The three major stock market indexes posted losses for the week, with the S&P 500 snapping a three-week winning streak that had lifted it to its best performance since 2020, as investors reacted to the Federal Reserve’s more aggressive tone in fighting inflation. Throughout the week, investors parsed comments from Fed officials as well as the latest minutes that showed policy makers were considering raising rates and unwinding its balance sheet faster, which drove stocks lower. Goldman Sachs Chief Economist Jan Hatzius said the Fed may need to hike rates past 4% to cool an overheated economy, which added another boost to bond yields. The yield on the benchmark 10-year Treasury note rose for a sixth straight day to 2.71%, the highest in more than three years, and the two-year yield climbed to 2.51% to wrap up its biggest five-week yield gain since May 1987. For the week, the Nasdaq sank 3.6% and the S&P slipped 1.3%, the worst declines for both indexes in a month, while the Dow Jones edged lower by 0.3%.
Baristas at Starbucks’ (NASDAQ:SBUX) Reserve Roastery in New York City voted 46-36 in favor of forming a union as labor campaigns intensify across the country. The location was the ninth company-owned Starbucks to unionize, with another 140 stores across 27 states filing for union recognition since the first bombshell victory seen in Buffalo in December. To date, only one location that filed for elections has chosen against unionizing under Workers United, an affiliate of the Service Employees International Union.
How will Howard Schultz handle it? On Monday, the longtime Starbucks CEO stepped back into the role for the third time as the company seeks a permanent replacement for departing chief Kevin Johnson. In the past, Schultz has said no employee, whom Starbucks calls “partners,” has ever needed a representative and expressed his disappointment with unionization drives. Companies are often wary of unions as they can interfere with their autonomy and productivity, while Starbucks does have serious cash to keep fighting the initiatives, with annual revenue last year of $29B.
Schultz could also seek to shift the conversation, especially with SBUX shares declining nearly 30% since the start of the year. He already suspended billions of dollars in share repurchases to free up cash to invest in cafes and employees, and may focus on take-away-oriented locations, tackling higher costs and the competition. “I am returning to the company to work with all of you to design our next Starbucks – an evolution of our company deep with purpose, where we each have agency and where we work together to create a positive impact in the world,” he wrote.
Go deeper: The big wins in the restaurant industry – where there are almost no unions – are heating up organized labor and advocacy movements nationwide. Last Friday, Amazon (AMZN) lost efforts to stop unionization at its JFK8 warehouse on Staten Island, marking the first-ever labor foothold at the retail giant’s U.S. operations. President Biden has also promised to be the “most pro-union president in American history,” declaring on many occasions that “unions built the middle class.” (75 comments)
Twitter (TWTR) appointed Elon Musk to its board on Tuesday, bringing the social-media activist (and troll) inside the company fold. The announcement follows weeks of discussions between Musk, Twitter CEO Parag Agrawal and independent board chair Bret Taylor, as top brass learned that the Tesla (TSLA) CEO was accumulating a 9.2% stake in the platform. In fact, Musk began scooping up Twitter shares on Jan. 31, when the stock traded at $36.828, and those purchases continued through April 1, according to a new SEC filing. Twitter shares soared about 30% in the two sessions after his position was first disclosed.
Details: As long as Musk is on the board of directors (his current term is two years), his ownership stake will be capped at 14.9%. Musk currently controls only about 9% of the shareholder vote, meaning he’ll need plenty of support for any future proposals. He also amended paperwork known as a 13D, which is generally associated with activist investors, but said he had “no present plans or intentions which would result in or relate” to a merger or sale, shake up the board or change the company’s dividend or share buyback policy.
“He’s both a passionate believer and intense critic of the service which is exactly what we need on @Twitter, and in the boardroom, to make us stronger in the long-term. Welcome Elon!” Agrawal announced by tweet. Twitter additionally confirmed that it has been working on a feature that would permit editing tweets (a contentious feature among its user base) and will test it in the coming months. According to the company, it predates the Monday evening poll from Musk, which saw 70% of respondents take issue with free speech practices on Twitter.
What to expect: Musk has described himself as a “free speech absolutist” in the past and has pushed Twitter to allow a wider range of opinions. “Looking forward to working with Parag & Twitter board to make significant improvements to Twitter in coming months!” he wrote in a follow-up tweet. With his new board seat, Musk will be able “to really kick up dirt,” Bernstein analyst Mark Shmulik declared. “He moved from the back seat of the car to the front seat of the car. In fact, he’s probably the driver.” (124 comments)
All FOMC members are in agreement that the Federal Reserve will have to adopt a faster pace in shrinking its balance sheet than it conducted during the 2017-’19 period. “Participants generally agreed that monthly caps of about $60B for Treasury securities and about $35B for agency MBS would likely be appropriate,” per the minutes from March 15-16 gathering. That means the Fed could trim its roughly $9T balance sheet by more than $1T per year, while hiking rates “expeditiously” to fight the hottest inflation since the early 1980s.
Bigger picture: The day before the release, Fed Vice Chair Lael Brainard pre-empted the minutes by saying a “rapid” reduction could happen as soon as May, calling the move “of paramount importance.” Treasury yields shot up in response, breaching the 2.6% level after rising 10 bps to 2.65%. As in most markets, current yields factor in future conditions, and all of those are now pointing to a faster pace of quantitative tightening.
Following the news, the average rate on the 30-year fixed mortgage also crossed 5%, marking the first time it has passed the threshold since 2011 (save two days in 2018). It wasn’t that long ago that consumers could have refinanced their mortgages below 3%, but the majority of those applications have since dried up. Homebuyers are additionally facing a pricey housing market, with a report from CoreLogic showing prices in February were up 20% from a year ago, marking the 12th consecutive month of annual increases.
Why are mortgage rates going up? A confluence of factors impacts the market, including a coming rate hike cycle from the Federal Reserve and economic uncertainty linked to the war in Ukraine. Rising inflation that erodes purchasing power, tighter lending regulations and the financial picture of consumers can send rates even higher. The borrowing benchmark does not only affect housing demand, but other significant implications ranging from consumer spending to labor mobility. (163 comments)
The first commercial drone deliveries in the U.S. took off on Thursday as Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Wing unleashed its aircraft over the suburban towns of Frisco and Little Elm, which are located just north of Dallas, Texas. If successful, the service could revolutionize how goods are currently transported around cities. Wing has partnered with Walgreens (NASDAQ:WBA), Blue Bell Creameries, Easyvet, and Texas Health for the initial rollout, meaning consumers will be able to order prescription pet meds and ice cream, among other items.
How it works? Retail workers will load up the drones outside participating stores – rather than a Wing facility – carrying small packages that weigh 2.6 lbs or less. They will then climb to a cruise height of around 150 feet above the ground and travel their routes autonomously (remote pilots will be on standby to take control if something goes wrong). Once a delivery drone reaches its destination, it will stay at roughly 23 feet while lowering the package on board into a customer’s yard via a cable.
“I do want to set clear expectations: Not everyone who lives within range of our drones will be able to order on Day 1,” Wing CEO Adam Woodworth declared. “We’re going to invite customers in groups to make sure everyone has a good first experience with drone delivery.” Eventually, Wing hopes to expand the service to all the tens of thousands of homes in Frisco and Little Elm, and then to other regions in the Dallas-Fort Worth metro area.
Go deeper: Wing has been testing its service in the Dallas suburbs since last year following experiments in Christiansburg, Virginia; Helsinki, Finland; and Canberra and Logan, Australia (the division just made its 200,000th delivery). Similar to sister company Waymo, Wing is focused on achieving testing milestones before pressing the button on wide-scale deployment. Amazon Prime Air (AMZN) and Uber Eats (UBER) have also promised to ratchet up drone delivery operations in the near future, but until now, the technology has been mainly focused on small-scale trials. (49 comments)
Many of the recent sanctions leveled on Russia have power because they’re based on the U.S. dollar, which is the most widely used currency in global financial markets, trade and central bank reserves. However, some are cautioning that weaponizing the greenback in this fashion could erode its dominance, stoking fears that smaller currencies like the renminbi could gain a bigger role on the international stage. China is already buying Russian energy with the yuan, while India is looking into a rupee-ruble trade arrangement. “Wars upend the dominance of currencies and serve as a doula to the birth of new monetary systems,” cautioned Zoltan Pozsar, analyst at Credit Suisse.
Snapshot: This time around, the U.S. went ahead with unprecedented sanctions on Russia’s central bank, which has roughly a fifth of its $630B of foreign reserves in dollar-denominated assets. Many central banks across the globe have dollars in their “rainy day funds” given their longtime markings of continuous stability, but data from the IMF shows that reserves have been coming out of the dollar and trickling into other currencies. There was $12T worth of foreign reserves held by central banks around the world at the end of 2021, with the dollar accounting for about 59% of the total, down from 71% in 1999 (the year the euro was launched).
“This is the beginning of the end of the dollar’s monopoly in the world,” declared Vyacheslav Volodin, speaker of the Russian Duma lower house of parliament. “Anyone who keeps money in dollars today can no longer be sure that the U.S. will not steal their money.” While the ruble this week recovered all of the losses seen since the invasion of Ukraine in February, many caution that the rebound was due to severe capital controls imposed by the Kremlin, a doubling of interest rates and foreign traders being barred from exiting their investments. “Sanctions cause the U.S. to lose its credibility and undermine the dollar’s hegemony in the long run,” added Zhang Yanling, former executive vice president of Bank of China.
Outlook: While the decline of the dollar has been predicted many times before, the U.S. has been through many turbulent periods with its currency still reigning supreme in global markets. America is also coordinating its sanctions with major allies, meaning other key currencies that can be used as an alternative (like the pound, euro, yen) are also off the table. Moreover, countries may be hesitant to diversify their reserves to currencies like China’s yuan, which is still not fully convertible and mixed into added geopolitical risks associated with the country. On the other hand, the U.S. market offers a level of liquidity that is not seen anywhere else in the world, backed by free markets and strong financial institutions. (16 comments)
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