Economy

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Economists and investors are braced for aggressive Federal Reserve interest rate increases to continue beyond September after an unexpected jump in monthly inflation reignited fears over the US central bank’s grip on persistent price pressures.US consumer price growth accelerated once again in August, defying expectations for a 0.1 per cent monthly decline, as a steep slide in energy prices failed to offset rising costs elsewhere. Meanwhile “core” inflation, which strips out volatile items such as energy and food, registered an alarming 0.6 per cent increase for the month.“To call this a disappointment would be an understatement,” said David Rosenberg, chief economist and president of Rosenberg Research. “All we’re left with is the view that the [Federal Open Market Committee] hawks so far continue to have the story right and they are in charge.” He added: “Whatever the recession odds were before CPI, even if that’s not your base-case scenario, those probabilities have taken a significant leap forward.”Most economists now expect the FOMC to implement a third-consecutive 0.75 percentage point rate rise at the very least at its meeting later this month, in a move that would lift the federal funds rate to a target range of 3 per cent to 3.25 per cent.But on Tuesday, traders in fed funds futures contracts also raised the odds of a full percentage point increase in September to roughly 30 per cent, according to CME Group.

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Stocks plummeted as a result, with the S&P 500 down 4.3 per cent in its worst trading day of the year. The Nasdaq Composite dropped by more than 5 per cent. Yields on short-dated US government bonds, which rise as prices fall and are highly sensitive to changes in the policy outlook, also surged. More likely, however, is that the Fed chooses instead to extend its series of 0.75 percentage point rate rises beyond this month and maintain interest rates at a level that restrains economic activity for longer.“This [CPI] number is more about December than it is about anything else,” said Tim Duy, chief US economist at SGH Macro Advisors. “We’re not seeing enough of the results of monetary tightening showing up in the economy to think that the Fed’s job is anywhere near done.”Futures markets now point to the benchmark policy rate rising to above 4 per cent by year-end, before peaking at about 4.3 per cent in March 2023.

“The more likely outcome here is that we get big hikes for longer,” said Jonathan Millar, a former Fed economist now at Barclays.However, economists’ primary concern is that expectations of future inflation could spiral out of control, setting off a feedback loop whereby workers demand higher wages and businesses are forced to continue raising prices, leading to higher overall inflation.Diana Amoa, chief investment officer at Kirkoswald, warned that outcome is becoming more plausible the longer inflation remains elevated.While the jump in inflation figures comes as a blow to the Fed, it vindicates officials’ decision to set a high bar for reconsidering their approach to monetary policy — not least because they have been wrongfooted by price rises in the past.Fed governor Christopher Waller vowed last week not to repeat previous mistakes, pointing to a temporary dip in inflation last summer that went on to become the worst problem the central bank has seen in four decades.

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“The consequences of being fooled by a temporary softening in inflation could be even greater now if another misjudgment damages the Fed’s credibility,” he said. “So, until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy.”More specifically, Roberto Perli, a former Fed staffer who is head of public policy at Piper Sandler, said monthly inflation figures will need to fall to a level that amounts to a less than 3 per cent annualised pace on a sustained basis. Monthly core CPI is currently annualising at 6.4 per cent.“We’re just not even remotely close to what the Fed wants to see,” said Perli. “The more reports like this we get, the farther out the possible pause or pivot is going to go.” More

SYDNEY (Reuters) – Asian shares tumbled, the dollar held firm and the U.S. yield curve was deeply inverted on Wednesday, as a white-hot U.S. inflation report dashed hopes for a peak in inflation and fuelled bets that interest rates may have to be raised higher and for longer. U.S. Labor Department data showed on Tuesday the headline Consumer Price Index gained 0.1% on a monthly basis versus expectations for a 0.1% decline. In particular, core inflation, stripping out volatile food and energy prices, doubled to 0.6%.Wall Street saw its steepest fall in two years, the safe-haven dollar posted its biggest jump since early 2020, and two-year Treasury yields, which rise with traders’ expectations of higher Fed fund rates, jumped to the highest level in 15 years. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3% in early Asia trade on Wednesday. Resources-heavy Australia plunged 2.8%, while Japan’s Nikkei tumbled 2.7%. Both S&P 500 futures and Nasdaq futures rose 0.1%, after a heavy sell-off. The Dow Jones Industrial Average plunged 3.94%, the S&P 500 lost 4.2%, and the Nasdaq Composite dropped 5.16%. “Markets have reacted violently to what I would consider to be a modest miss in U.S. CPI. Stocks and bonds were smoked, taken to the principal’s office for a good old-fashioned, old-school pre-woke thrashing,” said Scott Rundell, chief investment officer at Mutual Limited. “Futures have stabilised, so we might see a dead-cat bounce tonight.”Financial markets now have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the FOMC’s policy meeting next week, with a 33% probability of a super-sized, full-percentage-point increase to the Fed funds target rate, according to CME’s FedWatch tool.”With another 75bp hike more than fully priced into the market following the CPI report, there is no reason for the Fed not to deliver another super-sized move,” said Kevin Cummins (NYSE:CMI), chief U.S. Economist at NatWest Markets. “We now expect the FOMC to follow up July’s large 75bps rate increase with a similar 75bps move in November (up from our earlier 25bps call) and another 50bps in December to 4.25-4.50% (up from our earlier 25bps call).”In the currency markets, the U.S. dollar held firm against a basket of major currencies at 109.9, after jumping 1.4% overnight on the surprisingly strong U.S. inflation report.It hovered close to its 24-year peak against the rate-sensitive Japanese yen at 144.57 yen. The yen has been a victim of the dovish monetary stance from the Bank of Japan, in contrast with rate hikes elsewhere. The two-year U.S. Treasury yield scaled a new 15-year high of 3.8040% on Friday, as the curve gap with the benchmark ten-year yields hovering around 34 basis points, compared with 16 bps a week ago.The yield curve inversion is usually treated as a warning of recession. The yield on 10-year Treasury notes rose to 3.4448% compared with its U.S. close of 3.423% on Tuesday. Oil prices recovered some ground on Friday, after falling in the previous session. U.S. crude settled up 0.4% at $87.63 per barrel and Brent settled at $93.44, up 0.3% on the day.Gold was slightly higher. Spot gold was traded at $1701.7526 per ounce. [GOL/] More

TOKYO (Reuters) – The dollar climbed close to a 24-year peak against the yen on Wednesday amid a jump in U.S. yields after hotter-than-expected inflation boosted bets for even more aggressive monetary tightening by the Federal Reserve next week.The dollar rose as high as 144.965 yen in the Asian session, taking it close to last Wednesday’s high of 144.99, a level not seen since August 1998, before last trading little changed at 144.56.Overnight, the currency pair, which is extremely sensitive to rate differentials, surged 1.26% as 10-year Treasury yields climbed to a three-month high following an unexpected rise in the U.S. consumer price index (CPI) for August.”This has really shattered the illusion … that inflation had peaked and was coming down,” Ray Attrill, head of currency strategy at National Australia Bank (OTC:NABZY), said in a podcast. “Hence markets have decided that next week’s Fed decision is not between 50 and 75 (basis point increase), it’s now between 75 and 100.”Money markets currently price 37% odds for a full percentage-point hike on Sept. 21, versus a 63% probability of another 75 basis point move. Nomura’s economists also said they now believe a 100 basis-point rate hike is the most likely outcome.”Markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” they wrote in a note.The dollar index, which measures the currency against six major peers including the yen, euro and sterling, was little changed at 109.750, after surging 1.44% overnight, its biggest one-day percentage gain since March 2020.The euro edged up 0.11% to $0.9981, clawing back a little of Tuesday’s 1.52% tumble. Sterling rose 0.17% to $1.151, but after a 1.61% plunge overnight.”The dollar is screaming overvaluation, but in order to see that as correct, you’re going to need some sort of catalyst for a cyclical downturn in the dollar, and these latest developments have challenged that,” NAB’s Attrill said.The risk-sensitive Aussie dollar rose 0.25% to $0.6750, although that jump paled in comparison with its precipitous 2.26% slide overnight.Leading cryptocurrency bitcoin lost another 0.21% to $20,191.00, following a 9.93% decline on Tuesday. More

Rather than fuel, it was food, shelter and medical services that drove costs higher in August, slapping a costly tax on those least able to afford it.
The food at home index, a good proxy for grocery prices, has increased 13.5% over the past year, the largest such rise since March 1979.
For medical care services, the monthly increase of 0.8% was the fastest monthly gain since October 2019. Veterinary care was up 10% from a year ago.

A person shops in a supermarket as inflation affected consumer prices in New York City, June 10, 2022.
Andrew Kelly | Reuters

For the better part of a year, the inflation narrative among many economists and policymakers was that it was essentially a food and fuel problem. Once supply chains eased and gas prices abated, the thinking went, that would help lower food costs and in turn ease price pressures across the economy.
August’s consumer price index numbers, however, tested that narrative severely, with broadening increases indicating now that inflation could be more persistent and entrenched than previously thought.

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CPI excluding food and energy prices — so-called core inflation — rose 0.6% for the month, double the Dow Jones estimate, bringing year-over-year cost-of-living increases up 6.3%. Including food and energy, the index rose 0.1% monthly and a robust 8.3% on a 12-month basis.

At least as important, the source of the increase wasn’t gasoline, which tumbled 10.6% for the month. While the summertime decline in energy prices has helped temper headline inflation numbers, it hasn’t been able to squelch fears that inflation will remain a problem for some time.

The broadening of inflation

Rather than fuel, it was food, shelter and medical services that drove costs higher in August, slapping a costly tax on those least able to afford it and raising important questions about where inflation goes from here.
“The core inflation numbers were hot across the board. The breadth of the strong price increases, from new vehicles to medical care services to rent growth, everything was up strongly,” said Mark Zandi, chief economist at Moody’s Analytics. “That was the most disconcerting aspect of the report.”
Indeed, new vehicle prices and medical care services both increased 0.8% for the month. Shelter costs, which include rents and various other housing-related expenses, make up nearly a third of the CPI weighting and climbed 0.7% for the month.

Food costs also have been nettlesome.
The food at home index, a good proxy for grocery prices, has increased 13.5% over the past year, the largest such rise since March 1979. Prices continued their meteoric climb for items such as eggs and bread, further straining household budgets.
For medical care services, the monthly increase of 0.8% is the fastest monthly gain since October 2019. Veterinary costs rose 0.9% on the month and were up 10% over the past year.
“Even things like apparel prices, which often decline, were up a little bit [0.2%]. My view is that with these lower oil prices, they stick and assuming they don’t go back up, that will see a broad moderation of inflation,” Zandi said. “I have not changed my forecast for inflation to get back to [the Federal Reserve’s 2% target] by early 2024, but I’d say I hold that forecast with less conviction.”

On the positive side, prices came down again for things such as airline tickets, coffee and fruit. A survey released earlier this week by the New York Fed showed consumers are growing less fearful about inflation, though they still expect the rate to be 5.7% a year from now. There also are signs that supply chain pressures are easing, which should be at least disinflationary.

Higher oil possible

But about three-quarters of the CPI remained above 4% in year-over-year inflation, reflecting a longer-term trend that has refuted the idea of “transitory” inflation that the White House and the Fed had been pushing.
And energy prices staying low is no given.
The U.S. and other G-7 nations say they intend to slap price controls on Russian oil exports starting Dec. 5, possibly inviting retaliation that could see late-year price increases.
“Should Moscow cut off all natural gas and oil exports to the European Union, United States and United Kingdom, then it is highly probable that oil prices will retest the highs set in June and cause the average price of regular gas to move well back above the current $3.70 per gallon,” said Joseph Brusuelas, chief economist at RSM.
Brusuelas added that even with housing in a slump and possible recession, he thinks price drops there probably won’t feed through, as housing has “a good year or so to go before the data in that critical ecosystem improves.”
With so much inflation still in the pipeline, the big economic question is how far the Fed will go with interest rate increases. Markets are betting the central bank raises benchmark rates by at least 0.75 percentage point next week, which would take the fed funds rate to its highest level since early 2007.
“Two percent represents price stability. It’s their goal. But how do they get there without breaking something,” said Quincy Krosby, chief equity strategist at LPL Financial. “The Fed isn’t finished. The path to 2% is going to be difficult. Overall, we should start to see inflation continue to inch lower. But at what point do they stop?”

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TOKYO (Reuters) – Japan’s top currency diplomat Masato Kanda warned about the yen’s significant weakening overnight following U.S. inflation data, saying he was “concerned” about the currency moves. “We are monitoring yen moves with a sense of urgency,” Kanda, Japan’s vice finance minister for international affairs, told reporters. “We will respond appropriately to currency moves without ruling out any options.”The dollar jumped against the yen as well as euro and other currencies on Tuesday after stronger-than-expected U.S. inflation data suggested the Federal Reserve may need to stay aggressive in raising interest rates.The dollar was last trading at around 144.44.The yen has lost about 20% in value versus the dollar since the start of this year.The Japanese currency hit a fresh 24-year low just shy of 145 yen last week, fuelling worries on higher living costs, prompting policymakers to jawbone investors against yen-selling.However, many market players say Japanese policymakers have few effective tools to correct the weak yen, which is seen as being caused by the diverging monetary policy between Japan and the United States.While the U.S. Federal Reserve is raising interest rates to fight inflation, the Bank of Japan has stuck to powerful monetary easing to support a fragile economy. More

TOKYO (Reuters) – Business confidence of Japanese manufacturers retreated in September from a seven-month high, while service firms’ sentiment fell to a five-month low, as unyielding cost pressures hit the corporate sector, the Reuters Tankan poll showed.While Japan’s annual consumer inflation remains far modest than global peers at about 2.5%, wholesale inflation has hovered at a near double-digit pace, squeezing profit margins for companies facing inflation-wary clientele and consumers. The yen’s recent plunge to a 24-year low has amplified the pain of higher import costs for domestic businesses, although the weaker unit benefits some exporters, according to the surveyed firms in the world’s third-largest economy.”We see vigorous demands, but raw material and fuel costs are rising faster than the pace of our price hike,” said a manager at a glass manufacturer in the Aug. 31-Sept. 9 poll, which tracks the Bank of Japan’s (BOJ) closely followed “Tankan” quarterly survey.The Reuters Tankan manufacturers’ sentiment index fell to 10 in September from 13 last month. The service-sector index slipped to 11 from 19 last month, marking the lowest level since April.The situation may remain unchanged in the next three months, manufacturers said, while service companies’ outlook was slightly better in the poll of 495 big- and mid-sized companies, of which 252 responded.(For a detailed table of the results, click)Among manufacturers, metal, electric machinery, oil refinery and ceramics sectors took the biggest hit in the September poll, with their sub-indexes posting double-digit decreases.”Uncertainties stemming from the situation in Russia and Ukraine, along with rising raw material prices, have made our clients cautious about their capital expenditure plans,” said a machinery maker manager.Meanwhile, the sub-index of Japan’s staple automobile industry improved to the highest since March, and that of textiles and paper sectors marked a double-digit growth.”Demand is recovering since Japan, following Europe and North America, shifted its COVID handling policy to one without curbs,” a paper company manager said, yet adding, “worrisome factors such as China’s urban lockdowns and risks of power crunch are lingering.”The impact of a weaker yen, which has lost about 20% against U.S. dollar this year and triggered policymakers’ strong verbal warnings this month, was mixed across sectors.In the poll, companies mainly dealing in domestic customers such as a food manufacturers, construction firms and wholesalers expressed concerns over the rising costs fanned by a softer currency. Still, export-reliant companies, including machinery makers and shipping companies, took comfort in a weaker yen as it increases their market competitiveness and boosts sales. In between, “the ongoing weak yen is positive for sales but negative for raw material costs, so it’s a back-and-forth situation,” a machinery firm respondent said.Among non-manufacturers, some said Japan’s high COVID-19 cases have discouraged consumers to resume face-to-face activities, in spite of the absence of government-imposed restrictions except for ongoing border controls.”The situation is mostly no different from when there were curbs,” said a service firm manager.On the three-month forward outlook, manufacturers expected no change overall to their mood at 10 in December, whereas services firms said their sentiment would improve 3 points to 14, the poll showed.The BOJ is set to release its next quarterly tankan survey results on Oct. 3. More

OAKLAND, Calif. (Reuters) -Alphabet Inc’s Google (NASDAQ:GOOGL) must face all but one antitrust allegation about its online advertising business brought in a lawsuit by attorneys general for Texas and 16 other states or territories, a federal judge ruled on Tuesday.Google won its motion to dismiss an allegation that a cooperation agreement it struck with Meta Platforms’ Facebook (NASDAQ:META) in 2018 was an unlawful restraint of trade, with U.S. District Judge P. Kevin Castel saying the companies had valid business reasons for the deal. Google failed to convince Castel to dismiss three other counts related to its market power, though the judge found that some underlying claims by the states lacked merit.Spokespeople for Texas’ attorney general’s office and Google did not immediately respond to requests for comment.The antitrust case is one of several against Google and other big tech companies that could go to trial over the next couple of years. More