Watson’s Weekly 04-02-2023

This is an amalgamation of the “best bits” of the daily weekday newsletter/blog woven together to form a concise and coherent view on the things that matter in the commercial and economic news of the week. 

THE COLOURED HIGHLIGHT REFERS TO THE EDITION WHERE THE STORY APPEARED IN WATSON’S DAILY. Clicking on the day will take you to the appropriate edition of Watson’s Daily.

This was a week of interest rate hikes, Meta Platforms’ rebound and tech disappointment…

• IN THE US – the Fed raised interest rates by 0.25%, as widely expected. US stocks jumped as investors interpreted the smaller-than-usual 0.25% jump (as opposed to what has become the “normal” 0.5% or 0.75% increase) as a sign that inflation is being tamed.
• IN CHINA – economists are getting increasingly excited about China’s reopening and the IMF has even upgraded its forecasts as a result. There were mixed messages coming from recent PMI surveys, though, as the official manufacturing sector PMI showed a tiny bit of growth for the first time in four months whereas the private-sector led Caixin manufacturing PMI showed a sixth consecutive month of contraction.
• IN EUROPE – the tussle between Europe and the US regarding subsidies for green industries rumbled on. The EU is talking about relaxing state aid to finance subsidies for green industries as it is becoming increasingly apparent that what’s on offer in the EU is not as attractive as what’s on offer stateside. Meanwhile, German chancellor Scholz said at Davos that Germany will avoid recession, but he might have spoken too soon as official data showed economic contraction in the final quarter of the year. If the current quarter goes the same way, he will have to eat his words as Germany will then be in a recession (which is defined as two consecutive quarters of economic contraction).
• IN THE UK – the Bank of England raised interest rates by 0.5% to 4% and the governor said that inflation is likely to have peaked. Markets rose on the back of this but concerns remain that wage growth could still push inflation higher. All of this is taking its toll on UK businesses as the number of UK profit warnings increased by up to 50% last year, according to analysis by EY Parthenon – something echoed by research conducted by the Insolvency Service, which concluded that UK companies failed at their fastest rate since the financial crisis!

IN OIL NEWS…

• There was good news and bad news for Shell this week. On the one hand, it was hit with a compensation claim in Nigeria for causing environmental damage and separately accused by activist group Global Witness of overstating how much money it was spending on renewable energy. It managed to console itself later in the week, however, as it smashed Q4 expectations and delivered its biggest ever profits!
• Meanwhile, there was some refreshing candour from BP as it said that it wanted to “dial back” its efforts in clean energy to focus on making money from the boom in fossil fuels! That said, BP also said earlier in the week that it reckons carbon emissions will fall more sharply than previously thought as the Ukraine war has pushed more countries towards renewables.

IN CRYPTOCURRENCY NEWS…

• The UK government is pushing ahead with bringing crypto regulation under the umbrella of mainstream financial services, although it won’t make guidelines as strict as they are for stocks, shares and insurance products (presumably, this is to give the new asset room to develop).

IN EMPLOYMENT TRENDS…

• US workers are returning to the office in greater numbers, according to data from Kastle Systems (which monitors swipe cards) and are now spending the most time in the office since the beginning of the pandemic. Meanwhile, headcount reductions of between 6% and 10% were announced at PayPal, FedEx and Rivian.

IN CONSUMER TRENDS…

• IN THE US – consumers are getting increasingly nervous as retail purchases have been falling for three out of the last four months, spending was flat in December, existing home sales fell to their lowest level since 2014 as mortgage rates increased and car sales were at their lowest for over ten years!
• IN THE UK – the government raked in £12bn more than it had originally thought because rising wages have dragged more people into the 40% tax bracket! In terms of behaviour, though, we saw more people making mortgage overpayments to beat higher interest rates while Nationwide figures showed that house prices fell for the fifth consecutive month, mortgage demand weakened and flat/apartment searches rose as consumers return to cities as they can’t afford houses in the ‘burbs. Meanwhile, food price inflation rose by a record rate in January, putting even more pressure on household budgets.

IN RETAIL NEWS…

• Tesco bought Paperchase brand – but not its shops – and announced an overhaul of its stores. It was a bit of a mystery as to why Tesco wanted to do this, but I guess that it got a recognisable brand on the cheap. Sainsbury’s got a nasty surprise as wholesaler Bestway built up a 4.5% stake, prompting rumours of an unsolicited takeover attempt. Aldi was unsuccessful at fending off M&S claims that the former had copied the latter on its light-up gin bottles and Lidl committed to spending an extra £2bn on UK suppliers, “cementing its support for suppliers across the country”.
• Elsewhere, Frasers is to start offering up to £2,000 in credit to customers via its “Frasers Plus” brand, Pets at Home did so well that it was confident enough to raise its guidance and Wickes put in a solid performance thanks to customers making home improvements to minimise their utility bills.

IN SOCIAL MEDIA…

• Meta had a better week as it posted strong results and fended off an FTC antitrust challenge for its proposed acquisition of VR start-up Within Unlimited. Zuck said 2023 would be the year of efficiency and lowered capex targets.
• Snap warned of a hit to revenue due to the expectation that advertisers will rein in spending this year and that there will be more competition for that shrinking pot of money.
• Twitter is making preparations to launch online payments, which will put it head-to-head with the likes of PayPal.
• YouTube intensified its rivalry with TikTok as it offered new financial incentives to content creators to attract them to its platform.

IN STREAMING NEWS…

• UK homes ditched 2m streaming services last year, according to Kantar, as households continue to cut costs.
• Spotify managed to add users and posted stronger user growth over the quarter.
• Universal Music is in talks with the major streaming platforms to change the business model in order to help encourage new artists, pay existing ones and de-prioritise lower quality songs, like ones that are meant to send you to sleep.

IN “BIG PICTURE” TECH NEWS…

• Washington moved towards a total ban on selling US tech to Chinese telecom equipment behemoth Huawei. It asserts that Huawei assists Beijing in espionage.
• Meanwhile, Big Tech companies like Meta, Amazon and Google are withdrawing job offers – sometimes at the last minute – as they continue to clampdown on costs. Nightmare.

IN CHIP NEWS…

• The Netherlands and Japan joined the US in restricting chip exports to China in a joint effort to make it harder for the Chinese military to develop advanced weapons.
• Research from Gartner predicts that spending on smartphones, PCs and tablets will fall by 5% this year, with PC demand falling particularly sharply.
• Meanwhile, there was a very interesting development this week as a US chipmaker (called Wolfspeed) announced plans to build a €3bn factory in Germany – this is particularly interesting because you’d expect it to be the other way around (i.e. a German chipmaker building a factory in the US) given the drama surrounding the goodies being dished out by the US Inflation Reduction Act.
• Intel cut exec and management pay to save money while rival Qualcomm announced a 12% fall in sales as the doom and gloom in the chip sector continues.

IN AI NEWS…

• OpenAI is offering a new subscription plan for ChatGPT for $20 a month which will include access during peak periods. Figures from Similarweb showed that ChatGPT hit 100million users just two months since launch! It took TikTok about nine months to reach this landmark and Instagram over two years, according to Sensor Tower!
• China’s Baidu said it is developing its own equivalent of ChatGPT and will be the first to bring AI tech to Chinese customers. Access to ChatGPT in China is currently blocked.

IN “BIG TECH” NEWS…

• Apple announced disappointing results and blamed Covid lockdowns in China for an underwhelming performance in what is usually its most profitable quarter.
• Google also posted disappointing results as its advertising sales fell more sharply than expectations. Advertising revenues fell by 4% in the final quarter of 2022 in only its second quarterly contraction in its history! Elsewhere, there was an interesting discussion about what would happen if the Department of Justice was successful in its legal action against Google. It would result in Google splitting up its highly lucrative ad business – but the problem would then be that it would be difficult to find a buyer because the only ones that could afford it may also face competition issues themselves!
• On the other hand, Amazon reported higher net sales, outperforming expectations for the final quarter of 2022 but expressed concerns about near-term prospects for consumer spending.
• Meanwhile, in the UK, British cybersecurity firm Darktrace saw its shares plunge on sizeable short-selling. It strongly denied accusations that it had inflated its sales figures and responded with a share buyback.

IN “TRAD” CAR NEWS THIS WEEK…

• Renault and Nissan recalibrated their 24-year alliance to move forward on an equal footing.
• GM saw a boom in Q4 profits as supply chains eased and outperformed market expectations.
• Ford underwhelmed in its results, missing its full-year profit guidance. It’s planning on making more cost savings this year.
• In the sportscar arena, Ferrari announced a record year of profits and expects “an even stronger 2023” while Geely-owned Lotus remains on course for a SPAC-backed IPO sometime in H2.

IN EV-RELATED NEWS…

• Ford cut prices of its Mustang Mach-E to counter the attractions of the newly-cheaper Tesla range.
• Arrival had more pain as it announced that it was going to cut around half of its remaining workforce in a dramatic effort to save costs.
• In batteries, a number of bidders emerged for Britishvolt and there are increasing calls for a shake-up of UK subsidy policies given Britishvolt’s spectacular failure.

• Starbucks announced record quarterly revenues although costs are still rising. Everywhere but China seemed to put in a strong performance (but you’d think this will bounce back now Covid restrictions have been lifted).
• Adani Enterprises had to call off a $2.4bn share sale following the release of the Hindenburg report trashing it last week. The drama continues…
• Peel Hunt announced the launch of a new trading venture called RetailBook, which will enable investors better access to IPOs and share offerings. It’s unusual in that the company is engaged in this with its rivals at Hargreaves Lansdown, Jefferies, Numis and Rothschild & Co.
• Flybe entered administration for the second time in less than a year. All flights were cancelled and their take-off and landing slots will be sold off. On the other hand, Ryanair posted very strong results – so strong, in fact, that it was confident enough to announced that it would be expanding in Scandinavia.
• A small Shropshire-based company called Upp is testing a broccoli harvester which not only picks broccoli – it also processes much more of the plant itself that can be used in alternative meat and nutritional products. This could be a huge game-changer, particularly in an industry that has been seeing a shortfall in manual workers.

• Watson’s Yearly 2022/23: coming shortly…

My favourite “alternative” story this week was the one about the very enterprising ice-cream/sorbet-maker in Dessert shop creates Prime sorbet version of sell-out drink and fans go wild (The Mirror, Ariane Sohrabi-Shiraz). Very niche, but I’m sure it’s very popular!