Eking Out A Gain

Those hoping for rate cuts in 2023 were severely disappointed by December’s FOMC Minutes released today. 📝

The notes from members showed little discussion about how much to raise rates at the February meeting. Instead, it focused on the need for flexibility and optionality in policy as inflation remains stubbornly high.

With that said, a new worry has emerged for the Fed.

Officials noted their concern that an “unwarranted easing in financial conditions” driven by the market’s perception that the Fed could loosen policy would further “complicate” their fight against inflation.

So what does that mean in English? 🤔

Recently the market has seen interest rates fall as participants began pricing in peak inflation and a looser approach from the Fed. However, the Fed says the data it’s looking at suggests inflation risks remain too elevated to begin adjusting their policy yet. But the market is doing its own thing. And if the market keeps rates subdued for a significant period, that will only make it harder for the Fed’s policies to have their desired effect on inflation.

In essence, the market positioning itself in anticipation of the Fed loosening its policy will only delay the Fed loosening its policy. 🤦

Jerome Powell has been clear on the Fed’s aggressive stance against inflation. For anyone paying attention, today’s “no rate cuts in 2023” messaging is nothing more than a reiteration of what we already knew. However, the market has yet to accept that rates will stay higher for longer; otherwise, they wouldn’t be pricing in rate cuts. So today’s messaging from the Fed is an attempt to talk rates back up where they want them to be. 🤷

We’ll have to see if this week’s December jobs data changes the broader inflation debate at all. But if today’s Job Openings and Labor Turnover Survey (JOLTS) is any indication, the labor market likely maintained its record strength last month.

And while we’re mentioning employment, it’s important to remember that certain pockets of the market continue to shed jobs. Particularly those who overexpanded during the pandemic or have weak overall business models. Salesforce cut 10% of its workforce today, and Vimeo laid off 11% of its employees. ✂️

Due to their recent strength, Chinese stocks have been a focus of our newsletter for the last few months. And today, that strength continued with hopes that a more relaxed Chinese regulatory environment is on the horizon. 🌤️

Sparking this continued optimism was news that Chinese officials approved an expanded capital plan from Ant Group. The China Banking and Insurance Regulatory Commission approved the company’s request to increase the amount of registered capital for its consumer unit from 8 billion to 18.5 billion yuan.

This is a sign of improvement for Ant Group, which saw its record-breaking IPO halted by regulators in late 2020. And if regulators let this behemoth up for air, maybe that’s a sign of a more favorable business environment. 🤷

Combine that with the country relaxing its covid-19 measures and supporting its real estate sector, and you’ve got investors pushing Chinese stocks to fresh recovery highs.

Alibaba led the charge, likely because it owns roughly a third of Ant Group. $BABA shares rose 13% on the day, while broader China ETFs like $MCHI rose nearly 6%. 📈

Blackstone shares have been under pressure because of fears around their BREIT Real-Estate Vehicle, which we discussed in December. 📰

For those who aren’t up to speed, the private real estate investment saw redemptions cross their quarterly limit in November as investors worry about real estate values. The uptick in redemption requests caused the fund to limit redemptions, sparking broader fears about the fund’s (and Blackstone’s) overall health.

News broke today that the University of California is investing $4 billion in the unlisted real estate income trust (BREIT). And while some investors saw this as a significant vote of confidence from a large institution, others were less impressed by the deal terms. 📝

Under the deal, UC Investments will hold its investment in BREIT for at least six years. Meanwhile, Blackstone will offer $1 billion of its own investment in BREIT as collateral to make up for any shortfall if the university fails to achieve at least an 11.25% annualized net return through January 2028.

In other words, Blackstone guaranteed an 11.25% annualized return net of fees to secure this investment. 😮

Bearish investors view this as a sign of more severe problems in the real estate fund. However, bullish investors see this investment as a net positive, especially since Blackstone can charge its standard fees and an additional profit sharing once the minimum 11.25% return is met.

Time will tell who is right. But the initial reaction from the market was positive, with $BX shares rising 2.47%. 🔺