Sam Altman was officially fired from his position on Friday, with Mira Murati, the Chief Technology Officer, stepping in as the interim CEO. The circumstances surrounding Altman's ousting remain unclear, even to his inner circle. The official statement from the board suggests that he “was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities”.
According to Bloomberg, one of the key issues that contributed to Altman's departure was his ambitious push to rapidly transform the former nonprofit organization into a profitable business. Some board members, were inclined to exercise caution, particularly regarding the safety of AI use.
Over the weekend following Altman's removal, Satya Nadella, CEO of Microsoft and OpenAI's largest investor, took on the role of mediator in talks aimed at bringing Altman back. Reports indicate that Altman's removal happened without Nadella's knowledge. Despite investor pressure urging the board to step down and reinstate Altman, these efforts were unsuccessful. Multiple sources reveal that Altman is joining Microsoft to lead an AI team. OpenAi’s board has decided to hire former Twitch executive Emmet Shear.
OpenAI, backed by Microsoft, Sequoia, and Andreessen Horowitz, has been gearing up for a $1 billion employee stock purchase, potentially valuing the company at $86 billion, according to reports from the Financial Times.
Macro
With a cooling job market in the US, predictions of rate cuts are becoming more prevalent. Some analysts suggest that the Fed may start cutting rates as early as March, while others are betting on Q2 2024. What is clear, however, is that the likelihood of rate hikes is off the table, especially in light of decreasing inflation .
The Labor Department reported that the CPI rose 3.2% in October, a decrease from 3.7% in September and below the 3.3% economists’ expectations. While it still surpasses the 2% target, the direction of inflation aligns with the Fed's objectives. However, this achievement comes at a cost. Restrictive policies are impacting the labor market, as evident from recent labor data. Despite the Fed not raising rates since July, financial conditions are becoming increasingly restrictive. This is measured by the Fed funds rate ratio to inflation using a six-month annualized measure, which increased due to the decline in inflation.
Source: Bloomberg
According to Conor Sen of Bloomberg, the Fed might be preparing to cut rates to compensate for increasing tightening, as it can't afford to wait until inflation is back at the target. This is due to labor market conditions facing challenges, making a case for two Fed rate cuts in early 2024, according to his opinion piece.
Another indicator of worsening economic conditions, and the result of higher borrowing costs, is the increasing default rates on junk-rated corporate bonds. Historically, such increases have been associated with an economic slowdown.
Finally, there's an anticipated change in consumer spending. In our recent newsletter, we discussed the massive contribution of the consumer to the GDP growth in the last quarter. It seems that this trend is changing. Walmart announced on Thursday that it expects profits this year to fall below analyst expectations, citing evidence of weak consumer spending. It led to an 8% drop in Walmart's shares, as reported by Forbes.
Q3 Earnings season wrap
As Q3 earnings season concludes, here are the main takeaways , as outlined by Morningstar:
Weakening consumer spending: A sign of a slowdown, but a potential positive sign for the Fed as it likely contributes to pushing inflation down, making a stronger case for anticipated rate cuts in the near future.
Rising defense stocks: Amid ongoing geopolitical uncertainties, particularly in Ukraine and the Middle East, investors are turning to defense stocks, seeking exposure to a sector perceived as resilient in turbulent times.
Challenges for home builders: The surge in mortgage rates in the U.S., approaching 8%, has led to a slowdown in home buying, particularly among first-time buyers who are opting to rent for an extended period.
Manufacturing PMI in negative territory but with an upward trend: Despite the current negative trend in Manufacturing PMI, there's optimism as this might mark the bottom of the customer destocking trend, raising hopes for improved earnings in the coming quarters.
Banking sector possibly reaching its peak: While banks initially benefited from higher interest rates, resulting in increased net interest margins, analysts are now suggesting a downturn. Rapidly falling mortgage applications and anticipated loan losses, as consumers and businesses grapple with high interest payments, may put banks' profitability under pressure once again.
Commodity
Saudi Arabia is planning to extend oil production cuts into the next year as OPEC+ discusses further reductions in response to declining prices and increasing tension over the Israel-Hamas conflict. Following four-month low $77 a barrel price this week, sources familiar with the Saudi government's plans suggest a high likelihood of prolonging its 1m B/d cut, at least until spring.
AI
An interesting application of AI comes from major banks on Wall Street. According to Workday, financial institutions are exploring the use of AI to assist in crafting performance reviews. In the coming months, banks are planning to integrate the firm's software into their operations as part of broader initiatives to enhance efficiency and reduce costs.