Megadeal M&A hits record fueled by debt
Summary
U.S. markets traded higher after the FOMC meeting last Wednesday, and the S&P 500 hit an all-time high on Thursday before selling off on Friday to close the week down 0.6%. The S&P return for Q4 so far is 2.3%, and the year-to-date return to 17.5%. The 10-year U.S. Treasury yield rose 5 bps to close the week at 4.19%.
Fed meeting recap
The Federal Reserve delivered a third consecutive 25 basis point rate cut, setting the policy rate to 3.5 - 3.75%. The decision was primarily driven by risks to the labor market, with Chair Powell indicating that true payroll growth has likely been negative (-20k per month) and that this warrants a more neutral policy stance. However, the broader takeaway was that the cycle of insurance cuts has effectively ended, and any additional easing would require clear deterioration in the job market. Despite Powell's relaxed tone on inflation, the tension between the Fed's dual mandate was clear in the three dissents. The Summary of Economic Projections (SEP) showed a remarkably optimistic "Goldilocks" outlook for 2026, revising growth up to 2.3% while holding the unemployment rate steady, suggesting strong confidence in productivity growth. The median "dot" forecasts remain unchanged, looking for one cut in 2026 and one in 2027, contrasting with the market's pricing of three cuts by the end of 2026. Separately, the Bank of Canada held its rate at 2.25%, deeming it "about the right level."
Debt-fueled M&A
M&A megadeals, or those valued at $10 billion or more, have surged this year, reaching a record $1.2 trillion. The bidding war between Paramount and Netflix for Warner Bros. Discovery is the latest of these deals. Last week, Paramount’s bid reached $78 billion and was backed by $54 billion in debt. The trend is powered by the massive availability of financing from banks, corporate bonds, and private-credit funds, enabling acquirers to take bigger bets. While these debt-fueled deals offer paydays for shareholders, the heavy reliance on leverage increases risks, leaving some bond investors feeling apprehensive about the escalating borrowing.
The week ahead
Next week features a heavy macro data schedule, including the November full employment report, October Non-Farm Payrolls (NFP), and October advance retail sales on Tuesday, followed by November CPI on Thursday. October NFP is expected to slow to -65k, largely due to the end of the DOGE buyout program, with private jobs staying stronger. The unemployment rate is forecast to rise to 4.5% in October and hold there in November. Retail sales, ex. autos, for October are anticipated to increase by 0.2%, signaling a solid start to the fourth quarter. For the two months ending in November, the forecast for average monthly headline and core CPI inflation is a moderate 0.23% due to the impact of new health insurance information, with year-over-year headline and core CPI expected to slightly decrease to 2.9%. Looking ahead, December employment, CPI, and PCE data will precede the January FOMC meeting.
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