Raphael Stevens

“If there were a strict investment ban on US investors, it could create a significant supply of shares over the grace period and hence potential large volatility in the near term,” Bank of America’s Hong Kong-based research analysts said in a note Tuesday.
Politico reported last week the White House is considering an executive order to ban U.S. investment into high-end Chinese tech such as artificial intelligence, quantum computing 5G and advanced semiconductors.
“Though AI is quite prevalent in today’s online world, companies that don’t have a large business in external AI solutions likely see a lower chance being targeted by the U.S. side,” the BofA analysts said.

The Biden Administration has said the U.S. is in competition with China and restricted the ability of American businesses to sell high-end chip tech to China.
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BEIJING — A ban on U.S. investment in Chinese tech could drive up market volatility — but some sectors may escape untouched, Bank of America analysts said.
The White House is reportedly considering an executive order to ban U.S. investment into high-end Chinese tech, such as artificial intelligence, quantum computing, 5G and advanced semiconductors, according to a Politico report last week.

It’s unclear whether or when such a rule might take effect. The report indicated ongoing internal debate within the U.S. government.
“If there were a strict investment ban on US investors, it could create a significant supply of shares over the grace period and hence potential large volatility in the near term,” Bank of America’s Hong Kong-based research analysts said in a note Tuesday. “Potential long-term impact is less clear.”
“Though AI is quite prevalent in today’s online world, companies that don’t have a large business in external AI solutions [will] likely see a lower chance [of] being targeted by the U.S. side,” the analysts said.

“Online travel companies, pureplay game and music companies, online verticals in auto and real estate, niche eCommerce specialties, and logistics-focus eCommerce companies are some of the examples,” the Bank of America report said.
The analysts did not name specific stocks.

Chinese stocks have recently tried to rebound after a plunge in the last two years.
The country ended its stringent zero-Covid policy in December. In the second half of last year, the U.S. and China also reached an audit deal that significantly lowered the risk Chinese companies would have to delist from U.S. stock exchanges.

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Some of the U.S.-listed Chinese stocks with the largest U.S. institutional investor ownership on a percentage basis included KFC operator Yum China, livestreaming company Joyy and pharmaceutical company Zai Lab, according to a Jan. 25 Morgan Stanley report.
Semiconductor industry company Daqo New Energy had nearly 27% U.S. institutional ownership, Morgan Stanley said.
The data showed Alibaba had the most U.S. institutional ownership by dollar value, but it only accounted for 8.2% of the stock.
In a separate report Monday, Morgan Stanley equity strategist Laura Wang pointed out the Biden administration has focused on targeting tech with ties to the Chinese military.
She noted signs of stabilization in the U.S.-China relationship, including U.S. Secretary of State Antony Blinken’s planned visit to Beijing in the coming days and the potential for Chinese President Xi Jinping to visit the U.S. during the Asia-Pacific Economic Cooperation Leaders’ Summit — set to be held in San Francisco in November.
The White House and China’s Ministry of Foreign Affairs did not immediately respond to a request for comment on the Politico report.
— CNBC’s Michael Bloom contributed to this report.

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The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter percentage point and gave little indication it is nearing the end of this hiking cycle. Aligning with market expectations, the rate-setting Federal Open Market Committee boosted the federal funds rate by 0.25 percentage point. That takes it to a target range of 4.5%-4.75%, the highest since October 2007.
The move marked the eighth increase in a process that began in March 2022. By itself, the funds rate sets what banks charge each other for overnight borrowing, but it also spills through to many consumer debt products.

The Fed is targeting the hikes to bring down inflation that, despite recent signs of slowing, is still running near its highest level since the early 1980s.
The post-meeting statement noted that inflation “has eased somewhat but remains elevated,” a tweak on previous language.
“Inflation data received over the past three months show a welcome reduction in the monthly pace of increases,” Fed Chairman Jerome Powell said in his post-meeting news conference. “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
Markets, however, were looking to this week’s meeting for signs that the Fed would be ending the rate increases soon. But the statement provided no such signals. At first, stocks fell in the wake of the announcement, with the Dow Jones Industrial Average tumbling more than 300 points.
However, the market rebounded during Powell’s press conference, after he acknowledged that “the disinflationary process” had started. Major averages ultimately turned positive as market commentary focused on Powell’s somewhat optimistic comments on progress against inflation.

“We can now say I think for the first time that the disinflationary process has started,” Powell said, while also noting that it would be “very premature to declare victory or to think we really got this.”
The Fed’s statement included language noting that the FOMC still sees the need for “ongoing increases in the target range.” Market participants had been hoping for some softening of the phrase, but the statement, approved unanimously, kept it intact.
The statement altered one part when describing what will determine the future policy path.Officials said they would determine the “extent” of future rate increases based on factors such as the effects so far of the rate hikes, the lags in which policy has an impact, and developments in financial conditions and the economy. Previously, the statement said it would use those factors to determine the “pace” of future hikes, a possible nod that the committee sees an end to the increases somewhere, or at least a continuation of smaller moves ahead.In 2022, the Fed approved four consecutive 0.75 percentage point moves before going to a smaller 0.5 percentage point increase in December. In recent public statements, multiple officials said they think the central bank at least can scale back on the size of the hikes, without signaling when they could end.While it was raising its benchmark rate, the committee characterized economic growth as “modest” though it noted only that unemployment “has remained low.” The latest job market assessment omitted previous language that employment gains have been “robust.”Otherwise, the statement remained intact from previous messages as the Fed continues its efforts to arrest inflation.

Fed firmly focused on inflation

Fed policy is thought to work on a lag – when the central bank raises rates, it takes time for the economy to adjust to tighter controls on money.
This particular round of inflation started due to Covid-related factors such as clogged supply chains and surging demand for goods over services. The war in Ukraine aggravated rising gas prices, while unprecedented fiscal and monetary stimulus fueled increasing costs across a variety of goods and services.Food prices have risen more than 10% over the past year. Egg prices alone have soared 60%, butter is up more than 31% and lettuce has jumped 25%, according to Labor Department data through December. Gas prices were ticking lower toward the end of 2022 but have popped higher in recent days, hitting $3.50 a gallon nationally for an increase of about 30 cents over the past month, according to AAA.Fed officials have remained resolute about tackling inflation, though they have said recent numbers show pressures could be easing. The consumer price index declined 0.1% in December on a monthly basis and is up 6.5% from a year ago – down from the peak of 9% last summer but still well above where the Fed feels comfortable.

Fed’s bond buying

Along with the rate hikes, the Fed has been reducing the holdings in its bond portfolio. That has resulted in a reduction of about $445 billion since June, as the Fed has targeted a capped level of $95 billion in maturing bonds it is allowing to roll off each month rather than reinvest.
The balance sheet reduction has been the equivalent of about 2 percentage points of additional rate hikes, according to the San Francisco Fed. The balance sheet is still at more than $8.4 trillion.
Markets are watching for where the Fed will finally end the increases.
At the December FOMC meeting, committee members indicated they see the “terminal rate,” or point where the Fed thinks policy is sufficiently restrictive, as 5.1%. Markets are betting that number is closer to 4.75%, and they expect the Fed to start cutting rates later this year, after one more quarter-point increase in March.
Responding to a question from CNBC’s Steve Liesman, Powell said it’s “possible” that the funds rate could stay lower than 5%. But he also said it’s unlikely the Fed would cut rates this year unless inflation comes down more rapidly.

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DoubleLine Capital CEO Jeffrey Gundlach said he sees one additional rate hike from the Federal Reserve before the central bank ends its tightening cycle.
“I think one more,” Gundlach said Wednesday on CNBC’s “Closing Bell: Overtime.” “I think it’s tough to make the statement ‘ongoing increases’ with an ‘s’ at the end of the word ‘increase’ and do zero unless you had very substantial change in economic conditions.”

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The Fed on Wednesday raised its benchmark interest rate by a quarter percentage point, taking its target range to 4.5%-4.75%, the highest since October 2007. The Fed’s statement included language noting that the central bank still sees the need for “ongoing increases in the target range.”
The so-called bond king said Fed Chairman Jerome Powell had a “clarifying” statement at the press conference Wednesday, saying the real yields are positive across the curve. Gundlach said he was referring to the Treasury Inflation-Protected Securities (TIPS), whose yields have stopped their ascent.
“He’s looking at the TIPS market, which had a huge increase in yields last year. That was a major headwind for risk assets in the stock market,” Gundlach said. “They’ve stopped going up and I have a feeling that real yields are going to not go up in the first part of this year. So that keeps a little bit of runway, I think.”
Stocks staged a big comeback in January, led by beaten-down technology names. The S&P 500 rallied 6.2% in January, notching its best start of the year since 2019. The tech-heavy Nasdaq Composite jumped 10.7% last month for its best monthly performance since July.
In Powell’s press conference, the Fed chief said the central bank could conduct a few more rate hikes to bring inflation down to its target.

“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell said. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”
Asked if Gundlach sees the Fed cutting rates this year, he said it’s a coin flip, depending on the incoming inflation data.
“I kind of think that they’ll cut rates in the second half of the year, but I’m not really committed to that idea firmly at all,” Gundlach said.
The widely followed investor also said he believes the odds for a recession this year have decreased, but they are still above 50%.

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Check out the companies making headlines in after-hour trading.
Meta — The Facebook parent jumped 17% after the company announced a $40 billion stock buyback when reporting quarterly results. Meta beat analysts’ estimates for fourth-quarter revenue, according to Refinitiv. Meta also said it lost $13.7 billion in 2022 in the business unit responsible for the metaverse. Google parent Alphabet added 3.7%, while Amazon gained 2%.

Align Technology — Shares of the orthodontics company gained 14% after the company beat analysts’ estimates in its latest quarter. Align posted quarterly earnings of $1.73 per share on revenue of $902 million. Analysts polled by Refinitiv anticipated per-share earnings of $1.56 and revenue of $893 million. The company also announced it will repurchase up to $1 billion of its common stock over the next three years.
Hologic — The medical product maker gained 1.7% after reporting first-quarter earnings per share above expectations and previous guidance, according to FactSet. Hologic also said its revenue was in line with expectations for the quarter.
e.l.f Beauty – The cosmetics company’s shares leapt 11% after e.l.f Beauty exceeded analysts’ estimates in its fiscal third quarter. The company posted adjusted earnings of 48 cents per share on revenue of $146.5 million. Analysts called for per-share earnings of 23 cents on revenue of $121.8 million, according to Refinitiv. The company also raised its full-year outlook.
C.H. Robinson — The freight stock dropped 4% after C.H. Robinson missed expectations from analysts polled by Refinitiv for the fourth quarter. The company posted $1.03 earnings per share on $5.07 in revenue. That compares with analysts’ estimates of $1.38 in per-share earnings on $5.68 billion in revenue.
Snap — Shares of the social media company added 1.2%, making up some ground after a selloff during the day on the back of a disappointing fourth-quarter earnings report.
— CNBC’s Darla Mercado contributed reporting

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The “money illusion” ranks among the most lyrical-sounding concepts in economics. It refers to the mistake that people make when they focus on nominal rather than real values. Anyone chuffed to get a hefty pay rise over the past year without considering whether, after inflation, they can actually buy more has fallen prey to the illusion. Financial investors ought to be savvier, but they too can be seduced by a lovely nominal story. The Federal Reserve’s downshift to smaller interest-rate rises is a case in point. It may look like a step away from hawkish monetary policy; in real terms, though, the central bank’s stance is tighter than it first appears.On February 1st the Fed raised rates by a quarter of a percentage point, taking short-term borrowing rates to a ceiling of 4.75%, as widely expected. This was half the size of its last increase, a half-point in December, which in turn was down from its previous string of three-quarter-point increases. The immediate question for investors is when the Fed will call it quits altogether. A narrow majority see the central bank delivering one more quarter-point increase next month and then stopping, as evidence mounts of cooling inflation. Even those more concerned by high inflation are pricing in, at most, an extra half-point of rate increases before the Fed stops. This is the light at the end of the monetary-tightening tunnel that has helped to fuel a stockmarket rally in recent weeks.Yet what ultimately matters for the companies and households that need to borrow money is the real, not the nominal, rate of interest. Here, the outlook is a little more complicated—and almost certainly less rosy. Conventionally, many observers simply subtract inflation from interest to obtain the real rate. For example, with annual consumer-price inflation of 6.5% in December and the federal funds rate that month at a ceiling of 4.5%, the calculation would imply a real interest rate of -2%, which would still be highly stimulative.This, however, reflects a basic mistake. Since interest is a forward-looking variable (ie, how much will be owed at some future date), the relevant comparison with inflation is also forward-looking (ie, how much will prices change by that same future date). Of course, no one can perfectly predict how the economy will evolve, but there are comprehensive gauges of inflation expectations that draw on both bond pricing and survey data. Subtracting one such gauge—the Cleveland Fed’s one-year expected inflation rate—from Treasury yields produces a much steeper trajectory for rates. In real terms they have soared to 2%, the highest level since 2007 (see chart).Even after the Fed stops raising nominal rates, real rates are likely to go on increasing for some time. Before covid-19 one-year expected inflation was about 1.7%. Now it is 2.7%. If inflation expectations recede towards their pre-pandemic levels, real interest rates would rise by as much as one additional percentage point—reaching a height that has always preceded a recession over the past couple of decades.None of this is preordained. If inflation proves to be persistent this year, expectations for future inflation may rise, which would lead to a reduction in real rates. The Fed could end up cutting nominal rates sooner than it has forecast, as many investors predict. Some economists also believe that the natural, or non-inflationary, level of interest rates may have risen since the pandemic, implying that the economy can sustain higher real rates without suffering a recession. Whatever the case, one conclusion is clear. It is always better to stay grounded in reality. ■ More