Forget the Shutdown. Why Stocks Have Plenty More to Worry About.

History suggests that markets usually shrug off a shutdown. A more plausible explanation for the recent slump is changing expectations about interest rates.

Particularly as longer-term bond yields have moved up since the Federal Reserve decision this month, at which Chairman Jerome Powell promised to keep rates higher for longer and produced forecasts to back it up. That’s bad news for stocks because it makes it more expensive for companies to borrow money.

But the Fed isn’t the only reason that bond yields are moving. There could be real concern about government spending and borrowing that is forcing traders to reconsider what the right interest rate is to lend to the federal government. At the same time, the Fed is shrinking its balance sheet by shedding the bond holdings it built up over the past decade.

It’s not all bad news, though. One reason for the repricing of bonds is the Fed’s optimism about the economy into next year. The stronger growth seen in their forecasts should be good for stocks. The inverted yield curve, usually seen as a recession warning, is narrowing toward disappearance, which could also be a good sign.

So take heart. The fourth quarter could be a bit better for stocks.

—Brian Swint

*** Join Barron’s deputy editor Alex Eule and associate editor for technology Eric J. Savitz today at noon when they discuss the outlook for tech companies and individual stocks. Sign up here.

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UAW’s New Threat to Expand Strikes If Progress Stalls

The United Auto Workers, frustrated by the progress of labor contract talks with
General Motors
and
Stellantis,
said it would expand strikes to more facilities for a second time if there isn’t sufficient progress by Friday. The threat came hours before former President Donald Trump visited Michigan.

• Trump’s appearance Wednesday evening at the nonunion auto-parts maker Drake Enterprises comes a day after President Joe Biden joined striking UAW members on the picket line outside a General Motors plant in Belleville, Mich. Both politicians are courting labor voters.

• While Biden was invited to Michigan by UAW President Shawn Fain, the labor leader has been critical of Trump. The union hadn’t had contact with Trump’s campaign, MarketWatch reported. A Trump campaign representative told MarketWatch the union can’t stop its members from meeting with people.

• UAW first expanded its strike last Friday to GM and Stellantis parts and distribution facilities. Strike locations can signal the state of labor talks. Targeting plants making pickup trucks, for example, is a sign the union wants to inflict more pain on auto makers, which earn big profit from trucks.

• Although average U.S. hourly earnings have risen more than 4% a year since the pandemic, current UAW wages have risen closer to 1% to 2% a year over the past four years, the Federal Reserve said. Ford’s new contract with Canada’s Unifor includes 15% wage hikes over three years.

What’s Next: The UAW’s Fain is scheduled to give an update to members at 10 a.m. Eastern time on Friday over Facebook. That’s two hours before the next strike deadline.

—Janet H. Cho and Al Root

***

What Else Could Be Affected by a Shutdown? IPOs.

If Congress can’t pass a spending bill by the end of Saturday, the Securities and Exchange Commission will suspend processing new or pending registrations for initial public offerings, which could be an unwelcome move for companies that have been planning to list, such as sandal-maker Birkenstock.

• There have been 130 IPO filings this year, Renaissance Capital said. But companies and Wall Street bankers have been hoping to see a new flurry of activity after the recent trading debuts of
  Arm Holdings,
  Maplebear’s
  Instacart,
  and
  Klaviyo.

• SEC Chair Gary Gensler told the House Financial Services Committee on Wednesday that a shutdown would force the agency to furlough roughly 93% of its staff, leaving it without enough resources to perform basic market oversight.

• At the Food and Drug Administration, a short shutdown wouldn’t halt drug-approval reviews. More than 81% of its 19,250 employees will be able to review and approve new medical products, oversee factories, and manage product recalls.

• Goldman Sachs’ chief economist Jan Hatzius said the odds of a shutdown starting Sunday are up to 90%, and he estimated it could last two or three weeks, noting that a quick reopening “looks unlikely as political positions become more deeply entrenched.”

What’s Next: Hatzius said political pressure will grow as the Oct. 13 and Nov. 1 pay dates for active-duty military personnel pass, and as federal workers, including active-duty troops, air-traffic controllers, airport security screeners, and others have to do their jobs unpaid.

—Bill Alpert and Janet H. Cho

***

Oil Prices Climb to 13-Month High on Supply Fears

Oil prices climbed to the highest in more than a year Thursday on concerns that the global market will be stretched for supply amid planned production cuts.

• West Texas Intermediate futures, the U.S. benchmark, briefly topped $95 a barrel for the first time since August 2022. Brent Crude futures, the international standard, was also trading around $97 a barrel.

• “Concerns about tight supplies are fueling the rise in oil prices, reigniting worries about inflation and the need for interest rates to stay higher for longer,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

• In another sign of a tight oil market, government statistics released Wednesday showed supplies at the Cushing, Oklahoma storage hub have fallen to the lowest since July 2022.

What’s Next: The Organization of the Petroleum Exporting Countries (OPEC) meets on Oct. 4 to discuss planned reductions in output. The cuts by OPEC, plus additional voluntary cuts by Saudi Arabia and Russia, will reduce global production by 1.3 million barrels a day through the end of the year. That will both drag on economic growth as well as push up inflation, making the Federal Reserve’s job harder.

—Brian Swint

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Meta’s CEO Zuckerberg Is Pushing Forward on Digital World

Meta Platforms
CEO Mark Zuckerberg isn’t giving up his company’s expensive vision for the metaverse, telling attendees at its two-day developer event in Menlo Park, Calif., that one challenge will be combining physical and digital worlds, such as meetings that include those attending in-person and those represented by hologram.

• Zuckerberg called the work “building the future of human connection,” and said “increasingly, the real world is a combination of the physical world we inhabit and the digital world we are building.” Meta Connect, previously called Facebook Connect, hasn’t been held in person since 2019.

• Meta unveiled the Quest 3 virtual reality headset, which will start shipping Oct. 10 for $499. The headset will have no wires and allow users to play in the world around them with virtual objects layered on top of physical surroundings.

• Zuckerberg outlined efforts related to AI software as Meta competes with OpenAI‘s ChatGPT and
  Alphabet
  ‘s Bard. It is rolling out a text-to-image platform called Emu, which will allow sticker generation in its Messenger app. Meta is also adding AI photo editing tools in Instagram next month.

• Meta also has personality driven AI chat bots for various topics, such as “Max the sous chef” or “Lorena travel expert.” Celebrities such as Tom Brady, Snoop Dogg, Paris Hilton, and Kendall Jenner will be the personalities of some bots. Meta AI is a general purpose chatbot assistant.

What’s Next: Meta is targeting the Quest 3 headset at business users and plans to start a platform called Meta Quest for Business that allows app and device management for corporate customers. Meta said that the business version of the device will include support for
Microsoft
365 apps.

—Eric J. Savitz and Liz Moyer

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Peloton and
Lululemon
Strike Content, Apparel Deal

Peloton Interactive
and
Lululemon Athletica
are coming together in a five-year deal that could open new pathways to expand sales. Connected-fitness company Peloton will provide Lululemon with its digital fitness content, and retailer Lululemon will become Peloton’s primary apparel provider.

• The deal allows Peloton to pick off one of its most direct competitors, and means it will likely profit from sales of its Lululemon branded line in the U.S., the U.K., and Canada. Lululemon will stop selling its Studio Mirror at-home exercise screen by the end of 2023.

• After pandemic lockdowns lifted and gyms reopened, demand for Peloton’s connected exercise bikes dropped. Peloton has cut jobs, shaken up leadership, and announced a recall of two million exercise bikes due to injury risks.

• Lululemon bought Mirror for $500 million in 2020, but cited “weakening demand” for in-home fitness hardware in its latest regulatory filing as people returned to exercise studios and gyms. Lululemon will keep providing service and support for current owners of Mirror devices.

• Peloton will eventually develop all content for Lululemon Studio, the companies said. Lululemon Studio replaced Mirror’s subscription program in September 2022.

What’s Next: The apparel will be available across Peloton’s retail and online stores starting Oct. 11. Starting Nov. 1, Lululemon will end its digital app-only membership tier and give Studio-All Access Members access to thousands of Peloton classes for what they pay now.

—Janet H. Cho and Sabrina Escobar

***

The U.S. federal government is barreling toward a partial shutdown Sunday morning if lawmakers don’t act before then, putting workers’ paychecks and environmental and food inspections at risk—but not, at least from a historical perspective, the stock market.

Visitor services at national parks may be halted, passport applications could be delayed and many workers at agencies like the Securities and Exchange Commission would be told not to show up at the office. Meanwhile, other government functions would continue, such as the payment of Social Security and Medicare benefits. How else could a government shutdown affect Americans?

For more, read here.

—Robert Schroeder

***

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