Thursday 16/02/23

1. In MACRO & MARKETS NEWS, UK inflation slows, the FTSE breaks 8,000 and Sturgeon resigns
2. In FINANCIALS NEWS, Barclays sees profits fall, Revolut is targeted for crypto and KPMG cuts US headcount
3. In TECH NEWS, Allen & Overy introduces an AI chatbot, ChatGPT stumbles, Musk is to stay on as Twitter chief while regulators look into Amazon and Apple and UK police look vulnerable
4. In RETAIL/CONSUMER-RELATED NEWS, US retail sales jump, Kraft Heinz holds off on price hikes, Morrisons gets a credit rating downgrade and Dunelm maintains full-year guidance
5. AND FINALLY, I bring you Tom Cruise doing ridiculous things…

So UK inflation falls and Sturgeon resigns…

📢 I’ll shortly be publishing my annual P/Review where I roundup the news of the year in 2022 and then outline predictions for themes in 2023. Because it’s such a big report 😱, I will be publishing it in stages. There is nothing like this anywhere else, and it will help your understanding of what’s going on enormously so keep an eye out for it! In the meantime, I’ve recorded a special podcast where Ralph Hebgen and I talk through some key themes to watch out for this year. You can listen to it HERE or watch it HERE.

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

In UK inflation falls to five-month low of 10.1% (Financal Times, Valentina Romei) we see that the latest release from the ONS shows that the annual rate of inflation slowed down from 10.5% in December to 10.1% in January versus market expectations of 10.3%. Inflation fall driven by fuel prices (The Times, Arthi Nachiappan) cites the fall in fuel prices as the main driver behind this (although food inflation remained at a 45-year high!), UK inflation: which goods and services have risen most in price? (The Guardian, Richard Partington) does a really good breakdown of how much individual prices have risen over the past year and Sterling drops as inflation data points to Bank of England pause (Financial Times, George Steer) highlights the immediate

📢 It’s Thursday, but I’m afraid I won’t be doing the call tonight as it is actually my birthday today! Normal service to be resumed next week 👍

implications as the inflation slowdown took some of the edge off the pressure on the Bank of England to keep hiking interest rates. * SO WHAT? * This is particularly interesting because it may mean that the UK may start to diverge with the US on its monetary tightening cycle as continuously strong US economic data is putting MORE pressure on the Fed to RAISE rates.

FTSE 100 hits 8,000 points for first time as recession fears ease (The Guardian, Graeme Wearden and Jasper Jolly) highlights an impressive level for the index to reach as investor fears of a global recession recede, although it did end the day slightly below 8,000. Mining and oil companies continue to benefit from high commodity prices while hopes of a China recovery seem to belie the fact that the war in Ukraine is still raging and that although inflation’s growth rate is slowing, it’s still pretty darn high!

Elsewhere, Nicola Sturgeon leaves Scotland with a disastrous economic legacy (Daily Telegraph, Melissa Lawford) we take a look at Sturgeon’s legacy of where eight years of high taxes, low growth and anti-business policies have led. Average earnings were 96.7% of the equivalent earnings in the UK when she came to power in 2014, they are now 92.9% versus the pre-2014 average of 95.9% and they are expected to fall further. Who could replace Nicola Sturgeon as Scotland’s first minister? (Financial Times, Mure Dickie) names Kate Forbes (cabinet secretary for finance and the economy: young but may divide because of her religious beliefs), Angus Robertson (cabinet secretary for the constitution, external affairs and culture: not too old and is quite progressive), John Swinney (deputy first minister and acting finance secretary: has the most experience but his previous stint as leader did not go well), Humza Yousaf (health secretary: young but hasn’t dazzled in this role) and Keith Brown (cabinet secretary for justice and veterans: solid but his age could go against him) as potential successors. It looks like Angus Robertson could be the front-runner out of this lot as things stand at the moment. * SO WHAT? * This is going to be tricky as the successor isn’t going to be sliding into a cushy job (unlike Sturgeon, who may well pop up elsewhere!). No doubt another referendum will very much be on the agenda…

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Barclays falters, Revolut is in the crosshairs and KPMG cuts US staff…

Barclays cuts bankers’ bonuses after profits fall (The Times, Ben Martin) highlights a disappointing performance by the UK bank in terms of its pre-tax profits and its decision to cut the bonus pool by a chunky £500m. The share price fell by just less than 8% on the news as investors took fright. The main culprits for the weakness were the relative lack of investment banking and trading revenues and a £1.6bn hit from litigation and conduct charges. For those of you who are concerned about the welfare of Barclays bankers, you would have every right to worry as they are going to have to scrape by on just £1.79bn in the bonus pot. Might have to downgrade the Lambo to a Porsche or something 🤣. * SO WHAT? * The question is whether things are going to get better from here. You would hope that the fines and litigation charges are more of a one-off. However, I still think there’s scope for growth elsewhere! OK, so the Net Interest Margin isn’t going to grow as fast as it has done before because interest rate rises are slowing down, but they are still going to be at decent levels! Also, if everyone’s hopes about China growth this year prove to be correct, we could see economic conditions that are more conducive for IPOs and M&A which will rake in the fees once more. Still, for now, things aren’t looking particularly great.

In Revolut poised for Treasury crackdown on unregulated crypto trades (Daily Telegraph, James Titcomb and Simon Foy) we see that the challenger bank – and Britain’s biggest private company –

is about to face scrutiny over their involvement in cryptocurrency investing. It started to offer cryptocurrency “staking” to customers where investors lock up their crypto to earn double-digit returns. Revolut offers returns of up to 11.65% depending on the cryptocurrency if you lock up your holdings for a month. * SO WHAT? * This does indeed sound dodgy. US regulators recently fined Kraken (another major exchange) $30m and shut down its staking service for offering “outsized returns untethered to any economic realities”, as they advertised returns of up to 21%! It looks like the UK is going to be clamping down on staking as part of broader actions to regulate cryptocurrency investments and transactions which currently fall outside of the FCA’s remit.

Then in KPMG is first Big Four firm to cut staff in US as economy slows (Financial Times, Stephen Foley) we see that the Big Four accountant is cutting almost 2% of its staff in the US (around 700 people) thanks to the disappointing performance of its consulting business. * SO WHAT? * KPMG has not been immune to the slowdown of M&A activity and demand for its IT and strategic consulting. Mind you, it’s not just been them – EY cut holiday bonuses for US staff and job postings for jobs at the Big Four have halved versus last year, according to the latest monthly survey by William Blair. It’ll be quite interesting to see whether this affects EY in terms of whether it decides to continue with efforts to split the audit and consulting businesses. It is for times just like this that having “boring” business (audit) helps out the more exciting stuff (consulting). Fans of splitting will say that this is just a temporary blip while those who want the businesses to stay together will use this as a current example of why the businesses will stay together.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

A&O does AI, ChatGPT falters, Musk is to stay on at Twitter, regulators target Amazon and Apple and UK police look vulnerable…

Allen & Overy introduces AI chatbot to lawyers in search of efficiencies (Financial Times, Kate Beioley and Cristina Criddle) is a very interesting article that highlights the “Magic Circle” firm’s plans to introduce an AI chatbot to assist its lawyers in the drafting of contracts to save its lawyers time and its clients money. The chatbot is called Harvey and “he” has been in testing since November but has yet to be introduced to clients. Harvey is available to all of A&O’s lawyers and about 3,500 individuals. * SO WHAT? * Although others have been experimenting and developing their own similar technology, it is the first of the “Magic Circle” firms to introduce this type of “generative AI” company-wide on live cases. Harvey is based on ChatGPT and the company was quick to say that it wouldn’t replace anyone’s jobs for the moment and will be used as a starting point for basic document drafting that will need editing and improvement. It’s clearly at early stages but it’ll be interesting to see how this improves over time!

In Litany of errors casts doubt on Microsoft’s ‘Google killer’ (Daily Telegraph, Matthew Field and Gareth Corfield) we see further evidence emerging of AI still having some way to go as the recent Google/Bard embarrassment has been added to by Microsoft, which was demonstrating its new ChatGPT-enhanced Bing search engine. It was asked to plan the perfect holiday in Mexico City as part of a demo and came up with a bar recommendation that had just one Tripadvisor review from 2014 🤣. It was also asked to analyse a financial filing, but the results were full of errors and made-up numbers. * SO WHAT? * Fortunately for Microsoft, the litany of errors wasn’t immediately noticed at the time! As things stand at the moment, the chatbots have problems separating fact from fiction when scraping information from online sources and they also have a nasty habit of making up content to fill gaps – a phenomenon known as “hallucinating”. OK, so there are still significant problems that need ironing out, but I am sure that it is only a matter of time before they improve!

Elon Musk to stay as Twitter chief for almost another year (Daily Telegraph, Gareth Corfield) highlights the mercurial chief’s intention to step down “towards the end of this year” at which point someone else will take over. He intends to steady the ship at the moment and sort its finances and future strategy. * SO WHAT? * Musk has been very hands-on in the running of Twitter since buying it for $44bn in October last year and he has repeatedly said he would step back without putting a date on it. Now he has, speculation will whirl as to his successor – and I would also argue that this will be well-received by Tesla shareholders who have been less than impressed with his increased focus on his new toy. FWIW, I think that Tesla really needs Musk now, so this news will give Tesla shareholders some hope.

In regulatory news, EU set to investigate Amazon’s $1.7bn purchase of Roomba-maker (Financial Times, Javier Espinoza and Dave Lee) shows that the EU is about to launch an antitrust case regarding Amazon’s proposed acquisition of Roomba-maker iRobot

due to privacy concerns. This differs from separate concerns expressed by the US FTC over Amazon’s power in the home electronics sector. * SO WHAT? * This is really interesting because it is another bit of evidence which suggests that regulators are making a more conscious effort to clamp down on privacy and data concerns particularly regarding acquisitions by Big Tech firms such as Apple and Meta. Previous acquisitions (e.g. when Facebook bought WhatsApp and Instagram) seemed to have sailed through without much intervention, but it seems that we are now seeing more reticence on the part of the regulators to allow such deals to go through untouched. Whether anything actually comes of this is another question, though!

Talking of this, U.S. Escalates Apple Probe, Looks to Involve Antitrust Chief (Wall Street Journal, Aaron Tilley, Dave Michaels and Keach Hagey) highlights another instance of regulators wading into Big Tech as the Justice Department seems to be preparing to put together an antitrust complaint against Apple regarding whether or not it has a monopoly on mobile third-party software on its devices and whether its mobile operating system, iOS, acts anticompetitively by prioritising its own products over those of third-party developers. There has been no further comment from Apple on this, but I am sure that they will fight this very hard! * SO WHAT? * It really does seem to me that the momentum is very much with the regulators at the moment. I hope that they succeed as Big Tech has been able to throw its weight around largely unhindered for quite some time. We have definitely seen a lot of benefits from this, but I think that the major downside is that it is becoming increasingly difficult for new tech companies with exciting innovations emerge.

UK police vulnerable to Chinese spy equipment, says watchdog (Financial Times, William Wallis) is a very interesting article that cites the findings of a new survey from the Biometrics and Surveillance Camera Commissioner which suggest that police forces in England and Wales are highly exposed to potential espionage via the ubiquitous nature of CCTV, drones and body cameras from China in their kit. Hikvision surveillance equipment and DJI drones are being used by a number of forces, for instance, and a number of ethical and security concerns have been raised. Other suppliers include Dahua, Huawei and Nuuo – and even American supplier Honeywell uses Chinese components in some of its tech. * SO WHAT? * I guess that this has garnered a particularly high amount of interest given the recent shooting down of Chinese spy balloons, but it is interesting to see how pervasive this equipment is. The thing is, I would have thought it would cost a huge amount of money to replace it – a cost that the government will no doubt find difficult to finance given current economic circumstances (not to mention the huge amount of money it is going to have to pay out to public sector workers for backdated wages, wage increases etc.). It does make me wonder whether large scale procurement in general is going to have to change from prioritising cost to prioritising security and ethics. Cynical me would say that the latter will be prioritised for a few years, but then human nature is to then relapse to the former as those in procurement will no doubt be incentivised on getting what they can “on the cheap”.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

US retail sales rise, Kraft Heinz pauses price hikes, Morrisons takes a blow and Dunelm stays chirpy…

In a quick scoot around some of today’s other interesting stories, US retail sales jump in latest sign Federal Reserve may need to keep rates high (Financial Times, Alexandra White) shows that US retail sales shot up in January in one of the biggest monthly increases in the last two decades 😱, indicating that US consumers are still spending on discretionary items despite the current cost of living crisis. More pressure on the Fed to keep raising interest rates methinks…

Talking of the cost of living crisis, Kraft Heinz to Hold Off on Further Food-Price Hikes, Executives Say (Wall Street Journal, Jesse Newman and Dia Gill) shows that the food company has announced that it won’t put through any further price increases this year as it expects increasing client resistance to price rises. * SO WHAT? * I think that this is a good thing – and I wonder whether this will be something that companies who take this decision will emphasise more in their advertising – you know, “find comfort in buying our stuff that you know well, because we promise not to put our prices up any more” sort of thing (but obviously more slickly expressed 😁!).

Meanwhile, Morrisons’ debt sold at discount as credit rating downgraded (The Times, Helen Cahill) highlights the continuing nightmare that Morrisons is experiencing at the moment as its credit rating has now been downgraded by Moody’s three times since Clayton, Dubilier & Rice took over. * SO WHAT? * It doesn’t just rain but it pours – as the troubled retailer continues to “lose” against Aldi and Lidl. It is now technically out of the “Big Four” UK supermarkets as its market share was recently overtaken by Aldi. This is very disappointing for the company and I can’t see how they are going to turn things around at this point as the debt problem just isn’t going away. No doubt CDR is going to be using this as an excuse to sell off that store portfolio (which is arguably what they’ve wanted to do all along)…

Then in Dunelm keeps smiling despite uncertain outlook (The Times, Isabella Fish) we see that the soft furnishings retailer is confident enough to stick with full-year guidance despite reporting a 17% fall in interim profits and acknowledging a tricky economic outlook. It has benefited so far from customers buying bits that will help reduce their utility bills (e.g. thick curtains and heated airers) but you do wonder what “killer” products it will be selling going into the summer. After all that spend under lockdown when we were all confined to our homes, are we really going to be indulging in more extraneous spending in a cost-of-living crisis??

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

It’s pretty amazing to think that Tom Cruise is 60 isn’t it? Well at that age, you’d think he’d slow down a bit – but it doesn’t seem like he’s ready just yet for the pipe and slippers when you see him doing this. Unbelievable 😱! Alternatively, if you find that all a bit stressful, here is a strangely compelling video of a beaver eating cabbage. This left me craving cabbage for some reason…