Economists are forecasting U.S. headline consumer price inflation for August to ease to 8.1% Y/Y from 8.5% in July, in a growing sign that the closely-watched index may have peaked at 9.1% in June. On the other hand, core CPI, which excludes volatile prices and happens to be the Fed’s more preferred inflation gauge, is expected to increase to 6.1% in August from a year before vs. 5.9% in July, as rents and wages show little signs of slowing. Note that the Fed is currently in its blackout period before the big September meeting, so expect all the reactions to come from traders and analysts, not central bank officials.
Commentary: Interactive Brokers Senior Economist José Torres, who is expecting August’s CPI reading to be 8.2% Y/Y and 6.2% for core, believes the upcoming report on consumer prices “will not deter the Fed from their tightening plans as they remain committed to easing price pressures.” Chair Jerome Powell already telegraphed that he’s taking out the big guns next week, so the data is more likely to impact decisions in November and December, if anything. Bear in mind that part of the central bank’s dual mandate is to bring down inflation to its 2% target, which is nowhere near current levels.
As a result, markets are betting on another aggressive 75-basis-point rate hike as inflation hovers around a 40-year high. According to CME’s FedWatch tool, traders see a 92% probability that the FOMC will lift its fed funds target range to 3.00%-3.25% from the current range of 2.25%-2.50%, compared to a mere 8% probability of a 50-bps move.
What does it mean for stocks? “In order for the Fed to go slightly slower and for the recent [stock market] rally off of June lows to hold and persist, we need CPI, Core CPI, PPI, and Core PPI to come in below estimates,” wrote Ophir Gottlieb, CEO at Capital Market Laboratories. It’s also important that inflation expectations do not become entrenched, and it seems like things are going okay (for now) on that front, based on the latest Survey of Consumer Expectations from the New York Fed. Median one-year ahead inflation expectations for August fell to 5.7% from 6.2% in the prior month, while implied inflation three years ahead decreased to 2.8% from 3.2%. (25 comments)
Early voting suggests that Twitter (TWTR) is set to gain approval of its $44B deal to be acquired and taken private by billionaire Elon Musk. That’s not too surprising, as Twitter’s $41.41 share price still sits at a near-24% discount to Musk’s $54.20 buyout offer. The formal vote will arrive this morning, just as Twitter lawyers rejected a third attempt by Musk to cancel his agreement to buy the social network.
Snapshot: Early indications are that the deal will pass by a wide margin, especially with big shareholders, including index fund managers. Musk himself hasn’t voted his 9.6% stake, and is unlikely to do so given allegations that Twitter breached the merger agreement. While the transaction requires him to vote his share in favor of the deal – and it would be awkward for him to vote his stake against his own takeover – his support isn’t necessary if enough other investors back it.
Even if the agreement gets an overwhelming thumbs up, the biggest wild card is several weeks away. A trial in Delaware Chancery Court over holding Musk to the original terms of his acquisition is set to start on Oct. 17. According to Wedbush analyst Dan Ives, there remains “a high possibility” that some form of negotiated settlement will happen before the parties end up in a courtroom, though the “major X variable” will be the whistleblower claims of former Twitter security chief Peiter “Mudge” Zatko. Last week, it was reported that Twitter reached a $7M settlement with Zatko, and he is set to testify to the Senate Judiciary Committee today.
Four endings: Among the least likely outcomes are that Musk pays a $1B breakup fee – and he and Twitter go their separate ways – or that Musk wins the case and ends up having to pay no breakup fee at all. The most likely result is that the court rules against Musk and requires him to pay “significant damages” to Twitter ranging from $5B to $10B, while the last possible conclusion is the court upholds the “specific performance” guidelines of the deal and Musk buys Twitter at the agreed-upon price of $44B. (13 comments)
There’s been some new developments on the self-driving front, with Uber Eats (NYSE:UBER) inking a 10-year agreement with Nuro on autonomous food delivery. The latter has developed driverless delivery robots, which have already been operating on a limited basis in several cities. The latest partnership will kick off this fall with deliveries in Houston, Texas, and Mountain View, California, with a planned expansion into the greater Bay Area.
Bigger picture: Following a deadly crash in Arizona and dwindling R&D funding, Uber gave up its standalone autonomous ambitions in 2020 by selling its self-driving subsidiary to Aurora Technologies. While Uber still holds a stake in the car tech startup, and CEO Dara Khosrowshahi sits on its board, Uber is feeling pressure to invest in an industry which its founder once hailed as critical to the future of the firm. In fact, General Motors’ (GM) Cruise subsidiary just announced that its revenue-generating rideshare service would start operations in Austin and Phoenix within 90 days, which could be seen as a potential threat to Uber and others if it scales rapidly.
“With our unique autonomous delivery vehicles and Uber’s phenomenal scale and reach, we can expand food delivery options from your favorite local mom-and-pop restaurants all the way to nationwide chains,” said Cosimo Leipold, head of partnerships at Nuro.
How it works: Nuro’s second-generation R2 vehicle is about half as wide as a compact sedan, but shorter than most cars. It travels the roads with a top speed of 45 mph, and has space for about 24 grocery bags in its temperature-controlled compartments. R2 is also completely autonomous, meaning customers will have to go down to the street to unlock their “grab-and-go” orders by entering a code into a pad located on the side of the vehicle.
“The start of the trading week was supposed to be all about the August inflation report, but Kyiv’s sudden momentum has many hoping that this moment is a turning point with the war against Russia,” related Edward Moya, senior market strategist at OANDA. Over the past few days, Ukrainian military forces have retaken nearly all of the Kharkiv region that Russian forces had occupied since the start of the war on Feb. 24, and now appear to be moving ahead carefully and consolidating their gains. While the Russians still have the ability to regroup and hit back, the lightning offensive forced Moscow to make a hasty retreat and could weigh on the morale of Russian troops.
Economically speaking: It’s still early to tell how sanctions and economic warfare will affect the outcome of the war in Ukraine, but there will be a clear divide and a decoupling for years to come. The EU now recognizes it must have an energy grid that is independent from Russia supply, while the West won’t be pouring any foreign investment into the country for the near future. The new dynamics are also playing out on the global stage, with old alliances being cemented into place, as well as calls for some new ones.
In fact, President Xi Jinping this week is traveling outside of China for the first time since the pandemic, to meet Vladimir Putin at a meeting of the Shanghai Cooperation Organization. The gathering will take place on Thursday in Samarkand, Uzbekistan, and comes at a time that the two are becoming increasingly reliant on each other for goods and services. China has been buying record imports of low-priced Russian crude, and in Q2, 81% of Russia’s new car imports were Chinese and Xiaomi was its top-selling smartphone maker.
New global order: The two nations touted a “no-limits” partnership following their last meeting earlier this year, but this time around things may go to the next level. “The Chinese side is willing to work with the Russian side to continuously implement high-level strategic cooperation between the two countries, safeguard common interests and promote the development of the international order in a more just and reasonable direction,” declared Yang Jiechi, foreign affairs chief of the Communist Party. “The relationship between the two countries has always been on the right track, and both sides firmly support each other on issues relating to their core interests.” (29 comments)
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