The Fed and Markets Disagree on Rate Cuts. Here’s Why.

The dollar also rose, in no small part because the U.S. economy is looking more robust than Europe’s. Europe was chasing the Fed as interest rates rose earlier this year, now it looks possible that the BOE and the ECB get ahead of the Fed on the way down.

Nevertheless, expect all three central banks to push back against expectations for early rate cuts. The Fed and the ECB publish new forecasts that may give some hints about reductions, but the rhetoric will almost certainly focus on how high rates need to stay.

The Fed and its peers are well aware of what they don’t know now. Inflation has slowed very quickly, and that’s a little bit of a mystery. Unemployment remains historically low. Wage growth and services inflation are still relatively hot. On the other hand, it’s also not clear how much past rate hikes are going to weigh on the economy in the next few months.

When inflation started picking up two years ago, central banks thought they knew what was happening, and that it would be transitory. Now that inflation is coming down, they are more humble. And in that situation, they’ll want to err on the side of higher rates to prevent inflation from taking off again.

—Brian Swint

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Fed Meeting Seen as Setting Tone for Future Cuts

As the Federal Reserve prepares to meet Tuesday and Wednesday for its final policy decision of the year, economists and investors have started to talk about when officials can start cutting interest rates and by how much. Investors are worried the Fed will wait too long and trigger a recession.

• Another fear is it starts cutting too soon, before it gets inflation under control, with the uncertainty of shocks such as a potential spike in oil prices. The Fed is expected to hold rates steady again, but markets reflect the 44% probability of a March cut, the CME FedWatch tool says.

• The core consumer price index for November, due out Tuesday, is expected to rise 4% from the same time last year, excluding food and fuel. That would be even with the October figure. The Producer Price Index for November, out on Wednesday, is expected to slow from a month earlier.

• The economic outlook has improved as inflation and wage growth slow. While Fed officials will release a new set of economic projections on Wednesday, their last outlook in September targeted core inflation of 3.7% for 2023 and 2.6% for 2024, going lower after that.

• In addition, the Fed’s new “dot-plot” projections are expected to show 50 basis points of cuts in 2024, the same forecast as in September, MarketWatch reported. It is expected to continue to forecast slower economic growth in 2024 but no recession.

What’s Next: MUFG Bank U.S. economist Agron Nicaj told MarketWatch that slower growth and subdued inflation gives Fed Chair Jerome Powell reason to be dovish. Powell is likely to say interest rates are “well into restrictive territory,” hinting they might not have to stay so high for so long, Nicaj said.

—Liz Moyer

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Cigna Looks for ‘Bolt-On’ Deals, Boosts Stock Buyback

Cigna
has pivoted away from large transactions, saying Sunday that given the current environment it would consider “bolt-on” acquisitions aligned with its strategy and value-enhancing divestitures, while looking to spend most of its discretionary cash for stock buybacks next year.

• The move comes as the health insurer steps away from exploring a deal with
  Humana
  that would have created a $140 billion health-insurance industry giant, The Wall Street Journal reported, saying the companies couldn’t agree on price and other terms. Cigna didn’t respond to a request for comment.

• Cigna added $10 billion to its buyback plan, now totaling $11.3 billion. About $5 billion of the stock will be bought between now and the middle of 2024. CEO David Cordani said Cigna shares are significantly undervalued.

• The insurers were discussing a deal in which Cigna would have acquired Humana in a cash-and-stock transaction with a large stock component, the Journal reported. Cigna shares have dropped nearly 10% since the talks emerged amid questions about paying for the deal with stock.

• The stock drop signaled uneasiness about Humana’s willingness to make the deal, and whether management believes growth could moderatein the future, Mizuho healthcare equity strategist Jared Holz told Barron’s.

What’s Next: Cigna reaffirmed its full-year 2023 outlook for adjusted income from operations of $24.75 a share. It said it continues to target adjusted income from operations of at least $28 a share for full year 2024.

—Liz Moyer and Janet H. Cho

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Macy’s
Gets a $5.8 Billion Buyout Bid

A group of investors has offered $5.8 billion to buy Macy’s and take the department-store chain private, The Wall Street Journal reported Sunday. The proposal represents a 21% premium to Friday’s closing price, sending the stock higher early Monday.

• Arkhouse Management, a real-estate focused investing firm, and global asset manager Brigade Capital made the buyout proposal on Dec.1, according to the report, which cited people familiar with the matter. They already have a large stake in Macy’s and offered to buy the remaining shares for $21 a share, the report added.

• The investor group believes Macy’s is undervalued in the public market and it could be willing to increase its offer, the Journal reported. The stock, after years of intense competition from online retailers, is trading significantly below the highs of around $70 reached in 2015.

• Coming into Monday’s trading, the shares are 16% down in 2023 despite jumping 59% over the past month. The retailer beat earnings and sales expectations in its third-quarter earnings last month, and hiked its full-year profit outlook ahead of the key holiday season.

What’s Next: It’s a crucial holiday season for retailers who need to entice consumers amid signs of increased caution and a squeeze on spending. The Macy’s bid suggests the market may be undervaluing the sector, which could boost shares in the company’s rivals too.

—Callum Keown

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EU’s New AI Rules Catch Criticism from Industry Groups

New rules out of the European Union governing artificial intelligence already have been criticized by industry, social, and consumer groups about their scope and cost, but they are expected to reverberate through the West’s tech industry as other governments tackle the issue.

• First proposed in 2021, before OpenAI’s ChatGPT and Google’s Bard launched, the rules would require AI systems to comply with EU copyright law and summarize the content used to train AI models. The EU also has competition and online content rules for
  Meta Platforms,

  Alphabet
  -owned Google, and others.

• The proposal bans several AI applications, such as untargeted scraping of images to create facial-recognition databases, and sets rules for systems that lawmakers consider high-risk, the European Parliament said. It also includes transparency rules for general-purpose AI systems and the models that power them.

• DigitalEurope, a tech industry group, said compliance with the new rules would be expensive and risk putting Europe at a disadvantage. Daniel Friedlaender, head of the Computer and Communications Industry Association’s European office, said critical details are still missing.

• The European Consumer Organization said the rules weren’t strong enough to protect consumers from harm caused by AI systems, left too many issues unregulated, and rely too much on companies to self-regulate, deputy director-general Ursula Pachl said.

What’s Next: Parliamentarians and representatives from the EU’s 27 countries still must approve the proposal, which is unlikely to take full effect until 2025 at the earliest and threatens stiff financial penalties for violations.

—Janet H. Cho

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House Rentals Next Year Could Become New Starter Home

A surge of rental housing coming available in 2024 and a growing number of incentives might encourage prospective first-time home buyers to keep renting, and opt for larger apartments or single-family rentals, even as mortgage rates and other costs are poised to come down.

• One factor is larger supply. As of October, 361,000 large multifamily construction projects have been completed this year, census data show. That’s more than any comparable period since 1987, and follows a spike in multifamily housing starts in 2021 and 2022.

• That has contributed to softer rents. The median national rent gauged by ApartmentList in November was 1.1% lower than one year prior. Rents in cities such as Austin, Portland, San Francisco, Phoenix, and Atlanta have dropped even more dramatically.

• Two residential real estate technology companies see demand for single-family rentals increasing in 2024, and the rentals becoming the new starter home, Zillow wrote. Redfin expects demand for large rental apartments and houses to climb as more young families embrace renting.

• Unlike last year, when people entered bidding wars to lock down rental homes or apartments, landlords this year added incentives such as a month of free rent and fee waivers. Landlords are more willing to accept renters with lower credit scores and fixing cosmetic issues before move-in.

What’s Next: Jay Lybik,
CoStar’s
national director of multifamily analytics, expects 450,000 new multifamily units delivered in 2024. That means more options and stability for renters who are waiting out the mortgage market, continuing discounts, and incentives.

—Shaina Mishkin and Janet H. Cho

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MarketWatch Wants to Hear From you.

After decades of squirreling away money for retirement, people can feel incredible anxiety when it’s time to shift into spending mode. How can I devise a strategy for spending money in retirement that can alleviate some of that stress?

A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to [email protected].

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—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown, Steve Goldstein