Daily Brief: The Fed’s Making Moves, And Investors Called It

Daily Brief: The Fed’s Making Moves, And Investors Called It

over 2 years ago3 mins

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The US Federal Reserve (the Fed) indicated on Friday that it’ll start tapering its bond-buying program before the end of the year – just like investors expected.

What does this mean?

Last year, the Fed slashed interest rates to near-zero and started buying up $120 billion worth of bonds a month to help keep the pandemic-driven economic disaster at bay. And it worked: that flood of cheap money helped the economy stay on its feet, as well as prop up markets over the past year. But investors have been expecting the Fed to eventually announce the end of the bond-buying part of the program, and they figured this latest update from the central bank would be The One. They weren’t wrong: the Fed said the strong economic rebound means it can start reducing its monthly bond purchases before the end of the year.

Why should I care?

The bigger picture: So when’s the rate hike?

The Fed was quick to point out that a winding down of bond purchases shouldn’t be interpreted as a sign that an interest rate hike is on the way. It won’t do that, it says, until it’s confident the labor market is strong enough to hold its own. But with 6 million fewer jobs now than there were before the pandemic, the central bank reckons that could take until next year – if not until 2023.

Hiring up

For markets: Meet TINA.

One of the reasons the stock market has benefited from the Fed’s bond-buying program is that there is no alternative – known affectionately as “TINA”. In other words, the program’s driven bond yields so low that stocks are a much better way for investors to make a return. But as the Fed reduces the amount of bonds it buys, there’ll be less demand for them overall (all else equal), which should drive down prices and push up yields. And when there is an alternative, sky-high stocks might start to look a whole lot less appealing.

Peloton Is Slashing Bike Prices

Peloton image

Peloton reported worse-than-expected results late last week, as its audience’s devotion to the latest fitness fad once again ran out of steam.

What does this mean?

With gyms back in action last quarter, at-home exercise equipment fell out of favor and Peloton’s revenue growth dropped off dramatically. That, coupled with costs from an expensive treadmill recall, saw the company post a bigger-than-expected loss. It wasn’t optimistic about this quarter either: Peloton just slashed the price of its exercise bikes by around 20% in an attempt to get customers back on its saddles, and it’ll be shifting its business back toward less-profitable treadmills. And it’s a good thing Peloton likes to feel the burn, because this class isn’t over yet: the company also revealed it’d found a problem with the way it’s been valuing its inventory. That won’t change any of its previous financial reports, but it’s bound to make investors break out in a sweat…

Revenue
Source: The Wall Street Journal, Peloton

Why should I care?

For markets: Someone get the Deep Heat.

Peloton had a heck of a run in 2020, with its shares rising more than 400% as people took to exercising at home during lockdown. But the company’s stock plummeted almost 10% on Friday after the disappointing results, which is just another painful cramp in a year full of them: Peloton’s lost more than 30% of its value this year.

Peloton stock
Source: Google Finance

The bigger picture: So much for a solo ride.

Even worse, Peloton – which as recently as last year had the “connected fitness” market all to itself – now has to go toe to toe with the likes of Hydrow, Tonal, and Lululemon-owned Mirror. And those chiseled rivals are already starting to push Peloton to its limits: last week’s exercise bike price cut was the second one in less than a year, and the company spent almost three times as much on sales and marketing last quarter compared to the same time last year.

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