Tale of Two Feds: Will Interest Rates Drop and is FedEx a Tech Company? – WSJ’s Take On the Week – WSJ Podcasts

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Dion Rabouin: Before we get started, we're going to be asking you a question at the top of each show for the next few weeks. We want to know more about you. What you like about the show, and what else we could be doing to help you take on the week. Our question this week is about the way we discuss markets and financial topics. Is it too complicated, do we oversimplify, or are we getting it just about right? If you're listening on Spotify, look for our poll under the episode description, or you can send us an email at takeontheweek@wsj.com. Now, onto the show.
What's good, everybody? I'm Dion Rabouin for the Wall Street Journal and this is WSJ's Take On the Week, the show where we break down the most important things to watch in business and financial news. We cut through the noise to get you ready for what matters.
You already know what time it is. It is Fed Week. The Federal Reserve Rate Setting Committee gets together this week, so all eyes in the market will be on Chair Jerome Powell and the Fed's two-day meeting. The Fed Fund's futures market shows that investors have taken recent comments from Powell to heart and written off any chance that the Fed cuts rates this month. But our guest today, Torsten Slok, the chief economist at Apollo Global Management, thinks the Fed could take Wednesday's meeting even a step further. We'll talk with Torsten about his hot take and what the possibility of fewer rate cuts, or maybe even no rate cuts this year, could mean for the market.
We're also looking ahead to this week's earnings report from FedEx, which has been looking to brand itself as a tech company. We'll talk about what that actually means and why the nearly 53-year-old package delivery giant may have a case for being a tech company ahead of its earnings report on Thursday. And finally, we'll be looking forward to Bruce Springsteen's North American tour that starts on Tuesday. Artists like The Boss have become an increasingly popular target for investors looking to package music into asset-backed securities. Hearing about private equity firms securitizing music catalogs may feel like dancing in the dark. But don't worry, I got you.
But first, it's Fed Week. From 2:00 to 4:00 PM Eastern Time on Wednesday, investors will be squarely focused on what the Federal Reserve has to say, from its statement to the press conference to this year's first summary of economic projections. Torsten Slok, a partner and chief economist at Apollo Global Management, has been following the Fed and monetary policy for decades. Before he joined Apollo, he worked at Deutsche Bank on a team that was top ranked in fixed income and equities for a decade by institutional investor. He joins me now to break down what investors need to be looking for at this week's Fed meeting.
Torsten, this month's Fed meeting is one that investors, I think, have at this point kind of written off any chance that the Fed moves interest rates. So why does this meeting matter?

Torsten Slok: Well, it matters because the Fed has had interest rates at this very high level of 5.5% since last July, and there is a discussion in markets about, when will the Federal Reserve begin to cut interest rates? In other words, inflation has now come down. We peaked with inflation at 9.1% in the summer of 2022, and now inflation is down in the range of 3-4%, depending on which measure you look at. So therefore, the debate is starting to emerge. "Well, if we have come so far on lowering inflation, maybe it's time for the Fed to begin to at least think about cutting interest rates."

Dion Rabouin: What's your take on the market right now? I mean, it feels to me like watching, especially the stock market, but also the bond market, that there's some uncertainty starting to creep in. Would you agree with that?

Torsten Slok: Yeah, I agree with that. And what I think is very important, Dion, about your question is that when the Federal Reserve first began to talk about rate hikes, which of course was back in 2021 and '22, we had after that many, many, many quarters where the only direction for Federal Reserve communication was, "Interest rates are going up. Interest rates are going up. Interest rates are going up." That changed dramatically at the December 13 FOMC meeting where Jay Powell and the FOMC members came out and said, "Well, you know what? Maybe interest rates are no longer going up. Maybe the next move from us will actually be that interest rates are going down."
On the back of that, and including on the back of Chris Wallace, FOMC member's speech in November, financial markets have really taken off. Because then, financial markets, the stock market in particular, has come to the conclusion, "Well, if the Federal Reserve tells me that we no longer have an inflation problem, maybe then stock should be going up." And the stock market has, of course, taken off significantly.

Dion Rabouin: But it feels like now that there's a bit of uncertainty. Right? I think from November to about February, there was just this certainty. Right? The Fed's going to cut rates, markets are going to go straight up, buy all the risky stuff. And now, it seems like maybe the markets aren't so sure about that.

Torsten Slok: That's exactly right. So we went from the beginning of the year that the markets were pricing, meaning SOFR futures or Fed Fund futures were pricing that the Federal Reserve would cut interest rates six times this year, more than the three times that the Fed themselves were saying. And now we're back to pricing just three times. So yes, financial markets have taken out Fed cuts. In other words, financial markets are beginning to come around to the view that the Fed has been saying. Namely, "We will probably only cut interest rates a few times."
In my view, I actually don't think the Fed will cut rates this year at all, because I still think that the tailwind, in particular from this increase in the stock market, from this increase in asset prices, home prices, this will provide a tailwind to consumer spending and therefore also to inflation. That will keep the Fed busy battling inflation for the better part of the next six to nine months.

Dion Rabouin: Wow. Okay. That's a hot take, Torsten. Do you think we'll get a sign of that, that expectation as you say that the Fed might not cut all this year, at this week's FOMC meeting?

Torsten Slok: I think we will, because the data for January and February for inflation, it was simply higher than expected. And this has been such an important variable for Jay Powell and the Federal Reserve. So I do think that they will communicate at the meeting this week, both in the statement and also in Jay Powell's press conference, that they're still not quite confident that inflation is on its way back to their 2% target. And that will therefore result in financial markets, in my view, beginning to look at the likelihood that maybe we do need to have interest rates higher for longer. And that's, at least up to this point, still driven significantly by the tailwind of the wealth effects from high stock markets and what that does to people's consumption of everything from how many people are staying at hotels, flying on airlines, eating at restaurants, going to sporting events, to concerts. All this still continues to do really well.
So there's a lot of different things that are moving around. But still, the broad picture here, to answer your question, Dion, is that I still think that the tailwind to consumer spending, and therefore to inflation, continues to be quite strong.

Dion Rabouin: Okay. So let me ask you point-blank then, Torsten. I mean, are you concerned about the rally in the stock market? The S&P 500 is up over 25% over the past year. Is that rally in danger?

Torsten Slok: That's a really important debate, because to a very significant degree, that rally has been driven by a story about AI. So that means that all the other things that you and I have just talked about, namely what happens to interest rates, what happens to inflation, what happens to the Fed, that plays a very small role. It is the AI story and the Magnificent Seven that have driven almost all the returns in the S&P 500. So therefore, one way of answering your question, if you think the AI story will continue, well then the stock market could continue to go up. If you think, on the other hand, that maybe the level of interest rates should matter and will begin to matter, maybe inflation staying higher for longer will be a problem, maybe the Fed being more hawkish will ultimately be a problem, then the stock market should begin to face some headwinds.
So it's really these two apples and oranges up on the scale. Which one do you like the most? Do you like the AI story? Well then, stocks will probably continue to go up. Or if AI earnings begin to disappoint, of course stocks will be going down. And on the other hand, you have a very different story, namely about inflation has been coming down, but not quite enough. So if interest rates stay high, that could certainly also be a headwind. So it is really, in some sense, two different narratives that are battling in the stock market. And if you hang on to the AI narrative, which most equity investors have been putting a lot of weight on, well, then the stock market could potentially go up almost no matter what happens when it comes to the Fed inflation and interest rates.

Dion Rabouin: That was Torsten Slok, Partner and Chief Economist at Apollo Global Management. Up next. Ahead of FedEx's Earnings Report this week, we're going to dig into what makes a tech company and why so many companies, including the shipping giant, want to be one.
Everyone wants to be a tech company. You may have heard that Kroger isn't just a grocery store, it's a digital innovations leader in the retail grocery space, or that JPMorgan isn't just a bank, it's one of the world's biggest technology-driven companies. The cynical way to look at this is that companies are trying to game the market. Tech company stocks historically get higher valuations, meaning their stock prices increase even though their sales profit or revenue haven't risen at a similar rate. When you hear analysts talking about high multiples or PE ratios, that's what they mean. And a higher stock price usually means more compensation for CEOs, company boards, and top executives.
FedEx has recently looked to brand itself as a tech company. That may sound a little strange for folks who think of FedEx as a company that delivers packages, but we could hear a lot about the company's tech ambitions on its earnings call this week. To help explain what makes a company a tech company, and some of the reasons besides the stock price that FedEx and other firms are looking to position themselves as such, I'm joined by WSJ Transportation Reporter, Esther Fung, who covers FedEx, and Spencer Jakab, Editor of WSJ's Financial Insight and Analysis column, Heard on the Street.
Spencer, one way to view this is that companies want to be considered tech companies because tech is hot and they think it will help their stock price. But talk me through that. How does this actually work where being a tech company can boost these companies valuations?

Spencer Jakab: Well, if your main business is technology, and technology, it might be anything having to do with computers, or in a different era, anything to do with microchips, anything to do with jets and space. In the 1920s, it was anything to do with radio or cars or flight. Right? Those were sort of the tech companies of their day. Railroads were the tech company of their day in the 1840s and 1850s, where there was a huge bubble. That was the technology that was revolutionizing the world, but most railroads went out of business. And the same thing goes for most dot coms. And the same thing is going to go, not that they're going to go out of business, but you're not going to get rich on just picking a random tech company, probably today, that has AI in its business description, even though that's a really hot thing. So it's whatever the thing is that didn't exist when you were a kid or before you were born.

Dion Rabouin: Esther, why does FedEx say that it thinks it should be thought of as a tech company? What's their rationale?

Esther Fung: They say that their physical network, where the packages are being transported on, they get so much insights from millions of packages that go through its network daily, and there's digital revenue that could come from this physical network.

Dion Rabouin: That could come?

Esther Fung: Right. I mean, I think investors would definitely want to see proof of this revenue. They want to see sustainability in this possible new revenue stream. And so FedEx is trying to prove that it can do so. It's actively marketing its data to its customers right now. And some customers do tell me, that yes, they do want more insights in their supply chain, and I think there's a price that they would pay for it.

Dion Rabouin: You mean in terms of just customers of FedEx paying a little bit more for getting some more data on their packages?

Esther Fung: That's right. So for instance, I spoke to a meat company. They deliver meat products that need to be delivered in a temperature-controlled setting, and it's perishable. So they want to know when hiccups happen throughout the supply chain, perhaps a sortation facility is flooded and they could be informed beforehand, "Don't send your packages through this facility, find an alternative route." Versus sending all their packages through their facility and then everything goes to waste.

Dion Rabouin: Are there things that investors should be listening for or looking for in these companies earnings reports and earnings calls this week that could tell them whether this pivot to being a tech company is leading to more good or bad things? I'll ask you specifically related to FedEx.

Esther Fung: Investors would definitely want to hear what kind of revenue updates FedEx would provide in terms of the data portion. Have they been able to sell a bunch of data subscriptions, for instance, to customers? Any projection about the revenue stream from data, that would definitely be helpful. Any examples of how they might be leapfrogging their competitors in this space would also be something to look out for. I mean, I'm just giving my wishlist of what I want to hear.

Dion Rabouin: In essence, giving some hard numbers.

Esther Fung: Exactly. Give some hard numbers, give some examples of how great this data is. Don't just tell us, show us.

Dion Rabouin: And Spencer, same question to you. Are there particulars that you think investors will or should be looking for in this upcoming week's earnings reports?

Spencer Jakab: As wide-eyed and optimistic as people are today, I think they're also jaded to some extent. Because if you follow the markets a lot, read a lot of these press releases from various companies that aren't what you traditionally would consider tech, they try very hard to work that in there. They've been trying for a while because tech is so hot, and sometimes they miss the story. I mean, sometimes there really is a tech angle there that's going to affect the bottom line, and they just miss it.

Dion Rabouin: That was WSJ Heard on the Street Global Editor, Spencer Jakab, and WSJ Transportation Reporter, Esther Fung. When we come back, we're going to talk about the connection between E Street and Wall Street.
One more thing before we get out of here. I want to talk about The Boss. Bruce Springsteen begins his North American tour this week with the E Street band on Tuesday in Phoenix, and it got me thinking about asset-backed securities. I know that's probably not the first thing on most people's minds when they think of Bruce, but this is who I am. Don't shame me.
Anyway, Springsteen inked the most lucrative music deal of 2021, selling the rights to his catalog to Sony Music Group for between 500 and $600 million, according to people familiar with the matter. It turns out, that Wall Street has started to get involved in the music industry in a big way. Institutional money managers and private equity firms are turning the catalogs from artists ranging from Miles Davis to Daft Punk into securities that can be traded like stocks and bonds. These music-backed securities rise and fall in value along with the value of the music rights, and they make a consistent payment to investors.
Bret Leas, a partner and co-head of asset-backed finance at Apollo even told me earlier this month that he thinks the size of the music-backed securities market could double or triple in the next 18 to 24 months. I sat down with Sarah Krouse, WSJ's Los Angeles Bureau Chief, to talk about the way music is turning into an asset class for Wall Street.

Sarah Krouse: 2021 was a period in which there were a ton of these deals, and by the time you got to late 2022, things were definitely cooling off. But then towards the back half of last year, you started to see more of these deals happening again. Paul Simon's deal, Bob Burns earlier in the year, Manny Fresh. So you started to see some of that happen. And then towards the end of the year, you heard more about private equity pumping more money into the companies making the investments, which I think is a sign of more institutional interest coming to this.
We're in a period where this is coming back to life, and partly because, as you and our other colleagues at the Journal have reported, there is a lot of institutional interest in the fixed income securities that end up being comprised of these investments. So what you see is more of an assembly line of these deals happening and then sort of moving down a waterfall into institutional investor portfolios, and even in some case, retail investor portfolios. So you see demand for this across Wall Street growing, and that in turn is putting more capital into this as an asset class.

Dion Rabouin: I did wonder though why Bruce Springsteen's catalog was so valuable to Sony. Sarah had an answer.

Sarah Krouse: I mean, gut reaction to that is he's The Boss.

Dion Rabouin: Sometimes the best answer is the simplest one.
Before we go, we made a few corrections to last week's episode after it originally aired. The CEO Economic Outlook Index is produced by Business Roundtable, and we incorrectly referred to it as the CEO Confidence Survey, a different report that's put out by the Conference Board. Also, Business Roundtable Survey was released ahead of schedule after the conversation I had with our guests, but before the episode actually aired.
And that's everything you need to know to take on the week for Sunday, March 17th. The show is produced by Jess Jupiter. Jonathan Sanders is our booking producer. Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Melony Roy is our supervising producer. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are the deputy editors. And Philana Patterson is the head of News Audio for the Wall Street Journal. For even more, head to wsj.com. I'm Dion Rabouin. Stay smart.

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