Economy

(Reuters) – Federal Reserve Chair Jerome Powell won high marks from Wall Street as he dialed up expectations late last year for a more hawkish policy stance to quell rising inflation, a survey by the New York Federal Reserve published Thursday showed. The report card is included in the New York Fed’s quarterly survey of primary dealers who assess the U.S. central bank’s communication with markets and the public, using a scale of one, for “ineffective,” to five, for “effective.”The Powell Fed received an average score of 4.08 in the Jan. 12-18 survey released on Thursday. That is up from 3.75 in late October, the last time the Fed was graded on its messaging skills.In the intervening period, Powell shepherded an effort to radically reset policy expectations, from a view that the Fed would not even begin raising rates until after mid-2022 to what many economists now expect will be a string of hikes beginning next month, quickly followed by a reduction in its $9 trillion balance sheet.The shift is evident in the survey itself, with dealers seeing the Fed beginning to trim its balance sheet sometime between July and September, more than a year sooner than the survey showed two months earlier.Overall, the Fed under Powell has received better communications grades than under previous chairs. It is the only Fed to have received any above-4 average mark since the surveys were first published in 2011. GRAPHIC: What Wall Street thinks of the Fed’s messaging – https://graphics.reuters.com/USA-FED/POWELL/lbpgnwkodvq/chart.png “Most dealers noted that FOMC participants were in general clear or consistent in their communications on the policy outlook,” the survey published Thursday said, referring to the Federal Open Market Committee, the panel of central bankers headed by Powell that sets U.S. interest rates.”Several dealers suggested that communications on the outlook for balance sheet policy were less clear.”Powell likely faces an even tougher communications test in coming months, as investors struggle to figure out how quickly the Fed will raise rates and shrink its balance sheet to slow the fastest inflation in 40 years. Investors have been particularly focused on whether the Fed will start the coming round of rate hikes at half a percentage point or a more typical quarter of a percent. Dueling views from policymakers have roiled markets that investors use to place bets on or hedge against interest rate moves. St. Louis Fed President James Bullard has called for a full percentage point of rate hikes by June, while San Francisco Fed President Mary Daly has signaled a gentler approach.Powell has not spoken publicly since immediately after the Fed’s January policy-setting meeting.”Powell has been out of the limelight in recent weeks and not providing the markets any guidance on this point,” wrote SGH Macro Advisors’ Tim Duy.It will be up to Powell’s messaging to guide expectations for March and beyond, he added. More

How well did you keep up with the news this week? Take our quiz.Joe Biden has warned that Russia is on the brink of invading Ukraine within “several days”, saying the US believes the Kremlin is engaged in “a false flag operation to have an excuse to go in”. The US president spoke as Kyiv and Moscow blamed each other for clashes in Ukraine’s eastern Donbas region — incidents the west fears will be used as a pretext for a co-ordinated Russian military campaign. Russia reiterated its threat to take “measures of a military-technical nature” after it complained that the US had “twisted” draft proposals Moscow put forward to address its concerns about European security. Speaking at the White House, Biden offered a bleak assessment of the situation, noting there was a “very high risk” of a Russian invasion. “Every indication we have is they’re prepared to go into Ukraine, attack Ukraine,” he said. “My sense is it will happen in the next several days.”Markets briefing: Wall Street and European stocks sank on Thursday as the US said Russia was on the brink of invading Ukraine.Rachman Review podcast: Gideon Rachman talks to Charles Grant, head of the Centre for European Reform, about the impact of the Russian threat on US ties with Europe, and on Nato and the EU.FT Magazine: A 1946 telegram predicts much of Russia’s 21st-century foreign policyThanks for reading FirstFT Asia. Do you have any feedback on today’s newsletter? Share your thoughts with us at [email protected] — Emily Five more stories in the news1. Trump must testify in New York investigation Former US president Donald Trump and two of his adult children will be required to testify under oath in a civil investigation by the New York attorney-general into their family business, a judge has ruled.

Donald Trump, centre, with two of his children, Donald Jr and Ivanka. In a January court filing, New York’s attorney-general said her office had uncovered “significant evidence” of fraud committed by the family-owned business © AFP via Getty Images

2. Elon Musk and Tesla accuse SEC of ‘harassment campaign’ Tesla has accused the Securities and Exchange Commission of going “beyond the pale” and harassing its chief executive Elon Musk over his compliance with a 2018 agreement on his use of social media, the latest salvo in a lengthy dispute between Musk and the US stock market regulator. 3. GFG routed transactions through Gupta’s Romanian bank Steel tycoon Sanjeev Gupta has turned to an obscure bank he owns in Romania to process transactions, as criminal probes draw scrutiny on his troubled metals empire in the wake of his main lender Greensill Capital’s collapse.4. Sequoia earmarks $500mn for crypto push The firm, which is one of Silicon Valley’s most influential venture capital groups, announced that it had set aside between $500mn and $600mn for a new fund that would primarily invest in cryptocurrency tokens traded on third-party exchanges5. Climate ETF on brink of failure months after UN summit launch The MSCI Global Climate Select exchange, a UN-backed green investment fund, is on the brink of failure three months after its launch during the Glasgow COP26 climate summit because institutions including big banks never delivered expected seed funding. Thanks to those who voted in yesterday’s poll. Fifty-eight per cent of respondents said they would vote against Tim Cook’s $99mn pay and bonus package. Coronavirus digestStandard Chartered’s chief executive has warned that Hong Kong will struggle to retain its dominant position as Asia’s top financial centre the longer that China persists with its strict “zero-Covid” policy. Athletes grappling with the nerves of elite-level competition must also contend with an array of strict coronavirus restrictions at China’s first Winter Olympics.The chief economist of the European Central Bank said eurozone inflation looks unlikely to drop below its 2 per cent target in the next two years.Workers are returning to UK offices in their greatest numbers since the start of the pandemic.Opinion: The world will be a more dangerous place if G20 finance ministers downgrade the importance of pandemic and health response financing, writes Gordon Brown, former UK prime minister.The day aheadSingapore budget statement The city-state is expected to announce tax increases on Friday when finance minister Lawrence Wong unveils the new budget. (Bloomberg) Munich Security Conference The two-day meeting, which begins today, will be attended by several western allies as well as Volodymyr Zelensky, Ukrainian president.Vladimir Putin holds talks with Alexander Lukashenko The Belarusian president is expected to visit Moscow to meet his Russian counterpart. Lukashenko said on Thursday that Belarus would host “nuclear weapons” if threatened by the west. (Euronews) What else we’re reading and listening to Cost of Beijing Games spiral as China tries to project rising status The country has spent at least Rmb56bn ($8.8bn) to host the Winter Olympics, with the cost to retrofit or build a dozen new venues almost double the original budget, despite a pledge to ensure the Games would be “economical”.What it would take for Japan to get a national pay rise For those entering the Japanese workforce this year, their entire lives have been spent with three things stuck at zero: inflation, interest rates and the chances of the shunto “spring offensive” of wage demands being anything other than a disappointment. Can unions change employers’ minds?Go deeper: Explore global inflation forecasts with our inflation tracker.

Can Jay Powell build consensus at a divided Federal Reserve? As the Federal Reserve prepares to unwind unprecedented monetary support in the face of surging inflation, divisions have emerged among its policymakers over how — and how quickly — to withdraw the stimulus that has been in place for nearly two years.Boris Johnson’s Tories are facing a crisis of direction The Conservative party is facing two crises. First and most obvious is the one around Boris Johnson’s leadership. But there is a second, related, and deeper problem. It is also facing a crisis of purpose, writes Robert Shrimsley.Inside Peloton’s epic run of bungled calls and bad luck It was a darling with investors and customers. But as the home fitness company was soaring to a peak valuation of nearly $50bn in late 2020, we now know that it was about to endure a series of tribulations that would involve the chief executive ceding his position and laying off three in 10 employees.

Peloton was forced to recall products and face an activist investor’s ire over profligate spending as Wall Street turned on it for missing forecast after forecast

FilmSteven Soderbergh’s smart thriller Kimi, Netflix documentary Downfall: The Case Against Boeing and animated refugee story Flee are some of our six films to watch this week — reviewed by Danny Leigh and Leslie Felperin. More

U.S. President Joe Biden said there was every indication Russia was planning to invade Ukraine in the next few days and was preparing a pretext to justify it, after Ukrainian forces and pro-Moscow rebels traded fire in eastern Ukraine. [.N] The Dow Jones Industrial Average fell 622.24 points, or 1.78%, to 34,312.03, the S&P 500 lost 94.75 points, or 2.12%, to 4,380.26 and the Nasdaq Composite dropped 407.38 points, or 2.88%, to 13,716.72.The yield on the benchmark U.S. 10-year Treasury note fell more than 7 basis points as investors bought U.S. government debt, considered among the most secure assets. Gold, another traditional safe-haven, went up 1.6%, having topped $1,900 an ounce for the first time since June. COMMENTS FROM MARKET PROFESSIONALS:MICHAEL JAMES, MANAGING DIRECTOR, EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES“There’s a lot of nervousness out there and as we approach the weekend nothing’s been settled between Russia and Ukraine.””The continued weakness, especially in the growth names, is indicative of elevated nervousness and sellers continuing to swamp buyers in just about every stock.”PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK“It’s obviously all about the Ukraine-Russia situation. There seems to be solid evidence on the part of the West that Russia has not really pulled out of the Ukraine but has increased troops along the border.”“The market is basically under pressure due to the geopolitical situation.”“The Fed is taking a back seat at the moment.”PHIL ORLANDO, CHIEF EQUITY STRATEGIST, FEDERATED HERMES, NEW YORK”You look at the history of this country and our adversaries love to test us during periods of leadership transition and it could very well end ugly, we don’t think it will, but it certainly could.” “Based upon the timing of what is going on with the Federal Reserve, what is going on with inflation, what is going on with the geopolitical risk, we felt the first two to three quarters of the year were going to be very choppy as the market digests that.” JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON”Safe havens are outperforming as today’s geopolitical development dampened hopes for a diplomatic deal to avert military action around Ukraine.” More

Benefits from easing COVID-19 Delta infections were short-lived for Shake Shack (NYSE:SHAK) as the Omicron wave that soon followed dissuaded customers from venturing out, infected staff and set back the recovery of urban-centric restaurants.”Drivers of our business such as office returns, events, travelers and the general gathering of people that contribute to Shake Shack’s best results (turned) downward,” Chief Executive Officer Randy Garutti said during an earnings call.Shake Shack forecast first-quarter revenue of $196 million to $201.4 million, compared with analysts’ average estimate of $210.9 million, according to Refinitiv IBES.”We saw a more acute impact on SHAK sales from Omicron than its more geographically diversified peers … expectations were just too optimistic and underestimated the Omicron impact,” M Science analyst Matthew Goodman said.Rising paper and food expenses as well as labor costs have also put a squeeze on Shake Shack’s margins. Credit Suisse (SIX:CSGN) analysts noted the company’s margin forecast was also below consensus estimates.To protect its margins, Shake Shack will jack up prices in March and increase its third-party delivery menu prices, Garutti said. The company in October raised prices by 3% to 3.5%.Nearly every U.S. restaurant, including Chipotle Mexican Grill (NYSE:CMG) and McDonald’s (NYSE:MCD), has also raised prices.In the fourth quarter ended Dec. 29, same-store sales in Shake Shack’s urban restaurants, which account for over half of its topline, declined 4% as many city dwellers moved to suburbs during the pandemic.However, that helped comparable sales at suburban restaurants gain 9%.Shake Shack also pointed to a sales improvement in recent days, with monthly comparable sales through Feb. 15 jumping 13%, versus a 2% rise last month. More

NEW YORK (Reuters) -Wall Street’s biggest banks sounded a warning over the year ahead on Thursday, citing high inflation, credit concerns, asset price depreciation and companies postponing deals due to market uncertainty.U.S. banks reported a mixed bag of fourth quarter earnings last month as trading revenue fell after the Federal Reserve scaled back its asset purchases. They are now grappling with high inflation and the likelihood of multiple rate hikes.Several top executives commented on market conditions at the Credit Suisse (SIX:CSGN) Financial Services Forum in Florida.Bank of America (NYSE:BAC) is concerned enough about inflation to stress test its portfolio for the possibility that Fed policymakers are unable to control it and prevent the country going into recession, Chief Executive Brian Moynihan said. “We have to run those scenarios,” he said. “What will hurt the industry generally will be if they have to create a recession. And that’s not their goal for sure. They’ll hopefully do a great job handling it. We stress test that and we’re fine.”Goldman Sachs (NYSE:GS)’ Chief Executive David Solomon warned that rampant inflation could be a headwind to growth.”We’re moving from an environment of very easy money and below trend inflation to an environment of tighter money and above trend inflation. The economic environment is different and there will be consequences to that,” he said. Solomon added that “everybody is used to asset appreciation and we might have a period of time where there’s less asset appreciation.”Mike Santomassimo, chief financial officer at Wells Fargo (NYSE:WFC) & Co, the fourth-largest U.S. bank, noted that credit spreads had been widening and “that’s an area to watch to see if there are any cracks that start to emerge”. High inflation and expectations of more aggressive rate hikes from the Fed have whipsawed markets this year, sending the S&P 500 down 7% year-to-date while bond yields have jumped and the yield curve flattened. Bank shares declined Thursday with the S&P500 banking index down 3%. The S&P 500 was down 2%. Morgan Stanley (NYSE:MS) Chief Financial Officer Sharon Yeshaya said the bank had seen “a lot of uncertainty in the marketplace over the past couple of weeks” leading to companies putting off transactions. “We have seen some of the pipelines, which are still healthy, being pushed out,” she said. “At this point it doesn’t feel like the first quarter of 2022 is going to be the same as the first quarter of 2021.”Trading and investment banking activity had slowed since 2021 but was still healthy, Solomon said.Bank of America’s Moynihan took a similar tone, saying the bank’s capital markets business “is down” so far in 2022, even though it continues to see a strong pipeline of customer activity.Wells’ Santomassimo noted that while the bank’s consumer and real estate portfolios continue to perform, there had been “a little bit of noise” in auto loans.However, he said that rising rates would help the bank’s ultimate goal to reach a 15% return on tangible equity. When interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest they can earn by investing.”The question will be where rates go and then what impact that has on the economy and the environment we’re in,” Santomassimo said. More

A labor shortage that began as businesses reopened from pandemic lockdowns is helping to push up pay. The Fed is watching carefully.Amazon, Bank of America and Chipotle are among a spate of companies raising wages this year as they compete for workers in a labor market with more open positions than unemployed job seekers.But that positive development for workers could morph into a challenge for the Federal Reserve if climbing wages help to keep inflation high, prompting employees to ask for even more money and generating an upward spiral.So far, many economists think such a situation can be kept at bay. But the Fed is closely monitoring inflation and pay data to assess the risk, because the consequences if wages and prices begin to drive each other steadily higher could be serious, requiring a response from the central bank that could be economically painful.The Fed is already poised to raise interest rates in March in an attempt to begin cooling off the economy as inflation runs at its fastest pace in 40 years. But if it needed to restrain a self-perpetuating burst in wages and prices, officials might decide to adjust policy more drastically. Higher interest rates could abruptly hit the brakes on lending and spending, potentially sending the United States into recession and foiling central bankers’ hopes of guiding growth gently toward a more sustainable path.“I think we’re much more likely to have something messier than a magical soft landing,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “The wage evolutions are going to be the thing to look at.”Wages are already rising sharply. Pay for restaurant servers and hotel workers began to increase notably in 2021 as companies, reopening after lockdown, struggled to rehire people quickly. Now a wide array of industries are giving raises: The government’s latest employment report showed pay accelerating sharply for education and health workers, manufacturers, and professional and business services.Average hourly earnings jumped 5.7 percent in the year through January, a full percentage point more than economists had forecast.Earnings calls are replete with chief executives explaining that they are increasing pay to attract and retain talent. Unions have won pay bargaining fights. And the White House regularly celebrates signs that power in the work force seems to have shifted toward employees and away from employers.For the most part, that’s good news for labor. But economists have increasingly warned that the confluence of economic trends shaping up now — high inflation, a sense among consumers that prices might stay high for a while and a strong labor market that has handed workers bargaining power — could set the stage for a situation in which wage growth and prices feed off each other.“The combination of very high inflation, hot wage growth and high short-term inflation expectations means that concerns about falling into a wage-price spiral deserve to be taken seriously,” Goldman Sachs economists wrote in a note last week.That would be a big shift. America has not experienced a wage-price spiral since the 1970s and early 1980s, when rapid inflation and skyrocketing wages seemed to perpetuate each other. The Fed lifted interest rates to double digits and caused a painful recession to bring prices under control. Both wage growth and inflation have been slow in the decades since — until now.But even if wages and prices are both rising now, it is not clear that they are egging each other on yet, which is a crucial distinction. In fact, labor market experts point out three big reasons to doubt that a wage-price spiral will happen today.Chief among them: Productivity growth looks strong. If each individual worker can churn out more goods and services, companies should be able to pay more without hurting their profit margins and leading them to pass along the higher costs. Nick Bunker, an economist at the Indeed Hiring Lab, said recent productivity data was an encouraging sign but not a definitive one.“It’s really hard to observe in real time,” he said of the data, noting that the numbers jump around a lot. “I think it’s something to keep an eye on.”It is also unclear just how much wage bargaining power employees have, even with employers eager to hire. Wage growth appears to have been falling behind price increases for many income groups in recent months, suggesting that workers aren’t managing to persuade their companies to compensate them fully for rising costs. Unionization is much lower than in the 1970s, which could leave workers with fewer tools to bargain up pay.If that begins to crimp consumers’ ability to buy new couches and cars, it could cause demand to moderate, naturally restraining inflation.And the tie between wages and prices has been tenuous in recent decades. While research has found a link between the two in the 1960s and 1970s, the relationship collapsed after the early 1980s and has remained tame since.“The relationship between wage growth and services inflation just isn’t that tight,” said Laura Rosner-Warburton, an economist at MacroPolicy Perspectives. “Yes, you will see more inflation from wages in 2022. The question is how much?”A coffee shop in New York advertised open positions this month.Amir Hamja for The New York TimesWhile a wage-price spiral is on a “large list of risk factors” that the administration is closely watching, the “dominant forecast” is that the labor market will stay strong and price gains will moderate this year, said Jared Bernstein, a member of the White House Council of Economic Advisers.Wall Street economists generally think inflation will fade toward 3 percent this year, based on recent analyst notes and interviews. A recent survey from the Federal Reserve Bank of New York showed that consumers, who had been penciling in higher inflation in the years ahead, have begun to lower their expectations for price increases.But several forecasters said there was room for humility and wariness, because the pandemic economy has repeatedly confounded expectations. It has also drastically changed America’s economic backdrop.“The last 20 years have been years of very low inflation, very stable inflation,” Mr. Blanchard said. Before the coronavirus, inflation had hovered around — and then below — 2.5 percent for decades. Today, it has jumped to 7.5 percent.As prices for products including gas, steaks, bacon and camping equipment climb rapidly, eating into paychecks and dominating headlines, consumers are more likely to take note and ask for better pay.“Things change completely when inflation is a big number,” Mr. Blanchard said. “Salience changes.”There are signs that wages are feeding into price increases, at the margin. Prices have recently begun to rise sharply for core services, a set of purchases outside of health care, rent and transportation for which wages tend to make up a major cost of production.“That was concerning,” said Alan Detmeister, an economist at UBS who formerly led the Fed’s wage and price section. But, he added, it is hardly conclusive.More anecdotally, stories of workers winning big wage increases in a tight labor market abound.While wages in lower-qualification fields like leisure and hospitality have been rising rapidly for months, professional pay may also be on the cusp of picking up: Banks have been making big base salary increases, and Amazon will raise its maximum base salary for corporate and technology workers to $350,000 from $160,000 as it competes for a limited pool of highly trained employees.Amazon, which has also increased wages for warehouse employees, has raised prices partly in response.“With the continued expansion of Prime member benefits and the increased member usage that we’ve seen, as well as the rise in wages and transportation costs, Amazon will increase the price of our Prime membership in the United States,” Brian T. Olsavsky, the company’s chief financial officer, said on a Feb. 3 earnings call. The monthly price is rising to $14.99 from $12.99, and the annual membership is jumping to $139 from $119.“This is our first price increase since 2018,” Mr. Olsavsky noted.Other companies are raising pay but have said they are covering the climbing costs by improving efficiency. That’s the sort of sweet spot the White House and the Fed are hoping for, because it could leave workers earning more without pressuring prices relentlessly up.“We do anticipate when we do our annual review process that we will have a nominally higher wage rate increase provided to our associates,” Kevin Hourican, president and chief executive at the food distributor Sysco, said on a Feb. 8 earnings call. “And we have productivity improvement efforts that can help offset those types of increases.” More

MEXICO CITY (Reuters) -The expectation that the Federal Reserve will start hiking interest rate soon has put limits on Mexico’s monetary policy, Bank of Mexico Deputy Governor Jonathan Heath said on Thursday.Due to the close relationship between the U.S. and Mexican economies, the Bank of Mexico’s monetary policy decisions could not counter those of the Federal Reserve, he said during a virtual appearance before a Mexican business summit.”We cannot have a monetary policy that is independent or countercyclical to the Federal Reserve,” he said. “If the Federal Reserve begins to raise in March, well, I think that practically sets a ceiling for us.”Heath added that Mexico’s central bank was at a difficult “crossroads” due to stubbornly high inflation, especially core inflation, which strips out some volatile items.Mexico’s core inflation surged to 6.21% in the year through January, a level not seen since 2001, while headline inflation eased slightly to 7.07%. That is still more than twice as high as the Bank of Mexico’s 3% inflation target rate.Heath underscored that the Bank of Mexico’s monetary policy actions need to balance the issues of high inflation, adverse cyclical economic conditions in Mexico and the Fed’s expected interest rate hike cycle.He said the Bank of Mexico’s monetary policy stance will need to be consistent with the inflationary problems Latin America’s second-largest economy is facing, while avoiding being too restrictive towards the end of year when inflation is expected to converge near the target.At its last monetary policy meeting on Feb. 10, Mexico’s central bank raised its benchmark interest rate as expected by 50 basis points to 6.00%, a sixth straight rate increase, as policymakers sought to keep high inflation in check.Heath noted that Mexico is currently seeing low levels of private investment, hampering its economic recovery.”We don’t really have any (economic) growth engine” for 2022, he said. More

FRANKFURT (Reuters) -German insurer and asset manager Allianz (DE:ALVG) on Thursday said it would set aside 3.7 billion euros ($4.20 billion) to deal with investigations and lawsuits resulting from the collapse of a multi-billion-euro set of investment funds.The provision resulted in a net loss attributable to shareholders of 292 million euros in the fourth quarter, the company said. Analysts had expected a profit.Allianz said that the outcome of various investigations and lawsuits “cannot be reliably estimated” and that it “expects to incur additional expenses before these matters are finally resolved”.The issue centres around Allianz funds that used complex options strategies to generate returns but racked up massive losses when the spread of COVID-19 triggered wild stock market swings in February and March 2020.Investors in the so-called Structured Alpha set of funds have claimed some $6 billion euros in damages from the losses in a slew of cases filed in the United States. The U.S. Department of Justice and the Securities and Exchange commission have also been investigating the case.The matter has cast a shadow over Allianz, one of Germany’s most valuable companies. It is also one of the world’s biggest money managers with 2.5 trillion euros in assets under management through bond giant Pimco and its Allianz Global Investors, which managed the funds at the centre of the probes.Allianz said that it expects a settlement with major investors “shortly” but discussions with other investors, the DOJ and SEC “remain ongoing”. The quarterly loss compares with a profit of 1.8 billion euros a year ago. Profit for the full year at 6.6 billion euros was the lowest since 2013.”In spite of challenges in 2021, Allianz proved its resilience and adaptability,” Chief Executive Officer Oliver Baete said. The $15 billion Structured Alpha funds catered in particular to normally conservative U.S. pension funds, from those for labourers in Alaska to teachers in Arkansas to subway workers in New York.After the coronavirus sent markets into a tailspin early in 2020, the Allianz funds plummeted in value, in some cases by 80% or more. Investors alleged Allianz strayed from its stated strategy in their lawsuits. Allianz has publicly disclosed the SEC and DOJ investigations. It previously said it intended to defend itself “vigorously” against the investors’ allegations. Baete has said “not everything was perfect in the fund management”.($1 = 0.8804 euro) More