Wall Street Breakfast: Spotlight On Powell
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Federal Reserve policymakers have clearly telegraphed what they plan to do at today's FOMC meeting before the latest blackout period began on April 23. Officials are set to hike rates by 50 basis points for the first time in 22 years, after lifting the benchmark rate by a traditional 25 bps (to a range of 0.25%-0.50%) during the FOMC's last gathering in March. Chair Jerome Powell is also poised to announce plans for "quantitative tightening," or allowing the central bank's $9T balance sheet to run off at a pace of $95B per month, though outright sales of securities won't be ruled out for the future.
Commentary: The question isn't whether the Fed needs to be hawkish to combat inflation, it's "only a debate as to what the right hawkish approach is," wrote Evercore ISI's Krishna Guha and Peter Williams in a note to clients. "I think he [Powell] will say that asset sales are a tool that could be used in the future but remind us that the plan is to use interest rates as the primary policy tool; QT runs in the background and the path of rates will be adjusted as needed given QT," added Tim Duy, chief U.S. economist at SGH Macro. "Powell likely doesn't want to feed into any hopes of a 75bp hike, but if he lends any credence to that story [at the press conference], even accidentally, market participants will rush to price in 75bp for the June meeting."
Inflation has continued to gain steam since the Fed's tightening cycle began in March, with Russia's war in Ukraine pushing up energy and food prices, and China's severe COVID lockdowns further roiling the supply chain. Strength in the U.S. labor market also supports the expected larger-than-usual hike. On Tuesday, the U.S. Department of Labor said job openings in March reached 11.5M - the highest level since it started collecting the data in 2000 - as companies struggle to hold onto workers. That has led to surging employment costs and higher wages, or factors that can further inflame the inflation situation.
Go deeper: After underestimating the severity of price pressures, Powell is attempting to engineer a so-called soft landing, in which rates are raised high enough to keep the economy from overheating but not so much that it triggers a recession. "While some have argued that history stacks the odds against achieving this, there are three episodes - in 1965, 1984, and 1994 - where the Fed significantly raised rates without a downturn," the Fed Chair has previously said. "I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context - very little is straightforward in the current context." Stock markets have been hammered as the Fed embarks on its QT cycle, especially the tech sector, which saw the Nasdaq plunge 13.3% in April for its worst month since 2008. (56 comments)
The European Commission, the executive arm of the EU, has unveiled new sanctions on Russian energy, including a phase-out of crude oil imports within six months and refined products by the end of the year. Brent oil futures (CO1:COM) climbed as much as 5% to $109 a barrel on the news, while WTI crude futures (CL1:COM) advanced 4% to over $106/bbl. The EU also proposed that Sberbank, Russia's largest financial institution, and two other major banks be disconnected from the SWIFT international payment system, while "three big Russian state-owned broadcasters will be barred from EU airwaves."
Quote: "Let us be clear: it will not be easy," European Commission President Ursula von der Leyen said during a speech at the European Parliament. "Thus we maximize the pressure on Russia, while at the same time - and this is important - we minimize the collateral damage to us and our partners around the globe... because to help Ukraine we have to make sure that our economy remains strong."
The sanctions are aimed at denting one of Russia's most important sources of foreign earnings, but lucrative gas sales will stay intact for now. Moscow could also find other buyers looking to take advantage of the substantial discounts on its crude, like India and Turkey. "It might be just a game of musical chairs," declared Viktor Katona, an oil analyst at Kpler, while Rystad Energy even sees the Kremlin's total oil revenue rising 45% to $180B in 2022 as a rise in fuel prices counters any decline in production.
Exemptions: Von der Leyen didn't disclose any exclusions during her speech, but EU officials have privately confirmed that the commission's proposal includes flexibility for Slovakia and Hungary, which are both highly dependent on Russian energy. Additional time will be given to the two countries to phase out crude imports, likely until the end of 2023. While around 25% of Europe's oil is imported from Russia, there are big differences in the level of reliance among member nations (usually those closer to the Russian border are more dependent on its energy network). (13 comments)
Hope you didn't hold on to DiDi (DIDI) shares following last summer's hyped $4.4B IPO. The stock is down 5% to under $2 in premarket trade after the ride-hailing giant - once China's most celebrated startup - said it was under SEC investigation. In fact, shares are off 85% since its chaotic debut, which even prompted plans from DiDi in December to delist from the New York Stock Exchange to float in Hong Kong. Shareholders are set to vote on that decision later this month, but it may be suspended due to the latest developments.
The filing: "After our initial public offering in the United States, the SEC contacted us and made inquiries in relation to the offering. We are cooperating with the investigation, subject to strict compliance with applicable PRC laws and regulations. We cannot predict the timing, outcome or consequences of such an investigation."
Days after pricing its IPO at $14 per share, DiDi investors were shocked to find out that Chinese officials were probing the company for allegedly violating data privacy and national security laws. The authorities ended up blocking new users from downloading the DiDi app, suspending the internet giant from domestic stores. The move was part of a broad tech crackdown on China's internet companies, while American regulators have also chosen to apply stricter enforcement of Chinese companies that don't comply with U.S. auditing rules.
Other red flags? Wall Street underwriters including Goldman Sachs, Morgan Stanley and J.P. Morgan made about 2% on the total amount raised in DiDi's IPO, or around $88M when spread out between them. Language about the risks of doing business in China started on page 7 of the IPO prospectus, while regulatory and anti-monopoly warnings appeared on page 11. While some say the disclaimers were enough, others expected a certain amount of deep expertise or specifics about the regulatory environment. (10 comments)
Elon Musk is telling investors that after taking Twitter (TWTR) private, he could take it public again not too long after, according to WSJ. That's notable because investors and observers have tried to sort out Musk's motivations for buying the company - and looking for a public exit in three years closely resembles more profit-oriented private-equity deals. It also informs on his intentions for private investors, which Musk is courting to help with the substantial equity portion of the deal that is his responsibility.
Other reports: Sources over at Reuters say Musk is in talks over new financing for his $44B bid for the social media company, with an eye toward tying up less of his own wealth in the deal. Musk had committed to spending some $21B of his own cash for the deal - and banks agreed to offer $13B in loans secured against Twitter - but the lenders balked at offering more than that because of the company's limited cash flow. He has also secured a $12.5B margin loan secured against his Tesla (TSLA) stock, but is talking with big investment firms and high-net-worth individuals to perhaps trim the size of that loan.
"Twitter will always be free for casual users, but maybe a slight cost for commercial/government users," Musk tweeted overnight, suggesting a new revenue stream for the social network. "Ultimately, the downfall of the Freemasons was giving away their stonecutting services for nothing. Some revenue is better than none!"
Outlook: The world's richest person has said his offer to buy Twitter is not a way to "make money," but instead part of an effort to make the platform an inclusive arena for free speech. “Twitter has become sort of the de facto town square, so it’s really important that people have both the reality and the perception that they’re able to speak freely within the bounds of the law," Musk announced during an interview at the TED2022 conference. With all his outsized borrowing, the platform still has to make money, and is exploring changes to experimental subscription service Twitter Blue, the monetization of viral tweets, or even charging a fee for verified users or tweet embeds. (63 comments)
Today's Markets
In Asia, Japan closed. Hong Kong -1.1%. China closed. India -2.3%.
In Europe, at midday, London -0.5%. Paris -0.5%. Frankfurt -0.2%.
Futures at 6:20, Dow +0.4%. S&P +0.4%. Nasdaq +0.3%. Crude +3.6% to $106.25. Gold flat at $1870.30. Bitcoin +1.4% to $38,930.
Ten-year Treasury Yield unchanged at 2.95%
Today's Economic Calendar
Auto Sales
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
8:30 Goods and Services Trade
9:45 PMI Composite Final
10:00 ISM Service Index
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Chairman Press Conference
Companies reporting earnings today »
What else is happening...
Starbucks (SBUX) suspends outlook as lockdowns hit sales in China.
Airbnb (ABNB) pops, then drops, amid 'substantial' travel demand.
Highest since '08: Perfect storm lifts natural gas prices above $8.00.
Meta (FB) e-commerce efforts hit hurdles, with senior executives departing.
AMD (AMD) CEO says chipmaker reached a 'significant inflection point.'
SEC almost doubles size of unit dedicated to shield crypto investors.
Transocean (RIG) rips higher as drillship dayrates could top $400K.
Pfizer (PFE) keeps guidance intact, prepared to modify COVID vaccine.
Biogen (BIIB) begins search to replace CEO amid Aduhelm write-offs.
Expedia (EXPE), travel stocks slide after Hilton's (HLT) guidance disappoints.
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Comments (59)
Investment portfolio of holdings has been rebalanced for the worst yet to come forth.
DOW 30K likely and possibly much lower imo.Ciao friends.
Powell broke the global supply chain…?Powell unleashed the Pandemic….?Powell told Putin to invade Ukraine….?Powell jacked up the price of commodities and cut the global Oil supply…?Powell magically made the global deflationary environment we lived in the last four decades disappear…..?No one complained the last 13 years of QE that put $4T plus into the economy….?Hypocrites come in all sizes and shapes….?
Higher prices will continue to go higher, as inflation likely becomes hyperinflation, and recession will likely turn into a depression imo.
Markets will react accordingly, as markets do, and likely towards the downside as the pain throughout intensifies going forth.Ciao and enjoy the ride friends.
Dire straits for the markets and economies throughout friend.Ciao.
826
Pigs will fly first. Somebody tell him the economy is already weak if not in recession. If the second quarter GDP is microscopically positive does that mean we are not already in a recession?
Powell and the administration can spin all they want but Main street people know the truth.
