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Monday, January 31, 2022
Boeing wins Qatar deal for 777X freighters, 737 MAX jets - Reuters
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WASHINGTON, Jan 31 (Reuters) - Boeing Co (BA.N) secured a launch order from Qatar Airways for a new freighter version of its 777X passenger jet and a provisional order for 737 MAX jets in a Washington ceremony on Monday coinciding with a visit by the Gulf state's ruling emir.
Reuters reported last week that the U.S. planemaker was in advanced negotiations with the Gulf carrier for around 34 of the planned twin-engined freighters in a deal provisionally estimated to be worth $14 billion at list prices. read more
"(The 777X) will be an absolute world-beater," Boeing Chief Executive Dave Calhoun said at an afternoon signing ceremony at the White House attended by Qatar Airways Chief Executive Akbar Al Baker and U.S. Commerce Secretary Gina Raimondo.
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Qatar is also bridging to the new cargo version of the upgraded 777X with a handful of extra current-generation 777 freighters.
Qatar Airways also signed a provisional order for up to 50 737 MAX jets, making Monday's deal a potential 100-plane, $30 billion-plus package. Reuters reported the 737 MAX deal earlier on Monday.
The unexpected addition of at least 25 of the jets, with options for another 25, comes days after Airbus SE (AIR.PA) revoked an order for 50 A321neo jets as part of a contractual and safety dispute involving a different model.
Airbus declined comment.
The cargo deal represents the first order for a freighter version of the world's largest twin-engined passenger plane, whose entry to service has been pushed back by more than three years to late 2023 or beyond.
It comes as Qatar Airways is locked in a bitter dispute with Boeing's European rival Airbus over surface flaws on competing A350 passenger jets.
The airline had dropped a new freighter version of the A350 from its cargo fleet renewal plans, citing the rift over the flaws to paint and lightning protection.
For Boeing, the deal marks a respite from the ongoing impact of a safety crisis over the 737 MAX and industrial and certification delays with the 777X passenger version and 787 Dreamliner - which remains sidelined by production flaws.
Boeing has dominated the air freight market for years through its 767, 777 and 747 cargo jets, though it will be urgently pressing for more orders for the new freighter flagship.
About half of global cargo by value travels by air, and in turn half of that usually goes in the belly of passenger planes.
During the pandemic, many airlines have been forced to park unused passenger jets, driving up demand for cargo space on dedicated freighters at a time when e-commerce has been a lifeline for many during COVID-19 lockdowns.
But economists warn the trends could start to unravel as the pandemic eases.
The amount of additional future revenue for Boeing from the deal would depend on discounts and how many of the freighters are converted from previous orders for 777X passenger versions. Airplanes typically sell for about half the list price.
Qatar is the second-largest customer for the world's largest twin-engined jetliner with a total of 60 of the 406-seat 777X passenger version on order.
Industry sources estimate that could fall by around a third in the wake of design delays and a drop in near-term demand for long-haul passenger jets, suggesting the number of new airframes resulting from the freighter order could be closer to 15.
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Reporting by David Shepardson in Washington Additional reporting by Alexander Cornwell in Dubai Editing by Tomasz Janowski and Matthew Lewis
Our Standards: The Thomson Reuters Trust Principles.
Boeing wins Qatar deal for 777X freighters, 737 MAX jets - Reuters
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Sunday, January 30, 2022
Amazon, Facebook, and Alphabet earnings, jobs report: What to know this week - Yahoo Finance
The wild ride in markets is likely to power on this week, with investors in store for a slew of big earnings and fresh reads on key unemployment data out of Washington, including the ever-important monthly jobs report.
Monday kicks off a pivotal week in the earnings season, with more than 100 companies in the S&P 500 set to report fourth quarter results through Friday. Most notably, investors will tune in to presentations from Amazon (AMZN), Facebook now Meta Platforms (FB), and Alphabet (GOOG, GOOGL), three of the five corporate heavyweights that account for about one-quarter of the benchmark’s total market capitalization.
Amazon is scheduled to report figures for the last three months of 2021 after the bell on Thursday. Analysts expect adjusted earnings per share of $3.89 on revenue of $137.87 billion. With the stock down 15.5% year-to-date as of Friday’s close, a look at fourth quarter performance could be a make-or-break moment for the e-commerce giant as markets reassess tech valuations.
Facebook, known now by its rebrand to Meta Platforms, has also been under pressure in recent weeks amid the broader sell-off in technology stocks. Investors are likely to get more details about the company’s progress on its Oculus virtual reality headset when it reports on Tuesday, which stock watchers expect could give the social media platform a needed boost. Facebook is projected to report earnings of $3.83 per share, on revenue of $33.44 billion, according to Bloomberg consensus estimates.
Results from Alphabet, due out Tuesday, are expected to show adjusted earnings per share of $27.45 on revenue of $59.38 billion. Also bearing the brunt of the tech rout, shares of Alphabet are down 8% year-to-date. Stock watchers will tune in for a gauge on the momentum of its cloud platform, a component that has contributed greatly to the company’s growth and could help the stock see a rebound.
On the economic front, employment data will be in the spotlight this week. The Department of Labor’s monthly jobs report due for release on Friday will offer an updated look at the strength of hiring and labor force participation — important measures of the U.S. economy, made even more consequential in recent weeks as the impact of the latest Omicron-driven wave begins to appear in the latest surveys. Economists expect private employers added 150,000 jobs in January, lower than the previous month. The unemployment rate is expected to remain unchanged from December at 3.9%, according to Bloomberg consensus estimates.
Even as Omicron’s spread may be slowing, payrolls are likely to be a bit slower to respond to falling COVID-19 cases than the real-time activity data, according to Pantheon Macroeconomics Chief Economist Ian Shepherdson.
“The surge in COVID cases has created new headwinds for the economy even as tailwinds, including the federal government’s fiscal boosts, are waning,” Bankrate senior economic analyst Mark Hamrick said in a note.
“The detrimental combination of supply chain constraints and the shortage, or lack of availability, of workers amid the Omicron surge is weighing on the nation’s economic recovery,” adding that under the circumstances, “it is hard to make the case for a huge acceleration in hiring this month.”
End of a volatile month for equities
Federal Reserve anxiety has made for a volatile January for equities. The S&P 500 is poised to end the month down 7% and 8% off its all-time high as traders adjust to the reality of a more aggressive central bank and a quicker pace of interest rate hikes than initially anticipated.
Stocks whipsawed last week after remarks from Jerome Powell following the Fed’s two-day policy-setting meeting that strongly signaled a liftoff on interest rates to above their current near-zero levels was likely to come in March as policymakers look to tighten financial conditions amid a backdrop of surging inflation.
“Anytime the Fed is going from really easy to starting to tighten, there’s always uncertainty, but this has been a stomach-churning week,” Wells Fargo Investment Institute senior global equity strategist Scott Wren told Yahoo Finance Live, adding that every day has been a battle of the 200-day moving average in the S&P 500.
Powell, taking on his most hawkish tone yet, prompted even big Fed watchers to sharply ramp up and revise their calls on rate hikes: Bank of America unveiled one of the most aggressive predictions on the Street, outlining expectations for seven increases this year, while JPMorgan upwardly revised its outlook from four to five hikes. On Saturday, Goldman Sachs revised its interest rate hike expectation to five times from four this year.
Charles Schwab chief fixed income strategist Kathy Jones told Yahoo Finance Live, however, that it is “premature” to talk about much more than three until the Fed offers more clarity around how it will use its balance sheet to tighten policy.
“Some of the estimates are just well ahead of reality at this stage of the game,” she said.
As investors buckle up for swing after swing, TKer’s Sam Ro points out that “gut-wrenching sell-offs are normal:” the S&P 500 sees three sell-offs of 5% or greater in an average year, with the maximum average annual drawdown — or biggest intra-year sell-off — at 14%, making even the sharpest of gyrations in benchmarks in recent weeks “very much within the realm of average."
Economic calendar
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Monday: MNI Chicago PMI, January (61.8 expected, 63.1 prior, upwardly revised to 64.3); Dallas Fed Manf. Activity, January (8.5 expected, 8.1 prior)
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Tuesday: Markit US Manufacturing PMI, January final (55.0 expected, 55.0 prior); Construction Spending, month over month, December (0.6% expected, 0.4% during prior month); ISM New Orders, January (60.4% prior month, upwardly revised to 61.0%); ISM Manufacturing, January (57.5 expected, 58.7 during prior month, upwardly revised to 58.8); ISM Employment, January (54.2 prior month, downwardly revised to 53.9); ISM Prices Paid, January (67.0 expected, 68.2 prior month); JOLTS job openings, December (10.3 million prior month); WARDS Total Vehicle Sales, January (12.7 million expected, 12.44 million prior month)
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Wednesday: MBA Mortgage Applications, week ended Jan. 28 (-7.1% during prior week); ADP Employment Change, January (200,000 expected, 807,000 prior month)
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Thursday: Challenger Job Cuts, year over year, January (-75.3% prior); Unit Labor Costs, fourth quarter preliminary (1.0% expected, 9.6% during prior quarter); Nonfarm Productivity, fourth quarter preliminary (3.2% expected, -5.2% expected); Initial Jobless Claims, week ended Jan. 29 (250,000 expected, 260,000 during prior week); Continuing Claims, week ended Jan. 22 (1.6 million expected, 1.675 million during prior week); Markit US Services PMI, January final (50.9 expected, 50.9 prior month); Markit US Composite PMI, January final (50.8 expected, 50.8 prior month); ISM Services Index, January (59.0 expected, 62.0 prior); Durable Goods Orders, December final (-0.9% prior); Factory Orders Excluding Transportation, December (0.8% final) Durable Goods Excluding Transportation, December final (0.4% prior); Capital Goods Orders Nondefense Excluding Aircrafts, December final (0.0%); Capital Goods Shipments Nondefense Excluding Aircrafts, December final (1.3%)
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Friday: Revisions – Employment Report, Establishment Survey; Two-Month Payroll Net Revision, January (141,000 prior); Change in Private Payrolls, January (150,000 expected, 211,000 prior month); Change in Manufacturing Payrolls, January (20,000 expected, 27,000 prior month); Unemployment Rate, January (3.9% expected, 3.9% prior); Average Hourly Earnings, month over month, January (0.5% expected, 0.6% prior month); Average Hourly Earnings, year over year, January (5.2% expected, 4.7% prior month); Average Weekly Hours All Employees, January (34.7 expected, 34.7 prior month); Labor Force Participation Rate, January (61.9% expected, 61.9% prior month); Underemployment Rate, January (7.3% prior month)
Earnings calendar
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Monday: Otis WorldWide (OTIS) before market open, NXP Semiconductors (NXPI) after market close, Cirrus Logic (CRUS) at market close
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Tuesday: UPS (UPS) before market open, Sirius XM (SIRI) before market open, Alphabet (GOOG) after market close, General Motors (GM) at market close, Starbucks (SBUX) after market close, AMD (AMD) after market close, PayPal Holdings (PYPL) after market close, Match Group (MTCH) after market close and Electronic Arts (EA) after market close, Gilead (GILD) after market close
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Wednesday: AmerisourceBergen (ABC) before market open, AbbVie (ABBV) before market open, Humana (HUM), ThermoFisher Scientific (TMO), Marathon Petroleum (MPC) before market open, T-Mobile (TMUS) after market close, Qualcomm (QCOM) after market open, Meta Platforms (FB) after market close, Boston Scientific (BSX) after market close
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Thursday: Merck (MRK) before market open, Eli Lilly & Co. (LLY) before market open, HoneyWell (HON) before market open, Estee Lauder (EL) before market open, Cardinal Health (CAH) before market open, Shell plc (RDS-b) before market open, Cigna (CI) before market open, Amazon (AMZN) before market open, Ford (F) before market open, Snap (SNAP) before market open, Pinterest (PINS) before market open, Activation Blizzard (ATVI) before market open, Skechers (SKX) before market open, GoPro (GPRO) before market open, Fortinet (FTNT) before market open, News Corp. (NWSA) before market open, Unity Software (U) before market open
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Friday: Wynn Resorts (WYNN), Bristol-Myers (BMY) before market open, Regeneron (REGN) before market open, Aon (AON) before market open, Royal Caribbean Cruises (RCL), Eaton (ETN), CBOE Global Markets (CBOE)
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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Amazon, Facebook, and Alphabet earnings, jobs report: What to know this week - Yahoo Finance
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Elliott and Vista Near Deal to Buy Citrix Systems - The Wall Street Journal
Cloud-computing company Citrix Systems Inc. is close to a roughly $13 billion deal to go private, continuing a spate of big leveraged buyouts that are powering record private-equity activity.
Elliott Management Corp.’s private-equity arm, Evergreen Coast Capital, and Vista Equity Partners are near an agreement to pay $104 a share for the software company, according to people familiar with the matter.
The...
Cloud-computing company Citrix Systems Inc. is close to a roughly $13 billion deal to go private, continuing a spate of big leveraged buyouts that are powering record private-equity activity.
Elliott Management Corp.’s private-equity arm, Evergreen Coast Capital, and Vista Equity Partners are near an agreement to pay $104 a share for the software company, according to people familiar with the matter.
The deal could be announced Monday, the people said, assuming the talks don’t fall apart or drag out.
Should it go forward, the takeover would be the biggest leveraged buyout in recent months, ending the lull that followed a flurry of them in 2021.
With interest rates near historic lows, private-equity firms have amassed billions of dollars of cash from investors that they must put to work to begin earning fees on it.
In all, private-equity firms announced more than $900 billion worth of deals in the U.S. last year, including buyouts and exits, according to Dealogic.
Software companies like Citrix, with their predictable revenue, have become some of the most sought-after targets for private-equity firms because they can carry significant amounts of debt.
Vista is among the firms that specialize in software buyouts, and this would be among its biggest deals. Based in Austin, Texas, Vista manages more than $86 billion in assets and its chief executive, Robert Smith, is the wealthiest Black person in the U.S., worth $6.7 billion, according to Forbes. Founded in 2000, Vista is known for using a detailed playbook aimed at maximizing profits at the companies it buys.
The firm has been relatively quiet since October 2020, when Mr. Smith admitted to criminal tax evasion and agreed to pay $139 million in back taxes and penalties.
Citrix makes software that allows users to virtually access desktops as well as other cloud-computing capabilities.
Citrix, like many legacy software companies, has had a rocky transition to a subscription-based model for its core virtual-desktop services. Converting customers into subscribers instead of licensees provides more recurring revenue, which investors like and have come to expect from software companies.
Citrix’s David Henshall in October stepped down as president and chief executive and also left as a director along with another board member, a move that reduced the board’s size to eight. The company tapped chairman Bob Calderoni as interim CEO.
But Citrix has had some success lately, benefiting along with peers as more daily life takes place on the cloud and as the number of people working remotely soars. The company said in November that annualized recurring revenue in its third quarter grew 13% from a year earlier.
Its shares closed Friday at $105.55, and had already jumped on speculation of a deal over the past few months. Bloomberg reported Jan. 14 that Elliott and Vista were in advanced talks to buy Citrix.
The hardware and software infrastructure Amazon.com Inc., Microsoft Corp. , Google and others provide is commonly referred to as the cloud.
The migration to the cloud has been happening for about a decade as companies have opted to forgo costly investments in in-house IT infrastructure and instead rent hardware and software from the likes of Amazon and Microsoft, paying as they go for storage and data-processing. That has made cloud computing one of the most fiercely contested battlefields among business-IT providers and the companies that provide it a hot commodity among investors and acquirers.
That trend appears poised to continue.
Citrix’s modest size compared with that of peers such as VMware Inc. and spotty results over the years have made it the subject of periodic takeover speculation. Indeed, it has drawn the attention of private-equity firms and industry players in the past, though no deal was struck.
Citrix is expected to be combined with Tibco, a software company Vista agreed to buy in a $4 billion deal in 2014 and has tried to sell multiple times since then, some of the people said. That could afford opportunities to cut costs from overlapping functions and create a company more attractive to another buyer down the road or to public investors if and when the buyout firms decide to take it public again.
Elliott, founded by billionaire Paul Singer, manages roughly $48 billion in assets and has been one of the most visible activist investors in recent years, challenging companies including AT&T Inc. and Duke Energy Corp.
While best-known for its activist investments, Elliott has been expanding its private-equity practice. Outside of Evergreen, which focuses on technology investments, Elliott owns other companies including bookseller Barnes & Noble Inc.
Elliott has a long history with Citrix. It holds a more than 10% stake worth over $1 billion and had been pushing it to take steps to boost its share price, The Wall Street Journal reported in September.
Elliott took a stake in Citrix in 2015 and held a seat on its board until last spring. The hedge fund has gone on to buy other companies it agitated at, including health-data company Athenahealth Inc., which it agreed to sell last year.
Write to Cara Lombardo at cara.lombardo@wsj.com and Miriam Gottfried at Miriam.Gottfried@wsj.com
Elliott and Vista Near Deal to Buy Citrix Systems - The Wall Street Journal
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China Jan factory activity growth slows, demand wanes as COVID surges - Reuters
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BEIJING, Jan 30 (Reuters) - Growth in China's factory activity slowed in January as a resurgence of COVID-19 cases and tough lockdowns hit production and demand, but the slight expansion offered some signs of resilience as the world's second-largest economy enters a likely bumpy new year.
The official manufacturing Purchasing Manager's Index (PMI) registered 50.1 in January, remaining above the 50-point mark that separates growth from contraction, but slowing from 50.3 in December, data from the National Bureau of Statistics (NBS) showed on Sunday.
Analysts had expected the PMI to fall to 50.
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The official results contrasted with those in a private survey of mostly small manufacturers in coastal regions, which showed activity fell at the fastest rate in 23 months.
China's economy started last year strong, reviving from a sharp pandemic-induced slump, but it started losing momentum in the summer, weighed down by debt problems in the property market and strict anti-virus measures that hit consumer confidence and spending.
Rising raw material costs and soft demand have also eroded corporate profit margins. Profits at industrial firms rose at their slowest pace in December for more than a year and a half.
With the real estate slump expected to drag on through at least the first half of this year and the emergence of more infectious COVID-19 variants, China's central bank has started cutting interest rates and pumping more cash into the financial system to lower borrowing costs. Further modest easing steps are expected in coming weeks.
Stability will trump everything ahead of a once-in-five-years Communist Party congress this year, with policymakers looking to ward off a sharper slowdown that could undermine job creation.
RISKS OF EASING, COVID CURBS
But such easing carries risks, as other global central banks like the U.S. Federal Reserve are preparing to raise interest rates, which could spur potentially destabilising capital outflows from emerging markets like China.
The International Monetary Fund on Wednesday cut its China 2022 growth forecast to 4.8%, from 5.6% previously, reflecting the property woes and the hit to consumption from strict COVID-19 curbs.
"Industrial activity slowed due to weak domestic demand," said Zhang Zhiwei, chief economist at Pinpoint Asset Management. "The service sector is also affected adversely by the outbreaks in many cities."
"The weak PMI indicates the policy easing measures from the government have not yet been passed to the real economy... We expect the government will step up policy supports in coming months, particularly through more fiscal spending."
A sub-index in the official PMI for production stood at 50.9, down from 51.4 in December, while new orders fell to 49.3 from 49.7.
While China's new COVID-19 cases have been low compared with many other countries, a surge of infections since late December in the manufacturing hub of Xian forced many auto and chip makers to shut operations. Production has gradually returned to normal as the city emerged from a lockdown.
Samsung Electronics Co Ltd (005930.KS) last month temporarily adjusted operations at its Xian manufacturing facilities for NAND flash memory chips, but it said on Wednesday that production has returned to normal.
Output in Tianjin, which battled an outbreak of the highly transmissible Omicron variant, was also affected.
At the same time, the government is trying to limit industrial air pollution levels ahead of the Beijing Winter Olympics, starting on Friday. China has told steel mills in northern regions to cut production until mid-March.
A survey on China's sprawling services sector also showed growth slowing in January, as virus containment measures hit consumer sentiment.
China's official composite PMI, which combined manufacturing and services, stood at 50.1 in January compared with 52.2 in December.
China's economy grew 4.0% in the fourth quarter from a year earlier, its weakest expansion in one and a half years.
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Reporting by Emily Chow and Stella Qiu; Editing by William Mallard
Our Standards: The Thomson Reuters Trust Principles.
China Jan factory activity growth slows, demand wanes as COVID surges - Reuters
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Inflation and Deficits Don’t Dim the Appeal of U.S. Bonds - The New York Times
Markets have been in upheaval. The Federal Reserve is taking steps to cool off the economy, as questions loom about the course of the recovery. And headlines are proclaiming that government bond yields are near two-year highs.
But the striking thing about bonds isn’t that yields — which influence interest rates throughout the economy — have risen. It’s that they remain so low.
In the past year, with consumer prices rising at a pace unseen since the early 1980s, a conventional presumption was that the demand for bonds would slump unless their yields were high enough to substantially offset inflation’s bite on investors’ portfolios.
Bond purchases remained near record levels anyway, which pushed yields lower. The yield on the 10-year Treasury note — the key security in the $22 trillion market for U.S. government bonds — is about 1.8 percent. That’s roughly where it was on the eve of the pandemic, or when Donald J. Trump was elected president, or even a decade ago, when inflation was running at a mere 1.7 percent annual rate — compared with the 7 percent year-over-year increase in the Consumer Price Index recorded in December.
If you had run that data past market experts last spring, “I think you would have been hard-pressed to find anybody on the Street who’d believe you,” said Scott Pavlak, a fixed-income portfolio manager at MetLife Investment Management.
Because the 10-year Treasury yield is a benchmark for many other interest rates, the rates on mortgages and corporate debt have been near historical lows as well. And despite a binge of deficit spending by the U.S. government — which standard theories say should make a nation’s borrowing more expensive — continuing demand for government debt securities has meant that investors are, in inflation-adjusted terms, paying to hold Treasury bonds rather than getting a positive return.
Adjusting for inflation, 10-year Treasury yields are negative
At current rates, buyers of Treasuries seem likely to have a negative return on their ownership of the asset. They are, in effect, paying for a safe financial parking place.
The major reasons for this odd phenomenon include long-term expectations about inflation, a large (and unequally distributed) surge in wealth worldwide and the growing ranks of retiring baby boomers who want to protect their nest eggs against the volatility of stocks.
And that has potentially huge consequences for public finances.
“If governments ever wanted to engage in an aggressive program of spending, now is the time,” said Padhraic Garvey, a head of research at ING, a global bank. “This is a perfect time to issue bonds as long as possible and proceed with long-term investment plans — and as long as the rate of return on those plans is in excess of the funding costs, they pay for themselves.”
Weighing the Fed’s Role
Because the government debt issued by the United States is valued, with few exceptions, as the safest financial asset in the global market — and because this debt is used as the collateral for trillions of dollars of systemically important transactions — the monthly and weekly fluctuations of key U.S. Treasuries, like the 10-year note, are watched closely.
Understand Inflation in the U.S.
- Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.
- Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.
- What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.
- Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.
There are rancorous debates about the added role that the emergency bond-buying program conducted by the Fed since March 2020 — which included hundreds of billions of dollars in U.S. debt securities — has played in keeping rates down.
Some of the central bank’s critics concede that the Fed’s aggressive measures (which officials are dialing back) may have proved necessary at the start of the pandemic to stabilize markets. But they insist its program, another form of economic stimulus, continued far too long, egging on inflation by increasing demand and keeping rates low — an equation that hurt savers who could benefit from higher returns to hedge against the price increases.
Still, most mainstream analysts also tend to identify a broader gumbo of coalescing factors beyond monetary policy.
Several major market participants attribute these stubbornly low yields in spite of a high-growth, high-inflation economy to a widening sense among investors that a time of slower growth and milder price increases may eventually reassert itself.
“While inflation has surged, they do not expect it to be persistent,” said Brett Ryan, the senior U.S. economist at Deutsche Bank. “In other words, over the long run, the post-pandemic world is likely to look very similar to the prepandemic state of the economy.”
Long-run inflation expectations are still relatively anchored at an annual rate of about 2.4 percent over the next 10 years. This indicates that markets think the Fed will prevent inflation from spiraling upward, despite the huge increase in debt and the supply of dollars.
Lots of Cash in Search of Havens
One potent element driving down rates is that from 2000 to 2020 — a stretch that included a burst dot-com bubble, a breakdown of the world’s banking system and a pandemic that upended business activity — global wealth in terms of net worth more than tripled to $510 trillion. The resulting savings glut has deeply affected the market, particularly for government bonds.
The vast majority of wealth has accumulated to borderless corporations and a multinational elite desperate to park that capital somewhere that is safe and allows its money to earn some level of interest, rather than lose value even more quickly as cash. They view lending the money to a national government in its own currency as a prudent investment because, at worst, the debt can be repaid by creating more of that currency.
The downside for these investors is that only so many stable, powerful countries have this privilege: This mix of exorbitant levels of wealth and a scarcity of safe havens for it has whetted, at least for now, a deepening appetite for reliable government debt securities — especially U.S. Treasuries.
“To have truly risk-free returns and storage of your dollars, where else are you going to put them?” asked Daniel Alpert, a managing partner of the investment bank Westwood Capital.
As the principle of supply and demand would suggest, the combination of high demand and low supply has helped keep Treasury bond prices high, which in turn produces lower yields.
Demographic changes are affecting bond trends, too. As they approach or reach retirement, hundreds of millions of people across developed economies are looking for safer places than the stock market for their assets.
Even in an inflationary environment, “there’s just this huge demand for yield in fixed income from people,” said Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management. “You have all these boomer retirees who have money in the stock market and they’re doing great, but they know soon they’re not going to have a paycheck anymore and they need some portion of their portfolio to provide yield and stability.”
Running Room for Federal Spending
The U.S. Treasury market has grown to roughly $23 trillion, from $3 trillion two decades ago — directly in step with the national debt, which has grown to over 120 percent of gross domestic product, from 55 percent.
But borrowing costs for the American government have trended lower, not higher. Congress issued roughly $5 trillion in Treasury debt securities to finance pandemic fiscal relief, “and we had, effectively, zero cost of capital for most of it,” said Yesha Yadav, a law professor at Vanderbilt University whose scholarship covers the Treasury market’s structure and regulations.
Since the 1980s, the federal debt has skyrocketed.
Total public debt as a percentage of gross domestic product
But the cost of paying investors back is at its lowest in years.
Interest payments on U.S. debt as a percentage of gross domestic product.
The cost of the interest payments that the U.S. government owes on its debt peaked in 1991 at 3.2 percent of gross domestic product, when the national debt was only 44 percent of G.D.P. By that measure, interest costs now are about half what they were back then.
“If the world’s demand to hold Treasury securities is strong enough, then running budget deficits can be sustainable,” said David Beckworth, a former international economist at the Treasury who is now a senior research fellow at George Mason University’s Mercatus Center, a libertarian-oriented think tank.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe that the inflationary burst will fade, but some concerning signs suggest it may last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
The real cost of servicing the debt “has been very low,” said Jared Bernstein, a leading economic adviser to President Biden. Treasury Secretary Janet L. Yellen has made similar assertions about the nation’s debt burden in recent months. And this “real cost” framing was used as a rhetorical salve of sorts when Democrats, joined by 19 Republicans, enacted a $1 trillion infrastructure bill that is expected to increase deficits by more than $250 billion.
Mr. Bernstein stipulated that while debt financing has its place, the White House also believes it has firm limits within its agenda. “The outcome of all this is going to be some mix of progressively raised revenues and investments in essential public goods with a high return financed by some borrowing.”
Looking Ahead, and to the Past
What would have to happen for these rock-bottom borrowing costs to rise significantly? There could be a crisis of confidence in Fed policy, a geopolitical crisis or steep increases in the Fed’s key interest rates in an attempt to kill off inflation. In a more easily imagined situation, some believe that if inflation remains near its current levels into the second half of the year, bond buyers may lose patience and reduce purchases until yields are more in tune with rising prices.
The resulting higher interest payments on debt would force budget cuts, said Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget. Mr. Goldwein’s organization, which pushes for balanced budgets, estimated that even under this past year’s low rates, the federal government would spend over $300 billion on interest payments — more than its individual outlays on food stamps, housing, disability insurance, science, education or technology.
Last month, Brian Riedl, a senior fellow at the right-leaning Manhattan Institute, published a paper titled “How Higher Interest Rates Could Push Washington Toward a Federal Debt Crisis.” It concludes that “debt is already projected to grow to unsustainable levels even before any new proposals are enacted.”
The offsetting global and demographic trends that have been pushing rates down, Mr. Reidl writes, are an “accidental, and possibly temporary, subsidy to heavy-borrowing federal lawmakers.” Assuming that those trends will endure, he said, would be like becoming a self-satisfied football team that “managed to improve its overall win-loss record over several seasons — despite a rapidly worsening defense — because its offense kept improving enough to barely outscore its opponents.”
But at least one historical trend suggests that rates will remain tame: an overall decline in real interest rates worldwide dating back six centuries.
A paper published in 2020 by the Bank of England and written by Paul Schmelzing, a postdoctoral research associate at the Yale School of Management, found that as political and financial systems have globalized, innovated and matured, defaults among the safest borrowers — strong governments — have continuously declined. According to his paper, one ramification may be that “irrespective of particular monetary and fiscal responses, real rates could soon enter permanently negative territory,” yielding less than the rate of inflation.
An old rule, still holding true across markets, is that high risk bets reward investors with higher yields, yet bring high loan costs for borrowers. Low-risk investments, in turn, come with cheap borrowing costs. If the Fed and other central banks continually prove that they can stabilize (or bail out) the most systemically important governments, then investment risks are flattened — and there could be plenty of leeway to borrow for years to come.
Inflation and Deficits Don’t Dim the Appeal of U.S. Bonds - The New York Times
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Wall Street week ahead: Bargain hunters study stock valuations after big declines - Economic Times
The S&P 500 has dropped over 9% so far in 2022, while the tech-heavy Nasdaq stands in correction territory after a nearly 15% fall. The market sank again this week after the Federal Reserve signaled it is likely to raise U.S. interest rates in March before shrinking its balance sheet later in the year.
Buying after pullbacks paid off for many investors over the last two years, when the Fed's ultra-easy monetary policies during the pandemic buoyed stocks from one record high to the next.
With the market now pricing in almost five rate hikes by the end of 2022, that calculus has changed dramatically.
"The convergence of monetary and fiscal policy, which was historically dovish and ample, now is changing course and the equity markets as well as other risk markets are slowly coming to terms with that sobering reality," said Chad Morganlander, portfolio manager at Washington Crossing Advisors.
The slide in stocks has brought down the valuation of the overall S&P 500, which at the end of 2021 stood not far from its highest level in two decades. The index now trades at 19.5 forward 12 months earnings, compared to 22 times earnings in late December and its five-year average of 18.5, according to Refinitiv IBES.
The market's fall hadn't been precipitous enough for Barclays strategists, who early this week declared in a note it was still "too early to buy the dip." An analysis of pre-pandemic equity valuations showed the index could decline another roughly 8% from the 4,410.13 level where it closed on Monday, Barclays strategists said in a report. The S&P 500 was recently at 4,330, about 2% below Monday's level.
Other valuation metrics are more favorable to stocks. A look at the equity risk premium - or the extra return investors receive for holding stocks over risk-free government bonds - favors equities over the next year, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
When that premium historically has been at the level it reached on Wednesday, the S&P 500 has beaten the one-year return for the 10-year Treasury note by an average of 11.8%, Lerner said. The yield on the benchmark 10-year Treasury has climbed about 30 basis points this year to 1.81% but remains low by historical standards.
"At least right now, even though there could be more volatility, until and unless the Fed actually makes a mistake or there is actually a recession, you still want to stick with stocks over bonds," said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.
The strength of fourth-quarter corporate results, which continue to roll in with S&P 500 earnings season not yet at the halfway point, could bolster the case for investors looking to buy at a discount.
With S&P 500 earnings expected to grow 8.4% in 2022, the backdrop for stocks appears to be a solid one. However, skittish investors have punished companies such as Netflix, JPMorgan and Tesla delivering less than stellar news in recent weeks, adding to the uneasy mood. Another large batch of reports is due next week, including from heavyweights Alphabet and Amazon.
"Heading into 2022, our view was that equities could earn their way out of rising yields and lower P/E multiples. Our new base case for six hikes this year poses challenges to that bullish outlook," analysts at BNP Paribas wrote.
Nevertheless, the bank said investors should "stay the course" in equities, as the "outlook for above-trend growth and inflation still translates to above consensus double-digit earnings growth for 2022."
Wall Street week ahead: Bargain hunters study stock valuations after big declines - Economic Times
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Fed's Bostic tells the FT the central bank could hike rates by a half-point if needed - CNBC
The Federal Reserve isn't ruling out raising interest rates by half of a percent instead of the typical quarter-point move if inflation remains high, Atlanta Fed President Raphael Bostic said in an interview with the Financial Times.
Bostic reiterated to the news outlet his call for three quarter-point interest rate increases in 2022, starting in March. But he didn't rule out that a more aggressive approach was possible if the data evolves.
"If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I'm going to lean into that . . . If moving in successive meetings makes sense, I'll be comfortable with that," Bostic said in the interview.
Bostic said he would be watching for a deceleration in monthly consumer price gains and whether higher wages are meaningfully boosting prices, according to the Financial Times.
After more aggressive inflation fighting comments from Fed Chair Jerome Powell this past week, the market now expects the central bank to raise rates at least five times this year, up from four previously, according to fed funds futures.
It's largely believed that those hikes will be in quarter-point increments though some in the market, including Bill Ackman, believe a half-point hike is needed to tame inflation cause the Fed is behind the curve. The Fed last raised rates by half of a point in May 2000.
Bostic rejected the idea that the Fed would raise rates too aggressively or in a damaging way, according to the report.
"Our policy path is not a constriction path. It's a less accommodative path," he told the paper. "If we do the three [interest rate increases] that I have in mind, that'll still leave our policy in a very accommodative space."
Fed's Bostic tells the FT the central bank could hike rates by a half-point if needed - CNBC
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Saturday, January 29, 2022
Wall Street split on ‘buying the dip’ in whipsawing US stock market - Financial Times
Wall Street is starkly divided over buying the dip as the US stock market is on track for its worst January since 2009.
Buying the dip, or adding shares during downturns, has proven a lucrative strategy since the start of the pandemic. Markets have rebounded higher and faster as monetary and fiscal policy kept borrowing rates near zero and flooded the economy with money.
But as the Federal Reserve moves to clamp down on high inflation, investors sharply disagree over how well markets will bounce back this time.
“The buy-the-dip reflex should be resisted in the environment we are likely to continue to face in 2022,” said Rob Sharps, the new chief executive of T Rowe Price, the fund manager which oversees $1.7tn in assets.
Bill Gross, the founder and former chief investment officer of $2.2tn fund manager Pimco, told the Financial Times: “The buy the dip mentality has been obliterated in the market.”
Markets have had a rough start to 2022 as highly-valued tech stocks and lossmaking but buzzy names are pulled back to earth. The tech-heavy Nasdaq Composite index is down nearly 13 per cent since the start of the year, while the S&P 500 index of US blue-chip stocks has dropped 7.6 per cent, even after a rally late on Friday.
Shares have moved violently as investors grapple with the path of US interest rates. The Federal Reserve this week signalled it would begin to raise rates in March, and Jay Powell, chair, left open the prospect of an aggressive sequence of rate rises during the year.
Wall Street analysts took notice: HSBC warned investors that there was little indication that Powell would step in to prop up a falling market, while Jefferies said that the more the Fed tightens, the more optimism in the markets will come into doubt.
“Any environment where there is a reversal of accommodating monetary policy makes it more difficult to expect that returns will be robust, and that it is necessarily the right thing to do to buy each pullback,” Sharps said in an interview with the FT.
Yet others are pouncing on pullbacks. The billionaire Bill Ackman, the head of the hedge fund Pershing Square, this week said his group bought more than 3.1m shares of Netflix after the video streaming company’s price had slumped.
“Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon,” Ackman said in a letter released on Wednesday.
Jonathan Gray, president of Blackstone, said earlier this week that “the market trading off and the average Nasdaq stock being down over 40 per cent [from last year’s all-time high] could create opportunities” for the private equity and alternatives manager with $881bn in assets.
And Cathie Wood of Ark Invest, whose once high-flying flagship portfolio of tech stocks is down 27 per cent since the start of 2022, this week argued that “innovation is on sale” after asset prices dropped.
Analysts note that this month’s sell-offs have been not simply driven by concerns over interest rates but fundamentals, as companies trading at high valuation multiples begin to look more precarious.
Gross said that as Fed policy tightens, investors, especially new ones who have only experienced a bull market, will shy away from buying shares on the way down “in what we’re beginning to see as a bear market”.
Additional reporting by Nicholas Megaw
Wall Street split on ‘buying the dip’ in whipsawing US stock market - Financial Times
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Friday, January 28, 2022
US labour costs climb as inflationary pressures persist - Financial Times
US labour costs have risen sharply, contributing to the rapid climb of inflation as the Federal Reserve prepares to act forcefully to temper demand in the world’s largest economy.
The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the fourth quarter increased 1 per cent, just shy of the record-setting 1.3 per cent jump seen between July and the end of September, and slightly below economists’ expectations.
That translated to a 4 per cent jump for the 12-month period ending last month. Wages shot up 4.5 per cent during that window, nearly double the pace during the same time last year. Benefits rose 2.8 per cent.
Employers in the services sector confronted the biggest increases, with total pay rising 7.1 per cent. For those in leisure and hospitality, costs jumped 8 per cent. Worker shortages that began to intensify last year have been most acute in those industries, leading to heightened competition to attract new talent and retain employees.
Sarah House, senior economist at Wells Fargo, called the slight moderation in the quarter-over-quarter pace “encouraging”, but warned that the economy was not yet “out of the woods” when it came to a worsening inflation situation.
Stephen Stanley, chief economist at Amherst Pierpont Securities, said: “If anything it feels like the momentum is gaining and the first quarter of this year could be even firmer.”
He noted the bid-up in wages heading into the new year. “Unfortunately, that gives some staying power to inflation [which] looks more and more entrenched,” he said.
Jay Powell, the Fed chair, cited the previous ECI release, which showed a 3.7 per cent increase in total pay for the 12-month period ending September, as a primary reason why the central bank decided in December to speed up the scaling back of its stimulus programme.
Rather than continuing to buy government bonds to the end of June, the Fed is now planning to cease purchases of Treasuries and agency mortgage-backed securities in early March, right around the time it is expected to begin raising interest rates for the first time since 2018.
The most recent data on labour costs were released on Friday alongside the Fed’s preferred inflation gauge. The core personal consumption expenditures (PCE) price index increased 4.9 per cent in December from the year before and another 0.5 per cent from the previous month.
That was a modest acceleration from the 4.7 per cent annual pace reported in November and the fastest rise since September 1983. Once volatile items such as food and energy are factored in, the PCE index jumped 5.8 per cent.
An increase in the price of goods drove the bulk of last month’s surge, rising 8.8 per cent in December. Expenses related to services rose 4.2 per cent.
The PCE index is calculated slightly differently than its counterpart, the consumer price index, which is running at a 7 per cent annual pace. The US commerce department also pulls from different sources, relying on business surveys to formulate the PCE index, while the Bureau of Labor Statistics looks at consumer surveys for the CPI.
The data reinforced the central bank’s decision to keep its options open for its monetary policy path forward.
“Getting policy back to a more normal stance is the equivalent of stopping putting lighter fluid on an already blazing bonfire,” said Stanley.
Powell refused on Wednesday, following the first two-day gathering of the Federal Open Market Committee, to even rule out either raising interest rates at each of the seven remaining policy meetings this year or considering supersized adjustments that bump up the federal funds rate by half a percentage point, as opposed to the typical quarter-point increase.
Market expectations for the policy path forward have since shifted, with traders now pricing in roughly four more interest rate increases in 2022 after “lift-off” from the current near-zero levels in March.
Soaring inflation has forced the Fed to assume a much more hawkish stance than initially expected just a couple of months ago. The labour market has also made significant strides and now appears historically tight owing to a severe worker shortage.
Some economists warn that may be too aggressive, especially given that economic growth is expected to slow down this year as consumption falls. Personal spending has already begun to decline, falling 0.6 per cent in December from the previous month.
“Despite the strength of price and wage inflation, it is disappointingly weak real economic growth that will prevent the Fed from delivering a full-blow Rate-maggedon this year,” said Paul Ashworth, chief US economist at Capital Economics.
Powell on Wednesday reiterated that the central bank was “attentive” to the risks caused by “persistent” wage growth, which he warned could lead to even higher inflation. “We have an expectation about the way the economy is going to be evolved, but we’ve got to be in a position to address different outcomes, including the one where inflation remains higher,” he later said.
US labour costs climb as inflationary pressures persist - Financial Times
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Regional Bank Stocks Fall After New York Community Bancorp Cuts Dividend, Posts Loss - The Wall Street Journal
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