The squeeze on UK consumers of rising inflation and weak wage growth is unlikely to ease this year as Brexit uncertainty continues to weigh.
The Office for National Statistics publishes UK inflation data on Tuesday and employment figures on Wednesday, which are expected to reveal that real wages remain under pressure.
The inflation rate rose to its highest in more than five years in August at 2.9%, up from 2.6% in July, driven by a weaker pound since the Brexit vote.
Some economists have predicted the surge in inflation has further to go in coming months.
“The recent slippage in sterling has increased the likelihood that inflation will hit just above 3% in the latter months of 2017,” said Howard Archer, chief economic advisor to the EY ITEM Club.
“However, we believe this should be around the peak as long as sterling does not suffer further weakness.”
UK wages increased by 2.1% in the three months to July, compared to the 2.6% inflation in July, leaving workers suffering a 0.4% decline in real wages.
The drop in real wages overshadowed an 181,000 increase in employment and a 75,000 fall in unemployment with the jobless rate down to 4.3% from 4.4%.
The Bank of England has signalled that interest rates may need to rise in coming months in the face of inflation overshooting its 2% target and low unemployment.
Despite the consumer squeeze, UK retail sales rose 1% August, compared to analysts’ forecasts of 0.2%.
Investors will be keen to see whether retailers were able to once again rise above sector challenges when the ONS publishes its figures for September retail sales on Thursday.
Upbeat update expected from Schroders
As ever, assets under management will be the key number; at the end of June they stood at a record level of £418.2bn, up from £343.8bn a year earlier, with the group seeing net inflows of £0.8bn in the first half of the year.
Markets – especially the US – have performed well in the second half of 2017 so an upbeat update is in prospect.
ASOS expansion plans and 2018 guidance in focus
The online fashion retailer reports its full year results on Tuesday and it has already told investors it expects an increase in sales at the top end of its estimates of between 30-35%.
Profit before tax is anticipated to be in line with market consensus forecasts of £79.4mln, compared to £32.7mln the previous year, according to a trading update in July.
With the guidance for 2017 laid out, investors are likely to pay more attention to any updates on the group’s expansion plans and its guidance for 2018.
ASOS is spending US$40mln on a second distribution centre in the US as part of its international expansion plan.
“The company's main focus is likely to be on providing an update on key operational initiatives: the ramp up of the Eurohub 2 warehouse in Germany, further details on plans for the US warehouse, delivery and returns service improvements, the launch of beauty and private label activewear to name a few,” Deutsche Bank said.
“However, the main focus for analysts and investors is likely to be on FY18 guidance.” Deutsche Bank expects a 27% increase in sales and pre-tax profit of £101mln for 2018.
Bellway shrugs off Brexit uncertainty
The company, which publishes its annual results on Tuesday, has guided to a 14% increase in housing revenue to £2.5bn, compared to £2.2bn in 2016.
It reported further volume growth with a 10.6% increase in the number of housing completions to 9,644, up from 8,721 a year earlier, and said its operating margin is expected to rise to slightly in excess of the 2016 level of 22.0%.
Bellway added that it achieved 16% growth in the value of the forward order book to £1.2bn, versus £1.1bn in 2016.
However, the housing market is expected to see a further slowdown on the prospect of rising interest rates, an increasing squeeze on real wages and the risk of a hard Brexit.
Analysts at UBS said they will be looking for an update on post-period trading in Bellway’s annual results and any further guidance on the outlook for 2018.
UBS expects full year pre-tax profit of £544mln, net income of £437mln, earnings per share of 357p and dividend of 123p, with net cash of £16mln.
Weaker London tourism growth to weigh on Merlin’s Q3 numbers
Had this preview been written last week, a large chunk of it would likely have focused on Merlin Entertainments PLC (LON:MERL) supposed acquisition of some of SeaWorld’s assets, but the company has now blown that idea out of the water.
Moving on and there were plenty of headwinds for the Thorpe Park owner to contend with in the last quarter, with further terror attacks, bad weather and weaker inbound tourism all likely to weigh on revenues.
Given that toxic mix, shares have edged lower over the period and Barclays analysts don’t expect that trend to suddenly change with the announcement of the third quarter results on Tuesday.
Still, the Barclays team are looking for like-for-like sales growth of 1.6% overall, with LEGOLAND and the other theme Parks making up for a flat performance from the London-focused Madame Tussauds, London Eye etc where demand growth has been weaker.
Elsewhere, keep an eye out for any updates on LEGOLAND New York which is currently being built.
Unilever sets the bar high with targets
Unilever moving at pace is still a bit like an arthritic maiden aunt easing herself into a hot bath, but the publication of a strategic review in April of this year was clearly meant to give the impression of a company determined to keep the shareholders happy.
The Flora, Lynx, Persil and Bertolli brands owner announced a €5bn share buy-back programme, a 12% dividend hike and decided to put the spreads business up for sale.
The board also announced plans to accelerate its “Connected 4 Growth” programme and is now targeting a 20% underlying operating margin (before restructuring) by 2020, so Thursday’s third quarter operating update will be a chance to inform shareholders how that ambition is progressing.
Dutch banking giant ABN Amro reckons Unilever has set the bar high with this target, and a “quarterly miss” could have a material share price impact.
Since 17 August, Kraft-Heinz has been free to approach Unilever again, but so far as we know has thus far not done so.
“Unilever’s valuation reflects scenarios of a break-up or a return of Kraft-Heinz with a new bid. We deem both scenarios unlikely,” ABN Amro said.
“Unilever’s new strategy is highly influenced by third parties, and we see operational and financial risks in its execution, hence our recommendation is ‘sell’.”
New management under the microscope at Travis Perkins
Shareholders will be hoping for some signs of improvement under the new management team installed in the first half of the year, though there is a limit to how much “self-help” the company can perform given the division’s reliance on the social housing sector, which is declining.
The division’s margins have come under pressure in recent years from “the significant expansion of online and fixed price multi-channel operators and strong local and regional independents”, the group said in its August update.
The Consumer division, which included DIY specialist Wickes, has been hanging tough, growing revenue in a competitive market.
“Despite continuing to invest in value to maintain price leadership in both Wickes and Toolstation, gross margin was unchanged in the period,” the company said in its second quarter update, and it will be interesting to learn whether that was still the case in the third quarter.
Possible guidance upgrade from IHG
A decent performance is expected from IHG across its key regions, but particualry in Europe and China where revenue per available room is forecasts to grow by 3.9% and 4.2% respectively.
Overall, Barclays is looking for group revenue per available room growth of 2%.
“Following a softer Q2 releases and recent underpfroamnce of the shares, we expect Q3 to be a small positive catalyst.”
Significant events expected:
Monday October 16:
Economic data: China consumer price inflation, eurozone trade balance
Tuesday October 17:
Trading updates: Evraz plc (LON:EVR), Mediclinic International Plc (LON:MDC), Merlin Entertainments PLC (LON:MDC), Moneysupermarket.com Group PLC (LON:MONY), Pearson plc (LON:PSON), Segro PLC (LON:SGRO)
Wednesday October 18:
Trading updates: Reckitt Benkiser Group PLC (LON:RB.)