Economy

NEW YORK (Reuters) – U.S. stocks’ tumble this year is putting an increased focus on equity valuations, as investors assess whether recently discounted shares are worth buying in the face of a hawkish Federal Reserve and widespread geopolitical uncertainty.With the benchmark S&P 500 index down 13.5% year-to-date, valuations stand at their lowest levels in two years, putting the index’s forward price-to-earnings ratio at 17.9 times from 21.7 at the end of 2021, according to the latest data from Refinitiv Datastream.Although many investors tended to brush off elevated valuations during the market’s dynamic surge from its post-COVID-19 lows, they have been quick to punish companies viewed as overvalued this year, as the Fed rolls back easy money policies that had kept bond yields low and buoyed equities.While recently discounted valuations may boost stocks’ appeal to some bargain hunters, other investors believe equities may not be cheap enough, as the Fed signals it is ready to aggressively tighten monetary policy to fight inflation, bond yields surge, and geopolitical risks such as the war in Ukraine continue roiling markets.”Stocks are getting close to fair valuation … but they’re not quite there yet,” said J. Bryant Evans, portfolio manager at Cozad Asset Management in Champaign, Illinois. “If you take into account bond yields, inflation, what is going on with GDP and the broader economy, they’re not quite there yet.”Wild swings shook markets in the past week after the Fed delivered a widely expected 50 basis point rate increase and signaled similar moves for the meetings ahead as it tries to quell the highest annual inflation rates in 40 years. The index has declined for five straight weeks, its longest losing streak since mid-2011.More volatility could be in store if next week’s monthly consumer price index reading exceeds expectations, potentially bolstering the case for even more aggressive monetary policy tightening from the Fed.”There has … been a healthy reset in valuations and sentiment,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services, in a recent note to clients. “For stocks to move higher on a sustainable basis, investors will likely need to have greater confidence in the Fed’s ability to tame inflation without unduly hurting the economy.”Though valuations have come down, S&P 500’s forward P/E stands above its long-term average of 15.5 times earnings estimates. Graphic- U.S. stock market valuations: https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/znpnemgxyvl/chart.png Potentially burnishing stocks’ appeal, S&P 500 companies are expected to increase earnings by about 9% this year, according to Refinitiv data, as they wrap up a better-than-expected first-quarter reporting season.One likely factor is whether Treasuries extend a sell-off that has lifted the benchmark 10-year note yield, which moves inversely to prices, to its highest since late 2018.Higher yields in particular dull the allure of technology and other high-growth sectors, as their cash flows are often more weighted in the future and diminished when discounted at higher rates.The forward P/E for the S&P 500 technology sector has declined from 28.5 times to 21.4 so far this year, according to Refinitiv Datastream data as of Friday morning.”In terms of growth valuations, they have been hit the hardest and likely the most oversold,” said Art Hogan, chief market strategist at National Securities.But the sector continues to trade at a nearly 20% premium to the overall S&P 500, above the 15% premium it has averaged over the broader index over the past five years.If the 10-year yield hovers between 3% to 3.5%, after being a “fraction” of that level for a long period, “that is going to continue to be a weight on the P/E and therefore the discounting mechanism for the growth and technology space,” said John Lynch, chief investment officer for Comerica (NYSE:CMA) Wealth Management, which favors value over growth shares.”To a large extent, (the pressure from higher yields) has been baked in,” Lynch said. “But I don’t think it is going to go away. I think it is going to persist.” More

CGI Merchant Group had agreed to buy the rights of the hotel from the Trump Organization for $375 million in a deal reports have said was to be finalized in late April and could net Trump $100 million. Trump bought the rights to the property – located in the historic Old Post Office Building four blocks from the White House – from the federal government in 2013, before he ran for president and won the 2016 election. House Oversight and Reform Chair Carolyn Maloney and House Subcommittee on Government Operations Chair Gerald Connolly, in a letter to CGI Chief Executive Raoul Thomas, said the firm did not give the U.S. General Services Administration all of the investors’ identities. “Far from resolving the Committee’s grave concerns regarding this lease, the high sale price and lack of transparency surrounding the ultimate purchasers have heightened concerns that former President Trump will receive a final, significant windfall from a lease that he should have never retained while in office,” the two Democrats wrote.Trump never formally divested himself from his business during his term in the White House, although he said he handed over day-to-day operations to two of his sons. The hotel served as a gathering point for his supporters and some foreign government officials during his presidency, raising concerns over violated ethics laws and prompting legal fights. On Tuesday, Trump’s company settled one lawsuit brought by Washington, D.C.’s attorney general, alleging his inauguration committee had funneled excessive amounts of charitable funds to the hotel. The company denied any wrongdoing.That settlement has only increased the lawmakers’ concerns, they said, setting a May 20 deadline for CGI to respond. CGI, which has said it planned to operate the property as a Hilton-affiliated Waldorf Astoria hotel, could not be immediately reached for comment. The Trump Organization also could not be immediately reached. More

Macro hedge funds, which bet on macroeconomics trends, rose 5.49% in the quarter, according to a macro fund asset weighted index. HFR said results were driven by strategies that benefited from skyrocketing inflation, rising interest rates and the Russia-Ukraine conflict.In the first four months of 2022, macro hedge funds gained 13.37%, while the S&P 500 index declined almost 13%.The industry as a whole was up 4.22% in the year.”Hedge fund managers and investors have effectively adapted to the current fluid market paradigm defined by extreme volatility, massive dislocations, and tremendous uncertainty, demonstrating tactical flexibility and operating as liquidity providers through the volatility,” said Kenneth J. Heinz, President of HFR in a statement.At the other end of the spectrum, equity hedge funds lost 3.62% in April, but they still outperformed the S&P index, which was down 8.71% in the month. More

The Labor Department reported a gain of 428,000 jobs in April, along with a 5.5 percent increase in average hourly earnings from a year earlier.The U.S. economic rebound from the pandemic’s devastation held strong in April with another month of solid job growth.Employers added 428,000 jobs, matching the previous month, the Labor Department reported Friday, with the growth broad-based across every major industry.The unemployment rate remained 3.6 percent, just a touch above its level before the pandemic, when it was the lowest in half a century.The challenge of a highly competitive labor market for employers — a shortage of available workers — persisted as well. In fact, the report showed a decline of 363,000 in the labor force.The economy has regained nearly 95 percent of the 22 million jobs lost at the height of coronavirus-related lockdowns two years ago. But the labor supply has not kept up with a record wave of job openings as businesses expand to match consumers’ continued willingness to buy a variety of goods and services. There are now 1.9 job openings for every unemployed worker.The hiring scramble has driven up wages, and employers are largely passing on that expense, helping fuel inflation that Americans have cited as their leading economic concern. On that front, Friday’s report showed an easing in the acceleration of average hourly earnings, which increased 0.3 percent from the month before, after a 0.5 percent gain in March.President Biden pointed to the latest data as evidence of “the strongest job creation economy in modern times,” a message the White House is increasingly amplifying ahead of the congressional elections.The unemployment rate stayed under 4 percent in April.The share of people who have looked for work in the past four weeks or are temporarily laid off, which does not capture everyone who lost work because of the pandemic. More

Company officials said the terminations were the result of an internal review, while the fired managers saw it as a response to the recent union victory.After Amazon employees at a massive warehouse on Staten Island scored an upset union victory last month, it turned the union’s leaders into celebrities, sent shock waves through the broader labor movement and prompted politicians around the country to rally behind Amazon workers. Now it also appears to have created fallout within Amazon’s management ranks.On Thursday, Amazon informed more than half a dozen senior managers involved with the Staten Island warehouse that they were being fired, said four current and former employees with knowledge of the situation, who spoke on the condition of anonymity out of fear of retaliation.The firings, which occurred outside the company’s typical employee review cycle, were seen by the managers and other people who work at the facility as a response to the victory by the Amazon Labor Union, three of the people said. Workers at the warehouse voted by a wide margin to form the first union at the company in the United States, in one of the biggest victories for organized labor in at least a generation.Word of the shake-up spread through the warehouse on Thursday. Many of the managers had been responsible for carrying out the company’s response to the unionization effort. Several were veterans of the company, with more than six years of experience, according to their LinkedIn profiles.Workers who supported the union complained that the company’s health and safety protocols were too lax, particularly as they related to Covid-19 and repetitive strain injuries, and that the company pushed them too hard to meet performance targets, often at the expense of sufficient breaks. Many also said pay at the warehouse, which starts at over $18 per hour for full-time workers, was too low to live on in New York City.Understand the Unionization Efforts at AmazonBeating Amazon: A homegrown, low-budget push to unionize at a Staten Island warehouse led to a historic labor victory. (Workers at another nearby Amazon facility rejected joining a similar effort shortly after.)Retaliation: Weeks after the landmark win, Amazon fired several managers in Staten Island. Some see it as retaliation for their involvement in the unionization efforts.A New Playbook: The success of the Amazon union’s independent drive has organized labor asking whether it should take more of a back seat.Amazon’s Approach: The company has countered unionization efforts with mandatory “training” sessions that carry clear anti-union messages.An Amazon spokeswoman said the company had made the management changes after spending several weeks evaluating aspects of the “operations and leadership” at JFK8, which is the company’s name for the warehouse. “Part of our culture at Amazon is to continually improve, and we believe it’s important to take time to review whether or not we’re doing the best we could be for our team,” said Kelly Nantel, the spokeswoman.The managers were told they were being fired as part of an “organizational change,” two people said. One of the people said some of the managers were strong performers who recently received positive reviews.The Staten Island facility is Amazon’s only fulfillment center in New York City, and for a year current and former workers at the facility organized to form an upstart, independent union. The company is challenging the election, saying that the union’s unconventional tactics were coercive and that the National Labor Relations Board was biased in the union’s favor. And the union is working to maintain the pressure on Amazon so it will negotiate a contract.Christian Smalls, the president of the Amazon Labor Union, testified on Thursday before a Senate committee that was exploring whether companies that violate labor laws should be denied federal contracts. Mr. Smalls later attended a White House meeting with other labor organizers in which he directly asked President Biden to press Amazon to recognize his union.A White House spokeswoman said it was up to the National Labor Relations Board to certify the results of the recent election but affirmed that Mr. Biden had long supported collective bargaining and workers’ rights to unionize.Amazon has said that it invested $300 million on safety projects in 2021 alone and that it provides pay above the minimum wage with solid benefits like health care to full-time workers as soon as they join the company.More than 8,000 workers at the warehouse were eligible to vote, and the union made a point of reaching out to employees from different ethnic groups, including African Americans, Latinos and immigrants from Africa and Asia, as well as those of different political persuasions, from conservatives to progressives.Company officials and consultants held more than 20 mandatory meetings per day with employees in the run-up to the election, in which they sought to persuade workers not to support the union. The officials highlighted the amount of money that the union would collect from them and emphasized the uncertainty of collective bargaining, which they said could leave workers worse off.Labor experts say such claims can be misleading because it is highly unusual for workers to see their compensation fall as a result of the bargaining process.Roughly one month after the union victory at JFK8, Amazon workers at a smaller facility nearby voted against unionizing by a decisive margin.The votes came during what could be an inflection point for organized labor. While the rate of union membership reached its lowest point in decades last year (about 10 percent of U.S. workers) petitions to hold union elections were up more than 50 percent over the previous year during the six months ending in March, according to the National Labor Relations Board. The number of petitions is on pace to reach its highest point in at least a decade.Since December, workers at Starbucks have won initial union votes at more than 50 stores nationwide, while workers have organized or sought to organize at other companies that did not previously have unions, such as Apple and the outdoor apparel retailer REI.Grace Ashford More

Hiring in the manufacturing, transportation and health-care sectors helped the U.S. economy add more than 400,000 jobs in April.
Leisure and hospitality, the industry that saw the largest one-month pop in job gains, added 78,000 jobs during the first month of the second quarter.
“We’re seeing [strong numbers in] the manufacturing sector — we saw some great growth, we’re very happy about that,” Labor Secretary Marty Walsh told CNBC. “We saw some good growth in retail as well.”

Arrows pointing outwards

Strong hiring in the manufacturing, transportation and warehousing and health-care sectors during April helped the U.S. economy notch its 12th straight month of job gains of 400,000 or more.
The U.S. economy added 428,000 jobs last month, the Labor Department reported Friday, the same gain as in March that followed a jump of 714,000 in February and 504,000 in January.

Leisure and hospitality, the industry that saw the largest one-month pop in job gains, added 78,000 jobs during the first month of the second quarter.
Within that industry, restaurants and bars added 43,800 jobs, hotels and other lodging businesses tacked on 22,300 and performing arts and spectator sports businesses added 13,300.
Despite the long string of robust monthly job gains, however, employment in leisure and hospitality is still down by 1.4 million jobs, or 8.5%, since February 2020.
Manufacturers, another bright industry group in the April 2022 jobs report, added 55,000 jobs last month.
Government economists said the majority of manufacturers’ gains came from hiring at durable goods plants. Wood product producers added 3,600 positions, machinery makers tacked on 7,400 and businesses that craft transportation equipment — including motor vehicle parts — added 13,700 jobs.

Department of Labor Secretary Marty Walsh touted the past year’s healthy jobs figures and acknowledged manufacturers’ solid performance last month.
“We’re seeing [strong numbers in] the manufacturing sector — we saw some great growth, we’re very happy about that,” Walsh told CNBC’s “Squawk on the Street” Friday morning. “We saw some good growth in retail as well. Not just the online side, we saw it in the stores.”
Walsh’s boss, President Joe Biden, is visiting Cincinnati on Friday to promote advanced manufacturing and is expected to offer comments later in the day on the administration’s efforts to expand domestic production in the coming years.

Retailers, which market and sell goods to American consumers, added 29,200 jobs in April.
While retail employment statistics have been volatile in recent years due to the effects of the Covid-19 pandemic and government-imposed lockdowns, those figures are routinely susceptible to seasonal shopping trends. Stores tend to bulk up on staff in the fall and winter to prepare for the busy holiday season, and trim down payrolls in the spring and summer.
The Labor Department does attempt to control for those seasonal variations, but even with that consideration, retail’s gain of 29,200 represents the sector’s best April jobs performance since 2014.
Transportation and warehousing, an industry scrutinized for potential supply chain relief, also posted a solid month of job creation with a net gain of 52,000. The Labor Department said warehousing and storage facilities added 17,000 jobs, couriers and messengers rose by 15,000, truck transportation gained 13,000, and air transportation climbed 4,000.
Employment in transportation and warehousing is 674,000 above its February 2020 level, led by strong growth in warehousing and storage and in couriers and messengers, which have risen by 467,000 and 259,000, respectively, since Covid-19 reached U.S. shores.
The broad health and social services sector added 40,900 jobs to payrolls, thanks in large part to gains among ambulatory health-care workers, a broad definition that includes private doctors’ and dentists’ offices and other outpatient care facilities.
— CNBC’s Crystal Mercedes contributed reporting.
Correction: The hospital and leisure sector had the highest single-month jobs increase; an earlier version misstated the sector. The health and social services sector added 40,900 jobs to payrolls; an earlier version misstated that figure.

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(Reuters) – Two ex-Federal Reserve officials, now freed from having to set economic policy and be accountable for it, are warning the U.S. central bank will have to raise interest rates more than expected and the outcome could well be a recession – cautions neither voiced before leaving their posts a few months ago.The remarks this week from the Fed’s two most recent vice chairs – Richard Clarida, who until January served as one of Chair Jerome Powell’s top lieutenants for monetary policy formation and Randal Quarles, who oversaw banking regulation to the end of last year – rank among a small chorus of other former U.S. central bankers now offering up critiques of where Fed policy stands and is headed.Clarida, now returned to academia as an economics professor at Columbia University, said on Friday the Fed will need to raise interest rates well into “restrictive territory” to slow economic growth and curb inflation. Quarles, who has returned to the Utah-based investment firm he co-founded, chimed in earlier in the week that a recession was now “likely.”The dour views from the ranks of former officials come just as Powell has ramped up the central bank’s battle with inflation by raising interest rates a half percentage point and all but promising two more such rate hikes by July. The pace of policy tightening is designed to get overnight borrowing costs “expeditiously” to a neutral range of 2.25%-2.5% and in position to rise further if needed. Powell said he saw a “plausible path” to cooling inflation without creating an economic downturn.Clarida, speaking Friday to a conference at Stanford University’s Hoover Institution, said the Fed will need to raise rates to “at least” 3.5% if not higher to bring inflation back down to its 2% goal. “The Fed has the tools to meet this challenge, officials understand the stakes, and are determined to succeed,” said Clarida, whose role at the Fed gave him huge influence over policy but constrained him from departing in public much if at all from Powell’s view. “But the Fed’s instruments are blunt, the mission is complex, and difficult trade-offs lie ahead.”Quarles, who while at the Fed was more overtly hawkish than Clarida, was even sharper-tongued this week. “We would have been better served to start getting on top of it in September,” he told the Banking With Interest podcast, blaming the delay at least in part on President Joe Biden delaying until November the decision to renominate Powell for a second term as Fed chief.Now with inflation pressure intense, unemployment low, and demand far outpacing supply, the effect of rapid rate hikes “is likely to be a recession,” said Quarles, a Donald Trump appointee who left his post in December when he did not get Biden’s nod for a second term.Neither he nor Clarida, also a Trump appointee, called for sharp rate hikes before leaving the Fed. Bill Dudley, who ran the New York Fed until 2018, also says the Fed has been late to raise rates and that a recession will result. PAIN AHEADPowell, for his part, has acknowledged that engineering a soft landing for the economy will be challenging and that the higher borrowing costs that lie ahead will cause “some pain” for Americans already struggling with higher prices. “But, you know, the big pain is in not dealing … with inflation, and allowing it to become entrenched,” he said Wednesday.On Friday, Clarida said that as early as last summer he saw that inflation risks were “skewed decidedly to the upside.” If inflation, now at 6.6% by the Fed’s yardstick, is a year from now still running at 3%, “simple and compelling” arithmetic by a widely cited policy guide known as the “Taylor rule” means rates will need to rise to 4%, he said.Clarida made the remarks at a conference convened by Stanford’s John Taylor, the author of that rule. Several other economists speaking at the conference also made the case for a sharper set of rate hikes than the Fed is currently signaling.Two current Fed policymakers – Fed Governor Christopher Waller and St. Louis Fed President James Bullard – will also speak at Friday’s conference. Both have been pushing for faster rate hikes for months now. Taylor delivered his own paper arguing the Fed’s policy rate – which after this week’s rate hike is in the 0.75%-1% range – should be at least at 3% and possibly more than twice that to bring inflation back down to 2% this year.Powell has said he does not expect inflation to drop that fast, though rising rates should start to bring it down later this year. A “softish” landing will “not be easy, he said, but the economy is “very strong and well positioned to handle tighter monetary policy.”A Friday report showing U.S. job growth increased more than expected in April and the unemployment rate held steady at 3.6% provided some fresh evidence for that view. More

The surging dollar has prompted some analysts and investors to forecast a new period of “reverse currency wars” as many central banks abandon a longstanding preference for weaker exchange rates. The new dynamic marks a departure from the period of low inflation that followed the 2007-09 global financial crisis, when historically low interest rates and large-scale asset purchases — which were partly aimed at boosting growth through a weaker currency — sparked accusations that some economic policymakers were pursuing a currency war. But in the global burst of price growth that has followed the coronavirus pandemic, stoked even further by Russia’s invasion of Ukraine, the focus for central banks has shifted from encouraging growth to bringing down inflation.“We are now in a world where having a stronger currency and offsetting the forces driving inflation is something that policymakers actually welcome,” said Mark McCormick, head of foreign exchange strategy at TD Securities.The dollar hit its highest level against a basket of rival currencies in 20 years this week as traders respond to the Federal Reserve’s attempt to cool inflation with sharp rate rises. But where once central bankers outside the US might have embraced the rampaging dollar, now they feel shifts in exchange rates have added extra pressure to keep pace with the Fed, McCormick argues.

A weaker currency pushes up inflation by increasing the price of imported goods and services. According to analysts at Goldman Sachs, who have identified a new era of “reverse currency wars”, central banks in big developed economies need to raise interest rates on average by an extra 0.1 percentage points to offset a 1 per cent decline in their currencies.The euro touched a five-year low against the dollar of less than $1.05 last week, sparking renewed speculation that it could fall to parity with the US currency as the fallout from the Ukraine conflict holds back the eurozone’s economy. The 7 per cent decline so far this year has not gone unnoticed at the European Central Bank.Isabel Schnabel, an influential member of the ECB’s governing council, said in an interview this week that the central bank was “closely monitoring” the inflationary effects of a weaker euro, although she reiterated the mantra that the central bank does not target the exchange rate.Still, given their economies’ proximity to Ukraine and their greater reliance on energy imports, investors increasingly think central banks in Europe will struggle to keep up with the Fed. The pound slumped to a two-year low this week even after the Bank of England raised rates for its fourth meeting in a row, as it also warned that the UK is headed for a recession later in the year.Sterling weakness could begin to worry BoE policymakers, Goldman Sachs strategists warned in the run-up to the meeting. “At some point, the ‘reverse currency wars’ mentality could become more prevalent in the BoE’s mind, with currency weakness exacerbating an already bleak inflation outlook,” Goldman wrote in a note to clients.The Swiss National Bank, for so long one of the most active currency warriors, with its policy of not allowing the franc to appreciate too much, has also changed its tune. Andrea Maechler, a member of the SNB’s board, said this week that a strong franc has helped ward off inflation, which has risen in Switzerland this year but far less than in the neighbouring eurozone.The Bank of Japan has largely stood apart from the newfound aversion to a weaker currency, sticking with its ultra-loose monetary policy even as the yen takes a historic tumble. Even so, the speed of the yen’s decline has stirred increasing speculation that Japan’s finance ministry might step into markets to prop up the currency for the first time since 1998.

The strong dollar has also been creating problems in emerging market countries, particularly those with a significant amount of debt denominated in dollars. Even before this year’s run-up in the dollar, roughly 60 per cent of low-income countries were at risk of debt distress, according to the IMF. “The strong dollar is part of why you’re seeing very limited investment in emerging markets today. Because that is a big risk. The dollar liabilities in much of emerging markets today are sizeable, not just on the sovereign level, but also at the corporate level,” said Rick Rieder, chief investment officer for global fixed income, BlackRock.According to Karl Schamotta, chief market strategist at Corpay, such strains are the latest reminder that the dollar is “our currency, but it’s your problem”, in the words of former US Treasury secretary John Connally in the early 1970s. Given the dollar’s unique role at the heart of the global financial system, its strength makes it tougher for businesses and households to access finance in many economies outside the US.“As the dollar rises, we are seeing a tightening of global financial conditions,” Schamotta said. “The US continues to make the world’s weather.” More