Weekly Research Briefing: Prime Time

Fed officials raised rates at 11 of their past 12 meetings, most recently in July, to a range between 5.25% and 5.5%, a 22-year high. They appear to be in broad agreement to hold interest rates there at their Sept. 19-20 meeting, giving them more time to see how the economy is responding to increases.

The bigger debate is what would prompt them to raise rates again in November or December. In June, most officials projected they would need to raise rates by another quarter point this year.

Projections to be released at the end of the September meeting will likely show that an additional increase is still on the table. But whether they deliver such an increase is an open question.

For the past year, officials have placed the burden on evidence of a slowing economy to justify pausing rate increases. As inflation cools, the burden has shifted toward evidence of an accelerating economy to justify higher rates.

This is apparent from how Fed Chair Jerome Powell recently described the risk that firmer-than-expected economic activity would slow recent progress on inflation. Last month, he twice used the word “could” instead of the more muscular “would” to describe whether the Fed would tighten again. Evidence of stronger growth “could put further progress at risk and could warrant further tightening of monetary policy,” he said in Jackson Hole, Wyo.

"I would say I am very surprised by the consumer resilience. We continue to see very strong spend across the board. The consumer has been outperforming expectations. Obviously, our business is a good indicator of what the consumer is doing. We have more data than probably many others. So what we are seeing is a resilient consumer all throughout. We told you that in the second quarter conference call. And as we look at data running up until the end of August, we continued to see the same trends. So resilient consumer, that’s good." - Mastercard Co-President Ling Hai

Visa CEO when asked about the state of the consumer: "I think you nailed it when you said stable. Stability, resiliency, in the US and around the world..." Visa Aug US payment volume +7%, credit +6% y/y; Global processed transactions +10% y/y

UBER CEO pointed to the US and Global consumer remaining strong and did not highlight any sign of broad based weakness across Mobility or Delivery. UBER is gaining category position in 8 of its top 10 Mobility markets and 9 out of its 10 Delivery markets.

The consumer balance sheet is exceptionally healthy. For what it is worth, our estimate of excess accumulated PCE savings is between $400 billion to $1 trillion, relative to the San Francisco Fed’s conservative estimate of around $100 billion. Relative to disposable income, net wealth is just off its all-time highs at 860% — with equities and real estate assets just off the highs at 400% and cash & cash-like holdings just off the highs at around 90%. Household liabilities are around their 20-year lows relative to income at around 100% — with credit card balances still around 30-year lows at around 5% to 6% of disposable income... Despite the rise in interest rates, debt service costs are still near all-time low due to the extraordinary situation in the mortgage space... Although non-mortgage interest paid has shot up near 20-year highs at over 2.5% of disposable income, mortgage interest paid is just about the lowest on record at just 2.7% of income.

[LULU] Exec: Sees North American business accelerating relative to Q2; Q3 off to a solid start - earnings call comments

• Have seen a noticeable uptick in travel and tourism within Asia Pacific, which is also having a positive impact on business
• Guests are responding well to Back-to-School and early Fall product innovations
• At the end of Q3 we expect inventory to be up in the high single to low double-digits y/y
• See really strong, healthy growth across each of the 3 months of the quarter in China

Today’s report also provided an encouraging signal on inflation, with headline and core PCE rising 0.2% on the month in July. While a 2.5% jump in financial services led to a solid 0.5% monthly gain in “supercore” inflation, market-based PCE price measures were much softer. Overall, we think the data suggest an inflation trend that is returning closer to the FOMC’s target.

Last week Mike Konczal of the Roosevelt Institute published an article arguing that the majority of the disinflation that we've seen is a result of expanding supply and not diminished demand.

He writes:

The majority of disinflation has been driven by expanding supply rather than decreasing demand. Decomposing price and quantity changes for 123 core PCE items, I find 73 percent of all core items, and 66 percent of services, see prices falling with quantities increasing—a sign of expanding supply.

There's quite a few interesting aspects of this paper. First again, the headline point is that since December 2022 — across both goods and services — the majority of items have seen both a decrease in price and an increase in volume.

As you can see in this chart, there are very few categories in the bottom left quadrant, where price declines have coincided with a reduction in demand. Where we see improvement in price is much more in areas where the quantity has gone up.

@lisaabramowicz1: US 10-year real yields are bumping up against the highest levels since 2009:

From high-yield credit to equities, the odds of an economic downturn priced into financial assets have fallen to the lowest since April 2022, according to JPMorgan Chase & Co. It’s a big reversal from the doom and gloom of the past year, when a recession was effectively seen as a done deal...

Equity, credit and rate markets together are assigning 16% probability to a US recession over the next six to 12 months, down from more than 50% in October, a JPMorgan trading model reveals.

The S&P 500 is assigning just 22% odds to recession, down from 98% in October while the market for junk bonds sees a 9% chance. The bank calculates the metrics by comparing the pre-recession peaks of various classes and their troughs during the economic contraction.

@NickTimiraos: Goldman Sachs chief economist Jan Hatzius:

"We have further reduced our 12-month US recession probability back to 15%, from 20%" in July

"This change reflects continued encouraging inflation news, a favorable real income outlook, and the decline in the jobs-workers gap."

@carlquintanilla: B of A: “It’s official: we’re in a Recovery. Admittedly, the last few years have not felt well-defined from a “cycle” perspective .. But our US Regime Indicator .. improved for its 2nd consecutive month in August... Five inputs improved (Inflation, GDP forecast, 10-yr Treasury yield, ISM PMI, and Capacity Utilization) ..”

"I think everybody reads about chips in every industry, transforming every market, 7,000 chips in an electric vehicle. If you look at an AI server versus an industry-standard server enterprise or cloud, you had 8x the amount of foundry logic chips in that server and about 8x DRAM. So those markets, and we're still in the early innings of that transition to those AI servers." - Applied Materials CEO Gary Dickerson

"I know a lot of people talk about, well, content growth, content growth, content growth. But in reality, take, for example, our content. We have $50 worth of content in an internal combustion engine, $750 in EV. This is on the drivetrain side. So mathematically, you can have 10 less cars in internal combustion and one car of EV and for us to be flat, grow slightly. Just mathematically, that's the content growth story for us specifically and that applies to some of our peers." - ON Semiconductor Corporation CEO Hassane El-Khoury

SoftBank’s $50bn flotation of Arm is more than five times oversubscribed, according to bankers pitching investors on the biggest initial public offering in nearly two years, as the UK-based chip designer forecast accelerating revenue growth boosted by the artificial intelligence boom.

Despite investor concerns about a drop in profits in Arm’s most recent quarter amid a smartphone industry slowdown and the company’s exposure to multiple risks in China, advisers working on the Nasdaq listing said there was “little price sensitivity among investors”, many of whom would be forced to buy because of Arm’s inclusion in indices.

Brokers from the 28-strong army of banks selling Arm’s IPO gathered more than 100 of the world’s biggest fund managers at a New York hotel this week to convince them that this was their chance to be big winners in AI.

“AI is going to be everywhere and it all runs on Arm,” Rene Haas, the SoftBank-owned chip designer’s chief executive, told prospective investors in a pitch video seen by the Financial Times.

Arm executives projected revenue growth would accelerate after a flat year in 2023, as it increased the royalties it is paid by smartphone makers, said people who attended the roadshow. Arm indicated it could achieve revenue growth of at least 20 per cent in the financial year ending March 2025, ahead of analysts’ expectations, these people said...

Earlier this week, Arm set an initial price range of $47-$51 per share, raising up to $4.9bn for its parent SoftBank and valuing the Cambridge-based company at up to $52bn.

Instacart is targeting a valuation of roughly $8.6 billion to $9.3 billion in its imminent IPO, a fraction of what the grocery-delivery company was previously worth, in the latest sign of diminished investor enthusiasm for private growth companies...

The expected valuation, on a fully diluted basis, is a far cry from the roughly $39 billion Instacart garnered in a fundraising round in 2021, the year it started laying the groundwork for a public listing. Since then, valuations of high-growth startups have fallen as interest rates rose, making riskier investments less attractive...

Founded in 2012, Instacart sends couriers to grocery stores to pick out and deliver orders to customers’ homes. The company has raised more than $2 billion in venture-capital funding over the years and has long said it expected to go public.

The company revealed its financials last month, saying it generated $242 million in profit for the first six months of the year compared with a $74 million net loss a year earlier.

• Owner of Salomon, Arc’teryx plans listing by early next year
• Anta-led group bought Amer Sports for $5.2 billion in 2019

Sports, the maker of Wilson tennis rackets and Salomon ski boots, has filed confidentially for a US initial public offering that could value the group at as much as $10 billion, people familiar with the matter said.

The company is working with Bank of America Corp., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley on preparations for the share sale, said the people. Amer Sports plans to list by early next year, the people said, asking not to be identified discussing information that’s private.

Amer Sports is targeting an IPO of more than $1 billion and could end up seeking as much as $3 billion depending on market conditions, some of the people said. The company, which is backed by China’s largest athletic-apparel producer Anta Sports Products Ltd., also owns brands including Louisville Slugger baseball bats, Arc’teryx outdoor gear and Atomic winter equipment.

Private equity firm KKR Group plans to list Kokusai Electric Corp.’s shares in Tokyo as early as October at a valuation north of ¥400 billion ($2.7 billion), a person familiar with the matter said.

KKR will float a portion of the shares it owns in the former Hitachi Ltd. operations on the Tokyo Stock Exchange, the person said, asking not to be named as the talks are not public. While it’s not yet clear how much equity will be sold to investors, the initial public offering would raise roughly $540 million if the company sold a 20% stake.

@dailychartbook: IPOs: "Issuance YTD remains low ($9bn YTD), with dry powder on the sidelines eagerly awaiting a return of deals." - Goldman Sachs

But the announced enterprise value amounts to a very high multiple of 17.2 times expected, adjusted earnings before interest, taxes, depreciation and amortization this year. By contrast, snacking companies Mondelez International, which owns the Oreo and Cadbury brands, and PepsiCo, which owns Frito-Lay, trade at 16.4 times and 16.8 times, respectively, on a similar basis, according to FactSet. Those are both huge, global businesses with very strong long-term track records. Hostess has posted good sales results recently, but it has also been through two bankruptcies.

The high price might be the result of a bidding war: The Wall Street Journal reported that there was heated competition with General Mills for the deal. Smucker says the multiple would fall to 13.2 times after expected synergies, but that is still rather high. Smucker itself trades at an enterprise value to Ebitda multiple of just 11 times.

WestRock is nearing a deal to merge with Europe’s Smurfit Kappa Group in a move that would create a global paper and packaging powerhouse valued at some $20 billion, according to people familiar with the matter.

After The Wall Street Journal published a report on the move, Smurfit Kappa confirmed that it is in talks with WestRock over a potential merger.

Smurfit Kappa said the discussions involve the creation of a new company—Smurfit WestRock—in a combination with a WestRock subsidiary. WestRock shareholders would receive shares in the combined group, Smurfit Kappa said. The company didn’t provide any financial details about the potential merger.

“Discussions between the parties remain ongoing regarding the potential combination. Smurfit Kappa and WestRock are engaged in a mutual due diligence process,” Smurfit Kappa said.

Enbridge has entered into definitive agreements with Dominion Energy, Inc. to acquire The East Ohio Gas Company ("EOG"), Questar Gas Company ("Questar Gas"), and its related Wexpro companies ("Wexpro" and collectively with Questar Gas, "Questar"), and Public Service Company of North Carolina, Incorporated ("PSNC") (collectively the "Gas utilities") for an aggregate purchase price of US$14.0 billion (CDN$19 billion1), comprised of US$9.4 billion of cash consideration and US$4.6 billion of assumed debt (the "Acquisitions").

• Creates North America's largest natural gas utility platform delivering ~9.3 bcf/d to ~7 million customers across multiple regulatory jurisdictions.
• Historically attractive acquisition multiples, based on 2024 estimate of ~1.3x Enterprise Value-to-Rate Base and 2023 estimate of ~16.5x Price-to-Earnings.
• Compounded annual growth rate of approximately 8% on the consolidated rate base is expected to deliver long-term value for Enbridge shareholders.

[SUM] To combine with Argos in cash and stock deal worth $3.2B

• Entered into a definitive agreement with Cementos Argos S.A under which Summit will combine with Argos North America Corp, the US operations of Cementos Argos in a cash and stock transaction valued at $3.2B.
• The combination of Summit and Argos USA will create the fourth-largest cement platform in the United States and accelerates Summit's 'Elevate Summit' strategy, enhancing the company's materials-led approach and positioning it for even greater success with a national footprint and significantly improved scale.
• The transaction reflects a pre-synergized enterprise value to EBITDA multiple of approximately 10x based on full year 2023 estimated EBITDA for Argos USA or below 8x on a post-synergies basis.

[NXGN] To be acquired by Thoma Bravo at $23.95/shr cash - Under the terms of the agreement, NextGen Healthcare shareholders will receive $23.95 per share in cash. The per share purchase price represents a 46.4% premium to the Company’s unaffected closing stock price on August 22 (the last trading day prior to published market speculation regarding a potential transaction involving the Company) and a 39.2% premium to the 30-day volume-weighted average price for the period ending September 1.

NextGen Healthcare, Inc. provides software and services for ambulatory healthcare services in the United States.

Rogers Communications Inc. priced the largest corporate bond issuance so far this year as the telecom company refinances debt after it completed the acquisition of a smaller rival.

The Toronto-based wireless company sold C$3 billion ($2.2 billion) of investment-grade rated notes in four parts, according to data compiled by Bloomberg. The longest portion of the offering, a 10-year tranche, was priced at the tight end of a range between 232 basis points and 235 basis points over the Canadian government curve, said the person, who asked not to be identified as the details are private.

@MikeZaccardi: Q2 earnings season 'bank lending' discussions.. Concerns About Bank Credit Have Normalized

Overall, we anticipate dealflow in H2 to be better. If you look at previous downturns, the outperformance of private equity compared to public equity has increased during times of volatility and crisis. So, the opportunity set is maybe smaller than in previous years, but also more interesting. In terms of what is driving dealflow, firstly, the financing markets are opening up. Leverage is still expensive, but we are seeing it beginning to open up definitively in the US and a bit in Europe. Second, whenever you have volatility, it can take six to nine months for buyers and sellers to converge on prices and close the valuation gap, which we saw emerge at the tail end of 2022. I think it has dawned on people that increased interest rates and inflation are here to stay. So, the valuation mismatch has started to close. The upside is that more deals are not only being started but also being closed.

But even for the moderately wealthy, insurance costs are beginning to verge on unaffordable: The cost of so-called high-value insurance, loosely defined as policies covering homes worth more than $1 million, is outpacing the rise in premiums for more modestly valued homes by anywhere from two to 70-fold.

“I’ve done this 32 years and I’ve never seen rates rise the way it’s happening today,” said Cindy Zobian, managing director at insurance broker Alliant Private Client. “If you’re getting a rate increase under 20% it’s almost a gift.”

Increases of up to 800% are closer to the norm, she said, and it’s not uncommon for those triple-digit rate hikes to be accompanied by lowered coverage limits.

A home in Florida that was insured for $60 million, excluding contents, with full wind coverage carried a premium of about $600,000 last year. This year the insurer dropped wind coverage. After negotiating and finding a separate carrier for a wind policy, the homeowner wound up agreeing to pay $750,000 in premiums for $50 million less coverage. “That was a considered a win,” said Zobian.

In Florida, the problem boils down to this: Too many people have moved into areas that might be at danger from rising sea levels and more frequent and intense tropical storms.

More than three years after the coronavirus pandemic began, workers have not fully returned to once-bustling downtowns across the country. Many government officials worry that they never will, sounding alarms about how such a reality will drag down tax assessments and threaten the revenue needed to fund public services.

Cities big and small, including nearby D.C. and Alexandria, Va., have sought to address this looming crisis by trying to turn vacant office towers into apartment buildings. It’s a buzzy idea that has drawn broad support as a way to reinvent downtowns while tackling a housing crunch, too.

But it may be easier said than done, with many newer office towers lacking the sunlight or plumbing to easily carve the space into apartments.

If that’s the case, then Chon’s Balian Springs spa — and a handful of projects like it sprouting up around the country — offers one alternative that is increasingly being explored by real estate brokers and local officials: Why not turn an empty office into, well, basically anything else?

“I don’t see a silver bullet or even a series of bullets that can solve the office-vacancy crisis,” said Dror Poleg, an economic historian and the author of “Rethinking Real Estate.” Yet, he added, “now that people are working in more places and moving around more throughout the day, suddenly there is low-hanging fruit that will become relevant to fill space.”

Some possibilities are already being tested. What was once the tallest building in Portland, Ore., is being marketed as a potential home for data centers to power cloud computing. Inside a 22-story Chicago office tower across from City Hall, there could soon be a vertical farm growing tomatoes and herbs.

And closer to Chon’s Northern Virginia spa, officials in Arlington County are trying to make way for a range of potential new tenants — from breweries and podcasting studios to doggy day cares — by loosening rules that limit what can go inside empty offices without the need for a government permit.

Abba is making more than $2 million a week touring as avatars

Seven times a week, the Swedish supergroup ABBA performs in front of a sold-out crowd in east London. None of the band’s four members are on stage.

Audiences at ABBA Voyage watch three-dimensional renderings of Agnetha Fältskog, Björn Ulvaeus, Benny Andersson, and Anni-Frid Lyngstad perform hits like Chiquitita and Fernando backed by a 10-piece band. They look 28, they sound 28 and they move … like they are a little older than 28.

The ABBA Arena, which seats about 3,000 people, was built specifically for this show, featuring LED screens that make the venue seem deeper and 291 speakers to deliver surround sound. All told, ABBA Voyage is one of the most expensive productions in music history, with a price tag of £140 million (about $175 million) before the first show opened in May 2022.

That investment is starting to look like one of the savvier bets in modern music history. In 15 months, the show has generated more than $150 million in sales and sold more than 1.5 million tickets, surpassing all but a handful of the biggest live shows last year. The venue is 99% full every night and, with an average ticket price of about £85 ($105), the show is making more than $2 million a week.