Thursday 29/06/23

1. In MACRO NEWS, central bank chiefs warn about interest rates, Bailey blames it on Covid and Hunt gets the regulators together
2. In WATER NEWS, Thames Water’s in a pickle and we consider the impact
3. In TECH NEWS, the US considers plugging advanced chip leakage to China, news publishers team up to face AI, the gaming industry tests AI and Apple edges closer to the $3tn mark
4. In MISCELLANEOUS NEWS, General Mills sees falling sales, Mulberry loses momentum and PwC warns on pay
5. AND FINALLY, I bring you info about flying ant day…

So central bankers get solemn on interest rates while Hunt gets the regulators together…

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:

Central bank chiefs warn interest rates will keep rising (Financial Times, Martin Arnold) shows that central bank chiefs from the Fed, ECB and Bank of England all warned about higher-for-longer interest rates to combat inflation at a conference in Portugal but, as you’d expect by now, Covid not Brexit drove up inflation, says Bailey (Daily Telegraph, Tim Wallace) shows our Bank of England governor, Andrew Bailey, blaming something else for his ineptitude. TBH, I don’t think it’s a case of one or the other – I think it’s a bit of both (plus the effect of Russia’s war in Ukraine pushing up food and fuel prices to varying degrees). However, the main problem is that the Bank of England (as well as the Fed and ECB) were too arrogant in their thinking that inflation was just a blip that would pass.

Meanwhile, Jezza was getting busy in UK watchdogs agree on ‘action plan’ to prevent consumers being ripped off (The Guardian, Alex Lawson) shows that chancellor Hunt had a meeting yesterday with the heads of the Competition and Markets Authority (CMA), Financial Conduct Authority (FCA), Ofcom, Ofgem and Ofwat with a view to making sure consumers aren’t being taken advantage of in this cost-of-living crisis and to ensure that they were giving sufficient help to those who were more vulnerable. Accusations of “greedflation”, where companies hike prices using inflation as an excuse to boost profit margins, continue to fly around and the CMA is actually due to publish its report on the profit margins of supermarkets and food retailers next week. Talking of which, Food retail: profiteering accusations do not stack up (Financial Times, Lex) contends that although it seems like they must be raking it in, profit margins at UK supermarkets are actually very thin (I referred to this yesterday) and when you consider that their wage bills are likely to go up, those margins will probably get even thinner! As for banks/mortgage lenders, Banks ‘will lift mortgage costs if forced to help savers’ (Daily Telegraph, Ruby Hinchcliffe and Szu Ping Chan) cites a senior exec at trade body UK Finance as saying that lenders will just protect their margins by increasing mortgage rates if the chancellor makes them pay higher savings rates (they are currently being accused of not passing on rising interest rates on fast enough to savers). Tough times and tricky solutions but Jezza’s got to be seen to be doing something…

Don’t forget to register HERE to attend NEXT MONDAY’S roundup of the business and financial markets news of May and June with myself and Jake Schogger of the Commercial Law Academy!

Thames Water has a ‘mare and we look at the consequences…

The big story today (in the UK anyway!) is Thames Water! UK government looks at nationalising Thames Water as crisis deepens (Financial Times, Gill Plimmer, Jim Pickard and Michael O’Dwyer) shows that ministers are considering a temporary nationalisation of Thames Water just a day after chief exec Sarah Bentley’s sudden resignation. The company is creaking under the weight of £14bn of debt, which is not ideal when you consider that interest rates (and therefore the cost of servicing that debt) are high – and potentially going higher. UK water sector faces biggest crisis since Thatcher’s 1989 privatisation (Financial Times, George Parker, Jim Pickard and Gill Plimmer) gives us a bit of the history as to how we got here and how things have changed since privatisation. At the time, Thatcher wrote off £5bn of the industry’s debts, leaving water companies debt-free. Since then the industry as a whole has £60bn in debt! What went wrong at Thames Water and what could a bailout look like? (The Guardian, Alex Lawson, Anna Isaac and Sandra Laville) does a decent summary of the story so far and blames former owner Macquarie for underinvestment, “asset stripping” and not paying corporation tax. A government bailout could be extremely expensive and would involve at least some of the cost being passed on to the taxpayer,

although this is likely to make finances even tighter for the consumer – as per Thames Water: bursting balance sheet requires large financial plug (Financial Times, Lex), which advises against nationalisation. In the meantime, Water firms push for bills in England to rise by up to 40%, say reports (The Guardian, Julia Kollewe) suggests that even more pressure will be placed on consumers if the water companies get their way as they push to drum up cash to pay for dealing with the sewage crisis and climate-related issues.

Thames Water doesn’t seem to be the only one having problems, though – Financial resilience test for water firms (The Times, Emily Gosden) shows that Ofwat published a report in December on water companies’ financial resilience and flagged Thames Water as one of five who looked dodgy. The other four are Southern Water, Yorkshire Water, SES Water and Portsmouth Water. They will now undoubtedly be under the microscope! * SO WHAT? * It just sounds like the companies have been victims of underinvestment and less-than-ideal financial management over the years. Whether or not they would have done any better as nationalised companies is a moot point, but the fact is that we are now in a tricky situation that needs a swift solution. Given the parlous state of household finances at the moment, a state buyout is not likely to go down well and will no doubt be painful for all involved.

Don’t forget to register HERE to attend NEXT MONDAY’S roundup of the business and financial markets news of May and June with myself and Jake Schogger of the Commercial Law Academy!

The US considers more restrictions on advanced chips going to China, news publishers get together to face AI, AI in gaming is about to get tested and Apple edges back to its $3tn mark…

For Nvidia and China, an AI Battle With Washington Bodes Ill (Wall Street Journal, Jacky Wong) shows that things may be about to get trickier for advanced chip companies and China because the Biden administration is looking at ways to further restrict the supply of AI chips to China – like those currently being made by Nvidia. As things stand currently the US requires a special licence to sell the highest level AI chips – like Nvidia’s A100 – to customers in China, but they are now considering restrictions on some of the other chips as well. * SO WHAT? * The thing is that there is a delicate balance to be struck here because if the administration restricts chip supply tightly, it will of course slow China’s AI advance – but it will also dent revenues at American companies. The other risk is that if restrictions get too tight China may advance its own AI technology to make itself more independent – and then US companies may never get a decent foothold in a market that’s expected to have great potential! Chinese companies such as Cambricon Technologies and Changsha Jinglia Microelectronics may ultimately benefit from a push to manufacture chips domestically. In the meantime, it’s thought that China has been stockpiling chips – analysts at Citi reckon that China may make up 5-10% of Nvidia’s data centre sales.

Elsewhere, Big News Publishers Look to Team Up to Address Impact of AI (Wall Street Journal, Alexandra Bruell) shows that some major news and magazine publishers are looking at forming a new coalition (a media version of OPEC?) to collectively face the impact of AI on the industry. Execs at the New York Times, News Corp, Vox Media, Advance (parent of Condé Nast) and Axel Springer (owner of Politico and Insider) have been mooting such a formation although nothing concrete’s been decided yet. * SO WHAT? * It’s extremely rare to see any kind of collaboration between big publishers – so even just talking about such a coalition shows just how seriously the threat of AI is being taken.

Publishers have thus far been looking at how much their content has been used to train AI tools such as ChatGPT, how they should be paid for access and what legal rights they have. Also, News Media Alliance has been representing news publishers and pushing for legislation in the US that would let publishers under a pre-determined threshold to collectively negotiate with tech giants who use their content.

Then in Gaming industry puts generative AI to the test (Financial Times, Tim Bradshaw) we see that video games companies are looking at how they can trim costs and enhance gaming experiences by using AI to generate characters, dialogue and landscapes. It is thought that this will enhance player experiences by enabling them to interact more naturally with lifelike characters and changing storylines. Unity Software, which provides one of the most widely used game development toolkits, has just this week launched some new tech that will simplifies the creation of 3D assets. At the moment, developers can apply to test the software – and excitement about this latest development pushed the shares up by around 15%. Elsewhere in China, games giant NetEase is launching Justice Mobile, a multi-player game that contains AI-powered characters. This will be the first test of AI in a mass-market game – and it already has 40m sign-ups prior to its launch tomorrow! * SO WHAT? * I think that this will be transformative for the industry but a nightmare for all those artists and designers who currently create all this stuff. From the players’ point of view, though, it will mean that they will no longer (potentially!) have to endure clunky scripted interactions and will make gaming even more immersive than it is currently. Studios will also no doubt be able to cut costs dramatically – and they can couple the character creation with AI-generated voices, which bypass the need for voice actors. There will be huge changes to come!

I thought that Second bite for Apple at $3tn status (The Times, Callum Jones) was worth mentioning as Apple’s valuation is heading back to $3tn territory after a return to form following last year’s tech sector sell-off. It breached the $3tn level early last year and has had a strong 2023 so far despite a torrid economic backdrop.

Don’t forget to register HERE to attend NEXT MONDAY’S roundup of the business and financial markets news of May and June with myself and Jake Schogger of the Commercial Law Academy!

General Mills and Mulberry disappoint while PwC gets (more?) miserly on pay…

In a quick scoot around some of today’s other interesting stories, General Mills’ Sales Fall Short of Forecasts Despite Higher Prices (Wall Street Journal, Dean Seal) shows that the company – which owns brands including Betty Crocker, Yoplait, Nature Valley, Pillsbury, Old El Paso, Cheerios etc. etc. – reported disappointing sales numbers as volumes continued to lose momentum and retailers cut inventories after lockdown build-ups (remember all those supply chain problems??). Basically, prices went higher but volumes went lower and sales came in below market expectations. This downbeat news hit sentiment in rivals including Mondelez International and Kraft Heinz. On the plus side, pet food did quite well. * SO WHAT? * I think that companies such as General Mills are now finding the limits of their customers and I think they will have to be quite careful from now on regarding what they do next with pricing given that things look like they are going to get worse before they get better again.

Back home, Mulberry handbag sales dip in Britain as tourist tax bites (Daily Telegraph, Daniel Woolfson) shows that expensive handbag purveyor Mulberry put in a disappointing performance in the UK as tourist numbers fell. The company blame this on the scrapping of VAT-free shopping in the UK – something that many luxury retailers are trying to get the government to roll back. It is said that tourists are preferring to do their shopping in Paris and Milan rather than London.

Then in PwC fires warning on pay and bonuses (The Times, Tom Howard) we see that PwC has told its 25,000 UK staff to manage expectations re bonuses and pay rises this year, blaming the “challenging” market backdrop. * SO WHAT? * Given that it gave its biggest pay rise in a decade to its staff last year, I guess this isn’t so surprising, particularly given what’s going on in the economy at the moment. It also looks like junior auditors won’t get any pay rise this year either.

Don’t forget to register HERE to attend NEXT MONDAY’S roundup of the business and financial markets news of May and June with myself and Jake Schogger of the Commercial Law Academy!

…in other news…

I know this isn’t pleasant but I just thought I’d warn you: Flying Ant Day 2023: ‘Bumper swarm’ warning that could last WEEKS ahead of mass flight (The Mirror, Matt Atherton). Not great if you like having picnics…