Jobs, Inflation, and Fed Decision. Why the Santa Rally Is at Stake.

The Federal Reserve will pore over the November jobs report, and Tuesday’s inflation reading, before making its final decision of 2023 on Wednesday. The latter stages of the year have been dominated by the question of when the central bank will begin cutting interest rates.

Traders see a 58% chance of that happening by March, compared to just an 18% probability a month ago, according to CME’s FedWatch tool. That shift has buoyed the stock market–the Dow Jones Industrial Average has jumped 6% over that same period.

However, the rapid change in rate-cut expectations comes with a warning that the market move could unravel just as quickly if the data or the Fed spring a surprise.

Anything that further cements the market’s view for a first rate cut in March will likely support stocks, and improve the chances of a Santa rally. But the risks are now skewed more to the downside.

The Fed is unlikely to entertain the idea of a March rate cut when it meets next week. It may stick to its “wait and see” narrative, or even reiterate that more work needs to be done to tackle inflation. The market may not believe much of it anyway, since it has mostly disregarded rhetoric that rates could stay higher next year.

That just leaves the data. The labor market and inflation can’t run too hot if stocks are to end 2023 with a final festive flourish.

—Callum Keown

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Broadcom, C3.ai CEOs See Generative AI Demand Accelerating

Broadcom
met revenue expectations in the fourth quarter, and full year results were up 8%. CEO Hock Tan said the gains were driven by investments in accelerators and network connectivity for artificial intelligence. It expects the semiconductors business to sustain a mid- to high-single digit revenue growth rate in 2024.

• Adjusted fourth quarter earnings of $11.06 a share topped Wall Street’s expectations. Revenue came in at $9.3 billion, up 4% from one year ago. Its semiconductor-solutions segment had revenue of $7.3 billion, and infrastructure software revenue was $2 billion.
• On a call with analysts, CEO Tan said generative AI-related demand is accelerating. The contribution of the recently acquired VMware is expected to result in 2024 revenue of $50 billion, and adjusted earnings of $30 billion before interest, taxes, depreciation, and amortization.
• The CEO of
  C3.ai,
  which makes AI software for businesses, told Barron’s in an interview that the opportunity in generative AI is “staggering,” explaining why the firm is spending a chunk of its $800 million in cash to capture more market share.
• Tom Siebel, the CEO, told Barron’s the company plans to launch a brand campaign, add staff, build more applications, and fine-tune more models. He says that the emergence over the past year of generative AI has effectively doubled the company’s market opportunity.

What’s Next: For the January quarter, C3.ai projects revenue of between $74 million and $78 million, with an adjusted operating loss of between $40 million and $46 million. Analysts had expected revenue of $77.7 million, and an adjusted operating loss of $21.1 million.

—Tae Kim and Eric J. Savitz

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White House Threatens to Seize Drug Patents to Lower Costs

The Biden administration is threatening to seize patents on certain drugs that were developed with taxpayer money and license generic versions of them if their prices are deemed too high, which would force the pharmaceutical industry to lower the costs of medications. But the initial implications appear limited.

• Federal agencies have had so-called march-in rights since 1980, but have never used them. It isn’t clear if the National Institutes of Health can march in on a drug based solely on price, but President Joe Biden called it an important step toward ending price-gouging by the industry.
• The proposal could theoretically apply to virtually every branded drug. All but two of the 356 new drugs the Food and Drug Administration approved between 2010 and 2019 were NIH-funded, according to an April 2023 paper published in JAMA Health Forum.
• “Nothing about this is positive for the pharma industry,” said Chris Meekins, Raymond James’ Washington healthcare policy analyst. Drug-pricing expert Dr. Aaron Kesselheim of Harvard Medical School told Barron’s that marching-in rights would likely only apply when drug prices are “truly unreasonable.”
• The White House’s proposal is expected to face significant legal opposition from drugmakers. The drug industry group PhRMA opposes the idea, calling it a loss for patients who rely on public-private partnerships to advance new treatments and cures, said Megan Van Etter, senior director of public affairs.

What’s Next: The government’s moves come as acquisitions are picking up in the pharmaceutical sector.
AbbVie
announced an $8.7 billion all-cash deal to buy
Cerevel Therapeutics,
which makes treatments for schizophrenia, Parkinson’s disease, and mood disorders. It is also planning to buy cancer treatment developer
ImmunoGen
for $10 billion.

—Josh Nathan-Kazis and Janet H. Cho

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Lululemon Athletica Sees Slowing Sales Growth Ahead

Lululemon Athletica
is the latest retailer to warn of softening sales heading into the heart of the holiday shopping season, issuing a fourth-quarter outlook that fell short of Wall Street’s expectations. Though sales were up 19% in the third quarter, it said it was navigating an “uncertain” economy.

• Fourth-quarter revenue is expected to range between $3.14 billion and $3.17 billion, and earnings are expected to range between $4.85 and $4.93 a share, both below analysts’ estimates. The sales projection points to slowing growth of around 14% for the final quarter.
• For the October quarter, same-store sales rose 13%, and the company tweaked its full-year forecast slightly higher. For fiscal 2023, Lululemon said revenue will rise 18%, slightly higher than previous guidance.
• CFO Meghan Frank told analysts that they were pleased with the trends seen from the start of the holiday, but with much of the fourth quarter still to come, they are planning a business “for multiple scenarios.”
• Total consumer credit rose $5.2 billion in October, down from a $12.2 billion gain in the prior month, the Federal Reserve said Thursday. That is a 1.2% annual rate, down from 3% in September. Economists expected credit to rise $9.1 billion in October.

What’s Next: Lululemon’s board approved a new $1 billion stock repurchase program on Nov. 29. The company bought back $210.8 million of shares during the quarter and has $243.2 million remaining in its previous stock repurchase program.

—Janet H. Cho and Sabrina Escobar

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Buying ‘12 Days of Christmas’ Gifts Would Cost $47,000

True Loves will pay a record $46,729.86 this season to buy all the gifts mentioned in “The 12 Days of Christmas” song. Scrooges everywhere can blame the 2.7% increase from last year on the rising price of turtle doves, laying geese, and lords-a-leaping.

• PNC Financial Services Group’s 40th annual Christmas Price Index calculates how much it would cost to buy everything from the partridge in the pear tree through the 12 drummers drumming. Buying all 364 gifts repeated through the whole song would cost $201,972.66.
• The most recent reading has the consumer price index up 3.2% from a year ago. This year’s Christmas price increase isn’t because of the cost of fowl, but more because of rising wages for skilled labor. Wages for performers are up 3.3% in aggregate—but not for all workers.
• Among other increases, the cost of a partridge in a pear tree rose 14%; two turtle doves increased 25%; three French hens cost 3.5% more; and six geese-a-laying rose 8.3%. Prices for four calling birds, five gold rings, and seven swans-a-swimming all stayed the same as in 2022.
• Higher U.S. labor costs explain why it costs 4% more this year to buy 10 lords-a-leaping, 6.2% more for 11 pipers piping, and 6.2% more for 12 drummers drumming, Amanda Agati, the chief investment officer of PNC’s Asset Management Group, told Barron’s in an email.

What’s Next: But there were no raises for eight maids-a-milking, because PNC calculated using the $7.25 federal minimum wage as a proxy, which hasn’t risen in many years, Agati said. The nine ladies dancing, who received a 10% raise in 2022, didn’t get any raises this year.

—Janet H. Cho

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Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to thebarronsdaily@barrons.com.

1.
Alphabet
-owned Google unveiled a new artificial intelligence technology it says is its most powerful yet as it races to compete in the AI space with the likes of OpenAI. What is the name of this new technology?

a. Pisces

b. Gemini

c. Taurus

d.
Capricorn

2.
Alaska Air Group
announced a $1.9 billion deal, including debt, to combine with which of these rival carriers in a bid to compete more effectively with the big four airlines?

a. Republic Airways

b. Air Wisconsin

c. Frontier Airways

d.
Hawaiian Airlines

3. Which of Elon Musk’s companies is raising $1 billion from outside investors, at a minimum investment of $2 million each, according to a Securities and Exchange Commission filing this week?

a. xAI

b. X

c. The Boring Company

d. SpaceX

4. Realtor.com says which of the following metro areas will have the hottest housing market in 2024, forecasting an 8.3% rise in house prices and a 14% jump in sales.

a. Worcester, Mass.

b. Grand Rapids, Mich.

c. Toledo, Ohio

d. Rochester, N.Y.

5.
Apple
crossed back above the $3 trillion market value level this week for the first time since August, retaining its spot as the most highly valued U.S. company. When did the iPhone maker first cross that threshold?

a. June 30, 2023

b. April 30, 2023

c. February 30, 2023

d. December 30, 2022

Answers: 1(b); 2(d); 3(a); 4(c); 5(a)

—Barron’s Staff

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—Newsletter edited by Liz Moyer, Brian Swint, Rupert Steiner and Steve Goldstein