US FINANCIAL MARKET

Stocks Fall as Yields Rise on ISM, Fed’s Remarks: Markets Wrap – Bloomberg, 2/5/2024

• Wall Street traders sent stocks and bonds lower after hotter-than-estimated economic data and signals that the Federal Reserve isn’t ready to call victory over inflation just yet.
• Treasuries came under renewed pressure, with two-year yields heading toward their highest levels in 2024.
• Fed swaps almost wiped out the odds of a March interest-rate move, and the chances of a May cut have also been reduced.
• The dollar was on track for its strongest since November, while the S&P 500 lost steam after closing at a record Friday.
• The Dow Jones Industrial Average fell about 1%.
• The US service sector expanded in January by the most in four months after coming close to stagnating at the end of 2023, helped by a pickup in orders and employment.
• The Institute for Supply Management’s overall gauge of services increased to 53.4 — remaining above the 50 level that indicates expansion.
• The group’s metric of price paid for materials jumped, showing that costs are rising faster.
• Traders also waded through remarks from Fed speakers. Jerome Powell reiterated that policymakers will likely wait beyond March to cut rates in a Thursday interview with CBS’s 60 Minutes that aired Sunday evening.
• Fed Bank of Minneapolis President Neel Kashkari said Monday that officials have time to gauge incoming data before cutting borrowing costs.
• The OECD said that the world’s major central banks mustn’t drop their guard in the fight against inflation as it’s too soon to say if sharp interest rate increases have contained underlying price pressures.
• American shoppers won’t be deterred by mounting credit-card bills or the recent ripple of layoffs, according to the latest Bloomberg Markets Live Pulse survey.
• More than half of 463 respondents said spending would stay strong or even more robust in 2024, with consumers set to shell out for airline tickets, restaurant meals, and concerts.
• The Senior Loan Officer Opinion Survey on Bank Lending Practices, known as SLOOS, will also be on the radar on Monday.
• Back in November, the Fed said US banks broadly reported tight lending standards and weak loan demand in the third quarter.
• Boeing found more mistakes with holes drilled in the fuselage of its 737 Max jet, a setback that could further slow deliveries on a critical program already restricted by regulators over quality lapses.
• Caterpillar, one of the world’s largest manufacturers of heavy machinery, batted away concerns of a global economic slowdown after reporting higher fourth-quarter sales in its energy and transportation business, which helped it to post a profit that topped analysts’ expectations.
• McDonald’s sales missed investor expectations in the fourth quarter as growth decelerated, partially hurt by the conflict in the Middle East.
• Tyson Foods posted quarterly earnings that beat even the highest of analysts’ estimates, with improving results from its chicken and pork. They prepared food businesses more than offsetting losses at its beef operation.
• Snap is reducing its workforce by roughly 10% worldwide, joining the chorus of technology companies that have announced fresh cuts since the start of the year.
• Estée Lauder said it’s cutting as many as 3,000 positions as part of a restructuring plan to put one of the world’s largest beauty companies back on track.
• Novo Nordisk agreed to buy three manufacturing plants for $11 billion to help it meet surging demand for the obesity drug Wegovy and diabetes shot Ozempic.
• The Stoxx Europe 600 fell 0.2%.
• The Bloomberg Dollar Spot Index rose 0.5%.
• The yield on 10-year Treasuries advanced 13 basis points to 4.15%.
• West Texas Intermediate crude fell 1% to $71.54 a barrel.

McDonald’s Sales Dented by Israel-Hamas Conflict – Wall Street Journal, 2/5/2024

• McDonald’s said price increases and menu promotions helped boost US sales last quarter, though conflict in the Middle East weighed on its regional restaurants.
• McDonald’s, Starbucks, and other US restaurant chains have become entangled in the polarizing Israel-Palestine conflict, which has cut into sales at Middle Eastern locations.
• The chains have also faced online accusations that they favor one side or the other in the conflict, which the companies have denied.
• The company reported $6.4 billion in revenue for the most recent quarter, roughly aligned with analysts’ expectations.
• The burger giant Monday said its global same-store sales grew 3.4% in the three months ending December 31, compared with the 4.7% expected by analysts from FactSet.
• While US stores grew roughly in line with expectations, McDonald’s business, including its Middle East restaurants, rose 0.7%, short of the 4.7% analyst forecast, according to Consensus Metrix.
• According to company filings, • Around 10% of McDonald’s, roughly 18,000 international restaurants run by licensees are located in the Middle East, accounting for 12% of that segment’s sales.
• McDonald’s international licensed markets accounted for 10% of the company’s 2022 fiscal year revenue.
• Earnings per share were $2.95 when adjusting for charges related to layoffs conducted by McDonald’s last year and other one-time items.
• Analysts polled by FactSet expected $2.83 a share.

Caterpillar Stock Jumps After Earnings Beat Forecasts – Wall Street Journal, 2/5/2024

• Caterpillar shares climbed Monday after profit topped expectations.
• Sales rose 3% to $17.07 billion, in line with the estimates of analysts polled by FactSet.
• Operating profit surged 87% due to higher prices and the absence of a $925 million goodwill impairment charge in the company’s rail division. That offset higher overheads and research and development costs.
• Adjusted earnings, which strip out one-time items, of $5.23 per share topped analyst projections by 47 cents.
• Higher prices helped boost profit margins and offset a drop in sales volume at the construction equipment maker.
• Equipment sales to end users increased last quarter, even as dealer inventories declined.
• The company expects sales in 2024 to be broadly similar to last year’s total, with no significant change in machine dealer inventory.

Tyson Shares Surge as Profit Beats on Chicken, Pork Rebound – Bloomberg, 2/5/2024

• Tyson Foods posted quarterly earnings that beat even the highest of analysts’ estimates, with improving results from its chicken and pork. They prepared food businesses more than offsetting losses at its beef operation.
• The unit that produces processed food under brands such as Wright and Jimmy Dean posted margins that exceeded analyst estimates, accounting for more than half of Tyson’s gains in the three months.
• Meanwhile, Tyson’s beef business reported a worse-than-expected loss, exacerbated by an inventory valuation charge following a sudden drop in cattle prices.
• The largest meat producer in America posted an adjusted net income of 69 cents per share in its fiscal first quarter, down 19% from a year earlier, the company said Monday in a statement.
• That compares with a 42-cent average estimate from analysts.
• The meat producer has slightly increased its earnings outlook for the chicken and pork divisions in 2024.

Boeing Finds More Misdrilled Holes on 737 in Latest Setback – Bloomberg, 2/5/2024

• Boeing found more mistakes with holes drilled in the fuselage of its 737 Max jet, a setback that could further slow deliveries on a critical program already restricted by regulators over quality lapses.
• The latest manufacturing slip originated with a supplier and will require rework on about 50 undelivered 737 jets to repair the faulty rivet holes, Boeing commercial chief Stan Deal said in a note to staff.
• While he didn’t identify the contractor, a spokesman for fuselage supplier Spirit AeroSystems Holdings said it’s aware of the issue and will conduct repairs.
• The extra time required for inspections and repair work could delay near-term plane deliveries, Deal said in his memo, which Bloomberg News saw.
• He didn’t say whether any action would be required on the in-service 737 fleet.
• “This is the only course of action given our commitment to deliver perfect airplanes every time,” Deal said in his note.

Merck to Buy Elanco’s Aqua Business for $1.3 Billion – Wall Street Journal, 2/5/2024

• Merck has struck a deal to buy Elanco Animal Health’s aqua business, expanding the drugmaker’s animal health business.
• On Monday, Merck said the deal includes a portfolio of medicines and vaccines, nutrition, and supplements for aquatic species, manufacturing plants in Canada and Vietnam, and a research facility in Chile.
• Elanco’s aqua business, which includes products across warm-water and cold-water species, generates about $175 million in annual revenue.
• Merck’s animal health unit accounted for nearly $5.63 billion of the Rahway, NJ, company’s more than $60 billion in sales last year.
• Elanco, a Greenfield, Ind., animal health company, said it plans to use the $1.05 billion to $1.1 billion of after-tax cash proceeds from the sale to pay down debt.

Estée Lauder Stock Surges on Layoff Plans – Wall Street Journal, 2/5/2024

• Estée Lauder shares jumped in Monday trading after the cosmetics giant said it would lay off up to 5% of its workers, moving to boost profit after several weak quarters.
• The company, which has roughly 62,000 employees, will eliminate up to 3,100 positions.
• It expects restructuring and other charges of between $500 million and $700 million and would retrain and redeploy some staff.

Snap to slash 10% of staff as tech layoffs continue – Market Watch, 2/5/2024

• Snap plans to conduct a new round of layoffs as part of a restructuring.
• Snapchat’s parent company intends to cut about 10% of its staff “to position our business best to execute on our highest priorities and to ensure we can invest incrementally to support our growth over time,” it said in a Monday morning filing with the Securities and Exchange Commission.
• The company expects to incur $44 million to $75 million in pretax charges, primarily related to severance and related costs.
• These are anticipated to hit mainly during the first quarter.

Humana Stock Falls On More Bad Medicare Reimbursement News – Wall Street Journal, 2/5/2024

• Humana’s shares slid again this morning after the company said a federal rate proposal issued last Wednesday was lower than expected, in the latest blow to the insurance industry’s Medicare business.
• Humana said it had expected the Centers for Medicare and Medicaid Services to hold rates effectively flat.
• The industry typically lobbies hard for the final rates, typically issued around the start of April, to be higher than the early proposal, and it often wins.
• Several Wall Street analysts said in research notes they expected the final rates to be closer to flat.
• For Humana, which focuses on Medicare Advantage, the private insurers’ version of the federal program for the elderly and disabled, the announcement was the latest bad news.

US ECONOMY & POLITICS

US Services Gauge Rises to Four-Month High While Prices Pick Up – Bloomberg, 2/5/2024

• The US service sector expanded in January by the most in four months after coming close to stagnating at the end of 2023, helped by a pickup in orders and employment.
• The Institute for Supply Management’s overall gauge of services increased 2.9 points, the most in a year, to 53.4 last month.
• The latest reading exceeded all estimates in a Bloomberg survey of economists.
• The group’s metric of prices paid for materials jumped 7.3 points, the most since 2012, to 64 in January.
• US companies are contending with soaring shipping costs amid militant attacks in the Red Sea that are prompting carriers to reroute.
• A gauge of new orders placed with service providers — a proxy of future demand — rose to a three-month high of 55.
• The business activity index, which parallels ISM’s factory output gauge, held a robust reading of 55.8.
• Ten service industries reported growth in January, led by health care, agriculture, and professional, scientific, and technical services, while seven contracted.
• The group’s measure of services employment rebounded 6.7 points, back to expansion territory at 50.5.

Powell Tells ‘60 Minutes’ Fed Is Wary of Cutting Rates Too Soon – Bloomberg, 2/5/2024

• Federal Reserve Chair Jerome Powell said Americans may have to wait beyond March for the central bank to cut interest rates as officials look for more economic data to confirm that inflation is headed down to 2%.
• In an interview conducted Thursday with CBS’s 60 Minutes that aired Sunday evening, Powell sought to explain the central bank’s rationale for eventual reductions to a broad public audience.
• The “danger of moving too soon is that the job’s not quite done and that the really good readings we’ve had for the last six months somehow turn out not to be a true indicator of where inflation’s heading,” Powell said in the interview with CBS’s Scott Pelley, according to a transcript provided by the network.
• “We don’t think that’s the case,” he said.
• “But the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.”
• Powell said it isn’t likely that the Federal Open Market Committee, the Fed panel that sets interest rates, “will reach that level of confidence” about inflation’s path by its March 19-20 gathering, echoing remarks he made at a press conference Wednesday.
• Pelley said in a voiceover that Powell suggested the first cut could happen around the middle of the year, though the transcript of the interview — which included comments that were not aired during the show — did not indicate that.
• The Fed chief also said he didn’t expect policymakers to “dramatically” change their 2024 interest-rate forecasts, which, in December, they predicted their benchmark lending rate to reach 4.6% by the end of the year, according to their median estimate.

California Battered by Flash Floods and Hurricane-Level Winds – Wall Street Journal, 2/5/2024

• Residents in Southern California were surveying the damage after heavy rains brought flash flooding and landslides overnight.
• The deluge battered communities from Santa Barbara to San Diego, with up to 8 inches of rain falling in some places, according to the National Weather Service.
• The Los Angeles Fire Department said evacuations had been enforced in several areas after homes were hit by mudslides and debris flows.
• “Heavy rainfall will be lingering across southern areas with the threat of flash floods continuing from LA to San Diego through Tuesday,” Bob Oravec, a meteorologist at the NWS, said Monday.
• Mudslides struck homes in the Studio City neighborhood of Los Angeles, and local officials reported debris flows in Sun Valley.
• Flash-flood warnings were in place for much of LA County into Monday morning, the NWS said.
• An atmospheric river, a flowing column of condensed water vapor, barreled across the nation’s populous state, leaving nearly 700,000 customers without power early Monday, according to PowerOutage.us.
• Around 30% to 50% of the annual precipitation on the West Coast occurs in just a few atmospheric-river events, according to the National Oceanic and Atmospheric Administration.
• In Northern California, wind gusts exceeding 100 miles an hour were recorded, according to the NWS.

Dartmouth Reinstates SAT Requirement in First for Ivy League – Wall Street Journal, 2/5/2024

• Dartmouth College will require SAT or ACT scores beginning with next year’s class of applicants, the first Ivy League school to reverse course on pandemic-era test-optional policies.
• The New Hampshire school said it was making the move based on new research showing that, at Ivy League and other highly selective schools, standardized test scores help predict first-year college performance—even better than high-school grades do.
• “I’ve become less convinced that [test] optional is working for us at Dartmouth,” said Lee Coffin, vice president and dean of admissions and financial aid.
• “We’re reanimating the policy based on evidence.”
• He said there were many occasions since the school adopted its test-optional policy in 2020 when he wished he had one more data point on a student “to confirm what we think is a high-achieving profile.”
• Coffin said test scores will be beneficial as Dartmouth receives more applications from high schools unknown to the admissions office and schools where grade inflation is a concern.

Fed’s Goolsbee Says More Good Data Needed Before Starting Cuts – Bloomberg, 2/5/2024

• Federal Reserve Bank of Chicago President Austan Goolsbee reiterated that he’d like to see more of the favorable inflation data published in the past several months. Still, it did not explicitly rule out the potential for an interest-rate cut in March.
• “We’ve had seven months of excellent inflation reports, right around or even below the Fed’s target,” Goolsbee said Monday in an interview on Bloomberg Television with Michael McKee.
• “So if we just keep getting more data like what we have gotten, I believe we should be on the path to normalization.”
• Goolsbee repeated that he doesn’t want to commit to a specific decision weeks before the Fed’s March meeting.
• He also said he doesn’t want to speculate on the possibility of a more significant, half-percentage point cut at some point.

Fed’s Kashkari backs sentiment that policymakers can take their time cutting interest rates – CNBC, 2/5/2024

• Interest rates running at their highest levels in about 23 years are not hurting the economy and could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve President Neel Kashkari said Monday.
• In an essay released on the central bank’s website, Kashkari said economic developments have shown that Fed policy is not as restrictive on growth as it appears on the surface.
• That means the longer-run “neutral” rate, or the level that is neither restrictive nor stimulative, is probably higher than before the Covid pandemic.
• In essence, what would appear to be tight monetary policy judging by history over the past 15 years no longer looks that way, meaning nominal rates could hold higher for longer without harming the economy.
• “This constellation of data suggests that the current stance of monetary policy … may not be as tight as we would have assumed given the low, neutral rate environment before the pandemic,” Kashkari wrote.
• “It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” wrote Kashkari, a nonvoting rate-setting Federal Open Market Committee member this year.
• “The implication of this is that I believe it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too tight of a policy will derail the economic recovery.”

Senate releases $118 billion bipartisan aid proposal for Israel, Ukraine, border security – CNBC, 2/5/2024

• On Sunday, senators released the details of a $118.2 billion bipartisan aid proposal for Ukraine, Israel, and the southern US border after months of painstaking, closed-door negotiations.
• The long-awaited bill requests $60.1 billion for Ukraine aid, $14.1 billion for Israel, and $20.2 billion to improve security at the US border.
• It also includes smaller pockets of funding for humanitarian assistance in war-torn regions and defense operations in the Red Sea and Taiwan.
• The central difference in the new proposal is over $13 billion more in border security funding, a significant point of contention in the months-long Senate talks.
• The president said Sunday that he supports the Senate’s bipartisan proposal, including the term that gives him “new emergency authority to shut down the border when it becomes overwhelmed.”
• Senate Majority Leader Chuck Schumer, D-N.Y., said a vote is scheduled for the bill on Wednesday.
• The bill’s publication marks a small victory for Senate negotiators who have gone back and forth for months trying to strike a deal.

EUROPE & WORLD

Wegovy Maker to Boost Production Capacity With Multibillion-Dollar Deal – Wall Street Journal, 2/5/2024

• Novo Holdings, the controlling shareholder of Wegovy maker Novo Nordisk, is buying Catalent CTLT in a deal that values the US drug company at $16.5 billion, including debt.
• Novo Holdings said Monday that it would buy New York-listed Catalent for $63.50 a share in cash, a premium of 16.5% to Catalent’s closing price on Friday and a 47.5% premium to the 60-day volume-weighted average price as of Friday.
• In connection with the deal, Novo Nordisk has moved to boost its production capacity by agreeing to buy three of Catalent’s manufacturing sites from Novo Holdings for $11 billion.
• The company said the acquisition of the three fill-finish sites will allow it to reach more people living with diabetes and obesity with current and future treatments, enabling an expansion of its manufacturing capacity while providing future optionality and flexibility for Novo Nordisk’s existing supply network.
• The three manufacturing sites specialize in the sterile filling of drugs.
• The sites employ more than 3,000 people, all collaborating with Novo Nordisk.
• The merger is expected to close toward the end of 2024.

US Economy Is Remarkably Strong Compared to Europe, OECD Economist Says – Bloomberg, 2/5/2024

• The US economy is showing “remarkable strength” compared with Europe, where countries are struggling more with tighter monetary policy and the shocks of the energy price surge in recent years, OECD Chief Economist Clare Lombardelli said.
• The Paris-based organization revised its forecasts for US growth next year while cutting expectations for most of the euro area, which it now sees expanding only 0.6% in 2024.
• “We are seeing a mixed picture around the world: The European economies are a bit weaker because of the tightening of monetary conditions in particular weighing on activity,” Lombardelli said on Bloomberg Television.
• “We’ve got a stronger picture in the US.”

The World’s Chip Industry Poised to Bounce Back After Tough 2023 – Bloomberg, 2/5/2024

• The global chip industry is poised for a significant rebound this year, with sales expected to jump to a record level, fueled by a greater need for electrical components from a broad range of businesses, according to a forecast from the Semiconductor Industry Association.
• Worldwide sales declined 8.2% to $526.8 billion in 2023, although the fall was mitigated by improving conditions in the second half of the year, the association said Monday in a statement.
• The increasing momentum indicates sales will gain 13% this year to almost $600 billion, the SIA said.
• “Global semiconductor sales were sluggish early in 2023 but rebounded strongly during the second half of the year, a trend we expect to continue in 2024,” said John Neuffer, SIA president and chief executive officer.
• “With chips playing a larger and more important role in countless products the world depends on, the long-term outlook for the semiconductor market is solid.”
• According to Neuffer, the weak first half of 2023 was a “hangover” from the pandemic, when electronics makers struggled to get enough supply and faced unprecedented demand.
• That provoked many customers to order too much and get caught in a glut when the economy returned to normal, and purchasing devices such as personal computers slowed.
• By region, Europe was the only area that grew last year.
• Sales increased 4%. China and the Asia Pacific region posted the steepest declines.
• China revenue, the biggest block of sales for the industry, was down 14%.
• In the Americas, the market contracted 5.2%.

China Tightens Some Trading Restrictions for Domestic and Offshore Investors – Bloomberg, 2/5/2024

• China is tightening trading restrictions on domestic institutional investors and some offshore units as authorities fight to stem a deepening stock rout, according to people familiar with the matter.
• Officials this week imposed caps on some brokerages’ cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks, said the people, asking not to be identified discussing a private matter.
• At the same time, the people said some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions.
• Some quantitative hedge funds were banned from placing complete sell orders starting Monday, while others were barred from cutting stock positions in their leveraged market-neutral funds.
• These bets, known as a Direct Market Access strategy, are believed to have amplified the recent sell-off in small-cap stocks, the people added.

US Plans Further Action Against Iran’s Militia Allies – Wall Street Journal, 2/5/2024

• The US and UK launched a fresh wave of strikes against Iran-backed Houthi rebels in Yemen in response to their attacks on international shipping in the Red Sea, as Secretary of State Antony Blinken prepared to head to the Middle East in hopes of brokering a pause in Israel’s war in Gaza.
• The US Central Command, which is responsible for US military operations in the Middle East, said it had conducted another strike early Sunday against an anti-ship cruise missile position that the rebels had prepared to target vessels in the Red Sea.
• Separately, Washington said it is also planning more military strikes in response to an attack from an Iran-backed militia that killed three American soldiers in Jordan a week ago after targeting Iranian allies in three Middle East countries over the weekend, including an earlier strike on the Houthis.
• “That is not the end of it,” national security adviser Jake Sullivan said Sunday on NBC’s “Meet the Press,” referring to American reprisals against targets in Syria and Iraq.
• He said that the US intends to carry out “additional action to continue to send a clear message that the United States will respond when our forces are attacked or people are killed.”

Yandex Owner to Sever Ties to Russia With $5.2 Billion Sale – Wall Street Journal, 2/5/2024

• Yandex, the tech company often referred to as Russia’s Google, has agreed to sell its Russian assets to local investors for $5.2 billion, the largest corporate exit from the country since Moscow invaded Ukraine almost two years ago.
• The company, listed on Nasdaq and based in the Netherlands, said Monday it was selling about 95% of its assets, including its biggest search engine in Russia.
• It will retain some of its assets outside of Russia, including autonomous driving, cloud computing, and artificial intelligence businesses, and plans to rebrand under a new name.
• The deal is a potent marker of Russia’s increasing isolation from the West and the diminished status of its once globally expanding tech sector.
• Monday’s announcement caps months of uncertainty for Yandex, which has been looking at options to restructure its ownership and governance for more than a year.
• The company’s market capitalization is about $10 billion today, down from a peak of around $30 billion before the war.
• The group buying the Yandex assets is led by local management and includes a fund linked to Russian oil giant Lukoil and several entrepreneurs.

El Salvador’s Anti-Gang Crusader Claims Sweeping Re-Election Victory – Wall Street Journal, 2/5/2024

• President Nayib Bukele left no detail to chance last year when unveiling El Salvador’s new maximum security prison, Latin America’s most significant.
• Government videos posted online showed convoys of buses arriving at dawn at the facility in the country’s remote hinterland, a brooding, doom-laden soundtrack playing in the background.
• Guards in riot gear corralled the handcuffed inmates, barefoot, shirtless, their heads shaved and torsos and faces covered with gothic-style tattoos.
• There are now more than 12,000 gang suspects there, with room for almost 30,000 more inmates.
• “Everyone said it was going to take several generations to win the war against the gangs,” Bukele said in one of the clips.
• “It’s too surprising a victory.”
• Bukele, 42 years old, said he won re-election by a wide margin in Sunday’s general election because of his relentless campaign to dismantle El Salvador’s criminal gangs.

Factmonster – TODAY in HISTORY

• After George III was declared insane, the Prince of Wales became Prince Regent of England, and later George IV. – 1811
• Mexico adopted its present constitution. – 1917
• FDR proposed increasing the number of Supreme Court justices—”packing” the court. – 1937
• Under international pressure, three of Switzerland’s most prominent banks created a fund worth 100 million Swiss francs for Holocaust victims and their families. – 1997

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