The Week Ahead: US inflation; Fed minutes; US banks’ results

Here's our pick of the top three economic and company events in the week commencing Monday 9 October:

Fed minutes

Wed 11 Oct: As expected, the US Federal Reserve held interest rates at between 5.25% and 5.5% last month. The minutes from that rate-setting meeting on 19-20 September, due to be published on Wednesday, might shed light on the Fed’s surprisingly hawkish guidance as the US central bank signalled a possible rate rise before the end of the year. The ‘higher for longer’ message, plus the prospect of another rate hike to come, has sent both the dollar and long-term US government bond yields sharply higher. The Fed scaled back its rate-cut expectations for next year, raising its 2024 fed funds rate guidance to 5.1% from 4.6%, while keeping guidance for 2023 unchanged at 5.6%. The Fed also raised its GDP guidance for this year to 2.1% and cut its full-year unemployment estimate to 3.8%. The Fed reiterated that it remains “data-dependent” when it comes to interest rate decisions. That being the case, the resilience of the US economy suggests that the Fed may have more to do. The soon-to-be-published meeting minutes should also offer the market further clues as to how concerned Fed officials are about the risks of overtightening. Fed chair Jay Powell said the Fed would tread carefully, indicating that there is some uncertainty about the potentially negative impact of further rate hikes. One other thing the dot plots told us about 2024 was that Fed officials were much less dovish about where rates were likely to go over the next 12-18 months, with today's September payrolls report justifying the Fed’s decision to up its 2024 rate guidance

US CPI (September)

Thu 12 Oct: The US consumer price index reading for September is likely to be the final guide as to whether the Fed will raise interest rates at its next decision day on 1 November, the penultimate rate-setting meeting of 2023. Given recent economic data, it seems likely that the Fed will raise rates once more this year. The headline rate of inflation climbed to 3.7% in the year to August, versus 3.2% in July and up from a year-to-date low of 3% in June. That said, core CPI, which excludes volatile items such as food and energy prices, continued to ease, falling to 4.3% in August, down from 4.7% in July. This is the measure that the Fed is likely to focus on. Economists estimate that core CPI slowed further in September to 4.1%, with core producer price inflation (PPI) easing to 2.2% in August. If the slowdown in core inflation did indeed continue in September, the Fed may well look through the persistence in headline CPI – which is expected to have remained stuck at 3.7% – and decide to sit on its hands in November, saving its final rate rise of 2023 for December. 

JPMorgan Chase & Co Q3 results

Fri 13 Oct: JPMorgan Chase has been the outlier among major US banks over the past year, its shares far outperforming those of rivals like Citigroup and Wells Fargo. As the main beneficiary of the regional bank crisis in March, JPMorgan has seen its share price soar by more than 30% from the lows of last October. In July, the shares hit their highest levels since January 2022, before slipping back a touch in subsequent months. The collapse of Silicon Valley Bank and Signature Bank saw JPMorgan win over $50bn of new deposits, with the objective now being to hang on to this cash. The turmoil in rates markets also proved to be a boon as the bank’s revenue surged in both Q1 and Q2, the latter quarter delivering record revenue of $42.04bn. That blew through expectations of $39.34bn, while a profit of $14.5bn, or $4.75 a share, marked an increase of 67% on the year-ago figure. The bank also raised its guidance for net interest income to $87bn, as the gap between loans and deposit margins widened. Put simply, the largest US bank by assets has more deposits than it knows what to do with.

Here's our pick of the rest of the week's major economic and company events:

UK GDP (August)

Thu 12 Oct: After the Office for National Statistics updated its GDP methodology for the last few years, we’ve discovered that the UK economy is in much better shape than first thought. It turns out that the UK has outperformed both France and Germany since 2020, undermining a political narrative that had claimed that the British economy was struggling post-Brexit. That’s not to say the UK economy doesn’t face challenges. However, the challenges are similar to those facing the country’s European peers: high energy prices and high inflation. The UK got off to a poor start to Q3, the economy contracting 0.5% month-on-month in July, undoing the 0.5% gain in June. The rise in petrol prices is likely to have acted as a brake on consumption in August, and could weigh on economic growth in Q3, even as headline CPI slowed to its lowest level since February 2022. 

easyJet Q4 results

Thu 12 Oct: The easyJet share price got off to a flyer in the early part of this year, the shares pushing up to their highest levels since May 2022 back in April. However, all of that early momentum has dissipated as the shares have struggled. Since those peaks the shares have slipped back by around 10%. The airline’s Q2 numbers showed a solid increase in revenue, with the expectation that this could push up to a record £8bn by fiscal year-end. Ancillary revenue has been a core driver of this improvement, while its guidance for the second half of the year was for a 9% rise in seats to 56m, with expectations that we could see an end-of-year profit. In Q3 headline profit before tax rose to £203m, with revenue per seat rising 23%. The company’s package holiday division continued to do well and is expected to deliver £100m in profit before tax for 2023. The airline’s biggest problem in Q4 is likely to have been flight cancellations as a result of air traffic control issues. Q4 capacity was expected to be 29m, but could come in lower. easyJet also said it expected to add 15% more capacity this winter, however this now looks in doubt given recent events with respect to air traffic control constraints at Gatwick. Group revenue in Q3 rose 34% to £2.36bn, but fuel costs were up 40% at £585m, while costs were also up 7%. For Q4, revenue is expected to rise to £3.2bn, while pre-tax profit is expected to surge to £691m.

China trade balance, CPI (September)

Fri 13 Oct: There’s been little sign in recent trade numbers that China is about to see a significant pick-up in economic activity. The sharp slowdown in the recent Caixin manufacturing and services PMIs indicates that confidence remains low, and suggests that the modest improvement in August may have been a one-off. Imports have fallen every month this year, highlighting the challenges facing the Chinese government in stimulating domestic demand. With the woes in its property sector far from resolved, and youth unemployment well above 20%, the Chinese economy faces a number of complex challenges. Not only has domestic demand been weak, but global demand for Chinese goods has slowed sharply since April, with declines in exports every month since then. This weakness has been reflected in price pressures in the Chinese economy, which slipped into deflation in July, although headline CPI has since edged up to 0.1%. Producer price inflation, on the other hand, has been in negative territory since October last year. Exports declined 8.8% in August and are expected to fall a further 7.5% in September. Imports are also expected to decline 6%, a modest improvement on the decrease of 7.3% in August. 

Wells Fargo & Co Q3 results

Fri 13 Oct: As one of the biggest US retail banks and mortgage lenders, Wells Fargo is generally considered a decent bellwether of the US consumer. Back in March the shares slipped to two-year lows in the aftermath of the meltdown in the US regional banking sector, before rebounding modestly to current levels. When the bank reported in Q2, the numbers showed that overall lending was starting to slow as higher rates hit US consumer spending. Q2 revenue came in at $20.53bn, while profit came in at $4.9bn, or $1.25 a share. Both revenue and profit were ahead of forecasts. In a sign that lending was slowing, total average loans came in below expectations at $945.9bn, while provision for credit losses came in at $1.71bn, a big increase from last year’s $580m. Net interest income was higher than expected at $13.2bn, with the bank raising its target for the full year as higher rates helped to boost margins. For Q3, revenue is expected to rise to $20.16bn, but profits are forecast to fall to $1.25 a share. Investors are likely to keep an eye on the amount of money set aside to cover bad loans, with expectations that another $1.35bn will be earmarked.

Citigroup Q3 results

Fri 13 Oct: With its share price languishing close to one-year lows, Citigroup’s CEO Jane Fraser last month announced another plan to reorganise the bank that she has been in charge of since 2021. Citigroup has been struggling for a while. It is one of the least profitable US banks, with multiple layers of management that Fraser is keen to strip away. The bank has already shed 5,000 positions this year. Last year Citigroup said it would focus on five key business areas: wealth management, investment banking, trading, services and retail. Fraser’s plan is to have five senior managers overseeing these areas, all of whom would report to her. In Q2 Citigroup saw revenue fall 1% year-on-year to $19.4bn as profit fell 36% to $2.9bn, or $1.33 a share. FICC revenue fell 13% to $3.53bn, while equities trading revenue fell 10% to $1.1bn. Operating expenses were up 9% at $13.57bn, while credit losses rose 77% year-on-year to $1.5bn. Costs are the area which Fraser needs to focus on. Citigroup’s staff costs are significantly higher as a percentage of income than at the likes of JPMorgan. For Q3 revenue is forecast to come in at $19.2bn, with a profit of $1.21 a share. Citigroup reaffirmed its full-year forecasts of $78bn to $79bn in revenue, and expenses of $54bn.

INDEX DIVIDEND SCHEDULE

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SELECTED COMPANY RESULTS

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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