Bond Selloff Raises the Stakes for Earnings Season

Summary

WSJ What’s News: Bond Selloff Raises the Stakes for Earnings Season Release Date: January 13, 2025

In this episode of WSJ What’s News, hosted by Kate Bullivant, a range of pressing issues from catastrophic wildfires in Los Angeles to the global bond selloff and its impact on the stock market are discussed. Additionally, the episode delves into political developments surrounding key government nominations and the fragile state of the electric vehicle (EV) battery industry amid potential policy changes.

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1. Catastrophic Wildfires in Los Angeles

Key Points:

• Persistent Santa Ana Winds: Los Angeles faces renewed threats from strong Santa Ana winds, exacerbating wildfire conditions.
• Firefighting Efforts: A brief period of calmer weather allowed firefighters to make progress, but conditions are rapidly worsening again.
• Death Toll and Severity: The death toll from recent fires has risen to 24, with California Governor Gavin Newsom predicting it could become the worst natural disaster in U.S. history.

Notable Quotes:

• Fire Chief Anthony Maroney [01:54]: “Los Angeles Elevated Critical Fire weather conditions will continue through Wednesday. Please rest assured that your county of Los Angeles Fire Department will be prepared. These winds, combined with low humidities and low fuel moistures, will keep the fire.”

• Kate Bullivant [02:17]: “The Palisades fire, which started a week ago, was just 13% contained as of early this morning, while the Eaton fire in Altadena and Pasadena is 27% contained.”

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2. China's Growing Dependency on Exports

Key Points:

• Export Growth: Chinese exports surged by 5.9% to $3.6 trillion last year, now constituting a fifth of China's projected economic growth for the year.
• Domestic Challenges: The reliance on exports underscores China's difficulties in revitalizing domestic consumer spending.
• Trade Vulnerabilities: Increased dependence on exports makes China more susceptible to potential trade actions from the U.S., particularly under the Trump administration.

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3. Global Bond Selloff and Market Implications

Key Points:

• Surging Government Bond Yields: Worldwide bond yields have risen sharply, leading to increased borrowing costs for governments and impacting global markets.
• Strong U.S. Economy: The bond selloff signals confidence in the U.S. economy's robust growth but also raises inflation fears.
• Global Impact: Rising U.S. rates influence global economies, making borrowing more expensive elsewhere, which can stifle economic activity.

Notable Quotes:

• Alex Frangos, Europe Finance Editor [03:49]:
  “It's basically a sign of the US Economy doing really well, growing much more strongly than people expected and therefore worries about inflation being more persistent and expectations that the Fed won't be able to cut rates as much as they wanted.”

• Kate Bullivant [04:35]: “What are the consequences of this for the stock market? Does this raise the stakes going into this earnings season?”

• Alex Frangos [04:41]:
  “Absolutely. So the stock market has had a little wobble the beginning of the year, partially because it's safer to be in bonds that are yielding 5% than in stocks that are already very overvalued.”

Implications for the Stock Market:

• Earnings Season Pressure: With high investor expectations for profit growth, companies must not only meet these targets but also provide optimistic future outlooks to maintain stock valuations.
• Potential Market Volatility: Failure to meet earnings expectations could lead to further instability in the already overvalued stock market.

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4. Political Developments: CIA and Defense Secretary Nominations

Key Points:

• John Ratcliffe for CIA Head: Trump’s nominee is expected to advocate for intensified espionage operations against China, including targeting high-level officials and countering Beijing’s global influence.
• Pete Hegseth for Defense Secretary: Facing scrutiny over past sexual assault allegations and controversial statements regarding women in combat roles, Hegseth’s confirmation hinges on his Senate hearing performance.

Notable Quotes:

• Kate Bullivant [05:23]:
  “Donald Trump's pick to lead the CIA, John Ratcliffe is likely to push for more aggressive spying operations targeting Beijing if confirmed by the Senate this week.”

• Kate Bullivant [09:48]:
  “It's going to be very interesting to see what Republicans do here when they assume full control in Washington.”

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5. The Fragile State of the EV Battery Industry Amid Policy Uncertainty

Key Points:

• Boom in EV Battery Plants: Significant investment has led to the emergence of EV battery factories across the southern and Midwestern United States, transforming towns like Elizabethtown, Kentucky.
• Dependency on Federal Subsidies: The growth of these plants is heavily reliant on Biden-era subsidies, with concerns looming over potential withdrawal of federal support under the Trump administration.
• Economic Impact on Local Communities: Towns experiencing EV battery plant booms are facing population growth, increased construction, and job creation, but the sustainability of these developments is uncertain.

Notable Quotes:

• Christopher Otz [07:42]:
  “Elizabethtown has been undergoing a boom in the last few years. Now it was growing already, but then in 2021 when Ford announced that it would build its largest electric vehicle battery manufacturing complex in nearby Glendale, that was the catalyst for just a huge boom in growth and construction.”

• Christopher Otz [09:16]:
  “These factories are coming to the south and the Midwest, primarily to Republican states such as Kentucky. And there's certainly the desire not to pull the rug out from under them, even though no Republicans voted for the Inflation Reduction Act.”

• Christopher Otz [12:14]:
  “Automakers are just not making money on EVs, and part of the equation is insourcing the battery making process and benefiting from the scale of selling many EVs and rationalizing the fixed costs associated with these huge investments.”

Potential Risks:

• Policy Reversal: If federal incentives such as the $7,500 tax credit for EV purchases are revoked, consumer demand for EVs may decline, adversely affecting the EV battery industry's growth prospects.
• Sustainability Concerns: Without continued financial support, many EV battery plants may face operational challenges, leading to potential job losses and economic downturns in dependent communities.

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Conclusion

This episode of WSJ What’s News paints a comprehensive picture of the interconnectedness between economic policies, environmental challenges, and geopolitical tensions. From the immediate dangers of wildfires in Los Angeles to the broader implications of a global bond selloff, the discussions highlight critical factors that influence both local and international markets. Additionally, the episode underscores the precarious balance between government support and industry sustainability, particularly in the burgeoning EV battery sector, which stands at a crossroads amid shifting political landscapes.

For those not tuning into the podcast, this summary encapsulates the multifaceted issues impacting today's financial and political environments, offering insights into how these elements may shape future developments.

Transcript

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[Kate Bullivant]

Strengthening winds threaten efforts to control catastrophic fires in Los Angeles plus, investors hope earnings season can revive a stock market rally and EV battery plants crop up across the country even as uncertainty looms over tens of billions in Biden era subsidies.

[Christopher Otz]

It's going to be very interesting to see what Republicans do here when they assume full control in Washington. These factories are coming to the south and the Midwest, primarily to Republican states such as Kentucky.

[Kate Bullivant]

It's Monday, January 13th. I'm Kate Bullivant for the Wall Street Journal, filling in for Luke Vargas, and here is the AM edition of what's news, the top headlines and business stories moving your world today. Authorities in the Los Angeles area are warning that strong Santa Ana winds that have fueled the historic wildfires in the city are forecast to return today, while a lull in windy conditions allowed firefighters to make some progress over the weekend. Los Angeles County Fire Chief Anthony Maroney warned yesterday of worsening weather and urged residents to be ready for more evacuations. Here he is, courtesy of ABC7 Los.

[Los Angeles County Fire Chief Anthony Maroney]

Angeles Elevated Critical Fire weather conditions will continue through Wednesday. Please rest assured that your county of Los Angeles Fire Department will be prepared. These winds, combined with low humidities and low fuel moistures, will keep the fire.

[Alex Frangos]

Threat in all of Los Angeles county.

[Kate Bullivant]

Very high, according to the state Fire Authority. The Palisades fire, which started a week ago, was just 13% contained as of early this morning, while the Eaton fire in Altadena and Pasadena is 27% contained. Officials said the death toll from the fires rose to 24 as search and rescue efforts continue in what California Governor Gavin Newsom projected will be the worst natural disaster in US History. China's economy is more dependent on exports than it has been for most of the past two decades. That's according to new figures that Chinese exports to the rest of the world grew 5.9% to $3.6 trillion last year, putting trade on track to make up one fifth of the growth China is expected to report this year. That growing reliance on exports highlights China's struggles to revive customer spending domestically and leaves it vulnerable to a new broadside on trade from President Elect Trump. Government bond yields have surged around the world in recent weeks, hitting stocks and pressuring indebted countries. With earnings season about to kick off, I asked Europe finance editor Alex Frangos to stop by and help us understand what's been behind this bond sell off and how it affects the broader market. Alex, start by telling us what's happening and what is it a sign of.

[Alex Frangos]

It's basically a sign of the US Economy doing really well, growing much more strongly than people expected and therefore worries about inflation being more persistent and expectations that the Fed won't be able to cut rates as much as they wanted. The Fed is so important not just to the US but to the whole global economy. It pulls up rates in the rest of the world. So we've seen bond yields, government borrowing costs essentially rising in the UK and Germany all over the place. And while it's good news for the US that the economy is growing, well for the rest of the world, where the economy is aren't doing so well. These rising borrowing costs can make it harder for companies and consumers to borrow at a time when arguably they need to be able to borrow to get the economy going.

[Kate Bullivant]

What are the consequences of this for the stock market? Does this raise the stakes going into this earnings season?

[Alex Frangos]

Absolutely. So the stock market has had a little wobble the beginning of the year, partially because it's safer to be in bonds that are yielding 5% than in stocks that are already very overvalued. And so we're heading this week into the beginning of the earnings season. We'll have the big banks like JP Morgan and Wells Fargo and asset manager BlackRock and other companies starting to report how they did at the end of last year. And investor expectations for profits are pretty high. They're expecting pretty robust profit growth and companies need to meet that and they need to also give an outlook for the future, saying, hey, it's also still looking pretty good. Otherwise, people are worried that the stock market could wobble even further.

[Kate Bullivant]

That was the Journal's Europe finance editor Alex Frangos. Donald Trump's pick to lead the CIA, John Ratcliffe is likely to push for more aggressive spying operations targeting Beijing if confirmed by the Senate this week, current and former colleagues say. According to a person close to the former congressman, this could include spy missions against high level officials in China and covert operations intended to counter Beijing's growing influence influence around the world. Ratcliffe would also likely pursue such activity to deter recent Chinese cyber attacks, this person said. A representative for the Chinese embassy in Washington didn't respond to a request for comment. China has accused the US of manufacturing claims against Beijing to justify its own foreign policy. Meanwhile, also preparing for its confirmation hearing this week is Pete Hegseth, Trump's nominee for defense secretary. Hegseth is bracing for tough questions, questions around allegations of sexual assault, which he has denied, as well as his comments that women should be barred from combat, a position he recently softened. A dozen senators and aides interviewed on Capitol Hill in recent days said they believe Hegseth is likely to win confirmation, but that it depends on Hegseth's performance at the hearing. Coming up, tens of billions in federal money to support EV battery plants helped drive a boom in towns across the south and Midwest. If Trump decides to pull that funding. We've got that story after the break.

[Los Angeles County Fire Chief Anthony Maroney]

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[Capella University Representative]

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[Alex Frangos]

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[Los Angeles County Fire Chief Anthony Maroney]

Catch our series Money Moves for the New Year the week of December 23rd on your money Briefing.

[Kate Bullivant]

Just as America's so called battery belt was finding its feet, thanks in part to tens of billions in federal money that's helped fund EV battery factories stretching from Georgia to Michigan, it now risks having the rug pulled out from under it. That's because President Elect Trump and some Republicans in Congress are threatening to eliminate federal funding for EVs. So how are the US's new battery towns responding? Journal Autos reporter Christopher Otz went to one of them to find out and told our Luke Vargas about it.

[Los Angeles County Fire Chief Anthony Maroney]

Chris, your travels took you to Kentucky to the town of Elizabethtown, population 33,000. I'm curious what you found there.

[Christopher Otz]

Well, Elizabethtown has been undergoing a boom in the last few years. Now it was growing already, but then in 2021 when Ford announced that it would build its largest electric vehicle battery manufacturing complex in nearby Glendale, that was the catalyst for just a huge boom in growth and construction. So if you drive around, you'll see all kinds of former farmland that now has these three and four story apartment buildings popping up. You'll see new restaurants, you'll see new single family homes being built and it's all predicated on a population boom that's expected to happen when this new factory called Blue Oval, is fully up and running with 5,000 new jobs.

[Alex Frangos]

Yeah.

[Los Angeles County Fire Chief Anthony Maroney]

Elizabeth Towns, mayor telling you basically that they are banking on the success of those Ford factories in order for the town to be able to justify all these investments. And you report there are EV plants going up in Tennessee, Ohio, North Carolina, Georgia. And as the head of the trade group, the Zero Emission Transportation association told you, in many cases, these are the same places that had been the backbone of US Auto manufacturing for decades. Which brings us, I guess, to the political math of all of this for President Elect Trump, whether to continue some of these subsidies that were included in President Biden's Inflation Reduction Act.

[Christopher Otz]

Yeah, it's gonna be very interesting to see what Republicans do here when they assume full control in Washington. And the reason is that, as you said, these factories are coming to the south and the Midwest, primarily to Republican states such as Kentucky. And there's certainly the desire not to pull the rug out from under them, even though no Republicans voted for the Inflation Reduction Act. So it's important to distinguish between a few things. So everyone or many people are aware of the $7,500 tax credit that's available when you purchase an EV from a car dealer. And that has been in the crosshairs. It may very well go away when Trump comes into office. There are other ways that the IRA supports all of this, however, and one of the biggest is tax credits that manufacturers get for making batteries. In the United States, the government is expected to spend about $78 billion on the product credit. And that amount really dwarfs the amount from the $7,500 at the dealer. So whether they leave that money or not is also a big question. But of course, it's all tied together. If demand for EVs goes away because there's no more federal incentives for consumers to purchase them, well, then demand for EV batteries will also fall. You know, Luke, we're already seeing these sort of fragility of this market. Just in Kentucky, where I was, you've got two massive, massive facilities side by side, but only one of these plants is actually getting ready to start work. And that's because Ford in 2023 decided to delay the second plant indefinitely, citing the slower than expected EV demand. So this second plant, for now, is basically mothballed. We don't know when it will start and when the 2,500 jobs that are associated with that plant will come online.

[Los Angeles County Fire Chief Anthony Maroney]

All right, so already a challenging market for EVs, take away the federal tax credits then and or the consumer rebates. I'm curious where the EV battery industry in the US Stands. Is this a sector that can stand on its own?

[Christopher Otz]

Eventually, that is the hope automakers have. But today it would perhaps look very different. You might see many more plant idlings like we saw in Kentucky, because right now most automakers are just not making money on EVs, and part of the equation is insourcing the battery making process and benefiting from the scale of selling many EVs and rationalizing the fixed costs associated with these huge investments that they've made. So it would be very interesting to see what happens in a scenario when all of the support is removed because the EV market just has not materialized as quickly as automakers thought it would only two, three, four years ago.

[Los Angeles County Fire Chief Anthony Maroney]

Chris Otz is an autos reporter for the Journal. Chris, I have a feeling we're going to be checking in with you on this story again in the next few months. I'm looking forward to it. Thank you so much.

[Christopher Otz]

Thank you.

[Kate Bullivant]

And that's it for what's news for this Monday morning. Today's show was produced by Daniel Bark with supervising producer Christina Rocker. And I'm Kate Bullivant for the Wall Street Journal filling in for Luke Vargas. We'll be back tonight with a new show. Until then, thanks for listening.