Tag Archives: higher inflation

As U.S. inflation hits 31-year high, banks assess risks and opportunities

By Matt Scuffham

NEW YORK (Reuters) – Wall Street banks are planning for a sustained period of higher inflation, running internal health checks, monitoring whether clients in exposed sectors could pay back loans, devising hedging strategies and counseling caution when it comes to deals.

U.S. consumer prices this month posted their biggest annual gain in 31 years, driven by surges in the cost of gasoline and other goods.

Senior bank executives have become less convinced by central bankers’ arguments that the spike is a temporary blip caused by supply chain disruption and are stepping up risk management.

Higher inflation is generally seen as a positive for banks, raising net interest income and boosting profitability. But if it jumps high too quickly, inflation could become a headwind, top bankers warn.

Goldman Sachs Chief Operating Officer John Waldron last month identified inflation as the No. 1 risk that could derail the global economy and stock markets.

JPMorgan Chief Executive Officer Jamie Dimon told analysts last month that banks “should be worried” that high inflation and high interest rates increase the risk of extreme price movements.

A sustained period of higher inflation would pose both credit and market risk to banks, and they are assessing that risk in internal stress tests, said one senior banker at a European bank with large U.S. operations.

Risk teams are also monitoring credit exposures in sectors most affected by inflation, another banker said. They include firms in the consumer discretionary, industrial and manufacturing sectors.

“We are very active with those clients, offering hedging protections,” said the banker, who asked not to be named as client discussions are confidential.

Clients that may need extra funding to get them through a period of higher inflation are being advised to raise capital while interest rates remain relatively low, the banker said.

“It’s still a very beneficial environment to be in if you need funding, but that won’t last forever.”

Investment bankers are also assessing whether higher inflation and monetary tightening could disrupt record deals and public offering pipelines.

“We expect a sustained period of higher inflation, and monetary tightening could slow the momentum in the M&A market,” said Paul Colone, U.S.-based managing partner at Alantra, a global mid-market investment bank.

Alantra is advising clients in the early stages of M&A discussions “to review the risks sustained inflation could bring to both valuation and business results,” Colone said.

Sales and trading teams, meanwhile, are taking more calls from clients looking to reposition portfolios, which are vulnerable to a loss in value. When inflation ran out of control in the 1970s, U.S. stock indices were hit hard.

“We’re seeing more interest from clients in finding some manner of inflation protection,” said Chris McReynolds, Barclays’ head of U.S. inflation trading.

Treasury Inflation Protected Securities, which are issued and backed by the U.S. government, are proving popular, he said. The securities are similar to Treasury bonds but come with protection against inflation.

Traders are also seeing demand for derivatives that offer inflation protection such as zero-coupon inflation swaps, in which a fixed rate payment on an investment is exchanged for a payment at the rate of inflation.

“People are realizing they have inflation exposure and it makes sense for them to hedge their assets and liabilities,” McReynolds said.

Banks with diversified businesses are likely to fare best during a sustained period of inflation, most analysts say.

They expect that a steepening yield curve will boost overall profit margins, while trading businesses can benefit from increased volatility and the strength of deals, and initial public offering pipelines mean investment banking activity will remain healthy.

But Dick Bove, a prominent independent banking analyst, takes a different view. He anticipates the yield curve will flatten as higher rates reduce inflation expectations, crimping profit margins.

“Perhaps for as long as 12 to 18 months, bank stock prices will rise,” he said. “At some point, however, if inflation continues to rise, the multiples on bank stocks will collapse and so will bank stock prices.”

(Reporting by Matt Scuffham; Editing by Dan Grebler)

U.S. consumer confidence near 1-1/2-year high; house prices accelerate

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer confidence jumped to its highest level in nearly 1-1/2 years in June as growing labor market optimism amid a reopening economy offset concerns about higher inflation.

The survey from the Conference Board on Tuesday also showed strong appetite to buy goods such as motor vehicles and household appliances, suggesting strong momentum in the economy as the second quarter ended.

Consumers were also keen to purchase homes, a sign that house prices will continue to rapidly increase as supply lags. Many intended to go on vacation, mostly in the United States, over the next six months, which should boost demand for services and add fuel to consumer spending.

“Consumer attitudes are likely to benefit from the ongoing reopening and a better health backdrop going forward that will support job growth and incomes,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

The Conference Board’s consumer confidence index raced to a reading of 127.3 this month, the highest level since February 2020, from 120.0 in May. Economists polled by Reuters had forecast the index at 119.0.

The survey places more emphasis on the labor market, which is steadily recovering. More than 150 million Americans have been fully vaccinated against the coronavirus, allowing for broader economic re-engagement.

The survey’s present situation measure, based on consumers’ assessment of current business and labor market conditions, increased to 157.7 from 148.7 last month. The expectations index, based on consumers’ short-term outlook for income, business and labor market conditions, rose to 107.0 from 100.9.

Consumers’ inflation expectations over the next 12 months rose to 6.7% from 6.5% last month.

Stocks on Wall Street were trading mostly higher. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

STRONG LABOR MARKET VIEWS

The Conference Board survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, vaulted to 43.5 in June. That was the highest level since 2000 and was up from 36.9 in May.

This measure closely correlates to the unemployment rate in the Labor Department’s closely watched employment report. The jump in the so-called labor market differential augurs well for June’s employment report due out on Friday. There are a record 9.3 million job openings.

Though job growth has picked up, a shortage of willing workers is frustrating companies’ efforts to ramp up hiring. The worker shortage has been blamed on generous unemployment benefits, including a weekly $300 subsidy from the federal government. A lack of child care facilities as some centers which shut during the pandemic never reopened, is also keeping some parents home.

At least 26 states are terminating federal government-funded unemployment benefits before the Sept. 6 expiration date. This, together with school districts expected to resume in-person classes in the fall, is seen expanding the labor pool.

This month, more consumers planned to buy homes, cars and major household appliances over the next six months, relative to May. That suggests demand for so-called durable goods will remain strong even as spending shifts backs to services such as air travel, dining out and hotel accommodation.

Strong demand for homes amid a dearth of properties on the market is fueling house price inflation.

A separate report on Tuesday showed the S&P/Case Shiller composite index of 20 metropolitan areas accelerated 14.9% year-on-year in April, the largest gain since December 2005. That followed a 13.4% increase in March.

Soaring house price inflation was corroborated by another report showing the Federal Housing Finance Agency (FHFA) house price index shot up a record 15.7% in April from a year ago after rising 14.0% in March.

The FHFA’s index is calculated by using purchase prices of houses financed with mortgages sold to or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac. Demand for housing is being driven by historically low mortgage rates.

Economists do not believe another housing bubble is developing, noting that the surge is being mostly driven by a mismatch between supply and demand, rather than poor lending practices, which triggered the 2008 global financial crisis. But the rapidly rising prices could feed inflation.

“Despite the pick-up in house price expectations, we don’t think a self-reinforcing bubble will form, nor do we expect values will crash,” said Sam Hall, a property economist at Capital Economics. “Rather, we think rising mortgage rates and stretched affordability will cool house price growth to around 7% year-on-year by the end of the year.”

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

U.S. consumer prices post biggest gain in 8-1/2 years as economy reopens

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. consumer prices rose by the most in more than 8-1/2 years in March as increased vaccinations and massive fiscal stimulus unleashed pent-up demand, kicking off what most economists expect will be a brief period of higher inflation.

The report from the Labor Department on Tuesday also showed a firming in underlying prices last month as the broader reopening of the economy bumps against bottlenecks in the supply chain, capacity constraints and higher commodity prices.

Federal Reserve Chair Jerome Powell and many economists view higher inflation as transitory, with supply chains expected to adapt and become more efficient. The supply constraints mostly reflect a shift in demand towards goods and away from services during the pandemic, now in its second year.

“Inflation is a process and not a one-time event,” said Chris Low, chief economist at FHN Financial in New York. “These bottlenecks are one offs. The Fed will not consider action until it views price levels changes as permanent rather than temporary, something it does not consider possible until the economy is at full employment.”

The consumer price index jumped 0.6% last month, the largest gain since August 2012, after rising 0.4% in February. A 9.1% surge in gasoline prices accounted for nearly half of the increase in the CPI. Gasoline prices rose 6.4% in February.

Food prices edged up 0.1%. The cost of food consumed at and away from home also rose 0.1%.

Economists polled by Reuters had forecast the CPI advancing 0.5%. In the 12 months through March, the CPI surged 2.6%. That was the largest gain since August 2018 and followed a 1.7% increase in February.

The jump mostly reflected the dropping of last spring’s weak readings from the calculation. Those so-called base effects are expected to push up annual inflation even higher in the coming months before subsiding later this year.

Stocks on Wall Street were mostly higher. The dollar slipped against a basket of currencies. U.S. Treasury prices rose slightly.

UNDERLYING INFLATION FIRMING

Excluding the volatile food and energy components, the CPI increased 0.3% after nudging up 0.1% in February. The largest gain in seven months in the so-called core CPI was driven by a rise in rents as well as hotel and motel accommodation prices, which rebounded 4.4% after falling 2.7% in February.

The cost of hospital services increased 0.6%. But prescription medication prices were unchanged leading to overall healthcare costs edging up 0.1%. Used cars and trucks prices increased a solid 0.5%, but the cost new cars was unchanged for a second straight month. Motor vehicle production has been hampered by a global shortage of semiconductors.

Consumers also paid more for motor vehicle insurance as well as recreation and household furnishings. But apparel prices fell as did costs related to education.

The core CPI increased 1.6% on a year-on-year basis after rising 1.3% in February. The Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target, a flexible average. The core PCE price index is at 1.5%.

The cost of services advanced 0.4% after rising 0.3% in February. The government reported last week that producer prices surged in March. With the CPI and PPI data in hand, economists at JPMorgan forecast the core PCE price index gained 0.4% in March after nudging up 0.1% in February. That would lift the year-on-year increase to 1.9% from 1.4% in February.

March’s strong inflation readings are in sync with several business surveys showing an acceleration in cost pressures.

Manufacturers are grappling with acute shortages of basic materials, rising commodities prices and difficulties in transporting finished goods.

Some economists argue the fractured supply chains, together with nearly $6 trillion in government relief since the COVID-19 pandemic barreled through the United States in March 2020 could fan inflation for a sustained period. The Fed has also slashed its benchmark overnight interest rate to near zero and is pumping money into the economy through monthly bond purchases.

These economists also point to the business surveys, which have indicated that customer inventories are at record lows and order books are full. A survey from the NFIB on Tuesday showed just over a third of small businesses planned raising prices in March, noting that “low inventories and solid sales will create more opportunities to raise prices.”

“This suggests companies have strong pricing power that could allow them to expand profit margins after several years of margin compression, which could keep inflation higher for longer,” said James Knightley, chief international economist at ING in New York.

But labor market slack could make it harder for inflation to continue spiraling higher. Employment remains 8.4 million below its peak in February 2020. The extremely accommodative fiscal and monetary policy are also unlikely to keep inflation uncomfortably high, if history is a good predictor.

“Neither rapid money growth and record federal budget deficits have had any correlation with inflation over the past 40 years,” said David Berson, chief economist at Nationwide in Columbus, Ohio. “Additionally, the factors that have acted to keep inflation in check in recent decades – stable inflation expectations, increased use of technology, production movements to low-cost areas – all remain in place.”

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

U.S. producer inflation heats up in March as prices increase broadly

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. producer prices increased more than expected in March, resulting in the largest annual gain in 9-1/2 years and likely marking the start of higher inflation as the economy reopens amid an improved public health environment and massive government aid.

The report from the Labor Department on Friday also showed solid gains in underlying producer prices last month. That aligned with business surveys showing rising cost pressures as strengthening domestic demand pushes against supply constraints.

Federal Reserve Chair Jerome Powell on Thursday reiterated that he believed the expected rise in inflation will be transitory and that supply chains will adapt and become more efficient. Most economists agree, citing considerable slack in the labor market.

“Beyond temporary effects, inflation is unlikely to keep accelerating given ample slack in the labor market,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

The producer price index for final demand jumped 1.0% last month as costs increased across the board. The PPI rose 0.5% in February. In the 12 months through March, the PPI surged 4.2%. That was the biggest year-on-year rise since September 2011 and followed a 2.8% advance in February.

The year-on-year PPI was boosted as last spring’s weak readings dropped out of the calculation. Prices tumbled early in the pandemic amid mandatory closures of non-essential businesses across many states to slow the first wave of COVID-19 cases.

Economists polled by Reuters had forecast the PPI would increase 0.5% in March and jump 3.8% on a year-on-year basis. The PPI report was delayed after the Bureau of Labor Statistics website crashed. The BLS, the Labor Department’s statistics agency, said it was looking into the problem with the website.

Goods prices soared 1.7%, accounting for almost 60% of the increase in the PPI last month. That was the biggest increase since December 2009 and followed a 1.4% rise in February. Prices for services shot up 0.7% after gaining 0.1% in February.

Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury prices were mostly lower.

SOLID GAINS

The government has provided nearly $6 trillion in relief since the pandemic started in the United States in March 2020, while the Fed has slashed its benchmark overnight interest rate to near zero and is pumping money into the economy through monthly bond purchases.

Powell said on Thursday that while he expected a surge in demand and bottlenecks in the supply chain as the economy reopens, “it seems unlikely that will change the underlying inflation psychology that has taken deep roots over the course of many years.”

Employment remains about 8.4 million jobs below its peak in February 2020. Though vacancies have rebounded above their pre-pandemic level, competition for jobs remains stiff, limiting workers’ ability to bargain for higher wages.

But some economists do not share Powell’s inflation assessment, arguing that businesses have the capacity to pass on the higher production costs to consumers. Business surveys have indicated that customer inventories are at record lows and order books are full.

“The implication is that manufacturers potentially have the sort of pricing power we haven’t seen in years,” said James Knightley, chief international economist at ING in New York. “With greater scope to pass these price rises on to customers, the obvious implication is that risks are increasingly moving in the direction of higher CPI readings.”

Fed Vice Chair Richard Clarida said on Friday if the expected jump in inflation did not reverse going into 2022, the U.S. central bank “will have to take that into account.”

According to a Reuters survey, the consumer price index likely rose 0.5% in March, which would boost the year-on-year increase to 2.5% from 1.7% in February. The report is scheduled to be released on Tuesday.

Wholesale energy prices increased 5.9%, accounting for 60% of the broad-based rise in goods prices in March. Energy prices rose 6.0% in February. Food prices climbed 0.5% last month.

Excluding the volatile food, energy and trade services components, producer prices increased 0.6%. The so-called core PPI gained 0.2% in February. In the 12 months through March, the core PPI accelerated 3.1%, the biggest rise since September 2018, after increasing 2.2% in February.

In March, wholesale core goods prices shot up 0.9% after gaining 0.3% in February. The Fed tracks the core personal consumption expenditures (PCE) price index for its 2.0% inflation target, a flexible average.

The core PCE price index is at 1.5%. Some of the PPI components, which feed into the core PCE price index, rose moderately last month.

Airline tickets increased 1.1% after jumping 3.7% in February. Healthcare costs rose 0.2% after dipping 0.1% in the prior month. Portfolio management fees rebounded 1.6% after dropping 1.1% in February.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)

Fed’s Evans sees ‘uncomfortable’ months of higher inflation ahead

(Reuters) – Chicago Federal Reserve Bank President Charles Evans on Wednesday said he is optimistic and confident in his forecast for stronger growth this year, but said that the Fed will need to see actual progress toward its goals, not just improved forecasts, before reducing its massive bond buying program.

“We are going to have to go months and months into the higher inflation experience before I’m going to even have an opinion on whether or not this is sustainable or not, and that’s going to be uncomfortable,” Evans said, noting he expects prices to rise in coming months. “We really have to be patient and be willing to be bolder than most conservative central bankers would choose to be if we are going to actually get inflation expectations to move up in a sustainable fashion.”

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

Cold weather chills U.S. retail sales, manufacturing production

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales fell more than expected in February amid bitterly cold weather across the country, but a rebound is likely as the government disburses another round of pandemic relief money to mostly lower- and middle-income households.

The harsh weather also took a bite out of production at factories last month as the deep freeze in Texas and other parts of the South put some petroleum refineries, petrochemical facilities and plastic resin plants out of commission.

The setback is probably temporary, with the strongest economic growth since 1984 anticipated this year, thanks to massive fiscal stimulus and an acceleration in the pace of vaccines, which should allow for broader economic re-engagement, even as new COVID-19 cases are starting to creep up.

Federal Reserve officials, who started a two-day meeting on Tuesday, are likely to focus on the underlying economic strength, expectations of higher inflation and a steadily recovering labor market.

“We knew the economy took a major hit in February due to the brutally cold weather and a lot of snow,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “No reason to panic over the February numbers, the economy is moving forward rapidly and it should pick up the pace as the latest stimulus payout hits home.”

Retail sales dropped by 3.0% last month, the Commerce Department said. But data for January was revised sharply up to show sales rebounding 7.6% instead of 5.3% as previously reported. Economists polled by Reuters had forecast retail sales falling only 0.5% in February.

Unseasonably cold weather gripped the country in February, with deadly snow storms lashing Texas. The decline in sales last month also reflected the fading boost from one-time $600 checks to households, which were part of nearly $900 billion in additional fiscal stimulus approved in late December, as well as delayed tax refunds.

The broad-based decrease was led by motor vehicles, with receipts at auto dealerships dropping 4.2%. Sales at clothing stores fell 2.8%. Consumers also slashed spending at restaurants and bars, leading to a 2.5% drop in receipts. Sales at restaurants and bars decreased 17% compared to February 2020.

Receipts at electronics and appliance stores dropped 1.9% and sales at furniture stores tumbled 3.8%. There were also big declines in sales at sporting goods, hobby, musical instrument and book stores. Receipts at food and beverage stores were unchanged. Sales at building material stores decreased 3.0%. Online retail sales plunged 5.4%.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. Longer-dated U.S. Treasury prices fell.

TEMPORARY SETBACK

Excluding automobiles, gasoline, building materials and food services, retail sales decreased 3.5% last month after surging by an upwardly revised 8.7% in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously estimated to have shot up 6.0% in January.

President Joe Biden last week signed his $1.9 trillion rescue package into law, which will send additional $1,400 checks to households as well as extend a government-funded $300 weekly unemployment supplement through Sept. 6. Households have also accumulated $1.8 trillion in excess savings.

“This year, we expect the combination of an improved health situation and generous fiscal stimulus to fuel a consumer boom for the history books,” said Lydia Boussour, lead U.S. economist at Oxford Economics in New York.

Economists at Goldman Sachs on Saturday raised their first-quarter GDP growth estimate to a 6% annualized rate from a 5.5% pace, citing the latest stimulus from the Biden administration. The economy grew at a 4.1% rate in the fourth quarter.

Goldman Sachs forecast 7.0% growth this year. That would be the fastest growth since 1984 and would follow a 3.5% contraction last year, the worst performance in 74 years.

The rosy economic outlook was not dimmed by a separate report from the Fed on Tuesday showing output at factories tumbled 3.1% in February, also weighed down by a global semiconductor shortage because of the pandemic.

“While we expect these supply disruptions to be temporary, auto production could remain soft in the very near term,” said Veronica Clark, an economist at Citigroup in New York. “With substantial new fiscal stimulus to support demand for consumer goods in the coming months, supply disruptions could lead to rising prices.”

Indeed, supply constraints because of coronavirus-related restrictions are driving up commodity prices. A third report from the Labor Department showed import prices rose 1.3% last month after surging 1.4% in January. They jumped 3.0% on a year-on-year basis after rising 1.0% in January.

Though inflation is expected to accelerate as early as the first half of this year, many economists do not expect it to spiral out of control with millions of Americans unemployed. Supply chain bottlenecks are also expected to start easing as more people around the globe get vaccinated.

The dollar has also strengthened so far this year against the currencies of the United States’ main trade partners.

“There is still a great deal of unused industrial capacity in the U.S. economy. This will help keep inflation under control throughout this year,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Dan Burns and Andrea Ricci)