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Wednesday preview: Fed to hike, UK eyes on wages and Kingfisher results

By Oliver Haill

Date: Tuesday 20 Mar 2018

LONDON (ShareCast) - (ShareCast News) - Wednesday is likely to see US interest rates hiked and a report on the UK jobs market that could hasten or delay a UK hike, while Kingfisher and Ferrexpo are among those due to report in London.
In UK company news, other results are scheduled from FTSE 250 newcomer RHI Magnesita, plus ScS, Softcat and Vectura.

Over in the States, all eyes will be on the Federal Open Market Committee's decision at 1800 GMT, with a press conference at 1830 GMT.

New Federal Reserve Chair Jerome Powell will preside over the meeting of the Federal Open market Committee for the first time this week, most likely raising the Fed funds target range as the economy strengthens.

An increase of the target range for Fed funds from 1.25%-1.5% to 1.5%-1.75% at this week's meeting should not surprise, as it is fully expected by a wide range of market observers and discounted by money market rates, but a more upbeat rate hiking guidance could have the potential to surprise financial markets.

"The US economy can digest higher rates, as they rise in lockstep with inflation, but highly leveraged US corporates could start to feel the pressure from higher debt-servicing costs," said strategists at Julius Baer.

Comments on what happens next will be the real challenge and could lead to some surprises. "We expect that the future path for interest rates could be revised up, something which is not fully discounted by money markets," Baer said. "This rate increase by the Fed is easy to digest for the US economy as it is in step with rising inflation, meaning that real borrowing costs remain largely unchanged. However, highly leveraged and indebted companies could start to feel the pressure from rising debt servicing costs, in particular when they fail to increase their operating income."

Credit Suisse economists now expect the FOMC to raise rates four times this year, which is more than the three currently indicated by the FOMC's 'dot plot' and more than the market has priced.

Earlier on home shores, the Office for National Statistics will confirm levels of unemployment, wages and public finances at 0930 GMT, while the CBI will publish its Industrial Trends survey at 1100 GMT.

The headline unemployment rate is slated to remain at 4.4% in January, with average earnings rising 2.6% in the three months to January compared to the same period a year ago. Excluding bonuses the figure is forecast to be the same. In more timely data, February's claimant count is forecast to fall 5,000.

Unemployment is likely to have slipped to 4.3%, said Pantheon Macroeconomics, while the pick-up in pay awards suggests the headline rate of average weekly wage growth rose to 2.7% in January, from 2.5% in December.

After Tuesday's data showed UK inflation has fallen, economists were keen to see how wages are performing.

The fall in CPI will not be enough on its own to change the Bank of England's interest rate plans, said Barclays. "More important may be this week's labour market report as an upside surprise in wages would support a earlier hike while an equally likely, in our view, downside surprise in job creation would call for holding off a premature hike."

Paul Hollingsworth at Capital Economics said: "We don't think that the CPI outcome significantly reduces the chance of an interest rate hike in May." With Mark Carney and co focussing more on wage growth recently, if Wednesday's figures reveal another pick-up, as expected, Hollingsworth was confident the MPC will raise interest rates again at its meeting in May.

As for UK public finances, the consensus expects borrowing of 2.0bn in February, compared to a surplus of 1.2bn in February last year.

COMPANY NEWS

At Kingfisher's half year results the Screwfix and B&Q owner reported a rise in sales but a decline in profits, with strength coming from Polish operations and the fast-growing Screwfix division. For the third quarter, it was a similar story, with LFL sales up 1.5% in the UK and Ireland but dragged into the negative by more weak numbers from France.

Business disruption from the ONE Kingfisher plan continued, primarily product availability and clearance, but the company was confident that this would ease and said it remained on track to deliver full-year profit targets.

RBC Capital Markets forecasts revenue to rise to 11.8bn from the 11.2bn a year before, with EBITDA falling to 953m from 1bn, PBT dropping to 657m from 743m and EPS losing 2.2 pennies to 22.1p. A dividend of 10.7p per share was predicted.

"We continue to be cautious on Kingfisher short term given pressure on housing related retail categories we are seeing in the UK, and most recently in France," RBC said on Monday.

Numis noted that the fourth quarter accounts for 23% of annual sales, with Christmas products largely compensating for the seasonal lull in building activity. Analysts at the broker noted their forecast are in line with consensus and show underlying PBT broadly flat year-on-year, backed by a modest currency tailwind.

Analyst Michael Hewson at CMC Markets said the French operation "remains the proverbial ball and chain around its ankle" as the management sets about closing uneconomic UK stores and revamping its IT infrastructure. "Investors will be hoping that the full year numbers match the expectation around the 20% rise in the share price since September."

Iron ore pellet producer Ferrexpo recently reported 2017 production of 10.4mt at an average cash cost of US$33 per tonne, with net debt of $400m. A special dividend of $3.3c for the first half of the year was paid in January, adding to the interim dividend of $3.3 paid in September.

Deutsche Bank forecasts EBITDA of $519m, assuming an average pellet premium of US$44 and an average 62% fines price of 71US$/t. Analysts think further dividends could continue through 2018 and 2019 as pellet premiums remain elevated. "However, this will need to be balanced with higher capex needs as Ferrexpo seeks to ramp production from 2020 - we expect management to provide further clarity on this."

They also expect production to increase only slightly to 10.7mt in 2018 and 2019. "We look for any comment on cost pressures. The next pellet line refurbishment is scheduled for 1H18, as is the repayment of a US$173m Eurobond tranche."

First full year results are also due from RHI Magnesita, after the RHI and Magnesita merger was completed and the shares listed in London at the end of October and joined the FTSE 250 in December.

The historic numbers will primarily reflect a combination of the fortunes of the two businesses as separate entities, said Numis, hence Q4 trading, balance sheet and outlook "will prove the most meaningful".

Steel production is expected to grow a more modest 1-2% in 2018. "Whilst this should prove helpful but key will be the update on price increases and the benefit to the group given their vertically integrated model," Numis said. "Also expect an update on the cost savings, timings and associated cash costs."



Wednesday March 21



INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Crude Oil Inventories (US) (14:30)
Current Account (US) (12:30)
Existing Home Sales (US) (14:00)
MBA Mortgage Applications (US) (11:00)
Federal Open Markets Committee Decision (US) (18:00)

UK ECONOMIC ANNOUNCEMENTS

CBI Industrial Trends Surveys (11:00)
Public Sector Net Borrowing (09:30)
Unemployment Rate (09:30)

FINALS

Accesso Technology Group, Alpha Fx Group , Brave Bison Group, Brave Bison Group, Cambian Group, Centaur Media, Ebiquity, Empiric Student Property , Ferrexpo, IFG Group, IGas Energy, International Public Partnerships Ltd., Kingfisher, Medaphor Group, Personal Group Holdings, Premier Technical Services Group , Science In Sport, Ten Entertainment Group , Vectura Group, Xaar

INTERIMS

SCS Group, Softcat



ANNUAL REPORT

Cobham, Laird

AGMS

Athelney Trust, RM, Safestore Holdings, SK Telecom Co Ltd. ADS

FINAL DIVIDEND PAYMENT DATE

Lancashire Holdings Limited

QUARTERLY PAYMENT DATE

Unilever