Economy Daily

Economic downturn now

Monique Deals, 5-8, 22, The Hill, Gates says global economic slowdown coming sooner or later, https://thehill.com/policy/finance/3481257-gates-says-global-economic-slowdown-coming-sooner-or-later/

Microsoft founder Bill Gates said rising inflation and interest rates in Western economies would drive the world toward an economic slowdown “eventually.” CNN’s Fareed Zakaria asked Gates how Russia’s invasion of Ukraine, and the resulting rise in energy and food prices, would impact the global economic outlook. “It comes on top of the pandemic where government debt levels were already very, very high and there were already some sort of supply chain problems,” Gates said on “Fareed Zakaria GPS.” The philanthropist and billionaire added “it’s likely to accelerate the inflationary problems” and “force an increase in interest rates that eventually will result in an economic slowdown.” So I’m afraid that the bears on this one have a pretty strong argument that concerns me al lot,” he said, noting that “when the rich countries have these big budget problems, the health needs of places like Africa get deprioritized.” Last week, the U.S. Federal Reserve raised its baseline interest rate range by 0.5 percentage points to combat inflation, and is expected to make similar moves at its next two meetings this summer. Though the Fed says it hopes to avoid pushing the economy into a recession, fears are mounting that it will, illustrated by the brutal week on Wall Street. During the interview with CNN, Gates also spoke about his new book, “How to prevent the next pandemic,” saying that the country needs to better prepare itself for the next global medical crisis. “It’s hard to overstate how unprepared we were for what was sadly even somewhat predictable, and so hopefully this is our big wake-up call to do like we do for earthquake and fire and war to really be able to respond correctly,” Gates said of pandemic preparedness. Canada’s Trudeau says Putin ‘can only lose’ in UkraineMexico says no country should be left out of Americas summit, rebutting US

35% chance of a recession now

Ethen Kim Lieser, 4-25, 22, Ethen Kim Lieser is a Washington state-based Finance and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn, Danger Ahead: Odds of a U.S. Recession Continues to Climb Higher, https://nationalinterest.org/blog/buzz/danger-ahead-odds-us-recession-continues-climb-higher-201997

Moody’s chief economist Mark Zandi stated that he believes that there is about a 35 percent chance that the country will fall into a recession in the next two years. With year-over-year inflation sitting at a four-decade high of 8.5 percent and an increasingly hawkish Federal Reserve seeking to raise interest rates more aggressively, some notable economists and financial experts are now suggesting that the United States will eventually enter into a recession. As reported by Fortune, Moody’s chief economist Mark Zandi stated that he believes that there is about a 35 percent chance that the country will fall into a recession in the next two years.“The risk of the economy entering into a recession at some point over the next 12, 18, 24 months is very high, uncomfortably high. And I’d say (it’s) rising,” he said earlier this week in a webinar.

50% chance of an expansion now

Ethen Kim Lieser, 4-25, 22, Ethen Kim Lieser is a Washington state-based Finance and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn, Danger Ahead: Odds of a U.S. Recession Continues to Climb Higher, https://nationalinterest.org/blog/buzz/danger-ahead-odds-us-recession-continues-climb-higher-201997

But on a more positive note, Zandi was confident that the Fed will be able to engineer a mollify what many pessimistic experts are anticipating will be a dire situation. “I think the Fed will be able to calibrate things and navigate through all of this and land the economic plane on the tarmac reasonably so,” he added. “I don’t think I want to say soft landings or that anything about this is going to be soft. This is going to feel ugly—it’s already feeling ugly. So it’s not gonna be an easy thing. There’s going to be a lot of bumps, a lot of hand-wringing along the way. But I think we’re going to be able to land the plane,” he continued. Instead of the recession scenario, Zandi contended that there is about a 50-percent probability that the U.S. economy will evolve into what is called a “self-sustaining economic expansion”—in which the country will return to full employment and inflationary pressures will ease.

Markets down

Hannah, 4-24, 22, CNBC, Dow drops about 300 points as April sell-off continues, global slowdown fears loom, https://www.cnbc.com/2022/04/24/stock-market-futures-open-to-close-news.html

The Dow Jones Industrial Average fell Monday, continuing an April market sell-off that has pushed the index lower for four straight weeks. Fear about a global economic slowdown loomed as Asian stock markets cratered Monday amid concerns about Covid case spikes in China. Oil prices declined and yields retreated on the fears. Wall Street is also bracing for a stacked week of earnings, including reports from major technology companies like Amazon and Apple. The Dow fell about 300 points, or 1%. The S&P 500 retreated 1.1%. The Nasdaq Composite dipped 0.4%. “Stocks are kicking off the week deeply in the red as all the anxiety and negativity from Thurs/Fri carried over the weekend,” wrote Adam Crisafulli of Vital Knowledge in a note to clients. “The dramatic shift in [central bank] tightening expectations last week remains a huge overhang, but China is quickly rising the top of the list of market fears as COVID shutdown concerns spread to Beijing.” China’s Shanghai composite dropped more than 5% on Monday as China struggles to contain a Covid breakout in Shanghai. Beijing reported a spike in cases over the weekend. Fears of a global slowdown send oil prices lower. WTI crude fell more than 5% back below $100. Energy shares retreated, comprising the worst-performing S&P 500 sector Monday. Chevron fell more than 3% and Exxon Mobil lost more than 5%. The 10-year Treasury yield, which has undergone a rapid rise this year that has worried investors, dropped more than 12 basis points to below 2.8% (1 basis point equals 0.01%). Some technology shares were a bright spot in the market, rising as interest rates fell. Google-parent Alphabet shares nearly 2% and Microsoft was marginally higher. Investors are watching Twitter as well, which reportedly is re-examining Elon Musk’s takeover bid. The social media company is nearing a deal to sell itself to the billionaire investor, The New York Times reported, citing unnamed sources. Twitter shares were more than 3% higher. Coca-Cola shares were marginally higher after the company reported better-than-expected quarterly earnings before the bell Monday. About 160 companies in the S&P 500 are expected to report earnings this week, and all eyes will be on reports from mega-cap tech names, including Amazon, Apple, Alphabet, Meta Platforms and Microsoft. “This week may easily be a fork in the road of equities. We have nearly a third of the S&P 500 and half of the Dow Jones set to report. Bottom-up drivers will either confirm or reject what the challenging macro backdrop has given us over the last three weeks,” MKM’s JC O’Hara said in a note. After a late March comeback, stocks returned to their losing ways in April. The Dow is coming off its worst one-day performance since October 2020 on Friday, dropping more than 900 points and marking the Dow’s fourth straight weekly loss. For the week, the S&P 500 and the Nasdaq are fresh off three straight losing weeks. The Nasdaq Composite is down about 10% for the month, while the S&P 500 and Dow are off by around 6% and 3% respectively. The S&P 500 is back in correction territory, down roughly 12% from its high. The Nasdaq is off by more than 21% from its record.

All current economic downsides are internalized, the market will rebound

Stephanie Landsam, 4-18, 22, Market will break out of slump due to peaking inflation, Evercore ISI predicts, https://www.cnbc.com/2022/04/18/market-will-break-out-of-slump-due-to-peaking-inflation-evercore-isi.html

The market slump may be in its final innings. According to Evercore ISI’s Julian Emanuel, stocks should start grinding higher due to peaking inflation. He cites a positive trend going back to the last time stocks and bonds fell together: 1994. “The market just sort of digested it, and there was a lot of sideways chop,” the firm’s senior managing director told CNBC’s “Fast Money” on Monday. “There was a lot of bearishness.” It paved the way for an epic market breakout over the next four years. “At the end of the day, earnings carried the day,” noted Emanuel. “That’s what we see when we think about ’22 and ’23 because we don’t think there’s going to be a recession.” Emanuel sees the benchmark 10-year Treasury Note yield ending this year at 3.25%. The yield kicked off the week at 2.85%, touching the highest level since December 2018. Goldman says buy these tech stocks to beat the turbulence — and gives one 80% upside El-Erian says inflation won’t peak for some time and the Fed might be forced to raise its target The market bull expects strong consumer spending to buoy the economy. Margins on balance haven’t contracted because the pricing power has been there,” said Emanuel. Yet, Wall Street optimism is at a 30-year low. Emanuel alludes to the latest AAII Investor Sentiment Survey. In the week ending April 13, bears outnumbered the bulls by about three to one. Emanuel sees the results as a key contrary indicator. ’It’s a question of can you manage through what’s already in the price from an asset market perspective,” Emanuel said. “As difficult as the external circumstances have been abroad and certainly slowing down in China now, the U.S. consumer is still intact.” As the Street gets deeper into earnings season, he doubts corporate America will give inflation outlooks. “You’re not going to hear that from companies. They don’t need to take that risk guidance-wise,” Emanuel said. “We don’t think they’re going to be very, very cautionary because they really haven’t seen the evidence concretely themselves.” Emanuel has a 4,800 year-end target on the S&P 500, a 9% jump from Monday’s close.

Inflation increasing

Jeff Cox, 4-12, 22, ECONOMY; Consumer prices rose 8.5% in March, slightly hotter than expected and the highest since 1981, https://www.cnbc.com/2022/04/12/consumer-prices-rose-8point5percent-in-march-slightly-hotter-than-expected.html

Headline CPI in March rose by 8.5% from a year ago, the fastest annual gain since December 1981 and one-tenth of a percentage point above the estimate. Surging food, energy and shelter costs helped account for the gain. Real worker earnings fell by another 0.8% during the month as the cost of living outpaced otherwise strong pay gains. Inflation climbs 8.5% in March, highest level since December 1981 Prices that consumers pay for everyday items surged in March to their highest levels since the early days of the Reagan administration, according to Labor Department data released Tuesday. The consumer price index, which measures a wide-ranging basket of goods and services, jumped 8.5% from a year ago on an unadjusted basis, above even the already elevated Dow Jones estimate for 8.4%. Excluding food and energy, the CPI increased 6.5%, in line with the expectation. The data reflected price rises not seen in the U.S. since the stagflation days of the late 1970s and early ’80s. March’s headline reading in fact was the highest since December 1981. Core inflation was the hottest since August 1982.

Inflation peaking, economy strong

Jeff Cox, 4-12, 22, ECONOMY; Consumer prices rose 8.5% in March, slightly hotter than expected and the highest since 1981, https://www.cnbc.com/2022/04/12/consumer-prices-rose-8point5percent-in-march-slightly-hotter-than-expected.html

However, core inflation appeared to be ebbing, rising 0.3% for the month, less than the 0.5% estimate. Despite the increases, markets reacted positively to the report. Stock market futures rose and government bond yields declined. “The big news in the March report was that core price pressures finally appear to be moderating,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. Hunter said he thinks the March increase will “mark the peak” for inflation as year-over-year comparisons drive the numbers lower and energy prices subside. Still, due to the surge in inflation, real earnings, despite rising 5.6% from a year ago, weren’t keeping pace with the cost of living. Real average hourly earnings posted a seasonally adjusted 0.8% decline for the month, according to a separate Bureau of Labor Statistics report. The inability of wages to keep up with costs could add to inflation pressures. The Atlanta Federal Reserve wage tracker for March indicated gains of another 6% which is “symptomatic of inflation pressures continuing to broaden,” said Brian Coulton, chief economist at Fitch Ratings. Coulton pointed out that the core inflation deceleration was due largely to a drop in auto prices, while other prices continued to show increases. Shelter costs, which make up about one-third of the CPI weighting, increased another 0.5% on the month, making the 12-month gain a blistering 5%, the highest since May 1991. To combat inflation, the Federal Reserve has begun raising interest rates and is expected to continue doing so through the remainder of the year and into 2023. The last time prices were this high, the Fed raised its benchmark rate to nearly 20%, pulling the economy into a recession that finally defeated inflation. Economists generally don’t expect a recession this time around, though many on Wall Street are raising the probability of a downturn. “Overall, this report is encouraging, at the margin, though it is far too soon to be sure that the next few core prints will be as low; much depends on the path of used vehicle prices, which is very hard to forecast with confidence,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We’re sure they will fall, but the speed of the decline is what matters.” Price increases came from many of the usual culprits. Food rose 1% for the month and 8.8% over the year, as prices for goods such as rice, ground beef, citrus fruits and fresh vegetables all posted gains of more than 2% in March. Energy prices were up 11% and 32%, respectively, as gasoline prices popped 18.3% for the month, boosted by the war in Ukraine and the pressure it is exerting on supply. One sector that has been a major driver in the inflation burst subsided in March. Used car and truck prices declined 3.8% for the month, though they are still up 35.3% on the year. Also, commodity prices excluding food and energy fell by 0.4%. Those declines, however, were offset by gains in clothing, services excluding energy and medical care, each of which increased 0.6% for the month. Transportation services also rose 2%, bringing its 12-month gain to 7.7%. In a sign of economic recovery from a sector hard-hit during the Covid pandemic, airline fares jumped by 10.7% in the month and were up 23.6% from a year ago.

Recession shock

Reuters, 4-8, 22, https://finance.yahoo.com/news/recession-shock-coming-bofa-warns-101801015.html, A “recession shock” is coming, BofA warns

LONDON (Reuters) – The macro-economic picture is deteriorating fast and could push the U.S. economy into recession as the Federal Reserve tightens its monetary policy to tame surging inflation, BofA strategists warned in a weekly research note. “‘Inflation shock’ worsening, ‘rates shock’ just beginning, ‘recession shock’ coming“, BofA chief investment strategist Michael Hartnett wrote in a note to clients, adding that in this context, cash, volatility, commodities and crypto currencies could outperform bonds and stocks. The Federal Reserve on Wednesday signalled it will likely start culling assets from its $9 trillion balance sheet at its meeting in early May and will do so at nearly twice the pace it did in its previous “quantitative tightening” exercise as it confronts inflation running at a four-decade high. A large majority of investors also expect the central bank to hike its key interest rate by 50 basis point. In terms of notable weekly flows, BofA said emerging market equity funds enjoyed the biggest inflow in ten weeks at $5.3 billion in the week to Wednesday while emerging market debt vehicles attracted $2.2 billion, their best week since September. It was also an eight week of outflows for European equities at $1.6 billion while U.S. stocks enjoyed their second week of inflows, adding $1.5 billion in the week to Wednesday. The analysis was based on EPFR data. (Reporting by Julien Ponthus, editing by Karin Strohecker)

Recession now

Matt Eagan, 4-5, 22, CNN, Deutsche Bank is the first big bank to forecast a US recession, https://www.cnn.com/2022/04/05/business/recession-inflation-economy/index.html

The Federal Reserve’s fight against inflation will spark a recession in the United States that begins late next year, Deutsche Bank warned on Tuesday. The recession call — the first from a major bank — reflects growing concern that the Fed will hit the brakes on the economy so hard that it will inadvertently end the recovery that began just two years ago. “We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession,” Deutsche Bank economists led by Matthew Luzzetti wrote in the report. That forecast is driven by red-hot inflation, with consumer prices rising at the fastest pace in 40 years. Hopes that inflation would rapidly cool off have been dashed, in part because of the war in Ukraine. Inflationary pressures have broadened out, raising concern that the Fed will have to rapidly raise interest rates to get prices under control. Deutsche Bank pointed to how energy and food commodity prices have spiked since Russia invaded Ukraine. “It is now clear that price stability…is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand,” the Deutsche Bank economists wrote. In other words, the Fed can’t just tap the brakes on the economy. It needs to really slow the economy down. Fed Governor Lael Brainard said Tuesday the Fed will need to “rapidly” shrink its balance sheet and “methodically” raise interest rates to cool off inflation. “It is of paramount importance to get inflation down,” Brainard said in a speech. ‘Mild’ recession and 5% unemployment Although Deutsche Bank cautioned there is “considerable uncertainty” around the exact timing and size of the downturn, it’s now calling for the US economy to shrink during the final quarter of next year and the first quarter of 2024, “consistent with a recession during that time.” The good news is Deutsche Bank is not forecasting a deep and painful recession like the past two downturns. Rather, the bank expects a “mild recession,” with unemployment peaking above 5% in 2024. That would still translate to considerable layoffs. During the Great Recession unemployment peaked at far higher levels of 14.7% in 2020 and 10% in 2009. This coming recession would allow inflation to get back towards the Fed’s target by the end of 2024, Deutsche Bank said. “With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed’s 2% objective in 2025,” Deutsche Bank said. Dimon sees a slowdown that ‘could easily get worse’ Others have recently warned of a growing probability of a recession, though they have mostly stopped short of predicting an outright downturn. There is at least a one-in-three chance of a recession in the next 12 months, Moody’s Analytics chief economist Mark Zandi told CNN late last month. “Recession risks are uncomfortably high — and moving higher,” Zandi said. Goldman Sachs has similarly said recessions chances have climbed to as high as 35%. “The war in Ukraine and the sanctions on Russia, at a minimum, will slow the global economy — and it could easily get worse,” the JPMorgan Chase CEO Jamie Dimon wrote in his annual shareholder letter Monday, recalling that the 1973 oil embargo sent energy prices skyrocketing and pushed the world into recession. America’s job market is on fire. Here’s why it doesn’t feel like it Fed Chairman Jerome Powell, on the other hand, pointed out in a speech last month that there have been instances in the past where the Fed was able to achieve a soft landing: Fighting inflation by raising rates without causing a recession. Powell pointed to 1965, 1984 and 1994 as examples. However, the Fed chief also conceded there is no guarantee it will be able to pull off that feat this time. “No one expects that bringing about a soft landing will be straightforward in the current context,” Powell said, “very little is straightforward in the current context.”

Recession coming

Yun Li, 3-22, 22, CNBC, Carl Icahn says there ‘very well could be a recession or even worse’, https://www.cnbc.com/2022/03/22/carl-icahn-says-there-very-well-could-be-a-recession-or-even-worse.html?&qsearchterm=recession

Famed investor Carl Icahn said Tuesday an economic downturn could be on the horizon and he is loaded on protection against a steep sell-off in the market. “I think there very well could be a recession or even worse,” Icahn said on CNBC’s “Closing Bell Overtime” to Scott Wapner. “I have kept everything hedged for the last few years. We have a strong hedge on against the long positions and we try to be activist to get that edge… I am negative as you can hear. Short term I don’t even predict.” The founder and chairman of Icahn Enterprises said surging inflation is a major threat to the economy, while the Russia-Ukraine war only added more uncertainty to his outlook. The Federal Reserve raised interest rates for the first time in more than three years in an attempt to battle inflation that is running at its highest level in 40 years. Fed Chairman Jerome Powell this week vowed tough action on soaring prices, indicating he’s open to rate hikes more than the traditional 25 basis points. “I really don’t know if they can engineer a soft landing,” Icahn said. “I think there is going to be a rough landing… Inflation is a terrible thing when it gets going.” Icahn, a longtime activist investor and so-called corporate raider, said he believes the system of company boards needs to be fixed and weak management could lead to disasters. “There’s no accountability in Corporate America. You have some very fine companies, some very fine CEOs, but far too many that are not up to the task,” the longtime activist investor said. To position for a recession in America, Icahn said he’s betting against malls and commercial real estate.

No Russian oil means recession

Christ Antsy, March 22, 2022, Bloomberg, Recession Is Unavoidable Without Russian Oil, Dallas Fed Study Says, https://www.bloomberg.com/news/articles/2022-03-22/recession-unavoidable-without-russian-oil-dallas-fed-study-says

The global economy likely won’t be able to avoid a recession without a resumption of Russian energy exports this year, according to a study by Federal Reserve Bank of Dallas economists. “If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable,” economists Lutz Kilian and Michael Plante wrote in an article posted by the Dallas Fed Tuesday. “This slowdown could be more protracted than that in 1991.” Oil-price spikes associated with some past downturns The authors drew a parallel to the 1991 global recession, set off by Iraq’s invasion of Kuwait in the year prior that caused an oil-supply shock. Back then, Saudi Arabia partly reduced the impact by pledging to ramp up production, helping ensure what the researchers called “only a brief U.S. recession,” which lasted less than a year. The refusal of financial institutions to support Russian energy exports has been the main development putting those shipments at risk, the Dallas Fed economists wrote. “This outcome was largely unanticipated, as U.S. and European Union sanctions originally deliberately excluded Russian energy exports.” Barter Schemes Replacing that supply may be challenging, given that Saudi Arabia and the United Arab Emirates have signaled they won’t provide relief, the researchers said. They also highlighted that U.S. shale producers are “constrained by supply-chain bottlenecks, labor shortages and the insistence of public investors on capital discipline.”“There are indications that some oil-importing countries are exploring alternative-payment schemes that avoid the use of trade credit, bypass current financial sanctions or rely on alternative currencies,” which could help ease the hit caused by financing difficulties, Kilian and Plante wrote. Without a supply response, the drop-off of Russian exports will cause an inflationary hit that compresses spending, according to the authors. “Unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil,” they wrote. “This demand destruction is likely to be assisted by the recessionary effect of higher natural gas prices and other commodity prices, especially in Europe.”

High chance of a recession now

Fox Business, 3-22, 22, https://www.foxbusiness.com/economy/russia-ukraine-inflation-oil-recession-economist, Risk of recession ‘uncomfortably high’: Moody’s Analytics chief economist

Moody’s Analytics chief economist Mark Zandi joined “Mornings with Maria,” Tuesday and argued the risk of recession is “uncomfortably high” amid Russia’s invasion of Ukraine and the spike in oil prices. POWELL SAYS FED COULD RAISE INTEREST RATES FASTER TO COMBAT RED-HOT INFLATION MARK ZANDI: The risks of recession have risen quite considerably… With Russia invading Ukraine, the spike in oil and other commodity prices, inflation expectations have taken off here and the Federal Reserve, as we could see from [Jerome] Powell’s speech yesterday is now on high alert. … It’s going to have to tighten monetary policy a lot more aggressively. Therefore, the risks of recession are now a lot higher… I’d put… the risk of recession now in the next 12 months, at least one in three… that’s uncomfortably high.

Markets down

Miriam Berger, 3-18, 22, U.S. stocks were poised for a pullback Friday after notching three consecutive days of gains, and oil prices edged higher as traders kept wary watch on Ukraine, https://www.washingtonpost.com/world/2022/03/18/russia-ukraine-war-news-putin-live-updates/#link-2XN3K4EKXVEVZM4IMBVIYIPDXQ

U.S. stocks were poised for a pullback Friday after notching three consecutive days of gains, and oil prices edged higher as traders kept wary watch on Ukraine. Markets had been buoyed this week by the hope of a possible cease-fire ― the Dow is up 3.6 percent over the past week ― but Russia continued its assault. On Friday, futures linked to the Dow Jones industrial average fell 200 points, or 0.6 percent, while the broader S&P 500 index lost 0.7 percent and the tech-heavy Nasdaq dropped 0.8 percent. Oil prices climbed, with Brent crude, the international benchmark, inching up near $107 a barrel. The U.S. benchmark, West Texas Intermediate, was trading near $103 per barrel. Prices have fallen significantly from recent surges that sent them beyond $130 per barrel. The Ukraine war has weighed heavily on energy markets because Russia produces about 10 percent of the world’s oil supply, on par with the United States and Saudi Arabia. Surging energy costs tend to ripple quickly through the economy, adding heat to already high inflation and sticker shock at the gas pump, where the U.S. average for a gallon of gas was $4.27 on Friday, according to data from AAA. That’s a 4-cent drop since Monday but still nearly 75 cents higher than a month ago and $1.39 more than last year.

Russian default

Markets down

Miriam Berger, 3-18, 22, U.S. stocks were poised for a pullback Friday after notching three consecutive days of gains, and oil prices edged higher as traders kept wary watch on Ukraine, https://www.washingtonpost.com/world/2022/03/18/russia-ukraine-war-news-putin-live-updates/#link-2XN3K4EKXVEVZM4IMBVIYIPDXQ

U.S. stocks were poised for a pullback Friday after notching three consecutive days of gains, and oil prices edged higher as traders kept wary watch on Ukraine. Markets had been buoyed this week by the hope of a possible cease-fire ― the Dow is up 3.6 percent over the past week ― but Russia continued its assault. On Friday, futures linked to the Dow Jones industrial average fell 200 points, or 0.6 percent, while the broader S&P 500 index lost 0.7 percent and the tech-heavy Nasdaq dropped 0.8 percent. Oil prices climbed, with Brent crude, the international benchmark, inching up near $107 a barrel. The U.S. benchmark, West Texas Intermediate, was trading near $103 per barrel. Prices have fallen significantly from recent surges that sent them beyond $130 per barrel. The Ukraine war has weighed heavily on energy markets because Russia produces about 10 percent of the world’s oil supply, on par with the United States and Saudi Arabia. Surging energy costs tend to ripple quickly through the economy, adding heat to already high inflation and sticker shock at the gas pump, where the U.S. average for a gallon of gas was $4.27 on Friday, according to data from AAA. That’s a 4-cent drop since Monday but still nearly 75 cents higher than a month ago and $1.39 more than last year.

Russian default

Elliot Smith, 3-14, 22, https://www.cnbc.com/2022/03/14/as-russia-nears-a-debt-default-talk-now-turns-to-global-contagion.html, MARKETS, As Russia nears a debt default, talk now turns to global contagion

International Monetary Fund Managing Director Kristalina Georgieva said Sunday that Russian sovereign debt default is no longer an “improbable event.” The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday. Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.” Russia is on the brink of defaulting on its debt, according to ratings agencies and international bodies, but economists do not yet see a global contagion effect on the horizon. International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.” Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments. Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.” However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC. The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday. Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.” S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-” on the basis that the measures taken by Moscow to mitigate the unprecedented barrage of sanctions imposed by the U.S. and allies “will likely substantially increase the risk of default.” Moody’s downgrades Russia’s credit rating in an ‘unprecedented’ way “Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including ones targeting the foreign exchange reserves of The Central Bank of Russia (CBR); this has rendered a large part of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and impairing what had been – until recently – Russia’s standout credit strength: its net external liquidity position,” S&P said. Moody’s also slashed Russia’s credit rating earlier this month to its second-lowest tier, citing the same central bank capital controls likely to hinder payments in foreign currencies, resulting in defaults. Moscow moved to strengthen its financial position following a suite of western sanctions imposed in 2014, in response to its annexation of Crimea. The government ran consistent budget surpluses and sought to scale back both its debts and its reliance on the U.S. dollar The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but reserves of dollars and euros have been effectively frozen by recent sanctions. Meanwhile, the Russian ruble has plunged to all-time lows. “To mitigate the resulting high exchange rate and financial market volatility, and to preserve remaining foreign currency buffers, Russia’s authorities have – among other steps – introduced capital-control measures that we understand could constrain nonresident government bondholders from receiving interest and principal payments on time,” S&P added. Russian Finance Minister Anton Siluanov said Monday that Russia will use its reserves of Chinese yuan to pay Wednesday’s coupon on a sovereign eurobond issue in foreign currency. Alternatively, Siluanov suggested the payment could be made in rubles if the payment request is rebuffed by western banks, a move Moscow would view as fulfilling its foreign debt obligations. Although any defaults on upcoming payments would be symbolic – since Russia has not defaulted since 1998 – Deutsche Bank economists noted that nonpayments will likely begin a 30-day grace period granted to issuers before defaults are officially triggered. We could be heading for World War III if Russia joins forces with China, investor says “Thirty days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside,” Jim Reid, Deutsche Bank’s global head of credit strategy, said in an email Monday. “There has already been a huge mark to market loss anyway with news coming through or write downs. However, this is clearly an important story to watch.” Russian assets pricing in defaults Trading in Russian debt has largely shut down since the web of sanctions on central banks and financial institutions was imposed, with government restrictions and actions taken by investors and clearing exchanges freezing most positions. Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, said in a recent note that investors will be unable to access any liquidity in Russian assets for some time. Bhatia added that prices for Russian government securities are now pricing in a default scenario, which Neuberger Berman strategists think is a likely outcome. “It’s unclear why Russia would want to use hard currency to repay these securities at the moment, and we expect much of this debt to enter ‘grace periods’ over the coming month,” he said. Russia’s economy will limp on without much deeper dislocation, strategist says “Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and will likely remain there.” Bhatia suggested that the key macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure to global credit markets will be “relatively muted” with recent volatility across asset classes continuing. “But given that Russian securities have been repriced to default levels, we believe those immediate impacts are largely over,” he said. “Debates about the economic impacts and central bank responses will now become front and center.”

Recession now

Nikos Chrysoloras 3-12, 22,  Recession Risks Are Piling Up And Investors Need to Get Ready, https://finance.yahoo.com/news/recession-risks-piling-investors-ready-073042241.html

Ominous signs are piling up that more turmoil is still coming, as key indicators point toward a potential recession. That could deepen the market rout triggered by the Federal Reserve leading a hawkish shift among central banks and war in Ukraine. The U.S. Treasury yield curve has collapsed to near inversion — a situation when short-term rates exceed those with longer tenors, which has often preceded a downturn. In Europe, energy costs have climbed to unprecedented levels, as sanctions against Russia exacerbate a global commodity crunch. “Over time, the three biggest factors that tend to drive the U.S. economy into a recession are an inverted yield curve, some kind of commodity price shock or Fed tightening,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “Right now, there appears to be potential for all three to happen at the same time.” Food prices are already past levels that contributed to uprisings in the past, and the outbreak of a war between Russia and Ukraine — which combined account for 28% of global wheat exports and 16% of corn, according to UBS Global Wealth Management — only adds to risks. Meanwhile, the Fed is unlikely to intervene to prevent sell-offs, according to George Saravelos, Deutsche Bank’s global head of currency research. That’s because the root cause of the current spike in inflation is a supply shock, rendering the playbook used to fight downturns for the past 30 years all but useless. The probability of a U.S. recession in the next year may be as high as 35%, according to economists at Goldman Sachs Group Inc., who cut the bank’s growth forecasts due to the soaring oil prices and the fallout from the war in Ukraine. Bank of America Corp. said the risk of an economic downturn is low for now, but higher next year. With a sharp and widespread economic slowdown looming over the horizon, here’s a guide on how to prepare based on conversations and notes by fund managers and strategists. Europe Exodus While the year started with bullish bets on European stocks, that’s ancient history now. Record inflation, a surprisingly hawkish pivot by the European Central Bank and Vladimir Putin’s attack on Ukraine have changed everything, and a mass exodus from the region’s stocks is in full swing. Strategists across asset classes see the Old Continent as the most exposed to risks stemming from the war, not least due its geographical proximity and its energy dependence on Russia. “For euro zone, there is a high probability of recession if the situation doesn’t normalize quickly,” said Christophe Barraud, chief economist at Market Securities LLP in Paris. The risks include the confidence shock from the war, the hit to household consumption from higher food and energy prices, and the amplified supply chain disruptions caused by the conflict, he said. Even enthusiastic bulls, like UBS Global Wealth Management, have downgraded euro-area equities. Amundi SA, Europe’s largest asset manager, said Friday that a temporary economic and earnings recession on the continent is now possible. The silver lining is that much of the bad news for Europe may now already be accounted for, revealing pockets of opportunity. Bank of America Corp. strategists lifted the region’s cyclical versus defensive stocks, as well as carmakers. “The recent underperformance leaves them more realistically priced,” they said. Commodity Havens Miners and energy are the only sectors that have weathered the rout in European equities so far, and that’s likely to continue — unless price rises destroy demand in the process. “The energy sector in equities is one of the areas that provides shelter,” Nannette Hechler-Fayd’herbe, global head for economics and research at Credit Suisse Group AG told Bloomberg TV. “In the best case, growth is picking up and energy is supported by that. In the worst case, it is prices that continue to increase and energy sector continues to be supported as well.” In the emerging landscape, the U.K. has been touted as a potential haven because of an abundance of commodity stocks in the FTSE 100 index. While MSCI’s benchmark of global stocks has slumped 11% this year, Britain’s large-cap gauge has lost a mere 3%. Energy and materials firms, along with the traditionally-defensive sectors of health care and utilities, account for a combined 58% of the FTSE 100 — index members like Shell Plc and Glencore Plc have risen amid fears of a supply squeeze. The figure drops to about 31% for MSCI’s world benchmark. Opaque industries such as agricultural chemicals are also doing well, and the ongoing tightness in fertilizer markets due to the war in Ukraine could bode well for companies like Yara International ASA, OCI NV, Mosaic Co. and Nutrien Ltd. Food staples and retailing in the U.S. have also historically outperformed during stagflationary periods, UBS strategists Nicolas Le Roux and Bhanu Baweja wrote in a note. Booze and Chocolate To be sure, not all yield-curve inversions, tightening cycles and commodity spikes lead to economic contractions. But the risks are there, and investors seeking to take cover should act — though it may already be too late. The U.S. market anticipates the start of recessions by an average of seven months and bottoms by an average of five months before the end of a recession, according to CFRA data going back to World War II. By the time the National Bureau of Economic Research tells us we’re in a recession, “it’s the time to buy,” said Sam Stovall, chief investment strategist for CFRA. And if you are unsure what to buy amid the market uncertainty, Greenmantle’s Dimitris Valatsas recommends a house. “The historical evidence from the last global inflationary period during the 1970s is clear,” he said. “In real terms, across major economies, housing outperforms every other major asset class, including equities.” But to keep a foothold in equity markets, it’s worth keeping an eye on purveyors of creature comforts and what people can’t do without such as must-have technologies, like Microsoft Corp. When crisis hits, “consumers typically go for little pleasures,” said Edmund Shing, chief investment officer at BNP Paribas Wealth Management. “Buying new cars or smartphones suffer, while booze and chocolates tend to benefit.”

High energy prices killing the economy

Abha Bhattarai, The Washington Pos, March 12, 2022, Record gas prices are pushing up everyday costs, dampening economic recovery’, https://www.thetelegraph.com/business/article/Record-gas-prices-are-pushing-up-everyday-costs-16996851.php

Americans are facing sticker shock at gas stations across the country, but surging global energy costs are rippling through the economy in other ways, too: Airlines are scaling back on flights. Truckers are adding fuel surcharges. And lawn care companies and mobile dog groomers are upping their service fees. Russia’s invasion of Ukraine and the surge in energy prices appears to be making the country’s inflation problems much worse. “Customers really don’t want to hear it, but fuel prices are going through the roof so we’re having to charge more,” said John Migliorini, vice president of Lakeville Trucking in Rochester, N.Y., where diesel costs have nearly doubled to about $400,000 a month. “What choice do we have? I’ve never seen prices jump this high, this fast.” The company has a fleet of 30 tractor trailers that transport general freight and food products, including groceries for the supermarket chain Wegmans. Each truck goes through about 100 gallons of diesel a day, Migliorini said. Record-high gas prices are seeping into everyday costs beyond the pump, adding new uncertainty to the economic recovery. Prices hit $4.33 this week after the Biden administration took steps to ban Russian oil imports, boosting the prospect of higher short-term inflation while threatening economic growth and spending and even reshaping hiring patterns. Higher energy costs are also complicating the Federal Reserve’s efforts to rein in inflation, which jumped to a new 40-year high this week. Economists say the one-two punch of rising prices and the intensifying geopolitical crisis could put the brakes on the rapid rebound. Goldman Sachs this week lowered its forecast for annual U.S. economic growth, citing “higher oil prices,” and said there is a risk the United States will enter a recession in the next year. But unlike in the 1970s, when spiking oil prices triggered a years-long downturn, the underlying strength in the U.S. labor market, combined with extra household savings and a reduced reliance on oil, could help shield the country from economic turmoil. 5 Lakeville Trucking in Rochester, N.Y., has seen diesel costs nearly double to about $400,000 a month. 1 of 5Lakeville Trucking in Rochester, N.Y., has seen diesel costs nearly double to about $400,000 a month.Photo for The Washington Post by Libby March. “The rise in energy prices will weigh on U.S. economic growth,” said Peter McCrory, an economist at J.P. Morgan. “But overall we still are looking for above-trend growth for the year.” The average price for a gallon of gas jumped 13% this week, according to AAA. Overall gasoline prices are up 38% from a year ago, according to the Labor Department’s latest inflation figures. That sudden jump is creating new challenges for Dennis Coyle, who owns a landscaping business in Morris County, N.J. “My entire business runs on gas: cars and trucks, lawn mowers, weed whackers, leaf blowers,” he said. “The simple math is that if prices stay this high, my fuel costs are going to go from $20,000 to $40,000 this year.” Coyle, whose employees drive Ford pickups, has begun raising prices for some of his customers by $1 or $2 a week, though he says he’s wary of driving them away. “In my type of business, if you raise peoples’ prices, they’ll just go somewhere else,” the 35-year-old said. “It’s really hard to know what to do.” As gas prices rise, consumer spending tends to fall. Each 10% increase in gas and oil prices means consumers will have to spend an additional $23 billion a year to keep up with earlier spending patterns, analysts at J.P. Morgan found. But the pandemic has also boosted Americans’ bank accounts, leaving them with an additional $2.5 trillion in savings to help cushion that blow. “Oil price shocks tend to not have as severe of an impact on the aggregate U.S. economy as they once did, but there are still concerns – about not just energy prices, but general inflation leading to recession,” said Harrison Fell, a senior research scholar at Columbia University’s Center on Global Energy Policy. “There is still a lot of uncertainty about which way things could go.” For businesses that rely heavily on fuel, recent price jumps have already become a major sticking point. Airlines, for example, typically spend about one-third of their expenses on fuel, which means any spike in prices has a discernible impact. As a result, some international carriers are already tacking on fuel surcharges to ticket prices. Alaska Air Group is cutting back on up to 5% of its flights in the first half of the year as a result of “the sharp rise in fuel costs,” it said in a corporate filing this week. And though many airlines lock in lower rates by “hedging” oil prices – essentially committing for future use – major U.S. carriers including United Airlines and American Airlines do not, making them particularly susceptible to swings in energy costs. Experts say airfares, which are already ticking upward because of heightened demand and rising jet fuel costs, are likely to surge even higher in the coming months as the industry factors in the latest energy shocks. At the same time, rising gas prices could also lead consumers to pull back on travel and retail spending. Executives at clothing chain the Children’s Place said this week that “the volatility surrounding oil and gas prices and its impact on our customer” were likely to eat into sales and profits, while outstripping the benefits of last year’s federal stimulus payments. Meanwhile, online retailer Overstock.com is already paying more for ground shipping because of rising fuel costs, according to chief executive Jonathan Johnson. “We do feel it,” Johnson said. “And we suspect – though it’s probably a little early to tell – that customers are being extra careful with how they spend their discretionary income. “Higher energy costs impact businesses on both sides of the equation: By raising their costs and also leaving consumers with less money to spend on other things,” said David French, senior vice president of government relations at the National Retail Federation, an industry trade group. “We’ve seen more than a dollar increase in the price of gas in the last year – and something like 60 cents this week alone – which means a lot of billions of dollars are probably not getting spent at other establishments because of gas prices.” Beyond lifting gas prices, spikes in energy costs could reshape the mix of U.S. job openings and exacerbate labor shortages in certain industries, according to Guy Berger, principal economist at LinkedIn. Sectors like leisure and hospitality, which have been rapidly hiring back workers in recent months, could scale back if consumers start canceling travel plans because of higher prices. On the flip side, energy and mining companies – where hiring has stalled during the pandemic – could see a resurgence of demand. “If crude oil prices remain sky high, it’s going to reallocate job openings across sectors and geographies,” Berger said. “Up until now energy and mining have been among the least well-performing industries during covid, but that could quickly change.” In Palestine, Texas, EasTex Solar has increased its workforce by 30% in the last year to keep up with demand, according to owner Cal Morton. Demand for solar panel installations with battery storage quadrupled in early 2021 after severe winter storms left much of the state without power for days, he said. Business has remained brisk since and continues to increase week over week. “People in Texas have a real awareness of energy prices and are starting to realize prices won’t remain cheap forever,” he said. “Many just got their highest electric bill of the year and, at the same time, they’re worried that energy prices are going to shoot up because of the war.”

Ukraine killing global economy

David Lynch, 3-11, 22, Washington Post, Oil price shock jolts global recovery as economic impact of Russia’s invasion spreads, https://www.washingtonpost.com/business/2022/03/11/oil-price-global-recovery-russia-ukraine/

The highest oil prices since the 2008 financial crisis are dealing a heavy blow to the global economy, slowing Europe’s pandemic recovery to a near stall and complicating the fight against inflation in the United States. China, the world’s largest oil importer, will probably strain to reach this year’s economic growth target, while developing countries in North Africa and the Middle East confront the danger of social unrest over rising energy and food costs, economists said. The interruption of Russian oil shipments, including the U.S. import ban that President Biden announced Tuesday, represents one of the largest supply disruptions since World War II, according to Goldman Sachs. With other major oil producers unable or unwilling to increase output in the short run, the per-barrel price of Brent crude, the global benchmark, hit $128 earlier this week, up nearly 65 percent since Jan. 1. After falling Wednesday on hopes for a negotiated settlement in Russia’s war on Ukraine, Brent slid further Thursday, closing just shy of $110. But the likelihood that oil prices will remain elevated for the rest of the year is expected to reshape consumer spending, weigh on financial markets and strain government budgets in dozens of countries. “This is going to feel pretty grim,” said Neil Shearing, chief economist for Capital Economics in London. “It’s not going to feel like the Roaring Twenties.” Asian markets open sharply lower as global investors brace for fallout from Ukraine turmoil Rising oil prices effectively redistribute income from oil-consuming nations in Europe and China to producers such as Saudi Arabia, Russia and Canada. As a group, producing nations spend less of each additional dollar than do consuming countries, meaning higher oil prices tend to reduce overall economic activity, Shearing said. The price jump since Jan. 1 — if sustained for a full year — would transfer more than $1 trillion from consumers to producers. And that figure does not include petroleum products such as diesel, gasoline or fuel oil. For the United States, higher prices are a mixed bag. Drivers fumed this week when the average price of a gallon of gasoline surged to a record $4.32. But the shale oil revolution has made the United States one of the world’s largest oil producers, so higher prices boost oil company profits and investor returns. One oil stock index has gained 29 percent this year while the broader S&P 500 fell by more than 11 percent. Still, Capital Economics says it would take oil prices of $200-plus to trigger a U.S. recession. One reason is that U.S. households together have an ample $2.5 trillion savings cushion, dwarfing the estimated $150 billion to $200 billion cost to consumers of higher pump prices, said Ian Shepherdson, chief economist of Pantheon Macroeconomics. Though Russia accounts for just 2 percent of the world economy, it is a major player in global energy markets. Russian wells supply 11 percent of global oil consumption and 17 percent of natural gas usage, according to Goldman Sachs. U.S. to ban oil imports from Russia as White House explores drastic plans to buffer economy from energy shock Russian gas pipelines are critical to Europe’s economy, meeting 40 percent of European needs. Russian oil flows to refineries in Poland, Germany, Hungary and Slovakia. As a result, the hit to growth from higher oil and gas prices will be four times larger in Europe than in the United States, Goldman said. For now, continued growth in the United States, China and India — accounting for nearly half of world output — should be enough for the global economy to avoid an outright recession, economists said. “It’s going to be significantly slower growth,” said Shepherdson. “Nothing like 2008 or the covid hit. But it’s going to be a marked slowdown.” The outlook is clouded, however, by the possibility that Europe’s worst conflict in more than 75 years could spill into a more damaging war at any time. Predicting the future of Russian oil sales — and global prices — is especially hazardous. If U.S. allies in Europe overcome their economic worries and agree to a complete embargo on Russian energy, oil prices could hit $160 a barrel, according to Capital Economics. Bjornar Tonhaugen, an analyst with Oslo-based Rystad Energy, told clients this week that oil could hit $240 this summer in a worst-case scenario, according to a Bloomberg report. Reaching those stratospheric levels would require more comprehensive energy sanctions than have been imposed so far. To date, the United Kingdom has said it will wean itself from Russian oil imports by year’s end. The European Union announced a plan to cut its Russian gas purchases by two-thirds before 2030 and said it will take unspecified steps to eliminate oil and coal buys as well. “We must become independent from Russian oil, coal and gas. We simply cannot rely on a supplier who explicitly threatens us,” European Commission President Ursula von der Leyen said Tuesday. Even without additional government action, traders at companies like France’s TotalEnergies are shunning Russian crude. Finnish refiner Neste has said it shifted to non-Russian sources of crude. And fear of running afoul of allied sanctions on Russia prompted China’s largest two state-owned banks to decline to finance new purchases of Russian oil. This “self-sanctioning” could idle 3 million to 4 million barrels a day of Russian oil, roughly 70 percent of the country’s total crude exports, according to the Oxford Institute for Energy Studies. Keeping that much supply off the market could add $25 to the cost of a barrel of oil. Oil prices, which hovered around $65 a barrel in early 2020, traced an extraordinary arc over the past two years. In the pandemic’s first months, prices actually turned negative as a glut of oil left traders offering to pay storage facilities to take supplies. Prices have marched steadily higher over the past year as the economy gained ground. There is little prospect of easily replacing lost Russian barrels. A resumption of Iranian exports is stalled by Moscow’s demand that its trade with Tehran be exempted from allied financial sanctions. Venezuela’s dilapidated facilities would need to be refurbished before they could fill the void. Near-term prospects for higher U.S. production are likewise limited. Burned by the last oil bust — and alert to Washington’s push for a transition to more environmentally friendly fuels — Wall Street has been unenthusiastic about funding expanded oil production. The number of oil rigs in service has climbed steadily over the past year, but remains almost one-quarter below pre-pandemic levels, according to Baker Hughes, a Houston-based oil field services company. “If this continues to escalate, we are looking at the ‘70s,” said Robert McNally, president of Rapidan Energy Group in Washington. “It’ll impart a sustained, grievous blow to the economy.” Europe will be hit hardest. On Thursday, the European Central Bank acknowledged the war would have a “significant negative impact” on the euro-area economy and cut its 2022 growth forecast by half a percentage point, to 3.7 percent. Some private assessments are gloomier. Goldman Sachs said Thursday that euro-zone output will shrink in the second quarter. Eric Winograd, a senior economist at AllianceBernstein, puts recession chances at better than 50 percent. Others see higher energy costs pushing Europe perilously close to the brink. “Maybe growth is not negative, but it kind of kills the bounce back from covid,” said Sergi Lanau, deputy chief economist of the Institute of International Finance. Central banks traditionally resist reacting to oil price movements, seeing them as a temporary influence on price levels. But with U.S. inflation at a 40-year high of 7.9 percent, and labor market conditions tight, the Fed is almost certain next week to raise its benchmark lending rate by a quarter point. Reacting to Thursday’s inflation news, Biden blamed rising energy prices, which he labeled “Putin’s price hike,” one of four times he name-checked Russian President Vladimir Putin in a five-paragraph statement. Higher oil prices could cause the Federal Reserve to move less aggressively on its rate-hike campaign, Goldman said earlier this week. Fed Chair Jerome H. Powell faces a tricky challenge: he must cool off the highest inflation in decades even as most economists expect it to decline over the rest of this year. And he must do so without tipping the $23 trillion U.S. economy into recession. Economic sanctions will attempt to slow the advance of Putin’s tanks The balancing act may be even tougher in Europe, where the economy began the year with less momentum and yet consumer price inflation is at its highest since the introduction of the euro currency. On Thursday, the ECB surprised investors by accelerating plans to withdraw its extraordinary financial stimulus, saying it would begin reducing its bond purchases in May and consider ending them this summer. Euro-zone inflation hit 5.8 percent last month and the Ukraine war represents “a substantial upside risk” to price stability, ECB President Christine Lagarde told reporters in Frankfurt, Germany. Central banks in many emerging markets — including Russia, Brazil, Mexico, Pakistan and Hungary — already have raised borrowing costs in recent months. As the Fed begins tightening, many of them will be under pressure to act again to slow economic activity, even though their pandemic recoveries are not yet complete. At current levels, oil prices could cut a full percentage point off economic growth rates in major oil-importing countries such as China, Indonesia, South Africa and Turkey, according to World Bank estimates. For South Africa and Turkey, that would slash prewar growth estimates in half, while China and Indonesia would see projected growth drop to about 4 percent. Governments in countries like Jordan, Lebanon and Tunisia, which protect consumers by subsidizing electricity prices, will struggle to afford those escalating costs. In January, Fitch Ratings warned that efforts to reduce fuel and utility subsidies “could spark social and political instability, particularly in Tunisia,” where the 2011 Arab Spring protests began.


Inflation will continue to increase

Christopher Rugaber, 3-10, 22, Yet another 4-decade inflation high is expected for February, https://apnews.com/article/russia-ukraine-biden-business-united-states-europe-776c03520c90083894fedf31f1a7db00

WASHINGTON (AP) — Consumer inflation in the United States likely set another 40-year high in February — and it won’t even reflect the oil and gas spikes of the past week, which will likely catapult prices even higher in coming months. Energy prices, which soared after Russia’s invasion of Ukraine on Feb. 24, jumped again this week after President Joe Biden said the United States would bar oil imports from Russia. A report Thursday from the government is expected to show that consumer inflation leapt 7.9% in February compared with 12 months earlier, according to data provider FactSet. That would be the biggest such increase since January 1982. Analysts have also estimated that prices rose 0.7% from January to February. For most Americans, inflation is running far ahead of the pay raises that many have received in the past year, making it harder for them to afford necessities like food, gas and rent. As a consequence, inflation has become the top political threat to Biden and congressional Democrats as the midterm elections draw closer. Small business people now say in surveys that it’s their primary economic concern, too. Seeking to stem the inflation surge, the Federal Reserve is set to raise interest rates several times this year beginning with a modest hike next week. The Fed faces a delicate challenge, though: If it tightens credit too aggressively this year, it risks undercutting the economy and perhaps triggering a recession. For now, solid consumer spending, spurred in part by a further reopening of the economy as omicron fades, on top of higher wages and pricier gas, will likely send inflation higher for months. Gas prices spiked to $4.25 Wednesday, up about 55 cents a gallon just since the end of February. Oil prices did fall back Wednesday on reports that the United Arab Emirates will urge fellow OPEC members to boost production. U.S. oil was down 12% to $108.70 a barrel, though still up sharply from about $90 before Russia’s invasion. Yet energy markets have been so volatile that it’s impossible to know if the decline will stick. If Europe were to join the U.S. and the United Kingdom and bar Russian oil imports, analysts estimate that prices could soar as high as $160 a barrel. The economic consequences of Russia’s war against Ukraine have upended a broad assumption among many economists and at the Fed: That inflation would begin to ease this spring because prices rose so much in March and April of 2021 that comparisons to a year ago would decline. “Any hope that inflation will peak in the near term is long gone,” said Eric Winograd, senior economist at asset manager AllianceBernstein. Should gas prices remain near their current levels, Winograd estimates that inflation could reach as high as 9% in March or April. The cost of wheat, corn, cooking oils and such metals as aluminum and nickel have also soared since the invasion. Ukraine and Russia are leading exporters of those commodities. Even before Russia’s invasion, inflation was not only rising sharply but also broadening into additional sectors of the economy. Many prices have jumped over the past year because heavy demand has run into short supplies of items like autos, building materials and household goods. But in other areas unaffected by the pandemic, like rents, costs are also surging at the fastest pace in decades. Steady job growth is encouraging more people to move into their own apartments, elevating rental costs by the most in two decades. Apartment vacancy rates have reached their lowest level since 1984. In the final three months of last year, wages and salaries jumped 4.5%, the sharpest such increase in at least 20 years. Those pay increases have, in turn, led many companies to raise prices to offset their higher labor costs. Soaring energy costs pose a particular challenge for the Fed. Higher gas prices tend to both accelerate inflation and weaken economic growth. That’s because as their paychecks are eroded at the gas pump, consumers typically spend less in other ways. That pattern is similar to the “stagflation” dynamic that made the economy of the 1970s miserable for many Americans. Most economists, though, say they think the U.S. economy is growing strongly enough that another recession is unlikely, even with higher inflation.

Oil prices down, Dow up

Aaron Gregg, 3-9, 22, U.S. stocks rally as oil prices fall; Dow jumps 550 points, https://www.washingtonpost.com/world/2022/03/09/russia-ukraine-war-news-putin-live-updates/#link-JFATEK2P7RBEZMW5SNAMS6MCFA

Wall Street rallied in Wednesday, with the three major U.S. indexes getting big bumps at the opening bell. The Dow Jones industrial average jumped 550 points, or 1.7 percent, to kick off the regular session. The broader S&P 500 index advanced 1.9 percent and the tech-heavy Nasdaq added 2.2 percent. The rally comes as oil prices appeared to be leveling off, with Brent crude, the international benchmark, falling 4.6 percent to about $122 a barrel. West Texas Intermediate crude, the U.S. benchmark, fell 4.7 percent to under $118 a barrel. U.S. and European governments have moved to limit purchases of Russian oil in response to Russia’s invasion of Ukraine. Overseas, Germany’s DAX index was up 5.2 percent, while France’s CAC 40 was up 4.5 percent. The Pan-European Stoxx rose 3 percent. Asian indexes were mostly negative, with the Hang Seng off 0.7 percent and the Nikkei down 0.3 percent.

US economy can withstand Ukraine

Emily Stewart, 3-8, 12, Vox, Yup, the Russian oil ban means gas prices are going to suck, https://www.vox.com/the-goods/22949683/russia-ukraine-gas-prices-oil-inflation-stock-market

“Energy prices mean that inflation is going to stay well above the Fed’s target in 2022, and that’s going to stiffen the Fed’s resolve to normalize monetary policy this year,” Bill Adams, chief economist for Comerica Bank, told Vox. “Inflation was drastically above the Fed’s target in 2021 and had looked like it was about to slow in 2022, but the surge in energy prices caused by the invasion is going to keep inflation higher for longer.” Adams did, however, note that the US economy is quite strong at the moment, despite inflation. Jobs are coming back, and supply chain problems are being worked out. “The big picture is that the US economy is strong and is well-positioned to absorb a shock like higher energy prices or disruptions to commodity supply from the Russia-Ukraine war,” he said. “We’re in a better position to absorb this shock than, for example, in 2006-2007 when energy prices were jumping but consumer balance sheets were much more stressed than they are today.”

Markets up despite the war, no recession

Maggie Fitzgerald,, 3-8, 22, Dow futures climb nearly 500 points as commodity prices ease amid war in Ukraine, https://www.cnbc.com/2022/03/08/stock-market-futures-open-to-close-news.html

Stock futures posted strong gains early Wednesday surging in commodity prices eased while the war in Ukraine continues. Futures tied to the Dow Jones Industrial Average rose 458 points, or about 1.4%. S&P 500 futures climbed 1.6% and Nasdaq 100 futures gained 2%. The gains came amid an easing in commodity prices that have spooked the broader market. Energy and agriculture products in particular have catapulted higher amid the fighting in Ukraine, while some metals also have posted major gains. West Texas Intermediate crude, the U.S. oil benchmark, was last down 2.2% to $120.92, while Brent crude, the international standard, fell 1.7% to $125.78. Wheat futures also were sharply lower, falling 6.3% to $1,206 a bushel, though palladium continued its march higher, rising 3.8% to $3,082 per ounce. Treasury yields also climbed as investors focused on the overall trend of higher inflation. The benchmark 10-year note rose about 3.7 basis points to 1.91%. A basis point equals 0.01%. Pepsico shares rose 1.8% in premarket trading after the soft drink giant said it will suspend sales in Russia, though it will continue to sell snacks and essentials such as baby formula. Elsewhere, shares of dating service Bumble soared nearly 23% after it reported profit and expected growth that was much better than Wall Street expectations. The major averages all closed lower Tuesday after a day of whipsaw trading. The Dow gave up a 585-point gain to end the day lower by 184 points, falling deeper into its correction. The S&P 500 slid 0.7%, in correction territory. The Nasdaq Composite lost 0.2%, after entering bear market territory Monday. The market volatility was driven by uncertainty among investors as they continued to assess surging prices in commodities like oil, gasoline, natural gas and precious metals. That fueled concerns about a slowdown in global growth amid surging inflation. It remains to be seen if the Federal Reserve will manage a soft economic landing, but the U.S. should be able to avoid a recession, according to Ross Mayfield, investment strategy analyst at Baird. “The strength of the U.S. labor market, consumer and aggregate corporate sector should act as the weight to keep us out of recession near-term,” he told CNBC. “Overall, volatility is likely to persist, [there’s a] wide range of outcomes possible in Ukraine, but the fundamentals of the U.S. economy still look decent, especially if the Fed can navigate raising rates without breaking demand.” Wall Street says these Nasdaq stocks have the best shot at bouncing back from the bear market Nickel surge just raised the input cost for an electric vehicle by $1,000, Morgan Stanley estimates Energy stocks were a bright spot in the market as oil prices continued to climb, jumping to their highs of the session as President Joe Biden announced a ban on Russian fossil imports, including oil, in response to the country’s invasion of Ukraine. That was after oil hit a 13-year high of $130 to start the week. Other commodity prices resumed their push higher, including nickel, which touched a new record above $100,000 a metric ton. Earnings continue Wednesday with Campbell Soup, Crowdstrike and Marqeta all set to report. On the economic data front, investors are looking forward to homebuying data from the Mortgage Bankers Association as well as the Job Openings and Labor Turnover Survey, or JOLTS.

Economy strong, jobs increasing

Jeff Cox, 3-4, 22, CNBC, ECONOMY, February jobs rose a surprisingly strong 678,000, unemployment edged lower while wages were flat, https://www.cnbc.com/2022/03/04/jobs-report-february-2022.html

Job growth accelerated in February, posting its biggest monthly gain since July as the employment picture got closer to its pre-pandemic self. Nonfarm payrolls for the month grew by 678,000 and the unemployment rate was 3.8%, the Labor Department’s Bureau of Labor Statistics reported Friday. That compared to estimates of 440,000 for payrolls and 3.9% for the jobless rate. In a sign that inflation could be cooling, wages barely rose for the month, up just 1 cent an hour or 0.03%, compared to estimates for a 0.5% gain. The year-over-year increase was 5.13%, well below the 5.8% Dow Jones estimate. For the labor market broadly, the report brought the level of employed Americans closer to pre-pandemic levels, though still short by 1.14 million. Labor shortages remain a major obstacle to fill the 10.9 million jobs that were open at the end of 2021, a historically high gap that had left about 1.7 vacancies per available workers. “The labor market recovery remains very robust across the board as more Americans are returning to work,” said Eric Merlis, managing director of global markets at Citizens Financial Group. “Geopolitical issues and inflation pose ongoing threats to the U.S. economic recovery, but pandemic restrictions are being lifted and we continue to see strong job growth.” Markets, however, reacted little to the news as investors remain focused on the Russia-Ukraine war. Dow futures pointed to a loss of 300 points at the open and government bond yields were sharply lower. As has been the case for much of the pandemic era, leisure and hospitality led job gains, adding 179,000 for the month. The job gap for that sector, which was hit most by government-imposed restrictions, is 1.5 million from pre-Covid levels. The unemployment rate for the industry tumbled to 6.6%, a slide of 1.6 percentage points from January and closer to the 5.7% of February 2020. Other sectors showing strong gains included professional and business services (95,000), Health care (64,000), construction (60,000), transportation and warehousing (48,000) and retail (37,000). Manufacturing contributed 36,000 and financial activities rose 35,000. Previous months saw upward revisions. December moved up to 588,000, an increase of 78,000 from the previous estimate, while January’s rose to 481,000. Together, the revisions added 92,000 more than previously recorded and brought the three-month average to 582,000. The labor force participation rate, a closely watched metric indicating worker engagement, moved higher to 62.3%, still 1.1 percentage points from the February 2020 pre-pandemic level. An alternative measure of unemployment that includes discouraged workers and those holding parttime jobs for economic reasons, and is sometimes referred to as the “real” unemployment rate, also edged up, to 7.2%. The trend for jobs is clearly upward after a wintertime surge of omicron cases, while exacting a large human toll, left little imprint on employment. “If we see more numbers like this moving forward, we can be optimistic about this year,” wrote Nick Bunker, economic research director at job search site Indeed. “Employment is growing at a strong rate and joblessness is getting closer and closer to pre-pandemic levels. Still, in these uncertain times, we cannot take anything for granted. But if the recovery can keep up its current tempo, several key indicators of labor market health will hit pre-pandemic levels this summer.” The economy also has been wrestling with pernicious inflation pressures running at their highest levels since the early 1980s stagflation days. The Labor Department’s main inflation gauge showed consumer prices rising at a 7.5% clip in January, a number that is expected to climb to close to 8% when February’s report is released next week. Amid it all, companies continue to hire, filling broad gaps still left in the leisure and hospitality sector as well as multiple other pandemic-struck industries. The Federal Reserve is watching the jobs numbers closely. Monetary policymakers widely view the economy as near full employment, adding pressure to prices that have soared amid supply shortages and demand surges related to the pandemic. Inflation has come as Congress has pumped more than $5 trillion in stimulus into the economy while the Fed has kept benchmark borrowing rates anchored near zero and injected nearly $5 trillion into the economy through asset purchases. Now, Fed officials expect this month to start raising interest rates, with market expectations that those hikes likely will continue through the year. The February jobs report “will give the Fed greater confidence to push ahead with its planned policy tightening but, with wage growth now levelling off, there is arguably less pressure for officials to front-load an aggressive series of rate hikes over the coming months,” wrote Michael Pearce, senior U.S. economist at Capital Economics.

Inflation pressure decreasing

Reid Pickert, 3-4, 22, https://www.bnnbloomberg.ca/u-s-job-gains-accelerate-while-wage-growth-slows-sharply-1.1732480,  U.S. job gains accelerate while wage growth slows sharply

U.S. hiring boomed in February while wage growth slowed, showing a robust labor market that likely keeps the Federal Reserve on track to raise interest rates this month and offering some respite from strong inflationary pressures. Nonfarm payrolls increased 678,000 last month — the most since July — after upward revisions in the prior two months, a Labor Department report showed Friday. The advance was broad-based across sectors. The unemployment rate edged down to 3.8 per cent, and average hourly earnings were little changed from the prior month. The median estimate in a Bloomberg survey of economists called for a 423,000 advance in payrolls and for the unemployment rate to fall to 3.9 per cent. While a Fed rate hike later this month was a foregone conclusion before the payrolls data, the report reinforced recent central bankers’ assessment that the labor market is extremely strong. Employers have added at least 400,000 jobs each month since May against the backdrop of a rapid bounceback of the economy. “If the recovery can keep up its current tempo, several key indicators of labor market health will hit pre-pandemic levels this summer,” Nick Bunker, economic research director at Indeed Inc., said in a note. Friday’s report showed average hourly earnings were little changed in February and up 5.1 per cent from a year ago, a deceleration from the prior month, while hours worked picked up slightly. The disappointing wage data are even worse after accounting for faster inflation. With price increases outpacing growth in compensation, that effectively means many workers are taking a pay cut. Embedded Image “Such a low print does serve as a reminder that wages won’t necessarily continue to rise at a very rapid pace if labor supply continues to increase,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note. Traders focused on the flat average hourly earnings figure, sending the yield on the 10-year Treasury note down. The S&P 500 opened lower as war jitters overshadowed the jobs figures. Even though wage growth lagged expectations, strong hiring and the lower unemployment rate support the Fed’s plan to raise rates this month. Chair Jerome Powell reaffirmed that plan this week after Russia’s invasion of Ukraine, which has led to a surge in oil, metals and grain prices and clouded the U.S. economic outlook. He said he favors a 25 basis-point increase to kick off an expected series of hikes this year. PARTICIPATION RATE The labor force participation rate — the share of the population that is working or looking for work — ticked up to 62.3 per cent, and the rate for workers ages 25-54 rose to the highest since March 2020. While improved, a combination of factors like child care challenges, COVID-19 concerns and early retirements have whittled down America’s workforce. Before the pandemic, the overall rate was over a percentage point higher. In testimony to lawmakers Wednesday, Powell noted the decline in labor force participation is “certainly something that’s now contributing to wage inflation and actual inflation and to the labor shortage that we’re currently seeing.” He also said the U.S. is “at least” at maximum employment, defined as the highest level that’s consistent with price stability. What Bloomberg Economics Says “This easing of labor shortages appears to be starting to slow the pressure on wages, which could provide a glimmer of support to the optimists on the FOMC that inflation might come down later this year.” — Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger, economists Some of the sectors hit hardest by the pandemic saw strong job gains in February, including restaurants and health care. Professional and business services also advanced, while construction payrolls gained by the most since March. The unemployment rate declined broadly among all racial and ethnic groups. The jobless rate among Asian and Hispanic workers dropped 0.5 percentage point, while that of Black Americans fell 0.3 point. However, the rate among women was unchanged, while their participation rate fell for the first time since September. President Joe Biden noted the strength of recent job and wage gains in his State of the Union address earlier this week but emphasized how inflation is “robbing” Americans of feeling much of those gains. The February consumer price index, a key gauge of U.S. inflation, is expected to show on Thursday that year-over-year inflation accelerated to nearly 8 per cent.

Economic growth foundation of national power

Brad Bannon, 3-3, 22, The Hll, , A vibrant economy guarantees US national security during troubled and turbulent times, https://thehill.com/opinion/white-house/596659-a-vibrant-economy-guarantees-us-national-security-during-troubled-and, Brad Bannon is a Democratic pollster and CEO of Bannon Communications Research. His podcast, “Deadline D.C. with Brad Bannon,” airs on Periscope TV and the Progressive Voices Network.

President Biden’s first State of the Union address was a celebration of America’s and Europe’s steely resolve to resist Russian aggression — and a eulogy for his big and bold Build Back Better plan to fundamentally reshape and reinvigorate an ailing economy. On Tuesday, the president repurposed elements of Build Back Better into a new plan which he called Building a Better America. The new plan is a solid step to move our economy forward but it’s not nearly as transformative or as comprehensive as its predecessor. It’s America’s loss and a victory for China, which is rapidly modernizing its economy and is fighting the United States for international dominance. Biden could have devoted the entire State of the Union address to tout his remarkable record of accomplishment in the first 13 months of his administration. The economy is growing, and pandemic is receding. He would have had more time to focus on his plans to combat climate change and win the war against inflation. But Russian President Vladimir Putin dropped the hammer on Ukraine and dampened Biden’s ambitious plans to modernize the economy. Presidential candidates run to be the chief executive of the United States of America but often end up governing as commander in chief of the armed forces. Presidents have a finite opportunity at the beginning of their terms to advance their domestic agenda. Then reality rears its ugly head. The presidential honeymoon ends, Congress asserts itself and foreign powers flex their military muscles. That why presidents rush to get as much done as quickly as they can. In the first year of his presidency, Biden convinced millions of Americans to get vaccinated and persuaded members of Congress to support his lifesaving COVID-19 relief plan, the American Rescue Act. The president’s efforts saved the nation from the ravages of the deadly pandemic. The economy is on the upswing with the passage of the bipartisan law the Infrastructure Investment and Jobs Act, as well as the creation of almost 7 million jobs. The Russian threat looms in Europe but there’s still a lot more to do here to improve the health, wealth and wellbeing of the American people. The president’s transformative Build Back Better bill was already on life support and Putin just pulled the plug. The demise of the president’s ambitious initiative is a blow to reinvigorating the American economy and preparing it to grapple with challenges that face the United States. Critics wrongly framed the proposal as a massive social spending bill but, Build Back Better was financed by tax increases on wealthy Americans and corporate America to transform the economy to make it more competitive in the cutthroat international marketplace. The president’s proposal would have created green energy jobs that would have fought the ravages of global climate change. The Child Tax Credit would have helped integrate valuable employees back into a depleted workforce. Universal pre-school education and free two-year college tuition would have produced more skilled and highly trained employees better equipped to compete with workers in other nations. The reversal of former President Trump’s 2017 tax law would have put money back into the pockets of hard-working middle-class families and help them cope with price gouging by big businesses. Congressional spending battles are fights between guns and butter for budgetary supremacy. Russian aggression in Eastern Europe and Republican obstruction to the president’s ambitious domestic agenda may tilt the balance of power toward military spending. Overnight Defense & National Security — US tries to turn down the… Trump border wall breached thousands of times by smugglers: report But history demonstrates that economic strength — not military might — makes or breaks world powers. Challenges remain here in the United States while the nation turns its eyes towards Ukraine. Global climate change is as much a threat to the security of the U.S. and the world as Russian aggression. Our outmoded system of physical and electronic infrastructure is an open invitation to China to extend its economic hegemony over the world at our expense. Americans must keep their eyes on the prize when international tensions intensify. The payoff is a vibrant economy that guarantees our security during troubled and turbulent times.

Long-term growth decreasing coming

Desmond Lachman, 2-16, 22, Biden Boom or Bust? Scoring the 2022 U.S. Economy, At what price to future economic prosperity was last year’s strong economic performance achieved?, , Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney, https://nationalinterest.org/feature/biden-boom-or-bust-scoring-2022-us-economy-200614

At next week’s State of the Union Address, President Joe Biden is almost certain to cite last year’s strong economic recovery as evidence that the U.S. economy has prospered under his stewardship. A more objective look at the data would reveal a more troubling economic picture. Not only has inflation soared to a forty-year high under Biden’s watch. The budget deficit and the trade deficit have both ballooned to levels that must raise serious questions about the country’s long-term economic growth prospects. Biden’s signature economic legislative achievement to date has been the March 2021 passage of the $1.9 trillion American Rescue Plan. That budget stimulus came on top of the previous year’s $3 trillion bipartisan budget support packages in response to the Covid-induced economic recession. This meant that, over the past two years, the economy received a combined budget stimulus amounting to a staggering 20 percent of the size of the economy. There can be no gainsaying Biden’s claim that last year his massive budget stimulus contributed to the fastest rate of economic growth since 1984. Nor can one dispute the fact that his stimulus helped boost employment by more than a record 6.5 million jobs, which allowed unemployment to return close to its pre-pandemic low. The troubling yet very pertinent question, however, which Biden is unlikely to raise at next week’s State of the Union Address, is at what price to future economic prosperity was lastyear’s strong economic performance achieved? As former Treasury Secretary Larry Summers correctly warned last March, the excessive Biden budget stimulus has contributed to a surge in consumer price inflation to 7.5 percent, or to its highest level in the past forty years. It did so by adding excessively to aggregate demand at a time when monetary policy was extraordinarily accommodative and when disruptions to the global supply chain were causing an array of supply shortages. This surge in inflation has already led to a decline in wages in inflation-adjusted terms. It is also all too likely setting us up for a hard economic landing in the run-up to this November’s midterm elections that could tip the economy into another recession. With inflation now running at a rate well above its 2 percent inflation target, the Federal Reserve will have little alternative but to slam on the monetary policy brakes by raising interest rates to return the inflation genie to its bottle. That, in turn, could very well be the trigger that bursts today’s equity and housing market bubbles which have been caused by the Fed’s earlier monetary policy largesse and which have been premised on the assumption that today’s ultra-low interest rates will last forever. The Biden budget stimulus has also contributed to the widening in the budget deficit to levels seldom experienced before in peacetime. That is likely to have compromised the country’s long-term economic growth prospects by having put the country on an unsustainable debt path. In that context, the non-partisan Congressional Budget Office estimates that the public debt already exceeds 100 percent of GDP, which is higher than it was at the end of the second world war. It also has warned that on present policies, over the next thirty years the public debt level could double to 200 percent of GDP. Another way in which the Biden budget stimulus is likely to have compromised the country’s future economic growth prospects is by having contributed to a widening in the trade deficit to a record $850 billion in 2021. In time, that widening together with the country’s unsustainable public debt path could raise serious questions about the dollar’s current favorable status as the world’s dominant international reserve currency and precipitate a flight from the dollar. One has to hope that the Biden administration does not believe the economic rhetoric that Biden will all too likely pedal in next week’s State of the Union Address. Rather, one must hope that it recognizes the country’s serious economic challenges and that at a minimum it refrains from further contributing to those challenges by engaging in additional unfunded public spending.

7 rate increases coming

Sumathi Bala, 2-11, 22, FEDERAL RESERVE U.S. inflation data is like a ‘punch in the stomach’ for the Fed, says Citi economist, https://www.cnbc.com/2022/02/11/us-inflation-data-like-a-punch-in-the-stomach-for-the-fed-citi-.html

The latest U.S. January inflation data came in like a “punch in the stomach” for the Federal Reserve, which raises the possibility for an aggressive 50 basis points rate hike in March, the global chief economist of Citi Research said. The consumer price index for January, which measures the costs of dozens of everyday consumer goods, rose 7.5% year-on-year, the Labor Department reported Thursday. “This inflation data today came like a punch in the stomach for Jay Powell and his colleagues,” Nathan Sheets told CNBC’s “Squawk Box Asia” on Friday, referring to the Fed chairman. “Their narrative is that as the year progresses, we should see inflation start to abate and to come on down. And there was not even a hint of that in the January data,” he added. The monthly CPI rates also came in stronger than expected. Both headline and core CPI rose 0.6%, compared to estimates for a 0.4% increase by both measures. Even with the challenges posed by the highly contagious omicron variant, inflation still remains high, and more progress needs to be made to bring inflation down to 3% for this year, Sheets said. WATCH NOW VIDEO05:25 Inflation climbed faster than expected in January at 7.5% “I think we’re also going to have to see an increasingly aggressive Federal Reserve. And I think that clearly after today’s inflation data, 50 basis points for March has to be on the table,” he said. Even then, he added, it may not be enough. “What are we going to have to do through the rest of the year to wrestle inflation to the ground? Because it doesn’t seem like it’s abating on its own — at least there’s no sign of that yet,” said Sheets. Goldman, BoFA predict seven hikes Following the latest inflation data, Goldman Sachs said it was raising its Fed forecast to include “seven consecutive 25bp rate hikes” at each of the remaining Federal Open Market Committee meeting in 2022. The investment bank had previously predicted five hikes for the year. “We see the arguments for a 50bp rate hike in March. The level of the funds rate looks inappropriate, and the combination of very high inflation, hot wage growth and high short-term inflation expectations means that concerns about falling into a wage-price spiral deserve to be taken seriously,” its analysts said it a note on Thursday. Stock picks and investing trends from CNBC Pro: Keep these stocks out of your portfolio if inflation continues to rage How to trade the 40-year-high inflation like top investors using ETFs HSBC picks Chinese stocks to play a rising U.S. 10-year Treasury yield Stocks could hit new wave of turbulence after 10-year hits key 2% level, Fed rate hikes loom “We could imagine the FOMC concluding that even a meaningful risk of an outcome as serious as a wage-price spiral requires a more aggressive and immediate response,” they added. Even before the inflation numbers were out, Bank of America predicted the Fed will launch an aggressive rate hike campaign starting this year. It’s economists are expecting seven quarter-percentage-point rate hikes in 2022, followed by four more next year. The inflation numbers come at a crossroads for the U.S. economy, with 2021′s rapid growth pace expected to slow this year as fiscal and monetary stimulus fade. The momentum for the U.S. economy remains soft and is dependent upon how the omicron factor plays out, Sheets said. “If the Fed is going to get an assist on inflation, it’s got to come from improvements in the pandemic, some rebalancing away from the red hot goods sector into services, and we need to see some attenuation of the still intense pressures in supply chains,” he added.

Markets down globally

Eustance Huang, 2-10, 22, ASIA MARKETS, Asia-Pacific stocks lower as investors react to hot U.S. inflation report, https://www.cnbc.com/2022/02/11/asia-markets-us-inflation-treasury-yields-currencies-oil.html

SINGAPORE — Shares in Asia-Pacific declined on Friday, as investors in the region reacted to the Thursday release of a hotter-than-expected U.S. consumer inflation report that pushed the 10-year Treasury yield past 2%. Mainland Chinese stocks closed lower, with the Shanghai composite falling 0.66% to 3,462.95 while the Shenzhen component shed 1.546% to 13,224.38. Hong Kong’s Hang Seng index declined 0.24%, as of its final hour of trading. South Korea’s Kospi fell 0.87% on the day to 2,747.71, with shares of game developer Krafton plunging 12.79% after it announced Thursday a 84.9% year-on-year drop in its net profit for the fourth quarter. The S&P/ASX 200 in Australia closed 0.98% lower at 7,217.30. MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.97%. Markets in Japan were closed on Friday for a holiday. Investors monitored moves in U.S. bond yields on Friday, after the U.S. consumer price index for January showed a hotter-than-expected 7.5% year-over-year rise — its largest gain since 1982. The reading was also higher than Dow Jones estimates of 7.2% for the closely watched inflation gauge. The benchmark U.S. 10-year Treasury yield, which crossed 2% Thursday stateside after starting the year at 1.51%, last sat at 2.0206%. Yields move inversely to prices. Stock picks and investing trends from CNBC Pro: Keep these stocks out of your portfolio if inflation continues to rage How to trade the 40-year-high inflation like top investors using ETFs HSBC picks Chinese stocks to play a rising U.S. 10-year Treasury yield Stocks could hit new wave of turbulence after 10-year hits key 2% level, Fed rate hikes loom The major indexes on Wall Street tumbled overnight, with the Dow Jones Industrial Average dropping 526.47 points to 35,241.59 while the S&P 500 shed 1.81% to 4,504.08. The tech-heavy Nasdaq Composite lagged as it plunged 2.1% to 14,185.64. U.S. stock futures later pointed to further losses ahead stateside. In the afternoon of Asia trading hours on Friday, Dow futures fell 120 points. S&P 500 futures shed 0.58% while Nasdaq 100 futures declined 0.76%. Currencies The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 96.007 against an earlier low of 95.806. The Japanese yen traded at 116.05 per dollar, weaker than levels below 115.8 seen against the greenback yesterday. The Australian dollar was at $0.7124 after recently falling from above $0.72. Oil prices were lower in the afternoon of Asia trading hours, with international benchmark Brent crude futures down 0.49% to $90.96 per barrel. U.S. crude futures shed 0.32% to $89.59 per barrel.

Inflation at 7%

Jeff Cox, 2-10, 22, CNBC, Inflation surges 7.5% on an annual basis, even more than expected and highest since 1982, https://www.cnbc.com/2022/02/10/january-2022-cpi-inflation-rises-7point5percent-over-the-past-year-even-more-than-expected.html

Consumer prices surged more than expected over the past 12 months, indicating a worsening outlook for inflation and cementing the likelihood of substantial interest rate hikes this year. The consumer price index for January, which measures the costs of dozens of everyday consumer goods, rose 7.5% compared with a year ago, the Labor Department reported Thursday. That compared with Dow Jones estimates of 7.2% for the closely watched inflation gauge. It was the highest reading since February 1982. Stripping out volatile gas and grocery costs, the CPI increased 6%, compared with the estimate of 5.9%. Core inflation rose at its fastest level since August 1982. The monthly CPI rates also came in hotter than expected, with headline and core CPI both rising 0.6%, compared with the estimates for a 0.4% increase by both measures. Stock market futures declined following the report, with rate-sensitive tech stocks hit especially hard. Government bond yields rose sharply, with the benchmark 10-year Treasury note touching 2%, its highest since August 2019. Markets also got more aggressive in pricing rate hikes ahead. The chances of a 0.5 percentage point Fed rate increase in March rose to 44.3% following the data release, compared with 25% just before, according to CME data. Chances of a sixth quarter-percentage point hike this year rose to about 63%, compared with about 53% before the release. “With another surprise jump in inflation in January, markets continue to be concerned about an aggressive Fed,” said Barry Gilbert, asset allocation strategist at LPL Financial. “While things may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control.” Food, shelter costs up sharply The inflation numbers come at a crossroads for the U.S. economy, with 2021′s rapid growth pace expected to slow this year as fiscal and monetary stimulus fades. Growth is still expected to be above trend, though sharper rate increases from an inflation-fighting Fed could prove troublesome. On a percentage basis, fuel oil rose the most in January, surging 9.5% as part of a 46.5% year-over-year increase. Energy costs overall were up 0.9% for the month and 27% on the year. Vehicle costs, which have been one of the biggest inflation contributors since they began surging higher in the spring of 2021, were flat for new models and up 1.5% for used cars and trucks in January. The two categories have posted respective increases of 12.2% and 40.5% over the past 12 months. Shelter costs, which make up about one-third of the total CPI number, increased 0.3% on the month, which is the smallest gain since August 2021 and slightly below December’s rise. Still, the category is up 4.4% over the past year and could keep inflation readings elevated in the future. Food costs jumped 0.9% for the month and are up 7% over the past year. That combination of higher food and housing prices “underlines our view that a rapid cyclical acceleration in inflation is underway and, with labor market conditions exceptionally tight, it is unlikely to abate any time soon,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. “While we still expect more favorable base effects and a partial easing of supply shortages to push core inflation lower this year, this suggests it will remain well above the Fed’s target for some time,” he added. The burst in inflation has muted the sizeable earnings growth workers have seen. Real average hourly earnings rose just 0.1% for the month, as the 0.7% monthly gain in wages was almost completely wiped out by the 0.6% inflation gain.

Consumer spending collapsing, inflation up

Danny Dougherty, 2-1, 22, Consumer Pessimism Grows as Inflation Accelerates, https://www.wsj.com/articles/consumers-get-more-pessimistic-as-inflation-looms-11643711412?mod=hp_lead_pos2

Consumer perception of current economic conditions in December was almost even with April 2020 levels, when sentiment bottomed out following the first major restrictions to control the coronavirus pandemic. While Americans’ feelings about their personal finances slid through much of 2021, concerns about buying conditions—amid continuing worries about inflation—fell drastically for much of the year. Household income has declined from spikes that occurred as the government distributed pandemic-related stimulus. Still, many Americans have seen wages and benefits increase, as the economy rebounded from earlier disruptions from the pandemic. At the same time, decades-high levels of inflation have tempered enthusiasm for spending. The University of Michigan has seen less enthusiasm for large purchases during the pandemic, with 41% of consumers citing high prices as a reason not to buy in December. Uncertainty and a lack of affordability were the leading causes for hesitance throughout much of 2020. Since the pandemic began, a sharp increase of Americans buying goods has helped offset slower spending in the larger services economy. At the end of 2021, service spending was picking up speed but could be hampered by the rise in cases from the more infectious Omicron variant. The rapid economic growth, driven by consumer spending, means that the U.S. economy has largely rebounded. It was within $150 billion of Federal Reserve U.S. gross domestic product projections made before the pandemic hit.

Growth will stabilize at 3%

Danny Dougherty, 2-1, 22, Consumer Pessimism Grows as Inflation Accelerates, https://www.wsj.com/articles/consumers-get-more-pessimistic-as-inflation-looms-11643711412?mod=hp_lead_pos2

Supply constraints caused by the pandemic and high consumer demand has helped to drive up prices. This imbalance in the economy is dragging down Americans’ confidence to make purchases but could be short-lived. A Wall Street Journal survey of economists shows this rate is expected to rapidly fall, landing around a lower but still elevated 3% annual growth in 2022. Demand for labor is still high, despite growing employment costs. Industries hit hard by the pandemic, such as leisure and hospitality businesses, have since seen large wage gains and a steep climb in payrolls. Leisure and hospitality jobs have recovered 2.6 million positions in 2021. Likewise, retail jobs have outpaced the overall labor market, while those jobs have been more expensive to fill. Continued recovery in hiring for in-person services and shopping—at a time when the Great Resignation has driven up the costs of workers—shows that businesses think there will be room to grow. Following the rapid growth seen last year, the outlook for GDP growth is expected to return to more typical levels, according to many economists from The Wall Street Journal Economic Forecasting Survey.

Economic downturn coming

Greg Ip, 1-14, 21, Wall Street Journal, Bond Market Forecasts Bad Economic News, https://www.wsj.com/articles/bond-market-forecasts-bad-economy-11642098186

With the best job growth in over 40 years, inflation a national obsession and the Federal Reserve preparing to raise interest rates, it is easy to forget how different the world was before the pandemic. The global environment then was marked by sluggish growth, lackluster investment, worryingly low inflation and low interest rates. Which could be where the U.S. is headed again. The bond market seems to be betting on it. Even with U.S. inflation at a near-40 year high of 7%, 10-year Treasury yields are below 2%. Real bond yields—that is, adjusted for expected future inflation—are negative 0.2%, and have been mostly negative since the start of the pandemic, only the second such episode in 30 years. Even as the Fed moves up plans to raise interest rates, markets have revised down how high they are likely to get. They see the federal-funds rate, now near zero, reaching only 2% in 2025, which would be slightly negative in real terms. Investors, of course, may simply be wrong. Since the start of the year, investors appear to have reassessed the interest-rate outlook. Bonds have sold off, with the 10-year Treasury yield, which moves in the opposite direction to its price, jumping to 1.7% from 1.5% at the end of 2021. The Federal Reserve building in Washington, D.C. The Fed has moved up plans to raise interest rates, but markets have revised down how high they are likely to get. Yet there are good reasons to think today’s sizzling economy may be just a temporary respite. Looked at over the longer term, real yields have been declining for decades. Olivier Blanchard, the former chief economist at the International Monetary Fund, makes this point in a new book, “Fiscal Policy Under Low Interest Rates.” In it he notes that safe interest rates—in other words, those on risk-free government debt—have been declining in the U.S., Western Europe, and Japan for 30 years. “Their decline is due neither to the Global Financial Crisis of the late 2000s, nor to the current Covid crisis, but to more persistent factors,” he writes. “Something has happened in the last 30 years, which is different from the past.” Several years ago, former Treasury Secretary Larry Summers argued a persistent shortfall of investment amid a glut of global savings was holding down both growth and interest rates, a situation he called “secular stagnation,” a term first used in the 1930s. “Secular stagnation was the issue of the moment in the late 1930s,” Mr. Summers said at The Wall Street Journal’s CEO Council Summit in December. “Once rearmament and World War II began, and there was a massive fiscal expansion, it was no longer the issue. In the same way, after we’ve had a 15%-of-GDP fiscal expansion, secular stagnation is not the issue of this moment.” New warnings That is why early last year Mr. Summers switched from warning about secular stagnation to warning that fiscal and monetary stimulus threatened to send inflation sharply higher. Yet he thinks it more likely than not that secular stagnation will return in a few years’ time: That is a “natural interpretation” of why markets expect real interest rates to remain so low, he said. Sluggish Signals Interest rates and demographics indicate that the current moment of high inflation and hot growth may not last Sources: Federal Reserve Bank of Philadelphia (expected inflation); Federal Reserve (bond yields); WSJ analysis (Treasury yield); Cornerstone Macro (rates) This possibility also weighs on the minds of Fed officials. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in supporting higher rates this year that he is weighing two opposing risks. One is that high inflation becomes embedded in the public’s behavior, which would require even higher interest rates later on. The other is that after Covid-19 passes, the world returns to the pre-pandemic regime of low growth and low inflation. That regime, he wrote on the publishing site Medium, was driven by “demographics, trade, and technology factors. It is unlikely that these underlying forces have gone away.” Slower population growth reduces demand for cars, houses and other durable goods, and the need for business to expand capacity. Lengthened life expectancy means people spend more of their lives retired, so they save more in anticipation. In combination, these effects tend to hold down interest rates. The pandemic intensified the trend of slowing population growth around the world. The U.S. population grew just 0.1% in the year to July—the slowest on record—as both birthrates and immigration plummeted. With retirements accelerating because of the pandemic, the U.S. labor force ended last year 1.4% smaller than before the pandemic. China’s population barely rose in 2020, and its population in the 15 to 59 age range shrank 5% in the preceding decade. The government has responded with alarm. A state-backed newspaper briefly urged Communist Party members to have more children, and access to vasectomies and abortion has reportedly diminished. Annual Population Growth Rates This driver of economic growth has been low and falling in these key economies A hit to productivity Apart from population, the main contributor to growth is productivity, and that too appears to have suffered during the pandemic. While businesses stepped up digitization by investing more in e-commerce, cloud computing and artificial intelligence, productivity has still suffered because of Covid-19 protocols and restrictions, and sweeping changes in where, and whether, people chose to work. The recent rise in inflation suggests the U.S. can’t grow as fast as before without straining productive capacity. Some of those barriers to growth are likely to persist even after the pandemic passes. Meanwhile, Chinese investment has slowed under the impact of its own Covid-19 restrictions and cooling property sector. As a result, its excess savings are once again being recycled to the rest of the world. One indicator of that excess, China’s trade surplus, rose 53% in the 12 months through November to $673 billion from two years earlier. Those surpluses are apt to continue if a shrinking labor force and reduced property investment continue to weigh on Chinese domestic demand. A return to a low-growth, low-inflation, low-interest-rate world has a positive side. It would mean rich asset valuations are less likely to represent a bubble. Stocks are trading at near-record price-earnings ratios, but those ratios are justifiable if real interest rates remain around zero. Federal debt, which since 2019 has shot from 80% to around 100% of GDP, is more easily sustained with low rates, although slower growth works in the opposite direction. Indeed, one reason interest rates may be low is that investors think the Fed won’t raise them so much for fear of a stock market crash. It raised rates above 2.25% in 2018, then reversed course when stock and commodity markets wobbled. What if investment and economic growth weaken, but inflation stays high? If inflation settles at, say, 3.5%, as some economists expect, then bond yields could also double to 3.5% with real rates remaining zero. In the U.S., though, high and volatile inflation eventually led to higher real interest rates, while in other countries such as Japan, stagnant growth and low inflation have gone hand in hand. For now, investors think inflation is coming down, and will average 2.5% over the next 10 years, based on the yields on regular and inflation-indexed bonds. But Joe Gagnon, an economist at the Peterson Institute for International Economics, warns: “Bond markets have never predicted an outburst of inflation. So why would we think they can now?” He adds: “They respond very quickly when inflation starts to rise.”

Slow growth now

Alan Rappeport, January 11, 2022, New York Times, https://www.nytimes.com/2022/01/11/business/world-bank-2022-growth.html, The World Bank warns that the pandemic will slow economic growth in 2022.

WASHINGTON — The World Bank said on Tuesday that the pace of global economic growth was expected to slow in 2022, as new waves of the pandemic collide with rising prices and snarled supply chains, blunting the momentum of last year’s recovery. This projection underscores the stubborn nature of the public health crisis, which is widening inequality around the world. The pandemic is taking an especially brutal toll on developing countries, largely owing to rickety health care infrastructure and low vaccination rates. “The Covid-19 crisis wiped out years of progress in poverty reduction,” David Malpass, the World Bank president, wrote in an introduction to the report. “As government’s fiscal space has narrowed, many households in developing countries have suffered severe employment and earning losses — with women, the unskilled and informal workers hit the hardest.” Global growth is expected to slow to 4.1 percent this year, from 5.5 percent in 2021, according to the World Bank. Output is expected to be weaker, and inflation is likely to be hotter than previously thought. The World Bank said growth rates in most emerging markets and developing economies outside East Asia and the Pacific would return to their prepandemic levels, still falling short of what would be needed to recoup losses during the pandemic’s first two years. The slowdown in these regions will be more abrupt than what advanced economies will experience, leading to what the World Bank describes as “substantial scarring” to output. Income inequality is widening both within and between countries, the World Bank said, and could become entrenched if disruptions to education systems persist and if high national debt hinders the ability of nations to support their low-income populations. Globally, the prospect of higher interest rates and withdrawal of fiscal support could take a toll on low-income countries while they are already vulnerable. Growth in the world’s two largest economies, the United States and China, is poised to moderate considerably. The World Bank said that the recently passed infrastructure law would do little to buttress growth in the United States in the near term and that pandemic restrictions were curbing consumer spending and residential investment in China. The World Bank is recommending stronger debt relief initiatives to help poor countries as well as urging support for policies that will strengthen their financial systems and improve local infrastructure in ways that will spur growth. Easing global supply chain bottlenecks, particularly for Covid vaccine doses, will be crucial.

’22 growth strong

Hugh Son, 1-10, 22, Jamie Dimon sees the best economic growth in decades, more than 4 Fed rate hikes this year, https://www.cnbc.com/2022/01/10/jamie-dimon-sees-the-best-economic-growth-in-decades-more-than-4-fed-rate-hikes-this-year.html

Jamie Dimon said the U.S. is headed for the best economic growth in decades. Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer. Dimon said that while the underlying economy looks strong, stock market investors may endure a tumultuous year as the Fed goes to work. Jamie Dimon said the U.S. is headed for the best economic growth in decades. “We’re going to have the best growth we’ve ever had this year, I think since maybe sometime after the Great Depression,” Dimon told CNBC’s Bertha Coombs during the 40th Annual J.P. Morgan Healthcare Conference. “Next year will be pretty good too.” Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer. JPMorgan is the biggest U.S. bank by assets and has relationships with half of the country’s households. “The consumer balance sheet has never been in better shape; they’re spending 25% more today than pre-Covid,” Dimon said. “Their debt-service ratio is better than it’s been since we’ve been keeping records for 50 years.” Dimon said growth will come even as the Fed raises rates possibly more than investors expect. Goldman Sachs economists predicted four rate hikes this year and Dimon said he would be surprised if the central bank didn’t go further. “It’s possible that inflation is worse than they think and they raise rates more than people think,” Dimon said. “I personally would be surprised if it’s just four increases.” Ark Innovation fund rebounds from tech-driven rout as Cathie Wood calls markets ‘irrational’ Here are Bank of America’s favorite chip stocks for 2022 Dimon has expressed expectations for higher rates before. Banks tend to prosper in rising-rate environments because their lending margins expand as rates climb. Indeed, bank stocks have surged so far this year as rates climbed. The KBW Bank Index jumped 10% last week, the best start to a year on record for the 24-company index. However, Dimon said that while the underlying economy looks strong, stock market investors may endure a tumultuous year as the Fed goes to work. “The market is different,” Dimon said. “We’re kind of expecting that the market will have a lot of volatility this year as rates go up and people kind of redo projections.” “If we’re lucky, the Fed can slow things down and we’ll have what they call a `soft landing’,” Dimon added. The bank was forced to move its annual healthcare conference to a virtual format because of the spread of the omicron variant of Covid-19.

More rate hikes coming, inflation will not slow

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative.

Feds will raise rates three times over the next year, more inflation and greater rate hikes will tube the markets

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative. Financial markets have taken the news in stride thus far, as the Fed’s forecasts are in line with what investors were anticipating. Bondholders, nonetheless, should realize that even if inflation subsides to the Fed’s 2 percent target in the next few years, they in effect will be accepting negative yields in real terms throughout this period. So, why would they do so? My take is that investors’ expectations about inflation and interest rates have been shaped by the experience following the 2008 Global Financial Crisis, when economic growth and inflation were subdued for a decade. This outcome is consistent with prior bouts of financial crises, as Carmen Reinhart and Kenneth Rogoff spell out in their article “Recovery from Financial Crises.” By comparison, the coronavirus pandemic is a completely different type of shock that did not inflict lasting damage on the economy and the financial system. While it has taken a heavy toll on people’s lives and well-being, it has also unleashed unforeseen changes in the way business is conducted and how people go about providing for their livelihood. Throughout the travail, what stands out is that many U.S. companies are highly adaptable and experienced increased productivity while others have seen their businesses disrupted. Radio City Music Spectacular shuts down amid COVID-19 spike in NYC Overnight Health Care — Presented by Rare Access Action Project —… As a result of the policy support during the pandemic and the resilience of the American economy, the U.S. stock market has posted outsized returns in the past two years that far exceed other developed markets. To a large extent, the gains this year reflected a strong rebound in corporate profits, with earnings for S&P 500 companies up by 40 percent. Going forward, however, investors should lower their return expectations as the economy and earnings normalize while interest rates rise. How well the stock market performs will hinge to a large extent on how inflation fares. If it recedes as the Fed expects and interest rate increases are gradual, valuations are likely to remain high. But should inflation prove to be persistent, and the Fed is compelled to accelerate the pace of rate hikes, the stock market would become vulnerable and the bull-run could end. For this reason, I believe caution is warranted.

More rate hikes coming, inflation will not slow

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative.

Feds will raise rates three times over the next year, more inflation and greater rate hikes will tube the markets

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative. Financial markets have taken the news in stride thus far, as the Fed’s forecasts are in line with what investors were anticipating. Bondholders, nonetheless, should realize that even if inflation subsides to the Fed’s 2 percent target in the next few years, they in effect will be accepting negative yields in real terms throughout this period. So, why would they do so? My take is that investors’ expectations about inflation and interest rates have been shaped by the experience following the 2008 Global Financial Crisis, when economic growth and inflation were subdued for a decade. This outcome is consistent with prior bouts of financial crises, as Carmen Reinhart and Kenneth Rogoff spell out in their article “Recovery from Financial Crises.” By comparison, the coronavirus pandemic is a completely different type of shock that did not inflict lasting damage on the economy and the financial system. While it has taken a heavy toll on people’s lives and well-being, it has also unleashed unforeseen changes in the way business is conducted and how people go about providing for their livelihood. Throughout the travail, what stands out is that many U.S. companies are highly adaptable and experienced increased productivity while others have seen their businesses disrupted. Radio City Music Spectacular shuts down amid COVID-19 spike in NYC Overnight Health Care — Presented by Rare Access Action Project —… As a result of the policy support during the pandemic and the resilience of the American economy, the U.S. stock market has posted outsized returns in the past two years that far exceed other developed markets. To a large extent, the gains this year reflected a strong rebound in corporate profits, with earnings for S&P 500 companies up by 40 percent. Going forward, however, investors should lower their return expectations as the economy and earnings normalize while interest rates rise. How well the stock market performs will hinge to a large extent on how inflation fares. If it recedes as the Fed expects and interest rate increases are gradual, valuations are likely to remain high. But should inflation prove to be persistent, and the Fed is compelled to accelerate the pace of rate hikes, the stock market would become vulnerable and the bull-run could end. For this reason, I believe caution is warranted.

Inflation will not slow

Peter Santilli, 12-17, 21, Wall Street Journal, Inflation Is Near a 40-Year High. Here’s What It Looks Like., https://www.wsj.com/articles/inflation-is-near-a-40-year-high-heres-what-it-looks-like-11639737004?mod=hp_lista_pos5

U.S. inflation climbed to a 39-year high in November, as strong consumer demand collided with supply constraints. Overall, the level of consumer prices leapt 6.8% last month from a year earlier, the Labor Department said. But prices didn’t change at the same rate for all goods and services. A surge in prices for gasoline and other energy sources, along with prices for cars, have been the primary drivers of this year’s inflation burst. Meanwhile, prices for services like education and medical care rose just slightly. The consumer-price index rose 6.8% in November from the same month a year ago. The core index, which excludes the more-volatile food and energy categories, increased by 4.9%. Prices for energy and transportation made the biggest jumps among the broad categories shown here. Drilling down into some subcategories related to energy and transportation, we need to expand the range of our color scale to capture wider swings. Prices for vehicles have risen sharply and those for gasoline are nearly 60% higher than a year ago. Moving on to food and tightening the range of the scale, we can see that price gains for beef and pork are at the top of the items shown here. A snapshot of some apparel and other wearable items shows prices declined early in the pandemic but this year have been moving steadily higher than those levels. Much of these differences are the result, in one way or another, of the Covid-19 pandemic. This year’s explosive growth in auto prices is due largely to a semiconductor shortage, which was caused in part by the pandemic but also by trade policy. Much of the rise in food and energy prices comes down to pandemic-related production problems, though also to weather and geopolitical factors. Prices for airline fares and hotels have tended to swing with Covid-19 infection rates, as consumers adjust travel plans to their risk of getting sick. Still, inflation in prices of many goods and services hit multidecade highs in November, regardless of the differing underlying factors. The highs signal that price pressures are broadening beyond the goods and services directly affected by Covid and related supply-chain bottlenecks. For example, apparel prices began picking up early in the pandemic, after a long deflationary stint. Housing costs are also climbing, driven by a leap in prices for home energy, furniture and, increasingly, rent. This broadening of price pressures is important because it could signal that inflation will remain elevated into 2022 and beyond—even after Covid-related disruptions abate. Economists generally expect price pressure caused by supply constraints to ease next year as sidelined workers return to the labor force, consumer demand for goods calms down and production ramps up. However, those sources of price pressures may be replaced by more persistent ones. For instance, many economists are closely watching the rise in rent, since it makes up nearly one-third of the consumer-price index and tends to influence inflation’s future path.

Fed will raise rates

Anneken Tappe, 12-17, 21, CNN, https://www.cnn.com/2021/12/17/investing/dow-stock-market-today-omicron/index.html

The Nasdaq Composite (COMP), which was the biggest loser Thursday as tech stocks came under fire, also initially traded in the red before turning green. It finished the session 0.1% lower. Earlier this week, the Federal Reserve announced it will roll back its pandemic stimulus program at a faster pace. It also revealed that the bank’s policymakers expect more interest rate hikes next year than they did just a few months ago. The Bank of England went even further and actually raised its benchmark rate this week. Central banks around the world are turning hawkish to combat the high inflation spurred by the recovery. In the United States, one measure of prices climbed to its highest level in 39 years in November. Even though the Fed’s move was no surprise, it’s bitter medicine for the market.

Inflation will increase

Summers, 12-16, 21, Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010 Washington Post, pinion: The Fed’s words still don’t measure up to the challenge of inflation, https://www.washingtonpost.com/opinions/2021/12/16/lawrence-summers-fed-inflation/

In fact, there is significant reason to think inflation may accelerate. The consumer price index’s shelter component, which represents one-third of the index, has gone up by less than 4 percent, even as private calculations without exception suggest increases of 10 to 20 percent in rent and home prices. Catch-up is likely. More fundamentally, job vacancies are at record levels and the labor market is still heating up, according to the Fed forecast. This portends acceleration rather than deceleration in labor costs — by far the largest cost for the business sector. Meanwhile, the pandemic-related bottlenecks central to the transitory argument are exaggerated. Prices for more than 80 percent of goods in the CPI have increased more than 3 percent in the past year. With the economy’s capacity growing 2 percent a year and the Fed’s own forecast calling for 4 percent growth in 2022, price pressures seem more likely to grow than to abate.

Rates need to be raised more than 3 times to control inflation

Summers, 12-16, 21, Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010 Washington Post, pinion: The Fed’s words still don’t measure up to the challenge of inflation, https://www.washingtonpost.com/opinions/2021/12/16/lawrence-summers-fed-inflation/

This all suggests that policy will need to restrain demand to restore price stability. How much tightening is required? No one knows, and the Fed is right to insist that it will monitor the economy and adjust. We do know, however, that monetary policy is far looser today — in a high-inflation, low-unemployment economy — than it was about a year ago when inflation was below the Fed’s target and unemployment was around 8 percent. With relatively constant nominal interest rates, higher inflation and the expectation of future inflation have led to dramatic reductions in real interest rates over the past year. This is why bubbles are increasingly pervasive in asset markets ranging from crypto to beachfront properties and meme stocks to tech start-ups.The implication is that restoring monetary policy to a normal posture, let alone to applying restraint to the economy, will require far more than the three quarter-point rate increases the Fed has predicted for next year. This point takes on particular force once it is recognized that, contrary to Powell’s assertion, almost all economists believe there is a lag of about a year between the application of a rate change and its effect. Failure to restore policy neutrality next year means allowing two more years of highly inflationary monetary policy.

Inflation at an all-time high

Rachel Siegel, 12-10, 21, Washington Post, Prices climbed 6.8% in November compared with last year, largest rise in nearly four decades, as inflation spreads through economy, https://www.washingtonpost.com/business/2021/12/10/inflation-november-cpi-fed-biden/

Prices rose 6.8 percent in November to a nearly 40-year high, compared with a year ago, as inflation continues to squeeze households and businesses nationwide and complicate the political environment for Congress and the White House. Data released Friday by the Bureau of Labor Statistics showed that prices rose 0.8 percent in November compared with October, with inflation spreading further throughout the economy, including to areas that had not been previously hurt by the coronavirus pandemic. The increases were driven by broad-based price hikes in most of the categories tracked, similar to October. Indexes for gasoline, shelter, food, used cars and trucks and new vehicles were among the larger contributors. Airline fares also increased. Also, rents have been climbing, influenced by soaring home prices and supply chain issues limiting construction of new homes. Friday’s inflation report showed rent was up 0.4 percent in November compared with the month before. The energy index was up 3.5 percent in November, and measures of gasoline were up 6.1 percent. Recent moves by the Biden administration intended to bring prices down at the pump aren’t reflected in Friday’s data. The price increases can be seen in the grocery store aisles, as food companies including Campbell Soup, Kraft Heinz and Mondelez have all announced higher prices on items that include soup, macaroni and cheese, crackers, and cookies. Dollar Tree also announced it’s hiking prices on most products to $1.25. BLS data showed that “food at home,” namely groceries was up 6.4 percent in the past year, and that “food away from home” also climbed 5.8 percent. The November data marked the largest 12-month increase since June 1982, around a period when inflation was more of a scourge on daily life than most millennials have ever known. Current inflation dynamics have been spurred by a devastating pandemic that roiled the global economy, upsetting the workforce and supply chains, along with stimulus measures that helped unleash high demand for goods. Friday’s inflation data is only the latest example of how severely inflation looms over the economic recovery. Top officials at the White House and Fed have maintained that unsustainably high prices won’t become a permanent feature of the economy, and that policymakers, if necessary, have the right tools to get inflation under control. But over the past few months, they’ve been forced to back away from their initial message that inflation is temporary, or “transitory,” because that position became increasingly at odds with what was unfolding in the economy — and the ways people experience it.

Inflation increasing, rates will increase

Reade Pickert and Matthew Boeslerm, December 9, 2021, Inflation Near 40-Year High Shocks Americans, Spooks Washington, https://finance.yahoo.com/news/inflation-near-40-high-shocks-120000359.html

(Bloomberg) — The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else. Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Ronald Reagan was president in the early 1980s — and in the lifetimes of most Americans. Higher prices helped deliver a banner year for U.S. business, which is posting its fattest profit margins since the 1950s. But for Joe Biden’s administration and the Federal Reserve -– who didn’t see it coming — the sudden return of inflation, largely dormant for decades before 2021, is looking increasingly traumatic. It’s likely to drive some big changes in the coming year, as the Fed pivots toward raising interest rates and the president heads into midterm elections with slumping approval ratings. How did it happen? Essentially, the pandemic made it harder for the world to produce stuff and move it around. The government shored up incomes in the crisis like never before, so households remained eager to spend. And a combination of lockdowns and Covid caution meant their purchasing power was focused on consumer goods instead of services. That’s why there are long lines of cargo ships stretching off the coast of Los Angeles waiting to dock, while used-car dealers keep hiking prices and a global commodities rally leaves Americans paying more at grocery stores and gas pumps. Hotspots to Everywhere A year ago, economists were forecasting 2% inflation for 2021. The pandemic had depressed prices early on, and everyone expected a rebound. But Fed Chair Jerome Powell’s prediction that it would be temporary, and not very large, was widely shared. The first hint that inflation was about to really accelerate came in February, said Omair Sharif, president of research company Inflation Insights LLC. “Something was bubbling under the surface — and more specifically in autos.” A pandemic-driven shortage of semiconductors was holding back production of new cars, so buyers — including rental firms, who’d sold off their fleets earlier in the crisis — were bidding up the prices of old ones. Americans had the cash. In contrast to the last recession, when fiscal austerity held back the recovery, Congress kept the stimulus flowing. On top of the $2.2 trillion rescue package in the spring of 2020, when the pandemic arrived, came another $900 billion in December 2020, then $1.9 trillion more in March after Biden took office. But consumers remained reluctant to spend money in gyms or restaurants, say, where they might catch Covid-19 -– so they bought more goods instead. Shortages of materials, and workers, were creating bottlenecks all along the supply chain. Ports got jammed. Imports kept breaking records. “It was a demand shock,” says Aneta Markowska, chief financial economist at Jefferies. “It’s the U.S. consumer essentially that caused this inflationary impulse, by just buying more stuff than the global economy can produce.” Commodity Stories With other countries recovering too, albeit less exuberantly, globalized commodities like oil were rebounding. U.S. pump prices are about 50% higher than a year ago. The commodity surge wasn’t limited to energy. One of the pandemic inflation’s headline-grabbing episodes came in lumber markets, where prices jumped about 70% from early March to early May –- adding steam to an incipient housing boom. When the lumber bubble burst, some — including Powell — cited it as an example of how pandemic inflation could soon fade. But global food prices, after a lull in June and July, started climbing again. Helped by some bad weather around the planet, they were up 27% in the 12 months through November, reflecting jumps in everything from meat and wheat to coffee and cooking oil. Grocery chain Kroger Co. “saw higher product cost inflation in most categories” in the third quarter, Chief Financial Officer Gary Millerchip said on a Dec. 2 earnings call. “We are passing along higher cost to the customer where it makes sense to do so.” For American business, those higher costs included wage bills. Employers were struggling to increase headcount fast enough to meet soaring demand. In June, Chipotle Mexican Grill Inc. made headlines by hiking prices some 4% to offset pay raises. Plenty more companies would join them as the year went on. At least in the eyes of the market, September’s CPI report was the turning point, when inflation spread well beyond a handful of hotspots. The overall rise in the index was muted -– but food and shelter contributed more than half of it, with rents jumping the most in two decades. While Bloomberg Economics predicts inflation close to 7% for another few months, there’s widespread agreement that it will come down at some point next year. Energy markets are already signaling some relief, with oil down about 15% since late October, presaging lower fuel and transportation costs in 2022. Durable goods inflation is projected to slow as the pandemic recedes and households return to more-normal spending patterns.

Inflation will slow, the labor market will determine how much it will slow

Reade Pickert and Matthew Boeslerm, December 9, 2021, Inflation Near 40-Year High Shocks Americans, Spooks Washington, https://finance.yahoo.com/news/inflation-near-40-high-shocks-120000359.html

One offset to that may be housing costs. Bloomberg Economics’ David Wilcox says they could be rising at a 6% to 7% pace by next summer, about double the rate in the years before the pandemic. Maybe the biggest unknown in 2022 is wages, already rising faster than at any point in the decade-long expansion that ended with the arrival of Covid-19. “The question for me isn’t whether inflation will slow,” said Markowska at Jefferies. “The question is, are we going back to 2? Are we going back to 3? What’s the medium-term destination? And that’s, I think, going to be determined by the labor market.”

Inflation transitory, will moderate

Abigail Ng, 12-9, 21 , CNBC, Anthony Scaramucci says he sees inflation as transitory, not a long-term problem, https://www.cnbc.com/2021/12/09/scaramucci-says-he-sees-inflation-as-transitory-not-a-long-term-issue.html

Inflationary pressures in the global economy are temporary and won’t be long-term problems, according to hedge fund investor Anthony Scaramucci. The founder and managing partner of SkyBridge Capital said he believes rising prices are related to supply chain constraints and will ease once the bottlenecks are resolved. “I don’t see the inflation being long term. I think this is a transitory aftermath of the crisis,” he told CNBC’s “Capital Connection” on Wednesday. In October, consumer prices in the U.S. surged by 6.2%, the biggest jump in more than 30 years. Market experts are split on whether inflation is temporary or not. Mohamed El-Erian, chief economic advisor at Allianz, told CNBC last month that the Fed is losing credibility over its view that rising prices are transitory. Fed Chairman Jerome Powell last week said the central bank uses the term to mean that the current increase in prices won’t leave a permanent mark on the economy. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean,” he said. Scaramucci also said the Fed is likely to move slowly with regard to reducing the pace of its monthly bond purchases. That’s in part because there are still uncertainties about additional Covid variants, he said, noting that many in the U.S. remain unvaccinated and that could lead to an “elongation” of the pandemic. Additionally, there are deflationary forces in the form of technology and oil prices, he added. Stocks should be fine when the Fed starts raising rates next year, history shows Asked what trades he recommends, Scaramucci named cryptocurrency exchange Coinbase and software company MicroStrategy. “Those are two trades I don’t think we can live without,” he said. He also said the “sluggishness” in cryptocurrencies such as bitcoin and ethereum are to do with profit taking, and that both are “set up nicely for the beginning of the year” when he expects more institutional investors to buy the coins.

Inflation will continue

Greg In, 12-8, 21, Wall Street Journal, This Inflaiton Defies the Old Model, https://www.wsj.com/articles/this-inflation-defies-the-old-models-11638978991?mod=hp_major_pos2#cxrecs_s

Last April, economists thought inflation would be around 2.5% right now. Instead, it’s over 6%. Even by the forgiving standards of economic forecasting, that’s a miss of epic proportions. Explanations come in two schools. The demand school blames President Biden and the Federal Reserve for administering too much stimulus. The supply school blames pandemic-related bottlenecks and supply chains. In fact, it’s becoming clear that neither demand nor supply by itself is to blame. Rather, this inflation was made possible only by strong demand interacting with restricted supply. The U.S. hasn’t seen anything like this combination except, perhaps, in the aftermath of World War II. Then, Mr. Biden’s Council of Economic Advisers has noted, pent up demand coincided with war-induced shortages. This makes the solution elusive: fixing supply is largely beyond the means of the White House and Fed, but treating the problem as one of only demand could damage the economy. First, consider demand. Federal spending and lower interest rates influence inflation indirectly, by bolstering aggregate demand which drives down unemployment. As the labor market tightens and spare capacity diminishes, firms get pricing power and workers win higher wages. This inverse relationship between unemployment and inflation, called the Phillips curve, was factored into economists’ spring forecasts that found Mr. Biden’s $1.9 trillion stimulus, enacted in March, would have only a slight impact on inflation. David Mericle, chief U.S. economist at Goldman Sachs, puts the impact at 0.1 to 0.2 percentage points at most. Joel Prakken, chief U.S. economist at IHS Markit, said: “No way can the current inflation rate be accounted for by the impact of fiscal stimulus through the usual Phillips curve channels.” Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News What about the supply side? Global developments that pushed up oil and gas prices explain some of the rise in inflation; core inflation, which excludes energy and food, was 4.6% in October. Core inflation has been heavily influenced by shortages of inputs, such as semiconductors for automobiles, and bottlenecks such as for oceangoing freight. Yet most other advanced economies have suffered similar disruptions, and their inflation has risen less than that of the US. What sets the U.S. apart is the combination of constricted supply in many sectors and stimulus-inflated demand. Normally, an industry responds to higher demand mostly by raising output and only partly by raising prices. (Economists would say the supply curve slopes up). Sometimes, though, supply is fixed (the supply curve is vertical). This characterizes the oil market. In 2008, demand from China surged when producers had little spare capacity. Oil prices rocketed to records, lifting inflation around the world. The auto market this year resembles the oil market of 2008. Ordinarily, auto manufacturers can meet increased demand with ease. But this year, as low interest rates and pandemic-triggered needs drove up demand, supply has been fixed because of a lack of semiconductor chips. The result: a huge jump in prices that, according to IHS Markit, explains roughly a third of the rise in the Federal Reserve’s preferred core inflation measure. Many economists note the boost to inflation is concentrated in goods. That’s because the pandemic diverted consumer spending away from services such as restaurant meals toward goods such as groceries. Nonetheless, the unusual dynamics are spreading to services as well. The Covid-19 pandemic diverted consumer spending away from services such as restaurant meals toward goods such as groceries. The cost of shelter, for example, depends heavily on home prices which are up 14% so far this year, according to Freddie Mac. Don’t blame the Fed: the decline in mortgage rates since 2019 can at most explain 5 percentage points of the increase, a Federal Reserve Bank of New York review of various studies concludes. Don’t blame investors or speculators, either: cash buyers’ share of home buying is normal, according to Freddie Mac. Prices are up so much because demand is being funneled into just a few segments of the market. Demand has been especially strong for entry-level existing homes in smaller interior markets with limited inventory such as Idaho, whereas the “gateway” markets of New York, Los Angeles, and San Francisco, Boston, Washington, D.C., and Miami are experiencing significant out-migration, according to Freddie Mac. The resulting price dynamics can be “explosive,” said Sam Khater, Freddie’s chief economist. Even the labor market features rising demand and fixed supply. Demand for workers has jumped as businesses reopen and consumers spend stimulus checks and stock market wealth. But the supply hasn’t responded, especially of lower-paid workers on which many service industries depend. In the hotel and restaurant industry, even though demand and employment have yet to return to pre-pandemic levels, a severe shortage of workers has caused job vacancies to double from their-prepandemic level. As a result, both wages and prices in the sector are rising briskly. The unusual origins of this inflation mean the solution isn’t straightforward. Ideally it will recede painlessly as distortions to demand and supply self-correct. Rising semiconductor output will eventually cure the shortage of cars. A receding virus and less generous federal relief should coax some workers to fill job vacancies. Households may have all the furniture, exercise equipment and pizza they want. But that process could take a while; meanwhile, higher inflation could become self-perpetuating through price and wage-setting behavior. Then, the solution to this unfamiliar inflation becomes painfully familiar: higher interest rates and perhaps a recession.

Stock FUTURES are up

Harry Robertson, 12-1, 1, Business Insider, US stock futures rebound from another Omicron sell-off despite Jerome Powell hawkishness, https://markets.businessinsider.com/news/stocks/stock-market-today-us-futures-dow-jones-omicron-jerome-powell-2021-12

US stock futures rallied Wednesday as global stocks rebounded from the latest Omicron-driven sell-off, as investors weighed Federal Reserve Chair Jerome Powell’s hawkish comments on bond-buying and inflation. S&P 500 futures were 1.19% higher, Dow Jones futures were up 0.89%, and futures for the tech-heavy Nasdaq 100 were 1.36% higher, suggesting a higher open for markets at the start of a new month. Uncertainty around the severity and impact of the newly detected Omicron coronavirus variant has caused volatility in stocks after months of calm and regular record highs. “The only winner in December [is] likely to be volatility, as the street sells everything on any negative Omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought,” Jeffrey Halley, senior market analyst at Oanda, said in a daily note. Stocks began tumbling Tuesday after Moderna CEO Stephane Bancel told the Financial Times that vaccines were likely to be much less effective against the variant. The S&P 500 fell 1.9% Tuesday as hawkish comments from Powell also drove selling. It put the benchmark US stock index 2.9% below its record closing high of 4,704.54, reached on November 18. But comments from the Israeli health minister on Omicron appeared to be contributing to a more positive tone Wednesday. Nitzan Horowitz said “there are initial indications that those who are vaccinated with a vaccine still valid or with a booster will also be protected from this variant,” according to CNN. That followed scientists at the University of Oxford saying Tuesday “there is no evidence so far” that Omicron is resistant to current vaccines. European stocks rebounded along with US futures, after falling sharply Tuesday, with the continent-wide Stoxx 600 up 1.09%. Hong Kong’s Hang Seng rose 0.78% overnight, while Tokyo’s Nikkei 225 gained 0.41%. Bond yields, which move inversely to prices, rose as investors moved away from safe-haven assets in favour of equities. The yield on the key 10-year US Treasury note climbed 5.4 basis points to 1.495%. It remained well below the recent one-month high of 1.666% touched on November 24, however, in a sign that investors want to own safer assets in the face of rising coronavirus risks. Short-term bond yields jumped Tuesday and pushed higher Wednesday after the Fed’s Powell told lawmakers that it’s “probably a good time to retire” the word “transitory” to describe inflation and considered an earlier-than-expected end to tapering asset purchases. Markets interpreted Powell’s comments as hawkish — that is, as a sign that the Fed is set to become more aggressive in tackling inflation by raising interest rates and cutting back on bond buying. The 2-year Treasury note yield rose 6.5 basis points to 1.495% Wednesday, from as low as 0.429% the previous day. It is seen as the security most sensitive to interest rates.

Inflation increasing now

Paul Hanon, 12—1, 21, Wall Street Journal, https://www.wsj.com/articles/global-inflation-set-to-be-higher-for-longer-says-oecd-11638356853?mod=hp_lead_pos2, Global Inflation Set to Be Higher for Longer, Says OECD

The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses grow accustomed to faster price rises, the Organization for Economic Cooperation and Development said in its latest forecasts for the global economy. But the Paris-based research body’s chief economist also warned that should the new Omicron variant of the coronavirus sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected and a round of price declines similar to those seen in the early months of the pandemic. Releasing the last of its four reports on the economic outlook this year, the OECD said it now expects consumer-price inflation in the U.S. to average 4.4% in 2022, up from 3.1% when it last released forecasts in September. It said it now expects inflation in the eurozone to be 2.7%, up from 1.9%. The new forecasts were made before the discovery of the Omicron variant. The OECD also expects inflation to be above the U.S. Federal Reserve’s 2% target at 2.5% in 2023, although it expects eurozone inflation to be just below the European Central Bank’s target at 1.8% in the same year. In an interview with The Wall Street Journal, OECD Chief Economist Laurence Boone said there is a growing risk that households and businesses will come to expect that higher inflation rates will persist. That is the outcome that central bankers fear most, since it opens the way for a vicious cycle of higher wage settlements and price rises intended to cover those higher costs. Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News With inflation rates having surprised policy makers over recent months, there is an associated risk that households and businesses will lose confidence in the reassurances being offered by some central banks that higher inflation will prove to be temporary. “That’s a concern,” Ms. Boone said. “People have been saying that higher inflation is transitory for 10 months or so.

Fed perceives that inflation will slow to a healthy level now

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Leaders such as Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and Biden administration officials view inflation as temporary and almost wholly driven by factors unique to the pandemic. Once those factors subside, they see inflation drifting lower, eventually getting around the 2% level the Fed considers emblematic of a healthy and growing economy

The 1970s prove that strong unions will boost wages and trigger inflation

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Mark Zandi, the chief economist at Moody’s Analytics, feels that way even though he says there are close parallels between the current predicament and the runaway inflation of the 1970s. For one, he said the waves in that inflation shock were both demand-driven and the product of supply issues because of the oil embargoes back then. Unions that were able to negotiate cost of living increases in contracts also boosted the wage-price spiral.

Economy strong, new variant won’t slow it

Justin Lahart, 11-26, 21. WSJ. https://www.wsj.com/articles/u-s-economy-could-enjoy-post-holiday-glow-11637928001?mod=hp_lista_pos5, U.S. Economy Could Enjoy Post-Holiday Glow, New Variant or No

By now it is clear that the economy should be closing out the year on a high note, with Americans spending money over the holidays and reengaging in many of the activities that they missed out on during last year’s damped-down festivities, even with the emergence of a new virus variant. Even in normal times, the shift in the economy from December to January is abrupt. Consumer spending drops, highway and airline traffic thins and hundreds of thousands of workers brought on temporarily for the holidays leave their jobs. If it wasn’t for the adjustments that government statistical agencies make for seasonal swings, gross domestic product would register a contraction in the first quarter from the fourth quarter every single year. But the pandemic, and all the economic imbalances it has fomented, make getting a read on what January might look like particularly hard. Covid-19 cases are, unfortunately, rising, and there is a danger that this year’s holiday gatherings and travel will exacerbate the increase. Worse, now there is a fast-spreading new strain of the virus that might be better able to infect people who are vaccinated than previous variants were. That could dent sales—an analysis by economists at JPMorgan Chase finds that spending has softened in states where Covid-19 cases have risen the most in recent weeks, relative to other places. Moreover, while it seems likely that even after the holidays, most Americans will have ample savings relative to before the pandemic, that may not be as true for people lower down the income ladder, leading to some curtailment of spending. That said, predicting where Covid-19 cases might be headed is something of a fraught exercise. Already 37 million people have gotten their boosters, and more children are now getting vaccinated: The virus’s opportunities for transmission could decline, especially if the vaccines prove effective against the new variant. Moreover, with Covid-19 generally not nearly as dangerous for vaccinated people as for the unvaccinated, and with new antiviral drugs from Pfizer and Merck looking as if they could become available soon, many consumers may view Covid-19 as less risky than in the past. Meanwhile, companies ought to experience some easing of the labor and supply chain strains they have been facing. A lot of people coming off holiday jobs will be looking for work again and available to hire. And with holiday goods no longer clogging up transportation networks, getting supplies will be easier. Many businesses might look at it as a good time to secure necessary labor and rebuild depleted inventories. As a result, some of the seasonal swoons in activity that typically occur when the calendar flips might be diminished—translating into gains after they go through the seasonal-adjustment process. This holiday season is looking a lot different from last year’s. This January will look a lot different, too.

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. Atlanta Federal Reserve President Raphael Bostic said on Friday he is hopeful that the momentum of the U.S. economy will carry it through the next wave of the coronavirus pandemic, and said he remains open to accelerating the pace of the central bank’s bond taper. Earlier on Friday, the World Health Organization said it was designating the new omicron variant, first identified in South Africa, as being “of concern.” If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. “We have a lot of momentum in the economy right now,” Bostic said during an interview with Fox News, citing strong jobs growth. “And that momentum, I’m hopeful, will be able to carry us through this next wave, however it turns out.” Bostic reiterated that he is open to speeding up the pace at which the central bank slows down its asset purchases so officials can have greater flexibility to respond to surging inflation. It could be “reasonable,” Bostic said, for the Fed to potentially conclude its asset purchases by the end of the first quarter next year, or early in the second quarter, if the economy continues on the same trajectory. At the current pace, Fed officials would be done tapering purchases by the middle of next year. Policymakers will meet again on Dec. 14-15.

One rate hike, which markets have priced in now.  Greater inflation means a double rate hike

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

According to CME’s FedWatch tool, money market traders were pricing in a 53.7% chance of at least one rate hike by the Federal Open Market Committee’s June meeting as of Friday afternoon, down from an 82.1% chance on Wednesday. Bostic said on Friday that he has not ruled out any possible actions and said it is “certainly possible” for the Fed to raise interest rates at least twice next year if inflation remains elevated. “We’re not going to let inflation get out of control,” Bostic said.

Investors already expecting a three quarter point rate increase

Nick Timaraos, 11-24, 21, WSJ, Fed Officials Debated Inflation Concerns, Taper Pace at November Meeting, https://www.wsj.com/articles/fed-officials-debated-inflation-concerns-taper-pace-at-november-meeting-11637780402?mod=hp_lead_pos3

Investors have dialed up expectations of interest-rate increases by the Fed next year. The probability of a rate increase by May rose above 50% on Wednesday, and expectations of at least three quarter-point rises by the end of 2022 has risen to nearly 65%, according to futures market prices tracked by CME Group. Brisk demand for goods, disrupted supply chains, temporary shortages and a rebound in travel have pushed 12-month inflation to its highest readings in decades. Core inflation, which excludes volatile food and energy prices, rose 4.1% in October from a year earlier, according to the Fed’s preferred gauge.

Economy up, consumer spending rebound

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

The U.S. economy showed broad-based signs of acceleration heading into the end of the year, with consumers ramping up spending, businesses stepping up investment and jobless claims falling to historic lows. Household spending rose 1.3% in October from a month earlier, while personal income increased 0.5% last month, the Commerce Department said Wednesday. Consumers are benefiting from a strong labor market. And they are spending at a faster pace than inflation, which recently hit a three-decade high. Jobless claims, a proxy for layoffs, fell to 199,000 last week, the lowest weekly level in 52 years, the Labor Department separately said. The sharp decline in unemployment claims suggests rising wages and bountiful job openings could continue to buttress consumer spending—the economy’s main engine—despite fading government stimulus and dwindling savings. “Consumer demand remains quite strong,” said Gregory Daco, chief U.S. economist at Oxford Economics. “People are looking to travel. They’re still looking to eat out. They’re still looking to make purchases for the end-of-the-year holidays.” Elevated inflation, stoked by strong demand and limited goods and labor supply, poses a risk to the economy, though. Federal Reserve officials at their meeting earlier this month signaled greater doubts over how long it would take for inflation to abate and how soon they would need to raise interest rates to cool the economy, minutes from the meeting released on Wednesday showed. Consumers increased spending on goods, including big-ticket and smaller purchases, by 2.2% in October. Spending on services, which were hit hard by the pandemic, is showing glimmers of improvement. Outlays on services grew 0.9% last month, an acceleration from the preceding two months. Some sectors that are particularly vulnerable to the pandemic are starting to see a pickup and are in a much better position than a year earlier. For instance, international travel to major U.S. airports rose in November after the U.S. lifted its travel ban on Europeans, Jefferies economists said in a note. Spending among tourists could help boost U.S. retail sales, the economists said. Companies such as manufacturers face higher material and shipping costs, as well as labor and parts shortages that could delay some shipments this holiday season. Still, early signs suggest that global supply-chain problems are abating. In Asia, Covid 19-related factory closures, energy shortages and port-capacity limits have eased in recent weeks. Demand for goods remains hot even though computer-chip shortages have dented factory output for months. New orders for motor vehicles and parts jumped 4.8% from September to October, one of the largest increases among sectors, the Commerce Department said in a report on durable goods released Wednesday. A separate Federal Reserve report from earlier in November said production of vehicles rose 18% last month. New orders for nondefense capital goods excluding aircraft, a closely watched proxy for business investment, were up 0.6% in October compared with the previous month, Commerce Department data show. Business investment has grown solidly this year. In an economy where there is a shortage of workers, companies are investing in machinery and technology that make their existing employees more productive, said Gus Faucher, chief economist at PNC Financial Services Group Inc. “I suspect that will remain strong through 2022,” he said. Strong consumer demand for everything from apparel to electronics to hardware is boosting sales at several of the biggest U.S. retailers, despite rising prices. The retail chains Target Corp. and TJX Cos. said they were able to sidestep supply-chain snarls to post strong sales in the most recent quarter and stock up with goods for Black Friday and the holiday season. Employers across the economy report they are struggling to find workers to keep pace with demand. Retailers, hospitality, leisure and logistics firms are strapped and have been raising pay to avoid staff shortages during the critical holiday shopping and travel season.

Wage increases boost consumer spending

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

Wage increases will be a key source of spending power for consumers as they run through savings accumulated from multiple rounds of government stimulus. Americans were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts. “We’re seeing the growth baton being passed from the public sector to the private sector,” said Mr. Daco of Oxford Economics. The personal-saving rate, which is saving as a percentage of after-tax income, was 7.3% in October, in line with pre-pandemic levels. The booming job market has been a boon for Caleb Waack’s career. The 28-year-old starts a new job in data engineering for an online mattress firm next Monday, his third since the pandemic began. Mr. Waack said he seized on extra time from working remotely to study up on programming, helping him transition from automotive engineering to consumer goods and, ultimately, to his chosen field of data science. He said he received an offer for his new job within a week of applying, compared with a five-week turnaround time for the role he took in mid-2020. “The labor market is scorching hot,” said Mr. Waack, who lives in De Pere, Wis. “The salary increase is—it’s significant, definitely higher than inflation. It’s an employees’ market, right?” Covid-19 is still disrupting the economy and poses a risk to the outlook. Virus cases have risen this month, and some public-health experts warn that cases could continue to climb as people gather indoors during the winter.

Economy rebounding, unemployment low, consumer spending up

Paul Wiseman, 11-24, 21, AP, US jobless claims hit 52-year low after seasonal adjustments, https://apnews.com/article/coronavirus-pandemic-business-health-economy-jobless-claims-a774386e727ad7c917a669f5712deb32

WASHINGTON (AP) — The number of Americans applying for unemployment benefits plummeted last week to the lowest level in more than half a century, another sign that the U.S. job market is rebounding rapidly from last year’s coronavirus recession. Jobless claims dropped by 71,000 to 199,000, the lowest since mid-November 1969. But seasonal adjustments around the Thanksgiving holiday contributed significantly to the bigger-than-expected drop. Unadjusted, claims actually ticked up by more than 18,000 to nearly 259,000. The four-week average of claims, which smooths out weekly ups and downs, also dropped — by 21,000 to just over 252,000, the lowest since mid-March 2020 when the pandemic slammed the economy. Since topping 900,000 in early January, the applications have fallen steadily toward and now fallen below their prepandemic level of around 220,000 a week. Claims for jobless aid are a proxy for layoffs. Overall, 2 million Americans were collecting traditional unemployment checks the week that ended Nov. 13, down slightly from the week before. “Overall, expect continued volatility in the headline figures, but the trend remains very slowly lower,” Contingent Macro Advisors wrote in a research note. Until Sept. 6, the federal government had supplemented state unemployment insurance programs by paying an extra payment of $300 a week and extending benefits to gig workers and to those who were out of work for six months or more. Including the federal programs, the number of Americans receiving some form of jobless aid peaked at more than 33 million in June 2020. The job market has staged a remarkable comeback since the spring of 2020 when the coronavirus pandemic forced businesses to close or cut hours and kept many Americans at home as a health precaution. In March and April last year, employers slashed more than 22 million jobs. But government relief checks, super-low interest rates and the rollout of vaccines combined to give consumers the confidence and financial wherewithal to start spending again. Employers, scrambling to meet an unexpected surge in demand, have made 18 million new hires since April 2020 and are expected to add another 575,000 this month. Still, the United States remains 4 million short of the jobs it had in February 2020. Companies now complain that they can’t find workers to fill job openings, a near-record 10.4 million in September. Workers, finding themselves with bargaining clout for the first time in decades, are becoming choosier about jobs; a record 4.4 million quit in September, a sign they have confidence in their ability to find something better.

No inflation control now

AP, 11-23, 24, https://apnews.com/article/coronavirus-pandemic-joe-biden-health-business-richard-nixon-ae06d5cccf066239f9aa7f06491c7698, Biden aims to do what presidents often can’t: Beat inflation,

WASHINGTON (AP) — LBJ tried jawboning. Richard Nixon issued a presidential edict. The Ford administration printed buttons exhorting Americans to “Whip Inflation Now.” Over the years, American presidents have tried, and mostly floundered, in their efforts to quell the economic and political menace of consumer inflation. Now, President Joe Biden is giving it a shot. Confronting a spike in gasoline and other consumer prices that’s bedeviling American households, Biden on Tuesday ordered the release of 50 million barrels of oil from the U.S strategic petroleum reserve. The move, done in coordination with several other major nations, is intended to contain energy costs. Oil markets, having anticipated the move, were unimpressed with the details: Oil prices actually rose on the news. It was just the latest step Biden has taken to show he is doing everything he can to combat inflation as gasoline and food prices, in particular, have imposed a growing burden on American households. On Monday, he announced that he would reappoint Jerome Powell as chair of the Federal Reserve, a move meant in part to reassure financial markets that Washington is serious about containing consumer prices. Last month, he announced a deal to ease supply backlogs at the Port of Los Angeles by extending operations there to 24 hours a day, seven days a week. ADVERTISEMENT Yet none of the president’s actions is considered likely to make a meaningful dent in surging prices anytime soon. “I don’t think the president has many levers to pull to bring down the rate of inflation any time soon,” said Mark Zandi, chief economist at Moody’s Analytics. “The things he is doing are positive, and there’s no downside to them … but they are on the margins. They’re not going to move the dial very much.” Inflation is always a tough foe, made even more complicated by the unusual recovery from the pandemic recession, with shortages of supplies and workers and shipping bottlenecks forcing up prices. The government’s consumer price index skyrocketed 6.2% in the 12 months that ended in October — the sharpest such jump since 1990. Coming after nearly four decades of more or less stable prices, the CPI news represents a “once-in-a-generation uptick in inflation,” said Sarah Binder, a George Washington University political scientist who studies the Fed. “The problem is pretty stark because it’s something that voters notice. It’s hard to escape the impact of a spike in inflation on your daily life, whether it’s buying milk or buying gas.’’ The average price of regular gasoline has shot up to $3.40 a gallon from $2.11 a year ago, according to AAA. Compounding the pain and heightening the pressure on Biden, inflation has been outpacing Americans’ income. Adjusted for price increases, average hourly wages were actually down 1.2% last month compared with a year earlier. “Inflation is painful, and it’s always political,” said Diane Swonk, chief economist at the accounting and consulting firm Grant Thornton. WHAT’S BEHIND THE PRICE SPIKE? It’s partly the consequence of very good news. The world economy — and America’s in particular — rebounded with unexpected speed and strength from last year’s brief but intense recession. It was a result of super-low interest rates, massive government spending and, eventually, the broad rollout of vaccines that allowed more of the economy to reopen. The swiftness of the rebound caught businesses off guard. A year and a half ago, they were bracing for the worst — laying off workers, letting shelves and warehouses go bare, reducing investment and factory output. And energy companies did the same: They cut production of oil and gas as demand for transportation fuels plummeted. Once demand came roaring back, they were unprepared. They found themselves scrambling to call back workers and buy enough to fill customer orders. Ports and freight yards couldn’t handle the traffic. Countries competed over boatloads of overpriced liquid natural gas. Periodic COVID-19 outbreaks shut down Asian ports and factories. Global supply chains broke down. As costs rose, many businesses found that they could pass the burden along to consumers in the form of higher prices. In the meantime, many families had banked their government relief checks and built up their savings. Some critics also blamed Biden’s $1.9 trillion emergency aid package for overheating the economy and contributing to inflation pressures.

Inflation likely to stabilize, more inflation causes rate hikes, killing the economy

Sebastian Mallaby, 11-22, 21, SEBASTIAN MALLABY is Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations. His forthcoming book, The Power Law: Venture Capital and the Making of the New Future, will be published in January 2022, Is Inflaiton here to Stay? https://www.foreignaffairs.com/articles/2021-11-22/inflation-here-stay

Early in the COVID-19 pandemic, in Foreign Affairs, I wrote that advanced economies were entering a new age: the age of magic money. Because inflation seemed dormant, central banks faced no penalty for conjuring money out of thin air. And because this money would drive interest rates lower, governments would likewise face no penalty for borrowing. A period of expansive government beckoned. Countries with firmly anchored prices would be empowered to assist citizens in extraordinary ways, courtesy of magic money. Eighteen months on, this thesis seems both true and troubled. True, because the advanced economies’ response to the pandemic has been genuinely extraordinary. In 2020 and 2021, the U.S. government has propped up the economy by running budget deficits worth a combined 27.0 percent of one year’s GDP, far more than the cumulative 18.5 percent in 2009–10, following the global financial crisis. Thanks to this unprecedented stimulus, a miraculous recovery has ensued. Relative to the eve of the pandemic, U.S. consumers are richer, wages are up, businesses have more cash on hand, and real GDP is higher. Compare that with the painful rebuilding after the financial crash, when it took ten quarters for real output to exceed its mid-2008 high point. Other advanced economies—Japan, the euro area, and the United Kingdom—have experienced something similar. Expansive government programs have boosted household disposable income above the pre-pandemic level. Yet the magic money thesis is simultaneously in trouble, because its premise—dormant inflation—has been battered. In the United States, the Federal Reserve’s preferred measure of core inflation came in at 3.6 percent in the year to September, a 30-year record. Across the 38 economies of the Organization for Economic Cooperation and Development, core inflation stands at 3.2 percent. This past June, I updated my analysis of magic money in Foreign Affairs and noted that inflation was stirring but suggested that this might be temporary; further, I argued that if inflation were to persist, the Fed would act to control it. Both these claims seem weaker now. In the past five months, core inflation has stayed obstinately high, and a rising chorus of commentary insists that the Fed is “behind the curve.” It is time to update my update. Even if the age of magic money really has ended, it has been a remarkable phase in economic history. As Matthew Klein of The Overshoot newsletter observes, the huge pandemic stimulus had three possible consequences. Companies and citizens might have taken the government handouts and nervously saved them, in which case magic money would have failed to spark recovery. At the other extreme, the private sector could have spent the handouts all at once, in which case there would have been hyperinflation. Instead, the economy followed a middle path, and the outcome has been pretty close to the ideal one. On the one hand, output has recovered fast. On the other hand, core inflation at 3.6 percent is a manageable problem. Magic money has worked extraordinarily well. If one parachutes from a great height and lands within yards of the target, that’s victory. Second, although inflation has been more sustained and broader than expected, it may yet turn out to be transitory. In the near term, the world is short of fundamentals such as semiconductors, housing space, and energy, so price pressures may get worse before they get better. The digitization of everything, accelerated by the pandemic, has made the chip shortage especially painful; Goldman Sachs notes that the average new car contains 50 percent more semiconductors than it did just three years ago. But in the medium term, the supply factors pushing prices up seem more temporary than permanent. Production bottlenecks are likely to smooth themselves out as the world puts the pandemic behind it. Workers are likely to rejoin the labor force as more people get vaccinated and oral antiviral therapies to treat COVID-19 become more readily available. Meanwhile, energy prices are more likely to fall than to rise, given their currently high level. Something similar can be said of the demand side of the inflation outlook. For now, too much demand is chasing too few goods, particularly the durable goods that have pushed prices upward. But by this time next year, the government stimulus will be waning. Consumers will have run down some of the financial reserves resulting from government largess and a dearth of spending opportunities during the pandemic. The service sector should be back to normal, absorbing some of the demand that is currently pushing up durable goods prices. Factor in the Fed’s measured withdrawal of stimulus, and the United States may gradually return to price stability. Under this scenario, magic money will have proved extraordinarily effective in 2020–21—and will likely get rolled out again whenever the next crisis arrives. MAGIC KINGDOM Of course, the outlook will darken if people come to expect continuous inflation. Given that the current supply-and-demand disruptions will persist into next year, workers may get into the habit of pushing for higher pay because they expect prices to go up, while businesses may raise prices reflexively because they expect higher wage costs. Already, investors are betting that inflation will average more than three percent over the next five years, though they also believe that the rate will come down in the subsequent five-year period. How people form inflation expectations is not well understood, so it’s hard to gauge this risk. But it is clearly not zero. Another risk comes from the extraordinary state of the financial markets. U.S. fund managers have piled into the stock market on the TINA theory: the idea that with bonds yielding virtually nothing, “there is no alternative” to stocks. As a result, in the past year, stocks have jumped by about a quarter relative to earnings and are way above their long-term average. Housing prices and crypto assets have followed suit. If inflation turns out to be worse than it looks now, the Fed may be forced to surprise the markets with higher rate hikes. That could trigger a financial bust, which would damage the real economy. Magic money has worked extraordinarily well. In short, this drama is not over. If inflation expectations rise further, and if a consequent Fed tightening punctures markets, the age of magic money may indeed have ended. The perils of massive budget stimulus will have been exposed, although these may still pale relative to the perils of doing too little in a crisis. To reduce the risk of this negative scenario, the Fed should signal its concern: it should taper asset purchases faster, stand ready to raise interest rates sooner, and stop talking about unemployment. A calm forewarning of tougher tightening is better than delay followed by clampdown. Yet a brighter future remains the most probable one. If supply stabilizes and demand subsides, measured tightening may turn out to be enough. By the start of 2023, inflation will have stabilized at or just above the two percent target—a bit higher than before, partly because of the jolt to expectations from the current inflation blip and partly because the ongoing transition to green energy will require major investments that will boost the cost of capital. The fact that inflation and interest rates will settle somewhat higher than before will be all to the good. The fear of “secular stagnation”—the worry that the economy can grow only with interest rates close to zero—will have been alleviated. Higher interest rates will discipline borrowers and render the financial system a bit less prone to bubbles. If the U.S. economy can reach that healthy equilibrium, today’s inflation scare will soon be forgotten. The world will move on. The Fed will have won. And the age of magic money will continue

Inflation baked in for the long-term

David Javier, 11-19, 21, https://finance.yahoo.com/news/yes-fatter-paychecks-really-do-stoke-inflation-morning-brief-101151680.html, Yes, fatter paychecks really do stoke inflation: Morning Brief

It should be noted outright that in a society that’s become polarized by class and surging inequality, it’s become incredibly difficult to discuss the role wages play in pushing up inflation. It gets subsumed by facile accusations that those trying to make the argument somehow disdain the working class — which those of us here at the Morning Brief certainly do not. Meanwhile, the finer points often get lost in the soundbite-driven world of social media and opinionated cable TV. With all that being said, it should be noted that our current problem with soaring prices is, at its core, an issue of unusually high COVID-era demand stoked by massive intervention from the Federal Reserve and Uncle Sam. That point was recently articulated by at least two Obama-era officials, Steve Rattner and Larry Summers. For those unaware, consumer spending, and all the conspicuous consumption that goes along with it, comprises a whopping 70% of gross domestic product. The reason why this matters is because wages, which the Morning Brief has pointed out on several occasions, have risen quite significantly during the pandemic after a prolonged period of stagnation. Given the worker shortage and historically high numbers of people quitting their jobs, employers are more likely than not to hike pay even further. On its face, this is a good thing. But in a nutshell, behavioral economics tells us that the more money people have, the more they will spend. And as I pointed out in Thursday’s edition, ample evidence suggests that free-spending workers are loading up on revolving credit. That, of course, stimulates demand in an economy that’s powered mostly by the consumer — thus stoking the inflationary problem best summarized by Rattner as “too much money chasing too few goods.” Most reasonable people rightly applaud the idea of middle and working classes making more money. Yet the rapid pace of (long overdue) wage hikes is stoking both demand and prices alike, and creating shortages just about everywhere. Pointing to the Atlanta Fed’s wage growth tracker that showed two consecutive months of growth over 4%, veteran Wall Street watcher Peter Boockvar noted this week that those readings “are the two highest … since 2008 and in Q1 this year it averaged 3.4% and in Q2 it was 3.1%.” Meanwhile, a National Federation of Independent Businesses survey — the voice of the small business sector, which accounts for at least 40% of economic activity — reported that compensation hit its highest in nearly 40 years, Boockvar pointed out. A net 44% of NFIB respondents said they boosted pay, and 32% plan to do so in the next few months. “The trend is clear with wages and worker leverage,” the analyst added. Taken together, these factors are contributing to what Tom Tzitzouris, head of fixed income research at Strategas, stated candidly recently was a “wage-price spiral” adding to the supply and labor backlogs. “That tells us that people who work for a living — high income or low income — believe they have pricing power. And once they believe that, then inflation has real legs,” the analyst warned. “It doesn’t mean that we are going to see an acceleration in inflation, it just means that this inflation is going to be sticky — potentially 3%+ [in headline consumer prices] for the next decade or at least for the remainder of this business cycle,” Tzitzouris added. “As long as wages are rising towards where inflation is, that tells us that the wage-price spiral is still in effect,” he said.

Interest rate increases coming

Reuters, November 18, 2021, Fed to hike in Q4 next year; inflation to remain above target until 2024: Shrutee Sarkar, reuters.com

BENGALURU, Nov 19 (Reuters) – The Federal Reserve will raise interest rates late next year, earlier than expected just a month ago, in a landmark shift from the emergency measures it took to backstop the U.S. economy during the COVID-19 pandemic, according to a Reuters poll. Most respondents said the Fed should move even sooner to combat inflation, which hit a 30-year high last month and economists say it will stick above the central bank’s target until at least 2024. The shift in economists’ expectations for a first rate hike to next year from early 2023 predicted in an October survey puts them more in line with market expectations, and follows recent news U.S. inflation hit a 30-year high last month. With disrupted global supply chains and a sharply-improved job market, the Fed, like most major central banks, is expected to move sooner rather than later. The Nov. 15-18 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50% in Q4 2022, followed by two more hikes in Q1 and Q2 2023. The fed funds rate was expected to reach 1.25-1.50% by the end of 2023. But nearly two-thirds of economists, 27 of 42, who responded to an additional question on what they recommended the Fed ought to do said the Fed should raise rates earlier, by the end of September next year. “The double-whammy of a cost and wage push into prices is likely leaving the Fed uncomfortable. The risks of earlier hikes – next summer, if not before – are on the rise,” said Michelle Meyer, U.S. economist at Bank of America Securities. “To the extent that inflation expectations march higher over the longer run and consumers continue to react negatively to higher prices on the view that they will prove persistent, the more likely the Fed will damper the inflationary pressure with tighter monetary policy.” High inflation is a concern for central banks around the world, some of which have already raised rates or are close to doing so. The Fed, for its part, is expected to taper its $120 billion in monthly bond purchases from this month. The consensus view for change in the core personal consumption expenditures (PCE) price index, the Fed’s key inflation gauge, was predicted to stay above 4% this quarter and next, double the 2% target. It’s then forecast to slow in the second half of 2022, along with growth. Those forecasts were upgraded from last month. “The whiff of stagflation is getting stronger as shortages worsen, leading to surging prices and weaker real GDP growth. Shortages of goods and intermediate inputs will eventually ease, although not for at least six to 12 months,” said Paul Ashworth, chief North America economist at Capital Economics. “But the drop in the labour force appears to be more permanent, which suggests the pandemic could have a long-term scarring effect on potential GDP after all.” After expanding 6.7% in the second quarter on an annualized basis, U.S. economic growth was expected to have slowed to 2.0% in the third quarter before expanding 4.8% this quarter. That compared with 3.8% and 5.0% predicted in October for the third and fourth quarters, respectively. On average, the economy was expected to grow 3.9% next year, 2.6% in 2023 and 2.3% in 2024. That compared with previous forecasts of 4.0% for 2022, 2.5% for 2023 and 2.2% in 2024. While the unemployment rate was predicted to range between 3.6% and 4.3% until the end of 2023, over 55% of 39 respondents who answered another question said consumer spending in the U.S. would improve over the coming year.

Inflation high now

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

ASHINGTON (BLOOMBERG) – “Is it easier for you to go and buy things in the stores than it was four years ago?” Ronald Reagan asked days before his sweeping 1980 presidential election victory. That simple question looms as a decisive factor in next year’s congressional ballot. Inflation is now running at its highest in a generation, with a report Wednesday (Nov 10) showing that consumer prices surged at a 6.2 per cent annual pace in October. Nearly all economic forecasters expect it to cool in the coming year, but the key question for President Joe Biden and congressional Democrats is how quickly and how much. While Mr Biden argues that inflation will be pulled down by his forthcoming US$1.75 trillion (S$2.37 trillion) social-spending Bill, along with a US$550 billion infrastructure plan he will soon sign, Republicans are hammering exactly the opposite argument: cash drops by the government are driving up prices. Even some Democrats are echoing GOP fiscal concerns, complicating the outlook for the pending legislative package. At stake in how quickly inflation recedes, and in the debate over the cause and remedy of the escalation in prices, is control of Congress. In next November’s midterm elections, Democrats’ razor-thin majorities of both chambers will be up for grabs. It’s effectively the first national election where inflation will be a prime issue since Reagan’s win over President Jimmy Carter. “We’ve never recorded as many people talking about high home prices or high appliance prices or high TV prices,” said Mr Richard Curtin, who oversees the University of Michigan Consumer Sentiment Survey, a key gauge of household attitudes. “We get a large share of people talking about the reduction of their living standards due to inflation,” made worse because “consumers see no effective economic policies that would restrain inflation,” he said.

Inflation will slow in ‘22

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

Treasury Secretary Janet Yellen said in an interview that aired Tuesday on National Public Radio’s “Marketplace” that she expects inflation next year to be “closer to the 2% that we consider normal.” Outside forecasters largely agree. The median estimate of economists surveyed by Bloomberg is for a 2.8 per cent rate in the third quarter of next year, on the eve of the election, with 2.4 per cent seen for the final three months of 2022. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels, signalling prices at the pump should ease. But much depends on the course of the pandemic, and things may get worse before they improve, with no guarantee that supply-chain bottlenecks will have fully cleared. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels. PHOTO: EPA-EFE Meantime, rising prices at grocery check-out lines and the gas pump are already unsettling the public, and much of the country is in for more sticker shock when winter heating bills start arriving.

Miniscule impact from reconcilliation

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

But most economists don’t see a near-term impact on inflation from the fiscal packages. It can take years for infrastructure projects to affect transport and other costs, for example. And the ramping up of social safety-net support could in the meantime add fuel to already strong demand. “The spending is front-loaded,” said Dr Jason Furman, a former senior economic adviser in the Obama administration who’s now a professor at Harvard University. Inflation could be boosted by “a few tenths of a percentage point” next year, he said. Longer term, any inflation impact would be “miniscule” and could work in either direction. With American payrolls about 4 million lower today than they were before the pandemic, the biggest impact on inflation over the next year is likely to be how quickly people return to the labour force, Dr Furman said. “Inflation right now is more uncertain than at any point in many decades. We’re in such an unprecedented situation that our biggest lesson from the last year should be humility in our forecasts.” A key Democratic swing voter in the Senate, Joe Manchin of West Virginia, is worried enough about the idea that he’s held up consideration of the social spending Bill the White House and congressional leaders are trying to get enacted. He’s yet to commit to voting for the draft package.

Inflation increasing

Paul Wiseman, 11-11, 21, EXPLAINER: Why US inflation is so high, and when it may ease, https://apnews.com/article/coronavirus-pandemic-business-health-jason-furman-prices-77dc786442ccc3ed8092a7647716d682

WASHINGTON (AP) — Inflation is starting to look like that unexpected — and unwanted — houseguest who just won’t leave.

For months, many economists had sounded a reassuring message that a spike in consumer prices, something that had been missing in action in the U.S. for a generation, wouldn’t stay long. It would prove “transitory,” in the soothing words of Federal Reserve Chair Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy. Yet as any American who has bought a carton of milk, a gallon of gas or a used car could tell you, inflation has settled in. And economists are now voicing a more discouraging message: Higher prices will likely last well into next year, if not beyond. On Wednesday, the government said its consumer price index soared 6.2% from a year ago — the biggest 12-month jump since 1990. ADVERTISEMENT “It’s a large blow against the transitory narrative,” said Jason Furman, who served as the top economic adviser in the Obama administration. “Inflation is not slowing. It’s maintaining a red-hot pace.’’ And the sticker shock is hitting where families tend to feel it most. At the breakfast table, for instance: Bacon prices are up 20% over the past year, egg prices nearly 12%. Gasoline has surged 50%. Buying a washing machine or a dryer will set you back 15% more than it would have a year ago. Used cars? 26% more. Although pay is up sharply for many workers, it isn’t nearly enough to keep up with prices. Last month, average hourly wages in the United States, after accounting for inflation, actually fell 1.2% compared with October 2020. Economists at Wells Fargo joke grimly that the Labor Department’s CPI — the Consumer Price Index — should stand for “Consumer Pain Index.” Unfortunately for consumers, especially lower-wage households, it’s all coinciding with their higher spending needs right before the holiday season. The price squeeze is escalating pressure on the Fed to shift more quickly away from years of easy-money policies. And it poses a threat to President Joe Biden, congressional Democrats and their ambitious spending plans. ___ WHAT CAUSED THE PRICE SPIKES? Much of it is the flipside of very good news. Slammed by COVID-19, the U.S. economy collapsed in the spring of 2020 as lockdowns took effect, businesses closed or cut hours and consumers stayed home as a health precaution. Employers slashed 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter. Everyone braced for more misery. Companies cut investment. Restocking was put off. And a brutal recession ensued. ADVERTISEMENT Yet instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by massive government spending and a bevy of emergency moves by the Fed. By spring, the rollout of vaccines had emboldened consumers to return to restaurants, bars and shops. Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to plug job openings — a near record 10.4 million in August — or buy enough supplies to fill customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became snarled. Costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic. “A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,” said Furman, now an economist at the Harvard Kennedy School. Furman suggested, though, that misguided policy played a role, too. Policymakers were so intent on staving off an economic collapse that they “systematically underestimated inflation,” he said. “They poured kerosene on the fire.” A flood of government spending — including President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said. “Inflation is a lot higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’ In a statement Wednesday, Biden acknowledged that “inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me.” But he said his $1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply bottlenecks. ___ HOW LONG WILL IT LAST? Consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ prodigious demand for goods and services. A resurgent job market — employers have added 5.8 million jobs this year — means that Americans can continue to splurge on everything from lawn furniture to new cars. And the supply chain bottlenecks show no sign of clearing. “The demand side of the U.S. economy will continue to be something to behold,” says Rick Rieder, chief investment officer for global fixed income at Blackrock, “and companies will continue to have the luxury of passing through prices.” Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy will eventually return to something closer to normal. “I think it it will be ‘transitory’,” she said of inflation. “But economists have to be very honest about defining transitory, and I think this could last another year easily.’’ “We need a lot of humility talking about how long this lasts,” Furman said. “I think it’s with us for a while. The inflation rate is going to come down from this year’s blistering pace, but it’s still going to be very, very high compared to the historical norms we have been used to.”

Inflation will stabilize mid next year

Erin Doherty, 11-10, 21, https://www.axios.com/consumer-price-index-october-inflation-60151fa5-0191-4b8b-9c8a-5fc43e1a47ba.html, Inflation at its highest in 30 years

What they’re saying: “We expected inflation would get worse before it got better, but not this much worse. Particularly painful is the increase in food prices as we approach the holidays, and the rise in energy prices as we plan to travel more to family get-togethers,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a research note. “However, both those increases are likely to be temporary, and the forecasts that inflation overall will drop early-to-mid-next year still seems credible,” he added.

Economic fundamentals are strongFelix Solomon, 11-9, 21, https://www.axios.com/economy-inflation-stocks-good-pessimism-biden-997e1f94-f600-4475-8cc3-811fd5cf247c.html, The economy is great, but voters don’t believe it

By the numbers: Economic strength is undeniable, both in the country overall and at the household level. The economy is expected to grow 5.7% this year. Almost 6 million jobs were created just between January and October; the unemployment rate is now just 4.6%. The quit rate, the standard barometer of workers’ optimism, hit an all-time record high of 2.9% in August. Average earnings are up 3.5% this year and 4.9% annually, to $31 per hour. Checking accounts are 50% fatter than they were pre-pandemic, while the bottom 50% of the population now has more than $3 trillion in household wealth — up 32% just in the first half of this year, and up 55% from before the pandemic. Stocks hit a new record high every day last week (and yesterday, too), and are up more than 30% year-t0-date.

Growth outlook strong

Hope King, 11-9, 21, A dose of optimism from JPMorgan, https://www.axios.com/economic-optimism-jpmorgan-94364feb-4f23-4d2f-857b-2174f90700c1.html

With 2021 soon in the rearview, the economic tumult of 2020 is looking more and more like a faded “scar,” J.P. Morgan Asset Management’s team told reporters on Monday. Why it matters: “Bold” and coordinated fiscal and monetary policies not only helped soften the pandemic’s blow — they also set up conditions for more corporate and economic growth, they said. The big picture: The passage of the $1.2 trillion infrastructure bill on Friday is a further example of the U.S. government’s willingness to spend in order to drive economic activity, said David Kelly, the firm’s chief global strategist. That, along with strong corporate profits and low-interest rates, points to strong capital spending in the U.S. over the next 10 to 15 years, he said. Yes, but: Global growth will likely moderate compared to the last decade, as expansion in China — the world’s second-largest economy — slows down. The bottom line: “[T]he growth outlook is pretty good, all things considered — and certainly, it does not look like the global economy has been in any way permanently scarred by the pandemic,” Kelly said.