Watson’s Weekly 17-08-2024

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 the week when Japan’s Prime Minister resigned, when Mars bought Kellanova and when X was involved in a lot of drama…

• IN THE US – Kamala Harris edged ahead of Trump in a survey about who voters trusted more on the economy, Trump ranted about Harris trying “to be more Trump than Trump” in what he described as “the greatest interview ever” with Musk on X and he promised an “economic boom” if he got elected. Meanwhile, the ruling Democrats got a boost as inflation in the US dropped unexpectedly to its lowest level since March 2021. IMO, Harris will maintain momentum as long as the economy chugs along OK but if things slide, Trump will definitely press this as a weakness. This makes interest rate cuts more likely.
• IN CHINA – we saw that China’s industrial production growth slowed down slightly in July. Given that Xi is trying to get the industrial sector to pull China out of its current rut, this isn’t ideal (but it’s not yet disastrous).
• IN JAPAN – PM Fumio Kishida bowed to pressure and announced his resignation. The fact that markets took this pretty much in their stride just shows how ineffectual most politicians are in Japan with regard to the economy. Contrast this “meh” reaction with the market gyrations following Truss’s disastrous time in power.
• IN THE UK – inflation growth rose, but not by as much as markets were expecting, so that was a relief. The key here is that although the headline rate was up, underlying services sector inflation (which has proven to be stubbornly high thus far) fell by more than expected. Meanwhile, the latest figures from the ONS showed that GDP growth over the latest quarter perked up in line with market forecasts, a nice boost for chancellor Reeves heading into the Budget at the end of October. Talking of Reeves, it looks like she’s trying to get a PFI-style deal sorted for a new £9bn Thames crossing, getting the private sector to become more involved in public infrastructure projects.

IN MARKETS NEWS…

• Markets generally fell back to levels pre-panic this week. Where’s all that clever-sounding talk of the unwinding of the Japanese “carry-trade” now, eh?? They were also helped by better data from the US on jobs and retail spending.
• The rouble took a hit after Russia’s currency hit its lowest level since late May after Kyiv launched its biggest attack within Russian territory since the war started in 2022. The rouble has lost ground to the dollar for five consecutive trading sessions since the attack started.

IN BUSINESS TRENDS NEWS…

• Companies are getting increasingly nervous about doing business in China thanks to a waning of interest in foreign brands and intensifying competition combining in a toxic mix. We also saw the latest balance of payments data from the State Administration of Foreign Exchange which shows that investors pulled a record $15bn of cash out of China over Q2, which reflects investor concerns.
• There was a lot of news about students this week! The UK student housing crisis looks like it’ll benefit specialist developers like Unite Group and Empiric – and, in fact, we heard at the end of the week that Empiric decided to whack up student accommodation rents by 10%! A lot of UK universities are in financial trouble at the moment and are being advised to cut costs. Their situation isn’t being made any easier as international student numbers are still below previous highs.

IN CONSUMER TRENDS…

• IN TERMS OF WAGES – German wages are soaring at their fastest rate since records began, which is prompting some to question the need for the widely-expected interest rate cut next month at the ECB’s meeting. In the UK, though, wages growth slowed down to its lowest rate in two years while unemployment also fell unexpectedly sharply.
• IN TERMS OF SPENDING – the latest Kantar data showed that grocery price inflation in Great Britain actually increased for the first time in 17 months. Rather than signifying disaster, this could just mean that prices are normalising after 17 consecutive months of price decreases.
• IN TERMS OF TAXATION – it looks like calls for the super-rich to pay more in taxes appears to be gathering momentum. 19 former heads of state signed a joint letter calling for higher taxes on the super-rich just a few weeks ago. Even a recent meeting of the G20 finance ministers agreed that more needed to be done to tax the global super-rich.

IN CONSUMER GOODS NEWS…

• Mars made a $36bn offer to buy savoury snack-maker Kellanova but it could prove costly, particularly as the popularity of weight-loss drugs may mean that people just snack less overall.
• Canadian cannabis company Tilray bought four craft beer brands from Molson Coors in a deal that’s expected to close this month. It has been growing its beer business and this latest acquisition will help to boost its presence in key markets. It’s still hungry for more, apparently!
• Carlsberg raised guidance for the full year but missed profit and revenue expectations. China weakness was cited as a factor, something echoed recently by Anheuser InBev and Heineken.

IN RETAIL NEWS…

• Walmart posted strong quarterly sales and the company was confident enough to raise full year guidance. It is worth noting that Walmart even saw a slight rebound in its general (i.e. non-food) category, which has been falling for 11 quarters!
• Home Depot announced disappointing quarterly results, but that’s to be expected given the lacklustre property market. It’s doing all the right things at the moment, so it’s just a case of hunkering down until the good times roll once more!
• Alibaba posted weaker-than-expected profits and revenues for the latest quarter amid tough domestic competition, a tricky economy and nervous consumers.
• Amazon got the go ahead from the CAA to test-fly drones beyond a human controller’s line of sight in the UK, which could be a precursor to using them to make home deliveries. Realistically though, I can’t see drone home delivery for quite some time given how complicated it’s likely to be. FWIW, I think its use is going to be pretty niche…
• Asda’s sales slowed down and it was the only major UK supermarket to see a downturn in trading. I think that the Issa brothers/TDR Capital acquisition back in 2021 has proved to be an expensive disaster and if nothing is done, Asda’s just going to fall into obsolescence. I think Chairman Rose needs to clear out all the senior management failures and start again. At least he knows what he’s doing (TDR Capital clearly don’t, not from a retailer’s perspective anyway).

IN LEISURE NEWS…

• Starbucks unceremoniously kicked out its failing CEO and replaced him with a shiny new one in the form of the super-successful CEO of Chipotle, Brian Niccol, who dragged the burrito chain out of the rut it found itself in a few years back. Clearly this guy’s got form in turnarounds – something that is badly needed at Starbucks.

• There was a lot of drama at X this week! EU Commissioner Thierry Breton warned Musk in an open letter that he had “due diligence obligations” regarding the spreading of “content that promotes hatred, disorder, incitement to violence, or certain instances of disinformation” under the terms of the Digital Services Act which Musk batted aside and the EU itself criticised as not being officially sanctioned.
• xAI launched its latest LLM, Grok-2 which, according to LMSYS, is able to mix it with the likes of Meta, Anthropic, OpenAI and Google despite xAI only being 18-months old! Talk about a catch-up!
• IN TERMS OF SOCIAL MEDIA CONTENT – the UK is looking at appropriate measures to take against social media platforms that overstep the mark in the wake of the recent riots. It is now looking at bringing in controversial new powers to force tech companies to remove “legal but harmful” content, which had been abandoned in 2022 due to strong resistance from the tech industry and advocates of free speech. This could enable Ofcom to crack down on the spread of the sort of misinformation that helped incite recent rioting. In the meantime, the 2023 Online Safety Act is being put to the test at the moment in cases that involve offences prohibiting the spread of false information.
• Apple announced that it’s going to open up the tech behind Apple Pay and Apple Wallet to third-party developers – for a fee, of course! This has come as a result of regulators in the US and EU pressuring the company to open up access.
• The US DoJ is looking at the potential break-up of Google following last week’s judgment that its power in search amounts to an illegal monopoly. It sounds bad, but TBH I think that “traditional” search is going to give way to AI anyway, so it may not actually be that bad in the end for Google.

IN MEDIA NEWS…

• Hot on the heels of the recent news about Disney seeing weaker spending at its theme parks, the company announced plans for tens of billions of dollars to be invested in theme parks (which is part of the “Experiences” division that also includes cruises and videogames) to address the issue. This is important given that the Experiences division made up a whopping 69% of the company’s operating income in fiscal 2023.

• IN PLANNING – it looks like councils and public bodies in England will be getting more powers to buy greenbelt land without overpaying. Landowners who refuse to sell will be subject to Compulsory Purchase Orders (CPOs) that would force them to hand over land if a site is to be used for a “quality housing scheme” that is in the public interest.
• IN COMMERCIAL PROPERTY – data from CoStar shows that offices in the UK are selling for 18% less than owners were hoping for. This represents the biggest discount since the financial crisis 15 years ago! Demand for top-end eco-friendly offices is extremely tight, but offices that don’t meet these standards and require upgrading to meet them are not so popular for buyers, hence the discounts.
• IN RESIDENTIAL PROPERTY – PE firm Blackstone just offloaded 3,000 shared ownership homes to the UK’s biggest private pension fund, USS, in the biggest affordable housing deal of its kind. Meanwhile, the latest research from Savills shows that the share of first-time buyers getting help from the Bank of Mum and Dad (“BOMAD”) is at its highest level since 2012, with 57% of buyers getting some help from relatives over the course of 2023.
• IN DEVELOPER NEWS – Balfour Beatty’s profits took a beating due to the costs related to a US military housing scandal while Bellway ditched its proposed acquisition of Crest Nicholson at the last minute. No doubt everyone will now be thinking that Crest Nicholson has something unattractive buried somewhere that Bellway didn’t like in its due diligence.

• IN AUTOMOTIVE-RELATED NEWS – the latest figures show that BMW is within touching distance of Tesla’s crown of being number one in Britain’s electric car market! The latest figures show that, so far this year, BMW has sold more electric cars than it did in the entirety of 2023! It was really interesting to hear that an American start-up called Natron Energy is about to invest $1.4bn in building its first big plant in North Carolina. The company is focused on making sodium-ion batteries which are cheaper to make and safer than lithium-based batteries that currently power EVs. Will this help to wean the West off reliance on China??
• IN FINANCIALS NEWS – cyber insurers like Beazley are the biggest winners from the massive recent IT outage because a lot of companies weren’t covered (so they won’t have to pay out as much as they would have done if they had!) and now that everyone’s seen the damage it can do, they will probably rush to get some cyber cover! In banks, the tables are turning as Revolut is now being courted by the government because the latter wants the former to list in the London instead of New York – a reversal of Revolut’s courting of the government prior to getting a UK banking licence last month!

My favourite “AND FINALLY” video this week – by far 🤣 – was the one with the kids in the car arguing which parent was better 🥰!