Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair.
Bair, who ran the FDIC during the 2008 financial crisis, suggests Federal Reserve Chair Jerome Powell was irresponsibly dovish at last week’s policy meeting by creating “irrational exuberance” among investors.
“The focus still needs to be on inflation,” Bair told CNBC’s “Fast Money” on Thursday. “There’s a long way to go on this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.”
The Dow hit all-time highs in the final three days of last week. The blue-chip index is on its longest weekly win streak since 2019 while the S&P 500 is on its longest weekly win streak since 2017. It’s now 115% above its Covid-19 pandemic low.
Bair believes the market’s bullish reaction to the Fed is on borrowed time.
“This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot,” Bair said. “My concern is the prospect of the significant lowering of rates in 2024.”
Bair still sees prices for services and rental housing as serious sticky spots. Plus, she worries that deficit spending, trade restrictions and an aging population will also create meaningful inflation pressures.
“[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out,” Bair said.
New York Federal Reserve President John Williams said Friday rate cuts are not a topic of discussion at the moment for the central bank.
“We aren’t really talking about rate cuts right now,” he said on CNBC’s “Squawk Box.” “We’re very focused on the question in front of us, which as chair Powell said… is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.”
The Dow Jones Industrial average shot to a record and the 10-year Treasury yield fell below 4.3% this week as traders took the Fed’s Wednesday forecast for three rate cuts next year as a sign the central bank was changing its tough stance and would start cutting rates sooner than expected next year.
Traders are betting that the central bank would cut rates deeper than three times, according to fed funds futures. Futures markets also indicate that the Fed could start cutting rates as soon as March.
Williams is reining in some of that enthusiasm a bit, it appears.
“I just think it’s just premature to be even thinking about that,” Williams said, when asked about futures pricing for a rate cut in March.
Williams said the Fed will remain data dependent, and if the trend of easing inflation were to reverse, it’s ready to tighten policy again.
“It is looking like we are at or near that in terms of sufficiently restrictive, but things can change,” Williams said. “One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”
The Fed projected that its favorite inflation gauge — the core personal consumption expenditures price index — will fall to 2.4% in 2024, and further decline to 2.2% by 2025 and finally reach its 2% target in 2026. The gauge rose 3.5% in October on a year-over-year basis.
“We’re definitely seeing slowing in inflation. Monetary policy is working as intended,” Williams said. “We just got to make sure that … inflation is coming back to 2% on a sustained basis.”
The Dow Jones Industrial Average surged to close at more than 37,000 points for the first time as investors applauded a statement from the Federal Reserve on Wednesday that it could cut its benchmark interest rate next year.
The blue-chip index jumped 512 points, or 1.4%, to end the day at 37,090, topping its prior peak of 36,799 in early 2023. The broader S&P 500 rose 1.4% and is within 1.9% of its own record. The tech-heavy Nasdaq composite added 1.4%.
Fed officials also left their short-term rate unchanged for a third straight meeting amid signs that their aggressive push to subdue inflation is working. With the price spikes that slammed Americans during the pandemic now receding in earnest, Fed Chair Jerome Powell said in a news conference that the federal funds rate is projected to fall to 4.6% by the end of next year, from its current range of 5.25% to 5.5%.
“The Fed decision was more dovish than anticipated on a variety of fronts, including the acknowledgement that growth and inflation have both cooled, the strong signals that rate hikes are finished, and Powell’s admission during the press conference that ‘rates are at or near their peak,’” analyst Adam Crisafulli of Vital Knowledge said in a report.
Lower interest rates curb borrowing costs for consumers and businesses, boosting spending and broader economic growth. Interest rate cuts also tend to buoy riskier assets, including stocks. Markets have steadily pushed higher since October as Wall Street bet that the Fed, which hiked rates 11 times during the latest tightening cycle to their highest level in 22 years — will pivot to cuts in 2024.
While noting that the Fed is not ready to declare victory over inflation, Powell also said Fed officials don’t want to wait too long before cutting the federal funds rate.
“We’re aware of the risk that we would hang on too long” before cutting rates, he said. “We know that’s a risk, and we’re very focused on not making that mistake.”
Headline inflation around the U.S. edged down November as gas prices fell. The Consumer Price Index edged 0.1% higher last month, leaving it 3.1% higher than a year ago, the Labor Department reported on Tuesday. The so-called core CPI, which excludes volatile food and energy costs, climbed 0.3% after a 0.2% increase in October and is up 4% from a year ago. The Fed targets annual inflation of 2%.
Following the release of the Fed’s rate projections, traders on Wall Street upped their bets for cuts in 2024. Most of those bets now expect the federal funds rate to end next year at a range of 3.75% to 4%, according to data from CME Group.
“We see modest upside for U.S. stocks from current levels,” David Lefkowitz, CIO head of equities at UBS, told investors in a research note. “Both sentiment and positioning have improved, posing greater downside risks if there are any negative economic or earnings surprises.”
Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS). Wells Fargo said this week that more layoffs are on the horizon for 2024, as the bank doubles down on efficiency and cost cuts. Elsewhere, Morgan Stanley’s asset management division raised over $1 billion for growth investing , The Wall Street Journal reported Thursday, in the latest sign its long-dormant deal-making business could start to show signs of life. At the same time, the banking industry is facing the prospect of fresh regulations that threaten to chip away at profits for both firms. Banks are wading through decades-high interest rates and higher funding costs as economic uncertainty grips the sector. The KBW Bank Index, which tracks the performance of the biggest U.S. bank stocks, is down 13.85% year-to-date, compared to the S & P 500 ‘s 19.91% gains since the start of 2023. While Jim Cramer recently described the sector as the laggard of the stock market, he maintains that the stocks of both firms are still a buy. With Morgan Stanley, in particular, Jim said shares should be purchased “aggressively” because of its great dividend yield and cheap valuation. Still, recent headlines shed light on how our financial names are pushing forward amid a tough operating environment. Cost cuts The news: During a Goldman Sachs conference Tuesday, Wells Fargo CEO Charlie Scharf warned of large severance costs for the bank’s fourth quarter. “We’re looking at something like $750 million to a little less than a billion dollars of severance in the fourth quarter that we weren’t anticipating, just because we want to continue to focus on efficiency,” Scharf said. He added that the firm needs to get even “more aggressive” on managing headcount and is “not even close” to where it should be on efficiency. Wells Fargo has already laid off more than 227,000 staffers — roughly 4.7% of its workforce — this year, as of September. The chief executive also noted that the bank wants to continue allocating funds to build out the money-making areas of its business like capital markets. The Club’s take: Although layoffs are never an easy decision, management’s focus on cost cutting is necessary to improve Wells Fargo’s efficiency ratio – a gauge of the bank’s expenses relative to its revenue. Wells Fargo’s efficiency ratio has consistently improved in recent years, helped by various initiatives like significantly scaling back its U.S. mortgage business . Overall, Wells Fargo is a multi-year play for the Club as the bank continues to show further progress around its turnaround plan, which was implemented after financial regulators imposed a $1.95 trillion asset cap on the bank back in 2018. However, we maintain that lifting the cap is a “when, not if” scenario — one that should increase the bank’s balance sheet, allowing the firm to rake in more profits. WFC YTD mountain Wells Fargo year-to-date performance. Fundraising The news: Morgan Stanley Investment Management has raised almost $1.2 billion in funding for late-stage growth investing, news that the bank confirmed after The Journal originally broke the story. The bank’s asset management arm closed two different private-equity vehicles, surpassing its fundraising goal by approximately 40%, the bank said. The Club’s take: Although the investment may seem like a drop in the bucket for one of the nation’s largest banks – it manages around $1.4 trillion in assets – the move signals a more positive trajectory for the broader fundraising environment. Raising capital has been significantly more difficult since the Federal Reserve began hiking interest rates in March 2022 and the blow up of SVB earlier this year, so any indication of a pick-up in investments could be beneficial for the overall deal-making environment. This would benefit Morgan Stanley’s languishing investment-banking business, which has slowed in recent quarters due to a muted initial-public-offering market and weak mergers-and-acquisitions activity. MS YTD mountain Morgan Stanley year-to-date performance. Regulation The news: On Wednesday, the heads of eight of the largest U.S. banks, including Wells Fargo and Morgan Stanley, tried to convince lawmakers that proposed regulations, known as the Basel 3 endgame, will hurt not only their firms but everyday Americans, too. During an annual senate oversight hearing, the CEOs pushed back on new proposed rules — designed for U.S. banks with at least $100 billion in assets — that would raise the level of capital firms must hold to mitigate against future risk. “The rule would have predictable and harmful outcomes to the economy, markets, business of all sizes and American households,” JPMorgan CEO Jamie Dimon said. The Club’s take: We’re optimistic that Wells Fargo and Morgan Stanley would be able to adapt to any new rules because both are well capitalized, as indicated in the Federal Reserve’s annual stress tests earlier this year. Although the Basel 3 endgame could hit net interest income for Morgan Stanley, any weakness should be offset by a more profitable investment-banking division. Additionally, Morgan Stanley’s outgoing CEO, James Gorman, told CNBC last month that the bank can handle “any form” of new rules regulators might implement. (Jim Cramer’s Charitable Trust is long WFC, MS . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.
Reuters
Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS).
Big bank CEOs will likely convey deposits and earnings are stable to lawmakers on Wednesday, according to a major financial services executive. Thomas Michaud, CEO of Stifel company Keefe, Bruyette & Woods, thinks the hearing before the Senate Banking Committee will successfully provide assurance to Washington and Wall Street. Banking chiefs slated to speak at the “Annual Oversight of Wall Street Firms” hearing include JPMorgan CEO Jamie Dimon and Goldman Sachs CEO David Solomon. “The crisis of the spring where we had three of the four largest failures in history is behind us,” Michaud said on CNBC’s ” Fast Money ” on Tuesday. He’s referring to Silicon Valley Bank , Signature Bank and First Republic — the latter of which was the nation’s biggest bank failure since the 2008 financial crisis. Michaud, who testified before Congress in May on the bank failures, hopes Wednesday’s hearing re-addresses the call for changes to prevent bank runs from pushing other financial institutions over the edge. “One way to fix it is deposit insurance reform,” he said. “The targeted approach to change deposit insurance to reduce the ‘too big to fail’ thinking, so depositors don’t run like that. That is what we need, and that effort has stalled in Congress.” He thinks action is needed to keep mid-sized banks competitive with the big banks — starting with lifting Federal Deposit Insurance Corp coverage limits for small businesses. Currently, the FDIC covers $250,000 per depositor, per insured bank, per ownership category — an amount that is likely inadequate for small businesses . “If deposit insurance reform in my opinion doesn’t happen, there’s going to be tremendous pressure on those [mid-size] banks to consolidate,” Michaud said. Disclaimer
Check out the companies making headlines after the bell : Box — The cloud company plummeted 11% after reporting fiscal third-quarter adjusted earnings of 36 cents per share on revenue of $261.5 million. This was lower than FactSet’s analyst expectations of 38 cents per share on $262.4 million of revenue. MongoDB — The database stock shed 4%, despite MongoDB beating analyst expectations in its third-quarter earnings. MongoDB’s adjusted earnings came to 96 cents per share, above the 50 cents per share expected by analysts polled by LSEG. The company reported revenue of $433 million, also above the expected $404 million. Asana — Shares of the software firm slipped nearly 10%. Asana posted a narrower-than-expected adjusted loss of 4 cents per share in the third quarter, compared to the 11-cent per share loss expected by analysts surveyed by LSEG. The company’s $167 million revenue was also above the forecasted $164 million. Neurocrine Biosciences — The stock gained 2% in extended trading hours after the biopharma announced it has received a breakthrough therapy designation from the U.S. Food and Drug Administration for crinecerfont, which treats congenital adrenal hyperplasia, a hormone disorder. This designation expedites the development and review process for drugs that treat serious conditions. Dave & Buster’s — The stock slipped 3% after the company posted third-quarter revenue of $466.9 million, lower than lower than analysts’ forecasts for $473 million, per LSEG. The company also announced it would repurchase 2.8 million shares for a total cost of $100 million. Toll Brothers — Shares of the homebuilder gained 2% in extended trading hours after a fiscal fourth-quarter earnings beat. Toll Brothers reported earnings of $4.11 per share on a revenue of $2.95 billion, more than the $3.72 per share on $2.78 billion analysts surveyed by LSEG had predicted.
The Dow Jones Industrial Average on Friday topped 36,000 points for its highest close of the year. After a sluggish summer, Wall Street’s recent big gains has investors bullish this could be a sign the Federal Reserve could be done raising interest rates. However, homebuyers aren’t feeling quite as positive. Michael George has more.
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According to NewEdge Wealth’s Ben Emons, the final month of the year typically creates a bigger appetite for the yellow metal.
“It’s been very consistent every December. It’s been a pretty strong performance for gold — especially when there is a rally in the stock market in November,” the firm’s head of fixed income told CNBC’s “Fast Money” on Tuesday.
Gold settled at a new record high Friday. It closed the day up almost 2%, at $2,089.70 an ounce.
Emons listed the economic backdrop and geopolitical backdrop as additional positive catalysts for gold.
“There’s uncertainty next year. We have an election. We don’t know what’s going to happen. We get a recession maybe, maybe not,” said Emons. “At the same time, gold rallies when there’s this risk-on feel in the markets, and that’s really when real rates and interest rates are declining. This gives the gold a really good push for the breakout.”
In a note to clients this week, Emons wrote that months for both gold and stocks are a “rare combo.” Gold gained 3% while the Dow and S&P 500 were both up almost 9% in November.
“[It] tends to occur when markets price in major easing cycles,” he wrote. “Currently, that is going on in a mild manner, which puts the spotlight on the seasonals of gold.”
Emons suggests the strength will continue into next year.
“Central banks are again outbidding gold against dwindling supply, likely setting up the metal for a major breakthrough towards 2100 … lifting boats for laggards like utilities have a shot to claim market leadership by early 2024,” Emons also wrote.
“Fast Money” trader Guy Adami also sees gold shining due to the dollar‘s recent performance.
“If rates continue to go lower, the dollar will go lower. That will be a tailwind for gold,” he said. “Gold is within a whisper of having a huge breakout to the upside.”
As of Friday’s close, gold is up more than 14% so far this year.
Charlie Munger at Berkshire Hathaway’s annual meeting in Los Angeles California. May 1, 2021.
Gerard Miller
The late investment icon Charlie Munger said Berkshire Hathaway, the conglomerate he and Warren Buffett built over the last five decades, could have doubled its value if they applied leverage, or borrowed money, when buying businesses and common stocks.
Munger, Berkshire Hathaway’s vice chairman who died Tuesday just a month shy of his 100th birthday, stressed that he and Buffett almost never used this common Wall Street practice, because they always put their shareholders first.
“Berkshire could easily be worth twice what it is now. And the extra risk you would’ve taken would’ve been practically nothing. All we had to do is just use a little more leverage that was easily available,” Munger said in CNBC’s special “Charlie Munger: A Life of Wit and Wisdom,” which aired Thursday.
“The reason we didn’t is the idea of disappointing a lot of people who had trusted us when we were young … If we lost three quarters of our money, we were still very rich. That wasn’t true of every shareholder,” he told CNBC’s Becky Quick in the previously unaired interview. “Losing three quarters of the money would’ve been a big letdown.”
The use of leverage is prevalent on Wall Street as it provides a way to boost buying power and enhance the potential return in any given investment. But it also significantly increases the risk as losses can multiply quickly if the investment doesn’t pan out as expected.
Beware an ‘unsettled mind’
Buffett, often called the “Oracle of Omaha,” previously explained the perils of using debt and leverage to buy stocks, saying it can make an investor short-sighted and panicky when times turn volatile.
“There is simply no telling how far stocks can fall in a short period,” he wrote in his 2017 annual letter to shareholders. “Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Munger said he and Buffett had been “very cautious” in handling their shareholders’ money over the years. Berkshire shareholders tend to be long-term investors like all the conglomerate’s top executives, often treating their stock like a savings account.
“If Warren and I had owned Berkshire without any shareholders that we knew, we would’ve made more. We would’ve used more leverage,” Munger said in the CNBC special.
Still, Munger acknowledged that Berkshire did use leverage in the form of its insurance float. Insurers receive premiums upfront and pay claims later, so they can invest the large sums collected — cost free — for their own benefit.
“Insurance float gave us some leverage. That’s why we went into it,” he said.
JPMorgan CEO Jamie Dimon has a message for some of the world’s wealthiest corporate leaders: Help Nikki Haley’s presidential campaign.
“Even if you’re a very liberal Democrat, I urge you, help Nikki Haley, too. Get a choice on the Republican side that might be better than [Donald] Trump,” Dimon said Wednesday at a conference hosted by The New York Times’ DealBook franchise.
Present in the audience for Dimon’s remarks was a who’s who of Wall Street titans, including hedge fund veteran Bill Ackman. Billionaire Tesla CEO Elon Musk, media titan David Zaslav and Disney CEO Bob Iger were all scheduled to speak later in the day.
Dimon was clearly addressing his remarks to the people in the room, and not to all liberal Democrats.
The comments come as Haley is riding a wave of new support from key big money political backers. On Tuesday, the political network financed largely by billionaire Charles Koch formally endorsed the former governor of South Carolina.
Haley told CNBC’s Squawk Box that she and Dimon spoke by phone recently about the state of the economy. Dimon has a net worth is $1.8 billion, according to Forbes.
At the Dealbook conferene, Dimon stopped short of saying the Republican presidential nominee should be anyone but Trump.
“I would never say that, you know, because he might be the president and I have to deal with him too,” said Dimon.
Haley’s current momentum extends beyond Wall Street. A recent CNN poll showed 42% of likely GOP primary voters in the key primary state of New Hampshire supported Trump, with Haley in second place, getting 20%. For Haley, that’s an 8-point increase since the last CNN/University of New Hampshire poll in September.
Florida Governor Ron DeSantis was in fourth place in that poll at 9%, behind former New Jersey Gov. Chris Christie’s 14%.
LONDON — She might have crashed Britain. But can she save the world?
Former U.K. Prime Minister Liz Truss landed in Washington this week to drum up support for Ukraine among skeptical Republican lawmakers.
On both sides of the Atlantic there are hopes Truss can help steer the debate on the American right away from isolationism and toward the active international role espoused by both U.K. prime minister Rishi Sunak and U.S. President Joe Biden.
Truss — no fan of either man — makes for an unlikely diplomatic superhero.
The trip comes barely a year after her humiliating resignation ended a disastrous tenure as Britain’s shortest-serving prime minister. Since the end of her 49-day stint in Downing Street, Truss has tried to carve out a place for herself as a champion of right-wing policies around the world.
She is in Washington this week as part of a delegation of the Conservative Friends of Ukraine (CFU), alongside fellow former Tory leaders Iain Duncan Smith and Michael Howard. The group has a packed schedule, with around two dozen meetings planned with conservative U.S. lawmakers and think tanks.
The delegation’s arrival coincides with a stand-off between Biden and Republican lawmakers, who are stalling on a request to send billions more dollars in military aid to Ukraine. Congress has twice passed spending bills this fall that omitted funding for the conflict.
Republicans have sought to tie support for Ukraine with measures to strengthen the U.S–Mexican border.
Former President Donald Trump, who is widely expected to secure the Republican nomination for next year’s general election — and whom polling suggests is ahead of Biden in a series of key battleground states — shares this skeptical view of Ukraine aid. Back in May, Trump refused to say even whether he thought Ukraine or Russia should prevail in the war.
A showdown is expected next week with a potential vote in the Senate on Joe Biden’s $106 billion aid package — $61.4 billion of which is earmarked for Ukraine. Senior diplomats on both sides of the Atlantic hope Truss could help break the impasse.
One U.K. official said of the delegation: “They bring a more authentic voice to those kind of Republicans who like speaking to people from their own party — they’re not encumbered by government policy, they don’t have to sort of say nice things about the [Biden] administration.
“If that resonates with Republican lawmakers in a way that governments don’t, then all to the good.”
“We’ve targeted Trump-leaning or Trump-supporting Republicans to try and get them to think strategically,” Tory MP Jake Lopresti said | Jim Vondruska/Getty Images
Showing the right what’s right
Truss’ full-bodied right-wing agenda might have ended in disaster in Downing Street — but it puts her in a good stead with the Republican right.
Far from being nice about the Biden administration, Truss was quick to explicitly endorse the Republican Party ahead of her trip, writing in the Wall Street Journal that she hoped “a Republican will be returned to the White House in 2024.”
She went on: “There must be conservative leadership in the U.S. that is once again bold enough to call out hostile regimes as evil and a threat.”
The CFU said there is no meeting with Trump himself on its agenda. Instead, Jake Lopresti, a Tory MP who is among the delegation, told POLITICO the group was focusing on lawmakers ahead of the expected Senate vote next week. “We’ve targeted Trump-leaning or Trump-supporting Republicans to try and get them to think strategically,” he said.
Lopresti said the case the delegation was making was simple: “If you want to avoid conflict in the future, you have to have a strong deterrent. There’s trouble bubbling up all over the world. It’s a bit like the 1930s.
“It’s cheaper and cleaner and quicker to actually solve it now, send a message — we won’t allow people to walk into other people’s countries in the 21st century. Ukraine is an independent nation, free, democratic. It’s got a right to run its own affairs.”
High stakes
John E. Herbst, a senior director at the Atlantic Council — and former U.S. Ambassador to Kyiv — said his think tank is supporting the delegation because it agrees Washington has a “vital stake … in making sure Russia loses in Ukraine.”
“When Tory MPs come to the United States to explain to populist Republicans that the policy view of those Republicans on Ukraine is a great mistake, we think they should be supported,” he said.
Notably, the delegation is following in Boris Johnson’s footsteps — another former British PM who has travelled to Washington several times this year to bring the case for supporting Ukraine to wavering Republican lawmakers.
Johnson addressed a lunch organized by a pro-Ukraine think tank deep in the Republican territory of Dallas, Texas, where he told those present that victory for Vladimir Putin would be “terrible in its ramifications.” He evoked China’s claim over Taiwan, a major foreign policy concern for U.S. politicians of all stripes — especially Republicans.
Duncan Smith, who has been sanctioned by China for criticizing its human rights record, similarly warned in a speech to the Heritage Foundation this week that the conflict in Ukraine and China’s threats against Taiwan are “linked inexorably” by a “new axis of totalitarian states.”
“To ignore one is to multiply the danger in the others,” he said. “If Ukraine loses or is forced into some weak settlement with Russia … this in turn will be the strongest signal that the free world will not stand by Taiwan.”
Whether enough Republicans are ready to listen remains to be seen.
Wells Fargo Securities is officially out with its 2024 stock market forecast.
Chris Harvey, the firm’s head of equity strategy, sees a volatile path to his S&P 500 to 4,625 year-end target.
“It’s really hard to get excited. If we have better [economic] growth, then the Fed doesn’t do anything,” he told CNBC’s “Fast Money” on Monday. “If we have worse growth, then numbers are going to come down and then the Fed will eventually cut. The second half will be better, but the first half is going to be really, really sloppy.”
Harvey’s target is just 75 points above Monday’s S&P 500’s close.
“Can we go higher from here? Sure, we can go a little bit higher. But I just don’t think you can go a ton higher,” he said. “People have talked about 5,000. I don’t see how you get to that level.”
In his official 2024 outlook note, Harvey told clients to brace for a “trader’s market” instead of a “buy-and-hold situation.” His early year strategy: Start with a risk-averse stance.
“The VIX [CBOE Volatility Index] is up 13. Every time we’ve gone into a new year with the VIX at 13, we’ve seen spikes. We’ve seen the equity market pull back, and it’s just not a great setup into 2024,” Harvey added.
He warns the higher cost of capital is an additional market problem because it prevents multiples from going higher.
“As long as the cost of capital stays higher, it’s really hard for me to get to a much higher price target,” Harvey said.
Yet, he still sees opportunities for investors.
“What we want to do is we want to go to the places that are oversold. We just upgraded utilities today. We upgraded health care,” Harvey noted. “Those are areas that have good valuations, decent fundamentals and most people really aren’t there at this point.”
“If you look at the alternatives, there are things that are pretty attractive. And, I hate to say that as being head of equity strategy, but you can park money at the front of the curve and make a pretty good rate of return and not put on a whole lot of risk,” said Harvey.
His 2023 S&P target is 4,420 — which implies a three percent drop from Monday’s close.
Ermotti told CNBC on Wednesday that he was “more than encouraged” by the massive oversubscription received for last week’s return to the market.
“The AT1 demand was incredible — $36 billion of demand for what happened to be $3.5 billion of placements — and in my point of view, it was probably the highlight in a sense of the confidence is restoring not only for UBS, I would say also it is a signal to the Swiss financial system,” Ermotti said.
“The first reactions were based on emotions or people that were very loud because they had their own interest, but I think that, as time went by, people had enough chances to really look at the idiosyncratic situation, and also probably look more carefully into the prospectus of what is written,” Ermotti told CNBC’s Joumanna Bercetche on the sidelines of the UBS Conference in London.
“Those bonds were designed to be there for those kind of situations so I think that people over time, or the vast majority of the people, are coming down to a more balanced way of looking at matters,” he added.
UBS CEO Sergio Ermotti discusses the high demand for the Swiss bank’s recent issuance of AT1 bonds and shares his thoughts on the outlook for central banks.
Former St. Louis Fed President Jim Bullard says the Federal Reserve still has “a ways to go” in fighting inflation and that there is still a risk that prices pick up once again.
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%, and inflation has since fallen substantially.
Although markets now believe interest rates have peaked and have begun looking forward to cuts next year, Bullard — who stepped down as head of the St. Louis Fed in August — suggested the central bank’s work is far from over.
“It’s been so far so good for the FOMC. Inflation has come down, core PCE inflation on a 12-month basis down from 5.5% to 3.7% — pretty good but that’s still only halfway back to the 2% target so you’ve still got a ways to go,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference in London.
“I think you have to watch the data carefully and it’s very possible that inflation will turn around and go the wrong way.”
October’s consumer price index slated for release Tuesday is expected to show an increase of 0.1% month-on-month and 3.3% annually, according to a Dow Jones poll of economists.
“That’s just one month’s number, but still I think the risk for the FOMC is that the nice disinflation that we’ve seen over the last 12 months won’t persist going forward and then they’ll have to do more,” Bullard said.
U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.
Evelyn Hockstein | Reuters
UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.
In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”
UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.
The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.
UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”
“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.
“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”
The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.
“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.
“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”
UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.
“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.
Worst credit impulse since the financial crisis
Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.
“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.
Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”
“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.
A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production, and incomes.
Goldman ‘pretty confident’ in the U.S. growth outlook
The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.
Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.
“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”
Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.
“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded.
Correction: Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%. An earlier version misstated the range.
The binge on designer brands is over. After three years of record growth, luxury companies are feeling the pain as sales slow to a more normal pace. On Friday, an earnings report from Cartier owner Richemont offered up the latest evidence, and sent luxury stocks reeling. “I’d say a soft landing is our hope, but we will only know that when we look back at it probably in a years’ time,” Richemont Chief Financial Officer Burkhart Grund told investors during a quarterly earnings call on Friday. High interest rates around the world means that consumers are shopping less, moderating annual revenue growth in the sector to about 9%. China’s slower-than-expected recovery, as well as foreign exchange fluctuations have also pressured travel-related purchases and eroded profit margins. Amid this unfavorable backdrop, investors may want to look toward the defensive names in the sector — those that sit at the very top of the brand prestige pyramid. Nowhere have the struggles of the luxury sector been more prominent than in the French conglomerate LVMH Moet Hennessy Louis Vuitton , the group’s bellwether. Share value jumped more than 200% from March 2020, the start of the pandemic, to April 2023, when the company became the first European company to exceed $500 billion in market value after posting record results in 2021 and 2022. However, U.S.-traded LVMH shares are down more than 30% from the July high, after hitting a fresh 52-week low of $137.31 in trading on Friday. The company remains up 2% year-to-date after third-quarter revenue growth slowed to a 9% year-over-year gain in October, a sharp decline from 17% annual pace in the prior quarter. LVMUY YTD mountain LVMH shares in 2023 Luxury peers such as Gucci parent company Kering and Richemont also enjoyed a boost in the wake of the pandemic, bringing the sector’s revenue growth rate from 2019 to the first half of 2023 to 11%, or 200 basis points above the 20-year trend, said Bank of America analyst and head of consumer discretionary Ashley Wallace. She added that luxury stocks are trading below their historical averages. “The crux of the luxury investment case is now whether we shall see ‘gentle’ growth normalization through a ‘soft landing,’ or whether we will see a dip and a spend[ing] ricochet after years of consumers splurging,” Bernstein analyst Luca Sola wrote in a September note. While the richest consumers remain relatively insulated from a high interest rate environment and an economic slowdown, the aspirational consumer is more sensitive to these pressures and has begun to weaken. This dynamic tends to hurt the less-prestigious luxury brands more, according to Rogerio Fujimori, an analyst at Stifel. “What you have is basically companies that suffer less and suffer later. Usually, every time you have a slowdown period, it’s the more aspirational tier-two brands that suffer first. So you have to put that in this context,” said Fujimori. Nonetheless, he noted that no company is “fully immune.” The trend is already visible in the U.S. luxury market, which had been one of the strongest parts of the post-pandemic rebound, but also is the most cyclical, according to Wallace. “It’s important to understand that this normalization is coming from a point where demand has been elevated versus history,” said Wallace. “I don’t think that we should be calling into question the structural appeal of the sector.” Wallace expects the sector will “undershoot” on year-over-year growth for the second half of this year and into 2023. Currency headwinds The relative strength of the U.S. dollar compared to other major currencies has been a double-edged sword for the sector. During the summer of 2022, the gap between the U.S. dollar and the euro created nearly a 30% discount between EU-sold and U.S.-sold luxury goods, and led to a surge in U.S. travelers splurging on luxury goods in Europe. The weak Japanese yen also put luxury goods prices in Japan on par with Europe, attracting Chinese tourists to Japan for shopping sprees. However, the renminbi has fallen to its lowest level in 16 years as concerns over China’s economy mount, reducing Chinese consumers’ incentives to shop abroad, according to Wallace. This is critical. China is the biggest market for most luxury brands. Pre-pandemic, more than 60% of the luxury purchases made by Chinese consumers were made outside of mainland China, according to Stifel’s Fujimori. The number fell to a range between 10% and 15% during the pandemic. For LVMH, Kering and Moncler, the share is hovering around 30% year to date. “The luxury consumer tends to spend more when they travel versus when they are at home,” Fujimori said. “Chinese [consumers] are back to Southeast Asia and Japan, but there’s still a long way to go in terms of Europe. And that is probably something that’s continuing into next year. But that’s why you need, of course, Chinese consumer confidence — probably renminbi that is stable, because if the renminbi gets weaker, you have less purchasing power to pay for your trip,” said Fujimori. The companies do have the advantage of pricing power, which allows them to pass on currency moves over time to protect profitability and hedge, said Fujimori. “But the problem with currencies is [that] usually there is a shock when you have a very big move because that creates price gaps among regions. And the companies don’t increase prices straightaway,” said Fujimori. Unfavorable foreign currency movements also weigh on luxury company profits. Richemont reported that gross margins in its fiscal second quarter fell 2% from the prior year when using actual exchange rates — but were actually up 15% at constant exchange rates. Waiting for China’s rebound Luxury stocks may have no choice but to hope for tailwinds around China’s reopening. “There are and have been for quite a while elements that in general weigh down on the Chinese economy and especially on the feel-good factor on which we, as an industry, depend on,” Richemont’s Grund said. The sector will be especially sensitive to Chinese consumer sentiment next year as consumers in other regions have already slowed down. American consumers have already seen seven quarters of sequential acceleration in demand, at more than three times the normalized growth rate, before hitting a peak in the first quarter of 2022. Growth is slower, but still positive. European consumer demand peaked a year later, said Wallace, who forecasts luxury consumption in the region will decline 6% next year. Wallace expects consumption in Japan to peak in either the fourth quarter or the first quarter of 2024. “Next year, the Chinese consumer will contribute probably more than 70% of incremental revenue. So you’re highly reliant on growth from the Chinese consumers,” Wallace said. If the Chinese economy enters a stagnation similar to Japan’s economic growth in the 1990s and 2000s — the “lost 20 years” — then Fujimori foresees risks ahead. “After the U.S. and Europe reopened [post-pandemic], there was a bit of ‘revenge spending.’ … But in China, it didn’t happen. Confidence is very low, and youth unemployment is high,” Fujimori said. “Most of the wealth of wealthy Chinese is basically tied to the stock market and property market, which [have] been weak. So as you can imagine, [they] don’t feel a lot of confidence to make a big purchase.” Defensive luxury picks Amid the period of macro and consumer uncertainty, investors are favoring companies with defensive attributes that can withstand a tougher, slow growth world amid high rates. “The sector is seeing very little top-line growth at all. As we kind of enter into the ongoing normalization phase in terms of revenue growth, people should be positioned in the most defensive way possible until we’ve paddled through this weakness of the top line, and can start looking at better trends to come in the second half of next year,” said Wallace. Analysts are bullish on Hermes and Brunello Cucinelli , which are currently outperforming in spite of weakening consumption. These companies are more resilient due to their greater exposure to a high-net worth customer profile, which is less cyclical and more resilient against macro headwinds. HESAY YTD mountain Hermes’ U.S.-listed shares, year to date. Hermes also benefits from being less exposed to travel industry, Citi analyst Thomas Chauvet said in an October note. Hermes and Louis Vuitton have been more resilient in past recessions, Fujimori said. “I think perhaps because in less favorable times, consumers become more selective and buy fewer units — and the fewer purchases are concentrated on the stronger brands,” he said. U.S.-traded shares of Hermes and Brunello Cucinelli are up nearly 29% and 18% year to date, respectively. Shares of the two companies also were weathering Friday’s sell-off well, with Hermes unchanged, while Brunello Cucinelli gave up about 2%. That contrasts with LVMH shares down 3% and Kering shedding more than 2%. Hermes also benefits from being more measured in its price hikes compared to brands such as LVMH-owned Dior and Louis Vuitton, said Vontobel Quality Growth Boutique analyst Markus Hansen. “There were some egregious pricing moves by certain companies. And that maybe is now going to come back and bite a bit, because I think the nature of the price increases was maybe a bit too aggressive,” said Hansen. Bank of America’s Wallace expects Hermes will play some catch-up in pricing in 2024. “So there’s more still to come from them, which should be supporting their top line growth. And this kind of strong top line, supported by pricing and volumes, should help to give them better incremental margins as [we] go into next year, where margins in the sector will potentially become under more pressure,” the analyst said. To be sure, the U.S.-listed stock has an average rating of a hold from analysts. The average target price on shares is $210.50, which suggests shares could rise about 14% from Thursday’s close, according to FactSet. Analysts are less optimistic about Kering — the parent company of Gucci and Bottega Veneta, among others — as several of its brands are in turnaround mode under relatively new creative directors. It’s also more exposed to an aspirational customer. U.S.-traded shares of Kering have fallen 17% in 2023. Product categories are also important when considering growth possibilities amid a slowdown. Fujimori underscored aspirational categories, or items with higher price points and more discretionary in nature, such as watches, as being more volatile and sensitive to market changes than perfumes. Beauty is generally more recession resilient, he noted. Underscoring this point is LVMH-owned Sephora’s outperformance compared with the conglomerate’s other segments in 2023. Flexing its pricing power Despite the difficult near-term environment for luxury companies, the analysts remain confident in the sector’s structural strength and longer-term growth opportunities. “That 9% compound [revenue] growth, if you take a medium-term perspective, is really supported by the fact that you have an addressable market which has more than doubled thanks to product extensions and cultural relevance, which has gone up significantly,” said Wallace. “Both of those things together support positive volume and price benefits.” An increasing number of high net-worth individuals from emerging markets also helps its structural long-term growth story, said Vontobel’s Hansen. That, combined with its supply-driven model gives companies resilience, he said. “As wealth improves over time, you have a product which is selling to a consumer where the numbers are growing but where the supply of the product itself is still behind demand. And that’s what allows you this amazing pricing power,” Hansen said. Longer term, the European luxury sector may once again contain opportunities for growth investors. LVMH and other European luxury brands have been market leaders among European equities since 2021 until the first half of 2023. The luxury industry also has strong barriers to entry, pricing power and no meaningful competition — which remains unchanged because the long-term fundamentals are unchanged, Fujimori stated. The brands are also timeless. This ensures that the luxury powerhouses can retain their market share and prestige in the long-run. “The luxury brands are basically the same leading players for many decades. That hasn’t changed,” said Fujimori. —CNBC’s Michael Bloom contributed to this report.
There’s growing concern among some Wall Street participants that November’s hot start has more to do with hedge funds racing to cover their bearish bets than an actual change in the stock market’s prospects. “We believe that last week’s drop in U.S. treasury yields and sharp rebound in equity markets were driven by an epic short covering rally across asset classes,” Chris Senyek, chief investment strategist at Wolfe Research, wrote in a Monday note. “While there could be some additional follow through, in our view, last week’s sharp moves continue to look like shorter-term trades, not new longer term trends,” Senyek added. The S & P 500 surged by 5.85% last week, its best weekly performance going back to November 2022. The Nasdaq Composite gained 6.61%, its best also since November 2022. Both benchmarks are higher eight days in a row, their best winning streaks in nearly two years. Those moves come as Treasury yields pull back from their multi year highs. The 10-year Treasury yield on Tuesday was below 4.6%, after having topped 5% last month. .SPX 3M mountain S & P 500 But a number of market participants are concerned the rally has more to do with short covering. Selling short is when a sophisticated trader borrows stock from a broker and sells it, in order to buy it back at a lower price and return the shares later, profiting from the difference. Short covering is when the stock, or in this case securities linked to indexes, advance rather than fall, causing investors to rush and buy back the stock before their losses balloon. If done in force, their buying can cause a so-called short squeeze. Shorted stocks surged The Goldman Sachs Most Short Rolling Index, a basket of stocks with the highest short positions, registered a 3.6% advance on Friday. But then just as quickly it fell by 4.4% by Monday afternoon, as pointed out by BTIG’s Jonathan Krinsky. Over the last four years, the pattern — a one-day gain of at least 3.6% followed by next-day fall of 3.6% or more — has only happened eight times, according to BTIG. Of those instances, the S & P 500 was down five days after the move, by more than 1% on both an average and median basis. “While this is by no means a guarantee of weakness ahead, we think it speaks to the fact that the last couple of days was largely a function of shorts being covered, and when there is nothing to support that move it gives back a significant portion of that the following day,” Krinsky wrote. “This can often act as a fulcrum for the broad market as well,” Krinsky added. Commodity trading advisors also accelerated short covering, notably turning short in the front end, according to a Bank of America note on Monday. Elsewhere, Citi’s Chris Montagu said S & P 500 futures positioning remains “moderately bearish” following the short-covering rally. “S & P and Nasdaq short positioning declined, as investors unwound profitable shorts,” Montagu wrote on Monday. “However, the bearish extension for S & P remains, with short positioning moderate.” BTIG’s Krinsky anticipates further challenges for the broader index, especially if the Federal Reserve is unlikely to cut rates anytime soon, part of the hope driving the rally. Meanwhile, Wolfe Research’s Senyek expects the 10-year Treasury yield will climb back above 5%, and that stocks will fall again by year end.
UBS on Wednesday began selling Additional Tier 1 (AT1) bonds — which were at the heart of controversy during its emergency rescue of Credit Suisse — for the first time since completing the takeover.
The Swiss banking giant is marketing two tranches of U.S. dollar AT1 bonds, a noncall five-year offering around a 10% yield and a noncall 10-year offering around 10.125%, according to LSEG news service IFR. Noncall bonds are bonds that only pay out at maturity.
UBS confirmed to CNBC that it is offering Additional Tier 1 securities, but did not comment on the details of the contracts and said it will provide additional information when the offering is complete.
AT1 bonds are considered a relatively risky form of junior debt and are often owned by institutional investors. They were introduced in the aftermath of the 2008 financial crisis as regulators looked to divert risk away from taxpayers and boost the capital held by financial institutions to protect against future crises.
Fitch on Wednesday assigned the new AT1 notes a BBB rating, four notches below UBS Group’s overall viability rating of A, with two notches for “loss severity given the notes’ deep subordination” and two for “incremental non-performance risk.”
“UBS’s new AT1 notes will contain a permanent write-down mechanism at issue. However, subject to approval by UBS Group AG’s 2024 AGM [annual general meeting], the permanent write-down mechanism will be replaced by an equity conversion mechanism from the date of the AGM, which will bring the terms in line with other European markets,” the ratings agency said.
“The conversion feature would mean that, if approved by the AGM, the notes would be converted into a pre-defined volume of share capital of UBS Group AG if the latter’s common equity Tier 1 (CET1) ratio falls below a 7% trigger, or if a viability event is declared by FINMA [Swiss Financial Market Supervisory Authority].”
