Early Morning Call: thousands of jobs under threat at Royal Mail

Indices overview

Equity markets in Asia-Pacific region rallied overnight, following Wall Street’s performance yesterday.

US indices initially dropped at the release of the US inflation report but rallied soon after. After the higher-than-expected inflation data published yesterday, the US Federal Reserve (Fed) is fully expected to deliver another 75-basis point (bps) hike in three weeks time when its members meet again.

Consumer Price Index (CPI) rose by 8.2% in September year-on-year (YoY), down from the 8.3% recorded last month, but higher than what economists had anticipated. Core CPI rose by 6.6% YoY, after 6.3% in August, and higher that the 6.5% expected.

The reaction to these numbers was instantaneous. Fed swaps now fully price in a 75-bps hike in November and point to a peak at 4.85% in March 2023. Bond yields rose, and USD/JPY (大口） broke that August 1998 historical resistance to set a new 32-year high.

In China, consumer prices in September rose at their fastest pace since April 2020, driven largely by food costs. CPI increased by 2.8% in September last year as food price inflation accelerated to 8.8% YoY, from a 6.1% gain in August.

Underlying inflation remained much more modest, however, with core inflation, which excludes volatile food and energy prices, at 0.6% versus 0.8% in August. The producer price index (PPI) grew at the slowest pace since January 2021, rising 0.9% year-on-year from 2.3% growth a month earlier.

Sterling

Sterling is up, at a one-week high against the dollar, a one-month high against the euro, as currency traders expect a UK government u-turn on it fiscal plans.

UK Chancellor of the Exchequer, Kwasi Kwarteng, has dramatically cut short his visit to the International Monetary Fund (IMF), flying home early from Washington in response to the mounting political crisis over his tax-cutting budget.

Royal Mail job cuts

Royal Mail strike uncertainty means that the Board is unable to give a clear outlook for the full year. Royal Mail could cut as many as 5,000 to 6,000 jobs by the end of August next year.

Parent company, International Distributions Services said this morning it "will be starting the process of consulting on rightsizing the business in response to the impact of industrial action, delays in delivering agreed productivity improvements and lower parcel volumes".

Royal Mail expect a full-year adjusted operating loss of around £350 million.

US earnings

The US earnings season well and truly gets underway today with releases from five major banks that could set the tone for equity markets for the coming weeks.

With growing fears of a global recession, 'cautiousness' is a word that could repeatedly appear in statements. As far as the banking sector is concerned, demand for loans keeps growing, but so do concerns about potential loan losses.

Earlier this week, Bloomberg predicted that the six largest US banks will set aside another $4.5 billion in loan-loss reserves during the third quarter (Q3).

JPMorgan Chase revenues are expected to increase by 5.4% YoY to just over $32bn, but analysts see a 22% drop in earnings to $2.91 per share. Three weeks ago, JPMorgan's CFO warned the markets that investment banking revenue would be down by 45 to 50% in Q3.

Last year, strong demand for IPOs and other deals pushed investment banking revenue up to $3.3bn.

Wells Fargo , the third largest bank by market capitalisation, is expected to post earnings of $1.10 per share, that's a 17% decline according to Refinitiv. Revenue is expected to fall by about 1% to $18.75bn.

Wells Fargo, also the biggest mortgage lender in the country, has to deal with higher interest rates and slowing demand for mortgages. The bank has previously said it was planning to reduce its exposure to the US housing markets.

As for Morgan Stanley, the one major US bank that does not trade all-sessions on the IG platform, analysts anticipate earnings of $1.52 per share, and revenue to reach $13.23bn.

On top of the troubles that the banking sector is facing, Morgan Stanley may have added more on its plate by agreeing to put up $13bn for Elon Musk's buyout of Twitter , that could translate to more writedowns.

Citigroup is seen posting a 32% decline in earnings, down to $1.49 per share, on revenue of $18.38bn.

Outside the banking sector, UnitedHealth, the largest US health insurer, is expected to post earnings of $5.43 per share on revenue of $80.52bn. If you are looking for an outperformer, this is one of them. Over the past 12 months the stock has gained some 28%, while the S&P 500 has shed 18%.

Commodities

US crude stocks rose by nearly 10 million barrels last week according to the EIA after another big release of 7.7 million barrels from strategic petroleum reserves, matching Wednesday's API data.

Gasoline stocks rose by two million barrels, distillate fell by 4.85 million barrels.

Traders await Baker Hughes data tonight. Last Friday, Baker Hughes total rig count fell by three to 762. The number of oil rigs in operation decreased by two to 602, while the operational gas rig fell by one to 160.