What. A. Week.
This week, US CPI data came in, the UK Spring Budget was released, we saw further banking failures, there was more TikTok drama, and of course, earnings.
Volatile and uncertain times, such as we’re seeing today, really illustrate the importance of becoming as financially literate as possible. While it’s not particularly intuitive, building wealth has historically been much easier during times of fear and recession, thanks to the recovery that has followed. This is of course not financial advice, but now could be a once-in-a-decade opportunity to really buckle down, earn as much as possible, and invest as regularly as you can. Especially if we see a significant drawdown in the stock market due to fear and capitulation. In 2020, many companies saw their share prices fall by over 50% in a matter of days. Merely months later, indices regularly hit new all-time-highs.
As Warren Buffett would say:
“Be greedy when others are fearful, and be fearful when others are greedy.”
Anyway, let’s dive into this week’s events.
Key Events
US CPI (Inflation) Data for February 2023
On Tuesday, we received US inflation data for February, which largely met expectations.
Year-over-year, headline CPI fell to 6.0% year-over-year, down from the 6.4% seen in January. Month-over-month, CPI rose 0.4% (i.e., 4.8% annualised).
For Core CPI (excluding energy and food), the headline figure came in at 5.5% year-over-year. Month-over-month, Core CPI rose 0.5% (i.e., 5.5% annualised); the only reading coming in above expectations.
This continues to suggest a downtrend for US inflation and is seen as a very positive sign. Next month, we’ll see direct comparisons to the start of the war in Ukraine, which should push inflation down even further. To add extra weight to future reports, it is almost universally expected that shelter costs, which accounts for around half of Core CPI, will also begin to plummet this year. Shelter is seen as a ‘lagging indicator’, in that drops in prices don’t show up in the CPI reports until 6 months (or more) after the fact.
UK’s 2023 Spring Budget
On Wednesday, Jeremy Hunt released his Spring Budget.
I’ll link to a more in-depth post shortly. Until then, here are some of the key takeaways:
- The Energy Price Guarantee increase (to £3,000) has been postponed until 30th June 2023. This means households with ‘average use’ will continue to benefit from the £2,500 cap currently in place.
- In England, “all” working parents will be able to claim 30 hours of free childcare for children aged between 9 months and 3 years. Though, this won’t be fully rolled out until September 2025.
- The annual pension allowance has been increased, from £40,000 per year, to £60,000. Additionally, the lifetime pension allowance has been abolished.
- The fuel duty rise will be postponed, and the previous fuel duty cut (of 5p per litre) will continue for another 12 months.
- For businesses, the annual investment allowance (AIA) will be frozen at £1,000,000. Additionally, businesses will be able to take advantage of ‘full expensing’. allowing them to claim 100% of eligible equipment against their taxable income. This will come into effect from 1st April 2023 to 31st March 2026.
- On defense, spending is to reach 2.25% of GDP by 2025 (an extra £11bn over next 5 years).
- Nuclear power generation is to be classified as ‘environmentally sustainable’, allowing nuclear projects to receive similar incentives to wind or solar.
- Up to £20bn will be dedicated to the development of carbon capture and storage projects.
The Bank Failure Contagion Continue to Spread
Last week, we saw the collapse of Silvergate Bank and Silicon Valley Bank. Around the time I posted last week’s Market Update, Signature Bank also declared that they had become insolvent. Thus, the third major banking casualty in less than a week.
On Monday, 13th March, the US Government announced that all depositors at Silicon Valley Bank and Signature Bank would be protected. This includes those with deposits above the FDIC insurance limit. Effectively, these two banks were bailed out in a similar way to banks in 2008. However, Silvergate did not receive the same treatment; it will continue to cease operations.
In the case of Silicon Valley Bank, the UK government approved the sale of its UK branches to HSBC, for the huge sum of £1, protecting UK depositors. I’d love for this to be somewhat of a happy ending end to this story… However, since Monday, we’ve seen additional banks come close to collapse.
Firstly, First Republic Bank, another US bank, saw a huge bank-run (people withdrawing their money en-masse) following the collapse of Silicon Valley Bank. To ease the situation and ‘restore confidence’, a combination of Bank of America, Goldman Sachs, JP Morgan, among others companies, will deposit $30bn into the bank. This is to provide liquidity and, with any luck, prevent another banking failure. It is yet to be seen if this will be enough.
Secondly, the second-largest bank in Switzerland, has run into similar issues as the above banks. In a bid to prevent (yet another) collapse, Swiss National Bank offered to lend the bank $54bn in an attempt to sooth investors’ concerns. However, this doesn’t seem to have been enough to resolve the issue of confidence. In fact, just hours ago, Switzerland’s largest banking institution, UBS, announced it will buy Credit Suisse for just $3.23bn, taking on up to $5.4bn in losses, in an attempt to boost confidence and finally stabilise the situation.
In less than two weeks, we’ve now seen at least 5 banking failures (or near failures). The question is: is this the end? Or will this contagion continue to spread?
Further Restrictions in Store for TikTok
Last week, I talked about TikTok’s woes in the US, where the government has banned its use on federal devices and are considering an outright ban across the country.
To add fuel to this fire, it was reported this week that the UK government will follow suit, banning TikTok on all government devices. The announcement cited the risk of government data being transferred to China.
The UK government has not ruled out a full UK-wide ban for the app, which is owned by ByteDance, a Chinese tech firm based in Beijing.
Stock Market News
Meta (META) – Second Round of Layoffs Announced
This week, Meta announced it would be laying off an additional 10,000 staff.
This will be the second round of layoffs at the company since November, when it shed 11,000 employees (~13% of the workforce). This new announcement brings the total to 21,000.
Adobe (ADBE) – Fiscal Q1 Earnings
On Wednesday, Adobe comfortably beat analyst expectations on both revenue and net income. Shares rose 5% in after-hours trading on the news.
Key Points:
- Revenue of $4,655m, up from $4,262m (+9.2%) a year ago
- Gross profit of $4,087, up from $3,750m (+9.0%) a year ago
- Operating profit of $1,586m, up slightly from $1,580m (+0.4%) a year ago
- Profit before tax of $1,598, compared to $1,543m a year ago
- Profit after tax of $1,247m, compared to $1,266m a year ago
- Basic earnings per share of $2.72
- Revenue guidance for Q2 2023 came in at between $4,075m and $4,780m. Basic earnings per share guidance for Q2 is expected to come in between $2.65 and $2.70. Additionally, the company raised non-GAAP guidance slightly for the full fiscal year
- During the earnings call, the company stated that its existing clients are beginning to pay for Frame.io, a tool for reviewing and approving videos. Adobe acquired Frame.io for $1,240m in 2021
- Adobe has seen a key customer in Microsoft, who intend to utilise Adobe’s Acrobat PDF engine and integrate it into Edge, Microsoft’s default Windows 10/11 browser
- Not everything is rosy for the company, however. Its $20,000m acquisition of Figma is still on-hold, pending various anti-trust pushbacks. Though, it sounds like Adobe is relatively confident it can soothe these concerns and get the acquisition past the finish line
Next Week
UK CPI (Inflation) Data for February 2023
On Wednesday, we’ll get UK CPI data for February.
Current expectations are that headline inflation will come in at 9.8% year-over-year. This will mark the first time that the CPI reading dips below 10% since August of 2022.
The coming months ahead should see inflation continue to fall, as the comparisons will begin to overlap with the war in Ukraine (where oil prices exceeded $100 per barrel, for example).
US FOMC Meeting
Also on Wednesday, the US Federal Reserve will conclude their FOMC meeting. This means they will announce the new Federal Funds Rate, or the US equivalent of the base interest rate.
Following positive CPI results and the collapse of several banks, it’s now expected that we’ll see either a 0.25% interest rate hike, or no rate hike. In other worse, there is now a small chance of a ‘pause’ in interest rate increases.
UK Bank of England Monetary Policy Committee Meeting
On Thursday, we’ll hear from the Bank of England regarding their decision on interest rates.
Previous expectations have suggested that the Base Rate will reach ~4.6% by July of 2023. It is currently sat at 4.00%.
With three meetings to go between now and then (23rd March, 11th May, 22nd June), I suspect we will see a 0.25% increase at each meeting. However, it’s entirely possible that the BoE committee could push for a 0.50% rise in March, and 0.25% in May or June. We will soon find out.
Company Earnings
Here’s a list of the companies I’ll be covering next week:
- Nike (NKE) – 21st March
Let me know your thoughts on this week’s events, in the comments below!
