🎙️ Fed Signals

✈️ United Airlines could be revamping the future of everybody’s favorite part of travel: boarding the plane.

The airline says it can save about two minutes just by letting passengers in economy class with window seats board first.

So-called operation WILMA — window, middle, aisle — sounds more efficient. However, some worry that it will only encourage more passengers to crowd the gate area for boarding so they can jump the line in front of others.

Gate agents and frequent flyers call them “gate lice.” No bueno!

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Powell signals Fed will extend interest-rate pause

• How currency fluctuations impact earnings

• Walmart heir’s big bet on Formula One

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🖐 Powell Signals Fed Will Extend Interest-Rate Pause

Not that we needed to be told, but Fed Chair Jerome Powell reminded us anyway: Inflation “is still too high.” No kidding.

However, Powell did reveal on Thursday that the possibility of an interest rate hike next month is unlikely, though he left a December hike on the table. Powell also said bringing inflation down will likely require a slower-growing economy and job market than the quite robust economy we’re seemingly in.

Resilience: In less than two years, we’ve gone from a land of minimal inflation and very low rates to a world of rates at a 22-year high. Inflation has fallen about half of its June 2022 peak.

• But the Fed’s campaign hasn’t exactly put a dent in hiring or unemployment, consumer spending, or broader economic growth, leading Powell to say, “we certainly have a very resilient economy on our hands.”
  

• Powell also cautioned that the economy is growing faster than the Fed had expected, and getting back to the Fed’s 2% target isn’t a clear path.
  

• Here’s Powell: “Many forecasts called for the U.S. economy to be in recession this year. Not only has that not happened; growth is now running for this year above its longer-run trend. So that’s been a surprise.”

Making sense: Fed officials have echoed Powell’s comments recently, underscoring how they’re grappling with (mostly) slowing inflation, and economic growth, and robust hiring.

More evidence of job strength came in earlier this month, when the hot jobs report showed that hiring was much greater than expected and the unemployment rate remains near a half-century low.

• Strong hiring usually allows workers to command higher wages, which can worsen inflation if companies pass higher labor costs onto the consumer through higher prices.
  

• And basically Powell said what’s on everybody’s mind: We’re all confused, just trying to make some sense of everything that’s happened since March 2020.

Why it matters:

Let’s zoom out briefly after the Fed raised rates 11 times since March 2022. Its key rate is now at about 5.4%, its highest level in 22 years.

If the economic expansion continues, including consumer spending, solid corporate earnings, and stronger job numbers, Powell said the central bank will have no choice but to raise its benchmark rate further in December.

• That would further raise the costs of auto and home loans, credit card borrowing, and business loans in another attempt to slow things down a notch.
  

• On the other hand, Powell hinted that the Fed might not have to impose any more hikes at all, at least in the foreseeable future. He noted that a rise in longer-term bond rates — the jump in long-term rates has contributed to a surge in the average cost of a 30-year mortgage — might just do the trick to slow growth and cool inflation.

“That’s exactly what we’re trying to achieve,” Powell added Thursday.

Read more

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💶 Currency Fluctuations Impact Earnings

It’s earnings season, and for keen investors, one common thing will come up in companies’ reports: Blaming the U.S. dollar for poor results or at least mentioning its impact.

For American companies, particularly those with lots of international sales, the U.S. dollar’s strong and rising exchange rate versus other major currencies is creating headaches.

How does it work? As the currency trading expert Martin Tiller outlines, it works something like this: Imagine that the exchange rate between dollars and yen is 100, so $1 = 100 yen. And let’s say Apple wants to sell its newest iPhone, costing $1,000 in the U.S., for an equivalent amount of yen in Japan.

It would charge 100,000 yen (1,000 × 100). But if the dollar strengthens dramatically against the yen and reaches a rate of 150 yen per dollar, meaning one dollar buys 50 more yen than before, Apple faces a conundrum.

• If Apple keeps its prices in Japan at 100,000 yen, after the exchange rate fluctuates from 100 to 150, it will only earn $667 instead of $1,000 per iPhone sold.
  

• Yet, if it hikes iPhone prices in Japan by 50%, the product might become unaffordable and drive a dropoff in sales volumes that exceeds the benefit of charging more.

It’s an extreme example (but not that extreme! — the dollar-to-yen exchange rate has risen from a low of 128 to 150 in 2023.)

Why it matters:

Currency fluctuations can work both ways, helping or hurting companies’ earnings. Over time, these fluctuations should theoretically balance out and be inconsequential.

• But on a quarter-to-quarter basis, they can influence whether companies hit their earnings targets.

• The DXY index (pronounced “dixie” in Wall Street slang), a measure of the dollar’s strength against other major currencies, is up some 6% since July and over 17% since early 2021.

Don’t be fooled: Companies often give results with a “constant currency” adjustment, which aims to normalize currency fluctuations. However, as Tiller puts it, these are “somewhat deceptive.”

• It’s like saying your team would’ve won if the receiver had just caught the game-winning touchdown pass. If they dropped it, only the final score would be remembered.
  

• Same for earnings. Many will quote constant currency figures, but they “won’t be much consolation” to investors in companies whose actual earnings were worse from currency impacts.

Read more

MORE HEADLINES

✂️ Big banks are quietly cutting thousands of employees

📉 Moody’s warns it could downgrade Israel’s credit rating amid conflict

👀 Peter Thiel, the billionaire Silicon Valley entrepreneur and investor, is apparently an FBI informant

💳 AmEx third-quarter profit remains strong on buoyant spending

😷 One in four Americans have had their health data compromised this year

🏎️ Walmart Heir’s Big Bet On Formula One

Forget pickleball and lacrosse. The hottest, fastest-growing sport might be on wheels.

Big names are pouring big money into Formula One, from NFL stars Patrick Mahomes and Travis Kelce to golf star Rory McIlroy to Walmart heir Rob Walton.

The recent investment boom has sent the valuation of F1 teams soaring: Walton’s investment, an unknown amount, has sent the valuation of one team — McLaren Racing — to roughly $682 million.

• Walton, who owns the NFL’s Denver Broncos franchise, is one of the world’s wealthiest people with a $70 billion fortune. He’s generating buzz for the sport, which will hold one of its biggest U.S. events — a Grand Prix in Las Vegas next month.
  

• “A Formula One team should be worth like what an NBA or an NFL or a football team is worth — there’s no reason why it shouldn’t,” noted an F1 executive. “You have 70 million people every Grand Prix weekend that watches the thing. You have a billion fans, and it’s growing.”

Billion-dollar enterprise: As interest in NASCAR has fallen sharply in the past 15 years, Formula One has transformed from a sport for amateur enthusiasts into a billion-dollar enterprise. Wealthy investors have helped Formula One sign lucrative sponsorship and TV rights deals.

Corporate interest: A Netflix series, “Drive to Survive” further boosted the sport’s image and produced “an incredible windfall for the industry,” per one industry executive. “It’s not only helped to capture a new fanbase in the U.S., but has also been a driver of new corporate interest in the sport globally.”

• F1 sponsorship prices have doubled in five years; sponsors include Alphabet, Cisco, Dell, and Goldman Sachs.

Check out the following visual breakdown of Formula One’s annual revenue since 2017:

Why it matters:

Formula One revenue rose 20% to a record $2.57 billion in 2022, and analysts expect it to top $3.2 billion this year. The sport appears to fill NASCAR’s void as the traditional racing sport in America continues to see declining TV viewership and ticket sales.

All in the rights: F1 benefits from a media rights deal with ESPN, the platform it has long needed. The network has reported a growing number of female and younger viewers, an audience NASCAR struggled to capture.

• NASCAR uses heavier stock cars, while F1 uses lighter, more aerodynamic open-wheel cars and competes globally.)
  

• Viewership has increased yearly since F1 returned to ESPN and ABC in 2018.

As one team executive said, “From an investment standpoint, it seems like we are in the money.”

Read more

QUICK POLL

Yesterday, we asked: Where do you prefer working from?

—Many of you (43%) prefer a hybrid work arrangement, with some time at the office and some time at home

—Almost as many (42%) prefer a fully remote setup

—The remaining ~15% of you prefer working on-site/at the office every day

See you next time!

That's it for today on We Study Markets!

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