Morning Reads
- Prices Soaring
- Tightens Flows
- Franc Surges
- Fifth Time in a Row as Inflation Soars
- Powell Sets Path
- Six Takeaways
- Bear Markets and Recessions
- U.S. Retail Sales Declined
- Rising Interest Rates Could Cool Industrial Investment
- Private Equity Faces ‘Crisis of Value’
- Still Have a Long Way Down
- Robinhood’s Stock Is Now Worth Less Than Its Cash on Hand
- Ethereum Mining Is Going Away
- Inside a Corporate Culture War
- Bill Gates Says Crypto and NFTs Are a Sham
- Workers Don’t Feel Quite as Powerful as They Used To
- Cosmetics Maker Revlon Files For Chapter 11
Futures
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The Federal Reserve has implemented its largest interest rate hike since 1994, taking the threat of inflation seriously by intensifying its campaign against surging prices. Another 75 basis point hike - or a 50 bps move - is also in the cards for the meeting in July, according to Fed Chair Jerome Powell, who is just beginning to show his aggressive side. Stocks initially sold off on the news, before climbing into the close in somewhat of a relief rally, but the gains didn't hold as futures stumbled overnight: Dow -2.1%; S&P 500 -2.6%; Nasdaq -3.1%.
Cue the uncertainty: "We don't seek to put people out of work," Powell said at a press conference, adding that the central bank is not trying to induce a recession. "Of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability. It's not going to be easy, and it may well depend, of course, on events that are not under our control."
"The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is boosting prices for gasoline and food and is creating additional upward pressure on inflation," he continued, giving an example of outside pressures. While the war has definitely exacerbated the situation, the Consumer Price Index has been climbing rapidly since March 2021, which was a whole year before the Russian invasion. Powell himself also "retired" use of the word "transitory" last November, which was several months before the onset of the war and the severe sanctions that followed.
How will it affect the average American? Despite the largest rate hike in three decades, it will take some time for the higher borrowing costs to cool demand and make their way into the economy. Mortgage rates will continue to go up, as well as car loans and credit cards, making it much more expensive to borrow cash. The hikes also won't impact the supply side, which the Fed largely attributes to soaring gas and food costs. In terms of the stock market and retirement funds, things will largely depend on whether investors believe the Fed will be successful in pulling off a "soft landing," by stabilizing inflation without denting economic growth. (56 comments)
An interesting dynamic continues to play out in energy markets as Americans continue to feel pain at the pump. Who is to blame for the current situation? Why is it happening? And what could be done to counter record gas prices? In a letter to U.S. oil refiners on Wednesday, President Biden chastised the industry for making "well above normal" profit margins during a "time of war" and requested solutions to the ongoing oil refining crisis.
Quote: "I am prepared to use all tools at my disposal, as appropriate, to address barriers to providing Americans affordable, secure energy supply," he wrote. "The crunch that families are facing deserves immediate action. Your companies need to work with my administration to bring forward concrete, near-term solutions that address the crisis and respect the critical equities of energy workers and fence-line communities." Biden is not only looking for help from the domestic oil industry, but has confirmed a trip to once dubbed "pariah" Saudi Arabia next month to urge more production.
ExxonMobil (XOM) was among the seven refiners to receive the letter from the president and was quick to outline some solutions to the fuel crunch. "In the short term, the U.S. government could enact measures often used in emergencies following hurricanes or other supply disruptions - such as waivers of Jones Act provisions and some fuel specifications to increase supplies. Longer-term, the government can promote investment through clear and consistent policy that supports U.S. resource development, such as regular and predictable lease sales, as well as streamlined regulatory approval and support for infrastructure such as pipelines."
Go deeper: While the shale revolution has allowed the U.S. to move from the world's largest importer of oil to the world's largest producer, the same cannot be said for refining capacity. Some companies like Exxon have invested into the sector, while others are afraid, given that the payback period is around 10 years and there will likely be many more millions of vehicles on the road then that are electric. "Oil and gas companies that have listened to policymakers' calls for less investment in fossil fuels is one of the reasons for current globally tight energy supplies," added Patrick Pouyanne, CEO of TotalEnergies (TTE). (410 comments)
Over the past couple of months, Elon Musk has gone back and forth on an offer to buy Twitter (TWTR) for $44B. He most recently suggested that he could walk away from the deal due to being willfully misled on fake accounts (or an inability to secure financing), but in the meantime, he's on the hook for going through with the transaction. More details on where things stand, as well as his plans for the company, may be revealed today at an all-hands meeting with Twitter employees.
Snapshot: The world's richest person hasn't spoken directly with Twitter's workforce since he agreed to acquire the platform on April 25. In the meantime, employees have expressed mixed reactions to the bid, which will likely prompt some contentious questions today surrounding organizational structure, product direction and moderation policies. The all-hands meeting will be moderated by Leslie Berland, Twitter's chief marketing officer and head of people.
Other issues that are likely to come up - depending on which employee questions get answered - will be Musk's feelings about remote work (he recently told Tesla (TSLA) and SpaceX (SPACE) employees to spend 40 hours a week in the office). There is also uncertainty about whether his plans include layoffs, what the revenue mix should look like, and, of course, whether former President Donald Trump will be allowed back on the platform. He was banned in early 2021, following the Jan. 6 attack on the U.S. Capitol.
Market movement: Skepticism about the Twitter deal being completed has led to a hefty spread between TWTR's stock price and the deal price. Twitter closed Wednesday at $37.99, though Musk is committed to buy the company at $54.20 per share, or a 43% premium. (23 comments)
While the U.S. is not yet in a recession, it sure seems like companies are preparing for one. Just this week, Coinbase (COIN) announced it would lay off 18% of its staff, Redfin (RDFN) said it would reduce headcount by 6% and Spotify (SPOT) disclosed yesterday that it would slow hiring by 25%. Other companies that have recently announced layoffs include Carvana (CVNA), Peloton (PTON), PayPal (PYPL) and Tesla (TSLA).
Quote: "We don't know where the labor market is headed yet," said Andrew Stettner, an unemployment expert at The Century Foundation. "But clearly many things are flashing warning signs."
Forced firings this year are likely to contrast with 2021, which has been subsequently coined "The Great Resignation." In fact, 48M people voluntarily left their jobs in 2021, marking an annual record. As layoffs take place in many industries and sectors, workers may soon feel a bigger need for job security, especially after remarks from Jerome Powell which implied the Fed would sacrifice a low unemployment number for the sake of price stability.
As mentioned previously on WSB: Several high-profile names have also issued warnings about the U.S. economy in recent weeks. JPMorgan's (JPM) Jamie Dimon referred to it as a "hurricane" on the horizon, Tesla's Elon Musk said he had a "super bad feeling" and BlackRock's (BLK) Larry Fink predicted that the spikes in inflation will last for years. The OECD and World Bank have also slashed their GDP growth estimates, citing vulnerabilities and persistent supply side disturbances that were preceded by a protracted period of highly accommodative monetary policy. (1 comment)
Today's Markets
In Asia, Japan +0.4%. Hong Kong -2.2%. China -0.6%. India -2%.
In Europe, at midday, London -2.1%. Paris -2%. Frankfurt -2.6%.
Futures at 6:20, Dow -2.1%. S&P -2.6%. Nasdaq -3.3%. Crude -0.2% to $115.06. Gold +0.6% to $1830.70. Bitcoin +4.9% to $21,209.
Ten-year Treasury Yield +5 bps to 3.45%
Today's Economic Calendar
8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Housing Starts and Permits
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
Companies reporting earnings today »
What else is happening...
ECB set to create 'new crisis tool' to combat fragmenting yields.
Storms prompt Abbott (ABT) to pause baby formula production again.
Michael Saylor: I can't come up with a better investment idea than Bitcoin.
Cryptos, NFTs fully based on greater fool theory - Bill Gates.
EU annuls Qualcomm's (QCOM) antitrust fine on Apple (AAPL) payments.
Boeing (BA) takes off after China Southern (ZNH) 737 MAX test flight.
Data likely shows Teslas (TSLA) on Autopilot crash more than rivals.
Netflix (NFLX) orders new 'Squid Game' reality competition show.
McDonald's (MCD) settles old tax case in France for $1.3B.
European natural gas prices up 40%, as Russia turns down the dials.