HOT AIR BALLOON FLIGHT

By Julia Horowitz • Thursday, December 16

Good morning. In today's newsletter: The Federal Reserve could hike interest rates three times next year. We break down what that means. Plus, Reddit is going public, and Wall Street has fallen in love with bowling.

 

US stock futures are higher after the S&P 500, Dow and Nasdaq Composite posted solid gains on Wednesday. Markets in Europe rose in early trading, following stocks in Asia.

 

🚨 This just in: The Bank of England is hiking interest rates as the United Kingdom battles a surge in consumer prices. Read more here.

 

▸ Forwarded this newsletter? Want global markets news and analysis from CNN Business reporters every morning? You can sign up here.

MARKET FLASH

Rates are set to rise in 2022. Here's what that means

The Federal Reserve has sent a clear signal that the era of rock-bottom interest rates will end in 2022.

 

What's happening: Rates have been near zero since March 2020, when government leaders around the world shut down the economy to slow the spread of Covid-19. But on Wednesday, the Fed — in addition to announcing a faster end to its emergency bond-buying program — projected that its benchmark interest rate could rise to 0.9% in 2022. 

 

The policy pivot, which comes as inflation rises at the fastest pace in almost four decades, could have big ramifications for markets and the economy.

But Paul Donovan, chief economist of UBS Global Wealth Management, told me that it's important to separate out what rate hikes will and won't do.

 

Borrowing costs would go up — while remaining extremely depressed.

 

"If you look at the real cost of capital in the broader economy, that's still going to be very low," he said.

 

Before the pandemic, the Fed's target interest rate was between 1.5% and 1.75%. That was also super low by historical standards. At the end of 2007, before the financial crisis, interest rates were at 4.25%.

 

Donovan does not think the move will have a profound effect on inflation, noting that many of the reasons prices have shot up this year — including the jump in energy prices and the cost of used cars — are tied to the effects of the pandemic and have little to do with central bank policy.

 

"The oil market doesn't care about [Fed Chair] Jay Powell," Donovan said. "Used car dealers don't care about Jay Powell."

 

In short, the Fed wants to make sure rates aren't too low when the economic recovery is complete so it has ammunition to fight another crisis.

 

That doesn't mean prices will keep climbing, however. Donovan thinks that as Americans deplete their savings from the pandemic, inflation will begin to drop "quite sharply" on its own.

 

"[Even if] the Fed does nothing, inflation comes down," he said.

 

What does this all mean for markets? Donovan said the situation would be different if the Fed wanted to raise interest rates to rein in economic growth. But that's not what he sees happening here.

 

"This is more about setting the scene for when we return to a more normal economic cycle," Donovan said. "The Fed is not on an anti-growth campaign."

 

That could minimize disruption for investors — assuming the Omicron variant, or other pandemic twists and turns, don't spoil the party.

 

"Omicron definitely has the potential to create distortions in the near-term but I don't think it disrupts the narrative," Donovan said. "The general story for 2022 is intact."

 

VOICES

Holiday shopping slowed. It's not necessarily bad news

"Retail sales growth slowed considerably in November. I see this more as a sign that Americans started their holiday shopping early, as opposed to bad news for retailers."

 

TED ROSSMAN, CREDITCARDS.COM INDUSTRY ANALYST

 

Read more from CNN Business.

DEAL MONITOR

Reddit fueled a market craze. Now it's going public

Reddit was one of the driving forces behind the meme stock craze that took financial markets by storm in 2021, sending shares of companies like GameStop surging 2,700% in a matter of weeks.

 

Now, the social media site wants to raise money itself.

 

The latest: Reddit announced Wednesday that it had confidentially filed paperwork for an initial public offering with the US Securities and Exchange Commission.

 

It's not clear how many shares the company wants to list, or its proposed price range. When the company announced it was raising money from private backers over the summer, it said it was valued at more than $10 billion.

 

For comparison: Facebook, the biggest social network, is valued at more than $950 billion, while Twitter has a market value of $35 billion.

 

Reddit's Wall Street launch could garner attention from investors who have started combing through the popular WallStreetBets group in search of the next stock target of everyday investors who use apps like Robinhood. 

 

Robinhood itself has had a rough year, with shares now trading at $19.50, well below their IPO price of $38. The dating app Bumble, which also went public in 2021, has seen its shares fall to $35.17 after kicking off at $43 apiece.

UP NEXT

Adobe reports results before US markets open. FedEx and Rivian follow after the close.

Also today →
▸ US housing starts and building permits for November arrive at 8:30 a.m. ET, along with initial jobless claims for last week.

▸ The flash reading of the IHS Markit Purchasing Managers' Index, a closely-watched gauge of economic health, follows at 9:45 a.m. ET.

 

Coming tomorrow: The Bank of Japan caps off a big week of central bank announcements.

WHAT WE'RE READING AND WATCHING

▸ Chinese private equity tycoon Wang Chaoyong goes missing (Caixin)
▸ Apple delays its return to offices indefinitely (CNN Business)
▸ Turkish lira slumps to new low after interest rate cut (Reuters)
▸ Bruce Springsteen sells song catalog to Sony in huge deal (Billboard)
▸ Kraft will pay you $20 not to make cheesecake (CNN Business)
▸ Investors bargain hunt Evergrande bonds amid default (WSJ)

FINAL WORD

Wall Street has fallen in love with bowling

Bowling is thriving, and the biggest company in the business wants to cash in.

 

The latest: Bowlero, which is the world's largest operator of bowling centers and owns the Professional Bowlers Association, will make its Wall Street debut on Thursday following a merger with Isos Acquisition Corporation, a special-purpose acquisition company, or SPAC.

 

The lifting of lockdowns has led to a bowling boom, my CNN Business colleague Paul R. La Monica reports. The company said third quarter revenue rose by more than 20% compared to the same quarter of 2019. Bowlero has also returned to profitability.

 

Bowlero President Brett Parker told Paul that there's still tons of room for growth, noting that there are roughly 3,500 independently-owned bowling alleys in the United States.

 

"This industry is still fragmented and ripe for roll-ups," Parker said.

 

He's also interested in setting up bowling as the next TV phenomenon.

 

The thinking: The SPAC taking Bowlero public is run by two former World Wrestling Entertainment executives. Parker said that the PBA will leverage their expertise to amp up bowling's entertainment value — without going overboard.

 

"Nobody is going to walk up behind anybody getting ready to bowl and hit them with a chair," Parker said. "The sport needs to maintain its integrity. But we can make it more engaging. And they know how to take something that is more of a niche product and bring it mainstream."