During the last week, we’ve gone from a soft landing with inflation coming down to inflation not coming down at all. Not only is the decline slowing, but in some categories, it’s increased — and that’s a problem. This is going to cause the Fed to be even more diligent, no question. There was confusion a month ago, and now interest rates are going to be higher for a longer stretch.

On February 23rd, Jamie Dimon, Chairman and CEO of JP Morgan, talked about Federal discount rate rising to six percent, not five as earlier thought. Today the market was expecting the low fives.

Translation: As long as we haven’t peaked, we still need to find our peak.

PPI, CPI, retail sales, job numbers and the PCE were all bad and this creates a trend.

We’re getting close to the top, but we’re not there. That means we’re going to have a lot of uncertainty, which is bad for the market. Instead of having that inflection point that says we’ve stopped and are beginning to decrease (and the Fed stops raising), we haven’t reached the top. That’s significantly different than a week ago — that’s why the market has been so volatile.

This also explains why the data has been so off, and now the data has been negative during the last week. *PPI, CPI, retail sales, job numbers and the PCE were all bad and this creates a trend.

The largest IT transactions — where martinwolf doesn’t directly participate — will continue to be “frozen,” because these deals are now by-and-large financed by non-banking entities and non-traditional commercial banks thereout, which is very different.

According to the latest CPI data from the BLS, the all-items index increased 0.5% in January 2023 bringing inflation to 6.4% over the last 12 months. This is slightly higher from the previous month’s increase of 0.1%, but inflation over the last 12 months declined from 6.5%. The largest contributors to January’s inflation reading were energy and food prices. The Core CPI, which removes volatile food and energy notched up 0.4% in January, resulting in a 5.6% inflation reading over the last 12 months. Core CPI in December 2022 increased 0.1% raising inflation to 5.7% during the last 12 months.

Larger Deals = More Impact/Smaller Deals = Less Impact

The largest IT transactions — where martinwolf doesn’t directly participate — will continue to be “frozen,” because these deals are now by-and-large financed by non-banking entities and non-traditional commercial banks thereout, which is very different. These people are taking higher risks. Traditional banks have paused, and that equates to higher interest rates and points/warrants.

The lower middle market deals are less impacted, which historically demonstrate more creativity in how those deals are structured. We’re seeing more earnouts vs. a year ago.

There’s no question multiples for most businesses, not all, have come down. But there’s another challenge: many companies don’t have financial issues, but rather customer concerns. We’ve actually paused engagements because there are customer disruptions. And that’s a new issue — a weakening affect on financial performance, which then impacts valuation.

Looking Ahead

We believe the second half of 2023 will see stabilized rates but not a decline in interest rates. This will directly affect sellers, resulting in favorable valuations. We’re forecasting less choppy sailing in a more normal environment during the second half of the year. If you have visibility into your customers and vendor programs, and you don’t have those issues, then a lot of businesses will enter the market in the second quarter with the expectation they complete their transactions in the fourth quarter of 2023.

* Note: The Consumer Price Index (CPI) and Producer Price Index (PPI) are two important measures of inflation that impact the M&A industry. The CPI measures the price change of goods and services purchased by households, while the PPI measures the average change over time in the selling prices received by domestic producers of goods and services. These indices can help assess the potential impact of inflation on various businesses looking to buy or sell.

Original article can be found here.