Wall Street’s Big Rethink on Interest Rate Cuts

What next on inflation and rate cuts?

The mood music on rate cuts has changed again. Inflation hasn’t fallen as quickly as expected and the economy is performing strongly. All eyes now are focused on the upcoming Consumer Price Index data for clues on when the Fed might finally start cutting interest rates.

Friday’s blowout jobs numbers have shifted sentiment. Economists on Tuesday are forecasting higher growth but also higher-for-longer inflation and rates. Traders are penciling in fewer than three cuts this year — lower than the Fed’s own projection — with the first coming not before July.

That’s a stark change from the start of the year, when Wall Street figured that a slowing economy and cooling labor market would force the Fed to cut rates as many as six times in 2024.

The uncertainty has hit the markets. After climbing more than 10 percent in the first quarter, the S&P 500 is down roughly 1 percent this quarter. Neel Kashkari, president of the Minneapolis Fed, briefly spooked the markets last week when he suggested that persistently high inflation could mean the central bank wouldn’t cut rates this year.

Wednesday’s inflation report could be pivotal. Economists forecast that overall inflation will tick up on the back of rising energy prices. But they expect that core C.P.I., which strips out the volatile fuel and food price fluctuations, could cool to 3.7 percent, from 3.8 percent.

The focus will be on so-called services inflation. This takes into account a range of expenditures from airfare to rent and auto insurance, and has been running hot since the early days of the coronavirus pandemic. Car insurance has risen for 27 consecutive months on an annualized basis, notes Michael Reid, an economist at RBC Capital Markets.

“The risk remains that if the progress in services continues to stall, then the path of Fed cuts may be even shallower than expected,” Reid wrote in an investor note on Monday.

A potential positive sign: The New York Fed’s monthly inflation survey on Monday showed that respondents think inflation will rise by about 3 percent during the next year. That’s still above the Fed’s 2 percent target, but it would be below the projections for Wednesday’s C.P.I. data.

Some prominent Wall Street voices see a bumpy path ahead. Jamie Dimon, the C.E.O. of JPMorgan Chase, issued a fresh warning that a soft landing was no certainty and that inflation could remain higher for a lot longer. Dimon said the bank’s worst-case scenario had interest rates climbing to 8 percent, “or even higher.”

HERE’S WHAT’S HAPPENING

Elon Musk predicts A.I. will overtake human intelligence within two years. Musk told Nicolai Tangen, C.E.O. of Norway’s sovereign wealth fund, in an interview on X that artificial general intelligence would probably be “smarter than the smartest human” next year or by 2026. The forecast is earlier than many others in the tech industry believe: Some say it will take years for that level of technology to reach the market. Elsewhere, Musk’s Tesla has settled a lawsuit over a fatal crash involving a driver using the car’s driver-assistance software.

Donald Trump’s efforts to delay his criminal hush-money trial are foiled. An appeals judge dismissed the former president’s request to have the case, related to charges that he falsified records to cover up a sex scandal, delayed and moved out of New York. Trump also said he planned to sue the judge overseeing the case, which is probably the only one of the four criminal matters he’s facing that will go to court this year.

President Biden unveils a big student-loan debt relief program. Some 10 million borrowers would see debt relief of $5,000 or more, he announced in Wisconsin, a key battleground state. Republicans have opposed the White House efforts to wipe out billions in payments owed by graduates, accusing Biden of overstepping his authority and adding to the swelling national debt.

Blackstone bets that real estate has bottomed out

Blackstone has doubled down on the volatile real estate market, agreeing to buy the luxury apartment group Apartment Income REIT for about $10 billion to take the company private.

The private equity giant said at the start of the year that it saw opportunities for deals in a market hobbled by high interest rates and last year’s regional banking crisis.

Commercial real estate has been mired in its worst downturn since the 2008 crisis. Office vacancies are soaring, as employers look to renegotiate leases amid a rise in hybrid work and high interest rates that are slamming property values. Investors bought $360 billion of U.S. commercial property in the 12 months ending in February, about half the volume of deals compared to the previous 12-month period, according to MSCI Real Assets.

Blackstone thinks a property rebound is in the cards. “We can see the pillars of a real-estate recovery coming into place,” Jon Gray, the company’s president, said on an earnings call this year. The firm thinks uncertainty about the economy and the timing of Fed rate cuts creates a buying opportunity. “We want to be aggressive,” Gray told The Financial Times in January.

Blackstone sees growth in big cities. Apartment Income REIT, also known as AIR Communities, owns 76 high-end rental communities in cities including Miami, Los Angeles, Washington and Boston. Shares in AIR jumped almost 20 percent on Monday.

In January, Blackstone paid $3.5 billion to buy Tricon Residential, a Canadian real estate company, and it took a stake in Signature Bank’s $17 billion real-estate loan book last year. In December, it teamed up with Digital Realty to build data centers through a new $7 billion venture.

Blackstone may be betting that rate cuts will help it. But that’s a gamble — and not just because the rates outlook has grown cloudy in recent weeks. Some analysts point out that previous deals came when the economy was more stable but some say that Gray, who used to run Blackstone’s global property investing business, may have the skills to ride that wave of uncertainty.

Paramount’s battle to win over shareholders

As more details emerge about a deal to combine Skydance and Paramount, some shareholders are going public with their opposition, write The Times’ Ben Mullin and DealBook’s Lauren Hirsch.

Paramount’s shares have tumbled since exclusive talks began last week. The stock closed down 8 percent on Monday and has lost about half its value in the past year. David Ellison’s Skydance has tentatively agreed to buy Shari Redstone’s National Amusements, the holding company that controls the group via a supervoting class of stock. Paramount would then merge with Skydance in a deal valued at about $5 billion.

A special panel of independent board members is negotiating with Skydance despite other interest. Apollo Global Management, the investment giant, was willing to pay $26 billion for the whole group, but Paramount ignored the approach because of concerns about its financing. That raised questions about whether the Skydance proposal might be good for Redstone but less good for other investors.

Opposition appears to be growing. “We’ll aggressively defend our rights if they take us down this path,” Justin Evans, the managing member of Blackwood Capital Management, told DealBook, threatening litigation. “It’s a toxic, unfair deal for shareholders.”

The comments came after Matrix Asset Advisors, another investor, sent a blistering letter to Paramount’s board on Monday slamming the Skydance bid. “As reported, this deal focuses on monetizing Shari Redstone’s shareholding for cash at a significant premium,” wrote David Katz, Matrix’s chief investment officer. “The vast majority of shareholders would not receive a similar premium and would be forced to finance a speculative investment in Skydance in a transaction significantly dilutive to shareholder value.”

Both shareholders hold relatively small stakes but they hint at growing concerns about the deal.

Questions about Skydance are another worry. Skydance and Paramount would split ownership of the new company. But because the company is private, Paramount shareholders have no easy way to assess the value of a business in which they may soon be an investor.

Katz urged Paramount to take 30 days to do due diligence and confirm financing on Apollo’s offer, just as Paramount has done for Skydance.

Paramount and National Amusements declined to comment for DealBook.

The eclipse economy: by the numbers

Eclipse mania has swept across North America, leaving people across the continent in awe at the celestial event.

The next time the sun, moon and Earth are scheduled to line up in a row across the region will be in 2044. For now, DealBook is looking at the economic impact of Monday’s total solar eclipse.

The rarity was expected to be a boon for businesses in the eclipse’s totality path. Estimates of the economic lift range from $1 billion to $6 billion. Hotel bookings and Airbnb rentals sold out long in advance. And eclipse parties were all the rage, from Austin, Texas, to Rockefeller Center in New York.

That said, a solar eclipse in 2017 was estimated to cost nearly $700 million in lost productivity, as workers left their desks en masse to gaze skyward.

The hit to the power grid was minimal. The U.S. has become more reliant on solar power, which accounted for nearly 6 percent of electricity last year. But utilities made adjustments well in advance to make sure customers were unaffected.

There was a run on protective eyewear in many places. ISO-certified glasses — Warby Parker gave them away for free while Target sold pairs for $13.99 — sold out in many locations.

One problem: There were reports of recalls and scam warnings associated with some vendors. And looking directly at the eclipse could damage one’s eyesight, which may explain an apparent uptick in people Googling, “my eyes hurt.”

One 1980s rocker wasn’t hurting. Spotify reported that searches for Bonnie Tyler’s 1983 chart-topper, “Total Eclipse of the Heart,” surged.

THE SPEED READ

Deals

• Blackstone is reportedly near a deal to buy L’Occitane and take the skin care company private. (Bloomberg)

• The deals mania that is shaking up professional sports leagues around the world is expected to accelerate with a flood of investments into smaller teams, researchers say. (MarketWatch)

Policy

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