Wall Street Breakfast: No Blinking

Sep. 22, 2022 7:20 AM ET21 Comments
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Federal Reserve Chairman Powell Holds A News Conference On Interest Rate Policy

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No blinking

Expectations for a soft landing have gone out the window following the latest FOMC meeting on Wednesday. The question, now, appears to be how hard of a hard landing will there be. Things couldn't have been more hawkish with the Fed's "dot plot" showing a benchmark interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (up from 3.25% and 3.8%, respectively). Lower growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate going up to 4.4% and leading to job losses of more than 1M (assuming no change in the size of the U.S. workforce).

Transcript highlights: "We have got to get inflation behind us. I wish there were a painless way to do that. There isn't," Fed Chair Jerome Powell declared. "Reducing inflation is likely to require a sustained period of below-trend growth and there will very likely be some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. We will keep at it until we're confident the job is done."

While a small relief rally took place after the Fed hiked rates by a whopping 75 basis points - instead of a colossal full percentage point - the sentiment did not last. The major stock averages closed the session down 1.7%, as the 10-year Treasury yield spiked 7 bps to 3.64% and the rate on the shorter-dated 2-year popped 15 bps to 4.11%. Futures weren't any less volatile overnight, whipsawing between gains of 0.7% and losses of nearly 2%, as investors fret over the state of the economy and the Fed willing to tolerate a painful recession as a key trade-off to keep a lid on inflation.

Case in point: "The deceleration in housing prices that we're seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals. And, you know, that's a good thing," Powell continued. "For the longer term, what we need is supply and demand to get better aligned, so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again. And I think we - so we probably in the housing market have to go through a correction to get back to that place." (10 comments)

A defensive consumer

Nearly every sector suffered a downturn following the Fed meeting, but whatever strength there was left appeared in defensive consumer staple industry. In fact, twelve out of the top twenty gainers in the S&P 500 were part of the sector, including names like Kellogg (K), Campbell Soup (CPB), Kraft Heinz (KHC), Hormel Foods (HRL), Conagra Brands (CAG) and J.M. Smucker (SJM). The stocks tend to do better than the broader market during recessions or periods of high volatility.

In first place: Cheerios-maker General Mills (GIS) drove the momentum, finishing the session up 5.7% after a strong beat-and-raise earnings report. Sales rose 4% to $4.72B, in line with Wall Street estimates, helped by lower than expected volume elasticities, strength with the North American retail business, and higher prices, which added 15 percentage points to the top line. Adjusted earnings also came in at $1.11 per share, beating consensus expectations by $0.11.

"Significant inflation and reduced consumer spending power has led to an increase in at-home eating and other value-seeking behaviors," noted CEO Jeff Harmening. "We continue to deliver strong performance in a highly volatile operating environment."

Guidance for FY2023: Organic net sales are expected to increase 6%-7%, compared to a previous estimate of 4%-5%, while EPS is forecast to grow +2% to +5% vs. a prior expectation for 0% to +3%. General Mills also sees costs rising as much as 15% due to increases for raw materials, labor, freight and fuel. Food prices in the U.S. climbed 13.5% Y/Y in August, according to the Labor Department, marking the fastest pace since March 1979. (4 comments)

Winding down

It's the end of the line for Kittyhawk, the secretive flying car company that has been bankrolled by Google (GOOG, GOOGL) co-founder Larry Page. It's not clear what caused the startup's demise, but reports over the past few years suggested executive infighting over direction, as well as technical issues, safety problems and unresolved questions about the practical use of its battery-powered aircraft. "We're still working on the details of what's next," the company wrote in a LinkedIn blog post, dashing dreams of a future where users can hail flying taxis like an Uber (UBER).

Backdrop: Kittyhawk was founded as Zee Aero in 2010, when Page hired Sebastian Thrun - known as the godfather of self-driving cars - to start working on electric vertical takeoff and landing aircraft (eVTOL). Kittyhawk became the parent company of Zee Aero in 2016, and later showcased an eVTOL called the Flyer in 2017 (that could hold one person and fly up to 20 miles), but the model was later retired. Over the next two years, Kittyhawk unveiled the Cora and the Heaviside, but what caught investors' eyes was its flying taxi partnership with Boeing (NYSE:BA) in a joint venture called Wisk Aero.

"Kittyhawk's decision to cease operations does not change Boeing's commitment to Wisk [or] affect operations or other activities in any way," according to a company spokesperson. "We are proud to be a founding member of Wisk Aero and are excited to see the work they are doing to drive innovation and sustainability through the future of electric air travel." Boeing poured another $450M into Wisk during its last funding round in January and the startup "remains in a strong financial and strategic position."

Go deeper: Besides developing the technology to enable flying taxis, there are other big challenges that will need to be solved before the industry can take flight. Among them are integrating eVTOL systems into existing air-traffic control and finding enough places for the aircraft to take off and land (vertiports?). "These locations have to be nearby, where the nodes of traffic exist," explained Erick Corona, Wisk's Director of Product Management. (6 comments)

Yen intervention

Japan has intervened in the foreign exchange market for the first time since the late '90s, in an attempt to shore up the battered yen after it breached the key ¥145 level. The currency buying bumped the rate back to ¥140 per dollar, though many caution that the move will only provide a temporary reprieve and may be unsuccessful in the long term. Japanese Finance Minister Shunichi Suzuki also didn't disclose how much the government had spent buying the yen and whether other countries had consented to the intervention.

What's happening? Ultra-dovish policies in Japan are keeping the yen under pressure, leading to a strong wave of constant dollar buying in the forex markets. The yen (along with the euro) are by far the most traded currencies against the dollar, so when both are weak, it makes it harder for anything else to rival the greenback. The Bank of Japan also wants to ride out recent price pressures by sticking to its yield curve control policies, hoping that the current levels of inflation aren't sustainable due to hiccups in the post-COVID recovery.

"I believe we won't be introducing a rate hike anytime soon," Bank of Japan Governor Haruhiko Kuroda told a news conference. "We have decided to continue the monetary easing after thoroughly discussing what the most effective monetary policy is by analyzing the Japanese economy, price trends and future development in depth."

Outlook: Japan is growing increasingly isolated on the global monetary policy stage, with most major economies pulling their short-term rates out of negative territory. The Swiss National Bank even raised its policy rate by 75 basis points today, ending years of minus rates that hoped to keep an appreciation of the franc in check. (4 comments)

Today's Markets

In Asia, Japan -0.6%. Hong Kong -1.6%. China -0.3%. India -0.6%.
In Europe, at midday, London -0.2%. Paris -0.7%. Frankfurt -0.5%.
Futures at 6:30, Dow +0.1%. S&P flat. Nasdaq -0.1%. Crude +0.5% to $83.37. Gold flat at $1675. Bitcoin +1.3% to $19,227.
Ten-year Treasury Yield +2 bps to 3.54%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Current Account
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
4:30 PM Fed Balance Sheet

Companies reporting earnings today »

What else is happening...

Tightening cycle: Bank of England boosts rates by 50 basis points.

Warner Music (WMG) names ex-YouTube business chief as next CEO.

U.S. asking rents climbed to record highs in August, growth moderates.

KB Home (KBH) homebuilding revenue guidance trails consensus.

Meta (META) cutting staff with plans to reduce costs by at least 10%.

New goal: Salesforce (CRM) sets $50B revenue target for 2026.

Trump SPAC (DWAC) threatens to sue SEC over delayed deal.

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