Fed Rate Hikes Looked Done. Why This Warning May Change Things.

Granted, it’s a different economy on the other side of the world, but it’s a cautionary tale that Fed officials ought to be mindful of. The reason for the hike, after four consecutive pauses, is stubborn inflation.

In the U.S. investors will have to wait another week to find out just how stubborn inflation is, with October’s consumer-price index released next Tuesday. It’s a data point that is becoming increasingly important for the Fed, and markets.

The U.S. central bank’s officials have a tough decision to make in the months ahead. They will be mindful of the potential economic impact if they overtighten, yet they could be thinking that one more hike now, after two pauses, could prevent the Fed following its Australian counterpart—forced to increase rates after holding for four meetings.

Minneapolis Fed President Neel Kashkari gave an indication of which way the Fed may lean. He said it’s better to overtighten than to not do enough to tackle inflation, in an interview with The Wall Street Journal.

The odds of another hike by the Fed’s January meeting are still low, at just 15%, down from 39% a week ago, according to CME’s FedWatch tool. But a sticky inflation reading, and more Fed speakers echoing Kashkari’s comments could see those chances edge higher.

The hike Down Under could even tip the balance toward the Fed opting for another increase in December or January—just to make sure.

—Callum Keown

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Epic Games’ Court Challenge to Google’s Android Store Begins

Alphabet’s
Google is defending its Android Play Store in a San Francisco federal court against Epic Games, the maker of Fortnite videogames. The trial opens a second antitrust front for Google, which is separately facing accusations by the Justice Department in Washington, D.C., over the dominance of its search engine.

• The Epic antitrust trial concerns third-party mobile developers, who have accused both Google and Apple, which operates the iPhone App Store, of taking an unfair share of in-app payments and for making it difficult for app creators to communicate with customers.
• The dispute dates to August 2020, when Epic updated its Fortnite game to let it directly bill users for in-app purchases without going through the app stores. After Google and
  Apple
  kicked Fortnite off their stores, Epic sued both companies. Epic’s trial with Apple concluded in September, when it convinced a judge the company should loosen restrictions on how app developers accept payments, but the videogame developer fell short on most claims.
• Wilson White, Google’s vice president of public policy and government affairs, called Epic’s claims “baseless” in a blog post, saying Epic “wants all the benefits that Android and Google Play provide without having to pay for them.” Google CEO Sundar Pichai is among those expected to testify.
• Epic CEO Tim Sweeney said on X, formerly Twitter, that Epic would go to trial alone after
  Match Group
  settled with Google, adding: “We reject Google’s so-called “user choice billing,” in which Google controls, surveils, and taxes transactions between users and developers.”

What’s Next: If Epic wins, Google could be forced to change the 15% to 30% fees it currently charges on digital goods and services users buy. Google said it charges developers some of the lowest fees among major app stores, saying 99% of developers are charged 15% or less.

—Janet H. Cho

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Banks Tightened Standards for Business, Consumer Loans Amid Uncertainty

Banks continued to tighten business loan standards for firms of all sizes in the third quarter, and a “significant” number also tightened lending standards for credit card, automobile, and other consumer loans, according to a Federal Reserve survey of loan officers.

• Banks tightened standards amid weaker demand for loans including a sharp drop in the number of inquiries from potential borrowers. In the midst of economic uncertainty, banks cited a reduced tolerance for risk, deteriorating credit quality, and concerns about funding costs.
• Big banks are signaling that they expect net interest income to bottom out in the next few quarters as they watch whether consumer deposit costs will come down, Jefferies bank analyst Ken Usdin said in a research note.
• Usdin said big lenders are waiting for consumer-deposit repricing to determine their net interest income, the profit made on loans after interest paid on deposits. The Federal Reserve potentially lowering interest rates, a soft jobs report, and a drop in Treasury yields all bode well for banks, he added.
• Citigroup,
  the holding company of America’s third-largest bank by assets, is considering cutting at least 10% of its 240,000 employees, CNBC reported, in what could be one of Wall Street’s largest rounds of layoffs in years. Citigroup declined to comment to Barron’s.

What’s Next: Economists don’t think the lending tightening has ended, with many worried a potential credit crunch could push the economy into a recession next year. “It’s only a matter of time before constrictive credit conditions choke off GDP growth,” said Nationwide economist Oren Klachkin.

—Janet H. Cho and MarketWatch

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WeWork
Files for Bankruptcy Just Months After Issuing Warning

WeWork, the office-sharing firm, finally filed for protection from creditors under Chapter 11 of the federal bankruptcy code Monday night. It came just a few months after it had warned of “substantial doubt” over its ability to stay in business.

• It’s a black eye for SoftBank, which owns about 74% of WeWork’s stock. A combination of bad decision-making, overpriced leases, and the lingering economic effects of Covid-19 meant not even SoftBank CEO Masayoshi Son could save it.
• WeWork shares are down more than 99% this year, and are now likely to expire worthless. Son made one of the best venture investments in history with an early bet on Alibaba. In WeWork, he made one of the worst.
• WeWork shares had been halted pending news during Monday’s trading session. SoftBank, which is scheduled to report quarterly results on Thursday, had declined to comment on the trading halt and what was a potential bankruptcy filing.

What’s Next: The failed stock will leave behind scars on the commercial real estate market—and more damage to the reputation of founder Adam Neumann and his primary ally, SoftBank. Now creditors, under the protection of the bankruptcy courts, will try to figure out if WeWork’s underlying business—short-term office rentals—can be salvaged.

—Eric Savitz

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Housing Affordability Sinks to 39-Year Low

The U.S. housing market hasn’t been this unaffordable since 1984, according to data from
Intercontinental Exchange.
Mortgage rates of nearly 8% pushed monthly payments on principal and interest on a median-priced home to record highs in October, and mortgage applications dropped 47% below prepandemic levels.

• The monthly principal and interest payment, excluding taxes, insurance, and homeowners association fees, surpassed $2,500 in October for the first time since ICE began tracking data in 1975. The payment jumped by $144 from September.
• The typical monthly principal and interest payment has climbed 94% over the last two years, to about 41% of household income. That’s up from 25% of household income for the past 35 years.
• The last time affordability was this low in the 1980s, mortgage rates were in the double digits, and the average home cost about 3.5 times median income. For homes now, the ratio is nearly 6-to-1, said Andy Walden, vice president of enterprise research at ICE.
• Cleveland, where monthly payments are 26% of household income, was the most affordable real estate market, followed by Oklahoma City and Pittsburgh. Los Angeles, where P&I payments are 77% of household income, was the least affordable, followed by San Diego and San Jose.

What’s Next: Although home prices rose 4.3% in September from a year ago, they gained only 0.4% from August, and ICE expects the slowdown to continue. Home prices have cooled in 49 of the 50 largest U.S. markets, the report said.

—Janet H. Cho

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RingCentral Raises Outlook—Sees AI Opportunity in Call Centers

RingCentral’s
third-quarter results beat its own forecasts and Wall Street expectations, and the cloud-based communications services firm raised its full-year outlook. Ring has seen stiffer competition from rivals
Microsoft
Teams and
Zoom Video Communications.

• For the quarter, RingCentral’s revenue rose 10% from the same time last year. Subscription revenue also rose 10%, to $531 million. Its adjusted operating margin of 19.1% also beat its own guidance. It raised its buyback authorization by $100 million.
• CEO Tarek Robbiati told Barron’s the company is taking steps to broaden its product portfolio, in particular in contact-center software and in niche video applications. In August, RingCentral acquired an events software business from the start-up Hopin.
• In contact centers, Robbiati said, the company is shifting from being a reseller of third-party software solutions to creating its own platform specifically targeting midsize companies. Ring is holding an online event on Nov. 14 to unveil new products for virtual events and call-center units.
• RingCentral projects fourth-quarter revenue will rise between 8% and 9%, to between $566.5 million and $573.5 million. For the full year it now sees revenue rising 11%, to between about $2.095 billion and $2.101 billion. It also increased its free cash flow forecast for the year, to a range of $290 million to $300 million.

What’s Next: Robbiati sees an opportunity to apply artificial intelligence to call centers, improving interactions before, during, and after calls. He also sees an opportunity for better tracking of customer interactions, summarizing calls, and analyzing customer feedback.

—Eric J. Savitz

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner