☀️☕️ No, Virginia. Rates are not coming down as much, or as fast

📝 Focus

• No, Virginia. Rates are not coming down as much, or as fast

📊 In the Markets

• Nasdaq record; PCE inline but above target; WeightWatchers lose Oprah;

• Howzat! Disney gets Indian cricket back with Ambani at its head

📖 MoneyFitt Explains

• 🎓 The Fed

💸 Personal Finance Corner

• Exploring Your Financial Options: Why Loyalty to One Adviser May Not Be Best

📝 Focus

On a day when January PCE inflation data in the US confirmed the slightly hot CPI numbers a few weeks earlier and markets are pricing in a rate cut at the June meeting, our guest writer takes a longer-term industrial view that, in his opinion, suggests that…

No, Virginia. Rates are not coming down as much, or as fast

The markets are beginning to temper their expectations for the timing and extent of rate cuts by the Fed this year. These expectations could turn out to be a bit sanguine. 

The Fed may not be able to cut rates to the extent that many in the markets believe, and it may not be able to start cutting them as early as many believe.

But that still may not be a bad thing. Expect job creation in the U.S. economy to remain relatively strong for the next 3-4 years. This strong growth in jobs could also underpin decent wage growth. Amidst all this, the outlook for consumption remains strong.

This thesis is based on one crucial datapoint: capex on factory construction in the U.S. This simple thesis is laid out below:

• U.S. manufacturing capex has surged to three times of what it was in the recent past, armed with $2 trillion of funding from the U.S. government.

• This manufacturing capex is going to create a large number of new manufacturing jobs over the next 3-4 years.

• Each of those manufacturing jobs is likely to create more than 7 new jobs in other industries, including in services.

• This could create such a tight labour market that wages may rise further, and consumption should stay strong.

• All in all, this does not create an environment for rates to come down meaningfully.

• On the other hand, a consumption-based economy being driven by strong job growth is nothing to sneeze at.

Overall, rates may come down somewhat from very elevated levels, but inflation may persist for quite some time leaving the Fed with no option but to keep rates at levels much higher than where they were before the rate hikes started.

Spending other people’s money

This thesis is predicated on the ongoing manufacturing renaissance in the U.S., led primarily by the state funding of new manufacturing projects. 

All this capex will create new factories and manufacturing jobs – which, in turn, will create many more jobs in other industries. 

In the five years before Covid (2015-2019), the U.S. manufacturing sector was spending an average of $77bn annually on new manufacturing facilities. In 2023, that figure rose to $195bn.

This means more hiring for these new factories. As the typical factory takes 2-3 years to build and up to another 2 years to reach 100% capacity utilisation, we can assume that the 2023 capex will continue to create new jobs through 2027.

Why do states try to out-compete each other in new factories? 

A key reason for trying to attract more manufacturing jobs is they engender more jobs, including many in higher-productivity service sectors. 

Each new manufacturing job, on average, creates far more jobs (7.4) than do most new jobs in other industries.

One of the reasons that manufacturing creates so many more jobs is that manufacturers tend to bring their own supply chains and service providers with them.

Why jobs and consumption have been so strong

The combination of capex spending through both reshoring and FDI has created a cumulative 1m jobs since 2021 when the first of these Acts (the IIJA in 2021) was enacted in the U.S.

The pace has accelerated in recent years as all the construction activity creates jobs first in the construction (and related) industries, even before the actual factories are commissioned. 

This is one of the reasons why employment figures, and consumption, have remained relatively robust through the past few months.

Writer: Rajeev R. Das of Das Kapital is a former MD at Goldman Sachs and spent two decades in Asian equities research. He was most recently an advisor to a major Asian sovereign wealth fund. This article is for information only and not investment advice. The writer may have long or short positions in the companies mentioned above. All opinions are his and his alone. Please see the important disclaimer at the bottom.

Please see Mr. Das’s original LinkedIn post in full here.

📊 In the Markets

On Thursday, the Nasdaq Composite surged to its first closing record since November 2021, leaping 0.9% to an all-time high of 16,091.92, driven by a late rally in tech and semiconductors stocks. The S&P 500 also hit a record close. 

February marked the fourth consecutive positive month for Wall Street, with the Nasdaq notching up a 6.12% gain and the S&P 500 climbing 5.17%.

January inflation came in inline with expectations, according to the Federal Reserve's key gauge, the personal consumption expenditures (PCE) price index. Core prices, excluding food and energy, rose 0.4% for the month and 2.8% from a year earlier. 

Though the core reading on an annual basis was the lowest since February 2021 it remains ahead of the Fed’s 2% annual inflation target.

The data also suggests the transition to services over goods as the economy adjusts post-Covid is continuing, with services prices rising 0.6% monthly and goods declining 0.2%.

WeightWatchers lost 18% on Thursday to hit a record low after iconic talk show host and business magnate Oprah Winfrey quit from the board, with plans to donate her 1.4% stake, now valued at under $4 million, to the National Museum of African American History and Culture.

This comes as a further blow to the company, which is already reeling from the rise of GLP-1 based anti-obesity drugs, led by Novo Nordisk’s Wegovy. The company's been trying to integrate such weight loss drugs into its business model, but after today’s losses, it is down 97% from all-time-highs of over $100 as recently as in 2018, closing at its lowest since its 2001 return to the public market as WW International.

Asia-Pacific stocks traded mixed as investors awaited U.S. inflation data for insight into the Federal Reserve’s interest rate trajectory. 

Japan’s manufacturing output fell 7.5% in January, slightly below expectations. The Topix remained flat.

India's economy saw strong growth in the final quarter of 2023, expanding by 8.4% and trouncing the forecast of just 6.6% from Mumbai’s Finest. This came on the back of strong manufacturing and construction activity, despite weak consumer spending growth of only 3%. This data is seen in the markets as a boon for Prime Minister Narendra Modi ahead of upcoming elections. 

Howzat! Disney gets Indian cricket back with Ambani at its head

More excitingly, Walt Disney and Indian conglomerate Reliance announced the merger of their competing Indian broadcast businesses, Star India and Viacom18, and is expected to reach an audience of over 750 million in India's fast-growing market. The deal values the combined entity at around $8.5 billion post-money, excluding synergies. [MFM: Howzat! Disney loses subs… but 🏏!!!] 

The merger is seen as a streaming wars win for India’s cricket-obsessed sports fans. Mukesh Ambani, Asia's wealthiest individual, will inject $1.4 billion into the new entity, with his wife assuming the chairmanship of the Ambani-led JV. (The ownership will be 16% Reliance, 47% Ambani’s Viacom18 and 37% Disney.)

Disney bought Hotstar and Star TV channels in 2019 with exclusive streaming rights to the Indian Premier League (IPL), one of the world’s top cricket leagues, and turned it into a paid service the next year. But Reliance won the IPL rights in 2022 for $2.6 billion and made the service free on its own streaming platform, leading to the loss of millions of Disney+ Hotstar subs.

📖 MoneyFitt Explains

🎓️ The Fed

The Federal Reserve System is the central bank of the United States. 

It is independent of the government even though the Chair is appointed by the President at the time and it is accountable to Congress. 

It's actually made up of twelve individual banks, but the main thing you should watch out for is the policy of the FOMC or the Federal Open Markets Committee, which sets the Federal Funds target interest rate which then directly and indirectly affects the cost of borrowing in the US economy and beyond. 

The FOMC meets eight times a year, regularly sending Wall Street into a speculative frenzy, because the decisions made regarding interest rates can have such large effects on the real economy and on asset and debt markets.

The main thing to remember is that, unlike most independent central banks around the world, the Fed has a "dual mandate", meaning that not only does it have to keep inflation under control (meaning around 2%) through all means necessary, it also has to seek "maximum sustainable employment"... not meaning zero unemployment, but a level that is neither a boom nor a bust rate of (un)employment.