Wednesday preview: Fed to announce policy tightening, UK retail sales due

Market Buzz

Wednesday preview: Fed to announce policy tightening, UK retail sales due

Tue, 19 September 2017
Article viewed 188 times
Wednesday preview: Fed to announce policy tightening, UK retail sales due

(ShareCast News) - Results from Kingfisher and Babcock, followed by official data on UK retail sales will for many traders prove only an hors d'œuvre for the US Federal Reserve's policy announcement late on Wednesday.
Although no change is expected in the Federal Reserve's policy settings, the central bank is expected to announce that October will see the beginning of its balance sheet taper/run-off/quantitative tightening, or "policy normalization" as the Federal Open Markets Committee likes to call it.

As Fed officials have thoroughly prepared financial markets for this event, economists anticipate little market reaction.

As the taper has been consensus view for some time now, the other big thing to watch will be what the 2020 economic and Fed funds projections for the first time, known as the 'dots' of FOMC members.

The median projection is for an additional three 25-basis-point rate hikes in 2018 and again in 2019.

"We expect that the median projection for 2017 will still be for one more 25bp rate hike in December," HSBC said, adding that in light of recent low inflation readings, some of the policymakers could lower their funds rate projections modestly for 2017 through 2019.

"This could create the impression of a 'dovish' change in the outlook for longer-run policy tightening. Although some dots could move lower, we do not expect the median projection for 2017 or 2018 will change. There is the possibility that the median projection for 2019 will come down."

RBC Capital Markets said the growth, unemployment and inflation numbers "should be unremarkable as the committee is typically not in the business of forecasting neither a breakout of growth nor an economic recession", with the Canadian bank's economists suggesting three options: that the Fed will show the tightening cycle effectively coming to an end in 2019 with federal funds rate at 2.9% or 3.0% in 2020; decide to adjust the near-term profile ; or show hikes beyond the neutral rate of 3% in 2020.

Mickey Levy at Berenberg said Fed Chair Janet Yellen's comments at the post-meeting press conference "should be interesting" on the impact of Hurricane disruptions on near-term policy; on how willing the Fed is to tolerate a lower range of inflation given lower production and distribution costs, higher competition and quality adjustments that are placing downward pressure on price inflation; and the implications for financial stability of easing financial conditions despite the Fed's policy tightening, and how these easier-than-expected conditions will affect policy normalization going forward.

UK retail sales held up well in July, with food volumes driving a second consecutive month-on-month rise after a weaker few months.

The exception was fuel volumes, which fell 2.4% in June and a further 1.1% in July.

The consensus is for total retail sales growth to ease to a yearly rise of 1.1% from the 1.3% seen a month ago, as m-o-m growth softens to 0.2% from 0.3%.

Said HSBC: "Although consumer confidence picked up a touch in August, we expect these retail sales moves to go into reverse, with fuel sales rising but most other goods seeing volumes fall, as colder weather and still squeezed real incomes weigh on consumption. Combined with base effects, this will take y-o-y growth rates to fresh four-year lows."


Kingfisher is scheduled to report full interim results, having already released a pre-close update in July that provided sales numbers.

Like-for-like sales for the three months to 31 July fell 4.7% for B&Q, rose 10.8% for Screwfix, while dropping 2.8% and 5.1% for French chains Castorama and Brico Depot, with a 4.0% gain for Poland.

Morgan Stanley analysts felt it was unlikely that headline profits will prove materially different to those expected by consensus.

"One thing that we will look out for, though, is the use of exceptional items and the difference between headline and statutory profits. We expect investors to focus mainly on the update on the progress being made in the delivery of the 'ONE' Kingfisher strategy and its impact on the business."

Babcock will provide a pre-close update for trading in July and August.

In its last update, the company said trading was in line with expectations and the outlook for the year was unchanged, with leverage also in line.

Babcock reported an improvement in revenue visibility at 82% for 2017/18 and 55% for 2018/19.

Morgan Stanley said that there was likely to be an update on the orderbook and pipeline, which were £19bn and £10.5bn respectively in July, and leverage, which is guided to 1.6x by FY18.

Wednesday September 20

Crude Oil Inventories (US) (15:30)
Existing Home Sales (US) (15:30)
Federal Reserve Rate Decision (US) (19:00)
MBA Mortgage Applications (US) (12:00)
Producer Price Index (GER) (07:00)

CBI Industrial Trends Surveys (11:00)
Retail Sales (09:30)

Accesso Technology Group, Attraqt Group , Cambian Group, Kingfisher, Science In Sport, Shield Therapeutics

Brunner Inv Trust

Babcock International Group

Adamas Finance Asia Limited (DI), Alcentra Euorpean Floating Rate Income Fund Ltd Red Ord Shs, Diageo, Eckoh, Mercantile Ports & Logistics Limited, Scholium Group, United Carpets Group

Aberdeen Private Equity Fund Ltd. Sterling Part Shares, Bloomsbury Publishing, Ramsdens Holdings