Booming markets neutralise impact of Fed’s interest rate rises

This is an audio transcript of the FT News Briefing podcast episode: ‘Booming markets neutralise impact of Fed’s interest rate rises’

Marc Filipino
Good morning for the Financial Times. Today is Tuesday, August 1st and this is your FT News Briefing.

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The US stock market is making the Fed’s job harder and China is splurging on overseas mining and metals. Plus, oil and gas majors are not seeing record profits anymore, but they’re still doing just fine. I’m Marc Filippino, and here’s the news you need to start your day.

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US stocks are on fire. American equities recorded their longest winning streak in two years after the S&P 500 closed out July 3 per cent higher. Rising stock prices and falling bond yields have essentially neutralised the impact of interest rate rises. US financial conditions are the loosest they’ve been since March of last year. That’s according to the Federal Reserve Bank of Chicago. Now, it’s a lot easier for US companies to raise money. Here to explain what’s going on is the FT’s Harriet Clarfelt. Hi, Harriet.

Harriet Clarfelt
Hi, Marc.

Marc Filipino
Okay. So take me from A to B. Why do these market conditions make it so much easier for US companies to raise money?

Harriet Clarfelt
That kind of makes it easier for companies to raise cash through share sales. And then if you look at companies that borrow as opposed to issuing equity, and obviously lots of companies do both. When we talk about spreads tightening and the credit market and the bond market, we’re referring to the premium that companies have to pay to issue debt over typically the government, how much the government has to pay if she does. And we’ve seen for risky companies that spread, tighten or, you know, that the cost basically over government bonds has fallen so far this year. So that makes it if companies want to it can make it for some companies cheaper to borrow in the current market environment compared to what it used to look like relative to government bonds.

Marc Filipino
All right. So I’m with you so far, Harriet. The current conditions make it easier for these companies to raise cash. Why would that counteract the interest rate rises that the Federal Reserve has been dishing out over the past year or so?

Harriet Clarfelt
Yeah, if it does seem counterintuitive, you’ve had the Fed raising rates 11 times, the 11th time being last week, and yet we have these kind of closely watched gauges of the financial conditions which actually feed into Fed policy decision making [inaudible] in looser conditions than there have been in recent times. And, you know, that is sort of counter to the goal of the Fed to slow down the economy and get inflation really under control. And that’s kind of what we mean by the neutralising effect. And I suppose what this suggests is that this more apparently benign fundraising environment reflects a kind of growing view among some investors that the US central bank has sort of effectively finished lifting interest rates because inflation is continuing to fall. And so the Fed’s plan is working like I hoped it would in terms of curbing inflation.

Marc Filipino
Could the Fed look at this data from the Chicago Federal Reserve and say, oh, you know, if this is neutralising what we’re trying to do, maybe we should continue to raise rates?

Harriet Clarfelt
Well, Fed Chair Jay Powell kind of pointed to this and after the 11th interest rate rise last week he kind of acknowledged the potential risks from easing conditions and said if financial conditions get looser, we may need to do more. But he also indicated that he was confident interest rates were affecting economic activity and inflation. The one other thing I would mention is that on Monday, so July 31st, we had the latest Senior Loan Officer Opinion Survey, which is also known as the Sloos, and that’s the kind of quarterly survey from the Fed. And it takes into account what banks are doing with lending standards and essentially showed similarly to the last survey, that banks are tightening credit lending standards and their outlook for the rest of the year is for tighter lending, too. So there are variables and I suppose that will all feed into the Fed decision making process.

Marc Filipino
Harriet Clarfelt is a US capital markets correspondent for the FT. Thanks, Harriet.

Harriet Clarfelt
Thanks very much.

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Marc Filipino
China has been pouring money into overseas metals and mining this year. A report from Fudan University found that China has so far sunk more than $10bn into investments and new contracts in the sector. This is already more than China spent on metals and mining for all of 2022, and it’s on pace to spend a record amount. The splurge shows that China is trying to invest in the clean energy supply chain. China’s throwing money at things like nickel, lithium and copper and doing it in places like Africa, Asia and South America. This is part of a larger push from China’s president, Xi Jinping, to become economically self-sufficient. As tensions with the US continue to grow.

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The war in Ukraine supercharged the profits of western oil and gas companies. But now those gains are starting to recede. ExxonMobil, Chevron and Shell all said that their second-quarter earnings were about half of what they were during the same period last year. BP is reporting today. Here to talk more about this is the FT’s Myles McCormick. Hi, Myles.

Myles McCormick
Hi, Marc.

Marc Filipino
So 50 per cent sounds like a big drop off in profits, but is it actually I mean, these oil and gas majors aren’t struggling, are they?

Myles McCormick
No, far from it. I mean, I suppose last year was just an outlier and these companies made huge profits on the back of oil and gas prices soaring to really high levels after Russian troops moved into Ukraine. So I suppose what we’re seeing this year is more of a return to normal on the pricing front and on the profit front. But on a historical basis, these are still very, very strong profits from the oil majors.

Marc Filipino
Myles, you report that analysts think that these receding profits will mean more scrutiny over the company’s energy transition plans. Why is that?

Myles McCormick
Yeah. So. Over the past year, when Russia’s invasion of Ukraine upended energy markets, there was a very real worry there wouldn’t be enough oil and gas to go round. When there’s a chance of supply disruption prices go up and prices go up at the pump. The priority then for people and therefore their politicians is to kind of make sure those prices don’t stay elevated for too long. And now that prices have come back down, it’s less of a focus for politicians to ensure that oil and gas is still being pumped and still being supplied to market. So we kind of revert to that previous kind of priority, and that is climate change and energy transition.

Marc Filipino
As we mentioned before, BP has earnings coming out today. What can we expect?

Myles McCormick
Well, I think we’re probably going to see more of the same. On the profit front, they’re probably going to see a massive decline in profit prices last year, as we saw with the four other majors. But there will be also scrutiny of what it says on the transition fronts of its investment in renewables and green energy because it did slow the pace of planned retreat from oil and gas earlier this year.

Marc Filipino
Myles McCormick is the FT’s Houston correspondent. He focuses on energy. Thanks, Myles.

Myles McCormick
Thanks, Marc.

Marc Filipino
Before we go, strap in Birkenstock could be going public. The private equity firm that owns the iconic German sandal maker, L Catterton, is considering an IPO as soon as September. Sources told the FT that Birkenstock could be valued at more than $8bn. It would be L Catterton’s second listing in just a few months, which is kind of rare right now because a lot of private equity firms are having trouble cashing out.

You can read more on all of these stories at FT.com for free when you click the links in our shownotes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.