Happy Sunday!
Here we are. We’ve (unofficially) begun the Q4 2022 earnings season as of Friday 13th (not a good omen). The next few weeks will set the tone for the rest of 2023. Cross all your fingers and toes that things aren’t as bas as they seem; especially in the UK.
It’s been a busy start to the year, so let’s dive right in.
Key Events
US CPI (Inflation) Data For December 2022
On Thursday, we received the much-anticipated US inflation data for December.
Expectations were for a 6.5% year-over-year reading, with a -0.1% month-over-month reading, implying we’d see an inflection point in these reports from inflation, to deflation.
The actual results came in EXACTLY as predicted (I say this, but the expectations were adjusted downwards on the day before this report was released…), with a 6.5% YoY read and a -0.1% MoM read.
Core inflation came in at 0.3% MoM, so a little high. However, half of this was entirely due to housing and shelter costs. This is something the market expect to come crashing down along with the general housing market; as a result of high interest rates.
All-in-all, this was a very positive result. Inflation is clearly falling. The market is now expecting the Federal Reserve to slow their interest rate hikes to just 0.25% per meeting, with a potential ‘pause’ in late Q1 or early Q2. In fact, this result reverberated across the global markets, with UK stocks reaching near all-time-highs despite all the challenges we face.
The Fed’s next meeting is scheduled for 31st January 2023, with the results of said meeting being released on 1st February 2023.
GDP Estimate for November 2022
On Friday, the estimate for November 2022 GDP data was released.
Despite a surge in economic movement thanks to the World Cup, the UK saw a mere 0.1% growth in GDP. Hospitality was the main driver for this result being positive.
The World Cup continued into December, so another positive result is possible. That being said, once December is behind us, we could begin to see a steep negative decline in GDP. This will become even more likely if we see a negative GDP figure for December.
Stock Market News
Mass Layoffs Continue
This week, we’ve seen continued announcements of company layoffs. Here are just the ones I’ve seen this week:
- Coinbase – Reducing its workforce by ~20%, or 950 employees
- Crypto.com – Reducing its workforce by ~20%, or around 500 employees
- BlackRock – Reducing its workforce by ~3%, or 500 employees
- Goldman Sachs – Reducing workforce by ~8%, or 3,200 employees
- McDonald’s – Reducing and restructuring the workforce, but with no set number of jobs in mind
Disney (DIS) – Bob Igor Continues Shakeup
Back in November, Bob Igor returned as CEO for Disney. Things were fairly quiet through December outside. But now that we’re in 2023, it’s clear Igor is beginning to get stuck-in and is willing to make large changes within the company.
In the past week or so, he’s announced that all full-time staff must return to the office for 4 days per week, with no exception. He aims to make the company leaner and more efficient.
Additionally, he’s enforced small – but significant – customer-friendly changes within the Disney theme parks. One change ensures that visitors will no longer be charged for photos (e.g., following a theme-park ride). This will naturally reduce Disney’s revenue slightly, but it will hugely positively impact the customer experience. In short, Igor wants to return Disney to being a family-focused company, rather than a cash-cow for investors, with the sole purpose of generating revenue at the cost of customer satisfaction. The theory is simple. Make the customers happy, and they’ll actually want to return to the parks to spend more money.
Tesla (TSLA) – Global Price Reductions, Giga Shanghai Expansion Delays
Two very important pieces of news for Tesla this week.
Firstly, the company decided to reduce prices substantially, across all markets. These price cuts reached as high as 20% for some models. Though, in most cases, prices are still slightly higher than they were before the Covid-19 pandemic, meaning they’ve simply returned to ‘normal’ levels.
It’s worth noting that this doesn’t include any EV incentives, for example the $7,500 EV tax credit in the US. Including the US credit, some Tesla models are now ~30% cheaper.
These price cuts have already significantly reduced inventories in the US, with the company (likely) once again selling to order. In other words, a backlog is being built up again. One can only speculate on how the next few weeks will play out and whether demand has increased enough to meet production. We’ll know more during the earnings call on 25th January 2023.
The second, more concerning news, is that Giga Shanghai’s planned expansion is being delayed. Rumour is that the Chinese government have raised concerns over the data Tesla holds and processes. This is definitely a risk to the future of Tesla in China, so something to watch carefully.
The Giga Shanghai expansion would increase the facility’s capacity from ~1.2 million vehicles, to around 2 million vehicles.
Bank of America (BAC) – Q4 Earnings
Though beating expectations in terms of both revenue and earnings, Bank of America saw a significant decline in investment banking. This was offset by increased interest income, thanks to high interest rates.
Key Points:
- Revenue of $24,532m, up from $22,060m (+11.2%) a year ago
- Net interest income rose 28.7% year-over year
- Non-interest income fell by 7.5% year-over-year
- Profit before tax of $7,897m
- Profit after tax of $7,132m
- Basic earnings per share of $0.85
- Dividend of $0.22 per share paid on 29th December 2022
- Guidance for Q1 was vague, but the company expects interest income to decline in Q1 of 2023
- The company expects, at minimum, a “mild recession”, positioning itself for a recessionary environment throughout 2023. The CEO, Brian Moynihan, stated, “Our baseline scenario contemplates a mild recession… But we also add to that a downside scenario, and what this results in is 95% of our reserve methodology is weighted toward a recessionary environment in 2023,”
- The company significantly increased its provision for credit losses, signalling a struggling consumer
JPMorgan Chase & Co (JPM) – Q4 Earnings
NOTE: JPM include very little in terms of financial statements in their earnings report, so I’ll have to wait for the 8-K to be filed with the SEC and fill this in more later.
As with BoA, JPMorgan beats on both revenue and earnings, largely helped by the higher interest income. They also saw a significant decline in investment banking.
Key Points:
- Revenue of $34,547m, up from $29,257m (+18.1%) a year ago
- Profit after tax of $11,008m
- Diluted earnings per share of $3.57
- Dividend of $1.00 per share, to be paid on 31st January 2023
- The company expects a recession in 2023, so have increased their provision for credit losses to weather the storm. They say this is due to the “modest deterioration in the Firm’s macroeconomic outlook, now reflecting a mild recession in the central case”
- The company saw a rise in loans and credit card use, while deposits saw a decline. This is another sign that the consumer is struggling
Next Week
UK CPI (Inflation) Data for December
On Wednesday, 18th January 2023 at 7:00am, the UK inflation report for December will be released.
In November, year-over-year inflation was 10.7%. I can’t seem to find a consensus estimate for December, however, many economists believe we’ve seen the peak. Thus, we’d hope that December’s reading will be either stable, or lower than 10.7%.
Company Earnings Reports
Here’s a list of the companies I’ll be covering next week:
- Morgan Stanley (MS) – 17th January
- Goldman Sachs (GS) – 17th January
- Procter & Gamble (PG) – 19th January
- Netflix (NFLX) – 19th January
Let me know your thoughts on this week’s events, in the comments below!
