The inflation rate in July came in slightly lower than expected. That gives the Federal Reserve a little less reason to keep raising interest rates, which investors should cheer.
Markets now believe there’s a more than 90% chance rates will remain unchanged at the Sept. 20 decision, according to the CME Fedwatch tool. But looking beyond that date, it’s not at all clear that borrowing costs’ long march higher is over.
For one thing, the headline inflation rate and the core rate are still too high for the Fed’s comfort. About 3% isn’t good enough when 2% is the target. The slight increase in the headline rate to 3.2% in August is a reminder that the rate can go up as well as down, even when disinflation is the broader trend.
The main driver of inflation in August was shelter costs, which economists don’t think will keep rising as quickly. But other underlying forces will prevent the rate from falling too much in the coming months. The labor market is still pretty tight, and services inflation is still pretty strong.
Anyone hoping that falling consumer prices in China last month might help keep a lid on U.S. prices should think again. Marc Chandler, a strategist at Bannockburn Global Forex, pointed out this week that Chinese inflation doesn’t have a big impact because most U.S. prices, for example services and shelter, are domestically generated.
If there was any doubt the Fed isn’t convinced that inflation is under control, San Francisco Fed President Mary Daly said the central bank has “more work to do.”
In short, the inflation report was good news. But it doesn’t mean that much, and interest rates could still go higher.
—Brian Swint
*** Join Mansion Global reporter Leslie Hendrickson today at noon when she talks with Zach Zeldner, luxury real estate agent, and Danielle Hale, chief economist at Realtor.com, about the strength of the Boulder, Colo., market, and the latest WSJ/Realtor.com Emerging Housing Markets Index. Sign up here.
Try your hand at the Barron’s crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week’s cover story. To see all puzzles, click here.
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Cooling Consumer Prices Encourage Thoughts of Rate Pause
The consumer price index climbed at a 3.2% annual pace in July, an uptick from June’s pace, but below economists’ consensus expectations. Core inflation, excluding volatile food and energy categories, slowed to a 4.7% annual pace.
- Energy prices rose 0.1% in July. The average price of a gallon of regular unleaded gasoline climbed to $3.76 at the end of July from roughly $3.54 at the beginning, according to OPIS, an energy-data and analytics provider.
- Shelter inflation was responsible for 90% of the consumer price index’s 0.2% monthly gain, the Bureau of Labor Statistics said. The cost of housing services such as rent, lodging away from home, and household insurance gained 0.4% in July from June, and rose 7.7% from last year.
- New- and used-car prices fell 0.2% for the year through July, the third such decline in the past seven months. But insurance and repair costs gained 9.3% from the same time last year, the 28th consecutive monthly increase.
- The Senior Citizens League’s projected Social Security cost-of-living adjustment for 2024 remains unchanged from last month’s estimate of 3%. The average monthly benefit of $1,789 would increase by $53.70. The Social Security Administration will set 2024’s adjustment in October.
What’s Next: The cooler-than-expected inflation report is fueling speculation the Federal Reserve could pause interest-rate increases at its September meeting, while others say it is too soon to tell. Fed Chairman Jerome Powell will deliver remarks on Aug. 25 at the Fed’s annual meeting in Jackson Hole, Wyo.
—Megan Cassella and Janet H. Cho
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Novo Nordisk to Restrict Some Supplies of Weight-Loss Drug
Danish drugmaker
Novo Nordisk,
maker of the weight-loss drug Wegovy and its Type 2 diabetes counterpart Ozempic, said it would continue to restrict supplies of starter doses of Wegovy in the U.S. as it tries to boost production amid red-hot demand.
-
Semaglutide’s popularity has pushed Novo Nordisk’s stock to the second most valuable in Europe, behind the French luxury brand
LVMH.
Novo raised its full-year profit and sales forecasts yet again. Second-quarter Wegovy sales surged more than 500% to $1.1 billion. - Novo said that, while supply capacity is gradually being expanded, lower-dose strengths would continue to be restricted in the U.S. to protect continuity of care for those who have been on it longer and have reached higher-dose amounts of the weekly injection.
-
Rival
Eli Lilly
has its own explosively popular drug Mounjaro that is trying to get approved for weight loss. It has also had delays in filling orders. Novo and Lilly are spending billions of dollars to add new production, hire contract manufacturers, and build new factories. - Novo also announced it would buy Canadian firm Inversago Pharma, which makes experimental weight-loss and diabetes treatments, for about $1.1 billion. And Novo is planning to split its shares 2 for 1 next month, which means for every share held before the split, each stockholder will have two after. The total dollar value of all shares outstanding remains the same.
What’s Next: Novo Nordisk expects 2023 sales growth of 27% to 33%, an upward revision from its earlier forecast. It also expects operating profit growth of 31% to 37%, also higher than previous guidance.
—Liz Moyer
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Country Garden Stock Plummets as China Property Woes Mount
Shares in China’s largest surviving real estate developer, Country Garden, hit a record low on Friday as woes continued to mount for the country’s property sector. The sprawling and indebted industry remains a key pressure on China’s economy, already facing a slowdown that has shaken domestic and international financial markets.
- Country Garden warned Friday that it could record a loss of up to 55 billion Chinese yuan ($7.6 billion) for the six months to the end of June amid “an unprecedented difficult period” for the industry. The company missed interest payments on bonds this week in what is the first stage of a default.
- Shares in Country Garden dropped 5.8% in Hong Kong trading on Friday, bringing losses for the stock across the past five days to 29% and weighing on the Hang Seng Index. Prices for the group’s corporate bonds have also plunged in recent days, indicating investors are bracing for default.
- China’s real estate sector took on massive debt over the past couple of decades to fuel fast expansion. An economic slowdown, triggered by the pandemic and fueled by the government’s zero-Covid policy, catalyzed the industry’s financial problems, with a much hoped-for recovery in 2023 largely failing to materialize.
What’s Next: Country Garden’s woes are reminiscent of the market-moving meltdown of China Evergrande two years ago, so there is scope for worries to become more widespread. While China has signaled support for developers, stimulus announced so far has been underwhelming and seems unlikely to fix the systemic issues facing the country’s property sector.
—Jack Denton
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Bud Light’s Anheuser-Busch InBev Still Chugging Outside U.S.
Shares of
Anheuser-Busch InBev
have risen after the Belgian beer maker last week reported better-than-expected second-quarter results globally, despite the impact from a boycott of its Bud Light brand among some U.S. consumers.
- Even though Bud Light volume has dropped by double digits in North America and the brand is no longer the best-selling U.S. beer, the region accounts for only about a quarter of AB InBev’s business. U.S. Bud Light sales are an even smaller slice.
- Bulls have repeatedly noted AB InBev’s global presence amid the domestic furor about Bud Light’s one-time marketing partnership with transgender influencer Dylan Mulvaney and subsequent management response, a point that Barron’s has also made.
- Organic revenue jumped in all of AB InBev’s segments outside North America, and the company had strong pricing power. While Bud Light’s market share declines continue, the rest of AB InBev’s portfolio’s promising outlook suggests the brewer will do just fine, said Dave Novosel of research company Gimme Credit.
- Although AB InBev stock is down 7.7% so far this year, it has recovered ground from its spring lows. Novosel expects the company to deliver organic near-term revenue growth in the mid- to high-single-digit range.
What’s Next: Canadian cannabis producer
Tilray Brands
is buying eight beer and drink brands from AB InBev, including Shock Top, Redhook Brewery, and Widmer Brothers Brewing, for an undisclosed sum. The deal includes employees, breweries, and brewpubs and is expected to close this year.
—Teresa Rivas and Janet H. Cho
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College Students Head to Campus Facing Rising Costs
College students are facing rising tuition and fees and the prospect of taking more loans to cover the costs. The Biden administration hit another pothole on student debt forgiveness this week when a federal Appeals Court blocked plans to forgive debt for borrowers whose colleges misled them or closed suddenly.
- Over 30 years through 2022-2023, tuition and fees for private nonprofit four-year colleges rose 80%, to an average of $39,400, the College Board said. Public four-year college in-state tuition and fees more than doubled, to an average $10,940. Private college tuition rose 3.5% over 2021-22, before inflation adjustments.
- Colleges have been spending big on facilities and programs. The Wall Street Journal reviewed financial statements since 2002 from 50 public flagship universities. At the median institution, spending rose 38% from 2002 to 2022. The University of Idaho was the only one found to spend less.
- The median school in the Journal’s analysis got double the revenue from undergraduate and graduate tuition and fees than it did 20 years ago. Accounting for enrollment gains, that works out to a 64% price increase for the average student, the report said.
- Researchers examined the eight Ivy League colleges plus University of Chicago, Duke, MIT, and Stanford and found while less than 1% of Americans attended, their graduates make up one-quarter of U.S. Senators, half of all Rhodes scholars, and three-fourths of the Supreme Court justices appointed in the past 50 years.
What’s Next: Discover Student Loans surveyed parents of college students and found 27% will help pay for all of their child’s education, down from 39% in 2022. About 60% of parents are turning to scholarships and grants, up 7 percentage points from 2022 and 14 points from 2021.
—Liz Moyer
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Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].
1. Moody’s Investors Service made this announcement, citing pressures from rising interest rates and weakening commercial real estate:
a. It downgraded the ratings of 10 regional banks
b. It downgraded the ratings of five regional banks and put five others on watch for possible downgrade
c. It downgraded the ratings of the five largest banks
d. None of the above
2. Novo Nordisk, maker of the popular Type 2 diabetes drug Ozempic, said tests of its similar drug for weight loss, Wegovy, showed it could reduce the risk of heart attacks, strokes and other heart conditions by how much?
a. 10%
b. 15%
c. 20%
d. 25%
3. Software maker Palantir Technologies boosted its outlook based on what it sees as strong demand for artificial intelligence capabilities by commercial customers. Which of the following was also featured in its earnings report?
a. A $1 billion stock buyback
b. Revenue rose by double-digit percentage from last year
c. It is talking to more than 300 enterprises about using its AI platform
d. All of the above
4. China has reported some economic data this week that has some analysts worried about slowing growth in the second biggest economy, including a drop in exports and the first drop in consumer prices in July from the prior year since early 2021. How much did China’s consumer prices drop?
a. 0.2%
b. 0.3%
c. 0.4%
d. 0.5%
5. Walt Disney is shifting strategy on streaming to take in more money from its existing subscribers rather than trying to gather up more subscribers themselves. After raising prices for ad-free Disney+ in December, the entertainment company is going to raise prices again to:
a. $13.99
b. $14.99
c. $15.99
d. $16.99
Answers: 1(a); 2(c); 3(d); 4(b); 5(a)
—Barron’s Staff
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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