Wall Street Has a Lot Riding on the Fed’s Rate Decision

Investors brace for decision day

After last month’s stock run for the ages, market watchers will look closely at what the Fed does on Wednesday with interest rates, hoping that Jay Powell and his colleagues don’t pour cold water on the rally.

Markets expect the Fed to raise the prime lending rate by 25 basis points, bringing it to a new target range of 4.5 to 4.75 percent. That would mark “the first ‘normal’ sized hike since March 2022,” when the central bank began its big anti-inflation push, the Deutsche Bank analysts Jim Reid and Henry Allen wrote to investors this morning.

The big question is what comes down the line. Investors will parse the forthcoming announcement by the Fed’s Federal Open Market Committee for signs of an approaching slowdown, or even pause, in interest rate increases. The key word is “ongoing” — as in, whether the committee still feels that “ongoing increases” in interest rates are necessary given signs in recent data that inflation is cooling.

For investors, that data has been a signal to buy. The U.S.’s three major stock indexes rose on Tuesday, after stats showed that wages were moderating even as hiring remained strong. Tuesday’s data was enough to push the S&P 500 to a two-month high, as investors anticipated the Fed might ease up on rate increases.

Some milestones from the January markets rally:

• The tech-heavy Nasdaq gained 11 percent last month, its best start to a year since 2001. (Then again, that turned out to be a rough year for tech, particularly dot-com stocks: BNP Paribas analysts pointed out that the Nasdaq ended 2001 down over 50 percent.)

• Big winners last month included the online auto dealer Carvana, which jumped 119 percent despite the end of a used-car boom, and Cathie Wood’s tech-heavy Ark Innovation exchange traded fund, whose 27.9 percent gain made January its best month ever. Both suffered last year as the Fed began raising rates and markets worried about an upcoming recession.

• Cryptocurrencies also roared back, in another sign that investors are flocking to risky assets. Bitcoin was up 38.6 percent and Ethereum 31.2 percent.

• Bonds also did well, as U.S. Treasuries gained 2.8 percent, according to Deutsche Bank.

• The S&P 500’s 6.4 percent gain achieved the so-called “January Indicator Trifecta,” a trio of measures that in the past has been a “super bullish” indicator for the year ahead.

• European stocks also did well, with the Pan-European Stoxx 600 outperforming the S&P 500 last month. Investors will be focused on tomorrow’s rate decisions by the European Central Bank and the Bank of England; both are seen as being more aggressive than the Fed in raising rates.

HERE’S WHAT’S HAPPENING

Vaccine makers kept $1.4 billion in payments for canceled Covid shots. Confidential documents obtained by The Times show that companies have declined to return advance payouts from Gavi, which ordered doses on behalf of the Covax global vaccination program. The companies aren’t contractually obligated to send the money back, but the drugmakers face criticism for keeping money meant for public health efforts.

Black Americans are three times as likely to be audited, a study finds. Academics and the Treasury Department discovered the discrepancy, which persists after accounting for the different types of filings different taxpayer groups are likely to make. The study’s authors point to apparent discrimination tied to algorithms for selecting audit targets.

Britain confronts its biggest day of strikes in a decade. Nearly half a million civil servants, teachers and train drivers were expected to walk off the job on Wednesday, as public-sector unions battle with the Conservative government over pay raises. Government ministers said they were bargaining in good faith; organized labor leaders accused them of stalling.

Apple’s secrecy violates workers’ rights, federal officials say. The National Labor Relations Board found that the tech giant’s famously strict approach to confidentiality interfered with employees’ right to collective action. Former Apple workers said that the culture discouraged colleagues from discussing workplace problems, which could then go unchecked.

A London-based banker dies by suicide during an insider-trading inquiry. The employee of Perella Weinberg Partners was a suspect in a German investigation into accusations that someone at the bank given others tips about planned takeovers. British authorities had searched Perella Weinberg’s London offices on Jan. 25.

Peloton’s self-help plan shows progress

When Barry McCarthy became Peloton’s C.E.O. almost one year ago, his mandate was clear: fix the home-fitness company, whose fortunes rocketed during the workout-at-home pandemic boom before falling after it overextended itself and lost hundreds of millions.

On Wednesday, as Peloton announced its latest financials, McCarthy is feeling optimistic about the company’s prospects. “It’s nice to be on the backside of a near-death experience,” he told DealBook in an interview. The question now is whether he can get the company growing again.

Peloton has achieved the first goal McCarthy set: cash-flow positivity. The company said it had about $8 million in positive cash flow for its second fiscal quarter. (That strips out costs to pay suppliers to settle obligations, however; it had negative cash flow of $94 million otherwise.) Contrast that with Peloton’s situation nine months ago, when the company reported $747 million in negative cash flow.

Peloton reported a roughly 30 percent rise in quarterly revenue from last quarter, to $790 million, helped by promotions like a $300 discount on its bikes and treadmills. Using generally accepted accounting principles, the company lost $335 million in the quarter, down from $439 million a year ago but more than analysts had expected.

The next goal is restoring growth. Part of that plan includes expanding use of Peloton’s app beyond owners of its equipment. “We’ve always been afraid to market to that use case” because it might encourage people to use someone else’s hardware, McCarthy said. (Aiding in that effort will be Leslie Berland, the former Twitter chief marketing officer whom Peloton recently hired as its C.M.O.)

Other potential avenues for growth include expanding internationally and through new programs like equipment rental.

But not everyone thinks restoring huge growth is the right idea. Simeon Siegel, a senior analyst at BMO Capital Markets, told DealBook that Peloton’s current market capitalization of over $4 billion might be too big. He questioned whether there was enough demand for Peloton products to justify an even higher valuation, especially if that required sacrificing the company’s brand or bottom line.

“What the company should be doing is focusing on bear-hugging their brand loyalists,” Siegel said. “If that is the case, Peloton is a much smaller, but honestly healthier, business.”

A big sell-off rocks the Adani empire

The Indian billionaire Gautam Adani pulled off a $2.5 billion stock offering for his flagship industrial company on Tuesday — but he is still seeing his personal fortune shrink, as investors dump shares in various parts of his sprawling business empire.

A last-minute surge of support saved Adani Enterprises’ offering. The Financial Times reports that Mr. Adani had enlisted other Indian tycoons to help get the deal over the line, including Sunil Mittal of Bharti Enterprises and Sajjan Jindal of JSW. Other investors included Abu Dhabi’s International Holding Company, Goldman Sachs and Jupiter Asset Management.

It’s a different story on Wednesday. Shares in Adani Enterprises fell by nearly 27 percent this morning; the stocks of other Adani companies, including Adani Green Energy and Adani Total Gas, also sank.

Adani’s listed companies have now lost over $90 billion in market value since last week, when the short-seller Hindenburg Research accused the conglomerate of market manipulation and fraud. Lenders are reportedly calling for more stock collateral to back a $1 billion loan, while Credit Suisse is said to have stopped accepting Adani companies’ bonds as collateral for margin loans, according to Bloomberg.

Meanwhile, investors in the Adani Enterprises offering appear to have paid heavily. The stock closed at 2179.75 rupees on Wednesday, or $26.61, nearly 30 percent below the offering’s range.

And Mr. Adani is no longer Asia’s richest man. Bloomberg calculates that the tycoon, who has leveraged close ties to Prime Minister Narendra Modi to venture into e-commerce, energy, green power and infrastructure, has lost $44 billion in net worth.

Where things go from here is unclear. The Adani Group has accused Hindenburg of a baseless “calculated attack” on India. Jugeshinder Singh, the group’s C.F.O., likened the behavior of Indians who sold the stock to a 1919 massacre in which a British military officer ordered Indian soldiers to fire on unarmed protesters.

But India’s largest insurer, the state-run Life Insurance Corporation, which has invested more than $4 billion in the Adani Group, said it would take a hard look at Adani’s use of offshore tax havens and its debt levels in the wake of Hindenburg’s report.

“The quote I included from Dr. Martin Luther King, Jr. was inappropriate and insensitive.”

— Jennifer Tejada, C.E.O. of the corporate software company PagerDuty, who apologized for invoking the civil rights leader in a 1,671-word memo announcing layoffs last week.

Can companies lean on E.S.G. to fight unions?

Though union membership across the United States is falling, labor organization efforts are gaining increased prominence in Washington and the news media. That has prompted industries to fight back — and some advisers have speculated about a novel way of doing so, according to a report by The Lever, an investigative news publication.

Companies might win over on-the-fence workers by discussing social issues, Felice Ekelman and Laura Pierson-Scheinberg of the law firm Jackson Lewis said at an October meeting of an affiliate of the National Restaurant Association trade group. In particular, management could cite efforts tied to the environment, social and corporate governance movement — known as E.S.G. — to win favor with employees who might otherwise vote to unionize.

From The Lever’s report:

THE SPEED READ

Deals

• FTX, the bankrupt crypto exchange, plans to sue Voyager Digital to recover $446 million in loan repayments. (Insider)

• Shares of Silvergate Capital, which had business ties with FTX, jumped on Tuesday on news that BlackRock had taken a 7 percent stake. (CNBC)

• Subway’s late co-founder Peter Buck agreed to give his 50 percent stake in the sandwich chain to a charity run by his sons. (CBS)

Policy

• President Biden plans to press Speaker Kevin McCarthy on Wednesday for details on House Republicans’ budget cut demands. (NYT)

• Representative George Santos, the embattled New York Republican, told party members he would step back from committees. (NYT)

Best of the rest

• Prosecutors formally charged Alec Baldwin with involuntary manslaughter in the fatal shooting of the cinematographer for the film “Rust.” (NYT)

• The creator of ChatGPT has released a tool to help spot A.I.-written text. (The Verge)

• Update: that tiny radioactive capsule lost in the Australian outback — it’s been found! (NYT)

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