Federal Reserve Chairman Jerome Powell may say it’s still too early for him to talk about interest-rate cuts. But almost everybody else is.
After the most aggressive campaign of hikes in a generation, people are starting to mention that the first reductions usually don’t come that long after the last increase. As Louis-Vincent Gave from Gavekal Research put it in a note Tuesday: “Rate hikes are like tequila shots: one never knows when one’s had enough until one’s had too much.”
With today’s latest inflation data, markets have yet to price in big moves down—the two-year Treasury yield is still around 5%, compared with a federal-funds rate range of 5.25% to 5.5%. The CME FedWatch Tool shows traders pricing in the first cut around the middle of next year.
But strategists at investment banks are tweaking their forecasts.
UBS
sees the fed-funds rate dropping below 3% by the end of next year. Goldman Sachs, which has been more optimistic about the economy than most, doesn’t see rates dropping that far—but it still sees them getting below 4%.
A recession next year, if one comes, may force the Fed’s hand. Stock investors will have already noticed that earnings outlooks look more downbeat.
Yet there are reasons to think the Fed may start cutting even without a deeper economic slump. The rise in longer-term bond yields in recent months is making financial conditions tighter. And falling inflation rates are also making past hikes more severe by raising real interest rates.
So keeping rates steady now has a similar effect to that of raising them in the past. To avoid hurting growth too much, the Fed will probably have to consider cutting in the near future.
—Brian Swint
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Biden-Xi Meeting Set for Wednesday at APEC Forum
President Joe Biden and China’s President Xi Jinping will meet Wednesday at the Asia-Pacific Economic Cooperation forum in San Francisco. The White House said they would talk about keeping open communication lines and managing competition, along with issues in the U.S.-China relationship.
- Xi will meet with U.S. business leaders during his visit this week, Bloomberg reported. That would come as U.S. companies are reassessing their exposure to China in light of its slowing growth and increased state intervention in the economy.
- Treasury Secretary Janet Yellen and China’s Vice Premier Li Hefeng agreed to increase communications and emphasized that the two economies weren’t seeking to decouple, but to work together for economic growth and financial stability, and tackle climate change and debt issues in low-income economies.
- Yellen raised concern about China’s recent export controls on graphite and other critical minerals, according to a readout of the meeting. She emphasized that the U.S. is taking a narrow approach as it looks at restrictions on China related to national-security concerns.
-
Boeing
was the highest mover in the
Dow Jones Industrial Average
on Monday after Bloomberg reported that China was considering a commitment to again buy its 737 Max jetliners, potentially reversing a yearslong freeze on sales. Boeing couldn’t be reached for comment.
What’s Next: Beacon Research’s Owen Tedford said he would be looking for where the administration is headed next. Beyond tariff review, areas to watch include renewed U.S. scrutiny of video-sharing app TikTok, possible restrictions on self-driving vehicle technology, and more limits on chip technology.
—Reshma Kapadia and Janet H. Cho
***
Lawmakers Are Still Wrangling Over Stopgap Government Funding
House members were still wrangling over Speaker Mike Johnson’s two-step stopgap government funding plan, with some Democrats appearing to soften their stance on supporting the bill, while some Republicans said they couldn’t vote in favor of it. The deadline to approve an extension is Friday.
- While House Rules Committee members were debating details of the plan, Democratic Leader Hakeem Jeffries told colleagues that House Democrats are carefully evaluating Johnson’s proposal, but “remain concerned” about splitting the resolution into two pieces.
- Democrats want government funding to stay at current fiscal 2023 levels. The proposal would fund government operations in two stages into early 2024 but doesn’t include aid for Israel or Ukraine.
- With Monday evening’s swearing-in of newly elected Rep. Gabe Amo (D., R.I.), House Republicans cannot afford to lose more than three votes on the bill.
- Senate Majority Leader Chuck Schumer said Monday that the Senate would not vote to advance their version of a stopgap bill as they would wait to see what the House does with its own proposal first. He said Johnson’s plan is “far from perfect,” but refrains from making “steep cuts.”
What’s Next: Several Republican members have already said they would vote against Johnson’s funding plan, meaning he would need Democratic support to approve it.
—Janet H. Cho
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Apple Supplier Foxconn Has Good News For Tech
Foxconn, the iPhone supplier formally known as Hon Hai Precision Industry, has reported a surprise increase in third-quarter profits. It could be a positive sign for Apple investors after the tech giant earlier this month disappointed with its prediction for fourth-quarter sales.
- The Taiwan-based company said profits rose 11% in the period from a year earlier, confounding expectations for a loss. Top-line revenue nevertheless slipped, and Foxconn said fourth-quarter earnings will probably also decline, but would be better than previously expected.
- It said there had been an improvement in operating-profit margin to 2.99% over the quarter—up from the 2.37% reported in the second quarter.
- The results come ahead of China’s leader Xi Jinping meeting with U.S. President Joe Biden in San Francisco Wednesday. Chinese officials want Biden to commit to opposing Taiwan’s formal independence, The Wall Street Journal reported citing people briefed on the preparations.
What’s Next: Foxconn’s earnings have traditionally been closely tied to Apple’s, and both companies have made moves to diversify supply chains amid tensions between the U.S. and China. This week’s meeting between Xi and Biden may relieve some of the pressure.
—Brian Swint
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Wall Street Bonus Season Is Coming. It May Be Ugly.
For many Wall Street workers, this year’s bonuses are going to feel like coal in their stockings. The year-end payouts are expected to be flat to down across many functions, including deal advisory, bond underwriting, trading and sales, and hedge funds, according to the latest forecast by Johnson Associates.
- The biggest bonus cuts are expected to come in the investment banking advisory business, where they are expected to fall 15% to 25%, Johnson Associates said. Bonuses for regional commercial and retail bankers are projected to decline 10% to 20%.
- On the other hand, workers in equity underwriting could see a bump of 5% to 15% over last year, though still below historical levels, and workers at global retail and commercial banks could get as much as a 10% boost in their bonuses.
- In October, New York state Comptroller Thomas DiNapoli said Wall Street’s profit in the first half of 2023 was down 4% from the same time in 2022, adding it was likely that the overall bonus pool would be smaller than 2022, when bonuses were down 21% from the prior year.
-
The forecast comes as several firms look to cut workers, given the slowdown in business.
Citigroup
is considering another round of cuts, CNBC reported last week, and
Goldman Sachs
has also been culling staff.
What’s Next: Alan Johnson, founder of the New York compensation consulting firm, expects a challenging 2024 as Wall Street tries to fire up its deal-making engines. Head count and staffing models are being evaluated with consideration for lower-than-expected voluntary turnover, Johnson said.
—Liz Moyer
***
Thanksgiving Travel Expected to Surge Despite Possible Shutdown
Thanksgiving travel is expected to be the third-busiest for the period since the AAA started tracking it, with an estimated 55.4 million people planning to go 50 miles or more from home over the long weekend. A possible federal government shutdown could toss an added bit of turmoil into the season.
- The number of projected travelers would be 2.3% higher than last year and just below 2019 levels, AAA said. Most people plan to drive, but 4.7 million people plan to fly, up 6.6% from last year and the highest number since 2005.
- The projected 1.55 million people taking cruises, buses or trains would be up nearly 11% from last year, and Thanksgiving cruises are mostly sold out, AAA said. Domestic cruise prices are averaging $1,507, down 12% from 2022.
- Average domestic airfare is up 5% from last year, while fares on international flights are down 5.7%. The average price for a domestic hotel room stay is $598, down 12%, and the average price of a domestic car rental is down 20%.
- Emirates airline said it placed an order for 95 planes from Boeing at a value of about $52 billion, the first big deal announced as the Dubai Airshow kicks off. Low-cost carrier FlyDubai announced an $11 billion order for 30 wide-body aircraft.
What’s Next: A potential government shutdown could force air-traffic controllers and Transportation Safety Administration employees to work without pay during one of the busiest travel weekends for air travel, potentially adding to airport congestion and security checkpoint delays.
—Janet H. Cho
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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