Aurelia Butler

(Reuters) – Data watched closely by the Federal Reserve showed inflation expectations remained broadly anchored through the end of last year, while an alternate measure of inflation showed the most intense price pressures may have begun to ease. At the same time, a Reuters poll of economists confirmed expectations of a weak January U.S. jobs report, with data to be released on Friday anticipated to show just 153,000 positions added in what would be the worst showing in a year. About 10% of those polled think the economy lost jobs over the month, which featured a record number of new COVID-19 infections from the highly transmissible Omicron variant.That good-news-bad-news mix could well typify the nature of incoming economic data in the weeks ahead as policymakers gear up to start reversing the extraordinary accommodation they put in place two years ago to shield the economy from the economic fallout of the pandemic.The U.S. central bank has all but said it will begin raising interest rates at its March 15-16 policy meeting to kick off a steady tightening of monetary policy meant to ensure inflation is brought under control. The pace of price increases has accelerated to multi-decade highs and at 5.8%, by the Fed’s preferred measure, is nearly three times the central bank’s 2% target. But data in the interim could influence how fast policymakers expect subsequent rate increases to be approved, and how firmly they are willing to lay out that path in their policy statement.The start of the year may leave room for debate, with some economists forecasting little to no economic growth for the first few months of the year with job growth dampened by the ongoing Omicron-driven outbreak.In an interview with Reuters Breakingviews, San Francisco Fed President Mary Daly said it was clear rates should rise, but that the Fed needed to look at a broad set of risks – including, for example, that support from federal spending will decline this year, and that overreacting could damage the recovery just as inflation is easing on its own. “Do we need to adjust the policy rate? Absolutely,” Daly said. But “you don’t want to overreact and ratchet rates too quickly … We are not trying to combat some viscous wage-price spiral. We are just recognizing the economy is getting itself to a self-sustaining level” and does not need the Fed’s help in the form of low market interest rates.’EVERY OPTION’ ON THE TABLE Inflation data to be released next week is expected to show consumer prices through January continued speeding ahead at an annual pace of more than 7% – a level more reminiscent of the high inflation era of the 1970s and early 1980s and enough to offset recent wage gains for many workers.But the monthly pace of change is expected to ease, and other recent inflation data have pointed in that direction as well.Along with actual pricing data, Fed officials pay close attention to measures of inflation expectations, or how households and businesses anticipate inflation will behave in the future. On Friday, the Fed updated an index that combines several measures of household and market expectations. It has risen this year, but was largely unchanged from the prior quarter even as inflation itself sped ahead – a sign the public had not lost faith in the Fed’s ability to defend its 2% target even after a period of faster-than-anticipated price increases.(Graphic: Fed inflation expectations index, https://graphics.reuters.com/USA-FED/EXPECTATIONS/zjvqkqgxmvx/chart.png) A separate Dallas Fed inflation measure that excludes items with the fastest and slowest price increases did increase slightly in December, from 2.9% to 3% on an annual basis, a sign that inflation was broadly affecting the economy.But the month-to-month rate fell sharply, and the share of goods seeing the fastest price increases fell as well.(Graphic: Faster price increases easing, https://graphics.reuters.com/USA-FED/ECONOMY/znvnejzxjpl/chart.png) Still, the Fed has positioned itself to raise rates, and if inflation trends don’t turn lower, central bank officials have insisted they will do what it takes, including raising rates at every meeting or in larger than the usual quarter-percentage-point increments.For now “every option is on the table for every meeting,” Atlanta Fed President Raphael Bostic told the Financial Times over the weekend. “If the data say that things have evolved in a way that a 50-basis-point move is required or (would) be appropriate, then I’m going to lean into that . … If moving in successive meetings makes sense, I’ll be comfortable with that.” More

HOUSTON (Reuters) – Exxon Mobil Corp (NYSE:XOM) on Monday disclosed a sweeping restructuring of its global operations that will combine its refining and chemicals businesses into one, and put its energy transition business on the same footing as its other operations. The broad restructuring marks its latest cost-cutting effort after activist investors seeking to boost returns and address the energy transition won three seats last spring on its board. Exxon vowed to cut $6 billion from operating costs by next year after suffering a historic, $22.4 billion loss in 2020.The changes were first considered around 2017, Exxon Senior Vice President Jack P. Williams told Reuters. Around that time, Exxon combined its fuels and lubricants division with supply and refining. “It’s an evolution,” said Williams. “We have been working on it now for a while.” Putting its low carbon business, which is seen as a response to the investor demand for lower emissions fuels and technology, on the same level as its other two businesses will give Exxon more flexibility to redirect investments as the company adjusts to the energy transition, Williams said.NO JOB CUTS ANTICIPATEDThe restructuring will not impact fourth quarter financial results, which the top U.S. producer reports on Tuesday. Exxon does not anticipate cutting any jobs as a result of the restructuring, said spokesperson Erin McGrath.Linda DuCharme, former president of Exxon Mobil Upstream Integrated Solutions and Upstream Business Development, has been appointed to lead Exxon’s Technology and Engineering unit, the company said. Karen McKee, former president of Exxon Chemical, will run the combined petrochemicals unit, called Exxon Mobil Production Solutions.Exxon’s upstream, or oil and gas production units, will be consolidated into a single organization, Exxon Mobil Upstream Company led by Liam Mallon, former president of Upstream Oil and Gas, the company said. “Aligning our businesses along market-focused value chains and centralizing service delivery, provides the flexibility to ensure our most capable resources are applied to the highest corporate priorities and positions us to deliver greater shareholder returns,” Chief Executive Officer Darren Woods said. PROFIT REBOUND Effective April 1, Exxon will be organized along three business lines: its upstream oil and gas production unit, the combined downstream refining and chemicals business, and its latest energy transition business, called Low Carbon Solutions, the company said in a filing.Past cost-cutting moves and higher oil prices are expected to deliver a quarterly per share profit of $1.93, up from an adjusted profit of three cents a share a year-ago. The restructuring will combine its technology operations, some of which had been assigned under the individual units. The new, single technology organization will be called Exxon Mobil Technology and Engineering, Exxon said.Exxon also will relocate its corporate headquarters from Irving, Texas, to its campus north of Houston. That move is expected to be completed in mid 2023. More

(Reuters) -The Federal Reserve can move sooner to start reducing its bond holdings than in the past and aggressive action to shrink the U.S. central bank’s portfolio could allow it to take a shallower path on interest rate increases, Kansas City Fed President Esther George said on Monday.The Fed signaled last week that it is likely to start raising interest rates when it meets in March, and officials are expected to begin offloading more than $8 trillion in bond holdings later this year. George said both actions, which the Fed is taking to remove the extraordinary support provided during the pandemic, are connected. “What we do on the balance sheet is likely to affect the path of policy rates and vice versa,” George said during an event organized by the Economic Club of Indiana. “For example, if we took more aggressive action on lowering, pulling down that balance sheet, it might allow for fewer interest rate increases.” George said a different approach in which the central bank pairs a “steep path” for rate increases with more modest reductions to the balance sheet could lead to more financial risks. She said such a scenario where the Fed is raising short-term interest rates while maintaining a large balance sheet “could flatten the yield curve.” That could, in turn, lead to “reach-for-yield behavior from long-duration investors.””All in all, it could be appropriate to move earlier on the balance sheet relative to the last tightening cycle,” George said. More

Inflation in Germany and Spain stayed higher than expected in January, increasing the pressure on the European Central Bank to explain whether it still thinks eurozone price growth will fall below its target later this year.Sharp increases in energy and food prices led to annual German inflation of 5.1 per cent in January, down from 5.7 per cent in December, according to the country’s harmonised index of consumer prices published on Monday. “A number of service providers — restaurants, hotels, hairdressers, craftsmen, etc — have raised their prices since the summer of 2021 to make up for lost turnover,” said Marco Wagner, senior economist at Commerzbank. “This category also includes package holidays.”This meant German inflation did not fall as much as expected by economists polled by Reuters, who had forecast a bigger drop to 4.7 per cent. Compared with the previous month, inflation was up 0.9 per cent, indicating underlying price pressures remain strong.Annual inflation in Spain also remained higher than expected at 6.1 per cent in January, down from 6.5 per cent in December.The ECB has a target of 2 per cent inflation for the eurozone and last month forecast price growth would fall back below this level by the fourth quarter of this year, justifying its decision to maintain a supportive monetary policy stance. Economists expect eurozone inflation to fall from a record high of 5 per cent in December to 4.4 per cent in January, when those figures are released on Wednesday. Some analysts have been raising their forecasts to reflect pressure on energy prices as a result of tensions between Russia and Ukraine and further disruption to supply chains caused by the pandemic.“In the short term risks to the inflation outlook are clearly tilted to the upside,” said Katharina Utermöhl, senior economist at Allianz. “Next to growing geopolitical tensions putting further upward pressure on energy prices, China’s zero-Covid policy may call for more severe lockdowns which in turn could fuel inflation by further postponing any easing in global supply chain stress.”The persistence of inflation is likely to dominate the next ECB governing council meeting on Thursday, even if most economists expect it to stick to its timetable for reducing asset purchases to a lower level this year, while keeping interest rates at negative levels.“For the ECB, today’s German headline inflation data will most likely lead to yet another upward revision of its inflation projections,” said Carsten Brzeski, head of macro research at ING. “Still, we see the ECB in no position to consider hiking interest rates any time soon.”Spiralling prices are a sensitive subject for Germans, whose approach to money is still haunted by the hyperinflation of the 1920s that wiped out most people’s savings.

German energy prices were boosted by the impact of higher gas prices on annual utility bills and the increase in a carbon tax by €5 to €30 a tonne at the start of this year, which more than offset a cut in a green energy tax on electricity. Core inflation in Germany, stripping out more volatile energy and food prices, fell from 3.7 per cent to 3 per cent.Part of the fall in prices was mechanical, because last year’s 1 percentage point boost to inflation from the reversal of a cut in sales tax has now dropped out of the year-on-year comparison.Spanish inflation of 6.1 per cent in January was down from 6.5 per cent in December, its highest year-on-year rise since 1992. Compared with the previous month, prices fell 0.9 per cent. But annual core inflation in the country rose from 2.1 to 2.4 per cent. More

The plane was overflying Belarus on its way from Athens to Vilnius when Belarus controllers ordered it to land in Minsk, citing a bomb threat. Once it was on the ground, a Belarusian dissident journalist on board the plane was arrested along with his female companion.Western powers responded with a wave of new sanctions and the United States this month charged four Belarus officials with aircraft piracy.A United Nations report published on Jan. 17 found that the reported bomb threat had been invented, without identifying the source of the hoax. It said Belarus had withheld crucial information from the U.N. fact-finding team.Ryanair Group head Michael O’Leary said the airline supported the U.S. action. He welcomed the U.N. report, though he said it “could have gone further”.”I think it is fundamental to the future of air travel that we do not have a repetition of what in my mind was the first case since the Chicago Convention (1944) of a state sponsored act of international piracy,” O’Leary told an investor call. “There should be no overflight of Belarus unless appropriate guarantees are obtained that this won’t recur.”Belarus has said it acted legally and in accordance with all international norms, and accused the West of using the episode to try to undermine President Alexander Lukashenko.The U.N.’s International Civil Aviation Organization’s (ICAO) council said on Monday that some members of its governing council expressed concern at gaps in information provided by Belarus and inconsistencies contained in the evidence available at the time of the investigation.The council asked the ICAO investigation team to continue trying to establish missing facts and to report any further findings, the agency said in a release. More

The eurozone economy grew 0.3 per cent in the final three months of last year, returning the bloc to its pre-pandemic level of output despite a sharp slowdown from the previous quarter as coronavirus infections hit record levels.Fourth-quarter growth in the 19-country bloc was in line with the expectations of economists polled by Reuters, as it decelerated from 2.2 per cent growth in the previous three-month period. Household spending continued to grow in many countries, albeit at a slower pace, while output was also boosted by businesses restocking inventories.Contractions of output in Germany and Austria were offset by quarter-on-quarter growth in countries including Spain, France and Italy, as the bloc showed increased resilience to the impact of the pandemic, which had plunged it into a record post-war recession in 2020.Eurostat said on Monday that its first estimate of full-year gross domestic product showed growth of 5.2 per cent in both the eurozone and the wider EU for 2021 — the region’s fastest expansion since 1971, but slower than the US economy’s 5.7 per cent growth last year. Economists calculated that the single currency area had rebounded to pre-pandemic levels of GDP.Eurozone growth is expected to remain sluggish in the first few months of this year before economic activity picks up again as coronavirus restrictions are loosened and supply chain bottlenecks ease.“Restrictions in many countries to counter the Omicron wave are set to be lifted soon, allowing the recovery to resume in the coming months,” said Jessica Hinds, senior Europe economist at Capital Economics.Italy’s economy continued to beat expectations with growth of 0.6 per cent in the fourth quarter, leading to full-year growth of 6.4 per cent, according to figures published on Monday. It was the fastest annual expansion since at least 1995, according to Reuters. The growth was attributed to higher domestic demand driving increased output in industry and services.

UniCredit’s headquarters in Milan. Italy’s economy has rebounded more sharply than many economists initially expected © Francesca Volpi/Bloomberg

The eurozone’s third-largest economy has rebounded more sharply than many economists initially expected from its decline of almost 9 per cent in 2020 and is now close to returning to pre-pandemic levels of GDP.“This confirms the country’s improved ability to recover from crisis compared to previous episodes,” said Loredana Maria Federico, chief Italian economist at UniCredit.While the latest wave of Covid-19 cases has led to tighter restrictions that dented consumer spending and prolonged supply chain bottlenecks that have squeezed manufacturing, overall economic activity in Europe has been less disrupted than in previous waves.The exception has been Germany, where the economy shrank 0.7 per cent in the fourth quarter, as a drop in consumer spending and supply constraints on manufacturing weighed on overall output.The lacklustre performance of Europe’s largest economy left it 1.5 per cent below pre-pandemic levels of GDP. In contrast, the US economy was 3.1 per cent above its pre-pandemic level in the fourth quarter, while France was 0.9 per cent above pre-crisis GDP levels.Spain achieved the fastest growth in the fourth quarter, expanding 2 per cent. But the country’s greater reliance on pandemic-hit tourism has weighed on its recovery and its GDP was still 4 per cent below pre-pandemic levels.“There are a lot of country-specific drivers, not only more pandemic-related effects such as the timing of restrictions and supply chain problems but probably also how direct the hit was from high electricity prices,” said Daniel Bergvall, an economist at SEB.Austria was one of the weakest eurozone economies in the fourth quarter, when its economy shrank 2.2 per cent after it imposed a lockdown to tackle soaring coronavirus infections. In contrast, Portugal had lighter curbs and its economy grew 1.6 per cent. More

A hawkish stance by the Fed has pushed up short-term rates, flattening the closely followed yield curve on U.S. Treasuries.Money managers and economists often view this shrinking of the gap between yields on shorter-term Treasuries and those maturing out years as a sign of worries over economic growth and uncertainty about monetary policy.The spread between the yield on 10- and 2-year U.S. Treasury debt [US2US10=TWEB] tightened to early November lows on Monday after hawkish comments by Atlanta Fed President Raphael Bostic.Standard Chartered (OTC:SCBFF)’s Steve Englander and John Davies, in the research note dated Friday, forecast four rate hikes from the Fed in a row, in March, May, June and July. That will mean pausing ahead of the U.S. midterm election “will not look partisan,” they said. Englander and Davies said they were raising their two-year yield forecast for the end of 2022 to 1.5% from 1.2% but said the market “will increasingly question the resilience of growth during Q2 and beyond, leading to a completely flat 2Y/10Y curve by mid-year.” Federal Reserve officials are monitoring the flattening of the U.S. Treasury yield curve, but don’t view its behavior as an “iron law” that predicts economic outcomes, Chair Jerome Powell said last week.Englander and Davies said that the flattening pressure may slow post July as they expect the Fed’s hiking to pause.”However, given Powell’s view that yield curve signals concerning slowdown/recession risks are not “iron clad”, we doubt that Fed messaging or actions can prevent the 2Y/10Y curve dipping into inverted territory by year-end,” they said. More