Thursday preview: BoE hike a close call, restructured Barclays in spotlight

At Thursday's monetary policy meeting, it is anticipated that the Bank of England will nudge interest rates higher, while the summer results season sees results from Aviva, Barclays, the London Stock Exchange and Rolls-Royce.

Having raised expectations for a rate rise three months ago only to abstain at the final moment, and again left rates alone in June, it's felt to be a close-run thing as the Bank's monetary policy committee convenes for the August meeting and publishes its quarterly inflation report, including a first published estimate of the equilibrium real interest rate.

While the City's jury is still out, on the whole the MPC is expected to raise interest rates to 0.75% from 0.50% on this particular 'Super Thursday'.

The BoE has been seeking an opportunity to raise rates because it believes an increase is needed to bring inflation down to the 2% target, having stayed at 2.4% in May and June, while pay growth slows to its lowest in six months.

Sceptics, such as Ian Stewart, chief economist at Deloitte, argue point to lowly wage growth and economic confidence amid Brexit uncertainty, making the case for a hike "hardly compelling".

Sam Tombs, chief UK economist at Pantheon Macroeconomics, felt the MPC will take a leap of faith and hike the bank rate, despite below-trend GDP growth in the first half of this year and rapidly falling core CPI inflation, with a 7-2 split of the vote as "most members still believe that inflation will exceed the 2% target in the medium term if they don't start to withdraw some monetary stimulus now."

RBC Capital Markets reckoned it will be a unanimous 9-0 vote in favour of the move, but do not expect the updated inflation projections resulting in wholesale changes for GDP and CPI estimates. "Though it is possible, in the context of the outlook for the economy, that the MPC may flag the risks of a potential global trade war, we don’t think that the latest iteration of the fan chart will alter the policy message from the May IR."

Howard Young at the EY Item Club said the recent data makes this "a closer call", but he believes the odds still favour a hike and a split vote, with interest rates down still around historical lows of 0.50%, the MPC "would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate", inflation above target and the labour market relatively tight.

CORPORATE NEWS

Thursday's results include are Aviva, Barclays, Centamin, Convatec, Ferrexpo, London Stock Exchange, Merlin Entertainments, Rolls-Royce, RPS, RSA Insurance, Serco and Spirent Communications.

Barclays investment bank will be under focus especially with activist investor Edward Bramson looking to pressure management into offloading the underperforming division.

The bank's CEO Jes Staley earlier this year said “the huge task of restructuring Barclays is now complete” and while regulatory investigations seem to have been mostly put to bed, the UK Serious Fraud Office last month applied to the High Court to restore charges against Barclays that were thrown out in May.

Otherwise, Barclays investors will be hoping they can look towards a brighter future, said broker Hargreaves Lansdown, though any eye needs to be kept on exposure to the UK housing market. "The presence of US activist investor Sherborne on the shareholder register will increase the pressure to start delivering results. If Barclays fails to get a slice of what’s been a bumper investment banking season on Wall Street then questions will be raised about the strategy of maintaining a transatlantic investment bank strategy.

With rumblings being heard from the UK housing market, Hargreaves said the bank deserves its fair share of scrutiny as well. "The government’s funding for lending scheme (which provides access to cheap money) closed in January 2018, potentially denting net interest margins (the difference between what the bank pays to borrow and charges on loans). Bad loans will also be watched closely – consumer borrowing like car finance and credit cards has been rising nationwide, and these sorts of loans are inherently higher risk."

Analysts at UBS forecast adjusted PBT of £1.3bn and a solid capital reading, with a Common Equity Tier 1 ratio of 12.8%. "Performance of the investment bank is a key focus reinforced by the 5% stake in Barclays held by activist Edward Bramson, investor emphasis on seasonality in Markets, and management's investment in staff, technology and IB balance sheet," analysts said.

Looking at consumer credit markets, UBS noted that domestic credit trends are stable from the bank's recent data, but with a disappointing 2017 on cards and with a leading market share in the UK and large US book "there are questions around the strength of incoming credit quality and the outlook for impairments".

For the LSE UBS forecast EBIT up 25% to £374m, translating into an adjusted EPS of 82.7p, up 19%. Analysts at Deutsche Bank, meanwhile expect second-quarter total income to be up 3% on the first, bringing first-half income up 12% year on year and 23% EPS growth. "Growth is in our view again driven by LCH, Information Services and also Capital Markets. In addition we expect 5% YoY cost inflation, and no major one-offs."

Merlin Entertainment's management should be in a reasonably sunny mood, said broker Peel Hunt, though this year's risk is that the World Cup and too much sun in Europe will have kept customers away from its attractions. Interims will show a profit behind last year, with analysts forecasting group EBITDA of £138m. "Merlin is starting to see the payback on increased capital investment which followed its acknowledgement that organic growth in the core business was falling short of prior expectations."

Deutsche Bank was cautious on Convatec, having lowered its 2018-2020E EPS on the back of a weaker outlook in wound care and ostomy, and less positive FX, while the need for management to make substantial investments to maintain its current positions.

Thursday August 02

INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Continuing Claims (US) (12:30)
Factory Orders (US) (15:00)
Initial Jobless Claims (US) (13:30)
Producer Price Index (EU) (11:00)

UK ECONOMIC ANNOUNCEMENTS

BoE Interest Rate Decision (12:00)

PMI Construction (09:30)

FINALS

Clipper Logistics

INTERIMS

Aviva, Barclays, Centamin (DI), Communisis, Convatec Group , Eurocell , Ferrexpo, London Stock Exchange Group, Merlin Entertainments , Non-Standard Finance, Portmeirion Group, Rolls-Royce Holdings, RPS Group, RSA Insurance Group, Serco Group, Spirent Communications, UK Commercial Property Reit Limited, Vivo Energy

TRADING ANNOUNCEMENTS

Gattaca, Mitchells & Butlers, Sage Group, Vedanta Resources

SPECIAL EX-DIVIDEND DATE

Artemis Alpha Trust, GCP Asset Backed Income Fund Limited

EGMS

Duke Royalty Limited

AGMS

Baillie Gifford UK Growth Fund, Civitas Social Housing, Highbridge Multi-Strategy Fund, VP

FINAL DIVIDEND PAYMENT DATE

Circle Property , Homeserve, Norcros

FINAL EX-DIVIDEND DATE

Alpha Financial Markets Consulting, CMC Markets, Downing One VCT , Gordon Dadds Group , Greene King, Latham (James), Micro Focus International, Monks Inv Trust, Motorpoint Group, Panther Securities, QinetiQ Group, Yu Group

INTERIM DIVIDEND PAYMENT DATE

ITE Group, WH Smith

INTERIM EX-DIVIDEND DATE

Inchcape, Independent Inv Trust, International Biotech Trust, Microgen, Moneysupermarket.com Group, Octopus Titan VCT, Tyman

QUARTERLY EX-DIVIDEND DATE

Unilever