Most businesses expect tariff price hikes, KPMG says
Nearly half of big businesses raised prices in the last six months due to tariffs, and a large majority expect to do so in coming months, a new KPMG survey out Thursday finds. (…)
44% of businesses have already increased prices due to tariffs, per the September survey of 300 executives at U.S. companies with more than $1 billion in annual revenue.
- Over the next six months, 42% say they will raise prices as much as 5%.
- Another 29% say they plan to raise prices somewhere from 6% to 15%.
Those price increases are helping with, but not eliminating, the margin compression companies face as their input costs rise.
- Some 39% of businesses have already seen their gross margins decline.
- About two-thirds of respondents say they have already seen sales be deferred or decline outright and hardly any say sales are rising.
Like I wrote yesterday, soft data is getting harder:
Eurozone growth ticks up once again but remains muted
The seasonally adjusted HCOB Eurozone Composite PMI® Output Index increased for the fourth month in a row to 51.2 in September, from 51.0 previously, signalling a further gradual acceleration in output growth across the eurozone private sector. Additionally, the headline measure rose to its highest level since May 2024.
Germany was central to the broader pick-up in growth, with its respective Composite PMI Output Index rising to a 16-month high and indicating a moderate expansion. Nonetheless, out of the euro area nations which Composite data are available for, Spain saw the strongest increase in private sector business activity during September. Moderate growth was registered in Ireland and Italy, making France the outlier across the currency bloc as output shrank at a faster pace than in August.
Albeit rising for a ninth straight month and to the strongest extent in almost a year-and-a-half, the expansion in eurozone output was relatively sluggish, once again coming in below the long-run trend rate of the survey (52.4). Limiting the upturn was a muted improvement in new business. While September’s rise in new order inflows represented the strongest gains in sales volumes for eurozone private sector companies since May 2024, growth was marginal.
Weighing on demand was a decrease in new export orders, stretching the current sequence of contraction in new work from abroad to over three-and-a-half years.
With growth of output surpassing that of new business, September survey data signalled a further reduction in backlogs of work across the euro area. The pace of depletion was the quickest in three months. Clearances of pending projects were achieved despite employment levels decreasing at the end of the third quarter. Notably, this marked the first time since February that workforce numbers have fallen. That said, the extent to which jobs were cut was fractional.
Eurozone companies reported an increase in their operating costs during the latest survey period. However, the rate of inflation slowed and remained below the survey’s historical average. There was likewise a cooling of selling price pressures as output charges increased to the weakest extent since May.
Looking ahead, private sector firms in the euro area were optimistic of growth in business activity over the coming 12 months. In fact, optimism improved on the month and reached its second-highest level since July 2024 (only fractionally surpassed by that seen in June). Nevertheless, expectations were relatively muted by historical standards.
The HCOB Eurozone Services PMI Business Activity Index increased from 50.5 in August to 51.3 in September, signalling faster growth during the closing month of the third quarter. The latest data point marked a fourth consecutive survey period in which the index has posted above 50.0 and therefore in expansion territory.
September saw a pick-up in demand for services which was notable, at least compared to the trend over the previous 12 months. That said, new business growth was mild overall and limited to domestic markets, as indicated by a concurrent (and fractionally faster) reduction in new export orders.
Employment in the service sector was only fractionally up from the level seen in August. This marked the weakest month for the eurozone service sector labour market in over four-and-a-half years when the latest expansionary trend in workforce numbers began. The downward trend in backlogs of work was nevertheless sustained, marking 17 successive months of reductions.
As for prices, inflation ticked lower at the end of the third quarter. Input costs and output prices rose at their slowest rates in two and four months, respectively.
Lastly, service providers maintained a positive assessment of year-ahead activity prospects, with expectations even rising by a solid degree to an 11-month high.
Multinationals race ahead as dollar slump divides US stock market Domestically focused companies lag behind as currency suffers worst year since early 2000s
(…) The US currency is on course for its worst performance in a calendar year in more than two decades, dropping nearly 10 per cent against a basket of major currencies so far in 2025 as Donald Trump’s trade and economic policies cause global investors to rethink their exposure to the world’s largest economy. (…)
A weaker greenback boosts a US company’s foreign earnings in dollar terms, while also making American goods cheaper abroad. Domestically focused companies do not tend to benefit, and those firms that rely on buying goods from overseas in foreign currency face higher input costs.
“Small companies that import goods . . . will suffer and large companies with global reach and capacity to access finance will manage the impact,” said Shahab Jalinoos, head of G10 FX strategy at UBS. (…)
“You hear about currency effects more often when the dollar strengthens and companies blame the strong dollar for losses. But management rarely says ‘we got bailed out by currency effects’.” (…)
“There are a subset of companies that will benefit more than others,” said George Pearkes, a macro strategist at Bespoke Investment Group, who cited tech giants among the businesses in line for a boost from the weaker currency, and utilities and banks among domestic-facing firms that would be hurt by it. (…)
GIVE THEM CREDIT
Jim Chanos slams ‘magical machine’ of private credit after First Brands collapse Investor famed for spotting Enron fraud sounds alarm on Wall Street’s booming debt machine
Jim Chanos, one of Wall Street’s best-known short sellers, has sounded the alarm on the private debt boom, telling the Financial Times that First Brands Group’s chaotic bankruptcy could augur a wave of corporate collapses.
Some of the biggest names on Wall Street are facing the prospect of multibillion-dollar losses from the bankruptcy of First Brands, a heavily indebted maker of spark plugs and windscreen wipers based in Ohio.
First Brands has now disclosed almost $12bn in debt and off-balance sheet financing built up in the years before its Sunday bankruptcy filing, which also ensnared less well-known private lenders such as a Utah-based leasing specialist. (…)
The FT has previously reported that the group’s founder and owner, low-profile businessman Patrick James, was previously sued by two lenders that alleged that fraudulent conduct had exacerbated their losses. James strongly denied the allegations of fraud in the two cases, which were both dismissed after settlements were reached. (…)
“With the advent of private credit . . . institutions [are] putting money into this magical machine that gives you equity rates of return for senior debt exposure,” he said, adding that these high yields for seemingly safe investments “should be the first red flag”. (…)
Chanos said: “We rarely get to see how the sausage is made.”
First Brands’ bankruptcy has revealed that James controlled both the auto parts conglomerate and some of its off-balance sheet SPEs through the same chain of limited liability corporations. Chanos described this common ownership as a “huge red flag”. (…)
First Brands’ financial statements were not publicly available. While hundreds of managers of so-called collateralised loan obligations had access to its financial disclosure, they had to consent to non-disclosure agreements to receive the documents.
“The opaqueness is part of the process,” Chanos said. “That’s a feature not a bug.”
Any resemblance from the above to the below is your own imagination.
Everything’s bigger in Texas, data center edition: behold the blockbuster debut of Fermi, Inc. (FRMI on the Nasdaq), with shares enjoying a 55% rip yesterday to leave the nine-month-old firm with a $19 billion market capitalization.
Fermi, which counts former Texas governor turned Trump 1.0-era energy secretary Rick Perry among its cofounders, plans to construct the world’s largest energy and data facility, which could generate 11 gigawatts of energy – twice that currently serving New York City – by 2038 per CEO Toby Neugebauer.
Tenant revenues are unlikely to take shape prior to 2027 according to the prospectus, a noteworthy detail considering the firm is structured as a real estate investment trust, which must earmark 90% of taxable income towards shareholder dividends. Neugebauer told the Financial Times that Fermi has snagged a deal with “one of the most valuable and respected technology companies on the planet.”
In any event, Wednesday’s closing price confers a $6 billion paper windfall on Neugebauer, the son of former Texas congressman Randy Neugebauer and who previously helmed the ill-fated, “anti-woke” banking startup GloriFi, which filed for Chapter 7 liquidation in 2023 alongside a torrent of investor litigation. (ADG)
Also from ADG:
- The firm [OpenAi] projects $20 billion in annual recurring revenue by year-end but also pegs cumulative cash burn at $115 billion through 2029, an increase of $80 billion from its first quarter forecast.
- Meta’s capital expenditures are set to vault to $97 billion next year from $37 billion in 2024 if the sell-side consensus proves accurate, with free cash flow poised to drop to $28 billion, half that achieved last year. Notably, those outlays do not include the monster four million square foot Hyperion data center, which Meta will occupy under a 20-year lease. A Pimco-led $26 billion debt financing will underpin the project, which is structured as a joint venture and remains off the social media giant’s books. Out of sight, out of mind? Not quite, according to a Sept. 5 Bloomberg bulletin: “If [Meta] decides to terminate the lease early or opts to not renew it and the value of the data center falls below a pre-determined threshold, [Meta] will reimburse investors for potential losses.”
Goldman Sachs:
Since the rise of the AI theme in 2022, most capex at large tech firms has been financed out of the substantial cash reserves on their balance sheets. Over the past few quarters, the tide appears to have shifted, with debt capital markets playing an increasingly important role.
This shift is evidence across many corners of credit markets—from the ABS market, where issuance of data center deals has now reached $20 billion since the start of 2024, to both pubic and private corporate credit markets, as well as bilateral vendor financing agreements.
Mapping the equities in the GS TMT AI basket, which tracks equities that are either pursuing artificial intelligence or can help enable the technology, we find these AI-related issuers have accounted for $141 billion in corporate credit issuance in 2025 to-date, eclipsing full-year 2024 gross supply of $127 billion. Tech issuers in this basket have accounted for the lion’s share of this supply at $86 billion, followed by Utilities at $51 billion.
We think this trend will likely extend for two reasons.
First, cash balances among large tech firms have substantially declined to levels that are almost in-line with the median non-financial IG issuer.
Second, the appetite for spending remains strong, with capex growth anticipated to reach a solid 50% on a year-over-year basis, through 2025.
The read-through for credit markets is, on the margin, negative, in our view. While not yet a cause for alarm, given both the high cashflow generation and low leverage among large tech companies, the shifting funding mix of capex beyond cash is worth monitoring.
This is arguably late cycle… and the Fed is loosening…meaning reducing the cost of capital, not only for banks like in the good not-so-old days, but to all capital providers.
But credit markets are already very loose and risk averse as the Bloomberg Financial Conditions Index, which measures the availability of capital across a broad range of markets, illustrates:
Besides easy financial conditions, there are other factors that might question why the Fed feels the need to cut rates: 1) the economy is healthy, 2) inflation expectations are rising, 3) trade agreements have resulted in supply chain shocks, and 4) immigration restrictions are limiting labor supply.
In addition, the Fed doesn’t appear to fully recognize that ongoing deglobalization and financial bubbles are both inherently inflationary.
Regardless of what the Fed should or should not do, they have cut rates and are signaling their intent to cut rates further. We think there could be two potential financial market outcomes.
First, the response to the Fed cutting rates could be a broadening of the equity markets. That would be a very healthy outcome because a broader stock market would imply the Fed has reignited a healthy lending cycle, which in turn would spur stronger profits and economic cycles.
The second response could be the Fed rate cuts simply result in more excess liquidity and more speculation. With existing easy financial conditions, investors might use the added liquidity to further speculate. This could ultimately foster a very bad outcome.
We have repeatedly emphasized over the past 30 years that bubbles are inherently inflationary because they grossly misallocate capital within an economy. In other words, capital flows to things not needed in the economy, while truly necessary investment goes ignored.
During the Technology Bubble, we argued that energy was the sector being starved of capital despite the massive need for investment. The bubble’s misallocation of capital led Energy to be the best performing sector during the 2000s, and the US CPI peaked at 5.6% before the global financial crisis destroyed economic growth and inflation fell.
There is a similar misallocation of capital within the US economy today. Simply put, imagine if all the capital going into cryptocurrencies instead was invested in the US electric grid. We strongly doubt electricity prices would be rising more than 6% per year as they currently are if that had been the case.
So, investors need to carefully watch the Fed and the markets’ responses to their actions:
The possibility that inflation isn’t dead and employment isn’t waning. The Fed might have to go on hold or even reverse course and raise rates. This is the worst case scenario for financial markets fueled by liquidity and speculation, but might be good for the relative performance of value, dividends, non-technology quality, and more broadly diversified portfolios.
The possibility that employment is much worse than expected and a series of large rate cuts ensue. This isn’t a particularly good scenario either because it implies the economy and earnings are demonstrably weaker than consensus forecasts. Defensive sectors would likely outperform in this environment.
The Fed’s rate cuts are very timely, and the economy reaccelerates without much inflation. This would result in a broadening of the market in a very healthy way.
The Fed adds unnecessary liquidity to the financial markets and speculation runs rampant. This might be fun for some investors in the short-term, but it could create serious misallocations within the economy and add to significant future inflation.
