A Hot CPI Report Forces a Rethink of Chances of a Soft Landing

“No landing”

Markets are still on edge after Tuesday’s hot inflation report, as Wall Street suddenly and sharply discounted the odds of imminent interest rate cuts.

It has also poured cold water on the belief among many investors that the U.S. economy will achieve a “soft landing.”

Why so gloomy? The Consumer Price Index report, which came in above economists’ forecasts, is a stark reminder of the challenges that the Fed faces in bringing down inflation to its 2 percent target. Even after excluding volatile energy and food prices, inflation is holding roughly steady and is well above where the central bank feels comfortable.

Shelter costs, including rents, also rose above expectations, and “supercore inflation,” a measure the Fed closely follows that includes common “services” expenditures — like haircuts and lawyer fees — rose 4.3 year-on-year, its highest level since May, according to Deutsche Bank data.

Markets responded with a jolt. Investors dumped Treasury notes on Tuesday amid concerns that the Fed will keep borrowing costs higher for longer. That pushed the Russell 2000 down nearly 4 percent, its worst slide in 20 months. (That said, S&P 500 futures were rebounding slightly on Wednesday morning as dip-buyers returned, and Britain reported milder-than-expected inflation data that pushed up stocks in London.)

The futures market on Wednesday is pricing in three to four interest rate cuts this year, down from the six to seven projected at the start of the year and all but silencing rate-cut bulls. Such predictions “made no sense in our view,” Mohit Kumar, an economist at Jefferies, wrote in a research note.

Worry extends beyond the markets. The prospect of higher inflation is weighing on consumers and small-business owners.

Meanwhile, Krispy Kreme, Coca-Cola and Heineken each warned this week that stubborn inflation could hurt their earnings.

Concerns are growing about a dreaded economic scenario. In the case of a soft landing, inflation would drift down to the Fed’s target while wages and the economy grow. (Treasury Secretary Janet Yellen has been in this camp.) And there’s the “no landing” scenario, a growing concern on Wall Street that would see growth but above-normal inflation.

Some economic watchers are now warning of a bumpier time ahead. “While the soft landing outcome is still in the ascendancy, I would say a no landing scenario is underpriced,” Jim Reid, a strategist at Deutsche Bank, wrote to investors on Wednesday.

HERE’S WHAT’S HAPPENING

Democrats retake George Santos’s New York House seat. Tom Suozzi, a former congressman, beat a Republican opponent by bigger-than-expected margins in an early test of 2024 elections. His victory further trims the party’s majority in the House, which has struggled to agree on much except impeaching Alejandro Mayorkas, the homeland security secretary.

Kyiv again claims that Russia is using Starlink systems. Intelligence officials cited an audio recording that they say shows Russian forces trying to procure equipment for Elon Musk’s satellite internet service from Arab countries to use in Ukraine, according to The Wall Street Journal. Musk has denied that Russia is purchasing Starlink systems. Meanwhile, Mitch McConnell, the Senate minority leader, urged House Republicans to allow a vote on a $95 billion aid bill for Ukraine and Israel.

Hackers for foreign governments are using OpenAI for their attacks. Research published on Wednesday by the company and Microsoft found that assailants working for China, Iran, North Korea and Russia were using its artificial intelligence tools in their work. The twist: Generative A.I. wasn’t being used to create exotic new hacks — but to carry out mundane tasks like drafting emails and debugging computer code.

SpaceX postpones the launch of a moon lander mission. A technical issue was blamed for the delay and another attempt is scheduled for Thursday. If all goes well, it would set up the first American spacecraft to land softly on the moon’s surface since 1972. The spacecraft was built by Intuitive Machines, which went public last year via a merger with a blank-check company.

A fight against OpenAI gets its sails trimmed

Of all the legal battles that OpenAI faces, among the most prominent is a copyright infringement lawsuit filed by best-selling authors including Sarah Silverman and Ta-Nehisi Coates. (The New York Times has separately sued OpenAI and Microsoft.)

But a federal judge has thrown out several claims from the Silverman-led lawsuit, in the latest instance of setbacks for legal challenges to generative artificial intelligence developers.

Only the authors’ central accusation against OpenAI remains. The group has claimed that the company “copied and ingested” their copyrighted work without permission or compensation. (One way that’s done is through so-called shadow libraries that house millions of texts online.) The end result, the authors argue: Every answer that ChatGPT creates is copyright infringement, because it was born from stolen work.

While the plaintiffs are allowed to maintain their argument of direct copyright violation, the judge overseeing the case dismissed other counts, finding that the plaintiffs hadn’t found specific examples of A.I.-generated output that’s “substantially similar — or similar at all — to their books.” (The authors can amend their lawsuit to address that concern.)

The ruling mirrors what happened in the authors’ similar lawsuit against Meta, which they claim trained its LLaMA system on their work. But the judge in the Meta case cast some doubt: “When I make a query of LLaMA, I’m not asking for a copy of Sarah Silverman’s book — I’m not even asking for an excerpt,” he wrote.

The economics of the generative A.I. industry are at stake in these cases. Rulings in favor of copyright owners could mean that companies like OpenAI would have to pay up to train their data-hungry systems. These tech companies argue that their programs are covered by fair use, and that their products’ output is sufficiently different from the original work — in short, that they aren’t violating copyright.

The outlook for such copyright battles remains unclear. While The Times’s lawsuit against OpenAI and Microsoft is still live, and recent rulings have been adverse to the authors group, a judge in a lawsuit involving A.I.-generated art generators said it was in the public interest.

• In other A.I. news: OpenAI gave ChatGPT a better “memory” for user queries to improve future answers. And Andrej Karpathy, an A.I. researcher who co-founded OpenAI, has left the company.

“This is actually a correction for the press release.”

— Erin Brewer, the C.F.O. of Lyft. Shares in the ride-hailing company went on a rocky ride after the ride-hailing company said that it had misstated its margins growth outlook in Tuesday’s earnings release. (Instead of margins rising 500 basis points, or 5 percent, this year, the company meant to say that they would increase 50 basis points, or 0.5 percent.)

Zuckerberg takes on the Vision Pro

Apple’s $3,500 Vision Pro headset, which was released two weeks ago, has raised the stakes in the virtual reality goggles market. And on Tuesday, a top tech executive delivered a detailed, no-holds-barred review that has generated plenty of buzz on social media.

That reviewer? Mark Zuckerberg, whose Meta is one of Apple’s biggest rivals in the V.R. space. In an Instagram video, he outlined his likes and dislikes, but perhaps unsurprisingly came out strongly in favor of his company’s own Quest headset.

Here’s his take:

“I have to say that before this, I expected that Quest would be the better value for most people since it’s really good and like seven times less expensive, but after using it” [Vision Pro] “I don’t just think that Quest is the better value, it’s the better product period.

“They have different strengths, but overall Quest is better for the vast majority of things that people use mixed reality for.”

Zuckerberg gives the Vision Pro strong marks for its high-resolution screen, and the eye-tracking technology it packs. (Such a feature would be part of future Quest headsets, he said.)

But he criticized it for comfort, what he described as “motion blur” for the wearer, and a relatively small library of applications. He also dinged Apple for making the Vision Pro, like all of its devices, a closed system for developers.

And in a final bit of showing off, Zuckerberg shot his Instagram video via … a Quest 3 headset.

Snow-nomics

Scattered power outages and canceled flights. Students across much of the Northeast home from school. And yet just 3.2 inches of snow in Central Park, and barely anything in Boston.

A fast-moving nor’easter that gave New York City its highest snowfall in over two years didn’t quite live up to predictions. But it did create severe disruptions, a reminder that even milder winters can still pack a punch.

It tested hybrid-learning infrastructure. Teachers, parents and students in New York reported difficulties logging on for remote classes. That prompted David Banks, the city’s public schools chancellor, to call out its I.T. partner, IBM, saying it was “not ready for prime time.” The company later said “the issues have been largely resolved.”

Valentine’s Day plans may get scrambled. More than 1,000 flights were canceled, disrupting schedules and possibly dashing couples’ dinner plans tonight.

It would have been worse for restaurant owners if the snow had fallen on a Friday or Saturday, said Evan Gold, an executive vice president of partnerships at Planalytics, which predicts how weather events can affect consumer demand.

A small silver lining: Some businesses may have been able to offload end-of-season inventory, such as salt to de-ice outdoor surfaces, or gloves. “The retail calendar is now in spring, so retailers are looking to get rid of that winter product,” Gold said.

THE SPEED READ

Deals

• Walmart is reportedly in talks to buy Vizio, the popular TV maker, for more than $2 billion in part to bolster its advertising business. (WSJ)

• Donald Mackenzie, a co-founder of the private equity firm CVC who led the investment giant’s takeover of Formula 1 in 2006, is stepping back. (FT)

Policy

• “This Arctic Circle Town Expected a Green Energy Boom. Then Came Bidenomics.” (NYT)

• A crypto-focused super PAC is seeking to oppose the Senate bid of Representative Katie Porter, a California Democrat who has called for tighter regulation of the industry. (NYT)

• Jared Kushner, a son-in-law of Donald Trump who served in his White House, said he wouldn’t return to Washington for a potential second Trump term. (Axios)

Best of the rest

• “Can America Turn a Productivity Boomlet Into a Boom?” (NYT)

• Jimmy Finkelstein, the founder of the doomed news start-up The Messenger, suggested that he may reverse course and pay laid-off employees severance. (Axios)

• Those flowers you ordered for Valentine’s Day probably arrived in the U.S. via Miami International Airport. (NYT)

We’d like your feedback! Please email thoughts and suggestions to [email protected].