Watson’s Weekly 13-05-2023

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 the Bank of England raising interest rates, the return of the 100% mortgage and Europeans cracking down on AI…

• IN THE US – inflation slowed down but remained high at an annualised rate of 4.9%. It’s down from the 9.1% peak last June but still way higher than the 2% target. It also sounds like the Fed will continue to jack up rates in order to calm inflation.
• IN EUROPE – a monthly survey by the ECB shows that eurozone consumers are getting increasingly pessimistic about inflation, which may become a self-fulfilling prophecy as this will put more pressure on the central bank to hike interest rates. It was also interesting to see that investment by China in Europe has been falling, according to a study by research group Rhodium Group. Many failed due to not getting past the regulators given increasing paranoia about dealing with the Chinese.
• IN GERMANY – poor industrial output figures for March suggest that Germany is sliding into recession. Given that Germany represents about 24% of the EU’s GDP, this doesn’t bode well for Europe. Automotive manufacturing is having a particularly hard time of it.
• IN THE UK – the Bank of England raised the interest by 0.25% to 4.5%, the twelfth consecutive increase – and it is now at its highest level since 2008! It’s also worth noting how useless the central bank has been with its economic forecasts as it is now saying that we won’t have a recession after a long period of dire warnings. Goldman Sachs reckons that the interest rate will peak at 5%, which is above current market consensus. Meanwhile, the UK decided not to revoke all EU regulations after all at the end of the year, as previously promised. Business groups rejoiced (more certainty) and Brexiteers were up in arms (broken promise to cut all European red tape). Only about 600 will be revoked out of the 4,800-odd EU laws that have been in force since Brexit.
• IN TURKEY – President Erdogan dished out pay rises to 700,000 public sector workers ahead of the forthcoming election, which is expected to be very tight.

IN OIL & ENERGY NEWS…

• Saudi Aramco saw its profits slide by 20% but tried to sweeten the blow by announcing additional dividends.
• Microsoft just signed a contract with nuclear fusion start-up Helion Energy, which reckons it’ll be able to supply the tech giant with fusion-powered energy by 2028. This is massive because commercially viable energy generated by nuclear fusion has traditionally been seen as being decades away from reality…
• Crypto exchange Binance says that it’s doing all it can to get regulatory approval in the UK due to its exasperation with the US regime which has been in crackdown mode since the collapse of FTX.

IN BUSINESS TRENDS…

• UK bosses are getting increasingly optimistic, according to the latest survey by accountancy firm BDO. This is been driven by better-than-expected consumer activity and a turnaround in the dominant services sector.
• Firms are hiring more temps and fewer permanent employees according to a monthly poll by REC and KPMG although the number of candidates has increased due to more people being made redundant and more people looking to change jobs to earn more as inflation continues to eat away at disposable income.

IN EMPLOYMENT TRENDS…

• Big Law is holding less attraction these days for Gen Z-ers, according to a survey by the recruitment firm Major, Lindsey & Africa which suggests that students and junior lawyers are looking beyond the big names in favour of companies that offer better work-life balance.
• Compass Group’s strong performance suggests that more employees are returning to the office as corporates are taking on the world’s biggest catering group in increasing numbers to help keep costs down in their canteens!

IN CONSUMER TRENDS…

• WFH is losing its attraction according to a survey from software firm Ivanti, with the most-cited downside being less time spent with co-workers.
• UK shoppers are, unsurprisingly, cutting their expenditure according to the latest data from BRC and KPMG.
• Bills look set to stay hefty, according to the latest research from Cornwall Insight which says that household bills are likely to remain elevated until at least Q1 of 2024.

IN SUPERMARKET TRENDS…

• UK supermarkets are facing increasing scrutiny following accusations of profiteering and “greedflation”. Sainsbury’s said it would cut the prices of bread and butter – and was closely followed by Tesco.
• John Lewis partners voted on two things this week – whether Dame Sharon Lewis had done a good job over the last 12 months (nope) and whether she should stay on (yep). I still think she’s done virtually nothing to address the core business of its supermarkets and department stores.
• In apparel retailing, Asos had a poor set of results and it blamed the stubbornly high rate of returns. It needs to address this properly as a matter of urgency – but it isn’t the only one suffering.

IN LEISURE TRENDS…

• Holiday-makers continue to spend – and what’s particularly interesting here is that first class and business seats are proving to be particularly popular! Ryanair is doing so well that it was confident enough to announce the purchase of up to $40bn worth of Boeing aircraft and hire 10,000 employees to boost traffic by over 80% over the next ten years. Its fortunes were also boosted winning a court case against the EU for allowing Lufthansa to get too much money in state aid. If it gets compensation for this, I imagine the money will be very welcome!
• Wetherspoon’s posted record sales as consumers sought out cheaper places to go out.

IN AI NEWS…

• MEPs voted on a broad set of regulations that will subsequently form part of Europe’s Artificial Intelligence Act which will, among other things, ban things like facial recognition and biometrics. The FTC of the US and the CMA of the UK are also doing their own investigations into how to oversee the development of AI.
• Google announced a new AI-powered search engine called AI PaLM 2 at its annual I/O Conference. It will be integrated into 25 new products – including Bard – and features as it attempts to close the gap with Microsoft and OpenAI.
• Law firms are getting involved with AI, potentially bringing an end to the billable hour. Law AI tools such as Latch, Harvey and Lexis+ are among those being used and tested by law firms currently. A Goldman Sachs report published in March estimated that 44% of legal work can be automated using AI while another report from some top US universities concluded that jobs in legal services and securities, commodities and investments would be the most vulnerable to change.
• Investors continue to pour money into AI but given how much money is required to develop it, it looks likely that Big Tech could get even bigger. Advertising guru Sir Martin Sorrell reckons that AI is the “fulfilment of the internet” and that although it could present many new opportunities, there were many threats as well. Doctors and public health experts believe that errors by AI could cause harm and deepen existing social and health inequalities.

ELSEWHERE…

• LinkedIn has decided to shut down its China-focused app InCareer, citing competitive pressures and a tricky economic backdrop.
• TikTok has delayed the full opening of its shopping platform in the US given the uncertainty of its immediate future.
• UK ministers were told that WhatsApp could disappear from the UK over privacy concerns if the incoming online safety bill turns out to be as hot on privacy as it’s threatening to be. The debate between privacy vs safety continues…
• Uber announced that users in the UK will soon be able to book flights on the Uber app as it gets closer to becoming a travel “super-app”.
• Foxconn took a massive hit in its profits from its investment in Sharp, the Japanese electronics company.

IN AI NEWS…

• PacWest took yet another hit in the US as its stock price fell by 29%. It’s seen as the weakest of the mid-sized regional banks and its valuation has plummeted from over $3.5bn in February to the current $530m as investors get freaked out by the recent banking disasters.
• British fintech Revolut announced that its CFO was quitting just weeks after auditors BDO expressed concerns about its revenues for 2021. This isn’t a good look for a company waiting for a UK banking licence…
• Insurer Direct Line warned that rising costs of repairs could hit its earnings this year. The new chief exec has got his work cut out this year to bring this company back to profitability…
• SoftBank announced a massive loss thanks to the disastrous performance of its Vision fund. A successful flotation of Arm is an imperative…
• Carl Icahn’s Icahn Enterprises share price fell again on news that US prosecutors were asking questions. Hindenburg Research, which published that damning report at the beginning of the month stuck the boot in again by publishing a follow-up report saying that Icahn’s response had not addressed any of the concerns highlighted in its initial report.

• UK mortgage lender, Skipton Building Society, is on the verge of launching a new 100% mortgage aimed at wannabe-first-time buyers who can’t save for a deposit. This will be the first 100% mortgage on the market for 15 years!
• Confidence in the UK property market had a bit of a wobble as landscaping supplier Marshalls suffered from lower rates of new housebuilding and sluggishness in maintenance activity while online estate agent Purplebricks saw its share price drop by a whopping 60% in trading earlier in the week as confidence ebbed away from the company that put itself up for sale in February.
• London’s super-prime property market (properties worth £10m+) is back to pre-Brexit levels while the UK’s biggest listed landlord, Grainger, put in a strong performance thanks to a surge in rental income.

• IN AUTOMOTIVE-RELATED NEWS – natural resources giant Glencore is planning to build Europe’s biggest battery recycling plant, Australian lithium miner Allkem announced an all-share merger with US rival Livent and Toyota announced that it would commit an additional $7.4bn to EVs by 2030.
• IN MEDIA NEWS – Disney lost 4m subscribers in Q1 but it actually managed to halve its operating losses while ITV unveiled a slump in ad revenues for Q1 and a downbeat outlook for the next few months.
• There’s potentially good news for Alzheimer’s sufferers as Eli Lilly and Eisai/Biogen have new treatments that could mark a turning point for the future treatment of the disease.
• Adidas has decided not to destroy its unsold Yeezy stock but sell it off and donate some of the proceeds to charity (although the amount is undisclosed). Given that its got £1bn-worth of inventory lying around this is probably the least bad solution…
• America’s biggest meat supplier, Tyson Foods, fell into loss in the latest quarter and slashed its outlook for 2023 – the first time it’s made a quarterly loss since the autumn of 2009! It cited a fall in consumer demand as the reason behind its sluggishness.

My favourite “alternative” story this week was the one about how to make a pizza pop tart! Presumably you could do something similar with Nutella and bananas etc. Enjoy!