Bank of England’s next interest rate decision. A decent drop in CPI could mean policymakers opt to raise interest rates by just 25 basis points (bps) in two weeks’ time. However, if the reading remains stubbornly high, the Bank could come under pressure to raise rates by 50 bps. Consensus estimates for June are for CPI to come in at 8.3%, with core inflation stuck at 7.1%. 

2. China Q2 GDP, June retail sales – Monday

After stagnating in Q4 China’s economy rebounded in Q1. In the first three months of the year GDP grew 2.2% compared to the previous quarter. Growth was driven by China’s economic reopening after Covid restrictions were eased in December. Retail sales also bounced back strongly in the first three months of this year, though the rebound appears to be running out of steam as economic activity has slowed sharply since Chinese New Year. 

In May China’s retail sales increased 12.7% year-on-year, down from 18.4% in April. That bumper figure for April was boosted by the low base of a year earlier, when Covid lockdowns contributed to an 11.1% decline in retail sales. So, while we’ve seen an improvement in retail sales, the gains have in fact been rather tepid. For June, growth is expected to have slowed to 3% year-on-year. 

Recent inflation figures from China have highlighted weakening demand. Producer prices fell 5.4% year-on-year in June, the fastest rate of decline since 2015. Meanwhile consumer prices flattened in June, with CPI slipping to a two-year low of 0%. 

In light of all this, economists expect that China’s GDP growth in Q2 slowed on a quarterly basis to 0.6%. That said, on a year-on-year basis GDP in Q2 is estimated to have grown 7%, up from 4.5% in Q1. Industrial production is estimated to have increased 2.5% year-on-year in June, down from 3.5% in May.

3. Tesla Q2 results – Wednesday 

In April Tesla’s share slipped back after the electric car maker’s Q1 results – released on 19 April – missed on revenue, profit and total gross margin. By the end of April, the shares had found a base at around $150. Since then, the stock has risen more than 75% to current levels of around $272. From 26 May, Tesla’s shares went on a record 13-day run of gains, helped by reports that many of its peers, including Ford, GM, Volkswagen and Mercedes, would adopt its US charging standard.

In Q2, Tesla continued to tweak its vehicle prices, raising or lowering them in response to market forces. As a result Tesla logged another record quarter in Q2, delivering 466,140 vehicles and  producing 479,700 vehicles. 

Going back to Q1, Tesla attributed the fall in gross margin to 19.3% to higher raw material, commodity, logistical and warranty costs. Tesla also cited the cost of ramping up production of its 4680 battery cell. Tesla maintained its full-year production guidance at 1.8m vehicles.

More key events

Our calendar of selected upcoming economic and company announcements:

MONDAY 17 JULY

China Q2 GDP, June retail sales

See our top three events, above

TUESDAY 18 JULY

US retail sales (June) 

US retail sales growth was steady in the first two months of Q2, rising 0.4% in April and 0.3% in May. At the same time consumer confidence has been increasing, while inflation expectations have been falling, which should be tailwinds for US consumer spending. 

Expectations for June retail sales are for a gain of 0.4% buoyed by a robust jobs market, despite concerns that the manufacturing sector slowdown could act as a drag on the more resilient services sector.

Ocado half-year results 

Having narrowly avoided relegation to the FTSE 250 in the last reshuffle, Ocado shares this month jumped to their highest levels since February as chatter about a possible bid from Amazon boosted investor sentiment towards the company. One of Ocado’s largest shareholders, Lingotto Investment Management, increased its stake in the business to 5%, fuelling speculation that something might be afoot, especially given the lack of any pushback on the speculation by either Amazon or Ocado. 

In Q1 Ocado reported revenue of £584m, a rise of 3.4% on the year-ago period, while average orders per week grew 3.6% to 381,000. Average basket value remained flat, despite a fall in basket size and a 13.8% year-on-year rise in active customers to 951,000. This trend continues to show that, with ever-rising prices, Ocado customers, like customers of other grocery chains, are spending more money and getting less. Ocado kept its full-year guidance unchanged.

Bank of America Q2 results 

Despite a solid set of Q1 numbers, Bank of America’s share price has struggled this year, falling 11.5% and languishing just above its 52-week low. Revenue and profit in Q1 comfortably came in ahead of forecasts at $26.39bn and $0.94 a share respectively. Unlike some of its peers, the bank managed to increase its revenues from last year, with Fixed Income, Currencies, and Commodities (FICC) performing well, although equities trading was disappointing, falling from $2bn last year to $1.62bn. Net interest income drove most of the improvement, rising by almost $3bn to $14.58bn as net interest margin (NIM) rose from 1.69% to 2.2%. 

For Q2, revenue is expected to slow from Q1 to $25bn, while profit is expected to come in at $0.85 a share. The recent bank stress test results have prompted Bank of America to push back on some of the Federal Reserve’s findings. The improvement in NIM has led to criticism of the bank’s reluctance to pass on interest rate increases to savers, at a time when mortgage costs have been rising more quickly.

WEDNESDAY 19 JULY

UK CPI (June); Tesla Q2 results

See our top three events, above

Goldman Sachs Q2 results 

It’s not been a good six months for Goldman Sachs’s share price. The shares, down 5% year-to-date, are suffering amid investor concerns over the banking sector’s stability. In Q1 revenue came in at $12.22bn, missing expectations for the second quarter in succession, though profit was better than forecast at $8.79 a share. 

On the various business units, equities trading revenue fell 7% to $3.02bn in Q1, while FICC slipped back to $3.93bn, a fall of 17% from a year ago. Investment banking was also disappointing, falling 26% to $1.58bn. The bank announced that it was selling its GreenSky unit as it looks to dispose of its struggling retail banking arm, which is acting as a drag on profitability. The partial sale of its Marcus loan portfolio incurred a loss of $470m, with the rest of the loans set to be offloaded at a later date. The bank’s costs also went up during Q1, rising to $8.4bn, making this an area of difficulty for the bank. 

For Q2, revenue is expected to fall on a quarterly basis to $10.75bn and profit is forecast to slide to $4.72 a share, with the focus remaining very much on the guidance for Q3. 

Netflix Q2 results

Although the Q1 results sent Netflix shares briefly lower, this year has seen the streaming platform’s share price soar. The shares are up more than 50% year-to-date and pushed to a one-year high of over $451 this month. Having recorded Q1 revenue of $8.16bn and a profit of $2.88 a share, the shares slipped on Q2 revenue guidance of $8.24bn and a profit forecast of $1.28bn, or $2.84 a share. Subscriber numbers were also disappointing, rising 1.75m, below forecasts of 2.41m, to 232.5m. However, Netflix has made it clear that the numbers are less important than the revenue generated. In every region bar one, subscriber numbers fell short of market expectations, none more so than in Latin America which saw a decline of 450,000. But the decreases were offset by a gain of 1.46m in the Asia Pacific region. 

As for Q2, Netflix could again see a drop in subscriber numbers as it rolled out paid sharing in the UK and the US. If current trends are any guide, this could prompt some viewers to cancel their subscriptions, weighing on growth of the user base. However, if the name of the game is to maximise revenue, then there’s every chance that cancellations won’t unduly slow the overall trend to sustainable cash flow and steady margin. Netflix says it expects to generate $3.5bn free cash flow for the full year 2023, up from the prior expectation of $3bn.

THURSDAY 20 JULY

easyJet Q3 results 

After a flying start to the year easyJet shares have plateaued since late January, settling at a steady altitude around the 500p mark, just below one-year highs. While there was optimism coming in to 2023 that the travel sector could have its best year since 2019 as travel returns to normal, there is also concern that higher fares could mean that capacity levels may never return to pre-Covid levels. 

Although travel disruption continues to hinder a return to normal, easyJet could still see a return to profit this year. The budget airline’s half-year results showed revenue in line with forecasts at £2.69bn, resulting in a pre-tax loss of £411m. Costs came in at £3.1bn. Airline ancillary revenue improved, rising 67% to £767m, with total revenue per seat rising 40% to £66.4m. However, costs per seat were also higher at £77.6m, a rise of 19%. The airline's load factor – a measure of bums on seats – was 87.5% over the half year, up from 77.3% a year ago, with management expecting that this will move towards 90% in the second half of the year. 

EasyJet maintained guidance that it expects to fly 56m seats in the second half of the year, a rise of 9% on last year. Capacity in Q4 is expected to come in close to pre-pandemic levels of 94%. EasyJet’s growing holidays operation continues to improve and expand, with customer numbers increasing to 0.6m during the first half, a 0.4m increase on the same period last year. Revenues in this part of the business also improved, rising to £173m, with an expectation that the business will see an annual profit in excess of £80m. In the first half of this year the business generated a profit of £10m. EasyJet said it will expand its holiday package offering, with a view to starting trips to Switzerland in early 2024. 

With the summer season well under way, consensus forecasts are for Q3 revenue to rise to £2.27bn, with passenger revenue rising to £1.75bn on a load factor of 89.8%. These estimates might need to be revised given the amount of travel disruption. French industrial action caused easyJet to cancel 1 700 flights over the summer period.

FRIDAY 21 JULY

UK retail sales (June) 

Retail sales in the UK increased 0.3% month-on-month in May, beating estimates of 0.2% decline, despite inflation running at its highest levels since the 1990s. A total of three bank holidays during May and warmer weather prompted a rise in consumer spending on short breaks, music concerts and other leisure activities. 

Consumer confidence has also been improving despite sticky inflation. However, the rise in mortgage rates is likely to act as a major drag as fixed-rate mortgage deals roll off. On the flipside, higher savings rates have, to some extent, helped to boost consumer spending. This balance is likely to shift in the coming months, with the sharp rise in mortgage repayments coming to the fore.

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SELECTED COMPANY RESULTS

MONDAY 17 JULY RESULTS
CrossFirst Bankshares (US) Q2
FB Financial (US) Q2
TUESDAY 18 JULY RESULTS
AAR (US) Q4
Bank of America (US) Q2
Bank of New York Mellon (US) Q2
Cambridge Bancorp (US) Q2
Equity Bancshares (US) Q2
Mercantile Bank (US) Q2
Morgan Stanley (US) Q2
Ocado Group (UK) Half-year
Prologis (US) Q2
WEDNESDAY 19 JULY RESULTS
Alcoa (US) Q2
Ally Financial (US) Q2
Baker Hughes (US) Q2
Commerce Bancshares (US) Q2
Equifax (US) Q2
First Horizon (US) Q2
Goldman Sachs Group (US) Q2
Halliburton (US) Q2
International Business Machine (US) Q2
M&T Bank (US) Q2
Nasdaq (US) Q2
Netflix (US) Q2
Redcentric (UK) Full-year
Steel Dynamics (US) Q2
Tesla (US) Q2
United Airlines (US) Q2
US Bancorp (US) Q2
THURSDAY 20 JULY RESULTS
Abbott Laboratories (US) Q2
Badger Meter (US) Q2
Capital One Financial (US) Q2
easyJet (UK) Q3
Fifth Third Bancorp (US) Q2
Howden Joinery Group (UK) Half-year
IG Group (UK) Full-year
Johnson & Johnson (US) Q2
ManpowerGroup (US) Q2
Marsh & McLennan (US) Q2
Philip Morris International (US) Q2
S&T Bancorp (US) Q2
FRIDAY 21 JULY RESULTS
American Express (US) Q2
Regions Financial (US) Q2
Roper Technologies (US) Q2
Schlumberger (US) Q2

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


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