CONSUMER CYCLICALS: Consumer & Transport: Week in Review
Feb-07 15:50
(hyperlinks in the weekly)
As pre-empted last week, earnings were low-beta this week, vol instead coming from event-driven news. Early in the week we saw blatant decompression – generally when we attempt to roll through crossover and HY names on the rise and screen for value. On Monday that included the VFC curve, Carnival 30s and Elis 28s. They are (+6bps ,+0.8pts, -5bps) vs. index +2.5 (all against swap) – VF the laggard. Earnings slows down next week but remains topical on Kering, Avis, Randstad (read-through to Adecco) and BAT. We are also hoping for primary to pick up pace (including potential for up to €5b from Carlsberg) after this week was dominated by issuers heading to $s (Altria, Pepsi, Cargill).
- Barry Callebaut; clients report results that echo Barry’s results with low-single digit volume falls for Chocolate products. Unlike Barry they are hurting more - earnings guidance ranging from -10% to -30% this year. Despite being optimistic on demand and the future evolution of Cocoa prices, we would caution their remarks with the simple fact they will be biased to paint the picture as such. Reassuringly spot and futures for Cocoa have come down ~£1k from recent highs this week.
- VFC; widens early in the week on HY decompression. Management says minimal exposure to tariffs in current supply chains, slight value skew remains
- Burberry; held firm early in the week despite peers widening. We revisit fundamentals and the chance of rating action. It remains a value skew.
Event driven news
- PVH; China has been ‘investigating’ it since late September and we turned cautious around then on the name. Discussions seem to not have worked out; China has added it to the “unreliable entity list” – one generally reserved for US weapons manufacturers. Not helping the outlook, a broker has an early bearish read for the 4Q/3m to Jan.
- Kering; parts ways with its Gucci creative director – the brand is half the groups sales and has been the weakest performer, riding high beta to Chinese consumer and its positioning towards a more “aspirational” luxury customer. Equity analysts dismiss the departure as expected but we encourage caution ahead of earnings next week.
- Metro AG; Daniel Křetínský wants to buy out the remaining 50%, delisting the co in the process. CoC at par will not offer protection (Daniel exempt in bond docs) and reporting clarity, which we already find lacklustre, is guided to get worse on delisting. Earnings are weak on margin performance.
- Walgreen Boots; receives another $300m from selling down its stake in Cencora. We revise down expectations for liquidity there and see it near exhausted now given the rest is in prepaid forwards. It says proceeds are to tackle 2026 maturity wall.
- Ceconomy; goes bid on Bloomberg carrying leaks that high-grade Chinese e-commerce giant, JD.com, may once again be interested in it. We see bonds pricing ~50% chance while equities are less optimistic.
Primary (NIC in brackets)
- Imperial 9y +165 (0), Whitbread (Premier Inn parent) £7.3y UKT+133 (-2 through)
- FedEx; consent solicitation still does not have majority on the 1.3% €31s. 25bp cash fee for participation, deadline is 21st Feb.
- Carlsberg; expect supply imminently, we revise up expectations to the full ~€5b
Rating Action
- Whirlpool (Baa3 Neg/BBB- Neg now/BBB- Neg); S&P moves to negative outlook. Co has poor BS governance but earnings are pointing to a recovery (in line with peers). After months of (repeated) caution, we are now starting to see value - but warn that investors may need to sit through a potential junking.
- Walgreen Boots (B1/BB-; Stable); S&P comments early in the week on both the dividend suspension (sees as slight credit positive) and renewed DoJ opioid lawsuits (sees historical verdicts indicative of insignificant credit risk).
- JAB Group (Baa1/BBB+ Neg); After the company announced an acquisition of a life insurer for an undisclosed amount, Moody’s stays put indicating management has reiterated 15-20% LTV target (last reported 24%). We do see a potential downgrade from S&P in the move towards private holdings and falling share prices in the public holdings (55% of group) that may pressure attempts to bring LTV down.
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Dec Minutes Preview: The Trump Factor And Neutral Rates (2/3)
Jan-08 15:47
- The Trump Factor: The degree to which the impact of potential Trump administration policy shifts impacted upon participants’ more hawkish outlooks at the December meeting is not entirely clear. As Chair Powell noted in the post-meeting press conference, some participants incorporated them into their projections (NY Fed’s Williams said as much after the meeting), while others did not.
- The minutes could tell us more about this divergence in approaches, and while it is too early for the FOMC to be coming to any firm conclusions, some potentially interesting hypotheses on that front would be interesting to see: for example, are one-off tariff increases considered to be one-off step-up in prices, rather than inflationary beyond the initial impact? Are the anticipated policies seen to be a net positive or negative for economic growth?
- For context, in the minutes to the December 2016 meeting – immediately after Trump was elected the first time – the Fed staff’s economic outlook made a “provisional assumption that fiscal policy would be more expansionary in the coming years. These effects were substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar”, and as for FOMC members, “about half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts” – so the December minutes could provide an idea of how many members incorporated them this time.
- Neutral Rate Questions: The “longer-run” dot in the Dot Plot rose from 2.875% to 3.00% - the 4th consecutive quarterly rise. While this isn’t considered to be the short-run “neutral rate”, it is the clearest manifestation of Committee members’ view that rates aren’t going back to pandemic lows. Powell noted that the reason to slow down cuts is because having cut by 100bp, “we are significantly closer to neutral” though “at 4.3% and change, we believe policy is still meaningfully restrictive…we are closer to the neutral rate which is … reason to be cautious about further moves.” We would expect the latter part of that to be a key focus in the minutes – are more participants concerned that neutral is not far off, and or that policy is not as restrictive as previously thought?
FED: Dec Minutes Preview: How Many Would-Be Holders? (1/3)
Jan-08 15:43
The minutes to the December 2024 FOMC meeting (released at 1400ET) should provide further context for what Chair Powell dubbed a “closer call” but ultimately the “right call” to cut rates by 25bp.Our preview of the December FOMC Minutes is here: (PDF):
- Recall that the meeting brought multiple hawkish surprises, with the Committee’s inflation and rate projections increased by more than expected, a more cautious Statement, and a surprise dissent by Cleveland Fed President Hammack in favor of holding rates.
- A few things to watch:
- How Many Would-Be Holders? Dot Plot indicated not just a median projection of just 50bp of cuts in 2025 (was 100bp previously), but also that 4 FOMC members saw rates remaining unchanged at the meeting. Hammack, and three other non-voting presidents, were likely the four (auguring hawkishly, because two of the other three could well have been KC Fed Pres Schmid and St Louis’s Musalem, both of whom are voters in 2025). Noted hawk and previous dissenter Gov Bowman is not (likely) to be the 4th (given that she voted in favor of a cut), which raises the question of just how close a call it was to ease at the meeting. One of our Instant Answers questions asks whether “several or more” participants could have envisaged holding rates, even if the vast majority ultimately went along with the cut.
- Hawks Fly: As such, we’ve updated our Hawk-Dove Spectrum for the New Year. Most of the Dots have been moved in a more hawkish direction. We now regard Hammack as the FOMC’s biggest hawk, though only marginally over her colleagues Bowman, Schmid and Musalem.
MNI EXCLUSIVE: Former IMF Economist House On BoC Outlook Under Trump
Jan-08 15:40
MNI speaks to former IMF economist Brett House on BOC outlook and potential response to Trump threats. -- On MNI Policy MainWire now, for more details please contact sales@marketnews.com
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