Oct 22, 2022
VOT Research Desk
Meeting of the Bank of Canada on October 26
As rate increases for the Bank of Canada approach their peak, Given the Federal Reserve’s direction of travel, it appears implausible. Following the 100bps increase in July, the Bank of Canada increased interest rates by an additional 75 basis points.
The evidence that wages are beginning to increase in reaction to the recent inflation surge is already mounting, although the headline CPI does seem to be decreasing, with headline CPI falling to 7% in August from the June heights of 8.1%.
This means that instead of the usual bumper rises we’ve been accustomed to, we may receive 50bps at this week’s meeting. The dynamics appear to be driven by a greater emphasis on core prices, which, although being lower, are considerably stickier at a rate of about 5.7%.
The ECB met on October 27.
The main question was whether the ECB will increase rates by 75 basis points or 50 basis points at its most recent meeting in September. The bank’s updated inflation predictions, which were revised higher to 8.1% in 2022 and 5.5% in 2023, were the driving force behind the decision to hike rates by 75 basis points.
Given that German inflation is already well above 10% and the EU headline rate is likewise in the double digits with core prices at 4.8% and set to rise, these objectives are now horribly out of date.
Despite acknowledging that the GDP is expected to decline very severely, an increasing number of ECB policymakers have been vocal about the necessity for considerably higher rates. The ECB boosted its projection for 2022 to 3.1% while lowering its predictions for 2023 and 2024 to 0.9% and 1.9%, respectively.
Given the energy backdrop, these GDP predictions look incredibly optimistic,which may indicate some cognitive dissonance on the part of ECB policymakers. Although we’ve heard from a number of governing council members that the need to front load rises and raise the headline rate back to 3%, the ECB stated that it expected to continue hiking in upcoming sessions, albeit perhaps at a slower pace than the Federal Reserve.
Given that rates are now at 1.25%, this would be a significant change. There are still many open issues regarding how the TPI programme could operate, and if the ECB makes another 75bps this week, the impact on nations like Italy may be severe.
A further issue is that strong tightening is the wrong treatment at a time when demand is collapsing and Germany’s economy, the largest in the union, is expected to enter a recession by year’s end.
Bank of Japan – 28 October
With the Japanese yen about to hit 32-year lows versus the US dollar, the Bank of Japan and its seeming inability to change its own monetary policy settings are still in the spotlight.
The yen initially strengthened after the first round of intervention, but further weakening into 150 and 160 now appears more plausible unless we see some form of reversal from the Japanese central bank.
Given that we are now at 3%, an 8-year high, and there is little evidence that price pressures are easing, the Bank of Japan’s CPI prediction is likely to be increased from its current 2.3%.
Meta Platforms Q3 (October 22–26)
Seemed to have a shockingly poor year for share prices, with the shares down more than 60% and close to levels last seen in late 2018. It had a disastrous start to its financial year because of the significant decline in February’s statistics.
After a drop in daily and monthly active users, as well as a fall in Facebook’s Q1 revenue forecast to between $27 and $29 billion, the stock plunged.
This was due to the many Apple privacy reforms beginning to negatively impact revenue. While earnings in Q2 came in at $2.46 cents per share, they were somewhat below estimates. Revenues in Q2 did marginally rise to $28.82 billion.
There were a variety of active users daily active users came in at 1.97 billion, slightly above forecasts, but monthly active users totaled 2.93 billion. The Q3 projection was revised downward to $26–28.5 billion, far less than what the markets had anticipated. By luring people away from Instagram, services like TikTok provide another problem for Facebook.
With operational expenses anticipated to be between $85 billion and $88 billion, Meta is also dealing with growing costs as its personnel has increased by over 30% from a year ago.
With its investment there showing little indications of paying off in terms of revenues in the short term, the focus on the Metaverse is also eating into the company’s profitability. In Q2, its Meta Reality Labs division lost $2.8 billion while only making $452 million in revenue. The estimated profit per share is $1.91c.
Q3 of the alphabet: 22-25/10
With Alphabet shares at 18-month lows, there is growing concern that the slowdown in global markets will result in a decline in advertising revenues, along with the fact that all social media companies and their ad targeting efforts have been negatively impacted by the recent data collection changes made by Apple iOS.
Total revenue in Q2 was $7.34 billion shy of expectations, or $69.7 billion overall. Search was more resilient; ad sales came in at $56.3 billion, which was in line with expectations, but profitability lagged at $1.21 cents per share.
The fact that the figures held up was reassuring because, as the market leader, a significant miss here would have been alarming.
However, that hasn’t stopped the shares from declining over the last
Amazon Q3 22 – 27 October –
When Amazon released its Q2 financial results back in July, the major focus was on whether it would exhibit any symptoms of Walmart-like issues with declining margins and growing expenses. We are aware of the increased prices since Amazon spent $445 billion last year, up from $363 billion in 2020.
With sales slightly above forecasts at $121.1 billion for the second quarter, it appears that the move to boost Prime fees did not have the adverse impact that many people had anticipated.
Revenues increased by 14% to $8.7 billion as Amazon heavily invested in new TV programming, including sports and the critically panned miniseries “The Rings of Power,” a prequel to The Lord of the Rings. On the other side, the business announced its second straight quarterly loss, this time as a result of a further $3.9 billion write-down of its Rivian holding. Due to a $7.6 billion write down on the exact same shareholding, it reported a $3.8 billion net loss in Q1.
Other positive aspects included AWS reporting a record-breaking quarter of $19.74 billion and operating margins of 2.7%, which were far higher than the 1.65% expected.
Operating expenses came in at $117.9 billion, which was below estimates, and Amazon cut over 100k employees during the quarter, primarily via attrition in its warehouse network, providing more indication that costs were beginning to level out. A few weeks ago, there was some speculation that Amazon would be interested in the video game developer Electronic Arts.
These speculations were soon refuted, but in situations like this, there is rarely fire without smoke. Amazon increased its sales forecast for the third quarter to $125 billion to $130 billion, and earnings are anticipated to be $0.24 per share, assuming no more Rivian write-downs.
Unilever Q3: 22–27 October-
Unilever shares have risen steadily since the debacle earlier this year when CEO Alan Jope thought it would be a good idea to try to offer £50 billion for Glaxo’s consumer health care unit, which ultimately went public in July at a far lower price.
Jope was fortunate that GSK rejected that offer, but he won’t be around much longer to take advantage of the current increase in share price that has occurred since the price of the stock hit a five-year low in March.
Following recent share price difficulties, several investors called for a review of the company’s brands when it was reported last month that Jope would retire at the end of the year The corporation reported a 14.9% increase in Q2 revenues to €29.6 billion, partly as a result of its capacity to hike pricing. Cost increases have affected margins to some extent, although the impact has been rather small, with underlying margins falling 180 bps to 17% in H1.
The company increased its full-year sales growth guidance to above the previous range of 4.5% to 6.5% after Q2 showed strong gains across all three business areas, Home Care, Foods and Refreshment, and Beauty and Personal Care.
Underlying sales during the first half increased by 8.1%, while underlying earnings per share increased by 1%. The more important issue is if the optimism displayed at the end.
