Economy

Inflation in the U.S. is likely to be “far stickier” and could last a decade, according to Bill Smead, chief investment officer at Smead Capital Management.
Wall Street is gearing up for news on key inflation data later Tuesday as the Labor Department will release its January consumer price index.

U.S. inflation is likely to be “far stickier” and could last a decade, according to Bill Smead, chief investment officer at Smead Capital Management.
Wall Street is gearing up for key inflation data later Tuesday, when the Labor Department releases its January consumer price index. It is a widely followed inflation gauge that measures the cost for dozens of goods and services spanning the economy.

“The enthusiasm … right now is the hope that we’ll get a friendly Fed out of a soft landing, and we do not believe that is going to be the case,” Smead told CNBC’s “Streets Sign Asia.”
“We think the inflation is going to be far stickier and longer lasting — in fact, a decade because in the United States, we have incredibly favorable demographics.”
Earlier in February, the Federal Reserve raised its benchmark interest rate by a quarter percentage point and gave little indication it is nearing the end of this hiking cycle. 

Controlling inflation

Smead underlined the Fed will find it tough to tame inflation despite the recent rate hikes.   
“We have 92 million people between 22 and 42, and they’re all going to spend their money on necessities the next 10 years, whether the stock markets are good or bad,” said Smead.

“They’re just going to be living their life. The economy should be pretty good and the Fed’s going to have a hard time controlling inflation,” he added.

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For now, investors seem to be betting on a solid CPI print on Tuesday that shows inflation is cooling and that a pause or pivot in Fed rate hikes may be near.
On the flip side, analysts warned, a miss will likely indicate that the Fed will hike interest rates even more.
Economists are expecting that CPI will show a 0.4% increase in January, which would translate into 6.2% annual growth, according to Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.
Stock futures ticked lower Tuesday morning as investors looked ahead to the inflation data.
Futures tied to the Dow Jones Industrial Average slipped 25 points, or 0.07%. Meanwhile, S&P 500 futures dropped marginally, and Nasdaq-100 futures declined 0.12%
— CNBC’s Jeff Cox contributed to this report

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Consumer prices are expected to have climbed at a slower pace last month across the US economy, according to economists polled by Reuters, as the Federal Reserve looks for evidence that its interest rate rises are steep enough to keep taming inflation. The consumer price index, due to be released on Tuesday, is expected to show a year-on-year rate increase of 6.2 per cent in January compared to 6.5 per cent pace in December, according to the consensus forecast.Stripping out energy and food prices, the “core” CPI measure is expected to have risen at an annual rate of 5.5 per cent in January, also slightly below the 5.7 per cent rise the previous month.The January inflation data will offer vital guidance to investors, economists and US central bankers after an unexpectedly strong jobs report for last month stoked expectations that the Fed might have to be more aggressive in tightening monetary policy to cool the economy more effectively.The Fed has already lifted interest rates from near-zero to a target range of between 4.5 and 4.75 per cent over the past year. As inflation has eased since peaking last summer, the central bank has slowed the pace of its rate rises, from increases of 75 and 50 basis points in the second half of last year to 25 basis points last month.But Fed officials have continued to stress that their fight against inflation is far from complete, even as some economists and investors are predicting that they might soon pause the interest rate increases and could start cutting rates by the end of the year.“We are still far from achieving price stability and I expect that it will be necessary to further tighten monetary policy to bring inflation down towards our goal,” Michelle Bowman, a Fed governor, told a gathering of community bankers in Florida on Monday.

“The ongoing tightness in the labour market puts upward pressure on inflation, even if some components of inflation moderate due to improvements in supply-side factors. The longer high inflation persists, the more likely it is that households and businesses may come to expect higher inflation in the longer term,” Bowman said, adding: “Should that be the case, the FOMC’s job of lowering inflation would be even more challenging.” The enduring strength of the US labour market combined with a gradual easing of inflation has raised hopes that the American economy might experience a “soft” landing, avoiding a recession even while monetary policy is being tightened. But Fed officials have always cautioned that such an outcome is far from guaranteed. If inflation proves to be more stubborn than expected, the central bank would have to raise interest rates higher for a longer period of time to bring price pressures down to its average 2 per cent target. This in turn might lead to a larger hit to output and employment in the future.Economists and officials have been especially concerned that inflation in the service sector has been difficult to curb, compared to inflation for goods, which has eased more rapidly. More

President Joe Biden is set to name Lael Brainard, vice-chair of the US Federal Reserve, to be his top economic adviser, bringing the central bank’s second-in-command to the White House to serve as one of Washington’s top financial policymakers.Brainard will become the next director of the National Economic Council, the main White House job co-ordinating economic policy across the government, two people familiar with the matter said on Monday night. She will replace Brian Deese, who is departing the Biden administration after serving in the role for more than two years.The White House and the Fed declined to comment. Brainard’s departure marks a rather abrupt exit from the US central bank’s leadership for the former Treasury under-secretary for international affairs. Although she has been on the board of governors at the Fed since 2014, she has only been vice-chair since May 2022. Brainard’s move is part of a broader shake-up of Biden’s economic team in the wake of November’s midterm elections. The overhaul is also expected to involve the elevation of Jared Bernstein to the chair of the White House council of economic advisers, taking over from Cecilia Rouse. Janet Yellen, Treasury secretary, is expected to remain in her post.In her years at the Fed, Brainard has been known for her dovish approach to monetary policy and her tougher stance on financial regulation, supporting more rigorous capital requirements for banks. In a speech at the University of Chicago’s business school last month, Brainard said “inflation remains high” and policy “will need to be sufficiently restrictive for some time” to get it down to the Fed’s 2 per cent target. But she also expressed some confidence that the US might secure a “soft landing”, avoiding a recession — a view shared by the White House.“It remains possible that a continued moderation in aggregate demand could facilitate continued easing in the labour market and reduction in inflation without a significant loss of employment,” she said.Brainard has long been considered one of the most talented economic policymakers of her generation within the Democratic party. She had been considered a contender for Treasury secretary before Yellen was chosen and for chair of the US central bank before Biden decided to nominate Jay Powell to a second term. Biden’s decision to appoint Brainard to lead the NEC was first reported by Bloomberg News.

Progressive Democrats have been sceptical of Brainard in the past, particularly because she was seen as sympathetic to more open trade and engagement with China while she worked at the Treasury department under former president Barack Obama. However, they have largely supported her approach at the Fed.Brainard’s appointment comes at a political inflection point within the White House. With Republicans in control of the House of Representatives, Biden’s expansive economic legislative agenda is expected to grind to a halt. But Brainard will be in charge of managing the White House’s response to expected fiscal brinkmanship congressional Republicans over the debt ceiling, and may have to help negotiate an agreement with Congress to avoid a default on US debt. More

LONDON (Reuters) – The Bank of England will make its final increase to borrowing costs in the current cycle next month to combat double-digit inflation, according to a Reuters poll which showed the British economy is almost certainly entering a recession.One of the first major central banks to begin lifting interest rates after the worst of the COVID pandemic, the BoE has already added 390 basis points to the Bank Rate. The Feb. 9-13 poll showed it would deliver another 25-basis-point hike on March 23, taking the rate to 4.25%.”Our baseline case is that the MPC (Monetary Policy Committee) will increase the Bank Rate by a further 25 bps to 4.25% next month as an insurance policy against firmer inflation pressures stemming from the tight labour market,” said Philip Shaw, chief economist at Investec.The U.S. Federal Reserve and the European Central Bank are also close to winding down their policy tightening campaigns, but are a little further from the end than the BoE, separate Reuters polls found.The March median view for the BoE was held by around three-quarters of 49 respondents, 38, while eight said it was already done. Only three expected a more aggressive 50-basis-point move.Still, when asked about the risk to their terminal rate forecast, 11 of 15 respondents said it was that the Bank Rate ends higher than they expect.MPC member Jonathan Haskel said on Monday the BoE needed to be “really, really careful” about the risk of high inflation becoming embedded after saying last week he remained ready to “act forcefully” against persistent inflation.However, fellow MPC member Silvana Tenreyro – who voted against half-percentage-point hikes earlier this month and in December – said interest rates were already too high and she might consider voting for a cut in future meetings.Poll medians did not show a BoE cut until at least April 2024.Inflation eased in December to a 10.5% annual rate, but January’s reading, due on Wednesday, is expected to show it was still over five times the Bank’s 2% target at 10.3%.It will drift down but won’t be at or under that goal until the second quarter of next year, the poll showed. Inflation was expected to average 7.0% this year and 2.6% next.Alongside elevated borrowing costs, consumers are struggling with high energy and food costs. Nearly two-thirds of respondents to an additional question said it would be at least six months before the cost-of-living crisis eased significantly.RECESSIONThe BoE has had to raise interest rates even though the economy has struggled after a post-pandemic boost faltered amid the cost-of-living crisis. It narrowly avoided recession last quarter as it flatlined.The economy will contract 0.4% in each of the first and second quarters and then shrink 0.1% in the following one, exceeding the technical definition of recession, medians in the poll showed. It is forecast to eke out 0.1% growth in the October-December period.”We do still think that the impact of the real income squeeze, ‘bad inflation’ – food, energy and rents/mortgages – and the 390 bps of monetary tightening we have had in just over a year, will weigh on growth in H1 (first half of) 2023,” said Elizabeth Martins, an economist at HSBC. The economy will end this year 0.8% smaller than it started 2023, the poll showed, and then expand 0.8% next year.That is a bigger contraction than the 0.6% predicted by the International Monetary Fund last month when it said Britain was the only Group of Seven nation expected to shrink this year.Finance Minister Jeremy Hunt is due to announce measures he hopes will speed up growth in a budget statement on March 15.(For other stories from the Reuters global economic poll:) More

TOKYO (Reuters) -Japan’s government is expected on Tuesday to name academic Kazuo Ueda as its pick to become next central bank governor, a surprise choice that could heighten the chance of an end to its unpopular yield control policy.Ueda, a 71-year-old former Bank of Japan policy board member and an academic at Kyoritsu Women’s University, will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.Prime Minister Fumio Kishida’s government is expected to present its nomination to both houses of parliament on Tuesday.The expected appointment of Ueda, which was first reported by the Nikkei newspaper and confirmed by Reuters on Friday, came as a surprise to many investors who expected the job to go to a career central banker like deputy governor Masayoshi Amamiya.International markets have been closely watching Kishida’s choice of next BOJ governor for clues on how soon the bank could phase out its yield curve control (YCC) policy.The leadership transition marks a historical end to Kuroda’s decade-long monetary experiment that sought to shock the public out of a deflationary mindset, and could finally align Japan with other major economies toward higher interest rates.With inflation exceeding the BOJ’s 2% target, Ueda faces the delicate task of normalising its prolonged ultra-easy policy that has drawn increasing public criticism for distorting market function and crushing bank margins.Data released on Tuesday showed Japan’s economic rebound in the final quarter of last year was weaker than expected, underscoring a fragile recovery that is facing headwinds from slowing global growth.”Japan’s economic recovery will be only gradual. The public will remain dissatisfied with the high level of inflation, even if spring wage negotiations result in higher pay,” said Toru Suehiro, chief economist at Daiwa Securities.”For the new BOJ leadership, communication would be very difficult from the outset,” he said.The government is also set to nominate Ryozo Himino, former head of Japan’s banking watchdog, and BOJ executive Shinichi Uchida as deputy governors, sources have told Reuters.They will replace incumbents Amamiya and Masazumi Wakatabe, whose five-year terms end on March 19.The nominations need the approval of both chambers of the Diet, which is effectively a done deal since the ruling coalition holds solid majorities in both chambers.The governor and deputy governor nominees will testify at confirmation hearings to be held on Feb. 24 for the lower house, and Feb. 27 for the upper chamber.Inflation hit 4% in December, double the BOJ’s 2% target, pushing up bond yields and challenging its resolve to defend YCC, a policy that sets a 0.5% cap on the 10-year bond yield.With markets creaking under the BOJ’s heavy-handed intervention, many investors are betting the central bank will start hiking rates under Kuroda’s successor.In an opinion piece in the Nikkei last July, Ueda warned against prematurely raising rates in response to inflation driven mostly by cost-push factors.But he also wrote the BOJ must eventually consider how to exit its ultra-loose policy, pointing to the potential flaws of YCC such as the difficulty of maintaining the yield cap when inflation perks up. More

TOKYO (Reuters) – Japan’s economy averted recession but rebounded much less than expected in October-December as business investment slumped, a sign of the challenge the central bank faces in phasing out its massive stimulus programme.While private consumption is holding up against headwinds from rising living costs, uncertainties over the global economic outlook will weigh on Japan’s delayed recovery from the scars of the COVID-19 pandemic, analysts say.The world’s third-largest economy expanded an annualised 0.6% in the final quarter of last year after slumping a revised 1.0% in July-September, government data showed on Tuesday.The increase in gross domestic product (GDP) was much smaller than a median market forecast for a 2.0% rise, due to a downswing in capital expenditure and inventory.”With other advanced economies heading into recessions, we still expect net trade to drag Japan into a recession as well in the first half, especially since business investment is weakening faster than we had expected,” said Darren Tay, Japan economist at Capital Economics.Private consumption, which accounts for more than half of Japan’s GDP, rose 0.5% in the fourth quarter, matching a median market forecast.But capital expenditure fell 0.5%, more than market forecasts for a 0.2% decline, the data showed.External demand added 0.3 percentage point to growth, against a 0.4 point contribution projected by analysts.”From a negative growth in July-September, the rebound isn’t very impressive,” said Toru Suehiro, chief economist at Daiwa Securities.”We can expect consumption to pick up as service spending stabilises. But it’s difficult to project a strong recovery partly due to pressure from rising inflation,” he said.Japan has seen an increase in the number of overseas visitors since ending in October some of the world’s strictest border controls to prevent the spread of the COVID-19 pandemic.Policymakers hope a rebound in domestic consumption, driven by savings accumulated during the pandemic, will last long enough for wages to pick up and cushion the blow on households from rising food and fuel costs.With inflation exceeding the Bank of Japan’s 2% target, the outlook for the economy and wages will be key to how soon the central bank could phase out its massive stimulus programme. More

Tuesday’s survey from National Australia Bank (OTC:NABZY) Ltd (NAB) showed its index of business conditions had risen 5 points to +18 in January, well above its long-run average.The measure of confidence climbed 6 points to +6, led by gains in the wholesale and the transport and utilities industries.”The improvement in confidence suggest firms have a more optimistic outlook as concerns about global growth prospects ease, while strong conditions are also providing evidence that the economy is more resilient than previously expected,” said Alan Oster, NAB’s chief economist.The survey showed a notable 8-point pick-up in its sales index to a very high +28 in January, supported by historically low unemployment and rapid population growth.Measures of employment edged up 2 points to +10, while profitability rose 4 points to +17.The resilience of demand was one reason the Reserve Bank of Australia (RBA) lifted interest rates to a decade high of 3.35% last week and warned further increases would be necessary to contain inflationary pressures.The NAB survey showed labour costs in November to January had been 2.7% higher than in August-October, when they were up 2.1% from the previous three months. The latest rise is well down from the 4.6% peak rate seen in May-July.Purchase costs and retail prices also picked up, but again were well short of last year’s peaks.”From here, the pace of ongoing supply chain healing and strength of wage growth will be important in shaping how much further cost pressures ease, while the resilience of consumption will continue to be tested as higher rates are passed through to households,” said Oster. More

The Westpac-Melbourne Institute index of consumer sentiment slid 6.9% for February, erasing a 5.0% bounce the previous month. The index reading of 78.5 meant pessimists greatly outnumber optimists.The result was echoed by a weekly survey from ANZ which showed a steep 5.5% drop in its confidence index to the lowest reading since April 2020.Both found mortgage holders were particularly gloomy after the Reserve Bank of Australia (RBA) lifted its cash rate a quarter point to 3.35% on Feb. 7, and flagged at least two more hikes were likely.Westpac senior economist Matthew Hassan noted the survey straddled the decision and the index after the move dove to 74.8, compared to 83.5 beforehand.”The consumer sentiment survey continues to give a very clear warning that the pressures bearing down on the consumer are becoming intense,” said “While spending has held up relatively well to date, we expect an abrupt slowdown to show through in coming months.”For respondents with a mortgage, confidence dove 13.5% in February, to be down more than 30% on the year.The weight of rising mortgage payments saw the survey’s measure of family finances compared with a year ago tumble 8.0%, while the outlook for finances over the next 12 months fell 6.7%.The index of the economic outlook for the next 12 months dropped 7.7% and the outlook for the next five years eased 2.8%.Westpac’s measure of whether it was a good time to buy a major household item slid 10.1% in a warning sign for retailers. More