🎙️ Ozempic Era

Investors are bracing themselves 🫣

The surge in real interest rates — U.S. 10-year Treasury yields have surpassed 4.7% — could have all kinds of effects on the economy down the line.

Long-term real rates are at levels rarely seen in the past two decades, thanks partly to the latest strong jobs report.

💭 This matters because it hinders the government’s ability to borrow more debt. Borrowing trillions of dollars now comes at a hefty 4.8% interest rate — not 0.8%, the rate of three years ago.

— Weronika, Shawn, and Matthew 

Here’s today’s rundown:

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

• America’s food giants confront the Ozempic era

• What could save the bond market

• Is Sam Bankman-Fried guilty?

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

CHART OF THE DAY

IN THE NEWS

🥪 America’s Food Giants Confront the Ozempic Era

Americans are in their Ozempic era. And soon, food producers may face a new challenge: Consumers losing their appetites for pizza, potato chips, and ice cream.

Executives from fast-food companies, ranging from Campbell Soup to Conagra, are feeling the heat from investors concerned about the surging popularity of appetite-suppressing drugs.

• Walmart is already seeing an impact: The company’s CEO says shoppers are taking home fewer calories. (Since Walmart sells Ozempic and similar drugs, it can monitor and compare those shoppers’ habits.)

Though the diabetes drug isn’t officially sanctioned for weight loss, some doctors prescribe it for that purpose. And Morgan Stanley anticipates that by 2035, 24 million individuals — almost 7% of the U.S. population, will utilize this class of medications.

Less appetite: Ozempic users sometimes reduce their daily caloric intake by up to 30%, and junk-food makers are increasingly worried their products may be on the caloric chopping block.

Why it matters:

Ozempic’s popularity coincides with decelerating sales growth for major food corporations as customers resist elevated prices.

• During the pandemic, food companies experienced booming sales as consumers loaded up on supplies, willingly paying inflated grocery prices (we all remember the hoarding in 2020.)
  

• But this year, the S&P 500 Packaged Food & Meat subindex has fallen 14% on concerns about Ozempic and declining sales volumes.

Another Ozempic loser: The traditional diet industry, worth some $76 billion annually in the U.S., is under pressure — looking at you, Weight Watchers.

• The impacts could ripple across gyms, yoga studios, supplement makers, and more, including those who profit from marketing fad diets.

A surprising winner? Airlines. A less heavy American population translates into less weight on planes on average, which reduces fuel consumption.

• United Airlines predicts that if the average passenger’s weight decreases by 10 pounds, it’ll save $80 million a year on fuel.

Read more

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🦸‍♂️ Analysts Say Only Stocks Can Save the Bond Market?

Only stocks can save the bond market. That’s according to Barclays analysts, but if stocks swoop in to save the day, it wouldn’t be all positive.

Rather, the analysts say only a stock market crash can rescue bonds.

• One wrote, “There’s no magic level of (bond) yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally.”

In other words: Interest rates on bonds are rising, but they still fail to attract enough investors to stem the sell-off in bond prices (bond yields and prices have an inverse relationship.)

• Specifically, a rout in the U.S. Treasury bond market has sent shockwaves through financial markets worldwide in recent months, pushing borrowing costs up and weighing on stocks.
  

• Still, the S&P 500 is up 11% on the year, and stocks would likely have to “fall sharply“ in the coming weeks to push investors back into buying bonds.

Two-pronged approach: The Federal Reserve’s monetary policies to cool inflation involve more than just raising short-term interest rates.

It’s also conducting a “quantitative tightening” program.

• That’s Wall Street jargon, which, in this case, means that the Federal Reserve is selling off its portfolio of Treasury bonds purchased in recent years, particularly in 2020/2021, when it was doing “quantitative easing” — the opposite of tightening.

Why it matters:

In simpler terms, the Fed is both pushing up overnight interest rates (rippling through the economy and raising mortgage costs, interest earned in bank accounts, etc.) and selling its huge portfolio of bonds.

Feeling the pain: The two effects are a double whammy on the bond market.

When the Fed raises interest rates, it makes bonds issued previously with lower interest rates less attractive, causing them to sell off until there’s a sufficient discount to compensate for the lower rate.

• And by unloading billions of dollars worth of bonds into the market through quantitative tightening, the Fed is increasing the supply of bonds for investors to absorb dramatically.
  

• That excess supply has hurt bond prices — supply & demand 101.

For investors to jump back into the bond market, the stock market will need to spook them, and the 5% drop in the S&P 500 over the past three months hasn’t been enough to do that. At least, that’s what the Barclays analysts think.

Read more

MORE HEADLINES

👩‍🚀 Prada is designing NASA’s suits for the first crewed moon-landing mission since 1972

🍻Modelo-fueled momentum continues for Constellation Brands

🏌️ Tiger Woods and Rory McIlroy’s new golf league will air on ESPN

🩺 The largest healthcare strike in U.S. history enters second day

🎞 Taylor Swift’s Eras Tour movie hits presale record for Cinemark

QUICK POLL

Yesterday, we asked: Which big tech stock would benefit most from AI over the next five years?

— 33% of you said Microsoft, which received the most votes

— Alphabet came in second at nearly 25%

— Amazon and Apple got the third and fourth most votes, respectively; Meta finished last with under 10% of votes

🏛 Is Sam Bankman-Fried Guilty?

Here we go: For nearly a year, a handful of attorneys have prepared for the Sam Bankman-Fried (SBF) trial, which began this week in New York.

SBF was indicted last year after his cryptocurrency exchange, FTX, imploded on charges that he operated what the U.S. government has called “one of the biggest financial frauds in American history” — if that doesn’t ring any bells, you probably saw his Super Bowl ad.

He has pleaded not guilty to seven counts of criminal fraud and conspiracy.

Here’s the case in a nutshell:

• A few assistant U.S. attorneys must read millions of pages of documents and then inform the courtroom that SBF did indeed commit fraud.
  

• They hope to prove that FTX customer money moved to a crypto-trading firm called Alameda Research, which SBF founded. How? By having users deposit funds in bank accounts controlled by Alameda and through code written on FTX that allowed Alameda to borrow tens of billions of dollars.
  

• There could be issues. For one, the government’s witnesses are crypto traders who pleaded guilty to criminal fraud. Attorneys must prove that SBF stole other people’s money to enrich himself, stake his investments, and fund his causes and political contributions to both Republicans and Democrats.

SBF’s lawyers, meanwhile, will say that he acted in good faith. Yes, they’ll say, he was a poor leader who made big mistakes, but he wasn’t a thief and didn’t intend to defraud anyone.

The U.S. attorneys must prove beyond a reasonable doubt that SBF wasn’t just careless and reckless but that he acted with intent to defraud customers, investors, and lenders.

Why it matters:

The prosecution in the Southern District of New York (SDNY), where the case is held, has been policing Wall Street for years. More recently, they’ve diverted their focus to newer markets, like the crypto industry. SBF is the most high-profile case yet and likely not the last.

• That said, it’s important to classify SBF’s case not as “crypto shenanigans” but as outright fraud that happens to be in the crypto space.

One question remains: Will he testify? He’s been shuttling back and forth from court in Manhattan to a Brooklyn detention center — not exactly the paradise of the Bahamas, where FTX was based.

• Leading prosecutors Nicolas Roos and Danielle Sassoon have experience in other big investigations, including one last year regarding the founder of EV startup Nikola.
  

• Only 0.3% of criminal defendants charged by SDNY went to trial and were acquitted last year. That’s why the defense might elect for SBF to testify, a hail mary that could swing things in their direction if played well.

Built on lies: In the prosecution’s opening statement Wednesday, one attorney said SBF is just another greedy businessman out for money, and that’s why he stole billions of dollars in customer funds.

“He had wealth, he had power, he had influence. But all of that — all of it — was built on lies.” (For what it’s worth, bitcoin has jumped more than 50% since FTX imploded, from about $17,000 to $27,000.)

Read more

See you next time!

That's it for today on We Study Markets!

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