Fed’s Powell Will Walk an Economic Tightrope. Why Markets May Not Like It.

The world will be watching Federal Reserve Chairman Jerome Powell later this week, and markets may not like what they hear.

The stock market tanked after Powell’s Jackson Hole speech last year, as he championed the central bank’s commitment to fighting inflation despite the economic pain–signaling the path of rate hikes ahead.

While the circumstances are different this year, his comments could still ring more hawkish than the market is expecting.

A year on and the dilemma facing investors isn’t how much higher rates will go but for how long they will stay high. In this regard, Powell could issue another wake-up call.

Focus has shifted recently to the possibility of rate cuts next year—something the market initially incorrectly predicted for later in 2023. The market is currently pricing in the first rate cut in May 2024. Goldman Sachs economists said last week they see the first cut in the second quarter and then 25 basis points of cuts per quarter.

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Powell has consistently said the Fed’s battle with inflation is far from over. There’s a chance he could dampen, or even shoot down, rate cut expectations.

The long-term feel of this year’s symposium (the theme is ‘Structural Shifts in the Global Economy’) raises the prospect of an adjustment to the “r-star”—essentially the neutral long-term interest rate when the economy is theoretically at equilibrium.

If the Fed chairman mentions this potentially needing to move up, then it could signal a new era of higher interest rates and end hopes of a return to lower levels. The bond market appears to see that shift coming–10-year yields hit their highest level since 2007 last week.

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Powell won’t want to cause a second year of market shocks at Jackson Hole, but he’ll want to make the Fed’s stance clear. It’s a tough balancing act.

—Callum Keown

*** Join Barron’s deputy editor Ben Levisohn today at noon when he talks with senior writers Al Root and Nicholas Jasinski about the outlook for the Fed’s annual meeting in Wyoming, the turmoil in the auto industry, and the lessons of earnings season as another one comes to an end. Sign up here.

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Try your hand at this morning’s Barron’s digital jigsaw, which is based on the week’s cover story. For all games, including the daily crossword and sudoku, click here.

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Chairman’s Remarks in Focus at Jackson Hole Symposium

Some economists are prepared to hear Powell use his Friday speech at the Economic Policy Symposium in Jackson Hole, Wyo., to calm down the bond market after Treasury yields have risen for five straight weeks.

“Our hunch is the Fed will try to avoid adding fuel to the fire in the hawkish direction,” Krishna Guha, vice chairman of Evercore ISI, wrote in a note to clients. The Fed raised its benchmark rate again in July to a target range of 5.25% to 5.5%, a 22-year high.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, said the Fed will welcome higher yields because recent data show that U.S. economic growth is still too strong. “Tighter financial conditions will help with” the slower growth and more balanced labor market policy makers want, he told MarketWatch.

Scott Wren, senior global market strategist at Wells Fargo Investment Institute, said: “the Fed’s not finished hiking” rates to combat sticky core inflation, and Powell may signal to the market that the Fed could again raise its benchmark rate to bring inflation down to its 2% target.

The S&P 500 is down 4.8% in August, after its third straight week of losses, according to Dow Jones Market Data, and on pace for its biggest monthly loss since December, FactSet data show. The technology-heavy Nasdaq Composite has also slid for three consecutive weeks.

What’s Next: The Fed has penciled in one more 25 basis-points rate hike before the end of this year. Behind the scenes, Fed officials will be debating whether the economy is going to go back to the low inflation, low interest rate environment seen before the Covid-19 pandemic.

—Janet H. Cho and MarketWatch

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Retailers’ Earnings Will Show How Eagerly Consumers Are Spending

A slew of major retailers will offer insight into consumer spending and economic resiliency this week. Retail sales rose by a faster-than-expected 0.7% rate in July as consumers demonstrated resilience, but shoppers are still making trade-offs between necessities and discretionary purchases.

Department stores
Macy’s
,

Kohl’s
,

and

Nordstrom

all report this week. Macy’s already cut its profit and revenue outlook for the rest of 2023. It is remaking its private-label business to boost sales and improve margins.

Sports apparel and equipment retailers
Dick’s Sporting Goods

and

Foot Locker

also report. Sales at sporting goods and hobby stores rose 1.5% in July, and clothing sales increased 1%, but some of that spending could be attributed to back-to-school shopping, Morning Consult economic analyst Kayla Bruun noted.

Discount retailers
BJ’s Wholesale Club

and

Dollar Tree

report, after

Walmart
,

Target
,

and

TJX

all beat earnings expectations last week. Grocery sales were a big boost to Walmart’s results.

Lowe’s

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reports on Tuesday, after

Home Depot

last week surpassed forecasts but warned of moderating demand for home-improvement projects and big-ticket items amid rising interest rates.

What’s Next: When the University of Michigan reports its final August Consumer Sentiment Index on Friday, economists surveyed by FactSet expect the index to remain at 71.2, essentially unchanged from July’s 71.6.

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—Janet H. Cho and Sabrina Escobar

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China’s Latest Interest Rate Cut Is Less Than Expected

China’s central bank made smaller-than-expected adjustments to interest rates Monday, undermining hopes of stimulus for the world’s second largest economy.

The People’s Bank of China reduced its one-year loan prime rate by 10 basis points to 3.45%, while the five-year rate was kept unchanged at 4.2%. Economists had expected a cut of 15 basis points for both rates.

Last week, China’s central bank lowered interest rates after fresh data showed consumer spending and factory output weakening. It cut a key interest rate on one-year loans, as well as one for one-week borrowing, after a report the previous week showed the inflation rate turned negative in July.

Officials are taking measures to help the economy bounce back from the country’s Covid-19-era lockdowns. The stakes for the government are high as it looks set to miss its 5% target for economic growth this year, which was already the lowest goal in years.

What’s Next: The five-year loan prime rate is the reference rate for mortgages in China. The lack of a rate cut disappointed investors. The lackluster stimulus raises questions about China’s ability to restore economic growth to pre-pandemic levels. UBS economists led by Tao Wang on Monday cut their 2023 growth forecast for China’s gross domestic product to 4.8% from 5.2% previously.

—Adam Clark

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J&J Spinoff Kenvue Faces Lawsuits Over Tylenol Ingredient

Johnson & Johnson
’s

new independent consumer health spinoff

Kenvue

is facing some little-noticed lawsuits claiming the painkiller Tylenol caused neurological disorders in children whose mothers took it during pregnancy. The lawsuits say the company should have warned consumers about such possible risks.

The lawsuits said studies over the past decade have shown that taking acetaminophen during pregnancy increases the risk that a baby will develop neurodevelopmental disorders such as autism spectrum disorder and attention deficit/hyperactivity disorder.

Kenvue says acetaminophen, the active ingredient in Tylenol, is one of the most studied medications in history, and that U.S. health regulators and medical organizations say it is safe. The American College of Obstetricians and Gynecologists calls it one of the only safe pain relievers during pregnancy.

When Kenvue spun off from Johnson & Johnson and went public this spring, it was an opportunity for the consumer product maker to get out from under the sprawling, costly litigation over claims that the talc in its body powders caused cancer. Those liabilities are staying with Johnson & Johnson.

The lawyer for Kenvue’s subsidiary said the legal system allows meritless cases against companies. But lawsuits can affect stocks. Shares of
Sanofi
,

GSK
,

and

Haleon

dropped last year after a passing mention of product liability litigation over the heartburn drug Zantac.

What’s Next: Judge Denise L. Cote of the Southern District of New York will decide which experts can testify at the Tylenol trial. If she rejects the plaintiffs’ experts, the litigation will collapse, but if she accepts them, the case will proceed. An opinion is expected before the end of 2023.

—Josh Nathan-Kazis and Janet H. Cho

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Nvidia Earnings to Put Spotlight on the AI Boom

Chip maker

Nvidia

will report this week in what some analysts see as a test of its status as the darling of the artificial intelligence investment boom. The report will also be an update of tech demand overall, after businesses tightened their IT budgets over worries about an economic slowdown.

Nvidia’s shares rocketed higher after its last earnings report, but even with the stock up nearly 200% this year, some analysts say there’s still room for them to go higher. Barclays analysts noted cloud spending has been funneled toward AI projects.

Synovus analyst Daniel Morgan pointed to Nvidia’s business focused on data centers, which have been trying to integrate AI chatbots and large language models. They also note Nvidia’s gaming segment, with a new Ada Lovelace graphics-processing unit, is seeing success in retail.

Nvidia stock soared above a $1 trillion market value in recent months after saying in May it expected to book about $11 billion in revenue during the quarter ended in July, compared with the consensus estimate of about $7 billion.

Companies that are hoping to develop their own AI programs need to buy Nvidia’s chips, known as graphics processing units, to build them. Nvidia’s blockbuster sales outlook shifted the AI enthusiasm into hyperdrive.

What’s Next: A Barron’s AI roundtable said the bigger value creation is going to be using the data that exist within enterprises to drive efficiencies, make leaps of intuition, make decisions faster, or reach conclusions that couldn’t previously be reached because the data were inaccessible.

—Liz Moyer and Eric J. Savitz

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner