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The Week Ahead: UK inflation; Fed minutes; Persimmon, Walmart results

Once again, inflation takes centre stage in the week ahead. On Wednesday we’ll get the July reading of the UK’s consumer price index (CPI), which soared to a fresh 40-year high of 9.4% in June. With the Bank of England forecasting that inflation could peak at 13% later this year, it’s a question of when, not if, CPI will hit double digits. Over in the US, the week’s key diaried event is Wednesday's publication of the minutes from the Federal Reserve’s July meeting, where inflation and interest rates were high on the agenda. And as earnings season winds down, we preview second-quarter results from US retailers Walmart and Target, half-year results from UK constructors Persimmon and Balfour Beatty, and more.

OUR TOP THREE EVENTS FOR 15-19 AUGUST:

Wednesday – UK CPI (July)

The UK’s consumer price index (CPI) rose 9.4% in the year to June, up from 9.1% in May, as inflation reached a fresh 40-year high. Although core CPI, which excludes energy, food, alcohol and tobacco costs, eased to 5.8% in June, down from 5.9% in May, a further rise in producer price inflation (PPI) in June suggests that more pain is coming down the line. Producer input prices rose by an eye-watering 24% in the year to June, while output (also known as ‘factory gate’) prices grew 16.5% over the same period.

The Bank of England has belatedly recognised that it must do more to counter the surge in prices, raising rates by half a percentage point to 1.75% earlier this month. Another strong CPI reading on Wednesday could increase the likelihood that Britain’s central bank will lift rates by a further 0.5 percentage points in September. While there is little that policymakers can do about the global issue of rising food and energy prices, it is telling that core CPI – which removes these costs – is way above the Bank’s 2% target.

On Wednesday we learned that US CPI increased 8.5% in the year to July, easing from June’s four-decade high of 9.1%. It seems unlikely that we’ll see something similar in the UK, with consensus estimates suggesting that inflation may have hit 10% in July, with core inflation moving above 6%.

Wednesday – Fed minutes

As expected, the US Federal Reserve raised rates by 0.75 percentage points for the second consecutive month in July, lifting its benchmark policy rate to a target range of 2.25-2.5%. However,  Fed chair Jay Powell’s press conference raised a few eyebrows as he commented that, at current levels, the federal funds rate is in line with policymakers’ estimates of a “neutral” setting. His remarks contributed to a fall in US treasury bond yields. 

With US inflation running at 8.5%, the Fed’s stance on neutral rates seems at odds with both Powell’s insistence that officials are in control of the battle against inflation and projections that the policy rate will rise to around 3.4% by year-end. 

Powell went on to tell journalists that the US economy was not in recession, and that the central bank may soon slow the pace of rate rises. “At some point it will be appropriate to slow down. We might do another unusually large increase, but that’s not a decision that we’ve made at all. We’re going to be guided by the data,” he said. 

Since the press conference, Fed members including Mary Daly, president of the San Francisco Fed, and James Bullard, president of the St. Louis Fed, have pushed back on accusations of dovishness, with Daly saying that the Fed is “nowhere near” done when it comes to tackling inflation, while Bullard says he sees the fed funds rate rising to 3.75-4% by the end of the year. 

The publication of the minutes from the Fed’s 26-27 July meeting should reveal where the majority of policymakers estimate the neutral rate to be. Powell has faced criticism for his comment that the current rate is in line with the Fed’s estimate of a neutral range. It will therefore be interesting to discover whether there was a genuine discussion around “neutral” rates at the meeting.

Wednesday – Persimmon half-year results

Despite strong growth in house prices over the last two years, shares in housebuilders such as FTSE 100-listed Persimmon have struggled. Since coming within touching distance of its pre-pandemic valuation in June last year, Persimmon’s shares have fallen more than 40%. Year to date, the stock has tumbled by around 35%, while the FTSE 100 is down just 0.5% over the same period.

Last month Persimmon issued a pre-results trading update, revealing that it had sold 6,652 properties in the first half of the year, slightly below expectations. Total revenue in those six months fell to £1.69bn, down from £1.84bn a year ago, reinforcing concerns about a slowdown in the UK housing market. Although the firm’s average selling price grew 4% year-on-year to £245,600 in the first half, rising costs and energy prices are a challenge. Persimmon said it has been able to pass these increased costs on to buyers so far, but this could be tough to maintain if house price growth starts to slow, or goes into reverse as rising interest rates deter would-be buyers. 

The housebuilder said forward sales were “robust” at £1.87bn, up from £1.82bn a year ago. The trading update also noted that some of the company’s plots were “stalled” due to delays in the planning system, which is holding up construction on 120,000 plots in England. Half-year profits are expected to come in ahead of guidance, with the average selling price of forward-sold homes rising to £280,700. Despite this resilience, investors appear concerned about the outlook given the shares’ recent weakness.

MORE KEY EVENTS (15-19 AUGUST):

Monday 15 August

China retail sales (July)

The recent China trade numbers may have been lauded for the strong recovery in exports, but the weak imports data suggest that domestic demand remains tepid as the economy struggles to adapt to the government’s zero-Covid policy and problems in the property sector. 

Lockdowns contributed to a 2.6% contraction in retail sales in Q2. Although retail sales grew 3.1% year-on-year in June, that wasn’t enough to offset declines of 11.1% in April and 6.7% in May. Many Chinese consumers were locked down through most of April and May, venturing out in June for a little bit of catch-up spending. In July, although consumer confidence remained weak as restrictions continued in certain parts of the country, retail sales growth is forecast to have improved to 5%, which would mark a one-year high.  

Meanwhile, industrial production has proved robust, expanding 3.9% year-on-year in June. The July figure is expected to come in at around 4.5%. 

Tuesday 16 August

UK unemployment (June)

The UK’s unemployment rate stood at a relatively low 3.8% in the three months to the end of May, which is perhaps fortunate given that inflation is running at 9.4%. Low unemployment is contributing to a tight labour market, with job vacancies rising to 1.29m in the three months to June. What is perhaps more surprising is that wage growth has lagged so far behind inflation. 

Hiring in the three months to May rose by 296,000 as the rising cost of living drew many people back to the workforce. Over the same period, average weekly earnings, excluding bonuses, rose 4.3% year-on-year, accelerating from the 4.2% increase registered in the preceding three-month period. Adjusted for inflation, earnings without bonuses decreased 2.8%, marking the steepest drop in real pay since records began in 2001, according to the Office for National Statistics. Including bonuses, earnings grew 6.2% as employers made one-off payments to help their staff cope with the rising cost of living. With food price inflation running at around 10% the squeeze on real incomes is likely to have continued through June and beyond.

Walmart Q2 results

Last year Walmart confounded expectations that higher costs would impact profitability, but Q1 marked a turning point. Although revenue in the first quarter came in ahead of expectations at $141.6bn, profits of $1.30 a share missed forecasts of $1.48. 

At the end of 2021 Walmart predicted sales growth of 4% for this year, which amid rising prices seemed optimistic. In May they reduced that target to 3.5% and cut EPS guidance for Q2 as consumers cut back on more expensive and higher-margin items while spending more on groceries. 

In July Walmart delivered more worrying news about the outlook when it downgraded its operating margins to below 4% for the second half of the year, although sales were expected to rise 7.5% in Q2 and 4.5% for the rest of the year. 

Wednesday 17 August

UK CPI (July)

See top three events, above 

Fed minutes

See top three events, above 

US retail sales (July)

Although the US economy is in a technical recession, retail spending has remained resilient. US retail sales have expanded in every month but one this year (sales contracted 0.1 in May). If higher prices are deterring consumers, you wouldn’t know it from these numbers. In June, retail sales rose 1% year-on-year, beating expectations of 0.9%, with the control group measure rising to 0.8% after a decline of 0.3% in May. 

With the US labour market continuing to add jobs each month, retail sales growth is likely to remain in positive territory. Forecasts point to an expansion of 0.3% in July. One note of caution, though, is that consumer credit has been soaring, suggesting that debt may be fuelling growth in retail sales.

Persimmon half-year results

See top three events, above

Balfour Beatty half-year results

in support services Having recovered from a 15-month low in early March, shares in construction and infrastructure group Balfour Beatty are up almost 6% year to date. Last year underlying pre-tax profits came in at £187m, beating expectations of £172m, though lower-than-expected revenue of £8.28bn marked a decrease on the previous year’s £8.59bn. Average net cash rose by 27% to £671m, up from £527m a year previously However, its order book fell from £16.1bn in December to £15.6bn in March.

In May the company said it was trading in line with expectations and that it expected to deliver margins of 1% to 2% on its US operations, 2% to 3% across its UK business, and 6% to 8% in support services. In July Balfour Beatty announced it had sold off its 67% interest in Aspire, the on-campus student accommodation at Purdue University in Indiana, for £122m. The company will secure a sum of £50m after various liabilities have been settled. The firm also expects to complete its £150m share buyback by the end of this year.       

Target Q2 results

Target’s share price hit a 52-week low after the big-box US retailer’s Q1 profits of $2.19 a share missed expectations in May. Consensus estimates were for profits of $3.07 a share. Q1 revenues were decent at $25.2bn, while comparable sales rose by 3.3%. Target said it expected operating margins for the year to slip to 6%, down from the previous forecast of 8% or above, due to unexpectedly higher costs for fuel, freight, inventory and wages. 

However, the company reiterated its forecast for revenue in 2023 to grow by between 5% and 8%. At the end of last year Target said that spending on wages and healthcare benefits would increase by $300m in 2023. The company also plans to continue spending up to $5bn a year on opening new stores.  

Thursday 18 August

Cisco Systems Q4 results

Cisco shares, down by more than a quarter this year, hit their lowest levels since November 2020 back in May after the company issued a surprise earnings downgrade. The shares have partly recovered since then, perhaps on the basis that the new guidance was too pessimistic. The company slashed its Q4 revenue outlook, forecasting a contraction of between 1% and 5.5%, versus expectations for growth of 5.7%, as it reduced its full-year forecasts. 

The company cited the effect of lockdowns in China and other supply chain issues as reasons for the shock downgrade. As some lockdown restrictions in China were lifted in June, the hope is that the Q4 results may not be as bad as feared. 

In Q3 revenue came in flat year-on-year at $12.84bn, with the company blaming Russia’s invasion of Ukraine for an increase in costs. Profits in Q4 are expected to come in at $0.81 a share.

Friday 19 August

UK retail sales (July)

Retail sales in June fell 0.1% month-on-month, a better-than-expected result as rising energy and fuel prices dented consumer confidence. Food and drink sales rose 3.1%, driven by celebrations to mark the Queen’s platinum jubilee. However, the main declines were for clothing, down 4.7%, and auto fuel, down 4.3%. The May retail sales figure was revised lower to a contraction of 0.8%.

So, what to expect for July? Above-average temperatures may have prompted an uptick in spending on summer clothing, electric fans and food and drink. Data from Barclaycard showed that spending grew 7.7% in July. 

Index dividend schedule

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Selected company results

MONDAY 15 AUGUST RESULTS
Phoenix Group Holdings (UK) Half-year
ZipRecruiter (US) Q2
TUESDAY 16 AUGUST RESULTS
Home Depot (US) Q2
Walmart (US) Q2
WEDNESDAY 17 AUGUST RESULTS
Amcor (US) Full-year
Analog Devices (US) Q3
Balfour Beatty (UK) Half-year
Bath & Body Works (US) Q2
Cisco Systems (US) Q4
Krispy Kreme (US) Q2
Persimmon (UK) Half-year
Synopsys (US) Q3
Target (US) Q2
TJX Cos (US) Q2
THURSDAY 18 AUGUST RESULTS
AO World (UK) Full-year
Estee Lauder (US) Q4
FRIDAY 19 AUGUST  RESULTS
Deere & Co (US) Q3
Foot Locker (US) Q2

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


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