Today is a happy day. The Federal Reserve is set to raise interest rates for only the second time in a decade, taking us all a further step away from the most traumatic crisis that most of us can remember, and back towards something more easily recognizable as normality. Two-year bond yields, which track short-term rate expectations closely, hit their highest level since November 2008 yesterday.
The near-certainty of a rate rise means that the most important development today will be the guidance that the Fed gives regarding rates in 2017. How many more rate rises will be baked into the ‘dot plot’ that reflects the board members’ expectations for the next two years?
Specifically, what will the central bank’s language tell us about how it will react if, as expected, fiscal policy turns more expansionary under President-elect Donald Trump? To what extent will the Fed hold back on rates, given that the dollar’s rise on the foreign exchange markets already represents a tightening of monetary conditions? And, not least, what will the President-elect tweet in reaction? (His past criticism of ultra-loose Fed policy suggests that he should be supportive, so alarm bells could really start ringing if he’s not.)
Everyone has their view, of course. But it would be a major surprise if the Fed were to mutate overnight into the kind of beast it was under Paul Volcker’s reign in the 1980s. Even though the cycle for inputs such as commodities appears to have turned, wage inflation is still near non-existent (average earnings fell in this month’s payrolls report), and the rapid expansion of the gig economy means that an increasing part of the workforce still has limited access to credit, at least until technology can develop more sophisticated ways of credit scoring. The strongest argument on the other side – other than the basic need for money to have a real price to serve its function in a capitalist economy – will be the central banker’s atavistic fear of letting an inflation genie out of the bottle. The Fed – particularly Janet Yellen’s Fed – is likely to wait for hard evidence of a reflationary fiscal policy before it succumbs to such fears.
More news below.
• Google Drops Plans to Build Its Own Cars
Google appears to have joined Apple in deciding not to build a car of its own, but rather concentrate on revolutionizing car use with new technology. The company said yesterday that its autonomous driving venture would be put into a new company under the Alphabet umbrella called Waymo, and taken out of Google X, the incubation unit for its experimental projects. John Krafcik, the project’s leader, said the company would be “a self-driving technology company…not a car company.” That focus will keep the project capital-light and allow it to make money faster but, as with Apple’s ‘Project Titan’, it appears to draw a firm line beyond which technology companies will refuse to challenge the established masters of mass-produced vehicles. Google had experimented with revolutionary designs for cars without brake pedals and steering wheels, but it seems now that they won’t be hitting the roads any time soon now.
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• J&J Abandons Actelion Bid
Johnson & Johnson ended talks to buy Actelion, after refusing to meet the Swiss-based biotech firm’s asking price. Reports had suggested J&J was willing to pay up to $27 billion for a deal that would have transformed its pharma operations. It’s the second time in recent history that the company has failed to complete a major acquisition, and pressure will now rise on the company to return much of its $18 billion cash pile to investors. The company’s shares have risen 4% since last week on speculation that the expensive-looking deal would break down. Reports indicate that France’s Sanofi will now sound out Actelion about some form of alliance.
• Rogue One Set To Give Disney Bosses Some Relief
The wait for Disney’s latest spin-off from the Star Wars franchise is nearly over. Disney reportedly expects Rogue One to take in as much as $150 million in North America this weekend after it opens on Friday, which would put the new movie in the ballpark of Civil War‘s $179 million domestic opening. Industry estimates put Rogue One’s potential worldwide grosses this weekend anywhere from $250 million to $350 million, which could be roughly half of The Force Awakens‘ global opening ($529 million) last year. Disney likely won’t be too upset by those figures. After all, that result would give it its fourth billion-dollar film in a year in which it will likely set an annual ticket sales record, becoming the first Hollywood studio to crack the $7 billion mark. All the same, the pressure on the movie business could hardly be greater, given the challenges to Disney’s other great cash cow, ESPN.
• Wells Fargo Takes Another Hit From Regulators
Wells Fargo’s losing streak with regulators continued, as the Federal Deposit Insurance Corporation said it had failed to present a credible plan for being wound down in an orderly manner if it were ever pushed into bankruptcy. Such “living wills” are now required by regulators to ensure that there is always an alternative to taxpayer-funded bailouts of banks that fail. The immediate consequences are not severe – only a ban on acquiring foreign or non-bank entities. However, it adds to a picture of a management team that is failing to master its brief. Four other banks who failed the FDIC’s initial test – JPMorgan Chase, Bank of America, Bank of New York Mellon and State Street – all passed at the second attempt (and it’s worth noting that the first two of those are far more complex entities than Wells).
Around the Water Cooler
• Exxon’s New CEO
Rex Tillerson’s elevation to Secretary of State, naturally, creates a vacancy at the top of one of the U.S.’s biggest companies. ExxonMobil’s board will meet “shortly” to discuss the transition and is widely expected to appoint Darren Woods, who has been heir apparent to Tillerson since taking over the title of President in January. Like Tillerson before him, Woods joined ExxonMobil pretty much straight from school. Unlike Tillerson, he has concentrated more on the company’s downstream operations of refining and supply. There’s been speculation that such a change of emphasis might reflect a desire to establish ExxonMobil as a trader of oil, a move that would give it alternative ways of sourcing crude after a couple of expensive and unsuccessful bets on new production projects under Tillerson. If Woods does get the nod, his compensation could more than double from last year’s $10.3 million.
• Icahn Shakes up Management at Hertz
Kathryn Marinello will take over from John Tague as CEO of struggling car-rental firm Hertz on the first Monday of 2017. Three of the company’s longest-serving board directors will also stand down. Marinello, who has been a board member of General Motors and, since 2014, a senior advisor at Ares Management, will take over two months after a bad quarterly earnings miss that appears to have jolted activist investor Carl Icahn, its biggest shareholder, into action. Icahn issued a strong statement of support for Marinello yesterday. Icahn raised his stake after the earnings miss, but the shares are still down 50% this year.
• Vivendi Moves on Berlusconi’s Media Empire
Mediaset, the media empire of former Italian Prime Minister Silvio Berlusconi, is in play. French tycoon Vincent Bollore broke cover by announcing that his company Vivendi was looking to build a stake of up to 20% in the company, driving its share price up by over 30% in Milan. Berlusconi’s holding company Fininvest responded by saying it would look to raise its stake by another 5% to 40%. The two tycoons have fallen out over a plan to create a European streaming player big enough to compete with Netflix and Amazon, built around Mediaset’s Premium unit. Typically, Vivendi likes to exert control on companies through buying large minority stakes, but Berlusconi’s current holding suggests that Bollore will have to launch a hostile bid for the shares of unaligned investors to impose his will.
• Germany Eyes Law Banning Fake News
The German government is considering a new law that would make social media companies like Facebook criminally liable for facilitating the spread of fake news. Chancellor Angela Merkel has already warned that disinformation could disrupt next year’s election campaign, and the general nervousness in Berlin has risen since Wikileaks (which has gone remarkably silent on U.S. politics since Donald Trump’s election victory) started to disclose details of contacts between the German and U.S. intelligence agencies. That leak provoked speculation that Russia, which has been accused of feeding Wikileaks the material with which to discredit its staunchest opponents, had turned its attention to Berlin. Merkel has put security issues ahead of commercial ones in leading support for sanctions against Russia since its invasion of Ukraine nearly three years ago. Yesterday, she reiterated her support for extending those sanctions. Kremlinology apart, it looks like another headache in Europe’s biggest market for Facebook, already under pressure there due to the proliferation of hate speech on its platform.
Summaries by Geoffrey Smith Geoffrey.email@example.com;