Stock Market Has Selective Hearing With the Fed. The Reckoning Is Coming.

This isn’t exactly a new phenomenon. Just as Powell likes to remind audiences that inflation has thrown a few head fakes in the past, so too have markets been fooled by the timing of a Fed pivot.

Last month, the Fed signaled three rate cuts with its new projections. The market promptly priced in six. Even after this week’s minutes, which were considered slightly less open to quick cuts than comments from the press conference held three weeks ago, that’s still the consensus view.

The market did noticeably pull back expectations for the first rate reduction to arrive in March. The odds on that are now about 66%, compared with 73% a month ago. Richmond Fed President Tom Barkin noted yesterday that the March meeting is a long way away and a lot can happen before then.

He’s right. But March is also shaping up to be a key rendezvous point for how current market expectations square with reality. The extent of future rate cuts and when they start are both important for markets. Later hikes mean tighter conditions for longer, which is bad for company earnings and thus bad for stocks.

So far this year, investors have merely tweaked their outlooks. Expect bigger gyrations if it starts to look like March will disappoint them.

—Brian Swint

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Minutes Show Rates Likely Peaked. Uncertainty Remains.

Federal Reserve officials believe interest rates have likely reached their peak after steady increases since March 2022 to quash inflation. The central bank’s next policy steps depend on how the economy evolves in the coming months, according to the Federal Open Market Committee’s Dec. 12-13 meeting minutes.

• Almost all officials submitted projections that the federal-funds rate would fall to 4.6% by the end of 2024 given recent disinflation trends, but several members noted that an “unusually elevated degree of uncertainty” remains, and refused to take further rate increases off the table.

• Some officials believe the 11 rate hikes the Fed has implemented in the past nearly two years are having their intended effect of slowing consumer demand and cooling the labor market—and will help bring inflation back to the Fed’s 2% target over time.

• Job openings slid to 8.8 million in November, a 32-month low, from a revised 8.9 million the prior month, the Bureau of Labor Statistics reported. The Institute for Supply Management reported that economic activity in manufacturing contracted in December for the 14th straight month.

• Richmond Federal Reserve President Tom Barkin told the Raleigh Chamber that although officials submitted forecasts signaling rate hikes were done, the range of estimates varied from no cuts to as many as six. He added that a soft landing is increasingly conceivable, “but in no way inevitable.”

What’s Next: Barkin said the economy could stall from the delayed effects of restrictive monetary policy, that consumers and businesses could pull back, or unexpected geopolitical events or a cyber shutdown could happen. But there’s no evidence the economy is headed toward a massive recession, he added.

—Janet H. Cho and Megan Leonhardt

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Microsoft Unveils Keyboard Change as ‘Year of AI’ Begins

Your next Windows keyboard is set to look a bit different. Microsoft is introducing a new key to launch its artificial-intelligence assistant as part of a push to make 2024 the “year of AI.”

• Microsoft said Thursday that the new key will launch its Copilot artificial-intelligence software on personal computers running Windows 11. It’s one of the biggest changes to the ubiquitous keyboard since the company introduced the Windows key in 1994.

• The company launched the 365 Copilot late last year, at a price of $30 per user a month and said it improved productivity in a survey of early corporate adopters.

• Separately, Intel named a new head of AI on Wednesday as it looks to catch up with Nvidia and Advanced Micro Devices. Justin Hotard, a former Hewlett Packard Enterprise executive, will become executive vice president and general manager of the chip maker’s data-center and AI group from Feb.1.

What’s Next: While the introduction of Microsoft’s new key is only a small change, it’s symbolic of a larger shift set to take place this year as technology companies adapt their hardware for AI. Intel has said dozens of PC manufacturers are using its AI-enabled processors in their latest models, as the tech industry hopes the technology will help revive hardware sales.

—Adam Clark and Callum Keown

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Disney Gathers Allies in Boardroom Fight With Trian’s Peltz

Walt Disney
has secured the support of activist investor ValueAct Capital and the hedge fund Blackwells Capital in its boardroom fight with another activist, Trian Fund Management’s billionaire founder Nelson Peltz. The moves come as Disney CEO Bob Iger faces questions about succession planning.

• Disney will consult with ValueAct on strategy, and ValueAct will support Disney’s board nominees at the 2024 annual meeting. Blackwells nominated three people for election to the board, saying they would support Iger’s efforts and suggesting Trian should end its campaign.

• Blackwells’ nominees include former
  Warner Bros. Discovery
  and NBCUniversal executive Jessica Schell, real-estate executive Craig Hatkoff, and venture capitalist and TaskRabbit founder Leah Solivan. Peltz has nominated himself and former Disney CFO Jay Rasulo.

• Iger, who returned as Disney’s CEO in late 2022, has focused on improving results from streaming and developing plans for theme parks and cruises, studios, and the ESPN sports network. Disney’s share price has been trading near 10-year lows, and Trian and others think it could do better.

• A Trian spokesperson told Barron’s it was Disney’s largest active shareholder, with an approximate $3 billion beneficial ownership stake, and “welcomes other shareholders attempting to help fix this iconic but wayward company.” The statement called out Disney’s “chronically underperforming Board.”

What’s Next: ValueAct built a so-far undisclosed stake in Disney, starting last summer, becoming one of its largest holdings, The Wall Street Journal reported. The activist investor sees Disney’s theme parks and consumer products businesses alone fetching $80 a share. Disney stock trades around $91 a share.

—Janet H. Cho and Brian Swint

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New Car Sales Seen Nearing 15.5 Million for 2023

Analysts project that, industrywide, auto makers sold nearly 15.5 million new vehicles in the U.S. in 2023—up about 13% from the prior year. They see evidence of pent-up demand, greater availability, and a return to normalcy after the industry’s worst sales year in more than a decade in 2022.

• The calculation would still fall far below the more than 17 million vehicles sold annually before the Covid-19 pandemic, The Wall Street Journal reported. The average price for new vehicles peaked in December 2022 before falling to about $46,055 last month, research firm J.D. Power said.

• Among those reporting numbers on Wednesday,
  General Motors,
  the nation’s largest car seller, sold 2.6 million vehicles in the U.S. last year, up 14% from 2022.
  Toyota Motor
  sold nearly 2.3 million cars, including sales of plug-in models, up nearly 7%.

• The six-week United Auto Workers strike didn’t hurt sales momentum, but double-digit wage increases and other benefits won in new contracts will raise labor costs by billions for GM,
  Ford Motor,
  and
  Stellantis.
  Nonunion auto makers including Toyota and
  Honda
  also boosted their workers’ pay.

• Electric-vehicle sales in the U.S. rose 48% for the first 11 months of 2023, according to Motor Intelligence, but the pace of growth slowed. Auto makers are spending to build new factories in their longer-term transition to EVs, but they have also scaled back their near-term ambitions.

What’s Next: Rising inventory levels and higher auto loan rates could influence sales momentum this year. The growth rate is expected to remain relatively flat, with Cox Automotive projecting about 15.6 million in annual sales, the Journal reported.

—Janet H. Cho

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Up for Auction: Warhol’s Queen Elizabeth II and ‘Succession’ Memorabilia

The auction market is set to kick off 2024 after a challenging economic environment resulted in weaker 2023 sales from the prior year. Phillips London plans a mid-January sale, including an Andy Warhol screen print of Queen Elizabeth II, while Heritage Auctions is selling memorabilia from the hit HBO series Succession.

• Christie’s and Sotheby’s, the major global auction houses, projected 2023 sales of $14.2 billion combined—a drop of 13% from 2022. Christie’s saw an increase in private sales and an influx of younger and new bidders. Sotheby’s highlighted 70 lots that went for more than $10 million each.

• The Phillips London sale, planned for Jan. 17 and 18, features 40 works. Warhol’s 1985 Queen Elizabeth II portrait is expected to fetch from $253,000 to nearly $380,000. Another Warhol, the 1981 depiction of Superman, is estimated to go for $190,000 to $253,000.

• Heritage Auctions is also planning a mid-January online sale of Succession items, including character Kendall Roy’s waystar/Royco ID badge, currently bidding is around $1,050, and Bridget’s “ludicrously capacious” Burberry bag, with current bidding at $1,600. The sale is a pre-Emmy event with HBO.

• The Succession items include examples of the show’s quiet luxury apparel, including Lukas Matsson’s pre-election party ensemble, currently bidding at $825, and Connor and Willa’s wedding outfits, currently fetching $1,200, not including buyer’s premium.

What’s Next: In a 2024 outlook by
UBS
and Art Basel, 54% of high-net-worth collectors planned to buy art over the next year, with paintings being the most popular choice, and 26% said they planned to sell from their collections. Some are holding off on sales because they expect prices to improve.

—Liz Moyer

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Callum Keown