TheChek News Flow

DAX:

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SDAX:

* Aumann Raised to Buy at Citi; PT 18.50 euros

* Equinor Raised to Neutral at JPMorgan; PT 350 kroner

* E.On Raised to Buy at Goldman; PT 12.50 euros

* Frontier Developments Raised to Hold at Numis; PT 1,450 pence

* Hammerson Raised to Hold at SocGen; PT 21.80 pence

>>> Down

* Colruyt Cut to Reduce at HSBC; PT 25 euros

* Eurofins Scientific Cut to Hold at SocGen; PT 80.40 euros

>>> Initiation

>>> Call

* Aumann Upgraded to Buy at Citi on Upside From EV Order Growth

Nikkei -1.38% Hang Seng +1.07% CSI +0.67% Shanghai +0.28% Shenzen +0.33%

Eur$ 1.0525 CNH 6.7050 CNY 6.7015 GBP 1.2309 CHF 0.9693 RUB 58.1879 TRY 17.3060 WIT$ 116.88 -0.60% Gold 1,845.87 -0.62% BTC 20,630 -0.22% ETH 1,091.85 -0.58%

S&P +0.66% Nasdaq +0.78% EuroStoxx +0.58% FTSE +0.49% Dax +0.63% SMI +0.50%

Macro :

- BofA Quant Indicator Shows Soft Economic Landing Still Possible

- Lagarde Tells Ministers ECB Plans for Limit on Bond Spreads

- Bridgewater Builds $5.7 Billion Bet Against European Stocks

- JPMorgan Strategists Say Stocks Imply 85% Chance of US Recession

Keep an eye on :

- ADP FP : Paris Airports CEO Says He’s Confident of Avoiding July Strike

- AF FP : Air France Pilots Call For Strike as Labor Strife Escalates

- AJB LN : AJ Bell Founder Andy Bell to Step Down as CEO

- AZA SS : Avanza to Cancel Potential Safello Crypto Asset Trading

- BA/ LN : BAE Wins $699m US Army Contract for Supercomputing Center

- CLDN LN : Caledonia Readies £400M Auction of Investment Manager 7IM: Sky

- ENEL IM : Enel Sells Russian Unit as Gas Standoff With Europe Intensifies

- ENEL IM : Enel Launches EU15m Sustainability-Linked Share Buyback

- ERG IM : IFM to Invest Over EU1b in Italy Energy Producer ERG

- EL FP : EssilorLuxottica to Buy Back as Many as 2.5M Shares

- ICP LN : TPG Close to Buy Doc Generici From ICG, Il Sole Reports

- META US : Meta Seeks TikTok, Telegram, WeChat Data for Antitrust Defense

- ORP FP : Orpea Recommends Voting Against Ex-CEO’s Variable Compensation

- BPSO IM : Popolare Sondrio to Cut NPL Ratio to 3.9% in New Plan: MF

- SAN SM : Santander Nominates Insider Grisi as CEO, Replacing Alvarez

- SAS SS : Hedge Funds Target SAS to Make Airline Most Shorted Nordic Stock

- SNAP US : Snap Is Working on Paid Subscription Snapchat Plus: Verge

- TTE FP : Chevron Eyes $2.5 Billion Investments in Low-Carbon Hydrogen

- TWTR US : Elon Musk Says He’s Not Hung Up on Potential Twitter CEO Role

- UMG NA : UMG Halves Stake of China Ops Tencent Can Buy Under Option Pact

- VOW GY : VW’s Audi Confirms Suit Against Nio Over Model Designations

- VOW GY : Volkswagen to Pay $80 Million Over Skewed Porsche Fuel Tests

Is the Fed kicking an economy that’s already down?

Yesterday markets sent an unambiguous signal. Stocks fell hard across the board, with the exception of a handful of consumer staples and healthcare companies. Bond prices rose (and yields fell). Translation: “There is going to be a recession! The Fed just told us that it is going to cause one to get inflation under control!”

But take a step back. What is the state of the US economy? Is the Fed going to tighten financial conditions in an economy that is already weakening — threatening not just a recession, but a deep one? What is the range of possible outcomes?

We know a few important, if somewhat stale, facts. The labour market is very strong; there are twice as many job openings as job seekers. As of March or April, personal consumption, industrial production and business investment were growing in real, inflation-adjusted terms.

At the same time, however, there are lots of anecdotal, company- or industry-specific examples of slowing growth, giving the impression that cracks are forming in the economic facade.

We also know that sentiment is terrible. Surveys of consumers and businesses are showing ugly results, because rapid price increases scare everyone to death, as they well should. But thus far, this has not been having a noticeable effect on real activity. So let’s exclude survey data and look exclusively at activity.

What is actually happening?

First, the housing market is clearly slowing. With mortgage rates near 6 per cent and climbing, demand is getting smooshed. The Mortgage Bankers Association index of purchase mortgage applications is down a third from its peak in January. Sales of existing homes are declining, but not as fast as those of new homes, which have fallen off a cliff along with housing starts, as this chart from Pantheon Macroeconomics shows:

Outside of housing, activity measures are sending much more ambiguous messages. The May retail sales report, which showed a 0.3 per cent fall from April, caused a certain amount of hand-wringing about the impact of inflation on consumption. One competitor’s story was headlined “US retail sales declined in May as inflation stings consumers”. Excluding autos, though, sales were up 0.5 per cent in nominal month-over-month terms. And it is not clear if softening retail sales do not reflect the long-awaited rotation back towards services after a period of forced spending on goods. Consider this chart:

The dip in month-to-month sales growth (pink line) looks less ominous in the context of the extraordinary bolus of growth — more easily visible in the year-over-year data (blue line) — that we just passed through.

Spending on durable goods surged during the coronavirus pandemic, and remains far below its March 2021 peak. Meanwhile, services spending has been rising gradually, and will probably jump even more this summer as everyone goes on holiday, believes Evan Brown of UBS Asset Management. The rotation is clear in the real PCE quantity index, which measures how many goods and services consumers bought in a month:

In other words, we may not be looking at falling demand, but a shift on where demand is going.

So what about cars? Vehicle sales fell 12 per cent in May, but look how volatile the data are. The industry’s supply chain problems make underlying demand hard to decipher:

Finally, jobless claims are sending faint signs that the labour market, while still red-hot, is cooling slightly:

To judge by activity measures, the US economy is slowing, but the slowdown to date is slight and is concentrated in a few significant areas, primarily housing. The Fed’s sledgehammer — as we have described it — will land on a relatively strong economy, not one balanced on the edge of recession.

The much hoped-for “soft landing”, in which inflation abates without significantly higher unemployment, is all but ruled out. We think the likelihood of a recession, defined crudely as a few quarters of negative growth, is very high, given the Fed’s posture. The central bank is all but determined to make a recession happen, but its depth remains an open question.

At the same time, the range of possible economic outcomes remains wide. This is partly because, as we have seen above, demand appears so resilient. Supply will matter too. The Fed cannot count on supply relief, but it may come, and if it does, the possibility of a shallow downturn is much higher. The market is badly spooked, but the economic story is not yet written. (Armstrong & Wu)

Company needs to separate itself from CEO’s personal brand, letter to management says

Some employees of SpaceX wrote a letter raising concerns and frustration over Chief Executive Elon Musk’s recent public statements and behavior, describing them as a source of embarrassment and distraction.

In the letter, the employees requested that management at Space Exploration Technologies Corp., as the company is called formally, publicly address and condemn what was described as Mr. Musk’s “harmful Twitter behavior” in order to separate the company from his personal brand.

It couldn’t be determined how many employees signed the letter, which was addressed to SpaceX executives and requested a meeting with them within a month. SpaceX has around 12,000 employees, Mr. Musk said in a recent interview.

“As our CEO and most prominent spokesperson, Elon is seen as the face of SpaceX—every Tweet that Elon sends is a de facto public statement by the company,” the letter said.

Mr. Musk didn’t immediately respond to a request for comment about the employee letter. SpaceX also didn’t immediately respond to requests for comment. The Verge reported on the letter earlier.

The letter also said there is a gap between SpaceX’s stated values and its current systems and company culture. As an example, the letter pointed to what it said was unequal enforcement of SpaceX internal policies on employee conduct.

The note from employees also referred to recent allegations against Mr. Musk and his “public disparagement of the situation.”

The letter follows a published report last month about a sexual-misconduct allegation against Mr. Musk and a payment SpaceX was said to have made in 2018 related to the alleged incident. Mr. Musk has called the allegation “utterly untrue” on Twitter, and SpaceX President Gwynne Shotwell said in an email to staff that she personally believed the claims were false.

SpaceX has emerged as the leading rocket-launch company, handling human space flights for the National Aeronautics and Space Administration and private customers, while regularly putting its own satellites into orbit. The company, which recently raised almost $1.7 billion, listed almost 900 open positions on its website as of Thursday morning.

Mr. Musk, who separately serves as the chief executive of Tesla Inc., is also pursuing a takeover of Twitter Inc., and addressed employees at the social-media company Thursday.

The brewer uses various tools to manage inflation, including price increases, changes to containers and its pack sizes

Anheuser-Busch InBev SA/NV says some of its beverages are going to get pricier and come in variable sizes as the maker of Corona and Bud Light looks to catch up with inflation in the U.S. and elsewhere.

Leuven, Belgium-based AB InBev found that despite regular updates to its pricing, the company is lagging on cost increases in certain markets, including the U.S. and Brazil, as inflation accelerated since the beginning of the year.

“Overall, I feel inflation is a little bit higher than our view,” AB InBev Chief Financial Officer Fernando Tennenbaum said.

In the U.S., the consumer-price index stood at 8% in the first quarter, but AB InBev’s total net revenue per hectoliter of beer only increased 6.2%, illustrating the gap between the pace of inflation and the company’s ability to match it. (An hectoliter equals 100 liters.)

Another country where the brewer has been slow to adjust is Brazil, where the CPI rose 10.7% in the first quarter compared with a rise of 8.5% in total net revenue per hectoliter, the company said. Across AB InBev’s global brands, the CPI during that time period increased by 8.2% on a weighted average basis, while total net revenue per hectoliter of beer rose 7.8%.

AB InBev tracks its budget on a monthly basis and sets a one-year plan and reviews it at least quarterly. It uses various tools to manage inflation, including price increases, changes to its containers and its pack sizes.

“You can have different pack sizes with different price points for different occasions,” Mr. Tennenbaum said. AB InBev uses returnable packaging in Brazil and in other countries, which helps with bringing down costs, he added.

U.S. consumer inflation in May reached its highest level in more than four decades as rising energy and food prices pushed prices higher. The Labor Department last week said the CPI rose 8.6% in May from the same month a year ago, the highest reading since December 1981.

Mr. Tennenbaum declined to provide specifics on AB InBev’s pricing strategy. “Pricing is only one of the levers we have to manage cost inflation,” a spokeswoman said.

The brewer, which operates in about 50 countries around the world, also uses zero-based budgeting to keep costs under control. The tool forces managers to plan every budget from scratch, and is being used by many consumer-facing businesses. “It’s a mind-set,” Mr. Tennenbaum said.

AB InBev plans to stick to its outlook this year for 4% to 8% growth in earnings before interest, tax, depreciation and amortization.

“In good times, it’s great to be a beer company. In bad times, it’s very good as well,” Mr. Tennenbaum said.

The company’s first-quarter results were somewhat mixed. AB InBev recorded revenue of $13.23 billion for the first quarter, up 11.1% from the prior-year period.

Using normalized Ebitda—which isn’t an accounting measure under International Financial Reporting Standards—the company posted $4.48 billion for the quarter, up 7.4% from a year ago. Its profit, however, was $499 million, a 44% slide from a year ago.

AB InBev has a broad collection of brands at different price points, which will help with generating revenue even if the economy slows, analysts said.

“They have mainstream and premium beers,” said Laurent Grandet, a managing director and lead consumer staples analyst at Guggenheim Securities LLC, a financial services firm.

“If consumers go for cheaper beers, they have the breadth of the portfolio,” he said. Still, customers trading down could result in lower profits, he added.

In the U.S., brewers including AB InBev are limited in how much more they could charge, as consumers might turn to spirits or other products instead.

“The price of beer has been increasing over time, but there is not much more to increase,” Mr. Grandet said.

Air Force One: how Boeing’s prestige project became its albatross

Aerospace group reworked presidential aircraft after former president’s tweets, but then took $1.1bn in charges

Air Force One is a flying symbol of American power. But for its maker, the presidential aircraft is becoming an albatross.

Boeing has recorded more than $1.1bn in costs due to production delays for the two modified 747-800 jumbo jets, which were ordered to replace the 1980s-era versions currently used by the US president, including a $660mn charge in the first quarter of 2022. Since 2018 Boeing has recorded roughly $4.4bn in charges across an array of defence contracts, according to Financial Times calculations.

Company executives now acknowledge the trouble began when Donald Trump took to Twitter as US president-elect in 2016 to claim that Air Force One “costs are out of control”, vowing to “cancel order!”.

That pushed company executives into a new $3.9bn deal to build the aircraft, which even after a subsequent revision to $4.3bn was well below the original $5bn cost estimate.

The deal was “a very unique moment, a very unique negotiation, a very unique set of risks that Boeing probably shouldn’t have taken”, Dave Calhoun, chief executive since 2020, said during an April earnings call. “But we are where we are.”

Air Force One is not the only military aircraft programme facing cost overruns, however, suggesting Trump is not the sole culprit for Boeing’s woes.

The company’s $4.4bn in defence charges since 2018 span an array of defence contracts including the KC-46A refuelling tanker, the T-7A Red Hawk pilot trainer, the MQ-25 unmanned aircraft and the Starliner space capsule.

Like Air Force One, all are fixed-term development contracts, meaning that any cost overruns are Boeing’s to shoulder.

Calhoun, whose predecessor Dennis Muilenburg negotiated the Air Force One deal, has said fixed-price contracts have been disproportionately vulnerable to supply chain bottlenecks, personnel losses tied to Covid-19 and inflation. He has told investors that he “will have a very different philosophy with respect to fixed-price development”. 

He cannot immediately change course. Boeing’s defence arm, which brings in more revenue than its more visible commercial aircraft business, generated 68 per cent of its 2021 sales from fixed-price contracts.

The risks of fixed-price contracts are particularly acute for Air Force One. The aircraft are highly customised, with a 4,000 square feet interior that features a presidential suite; cabins for senior staff, Secret Service personnel and press; a medical suite equipped to be an operating theatre; and sophisticated electronics and communications equipment. The planes must also be able to refuel in mid-air.

Originally expected to be delivered in 2024, the aircraft are now forecast to be completed at the end of 2026, according to the Air Force. There was “obviously quite a significant delay”, Andrew Hunter, the Air Force’s top civilian acquisition official, told Congress in May.

While taxpayers will not be on the hook for additional costs for the new planes, Hunter said the Air Force would request additional funding “to sustain the existing aircraft” which were delivered in 1990. The Air Current, an industry publication, has reported quiet dissatisfaction with Boeing among Pentagon officials.

“We continue to make steady progress on the [Air Force One] programme, while navigating through some challenges,” Boeing said. “It’s an honour to be entrusted with this responsibility and we take particular pride in this work. Our focus is on delivering two exceptional Air Force One aeroplanes for the country.”

The setbacks for Air Force One are part of a company-wide spate of production delays. Deliveries of non-military planes such as the wide-body 777X and 787 Dreamliner have been held back, while the 737 Max has a backlog of orders after two fatal crashes led to its grounding.

But Air Force One remains a special case. Requests from the Air Force can change over time. Working on the project requires a high security clearance, meaning the pool of available staff is smaller than for a typical defence contract. Much was outside of Boeing’s control when the pandemic hit and workers got sick, said Nicolas Chaillan, a former Air Force chief software officer who helped oversee the Air Force One programme.

Boeing also terminated subcontractor GDC Technics, which was hired to install the jets’ interiors, in April 2021 for “failure to meet contractual obligations”. This accounted for about one year of delays. GDC Technics filed for bankruptcy protection soon after, and the companies have sued one another.

The Air Force has not blamed Boeing. In a statement, it said the delays were due to “impacts from the Covid-19 pandemic, interiors supplier transition, manpower limitations, wiring design timelines, and test execution rates”.

Prestige projects like Air Force One are generally not expected to generate a profit — their value is an enhanced reputation for the producing company. Defence contractors regularly submit bids below actual costs needed to complete a contract to secure the tender, Chaillan said.

Delays were “very common” for defence contracts, said Cynthia Cook, director of the Defense-Industrial Initiatives Group at the Center for International and Strategic Studies. But Boeing has had more delays than its defence contractor rivals, said Cai von Rumohr, an analyst at Cowen.

In the past 15 years, Boeing has received $324.5bn in Pentagon contracts, second only to Lockheed Martin, which won $547.7bn, according to the CSIS. But even though Lockheed contracts were worth far more, Boeing has taken more charges in recent years: since 2018, Lockheed has reported about $400mn in charges, 11 times less than Boeing.

“I think they did feel a sense of desperation” after losing “lots” of money on the KC-46A tanker and getting beat on “other, bigger contracts” such as the Pentagon’s two most important fighter programmes, the F-22 and F-35, which both went to Lockheed, said von Rumohr. The Air Force One bid became “a must win”. 

Japanese central bank sees inflation as transitory even as Federal Reserve and others raise rates

The Bank of Japan has renewed its pledge to keep bond yields at zero, widening its policy gap with the central banks of other major economies that are raising interest rates to tame surging inflation.

The BoJ’s decision to stick to its ultra-loose monetary policy exacerbates a global divergence in yields after the Federal Reserve raised its main interest rate by a historic 0.75 percentage points this week, prompting Switzerland and the UK to also raise rates.

The BoJ on Friday kept overnight interest rates at minus 0.1 per cent. It said it would conduct daily purchases of 10-year bonds at a yield of 0.25 per cent, showing no willingness to let bonds trade in a wider band.

Japan’s core consumer prices, which exclude volatile food prices, have risen at their fastest pace in seven years due to soaring commodity prices. But the BoJ has long argued that underlying demand in the economy remains weak.

The central bank has greater confidence than its counterparts in Europe and the US that the current bout of inflation will be transitory and that it needs to continue supporting the economy with monetary easing measures.

“There remain extremely high uncertainties for Japan’s economy,” the BoJ said in a statement, citing Covid-19 disruptions, the war in Ukraine and rising import costs of commodities and other goods.

“In this situation, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices.”

The decision triggered a sharp dip in the yen to ¥134.28 against the dollar, extending what has been a phase of exceptionally volatile trading.

Ahead of the announcement, some analysts had forecast that BoJ governor Haruhiko Kuroda might seek to address the recent plunge in the yen with a small tweak in policy. When that did not happen, traders in Tokyo said that the yen may have further to fall.

Benjamin Shatil, forex strategist at JPMorgan in Tokyo, said the decision showed the BoJ “digging its heels in once again”. But he noted that the bank appeared to harden its tone slightly by saying it would pay due attention to developments in financial and foreign exchange markets.

The implication for the yen, he said, is that a move into the high ¥130s against the dollar is now in plan sight, and it could even hit ¥140.

“With the BoJ apparently impervious to the wave of hawkish global central bank capitulation, unconcerned about broadening imported price pressures in Japan, and apparently willing to purchase the entire stock of [10-year Japanese government bonds] if necessary to preserve yield curve control, pain for the yen looks set to go from acute to chronic,” said Shatil.

The BoJ’s decision comes as trading in JGBs continued to mount a direct challenge to the central bank’s resolve, in particular to its commitment to maintain yield curve control by keeping yields on the benchmark 10-year note within 0.25 per cent either side of zero.

After that line was repeatedly breached this week, the BoJ stepped in with massive purchases of JGBs on top of the standard offer of unlimited daily buying that it uses to reassure the market of its commitment to the policy.

On Friday morning, the 10-year JGB yield touched 0.265 per cent, marking its highest level since January 2016.

Trade body overcomes national differences to reach deal on jabs, as well as in digital products and fishing

The World Trade Organization has struck deals on a partial patent waiver for Covid-19 vaccines, and made agreements in several other fields of global contention, after a tense six-day ministerial meeting that has renewed some faith in the battered multilateral trading system.

Trade ministers temporarily extended duty-free trade in digital products such as films, computer software and data, and agreed to curb some fishing subsidies and to limit food export restrictions.

The WTO’s 164 members also agreed to update the organisation’s working practices and try to reinvigorate its dispute-settlement system, which has been hamstrung for years by US non-cooperation.

Piyush Goyal, India’s commerce minister, whom many countries privately accused of holding the talks hostage with demands for exceptions, told reporters it was “one of the most successful ministerials the world has seen in a long time”. The decisions made were “a signal that the multilateral order is not broken”, he said.

Valdis Dombrovskis, European trade commissioner, said the WTO was on a “positive path”, adding: “The WTO can provide a response to the acute issues and challenges we are facing and is willing to reform itself to bring its rule book into the 21st century.”

But the meeting in Geneva postponed several contentious decisions for the next gathering in December 2023.

The meeting was scheduled to finish on Wednesday but continued into Friday morning after two all-night sessions. Talks to reduce agricultural subsidies were put aside but countries agreed to prohibit restrictions on the sale of their food to the World Food Programme as the organisation grapples with food shortages caused by Russia’s invasion of Ukraine.

The waiver of the WTO’s “Trips” agreement that governs intellectual property was opposed until Thursday by the UK, which said it would undermine pharmaceutical research. But the deal will let governments compel companies to share their vaccine recipes for the next five years.

The agreement fell short of a demand by India and South Africa to exempt all Covid-related vaccines, treatments and diagnostics, though there will be a review in six months. Instead, governments can issue compulsory licences to domestic manufacturers but must compensate the patent holders.

Campaigners were disappointed at the result. “It is hard to imagine anything with fewer benefits than this, as a response to a massive global health emergency,” said James Love, director of non-governmental organisation Knowledge Ecology International.

India, South Africa, Sri Lanka, Pakistan and Indonesia had resisted extending the digital customs moratorium, saying it cheated developing countries out of billions of dollars in revenues. But small businesses in many poor countries said they relied on foreign software products to remain competitive, according to trade officials.

The extension of the moratorium until the next ministerial meeting followed heavy lobbying by business groups.

“Business and consumers everywhere already face a food insecurity crisis and an energy crisis. Thanks to this WTO outcome, we have narrowly prevented a data crisis,” said Jane Drake-Brockman of the Australian Services Roundtable.

But business reaction overall was muted.

“It is clear that there’s a tremendous need for a vibrant WTO that is able to tackle shared global priorities, but this ministerial laid bare the increasingly severe limits to meaningful outcomes that require unanimous agreement,” said Jake Colvin, president of the Washington-based National Foreign Trade Council.

The curb on fishing subsidies is the first time the WTO has regulated trade on sustainability grounds alone after talks to do so had dragged on for 21 years. Countries will have to limit subsidies for illegal, unreported and unregulated fishing; overfishing; and financial aid to vessels fishing in unregulated international waters.

Fishing subsidies total about $35bn worldwide, of which $22bn directly contributes to overfishing, according to the Pew Charitable Trusts. The UN says the number of stocks fished at biologically unsustainable levels increased from 10 per cent in 1974 to 34.2 per cent in 2017.

The agreements were a triumph for WTO director-general Ngozi Okonjo-Iweala. “The package of agreements you have reached will make a difference to the lives of people around the world,” she told delegates at the closing ceremony. “The outcomes demonstrate that the WTO is, in fact, capable of responding to emergencies of our time.”