Policymakers and investors are awaiting US labour market data for February, which is due out this Friday.
Wage growth is one of the biggest challenges for central bankers trying to tame inflation. Across the world, workers are demanding more pay. But even settlements that look reasonable could stop inflation dropping to the target 2 per cent, potentially forcing policymakers to ratchet up rates and risk recessions.
“One can dream of a negotiation between workers, firms and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown,” said Olivier Blanchard, former chief economist at the IMF. “ . . . Unfortunately, this requires more trust than can be hoped for and just does not happen.”
And after weeks of talking about how the markets were not aligning to the Fed’s messaging about raising rates, BoE governor Andrew Bailey has gone the other way.
Speaking on Wednesday,
he signalled that markets are wrong to predict the BoE will need to raise rates further. Markets expect interest rates will hit 4.75 per cent by the end of 2023 – at the start of February they were pricing in a 4.25 per cent peak.
Bailey said he had not seen anything in the data to justify this rise. “At this stage, I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more,” he said.
Analysts have also upgraded their outlook for the UK economy this week. The average forecast from economists predicts a 0.6 per cent drop in GDP this year – not ideal but an improvement on the 1 per cent contraction predicted in December and January.
The improved economic news and the fall in gas prices means “it is now plausible that there is no recession at all”, according to Liz Martins, economist at HSBC. “That would be a remarkable result given the scale of the energy shock and monetary tightening that we have had.”
Resetting trade, borders and relations
It was a momentous week for trade and geopolitics as the UK and EU published their new deal on post-Brexit arrangements for Northern Ireland.
Under
the Windsor framework, Northern Ireland will continue to follow EU rules for goods trade. But there will be a green lane for goods from Great Britain just to Northern Ireland (for which there will be fewer customs checks) and a red lane for goods destined for Ireland and the EU, which will be subject to full customs checks.
The deal – which is more than 100 pages – also covered other areas such as state subsidies and VAT.
With the protocol tension soothed, there’s now hope that
progress might be made on post-Brexit regulation of financial services. A memorandum of understanding – which will create a joint UK-EU financial regulatory forum to resolve issues – was agreed in 2021 but has been held up amid the Northern Ireland negotiations.
Counting the cost of M&A
Last year and the beginning of 2023 were slow for M&A, but a survey of FTSE 250 directors and institutional investors by broker Numis suggests that could change later this year.
More than nine in 10 FTSE 250 company directors expect some form of M&A activity this year and a similar number predict financing conditions will improve. But there was also a warning: a majority of leaders think UK PLCs are vulnerable to foreign takeovers, thanks to “compressed” valuations.
Slow M&A activity has also affected corporate law firms, who are now facing
tough fee negotiations and delayed payments as companies try to rein in costs.
“We had a number of clients who said ‘I’m not going to pay you all that now, I’ll do it over a different timeframe,’” said Tamara Box, Europe and Middle East managing partner of international law firm Reed Smith.
ESG proves to be risky business
The annual reports of some Wall Street titans – including the likes of BlackRock, Blackstone, KKR and T Rowe Price – have
disclosed a new risk: pro-ESG investing. A dozen of the dominant US financial companies have warned that the backlash against ESG in parts of the US is now becoming a material risk to their bottom line.
The debate is hotting up too. US President
Joe Biden is set to use his first presidential veto on a new rule that enables fund managers to consider ESG in their investments. This comes after two Democratic senators said they would support Republicans in opposing it.
The pendulum is still swinging in the other direction in Europe, however, as climate litigation continues to make headlines.
On Tuesday,
a French judge ruled against a case brought by human rights activists to suspend TotalEnergies’ multibillion-dollar oil pipeline project in Uganda. But it was due to a technicality – the ruling said another judge would have to consider the merits of the complaint.
This is one of a number of lawsuits filed under the French “vigilance law”. This stipulates large companies must be “vigilant” about risks to human rights, the environment and health throughout supply chains. No cases have yet finished so the law is yet to be fully tested.
Targets, performance and pay
Directors may raise an eyebrow at Klarna’s decision to grant its chief executive, Sebastian Siemiatkowski,
a 35 per cent increase in his pay package, despite the Swedish fintech suffering record losses.
Klarna’s annual net loss grew to SKr10.4bn ($1bn) in 2022, a 47 per increase from 2021. But the business said its remuneration policy was in line with other tech companies “in order to hire and retain the best talent”.
Green bonuses have also been under scrutiny this week, and may be one to watch out for in this year’s AGM season. A new report from PwC and London Business School found that 78 per cent of Europe’s 50 largest companies have some form of carbon target in executive pay deals.
But the targets’ rigour has been questioned after bonuses were “surprisingly high”. Of carbon-linked payouts by companies in the Stoxx Europe 50 index in 2022, half paid 100 per cent of the total possible bonus, while the average was 86 per cent.
“Current levels of payout don’t seem consistent with the slow progress we’re making on climate change,” said Tom Gosling, executive fellow at LBS’s Leadership Institute and board adviser.
UniCredit’s board has also put forward a
30 per cent pay rise – from €2.5mn to €3.25mn a year – for chief executive Andrea Orcel. Investors are broadly happy with Orcel’s performance – the lender’s share price has more than doubled since he joined in April 2021.
But exec pay has been a sticky topic at the bank nonetheless. There was an internal investigation following leaks to the press about the board’s pay discussions. Sources say Dame Jayne-Anne Gadhia, who was chair of the remuneration committee, was accused of leaking information. While the unsubstantiated allegations were dropped,
Gadhia felt her position was no longer tenable and resigned.
Diversity and democracy
The
FTSE 350 hit voluntary targets for female representation on boards three years early. In 2022, 40.2 per cent of directors at the UK’s largest listed companies were women – exceeding the target of 40 per cent by 2025.
For the first time this year, the 50 biggest private companies in the UK were also invited to submit their data on gender diversity. The proportion of women on their boards averaged about 31 per cent. The full report is linked in the resources section below.
Salesforce co-founder and chief executive
Marc Benioff will enjoy a bit of breathing space from recent activist investor pressure as the company posted better than expected revenues in the fourth quarter, coming in at $8.4bn.
After focusing predominantly on growth, Benioff addressed concerns on an analyst call yesterday saying “profitability is truly our number one strategy”.
But there’s
trouble brewing for multiple voting structures, writes business columnist Helen Thomas. Proxy firm ISS has recommended voting against directors at US companies with dual-class structures, and next year will suggest voting against directors at European companies with unequal voting rights.
But this goes against the grain on the continent where some think that these unequal structures support “long-term decision-making and responsible stewardship”. Proxies are coming under fire in the ESG backlash in the US – and they could face “similar terrain” in Europe, she adds.
