A Fed Pause Would Be Contentious. But Rate Optimism Is Already Boosting Netflix.

Inflation, while not slow enough, is clearly cooling. Any hope of a soft landing depends heavily on the Fed stopping its rate increases at the right time.

And yet, pausing the campaign now is still fraught with risks. For one, it would inevitably raise expectations that the rate hikes are over. Investors are optimistic about cuts later this year, which is one reason the Nasdaq is outperforming this year and the S&P 500 is at a nine-month high.

Rate hikes are toxic for technology stocks. Big Tech responded forcefully to last year’s downturn with job cuts and a focus on profitability. Netflix’s 9% gain on Thursday shows how much investors like the sector’s change in focus. It also illustrates how financial conditions probably still aren’t as tight as the Fed wants them to be.

Caveat—if debt ceiling talks collapse, all bets are off. The Fed would have to react, and it wouldn’t be pretty.

But for now, let’s assume that Washington doesn’t melt down. The Fed’s next steps are uncertain. Goldman Sachs CEO David Solomon says inflation will stick around, forcing the Fed to keep rates higher and hurting the economy. His chief economist, Jan Hatzius, is more optimistic that growth will hold up.

The bottom line, as Fed officials’ comments have shown, is that the June decision will be the most contentious in a long time.

—Brian Swint

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A Hike Halt Is Expected. Not So Fast.

The next interest-rate decision isn’t clear-cut, according to comments this week from Federal Reserve officials. Several of them have emphasized there is still work to be done to cool inflation, while others have said it might be time to step back and evaluate their progress.

• Dallas Fed President Lorie Logan told a gathering of bankers in San Antonio that she is leaning toward a rate increase in June. “The data in coming weeks could yet show that it is appropriate to skip a meeting,” she said. “As of today, though, we aren’t there yet.”

• But Fed Gov. Philip Jefferson, the nominee to be vice chairman, suggested it might be time to pause, despite continued high inflation. Monetary policy works with lags, he noted in a speech, and one year isn’t a long enough time to feel the full effect of higher rates.

• Several other Fed officials have appeared in public since late last week. Fed Gov. Michelle Bowman and Cleveland Fed President Loretta Mester argued the Fed hasn’t made enough progress on inflation to stop now.

• Minneapolis Fed President Neel Kashkari told a conference in that city this week that the Fed has “more work to do on our end.” Despite multiple rate increases, taking the benchmark from near zero to over 5% since last year, inflation is still running twice as high as the Fed’s 2% target.

What’s Next: More officials speak today. New York Fed President John Williams is the keynote speaker this morning at a conference in Washington. At 11 a.m. Eastern time at the same conference, Chairman Jerome Powell will share a panel discussion with former Fed Chairman Ben Bernanke.

—Liz Moyer

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Supreme Court Gives Twitter, Google Victories in Liability Cases

The Supreme Court handed big technology platforms a double victory after declining to hold them liable for user content in two cases, one involving Twitter and the other
Alphabet
-owned Google. The court also decided against addressing the scope of Section 230, an internet law that shields internet companies from liability.

• In the Twitter case, filed by the family of Nawras Alassaf, Justice Clarence Thomas said they didn’t prove Twitter, Google, or Facebook assisted in terrorist attacks that would make them culpable under the Anti-Terrorism Act. The Google case, filed by the family of Nohemi Gonzalez, was returned to a lower court.

• Section 230 is the backbone of the Internet, allowing tech companies to thrive without the risk of liability for harmful user content. It also allows tech companies to remove content in good faith without liability. But politicians have been pushing for changes.

• Sen. Dick Durbin (D., Ill.), the chairman of the Senate Judiciary Committee, said the court passed on a chance to clarify that Section 230 isn’t a “get-out-of-jail-free card” for online platforms when they cause harm, adding that he wants to protect children from the dangers of online platforms.

• Rep. Cathy McMorris Rodgers (R., Wash.), chairwoman of the House Energy and Commerce Committee, is working with Republicans to “require transparency around content moderation policies,” The Wall Street Journal reported.

What’s Next: A lawyer for Gonzalez’s family vowed to keep fighting, telling the Associated Press that “it took decades to topple Big Tobacco, we’ll eventually rein in reckless and greed-driven Big Tech as well.”

—Eric J. Savitz and Janet H. Cho

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Disney Changes Its Mind About $900 Million Florida Project

Walt Disney
has changed its mind on spending nearly $900 million in a new corporate campus outside Orlando and relocating about 2,000 employees there from Southern California, citing “considerable” leadership changes and changing business conditions since the project was announced.

• Josh D’Amaro, head of Disney’s parks and experiences business, told employees about the switch early Thursday in a memo seen by Barron’s. “As a result, we will no longer be asking our employees to relocate” to its Lake Nona, Fla., campus.

• The Lake Nona project was envisioned in 2021 by former Disney CEO Bob Chapek with a capital investment of up to $864 million, for $570 million in state tax breaks, The Wall Street Journal reported. Disney is now cutting 7,000 employees and $5.5 billion from its budget.

• Disney World’s Star Wars-themed Galactic Starcruiser luxury hotel, another Chapek project, will close at the end of September. For $4,800 a couple for a standard cabin or more for additional guests, the site offered guests a two-day immersive adventure.

• Disney has been fighting with Florida Gov. Ron DeSantis, who replaced the board overseeing Disney World’s tax district and wants to cancel a 30-year development deal for future growth. Disney and DeSantis have filed lawsuits in the matter.

What’s Next: D’Amaro said he was still optimistic about the Disney World business in the long term. CEO Bob Iger said it plans to invest $17 billion and create 13,000 jobs in Florida over the next decade. D’Amaro also said Disney will consider moving employees back to California if they already relocated.

—Janet H. Cho

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Applied Materials Says Chip Markets Are Still Weak

Applied Materials reported better-than-expected second-quarter earnings, but the shares fell in Friday’s premarket after management said the memory semiconductor market remains difficult.

• The chip-equipment maker reported adjusted earnings of $2.00 a share for the April quarter, compared with the consensus estimate of $1.84 among Wall Street analysts tracked by FactSet. Revenue came in at $6.63 billion for the quarter, above analysts’ expectations of $6.39 billion.

• On a conference call to discuss the results, management said the major consumer electronic markets, including PCs and smartphones, remain weak. They also said pricing and factory utilization for memory chips declined during the quarter, while inventories increased.

• The stock and its peers have enjoyed robust price appreciation this year, analysts at KeyBanc said. Adding: “Investors may have discounted a stronger recovery than we are likely to see in the near term, which could increase risk for new money as shares have little underlying valuation support.”

What’s Next:The analysts suggest Applied Materials doesn’t have much more room to rise after the strong run this year. In a bull-case scenario that assumes further increases in chip demand, Applied Materials shares may climb as high as $138 from the current level of about $130, the KeyBanc analysts say. In a bear case, shares could drop to $85—where they were around November of last year.

—Tae Kim and Brian Swint

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Alibaba Offers More Details on Cloud Spinoff, IPO Plans

Chinese tech giant
Alibaba Group
beat quarterly earnings estimates and said it would spin off its cloud-computing division, including its artificial intelligence arm, and put other units on the market. It is transforming from a sprawling conglomerate to a holding company.

• Alibaba said its board has approved spinning off its cloud unit in a dividend distribution to shareholders, to become its own publicly listed group. It announced plans in March to split into six independently run companies, breaking up Jack Ma’s business empire to satisfy Chinese regulators.

• Alibaba is seeking external financing for its global e-commerce arm. It is planning an initial public offering of its Cainiao smart logistics division in 12 to 18 months, and an IPO for its Freshippo grocery and fresh goods arm in six to 12 months.

• Alibaba’s core e-commerce business is struggling amid China’s uneven consumer recovery. Revenue from the customer management business, which includes advertising and commission revenue from Taobao and Tmall, dropped for the fourth straight quarter, The Wall Street Journal reported.

• The company reported fiscal fourth-quarter earnings of $1.56 a share on disappointing sales of $30.32 billion, amid a tough macroeconomic backdrop in China. Rivals
  JD.com
  and Pinduoduo are competing with discounts and promotions.

What’s Next: Alibaba investors are upbeat about the prospect of realizing a higher market value when the cloud division is listed independently. Thomas Hayes, chairman of Great Hill Capital, which owns a stake in Alibaba, called it a “huge value unlock.”

—Jack Denton and Janet H. Cho

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Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].

1. Which gold and copper miner has Newmont agreed to buy for $17.5 billion in what would be the largest ever gold-mining deal and cement Newmont’s position as the world’s largest producer of gold?

a. AngloGold Ashanti

b. Austral Gold

c. Newcrest Mining

d. Gold Fields

2. During the first quarter Warren Buffett’s Berkshire Hathaway sold its 25.1 million-share stake in Bank of New York Mellon and took a 9.9 million share position in which bank?

a. Capital One Financial

b. JPMorgan Chase

c. Wells Fargo

d. Goldman Sachs

3. A travel forecast by AAA expects about 42.3 million Americans to travel 50 miles or more during the coming Memorial Day weekend, with airports being the busiest since when?

a. 2019

b. 2020

c. 2021

d. 2022

4. The chief executive of ChatGPT creator OpenAI told Congress in a hearing that licensing and safety standards are needed for the artificial intelligence systems as their use can affect:

a. Elections

b. News coverage

c. Military operations

d. All of the above

5. Columbia Business School’s professor Sheena Iyengar argues in her new book “Think Bigger” that group brainstorming is usually a waste of time in the workplace since:

a. Blabbermouths with mediocre ideas can dominate the conversation

b. Introverts with brilliant ideas often keep to themselves

c. A and B

d. None of the above

Answers: 1(c); 2(a); 3(a); 4(d); 5 (c)

—Barron’s Staff

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner