Aurelia Butler

WASHINGTON (Reuters) – The Federal Reserve plans to raise interest rates in March on the assumption the U.S. economy will largely steer clear of fallout from the Omicron variant of the coronavirus and keep growing at a healthy clip.What if it doesn’t?With financial markets fast adapting to expectations of an ever-more aggressive Fed battle against inflation, year-end data showed weaker-than-anticipated results for some of the inflation measures the U.S. central bank watches closely, a reminder of how uncertain its ultimate policy path remains.The numbers were still high, with the employment cost index, the broadest measure of labor costs, rising 4% on a year-on-year basis in the fourth quarter, the largest increase since 2001, and the personal consumption expenditures price index jumping 5.8% on a year-on-year basis in December, the biggest annual rise since 1982 and nearly triple the Fed’s 2% inflation target.But the pace of change from the previous periods fell, and even as investors and many analysts continued penciling in more and faster Fed rate increases this year, some added a footnote.The slowdown in employment cost growth, for example, was a “big step in the right direction” for Fed officials who expect price trends to ease on their own, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.Where Fed Chair Jerome Powell and other U.S. central bank officials have emphasized the risk that inflation may prove higher and require them to raise borrowing costs faster then expected, Shepherdson in recent forecasts sketched an opposing view: Of an economy that flatlines because of the coronavirus pandemic in the first three months of 2022, loses jobs in January and February, and produces inflation that is “falling sharply” by the second quarter, just as the Fed is presumably gearing up for its rate increases.That scenario, out of step with investors who expect five rate hikes this year and some forecasters who have gone as high as seven, shows the degree of uncertainty still in play around where the economy is heading and how the Fed will respond.’NO ROAD MAP’An interest rate hike at the Fed’s March 15-16 policy meeting is virtually assured at this point. But even the size of that increase is up in the air as some analysts expect the Fed, rather than the usual quarter-percentage-point rate hike, to opt for a larger half-percentage-point rise to tighten credit faster and demonstrate its seriousness in lowering inflation.Much, however, rides on how the economy, inflation, financial markets and the virus behave in coming weeks. Major U.S. stock indexes were trading higher on Friday, punctuating a week of heavy losses. Earlier in the day, the U.S. Commerce Department reported that consumer spending fell in December, weakness that may have continued into January given the massive outbreak of new coronavirus cases. Consumer sentiment continued to decline at the start of the year, hitting the lowest point in a decade, according to the University of Michigan’s closely watched gauge of American households’ sentiment. Survey director Richard Curtin said the combination of Omicron, high inflation, and the steady dose of news about future Fed rate hikes could trigger a consumer backlash – a possible blow to economic growth on top of what’s already coming through lowered government spending.”The danger is that consumers may overreact to these tiny nudges,” Curtin said.That could help with inflation, at least some of which has been driven by strong demand for goods during the pandemic, but the Fed may be treading a fine line between what’s needed to temper prices and what would be an overreach.”Panic within the Fed’s ranks has begun to set in. The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out,” wrote Diane Swonk, chief economist at Grant Thornton, a professional services firm. “There is no road map for doing this after inflation has surged.”Bond markets on Friday were showing some signs of caution. U.S. Treasury yields fell, and the gap between longer-term and shorter-term securities has narrowed – often taken as a loss of faith in future economic growth, falling inflation, or both.Either way, said Minneapolis Fed President Neel Kashkari, it’s a reason the U.S. central bank may not ultimately need to “slam on the brakes” with aggressive rate increases.Despite the seemingly hawkish positioning of the Fed, Kashkari told NPR on Friday that the aim is not to restrict the recovery but “let our foot off the accelerator just a little bit.” More

The April to November shortfall was C$73.70 billion ($57.75 billion) compared with a C$232.02 billion deficit over the same eight months in 2020/21, the data showed.”As expected, the government’s 2021–22 financial results show a marked improvement compared to the peak of the COVID-19 crisis,” the finance ministry said. “That said, they continue to reflect challenging economic conditions.”April-November revenues grew by 34.3%, led by higher tax revenues and other revenues. Program expenses fell 25.1%, largely on lower emergency transfers to individuals and businesses.On a monthly basis, Canada posted a deficit of C$1.44 billion, compared to a C$15.40 billion deficit in November 2020.($1 = 1.2763 Canadian dollars) More

CHICAGO (Reuters) – U.S. carriers on Friday canceled thousands of flights through the weekend in anticipation of a winter storm forecast to bring high winds and heavy snow across the Northeast and Mid-Atlantic. The National Weather Service said in an advisory that the Nor’easter would result in dangerous blizzards and make travel “nearly impossible.” Flight-tracking service FlightAware reported about 4,900 U.S. flights were canceled between Friday and Sunday. Delta Air Lines (NYSE:DAL) said it would suspend operations at LaGuardia and John F. Kennedy airports in New York, Newark Liberty airport in New Jersey and Logan airport in Boston from Saturday through Sunday morning. The Atlanta-based carrier canceled 1,290 flights from Friday to Sunday. Customers who would have traveled then were allowed to reschedule to different flights without extra cost.”Delta teams are focused on a safe and orderly restart of operations at these airports and others in the Northeast Sunday afternoon, depending on conditions,” the company said in a statement.Similarly, American Airlines (NASDAQ:AAL) canceled about 1,160 flights as it expects “significant” impact from the storm on its Northeast operations, especially at Logan airport. Affected passengers can rebook flights without change fees.New York-based JetBlue canceled about 500 flights through Sunday including half of its scheduled flights on Saturday.United Airlines has cut 21% of its Saturday flights, according to FlightAware. The storm has added to the challenges facing the airline industry, which is trying to recover from turbulence caused by the Omicron coronavirus variant. An increase in COVID-19 infections among employees has left carriers short staffed, forcing them to cancel flights.Southwest Airlines (NYSE:LUV) Co on Thursday said about 5,000 employees, or roughly 10% of its workforce, had contracted the virus in the first three weeks of January. The company has canceled more than 5,600 flights thus far this month, which is estimated to cost it $50 million in revenue. More

(Reuters) – Stephen Bullock eight months ago gave up on the idea of buying raw materials and parts only shortly before they were needed on his assembly line.Instead, he told his purchasing manager to “just buy everything you can,” and they could store the excess, said Bullock, chief executive of Power Curbers Companies, a maker of heavy equipment used to build concrete sidewalks and other infrastructure projects.Roughly two years into a pandemic that has snarled supply chains across the globe, U.S. companies are scrambling not just to produce enough to feed current demand – but to also refill inventory shelves. That buildup was key to the fourth quarter’s hefty 6.9% annualized growth in gross domestic product, with inventory investment contributing 4.9 percentage points, according to the U.S. Commerce Department.Spending shifted during the pandemic from services to goods, a boom that has strained supply chains and emptied warehouses. Excluding inventories, GDP grew at a more modest 1.9% rate in the latest period.This boom in demand, coupled with shortages, has fueled a wave of inflation that increased at a pace last year not seen in nearly 40 years. This set the stage for the Federal Reserve to now look towards raising interest rates in March.Bullock, whose company is based in Salisbury, North Carolina, said supply chain problems have continued to grow worse in recent months – not better.Ditching the “just-in-time” inventory model in favor of building up supply to buffer stocks only made sense, he said, referring to a system that aims to buy parts and materials shortly before they’re needed – to minimize the cost of holding supplies. Just-in-time has evolved into a standard worldwide in the era of globalized trade, one embraced across corporate America – until COVID-19’s emergence upended it. Since the pandemic struck, many businesses found the system left them stranded when orders that normally took weeks suddenly took months to arrive.Bullock’s goal now is to snap up materials like steel whenever he can. “We’ve had to get creative in where to put all of it,” he added. “We’re using all the nooks and crannies to house those incoming items.”Supply chain problems are weighing on the results of some companies. On Thursday, Tesla (NASDAQ:TSLA) Inc.’s shares slid after the electric car maker said it would delay releasing new vehicles until next year because of supply chain breaks that it said could last through this year. Earlier in the week, General Electric (NYSE:GE) Co. reported a decline in quarterly revenue amid supply chain shortages.Companies have grown creative to deal with the gaps in supplies.Rockwell Automation Inc (NYSE:ROK). Chief Executive Blake Moret, said his company has increased amount of “work in progress,” in order to keep workers assembling goods as they wait for shipments of scarce computer chips. The chips are added just before the product is sent out the door. Rockwell, which has benefited from a push to automate factories and warehouses during the pandemic, has “slightly” increased its inventory levels, said Moret, but not enough to have a meaningful impact on overall inventories. The Milwaukee-based company on Thursday raised its earnings forecast for its fiscal year as it reported a 40% jump in orders in its first quarter, compared to a year ago. “We’re in the early phase of multi-year economic expansion,” said Moret. More

Argentina has secured an outline deal with the IMF to restructure $44.5bn of debt from a record 2018 bailout, President Alberto Fernández said on Friday, removing the threat of an imminent clash with the lender as Buenos Aires tries to bolster its floundering economy.“We suffered a problem and now we have a solution,” Fernández said in an address to the nation. “We will be able to access new financing precisely because this agreement exists.”Both sides had been anxious to reach agreement. Argentina is facing inflation of more than 50 per cent a year, pressure on its exchange rate, dwindling reserves and billions of dollars of IMF repayments. The lender wanted to draw a line under the failure of its $57bn bailout, which veered off track after only a year with most of the money already disbursed. The announcement came after a tense week of talks over a $700m payment that Argentina owes the IMF, which is due later on Friday. Markets welcomed the news of the agreement in principle, with government bonds that mature in 2030 climbing as much as 3 cents on the dollar before paring that gain slightly to trade at 33.2 cents, the biggest single-day increase since the notes were issued in 2020.Martin Guzmán, finance minister and chief negotiator with the IMF, outlined details of the new programme to refinance $44.5bn of debt outstanding from the $57bn that Argentina originally borrowed in 2018 under the previous centre-right government of Mauricio Macri.Fernández’s Peronist government had been critical of the original IMF bailout, saying it financed capital flight and should never have been granted. It vowed never to accept a new agreement that would involve spending cuts, an objective Guzmán said he had achieved in the talks. Instead, Argentina agreed to reduce its primary fiscal deficit gradually from 2.5 per cent of gross domestic product this year to 0.9 per cent in 2024. Central bank money printing to finance the deficit would slow to 1 per cent of GDP this year, from 3.7 per cent in 2021, and then “close to zero” in 2024, the minister said. A full agreement with the Washington-based lender on a debt restructuring deal still needs to be approved by the IMF’s board of directors and ratified by Argentina’s congress, where the opposition made big gains in elections last year. IMF officials said in a separate statement on Friday that although an understanding “on key policies” had been reached, a final staff-level agreement is still pending. Fund staff would continue working with their counterparts in Buenos Aires “in coming weeks”, the statement read. Argentina had resisted IMF calls for faster cuts to spending and subsidies, with the leftwing government arguing that this would hurt an economic recovery. The fund, often vilified in Argentina for demanding austerity policies, was keen to show it could support social goals and help secure the recovery while helping the country address economic imbalances.

Guzmán said that under the new IMF programme, which will run for two and a half years as part of a 10-year financing plan, the state would play “a moderately expansionary role”. A planned move to positive real interest rates would help with plans to borrow more in pesos and deepen local capital markets. No spending cuts, including energy subsidies, would be made under the terms of the deal, according to a finance ministry statement. Argentina would have at least a four-and-a-half year grace period before debt repayments begin. Guzmán did not outline any targets for GDP growth, and the programme’s apparent reliance on growth rather than spending cuts to produce an improvement in public finances raises the question of whether it will prove more durable than Argentina’s 21 previous agreements with the fund.Alberto Ramos, chief Latin America economist at Goldman Sachs, said he would “reserve judgment until we are able to review the blueprint of the new programme [but] the first impression based on the stylised remarks from the authorities it seems the monetary/financial strategy is not particularly strong”. More

WASHINGTON (Reuters) – U.S. consumer spending fell in December, suggesting the economy lost speed heading into the new year amid snarled supply chains and raging COVID-19 infections, while annual inflation increased at a pace last seen nearly 40 years ago. Wage inflation is also building up amid an acute shortage of workers. Private industry wages rose strongly in the fourth quarter, posting their largest annual gain since the mid-1980s, other data showed on Friday. Mounting inflation pressures could force the Federal Reserve to aggressively hike interest rates, stifling growth, economists warned.”No one wants to go back to the 80s, but the economy is. Can stagflation from an overly aggressive Fed be next?” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed let its guard down and now they risk it all by saying they might have to move faster and higher on interest rates.”Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.6% last month after gaining 0.4% in November, the Commerce Department said. The decline was in line with economists’ expectations.The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The economy grew at a 6.9% annualized rate last quarter, accelerating from the July-September quarter’s 2.3% pace. That helped to boost growth in 2021 to 5.7%, the strongest since 1984. The economy contracted 3.4% in 2020.Consumer spending dropped in December likely as the result of Americans starting their holiday shopping in October for fear of empty shelves at stores because of rampant shortages of goods, including motor vehicles. Spending on goods fell 2.6%, led by automobiles. Outlays on services gained 0.5%, lifted by healthcare.Sky-rocketing coronavirus infections driven by the Omicron variant slowed the improvement in supply chains, with workers calling in sick. Worsening shortages kept inflation elevated last month. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components, rose 0.5% after a similar gain in November. The so-called core PCE price index accelerated 4.9% year-on-year in December, the biggest rise since September 1983. The core PCE price index increased 4.7% in the 12 months through November.Stocks on Wall Street were lower. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.WAGE PRESSURES GROWINGInflation is running way above the Fed’s flexible 2% target. The U.S. central bank on Wednesday said it was likely to raise interest rates in March.Bank of America (NYSE:BAC) Securities is predicting seven rate hikes this year. JPMorgan (NYSE:JPM) on Friday raised its forecast to five rate increases from four.”The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “There is no road map for doing this after inflation has surged.”Signs that inflation could remain stubbornly high were reinforced by a separate report from the Labor Department on Friday showing the Employment Cost Index, the broadest measure of labor costs, rose 1.0% in the fourth quarter after increasing 1.3% in the July-September period.Labor costs surged 4.0% on a year-on-year basis, the largest rise since the fourth quarter of 2001, after increasing 3.7% in the third quarter.The ECI is widely viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes.The labor market is viewed as being at or near maximum employment. There were 10.6 million job openings at the end of November. Wages and salaries rose 1.1% last quarter after increasing 1.5% in the third quarter. They were up 4.5% year-on-year, the largest increase since the second quarter of 1990. Private industry wages rose 1.2% and shot up 5.0% year-on-year, the most since the first quarter of 1984. Benefits for all workers rose 0.9% after a similar gain in the July-September quarter.But high inflation is cutting into wage gains, eroding consumers’ purchasing power. The rising cost of living and pandemic fatigue pushed consumer sentiment back to a 10-year low in January. The report from the Commerce Department showed consumer spending adjusted for inflation dropped 1.0% in December after slipping 0.2% in November. The decline in the so-called real consumer spending set consumption on a slower growth trajectory heading into the first quarter, which could pull overall economic growth lower. Consumer spending rose at a 3.3% rate last quarter. Growth forecasts for the first quarter are so far below a 2% rate, with some economists predicting an outright decline in output. Still, growth is expected to rebound by the second quarter as the current Omicron wave of infections subsides and supply constraints ease. Consumers are sitting on more than $2 trillion in excess savings accumulated during the pandemic. It is, however, unclear when and how much of these savings will be spent. Economists also note that the bulk of the savings are by higher income households, who tend to be savers and some of the money could go towards retirement. “To our minds, despite the strength of price and wage inflation, it is disappointingly weak real economic growth that will prevent the Fed from delivering a full-blown Ratemaggedon this year,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. More