Fed’s Message Is Louder Than Its Rate Call. Why That’s Critical for Investors.

Markets reacted as such. Stocks fell, the dollar rose, and the two-year Treasury yield reached a 17-year high.

In stark contrast, the European Central Bank raised rates last week—but its tone was very different, signaling it may be done with tightening. That effectively undermined the intended impacts of a hike. European stocks rose, while the euro tumbled along with German bond yields.

At this late stage of the cycle, the forward messaging is arguably becoming more critical than ever, and is certainly seen by markets as being more important than the actual rate decisions.

Given the role financial conditions play in inflation, delivering a message effectively can be the difference between taming price growth or not.

For all the central bank messaging, intended or not, investors don’t actually have much more certainty after the latest round of rate decisions. Thursday is rate-setting day for the Bank of England. Its messaging over the past year has been criticized for being unduly dovish—even as it, like the other central banks, has been steadily lifting interest rates.

For the Fed, higher rates for longer is the broad message but the specifics—even November’s decision—are subject to change. Still, it’s better for markets to enjoy a dovish surprise down the line than suffer a hawkish one.

—Callum Keown

*** Join Financial News online editor Justin Cash today at noon when he talks with James Deal, the co-founder and head of U.K. at PrimaryBid, about whether retail investors are the key to London’s IPO battle. As global exchanges continue to fight it out for prized listings, review after review has sought to turbocharge sluggish equity investment. Sign up here.

Try your hand at this morning’s Barron’s crossword puzzle and sudoku games. For all games, including a digital jigsaw based on the week’s cover story, click here.

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The Dot-Plot Told One Story. Powell’s Words Told Another

The Federal Reserve’s latest Summary of Economic Projections delivered an optimistic message: Fed officials forecast that interest rates would stay above 5% through the end of next year, while unemployment will be lower and economic growth will be higher than previously expected.

• The median forecasts reflected tighter monetary policy over the coming year and a more resilient economy despite that. It’s what Bank of America economists called a “no landing” scenario: that there’s no price to pay in terms of growth or jobs for bringing inflation back down, they said.

• A hawkish stance on the rate-hike path was largely missing in the message from Chairman Jerome Powell’s press conference, however. He focused instead on the Fed’s data dependence and eagerness to tread cautiously on whether and when to raise interest rates again.

• Powell sought to de-emphasize the importance of the so-called dot-plot projections, which he noted were simply a collection of individual forecastsrather than an agreed-upon plan. He also declined to call a soft-landing scenario his “baseline forecast.”

• He acknowledged what he called a “long list” of external factors causing uncertainty that could weaken the economy right now, including the strike by United Auto Workers, a possible government shutdown, the resumption of student loan payments, and rising oil prices.

What’s Next: Wednesday’s press conference fueled the expectation that Fed officials are most likely done with raising rates this year. Wednesday evening, markets were pricing in a 28% probability of a November rate hike, significantly lower than the 41% a week before the Fed’s meeting began.

—Megan Cassella

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FedEx Raises Full-Year Outlook After Beating Expectations

FedEx
raised its full-year profit outlook after beating expectations in its fiscal first quarter. While the package delivery company benefited from a strike threat at rival
United Parcel Service
and the bankruptcy of fellow shipping firm Yellow during the quarter, cost cutting also boosted results.

• FedEx raised the lower end of its adjusted profit outlook for fiscal 2024 to between $17.00 and $18.50 a share. It expects revenue to be about flat for the fiscal year that ends in May compared with earlier projections of flat to low-single-digit-percent growth.

• For the first quarter, adjusted profit was $4.55 a share and revenue was $21.7 billion, down 6% from last year. The company has a multiyear restructuring plan to cut costs and improve efficiency by $6 billion as shipping demand falls. Operating expenses fell 8% from one year ago.

• UPS customers shifted some of their volume to FedEx in case of a strike, which was averted. FedEx’s freight operations also picked up volume after Yellow’s August bankruptcy.

• Separately, the United Auto Workers union is weighing a new offer from
  Stellantis
  as of Wednesday. A Stellantis spokesperson told Barron’s that it previously offered a 19.5% increase in wages over five years, or 21% when compounded. The UAW rejected Stellantis’ previous offer.

What’s Next: UAW President Shawn Fain has said the union will expand its strike to more plants if
Ford,

GM,
and Stellantis don’t make “serious progress” by noon Friday. He will update members at a
Facebook
live event at 10 a.m. Eastern time on Friday.

—Janet H. Cho

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Crunch Talks Raise Hopes for End to Hollywood Strike

The Writers Guild of America and studios are meeting Thursday to discuss how to end the Hollywood strike, raising hopes of a breakthrough.

• The WGA and the Alliance of Motion Picture and Television Producers met Wednesday and are meeting again, they said in a joint statement. The two sides are close to reaching an agreement, CNBC reported, citing people familiar with the discussions.

• The strike has lasted more than three months, shutting down production of television shows and movies. Writers are pushing for higher pay, arguing their compensation is too low for the amount of revenue that has been generated from streaming.

• Studios have been saving money since the strike began on May 2, but executives have warned earnings will be hit eventually by having less content. Work has halted on Netflix’s Stranger Things, Disney‘s Blade, and Paramount’s Evil.

What’s Next: Both sides say they want a deal as soon as possible. However, if no agreement is reached, the dispute could last until the end of the year, CNBC said.

—Brian Swint

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FDA Unexpectedly Rejects Nasal Spray Allergy Antidote

The Food and Drug Administration unexpectedly rejected Neffy, a nasal-spray alternative to epinephrine injections for allergic reactions, such as
Viatris
’ EpiPen. Neffy’s maker,
ARS Pharmaceuticals,
said the FDA wants more data on repeat doses of the drug compared with repeat doses of the injected form.

• ARS Pharmaceuticals CEO Richard Lowenthal said the company was surprised by the move, having previously been told the study could be finished after the drug came on the market. Outside advisors to the FDA voted in May to support Neffy’s approval without the additional study.

• ARS will appeal the FDA’s rejection, but said it would run the study and resubmit Neffy for approval in the first half of 2024. ARS said it would have $195 million in cash and short-term investments left in late 2024, when it rolls out the drug. Its shares slumped 56% on Wednesday.

• Neffy contains epinephrine, a synthetic version of adrenaline also used in Viatris’ EpiPen, which is injected when people go into shock from reaction to bee stings, food allergies, or other causes.
  Teva Pharmaceutical
  makes a generic version of EpiPen.

• If approved, Neffy would be the first needle-free nasal spray epinephrine treatment for severe allergic reactions. ARS has cited the importance of a needle-free option for those who are hesitant or afraid to give shots to themselves or others.

What’s Next: Separately, the Biden administration is making four free Covid-19 tests available for households again, amid concerns about a fall-winter surge of the virus. It is spending $600 million to buy tests from a dozen U.S. manufacturers, and its website covidtests.gov will start taking orders on Monday.

—Josh Nathan-Kazis and Janet H. Cho

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KB Home Raises Outlook as Demand Remains Steady

KB Home
beat expectations for third-quarter profit and raised its full-year outlook, citing steady demand despite rising mortgage rates. While profit and revenue were lower than last year’s record quarter, CEO Jeffrey Mezger said they see a more profitable year than they previously anticipated.

• Concessions to encourage buyers amid mortgage rates above 7% ate into margins. The housing gross profit margin was 21.5%, down 5.2 percentage points, and the average selling price of a home was $466,300, down 8% from last year. KB Home also cited higher construction costs.

• While homes delivered in the quarter dipped 7% to 3,375, KB Home said net orders surged 52%, to 3,097, and net order value rose 54%, to $1.5 billion. It said the increases reflected improved demand and a lower cancellation rate compared with last year.

• Renting a house is cheaper than buying one. Real-estate technology platform Cadre found it was 70% more expensive to buy than rent in August after analyzing data from CoStar Group, the St. Louis Fed, and Zillow. That’s the widest gap since 2000.

• The median home price in July was $406,700, the National Association of Realtors said. Redfin said the median asking rent in August was $2,052. The median monthly mortgage payment reached a record high of $2,632 in September, Redfin said.

What’s Next: KB Home forecast full-year 2023 housing revenue of $6.3 billion, which is above its prior guidance, and an average selling price of 481,000. It expects its housing gross profit margin for the full year to be 21.3%, assuming there aren’t any inventory-related issues.

—Liz Moyer

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The rate of U.S. inflation has slowed considerably from a 40-year peak of 9.1% in mid-2022, and it’s gotten an assist from a surprising source: falling medical costs. But that’s about to change.

It’s mostly because of the complex way the federal government tries to figure the rise of medical costs. But a reacceleration in healthcare costs could complicate the Federal Reserve’s job to get inflation back down to prepandemic levels of 2% or less.

For more, read here.

—Jeffry Bartash

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner