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The Fed unveils a new approach

August 28, 2020
Five Things - Asia
Bloomberg

The Fed unveils a new approach that will likely keep interest rates low for years. Microsoft finds a new partner in the race to buy TikTok. And the inside story of how a powerful Nissan insider tore apart Carlos Ghosn's legacy. Here are some of the things people in markets are talking about today.

Taking TikTok

A new player has entered the race for TikTok. Microsoft, already in a contest with Oracle, has teamed up with Walmart to buy the U.S. assets of the popular video-sharing app from China's ByteDance. Both Oracle and Microsoft, now with its new partner, submitted bids in a deal that could come within the week, according to people familiar with the deliberations. Walmart would also own a stake in a newly spun off TikTok business, alongside Microsoft, they said. In China and other countries, ByteDance's apps offer robust e-commerce features along with video clips, which haven't been available in the U.S. so far. Adding Walmart to the deal would enable the retail giant to play that role for the U.S. TikTok app, said a person familiar with the planning. Microsoft and Walmart are already collaborating on cloud applications, brought together by mutual rivalry with Amazon.com, which is the biggest cloud-infrastructure software seller, followed by Microsoft.

Running Hotter

Federal Reserve Chair Jerome Powell unveiled a new approach to setting U.S. monetary policy, letting inflation and employment run higher in a shift that will likely keep interest rates low for years to come. Following a more than year-long review, Powell said the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to permit labor-market gains to reach more workers. "Maximum employment is a broad-based and inclusive goal," Powell said Thursday in a speech delivered virtually for the central bank's annual policy symposium traditionally held in Jackson Hole, Wyoming. "This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities." The new strategy is being undertaken to tackle years of too-low inflation. It hands the central bank flexibility to let the job market run hotter and price pressures float higher before taking action as it may previously have done.

Markets Mixed

Treasury yields jumped after Jerome Powell said the Federal Reserve will remain accommodative and shift to a more relaxed approach on inflation, while U.S. stocks eked out modest gains. Asian equity futures were mixed, and the dollar climbed from a two-year low. Futures rose in Japan and were little changed in Australia and Hong Kong. The S&P 500 reached an all-time high for a fifth day and the Nasdaq Composite also set a record before closing in the red. The yield premium demanded by investors on long-maturity U.S. debt compared to short-term notes increased to the most in two months after Powell comments on inflation which implied allowing for periods of overshoots. Elsewhere, crude oil declined as Hurricane Laura weakened while crossing over land in the refinery and LNG-rich Gulf of Mexico region. Gold retreated for the fourth time in five sessions.

Bound For Rebound

China's economy picked up speed in August as a strong industrial sector and stock market, better business confidence and home and car sales combined to boost the first economy globally to emerge from the Covid-19 slump. That's the assessment from the earliest available indicators, which showed China's economy continuing to improve. The final result in July was also stronger than initially seen, given better results from purchasing manager indexes and more robust sales of homes and autos in the latter part of the month. That's not all that's stirring Chinese markets: An IPO mania is boosting the pace of wealth creation, with stocks surging up to 986%. In fact, of the two dozen or so companies that started trading in China this week, at least three produced new billionaires as of Thursday.

Inside Ghosn's Takedown

In the senior offices at Nissan, a powerful insider plotted a coup that brought down Carlos Ghosn, the man who had saved the company from ruin. Known for aggressive tactics and strong cologne, Hari Nada was prepared to go to extraordinary lengths to settle scores. Computer systems were hacked, a top attorney's home was raided, and Ghosn was placed under arrest. The resulting chaos sent shockwaves through the corporate world and still haunts Nissan today. Here's what happened.

What We've Been Reading

This is what's caught our eye over the past 24 hours:

And finally, here's what Tracy's interested in this morning

Here are some headlines out this week: "Blank Check IPOs, the Status Symbol of 2020, Have Raised $32 Billion This Year." "Penny Stock Boom Sparks 4,300% Gain in Indian Firm With No Sales." "Tech Unicorns Rushing to Go Public Defy Sleepy Summer Season." Reading those, you might conclude we're back in the heady days of the dot-com bubble of the early 2000s, or the buoyant capital markets of 2007. I don't mean to suggest that we're on course for a crisis or crash of any sort. But this must legitimately be one of the weirdest times in history when it comes to the relationship between capital markets and the economic experiences of individuals. Money is being thrown at blank-check companies competing for a limited group of companies. Retail investors are pouring into bankrupt stocks and shares of businesses that haven't booked sales — let alone profits — in years. Billions are being raised in the IPO market.

It's all decidedly late-stage capital markets stuff and it seems completely out of sync with the economic cycle. Obviously no one wants another financial crisis, but recessions have so often coincided with stress in the financial system that having economic misery without some corresponding difficulty in capital markets (at a minimum) just feels unseemly. The Covid-19 experience and policy responses have so far resulted in an economic crisis that has ended up almost completely divorced from the financial system and that's going to be difficult for many people to understand.

You can follow Tracy Alloway on Twitter at @tracyalloway.
 

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