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Federal Reserve rate decision to dominate in week ahead, with BoE meeting likely to be dull

The corporate diary is fairly sparse, but there are some bright spots, notably updates from refocused blue chip hotels group Whitbread and housebuilder Berkeley Group

Federal Reserve building
Economists at RBC Capital think that a US rate cut in June seems “extremely premature”

Interest rates will remain front and centre in the coming week, with the latest Federal Reserve policy meeting to be held on Tuesday and Wednesday, while the Bank of England’s Monetary Policy Committee also has its latest get-together, but neither are expected to make any changes – just yet! 

On the corporate front, the diary remains fairly sparse, but there are some bright spots, notably updates from refocused blue chip hotels group Whitbread plc (LON:WTB), and housebuilder Berkeley Group Holdings PLC (LON:BKG).

June US rate cut seems “extremely premature”

The main macro focus of the week will be on the Federal Reserve’s decision on US interest rates, due after the London market close on Wednesday, 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.”

Bank of England to stand pat too

The latest decision on UK interest rates will also be unveiled on Thursday after the Bank’s of England’s latest MPC meeting though, again, no change is expected.

In a preview of the meeting, Howard Archer, chief economic advisor to the EY ITEM Club, commented:  “We are expecting the Bank of England to keep interest rates unchanged at 0.75% next Thursday following a unanimous 9-0 vote within the Monetary Policy Committee (MPC) at their June meeting.

“While some MPC members (Andy Haldane, Michael Saunders and Ben Broadbent) have recently made relatively hawkish speeches regarding the need for interest rates hikes, we would be surprised if they – or any other MPC member – voted for an increase at the June MPC meeting.”

Archer added: “Heightened global trade tensions are unhelpful for UK growth prospects, while the current unsettled domestic UK economic environment may well reinforce business caution on investment and committing to new projects.

“Meanwhile, Brexit uncertainties remain high, with enormous doubts as to what will happen on 31 October. The risk of a “no deal” UK exit from the EU at the end of October has if anything increased recently, while a further delaying of the UK’s exit is also a genuine possibility.”

The economist concluded: “If the UK ultimately leaves the EU without a “deal”, the Bank of England has repeatedly maintained the view that interest rates could move in either direction.

“However, past comments by Governor Mark Carney have suggested that he thinks the economy would need stimulus if there is a “no deal” Brexit , thereby indicating that an interest rate cut would be a more likely scenario.”

UK inflation to fall back below BoE target

A key signpost for what the Bank of England could do in the future might come from May UK inflation numbers, due on Wednesday, 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 that 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, Table Table and Thyme.

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 on Wednesday 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”.

Finals from Ashtead could get bogged down

Shares in Ashtead Group PLC (LON:AHT), the FTSE 100-listed construction equipment hire group, have sunk 20% underwater since reaching high ground last year and ahead of full-year results on Tuesday have been quite bogged down.

Pressure has come from investor concern about a slowdown in the key North American market, which has been further aggravated by a profit warning from a construction services sector peer, which blamed high levels of rainfall in the US for a rash of delayed contracts.

Ashtead, which derives around 85% of its sales and 90% of profits from its US-based Sunbelt business, can take confidence from US rival United Rentals, which reported solid first quarter figures in April.

Despite headwinds from wet weather, analysts at broker Numis said they believe there is scope for Ashtead to beat its forecasts for pre-tax profit of £1.1bn.

“Peer United Rentals has twice outlined strong trading conditions since Ashtead last reported, with commentary confirming strong growth across all geographies and verticals. Ashtead has consistently outperformed its peer on a like-for-like sales growth basis,” the analysts added.

Dixons Carphone’s turnaround progress eyed

Moving to the second line, stores group Dixons Carphone Plc (LON:DC.) has been trying to turn around the business as weak demand for new mobile phones drags on sales.

The retailer has struggled against a downturn on the UK high street and the fact that less consumers have been taking out contracts for new handsets, leading to store closures and a string of profit warnings over the past year.

In its last update for the third quarter, Dixons said sales were flat over the key Christmas trading period as a 12% drop in mobile sales offset 2% growth in sales of electrical products such as TVs and games consoles.

Dixons publishes its full-year numbers on Thursday and is expected to report pre-tax profit of £300mln, compared to £382mln last year.

“Our forecast assumes a modesty better performance than this, but we wouldn’t expect any big surprises,” Numis said, adding that it estimates pre-tax profit at £307mln.

“Focus is likely to fall on fourth quarter trading momentum (for reference consensus models like-for-for-like sales trends of UK electricals: 0%, UK mobile: -5%, Nordics: +2%, Greece: +10%), outlook guidance and qualitative commentary around the outlook – particularly the mobile business.

“Here we fear that further confirmation of profit and cash challenges to the mobile business could drag on sentiment, albeit we acknowledge that (at the point of writing) the shares have re-traced towards lows going into results.”

Future strategy key for Saga

Saga PLC (LON:SAGA) on Wednesday 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.

Trading N Brown expected to remain robust

N Brown Group PLC (LON:BWNG) will issue an update on Thursday, with analysts at Numis expecting the plus-sized clothing retailer to report robust first quarter trading, particularly given the comment with its full-year results at the start of May.

The analysts noted that the FTSE All-Share-listed firm said then that its current trading was in line with expectations.

They added: “Whilst revenue declines are likely to persist, better management of costs should support the profit and cash outlook at this early stage of the year.”

Higher occupancy eyed from Safestore

Having ended its prior year with a pre-tax profit rise of over 100%, storage group Safestore Holdings PLC (LON:SAFE) will be hoping to keep the gains going in its interims on Tuesday.

The FTSE 250 firm reported 6.4% like-for-like (LFL) growth in revenue in its first quarter alongside a 3.2 percentage point rise in occupancy rates to 73.5%, so investors will be hoping more punters have been locking up more of their stuff in the company’s storage boxes.

There may also be news of a successor to outgoing chairman, Alan Lewis, who previously announced his intention to step down from the firm.

Brighter future hoped for Telecom Plus

Utilities firm Telecom Plus PLC (LON:TEP) provides an alternative to the more well-known suppliers of gas, electricity, telephone and broadband services through its Utility Warehouse brand, so investors will hope it has managed to take more market share when it reports its finals on Tuesday.

However, a profit warning in April is likely to dim expectations as the firm has suffered from the mild UK winter weather as well as the government’s energy price cap.

TEP is currently expected to report an adjusted pre-tax profit for the year of £56mln, so investors will be hoping the company has at least managed to keep stable so it can take advantage of high levels of customer switching.

Analysts at Numis said that they will look for TEP’s competitive standing in the energy supply market as well as any evidence of the company using its size to leverage better terms from wholesale suppliers.

Significant announcements expected for week ending June 21:

Monday June 17:

Full-year results: BTG PLC (LON:BTG)

AGMs: Fairfx Group PLC (LON:FFX)

Economic data: None scheduled

Tuesday June 18:

Finals: Ashtead Group PLC (Q4) (LON:AHT), Telecom Plus PLC (LON:TEP), NexEnergy Solar Fund Limited (LON:NESF)

Interims: Safestore Holdings PLC (LON:SAFE), Schroder European Real Estate Investment Trust PLC (LON:SERE)

AGMs: Clearstar Inc (LON:CLSU), Directa Plus PLC (LON:DCTA), Netscientfic PLC (LON:NSCO), Savannah Resources PLC (LON:SAV)

Economic data: US housing starts

Wednesday June 19:

FOMC US rate decision

Trading update: Whitbread plc (LON:WTB), Saga PLC (LON:SAGA)

Finals: Berkeley Group PLC (LON:BFG), Severfield PLC (LON:SFR), ULS Technology PLC (LON:ULS)

Interims: Standard Life Private Equity Trust PLC (LON:SLPR)

AGMs: Cadogan Petroleum PLC (LON:CAD), ECSC Group PLC (LON:ECSC), Midatech Pharma PLC (LON:MTPH), Summit Therapeutics PLC (LON:SUMM), Woodbois Limited (LON:WBI)

Economic data: UK CPI, RPI, PPI, HPI inflation

Thursday June 20:

Bank of England rate decision

Trading update: N Brown Group PLC (Q1) (LON:BWNG)

Finals: Dixons Carphone Plc (LON:DC.), Best of the Best plc (LON:BOTB)

Interims: CareTech Holding PLC (LON:CTH)

AGMs: Anglo Asian Mining PLC (LON:AAZ), Eurasia Mining plc (LON:EUA)

Ex-dividends to clip 1.83 points off FTSE 100 index: Compass Group PLC (LON:CPG), Land Securities Group PLC (LON:LAND), United Utilities PLC (LON:UU.)

Economic data: UK retail sales; US weekly jobless claims; US Philly Fed index

Friday June 21:       

AGMs: Xtract Resources PLC (LON:XTR)

Economic data: UK public sector finances; CBI industrial trends survey; US existing home sales

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