Finance

Wall Street pushes out rate-cut expectations, sees risk of no action until 2025

Published

6 months ago

April 18, 2024

Federal Reserve Chair Jerome Powell speaks during a House Financial Services Committee hearing on the “Federal Reserve’s Semi-Annual Monetary Policy Report” on Capitol Hill in Washington, U.S., March 6, 2024.

Bonnie Cash | Reuters

If there was any doubt before, Federal Reserve Chair Jerome Powell has pretty much cemented the likelihood that there won’t be interest rate reductions anytime soon.

Now, Wall Street is wondering if the central bank will cut at all this year.

That’s because Powell on Tuesday said there’s been “a lack of further progress” on lowering inflation back to the Fed’s 2% target, meaning “it’s likely to take longer than expected” to get enough confidence to start easing back on policy.

“They’ve got the economy right where they want it. They now are just focused on inflation numbers. The question is, what’s the bar here?” said Mark Zandi, chief economist at Moody’s Analytics. “My sense is they need two, probably three consecutive months of inflation numbers that are consistent with that 2% target. If that’s the bar, the earliest they can get there is September. I just don’t see rate cuts before that.”

With most readings putting inflation around 3% and not moving appreciably for several months, the Fed finds itself in a tough slog on the last mile toward its goal.

Market pricing for rate cuts has been highly volatile in recent weeks as Wall Street has chased fluctuating Fed rhetoric. As of Wednesday afternoon, traders were pricing in about a 71% probability that the central bank indeed most likely will wait until September, with the implied chance of a July cut at 44%, according to the CME Group’s FedWatch gauge.

As for a second rate cut, there was a tilt toward one in December, but that remains an open question.

“Right now, my base case is two — one in September and one in December, but I could easily see one rate cut, in November,” said Zandi, who thinks the presidential election could factor into the equation for Fed officials who insist they are not swayed by politics.

‘Real risk’ of no cuts until 2025

The uncertainty has spread through the Street. The market-implied odds for no cuts this year stood around 11% on Wednesday, but the possibility can’t be ignored at this point.

For instance, Bank of America economists said there is a “real risk” that the Fed won’t cut until March 2025 “at the earliest,” though for now they’re still going with a December forecast for the one and only cut this year. Markets at the onset of 2024 had been pricing in at least six quarter-percentage point reductions.

“We think policymakers will not feel comfortable starting the cutting cycle in June or even September,” BofA economist Stephen Juneau said in a client note. “In short, this is the reality of a data-dependent Fed. With the inflation data exceeding expectations to start the year, it comes as little surprise that the Fed would push back on any urgency to cut, especially given the strong activity data.”

To be sure, there’s still hope that the inflation data turns lower in the next few months and gives the central bank room to ease.

Citigroup, for example, still expects the Fed to begin easing in June or July and to cut rates several times this year. Powell and his fellow policymakers “will be pleasantly surprised” by inflation data in coming months, wrote Citi economist Andrew Hollenhorst, who added that the Fed “is poised to cut rates on either slower year-on-year core inflation or any signs of weakness in activity data.”

Elsewhere, Goldman Sachs pushed back the month that it expects policy to ease, but only to July from June, as “the broader disinflationary narrative remains intact,” wrote Jan Hatzius, the firm’s chief economist.

Danger looms

If that is true, then “the pause on rate cuts would be lifted and the Fed would move ahead,” wrote Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI. However, Guha also noted the wide breadth of policy possibilities that Powell opened in his remarks Tuesday.

“We think it still leaves the Fed uncomfortably data-point dependent, and highly vulnerable to being skittled from three to two to one cut if near-term inflation data does not cooperate,” he added.

The possibility of a stubborn Fed raises the possibility of a policy mistake. Despite the resilient economy, higher rates for longer could threaten labor market stability, not to mention areas of the finance sector such as regional banks that are susceptible to duration risk posed to fixed income portfolios.

Zandi said the Fed already should have been cutting with inflation well off the boil from its mid-2022 highs, adding that factors related to housing are essentially the only thing standing between the central bank and its 2% inflation goal.

A Fed policy mistake “is the most significant risk to the economy at this point. They’ve already achieved their mandate on full employment. They’ve all but achieved their mandate on inflation,” Zandi said.

“Stuff happens, and I think we need to be humble here regarding the financial system,” he added. “They run the risk they are going to break something. And to what end? If I were on the committee, I would be strongly arguing we should go already.”

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Stocks making the biggest moves premarket: MS, CSCO, ASML

Published

1 hour ago

October 16, 2024

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Finance

Morgan Stanley (MS) earnings Q3 2024

Published

5 hours ago

October 16, 2024

Business Finance News

Ted Pick, CEO Morgan Stanley, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 18th, 2024.

Adam Galici | CNBC

Morgan Stanley topped analysts’ estimates for third quarter profit as its wealth management, trading and investment banking operations generated more revenue than expected.

Here’s what the company reported:

Earnings:$1.88 a share vs $1.58 LSEG estimate
Revenue: $15.38 billion vs. $14.41 billion estimate

Morgan Stanley had several tailwinds in its favor. The bank’s massive wealth management business was helped by high stock market values in the quarter, which inflates the management fees the bank collects.

Investment banking has rebounded after a dismal 2023, a trend that may continue as easing rates will encourage more financing and merger activity.

Finally, its Wall Street rivals have posted better-than-expected trading results, making it unlikely that the firm missed out on elevated activity.

JPMorgan Chase, Goldman Sachs and Citigroup topped expectations, helped by better-than-expected revenue from trading or investment banking.

This story is developing. Please check back for updates.

Finance

China’s Alibaba claims AI translation tool beats Google, ChatGPT

Published

14 hours ago

October 16, 2024

Business Finance News

Chinese e-commerce company Alibaba has invested heavily in its fast-growing international business as growth slows for its China-focused Taobao and Tmall business.

Nurphoto | Nurphoto | Getty Images

BEIJING — Chinese e-commerce giant Alibaba‘s international arm on Wednesday launched an updated version of its artificial intelligence-powered translation tool that, it says, is better than products offered by Google, DeepL and ChatGPT.

That’s based on an assessment of Alibaba International’s new model, Marco MT, by translation benchmark framework Flores, the Chinese company said.

Alibaba’s fast-growing international unit released the AI translation product as an update to one unveiled about a year ago, which it says already has 500,000 merchant users. Sellers based in one country can use the translation tool to create product pages in the language of the target market.

The new version is based only on large language models, allowing it to draw on contextual clues such as culture or industry-specific terms, Kaifu Zhang, vice president of Alibaba International Digital Commerce Group and head of the business’ artificial intelligence initiative, told CNBC in an interview Tuesday.

“The idea is that we want this AI tool to help the bottom line of the merchants, because if the merchants are doing well, the platform will be doing well,” he said.

Large language models power artificial intelligence applications such as OpenAI’s ChatGPT, which can also translate text. The models, trained on massive amounts of data, can generate humanlike responses to user prompts.

Alibaba’s translation tool is based on its own model called Qwen. The product supports 15 languages: Arabic, Chinese, Dutch, English, French, German, Italian, Japanese, Korean, Polish, Portuguese, Russian, Spanish, Turkish and Ukrainian.

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Zhang said he expects “substantial demand” for the tool from Europe and the Americas. He also expects emerging markets to be a significant area of use.

When users of Alibaba.com — a site for suppliers to sell to businesses — are categorized by country, developing countries account for about half of the top 20 active AI tool users, Zhang said.

Chinese companies have increasingly looked abroad for growth opportunities, especially e-commerce merchants. PDD Holdings‘ Temu, fast fashion seller Shein and ByteDance’s TikTok are among the recent global market entrants. Many China-based merchants also sell on Amazon.com.

Contextual clues

Since Alibaba launched the first version of its AI translation tool last fall, the company said merchants have used it for more than 100 million product listings. Similar to other AI-based services, the basic pricing charges merchants by the amount of translated text.

Zhang declined to share how much the updated version would cost. He said it was included in some service bundles for merchants wanting simple exposure to overseas users.

His thinking is that contextual translation makes it much more likely that consumers decide to buy. He shared an example in which a colloquial Chinese description for a slipper would have turned off English-speaking consumers if it was only translated literally, without getting at the implied meaning.

“The updated translation engine is going to make Double 11 a better experience for consumers because of more authentic expression,” Zhang said, in reference to the Alibaba-led shopping festival that centers on Nov. 11 each year.

Alibaba’s international business includes platforms such as AliExpress and Lazada, which primarily targets Southeast Asia. The international unit reported sales growth of 32% to $4.03 billion in the quarter ended June from a year ago.

That’s in contrast to a 1% year-on-year drop in sales to $15.6 billion for Alibaba’s main Taobao and Tmall e-commerce business, which has focused on China.

The Taobao app is also popular with consumers in Singapore. In September, the app launched an AI-powered English version for users in the country.

Nomura analysts expect that Alibaba’s international revenue slowed slightly to 29% year-on-year growth in the quarter ended September, while operating losses narrowed, according to an Oct. 10 report. Alibaba has yet to announce when it will release quarterly earnings.