Markets Are Confident the Fed’s Done on Rates. Why That’s Dangerous.

Any one of those things might move the needle for the Fed in a normal month. But according to the
CME
FedWatch tool, there’s a 98% chance of a second-consecutive pause—up from a 73% chance of a pause a month ago.

It’s easy to think the most aggressive rate-hike campaign in a generation is over. That’s pretty much what the market says—CME has roughly 60% odds that rates remain unchanged through March of next year.

Fed Chairman Jerome Powell sealed expectations by saying last week the central bank wouldn’t need to raise overnight rates further to continue to get the benefit of higher, longer-term rates from bond yields.

But Powell also made the point that the struggle to get inflation back down isn’t over yet. Inflation is still too high, and it’s not clear how much of the past tightening has yet to fully be felt. Add to that the Hamas-Israel conflict in the Middle East, with the potential to spark an energy crisis and send inflation sharply higher, and the risks are even greater.

A tight consensus about the Fed outlook can be a dangerous thing. Investors should still be ready for surprises.

—Brian Swint

*** Join Barron’s senior managing editor Lauren R. Rublin and deputy editor Ben Levisohn today at noon when they discuss the outlook for financial markets, industry sectors, and individual stocks. Sign up here.

***

Tech Earnings This Week: Microsoft, Alphabet,
Meta,
and Amazon

Four of the Magnificent Seven tech stocks report earnings this week:
Microsoft
and
Alphabet
on Tuesday,
Meta Platforms
on Wednesday, and
Amazon
on Thursday. Analysts expect
Meta
and Amazon to lift earnings growth amid overall expectations that third-quarter profit from S&P 500 companies slipped 0.4%.

• The S&P 500 has risen 11% this year on a total-return basis through Friday’s close. Without the seven tech companies—the four reporting this week plus
  Apple,

  Nvidia,
  and
  Tesla
  —that return would be 0.6%, according to S&P Dow Jones Indices.

• The seven stocks accounted for 17% of S&P 500 per-share earnings in 2022, and Goldman Sachs analysts see that share growing to 24% by 2025. The stocks are 30% of the S&P 500’s market value, up from 22% in 2022, according to Dow Jones Market Data.
• Google parent Alphabet faces a bigger antitrust battle with the government, but analysts expect decent search-driven ad revenue and a better showing from YouTube. Some analysts expect Meta’s ad sales to recover. Microsoft has closed its deal to buy videogame maker Activision Blizzard.
• Analysts are anticipating Amazon’s forecasts on holiday spending, updates on its cloud business, and comments on the FTC’s lawsuit, which accused Amazon of exploiting its monopoly power while raising prices and making service worse. Analysts expect minimal financial impact on the e-commerce company.

What’s Next: Chip maker Nvidia, reporting on Nov. 21, is expected to be the largest contributor to third-quarter earnings growth for the entire S&P 500, FactSet Senior Earnings Analyst John Butters said. Without Nvidia the S&P 500’s blended earnings would decline to -1.8% from -0.4%, he said.

—Janet H. Cho

***

Chevron
to Buy
Hess
for $53 Billion in Stock

Chevron said Monday it has agreed to buy fellow oil company Hess in an all-stock deal valued at $53 billion.

• Chevron said Hess shareholders would receive 1.025 Chevron shares in exchange for each of their own shares. Hess stock rose early Monday, while shares in Chevron pointed lower.
• Chevron said that alongside the deal it expects to recommend an 8% increase to its first-quarter dividend per share to $1.63. It also intends to increase share repurchases by $2.5 billion to the top end of its guidance range of $20 billion a year, if oil prices remain strong.
• Earlier this month, Exxon Mobil confirmed a deal to buy Pioneer Natural Resources for $64.5 billion, including debt, in an all-stock transaction. Hess has projects in the U.S. and overseas, including a 30% stake in a consortium focused on offshore projects in Guyana, where it works with Exxon Mobil.

What’s Next: The acquisition is another oil megadeal and the latest sign of consolidation in an oil-and-gas industry. Companies are flush with cash and oil prices are elevated—there could be more deals to come.

—Adam Clark

***

General Motors, Ford Earnings Will Include Updates on UAW Strike

When
General Motors
reports earnings Tuesday, and
Ford Motor
reports on Thursday, investors will be eager for updates on the United Auto Workers’ strike that has been going since Sept. 15. UAW leaders didn’t expand the strike last week, which is also targeting Chrysler-parent
Stellantis.

• About 33,000 UAW-represented workers out of 146,000 are on strike, and auto makers have laid off thousands more, saying the strikes have snarled production. Deutsche Bank estimates the strike has prevented production of about 145,000 vehicles, The Wall Street Journal reported.
• Deutsche Bank estimates the strike has cost GM and Ford around $766 million each in operating profit, and cut Stellantis’ bottom line by around $384 million. Stellantis is a more global company with more business outside the U.S. than the other two.
• General Motors’ latest offer includes wage increases of about 25%, including inflation protection, over four years, and improvements in retirement benefits, workers’ progression to higher pay grades, profit-sharing, and time off. But there’s no mention if workers at EV battery plants are included in the new contract.
• UAW President Shawn Fain said all three auto makers are offering wage increases of about 23% over the life of their contracts, but added they all had more to give. He said the union is aiming for “absolutely every dollar we can.”

What’s Next: In other labor action, the unions representing Hollywood actors, who marked their 100th day on strike on Saturday, said they would resume negotiations with studio and streaming company executives on Tuesday. They are seeking higher wages, benefits, and protections against artificial intelligence.

—Al Root and Janet H. Cho

***

House Lawmakers Brace for Third Round of Speaker Candidates

House Republicans return today to consider nine candidates for the vacant speaker’s office as chaos on Capitol Hill stretched into a third week. Several GOP lawmakers told the Sunday morning talk shows that the divisiveness about filling the speaker role was an embarrassment.

• Former Speaker California Republican Kevin McCarthy is backing the Majority Whip, Rep. Tom Emmer (R., Minn.). “We need to get him elected this week and move on,” McCarthy told NBC News’ Meet the Press. It wasn’t clear how much support any one candidate had.
• Other candidates include Rep. Kevin Hern of Oklahoma, Rep. Byron Donalds of Florida, Rep. Mike Johnson of Louisiana, Rep. Jack Bergman of Michigan, Rep. Austin Scott of Georgia, Rep Dan Meuser of Pennsylvania, Rep. Gary Palmer of Alabama, and Rep. Pete Sessions of Texas.
• President Joe Biden delivered to Congress a request for $105 billion in military aid for Israel and Ukraine as lawmakers are divided. The proposal, which the House is unlikely to take up until it elects a speaker, includes funds for border security.
• Ohio Republican Rep. Mike Turner told CNN’s State of the Union that it will be hard for any speaker candidate to get 217 votes. And Texas Republican Rep. Michael McCaul told ABC News’ This Week that working with Democrats had been discussed, adding he doesn’t know how it plays out.

What’s Next: House Republicans plan a candidate forum for this evening and plan to start the election process on Tuesday with a party vote to name a nominee.

—Liz Moyer

***

Economic Data This Week: GDP and Personal Consumption Expenditures

Economic data this week include a reading on third-quarter gross domestic product and Friday’s report on the personal consumption expenditures index for September, a key inflation reading the Federal Reserve uses when it deliberates its next policy steps. A WSJ survey showed recession expectations are lower.

• A recent economist poll by The Wall Street Journal said optimism that a recession can be avoided has grown since July, fueled by a continued cooling in inflation, a strong labor market, and better-than-expected economic growth.
• On Thursday, the preliminary reading on third-quarter GDP is expected to show a rise of 3.7% from the second quarter and 2.4% from the same time last year. The increase would outpace the second-quarter GDP gain from the first quarter.
• On Friday, the PCE for September is expected to be up 3.4% for the year and 0.3% for the month, according to analysts tracked by FactSet. The Core PCE, which excludes food and fuel prices, is expected to rise 3.7% for the year, slower than August’s pace.
• The federal government’s 2023 budget deficit was $1.7 trillion up, or 23%, from one year ago as revenue and spending both fell. Revenue was down 9%, the Treasury Department said, and spending dropped 2% in the fiscal year that ended in September.

What’s Next: The 2023 fiscal deficit is about 6.3% of GDP and was the third highest behind 2020 and 2021. President Joe Biden has proposed tax increases some Republicans and Democrats oppose, and Republicans want spending cuts the White House won’t accept.

—Liz Moyer

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MarketWatch Wants to Hear From you.

The rising yields on U.S. government debt, which sent the 10-year Treasury rate near 5% last week, a level not seen in 16 years, has posed a challenging environment for stocks.

So for investors, what comes next?

A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to thebarronsdaily@barrons.com.

***

—Newsletter edited by Liz Moyer, Patrick O’Donnell, Callum Keown