Finance

Philadelphia Fed President Patrick Harker on Tuesday indicated that the central bank could be at the end of its current rate-hiking cycle.
“I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” the FOMC voting member said in a speech.
Harker indicated there are unlikely to be rate cuts anytime soon.

Patrick Harker at Jackson Hole, Wyoming
David A. Grogan | CNBC

Philadelphia Federal Reserve President Patrick Harker on Tuesday indicated that the central bank could be at the end of its current rate-hiking cycle.
A voter this year on the rate-setting Federal Open Market Committee, the central bank official noted progress in the fight against inflation and confidence in the economy.

“Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Harker said in prepared remarks for a speech in Philadelphia.
That statements comes after the FOMC in July approved its 11th hike since March 2022, taking the Fed’s key interest rate from near-zero to a target range of 5.25%-5.5%, the highest in more than 22 years.
While projections committee members made in June pointed to an additional quarter-point hike this year, there are differences of opinion on where to go from here. New York Fed President John Williams also indicated, in an interview with the New York Times published Monday, that the rate increases could be over. Governor Michelle Bowman said Monday that she thinks additional hikes are probably warranted.
Markets are pricing in more than an 85% probability that the Fed holds steady at its Sept. 19-20 meeting, according to CME Group data. Pricing action indicates the first decrease could some as soon as March 2024.
Harker indicated there are unlikely to be rate cuts anytime soon.

“Allow me to be clear about one thing, however. Should we be at that point where we can hold steady, we will need to be there for a while,” he said. “The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”
The Fed was forced into tightening mode after inflation hit its highest level in more than 40 years. Officials at first dismissed the price increases as “transitory,” then were forced into a round of tightening that included four consecutive three-quarter point increases.
While many economists fear the moves could drag the economy into recession, Harker expressed confidence that inflation will progress gradually to the Fed’s 2% goal, unemployment will rise only “slightly” and economic growth should be “slightly lower” than the pace so far in 2023. GDP increased at a 2% annualized pace in the first quarter and 2.4% in the second quarter.
“In sum, I expect only a modest slowdown in economic activity to go along with a slow but sure disinflation,” he said. “In other words, I do see us on the flight path to the soft landing we all hope for and that has proved quite elusive in the past.”
Harker did express some concern over commercial real estate as well as the impact that the resumption of student loan payments will have on the broader economy.
Policymakers will get their next look at the progress against inflation on Thursday, when the Bureau of Labor Statistics releases its July reading on the consumer price index. The report is expected to show prices rising 0.2% from a month ago and 3.3% on a 12-month basis, according to economists polled by Dow Jones. Excluding food and energy costs, the CPI is projected to grow 0.2% and 4.8% respectively. More

Italian Deputy Prime Minister Matteo Salvini announced on Monday a 40% levy on banks’ extra “excess” profits derived from higher interest rates.
The one-off tax will be equal to around 19% of banks’ net profits for the year, analysts at Citi estimated based on currently available data.
“We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares,” Citi said.

ROME – August 7, 2023: (L-R) Carlo Nordio, Minister of Justice, Adolfo Urso, Minister of Enterprise and Made in Italy, Matteo Salvini, Deputy Prime Minister and Minister of Transport, Francesco Lollobrigida, Minister of Agriculture and Orazio Schillaci, Minister of Health hold a press conference at Palazzo Chigi at the end of the Council of Ministers No. 47.
Simona Granati – Corbis/Corbis via Getty Images

Italian banking shares took a beating on Tuesday morning after Italy’s cabinet approved a 40% windfall tax on lenders’ “excess” profits in 2023.
As of 2:32 p.m. in Rome, BPER Banca shares were 10% lower and Banco BPM shares dropped 9%, while Intesa Sanpaolo and Finecobank were both down more than 8% and UniCredit fell more than 6%.

The effects were seen beyond Italy, with Germany’s Commerzbank down around 3.2% and Deutsche Bank trading 2% lower.
Italian Deputy Prime Matteo Salvini told a press conference on Monday that the 40% levy on banks’ extra profits derived from higher interest rates, amounting to several billion euros, will be used to cut taxes and offer financial support to mortgage holders.
“One only has to look at the banks’ first-half 2023 profits, also the result of the European Central Bank’s rate hikes, to realise that we are not talking about a few millions, but we are talking one can assume of billions,” Salvini said, according to a Reuters translation.
“If [it is true that] the cost of money burden for households and businesses has increased and doubled, it has not equally doubled what is given to current account holders.”

‘Substantially negative for banks’

The one-off tax will be equal to around 19% of banks’ net profits for the year, analysts at Citi estimated based on currently available data.

“We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares. The new simulated impact is also higher [than] the simulation we ran in April,” Citi Equity Research Analyst Azzurra Guelfi said in a note Tuesday.
The tax will apply to “excess” net interest income in both 2022 and 2023 resulting from higher interest rates, and will be applied on NII exceeding 3% year-on-year growth in 2022 from 2021 levels, and exceeding 6% year-on-year growth in 2023 versus 2022. Banks are required to pay the tax within six months after the end of the financial year.
“The introduction of this tax (which was discussed, then left pending) could lead to Italian banks increasing their cost of deposits in order to reduce the extra profit, and this comes after a round of results when every bank increases 2023 guidance for NII and assuming a slowdown of growth in 2H (due to raising deposit beta, even if expectation below previous guidance),” Citi said.
“It is not clear whether the tax will apply to domestic NII only (we base our simulation on this), and this could have larger impact for UCI vs. peers (given international franchise).” More

Among the smaller lenders receiving an official ratings downgrade were M&T Bank, Pinnacle Financial, BOK Financial and Webster Financial.
Major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are now under review for a potential downgrade.

A general view of the New York Stock Exchange (NYSE) on Wall Street in New York City on May 12, 2023.
Angela Weiss | AFP | Getty Images

Moody’s cut the credit ratings of a host of small and mid-sized U.S. banks late Monday and placed several big Wall Street names on negative review.
The firm lowered the ratings of 10 banks by one rung, while major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are now under review for a potential downgrade.

Moody’s also changed its outlook to negative for 11 banks, including Capital One, Citizens Financial and Fifth Third Bancorp.
Among the smaller lenders receiving an official ratings downgrade were M&T Bank, Pinnacle Financial, BOK Financial and Webster Financial.
“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts Jill Cetina and Ana Arsov said in the accompanying research note.
“Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital. This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios.”
Regional U.S. banks were thrust into the spotlight earlier this year after the collapse of Silicon Valley Bank and Signature Bank triggered a run on deposits across the sector. The panic eventually spread to Europe and resulted in the emergency rescue of Swiss giant Credit Suisse by domestic rival UBS.

Though authorities went to great lengths to restore confidence, Moody’s warned that banks with substantial unrealized losses that are not captured by their regulatory capital ratios may still be susceptible to sudden losses of market or consumer confidence in a high interest rate environment.
The Federal Reserve in July lifted its benchmark borrowing rate to a 5.25%-5.5% range, having tightened monetary policy aggressively over the past year and a half in a bid to rein in sky-high inflation.
“We expect banks’ ALM risks to be exacerbated by the significant increase in the Federal Reserve’s policy rate as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing QT,” Moody’s said in the report.
“Interest rates are likely to remain higher for longer until inflation returns to within the Fed’s target range and, as noted earlier, longer-term U.S. interest rates also are moving higher because of multiple factors, which will put further pressure on banks’ fixed-rate assets.”
Regional banks are at a greater risk since they have comparatively low regulatory capital, Moody’s noted, adding that institutions with a higher share of fixed-rate assets on the balance sheet are more constrained in terms of profitability and ability to grow capital and continue lending.
“Risks may be more pronounced if the U.S. enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion,” the analysts added.
Though the stress on U.S. banks has mostly been concentrated in funding and interest rate risk resulting from monetary policy tightening, Moody’s warned that a worsening in asset quality is on the horizon.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” the agency said. More

A UPS worker checks an Amazon box to be delivered in New York.
Eduardo Munoz | Reuters

Check out the companies making headlines in premarket trading.
Sagimet Biosciences — Shares of the biopharmaceutical company popped 31% following an upgrade from Goldman Sachs. The firm highlighted Sagimet could see strong gains thanks to progress on a treatment for  non-alcoholic steatohepatitis (NASH).

Banks —U.S. bank stocks fell broadly after Moody’s cut ratings on several institutions, including M&T Bank, Citizens Financial, Bank of New York Mellon and Truist Financial. Moody’s cited a higher interest rate environment as well as asset-liability management risks (ALM) as continued headwinds for U.S. banks. Major banks including Goldman Sachs and JPMorgan Chase traded more than 1% lower, while the regional bank ETF (KRE) fell nearly 3%.
Home Depot, Lowe’s — Both home improvement retailers fell more than 1% each in premarket trading. Telsey Advisory Group downgraded both stocks to market perform earlier on Tuesday, over more cautious consumer spending and weakening housing market trends.
Eli Lilly — The pharmaceutical stock climbed 8.6% after an earnings beat. The company reported an adjusted $2.11 per share on revenue of $8.31 billion, while analysts polled by Refinitiv forecasted $1.98 and $7.58 billion.
Novo Nordisk — Shares of the pharmaceutical company popped 13% after trial results showed its weight-loss drug Wegovy cut the risk of heart disease by 20% in adults with obesity.
EchoStar — Billionaire Charlie Ergen said he would reunite Dish and EchoStar in a merger, about 15 years after EchoStar was spun out. EchoStar slid more than 10%, while Dish gained more than 1%.

United Parcel Service — Stock in the shipping behemoth fell nearly 5% after missing on second-quarter revenue. UPS notched an adjusted $2.54 per share on $22.1 billion in revenue, while analysts polled by Refinitiv expected $2.50 per share and $23.1 billion. UPS also lowered forward guidance for the third-quarter.
Lucid Group — Shares of the electric automaker slid less than 1% after Lucid reported a wider than expected loss for the second quarter. The company had an adjusted loss of 42 cents per share on $151 million of revenue. Analysts surveyed by Refinitiv had penciled in a loss of 33 cents per share on $175 million of revenue. Lucid said it was still on track to manufacture more than 10,000 vehicles this year.
Palantir Technologies — Palantir Technologies slid 3.4% after the data analytics company reported its second-quarter results. Palantir reported earnings of 5 cents per share on revenue of $533 million, which was in line with expectations from analysts polled by Refinitiv.
Chegg — Chegg shares surged more than 20% after topping second-quarter revenue expectations and outlining plans to integrate AI-focused strategies. The educational technology company posted revenues of $183 million, ahead of the $177 million expected by analysts, per Refinitiv. Earnings came shy of the 29 cents expected per share at 28 cents.
Hims & Hers Health — The telehealth stock added 17% on better-than-expected quarterly results. The company reported an adjusted quarterly loss of 3 cents per share on $208 million in revenue, while analysts polled by Refinitiv forecasted 5 cents and $205 million. Hims also raised forward guidance for the third quarter to a range of $217 million to $222 million.
Beyond Meat — The plant-based meat company fell more than 14% after missing on second-quarter revenue, citing weak U.S. demand. Beyond Meat reported an adjusted loss of 83 cents per share on $102.1 million in revenue, while Refinitiv forecasted 86 cents and $108.4 million.
Paramount Global — The media conglomerate’s shares climbed more than 2% in premarket trading after the company reported a quarterly earnings and revenue beat. Paramount said its streaming segment continued to grow, with about 61 million subscribers by the end of the quarter. Subscription revenue grew more than 47% to $1.22 billion. The firm also agreed to sell book publisher Simon & Schuster to KKR for $1.62 billion.
— CNBC’s Yun Li, Samantha Subin, Sarah Min, Pia Singh and Jesse Pound contributed reporting. More

China is planning to restrict businesses’ use of facial recognition technology in favor of non-biometric methods, according to the Cyberspace Administration.
If facial recognition is used, the proposed rules encourage use of national systems.
Airports, hotels, stations, banks, stadiums, exhibition halls and other business establishments shall not use facial recognition to verify personal identity, unless required by law, the draft rules said.
The draft is open for public comment until Sept. 7.

Passengers swipe ID cards to exit Fuzhou South Railway Station on Dec. 16, 2021. The process doesn’t require passengers to remove masks for facial recognition.
China News Service | China News Service | Getty Images

BEIJING — China is planning to restrict businesses’ use of facial recognition technology in favor of non-biometric personal identification methods, according to draft rules from the Cyberspace Administration released Tuesday.
The proposed policy requires individual consent, and a specific purpose, for using facial recognition.

“If there are non-biometric verification technology for achieving a similar purpose or business requirements, those non-biometric verification methods should be preferred,” the draft said in Chinese, translated by CNBC.
However, individual consent isn’t required for certain administrative situations, which the draft did not specify. If facial recognition is used, the proposed rules encourage use of national systems.
Installation of image collection and personal identification equipment in public places should be for the purpose of maintaining public safety, the draft rules said, noting clear signage is required.

How facial recognition is being tested

Businesses in China have experimented with using facial recognition for payment at convenience stores.
Some apartment compounds have installed facial recognition systems to allow tenants to enter by just scanning their faces. Some subway turnstiles in Beijing have installed what appear to be facial recognition scanners, but they remain covered up.
At high-speed train stations, Chinese ID holders can simply swipe their ticket-linked ID cards to enter the train station and platform — sometimes with the assistance of facial recognition.

Where the tech may be restricted

Airports, hotels, stations, banks, stadiums, exhibition halls and other business establishments should not use facial recognition to verify personal identity, unless required by law, the Cyberspace Administration of China said in its proposed rules.
The draft did not specify the law’s requirements, but said businesses should not require people to use facial recognition to receive better services.

Building management cannot use facial recognition as the only way for people to enter or exit, the draft said, noting if individuals don’t agree to facial recognition, management should provide other “reasonable and convenient” methods.
Hotel rooms, public bathrooms, changing rooms and bathrooms must not install equipment for collecting images or personal information, the proposed rules said.
The draft is open for public comment until Sept. 7.
Last week, China’s increasingly powerful cybersecurity regulator released draft rules for restricting minors’ phone screen time and boosting personal data protection requirements. The proposed rules are open to public comment. More

Beyond Meat’s Cookout Classic value pack.
Beyond Meat

Check out the companies making headlines in after-hours trading.
Chegg — Shares soared more than 25% after the educational tech company posted quarterly results. Chegg notched second-quarter revenue of $183 million, while analysts polled by Refinitiv had expected $177 million.

Hims & Hers Health — Stock in the telehealth company climbed 16% after an earnings beat. Hims & Hers posted a second-quarter loss of 3 cents per share on revenue of $208 million. Analysts polled by Refinitiv called for a 5 cent loss per share and revenue of $205 million. The company also posted rosy guidance on revenue for the third quarter, giving a range of $217 million to $222 million, while analysts estimated $214 million.
Paramount Global — The media conglomerate added almost 4% in extended trading hours after posting an earnings and revenue beat. The company earned an adjusted 10 cents per share and $7.62 billion in revenue in the second quarter, while analysts polled by Refinitiv forecast flat EPS and $7.43 billion in revenue.
Lucid — Stock in the electric vehicle maker climbed roughly 3%. In the second quarter, the company reported $150.9 million in revenue against analysts’ estimate of $175 million, per Refinitiv. Still, the company’s $3 billion capital raise from May should assuage capital concerns for another year, executives said.
International Flavors & Fragrances — Shares slipped more than 19%. The company reported $2.9 billion in revenue in the second quarter. Analysts polled by Refinitiv called for $3.07 billion in revenue.
Celanese — The materials stock fell nearly 3% after missing on both the top and bottom line in the second quarter. Celanese reported adjusted earnings of $2.17 per share and $2.8 billion in revenue, against a FactSet forecast of $2.49 per share in earnings and $2.55 billion in revenue.
Beyond Meat — The plant-based meat supplier slumped more than 8% after reporting a second-quarter revenue miss due to lower U.S. demand. The company noted an adjusted loss of 83 cents per share and $102.1 million in revenue, while analysts polled by Refinitiv expected a loss of 86 cents and revenue of $108.4 million. More

Elon Musk is no fan of the Federal Reserve. At least a dozen times over the past year the owner of X (a firm until recently known as Twitter) has savaged America’s central bank for raising interest rates. Last December, for instance, he tweeted that its hikes might go down as the “most damaging ever”. But Mr Musk’s disdain for the Fed is not mirrored by the Fed’s attitude towards X. On the contrary, the central bank’s researchers rather like the website, treating it as a compelling barometer of the economy.This puts X in a peculiar position. Its value as a business remains dubious, which is why Mr Musk has been scrambling to remake it, with changes including (but not limited to) the company’s name. But its value to the economy is a different story altogether. The firm can serve as a timely indicator of both fundamental trends and market sentiment.There is a large, growing literature on how to decode economic signals from social-media sites, ranging from Facebook to Reddit. Yet even in the sea of online information and commentary, Mr Musk’s stands out. Others simply cannot match its volume and frequency. By 2013 Twitter users were already producing more than 5,700 posts in a second. By 2016 Instagram’s larger user base was producing only 1,000. Three papers recently published by the Fed explore the platform’s economic contributions. The first is as a predictor of markets. Sentiment gleaned from tweets seems to be rather good at presaging short-term movements in both share prices and bond yields. In one paper a group of economists including Francisco Vazquez-Grande sifted 4.4m finance-related tweets posted between 2007 and April 2023 to create a Twitter Financial Sentiment Index. They used a machine-learning model to measure each tweet’s sentiments: a message about stocks going to the Moon would be positive; Mr Musk’s quips about the Fed would presumably count as negative.The index, they find, correlates tightly with corporate-bond spreads (the difference between yields on corporate and government bonds, which usually widens as investors turn pessimistic). More than merely shadowing financial movements, posts can even foreshadow them. The overnight index before the stockmarket’s open dovetails with the coming day’s equity returns. A separate paper by Clara Vega and colleagues finds that the website’s sentiment also closely tracks Treasury yields. Indeed, the correlation is stronger with tweets than with sentiment measures gleaned from the Fed’s own official communications.A second use of tweets is as a gauge of economic conditions. Posts about job losses in particular seem to offer timely information about the labour market. Tomaz Cajner and co-authors construct a separate machine-learning model to digest posts with keywords such as “lost job” or “pink slip”. Their measure of job losses mirrors official data on employment levels from 2015 to 2023. This correlation is potentially powerful because most government statistics appear with a lag, whereas the tweets are available immediately. Twitter, for example, would have provided a ten-day advantage in detecting the collapse in employment at the height of the covid-19 pandemic in 2020.The Fed papers also see a third use for tweets: as a bellwether of sorts for monetary policy. Ms Vega and colleagues find that the social-media site fares better than changes in bond yields in predicting monetary-policy decisions on the day of their announcement. The Twitter sentiment index, meanwhile, is good at anticipating shocks from tighter policy such as rate increases. Tweets tend to turn sour just ahead of these moves. (That the website wastes no time in turning bitter will come as little surprise to regular users.)No one is about to ascribe powers of causation to X. The social-media posts instead reflect broader feelings that are already coursing through financial markets. Still, the cornucopia of tweets does provide an additional way of measuring such sentiment, which, if proved valid over time, would be highly valuable.Beyond the Fed, some analysts are also finding other potential applications. Agustín Indaco of Carnegie Mellon University in Qatar calculates that the volume of tweeting alone can account for about three-quarters of cross-country variation in GDP. Rather like satellite images of night lights, tweets may therefore be a way of observing economic health without relying so heavily on tardy official statistics. This metric may work best in poorer countries, where heavy posting on social media would be a proxy for the state of telecommunications and use of smartphones.Marking the spotIf X is so economically useful, why is it not more lucrative? The various papers do not venture so far as to examine the gulf between Twitter’s struggle for profitability and its evident utility—not just as an economic tool but as a platform for sharing information, opinions, jokes and more. Mr Musk was onto something when he described the firm as a “common digital town square”. The problem in economic terms is that a town square falls into the category of public goods such as parks and clean water. Although public goods can be privately owned, it is notoriously hard to extract profits from them given that, by definition, it is difficult to charge people for all the benefits they confer.Mr Musk is doing his darnedest to shift the economic equation at X by giving additional privileges to users who pay $8 a month for the site’s blue-check verification. Tweets by users who cough up now receive extra promotion, among other benefits, showing up more often in the feeds of other people on the website. That, however, sets up a trade-off. Paid-for tweets may start crowding out better-informed posts from users who would rather not subscribe to the website. Over time, a website that prioritises payment over credibility will function less well as a town square and, by extension, as an economic indicator. The gain to X’s finances would be a loss to the Fed’s economists. ■ More

Model Y cars are pictured during the opening ceremony of the new Tesla Gigafactory for electric cars in Gruenheide, Germany, March 22, 2022.
Patrick Pleu | Pool | via Reuters

Check out the companies making headlines in midday trading.
Tesla — The electric vehicle stock dropped nearly 3% after announcing the departure of its chief financial officer, Zach Kirkhorn. Tesla said it appointed Vaibhav Taneja to the position. Taneja will hold the role concurrently with his position as chief accounting officer.

BioNTech — U.S.-traded shares of the biotech firm slipped 9.1% after BioNTech reported disappointing revenue in the second quarter. The company earned 168 million euros in revenue, while analysts polled by Refinitiv expected 672 million euros.
Tyson Foods — Shares fell about 6% after a fiscal third-quarter earnings miss. The company reported adjusted earnings of 15 cents per share on $13.14 billion in revenue, while analysts polled by Refinitiv forecast earnings of 26 cents per share and $13.59 billion in revenue.
Berkshire Hathaway — Shares of Warren Buffett’s conglomerate rallied to a record high as investors cheered a strong quarter as well as its near-record cash hoard. Class A shares climbed more than 3% to hit an all-time high of $551,387 on an intraday basis, exceeding the conglomerate’s previous high from March 2022. Class B shares of Warren Buffett’s conglomerate rose about 3.4%, putting them on track to close at a record high.
Viatris — The pharmaceutical company added 6.6% after an earnings beat. The company reported adjusted net income and revenue that beat expectations for the second quarter. Viatris reported revenue of $3.92 billion, while analysts polled by StreetAccount called for $3.86 billion.
DaVita — The kidney dialysis services stock added 5.3% after UBS upgraded shares to buy from neutral Monday. Analyst Andrew Mok cited stronger patient growth as a driver.

Sovos Brands, Campbell Soup — Pasta sauce maker Sovos Brands rallied 25% following news that the Rao’s parent would be acquired by Campbell Soup. Campbell fell 1.3% to trade at its lowest share price in more than a year.
PayPal — PayPal stock climbed 2% after launching its first stablecoin, PayPal USD, backed by the U.S. dollar Monday. The move adds to PayPal’s broader offering of cryptocurrency services and is the first move into stablecoins from a major U.S. financial firm.
Palantir Technologies — Shares slipped nearly 5% ahead of second-quarter results. Analysts polled by FactSet are forecasting an adjusted 5 cents per share on $534.2 million in sales.
Cinemark — The movie theater stock added 1.7% following an upgrade from Morgan Stanley earlier Monday. Analyst Benjamin Swinburne said the success of blockbusters “Barbie” and “Oppenheimer” could help lift the stock as much as 35%.
— CNBC’s Yun Li, Alex Harring and Samantha Subin contributed reporting. More