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Global banking giants are starting a 12-week digital dollar pilot with the Federal Reserve Bank of New York, the participants announced yesterday, Reuters reported. Citigroup Inc., HSBC Holdings Plc, Mastercard Inc. and Wells Fargo & Co. are among the financial companies participating in the experiment alongside the New York Fed's innovation center, they said in a statement. The project, which is called the regulated liability network, will be conducted in a test environment and use simulated data, the New York Fed said. The pilot will test how banks using digital dollar tokens in a common database can help speed up payments. Earlier this month, Michelle Neal, head of the New York Fed's market's group, said it sees promise in using a central bank digital dollar to speed up settlement time in currency markets.

Elon Musk’s project to overhaul Twitter Inc. after taking it private carries potential legal risks, even though the billionaire doesn’t have to worry about keeping shareholders happy, Bloomberg Law reported. Musk still has to answer to the consortium of seven banks that provided $13 billion in financing for the buyout. The banks are likely to be patient for now, while Musk works to make Twitter more profitable. If Twitter’s revenue drops, Musk faces litigation perils. The clearest risks involve creditors, both the banks behind the initial deal financing and the secondary investors to whom they’re expected to farm out the loans. Creditors may take action if they start to worry about debt payments. The financial institutions backing the initial loans, which come with roughly $1 billion in annual interest payments. A decline in Twitter’s fortunes could lead to creative efforts to restructure the loans. If Musk “doesn’t turn this boat around in the next six months, not only is that a possibility,” Columbia University law professor Eric Talley said, “I actually think it’s a probability.” Talley pointed to increasingly popular restructuring plans that pit different groups of creditors against one another. Savvy creditors aware of the tactic could seek to head it off by suing Musk for breach of contract “right at that moment,” as soon as any shakeup is announced, leading to “a battle royale of debt restructuring,” Talley said. Those lawsuits could be brought either by the banks or the holders of syndicated debt, who could demand immediate repayment of the full loan.

Federal Reserve Bank of Philadelphia leader Patrick Harker said that the U.S. central bank is approaching a point where it may be able to moderate the pace of its rate rise campaign aimed at lowering too-high levels of inflation, Reuters reported. “In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance,” Harker said. But moving from what had been 75 basis point increases to something like a half percentage point rise would still be a significant action. Harker added, “at some point next year, I expect we will hold at a restrictive rate for a while to let monetary policy do its work” as more expensive borrowing costs impact the economy. The central banker said what happens after that will be driven by the data and added “if we have to, we can always tighten further, based on the data.” The policymaker gave some guidance about where he believes the central bank can stop and take stock of its work. "I am in the camp of wanting to get to what would clearly be a restrictive stance, somewhere north of four-ish, you know, four and a half percent, and then I would be OK with taking a brief pause, seeing how things are moving." Harker said. The rate-setting Federal Open Market Committee has increased the cost of short-term borrowing very rapidly this year, moving from a near zero short-term rate target to between 3.75% and 4% following last week’s 75 basis point rate rise.

Carvana, which promised to reinvent the business of selling used cars, has never turned a profit and has borrowed money to cover its losses, WSJ Pro reported. Carvana Co.’s bonds are touching all-time lows, spotlighting investors’ concerns about the used-car seller’s long-term trajectory as it burns cash and faces rising borrowing costs. Carvana’s long-term bonds have declined to distressed levels, with some now trading as low as 33 cents on the dollar on Wednesday, a sign that investors don’t believe they will be paid back in full. The yield on their 10.25% notes was over 30% as of Tuesday, according to MarketAxess, a sign that Carvana would struggle to borrow from bond markets presently. The used-car business thrived when people opted to drive to avoid mass transportation during the pandemic. But car prices have dropped as interest rates went up and concerns over a recession grew, denting the company’s growth prospects. The company, which promised to reinvent the business of selling used cars, has never turned a profit and has borrowed money to cover its losses. The bonds had already dropped this year as the Federal Reserve started to raise interest rates in March. But they slid around 25% after Carvana’s latest earnings report on Friday, indicating that investors have become more pessimistic about the company’s fundamentals, rather than following broader market moves.

Crypto markets face weeks of deleveraging in the fallout from the crisis at digital-asset exchange FTX.com, a period of upheaval that could push Bitcoin down to $13,000, according to JPMorgan Chase & Co. strategists, Bloomberg reported. A “cascade of margin calls” is likely underway given the interplay between the exchange, its sister trading house Alameda Research and the rest of the crypto ecosystem, a team led by Nikolaos Panigirtzoglou wrote. “What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking” in the crypto sphere, the team said. Digital-asset investors are still coming to terms with the rapid unraveling at FTX.com and the concerns swirling around Alameda Research, both founded by 30-year-old Sam Bankman-Fried. There are fears that the potential bankruptcy of FTX.com could lead to contagion that takes down other crypto outfits. The strategists pointed to Bitcoin’s production cost as a way of calibrating how much further it can fall. The production cost is mainly the electricity needed to operate the powerful computers that run the Bitcoin network. “At the moment, this production cost stands at $15,000, but it is likely to revisit the $13,000 low seen over the summer months,” they said. The $13,000 level is one that other prognosticators are looking at too as a possible floor. Bitcoin snapped four days of declines, including a near 16% tumble Wednesday, to add about 6% to reach $16,690 as of 7:53 a.m. in London on Thursday. Bankman-Fried has told FTX.com investors that without a cash injection, the company would need to file for bankruptcy. The episode is the latest imbroglio to befall virtual coins, exacerbating steep losses this year caused by a withering of speculative ardor under the sobering influence of aggressive interest-rate hikes.

The Federal Reserve could still avoid creating a severe economic downturn in the U.S. with its interest rate hikes, a chief J.P. Morgan Asset Management strategist said and Fortune reported. But it probably won’t because its leaders are convinced, without having said so publicly, that a recession is the only cure to rampant inflation. “If the window is narrowing, it’s because the Federal Reserve is shutting the window,” David Kelly, chief global strategist for J.P. Morgan Asset Management, told Insider in an interview released Tuesday. “The economy is very much at risk of the Fed pushing it into recession quite unnecessarily.” Hoping to tame roaring inflation by cooling the hot economy, the Federal Reserve has approved six interest rate hikes this year. The strategy may ultimately reduce prices, but it will, according to many bankers and economists, likely set off a recession next year. Last week, the Fed approved its most recent rate hike, and signaled it’s open to more, even as inflation shows signs of receding. Kelly isn’t alone in saying inflation may already be on the wane. U.S. annual inflation may already be down to as low as 4%, economist Paul Krugman wrote, citing indicators that take longer to show up in economic measurements such as slowing wage growth and declining rental prices. Some economists maintain that a “soft landing,” whereby inflation subsides without a significant economic downturn, is possible, as the U.S. could navigate a “narrow path” to avoid a recession next year.

Finance executives at large U.S. companies, including Coca-Cola Co. and Dow Inc., are increasing their foreign currency hedges and covering longer time periods as the strong dollar continues to take a toll on earnings, the Wall Street Journal reported. The dollar in recent quarters has surged against major international currencies as the Federal Reserve’s rate increases outpace those of other central banks, making higher-yielding dollar assets more attractive for investors. The Wall Street Journal Dollar Index is up nearly 15% since the beginning of the year. A strong dollar crimps income from abroad as it gets converted into fewer dollars. Finance chiefs and treasurers are responding by looking for additional protection, as they try to ensure that their overseas earnings are worth a certain amount when translated into U.S. dollars. Changes to companies’ hedge contracts include covering larger amounts of earnings as well as longer durations beyond the usual 18 to 24 months. There are growing indicators of the impact of the strengthening dollar on companies’ results and stocks. The number of S&P 500 companies that beat revenue expectations has declined as the dollar strengthened, with 38% of companies outpacing expectations through Oct. 31, compared with 45% in the second quarter and 49% in the first quarter. Share prices of S&P 500 companies with large overseas exposure are down about 23% since the beginning of the year, compared with 18% for the wider index and 6% for companies with largely domestic businesses. (Subscription required.)

The stock market could be set up for another rocky year in 2023 if earnings estimates from Goldman Sachs and Bank of America pan out, Business Insider reported. Goldman Sachs downgraded its 2023 earnings growth outlook to 0% for the S&P 500 — and that's only if a recession doesn't hit the U.S. economy. “In a recession, we expect S&P 500 EPS would fall by 11%,” Goldman Sachs’ equity strategist David Kostin said. The bank expects the S&P 500 to generate $224 in earnings per share for 2023, down from its prior estimate of $234. Over the long-term, corporate earnings growth and stock prices have a direct relationship, so if earnings aren't growing, there's a good chance stock prices aren't either, at least until the outlook begins to improve. Bank of America's Savita Subramanian is even more bearish than Kostin, as she expects the S&P 500 to generate earnings per share of just $200 in 2023. That's well below Wall Street's consensus estimate of $233. “Pricing is peaking, demand is slowing, yet costs are sticky. Our Corporate Misery Indicator remains well off its highs (more miserable), pointing to increased margin pressure. Demand is key, which was the main driver of pricing power post-COVID. Weakening demand should translate to weaker pricing and margin pressure,” Subramanian said. Much of the weakness in earnings growth next year is likely to come from the technology and consumer discretionary sectors, as higher interest rates and weaker fundamentals create a "perfect storm." Meanwhile, Kostin expects the financials sector to post the fastest earnings growth next year, with utilities and real estate also growing their profits. Based on the earnings estimate, Kostin expects the S&P 500 to end 2023 at 4,000.

The S&P 500 risks another leg down after a “complete U-turn” in 2023 earnings-per-share estimates for the U.S. stock-market index, according to a BofA Global Research note, MarketWatch reported. “Forward estimates have been cut much larger than usual,” BofA equity and quant strategists said in a research note. They said that estimates for earnings per share, or EPS, for the S&P 500 in 2023 are down 3.6% since the start of October to $233 — 2.9 times the typical cut. While the 2023 EPS consensus remains “well above” BofA’s forecast of $200, estimates are 8% below the June peak of $252. Revisions so far this year are “now trending in line with the historical average,” and if the 2.9x pace of cuts continues through year-end, the S&P 500 could see “no EPS growth next year” as 2023 consensus would fall to around $220. “Actual EPS historically came in 4% below where consensus stood in the beginning of the year, which also points to potential for negative growth,” the strategists said.  Meanwhile, estimates for S&P 500 EPS in the fourth quarter are down 4.3% since the beginning of October, or 2.5 times the typical estimate cut “at this point in earnings season,” they wrote. Analysts at Goldman Sachs Group said that they lowered their 2023 EPS growth forecast to 0%, from a previously expected increase of 3%, after the S&P 500’s net margins contracted in the third quarter for the first time since the pandemic on a year-over year basis. They wrote that “weak” third-quarter margins presage “a headwind” next year. Goldman kept its price target for the S&P 500 at year-end at 3,600 and also maintained its 2023 forecast of 4,000.