Unexpectedly heady inflation in Tokyo could rattle the Japanese central bank | A French pharmaceutical firm lost billions fast |

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Hi Reader, here's what you need to know for October 28th in 3:07 minutes.

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Today's big stories

  1. Higher-than-expected inflation data emerged from Tokyo, which could force Japan’s central bank to abandon its current tactics
  2. There’s an opportunity in small stocks that other investors have overlooked – Read Now
  3. French pharmaceutical company Sanofi announced a plan to separate its businesses, and its stock price was punished

Shock The System

Shock The System

What’s going on here?

Inflation in Tokyo jumped out from the shadows in October, taking the country’s central bank by surprise.

What does this mean?

After lying low for the last four months, inflation in Tokyo leapt into action during October. Goods – excluding volatile food prices – were 2.7% more expensive than the same time last year, while services prices rose at their fastest pace in nearly 30 years. Now, these figures just cover Japan’s capital city, but they’ll likely foreshadow the national data that’ll come out next month. Either way, whispers are already circulating: markets are wondering if the Bank of Japan (BoJ) might be forced to break away from its current inflation-fighting tactics.

Why should I care?

For markets: The name’s Bond, inflation-fighting Bond.

So far, the BoJ’s been striking a balance between tackling inflation and protecting economic growth by preventing its 10-year government bond rate from moving any more than a percent away from its target on either side. That should, in theory, keep prices relatively level without jeopardizing domestic growth. But now that inflation’s threatening to blow past the central bank’s forecasts, the BoJ’s hand might be forced. That could mean widening the limits on those bonds, or bringing that strategy back to the drawing board completely.

The bigger picture: Japan’s making lemonade out of lemons.

Japan’s pulled interest rates up a lot slower than the US, UK, or Europe, which has directly caused the country’s yen to lag behind the dollar and euro. Thing is, that’s been a win for major Japanese companies that rely on exports, because a weaker yen makes their products more attractive to foreign buyers. And even with the threat of higher interest rates and the stronger currency that could come with them, corporate reforms in the country are buoying up businesses even more. No wonder big-name investors like Warren Buffett are still exploring the country.

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Analyst Take

Why It’s Time For Small-Cap Stocks To Sparkle

Why It’s Time For Small-Cap Stocks To Sparkle
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Carl Hazeley, Analyst

The US stock market’s gains this year are partly thanks to a handful of massive and buzzy stocks.

That’s left small and mid-cap stocks ignored and overlooked – and created an opportunity.

See, analysis by Citi Wealth found that “high-quality” smaller stocks typically outperform their bigger peers in the long run.

And with valuations looking attractive and interest rates slated to start dropping next year, now could be the time to buy.

So that’s today’s Insight: how to pick out the high-quality small stocks that could outperform, and two strategies you could use to take advantage.

Read or listen to the Insight here


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Split Decisions

Split Decisions

What’s going on here?

Sanofi announced plans to spin off its consumer healthcare business, and that cost the French pharmaceutical company a few billion overnight.

What does this mean?

Sanofi’s plan to sell off its consumer healthcare business was never going to make the company a quick buck. Quite the opposite: it’s a long-term game plan that could allow the pharmaceutical firm to pour more cash into drug research. And while that may well pay off in the future, Sanofi did need to sacrifice the 32% profit margin target it had set for 2025 as a result. Next year’s outlook, too, ended up roughly 9% worse than analysts expected. Investors can be patient when they need to be, but not this time: they sent Sanofi’s stock down 16% after the news.

Why should I care?

For markets: That’s an expensive decision.

That knock cost Sanofi’s market value €20 billion in a single day, and the firm won’t be able to rest easy for a while. See, investors are already uneasy about companies' risk management during these dicey days of business-bruising high interest rates. What’s more, shaky stock markets and high interest rates aren’t exactly a dream dealmaking environment, which casts some doubt over Sanofi’s ability to make the most of the sale and make decent returns on its resulting investments.

The bigger picture: You win some, you lose some.

In fairness, businesses can’t simply rest on their laurels in this risky environment. Money’s only getting more expensive to borrow, which puts a cap on how much firms can invest in themselves. So while major strategic changes will be painful in the short term, risk-taking companies may emerge from the downturn at the top of the pile. And for investors who manage to spot the most promising strategy adjustments, the future could look just as lucrative.

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🎯 On Our Radar

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3. Bing’s AI is terrified of women. The reason why could be a bleak and worrying symptom of our society.

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5. Hot girl summer is finished. Toasted oat winter is here.

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