The Federal Reserve’s message is being heard loud and clear by markets. The central bank successfully shifted the focus toward higher-for-longer interest rates at its September meeting. Markets were previously hung up on when rate cuts might begin.
Cue a repricing ever since. The yield on the 10-year Treasury note climbed to 4.687% Monday, its highest level since 2007.
The timing of the move—on the first day of the fourth quarter and with little news—means last week’s rising yields can’t be attributed to end-of-quarter positioning. This is a market shift that’s picking up momentum.
But how far is too far, and how quick is too quick? The Fed has the power to stop the selloff, either through messaging or simply by reducing its quantitative tightening. But for the moment it seems happy to watch this play out.
At Jackson Hole, Boston Fed President Susan Collins said the rise in yields was “helpful” and a move consistent with the central bank’s messaging.
So, will it stay on the sidelines until something breaks?
Fed officials, for their part, have been ramping up the hawkish rhetoric. Cleveland Fed President Loretta Mester said Monday that another hike may be needed this year, while Fed Governor Michelle Bowman called for further rate raises and keeping policy restrictive “for some time.”
The higher-for-longer narrative is gathering steam, and without the Fed’s intervention, it looks unstoppable
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Microsoft’s CEO Nadella on Search and AI at Google Trial
Microsoft CEO Satya Nadella said Alphabet could use its dominant 90% share of online search to gain exclusive rights to publishers’ content to train its new artificial intelligence tools and widen its current lead. The idea that there is a true choice in search is “bogus,” he said.
- Nadella was testifying during the third week of the Justice Department’s trial. The government has accused Google of paying billions of dollars a year to rivals, smartphone makers, and wireless providers to be the default search option on devices. Google denies the allegations.
- Nadella said Silicon Valley sees search as among the toughest markets to crack, adding that there are limits to how much AI can reshape things. “The distribution advantage Google has today doesn’t go away,” Nadella said.
- Microsoft has invested billions of dollars in ChatGPT maker OpenAI, using the technology to create a new version of its Bing search engine. One Monday, Nadella hinted he may have been overly enthusiastic in previous comments about ChatGPT’s potential.
- Google’s lawyers contend that Bing is behind in the search wars because people prefer Google, and that Microsoft hasn’t invested as much in its development. Nadella said Microsoft has invested $100 billion in its search engine, Bloomberg reported.
What’s Next: The nonjury trial, in Washington, D.C., district court, is expected to last 10 weeks. The DOJ is joined by a coalition of state attorneys general. U.S. District Judge Amit Mehta could decide to break up Google or order other changes to its business.
Meta Explores Charge for Ad-Free Instagram and Facebook
Meta Platforms has proposed charging a monthly fee for Europeans to use its Instagram and Facebook social networks without advertising.
- Meta has made the proposal to EU regulators in recent weeks and hopes to roll out the charging plan in the coming months, The Wall Street Journalreported, citing people familiar with the matter.
- The proposed price for the ad-free offerings would be €10, or roughly $10.50 a month, on desktop using a Facebook or Instagram account, with the base price rising to €13 a month on mobile devices, according to the report. Meta declined to confirm or deny the ad-free charging plans.
- It’s the company’s latest bid to tackle European Union demands to allow users to opt out of personalized advertising based on user data. Meta was hit with a $1.3 billion fine earlier this year by EU regulators for sending user information to the U.S.
- Meta’s plan wouldn’t affect users in the U.S. but would mark a departure for a company that has focused on free services supported by advertising.
What’s Next: EU regulators might still demand a free version of Meta’s services with the ability to opt out of personalized advertising. If so, that might renew questions over whether Meta could even choose to withdraw from the EU. Meta has previously said roughly 10% of its global advertising revenue comes from ads delivered to Facebook users in EU countries.
Kaiser Permanente Bracing for Healthcare Worker Strike This Week
Kaiser Permanente, one of the nation’s largest nonprofit healthcare providers, is facing a strike by 75,000 union workers as early as Wednesday after their contracts expired last Saturday. Union leaders say it has the potential to be the biggest healthcare industry strike in U.S. history.
- The unions called for a three-day walkout from Kaiser facilities starting at 6 a.m. Wednesday, in protest at what they call unfair labor practices and unsafe staffing levels. The unions are also seeking pay raises and protections against outsourcing.
- The unions said they are prepared to stage a longer strike in November. Kaiser Permanente told Barron’s it was optimistic about reaching an agreement, and that negotiations would continue through midday today. If there’s a strike, facilities will continue providing care, and hospitals and emergency departments will stay open.
- Kaiser said it has offered “guaranteed across-the-board wage increases” and a $21 minimum wage in Washington, Oregon, Colorado, Virginia, Maryland, Washington, D.C., and Hawaii starting in 2024, and a $23 minimum wage in California starting in 2024.
- Doctors, registered nurses, and hospital managers won’t be included in the strike, but other medical staff are, including X-ray, surgical, and lab technicians, nursing assistants, pharmacy workers, home health aides, and others.
What’s Next: Kaiser told Barron’s it has hired more than 50,000 front-line employees in the past two years, including more than 9,800 workers hired this year in jobs represented by the union, toward a goal of 10,000 new hires by the end of October.
Birkenstock Presses Forward With IPO Despite Gloomy Conditions
While German sandals maker Birkenstock is pressing forward with its plans for an initial public offering in the near future, the market for new listings has been lackluster. Recent IPO stocks are still well below their peaks, with interest rates and the financing environment being the main culprits.
- Birkenstock updated its IPO plans on Monday, seeking to sell 32.3 million shares at between $44 and $49 each. It wants to raise up to $1.58 billion at a valuation of $9.2 billion and list on the NYSE under the symbol “BIRK.”
- Companies going public have raised just over $18 billion so far this year, according to KPMG. That is down from about $23 billion for all of 2022 and from roughly $300 billion in 2021, a record year. Recent high-profile IPOs include Arm Holdings , Instacart , and Klaviyo .
- After an initial pop, the recent IPO stocks have traded lower. Instacart, the shopping and delivery app, priced its initial public offering last month at $30 a share and opened for trading at $42. But on Monday the shares set a new post-IPO intraday low at $27.51.
- Birkenstock’s target valuation is higher than the $8 billion it was looking at last month when it originally filed its paperwork with regulators. JPMorgan, Goldman Sachs, and Morgan Stanley are arranging the offering.
What’s Next: Private equity firm L Catterton, an investment company formed through the partnership of Catterton, LVMH , and Groupe Arnault, acquired a majority stake in Birkenstock in 2021 and would still own 83% after the offering.
—Janet H. Cho and Callum Keown
What to Expect for Fourth-Quarter Home Builder Stocks
Home builders are heading into the fourth quarter facing several challenges in addition to it being a typically slow season for construction. A big part of it is that mortgage interest rates continue to rise, keeping would-be home buyers on the sidelines as housing affordability continues to be an issue.
- Builder stocks have already been dropping. The 13 home builder stocks in the SPDR S&P Homebuilders ETF fell an average of 12% in the third quarter, according to FactSet. It was the first losing period for builders since the same quarter last year.
- Mortgage rates climbed quickly in the third quarter, which spooked buyers, builders, and investors. The average 30-year fixed mortgage rate increased to 7.31% on Thursday, a more than two-decade high, according to Freddie Mac.
- The 10-year Treasury yield, which helps set mortgage rates, rose to 4.682% on Monday, its highest end-of-day yield since October 2007, Dow Jones Market Data showed. National Association of Realtors Chief Economist Lawrence Yun has said mortgage rates could rise as high as 8%.
- Home builders could spur demand by offering perks to entice buyers, UBS analysts wrote. With fewer homes for sale increasing demand for new properties, UBS expects publicly traded builders to remain the prime beneficiaries of this housing cycle.
What’s Next: Economists and analysts expect relatively high mortgage rates to stick around a while. Fannie Mae’s September housing forecast anticipates rates averaging 7.1% at the end of 2023, and falling to an average 6.3% by the end of 2024.
—Shaina Mishkin and Janet H. Cho
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