Good Wednesday. Here’s what we’re watching:
• Fears of overheating may be overdone.
• Goldman adds a new co-head of global M.&A.
• Expect Wall Street to keep worrying about inflation.
• Finra is looking into potential misconduct involving the VIX.
• The Justice Department’s antitrust chief may be called as a witness in the Time Warner lawsuit.
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Fears of overheating may be overdone.
Wall Street is worried about inflation right now – and a government report on Wednesday likely didn’t quell those concerns.
The consumer price index rose by 2.1 percent rise in January, faster than Wall Street analysts expected. The core index, which excludes food and energy, also came in above forecasts, prompting Michael Feroli, an economist at JPMorgan, to describe it as “hotter than Hades.”
While the stock market shrugged off the jump in inflation, bond markets got a bit of a jolt. The yield on the bellwether 10-year Treasury note rose above 2.9 percent on Wednesday, well above the 2.4 percent at which it finished last year.
The scary take on higher yields: To some, the bond market is a particularly prescient predictor of economic trends. So is it picking up on an inflationary surge that the Federal Reserve likely will take too long to recognize? If there’s a scenario guaranteed to scare investors, it’s one in which the Fed, caught out by inflation, has to frantically jack up interest rates.
But the overheating fears may be overdone. The January inflation report was hardly conclusive. Mr. Feroli of JPMorgan, waving away sulfurous fumes for a second, said that the January increase “probably overstates the underlying trend.”
Indeed, the index overshot expectations because two items — clothing and medical services — had very strong increases, according to Pantheon Macroeconomics. Clothing was due for a big rebound because it seemed to lag a lot in recent months, Pantheon asserted. As for medical services, the jump there came from hospital costs, which Pantheon described as “very erratic.”
The economy may not be as strong as it looks. It wasn’t too long ago that the prevailing view on Wall Street was that the economy was stuck with sluggish growth and perennially low inflation. And even though there are reasons to believe the United States economy is breaking out of that rut – big tax cuts and a revival of the global economy – it may not be as vibrant as it looks.
The analysts at Hoisington Investment Management have in recent years highlighted stubborn weaknesses in the United States economy, and the firm still sees significant problems. They note, for instance, that disposable personal incomes, adjusted for inflation, only rose by 1.9 percent last year, an increase that was supported by borrowing. And consumers’ lack of spending power may explain the weak retail sales that came out on Wednesday.
Bond yields may not rise much from here. Since the financial crisis of 2008, the yield on the 10-year Treasury note has risen in anticipation of an economic surge, only to fall again. That pattern may reoccur. Steven Major, global head of fixed-income research at HSBC, expects the yield on the 10-year Treasury to be at 2.3 percent by the end of the year, well below this week’s level. He notes that, over the past decade, actual inflation has been significantly lower than the level implied by the price of the 10-year Treasury note and other Treasury securities. “My point is that higher inflation is already in the price,” Mr. Major said in an email.
— Peter Eavis
Goldman adds a new co-head of global M.&A.
The investment bank named Dusty Philip as a co-head of its global mergers team. The 27-year Goldman veteran joins Michael Carr and Gilberto Pozzi, the current co-heads of the group.
Mr. Philip was most recently co-head of the global industrials banking team, and before that, he was a co-head of Americas M.&A. with Mr. Carr.
Matt McClure, who currently is co-head of Americas M.&A., will replace Mr. Philip as co-head of the industrials group, working alongside Clare Scherrer.
A spokeswoman for Goldman confirmed the appointments.
• Goldman ranks sixth among M.&A. advisers so far this year, according to Thomson Reuters, with 34 deals valued at $55.9 billion.
• The firm placed first among deal advisers last year, with 409 transactions worth $949 billion.
• Overall, deals worth nearly $380 billion have been announced this year, up 9 percent from the same time last year.
The memo about Mr. Philip
We are pleased to announce that Dusty Philip will become co-head of Global Mergers & Acquisitions (M&A) alongside Michael Carr and Gilberto Pozzi. Michael, Dusty and Gilberto will work together to lead this important client franchise by driving our premier merger market share position, implementing important strategic initiatives, and further strengthening and developing our global team.
Dusty is currently co-head of the Global Industrials Group. Previously, he was co-head of M&A in the Americas. Dusty is a member of the IBD Executive Committee. He joined Goldman Sachs in 1991 and was named managing director in 1999 and partner in 2000.
Please join us in congratulating Dusty and wishing him continued success.
The memo about Mr. McClure
We are pleased to announce that Matt McClure will become co-head of the Global Industrials (IND) Group alongside Clare Scherrer. Matt and Clare will work to refine and enhance IND’s global strategy with a focus on continuing to drive our leadership position across Global Industrials, strengthening client relationships, identifying commercial opportunities, and developing our global team.
Matt is currently head of Mergers & Acquisitions (M&A) in the Americas. Previously, he was head of Industrials M&A. Matt will join the IBD Executive Committee. He joined Goldman Sachs in 1999 and was named managing director in 2007 and partner in 2010.
Please join us in congratulating Matt and wishing him continued success.
— Michael de la Merced
Looks like Fannie Mae is about to get an infusion from taxpayers.
The mortgage-finance giant reported a net loss of $6.5 billion for the fourth quarter, and said it would seek an infusion of $3.7 billion from the Treasury Department as a result, the WSJ reports.
The loss was driven by a one-time $9.9 billion charge related to the new tax law.
The issue is that Fannie has been under government conservatorship since the financial crisis. Under the agreement, Fannie sends nearly all its profits to the government in the form of a dividend and operates with a limited capital buffer.
After the quarter’s planned infusion, Fannie will have sent $166.4 billion to the Treasury Department in total, compared with the $119.8 billion it has received from the government, according to the WSJ.
Expect Wall Street to keep worrying about inflation.
The Consumer Price Index, a government yardstick of inflation, jumped 2.1 percent in January, from a year earlier. That is slightly above the 2 percent rate that Wall Street economists, surveyed by Bloomberg, forecast. The January rate is equal to December’s increase of 2.1 percent.
The number didn’t roil the markets, but they did move lower.
The yield on the 10-year Treasury note, which moves in the opposite direction to its prices, jumped to 2.87 percent after the inflation figure came out. Yields rise when prices fall.
The United States stocks market opened down with the Standard & Poor’s 500 index off 0.3 percent.
Inflation fears were perhaps the main cause of the recent plunge in the stock market. After an unexpectedly strong rise in wages, investors became concerned that costs of producing goods and services might be rising, which could in turn prompt the Fed to raise interest rates more quickly than anticipated. Higher interest rates make stocks look like less attractive investments – and, in the longer run, they can slow down the economy and erode companies’ earnings.
— Peter Eavis
Was the VIX fixed?
Finra, Wall Street’s self-regulatory agency, is looking into it. It’s unclear whether this is a formal investigation, but the discovery of any misconduct would be a black eye for the CBOE, which runs the Volatility Index.
One theory is that someone could have swayed the VIX through bets on S. & P. 500 options.
More from Gunjan Banerji of the WSJ:
Last week, the resurgence of market volatility triggered a spike in the VIX and the collapse of a widely traded E.T.P. that buys and sells VIX futures. The E.T.P.’s demise helped send CBOE’s shares sliding 18 percent over the next four days amid speculation that losses like those suffered by the E.T.P.’s investors could lead to greater regulatory scrutiny for the VIX going forward.
The markets flyaround
• An Uber driver convinced the hedge fund manager Paul Britton that the “Goldilocks” bet on market calm was poised to unravel. (Bloomberg)
• Pierre-Henri Flamand, chief investment officer of the Man Group, warned against buying stocks in market dips for now. (Bloomberg)
AT&T gets aggressive in defending the Time Warner deal
The telecom giant wants to call Makan Delrahim, the Justice Department’s antitrust chief, as a witness in the government’s lawsuit seeking to block the deal. The goal: to probe for political motivations.
More from our colleague Cecilia Kang, who broke the story:
AT&T has also asked for internal communications between Mr. Delrahim’s office and Attorney General Jeff Sessions, according to two people with knowledge about company’s demands. As part of that request, AT&T has asked for email, phone and other communications between the White House and officials in the Justice Department, the people said.
The strategy isn’t without risks. “It could blow up in their face if the assistant attorney general is a credible witness for the legitimate challenge of the merger,” Gene Kimmelman, a former Justice Department official who has been critical of the deal, said.
The deal flyaround
• Mini-I.P.O.s allowed under the JOBS Act haven’t performed well. (Barron’s)
• Broadcom is now seeking six seats on Qualcomm’s board, rather than the full 11. (NYT)
• Darwin Deason, one of Xerox’s top investors, has sued to block its deal with Fujifilm. (FT)
• SkyBridge Capital, Anthony Scaramucci’s investment firm, expects regulators to tell it by the end of the month whether they’ll block its sale to the HNA Group. (Reuters)
• JD.com of China will raise about $2.5 billion by selling a stake in its logistics unit to Hillhouse Capital, Tencent and other investment firms. (Bloomberg)
• Danone agreed to sell some of its stake in the Japanese yogurt maker Yakult for about $1.8 billion, amid pressure from Corvex Capital Management. (Bloomberg)
Steve Case’s Rise of the Rest fund has made its first investments.
Late last year, Mr. Case and his venture capital firm, Revolution, teamed up with J.D. Vance, author of “Hillbilly Elegy,” to create the $150 million fund to find promising start-ups outside of Silicon Valley, New York and Boston, in which to invest.
Today Revolution announced the Rise of the Rest’s first round of investments:
AppHarvest (Pikeville, KY)
Catalyte (Baltimore, MD)
Cotopaxi (Salt Lake City, UT)
ENGAGE Talent (Charleston, SC)
Losant (Cincinnati, OH)
SafeChain Inc. (Columbus, OH)
SEEVA (Seattle, WA)
ZenBusiness (Austin, TX)
Zylo (Indianapolis, IN)
Norwest Venture Partners closes its new fund at $1.5 billion.
The venture capital firm said that it has closed its biggest-ever fund, bringing its total capital commitments to over $7.5 billion. The firm also announced that it had opened an office in San Francisco’s trendy South Park neighborhood, joining a slew of its V.C. competitors.
Among Norwest’s notable investments:
• Jet.com, which was sold to Walmart
• Casper, the mattress and sleep products company
Norwest also promoted Jon Kossow, a nine-year veteran of the firm who built out its growth equity team, to managing partner and Lisa Wu, a six-year veteran who sourced the firm’s Jet.com investment, to partner.
— Michael de la Merced
Blackstone finally confirms its heir apparent
In naming Jon Gray as its president and C.O.O., the giant investment firm joined a trend toward public succession planning in private equity. K.K.R., Apollo Global Management and the Carlyle Group all recently promoted their next generation of leadership to more visible roles.
Mr. Gray, who has long headed Blackstone’s real estate arm, has long been seen as Steve Schwarzman’s likeliest eventual replacement.
Mr. Gray is 48. Mr. Schwarzman is 71, while Blackstone’s longtime president, Tony James, is 67. (He will become executive vice president.) For now, Mr. Schwarzman will still take the biggest decisions, while Mr. Gray will run day-to-day operations.
The critical take: “Blackstone isn’t run for outsiders’ benefit, and the gradual approach to change shows it,” Tom Buerkle of Breakingviews writes.
The alternative assets flyaround
• Hillhouse Capital Management of China is raising a $6 billion fund, unnamed sources say. (Bloomberg)
• Meet Scott Ferguson, Keith Meister, Alex Denner, Quentin Koffey and other members of the next generation of activist hedge fund managers. (FT)
The Washington flyaround
• The White House shifted its story about Rob Porter’s background check after public testimony from the F.B.I. director, Christopher Wray. (NYT)
• Top American intelligence officials warned that Russia is already meddling in this year’s midterm elections, spreading disinformation through social media. But the Upshot says that the impact of fake news and bots is overblown.
• The White House is considering Loretta Meester, the president of the Cleveland Fed, for the Federal Reserve’s No. 2 position. (WSJ)
• Michael Cohen, President Trump’s longtime personal lawyer, said he had paid $130,000 out of his own pocket to the pornographic-film actress Stormy Daniels. (NYT)
• BuzzFeed has sued the Democratic National Committee, seeking any information that would help its defense against a libel lawsuit by a Russian business magnate tied to its publication of the Russia dossier. (Vanity Fair)
• Mr. Trump suggested that the U.S. might restrict metal imports. (NYT)
• A much-criticized plan to replace the SNAP food stamp program with meal kits was meant more as a signal of the administration’s intent than as a proposal for implementation. (NYT)
Will Uber be profitable before it goes public?
The ride-hailing giant is still losing money — $1.1 billion in the fourth quarter, Dara Khosrowshahi’s first as C.E.O. But that’s down 25 percent from a year ago.
One reason is that Mr. Khosrowshahi is clamping down on costs as the company heads toward an I.P.O. as soon as next year. More from Amir Efrati of The Information:
Uber spent 7.5 percent less on sales and marketing between the third and fourth quarters of last year. The cost of its operations and customer support fell by 1 percent during that time as the company was able to handle more customer issues without needing more support staff.
The tech flyaround
• Netflix poached Ryan Murphy, the producer behind “Glee,” from 21st Century Fox in a five-year deal worth as much as $300 million. (NYT)
• Autonomous selfie drones are here. Farhad Manjoo has an escape plan. (NYT)
• Amazon has invited hospital executives to Seattle to discuss expanding its business-to-business marketplace. (WSJ)
• Tim Cook talked up Apple’s health care ambitions, hinting at a move beyond wellness apps and devices. (CNBC)
• Fitbit is buying Twine Health, a start-up that helps people manage chronic diseases like diabetes and hypertension. (Axios)
• Baidu confirmed that it plans to list its video streaming unit in the U.S. (FT)
South Korea may not ban Bitcoin after all
The government will focus on transparency instead — a relief for one of the world’s biggest virtual currency markets. A petition against a ban was backed by more than 200,000 Koreans.
Where Bitcoin is today: Around $8,854, says CoinMarketCap.
Elsewhere in virtual currencies: Western Union is joining MoneyGram in testing Ripple. Just a fraction of Americans have reported virtual currency transactions to the I.R.S. Six investors have sued BitConnect, alleging fraud. They’re also offering a bounty, in JusticeCoins.
Maybe the meal-kit industry isn’t dead yet
Blue Apron gained notoriety when its stock sank after its I.P.O. last year, spurring talk that the meal kit industry was a flash in the pan. But its latest results showed signs of life — and those of its biggest rival, HelloFresh of Germany, suggest it’s unwise to write the sector off right now.
What happened at Blue Apron: The company’s $39 million quarterly loss was less than expected, and its marketing expenses dropped (in part because management was more focused on operational improvements in its distribution center). But subscriber rolls dropped 15 percent from a year ago, to 746,000.
And at HelloFresh: The company’s preliminary sales numbers, released last month, beat analyst expectations. Its stock has risen 24 percent since its I.P.O. And its C.E.O., Dominik Richter, told Michael that the industry shouldn’t fear competition from Amazon or other supermarket owners. “We have more in common with Chipotle or a fast-casual chain,” he said.
• Nelson Peltz is stepping down from Mondelez International’s board, to be replaced by Peter May, the president of his investment firm, Trian. (Mondelez)
• Chipotle has hired Brian Niccol, the chief executive of Taco Bell, as its C.E.O., replacing its founder, Steve Ells. (NYT)
The Speed Read
• Sam’s Club is shifting toward e-commerce and imitating Amazon Prime. (NYT)
• Police in Johannesburg raided the home of the Guptas, a powerful business family with close ties to President Jacob Zuma. (FT)
• Shell and Eni paid $1.3 billion for oil rights in Nigeria — but was that a bribe? (WSJ)
• The Israeli police recommended on Tuesday that Prime Minister Benjamin Netanyahu be charged with bribery, fraud and breach of trust. They said one of his patrons was James Packer, an Australian billionaire. (NYT)
• A former employee sued Vice Media, saying it systematically paid women less than men for similar work. (NYT)
• The U.S. is on track for huge economic expansion, but in California — which accounts for a fifth of the country’s growth — the governor is preparing for doom. (NYT)
• Inflated stock prices could discourage capital investments and promote inequality. (NYT)
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