Aurelia Butler

WASHINGTON (Reuters) – The Federal Reserve is expected on Wednesday to announce that it is speeding up the end of its pandemic-era bond purchases and signal a turn to interest rate increases next year as a guard against surging inflation.The identification of the Omicron coronavirus variant last month has added a new level of uncertainty for U.S. central bank officials who, after steadily discounting the impact of the pandemic on the economy’s performance, must now assess how the new strain’s faster spread may influence consumers, businesses, and the path of growth and inflation.Private forecasters polled by Reuters still expect U.S. growth of nearly 4% next year, well above trend, and are aligned around expectations the Fed’s increased concern about inflation will cause it to pull the plug on the bond-buying program – originally set at $120 billion per month – in March and pencil in multiple rate increases for 2022. (Graphic: Fed vs. private GDP outlook, https://graphics.reuters.com/USA-FED/OUTLOOK/xegpbzyyqpq/chart.png) The Fed will issue a new policy statement along with updated economic projections following the end of its latest two-day meeting at 2 p.m. EST (1900 GMT). Fed Chair Jerome Powell will hold a news conference half an hour later.Despite the unknowns around Omicron, the U.S. unemployment and inflation rates have blown past the Fed’s most recent projections, issued in September, and policymakers now have to catch up with where the economy and markets seem to be heading. The policymakers’ new forecasts “will generally show lower projections for the unemployment rate and higher ones for inflation,” prompting quarter-percentage-point increases in the Fed’s short-term policy rate beginning in June, JPMorgan (NYSE:JPM) economist Michael Feroli wrote in a note ahead of the meeting. “We think it’s a close call between looking for two or three hikes in ’22, but think three is a little more likely,” Feroli wrote.Powell’s news conference will draw particular attention for how the newly renominated Annual U.S. inflation is currently running at more than double the Fed’s flexible 2% target Fed chief frames the policy decision, the risks, and the outlook for next year, and whether his tone suggests more of an elevated concern about inflation, or the potential impact of the Omicron variant.Either way there may be substantial change in the central bank’s policy statement. Powell hinted as much in recent testimony in Congress when he said it was “time to retire” the Fed’s reference to inflation as “transitory.”Instead of easing over 2021, as Fed officials expected, the pace of price increases has remained near levels not seen since the inflation scares of the late 1970s and early 1980s, and gone on long enough that it has begun to depress consumer sentiment, undermine wage increases, and draw fire from politicians in both major political parties.It has also arguably passed the test the Fed set in September of 2020 when it promised not to raise interest rates until inflation exceeded 2% and was on track to remain above 2% “for some time.” (Graphic: Inflation, on average, https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png) The personal consumption expenditures (PCE) price index, a key gauge of inflation for the Fed, rose more than 2% on a year-over-year basis in March and hit 5% in October, with no clear sign that the price-fueling mix of clogged global supply chains and strong U.S. demand would change anytime soon.’UNDER PRESSURE’Investors for months have expected the Fed would have to react with higher interest rates to keep prices stable, which is one of its two main objectives mandated by Congress.Policymakers’ main tool to do that is to raise borrowing costs, which can discourage consumers from buying big-ticket items like homes and cars, and also undercut asset values – further depressing demand, and prices, through a “wealth effect.”Investors broadly are expecting the Fed to raise its benchmark overnight interest rate, currently set at a near-zero level, by a total of 0.75 percentage points next year.The Fed’s other mandated goal is to maintain maximum employment, and the current policy statement pledges to keep interest rates steady “until labor market conditions have reached levels consistent” with it.With an unemployment rate of 4.2%, the U.S. economy may be close to that point. But the pandemic’s scars run deep and have not fully healed. The number of payroll jobs is about 4 million below the pre-pandemic peak of early 2020, and health, childcare and other concerns may still be keeping people from rejoining the labor force.While positioning the Fed to act if needed against inflation next year, Powell also may use his news conference on Wednesday to buy time for the job market and rebut the idea that the Fed is now on a firm path to rate hikes and tighter financial conditions.”The Fed is clearly under pressure to respond” to higher inflation, Jefferies (NYSE:JEF) economist Aneta Markowska wrote late last week. But it is likely to “gently push back” against the most aggressive rate-hike expectations and to tie its initial increase in borrowing costs to further progress on employment. More

WASHINGTON (Reuters) – The U.S. unemployment rate is coming down, inflation is rising, and the Federal Reserve is preparing for faster rate increases than thought likely earlier this year.The situation amounts to a real-time test of the new approach to monetary policy that the Fed adopted in August 2020. That framework was meant to prevent the Fed from reacting too swiftly to inflation fears and cutting short what it pledged would be a “broad and inclusive” employment recovery.The Fed’s meeting this week will give the clearest view yet of what that means in practice as policymakers show how their projections for interest rates respond to a year of realized inflation much higher and unemployment rates much lower than they anticipated.THE PRELUDEAfter the 2007-2009 financial crisis and recession, the U.S. economy entered what would become a historically long period of growth. It also showed evidence of fundamental change. The unemployment rate fell steadily, but counter to economic theory inflation never really budged. The Fed slowly raised interest rates. Some policymakers wonder if it was necessary.WHAT IS THE NEW APPROACH?Following a two-year review the Fed said it would try to capture more job gains by targeting average inflation instead of the single numerical target of 2%, committing to leave interest rates low for a time as inflation rose. It put that strategy into play with its current policy guidance, promising that rates would not rise until inflation was at 2%, was on target to exceed it for some time, and that maximum employment had been reached. The new strategy was adopted in the midst of the pandemic, with unemployment high, inflation weak, and an expectation that the economy would behave as before – with low unemployment and low inflation able to coexist. Instead the two have run in opposite directions, as they did in earlier decades when low unemployment rates were associated with fast price increases.WHAT IS GOING ON WITH INFLATION AND JOBS?Indeed the inflation rates experienced this year not only have been the fastest in decades; they have arguably been enough to satisfy the Fed’s average inflation test. The labor market has been a bit more ambiguous. The new framework referred to maximum employment as a “broad-based and inclusive goal that is not directly measurable,” language meant to flag that the Fed would not just pay attention to the national unemployment rate, but at things like labor force participation, wages, or the recovery of jobs among different demographic groups.From that perspective the Fed’s forward guidance has not been satisfied: There are not only fewer jobs than before the pandemic, fewer people are even looking for work, women’s participation in the job market remains depressed, and the unemployment rate for Blacks remains high. Yet at the same time, wages and other costs incurred by employers have risen, which may feed into future inflation.And at 4.2% the current unemployment rate is at a level that, in prior years, would have seen the Fed raising rates already.SO WHAT’S NEXT?What this all means will soon become clearer. The new framework was criticized by some for not being more specific about the levels of inflation that would be tolerated or the expectations for the job market. When the Fed updates its forecasts and economic outlook, it may finally show its hand. More

Tesla, the global EV leader, has pushed many young consumers and legacy automakers to shift focus to electric vehicles.In a column, the FT’s editor, Roula Khalaf, credited Musk for demonstrating that EVs could replace cars fueled by gasoline, and called him a revolutionary in the industry.”For a long time, the rest of the auto industry was basically calling Tesla and me fools and frauds,” the newspaper quoted Musk as saying in an interview.”They were saying electric cars wouldn’t work, you can’t achieve the range and performance. And even if you did that, nobody would buy them.”Musk is the world’s richest person and his company Tesla is worth about $1 trillion, making it more valuable than automakers Ford Motor (NYSE:F) and General Motors (NYSE:GM) combined. Over the last few weeks, Musk has sold nearly $13 billion worth of Tesla shares.U.S. Senate Democrats have demanded that stocks and tradeable assets of billionaires be taxed as majority of their wealth lies there.Earlier this week, Democratic U.S. Senator Elizabeth Warren took to Twitter (NYSE:TWTR) to say that Musk should pay taxes and stop “freeloading off everyone else” after Time magazine named him its “person of the year”. https:// “And if you opened your eyes for 2 seconds, you would realize I will pay more taxes than any American in history this year,” Musk responded.From hosting NBC sketch comedy show “Saturday Night Live” to dropping tweets on cryptocurrencies and meme stocks that have triggered massive movements in their value, Musk has dominated the headlines and amassed over 66 million followers on Twitter. More

Investing.com — The Federal Reserve is about to get serious. It’s expected to announce a faster phase-out of its bond purchases later, paving the way for an earlier start to a new rate hike cycle next year. The Bank of England is also expected to move this week after inflation in the UK surged in November. China’s economy sputters as more anecdotal news points to wider trouble in its property sector. And oil prices fall below $70 on fears that Omicron-variant Covid-19 will lead to more demand-sapping lockdowns. Here’s what you need to know in financial markets on Wednesday, 15th December.1. You-know-whatThere’s a central bank meeting going on that you may have heard about. It ends at 2 PM ET (1900 GMT) and its chairman comes out to talk about its conclusions and the outlook for next year at 2:30 PM.Market consensus suggests the Federal Reserve will look to wrap up its bond-buying by March, as implied by Chairman Jerome Powell’s testimony to Congress last week. That would pave the way for a first interest rate hike around the middle of the year, with time for one or two more by the end of 2022. As ever, the ‘dot-plot’ of policymakers’ expectations for rates over the next two years will be important.The meeting takes place against the backdrop of a 39-year high in consumer inflation and a decade high in producer price inflation, neither of which has showed much sign of slowing down in the last month.2. China wobbles againChina’s economy continues to sputter, against the backdrop of its ongoing real estate crisis and the arrival of Omicron-variant Covid-19 in the country.Investment in fixed assets, a data series dominated by the property sector, grew at its slowest in nearly two years in November, rising only 5.2%. More importantly perhaps, it was the sixth straight month that growth had been slower than forecast. Sentiment in the real estate sector has been shaken in the last two days as Shimao Group – widely seen as one of the industry’s stronger players – was forced to inject funds into one of its weaker units.Additionally, offshore bondholders of Kaisa are in talks to buy some of the group’s bad loans on the mainland in search of better access to information on how the restructuring process is being conducted.Industrial production in China rose slightly more than expected but retail sales growth fell short, again.3. Stocks flat ahead of Fed. Trump media company in focusU.S. stocks are predictably flat ahead of the open, with few people willing to take new positions ahead of the Fed meeting and press conference.By 6:20 AM ET, Dow Jones futures were up 15 points, essentially unchanged from the previous session’s close, as were S&P 500 futures. Nasdaq 100 futures fell another 0.2%. All three indicates had posted losses on Tuesday after U.S. producer price data reinforced expectations of Fed policy tightening.Stocks likely to be in focus later include Digital World Acquisition Corp (NASDAQ:DWAC), the SPAC which is merging with Donald Trump’s new media company. Trump Media earlier signed a partnership agreement with Canadian-based Rumble. Lennar (NYSE:LEN), REV Group (NYSE:REVG) and ABM (NYSE:ABM) are all due to report earnings before the open.4. UK CPI surge puts rate hike back on the cardsTraders flip-flopped yet again on their expectations for the Bank of England’s policy meeting on Thursday after inflation data for November showed the annual CPI surging 5.1%, well above forecast.  The Bank’s senior figures hadn’t expected it to hit 5% until April, when a hike in regulated household energy prices takes effect.As in the U.S., producer price inflation data also came in above forecasts. Short-term interest rate futures now price in a 70% probability of a 15 basis point rate hike on Thursday, which would be the first since the start of the pandemic by a G7 central bank.That all puts the BoE in an awkward position. Officials had indicated they would want to see how the spread of Omicron-variant Covid-19 hits the economy before pulling the trigger on rates. The UK’s health authorities suspect that Omicron is spreading through the population at an unprecedented rate, although there has been no noticeable surge in hospital admissions so far.5. Oil slumps as API, Omicron stoke demand fearsCrude oil prices fell sharply on fears that the spread of Omicron will force governments to clamp down harder on economic and social life, stifling demand just at a time when the global market is already tipping back into surplus.The U.S. government will release its weekly inventory data at 10:30 AM ET, after the American Petroleum Institute’s figures showed a smaller than expected drop in stockpiles for both crude and refined products.By 6:30 AM ET, U.S. crude futures were back below $70 a barrel at $69.62, down 1.6% on the day. Brent futures were down 1.4% at $72.67 a barrel.   More

Hello from Washington, where you join us for the final DC-based edition of this newsletter. It will continue in geographically shrunken form, of which you’ll hear more soon. In the meantime, our main piece today looks at a trend we’re starting to see trade folks furrow their brows over, and that’s the threat of a subsidy race that could become the new Airbus-Boeing. Charted waters looks at shipping prices on north Europe routes.The storm clouds brewing for the US over tradeJoe Biden is fast approaching his midterm election period and it’s safe to say that, so far, his trade policy has been less confrontational than his predecessor’s. But just as protectionist. The US Trade Representative’s office is rightly pleased that it has struck deals with Europe to suspend billions of dollars of tariffs on transatlantic trade. Those deals involve both the decades-long Airbus-Boeing dispute (now postponed), and a suspension of Trump’s controversial national security crusade on steel and aluminium. In that sense, we could say some protectionist policies have been paused. Neither of those disputes is close to over. The aircraft subsidies are the subject of an ongoing conversation, and on metals almost no work has been done to thrash out exactly how the two sides will make steel green. Plus, rather than a return to tariff-free trade, there are quotas. Regardless, the tariffs are gone for now. But on the horizon storm clouds are brewing. The first and most urgent problem is the threat to the US-Mexico-Canada trade deal that Biden’s electric vehicle tax credits pose. Canada has threatened to suspend parts of the agreement (specifically the parts about dairy quotas that it thinks the US likes and that it considers concessionary on its part) in retaliation for the tax credits. Ottawa has also threatened to impose tariffs on the US auto sector, and plans to publish a list of suggested further products to slap tariffs on soon.It’s worth pointing out that the US’s tax credit plan is still in an as-yet-unpassed bill, and could change in form. So far, there doesn’t appear to be any substantial effort on the Hill to alter it, despite intense lobbying from both Canadian and Mexican officials. Europe, too, has also expressed its displeasure at the proposal. EU trade chief Valdis Dombrovskis has complained that the proposals are not compliant with World Trade Organization rules.Another looming issue is the question of chip subsidies. So far, the US and EU are in agreement that subsidising their semiconductor industries is a good idea. The US is proposing investing billions of dollars into boosting its domestic chip manufacturing, and the EU is floating similar plans. The two sides say they are in touch with each other about how best to do this to avoid a subsidy race, which, as EU competition chief Margrethe Vestager points out to the FT, is “a waste of taxpayers’ money”. The subsidies in Europe would be “appropriate, proportionate and necessary” and in the US “a legal basis for providing subsidies is being established.” In Washington, however, European diplomats are starting to worry about this issue, with one lamenting to us that it had the potential to become “the new Airbus-Boeing”.And so what of the WTO? Well, the WTO would perhaps be a good place to discuss this. But the days of the US caring what is and what is not WTO-compliant may be gone. The US just blocked the appointment of an appellate body judge for something like the 48th time. USTR officials say they care about the WTO and reforming the WTO, and they say that they care about concluding the fisheries negotiations. But there are unlikely to be any fish left in the sea by the time trade diplomats in Geneva manage to reach consensus on this topic. Meanwhile, in Washington, Europeans are muttering about the new subsidy race.As Simon Lester, formerly of the Cato Institute think-tank and now of China Trade Monitor, a news website, points out on Twitter, the Biden administration appears to want greater scope for protectionist policies, while pushing back against regulations such as Europe’s fledgling Digital Markets Act, that it argues “disproportionately” affect US companies.In fact, it seems that any effort to regulate or tax US tech companies prompts Washington to accuse whichever government that happens to be trying to create its own sovereign laws or tax regime of unfair discrimination. (The US was broadly furious about other counties introducing digital services taxes, too). However, Washington itself wants to have free rein to subsidise and stimulate its own chosen industries (like electric vehicles or chips).Legacy issues like Airbus-Boeing and steel might have been swept under the rug when it comes to Europe. But the contradictions might eventually come to a head, and bigger problems — ones that threaten to challenge fundamentally the global trading rules — lie ahead as the US presses on with its new doctrine of self-reliance and secure supply chains.Charted watersYesterday’s Trade Secrets noted that, despite some quite dramatic falls in container shipping costs on the high-profile Far East to US West Coast route, travel on other arteries of world trade remains as expensive as it did a few months ago. Among those routes are two that involve North Europe. We’ve charted the price to transport a 40ft container on these arteries using figures from shipping data firm Xeneta and Compass Financial Technologies. We’re not sure exactly why they’re yet to display the same falls as those witnessed on the Far East to US West Coast routes. If you do, please do get in touch. Claire JonesTrade linksWashington hasn’t learned the real lesson of the China shock, according to this Bloomberg piece. Martin Sandbu has joined us in championing the efforts of the world’s makers in trying to match rampant demand for consumer durables. His piece — Shortages, what shortages? — is well worth a read. European gas prices are rising again on the back of concerns over Ukraine. Top Japanese apparel makers will shift (Nikkei, $) most production back home from China and Vietnam in the next three to five years because of pressures from a weaker yen, overseas labour costs and shipment troubles. Thailand targeted (Nikkei, $) around $30bn in food exports this year, but a shortage of migrant labour from Myanmar, Cambodia and Laos has pushed that goal out of reach. Aime Williams and Francesca Regalado More

Citing two sources briefed on the plans, the Financial Times said the United States would add eight Chinese firms, including the drone maker, DJI Technology Co Ltd, to an investment blacklist on Thursday. The U.S. commerce department is also set to place more than two dozen Chinese firms, some of them involved in biotechnology, on an “entity list” restricting exports to them by U.S. firms, the newspaper cited the sources as saying.The report hastened a sell-off in Chinese healthcare shares in afternoon trade, knocking 3.2% off a mainland index tracking the sector against a drop of 0.87% in the broader index.The impact was sharper still in Hong Kong, where the Hang Seng Healthcare Index was down 7.6% in late afternoon trade.Healthcare firms were already under pressure on Wednesday after Chinese biotech company BeiGene (NASDAQ:BGNE) Ltd plunged on its Shanghai debut, amid worries that some Chinese firms could be ordered to delist from the U.S. stock market.The Financial Times said the U.S. treasury department would put eight companies including DJI on its “Chinese military-industrial complex companies” blacklist because of their alleged involvement in surveillance of the Uyghur Muslim minority.U.S. investors are barred from taking stakes in companies on the list, which now comprises about 60 firms. A DJI spokesperson declined to comment on the report, but directed Reuters to the company’s statement when U.S. commerce department put it it on the “Entity List” a year ago for the same reasons. That step barred it from buying or using U.S. technology or components. At the time, DJI said it had done nothing to justify the move and would continue to sell products in the United States, where it has built up a large market. The U.S. Treasury did not immediately respond to a Reuters request for comment.In Beijing, responding to questions on the FT report, foreign ministry spokesman Zhao Lijian told a news briefing China was opposed to U.S. “suppression” of its companies and would pay close attention to how the situation developed. The new additions come just days after artificial intelligence start-up SenseTime Group was added to the Treasury list, forcing it to postpone its $767-million Hong Kong initial public offering (IPO).SenseTime said the accusations against it were unfounded.U.N. experts and rights groups estimate more than a million people, mainly Uyghurs and members of other Muslim minorities, have been detained in recent years in a vast system of camps in China’s far western region of Xinjiang.Some foreign lawmakers and parliaments have labelled the treatment of Uyghurs as genocide, citing evidence of forced sterilisations and deaths inside the camps. China denies this, saying Uyghur population growth exceeds the national average.Other companies to be added to the list, the FT said, are image-recognition software firm Megvii, supercomputer maker Dawning Information Industry, facial recognition specialist CloudWalk Technology, cyber security group Xiamen Meiya Pico, artificial intelligence company Yitu Technology and cloud computing firms Leon Technology and NetPosa Technologies. More