Finance

U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.
“The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we’re not there yet,” top Societe Generale economist Kokou Agbo-Bloua said.
Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, said that a recession had been “postponed rather than canceled.”

U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve on June 14, 2023 in Washington, DC.
Drew Angerer | Getty Images News | Getty Images

Central banks are at “the end of the beginning” in their battle against inflation, as several factors keep core prices persistently high, according to top Societe Generale economist Kokou Agbo-Bloua.
Markets are eagerly awaiting key inflation prints from the U.S. later this week, with the core annual consumer price index (CPI) — which excludes volatile food and energy prices — remaining persistently high to date, despite the headline figure gradually edging closer to the Federal Reserve’s 2% target.

The persistence of labor market tightness and the apparent resilience of the economy means the market is pricing around a more-than 90% chance that the Fed will hike interest rates to a range of between 5.25% and 5.5% at its meeting later this month, according to CME Group’s FedWatch tool.
U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.
In assessing the current state of global policymakers’ efforts to tame inflation, Agbo-Bloua quoted former British Prime Minister Winston Churchill’s remarks in a 1942 speech: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

“The number one ‘original sin,’ so to speak, is that governments have spent a huge amount of money to maintain the economy that was put in hibernation to save human lives, so we’re talking roughly 10-15% of GDP,” Agbo-Bloua, global head of economics, cross-asset and quant research at Societe Generale, told CNBC.
“The second point — obviously you had the war in Ukraine, you had the supply chain disruptions — but then you also had this massive buildup in excess savings plus ‘greedflation,’ so companies’ ability to raise prices by more than is warranted, and this is why we see profit margins at record levels over the past 10 years.”

Companies have developed a “natural immunity” against interest rates, Agbo-Bloua argued, since they have been able to refinance their balance sheets and pass higher input prices on to consumers, who are now expecting higher prices for goods and services.
“Last but not least, the labor market is super tight and you have lower labor productivity growth which now is pushing unit labor costs and you get this negative spiral of wage prices,” he said.
“The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we’re not there yet.”
The impact of monetary policy tightening often lags the real economy by around three to five quarters, Agbo-Bloua said. But he highlighted that the excess savings built up during the pandemic created an additional buffer for consumers and households, while companies were able to repair balance sheets. He suggested that this has helped to keep the labor market resilient, which will likely extend this lag time.

Inducing a recession

In order to maintain credibility, Agbo-Bloua therefore said central banks — and in particular the Fed — will need to keep raising interest rates until they induce a recession.
“We think that the recession or slowdown should occur in the U.S. in Q1 of next year because we think the cumulative tightening is ultimately going to have its effects, it’s not disappearing,” he said.
“Then in Europe, we don’t see a recession in the euro area, because we see demand 2 to 3 percentage points above supply, and therefore we see more of a slowdown but not recession.”
In terms of where the recession in the U.S. will begin to take hold, he suggested it will most likely “creep into corporate profit margins” that are still lingering near record levels, through the “wage growth phenomenon that is essentially going to eat into earnings.”
“The second point is that consumer spending patterns will also slow down, so we think it is a combination of all of these factors that should eventually drive a slowdown,” he added.
“Then again, if you look at the current path of interest rates, it seems like we might see more tightening before this is likely to occur.”
‘Recession postponed, but not canceled’
This sentiment was echoed by Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, who said while economies had a better start to 2023 than expected and have so far mostly avoided a technical recession, this is more a case of the recession being “postponed rather than canceled.”
“The tightening of credit conditions and the slowdown in lending suggest that we’ve so far managed to delay the impending recession as opposed to averting it altogether,” Thooft said in the asset manager’s mid-year outlook on Friday.
“However, whether a recession actually takes [place] is far less relevant than how long we could be stuck in a period of below-trend GDP growth.”
He suggested that with global growth expected to settle at around 2.5% this year and next, below the 3% threshold that would herald a global recession if breached.
“If forecasts are correct, it means that global GDP growth would come in 15.2% below trend, a scenario last seen during the pandemic in 2020 and, before that, in the 1940s.” More

American summers, known for baseball games, roasted marshmallows and county fairs, have acquired new traditions: pools missing lifeguards, camps in need of counsellors and restaurants desperate for waiters. These shortages matter for more than just the businesses concerned. Over a year into the Federal Reserve’s fight against inflation, the state of America’s labour market has taken on extraordinary importance. Its health is a crucial indicator of whether the battle is being won or lost. Initially the covid-19 pandemic was to blame for many of the workforce gaps, since people were less inclined to venture out for employment. Now, as recent data releases make clear, the economy itself is the source of the strains. Consider a wide range of measures. All point to a slight softening in the labour market over the past year. Yet all are still, to a remarkable degree, resilient by historical standards. For every unemployed person in America, there are 1.6 jobs available, a ratio that is down a tad since mid-2022, but well in excess of the pre-pandemic norm. Since February 2020—before covid hit America—the economy has added nearly 4m jobs, putting employment above its long-term trend line. There do not appear to be many workers left on the sidelines: some 84% of prime-age workers (aged between 25 and 54) now participate in the labour force, the most since 2002 and just a percentage point off an all-time high.From the perspective of workers, such vigour is welcome. Wage growth has been especially fast for service-sector jobs that require less education, such as construction. That, in turn, has helped to narrow some of the income inequality which bedevils America. Less well-off parts of the population tend to benefit disproportionately from a tight labour market. The unemployment rate for black Americans hit 4.7% in April, a record low.Will these gains survive when labour shortages feed through to prices? Hourly earnings in June rose at an annualised pace of 4.4%, consistent with an inflation rate roughly twice the Federal Reserve’s target of 2%. Alternative measures suggest upward pressure may be even greater. A tracker by the Fed’s Atlanta branch points to annualised wage growth of around 6% this year.The continued labour-market strength all but guarantees the Fed will resume lifting interest rates at its meeting in late July, having refrained from doing so in June. Markets now assign a 92% probability to a quarter-point rate rise; just a month ago it was seen as a coin-flip. In March, when a handful of lenders including Silicon Valley Bank collapsed, many feared the financial turmoil would ripple through the economy. But in a speech on July 6th, Lorie Logan, head of the Fed’s Dallas branch, argued that a stronger-than-expected employment backdrop called for more restrictive policy. “Lay-offs remain low,” she said. “There is no indication of an abrupt deterioration in labour-market conditions.”Optimists hope that the labour market can carry on much as it has, cooling down but avoiding a sharp rise in joblessness. They point to several indicators. There were, for example, about 9.8m open jobs in May, down by 1.6m compared with a year earlier. In an ideal scenario employers would cancel help-wanted ads but not push workers onto the dole. This kind of reduction in staffing demand could, in theory, lead to a gradual slowdown in wage rises without reversing the gains of the past few years. To some extent, that is what is happening. Although still rapid, the growth in hourly earnings is a percentage point lower than a year ago.The pessimistic retort is that the cool-down has a way to go, and the economy does not move in tidy increments. The Fed has raised interest rates aggressively over the past year, and some of the impact is yet to be felt. At the same time, so long as the labour market remains tight and inflation stubbornly high, the central bank has little choice but to add to that tightening. Not much has broken so far. But the stresses are building. ■ More

Investors may want to stick with what’s working in the market.
ETF experts Todd Sohn and VettaFi’s Dave Nadig believe a second winning half is in store for technology and artificial intelligence plays.

Sohn, Strategas’ ETF and technical strategist, particularly likes Roundhill Generative AI and Technology ETF (CHAT).
“What I like about [CHAT] is that it’s actively managed,” Sohn told CNBC’s “ETF Edge” this week. “This would be my preferred route if you want to get that AI exposure and see how real the demand is.”
CHAT is up more than 10% so far this year.
Sohn also recommends Global X Robotics & Artificial Intelligence ETF (BOTZ) for those interested in introducing more industrials into their portfolio. BOTZ is up more than 37% year to date.
“I like [BOTZ] if you want to get away from tech because you already have tech exposure in your portfolio. The industrials are beneficiaries too,” he said.

Nadig, VettaFi’s financial futurist, also sees benefits from AI exposure. But, he suggested the upside has limits.
“AI is going to have a long-term and significant positive effect on GDP … [But] it’s very difficult to pick public companies that are going to be the outsized beneficiaries of that,” said Nadig. “We run into this all the time when we have cool new technology … and we end up buying Google and Microsoft and Apple and Nvidia, which we all already probably own too much of.”
He predicted industrials, robotics and automation are positioned for the biggest gains.
Both Nadig and Sohn also highlighted ETFs for those who believe the market is going to broaden out to include sectors beyond technology.
Sohn recommended the Invesco S&P 500 Equal Weight ETF (RSP) and the Vanguard Extended Market Index Fund (VXF), while Nadig suggested the JPMorgan Equity Premium Income ETF (JEPI). All three are generating positive returns this year.
“Playing a little bit defensive the rest of this year as opposed to trying to chase tech is probably the way to go,” said Nadig. “[JEPI] has been a huge flow gatherer; it’s delivered for investors … Something like extended market or equal weight exposure is a great way to try to get a leg back in if you’ve missed that [tech] rally so far this year.”

Disclaimer More

A Rivian logo on an Amazon.com delivery electric van photographed in Chicago, Illinois, on July 21, 2022.
Jamie Kelter Davis | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Alibaba — U.S. shares of the Chinese company added 8.8% in afternoon trading. Earlier on Friday, Reuters first reported that Alibaba’s affiliate company, Ant Group, would pay a $984 million fine to Chinese regulators, which would end several years of dispute. Alibaba also launched an AI tool that can generate images from text prompts.

Rivian Automotive — The electric vehicle maker popped more than 16% after Wedbush raised its price target on shares to $30 from $25, citing an improved outlook. The new target price implies shares rallying almost 39% from Thursday’s close.
Levi Strauss — Shares of the jeans maker slumped 6.7% after the company cut its full-year profit forecast on Thursday. Levi Strauss now expects an adjusted $1.10 to $1.20 per share compared to a previous range of $1.30 to $1.40.
First Solar — The solar company climbed 4.6% after receiving a five-year revolving line of credit as well as a guarantee for a $1 billion facility. JPMorgan will serve as the lead arranger for First Solar.
TG Therapeutics — The pharmaceutical company soared more than 10% after Cantor Fitzgerald reiterated an overweight rating on the stock. The firm said it sees sales of TG Therapeutics’ treatment for relapsing forms of multiple sclerosis, Briumvi, to come in above expectations for the second quarter.
Biogen — Shares slipped more than 2% even after the Food and Drug Administration approved its Alzheimer’s treatment, which was developed with Eisai.

DraftKings — The sports betting platform added 5% in midday trading. A day earlier, Jefferies included the stock as one of the stocks the firm is forecasting is set for gains as the company turns the profit corner.
— CNBC’s Hakyung Kim and contributed reporting More

The 13th Annual CNBC Delivering Alpha Investor Summit—New York City, September 28, 2023.  Register below

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, July 6, 2023.
Brendan McDermid | Reuters

A sweeping change sought by the Securities and Exchange Commission would take fund managers’ culpability a step further than current standards if they don’t effectuate a greater standard of care.  
The rule change involves lowering the bar for indemnification of fund managers to “ordinary negligence” from “gross negligence.” The latter, current standard, allows limited partners to sue general partners only for recklessness or disregard to obvious risk. But if that were changed to “ordinary negligence,” then LPs may be able to sue for simpler mistakes, making it easier for them to bring claims against GPs. 

“It would monumentally change the relationship between fund managers and investors,” said Marc Elovitz, partner and chair of the regulatory practice at Schulte Roth & Zabel, in an interview for the Delivering Alpha Newsletter. 
“The ability for fund managers to take risks and to be protected for their simple day to day conduct is fundamental to having an investment strategy that has potentially higher rewards, ” said Schulte’s Elovitz, whose law firm represents investment funds. “If you’re going to have funds that offer potentially higher returns, there are going to be risks associated with that. And investment managers are going to have a hard time protecting themselves from being on the hook for those risks.”  
Even the Institutional Limited Partners Association, which has been a broad proponent of the rule changes, has raised concerns about the adverse effects stemming from a broad change in this standard. 
“ILPA believes that an umbrella application of the ordinary negligence standard would have the unintended consequence of impacting a [general partner’s] risk tolerance and potentially damaging returns produced in private funds,” the group said in a recent analysis of the proposal. 
However, ILPA said that, “an ordinary negligence standard as applied to breach of contract would assure meaningful progress.” 

SEC Chair Gary Gensler has said in the past that this proposal prohibits private fund advisors from “engaging in a number of activities that are contrary to the public interest and the protection of investors,” including indemnification or limitation of its liability for certain activities. The SEC did not respond to our request to comment for this newsletter. 
The Private Fund Advisers (PFA) rule, which was initially proposed in February 2022, covers a lot of ground, including quarterly fee and expense reporting and preferential treatment of certain LPs over others. The indemnity change is one piece of the reform. In a recent memo to clients, several law firms have said they expect a final vote on the rule will take place this year. 
If it passes in its current form, critics say the reforms would most certainly affect the risk tolerance among private funds, who would need to tread much more carefully in making investment decisions. 
It’s kind of like taking your teenager to the amusement park but only riding the merry-go-round instead of the rollercoasters. And for many, that may not be worth the price of admission.  More

China’s central bank hit Alibaba affiliate Ant Group with a 7.12 billion yuan fine ($985 million) on Friday.
Chinese regulators forced Ant Group to restructure its business after cancelling its blockbuster initial public offering in 2020.
Recent signs emerged that Ant has been on the right side of regulators. In January, the company received approval to expand its consumer finance business.

Regulatory scrutiny forced Hangzhou-based Ant Group to abruptly suspend its massive IPO plans in 2020.
Vcg | Visual China Group | Getty Images

China’s central bank hit Alibaba affiliate Ant Group with a 7.12 billion yuan fine ($985 million) on Friday.
The People’s Bank of China, which issued the fine, said that the penalty was in response to violations of various laws and regulations, including around corporate governance, consumer protection and anti-money laundering requirements.

The fine is one of the biggest against a Chinese internet firm and looks to conclude the years-long scrutiny and restructuring of Ant Group, after its blockbuster $37 billion initial public offering was scrapped in late 2020.
Since that moment, which sparked an intense two-year crackdown from Beijing on China’s domestic tech sector, Ant has been forced to overhaul its business. This included turning itself into a financial holding company under the purview of the PBOC.
Alibaba owns around a 33% stake in Ant Group, and Chinese billionaire Jack Ma is the founder of both firms.
Authorities cancelled Ant’s listing over regulatory concerns in 2020.
Recent signs have emerged that Ant has been on the right side of regulators. In January, the company received approval to expand its consumer finance business.

The fine and potential resolution to Ant’s regulatory woes come as China looks to inject life into private industry amid a difficult domestic economic picture.
In its Friday statement, the PBOC said that most of the outstanding problems in the financial business of so-called platform companies, such as Ant Group, have been rectified. The central bank’s job is now “normalized supervision,” suggesting the strict measures like fines may be calming down.
Ant Group said in a statement on Friday that it will “comply with the terms of the penalty in all earnestness and sincerity and continue to further enhance our compliance governance.”
A possible listing for Ant Group is likely now in the spotlight, although the company’s valuation has dropped significantly over the last two and a half years.

Crackdown on Jack Ma’s empire More

The Levi Strauss & Co. label is seen on jeans in a store at the Woodbury Common Premium Outlets in Central Valley, New York, U.S., February 15, 2022. 
Andrew Kelly | Reuters

Check out the companies making the biggest moves before the bell:
Levi Strauss — The apparel retailer fell 7.7% after slashing its profit outlook for the year postmarket Thursday. Levi now expects adjusted earnings per share of $1.10 to $1.20 for the year, down from $1.30 to $1.40 previously. Analysts had expected adjusted earnings per share of $1.29, according to Refinitiv.

Biogen — Trading of the biotech stock resumed before the market opened Friday, after being halted Thursday on news that the Food and Drug Administration approved Biogen and Esai’s Alzheimer’s treatment drug Lequembi. Medicare also announced it will cover payments for the treatment. Shares were up 0.3%.
Alibaba — U.S. listed shares of the Chinese ecommerce retailer gained about 3% before the opening bell. On Friday, Reuters reported its affiliate Ant Group faces a $1.1 billion fine by Chinese authorities, which could clear the way for Ant to get necessary licenses and perhaps eventually go public. Also Friday, Alibaba launched its A.I. tool, Tongyi Wanxiang.
First Solar – Shares added 1.7% after the solar company secured a five-year revolving credit and guarantee facility worth $1 billion. JPMorgan Chase will act as the lead arranger.
Bloom Energy — Bloom Energy shares rose 2% premarket. RBC Capital Markets initiated coverage of the electric and hydrogen power company with an outperform rating, saying the stock could jump more than 50% on strong demand for fuel cells.
Costco — Shares of the club retailer were down 0.7% postmarket Thursday after Costco announced $22.86 billion in sales for the retail month of June, up just 0.4% year over year. Comparable sales in the U.S. were down 2.5% year over year.

Tesla — Shares were down fractionally following reports that Tesla announced a new cash rebate in China and laid off some workers in Shanghai.
Meta — The Facebook parent added 0.3% one day after saying it surpassed 30 million users on its Twitter competitor, Threads, which launched Wednesday. Following thedebut, Twitter sent a letter to Meta accusing it “systemic’ and “unlawful misappropriation” of trade secrets
—CNBC’s Jesse Pound and Sarah Min contributed reporting. More

Southeast Asia’s IPO market is growing despite global headwinds, Deloitte said in a new report.
In the last six months, the number of IPOs in Southeast Asia rose 16% while IPO proceeds increased 5%, according to Deloitte data.
“Southeast Asia’s positive growth outlook is making the region an investor favourite as there continues to be an influx of foreign direct investment due to the region reopening its doors, the restoration of the tourism industry, and the booming domestic demand,” the report said.

JAKARTA, INDONESIA – JANUARY 2: Citizens are seen crossing the street during rush hour in Jakarta, Indonesia on January 2, 2023.
Firdaus Wajidi | Anadolu Agency | Getty Images

Southeast Asia’s initial public offering market is showing promising signs despite a global IPO slowdown in the first half of 2023, according to a new Deloitte report.
In the last six months, Southeast Asia’s market saw 85 IPOs raising $3.3 billion in proceeds, versus the 73 IPOs in the same period last year which raised $3.1 billion. That’s a 16% increase in the number of IPOs and a 5% increase in proceeds for the first half of 2023.

“Southeast Asia’s positive growth outlook is making the region an investor favourite as there continues to be an influx of foreign direct investment due to the region reopening its doors, the restoration of the tourism industry, and the booming domestic demand,” the report said.
“Together, these factors have contributed to the positive economic growth in the region despite the global economic uncertainties.”

There remains a sea of exciting opportunities in the regional capital markets and a healthy deal flow for investors to explore and tap on.

The uplift was largely attributed to three IPOs in Indonesia that raised more than $500 million each, as compared with only one blockbuster IPO — GoTo, the merged entity of Gojek and Tokopedia — at $1 billion in the same period last year.
Meanwhile, the tech-heavy Nasdaq stateside has yet to see a notable venture-backed tech IPO since software vendor HashiCorp’s December 2021 debut.
There is a global IPO slowdown that persisted through the first half of 2023, with 5% fewer IPOs as compared to the same time last year, an EY report revealed. Proceeds plunged 36% year-on-year.

Indonesia’s rising star

Indonesia raised 70% of the total IPO proceeds in Southeast Asia for the first half of 2023.
The IPO market of the world’s fourth most populated nation was highlighted by three listings: nickel company PT Trimegah Bangun Persada Tbk, minerals and EV battery materials firm PT Merdeka Battery Materials Tbk and geothermal power plant operator PT Pertamina Geothermal Energy Tbk.
Indonesia’s President Joko Widodo has introduced measures to position the country as a global electric vehicle supply chain hub, including signing deals with Australia to collaborate on key EV production minerals lithium and nickel.

It still remains to be seen how Southeast Asia will ride out the storm in its economic recovery.

“Indonesia holds the world’s largest nickel reserves and the recent IPO of Harita Nickel (PT Trimegah Bangun Persada Tbk) is good gauge of the interest of both local and international investors,” said Deloitte.
Indonesia “looks set to have its best year ever in terms of listing proceeds with 44 IPOs in 2023 H1,” said Deloitte.
Thailand and Malaysia follow with 18 and 16 listings, respectively, in the first half of 2023.
“With each country’s pro-growth policies, stable macroeconomics and healthy demographics of Southeast Asia, coupled with the growing impact of tech-enabled entrepreneurs on investment, and strong trading relationships with China, there remains a sea of exciting opportunities in the regional capital markets and a healthy deal flow for investors to explore and tap on,” said Deloitte.

Deloitte said, however, that it remains “cautiously optimistic about the region’s prospects” in the second half of the year.
“It still remains to be seen how Southeast Asia will ride out the storm in its economic recovery,” said Deloitte. The firm said uncertainties such as interest rate hikes, troubles in the banking sector as well as inflation continue to rock the economy.
The International Monetary Fund expects Southeast Asia’s growth to slow from 5.7% in 2022 to 4.6% in 2023. The organization cited a slight moderation in domestic demand for Malaysia and Thailand, prices of commodities easing in Indonesia and Malaysia as well as weaker external demand from U.S. and Europe. More