Fed chair Jay Powell is locked in an interesting two-step with markets. He’s hawkish, but not as hawkish as they anticipated, despite saying he is going to be more hawkish than they expect.
And the riddle continues. Last Friday
US labour market stats posted an unexpected boost in jobs growth. That’s good news for the economy, but led Powell to warn on Tuesday that
the Fed might need to raise rates more than investors are pricing in to tame inflation.
“The base case, for me, is that it will take some time [for inflation to go away],” he said. “And we will have to do more rate increases and then we’ll have to look around and see whether we’ve done enough.”
Chief economics commentator, Martin Wolf, looked at the
lessons for central bankers from the Covid-19 pandemic and errors made in the 1970s to ask what mistakes might be made now.
He writes that “there is a danger not only of loosening too soon, but also of loosening too far under what is quite likely to be fierce political pressure, so generating another upsurge.” But whatever happens, he urges policymakers to get inflation down and keep it there.
Looking further ahead,
demographic decline is a “structural risk that remains under-appreciated” by central bankers, writes Rebecca Patterson, former chief investment strategist at Bridgewater Associates.
There has been some focus recently on ageing populations and reduced workforces, she writes. “But so far, their responses are woefully inadequate to prevent higher rates of inflation and more difficult fiscal trade-offs in the years ahead.”
The green subsidies arms race
French and German economy ministers are in the US this week to discuss their concerns about the Inflation Reduction Act.
Among a number of asks, they want to “avoid aggressive tactics involving the US administration going to see European companies to ask them if they want to move their factories to the US,” according to one French official.
“You don’t do that among friends.”
Washington is one thing, but the Europeans have less influence over US states – where much of the action is happening. The likes of Georgia and Michigan, Ohio and Indiana are
pushing hard to persuade companies to relocate or expand to their jurisdictions, dangling incentives including tax breaks, subsidies and “shovel-ready” sites.
Brussels will hold a summit today to explore the EU’s response to the US’s green investment package. But there’s trouble in the ranks. This week internal market commissioner Thierry Breton
criticised the EU for frequently changing its state subsidy rules, arguing it confuses businesses.
Oil major’s bumper profits come with problems
On the other end of the spectrum, following record profits at oil companies, governments face calls for windfall taxes.
But there’s another option, writes business columnist Pilita Clark. A
“carbon takeback obligation” – where companies that deal with fossil fuels have to store a percentage of the carbon dioxide created by their products – has been bandied around for years and support is gathering pace.
“It would make fossil fuel companies pay to clean up their carbon emissions in a way that would create a safer climate at a relatively affordable cost.”
Meanwhile, boards will want to
pay close attention to a legal claim that has been brought to the UK’s High Court against individual directors at Shell by an environmental group and Shell shareholder ClientEarth, with support from institutional investors.
The case alleges that current directors at Shell had breached their legal duties to properly manage the “material and foreseeable” risks from climate change.
“We do not have confidence that the board is properly preparing the company for the energy transition,”said ClientEarth’s lawyer Paul Benson. “It’s telling that the amount of money going into renewables is considerably less than the amount going to shareholders.”
Restructures and strategy
It’s crunch time for Credit Suisse. The Swiss bank has lurched from crisis to crisis, and is now about to undergo radical restructure.
A central part of that is the acquisition of banker Michael Klein’s boutique advisory firm, which was confirmed today, and will merge with the bank’s capital markets and advisory spin-off. Klein has been named Credit Suisse’s chief executive of banking and head of the Americas.
Sources suggest that if the strategy does not succeed, Credit Suisse could be broken up or sold off, with the likes of UBS, BNP Paribas and Middle Eastern sovereign wealth funds in the mix.
The board has a plan to focus the minds of top executives. They are preparing to present a “transformational award” –
also known as a $380mn bonus pool – for shareholder approval. This will be paid to senior executives if they meet restructuring targets.
But the scale of the challenge was laid bare today as
Credit Suisse posted its biggest annual loss since the 2008 crisis. The lender recorded $1.5bn in fourth quarter losses, driven by a drop in revenues from the investment bank and clients withdrawing money from the wealth management arm.
The UK prime minister Rishi Sunak has been undertaking a little restructuring of his own,
taking a sledgehammer to the Department for Business, Energy and Industrial Strategy.
UK companies will want to take note of two new spinouts – one covering energy security and net zero, and the other science, innovation and technology. The business department will be rebranded as the Department for Business and Trade.
Risk, regulation and remuneration
The importance of succession planning and executive recruitment was on display at Carlyle Group this week. The
private equity firm’s fundraising dropped off a cliff in the last quarter – falling behind rivals – as the lack of chief executive hung heavy over investor confidence.
Not for long, though. On Monday the firm announced it was
appointing former Goldman Sachs executive, Harvey Schwartz, as its new chief. And he could enjoy a huge pay deal – potentially worth more than $180mn over the next five years –
if he meets targets for share price and shareholder returns.
Workplace culture is front and centre and McDonald’s. The fast-food chain has signed a legally binding agreement with the UK’s Equality and Human Rights Commission
to improve how sexual harassment claims are handled. The measures include training and improving the complaints procedure.
And finally, directors at US companies may want to pay attention to a court ruling against Johnson & Johnson this week as it could
stop solvent companies using bankruptcy schemes to manage huge litigation action.
In 2021 J&J split in two, creating a subsidiary LTL management. LTL took on thousands of legal claims from cancer victims, who allege its talcum powder caused their disease, but then filed for bankruptcy. This put all the legal proceedings on hold – a move known as a “Texas two-step”.
The two-step has been used by others, but maybe not for much longer. “The ruling changes the risk profile for doing one of these bankruptcy moves,” said Jared Ellias, professor at Harvard Law School. “I think boards of directors are going to say: ‘you know what — this whole ‘Texas two step’ thing — it really isn’t for us.”
