The Week Ahead: US jobs; Fed minutes; Sainsbury’s results

The minutes from the US Federal Reserve’s June meeting, out Wednesday, and the US jobs report for June, out Friday, could offer clues as to whether the Fed will raise interest rates again on 26 July. As for company announcements, many traders will be keen to check out Sainsbury’s first-quarter results on Tuesday as shares of the supermarket chain have risen roughly 20% this year. 

Our top three economic and company events in order of importance are:

1. US jobs report inc. non-farm payrolls (June) – Friday

The US labour market has continued to beat expectations this year, complicating the Federal Reserve’s task of reducing inflation to its 2% target rate. In May, the US economy added 339,000 jobs, beating economists’ median forecast (195,000) for the 14th month in a row, while the April figure was revised up to 294,000. For June, economists estimate that the US economy added 213,000 payrolls.

The resilience of the jobs market presents a problem for the Fed, which must decide whether to stick or twist on interest rates in the coming months. After the Fed paused its programme of monetary tightening in June, hints that it will raise rates by half a percentage point by the end of the year have unsettled markets, driving yields higher at the short end of the yield curve. 

In May, the unemployment rate rose to 3.7%, up from 3.4% in April, while the labour force participation rate remained steady at 62.6%. Average hourly earnings growth was also stable at 4.3% year-on-year. However, in April the number of job vacancies rose back above 10m for the first time since January. The latest figures prompted the Fed to downgrade its forecast for the end-of-year unemployment rate to 4.1%, down from 4.5%. 

2. US Federal Reserve minutes – Wednesday

Recent briefings from Fed officials have highlighted a divergence of views on how the rate-setting Federal Open Market Committee might move forward. The publication of minutes from the FOMC’s 13-14 June meeting ought to reveal details about the split between policymakers who want to raise interest rates and those who want to maintain or perhaps even cut them. It will be interesting to learn more about the thought processes of the more dovish members of the FOMC, and to find out how comfortable they are with the prospect of further rate rises. 

While the FOMC’s pause to rate hikes in June was well flagged, the suggestion from policymakers that two more quarter-point rate hikes might be necessary this year clashed with inflation data, released shortly before the Fed’s two-day June meeting, which showed that the consumer price index eased to 4% in the year to May, down from 4.9% in April. 

To demonstrate that the FOMC hasn’t stopped fighting inflation, Fed chair Jay Powell delivered a strongly hawkish message at his post-meeting press conference. He also upgraded the central bank’s key economic forecasts. Meanwhile several FOMC members have changed their dot plots to show that they are prepared to raise rates twice more by the end of the year – one hike more than markets were pricing in. All of this makes a July rate hike seem increasingly likely. 

First and foremost, the Fed is determined to discourage markets from pricing in rate cuts by the end of the year. Expectations of rate cuts by year-end have driven stock markets higher, but some of the heat has come out of markets recently as the prospect of rate cuts has faded. The Fed, like other central banks, is prioritising bringing inflation down, even if that comes with the risk of a spike in unemployment. 

3. J Sainsbury Q1 results – Tuesday

After posting a solid set of full-year results in April, Sainsbury’s share price edged up to 14-month highs in May. Since those May peaks, the shares have slipped back, with the March lows at around 250p the next key area of support. 

The supermarket chain’s underlying full-year profit before tax came in at £690m, right at the top end of its guidance, but down 5% from the previous year. That was despite revenue increasing 5.3% to £31.49bn. Profit after tax crashed 69% to £207m but was still 15% above pre-Covid levels. The cost of goods sold increased 7% to £29.4bn, providing ammunition to bosses looking to deflect accusations from politicians that supermarkets are profiting from the cost-of-living crisis. 

The main areas of outperformance were in groceries, which saw annual sales rise 3%, and fuel, which saw a rise of 23.4%. Clothing and general merchandise posted a decline of 3% year-on-year.

For 2024 Sainsbury’s says it expects to match or possibly exceed last year’s underlying profit before tax, guiding £640m to £700m. The board proposed a final dividend of 9.2p per share. 

The recent Kantar survey showed that grocery price inflation eased slightly to 16.5% in June, with eggs and frozen potatoes showing the biggest increases. The data analytics company added that the biggest winners in terms of sales growth were Aldi and Lidl, while Tesco and Sainsbury remained the UK’s number one and two supermarkets by market share. Tesco’s Q1 statement, released a couple of weeks ago, underscored the challenges facing the sector, even as grocery price inflation cools.  

More key events

Our calendar of selected upcoming economic and company announcements:

MONDAY 3 JULY

Manufacturing purchasing manager indices (June)

Recent flash purchasing managers’ index (PMI) readings suggest that the underperformance in manufacturing has continued in June with activity in Germany falling to its lowest level since March 2020, at 41, and the initial Covid-19 lockdowns. 

In France we saw similar weakness albeit slightly higher at 45.5. Of slightly greater concern has been weakness in Chinese economic activity with weak demand there feeding into a global narrative that the economy is slowing, weighed down by higher costs and varying degrees of supply chain disruption. 

Economic activity in Italy and Spain has also been weak, but on the plus side they have managed to outperform France and Germany. If the eurozone is to avoid a third quarter of negative growth, then it is Italy and Spain that might allow them to do it.

TUESDAY 4 JULY

Reserve Bank of Australia interest rate decision

Having paused rate hikes earlier this year the Reserve Bank of Australia now appears to be playing catchup. Having caught markets by surprise in April with a quarter-point rate rise, the RBA followed that up in May with another quarter-point rate increase, pushing the cash rate up to 4.1%. The sudden hawkish shift appears to have been prompted by stinging criticism over its failure to spot early enough the inflation surge at the end of 2021 and through 2022. 

The RBA was hardly unique in this respect, with other central banks being similarly caught out. However, the RBA’s response has been fairly tepid, in comparison to the likes of the RBNZ where rates are much higher at 5.5%. This suggests that the RBA might feel it has to overcompensate in the opposite direction, running the risk of tightening too hard and unsettling the housing market. Will the RBA raise rates again or decide to wait and see? 

J Sainsbury Q1 results

See our top three events, above

WEDNESDAY 5 JULY

US Federal Reserve minutes

See our top three events, above

Services purchasing manager indices (June)

In contrast to the dire state of manufacturing activity, services activity has held up well. But even here we are seeing pockets of weakness, with France posting a reading of 48 in its flash reading a few days ago, a sharp drop from 52.5 the month before. 

Meanwhile, activity in the rest of the euro area remains broadly positive. Economic activity in Italy and Spain could receive a boost now we’re in the holiday season, which may help avert a third quarter of weakness. The UK and the US are also expected to register positive readings. 

AO World full-year results 

AO World benefited during the pandemic as demand for electrical goods shifted online, but the retailer soon ran into problems. When the UK economy reopened as lockdown restrictions were lifted, the business struggled to cope as costs surged. Back in 2021 shares of the Bolton-headquartered electrical retailer rose to a record high of 443p as a pandemic-era buying frenzy pushed the shares up from lows of 48.5p in the space of nine months. It’s taken a little bit longer to round-trip that journey, with the shares hitting a record low of 39p in August 2022. 

The share price has rebounded somewhat since then, helped by a number of guidance upgrades this year, including one in January. The focus has been on reducing costs as revenue is projected to fall 17.2% from last year. In March EBITDA guidance was raised to between £37.5m and £45m, with management citing further margin improvements. In April a Q4 trading update predicted UK revenue of £1.13bn and raised the company’s profit guidance to the top end of its £37.5m to £45m range. In a sign of investor confidence in AO’s turnaround plan, in June Mike Ashley’s Fraser Group acquired a 19% stake in the business at 68p per share.

THURSDAY 6 JULY

Levi Strauss Q2 results 

When Levi Strauss reported in April, the shares fell sharply due to caution over its Q2 outlook, eventually sliding to levels last seen in September 2020, before finding a base in May. . For Q1, the company posted a 6% rise in revenue to $1.69bn and profit of $115m, or $0.29 a share. All in all, the numbers beat expectations, however there was some disappointment that the company left its full-year guidance unchanged, for annual revenue of $6.3bn to $6.4bn. 

For Q2, revenue is expected to come in at a fairly lacklustre $1.34bn, before picking up in Q3 to $1.6bn. Investors will be hoping that this doesn’t change, while profit for Q2 is expected to slow to $0.03 a share.

FRIDAY 7 JULY

US jobs data inc. non-farm payrolls (June)

See our top three events, above

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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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