Markets Like Certainty, How the Biden and Trump Show Is Affecting Stocks, Bonds. And 4 Other things to Know Today.
Even though politicians like to take credit for rising stocks—or, in some cases, predict a crash if they lose—markets don’t have strong ideological preferences. The only important thing is how governments might affect companies’ bottom lines. Shares can thrive or suffer under policies that lean left or right on the political spectrum.
It’s also received wisdom on Wall Street that the market likes gridlock in Washington D.C.—power divided with one party in the White House and another in control of Congress. But what markets like even more than that is certainty—in other words, a high level of predictability about what the government is going to do for the next few years. Gridlock usually means very little will change, so traders tend to like it.
Since President Joe Biden’s shaky debate performance last week, and former President Donald Trump’s favorable Supreme Court ruling on partial immunity, stocks have been going up—and so have bond yields. The stock move may have been in part due to an increased sense of certainty about a Trump win. With bond yields, the pessimistic move reflects the idea that Trump’s policies on trade tariffs, reduced immigration and tax cuts will be inflationary, hence the shift to higher interest rates.
Another example—the U.K. is ushering sweeping change after a decisive center-left victory, and stocks are rising. It’s a different story in France, which is deeply divided. Marine Le Pen’s hard-right party is looking like it could be the biggest group in parliament but perhaps without a majority. The uncertainty is bad, and stocks have slumped since May.
If Biden drops out and Democrats find a new candidate, the Trump trades may reverse. If they do, the key factor for markets isn’t the politics per se, it’s the impending uncertainty.
—Brian Swint
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Fed Members Wanted More Evidence Inflation Was Declining: Minutes
Federal Reserve officials didn’t think it was appropriate to lower interest rates until they had greater confidence that inflation was moving sustainably toward their 2% goal, noting that progress in reducing inflation had slowed from what they had expected last December, their June meeting minutes said.
• Instead, participants were in wait-and-see mode at their June 11-12 monetary policy meeting, considering a range of plausible outcomes for the economy and inflation and their interest-rate implications, ultimately keeping the federal-funds rate at the same range set one year ago.
• Several officials said they were watching for signs of a faster decline in economic activity or increase in unemployment, which could support easing policy sooner. Others cited reasons inflation could remain above 2% or inch up again, including geopolitical developments, trade tensions, or shelter prices.
• This week, payroll processing firm ADP reported that private employers added 150,000 jobs in June, which was below the revised figure for May and below expectations. There was a jump in hiring for leisure and hospitality, but manufacturing jobs declined.
• A slowdown in hiring could bolster the argument for interest rate cuts. This week’s initial unemployment claims were higher than Wall Street expected, and the four-week moving average was the highest in nine months, another sign of a cooling labor market as the Fed.
What’s Next: The Fed’s policymaking board meets next on July 30-31. Interest-rate futures pricing implies a less-than-10% probability that the committee will reduce the fed-funds rate by a quarter of a percentage point then. Traders see a 66% probability of a cut at the Sept. 17-18 meeting.
—Janet H. Cho and Nicholas Jasinski
A Retail Merger Aimed at Building a New Luxury Juggernaut
The parent of luxury retailer Saks Fifth Avenue confirmed a deal to buy rival Neiman Marcus for more than $2.6 billion. The deal would combine two of the best-known high-end department stores plus brands such as Bergdorf Goodman to create a luxury retail powerhouse with potential annual sales of $10 billion.
• Amazon and Salesforce would each take minority shares of the new company, to be named Saks Global. Amazon will provide technology and logistical expertise, and Salesforce, which makes customer relationship software, will help with adopting artificial intelligence.
• Both companies’ boards have approved the merger, which went through months of negotiations, as Americans cut back on some of their luxury spending. The deal would help Saks and Neiman boost their online presence with advice from Amazon. Marc Metrick, CEO of Saks’s e-commerce business, will run the combined companies.
• Saks’ sales were about $6 billion last year. Neiman has been owned by private equity over the years, emerging from a 2020 bankruptcy reorganization with new owners and lower debt. The combined company will have a $7 billion portfolio of real estate in top luxury shopping locations, they said.
• HBC, the holding company that bought Saks in 2013, is funding the deal with investors including Rhône Capital, the Abu Dhabi Investment Council, and NRDC Equity Partners, a private-equity firm run by HBC’s executive chairman Richard Baker and son Jack Baker. It also has a $1.5 billion loan package.
What’s Next: Separately, the investor group that has been trying to buy Macy’s raised its offer for a second time, The Wall Street Journal reported. Arkhouse Management and Brigade Capital Management added $300 million to their offer, raising it to about $6.9 billion.
—Janet H. Cho
Hurricane Beryl an Omen for Costly Storm Season Ahead
Hurricane season got off to a fast start this year, as Beryl’s peak 160-mile-per-hour sustained winds wreaked death and destruction across the Caribbean. Though it has weakened as it moves west toward the Yucatán, Beryl could threaten the Texas coast by Monday, and foreshadows a banner year for ferocious storms.
• Beryl has already set the record for the earliest Atlantic hurricane to reach both Category 4 and Category 5, the most destructive classification. It is just the first of what forecasters have predicted to be five major hurricanes between now and November.
• Recent history shows rising hurricane costs, with more than $250 billion in damages to the Gulf Coast in 2005, mostly from Katrina, and more than $300 billion in 2017 from Harvey, Irma, and Maria, according to data from the National Oceanic and Atmospheric Administration.
• The Gulf Coast oil industry is particularly vulnerable. Refineries have to curb operations, and shutdowns can result in nationwide gasoline price hikes. After hurricane Harvey in 2017, prices rose 30 cents nationwide, according to S&P Global data. After Katrina, gasoline jumped to $3.11 a gallon from $2.65.
• For consumers, ripple effects are for felt years. Severe weather was a key contributor to big jumps in insurance premiums nationwide in 2023. The cost of home insurance rose a whopping 12.5% last year, versus 2.5% in 2019, according to S&P Global Intelligence’s RateWatch.
What’s Next: Federal disaster relief could fall short this year if a major hurricane hits. For the fiscal year ending in September, the fund has budgeted $48 billion in total costs, with about half going toward hurricane relief and the rest for wildfire, flood, and ongoing Covid relief. Congress can approve additional funding.
—Anita Hamilton and Liz Moyer
Air Travel on Track for Record Weekend Amid Demand Surge
Air travel is still on course to hit record levels this holiday weekend in the U.S., with Transportation Security Administration officials predicting it will screen more than 3 million people at airport checkpoints this Sunday, beating the record it set just last month. That is likely welcome news for airlines.
• More than 19.4 million travelers passed through U.S. airport security checkpoints between June 27 and Wednesday, or 10.6% more than the volume who were screened over those dates last summer, according to the TSA. The expected surge caps a record-setting travel week, officials said.
• Surging air travel demand would be a boost for airline stocks. Some have been benefiting from a rebound in leisure travel after the pandemic. Shares of Delta Air Lines and United Airlines are both up nearly 18% this year, while Southwest Airlines shares are down 1% and American Airlines has fallen 19%.
• Priceline reported that the average round-trip airfare to Paris for the Summer Olympics is $1,056; average nightly hotel rates are $388, and average rental car rates are $88. Paris is Priceline’s fifth most popular city for air travel this summer.
• Southwest adopted a temporary shareholder-rights plan, also known as a “poison pill,” to make it harder for activist hedge fund Elliott Investment Management to accumulate a controlling stake in the airline. Elliott couldn’t be reached for comment.
What’s Next: The plan lets shareholders buy more stock at half price if any one shareholder builds a stake of 12.5% or more. Elliott has an 11% stake with the flexibility to buy more starting July 11, Southwest said. The activist wants to shake-up senior management amid flagging performance.
—Janet H. Cho and Brian Swint