Why ‘Soft Landing’ Optimists Shouldn’t Celebrate Just Yet

A big test for the economy

With the S&P 500 in bull-market territory, corporate profits coming in better than expected and surprisingly decent economic growth, the soft-landing optimists are feeling pretty good about the direction of the economy. But their position will be tested as soon as Friday morning.

At 8:30 a.m. Eastern, the Commerce Department will release the June figures for the Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge. Economists expect to see a core P.C.E. reading — which strips out volatile purchases like food and energy — of 4.2 percent, down sharply from a year ago, but still well above the central bank’s target of 2 percent.

A hot P.C.E. number could determine the Fed’s next move on interest rates. Jay Powell, the Fed chair, reiterated on Wednesday that progress had been made in reducing inflation, but that it remained too high to rule out further increases in interest rates. That is top of mind for investors, who will be scrutinizing inflation and labor market data — the next jobs report comes out next Friday — to figure out what the Fed will do in September.

The concern is that the U.S. economy is still on uncertain footing, and that further tightening of borrowing costs could trigger a downturn. The Fed’s own economists no longer predict a recession, but some on Wall Street remain bearish about the second half of the year.

Economists worry that prices will be higher for longer. “We are cautiously optimistic of a quicker return to 2 percent” core P.C.E., Andrew Patterson, senior economist at Vanguard, wrote in a research note on Thursday. But he added that such a target was not likely to be reached before 2025.

Translation: Inflation could remain a wild card for the Fed well into next year.

Europe’s economy is looking even more vulnerable. As expected, the European Central Bank raised interest rates on Thursday by a quarter percentage point, as the eurozone grapples with inflation rates well above the United States’s.

Christine Lagarde, the E.C.B.’s president, suggested that the central bank could pause on raising rates in September, as data showed high prices sapping consumers of their buying power, putting the bloc’s economy at risk. Data this morning from Germany showing that Europe’s biggest economy is stagnating underscored this concern.

Meanwhile, in Japan … The Bank of Japan surprised global markets this morning by loosening its cap on 10-year government bond yields, the equivalent of an interest-rate increase.

Japanese stocks and bonds fell sharply, catching up with a drop in U.S. stock indexes on Thursday that was driven by forecasts that Japan’s central bank would signal an end to its yearslong policy of maintaining rock-bottom interest rates.

HERE’S WHAT’S HAPPENING

Facebook is said to have removed Covid-related content under pressure from the White House. The platform purged content, including some claims that the coronavirus was man-made, even though it disagreed with the Biden administration’s approach to misinformation, according to company documents obtained by House Republicans. Separately, new research casts doubt on how persuasive the algorithms that power Facebook’s News Feed are at polarizing users’ political beliefs.

Regulators propose higher capital requirements for U.S. banks. Federal officials announced draft rules that could force lenders to hold 20 percent more in reserves to bolster their financial stability. The proposal could affect companies like American Express and Morgan Stanley that rely on fee income from wealth management, which would face more onerous capital requirements.

Steve Wynn is banned from Nevada’s casino business. A new settlement between the gambling magnate and state regulators, over claims of workplace sexual misconduct, includes a $10 million fine and an agreement by Mr. Wynn to stay out of the industry he helped build. Mr. Wynn, who has denied the allegations and didn’t admit wrongdoing in the settlement, had already resigned from Wynn Resorts as chairman and C.E.O.

A little-known online bank helps keep Donald Trump’s empire afloat. Attorney General Letitia James of New York is examining hundreds of millions of dollars worth of loans made by Axos Bank to Trump properties that stabilized the former president’s finances, according to The Washington Post. Meanwhile, federal prosecutors filed three new charges against Mr. Trump over his handling of classified documents.

A return to luxury megadeals?

The fashion world took note on Thursday when Kering, the conglomerate that owns Gucci, Balenciaga, Alexander McQueen and Saint Laurent, bought a 30 percent stake in Valentino at a $1.9 billion valuation.

The deal, which gives Kering the right to buy the rest of Valentino by 2028, signals the company’s return to big-ticket M.&A.

It’s a major strategic move by Kering, which has been eclipsed in recent years by its archrival LVMH, which through deals for Tiffany, Off White and others is now significantly bigger in both size and market cap.

Kering, which is controlled by the billionaire Pinault family, has also suffered from controversy at Balenciaga and turmoil at its flagship Gucci brand. The conglomerate, which has come under pressure from the activist investor Bluebell Capital Partners, has already taken steps to shake things up, like replacing Gucci’s C.E.O.

The fashion industry has long been waiting for Kering’s next steps. The company has billions in free cash flow and a need to keep up with LVMH, so bankers have speculated about what would come next. The conglomerate’s last deal, the $3.8 billion takeover of the perfume company Creed, represented a big move by Kering into beauty.

The Valentino deal is more squarely in its wheelhouse, allowing Kering to use its huge distribution platform to supercharge sales of the luxury brand.

An interesting facet of the transaction is that Kering is starting with a minority stake, a rarity in big luxury deals. There are some potential explanations for that: It could give the companies time to work out their creative vision before a potential full takeover of Valentino, or it could allow Kering to shut out possible rivals without having to buy the entirety of the brand right away.

Will more luxury M.&A. emerge? Though analysts had speculated that Valentino would pursue an I.P.O., selling gives it an immediate cash boost. And as LVMH and Kering continue to pursue scale, investors will speculate about whether other independent brands — including Armani, Burberry, Ferragamo and Prada — may become targets as well.

An argument for how not to fix flawed mergers

Despite setbacks in court, the Biden administration’s top competition cops — Lina Khan of the F.T.C. and Jonathan Kanter of the Justice Department’s antitrust division — have signaled that they’ll continue to be tough on reviewing mergers.

But proposed merger guidelines released last week are still flawed, according to Jason Furman, a head of the Council of Economic Advisers during the Obama administration, and Carl Shapiro, another Obama economic official. In a Wall Street Journal opinion piece, they write that while mergers should be closely scrutinized, the guidelines risk turning what are rules based on widely accepted economic principles into, potentially, a political football:

They contain a structural presumption against many vertical mergers unsupported by theory or evidence. The proposed guideline on acquisitions of products or services that rivals may use to compete includes legal wishful thinking about how commitments made by the merging parties are treated, as the recent court rebuke of the F.T.C.’s attempt to block Microsoft’s acquisition of Activision illustrates.

Likewise, a new guideline states that “mergers should not entrench or extend a dominant position,” where a “dominant position” means a market share of at least 30 percent. As we read this guideline, many nonhorizontal deals that enable the acquiring firm to become more efficient, and thus gain market share or compete more effectively in adjacent markets, would be considered illegal even if they benefit consumers and workers. If this isn’t the intention, revisions are needed.

“Pricing the priceless”

Climate change is impossible to ignore as wildfire smoke dulls the skies across continents and air and water temperatures soar to new highs. That makes it especially timely to consider novel approaches to addressing the climate crisis, says Paula DiPerna, author of a new book, “Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect Our Most Precious Assets.”

Ms. DiPerna spoke to DealBook this week. The interview has been edited and condensed.

What’s the idea behind your argument?

The principle is that nature is an unpaid worker providing services, like carbon sequestration, soil retention, water filtration, replenishing raw materials and more. It is providing an invisible subsidy to world economies. Protecting the environment is portfolio management.

How would placing a price tag on nature help?

Take carbon pricing. If you can put a value on a ton of carbon dioxide, which we can do now, then why wouldn’t it be feasible to pay countries to not drill for oil or cut their trees, to protect resources instead of exploiting them?

Poor countries that have abundant natural resources are loaning their economic resources, like the carbon-sequestering value of their rainforests, to rich countries without compensation. Last year at COP [the U.N. climate conference], [Special Presidential Envoy for Climate] John Kerry practically begged the Democratic Republic of the Congo not to drill for oil in rainforest and peat lands, which would release lots of carbon, and the retort was “pay us.” It’s not a bad answer, actually.

Are there examples of successful projects for preserving natural resources?

The Forest Resilience Bond is the brainchild of four Berkeley graduate students. What they did was look at standing forests in the Lake Tahoe area as infrastructure. And they raised funds to maintain the forest — like you would for an infrastructure project — from the beneficiaries of the environment, such as the local wildlife service, the tourism industry, insurers and even hydropower companies that rely on standing forest to replenish groundwater. That kind of bond could be done all around the world.

Why add such a pricing structure when economies can exploit nature for free?

We are facing real costs now. Nature is the thing underpinning our economies and it is a depreciating asset. We speculate about price all the time when it comes to company valuations. Yet the atmosphere is worth nothing. We need a new kind of thinking.

THE SPEED READ

Deals

Policy

• Ford executives met with lawmakers this week amid scrutiny of the company’s deal to license electric vehicle battery technology from the Chinese company CATL. (Reuters)

• President Biden reportedly won’t attend fund-raisers in Los Angeles until the Hollywood writers and actors strikes are resolved. (TMZ)

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