Wall Street shudders after seeing US inflation data

This is an audio transcript of the FT News Briefing podcast episode: Wall Street shudders after seeing US inflation data

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, September 14th, and this is your FT News Briefing.

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Wall Street had its worst day in more than two years after seeing the latest US inflation data. Twitter’s former head of security testified before US lawmakers, blowing the whistle on the social media site.

Peiter Zatko
It’s not farfetched to say that employee inside the company could take over the accounts of all of the senators in this room.

Marc Filippino
Plus, a US effort to set up a global computer chip alliance can’t seem to get off the ground. I’m Marc Filippino, and here’s the news you need to start your day.

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Yesterday’s US inflation report came as a huge shock. Huge! The consumer price index for August showed inflation rising a tenth of a per cent over the previous month, not falling, as economists had expected. And Wall Street kind of lost it. The S&P 500 fell more than 4 per cent and the Nasdaq was down 5 per cent. Here’s the FT’s Kate Duguid

Kate Duguid
This inflation number persuaded investors that the Fed would have to continue its aggressive fight against high prices. So that means higher interest rates for longer. Currently, repricing, like the consensus expectation is that the Fed will raise interest rates by 75 basis points in September. But after the report on Tuesday, investors started pricing in about a one in three chance that they would raise interest rates by a full percentage point. So this is investors betting that the Fed will have to continue to be very aggressive in their fight against inflation, which will increase borrowing costs for companies, which will increase borrowing costs for individuals and take the economy down with it.

Marc Filippino
What do continued aggressive rate hikes mean for the Treasury market, not just short-term, but also long-term?

Kate Duguid
What it means at the moment is that the two-year yield, yields at the shorter end of the Treasury maturity spectrum, which move in tandem with interest rates, that those are skyrocketing as people are selling those off. It has also meant that yields actually at the long end as well, which move with growth expectations and with inflation expectations, that those have been rising. If you remember, yields move inversely to price. And so investors are selling treasuries across the board, both because they’re betting on higher interest rates as well as higher inflation and a weaker economy.

Marc Filippino
So Kate, does this activity in the Treasury market say anything about the US economy right now?

Kate Duguid
So this indicates that maybe the US economy is not quite as strong as people had been expecting. You know, stocks bottomed out in June and we’ve seen a little bit of a pick-up since then as people have been debating whether or not the Fed can achieve what’s called a soft landing. Right? Whether they can increase interest rates enough to damp down inflation while also keeping US growth in positive territory. The chances of that seem less likely, given how much harder the Fed will have to work in order to reduce inflation.

Marc Filippino
Kate Duguid is the FT’s US capital markets correspondent.

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Twitter’s former head of security was in Washington, DC yesterday, testifying before US lawmakers.

Peiter Zatko
My name is Peiter Zatko, but I’m more often referred to by my online handle as Mudge. For 30 years, my mission has been to make the world better by making it more secure.

Marc Filippino
Zatko has accused his former employer, Twitter, of having lax security protocols. To talk more about this, I’m joined by the FT’s Hannah Murphy. Hi, Hannah.

Hannah Murphy
Hi there. Hi.

Marc Filippino
So Hannah, what were some of Zatko’s main allegations?

Hannah Murph
So the overarching thrust was that Twitter was way behind its peers in terms of its cyber security controls and standards, and that this was because the company had decided to prioritise other issues, other crises and more generally, profits over security. So there’s the allegation that, you know, there’s these lax controls, but also that the company has sort of deliberately chosen not to address them.

Marc Filippino
And one thing Zatko said is that employees had too much access to user data, right?

Hannah Murphy
Yes. So among the allegations, there was the suggestion that Twitter staffers, thousands of them, have access to both user data and they also said advertising client data.

Peiter Zatko
It’s not farfetched to say that employee inside the company could take over the accounts of all of the senators in this room.

Hannah Murphy
He also suggested that Twitter had allowed itself to be infiltrated by foreign agents from nations such as China, and also the mention of India. I think that’s what concerned lawmakers the most, the fact that, you know, a foreign power could take over and hack this system. And obviously, while Twitter is not the largest social media platform — it’s sort of nothing like Meta or Facebook — it still has a bit of an outsized impact on geopolitics in that a lot of politicians are on the platform. A lot of political discourse goes on on the platform.

Marc Filippino
So Twitter denies all this, but Hannah, these allegations also come right as Twitter is in this huge legal battle with Elon Musk. Musk is now trying to back out of a $44bn deal to buy the social media site. Will Zatko’s goes testimony, his allegations, will it affect the legal fight between Twitter and Musk?

Hannah Murphy
Yes, I think we’ve already seen Elon Musk trying to seise on the allegations by Zatko and add them to his lawsuit, which has now happened successfully. So I think he’s going to play them up as much as he can. He’s going to jump on to anything, anything that might resonate when it comes to trying to get out of the deal. Whether they constitute a specific breach of the merger agreement is yet to be seen; will be determined by the judge.

Marc Filippino
Hannah Murphy is the FT’s tech correspondent. Thanks, Hannah.

Hannah Murphy
Thanks.

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Marc Filippino
The Biden administration came up with this ‘Chip 4’ initiative to try and secure vital computer chips. The alliance brought together the US and a few of its allies — Taiwan, South Korea and Japan. But it’s been a year since this Chip initiative was announced and member countries haven’t even had a meeting yet. That’s partly because the countries are concerned with how China is going to react. But the FT’s Christian Davies says this initiative isn’t actually directed at preventing China from gaining ground.

Christian Davies
This initiative is about trying to develop together a more resilient supply chain and to address some of the issues, such as the workforce R&D, and make sure that there’s no race to the bottom on subsidies. The problem is, is that China will necessarily interpret all of these moves as an attempt to corral regional countries against China. And what these countries I think don’t like is the idea of having their names on an initiative which is going to put a target on their backs in terms of Chinese retaliation.

Marc Filippino
There’s also political tension among the countries involved, particularly between Japan and South Korea. And there are tensions between the companies who’d also be part of this alliance.

Christian Davies
The problem is, of course, that these companies are great rivals of each other. And so there’s a bit of nervousness in some East Asian countries, not only that they will be forced to co-operate too closely with each other. For example, they might have to share technology with each other, or that the US could be using this forum as a pretext to gather information that could be used to give their own companies a competitive advantage.

Marc Filippino
So what’s going to happen to the Chip 4 initiative? Will it even get off the ground?

Christian Davies
So I think we’re at the point where the US has calmed quite a few nerves and it’s been watered down. Different countries have received the assurances that they need and so we will probably get a relatively weak, relatively watered down forum for discussion, which maybe is what it should have been in the first place.

Marc Filippino
That’s the FT’s Seoul correspondent Christian Davies.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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