The main macro focus on Wednesday will be on the Federal Reserve’s decision on US interest rates, due after the London market close, particularly given heightened expectations for further cuts following recent weak data.
In a preview of the latest FOMC meeting, economists at RBC Capital said, however, that a rate cut in June seems “extremely premature.”
They think the Fed can “make some communications tweaks that at least open up the possibility for a cut in July (more of a commitment than recent rhetoric, perhaps).”
But, the RBC economists added: “Despite the market pricing in a very elevated probability of a Fed rate cut at that July meeting, we still think there is significant uncertainty around this event.
“Indeed, the fact that the main variable in the reaction function is seemingly trade tensions with China means more variability should be priced into this outcome.”
They said the market is likely to gain more clarity on this with the G-20 summit set for June 28–29, with President Trump having said recently that if he and Chinese Premier Xi do not meet, the US will impose the final tariff tranche on China, although Trump also suggested more recently that a meeting will indeed occur.
The RBC economists concluded that they would find it hard to believe that the Fed would cut rates if all of a sudden there were a de-escalation of tensions with China - which could be, simply, a commitment from the US to take the next tranche of tariffs off the table - and equities were trading at all-time highs by the Fed’s July meeting.
“But,” they added, “a deterioration in trade dealings would also increase the risk that the Fed’s economic growth profile for the second half of 2019 gets a downgrade and the risk that financial conditions deteriorate.”
UK inflation to fall back below BoE target
Meanwhile, a key signpost for what the Bank of England could do in the future might come from the May UK inflation numbers, with April’s figure having been above the bank’s target rate.
RBC’s economists said: “As expected, a number of temporary factors contributed to a rise in CPI inflation last month. Electricity and gas, thanks to the energy market regulator Ofgem increasing its price cap on domestic utility bills, and airfares, thanks to Easter falling later this year than last, provided the main upward contributions.
“Yet, despite those factors, CPI printed, at 2.1% y/y, some 0.2ppts lower than we had expected in advance,” they added.
The RBC economists pointed out that as some of those temporary factors drop out, and the effect of last year’s oil price increases enter the year-on-year calculation, they expect CPI inflation to have fallen back below the BoE’s 2% target in May.
Whitbread investors hope to rest easy on Premier Inn
On the corporate front, Whitbread’s first quarter results will be closely scrutinised for the performance of its Premier Inn hotels business after selling its Costa Coffee chain to Coca Cola last year.
In the final quarter of 2018, UK like-for-like accommodation sales fell 3.2% with Whitbread blaming Brexit uncertainty for bringing down the amount businesses spent on putting up employees in hotels and for reducing leisure spend among consumers.
Whitbread had said that there was a “further weakening in market demand” since the start of the new financial year, particularly in regions where Premier Inn’s hotels are located.
Since completing the £3.8bn sale of Costa in January, the company has been investing in the expansion of the Premier Inn chain with plans to open 3,000-4,000 rooms in the UK this year.
It has also used some of the proceeds from the sale to buy back shares.
Whitbread completed the repurchase of £500mln shares in April and unveiled plans to return up to £2bn of cash to shareholders in the second phase of its buyback programme a day after its first quarter update.
For that first quarter, Numis expects Whitbread to report a 6% decline in revenue per available room and a 2% drop in food and beverage sales from its restaurants and pubs including Beefeater, Brewers Fayre and Table and Thyme.
Future strategy key for Saga
Saga PLC (LON:SAGA) is due to provide its first trading update since April’s final results saw the over-50s services specialist swing to a loss, slash its dividend and warn that it expects weaker margins in the insurance business this year.
Since then, chief executive Lance Batchelor has announced his retirement after a tumultuous 12 months and the company recently signed Goldman Sachs’ Marcus bank up as its new savings partner.
Analysts at UBS think Saga’s plan to launch new home and motor policies with three-year fixed pricing bring risks around capital requirements in the broking unit and also sees earnings headwinds from changes to renewal practices for home and motor policies in response to a Financial Conduct Authority investigation.
Tough comparatives for Berkeley Group
FTSE 100-listed housebuilder Berkeley Group may have reached the peak of its sales and profitability in 2017, so the company’s full year results will be facing a tough comparative.
Improving on its 2017 results was a tough ask for the group in 2018 and it looks as if 2019 will be the same, with its heavier focus on London in comparison to its peers likely to make the task even harder.
A cocktail of average selling prices and volumes completed will make it difficult to lift revenues while higher materials and labour costs will squeeze the bottom line.
Analysts at Numis said that they are expecting the company’s profits to moderate over the next few years, although they predicted the firm would end the year with net cash of £927mln which would support an increase in land spend and potentially pave the way for “improved shareholder distributions”.
Significant announcements expected for Wednesday June 19:
FOMC US rate decision
Interims: Standard Life Private Equity Trust PLC (LON:SLPR)
Economic data: UK CPI, RPI, PPI, HPI inflation