Finance

Central banks around the world have been aggressively raising interest rates for over a year in a bid to curb sky-high inflation.
But economists warned in recent days that price pressures look likely to remain higher for longer.
Almost 80% of chief economists surveyed by the WEF said central banks face “a trade-off between managing inflation and maintaining financial sector stability.”

Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, March 22, 2023.
Leah Millis | Reuters

After the rescue of First Republic Bank by JPMorgan Chase over the weekend, leading economists predict a prolonged period of higher interest rates will expose further frailties in the banking sector, potentially compromising the capacity of central banks to rein in inflation.
The U.S. Federal Reserve will announce its latest monetary policy decision on Wednesday, closely followed by the European Central Bank on Thursday.

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Central banks around the world have been aggressively raising interest rates for over a year in a bid to curb sky-high inflation, but economists warned in recent days that price pressures look likely to remain higher for longer.
The WEF Chief Economists Outlook report published Monday highlighted that inflation remains a primary concern. Almost 80% of chief economists surveyed said central banks face “a trade-off between managing inflation and maintaining financial sector stability,” while a similar proportion expects central banks to struggle to reach their inflation targets.
“Most chief economists are expecting that central banks will have to play a very delicate dance between wanting to bring down inflation further and the financial stability concerns that have also arisen in the last few months,” Zahidi told CNBC Monday.

As a result, she explained, that trade-off will become harder to navigate, with around three quarters of economists polled expecting inflation to remain high, or central banks to be unable to move fast enough to bring it down to target.
First Republic Bank became the latest casualty over the weekend, the third among mid-sized U.S. banks after the sudden collapse of Silicon Valley Bank and Signature Bank in early March. This time, it was JPMorgan Chase that rode to the rescue, the Wall Street giant winning a weekend auction for the embattled regional lender after it was seized by the California Department of Financial Protection and Innovation.

CEO Jamie Dimon claimed the resolution marked the end of the recent market turbulence as JPMorgan Chase acquired nearly all of First Republic’s deposits and a majority of its assets.
Yet several leading economists told a panel at the World Economic Forum Growth Summit in Geneva on Tuesday that higher inflation and greater financial instability are here to stay.
“People haven’t pivoted to this new era, that we have an era that will be structurally more inflationary, a world of post-globalization where we won’t have the same scale of trade, there’ll be more trade barriers, an older demographic that means that the retirees who are savers aren’t saving the same way,” said Karen Harris, managing director of macro trends at Bain & Company.

“And we have a declining workforce, which requires investment in automation in many markets, so less generation of capital, less free movement of capital and goods, more demands for capital. That means inflation, the impulse of inflation will be higher.”
Harris added that this doesn’t mean that actual inflation prints will be higher, but will require real rates (which are adjusted for inflation) to be higher for longer, which she said creates “a lot of risk” in that “the calibration to an era of low rates is so entrenched that getting used to higher rates, that torque, will create failures that we haven’t yet seen or anticipated.”
She added that it “defies logic” that as the industry tries to pivot rapidly to a higher interest rate environment, there won’t be further casualties beyond SVB, Signature, Credit Suisse and First Republic.

Jorge Sicilia, chief economist at BBVA Group, said after the abrupt rise in rates over the last 15 months or so, central banks will likely want to “wait and see” how this monetary policy shift transmits through the economy. However, he said that a greater concern was potential “pockets of instability” that the market is currently unaware of.
“In a world where leverage has been very high because you had very low interest rates for a long period of time, in which liquidity is not going to be as ample as before, you’re not going to know where the next problem is going to be,” Sicilia told the panel.
He also drew attention to the International Monetary Fund’s latest financial stability report’s reference to “interconnectedness” of leverage, liquidity and these pockets of instability.
“If the interconnectedness of pockets of instability don’t go to the banking system that typically provide lending, it need not generate a significant problem and thus, central banks can continue focusing on inflation,” Sicilia said.
“That doesn’t mean that we’re not going to have instability, but it means that it’s going to be worse down the road if inflation doesn’t come down to levels close to 2 or 3%, and central banks are still there.” More

Michael Milken, Chairman of the Milken Institute, speaks during the Milken Institute Global Conference in Beverly Hills, California, on May 2, 2022. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Patrick T. Fallon | Afp | Getty Images

Famed investor Michael Milken said Tuesday that the current banking crisis stemmed from a classic asset-liability mismatch that has played out miserably time and again in history.
“You shouldn’t have borrowed short and lent long… Finance 101,” Milken said on CNBC’s “Last Call.” “How many times, how many decades are we going to learn this lesson of borrowing overnight and lending long? Whether it was the 1970s, the 1980s and 90s.”

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“Again here, the banks have enough credit, they had enough equity, they had enough ability to absorb credit losses that are coming. However, what they did is they doubled, tripled, quadrupled their size by borrowing overnight at artificially low rates, and buying intermediate securities,” said Milken in the rare comments on the financial markets by the junk bond innovator.
Earlier this week, First Republic became the third failure of an American bank since March and the biggest bank collapse since the 2008 financial crisis. The bank suffered a deposit flight as its long-term assets fell in market value after a series of rate hikes, triggering worries about unrealized losses on the balance sheet.
The founder of the Milken Institute believes that there will be a decrease in the percentage of loans that are owned by the banking system in the aftermath of the crisis.
“We will be stronger as they move into hands of… pension funds that have long term liabilities,” Milken said. “People are so focused on credit risk, etc., but one of the great risks is interest rate risk.”
In the wake of these bank failures, investors have punished other lenders that had similar characteristics. Companies with the highest percentage of uninsured deposits and potential severe bond losses on their balance sheet were most scrutinized.

To be sure, the 76-year-old investor acknowledged that the largest banks in the U.S. have in fact displayed conservative risk management amid the rapid increase in interest rates.
“It’s not like there isn’t a great deal of liquidity in this country….We should also take into consideration that our major banks… have exercised extreme caution on liability and asset management,” Milken said.
Milken was the king of junk bonds in the 1980s and pioneered leveraged buyouts. In 1990, he pleaded guilty to securities fraud and tax violations, and was later pardoned in 2020 by President Donald Trump. More

Job openings and worker quits declined and the layoff rate increased in March, according to the Job Openings and Labor Turnover Survey issued Tuesday by the U.S. Bureau of Labor Statistics.
The Federal Reserve has raised interest rates to slow the economy and labor market in an attempt to rein in inflation.
However, the job market is still strong for workers and the unemployment rate is at multidecade lows.

Maskot | Digitalvision | Getty Images

The job market is still hot but is clearly slowing from the scorching levels seen during much of the past two years, according to labor experts.
Job openings and voluntary worker departures or, quits, declined in March, while the layoff rate increased, according to data issued Tuesday by the U.S. Bureau of Labor Statistics.   

“Two words: unambiguous cooldown,” Nick Bunker, director of North American economic research at job site Indeed, said of the data in the Job Openings and Labor Turnover Survey.
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The job market remains favorable for workers despite the recent cooling trend. By many metrics, it’s stronger than pre-pandemic levels in 2019, when it was also robust, economists said. The national 3.5% unemployment rate in March ties for the lowest since 1969.
“If you’re looking at the current temperature of the labor market, it’s still strong, still hot,” Bunker said.
It’s unclear if the cooling will continue and at what speed.

The Federal Reserve began raising borrowing costs aggressively last year to cool the economy and labor market, aiming to tame stubbornly high inflation. And a pullback in lending, exacerbated by recent turmoil in the banking sector, may apply an additional brake on the U.S. economy.

Here’s what the latest data tell us about the job market.

1. Job openings

Job openings, a proxy of employers’ demand for workers, dropped to a two-year low in March.
Openings decreased to 9.6 million in March, a drop of 384,000 from February, according to JOLTS data.
Job openings kept breaking records as the U.S. economy reopened in the Covid-19 pandemic era. Businesses clamored to hire workers, and openings eventually peaked above 12 million in March 2022.
Now, openings are down by 1.6 million from December — a “pretty rapid pullback,” Bunker said — and are at their lowest level since April 2021.
There are also 1.6 job openings for every unemployed worker, the lowest ratio since October 2021.

However, openings remain well above their pre-pandemic baseline. For example, there were about 7.2 million job openings a month, on average, in 2019.
Small businesses with fewer than 50 employees seem to have led the decline in overall job openings in March, said Julia Pollak, chief economist at ZipRecruiter.
While the number of job openings in the private sector declined 4.7%, the decline was sharper (8.9%) among small businesses, she said, citing JOLTS data.
Tighter lending conditions generally have a bigger effect on small businesses and “are likely hindering their ability to invest and grow,” Pollak added.

2. Quits

The so-called Great Resignation trend continued to wane in March.
About 3.9 million workers quit their jobs in March, a modest decline of 129,000 from February. However, these voluntary departures have fallen about 650,000 from about a year ago, when quits were near record highs.
Quits are a proxy for worker confidence that they can find another job, since those who leave often do so for new employment.

High employee turnover in restaurants has been a major driver of sky-high wage growth in recent months, but that may soon come to an end.

Julia Pollak
chief economist at ZipRecruiter

The numbers are still about 10% higher than pre-pandemic levels, but “also falling in a sign that workers are growing less confident in their ability to quit [and] find new jobs amidst a cooling job market,” said Daniel Zhao, lead economist at job site Glassdoor.
The slowdown was most pronounced in accommodation and food services, which includes businesses such as restaurants and hotels. The quits rate declined 1.3 percentage points over the month, more than double the rate of other industries, according to JOLTS data.
“High employee turnover in restaurants has been a major driver of sky-high wage growth in recent months, but that may soon come to an end,” Pollak said.

3. Layoffs

There was a sharp uptick in layoffs in March.
The layoff rate increased to 1.2%, the highest level since December 2020, from 1%.
The jump in layoffs is “the most concerning figure” from the JOLTS report, Zhao said. The number of layoffs rose 248,000 over the month, to about 1.8 million, which is “near the pre-pandemic level after spending much of the last [two] years well below, amidst a historically hot job market,” he said.
The sharpest increase was in the construction sector, where one would expect the economic fallout from higher borrowing costs to first hit the labor market, due partly to higher mortgage costs, Bunker added.
However, economists would need to see if that trend persists beyond the month before drawing negative conclusions, he added. More

A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California.
Lucy Nicholson | Reuters

Check out the companies making headlines after hours.
Ford Motor — Ford topped analysts’ expectations on the top and bottom lines, according to Refinitiv. However, the firm reiterated its prior full-year guidance of adjusted earnings between $9 billion and $11 billion, as well as about $6 billion in adjusted free cash flow. The auto stock declined about 2.3% in extended trading. 

Starbucks — Starbucks shares fell 2% in after-hours trading. The coffee chain topped analysts’ expectations on the top and bottom lines, reporting adjusted earnings of 74 cents per share, greater than the 65 cent per-share estimate, according to Refinitiv. It reported $8.72 billion in revenue, topping the $8.4 billion forecast. 
Clorox — Clorox gained 1% after topping analysts’ expectations on the top and bottom lines. The consumer products firm reported fiscal third-quarter adjusted earnings of $1.51 per share on revenue of $1.91 billion. Analysts polled by Refinitiv were expecting earnings of $1.22 per share on revenue of $1.82 billion.
Match Group — Match Group shares rose by 1.5% after reporting first-quarter earnings that exceeded expectations, according to consensus estimates from Refinitiv. However, the online dating firm missed analysts’ revenue estimates. 
Advanced Micro Devices — Shares fell nearly 5% after Advanced Micro Devices issued weaker-than-expected second-quarter revenue guidance. Otherwise, the firm surpassed analysts’ expectations on the top and bottom lines, according to Refinitiv. 
Yum China — Yum China added 3.6% after the China-based fast-food company beat analysts’ first-quarter earnings and revenue expectations. Yum China reported adjusted earnings of 69 cents per share on revenue of $2.92 billion. Analysts polled by Refinitiv expected per-share earnings of 46 cents on revenue of $2.77 billion.
Caesars Entertainment — Caesars Entertainment slid about 0.2% after missing analysts’ first-quarter earnings expectations. The casino giant posted a loss of 63 cents per share, far more than analysts’ forecast for a loss of 1 cent per share, according to Refinitiv. Otherwise, it reported revenue of $2.83 billion, beating the $2.76 billion forecast. More

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Check out the companies making headlines in midday trading.
Uber — Shares of the ride-hailing giant jumped 11.6% after the company reported first-quarter revenue that beat analysts’ expectations. Revenue for the quarter was up 29% year over year. CEO Dara Khosrowshahi said Uber is off to a “strong start” for the year.

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Chegg — The education technology company plummeted 48.4% after the company said ChatGPT was hurting its growth. Chegg beat analyst expectations for the first-quarter, while offering underwhelming current-quarter guidance.
Icahn Enterprises — Carl Icahn’s conglomerate saw its shares fall 20% after notable short seller Hindenburg Research took a short position against the company, alleging “inflated” asset valuations, among other reasons.
Dupont de Nemours — Shares dropped 6.3% following the company’s weak guidance for the second quarter. Its adjusted earnings per share forecast of 84 cents fell short of the 88 cents expected by analysts polled by StreetAccount, while its revenue guidance of $3.02 billion was less than the $3.10 billion expected. Dupont cited a delay in the electronics market’s recovery.
Arista Networks — The cloud network stock dropped 15.7% after the company said it expects cooling spending and slowing growth from “cloud titans.” Still, the company did beat expectations for the quarter and provide strong guidance.
NXP Semiconductors — Shares of the chipmaker added 3.3% after the company beat analysts’ expectations for first-quarter revenue and operating income. Revenue guidance for the second quarter was better than anticipated as well.

Dell Technologies — Shares added 2.2% after being upgraded to overweight from equal weight by Morgan Stanley. The Wall Street firm believes the tech and PC company’s stock can rally 25.5% from Monday’s close as the personal computer market forms a bottom.
BP — U.S.-listed shares of the British energy titan tumbled 8.1% on news of slowed share buybacks. The energy company was able to beat analyst expectations for its first quarter.
HSBC — HSBC’s U.S.-listed shares gained 3.5% on strong quarterly earnings results and profit growth year over year. The global bank also announced an upcoming $2 billion share buyback program and restored its quarterly dividend.
Marriott International — The hotel operator rose 5% after beating earnings and revenue expectations for the first quarter, according to Refinitiv, and raising its full year guidance. The company highlighted strength in international markets and reported an increase in revenue per available room worldwide.
Diamondback Energy — The oil and gas stock lost 4.9%. Diamondback posted $4.10 in earnings per share, lower than the $4.33 consensus estimate of analysts polled by FactSet. But the company was able to narrowly beat on revenue, recording $1.93 billion against the Street’s estimate of $1.92 billion.
Shoals — The solar company slid 10.1% on the back of a downgrade by Barclays to underweight from equal weight. The firm said the company has a pricey valuation and potential for risk this year.
Quest Diagnostics — Shares slid 1% after Bank of America downgraded the health stock to neutral from buy, saying it has concerns about the deal for Haystack Oncology.
SoFi — Shares of the student loan refinancer fell 10.3% on Tuesday, building on their sharp losses from the previous session.. The company reported quarterly results a day earlier, and added $2.7 billion in deposits. Company executives noted on a call with investors that loans that originated in the fourth quarter would see t lower monetization levels than previously expected thanks to interest rate hikes despite higher demand.
PacWest — Shares fell 27.8% as the First Republic failure pressed regional banks. Western Alliance was another laggard with a loss of more than 15%.
— CNBC’s Yun Li, Tanaya Macheel, Michelle Fox, Samantha Subin, Brian Evans, Jesse Pound and Mike Bloom contributed reporting More

Carl Icahn speaking at Delivering Alpha in New York on Sept. 13, 2016.
David A. Grogan | CNBC

Notable short seller Hindenburg Research is going after famed activist investor Carl Icahn.
The Nathan Anderson-led firm took a short position against Icahn Enterprises, alleging “inflated” asset valuations, among other reasons, for what it says is an unusually high net asset value premium in shares of the publicly traded holding company.

“Overall, we think Icahn, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well,” Hindenburg Research said in a note released Tuesday.
The shares fell 9% in premarket trading.
Icahn, the most well known corporate raider in history, made his name after pulling off a hostile takeover of Trans World Airlines in the 1980s, stripping the company of its assets. Most recently, the billionaire investor has engaged in activist investing in McDonald’s and biotech firm Illumina.
Headquartered in Sunny Isles Beach, Florida, Icahn Enterprises is a holding company that involves in a myriad of businesses including energy, automotive, food packaging, metals and real estate.
The conglomerate pays a 15.9% dividend, according to FactSet. Hindenburg said it believes the high dividend yield is “unsupported” by the company’s cash flow and investment performance.

CNBC has reached out to Icahn for comment.
Shares of Icahn Enterprises are down 0.5% on the year as of Monday’s close. More

James Tahaney loads textbooks on to a pallet in preparation for shipping at the Chegg warehouse in Shepherdsville, Kentucky, April 29, 2010.
John Sommers II | Bloomberg | Getty Images

Chegg shares tumbled after the online education company said ChatGPT is hurting growth.
“In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups,” CEO Dan Rosensweig said during the earnings call Tuesday evening. “However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.”

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The company, which provides homework assistance and online tutoring, said revenue would be between $175 million to $178 million this quarter, far below the analyst consensus estimate from FactSet of $193.6 million.
Chegg shares were last down 46% to $9.50 in premarket trading Wednesday, set to add to a 30% decline already this year.

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Chegg shares 1-day

Otherwise, Chegg beat first-quarter expectations on the top and bottom lines. The online education firm reported first-quarter earnings of 27 cents per share ex-items on revenue of $188 million. Analysts polled by Refinitiv had expected per-share earnings of 26 cents per share on revenue of $185 million.
Following the results, Morgan Stanley analyst Josh Baer slashed his price target to $12 from $18, implying a 30% fall. The analyst said that AI “completely overshadowed” the results.
Meanwhile, Jefferies downgraded the stock to hold from buy, citing the threat artificial intelligence poses on the stock. The Wall Street firm cut its price target to $11 from $25, implying shares could fall more than 35% from Monday’s close. 

To be sure, Chegg has its own AI product in CheggMate, which is meant to help students with their homework. The product is built in collaboration with OpenAI, which develops ChatGPT. However, Jefferies analyst Brent Thill says the impact of the product is yet uncertain. 
“While CHGG plans to launch the CheggMate beta this month to a select few, the timing of a full launch is unclear,” he said. “We don’t expect there to be any meaningful impact from CheggMate in FY23, believing any potential impact won’t show up until FY24 at the earliest.”
— CNBC’s Michael Bloom and Brian Evans contributed reporting. More

Morgan Stanley plans to eliminate roughly 3,000 positions by the end of June, according to a person with knowledge of the plans.
That equates to roughly 5% of the New York-based bank’s workforce when excluding the financial advisors and support staff who will be spared in the cuts, the person said.
In recent weeks, big bank peers including Citigroup and Bank of America and smaller advisor Lazard have cut jobs or announced plans to do so.

The logo of Morgan Stanley is seen in New York 
Shannon Stapleton | Reuters

As Wall Street’s slump in IPOs and mergers deepens this year, top advisory firms including Morgan Stanley, Bank of America and Citigroup have turned to job cuts in recent weeks.
Morgan Stanley plans to eliminate roughly 3,000 positions by the end of June, according to a person with knowledge of the plans.

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That equates to roughly 5% of the New York-based bank’s workforce when excluding the financial advisors and support staff who will be spared in the cuts, the person said. The layoffs are expected to impact banking and trading staff the most, according to Bloomberg, which reported the moves earlier.
A historic boom in deals ignited by the pandemic was followed by a bust that began last year after the Federal Reserve started raising rates to hit the brakes on an overheating economy. The IPOs, debt issuance and mergers that feed Wall Street have all remain muted this year. For instance, IPO volumes are 74% lower than last year, according to Dealogic data.
For Morgan Stanley, the cuts show that Wall Street is wrangling with expenses as the slump drags on for longer than expected. The bank already cut about 2% of its workforce in December, CNBC reported.

Rising costs, falling revenue

Last month, analysts criticized Morgan Stanley for posting higher first-quarter costs while revenue declined. Expenses in the firm’s investment bank and wealth management division hurt profit margins in particular.
The bank’s moves aren’t isolated. The industry’s job cuts began in September, when Goldman Sachs reinstated a practice of culling those it perceives to be low performers. Nearly all the major Wall Street firms followed, and Goldman itself had to resort to another, deeper round of layoffs in January.

In recent weeks, big bank peers including Citigroup and Bank of America have cut a few hundred jobs each, relatively surgical cuts that should position the banks well when a rebound in deals finally arrives.
Last week, top boutique advisor Lazard said it planned to cut 10% of its workforce this year. The step was necessitated by restrained capital markets activity and wage inflation that pumped up salaries across banking.
“Candidly, things are not feeling as good as they were in December or January,” Chief Executive Ken Jacobs told Bloomberg. More