More Jumbo

On the macro front, this week was dominated by interest rate decisions, with the US Federal Reserve and Bank of England just some of the central banks hiking rates this week. Japanese inflation, meanwhile, hit a three-decade high, showing the inflation problem really is global. On the stocks front, Volkswagen’s planned listing of Porsche was off to a great start this week. But it seems like their electrification efforts are only going to get more expensive after the price of lithium – the key metal in electric vehicle batteries – jumped to a new record high this week. Finally, news broke out this week that the US is considering a two-year ban on algorithmic stablecoins like TerraUSD, which collapsed spectacularly earlier this year.

Macro

Another Fed meeting, another jumbo rate hike: the US central bank increased interest rates by 75 basis points for a third straight time on Wednesday. A hike that size was in-line with what traders were expecting after August’s worse-than-expected inflation report, which showed consumer prices unexpectedly increased on a month-on-month basis. What’s more, Fed chair Jerome Powell reaffirmed the US central bank’s strong determination to bring inflation down to its 2% goal, signaling even more aggressive rate hikes ahead. Officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023. That’s a steeper rate path than officials laid out in June, and implies a fourth-straight 75 basis-point hike could be on the table for the next meeting in November. All in all, the Fed meeting was more hawkish than investors had anticipated, sending US stocks and bonds lower (and the dollar higher) on Wednesday.

In updated Fed forecasts, estimates for US economic growth in 2023 and 2024 were marked down to 1.2% and 1.7% respectively, reflecting a bigger impact on the economy from tighter monetary policy. And when asked about a potential recession, Powell refused to rule it out, adding that the chances of a soft landing are diminishing. Long story short, that basically means that the Fed is willing to tip the US economy into recession to bring inflation under control.

A day later, the Bank of England (BoE) delivered a second consecutive interest rate hike of 50 basis points, part of its battle to bring down the country’s high inflation. The move takes the BoE’s benchmark rate to 2.25% – its highest level since the start of the global financial crisis in 2008. The central bank also lowered its forecast for peak inflation from more than 13% to less than 11%, and suggested a deep recession may be averted as a result of new Prime Minister Liz Truss’s energy relief plan. But officials still project a technical recession in the second and third quarters of 2022, as the economy takes a hit from the extra bank holiday for the Queen’s funeral.

Finally, here’s one for you in case you need any more evidence that the inflation problem really is global: new data out on Tuesday showed consumer prices in Japan rose by a more-than-expected 2.8% in August from a year ago – the country’s highest inflation rate since 1991, barring the effect of sales tax increases. Despite that, the Bank of Japan (BOJ) is not expected to change its policy of keeping interest rates at rock-bottom levels. That means the BOJ is an outlier among central banks which has, in turn, caused the yen to slump to a 24-year low relative to the dollar. While that’s making energy and food imports more expensive for resource-poor Japan, it’s helped Japanese firms book the most profits since 1954 by inflating their overseas earnings when brought home.

Stocks

Volkswagen’s planned listing of Porsche was off to a great start this week. VW gathered more than enough investor orders to cover the €9.4 billion IPO of the iconic sports-car maker just hours after it started taking requests for the share sale. And at €9.4 billion, the IPO is set to be the fifth-biggest in Europe and comes despite this year’s market selloff. According to Bloomberg, the IPO’s order book has been covered multiple times over throughout the price range of €76.50-82.50. At the top end of that range, Porsche would be valued at €75 billion, which compares to about €92 billion for its parent Volkswagen. But here’s a stark difference between the two: Volkswagen churns out some 10 million vehicles a year, whereas Porsche – which specializes in luxury cars with high profit margins – sold just 300,000 last year.

During meetings with potential investors, VW pitched the IPO as a chance to invest in a firm that combines the best of auto rivals like Ferrari and luxury brands such as Louis Vuitton. That pitch was made all the sweeter by Porsche’s discounted valuation: at the midpoint of the IPO’s price range, the listing would value Porsche at 10x EBITDA (earnings before interest, tax, depreciation and amortization), according to investment bank Jefferies. This compares to Ferrari’s EBITDA multiple of 23x.

Commodities

The price of lithium – the key metal in electric vehicle (EV) batteries – jumped to a new record high this week. Lithium carbonate prices in China, a benchmark for the metal’s price, hit 500,500 yuan ($71,315) this week – roughly three times what it was a year ago and is more than 10x higher than the pandemic low touched in July 2020. Those higher prices are adding pressure to battery and EV manufacturers alike, who could start seeing their profit margins eroded as a result. And the issues don’t look like they’re going away anytime soon, with lithium supply continuing to lag behind forecasts for EV demand.

Crypto

News broke out this week that the US is considering a two-year ban on algorithmic stablecoins as well as allowing banks and non-banks to issue their own stablecoins. Proposed legislation being drafted in the House aims to target digital assets like TerraUSD (UST), which collapsed spectacularly earlier this year. The proposed law would make it illegal to create "endogenously collateralized stablecoins" whose value is solely based on a different digital asset by the same issuer, which was the exact case of UST. See, while many stablecoins in the crypto market are backed by US dollars held in reserve, UST's peg was directly tied to a sister token called LUNA. Both of these cryptocurrencies crashed back in May, causing investors to lose tens of billions of dollars.

Next week

A few US firms are reporting earnings next week, including Bed Bath & Beyond, Micron Technology, and Nike. On the macro front, we have US consumer confidence and new home sales on Tuesday. The latter will be closely watched by investors to see how rising interest rates are impacting the property market. Across the pond, we’ll get the first flash estimate of eurozone inflation for September, which will play a big roll in determining the European Central Bank’s next move.