What Will It Take for the Fed to Lower Interest Rates?

The wait continues

Global markets are still processing the probability that U.S. interest rates will remain higher for longer, as the Fed acknowledges that high inflation has forced it into a holding pattern on interest rates.

That’s putting new emphasis on Friday’s jobs report, as Wall Street and policymakers look for clues on how the labor market is affecting inflation and the wider economy.

U.S. futures are pointing to a modest rise after stocks in some parts of Asia and Europe sank. That came after a topsy-turvy final hour of trading on Wednesday in New York: The S&P 500 surged when Jay Powell, the Fed chair, said during his news conference that an interest-rate increase was “unlikely” — only to plunge when he backed away from offering clear guidance on when cuts may be coming.

The Fed needs “greater confidence” that inflation is headed down, Powell said, citing the central bank’s longstanding target of 2 percent. (That level remains the subject of persistent debate.) But, if anything, price data has shown inflation rising since the start of the year.

At the same time, consumer sentiment has fallen, with bellwether companies including Starbucks and McDonald’s reporting disappointing first-quarter sales. “Everybody’s fighting for fewer consumers or consumers that are certainly visiting less frequently,” Ian Borden, McDonald’s C.F.O., told analysts on Tuesday.

Other takeaways from Powell’s comments:

• He thinks that inflation will creep down “over the course of this year.” But that’s still not enough conviction for the Fed to be more specific about its outlook on cuts.

• The futures market on Thursday was penciling in 0.35 percentage points’ worth of cuts this year to the Fed’s prime lending rate, compared with predictions in January that the central bank would lower by more than 1.5 percentage points.

• Powell does not see a risk of stagflation. The economy is growing at roughly 3 percent and the inflation rate is under 3 percent over the past year, he said, adding, “I don’t see the stag, or the flation.”

Friday’s nonfarm payrolls report is in the spotlight. Economists forecast that employers added 233,000 jobs last month, keeping the unemployment rate steady at 3.8 percent. That’s despite some headline-grabbing layoffs in recent weeks at Alphabet, Tesla and Apple.

A wild-card is wage data. A strong number there could indicate persistent inflationary pressures, making the Fed more reluctant to lower borrowing costs. Another data point: the O.E.C.D. on Thursday said global inflation was likely to ease this year, but warned that tensions in the Middle East could jolt the oil market, and dash that best-case scenario.

There are signs of a cool-down in the jobs market. Labor Department data released on Wednesday showed that the pace of hiring had begun to abate, with the number of unfilled job openings falling to a roughly three-year low.

HERE’S WHAT’S HAPPENING

Exxon Mobil strikes an agreement to win regulatory approval of its $60 billion megadeal. The oil giant will agree not to add Scott Sheffield, the former C.E.O. of Pioneer Natural Resources, as a director in exchange for the F.T.C. clearing the transaction, according to The Wall Street Journal. Elsewhere, shares in Shell were up after the producer reported $7.7 billion in adjusted quarterly earnings, beating analyst expectations.

The U.S. imposes sanctions on Chinese companies over military support for Russia’s war effort. The Biden administration announced on Wednesday nearly 300 sanctions, including on more than a dozen Chinese businesses, aimed at disrupting Moscow’s full-scale invasion of Ukraine. Both Treasury Secretary Janet Yellen and Secretary of State Antony Blinken had warned Chinese officials during their recent trips there about what they say is Beijing’s continued support of Russia’s war.

Novo Nordisk feels the heat from competition in weight-loss drugs. Shares in the Danish drug maker were down on Thursday despite the company more than doubling sales of its blockbuster Wegovy treatment and raising revenue forecasts. The culprit: pressure on prices, amid growing competition from Eli Lilly’s Zepbound, supply constraints and scrutiny from lawmakers.

A top U.S. lawmaker investigates the F.T.C.’s work with the E.U. on a failed Amazon deal. Representative James Comer, Republican of Kentucky, and the chairman of the House Oversight and Accountability Committee, demanded the agency’s correspondence with the European Commission related to Amazon’s aborted $1.4 billion takeover of iRobot. While global competition agencies regularly communicate about their scrutiny of deals, Comer wants to know whether the American agency coordinated with its counterpart to effectively block the deal.

Big Tech’s competition test

Google and the Justice Department will face off again in court on Thursday, for closing arguments in the first tech monopoly trial of the modern internet age.

The government’s lawsuit is centered on Google’s dominance of the search market. Yet many experts think the case will test regulators’ ability to rein in Big Tech at a time when artificial intelligence and other innovations are poised to reshape technology.

The case hinges on how Google throws its weight around. Its core search engine conducts nearly 90 percent of web searches, which the company chalks up to its technical superiority. But it also pays companies tens of billions to make its search engine the default on browsers like Apple’s Safari and Mozilla’s Firefox.

Prosecutors say those arrangements defend its monopoly — and blunt competition in search ads.

A big unknown is potential remedies if the presiding judge rules against Google. The Justice Department hasn’t said which fixes it would seek, but Biden administration officials have suggested that they would address the issue of Google’s scale in search. Among the possibilities:

• A ban on deals that set a default service on devices, though that doesn’t address Google’s control of search data.

• Another, according to Matt Stoller, the research director of the American Economic Liberties Project, a progressive think tank, is making Google create a way to give rivals access to its data.

One that’s most likely not on the table, according to some experts: a breakup.

The bigger issue: Critics worry about other markets Google might dominate. Since the Justice Department sued the company in 2020, other technologies — notably generative artificial intelligence tools — have risen to prominence. Google’s rivals, which have worried about the company’s A.I. prowess, said they feared that the tech giant might use its search-market tactics to win the A.I. race as well.

“Despite my enthusiasm that there is a new angle with A.I., I worry a lot that this vicious cycle that I’m trapped in could get even more vicious,” Satya Nadella, Microsoft’s C.E.O., testified last year.

Will the third time be a charm for J. & J.?

Johnson & Johnson is making another attempt at using a contentious legal technique to end a decade-long battle over claims that its talcum powder products caused cancer.

The proposed $6.5 billion settlement is one of the biggest tests yet of the so-called Texas two-step process, which allows companies to split off liabilities into a separate unit that files for bankruptcy. If Johnson & Johnson’s latest bid works, more companies could use the tactic.

Here’s how the Texas two-step works: A company creates a subsidiary to take on liability for a wave of lawsuits. The new entity immediately seeks Chapter 11 protection, turning the plaintiffs into creditors.

The process allows the overall company to stay out of bankruptcy and insulates it from legal battles.

Courts rejected Johnson & Johnson’s previous attempts. Judges ruled that bankruptcy wasn’t the right way to address the settlements because the subsidiary could not show it was under financial distress.

Johnson & Johnson, which has already spent $178 million in legal fees on those efforts and has long denied the accusations, has said it would appeal the latest ruling to the Supreme Court.

This round has a new twist. The company plans to file a “prepackaged” bankruptcy if 75 percent of claimants vote to accept the settlement.

“In effect, all the bankruptcy court is doing is stamping ‘yes’ on an agreement that has already been reached,” Jared Ellias, a Harvard Law School professor who specializes in corporate bankruptcy law, told DealBook.

It’s not yet clear whether the plan would withstand legal challenges. Critics say that the approach abuses the bankruptcy system by allowing financially solvent companies to use it to avoid responsibility, while proponents argue it efficiently resolves a flood of lawsuits at once.

In January, a group of U.S. senators and state attorneys general urged the Supreme Court to curb the use of the tactic.

Companies will be watching closely. “To the extent this is successful, it’s going to be a new tool in the corporate tool kit,” Ellias said.

TikTok gets some good news

Universal Music Group on Thursday announced a new licensing deal with TikTok, ending the label’s monthslong boycott of the platform.

It’s welcome news for TikTok as the short-video app battles to avoid being banned in the U.S.

The context: Universal told TikTok to remove its music from the platform in February, accusing the company of underpaying and failing to stem a flood of “A.I.-generated recordings” on its platform that reduced the amount of money available for human musicians. TikTok shot back that Universal was being greedy and cutting off its artists’ access to a key promotional platform.

The fight took a turn when Taylor Swift, who is a Universal artist, reappeared on TikTok to promote her latest album last month.

Details of the deal weren’t released. Universal said it had secured more money and better protection against A.I., while TikTok said it would do more to promote Universal’s artists. Both companies added that they would cooperate on new ways to make money using TikTok’s growing e-commerce features.

Both sides can claim a win. Universal can show investors that it’s an industry leader in dealing with Big Tech, Mark Mulligan, an analyst at MIDiA Research, told DealBook. (Shares in the label were up this morning.) He added that the resolution underscored the importance of TikTok’s “soft power” in building fan bases for artists.

But Mulligan said that ByteDance, the Chinese owner of TikTok, hasn’t actually signaled any pullback from A.I. “Unlike Spotify, TikTok is not a music platform — it is a platform with music as its soundtrack,” he said. “It is far easier for TikTok to substitute human music for A.I. music, which is what scares music rights holders.”

One more thought: Given the uncertainty of TikTok’s future in the U.S., the companies may have been smart to do a deal that benefits both of them, at least in the short term.

THE SPEED READ

Deals

• CoreWeave, an Nvidia-backed A.I. cloud-computing start-up, nearly tripled its valuation to $19 billion in a new fund-raising round. (WSJ)

• Shares in Viking rose 9 percent on Wednesday in its trading debut, after the cruise operator held one of the year’s biggest I.P.O.s. (Reuters)

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