Finance

Source: Finance – cnbc.com More

A Tesla car dealership is seen on May 31, 2023 in Austin, Texas.
Brandon Bell | Getty Images

Check out the companies making the biggest moves in premarket trading:
Tesla – Shares dropped more than 3% before the bell after Morgan Stanley downgraded the electric vehicle maker to equal weight, citing its steep valuation following the recent AI-fueled rally.

Darden Restaurants — The company behind Olive Garden and other restaurant chains slid nearly 4% in the premarket. Darden beat expectations of analysts polled by Refinitiv for earnings in the fiscal fourth quarter, while revenue came in line with expectations. Its full-year earnings guidance placed the consensus estimate of analysts polled by FactSet on the higher end of the company’s range. Meanwhile, Darden’s revenue guidance was higher than Wall Street forecasted. The company also increased its quarterly dividend and announced Chairman Eugene Lee would retire.
Overstock.com — Shares moved nearly 10% higher in premarket trading after the e-commerce discounter won the auction for Bed Bath & Beyond’s digital assets and intellectual property, including the brand’s name. Overstock will pay $21.5 million, the floor price set at the auction.
NRG Energy — The energy company added 3% following a Wall Street Journal report that activist investor Elliott Investment Management is seeking to remove CEO Mauricio Gutierrez and other top executives.
Anheuser-Busch Inbev — The beer giant gained 2% after being upgraded by Deutsche Bank to buy from hold. The Wall Street firm said the stock is pricing in only downside risk without the expectation for recovery. Consumers could also inevitably return to Bud Light after fleeing over its collaboration with transgender influencer Dylan Mulvaney.
Alcoa — Shares of the aluminum company slumped 3.5% in premarket trading after Morgan Stanley downgraded Alcoa to underweight from equal weight. The investment firm said in a note to clients that Alcoa is at risk of missing estimates on a key profit metric in the coming quarters.

KB Home — The homebuilder fell nearly 2% despite posting a solid earnings beat after the bell Wednesday. Second-quarter earnings per share came in at $1.94, topping the $1.33 expected from analysts polled by Refinitiv. Revenue was $1.77 billion, versus the $1.42 billion expected. The stock has run up more than 60% this year.
Spirit Aerosystems — The Boeing supplier sank about 9% after the company suspended production in its factory in Kansas following an announcement that workers will strike, starting Saturday. Boeing shares also dropped 3.4%. Spirit Aerosystems makes Boeing’s 737 Max fuselage, as well as the forward section of many of its other aircrafts.
Accenture — Shares slid nearly 4% despite an earnings and revenue beat for the consulting company’s fiscal third quarter. However, Accenture also said it expects revenue for fiscal 2023 to be in the 8% to 9% range in local currency, compared to 8% to 10% previously.
— CNBC’s Samantha Subin, Jesse Pound and Alex Harring contributed reporting. More

Thursday’s 50 basis point hike surprised markets, which had priced in a smaller rise.
Policymakers are walking a tightrope as they attempt to tighten monetary policy sufficiently to quell inflationary pressures without triggering a full-scale mortgage crisis and recession.
Core inflation — which excludes volatile energy, food, alcohol and tobacco prices — was 7.1% year on year in May, up from 6.8% in April and the highest rate since March 1992.

A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.
Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England on Thursday surprised markets with a 50 basis point hike to interest rates, its 13th consecutive increase as policymakers grapple with persistently high inflation.
The Monetary Policy Committee voted 7-2 in favor of the half percentage point increase, which takes the bank’s base rate to 5%. The move defied market expectations, which had priced in around a 60% chance of a 25 basis point hike.

Sterling slipped against the dollar after the announcement while yields on U.K. government bonds — known as gilts — also retreated slightly. The yield on the 10-year gilt was down by around 4 basis points. Yields move inversely to prices.
Fresh data on Wednesday showed annual U.K. consumer price inflation was 8.7% in May, unchanged from the previous month, cementing market expectations that the MPC would opt for another hike. Economists also upped their expectations for further monetary tightening in the future.

Most worryingly for the central bank, core inflation — which excludes volatile energy, food, alcohol and tobacco prices — was 7.1% year on year in May, up from 6.8% in April and marking its highest rate since March 1992.
“There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand,” the MPC said in its summary Thursday.
“The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

Policymakers are walking a tightrope as they attempt to tighten monetary policy sufficiently to quell inflationary pressures without triggering a full-scale mortgage crisis and recession.

The MPC said that the high number of fixed-rate mortgages means that the full impact of the increase in the bank rate so far “will not be felt for some time.”
Since the end of 2021, the bank has hiked its main rate from 0.1% to 5%.
“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” Bank of England Governor Andrew Bailey said in a statement Thursday.
“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”
A ‘hawkish super-hike’
Although the market had partially priced in the larger increase, several analysts suggested that the size of the majority voting in favor of it implied a sense of urgency among MPC members.
Joseph Little, global chief strategist at HSBC Asset Management, said the “hawkish super-hike” comes at a critical juncture for the economy and signals policymakers’ desire to “get ahead of the curve.”
“The U.K. finds itself in the worst position of major western economies. A cost of living crisis, brought about by rising energy and food prices, has been amplified by structural labour shortages, and has now metastasised into ratcheting wages,” Little said.

“Inflation pressures show more persistency and more momentum than other western economies, and that forces the Bank into a hawkish corner. Today’s statement has increased concerns of a much-higher terminal policy rate, perhaps as high as 6%.”
Although all developed economies endured a similar post-Covid pandemic deluge of inflationary pressures, U.K. headline inflation is decelerating at a much slower rate, while the core component is significantly higher than all other G10 nations and still accelerating.
Huw Davies, investment manager at Jupiter Asset Management, said Thursday’s move from the MPC was “a tacit admission that they have been behind the curve in their hiking policy,” and the rate rise represents “an attempt to regain the initiative and their credibility.”
“The key problem is that U.K. real rates have consistently been negative despite the tightening cycle. It feels like the BOE will have to inflict more pain on U.K. households to achieve a return to a controlled level of inflation more in line with their inflation target,” Davies said. More

The quokka, an Australian marsupial about the size of a domestic cat, has full cheeks and a curved mouth that convey the impression—often to delighted tourists—that the critter is smiling. It has been dubbed the happiest animal on Earth. Yet these days it has competition from another species: the American stock investor. The s&p 500 has already risen by 14% this year. An increase of another 10% would take the index back to its all-time high, set in January last year. Excitement about artificial intelligence has lit a fire under companies seen as potential beneficiaries. Although climbing stock prices represent an impressive turnaround, they are not the most astonishing market shift. That award goes to the collapse in volatility. In the past 12 months the vix, an index that measures expected volatility in stock prices, using the cost of insuring against extreme moves, has declined by more than half, falling from around 30 to 13. The last time it was so depressed was in early 2020, before the disruption of covid-19, when concerns about stagnation were more common than worries about inflation. Considering that the vix is sometimes referred to as the “fear gauge”, its low level suggests a quokka-like placidity in the stockmarket.This outlook is all the more astonishing given the surfeit of things about which an investor could worry. There is, for instance, considerable uncertainty about the Federal Reserve’s next move, which would be a good reason for investors to want a little more protection. When the s&p 500 touched an earlier peak in 2021—a period of higher volatility—the federal funds rate sat at zero (it is now 5%) and ten-year Treasury yields at 1.5% (now 3.7%). Moreover, high rates may prompt something else to break. Recent ructions in American banking were hardly on the radar-screens of investors until days before Silicon Valley Bank and Signature Bank went bust. The failure of another lender, First Republic, came at the beginning of May. Today’s optimism makes it hard to remember that those troubles were so recent. Yet there is another species that looks rather less placid. If stock investors are the quokkas of the financial kingdom, bond investors are the porcupines: wary and naturally defensive. The decline of the vix stands in stark contrast to its equivalent in the Treasury market. Although the move index, which tracks the price of insuring against bond-market volatility, has declined from a 13-year high in March, it is still twice as high as it was pre-covid. Bond investors remain far from convinced that the good times have returned. The divergence in sentiment between the quokkas and porcupines is very different from the early stages of the pandemic, when stocks were extremely volatile and government bonds far less so. Back then, investors were preoccupied with covid’s economic fallout, the development and deployment of vaccines, and the pace of economic reopening. Then inflation picked up and the Fed’s actions became the overwhelming focus. It might be tempting to observe the difference and judge that either the bond or stockmarket must be wrong. But that would not be quite right. If artificial intelligence emerges as a transformative force for the bottom line of major technology companies, but not for economywide growth, it would be a tremendous boon for investors in shares and mean little for government bonds.The problem is that such an outcome is far from assured—and investors are beginning to price stocks based on earnings that are unlikely to materialise any time soon. The price-to-earnings ratio of the s&p 500, based on expected earnings over the next 12 months, has climbed from below 16 late last year to 19 now. This is still below the highs set during the pandemic, when earnings expectations were smothered by lockdowns and restrictions, but is higher than at any other point in the past two decades.What the divergence in animal spirits does say is that investors in the stockmarket—mistakenly or not—have left behind concerns that preoccupied them just a couple of months ago. They have traded their manifold worries for an optimistic narrative about artificial intelligence. The rosy outlook suggested by the lack of volatility is ultimately a judgment not just that the new technology will become a revolutionary moneymaker for America’s listed companies, but that the Fed’s decisions will not shake the financial system again and that the economy will withstand the impact of interest-rate rises. As things stand, it looks like a bold bet. ■Read more from Buttonwood, our columnist on financial markets:Sooner or later, America’s financial system could seize up (Jun 15th)Surging stockmarkets are powered by artificial intelligence (Jun 7th)Investors go back into battle with rising interest rates (Jun 1st)Also: How the Buttonwood column got its name More

The quokka, an Australian marsupial about the size of a domestic cat, has full cheeks and a curved mouth that convey the impression—often to delighted tourists—that the critter is smiling. It has been dubbed the happiest animal on Earth. Yet these days it has competition from another species: the American stock investor. The s&p 500 has already risen by 14% this year. An increase of another 10% would take the index back to its all-time high, set in January last year. Excitement about artificial intelligence has lit a fire under companies seen as potential beneficiaries. Listen to this story. Enjoy more audio and podcasts on More

Ukraine suffered a brutal winter. Russia lobbed missiles at civilian and energy infrastructure, attempting to terrorise the population and cut off the green shoots of economic growth. It had some success. A sentiment indicator surveying Ukrainian firms hit a low in January. But as the country’s soldiers began their counter-offensive, so the economy pushed back. In April and May the sentiment indicator signalled economic expansion. Vacancies continue to rise, as businesses seek workers. Forecasts are increasingly rosy, too. Dragon Capital, an investment firm in Kyiv, expects gdp growth of 4.5% this year. There is nevertheless a long way to go: Ukraine’s economy shrank by more than a third at the start of the war. Agriculture has been hit hard by the bursting of the Kakhovka dam; many iron and steel facilities are destroyed or in Russian-occupied territory; foreign investors are understandably cautious; many workers are fighting or have fled the country. Thus policymakers, financiers and business types gathered in London on June 21st and 22nd for an annual conference. Their task was to work out how to support Ukraine’s recovery.The first order of business was the immediate reconstruction of the country, so that it can meet the basic needs of its people, especially next winter. Ukraine has asked for $14bn to cover this year, of which a chunk will go on grants to households to rebuild their homes and to firms to repair their businesses. So far, only a portion of these funds have been raised. Ukraine also needs cash for its long-term recovery. In March the eu, un, World Bank and Ukrainian government together put the cost at $411bn over the next decade, a figure reached before the destruction of the Kakhovka dam. The International Finance Corporation, an arm of the World Bank, thinks two-thirds of the money will need to come from public sources because of the difficulty of enticing private money. This would amount to an annual cost of 0.1% of the West’s gdp over the same period. In London, Ursula von der Leyen, head of the European Commission, proposed that the eu should provide 45% of the funding until 2027 in grants and loans. Next comes reform. Seasoned donor-country experts are impressed by what Ukraine has so far achieved under war conditions. The country has completed an imf programme and continued with changes to improve the transparency of property transactions and public procurement, meaning international donors can use the country’s lauded Prozorro online platform, which makes information public and digitally accessible. The country has also completed two out of seven judicial and anti-corruption reforms required to open formal accession negotiations with the eu. The integration of electricity markets between Ukraine and the eu shows the value of pushing ahead. Long-planned as part of a shift towards the West, the process sped up after Russia’s invasion. It involved technical adjustments and painful market reforms on Ukraine’s side to create a competitive, open wholesale market. “It was quite brave of eu politicians to realise the integration so quickly,” says Maxim Timchenko, boss of dtek, one of Ukraine’s biggest energy firms. The bravery has paid off. Ukraine and the eu are able to trade electricity, and investors can begin to tap Ukraine’s vast potential for green energy.The question now is whether such private money will actually arrive. Under war conditions, investors usually need some kind of guarantee from a public body to take the leap. One idea under consideration in London was for donors not only to provide war insurance or guarantees, but to help prop up a reinsurance market. If such guarantees can be arranged, the final step will be to take advantage of opportunities, which ought to be plentiful given the amount of aid pouring into Ukraine and the country’s economic potential. Some observers even think private investment could surpass the $411bn estimated to be required for Ukraine’s long-term reconstruction. Yet that is only if everything goes to plan. Ukrainian reformers will need to take inspiration from their countrymen’s bravery on the battlefield, as will foreign investors. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Indian agriculture has a poor reputation, which is not unfair. About half the country’s workforce toils on the land. Their labour unfolds in the brutal heat and tends to be done by hand or in unsheltered, rudimentary vehicles. Seasonal financing often comes through informal channels, with lending at annual rates approaching 30%. Paralysing debts are not uncommon. Production efficiency is low; yields for corn, rice, wheat and other crops are a fraction of those in America, China and Europe. In Punjab, the country’s agricultural heartland, roadside signs forgo typical advertisements for cars, films and phones, and instead hawk foreign-language training, overseas education and expedited visas. What local farmers want is not a new gadget but a way out. Yet in some senses, rather than stagnating, Indian agriculture is flourishing. Working conditions may be grim, but record harvest follows record harvest—and famine is a thing of the past. Farming exports in the fiscal year ending in March were up by 9% on the previous 12 months, hitting $26bn and representing 7% of India’s outbound trade. During the global food scare that followed Russia’s invasion of Ukraine last year, India became a pivotal exporter of rice and wheat (it is the world’s second biggest producer of both), as well as other grains. In one of many such examples, it recently agreed to send 20m tonnes of wheat to the Taliban in Afghanistan, adding to 40m tonnes last year. India would be more important still to global agriculture were it not for the periodic export restraints and tax surcharges that the government imposes. Such restrictions are not the only official obstacles. Subsidies for fertilisers and pesticides have depleted soil fertility. Some countries occasionally ban imports from India out of concern about chemical residue. Minimum price supports have led to an emphasis on thirsty crops, such as rice, in regions where water is scarce, depleting aquifers. Restrictions on sales mean farms are often divided among children into smaller, less efficient plots. The average holding has shrunk from 5 acres in the late 1970s to 2.5 today. To maximise output on such tiny plots, wheat farmers throughout northern India burn the post-harvest stubble in order to shrink the time between reaping and sowing, producing a thick, toxic cloud over much of the land.However, Indian agriculture has begun a subtle evolution—in terms of policies, technology and finance—that is helping bypass the many official constraints. This is apparent in the economic data. A little more than a decade ago, agriculture and manufacturing produced similar amounts of gross value added, a measure that subtracts purchase costs from revenues to capture contributions to economic activity. The most recent numbers show that agriculture contributes a quarter more.hdfc Bank, India’s most important private financial institution, has increased agricultural lending from $1.2bn in 2015 to $7.5bn last year, charging somewhere in the region of a third to half the rates that are typically found in the informal market. And where hdfc goes, other private-sector banks follow. This lending boom is helping sharply reduce costs for farmers, and means they are less likely to fall foul of occasionally violent loan sharks.Supply chains are also increasingly innovative. In 2020, during a covid-19 lockdown, Anushka Neyol moved from Delhi, where she worked on startups including a baby spa, to her family farm, which sits near the Pakistani border. She began to experiment with types of wheat, as well as distribution through the internet, selling directly to bakeries and restaurants in big cities, bypassing a sclerotic government auction apparatus known as the mandi system. Clients include Subko, a coffee chain in Mumbai that boasts of uniquely sourced coffee, chocolate and wheat.Another approach can be seen in Nashik, a city 170km or so inland from Mumbai. In 2004 Vilas Shinde, a local resident, began exporting grapes from a small farm. Six years later he founded a co-operative, Sahyadri Farms. Co-operatives have a long and decidedly mixed record in India. They have been tried in a number of different forms, but usually dissolve in disagreement within a few years. Sahyadri’s success suggests at least that another outcome is possible. The co-operative now comprises around 21,000 farms, which mostly produce fruits and vegetables excluded from the official pricing and distribution system. It has the scale to justify the inspections and shipping required for international markets. Customers include Hindustan Unilever for tomatoes, Walmart for frozen fruits and a network of European grocers for grapes, reflecting a national trend towards such crops, which are more amenable to India’s hot weather and cheap labour. Surrounding Sahyadri is an embryonic Indian wine industry, which includes a winery named Sula Vineyards.Meanwhile, technology and market forces are seeping into the broader production processes. McKinsey, a consultancy, reckons that there are at least 1,000 Indian “agtech” companies, which have raised some $1.6bn. Through cheap smartphone apps, satellite data can now provide guidance on soil treatment, sowing and harvest dates, as well as when and how to employ fertilisers and pesticides. These changes attract plenty of attention and excite investors, blurring practical limitations. Visit a farmer whose inexpensive mobile phone has a cracked screen, limited memory and spotty connections, and it is evident that transformation will have to unfold gently. By the time it comes, some of the likely adopters will have read the writing on the billboards next to Punjabi roads and gone elsewhere. But change—halting, hidden, partial—is taking root. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Around the world a boom in defence spending is under way. Roused from their complacency by Russia’s invasion of Ukraine and China’s designs on Taiwan, the 24 of 31 nato members that do not meet the club’s 2%-of-gdp defence-budget target have promised to make good. China’s own military spending grew by 4.2% in real terms last year. Globally, new defence commitments and forecast spending add up to over $200bn, a figure that could rise as high as $700bn under plausible assumptions.This represents an abrupt reversal of a decades-long decline. During the second world war the Allies devoted half of their gdp to fighting. In the 1960s, at the height of the cold war, governments typically spent 6% of gdp on defence. But after the Soviet Union collapsed, the world reaped a “peace dividend” from shrinking defence spending. Last year global defence spending was $2.2trn, or just above 2% of gdp—close to an all-time low. As spending starts to rise, there is a puzzle. Why is the coming bill not bigger still? Even if politicians honour recent pledges, the world will spend less on defence, relative to gdp, than in 1990. Part of the answer lies in the fact that defence spending escapes a problem plaguing many governments: that of cost disease. This issue was first outlined by William Baumol, an economist, in the 1960s. The malady applies in labour-intensive industries, such as health care and education, in which productivity grows only slowly because automation is difficult. As innovation boosts output and wages in, say, manufacturing, it becomes necessary to pay nurses and teachers more, to stop them quitting and heading for the nearest factory. As a result, industries suffering from cost disease must, over time, spend more in real terms in order merely to stand still. Baumol presciently worried about health-care spending swallowing up an ever-larger share of gdp.Armed forces benefit from the reverse phenomenon. Call this “Lockheed’s law”, after the giant American defence contractor. Cost disease bites in places where, in Baumol’s words, “the human touch is crucial”. Yet in America only one-third of total defence spending goes on paying salaries. Indeed, every country that is falling short of nato’s 2% target is closer to America’s spending on armed-forces personnel, as a share of gdp, than it is to Uncle Sam’s other armed-forces spending. This suggests that arming nato will be more about buying additional and superior equipment rather than going on a hiring spree.Although Russia and Ukraine have deployed enormous conscripted armies, Western countries that are rearming remain mostly committed to the idea that quality beats quantity. Better, the logic goes, to have a smaller army equipped with state-of-the-art artillery, tanks, planes and equipment than a bigger one with rusty kit. To the extent it seeks to compete in manpower with its adversaries, the West tries to do so through big alliances such as nato (ie, by spreading labour costs among countries, rather than turning a greater proportion of workers into soldiers). There is also plenty of scope for the automation of defence: machine learning is already replacing human satellite-imagery analysts, for instance. Those companies, like Lockheed, which make military gear have no productivity problem—quite the opposite. America’s statisticians produce price indices for kit, covering everything from missiles to ships. The calculations behind these indices are fiendishly complicated. They can answer the sort of question that a ten-year-old boy might ask. How much does it cost to blow up an enemy’s position? How much does it cost to travel at 1,000 miles an hour in a military jet? The data produced show that armed-forces capabilities have been getting relatively cheaper: quality-adjusted missile prices have fallen by about 30% since the 1970s. In cash terms, America spends about the same on military aircraft as it did in the mid-1980s. Even though the purchasing power of the dollar in the wider economy has fallen over that period, it will buy about the same amount of airpower. The result is that shrinking budgets can still buy awesome armies. Economic growth makes the effect even starker. As soldiers posted in the South China Sea are well aware, China has vastly more military might than it did three decades ago. Yet in 2021 it spent 1.7% of its gdp on defence, down from 2.5% in 1990.Under the gunLockheed’s law is not without limitations. Periods of sudden defence spending tend to cause shortages, which send prices soaring. Having armed Ukraine, nato now needs to replenish its stocks of weapons, but defence supply-lines are stretched. More profoundly, health and education spending make peoples’ lives better. Defence spending is usually about forestalling threats and repelling adversaries. To the extent that military outgoings must rise simply because the world has become more dangerous, they are an unwelcome extra cost. The peace dividend was no myth.Ultimately what matters in war is not the absolute level of a country’s defence capabilities, but its strength relative to that of enemies. If everyone is upgrading capabilities, then the result will be an arms race in which, for every innovation, there must be a countervailing rise in spending. The technological change that has enabled Russia to launch Iranian drones stuffed with explosives at civilians has raised the cost of defending Ukraine, for example. In a zero-sum battle, only technologies that the West alone has access to can really be thought of as helping to contain costs. A hot war between great powers would still send defence spending soaring to agonisingly high levels. Nevertheless, it will reassure Western politicians—many of whom are struggling to meet the needs of ageing populations, accelerate decarbonisation and deal with rising interest payments—that not More