Inflation figures this week have shown a cooling effect in the US and UK – but is it enough to curb interest rate raises later in the year?
The US consumer price index rose at an annual clip of 6.4 per cent in January, a fractional dip on the previous month. Core inflation also rose by 5.6 per cent over the year last month, another slight drop on December.
Both these figures were slightly above economists' predictions, raising the prospect of more aggressive rate rises than investors were pricing in.
And it looks like markets might finally be falling in line. For months investors have bet on the Fed cutting rates this year, but they are
now pricing in rate rises in March and May and a less than 0.25 percentage point cut by the end of 2023 – which is roughly equal chances of one cut or none.
The mood amongst Wall Street bigwigs remained upbeat. “The consensus has shifted to be a little bit more dovish in the CEO community that we can navigate through this in the United States with a softer economic landing than what people would have expected six months ago,” Goldman chief executive David Solomon told an industry call on Tuesday.
UK inflation actually beat predictions,
rising by an annual rate of 10.1 per cent in January, a slowdown compared with December. Core inflation also decelerated – rising by 5.8 per cent in January, down from 6.3 per cent in December – as did services inflation.
While this will have reassured the Bank of England, it will be closely watching wages. Stats from Office for National Statistics showed that
wage growth accelerated towards the end of 2022, with average regular pay (excluding bonuses) up 6.7 per cent year-on-year for the final quarter.
This was the strongest rate of growth since records began in 2001 (excluding the pandemic era) and above forecasts. It did, however, remain below inflation – a key point as policymakers will want to avoid inflation baking into the economy.
The Brexit anti-dividend
The government wants to halve inflation and use “Brexit freedoms” to boost growth.
But it will have its work cut out. This week BoE rate setter Jonathan Haskel said that
Brexit had demolished £29bn of business investment – with the UK lagging at the back of the G7 pack in terms of investment growth since 2016.
Just for some extra context, the hole in business investment growth since the referendum was equivalent to 1.3 per cent of UK GDP, Haskel said.
Then there's the City of London. While it has grown over the past decade, it has been outpaced by rivals including New York and Hong Kong. Add Brexit into the mix, and London's pre-eminence as a financial centre is in question.
Can the Edinburgh reforms – with their focus on risk over red tape – revive its fortunes? The litmus test will be whether chip design firm Arm – a darling of UK tech – decides to list its shares on the LSE, alongside New York.
The energy transition and the markets at odds
One industry that could not be considered a laggard is energy. Last year the six biggest western oil companies – BP, Chevron, Equinor, ExxonMobil, Shell and Total – made record profits.
When BP rowed back on its plans to go green this week, the optics were not good. But the markets responded by lifting its share price to three-and-a-half-year highs. If the supermajors won’t drive decarbonisation, and the markets won’t push them,
what happens to the energy transition?
Hedge funds have also been
rewarded for owning coal stocks as its price surged. While some investors are reducing their exposure to the fossil fuel, others believe it would serve the world better to hold on a bit longer.
“The world doesn’t have enough renewables and the energy transition is going to take much longer [than people think],” said Mans Larsson, founder of hedge fund Makuria. “... It’s almost immoral not to invest in coal because of the reliance [by so many countries] on fossil fuels.”
But there could be a Trojan horse in the mix. “As competition for green business experts grows, financial firms are snapping up staff from environmental non-profit groups at a pace — and price — that industry veterans say is striking,” writes business columnist Pilita Clark.
While some might see this as selling out, there is an opportunity.
Sustainability experts are now being embedded across market players and may be able to influence from within.
Toshiba stares down the barrel of acquisition
Even by Toshiba’s standards, it’s been a tough week. The Japanese industrial conglomerate reported that its
operating profit fell almost 90 per cent to ¥5.3bn ($40.4mn) for the last quarter of 2022.
Its chief operating officer Goro Yanase also resigned after auditors found he had repeatedly submitted entertainment expenses improperly. The alleged misconduct happened in 2019 when he was on the board of a subsidiary.
“We feel strongly that there is an urgent need to transform the company,” said Toshiba chair Akihiro Watanabe on Tuesday.
He may have no option as vultures are circling. Last week Toshiba received a $15bn acquisition proposal from a consortium led by Japan Industrial Partners (it has received eight offers in recent years).
“Toshiba needs the restructuring its buyers would help it achieve,” our Lex writers argue.
“Missing the market’s earning expectations in such a dramatic fashion should increase the chances of a deal.”
Remuneration and reform and more legal action in corporate governance
High earners are putting bosses in a bind. They are often the most senior and experienced team members with a wealth of institutional knowledge.
But they are demanding even higher pay and tight labour markets are playing to their advantage, writes management editor Anjli Raval.
It’s a tough balance to incentivise and retain staff, but also manage expectations of other stakeholders particularly about fair pay – especially if you are looking to reduce headcount.
Elsewhere, environmental law charity ClientEarth is back at the UK High Court. After lodging a claim against Shell directors recently, it has filed another case against the FCA. It claims the watchdog
unlawfully approved listing documents that allegedly failed to adequately outline Ithaca Energy’s climate change risks.
And finally, while the FRC is fixed on driving up audit standards,
its zealotry could be discouraging smaller firms from taking up larger projects – just as reforms are in the pipeline for joint audits, writes accountancy correspondent Michael O’Dwyer.
“If the audit market was once a wild west, rife with cosy relationships and low standards, some in the profession feel the regulatory pendulum has swung too far in the other direction, potentially discouraging smaller players from stepping up,” he writes.
