AI, Cost Cuts Drive Most US Layoffs In October Since 2003 | The Pulse 11/6

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Key Concepts

• US Supreme Court and Tariffs: The Supreme Court's potential limitations on President Trump's global tariff authority.
• Veolia's Performance and Strategy: Strong financial results, international growth drivers, M&A activity, and focus on resource recycling.
• AI and Job Displacement: The impact of Artificial Intelligence on job cuts in the US and potential future effects in Europe.
• Bank of England Rate Decision: Anticipation of interest rates remaining on hold, the role of the budget, and inflation outlook.
• Qualcomm and ARM Earnings: Analysis of tech company performance and outlook in the context of AI.
• Novonesis's Growth and Targets: Updated guidance, focus on innovation, and long-term strategic goals.
• Rheinmetall's Defense Orders: Increased demand for defense products and production capacity.
• AstraZeneca's Financials and US Focus: Profit growth driven by key drugs and a strategic shift towards the US market.
• COP30 Climate Summit: Discussions on climate action, finance, and international cooperation.
• Reform UK's Financial Policy Proposals: Plans for shaking up financial regulation, taxation, and pensions.

US Supreme Court and Global Tariffs

The U.S. Supreme Court appears skeptical of President Trump's broad global tariffs, with justices suggesting he may have overstepped his authority. During a hearing, the Court hinted at imposing significant limits on Trump's economic policies. Analysts and betting markets suggest that the scenario of Trump having free rein with reciprocal tariffs is likely off the table. The key questions now revolve around the timeline for a decision (weeks or months) and the potential economic disruptions in Q4 and Q1 of next year. Market reactions show a "wait-and-see" approach with some selling off, indicating uncertainty about whether the Trump administration will find alternative ways to implement tariffs. Even if the Supreme Court rules against Trump, tariffs may simply take a different, slower, and more methodical form.

Veolia's Strong Performance and Future Outlook

Veolia reported strong results, confirming its guidance and expecting 2025 EBITDA to be at the upper end of its range. The company highlighted the significant contribution of its international operations, which are driving both topline and bottom-line growth at double the average pace. Veolia invested $2.3 billion in M&A since the beginning of the year, primarily outside Europe and in technology-focused "boosters."

Resource Recycling and Sustainability: Veolia is actively involved in mining waste, including old batteries, to recover critical metals like lithium, cobalt, and nickel. This initiative, exemplified by a new facility in France, addresses the growing demand for sustained and secured resources while removing pollutants. This demand underpins Veolia's strong future earnings.

Currency and Political Impact: Veolia's multi-local business model insulates it from currency depreciation (e.g., US Dollar, Argentine Peso) as there are no significant transaction effects. The company has increased its margins despite currency fluctuations. Similarly, the French political situation and potential new taxes do not significantly impact Veolia's results, as 80% of its business is international, and its operations are highly localized, serving cities and industries directly. Investment decisions are based on future growth potential, not political circumstances.

AI and Job Displacement in the US

U.S. companies announced the most job cuts in October in over two decades, with 153,000 layoffs, nearly tripling the number from the same month last year. This surge is driven by the technology and warehousing sectors and is the highest for any October since 2003, a period marked by the disruptive advent of cell phones. Andrew Childs, Chief Revenue Officer, noted that this trend is comparable to past technological disruptions.

Bank of England's Rate Decision and Economic Outlook

The Bank of England is expected to keep interest rates on hold at 4% today, adopting a cautious approach amidst elevated inflation and an upcoming crucial budget. While a surprise cut is possible, the consensus expectation is for a hold, potentially with a close vote (6-3). Economists from Barclays and Goldman Sachs are among those anticipating a cut, but the Monetary Policy Committee (MPC) is likely to proceed carefully, especially with the budget announcement on November 26th.

Inflation and Growth Forecasts: The MPC's updated forecasts are considered somewhat moot due to the budget. Expectations are for a downgrade in inflation forecasts for this year and next, with growth and unemployment forecasts remaining similar. Governor Andrew Bailey's comments on the Chancellor's budget will be closely watched, especially regarding the impact of 4% interest rates on business borrowing.

Key Focus for the Press Conference: Beyond the rate decision, the main question will be when the Bank will cut rates again and how long the hold will last. The characterization of the recent 3.8% CPI inflation figure, which was lower than forecasts but still double the BOE's target, will be crucial. A dovish communication or a rate cut could lead to continued outperformance for gilts.

Goldman Sachs's Perspective: Goldman Sachs believes a rate cut is more likely due to softer recent data on inflation, wages, and growth, which are running below August projections. They also anticipate a contractionary budget. However, they acknowledge that a hold is possible due to the desire for more data and budget details. The decision is expected to be closer than market prices or consensus suggest.

Budget Expectations: The budget is expected to address a significant shortfall (around £30 billion) through tax increases, likely non-inflationary ones. The budget is anticipated to be contractionary, slowing growth, and potentially helping to reduce inflation, especially if there's relief on energy taxes.

Inflation Downtrend: While inflation levels are high, significant progress is expected in the coming months, with food inflation showing a notable decrease. Rent inflation and pay growth are also showing signs of cooling. Goldman Sachs forecasts significant cooling in inflation over the next three to six months, leading to more Bank of England rate cuts.

Financial Market Variables: While energy prices and the yield curve have moved, the most significant changes relative to August are downside surprises in services inflation and pay growth. These factors are expected to put downward pressure on near-term forecasts for both growth and inflation. The key question is whether this is enough for Governor Bailey to vote for a cut.

Budget Tax Proposals: Likely tax increases include extending the freeze on income tax rates (estimated at £10 billion), gambling taxes, and tax avoidance measures. Covering the remaining shortfall could involve a series of smaller changes (council tax, pensions) or a larger shift like raising income tax, which has a broader tax base but might conflict with election manifestos. The timing of these tax increases (quick kick-in vs. backloaded) will be important for growth and the Bank's decisions.

AI and Job Displacement in Europe

While the AI revolution is prompting significant job cuts in the US, a direct link to job losses in Europe is viewed with skepticism. AI adoption and job displacement are expected to be a slower process in Europe compared to the US. Current evidence in Europe points more towards AI-related investment supporting growth, as flagged by the ECB. Labor market effects are anticipated to take longer to materialize.

Commerce Bank's Outlook and Takeover Bid

Commerce Bank raised its outlook for full-year lending income after reporting third-quarter profits that missed estimates. The CEO is under pressure to demonstrate the sustainability of her strategy of prioritizing profitability and shareholder payouts while fending off Unicredit's takeover bid. The company reported a record operating result for the first nine months, driven by lending growth (30% in corporates) and commission income.

Marvell Technology and AI Hardware

A Bloomberg scoop revealed that a US takeover of Marvell Technology was considered earlier this year, which would have been the semiconductor industry's largest deal. The billionaire founder had been studying Marvell as a potential target for years as part of his strategy to bet on hardware benefiting from the AI boom.

Novonesis's Guidance Update and Growth Strategy

Novonesis shares jumped after updating its full-year revenue guidance. The company is in a "good place of comfort" with strong nine-month results, showing 8% profitable growth driven by volume and price increases. Growth is observed across all segments and geographies (12% internationally). Innovation is a key driver, with over 20% of revenue from products less than five years old. Synergies from integration are also contributing.

2030 Targets: Novonesis updated its 2030 targets: 6-8% organic sales growth (ambitious but achievable) and a 39% EBITDA margin (described as ambitious and bold). This commitment to volume growth and enabling value for customers, supported by continued investment, underpins these targets.

Vegan Products and Emerging Food Trends: The demand for healthier food options is broader than just plant-based or vegan products, encompassing a desire for healthiness without compromising taste or cost. Enzymes and cultures enable customers to produce high-quality goods with improved palatability and competitiveness. This includes solutions for higher protein content, clean labels, replacing unwanted ingredients, and reducing sugar content without sacrificing taste. Emerging trends include gut health and additional functional features in food products.

Rheinmetall's Defense Orders and Expansion

Rheinmetall reported a slightly lower operating margin in the past nine months but is preparing for significantly delayed orders from Germany and other NATO countries. The company has strong, trustful relationships with American companies like Lockheed and is in discussions with Raytheon. Rheinmetall aims to capture 40-50% of the German defense budget and 25-30% of the European NATO budget. The company sees no significant obstacles to expanding its business faster, with permissions being granted for production lines.

AstraZeneca's Profit Growth and US Focus

AstraZeneca's profit rose more than anticipated last quarter, driven by sales of its blockbuster cancer and diabetes drugs. The company reiterated its guidance for the year and is on track to meet its $18 billion revenue target by 2030. This strong performance is part of a transformation towards a more global company with a strong US focus, particularly on cancer drugs. A newer drug significantly exceeded revenue estimates, indicating future growth potential.

US-UK Relationship and Strategy: 40% of AstraZeneca's revenue in the quarter came from the United States, exceeding other geographies. The company has a company-wide push towards the US, including a significant investment plan and a change in its ADR listing to ordinary shares to access US investors. This shift could lead to a potential revenue loss for the UK due to stamp duty on trading. While the UK remains its corporate headquarters, AstraZeneca does not see it as an investment geography for early-stage drug development, which is crucial for the UK's future in the pharmaceutical sector.

COP30 Climate Summit in Brazil

World leaders are gathering for COP30 in Brazil to advance progress on climate change, despite concerns about multilateral cooperation. While official negotiations begin on Monday, heads of state are delivering messages of solidarity and commitment to addressing global warming and clean energy. Key topics include the role of the circular economy and tackling the climate crisis.

Challenges and Sticking Points: Finance remains a major issue, with the challenge of delivering the pledged $1.3 trillion annually to developing countries. Friction is also expected over unilateral trade actions, such as the EU's carbon border adjustment mechanism.

Notable Absences and Attendee Mix: Major polluters like India (Narendra Modi), China (Xi Jinping), and the US (Donald Trump, who has scorned climate action) will not be represented at the leaders' summit. Attendance is expected to be around 60 heads of state, lower than in previous years. However, numerous European leaders, including Ursula von der Leyen, Olaf Scholz, and Emmanuel Macron, will be present. US mayors and governors, including California Governor Gavin Newsom, will attend to emphasize the US commitment to climate action and its economic opportunities.

Reform UK's Financial Policy Proposals

The Deputy Leader of Reform UK, a party with five Members of Parliament that has led national polls, outlined plans to shake up financial regulation, taxation, and pensions to boost Britain's economy. The party proposes transforming 30,000 pages of regulation into 100 pages of "pro-actionary" regulation.

Qualcomm and ARM Earnings Analysis

Both ARM and Qualcomm beat expectations in their reported quarters and provided better-than-expected outlooks. However, the market reaction differed. While Qualcomm showed encouraging progress, investors sought a stronger signal about future demand. ARM's efforts to expand its scope and breadth were seen as paying dividends, with the company going further in its guidance.

Apple's Siri and Google Partnership: Apple is reportedly nearing a deal with Google to pay for Siri's AI capabilities. This is seen as a significant upgrade and a potential end to Apple's AI struggles, aiming to close the gap with competitors. A partnership with Google is considered the right path for Apple.

Jensen Huang's China Statement: Jensen Huang's statement that China will be the US in the AI race is interpreted as a CEO's motivation to ensure a platform that provides sufficient runway for progress, especially given friction in the US regarding data centers, power, and model training.

Novonesis's Growth and Innovation

Novonesis is experiencing strong growth, with 8% profitable growth in the first nine months, driven by volume and price. International growth is at 12%, and over 20% of revenue comes from products launched in the last five years. The company's 2030 targets include 6-8% organic sales growth and a 39% EBITDA margin, which are considered ambitious. The company is focusing on evolving consumer demand for healthiness, taste, and cost-effectiveness, leveraging enzymes and cultures for products like high-protein yogurt and sugar reduction solutions.

Rheinmetall's Defense Business

Rheinmetall is experiencing strong demand for its defense products, with significant orders expected from Germany and other NATO countries. The company has robust relationships with US defense contractors and aims to capture a substantial portion of European defense budgets. Expansion is proceeding without significant roadblocks, with permissions for new production lines being granted.

AstraZeneca's Financial Performance and US Strategy

AstraZeneca reported strong quarterly results, exceeding profit expectations and maintaining its full-year guidance. The company's strategic focus on cancer and diabetes drugs, particularly in the US market, is driving revenue growth. The US now accounts for 40% of its revenue. AstraZeneca's shift to ordinary shares in the US aims to attract more investment, though it may impact UK stamp duty revenue.

COP30 Climate Summit and Global Cooperation

The COP30 summit in Brazil is a critical gathering for world leaders to address climate change and advance clean energy initiatives. Despite growing concerns about the erosion of the 1.5-degree Celsius target, leaders are expected to highlight the economic benefits of climate action, such as job creation. Key challenges include securing climate finance for developing nations and potential friction over trade mechanisms like the EU's carbon border adjustment mechanism. The attendance of major polluters is notably low, but European leaders and US state/city representatives are present to emphasize continued commitment.

Bank of England Rate Decision and Pound Outlook

The Bank of England is widely expected to hold interest rates at 4% today, though a close vote is anticipated. The upcoming budget is a significant factor, with expectations of a contractionary fiscal policy. While a rate cut is possible, the Bank may hold to see more convincing evidence of inflation slowing, as it remains double the target. The pound is expected to trend sideways until budget contours are known, with its earlier surge attributed more to investors adding risk premium to the dollar than to pound strength.

Conclusion

The transcript covers a range of critical economic and geopolitical developments. The U.S. Supreme Court's potential curb on presidential tariffs introduces significant uncertainty for businesses and investors. Veolia demonstrates resilience and strategic foresight in its international growth and sustainability initiatives. The accelerating impact of AI on job markets, particularly in the US, is a growing concern, with potential future implications for Europe. The Bank of England's cautious approach to interest rates, influenced by inflation and an upcoming budget, highlights the delicate balance of economic management. Tech earnings from Qualcomm and ARM reveal differing market perceptions of future demand, while Novonesis showcases strong growth driven by innovation and evolving consumer trends. Rheinmetall's defense business is booming due to geopolitical shifts, and AstraZeneca's strategic pivot to the US underscores the importance of that market. The COP30 summit faces challenges in securing climate finance and maintaining global cooperation, while Reform UK proposes radical changes to the UK's financial landscape. The pound's outlook remains tied to domestic economic policy and global risk sentiment.