The Fed plans to be ‘humble and nimble’ and hawkish

This is an audio transcript of the FT News Briefing podcast episode: The Fed plans to be ‘humble and nimble’ and hawkish

Marc Filippino
Good morning from the Financial Times. Today is Thursday, January 27th, and this is your FT News Briefing.

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The Federal Reserve said it will be “humble and nimble” as it signals that it’ll start raising rates in March, and vaping has been a hot sector for investors in tobacco-friendly China. But then Beijing started cracking down.

Edward White
I think also it just is another one of these cautionary tales for investors and for the markets which always jump on these growth industries in China, but they just turn around and the whiplash can be so fast.

Marc Filippino
But first, we’ll talk about Tesla and why record profits didn’t satisfy investors. I’m Marc Filippino, and here’s the news you need to start your day.

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Tesla raked in $2.3 billion last quarter. The electric carmaker reported those record earnings yesterday, and it is 65 per cent higher than the same quarter the previous year. Here’s the FT’s San Francisco correspondent, Patrick McGee.

Patrick McGee
It’s really amazing if you’re taking like a five-year view how they’ve actually managed to accomplish this, get through a supply chain crisis. It just is remarkable that Tesla really still has the EV market to some extent like to itself. I mean, if you recall, Tesla was plagued for years for never having, you know, back-to-back profitable quarters. Now they’ve got 10 back-to-back profitable quarters. And, you know, I’ve actually marked them in recent months because not only are the profits ballooning, but like they’re not even firing on all cylinders, right? They’re dealing with supply chain shortages. I mean, there’s plenty of things that aren’t going as planned at Tesla, and yet enough things are going right that they’re sort of sweeping the competition in electric vehicles and being rewarded to a degree we’ve never seen in automotive history on Wall Street.

Marc Filippino
So I wanna touch on something you said right there Patrick, and that is that the company yesterday said that supply chain issues are actually going to weigh on the company throughout 2022. And right after that, the share price for a Tesla dropped more than five per cent. It shot up right after that. But it seems like it’s something that’s on investors’ minds.

Patrick McGee
So I think what spooked investors was one, there was a miss on net income. So net income for last quarter, the holiday quarter, was 2.3 billion dollars, and that’s up a staggering 760 per cent from a year ago. But Wall Street sort of got ahead of itself and projected $2.55 billion. So, you know, it’s hard to say that’s a disappointment, but you could see why, you know, a trading algorithm might sort of demand a sell, based on that miss. The other thing, and I think this is really the big macro picture here, is as deftly as Tesla has navigated the supply chain crisis, it very prominently, high up in its press release, said that supply chain constraints would weigh on its results “through 2022”. And you know, as an Apple reporter looking ahead to Apple results later today, that certainly caught my attention because supply chain woes are just hurting even the most sophisticated companies.

Marc Filippino
So I don’t want to be the doom-and-gloom guy here, Patrick. But Tesla’s share price has been down more than 20 per cent this year. Is there any concern that the company might be losing its momentum?

Patrick McGee
The $3 trillion company I follow, Apple, is also down about 12 per cent this year. And, you know, basically just the biggest winners of the pandemic are seeing a hit. As you know, we have rumours of the Federal Reserve tightening or there’s just sort of a shakiness about everything from Russia-Ukraine tensions to supply chain shortages. So, you know, in a sense, companies that did the best in the last year or two are seeing some of the fastest falls right now. You know, whether that has any long-term momentum, who knows? It’s hard to say anything disappointing about the Tesla stock price when the market cap right now is $940 billion.

Marc Filippino
Patrick McGee is our San Francisco correspondent.

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So as Patrick just mentioned, the prospect of rising interest rates are on the minds of investors. And we got more details about those rate hikes yesterday from the Fed. It signalled that it could start raising rates as soon as March. It is a clear shift away from supporting the pandemic economy and more of a focus to fighting inflation. Here’s the takeaway from our Washington bureau chief, James Politi.

James Politi
Powell is really gearing up now for a tightening cycle, and he set the stage for it yesterday. Quantitative easing, the whole bond-buying programme that the Fed launched at the heart of the pandemic, that’s gonna come to an end in early March even before the next meeting. And the rate hikes will proceed in a way that may well be more aggressive than it was during the last sort of recovery. Powell said that the Fed’s gonna be “humble and nimble” about it, and they’re going to adapt their policy based on the economic circumstances. And if inflation is worse than expected or higher than expected for longer, they’re gonna probably hike rates at a more aggressive pace. And if there’s a new setback on the employment front, for instance, then they’re gonna hike more cautiously and it’s gonna be sort of a much slower pace of normalisation of policy.

Marc Filippino
So the Fed also said it will end the pandemic bond-buying programme in March. This has been a huge part of the pandemic stimulus policy. James, how big of a moment is this?

James Politi
It will be a big moment because the Fed launched the latest bond-buying programme and right at the start of the pandemic. It was a big deal last spring when the Fed said it was opening to sort of slowing the pace of those bond purchases. Finally, they’re gonna wind them down, and that was always seen as sort of the precursor to rate hikes. And now, you know, that sequence is clear that the bond buys are gonna end and the rate hikes will begin and there will be a discussion about the balance sheet of the Fed, but that will be focused on whether the central bank should start to shrink it.

Marc Filippino
So, James, what do you make of the market’s reaction to Powell’s comments? The S&P 500 was up most of the day and then as Powell was talking, it just dropped right and it actually ended the day in the red. So I’m wondering what you think it was about Powell’s speech that may have dampened the mood on Wall Street?

James Politi
Well, I think there was a certain hawkishness to Powell, a certain concern about inflation, which sort of shone through his policy outlook and also his words. He mentioned that the inflation picture had gotten worse since December. The Fed was going to, you know, launch this tightening cycle, potentially at a fairly aggressive pace, though not necessarily 50 basis points off the bat. It’s probably going to be a simple 25 basis points hike. But certainly there’s a sense that, you know, inflation is the main risk, and he didn’t try to sugarcoat that in any way. And that concern may have, you know, worried the market.

Marc Filippino
James Politi is the FT’s Washington bureau chief.

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In China, another big company is feeling the heavy hand of Beijing’s regulators. This time it’s Huabao International Holdings. It shares this week tumbled more than 65 per cent on news that authorities were investigating a subsidiary called Huabao Flavours & Fragrances. Our China correspondent, Ed White, told us a bit about the woman who runs it. She’s known as China’s vaping queen.

Edward White
For someone who has been worth seven or eight billion dollars, Chu Lam Yiu or Zhu Linyao as she’s referred to in China, has managed to keep a fairly low profile for many years now. She started Huabao, which is a flavouring and fragrance additive company, back in 1996. So when she was in her mid-twenties and she’s been referred to over the years as one of China’s wealthiest or richest self-made women. Now the company does sell to food producers, but it appears that this wealth has been linked to the growth of sales to tobacco companies. Now that’s including most recently, products used in e-cigarettes and vapes.

Marc Filippino
And vaping has become a big business in China and a boon for stockholders.

Edward White
Prior to this week, shares in Huabao, which is Chu’s company, had surged about seven-fold over the past two years. Now, while much of that gain was really wiped, in one trading session this week, with the announcement of this investigation into the company’s founder. Similar drops have been seen by other companies in the sector over recent months and years. I think also it just is another one of these cautionary tales for investors and for the markets which always jump on these growth industries in China. But they just turn around and the whiplash can be so fast, you know, to have this company lose 70 per cent of its market cap in one trading session in Hong Kong this week was just remarkable to see. And all of that came from one announcement by the company with no detail, and that, to me, just sums up what we’re seeing so much of in China at the moment.

Marc Filippino
Ed White is the FT’s China correspondent.

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Before we go, something else that’s really big in China: iPhones. Apple just reclaimed its position as the top smartphone seller spot in China for the first time in six years. China is the world’s largest phone market, and Apple now has nearly a quarter of it. Apple smartphone shipments rose as its competitor, Huawei, saw sales pretty much collapse due in part to US sanctions. Apple’s also stayed in good favour with Beijing and avoided the anti-foreign sentiment that’s hurt sales at other Western companies.

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

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.