Weekly outlook: Central banks to keep hiking as Apple and Shell report

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27 January 2023

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George Angier

Monday 30 January

– Full-year results from SThree
– Trading statement from Computacenter
– UK Nationwide house price index
– In Japan, quarterly results from Canon, Tokyo Electron, Fujitsu, and NEC
– In Europe, quarterly results from Ryanair, UBS, Vantage Towers, and Philips
– In the US, quarterly results from ExxonMobil, Pfizer, UPS, AMD, NXP Semiconductors, General Motors, Spotify, Western Digital, and Juniper

Tuesday 31 January

– Full-year results from Ceres Power
– First-half results from ITM Power
– Trading statement from Pets at Home
– Manufacturing and services purchasing managers’ indices from China
– Japanese unemployment
– UK mortgage approvals
– EU Q4 GDP growth
– US Conference Board consumer confidence survey
– US Case-Shiller house price index
– In Japan, quarterly results from Fujitsu and Hitachi
– In Asia, quarterly results from Samsung Electronics, Alibaba, and SK Hynix
– In Europe, quarterly results from Novo Nordisk and Novartis
– In Europe, quarterly results or trading updates from Meta Platforms, McDonalds, CostCo, Caterpillar, UPS, Stryker, Mondelez, Electronic Arts, Snap, and Peloton

Wednesday 1 February

– Full-year results from GSK
– Trading statements from Entain, Vodafone, and Glencore
– Manufacturing purchasing managers’ indices in Asia, Europe, the UK and the USA (final readings)
– EU inflation (flash reading)
– OPEC+ meeting
– US Job Openings and Labor Turnover Survey (Jolts)
– US ADP employment survey
– US car sales
– US weekly oil inventories
– US Federal Reserve policy announcement

The Federal Reserve hiked the Fed Funds rate to 4.5% in 2022, up from 0.25% in 2022, and also began the process of quantitative tightening (QT). AJ Bell’s Russ Mould and Danni Hewson said the assets on its balance sheet are being run down at a rate of $95bn (£78bn) a month.

Mould and Hewson added: “Thus far, the US central bank has shrunk its total assets by 5% from the peak, to $8.4trn (£6.8trn), but that is still more than double where it was before the pandemic and nearly 10 times 2007’s levels, before the financial crisis. The CME Fedwatch service shows that markets believe the Fed will slow down its pace of rate increases, with a one-quarter point hike this time around to 4.75%, with another quarter point in March, maybe one more in spring to 5.25%. That is currently seen as the peak, with the first rate cut expected in the fourth quarter.”

Ben Jones, director of macro research at Invesco, agreed that a hike of 25bps was the most likely outcome. However, he warned that it would come with comments that a pause in rate hikes is not imminent: “Chairman [Jerome] Powell will acknowledge the improved inflation data but is likely to stress that the inflation battle has not been won,” he said.

“I would not be surprised to see him push back on market pricing and show his dislike for the strength in the equity rally and loosening in financial conditions. Until the labour market shows significant weakness a pivot from the Fed is highly unlikely.”

– In Japan, quarterly results from Rohm
– In Europe, quarterly results from Ørsted, BBVA, Deutsche Bank, and Ferrari
– In the US, quarterly results from Alphabet, Merck, Altria, Conoco Phillips, Qualcomm, Starbuck’s, Qorvo, Estee Lauder, Pinterest, Coherent, Harley-Davidson, Cirrus Logic, and Microchip

Thursday 2 February

– First-half results from Renishaw and NCC
– Trading statements from BT, Airtel Africa, Anglo American, and Cranswick
– Analysts’ meeting at JD Sports
– Bank of England policy announcement

The Bank of England was more cautious than the Fed in 2022, according to Mould and Hewson, both in raising rates and employing QT. Governor Andrew Bailey and the Monetary Policy Committee hiked the headline cost of borrowing to 3.5% from 0.25% and, to further tighten policy, launched a bond-selling plan worth £80bn a year – total assets under QE peaked at £895bn. The BoE has managed to sell the government bonds, or gilts, it acquired during the autumn panic caused by Trussonomics without any drama.

Mould and Hewson expect the BoE to raise the base rate by half-a-percentage point to 4%, before a couple of quarter-point hikes in the spring to a peak of 4.5%. As with the Fed, markets expect the first 0.25% rate cut in the fourth quarter of 2023.

Again, Invesco’s Jones concurred with the AJ Bell duo, adding: “Though UK inflation has shown some signs of easing, the level remains so far away from target, it is hard not to see the BoE hiking by less than 50bps in February. However, recession risk is highest in the UK in our view so there is good reason to think that, unlike other central banks, the BoE could make a rapid pivot later this year.”

– European Central Bank policy announcement

The ECB was the last of the trio to raise rates and the last to embrace QT, according to AJ Bell’s Mould and Hewson: “The ECB increased its main refinancing rate to 2.5% from zero in 2022 and has stated that QT will begin in March 2023 as the central bank ceases to reinvest cash from bond holdings that mature.”

The initial run rate for QT is €15bn (£13.2bn) a month and that will be reassessed in June, though it is a tiny sum compared to the ECB’s €8trn (£7trn) balance sheet. Consensus is looking for 0.5% rise from the ECB but there has been some debate that only a quarter-point could be on the cards.

Jones has picked up on some hawkish comments from ECB members in recent weeks, adding that he expects the ECB to extend that tone at the next meeting. He said that a 50bps hike would likely be above what the Fed does and would buoy the euro further, but upside for the euro is limited from here as positioning measures suggest traders have already placed this bet.

– US Challenger, Gray and Christmas job cuts survey
– US weekly unemployment claims
– Fourth quarter results from Shell

Shell’s profits won’t be pouring in at quite the same bumper rate, given the drop in oil prices since the summer, but historically high energy costs mean times are still good for the energy giant, according to Susannah Streeter of Hargreaves Lansdown. Operational hiccups have also been eradicated in the integrated gas division so, although wholesale prices have retreated to October 2021 lows, profits here are expected to be significantly higher quarter on quarter, according to Streeter.

She added: “Shell has already warned that it’s going to shoulder a big windfall tax burden of $2bn (£1.6bn) in the quarter due to UK and EU levies. It would appear to be the first time in five years that Shell has paid tax on its UK operations given that it’s been able to benefit from decommissioning incentives and off-set investments in the North Sea.

“There will be interest in whether the arrival of Wael Sawan as the new CEO, who was previously head of renewables, will see Shell start to make more inroads into cleaner greener energy. Investors will also be keen to see the renewables arm of the business taking on more muscle, but it’s still a puny part of the revenues and profits have been non-existent in the last quarter.”

– In Japan, quarterly results from Sony, Honda Motor and Softbank
– In Europe, quarterly results from Roche, ABB, Infineon Technologies, Danske Bank, SKF, Konecranes, Intesa Sanpaolo and Electrolux
– In the US, quarterly results from Amazon.com, Eli Lilly, Hershey and Clorox
– Quarterly results from Apple

Apple’s shares are up 15% YTD after a tough 2022 in which $1trn (£810bn) was knocked off the company’s stock market valuation, said Mould and Hewson. Unlike many of its fellow tech giants, Apple did not cough up a profit warning in 2022, due largely to solid revenue streams, and the fact that CEO Tim Cook and CFO Luca Maestri did not issue any earnings guidance.

The AJ Bell pair said cash flow remained one of the business’ core attractions, and one thing going for Apple in some respects is the bar for expectations is dropping for this quarter and indeed this whole fiscal year. Analysts have been slashing earnings forecasts on the way into the first-quarter results. According to Zack’s, there have been seven estimate downgrades against just one upgrade in the last 60 days.

Matt Britzman, an equity analyst at Hargreaves Lansdown, expects to see a drop in Apple’s revenue for the first time in 15 quarters when it reports Q1 earnings.

“Having held up relatively well over the last earnings season, we’re cautiously optimistic about the coming results. A weaker US dollar and price hikes pushed through toward the end of last year should both act as tailwinds. But significant production disruptions in China due to Covid restrictions, riots and walkouts were a challenge. The main concern is that short term disruptions may be compounded by weakening hardware demand, iPhone sales were already a little weaker than expected back in October,” Britzman added.