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Financial and Economic News: November 15, 2023

Nov 15, 2023

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Wall Street Divided on Fed Hikes 

First up, let’s recap what's been happening on Wall Street. Right now, opinions are split on what the Federal Reserve should do with interest rates next year. Big banks like Morgan Stanley and UBS both said they think rates should be significantly lowered in 2024 because inflation is slowing down and the economy is getting sluggish. On the other hand, Goldman Sachs is playing it safe with suggestions for fewer rate cuts later on in the next year.

Remember, this disagreement comes after some chaos in the Treasury market which we touched on a few weeks ago, where traders who are trying to cope with economic ups and downs are worried about a lot of debt being sold. UBS believes rate cuts could happen as early as March, and haven’t shied away from admitting they think there might be a recession. On the flipside, Goldman Sachs sees it differently, saying they’re not expecting the first rate cut until late 2024. As for their specific predictions? UBS thinks rates will drop to around 2.5%-2.75% by the end of the next year, while Goldman Sachs thinks it'll be around 3.5%-3.75% by mid-2026.

I know-these are two hugely different opinions. And to make things more interesting, another big player, Morgan Stanley, said they agree with UBS. Although they think cuts could only start as late as June 2024 and could lead to a potential 1.75 percentage point reduction by mid-2026.

So, where does that leave things? Well, a weakening economy is usually a sign that bigger rate cuts are on the way, in which case Morgan Stanley has made the right bet, but other economic factors like the ongoing budget deficit might mean higher rates for longer, in which case Goldman Sachs has it right. These differing views are likely to keep the financial markets uncertain until the Federal Reserve gives its updated plans in their next meeting. In the meantime though, this is a good time to be looking into your investments and making sure that you’re practicing smart strategies for those long-term gains. Remember, whatever happens, it’s time in the market-not timing the market-that works!  

 

US Government Shutdown for Christmas? 

Next up, the looming threat of a US government shutdown on November 18 has finally eased up. And it's mainly thanks to House Speaker Mike Johnson's proposal for a temporary funding plan. With less than a week left before the current spending bill expires, Johnson's plan will help the government avoid deep spending cuts demanded by some of the senate's ultra-conservatives. And I don’t usually get into politics, but for the sake of the economy, bipartisan agreement is really the key here.  

So, exactly what’s on the table? Well, under Johnson's proposal, which would avert immediate spending cuts, funding for certain government agencies would get an extension until January, and others until February. The US has a habit of pushing through last-minute hefty spending bills before they break for the holidays, which fortunately won’t be the case this year. If approved, the plan would impact departments such as Energy, Agriculture, Transportation, Housing, and Urban Development until January 19.  

While the White House is skeptical about the plan, its lack of spending cuts have actually been well-received in the Senate. Having said that though, it’s important to point out that the economic stakes are pretty high right now. Especially since we learned late last week about Moody's negative outlook on the US’ credit rating…. but more on that later.  

Now, what does avoiding a government shutdown mean for you? Well, the big plus is that avoiding a government shutdown means uninterrupted government operations, preventing furloughs for non-essential federal workers and maintaining payments to vendors. Remember folks, shutdowns typically disrupt federal contracts and delay payments, which ripples into the broader economy. Johnson’s proposed plan aims to minimize such disruptions, offering some temporary reprieve and stability for lots of  government functions.

Wegovy Proves Health is Wealth 

Another story that caught my attention this week is from Wegovy. Now, when you think of booming billion dollar businesses, pharmaceutical companies might not be the first thing that comes to mind. But the truth is, big medical corporations know how profitable healthcare can be. And that’s exactly what Novo Nordisk found out this week, when their Wegovy weight-loss drug scored a whopping $14.5 billion boost in market value. Sheesh. In particular, Novo stock surged 4.3%, bringing their shares to a 52% increase just this year.  

So, why the sudden spike though? Well, a new study, championing the power of Wegovy, revealed it's not just a belt-tightener; it's also a potential lifesaver for folks with a history of obesity and heart disease. That’s right, it looks like this drug holds the answer to more than just assisted weight-loss, making Wegovy a potential game-changer in the weight-loss drug scene. 

Now, here's the kicker: Novo wants to add Wegovy to the heart disease-fighting prescriptions, but that might not be the hail mary people think it is. See, not unlike the US economy, addressing the symptoms of an underlying issue doesn’t actually change the root causes of those issues. And looking good on the outside doesn’t necessarily mean things are going well underneath (again, that applies to Novo and the US economy).  

So, will this magical medicine really be able to tackle the world's leading cause of death? I don’t really know. On the business side of things though, analysts are side-eyeing Wegovy's hefty price tag, asking for more proof and a long-term game plan for the company.  If they play their cards right, this might be a game-changer for the global pharmaceuticals industries. 

Moody’s Grim Forecast

 Next, I want to circle back to something I said earlier on and that’s the fact that on Friday we learned that Moody's had downgraded their outlook for the US credit rating. Let's unpack what that means together and see how it could shift things down the road. Despite the US maintaining its AAA rating, Moody's has shifted the outlook from stable to negative, stating that they’re worried about substantial deficits unless we see spending cuts or revenue increased. 

William Foster from Moody's noted a new era of higher interest rates, raising eyebrows as deficits hover around 6% of GDP. In case you’ve forgotten, Fitch Ratings cut our credit rating in August of this year, meaning that Moody's is the only agency giving the US top marks, but that’s exactly why the negative outlook adds fuel to the fire including new stresses about potential government shutdowns. 

Last week we talked about how long-term Treasury yields recently hit a 16-year high, partly due to escalating debt concerns. Now, Moody's projects federal interest payments could significantly increase by 2033 as a consequence of higher interest rates, and kinda rings some alarm bells that fiscal risks are on the rise here in the US.  

Is there someone who’s not so sure things are as bad as they look? US Treasury Secretary Janet Yellen, who brushed off Moody's concerns at the San Francisco press conference, said, "Our economy is strong, and our Treasury securities are still the VIPs of the global financial scene."

Despite her cool stance and the US economy flexing its muscles, the growing deficit (which doubled in the fiscal year through September) has raised eyebrows. Throw in some recent political drama, a few narrowly avoided shutdowns, and ongoing budget brawls, and you've got a seriously complex fiscal puzzle. 

Yellen did say that a shutdown now would be like slamming the brakes on a speeding economic car, and I honestly have to agree with her. With uncertainty spewing from Wall Street to Washington, it's not really clear where our national finances are headed. 

The SEC’s Crypto Crackdown: 

And to wrap up, I wanted to recap on what I think is some really positive news for investors. In the fiscal year 2023, the SEC flexed its regulatory muscles, raking in almost $5 billion in fines and paybacks for investors – the second-highest haul on record. In particular, Wall Street and major players in the crypto game were under the spotlight, with the SEC focusing on digital assets, cybersecurity, and communication oversight. 

SEC Chair Gary Gensler proudly emphasized the benefits to the investing public, describing the division of enforcement's role as a vigilant "cop on the beat." The SEC demonstrated significant activity, undertaking a whopping 784 enforcement actions, marking a 3% increase from the previous year. 

Crypto took center stage in the regulatory crackdown, featuring cases against prominent figures like FTX's Sam Bankman-Fried (who we covered last week), as well as major platforms like Binance and Coinbase. Beyond the crypto headlines, the SEC secured settlements with Wall Street for communication lapses and held auditors accountable for non-compliance with audit rules. BOOM. 

So, while fiscal 2023 didn't break records, it emphasizes the SEC's vigilant watch over the US’ financial sector, and highlights their commitment to maintaining transparency, protecting investors, and ensuring the stability of both traditional and emerging financial markets.

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