Stocks tumbled Tuesday aftera slew of economic data stoked fears about the US economy’s cloudy outlook and further interest rate hikes from the Federal Reserve.
The benchmark S&P 500 index slid 1.2%, on track for its lowest close since June. The Dow Jones Industrial Average fell 416 points, or 1.2%, on pace for its biggest one-day drop since March; and the Nasdaq Composite lost 1.5%.
The S&P 500 is hovering around the threshold that it passed to enter bull market territory earlier this summer, which represents a climb of more than 20% off its most recent low last October.
Housing data released Tuesday morning showed that new home sales fell 8.7% in August from July, as mortgage rates edged above 7% to the highest levels in decades.
At the same time, US home prices climbed to a record high in July, marking the sixth straight month of increases as a tight supply of homes continues to drive up prices, according to the latest Case-Shiller home prices index.
“The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer,” said Bill Adams, chief economist at Comerica Bank. “The Fed cannot afford to look past house prices’ influence on the cost of living.”
Investors have been on edge since the Fed last week indicated it could hike interest rates once more this year and delay rate cuts for longer than expected. That sent yields soaring to their highest level in decades, as investors recalibrate their expectations for how long rates will stay higher.
Oil prices gained on Tuesday after paring back their recent gains earlier. West Texas Intermediate crude futures, the US benchmark, rose to roughly $90 a barrel. Brent crude, the international benchmark, climbed to $94 a barrel.
JPMorgan Chase CEO Jamie Dimon said Tuesday in an interview with the Times of India that he is preparing the bank’s clients for a 7% interest rate scenario, further spooking investors.
The possibility of a government shutdown also looms over Wall Street as the fiscal year’s end on September 30 fast approaches without any spending deal.
Moody’s warned Monday that such an event could be negative for America’s credit rating, which already saw a downgrade from Fitch earlier this year after the federal government narrowly avoided breaching the debt ceiling.
Student loan payments are due in October for the first time in three-plus years – but for the next 12 months, borrowers will be able to skip payments without facing the harsh financial consequences of defaulting on their loans.
The Biden administration is providing what it’s called an “on-ramp period” until September 30, 2024. During that time, a borrower won’t be reported as being in default to the national credit rating agencies, which can damage a person’s credit score.
Think of it as a grace period for missed payments. But interest will still accrue, so borrowers aren’t off the hook entirely.
Here’s what borrowers need toknow:
Any federal student loan borrower who was eligible for the pandemic-related payment pause, which took effect in March 2020, is eligible for the “on-ramp” period. That includes borrowers with federal Direct Loans, Federal Family Education Loans and Perkins Loans held by the Department of Education.
Borrowers don’t need to apply for the benefit.
Normally, a federal student loan becomes delinquent the first day after a payment is missed. Loan servicers will report the delinquency to the three national credit bureaus if a payment is not made within 90 days.
A loan goes into default after a borrower fails to make a payment for at least270 days, or about nine months, which can result in further financial consequences.
A default can further damage your credit score, making it harder to buy a car or house. It could take years to establish good credit again. Borrowers could also see their federal tax refund or even a portion of their paycheck withheld.
Once in default, the borrower can no longer receive deferment or forbearance and would lose eligibility for additional federal student aid. At that point, the loan holder can also take the borrower to court.
Because the pandemic payment pause has ended, interest restarted accruing on September 1 after interest rates were effectively set to 0% for three-plus years.
That means if a borrower misses a payment now, he or shecould end up owing more debtover time due to interest.
As interest builds up, a borrower’s loan servicer may also increase monthly payment amounts to ensure the debt is paid off on time. (This won’t happen to borrowers enrolled in income-driven plans, which calculate payments based on income and family size.)
And unlike during the pause, a missed payment means that a borrower will miss out on a month’s worth of credit toward student loan forgiveness under certain repayment plans.
For borrowers enrolled in the Public Service Loan Forgiveness program, for example, each month during the pause still counted toward the 120 monthly payments required to be eligible for debt forgiveness.
Before missing a payment, it might be worth considering switching into an income-driven repayment plan that could lower monthly payments.
A new income-driven repayment plan launched this summer, called SAVE (Saving on a Valuable Education), offers the most generous terms and will likely offer the smallest monthly payment for lower-income borrowers.
Under SAVE, a single borrower earning $32,800 or less or a borrower with a family of four earning $67,500 or less will see their payments set at $0.
Borrowers can apply for a new repayment plan whenever they want, for free, but should allow at least four weeks for the change to take effect.
Borrowers who fell into default before the pandemic pause started in March 2020 can apply for the Department of Education’s “Fresh Start” program.
If borrowers use Fresh Start to get out of default, their loans will automatically be transferred from the Department of Education’s Default Resolution Group to a loan servicer and returned to an “in repayment” status, and the default will be removed from their credit report.
To claim these benefits, log in to myeddebt.ed.gov or call 800-621-3115. The process should take about 10 minutes, according to the Department of Education.
US retail sales picked in August, boosted by higher gas prices, as spending on other items grew modestly.
Retail sales, which are adjusted for seasonal swings but not inflation, rose 0.6% in August, the Commerce Department reported Thursday. That’s a slightly faster pace than July’s revised 0.5% gain, and marks the fifth straight month of growth. It’s also well above economists’ expectation of a 0.2% increase.
The increase was largely driven by spending at gas stations, which advanced 5.2% last month. Spiking oil prices due to OPEC+ production cuts, strong demand and disruption from a deadly flood in Libya have pushed up prices at the pump. The national average for regular gasoline stood at $3.86 a gallon on Thursday, according to AAA, the highest level in 10 months.
Excluding sales at gasoline stations, retail spending advanced a more modest 0.2% in August from July.
Retail spending increased across most categories, including at restaurants and grocery stores. Sales of furniture and at specialty stores, such as those that sell sporting goods, fell 1% and 1.6% respectively. Online retail sales in August were flat, after jumping in July due to Amazon’s Prime Day promotional event.
Despite 11 interest rate hikes from the Federal Reserve intended to cool demand, the US economy remains on strong footing, with American shoppers still doling out cash thanks to a strong job market.
But after a summer of robust spending, US consumers are facing a number of economic challenges for the rest of the year, including student loan payments restarting and tougher lending standards, which could curb spending.
“Fitch continues to view the consumer as relatively healthy, supported by low unemployment and somewhat declining goods inflation,” wrote David Silverman, senior director at Fitch Ratings, in an analyst note.
However, he noted that “headwinds are emerging,” citing lower consumer savings and the resumption of student loan payments this fall.
The US economy is widely expected to cool in the coming months, and since consumer spending accounts for about two-thirds of economic output, a weaker economy typically means softer spending. But economists don’t expect a recession this year. While Goldman Sachs recently reduced its bet of a US recession, the Wall Street bank still thinks there’s a 15% chance of an economic downturn.
The job market is also expected to slow, which would include softer wage growth. That could prompt US consumers to pump the brakes on their spending.
“Slowing labor market gains and softer disposable income growth in the coming months will likely mean ongoing consumer cautiousness. And it appears that consumers are already taking note,” wrote Lydia Boussour, senior economist at EY-Parthenon, in a note.
However, if inflation slows in the months ahead, that could actually maintain economic activity, since it means consumers have regained some spending power.
“Encouragingly, falling inflation should continue to provide a tailwind to real wages and avoid a retrenchment in consumer activity,” Boussour added.
The Consumer Price Index rose 3.7% in August from a year earlier, up from July’s 3.2% rise, largely due to higher gas prices. Economists still expect inflation to cool later in the year, despite volatile energy markets. But gasoline prices are highly visible indicators of inflation, so more pain at the pump could also dampen consumers’ attitudes.
German shoemaker Birkenstock has filed for an initial public offering in New York, becoming the latest European company to choose the United States as the placeto raise money on the stock market.
The iconic footwear brand said in a filing to the US Securities and Exchange Commission Tuesday that it planned to list on the New York Stock Exchange under the symbol “BIRK.” It didn’t disclose its target share price or the proposed date of the listing.
The Financial Times, citing unnamed sources familiar with the matter, reported Tuesday that Birkenstock was seeking a valuation of more than $8 billion.
In its filing, the company said revenue in the six months to the end of March had risen 19% from the same period in the 2021-22 financial year but that its net profit had fallen 45%. Birkenstock said inflationary pressures had pushed up the cost of labor and materials.
The family business traces its origins back to 1774 when church archives mention Johannes Birkenstock, who worked as a cobbler in Langen-Bergheim, Germany.
In 2021, the Birkenstockfamily soldmost of the company to L Catterton, a private equity firm backed by LVMH — the owner of luxury brands such as Tiffany & Co. and Dior, with brothers Christian and Alex Birkenstock retaining a minority stake.
The planned IPO marks another milestone for the shoemaker, which joins the ranks of high-profile European companies seeking a public offering across the pond rather than at home. British chip designer Arm is gearing up for a blockbuster IPO on the Nasdaq this week.
The listings come after an 18-month slump in the IPO market. As the world’s major central banks have jacked up interest rates to combat inflation, the appetite among investors for riskier assets has waned. US grocery delivery firm Instacart has also revealed plans to list on the Nasdaq in the near future, albeit at a significant discount to recent valuations.
“It’s safe to say the US is leading the [IPO] revival at this stage, and other financial centers, most notably London, have a lot of work to do to compete better going forward,” Craig Erlam, senior market analyst at Oanda, told CNN.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, added in a note Wednesday: “Birkenstock’s step shows that the IPO engine is whirring back to life after an 18-month downturn. Hopes that the end of the interest rate hiking cycle is in sight [are] also driving more confidence.”
Housing is less affordable than it has been in about four decades. But buying or renting a home might be even less affordable now if it weren’t for the continuing impact of remote and hybrid workers that resulted from the pandemic, according to a recent study by Fannie Mae.
The study, which was an analysis of Fannie Mae’s monthly National Housing Survey, with questions asked among more than 3,000 mortgage holders, owners, and renters between January and March this year, looked at how remote and hybrid work has changed over the past few years and its impact on housing.
More people are willing to move to less expensive areas further away from offices in city centers than a few years ago, according to the report. Continuing remote and hybrid work, at levels remarkably unchanged from two years ago, is enabling people to move toward housing affordability, the study found.
The report also revealed that “affordability” is the most important factor in finding a place to live, both for renters and homeowners.
At the beginning of the year, 22% of remote and hybrid workers said they would be willing to relocate to a different region or increase their commute. Only 14% such workers were willing to do so in the third quarter of 2021, which is used as a comparison throughout the study and was when many workplaces attempted a “return to work” until the Omicron variant of Covid-19 pushed many employers’ plans back that winter.
Workers who are able to break their ties to living in an area because of its proximity to work are able to spread out, reducing the competition for a historically low number of homes for sale that could push prices even higher.
The research showed that among remote workers, all age and income groups have grown more willing to relocate or live farther away from their workplace since 2021. But younger workers — those between 18 and 34 — are significantly more willing than those older than them to live or commute a further distance from their work, with the share willing to do so jumping from 18% in 2021, to 30% in 2023.
“We believe this greater willingness to live farther from the … workplace may be an indication that some workers are feeling more secure about their remote work situation … or their ability to find another job if their current employer were to change its policies,” wrote the researchers, in a summary.
This is good news for remote workers during a time of crushingly low levels of home affordability.
Remote and hybrid work may be here to stay. Or, it’s here long enough for people to buy or rent a new home because of it, the researchers found.
Despite the demands by leaders of some prominent companies that workers need to head into the office or head out the door, the share of fully remote and hybrid workers has remained surprisingly constant in the post-pandemic era, according to the study.
In the first part of the year, 35% of respondents worked fully remote or worked a hybrid mix of some time at a workplace and some time at home. That was only slightly down from 36% in 2021.
While the share of workers going to a work site or office every day was unchanged at 49% in both 2021 and in 2023, the share of people working fully remote ticked up to 14% this year from 13% in 2021.
Homeowners continue to be slightly more likely to work from home than renters. And those with more education and higher incomes are also more likely to have a work-from-home situation, which is consistent with 2021, the study found.
Only 30% of lower-income people, earning 80% of the area median income, could work remotely or hybrid in 2021, and that dropped to 27% by this year. Meanwhile 42% of upper-income people, those making 120% of the area median income, were able to work from home in 2021 and that number did not change in 2023.
Lower-income people — who are in most need of access to lower-cost housing, found further away from a city’s core — are also those least likely to work remotely, according to the survey.
With housing affordability taking a hit over the past few years as rents rose, home prices stayed elevated and mortgage rates soared to a 22-year high, it is not surprising that “affordability” was the top factor for people when picking a new home, at 36%. This was a big jump from 2014, the last time the question was asked, when the top consideration was “neighborhood” at 49%.
Homeowners and renters both showed growth in prioritizing “affordability,” but the increase was greatest among renters, shooting up from 21% in 2014 to 46% in 2023.
“The change in preference for renters is truly remarkable, since not only did it more than double, but it represented a complete reversal of the relative importance of neighborhood cited by consumers as the top consideration in 2014,” wrote the researchers.
In addition, despite the talk about moving for more space, “home size” as a factor for picking a next home was unchanged and still outweighed by “affordability.”
“The striking shift toward affordability as the top consideration among overall survey respondents for their next move substantiates the need of households to find ways to manage around the significant rise in mortgage rates, home prices, and rents of the past few years,” the researchers wrote.
And this is impacting where people look for a home and what they prioritize when they are searching.
“Home affordability may also be a reason why we saw an increase in remote workers’ willingness to relocate or live farther away from their workplace, particularly given that, historically, a shorter commute to denser job markets was considered a premium amenity,” the researchers wrote.
The suburbs are increasingly where people want to be, the report found, which is part of an ongoing trend since 2010. And that share has grown between 2021 and 2023.
The researchers say the change to the housing market brought about by remote workers holds broader implications for the link between housing and the labor market.
The growing share of remote-working renters and homeowners willing to live farther from their work location gives employers access to a wider labor market, which could be useful if a downturn in economic activity led to greater rates of job loss.
“Having access to a larger labor market may also reduce the adverse effect on local home prices when a major employer or industry contracts,” the researchers wrote.
China just made it easier for people to buy homes, in a move that could affect $3.5 trillion in mortgage loans as Beijing seeks to bail out a property market mired in a record slump and worsening cash crunch.
Down payments will be set at a minimum of 20% for first-time buyers and a minimum of 30% for second-time buyers nationwide, according to a joint statement by the People’s Bank of China (PBOC) and the National Administration of Financial Regulation (NAFR) released late Thursday.
That’s a big cut from the existing requirements of minimums of 30% and 40% for first-time and second-time buyers in cities that implement home-buying restrictions, such as Beijing and Shanghai.
In addition, minimum mortgage rates for buyers of second homes should be no less than 20 basis points over the loan prime rate (LPR), the statement said. Currently, minimum mortgage rates for second-time buyers are no less than 60 basis points over the LPR.
The LPR is the benchmark for most household and corporate loans in China and is set by the central bank each month.
The regulators also indicated in a separate statementthat rates on existing mortgages for first-home purchases can be renegotiated between banks and customers starting September 25. The regulators have encouraged banks to offer lower rates.
“The drop in the interest rates of existing housing loans can save interest expenses for borrowers, which is conducive to expanding consumption and investment,” the regulators said.
“For banks, it can effectively reduce the phenomenon of early loan repayment and mitigate the impact on banks’ interest income,” they added.
The new policy measures could affect 40 million home buyers and impact 25 trillion yuan ($3.5 trillion) in mortgages, which is about two thirds of the country’s housing loans, state-owned Yicai reported on Thursday, citing people close to the regulators.
Dollar General slashed its sales and profit outlook for the year on Thursday, blaming headwinds including weaker consumer spending on non-essential purchases and increasing theft.
Dollar General shares tumbled nearly 17% in pre-market trading Thursday.
The discount store’s challenges are yet another sign of American consumers pulling back on shopping as inflation remains well above the Federal Reserve’s 2% target.
“One of the key reasons for this is because Dollar General’s core customers are feeling the acute pressure of the cost-of-living-crisis,” Neil Saunders, retail analyst and managing director at GlobalData, said in a report Thursday.
“This has been exacerbated by cuts in SNAP payments as temporary pandemic benefits came to an end. As a result, lower-income shoppers are cutting back on non-consumable and indulgent purchases from the chain in a bid to save money,” he said. “Unfortunately, this dynamic will not change any time soon as, if anything, finances will tighten over the second half of the year.”
The discount retailer now expects sales for the full year to rise between 1.3% to 3.3%, down from its previous forecast of a 3.5% to 5% increase. It expects full-year earnings to decline 22% to 34% from its previous estimate of a flat-to-8% decrease.
The retailer said its same-store sales (or sales at stores open at least a year) are expected to range from a decline of about 1% to an increase of 1% for the year, compared to its previous expectation of a 1% to 2%. increase.
For its second quarter, Dollar General logged a 1% drop in its same-store sales. It said weaker customer traffic to its stores hurt sales in the period, combined with budget-conscious shoppers pulling back on higher-priced discretionary purchases such as home items and clothing in favor of lower-priced everyday necessities.
In addition, food stamp recipients started to receive about $90 a month less in benefits, on average, starting in March, as a pandemic hunger relief program comes to an end nationwide three years after Congress approved it.
Meanwhile, close on the heels of Dick’s Sporting Goods sounding the alarm on store theft eating into its profit this year, Dollar General also flagged an increase in product theft, among other factors, hurting its profit.
The company said “an increase in expected inventory shrink for the second half of 2023” factored into its lower guidance. Shrink is an industry term encompassing inventory losses caused by external theft, including organized retail crime, employee theft, human errors, vendor fraud, damaged or mismarked items and other losses.
Retailers large and small say they are struggling to contain an escalation in store crimes — from petty shoplifting to organized sprees of large-scale theft that clear entire shelves of products. Target warned earlier this year that it was bracing to lose half a billion dollars because of rising theft. It reported a large number of incidents of shoplifting and organized retail crime in its stores nationwide.
At the same time, it’s not clear that store crime is growing significantly more serious. Within the industry, at least one major player has argued that the problem is being overhyped.
UBS expects to shed around 3,000 jobs in Switzerland as it tries to save $10 billion from a sweeping overhaul of the global banking giant created by its emergency rescue of Credit Suisse earlier this year.
The job cuts amount to around 8% of staff employed by the combined bank’s Swiss operations and may spark new controversy in the country, where the deal has already proved unpopular with the public and some politicians.
“The Swiss Bank Employees Association demands that the 37,000 employees of the two institutions in Switzerland are treated fairly and equally in the integration process,” the Swiss banking union said in a statement.
On a call with analysts Thursday, UBS CEO Sergio Ermotti said: “Every lost job is painful for us. Unfortunately, in this situation, cuts were unavoidable.”
Ermotti said the job cuts would be spread “over a couple of years” and that the bank would provide affected employees with financial support, outplacement services and retraining opportunities.
The Swiss bank, which has a combined global workforce of nearly 122,000,gave no further details on the numbers of likely layoffs outside of Switzerland in its second quarter earnings statement — the first report since it acquired its rival.
UBS confirmed plans to retain Credit Suisse’s banking operations in Switzerland, and fully absorb those into the newly-merged group, rather than opting for a spin-off or IPO, even though thatmayhave resulted in fewer redundancies.
“Our analysis clearly shows that a full integration is the best outcome for UBS, our stakeholders and the Swiss economy,” Ermotti said in a statement. He added that this was “one of the biggest and most complex bank mergers in history.”
UBS said that it expected to generate more than $10 billion in savings from the integration by the end of 2026, $1 billionmore and a year earlier than planned when the takeover was announced in March. The bank’s shares gained as much as 7% on the news.
UBS (UBS) agreed on March 19 to buy Credit Suisse for the bargain price of 3 billion Swiss francs ($3.4 billion) in a rescue orchestrated by Swiss authorities to avert a banking sector meltdown.
UBS posted net profit of $29 billion for the second quarter, reflecting a one-off boost from the acquisition of Credit Suisse at a fraction of its value. But it also benefited from continued strong inflows into its global wealth management business, recording $16 billion of net new money — the highest second-quarter figure in over a decade.
Controversy in Switzerland
Credit Suisse went bust after confidence in the ailing lender collapsed and customers yanked their money from the bank. The firm had been plagued by scandals and compliance failures in recent years that wiped out its profit and caused it to lose clients.
But the death blow came after it acknowledged “material weakness” in its bookkeeping and as the demise of US regional lenders Silicon Valley Bank and Signature Bank spread fear about weaker institutions.
Thecombination of the banks has caused controversy in Switzerlandbecause it leaves the country exposed to a single massive financial institution with a market share of about 30% and assets roughly double the size of its annual economic output.
Taxpayers were originally on the hook for potential losses arising from the deal, but UBS said earlier this month it would no longer need a Swiss government guarantee of 9 billion francs ($10.3 billion) for future potential losses arising from Credit Suisse assets.
It also said it no longer required a 100 billion franc ($114.2 billion) government-backed loan and that Credit Suisse had repaid an earlier loan from Switzerland’s central bank of 50 billion francs ($57.1 billion).
“Taxpayers will no longer bear any risks arising from these guarantees,” the Swiss government said at the time.
Russia’s invasion of Ukraine caused deep disruptions in the global food supply, raising prices and increasing the risk of food insecurity in poorer nations in the Middle East and North Africa, America’s top spy agency said in an unclassified report released by Congress on Wednesday.
The direct and indirect effects of the war “were major drivers of one of the most disruptive periods in decades for global food security,” the eight-page report found – in large part because Ukraine and Russia were among the world’s largest pre-war exporters of grain and other agricultural products.
Although food security concerns have abated since the start of this year, according to the report, the future trajectory of global food prices likely will depend in part on what happens with the Black Sea Grain Initiative, which Russia ended in July. The deal, facilitated by the United Nations, had allowed Ukrainian agricultural shipments to safely exit Black Sea ports and reach the international market.
How much acreage Ukraine is able to cultivate as the war continues to rage and the cost and availability of fertilizers will also have an impact on global food prices, the report found. Global fertilizer prices reached near-record levels in mid-2022 as global oil and natural gas prices rose.
“The combination of high domestic food prices and historic levels of sovereign debt in many countries – largely caused by spending and recessionary effects of the COVID-19 pandemic – has weakened countries’ capacity to respond to heightened food insecurity risks,” the report said. “These factors probably will undermine the capacity of many poor countries to provide sufficient and affordable food to their population through the end of the year.”
Droughts last year in Canada, the Middle East, South America and the United States also compounded the war-related stress on global food supplies, according to the report.
Intelligence officials have accused Russia in the past of weaponizing food supplies by blocking Ukrainian exports, destroying infrastructure and occupying Ukrainian agricultural land.
Citing satellite imagery and open-source reporting, the report said that Russia stole nearly 6 million tons of Ukrainian wheat harvested from occupied territories in 2022. Cargo ships used to transport the stolen grain out of Russian-occupied territories in 2022 would steer along the coast of Turkey to deliver shipments to ports in Syria, Israel, Iran, Georgia and Lebanon, the report said.
“We cannot confirm if the buyers of the Russian cargoes were aware of the grains’ Ukrainian origin,” the report said.
The report was mandated by the annual intelligence authorization bill and released by the House Intelligence Committee.
“This report casts light on the war’s broader disruption to global food security and reveals how (Russian President Vladimir) Putin has intentionally used food security and the threat of starvation as a negotiating chip,” committee leaders Reps. Mike Turner and Jim Himes said in a statement. “Russia’s recent refusal to renew the Black Sea Grain Initiative will worsen this crisis, driving vulnerable nations into food shortages that could leave millions struggling to eat.”
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN
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Labor Day — one of the busiest driving holidays in the US — is on the horizon, and so is Hurricane Idalia. That’s potentially bad news for gas prices.
The storm, which is expected to make landfall in Florida as a Category 3 hurricane on Wednesday, could bring 100 mile-per-hour winds and flooding that extends hundreds of miles up the east coast. The impact could take gasoline refinery facilities offline and may limit some Gulf oil production and supplies. Plus, demand for gas is expected to surge as residents of the impacted areas evacuate.
The storm is expected to make landfall as drivers nationwide load into their vehicles for the Labor Day weekend, pushing up the demand for gasoline even further.
All together it means the price of oil and gasoline couldremain elevated well into the fall.
Generally, summer demand for oil tends to wane in September, but so does supply as refineries shift from summer fuels to “oxygenated” winter fuels, said Louis Navellier of Navellier and Associates. Since the 1990s, the US has required manufacturers to include more oxygen in their gasoline during the colder months to prevent excessive carbon monoxide emissions.
With the storm approaching,that trend may not play out.
What’s happening: Gas prices are already at $3.82 a gallon. That’s the second highest price for this time of year since at least 2004, according to Bespoke Investment Group. (The only time the national average has been higher for this period was last summer, when prices hit $3.85 a gallon).
Geopolitical tensions have been supporting high oil and gas prices for some time. Recently, increased crude oil imports into China, production cuts by Russia and Saudi Arabia and extreme heat set off a late-summer spike in gas prices. And the threat of powerful hurricanes could send them even higher.
Analysts at Citigroup have warned that this hurricane season could seriously impact power supplies.
“Two Category 3 or higher hurricanes landing on US shores could massively disrupt supplies for not weeks but months,” Citigroup analysts wrote in a note last week. In 2005, for example, gas prices surged by 46% between Memorial Dayand Labor Day because of the landfall of Hurricane Katrina, according to Bespoke.
What it means: The Federal Reserve and central banks around the world have been fighting to bring down stubbornly high inflation for more than a year. This week we’ll get some highly awaited economic data: The Fed’s preferred inflation gauge, the Personal Consumption Expendituresindex, is due out on Thursday. But the task of inflation-busting is a lot more difficult when energy prices are high, and it’s even harder when they’re on the rise.
The PCE price index uses a complicated formula to determine how much weight to give to energy prices each month, but they typically comprise a significant chunk of the headline inflation rate.
“Crude oil price remains elevated, even after the surge at the start of the Russia-Ukraine War,” said Andrew Woods, oil analyst at Mintec, a market intelligence firm. “Energy prices have been a major contributor to persistently high inflation in the US, so the crude oil price will remain a watch-out factor for future inflation.”
High oil and gas prices are one of the largest contributing factors to inflation. That’s bad news for drivers but tends to be great for the energy industry, as oil prices and energy stocks are closely interlinked.
Energy stocks were trading higher on Monday. The S&P 500 energy sector was up around 0.75%. Exxon Mobil (XOM) was 0.85% higher, BP (BP) was up 1.36% and Chevron (CVX) was up 0.75%.
OpenAI, will release a version of its popular ChatGPT tool made specifically for businesses, the company announced on Monday.
OpenAI unveiled the new service, dubbed “ChatGPT Enterprise,” in a company blog post and said it will be available to business clients for purchase immediately.
The new offering, reports my colleague Catherine Thorbecke, promises to provide “enterprise-grade security and privacy” combined with “the most powerful version of ChatGPT yet” for businesses looking to jump on the generative AI bandwagon.
“We believe AI can assist and elevate every aspect of our working lives and make teams more creative and productive,” the blog post said. “Today marks another step towards an AI assistant for work that helps with any task, is customized for your organization, and that protects your company data.”
Fintech startup Block, cosmetics giant Estee Lauder and professional services firm PwC have already signed on as customers.
The highly-anticipated announcement from OpenAI comes as the company says employees from over 80% of Fortune 500 companies have already begun using ChatGPT since it launched publicly late last year, according to its analysis of accounts associated with corporate email domains.
A multitude of leading newsrooms, meanwhile, have recently injected code into their websites that blocks OpenAI’s web crawler, GPTBot, from scanning their platforms for content. CNN’s Reliable Sources has found that CNN, The New York Times, Reuters, Disney, Bloomberg, The Washington Post, The Atlantic, Axios, Insider, ABC News, ESPN, and the Gothamist, among others have taken the step to shield themselves.
American Airlines just got smacked with the largest-ever fine for keeping passengers waiting on the tarmac during multi-hour delays.
The Department of Transportation is levying the $4.1 million fine, “the largest civil penalty that the Department has ever assessed” it said in a statement, for lengthy tarmac delays of 43 flights that impacted more than 5,800 passengers. The flights occurred between 2018 and 2021, reports CNN’s Gregory Wallace.
In the longest of the delays, passengers sat aboard a plane in Texas in August 2020 for six hours and three minutes. The 105-passenger flight had landed after being diverted from the Dallas-Fort Worth International Airport due to severe weather, with the DOT alleging that “American (AAL) lacked sufficient resources to appropriately handle several of these flights once they landed.”
Federal rules set the maximum time that passengers can be held without the opportunity to get off prior to takeoff or after landing, at three hours for domestic flights and four hours for international flights. Current rules also require airlines provide passengers water and a snack.
American told CNN the delays all resulted from “exceptional weather events” and “represent a very small number of the 7.7 million flights during this time period.”
The company also said it has invested in technology to better handle flights in severe weather and reduce the congestion at airports.
Satish Kumar sits in front of his submerged rice paddy in India’s Haryana state, looking despairingly at his ruined crops.
“I’ve suffered a tremendous loss,” said the third generation farmer, who relies solely on growing the grain to feed his young family. “I will not be able to grow anything until November.”
The newly planted saplings have been underwater since July after torrential rain battered northern India, with landslides and flash floods sweeping through the region.
Kumar said he has not seen floods of this scale in years and has been forced to take loans to replant his fields all over again. But that isn’t the only problem he’s facing.
Last month, India, which is the world’s largest exporter of rice, announced a ban on exporting non-basmati white rice in a bid to calm rising prices at home and ensure food security. India then followed with more restrictions on its rice exports, including a 20% duty on exports of parboiled rice.
The move has triggered fears of global food inflation, hurt the livelihoods of some farmers and prompted several rice-dependent countries to seek urgent exemptions from the ban.
More than three billion people worldwide rely on rice as a staple food and India contributed to about 40% of global rice exports.
Economists say the ban is just the latest move to disrupt global food supplies, which has suffered from Russia’s invasion of Ukraine as well as weather events such as El Niño.
They warn the Indian government’s decision could have significant market reverberations with the poor in Global South nations in particular bearing the brunt.
And farmers like Kumar say market price rises caused by poor harvests doesn’t result in a windfall for them either.
“The ban is going to have an adverse effect on all of us. We won’t get a higher rate if rice isn’t exported,” Kumar said. “The floods were a death blow to us farmers. This ban will finish us.”
The abrupt announcement of the export ban triggered panic buying in the United States, following whichthe price of rice soared to a near 12-year high, according to the United Nations Food and Agriculture Organization.
It does not apply to basmati rice, which is India’s best-known and highest quality variety. Non-basmati white rice however, accounts for about 25% of exports.
India wasn’t the first country to ban food exports to ensure enough supply for domestic consumption. But its move, coming just one week after Russia pulled out of the Black Sea grain deal — a crucial pact that allowed the export of grain from Ukraine — contributed to global concerns about the availability of grain staples and whether millions would go hungry.
“The main thing here is that it is not just one thing,” Arif Husain, chief economist at the United Nations World Food Programme (WFP) told CNN. “[Rice, wheat and corn crops] make up bulk of the food which poor people around the world consume.”
Nepal has seen rice prices surge since India announced the ban, according to local media reports, and rice prices in Vietnam are the highest they have been in more than a decade, according to customs data.
Thailand, the world’s second largest rice exporter after India, has also seen domestic rice prices jump significantly in recent weeks, according to data from the Thai Rice Exporters Association.
Countries including Singapore, Indonesia and the Philippines, have appealed to New Delhi to resume rice exports to their nations, according to local Indian media reports. CNN has reached out to India’s Ministry of Agriculture but has not received a response.
The International Monetary Fund (IMF) has encouraged India to remove the restrictions, with the organization’s chief economist, Pierre-Olivier Gourinchas, telling reporters last month that it was “likely to exacerbate” the uncertainty of food inflation.
“We would encourage the removal of these types of export restrictions because they can be harmful globally,” he said.
Now, there are fears that the ban has the world market bracing for similar actions by rival suppliers, economists warn.
“The export ban is happening at a time when countries are struggling with high debt, food inflation, and declining depreciating currencies,” Husain from the WFP said. “It’s troubling for everyone.”
Indian farmers account for nearly half of the country’s workforce, according to government data, with rice paddy mainly cultivated in central, southern, and some northern states.
Summer crop planting typically starts in June, when monsoon rains are expected to begin, as irrigation is crucial to grow a healthy yield. The summer season accounts for more than 80% of India’s total rice output, according to Reuters.
This year, however, the late monsoon arrival led to a large water deficit up until mid-June. And when the rains finally arrived, it drenched swathes of the country, unleashing floods that caused significant damage to crops.
Surjit Singh, 53, a third generation farmer from Harayana said they “lost everything” after the rains.
“My rice crops have been ruined,” he said. “The water submerged about 8-10 inches of my crops. What I planted (in early June) is gone… I will see a loss of about 30%.”
The World Meteorological Organization last month warned that governments must prepare for more extreme weather events and record temperatures, as it declared the onset of the warming phenomenon El Niño.
El Niño is a natural climate pattern in the tropical Pacific Ocean that brings warmer-than-average sea-surface temperatures and has a major influence on weather across the globe, affecting billions of people.
The impact has been felt by thousands of farmers in India, some of whom say they will now grow crops other than rice. And it doesn’t just stop there.
At one of New Delhi’s largest rice trading hubs, there are fears among traders that the export ban will cause catastrophic consequences.
“The export ban has left traders with huge amounts of stock,” said rice trader Roopkaran Singh. “We now have to find new buyers in the domestic market.”
But experts warn the effects will be felt far beyond India’s borders.
“Poor countries, food importing countries, countries in West Africa, they are at the highest risk,” said Husain from the WFP. “The ban is coming on the back of war and a global pandemic… We need to be extra careful when it comes to our staples, so that we don’t end up unnecessarily rising prices. Because those increases are not without consequences.”
Additional interest rate hikes are still on the table and rates could remain elevated for longer than expected, Federal Reserve Chair Jerome Powell said Friday.
Delivering a highly anticipated speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Powell again stressed that the Fed will pay close attention to economic growth and the state of the labor market when making policy decisions.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
The Fed chief’s annual presentation at the symposium, which has become a major event in the world of central banking, typically hints at what to expect from monetary policy in the coming months.
Powell’s speech wasn’t a full-throated call for more rate hikes, but rather a balanced assessment of inflation’s evolution over the past year and the possible risks to the progress the Fed wants to see. He made it clear the central bank is retaining the option of more hikes, if necessary, and that what Fed officials ultimately decide will depend on data.
US stocks opened higher before Powell’s speech, tumbled in late morning trading and then rose again.
The Fed raised its benchmark lending rate by a quarter point in July to a range of 5.25-5.5%, the highest level in 22 years, following a pause in June. Minutes from the Fed’s July meeting showed that officials were concerned about the economy’s surprising strength keeping upward pressure on prices, suggesting more rate hikes if necessary. Some officials have said in recent speeches that the Fed can afford to keep rates steady, underscoring the intense debate among officials on what the Fed should do next.
Financial markets still see an overwhelming chance the the Fed will decide to hold rates steady at its September meeting, according to the CME FedWatch tool, given that inflationary pressures have continued to wane.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.
Concerns over the economy running too hot for the Fed’s comfort only recently emerged.
Economic growth in the second quarter picked up from the prior three-month period and the Atlanta Fed is currently estimating growth will accelerate even more in the third quarter.
That could be a problem for the Fed, since the central bank’s primary mechanism for fighting inflation is by cooling the economy through tweaking the benchmark lending rate.
“if you’re a policymaker, you’re looking at the level of output relative to your estimate of what’s sustainable for maximum employment and 2% inflation,” William English, finance professor at Yale University who worked at the Fed’s Board of Governors from 2010 to 2015, told CNN. “So what does that mean for monetary policy? That may mean that they need rates to be higher for longer than they thought to get the economy on to that desirable trajectory, but there are a lot of questions around that force, and a lot of uncertainty.”
Cleveland Fed President Loretta Mester is one of the Fed officials backing a more aggressive stance on fighting inflation.
“We’ve come come a long way, but we don’t want to be satisfied, because inflation remains too high — and we need to see more evidence to be assured that it’s coming down in a sustainable way and in a timely way,” Mester said in an interview with CNBC after Powell’s remarks.
Meanwhile, some other officials think there will eventually be enough restraint on the economy and that more hikes could cause unnecessary economic damage. The lagged effects of rate hikes on the broader economy are a key uncertainty for officials, since it’s not clear when exactly those effects will fully take hold. Research suggests it takes at least a year.
“We are in a restrictive stance in my view, and we’re putting pressure on the economy to slow inflation,” Philadelphia Fed President Patrick Harker told Bloomberg in an interview Friday after Powell’s speech. “What I’m hearing — and I’ve been around my district all summer talking to people — is ‘you’ve done a lot very quickly.’”
Powell pointed to the steady progress on inflation in the past year: The Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 3% in June from a year earlier, down from the 3.8% rise in May. The Commerce Department officially releases July PCE figures next week, though Powell already previewed that report in his speech. He said the Fed’s favorite inflation measure rose 3.3% in the 12 months ended in July.
The Consumer Price Index, another closely watched inflation measure, rose 3.2% in July, a faster pace than the 3% in June, though underlying price pressures continued to decelerate that month.
In his speech Friday, Powell stood firmly by the Fed’s current 2% inflation target, which was formalized in 2012 — at least for now. The Fed is set to review its policy framework around 2025, which could be an opportunity to establish a new inflation target.
Harvard economist Jason Furman said in an op-ed published in The Wall Street Journal this week that the central bank should aim for a different inflation goal, which could be something slightly higher than 2% or even a range of between 2% and 3%.
For now, Powell has made it clear he is sticking with the stated inflation target.
Still, inflation’s progress has hyped up not only American consumers and businesses, but also some Fed officials.
Chicago Fed President Austan Goolsbee reiterated to CNBC Friday that he still sees “a path to a soft landing,” a scenario in which inflation falls down to target without a spike in unemployment or a recession.
Powell also weighed in on an ongoing debate among economists about whether the “neutral rate of interest,” also known as r*, is higher since the economy is still on strong footing despite the Fed’s aggressive pace of rate hikes.
In theory, the neutral rate is when real interest rates neither restrict nor stimulate growth. The Fed chair said higher interest rates are likely pulling on the economy’s reins, implying that r* might not be structurally higher, though he said it’s an unobservable concept.
“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint,” Powell said.
Either way, while the Fed chief hinted that more rate hikes might be coming down the pike, there’s no guarantee either way.
The Fed paused its historic inflation fight for the first time in June, mostly based on uncertainty over how the spring’s bank stresses would affect lending. The central bank could decide to pause again in September over uncertainty as it waits for more data.
“We think that the Fed is more likely to take a wait-and-see approach with the data and try to understand a little bit more about why the labor market is remaining so strong, even despite the inflationary experience that we’ve had and the higher interest rates in the economy,” Sinead Colton Grant, head of investor solutions at BNY Mellon Wealth Management, told CNN in an interview.
Target’s quarterly sales fell for the first time in six years as consumers pulled back on discretionary goods and fierce right-wing backlash to Target’s Pride Month collection took a toll on the brand.
Target’s sales at stores open for at least one year dropped 5.4% last quarter, including a 10.5% drop online. The company also cut its annual sales forecast.
Target’s foot traffic dropped 4.8% last quarter, “likely a function of a mix that skews too discretionary, as well as the Pride merchandise issues,” Michael Baker, an analyst at DA Davidson, said in a note to clients.
Still, Target’s profit came in higher than Wall Street’s expectations, and the stock rose 5% during early trading Wednesday. Heading into Wednesday, Target’s stock dropped 27% over the past year.
Target was one of the strongest-performing retailers during the pandemic as consumers flocked to stores and its website while stuck at home. But Target has slipped as consumers change their spending patterns.
Americans are spending more on experiences, including concerts and movies, and less on nonessential items. Home Depot
(HD) said Tuesday that consumers took on fewer major home renovation projects.
Target
(TGT) is over-exposed to non-essential merchandise compared to competitors such as Walmart
(WMT) and Costco
(COST). More than half of Target
(TGT)’s merchandise is discretionary – clothing, home decor, electronics, toys, party supplies and other non-essentials. The company in recent years has added more food and essentials to its stores.
“Consumers are choosing to increase spending on services like leisure, travel, entertainment and food away from home, putting near-term pressure on discretionary products,” CEO Brian Cornell said on a call with analysts Wednesday.
Cornell said that store theft and safety have also become bigger concerns.
“Safety incidents associated with [theft] are moving in the wrong direction,” Cornell said. “During the first 5 months of this year, our stores saw a 120% increase in theft incidents involving violence or threats of violence.”
Target has been embroiled in the political culture wars over gender and sexual orientation.
Beginning in May, Target also faced a homophobic campaign that went viral on social media over its annual Pride Month clothing collection. Fueled by far-right personalities, the anti-LGBTQ campaign spread misleading information about the Pride Month products.
The campaign became hostile, with violent threats levied against Target employees and instances of damaged products and displays in stores. Target said on May 24 that it was removing certain items that caused the most “volatile” reaction from opponents to protect its workers’ safety.
But Target’s response frustrated supporters of gay and transgender rights, who said the company caved to bigoted pressure.
“The strong reaction to this year’s Pride assortment” impacted sales during the quarter, Christina Hennington, Target’s chief growth officer, said Wednesday.
Target will adjust its Pride Month collection next year, including potential changes to timing, placement in stores and the mix of brands it sells.
“The reaction is a signal for us to pause, adapt and learn,” she said.
Other brands, such as Bud Light, have faced right-wing backlash over attempts to be more inclusive.
America’s former top-selling beer has targeted by right-wing media and anti-trans commentators since April, after sponsoring transgender influencer Dylan Mulvaney.
The controversy cost Bud Light’s parent company about $395 million in lost US sales and Bud Light lost its top beer spot to Modelo.
United States Steel Corp. (X) is considering a sale after fielding acquisition offers, according to a Sunday press release from the company.
The steel producer is under a formal review process after “receiving multiple unsolicited proposals” for both specific assets and the entire firm, the release announced.
“U. S. Steel’s Board and management team are committed to maximizing value for our stockholders, and to that end, we have commenced a comprehensive and thorough review of strategic alternatives,” wrote David Burritt, U. S. Steel’s CEO. “The Board is taking a measured approach to considering these proposals, including seeking more information in order to evaluate proposals that are preliminary and subject to ongoing due diligence and review.”
There is currently no set timeline or end date for the review process.
One of China’s biggest property developers says it has burned through up to $7.6 billion in the first half of the year, compounding the crisis coursing through the country’s embattled real estate sector.
Country Garden warned investors in a Hong Kong stock exchange filing Thursday that it would likely record a loss of 45 billion to 55 billion Chinese yuan (about $6.2 billion to $7.6 billion) for the six months through June.
That compares with a profit of approximately 1.9 billion yuan ($264.3million) for the same time last year.
The disclosure lays bare the financial woes currently facing Country Garden, a massive builder of hundreds of thousands of homes annually across China.
The developer, which employs some 300,000 people, has a massive debt pile that’s being compared to that of Evergrande, the world’s most indebted property group.
In recent weeks, the company has become the latest sign of China’s economic troubles, as it teeters on the brink of default and, by its own admission, works to save itself.
Country Garden shares plunged 8.7% in Hong Kong Friday following its loss warning, as well as a report from Chinese news outlet Yicai that the firm was preparing for a debt restructuring, citing unidentified sources.
CNN has not independently confirmed Yicai’s reporting.
The company had said in its filing that it would “consider adopting various debt management measures,” without elaborating further, as well as lean on a task force newly set up to “cope with” its challenges. Country Garden did not immediately respond to a request for comment.
As of early afternoon in Hong Kong Friday, its stock had reached a record low of 95 Hong Kong cents, below its previous low of 98 Hong Kong cents reached in October 2008.
Earlier this week, Country Garden stoked concerns by missing two bond payments, according to analysts. The company did not respond to multiple requests for comment from CNN on the matter.
Its failure to pay up raised concerns about its overall liabilities, which racked up to a whopping 1.4 trillion yuan (about $194 billion) as of the end of last year.
Some of the company’s debt — roughly $4.3 billion in onshore and offshore bonds — will come due or “become puttable” through the end of 2024, meaning the company will face obligations to bondholders, according to Moody’s.
For the rest of this year alone, “we estimate that CGH needs to fulfill at least $137 million of bond interest payments through the rest of 2023,” Morningstar analyst Jeff Zhang wrote in a report Thursday.
News of the missed payments led to the company being downgraded, with Moody’s bumping down its credit rating from B1 to Caa1 on Thursday.
The downgrade reflects Country Garden’s cash flow problems, “in view of its deteriorated liquidity and financial flexibility, sizable refinancing needs and still-constrained access to funding,” Kaven Tsang, a Moody’s senior vice president, said in a report.
“The negative outlook reflects the uncertainty over Country Garden’s ability to service its debt obligations, including coupon payments, in a timely manner over the next [six to] 12 months,” he added.
Zhang also said Morningstar believed the missed payments “may not be an isolated event.”
“Country Garden is likely to default,” he wrote in his report.
The company is working to stem the bleeding.
In its filing Thursday, it attributed the expected first-half loss to a series of problems, from falling property sales to lower profit margins.
New home sales by China’s 100 biggest developers dropped by 33% in July from a year ago, according to data released last week.
“Facing such an extremely difficult situation industry-wide, the company [has] worked together to carry out self-rescue by all means,” Country Garden told investors.
But “the overall market has not yet recovered, the absolute scale of the industry has declined, and the capital market needs time to restore its confidence.”
The company also detailed how its chairwoman, who is also its controlling shareholder, had personally tried to contain the crisis.
Since the company’s listing in 2007, Yang Huiyan and her family have pumped in approximately 38.6 billion Hong Kong dollars ($4.9 billion), in the form of new loans and share and bond purchases, the firm said in its filing.
Some of that debt — about 6.6 billion Hong Kong dollars ($844 million) is unsecured, it added.
But Yang alone won’t be able to turn things around. In its report, Moody’s cited “the absence of new external financing” as one reason it now considers the firm’s liquidity “weak,” compared to its previous classification of “adequate.”
The assessment was reached despite Yang’s willingness to provide “funding support to the company,” the agency added.
One of China’s wealthiest women, Yang has seen her own fortune plunge recently, dropping 84% since June 2021, or $28.6 billion, according to the Bloomberg Billionaires index.
That’s the biggest wealth drop of any billionaire in the world over the past two years, according to its calculations.
The impact of Country Garden’s problems won’t be felt in China alone, according to Alfredo Montufar-Helu, head of the China center for economics and business.
“The global economy is losing one of its engines of growth,” he told CNN.
“That’s why everyone should care about what is happening to real estate. Real estate is the main drag right now on confidence levels, on demand, and on industrial productivity.”
US mortgage rates remained elevated this week, rising for the third week in a row, but stayed just under the market’s 7% threshold.
The 30-year fixed-rate mortgage averaged 6.96% in the week ending August 10, up from 6.90% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.22%.
“There is no doubt continued high rates will prolong affordability challenges longer than expected,” said Sam Khater, Freddie Mac’s chief economist. “However, upward pressure on rates is the product of a resilient economy with low unemployment and strong wage growth, which historically has kept purchase demand solid.”
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.
The rate stayed elevated this week after the Federal Reserve highlighted its reliance on data on jobs and inflation in its July monetary policy meeting and in recent comments.
Markets had been waiting for July’s inflation report, released Thursday morning, which showed consumer price hikes rose 3.2% annually, the first increase in 12 months. The data also showed that shelter costs contributed 90% of total inflation last month.
“July’s Consumer Price Index holds significant importance for the Fed’s upcoming decisions,” said Jiayi Xu, an economist at Realtor.com.
Since inflation rose, it could support the Fed’s concern that the battle is not over, Xu said. The Fed also will consider the forthcoming August employment and inflation data prior to the next policy meeting, in September.
In addition, the most recent jobs report offered some mixed signals about the labor market, Xu said, including a smaller number of net new jobs added and a dipping unemployment rate.
“While July’s jobs report itself is very unlikely to have a direct impact on the Fed’s upcoming decision, the decline to a 3.5% unemployment rate may imply that more significant slowing is needed to align with the Fed’s projected year-end rate of 4.1%,” she said.
A hotly anticipated IPO for a company that designs chips for 99% of the world’s smartphones is just around the corner, after it filed paperwork Monday to go public.
Arm is a British tech company that architects power-sipping microchips for phones and tablets and licenses them to CPU makers, including Apple and Samsung. The company was public until 2016, when Japan’s Softbank bought it for $32 billion.
Softbank tried to offload Arm to Nvidia for $40 billion, in what would have been the biggest chip deal of all time. But global antitrust regulators put a stop to it, and the deal fell apart in February 2022.
Arm had been a hot commodity for decades, when the smartphone business was booming. But sales of smartphones have subsided recently, as customers opt to keep their phones for longer and new tech features have become less enticing to consumers.
The company, in its regulatory filing, said sales slipped 1% to $2.7 billion in the year that ended March 31, 2023. In the following quarter, which ended in June, sales fell 2.5%.
Still, Arm has piqued the interest of tech investors who are looking to catch the AI wave. Softbank CEO Masayoshi Son has touted Arm as an AI company that could have “exponential growth.” He promised ChatGPT-like services would eventually be offered on Arm-designed machines.
In its IPO filing, Arm said the company “will be central” to the transition to AI.
“Arm CPUs already run AI and [machine learning] workloads in billions of devices, including smartphones, cameras, digital TVs, cars and cloud data centers,” the company said. “In the emerging area of large language models, generative AI and autonomous driving, there will be a heightened emphasis on the low power acceleration of these algorithms.”
But Son and Arm’s AI promises may overstate the company’s potential, at least somewhat. Arm-based chips have appeared in some gadgets beyond smartphones and tablets, such as servers that are less power-hungry. But Arm said it does not make AI chips and is not a direct competitor to Nvidia and others that make chips that are purpose-built for AI. Nvidia’s stock has exploded more than 200% this year.
Arm did not list the number of shares it planned to sell, so a valuation wasn’t determinable yet. But Reuters reported Softbank is looking to basically double its investment from seven years ago with a $60 billion to $70 billion valuation for Arm when it IPOs, likely next month.
Softbank also this week bought the 25% stake in Arm that it did not own directly but that had been held by the Saudi Vision Fund, which Softbank manages. That purchase valued Arm at $64 billion, according to the Financial Times.
A new mergers and acquisitions advisory firm launched last year by former Centerview Partners dealmakers has scored a big win by advising Cisco Systems on its $28 billion acquisition of cybersecurity firm Splunk.
Based in Palo Alto, California, Tidal Partners was started by technology bankers David Handler and David Neequaye. Their firm, which employs just two dozen people, according to its website, was the sole financial adviser to Cisco, while larger investment banking peers Qatalyst Partners and Morgan Stanley advised Splunk.
While at Centerview, Handler worked closely with Cisco for several years and advised on numerous deals, including Cisco’s $5 billion acquisition of NDS Group in 2012 and Cisco’s $3.7 billion purchase of AppDynamics in 2017.
“We’ve known David (Handler) and his partner David (Neequaye) for a very long time. They did a great job for us, and so we’ve had that relationship for a long time,” Cisco CEO Chuck Robbins said in an interview on Thursday.
Tidal’s win comes as more technology bankers decide to launch their own firms amid an overall slowdown in dealmaking in the sector. Three former Qatalyst Partners bankers launched a new technology-focused investment banking boutique called AXOM Partners earlier this week, Reuters reported.
Handler and Neequaye helped launch Centerview’s technology advisory group in 2008. The group went on to advise other major technology companies, including Cisco, Qualcomm Inc and Twilio.
Since its launch last year, Tidal Partners has advised on transactions, including ServiceNow Inc’s acquisition of G2K Group and Bloom Energy’s $550 million convertible notes offering.
Handler, who previously worked at UBS Group, sued Centerview after his departure over a pay dispute.
Elon Musk has spent nearly two decades rallying SpaceX fans around his goal of colonizing Mars, something world governments aren’t currently attempting — in part because of the unfathomable price tag such a mission will entail.
Musk, the company’s CEO and chief engineer, refers to his interplanetary ambitions more like a sci-fi protagonist with a moral calling than an entrepreneur with a disruptive business plan.
“If there’s something terrible that happens on Earth, either made by humans or natural, we want to have, like, life insurance for life as a whole,” Musk said during a virtual Mars conference on Aug. 31. “Then, there’s the kind of excitement and adventure.”
SpaceX’s plans for a Red-Planet settlement bring up numerous technological, political and ethical questions. One of the most challenging hurdles may also be financial: Not even Musk has ventured to guess an all-in cost estimate.
The last space program that came close to Musk’s interplanetary travel ambitions was NASA’s Apollo program, the mid-20th Century effort that landed six spacecraft and 12 astronauts on the moon. Apollo cost well over $280 billion in today’s dollars, and, in some years, NASA was taking up more than 4% of the entire national budget. The space agency, which in more recent years has received less than half of one percent of the federal budget, is mapping its own plans to return humans to the moon and, eventually, a path to Mars.
But the agency has not indicated how much the latter could cost, either.
Musk’s personal wealth has ballooned to about $100 billion — at least on paper — thanks in no small part to a series of stock and stock awards from his electric car company, Tesla. Musk has also repeatedly said that he hopes profits from SpaceX’s other businesses, including a satellite-internet venture that is currently in beta testing, will help fuel development of his Mars rocket. SpaceX has also raised nearly $6 billion from banks and venture capitalists, swelling into one of the most highly-valued private companies in the world, according to data firm Pitchbook. Presumably, at least some investors will one day be looking to cash out.
And that begs the question: Is there money to be made on Mars?
SpaceX is likely still many, many years from developing all the technology a Mars settlement would require. The company is in the early stages of developing its Starship, a massive rocket and spaceship system that Musk hopes will ferry cargo and convoys of people across the at-minimum 30 million-mile void between Earth and Mars. Musk has estimated Starship development will cost up to $10 billion, and Musk said Aug. 31 that SpaceX will look to launch “hundreds” of satellites aboard Starship before entrusting it with human lives.
If it proves capable of the trek to Mars, settlers will need air-tight habitats to shield them from toxic air and the deadly radiation that rains down on its surface.
“It’s not for the faint of heart,” Musk said. “Good chance you’ll die, and it’s going to be tough going…It’d better be pretty glorious if it works out.”
But for at least the first 100 years that humans have a presence on Mars, the economic situation will be dubious, said Michael Meyer, the lead scientist for NASA’s Mars Exploration Program, which recently launched the Perseverance rover to further study the planet robotically.
Musk does have a plan for making Mars an attractive destination for long-term living: Terraforming, a hypothetical scenario in which humans make Mars more Earth-like by pumping gases into the atmosphere. It’d be an attempt to use the same greenhouse gases causing the climate crisis on our home planet to make Mars’ atmosphere thicker, warmer and more hospitable to life. Musk has promoted the idea that the process could be kicked off by dropping nuclear bombs on the planet.
The idea of terraforming arose from scientists who were kicking around ideas, Meyer said, but not from anyone who thought it was something humans could or should do.
“It was an intellectual exercise,” Meyer said. But there’s barely any oxygen in Mars’ atmosphere. And there’s an infinitesimally small amount of water, meaning it will be extremely difficult to grow crops, much less create a Mars-wide water cycle. It’s not even clear if there are enough resources on Mars to make terraforming possible at all.
“I think ‘Total Recall’ has the right idea,” he joked. “You’d need to use some alien technology.”
Musk has also acknowledged that terraforming will be extremely resource-intensive. But the concept is ingrained in SpaceX lore, so much so that the company sells t-shirts saying “Nuke Mars” and “Occupy Mars.”
Musk is frequently seen wearing one.
Values and valuations
There are no known resources on Mars that would be valuable enough to mine and sell back to Earthly businesses, Meyer said. “Part of the reason [scientists are] interested in Mars is — it’s pretty much made of the same stuff as Earth,” he told CNN Business.
Musk has previously suggested that he agrees, noting that the resources on Mars would likely be valuable only to settlers hoping to build up industries on the planet. He noted eight years ago that the only “economic exchange” between Mars and Earth dwellers would be “intellectual property.”
Money-making ambitions aside, the idea that Mars could one day become home to a metropolis and — potentially — a tourist destination is acknowledged by mainstream scientists like Meyer, NASA’s lead Mars expert.
Meyer said that, 20 years ago, he attended a presentation about Mars business and tourism. “I went in pretty skeptical of this… and coming away I was thinking, ‘Well, [there are] some pretty reasonable ideas,” he said, adding that he now embraces the idea that businesspeople could make space travel more accessible.
Meyer added that, in his mind, it’s not if Mars travel will one day be a profitable venture, but when.
Musk hasn’t expanded on his ideas for making money on Mars, but his musings about exporting intellectual property echoed a book written by Robert Zubrin, an influential but polarizing figure in the space community and a longtime Musk ally.
“Ideas may be another possible export for Martian colonists,” Zubrin, who heads the Mars Society, wrote in his oft-cited 1996 book, “The Case for Mars.”
To look towards a potential future of humanity, Zubrin looks to its past.
“Just as the labor shortage prevalent in colonial and 19th century America drove the creation of Yankee Ingenuity’s flood of inventions, so the conditions of extreme labor shortage…will tend to drive Martian ingenuity.”
In a recent interview with CNN Business, Zubrin stood by those ideas, arguing American colonization has worked. Zubrin again harkens back to the colonization of North America as an example of how would-be Mars colonists might fund their trip.
“If you say, okay, you want to go to Mars, you’re going to want to offer something,” Zubrin said. “If you look at Colonial America, a middle-class person could travel to America by liquidating their farm. But, the proceeds would give them a one-way ticket. But if you are working, what you could do is sell your labor for seven years. Remember the indentured servants?”
“So there’ll be some selection for, like, you know, if you can pay it, you can go on your own terms — but if you can’t…effectively it’s like $300,000 which is about what a working person can make in seven years, or what a middle class person can put together by selling their house,” Zubrin added.
Zubrin, who has worked with conservative think tanks but says he is not politically affiliated, also acknowledged that colonization can go hand-in-hand with exploitation: “If somebody says, ‘But won’t there be exploitation there?’ Well sure, that’s what people do to each other all the time.”
(Musk has not expounded on his thoughts about colonialism, and he donates to both US political parties.)
To be clear: The story of American colonialism also included chattel slavery and the brutalization and erasure of many native populations.
“There aren’t native Martians,” Zubrin said.
But Damien Williams — a teacher and PhD student at Virginia Tech who studies the intersection of advanced technologies, ethics and societies — warns that the stories we may tell ourselves about America and exploring outer space can leave out key context.
It’s still unclear, for example, who Musk envisions as the first Mars settlers. NASA astronauts? Ultra-wealthy thrill-seekers? SpaceX employees?
“This competitive stance of expansion and exploration, it’s not necessarily a bad thing,” Williams, who also works with the advocacy group Just Space Alliance, said. But, when it comes to a private company using resources that international treaties say do not belong to anyone — “Who’s been brought in and how? Who’s been left out and why? These things matter.”
Musk’s use of the word “colonization” also belies a long history of Americans and other Western nations enriching themselves by exploiting and enslaving others. And when it comes to colonizing another planet, it’s not just the microbial lifeforms that may exist on Mars that should be concerned. Without clearly defined objectives and agreements, SpaceX’s colony could create a “contentious sphere of conflict,” Williams said.
“The values that we take with us into space exploration should be front and center,” he added.
SpaceX did not respond to requests for comment for this story.
Update: This story has been updated with additional quotes from Robert Zubrin regarding how Mars settlers might pay for their journey.
