HOT AIR BALLOON FLIGHT

By Julia Horowitz • Thursday, January 13

Good morning. In today's newsletter: Companies are racing to borrow money before interest rates rise. Plus, investors grapple with inflation that's climbing at the fastest clip in almost four decades, and a look at the first big IPO of the year.

 

US stock futures are flat after the Dow, S&P 500 and Nasdaq Composite ticked higher on Wednesday. Markets in Europe were mixed in early trading, following stocks in Asia.

 

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MARKET FLASH

Companies are hoovering up cheap cash while they can

 

For companies that want to take advantage of historically-low borrowing costs, the clock is ticking.

 

What's happening: In the early days of the year, corporations have been racing to issue debt. Their aim is to tap the market before the Federal Reserve starts hiking interest rates, which have been near zero since the start of the pandemic.

 

In the US market, companies raised almost $96 billion through Wednesday, according to data from Refinitiv. That's the strongest start to the year on records dating back to 2003.

 

"The funding that we've seen in just the first [weeks] of the year has been big, and it not only reflects issuers trying to get ahead of their competition, but also that rates could be 1 [percentage point] higher or more by the end of the year," Bank of America credit strategist Barnaby Martin told me. "This is a very different dynamic than the past few years."

 

The Federal Reserve has indicated it could raise interest rates three times in 2022, though many on Wall Street now expect four hikes or more to rein in price increases (more on that below). Some policymakers have indicated they're not opposed.

 

"I currently have three increases in for this year, and I'd be very open to starting in March," Patrick Harker, president of the Federal Reserve Bank of Philadelphia, told the Financial Times in an interview published Thursday. "I'd be open to more if that's required."

 

Notable issuers in January include car companies like General Motors and Ford, Caterpillar, Deere, insurer MetLife and Dick's Sporting Goods, per Refinitiv.

 

The rush has been evident in the United States and in Europe, Martin said. It's built on a realization that even if borrowing costs remain low by historical standards, access to capital is only going to get more expensive.

 

"If rates really are on the rise from here, then we've seen the best of financing for companies," Martin said.

 

Blue-chip companies with strong credit ratings have been leading the charge, according to Martin. But some issuers with lower ratings have also managed to get in on the action, even though such deals typically take longer to stand up. Cruise line Royal Caribbean closed a $1 billion offering last week.

 

AMC Entertainment CEO Adam Aron took the unusual step of airing his interest in heading to debt markets on Twitter recently. He said his "new year's resolution for AMC" was to refinance some of the struggling movie theater chain's debt to reduce interest expenses and strengthen its balance sheet.

 

Looking ahead: Corporate borrowing is expected to taper off later this year after a brisk start. Paul Watters, head of credit research for S&P Global Ratings in Europe, told me that non-financial corporate issuance is expected to drop by about 7% globally in 2022.

 

One factor is that refinancing will be less attractive once rates begin to rise, Watters said. Companies also already have plenty of cash on hands thanks to the friendly environment for borrowing over the past two years. Additionally, China is trying to reduce corporate reliance on debt financing to limit risks to its economy.

 

Taken together, that could lead to a weaker 12 months. But for now, the rush is on. Companies will definitely be encouraged by their bankers to "consider front-loading issuance activity" with an eye toward rising rates, Watters said.

VOICES

Investors confront rising prices

"Some of us are saying maybe markets are too optimistic. Maybe markets are not looking under the hood of this inflation problem."

 

KRISTALINA GEORGIEVA, IMF MANAGING DIRECTOR

 

Watch her interview with CNN Business.

ECONOMY MONITOR

Inflation rises at the fastest clip in nearly four decades

US consumer prices rose at the fastest pace in 39 years in December, supercharging expectations that the Fed may need to respond more aggressively to rein in inflation.

 

The latest: The US Consumer Price Index rose 7% over the past year, its steepest climb since June 1982, the Bureau of Labor Statistics reported Wednesday.

 

Stripping out food and energy costs, which tend to be more volatile, inflation jumped 5.5% over the past year, the highest rise since 1991. That's a sharp uptick compared to the previous month's reading of 4.9%.

 

The data is feeding predictions on Wall Street that the Fed could hike interest rates more than three times in 2022. That's driving up yields on US government bonds.

 

Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients that the bank expects the yield on benchmark 10-year US Treasuries to climb to 2% "over the coming months, as investors digest the Fed's more hawkish stance along with further elevated inflation readings."

 

The yield on 10-year notes was at nearly 1.75% early Thursday, up from closer to 1.5% at the start of the year.

 

But Haefele doesn't think that the rise in yields, which historically has encouraged investors to pull money from the stock market, will "imperil the equity rally," noting that "year-over- year inflation is still likely to peak in the first quarter and recede over the year."

UP NEXT

Delta Air Lines reports results before US markets open.

Also today: Initial US jobless claims for last week and a report on US producer prices for December arrive at 8:30 a.m. ET.

 

Coming tomorrow: Earnings from BlackRock, Citigroup, JPMorgan Chase and Wells Fargo.

WHAT WE'RE READING AND WATCHING

▸ TSMC thinks strong demand for chips will continue in 2022 (SCMP)
▸ Fed's Brainard: Controlling inflation is 'most important task' (Reuters)
▸ Shipping congestion is growing at the world's top port (Bloomberg)
▸ Have you quit your job? We want to hear from you (CNN Business)
▸ Grocery stores are struggling to stock empty shelves (CNN Business)
▸ Libor, long the most important number in finance, dies at 52 (NYT)

FINAL WORD

Here comes the first big IPO of the year

Private equity firm TPG is about to make its Wall Street debut, the first major initial public offering of the year.

 

Details, details: The company priced its shares at $29.50 each, raising $1 billion. They're expected to start trading Thursday on the Nasdaq under the ticker "TPG."

 

Investor demand for TPG's stock could send a signal to other companies that are debating whether to move ahead with public offerings at a delicate moment.

 

On Wednesday, HR software company Justworks delayed its IPO. It attributed the decision to market conditions.

 

The global IPO market had a record-breaking 2021. But companies are nervous about going public as investors reassess their commitment to risky bets due to expectations interest rates will soon be on the rise.

 

In a report published late last year, EY said that while strong IPO momentum is still expected in 2022, companies should "remain flexible with a plan B in place to meet financing needs in case the IPO timetable is delayed."

 

"It will be imperative for IPO-bound companies to adopt a resilient and flexible strategy that is able to adapt to shifting market conditions," said Paul Go, EY's global IPO leader.