US Fed to raise rates with trade tensions on horizon

Jerome Powell, Chairman of the Federal Reserve Board, arrives to testify during a House Financial Services Committee hearing on Capitol Hill in Washington, DC. (AFP)
Updated 19 March 2018
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US Fed to raise rates with trade tensions on horizon

WASHINGTON: The Federal Reserve this week will fire the opening salvo in a series of interest rate hikes this year, hoping to get out in front of an expected pickup in inflation.
The first rate hike of the year is overwhelmingly predicted by futures markets, analysts and investors alike to come Wednesday at the conclusion of the Fed’s two-day policy meeting. It also will be the first under newly installed Fed Chairman Jerome Powell.
The central bank is preparing to raise the key lending rate as economic conditions converge to put upward pressure on prices, including massive new tax cuts, a weaker dollar and even the threat of a trade war.
Fears the Fed could raise its benchmark interest rate at a faster pace, perhaps as many as four times this year, spooked markets last month, briefly sparking a global stocks selloff in early February.
But Fed officials have called for calm, signaling that even the planned steady but gradual monetary policy tightening should not interrupt the momentum of the world’s largest economy, which they say has enough slack to allow for continued low unemployment and some wage increases without sparking inflation.
“They’re trying to prepare the markets and say, ‘Let’s not go crazy,’” Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, told AFP.
But like other economists he now expects four hikes this year rather than three.
“I predict they will have to. It’s not a bad thing. It’s a good thing.”
Fed officials also will update their quarterly forecasts for the economy and the path of interest rates this week. With stocks on edge last month, Powell told lawmakers his outlook for the US economy had “strengthened since December.”
Since the Fed’s last policy meeting in January, economic data have been somewhat mixed, weighing on expectations for GDP growth in the first quarter: The trade deficit continues to widen, retail and auto sales as well as the housing market have been weaker, durable goods orders have undershot expectations and construction spending has been soft.
But surveys of sentiment in the manufacturing and services sectors show a strong head of steam in the economy while measures of consumer confidence and business sentiment are at record highs.
Job creation also exploded in February, one of the best months of the current economic recovery, with 313,000 new positions added while unemployment remains at a historically low 4.1 percent.
Meanwhile, inflation, the Fed’s other primary concern, looks as though it may at last emerge from years in the doldrums.
Recent inflation measures have fallen short of the Fed’s two percent target but over the past six months, the Consumer Price Index has averaged gains of 2.5 percent — a good predictor that it will soon be heading north, Gagnon said.
In addition to strong job markets and low unemployment, the US now faces an expected short-term boost to growth from the recent $1.5 trillion tax cuts, which comes at a rare moment when all the world’s major economies are growing simultaneously. At the same time oil prices are recovering, while the US dollar is falling — losing 10 percent in value over the last year — making imports more expensive.
But one wildcard in any Fed forecast, economists said: President Donald Trump.
Trump is poised to reshape the Fed’s board of governors, where four vacancies remain, giving him the potential to influence monetary policy for years to come.
He also stokes fears of a trade war on an almost daily basis, most recently announcing punishing tariffs on steel and aluminum.
With top economic adviser Gary Cohn out the door in protest, protectionist views are ascendant in the White House and major trading partners are threatening to retaliate.
That could causes prices to rise even further, spurring the Fed to act faster to keep inflation in check, economists say.


Slack primed as latest unicorn to make market debut

Updated 19 June 2019
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Slack primed as latest unicorn to make market debut

  • Slack is a cloud-based software company that markets online tools for information sharing and workflow management
  • Current customers include Nordstrom, Ford and HSBC and the company has more than 95,000 paid customers overall

NEW YORK: The 2019 parade of big new Wall Street entrants continues this week with the debut of Slack Technologies, underscoring investor hunger for new companies in spite of some high-profile stumbles.
Nearly halfway through the year, US markets are on track for one of the biggest IPO seasons ever in terms of money raised following a stream of offerings from former “unicorns,” private companies worth more than $1 billion.
Yet two of this year’s biggest names — Uber and Lyft — currently trade below their IPO price, along with Snapchat, which has lagged its initial price for most of the time since it went public in March 2017.
Still, there have also been plenty of prominent companies that have risen since their initial public offerings, including jeans company Levi’s, Tradeweb Markets, which builds electronic marketplaces, Zoom Video Communications, and mobile application and software system Pinterest.
The most dramatic jump has been in food company Beyond Meat, which now trades at more than six-fold its entering price.
“The public has a huge interest” in new companies, said JJ Kinahan, chief market strategist at TD Ameritrade, adding that the mixed performance of the 2019 ex-unicorn class is comparable to that of the broader market.
“There aren’t a lot of other choices besides IPOs for investors seeking growth,” said Gregori Volokhine, president of Meeschaert Financial Services, who attributes the rush of funds in part to central bank policies promoting liquidity.
“There’s an excess of underinvested funds worldwide,” he said.
In terms of sheer volume, the number of IPOs in 2019 so far — 93 — is roughly equal to last year’s figure, according to Dealogic.
But the funds raised, $34.5 billion, stand 13.6 percent above last year’s sum and the highest for the comparable period since 2000, according to Dealogic data.

Direct listing
A cloud-based software company that markets online tools for information sharing and workflow management, San Francisco-based Slack parts ways from the other big companies this year by opting for a direct listing instead of an IPO.
This approach, which was also employed by Spotify last year, cuts down on fees to investment bankers in IPOs. Although existing shares can be sold, a direct listing does not issue new shares, averting share dilution but also forgoing the new funds raised in an IPO.
The process can also be riskier in terms of share price volatility compared with an IPO, where underwriters line up investors in advance. In a direct listing, shares are exposed more directly to the open market.
Slack chief executive and co-founder Stewart Butterfield described the company’s technologies as a “brand new category of software” that replaces email in a company.
Current customers include Nordstrom, Ford and HSBC and the company has more than 95,000 paid customers overall.
“It turns email to messages and organizes them into team, project and topic based channels instead of individual in-boxes,” Butterfield said in a June 10 earnings conference call.
“It’s a team-first approach to communication, in contrast to email’s individual first approach. It creates a rich, searchable, permanent body of information that’s widely available across an organization, even for people who just joined the team.”
 

Unprofitable three years
The company, which is expected to be valued at around $17 billion when it enters the market on Thursday, reported revenues of $134.8 million in the quarter ending April 30, up 66.7 percent from the year-ago period.
But Slack, which has been unprofitable the last three years, reported a $33.3 million loss during the period, 34 percent more than last year’s loss.
Of course, many unprofitable companies have gone public and done well in markets for years. Yet the heavy losses and murky profit outlook at Uber and Lyft have been seen as factors in their lackluster performance since going public.
But investors remain keen on growth stories following the success of Amazon, Facebook and other tech giants that have emerged in recent decades.
A key beneficiary of this desire has been Beyond Meat, which has multiplied in value many times since going public May 3 at $25 and currently is priced at $168.92. The company has been seen as a main beneficiary of the growing alternative protein market, which some analysts think could top $100 billion in the coming decade or so.
Kinahan said in general investors have wised up after the early 2000s Internet bubble but that “it’s just unnatural” for stocks like Beyond Meat to move in an unbroken straight line upwards.
“There’s a healthy bit of skepticism in the market,” he said. “However, certain companies have maybe gotten a little ahead of themselves.”