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CPI set to influence the Fed’s 2023 plans for inflation

Avatar photo Jeah Lorraine Adams on September 14, 2023

CPI: Consumer inflation is anticipated to have fallen in December compared to November after a problematic 2022 driven by inflation and high costs.

The sudden drop in energy and fuel costs brought on the decline.

However, the yearly rate would likely remain high.

According to Dow Jones, analysts anticipate a monthly decline in the consumer price index of 0.1%.

In the meantime, a 6.5% increase in inflation is presumed.

Despite the reports, the CPI remained below its all-time high of 9.1% in June 2022.

CPI vs Core CPI

The consumer price index measures the average yearly change in prices of consumer goods and services.

Costs associated with food and energy are removed from the core CPI because they alter more frequently than other products.

This limitation is crucial because it may take time to determine the underlying price trend when food and energy expenses vary significantly from month to month or year to year.

Since it is less impacted by short-term changes in food and energy costs, the core CPI is seen as a more reliable inflation index.

It is anticipated to increase by 0.3% in December, reflecting a 5.7% annual growth.

The core CPI increased by 6% annually and 0.2% monthly in November.

Diane Swonk, the chief economist at KPMG, praised the projected drop.

“We welcome it with open arms. It’s good news,” said Swonk.

“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”

Slowed inflation outlook

The CPI will be released on Thursday, the last batch of data, before the Federal Reserve decides on interest rates on February 1.

The relevance of the inflation rate on the financial markets has increased lately.

Traders predict the CPI to reflect less inflation than analysts expect.

They cited the weaker-than-expected wage increase in the December employment report and other data points that signaled lower inflation expectations.

Stocks rose before the results were made public on Wednesday, which worried Peter Boockvar, the chief investment officer at Bleakley Financial Group.

“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.

“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”

Read also: The Fed needs freedom to make hard decisions

The Fed impact

Traders continue to wager on the central bank raising interest rates by a quarter point at its upcoming meeting in the futures market.

Policymakers are expected to raise the fed funds target rate by 0.5 percentage points, according to economists.

20% of the market anticipates a hike of 50 basis points.

State Street Global Advisors’ head economist, Simona Mocuta, saw commotion surrounding a particular data point.

“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”

“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”

According to Mocuta, the Fed may be swayed by a lower CPI.

“The market has not priced the full 50. I think the market is right in this case,” she explained.

“The Fed can still contradict the market, but what the market is pricing is the right decision.”

According to Luke Tilley, chief economist at Wilmington Trust, the decline in energy costs and the 12% decline in gasoline prices in December reduced inflation.

The CPI has not reflected a deceased pace, even though the rental market suggests a drop.

“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”

“We think there could be a sharper slowdown.”

Nearly 40% of the core CPI comprises housing costs, which are anticipated to increase by 0.6% per month.

Luke Tilley claims that landlords have complained that as the housing market gets worse, it is getting harder for them to boost rent.

“We’re pencilling in slower increases in January and February and March on that shorter leg.”

Focus on services

Economic experts have concentrated on growing service inflation in the CPI since goods inflation is likely to continue shrinking because of the stabilized supply chain.

“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.

“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”

“I think right now the focus is very much on the services side.”

The market is now concentrating on the Fed’s capacity to control inflation since it may affect how much further interest rates are hiked.

The economic slowdown brought on by the hike might be the discrepancy between a recession and a soft landing.

“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.

“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”

“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.

“It’s like a patient is getting better, but they’re not out of the hospital yet.”

Reference:

Inflation is expected to have declined in December, but it may not be enough to stop the Fed

Inflation remains a thorn, but other problems loom

Avatar photo Jerry Cooper on April 13, 2023

Inflation — More than a year later, persistent inflation continues to be a thorn in the Federal Reserve’s shoes.

Even with the banking sector’s current predicament and investors on edge after two prominent banks failing in March, inflation remains the Fed’s top concern.

However, this week’s Consumer Price Index (CPI) could determine if the central bank will need to raise rates again in May.

The CPI is set to be announced on Wednesday at 8:30 in the morning.

The upcoming index could also affect markets as Wall Street has shifted its focus from the financial system to the economy.

Greg McBride, the chief analyst at Bankrate noted, “Inflation is no less relevant than it has been for the past two years.”

“The Consumer Price remains the most-watched monthly economic report.”

What’s happening?

According to CPI readings, inflation levels have cooled down for five consecutive months.

However, they are still close to historic highs at 6%, which is above the Federal Reserve’s goal of 2%.

The March reading showed prices increasing between January and February.

Greg McBride said the increase didn’t spur any confidence of the 2% target being around.

For March, economists projected a 0.4% monthly increase in the CPI, aligning with the September – February average, keeping year-over-year averages high.

But it has presented the question of how to make the Federal Reserve and investors happy.

McBride offer some insight, saying:

“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation.”

“We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”

However, Greg Bassuk, the CEO of AXS Investments, noted that resiliently elevated prices could potentially lead to another Fed rate hike in May.

“That’s notwithstanding the slowing economy that has been weighed down even more heavily by the banking system debacle,” added Bassuk.

Effect on the market

According to US Bank Wealth Management chief equity strategist Terry Sandven, the week is set up for increased stock volatility, stuck between inflation data and the start of the first-quarter corporate earnings season.

Three prominent US banks are set to report this Friday, including:

  • JPMorgan Chase
  • Wells Fargo
  • Citigroup

“Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices,” said Sandven.

“Each will be in focus this week.”

Read also: Business Intelligence—Importance to Business’s Growth

Bank stocks

On Monday, TD Ameritrade released its March Investor Movement Index, which tracks retail investor activities.

According to the report, retail traders continued to be equities net buyers in March, which means Main Street traders are buying most of the new stock in the United States, not larger financial institutions.

The increasing power of the retail investor has been a continued trend since the onset of the pandemic, fueled by several factors like:

  • Stimulus cash
  • Easier access to trading platforms
  • Further market education

Recently, larger companies have started changing their investor relations strategies to accommodate retail investors.

Even ‘smart money’ traders have turned to Reddit for stock tips.

TD Ameritrade found  that the strongest buying interest is focused on the Financial sector, which comes despite macroeconomic catalysts in March like the collapse of Silicon Valley Bank and Credit Suisse’s emergency sale.

Lorraine Gavican-Kerr, TD Ameritrade’s managing director, said:

“March was full of surprises, but the overall impact among TD Ameritrade retail clients when it came to exposure to the markets was neutral.”

“For the second month in a row, our clients were net buyers of equities, seemingly eyeing an opportunity to buy into the Financial sector’s lows and to sell off the highs in Information Technology.”

TD Ameritrade noted that the five most popular stocks purchased were:

  • Amazon
  • Ford Motors
  • First Republic Bank
  • Rivian
  • Tesla

Meanwhile, retail investors were net sellers of:

  • Advanced Micro Devises
  • Apple
  • Intel
  • Meta
  • NVIDIA

Increased short-term inflation expectations

The Federal Reserve Bank of New York’s March Survey of Consumer Expectations was released on Monday.

It said that inflation expectations have increased at the short-term and medium-term horizons.

According to the survey, inflation expectations for 2023 have increased by half a percentage point to 4.7%, the first increase since October 2022.

The survey questions around 1,300 household heads in the United States each month.

It found that respondents were more pessimistic about the US labor market’s outlook compared to previous months.

Meanwhile, the New York Fed found that unemployment expectations increased by 1.3 percentage points, going up to 40.7%.

The recent banking crisis and looming credit crunch have raised concerns in US households.

The Federal Reserve reported that perception of credit access compared to 2022 fell in March.

The share of households saying it’s harder to obtain credit than in 2022 hit an all-time high.

Inflation has a higher toll on women, experts believe

Avatar photo Brandon Foster on April 6, 2023

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Inflation —- The high inflation has been difficult for everyone with prices surging at a rapid rate, but women are suffering a greater deal than most.

Child care prices have soared, prompting women to leave the workforce.

In recent years, US child care costs have outpaced wage growth.

According to the Bureau of Labor Statistics, day care and preschool prices jumped 5.7% annually in February 2023 and 25% in the last decade.

From 1990 to 2022, child care inflation increased by 214%, outpacing the average family income gains, which rose by 143%.

Simultaneously, sectors with the highest share of female workers are seeing inflation beat wage increases.

75% of the healthcare and education sectors consist of women, but they have had the second lowest increase in nominal wage last year.

Recent progress

The Ellevest Women’s Financial Health Index monitors indicators like employment rates, inflation, reproductive autonomy, and pay gaps.

Recently, the index found progress to be mixed.

While it rose slightly from the November 2022 lows, ongoing inflation casts an overhang on further improvements.

The 2022 drop in women’s financial health lined up with inflation levels hitting double digits.

Dimple Gosai, the head of US ESG strategy for the Bank of America, offered her insight.

“While women are paying more, they also earn less,” she explained.

“The pandemic made the child care crisis undeniably worse, and inflationary pressures are adding fuel to the fire.”

“Surprisingly, over 50% of parents spend over 20% of their income on child care in the US.”

Gosai also noted that child care costs can not only keep women out of the workforce, but also push them out, which would remove the recent progress to close gender parity.

“Caregiving responsibilities are preventing more women from getting into, remaining, and progressing in the labor force,” she continued.

“This is more the norm than the exception.”

“The pandemic worsened this gap, with women taking on more of the traditional child care burden than men.”

Child care

The child care industry is suffering from a supply crunch thanks to low worker retention, which is affected by low wages – an issue that has lingered before the pandemic.

Child care providers are dealt with a dilemma of offering better wages and affordable prices to families and caregivers.

Mike Madowitz, the director of macroeconomic policy at the Washington Center for Equitable Growth, offered some insight.

“We have seen a negative shock to the supply of child care providers in this recovery, and that could make this problem even worse going forward, but child care costs are more systemic than other shorter-term inflation pressures we’ve seen,” said Madowitz.

“Absent public investment, there’s just not much margin to give in this market, and that’s one reason the Treasury department found child care is a failed market.”

However, it isn’t just women with children who are affected by inflation.

Gosai noted that underrepresented women and minorities in higher wage industries like tech or finance are more insulated from inflation pressures.

In addition, the economic landscape has shown that women’s shopping carts are more expensive at a faster rate.

Read also: Black couples still get unfair treatment, they pay higher marriage penalty tax

Long-term impact

The negative impact of rising prices isn’t just a short-term problem, but could have a lasting impact on their financial health.

The Bank of America Institute recently found that women’s 401(k) balances are two-thirds compared to men’s.

Ariane Hegewisch, the Institute for Women’s Policy Research program director of employment and earnings, shared her thoughts.

“Because of both [the] COVID and inflation crisis, women are much more likely to have broken into their retirement savings,” she offered.

“Debt is much higher, [and] rental costs have gone up.”

“So, there’s now an even bigger hole in retirement or in wealth or any kind of security right the financial security that [women] may have, and that needs to be rebuilt.”

Madowitz said the Fed’s aggressive interest rate hikes could impact the improvement of women’s economic health and opportunity.

The Fed has been raising rates since 2022.

“If the FOMC raises interest rates too high in an effort to reach its 2% inflation target faster, that would hurt worker demand and harm those already facing more labor market barriers,” Madowitz noted.

“Namely, women workers and workers of color.”

Hegewisch also said the higher rates could lead to higher unemployment, affecting women.

“Unemployment is always higher for women of color, and men of color, than it is for others,” Hegewisch noted.

“Unemployment is double for black women compared to white women and almost as much for Latinos.”

“And so, if it doubles, it goes [up] at a much higher rate for black women than it does for white women.”

Gosai said that one solution could lift the pressures of inflation on gender parity if companies invest more in their employees’ well-being, including:

  • Enhanced reproductive health care benefits
  • Subsidized child care
  • Flexible work arrangements

Mortgage rates affected by the banking crisis

Avatar photo Brandon Foster on April 3, 2023

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Mortgage rates – For the past couple of weeks, the United States has been ushered into a banking crisis, which in turn, has affected several industries.

Despite only being March, mortgage rates are already creating a headache for prospective buyers.

They can expect mortgage rates to go down through the rest of 2023 as the banking crisis continues, which could also cool down inflation.

However, there is also the possibility of some setbacks.

The Feds

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage topped out at 7.08% in November following a steady rise in 2022 due to the Federal Reserve’s attempts to curb inflation.

The average rate trickled down through January as the economic data suggested inflation was retreating.

However, strong economic reports in February raised concerns that inflation wasn’t cool as quickly or as much as projected.

As a result, the average mortgage rate climbed back up by half a percentage point over the month after it fell to 6.09%.

In March, banks started failing, which sent rates falling again.

Despite the decline, the Federal Reserve and the bank failures didn’t directly impact mortgage rates.

Instead, the rates are indirectly affected by the actions the Fed takes or is expected to take.

Other factors are the health of the broader financial system and uncertainty that could be percolating.

On Wednesday, the Federal Reserve announced another rate hike by a quarter point to combat high inflation while considering the recent risks to financial stability.

Analysts say that despite the bank failures complicating the Fed’s actions, if it’s contained then the crisis might have helped them by bringing down prices without resorting to more interest rate hikes.

The Fed suggested on Wednesday that it could be the end of the rate hikes.

Credit and rates connection

Mortgage rates have been known for tracking the yield on 10-year US Treasury bonds.

It moves based on three factors:

  • The Fed’s actions
  • What the Fed does
  • The investors’ reactions

When Treasury yields increase, mortgage rates also go up; when they decline, mortgage rates follow.

After the Fed’s announcement on Wednesday, bond yields and the mortgage rates that shadow them dropped.

However, it isn’t all bad according to Zillow senior economist Orphe Divounguy.

Divounguy pointed out that the relationship between mortgage rates and Treasuries have slightly weakened in the past few weeks.

“The secondary mortgage market may react to speculation that more financial entities may need to sell their long-term investments, like mortgage backed securities, to get more liquidity today,” he said.

Divounguy added that as Treasuries decline, tighter credit conditions from the bank failures could limit dramatic plunging of mortgage rates.

“This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” he said.

“For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding.”

“In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”

Read also: The Fed brings up interest rates for the 9th straight week

Rates expected to stabilize in the long run

Inflation remains high, but it is slowing down.

Analysts are projecting a slower economy in the coming quarters that could contribute to bringing down inflation.

According to Mike Fratantoni, the senior vice president and chief economist of Mortgage Bankers Association, it could be good for mortgage borrowers who can expect rates to retreat throughout 2023.

Inflation is expected to improve in the second half of 2023, which could lead to stable mortgage rates.

“Expectations for slower economic growth or even a recession should bring inflation down and help mortgage rates decline,” said Divounguy.

It could be good news for home buyers as it improves affordability and brings down the cost to finance a home.

Furthermore, it could benefit sellers by reducing the intensity of an interest-rate lock-in.

Lower rates could also convince homeowners to list their home to the market.

As the inventory of homes for sale are edging around historic lows, it would add much-needed inventory to a limited pool.

“Mortgage rates are steering both supply and demand in today’s costly environment,” said Divounguy.

“Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up.”

However, the cooling inflation could bring the risk of job losses, another hurdle in the housing market.

“Of course, much uncertainty surrounding the state of inflation and this still-evolving banking turmoil remains,” Divounguy added.

On Wednesday, Fed Chair Jerome Powell said estimates of the cost of banking developments could slow the economy.

Regardless, the impact would reflect mortgage rates.

“Evidence – in either direction – of spillovers into the broader economy or accelerating inflation would likely cause another policy shift, which would materialize in mortgage rates,” Divounguy noted.

 

Mortgage rates continue their upward rise for 5 straight weeks

Avatar photo Scarlet Logan on March 20, 2023

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Mortgage – Despite a new year, the fight against inflation continues as it remains stubbornly unpredictable.

For the fifth consecutive week, mortgage rates inched toward 7%, and the Federal Reserve suggested that rates will continue increasing.

Fixed-rate average

According to Freddie Mac data released on Thursday, the 30-year fixed-rate mortgage hit an average of 6.73% in the week ending March 9.

A week before, the fixed-rate mortgage was lower at 6.65%.

Last year, the 30-year fixed rate was 3.85%.

It peaked at 7.08% in November, but the rates started dropping.

Despite the positive progress, rates started climbing again in February.

In the past month, the fixed-rate mortgage rose half a percentage point.

The robust economic data suggests that the Federal Reserve has more to do in the battle against inflation and will likely continue hiking the benchmark lending rate.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” noted Sam Khater, a chief economist from Freddie Mac.

“Overall, consumers are spending in sectors that are not interest rate-sensitive, such as travel and dining out.”

“However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

The average mortgage rate is based on the mortgage applications Freddie Mac receives from thousands of lenders across the United States.

It only covers borrowers who give a down payment of 20% with excellent credit scores.

Rate hikes confirmed to continue

At the onset of 2023, inflation showed signs of cooling off.

However, substantial employment numbers and a rising Consumer Price Index showed that inflation was still around and remained stubbornly high.

On Tuesday, Federal Reserve Chairman Jerome Powell spoke to Congress, saying the central bank will likely raise interest rates higher than before.

Economist Jiayi Xu of Realtor.com said:

“While last month Fed officials said that a smaller increase in the federal funds rate would help create a soft landing for the economy, Powell’s testimony on Tuesday made it clear that the central bank is prepared to return to a faster pace of rate increases if the incoming February economic indicators remain strong.”

She said the decision suggests that investors weren’t fully prepared as they are anxious about the Federal Reserve’s next actions.

The Fed has another rate-setting meeting on March 21 – March 22, with the possibility of another half-point rate in the cards.

Read also: Bank stocks have become a prospect amid recession fears

“Uncertainty about how high rates will go and how long they will remain elevated makes it challenging for investors to make well-informed decisions,” said Xu.

“Therefore, it’s crucial to keep a close eye on the latest developments from the Federal Reserve.”

Although the Fed doesn’t set the interest rates borrowers pay on mortgages directly, its actions still influence them.

Mortgage rates tend to track the yield on 10-year US Treasury bonds.

It moves based on anticipation of the Fed’s actions, what it actually does, and how investors react.

When Treasury yields increase, mortgage rates also go up; when they decline, so do mortgage rates.

Housing market

The rising mortgage rates have slowed down the spring selling season.

According to the Mortgage Bankers Association, applications for a mortgage slightly rose last week following three weeks of declines.

As a result, the activity is muted.

Bob Broeksmit, the president and CEO of MBA, said:

“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower.”

“The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”

According to Fannie Mae’s survey, homebuyer sentiment fell to record lows in February.

Following three months of improvement, sentiment dropped and returned the index closer to its all-time survey low from October.

The most notable drops were associated with job security and home-selling conditions.

“While the current housing market may not look promising for sellers due to factors such as an increasing number of unsold homes, longer time on market, and decelerating price growth driven by high mortgage rates, there are still opportunities to be found,” said Xu.

For example, she noted that recent sales data shows the share of first-time homebuyers is higher than last year.

“As a result, sellers with starter homes may see robust demand and retain some bargaining power.”

Additionally, Xu said the lasting presence of hybrid working models offers more flexibility for homebuyers choosing where to live.

Instead of competing for a home in dense, central areas, buyers will move away from work if they don’t commute to work every day.

“This trend could make homes with easy access to public transportation systems more attractive to home buyers, which, in turn, enhances bargaining power for the sellers,” said Xu.

She also said that sellers who are also buyers could leverage their record-high equity even if they have to adjust expectations to lower asking prices.

 

Bank stocks have become a prospect amid recession fears

Avatar photo Alice Blake on March 16, 2023

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Bank stocks – Experts estimate that major economies will either slow down or fall into a recession.

As a result, investors today are abandoning tradition in 2023, piling into major bank stocks.

Banks

Between January and late February, the Stoxx Europe 600 Banks index, consisting of 42 major European banks, climbed by 21%.

It hit a five-year high, outperforming the Euro Stoxx 600, its broader benchmark index.

Meanwhile, the KBW Bank tracks 24 of the leading US banks, and it rose by 4% in 2023, slightly outpacing the broader S&P 500.

Following the lows last fall, the two bank-specific indexes have surged.

The economy

However, the economic picture is less encouraging.

The United States and the European Union’s biggest economies are projected to grow sluggishly compared to last year.

Meanwhile, the UK output is expected to decrease.

According to former Treasury Secretary Larry Summers, a sudden recession at some point is risky for the United States.

However, central banks were forced to raise interest rates following the widespread economic weakness coinciding with high inflation.

Regardless, it has been a bonus for banks, allowing them to make larger returns on loans to households and businesses as savers deposit more money into their savings accounts.

While rate hikes have anchored big banks’ stocks, fund managers and analysts said that great confidence in their ability to endure economic storms after the 2008 global financial crisis has also played a role.

“Banks are, generally speaking, much stronger, more resilient, more capable to [withstand] a recession than in the past,” said Roberto Frazzitta, the global head of banking at Bain & Company.

Interest rate increases

Last year, policymakers launched campaigns against the increasing inflation as interest rates in major economies increased.

The steep hikes followed a period of low borrowing costs that began in 2008.

The financial crisis ruined economics, prompting central banks to slash interest rates lows to incentivize spending and investment.

For more than a decade, central banks barely budged.

Investors don’t typically bet on banks in an environment where lower interest rates typically feed into lower lender returns.

Thomas Matthews, a senior markets economist at Capital Economics, said:

“[The] post-crisis period of very low interest rates was seen as very bad for bank profitability, it squeezed their margins.”

However, the rate hiking cycle from 2022, coupled with a few signs of easing up, changed investors’ calculations.

On Tuesday, Fed Chair Jerome Powell said interest rates would rise higher than anticipated.

Read also: Fitch Ratings warns of downgraded credit ratings

Returning investors

Due to the higher potential shareholders’ returns, investors have been drawn back.

For example, Ciaran Callaghan, the head of European equity research at Amundi, said the average dividend yield for European bank stocks is currently at around 7%.

According to Refinitiv data, S&P 500’s dividend yield currently stands at 2.1% while Euro Stoxx 600 is 3.3%.

Additionally, European bank stocks rose sharply in the past six months.

Thomas Matthews attributed Capital Economics’ outperformance to US peers based on how interest rates in the countries using euros are closer to zero than in the United States, which means investors have more to gain from the increasing rates.

He also noted that it could be due to Europe’s remarkable reversal of fortune.

Wholesale natural gas prices in the region hit a record high last August, but they have since tumbled to levels prior to the Ukraine war.

“Only a few months ago, people were talking about a very deep recession in Europe compared to the US,” said Matthrew.

“As those worries have unwound, European banks have done particularly well.”

Structural changes

Right now, European economies are still weak.

Whenever economic activity slows, bank stocks are challenging targets to hit due to banks’ earnings ties to borrowers’ ability to repay loans and satisfy consumers’ and businesses’ appetite for more credit.

However, unlike in 2008, banks are better positioned to endure loan defaults.

Following the global financial crisis, regulators proactively set up measures, requiring lenders to have a sizable capital cushion against future losses.

Lenders must also have enough cash (or assets that can be quickly converted) to repay depositors and other creditors.

Luc Plouvier, a senior portfolio manager at Dutch wealth management firm Van Lanschot Kempen, noted that banks underwent structural changes in the past decade.

“A lot of the regulation that’s been put in place [has] forced these banks to be more liquid, to have much more [of a] capital buffer, to take less risk,” he noted.

Mary Daly admits more hikes might be needed

Avatar photo Brandon Foster on March 7, 2023

Mary Daly – A series of crises have tarnished this past year, but the effects of inflation are still being felt today.

While it has decreased somewhat, the Federal Reserve is still on course to raise interest rates in order to handle the lingering issue.

Mary Daly, President of the San Francisco Fed, likewise underlined the importance of another rate hike.

The news

Mary Daly suggested on Saturday that the Federal Reserve should not only raise but also maintain interest rates at their current levels.

She claimed that doing so would enable them to deal with increased prices caused by inflation.

“There is more work to do,” said Daly at Princeton University.

“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”

“Restoring price stability is our mandate, and it is what the American people expect. So, the FOMIC remains resolute in achieving this goal.”

Mary Daly also confessed that high inflation and the Fed’s aggressive rate hikes to bring prices down frightened Main Street and Wall Street.

“The responses range from fearing these actions will tip the economy into a recession to fearing they won’t be enough to get the job done.”

Concern triggered huge market volatility with the release of fresh economic data, as uncertainty encourages investors to seek quick remedies.

Yet, Daly feels that meeting the stated goal will take time and “a broader view.”

Nevertheless, Mary Daly remarked that given the volume and length of high inflation readings, the Fed’s current tightening policy was (and continues to be) fair.

Daly also calls the disinflationary trend into question, noting significant inflation in the goods, housing, and related sectors, as well as strong economic indicators.

Mary Daly is a member of the Federal Open Market Committee and attends policy meetings, but she does not currently vote on Fed policy.

Federal Reserve warnings

A week before Mary Daly’s speech, the Federal Reserve issued similar concerns.

Last Wednesday, Minneapolis Federal Reserve President Neel Kashkari remarked that he is open to the possibility of a bigger interest rate hike during the Fed’s March policy meeting.

“Whether it’s 25 or 50 basis points,” said Kashkari.

Likewise, Atlanta Fed President Raphael Bostic stated that the Fed’s policy rate should be hiked by half a percentage point at the next meeting.

The next day, Fed Governor Christopher warned that interest rates might climb quicker than planned.

He highlighted a sequence of economic numbers that were stronger than predicted.

Read also: Stock market ends February with losses

Interest rate progress

In the last year, the Federal Reserve has done a lot to keep inflation under control.

It raised its target range from near zero to 4.5% to 4.75%.

After cutting half a percentage point in December, they reduced increases to a quarter of a percentage point in February.

Inflation had reached a four-decade high in 2022, but it had started to fall in the last quarter.

Yet, January inflation data showed that the rate of price increases was steadily growing again.

Gold price

As a result of the new warnings, gold prices have come to a halt.

Prices dipped from a two-and-a-half-week high on Monday as traders anticipated US Federal Reserve Chair Jerome Powell’s decision for clues about future rate hikes.

On February 15, spot gold reached a high of $1,858.19 per ounce, but it is now down 0.3% at $1,849.33 per ounce.

Likewise, gold futures in the United States rose slightly to $1,855.10.

In addition, the dollar index increased 0.1%, making greenback-priced bullion more expensive for overseas buyers.

Awaiting testimony

Many people are looking forward to Powell’s congressional hearing on Tuesday and Wednesday, followed by the February jobs report due Friday.

“Currently, gold is in a wait-and-see mode,” said UBS analyst Giovanni Staunovo.

“There’s unlikely to be a change of script from Powell, reiterating the need for further rate hikes to bring inflation under control.”

While gold is frequently employed as an inflation hedge, rising interest rates may dampen demand for the zero-yielding commodity.

Mary Daly explored the possibility of interest rates climbing (and sticking there) if data on Saturday is hotter than expected.

According to Reuters technical analyst Wang Tao, current gold prices may continue to rise into the $1,867 to $1,876 per ounce region once resistance at $1,853 is breached.

Fast-food 1 step ahead of others amid inflation

Avatar photo Scarlet Logan on February 13, 2023

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Fast-food – After the fourth quarter, businesses from a range of industries have already begun to release their quarterly results.

It’s a mixed bag overall, while fast-food establishments are the most successful.

The positive news is a result of fast-casual and casual dining establishments that have had a difficult time bringing in new customers.

The news

Despite the fourth quarter coming to a finish, very few publicly traded restaurant firms have reported their most recent quarterly results.

The handful who wrote reports stressed a new pattern.

Customers who had to contend with inflation over the holiday season reduced their out-of-home eating and retail spending.

Instead, fast-food businesses have used their specials and discounted menus to draw clients from various socioeconomic backgrounds.

Economy resilience

Economic upheavals and downturns have affected the market throughout the years, but the fast-food industry has consistently been among the most resilient.

For instance, one of the largest fast-food players in the market, McDonald’s, reported same-store sales rising by 10.3%.

The rise was aided by low-income clients returning more frequently than they did in the previous two quarters.

According to executives, the promotion for Adult Happy Meals was a spectacular success.

When paired with McRib’s annual reappearance, they significantly increased sales.

The fast-food juggernaut’s US traffic climbed for the second straight quarter, defying industry averages.

Other chains

Yum Brands, a rival fast-food chain, also reported strong US demand.

Domestic same-store sales at Taco Bell rose by 11% while this was happening.

The excellent sales are the result of an increase in morning orders, the return of Taco Bell value meals, and the popularity of Mexican pizza.

In the US, Pizza Hut’s same-store sales climbed by 4%.

KFC experienced challenging year-over-year comparisons and a meager 1% gain.

More fast food outlets want to update their status in the coming weeks.

On Tuesday, Restaurant Brands International, the parent company of Burger King, is expected to announce its fourth-quarter results.

Pizza Hut has scheduled the announcement of its financial results for February 23.

A disappointing quarter

Despite the fact that numerous fast-food firms reported improvements, Chipotle Mexican Grill’s sales were a little lacking.

The company’s quarterly profits and sales on Tuesday fell short of Wall Street projections for the first time in more than ten years.

Brian Niccol, the CEO of Chipotle, reassured customers that there had not been any “meaningful resistance” to the fast-food company’s price hikes.

Instead, management at Chipotle offered a lengthy number of justifications for its lackluster outcomes, including:

  • Bad economic weather
  • The underperforming debut of the Garlic Guajillo Steak
  • Challenging comparisons to 2021’s brisket launch
  • Seasonality

Jack Hartung, the chief financial officer at Chipotle, attributed the decline in December to weak retail sales at the time.

“As we got around the holidays, we didn’t see that pop, that momentum, that we normally see,” said Hartung.

“Frankly, we started the quarter soft, and we ended the quarter soft.”

Read also: CSX and 2 major unions find even grounds in agreement

Chipotle stated that in January, the traffic started to increase.

The Omicron outbreaks from a year ago, which compelled Chipotle and other companies to either close their doors early or for a brief period of time, are simple to compare to, however.

According to a research note written by Bank of America analyst Sara Senatore and released on Wednesday, the mild January weather increased demand for the broader industry.

Chains that serve fast-casual food haven’t yet made their fourth-quarter earnings reports public.

Shake Shack has already selected February 16 as the date.

The fast-food chain, however, admitted at the start of January that its same-store sales growth was below Wall Street expectations.

Sweetgreen will declare its earnings on February 23, while Portillo’s will do so on March 2.

The casual dining scene

Although the fast-food sector has mostly flourished, fast-casual restaurants have faced greater challenges than casual dining venues.

Businesses that offer casual eating have had a hard time luring new customers since Chipotle, Sweetgreen, and Shake Shack rose to prominence as superior substitutes.

Red Lobster and Applebee’s employed various tactics, such as substantial discounts and increased promotional spending.

For many restaurant firms, like Brinker International, the issue already existed; inflation’s increase did little more than exacerbate it.

The company is presently working to turn around Chili’s Grill and Bar.

Brinker said at the start of the month that Chili’s traffic decreased 7.6% during the course of the three months that ended on December 28.

According to Kevin Hochman, the CEO of Brinker and former president of KFC’s US business, who talked to investors on the conference call, a drop was expected as it strives to reduce less lucrative transactions.

Chili’s raised its prices in an effort to cut down on the usage of coupons.

The Fed needs freedom to make hard decisions

Avatar photo Alice Blake on January 12, 2023

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The Fed: After prices have risen to levels not seen in decades, the Federal Reserve attempted to control inflation last year.

However, their efforts have run into complications since political meddling has limited the Fed’s authority to make decisions.

Jerome Powell, the chairman of the Fed, recently spoke on the subject.

Remarks

Jerome Powell reiterated on Tuesday that for the central bank to effectively control excessive inflation, it must be free from political pressure.

Even if it leads to politically unfavorable criticism, the Fed Chairman informed Sweden’s Riksbank that stern measures would need to be taken to stabilize prices.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” said Powell.

“But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

“The absence of direct political control over our decision allows us to take these necessary measures without considering short-term political factors.”

At a meeting to discuss the independence of central banks, the Fed Chair remarked.

There was a question-and-answer period following the comments.

Actions

Jerome Powell’s speech included no references to the course that the policy will take this year.

In 2022, the Federal Reserve raised interest rates a record seven times, for a total increase of 4.25 percentage points.

The increases raise the possibility of more hikes this year.

Read also: Apple and Tesla stocks drop in 4th quarter

Opposition

The Federal Reserve frequently makes choices that are harshly criticized.

Public officials’ grievances and critiques are nothing new, but Powell’s Fed has drawn fire from both political parties.

Prices increased under his leadership, which former president Donald Trump condemned.

Democrats like Elizabeth Warren, a progressive senator, have criticized the most recent interest rate hikes.

President Joe Biden has refrained from commenting on the Fed’s actions, stating that it is the central bank’s responsibility to deal with inflation directly.

Jerome Powell stated that political factors had not swayed him in spite of the allegations.

Calls for climate change

During his speech on Tuesday, Powell addressed the lawmakers’ calls to use the Fed’s regulatory authority to fight climate change.

Last year, he received letters from four top Republican House Financial Services Committee members.

The Republicans argued that the Federal Reserve shouldn’t control consumer demand or decide which businesses get more support.

Powell said that the Fed should continue on its current trajectory rather than deviate from pursuing perceived societal benefits that are weakly connected to their legal obligations and goals.

He asserts that the Fed’s request for large banks to evaluate their financial preparedness for climate-related calamities (such as hurricanes and floods) is the closest thing to climate-related activities they should be involved in.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections,” added Powell.

“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.”

“We are not, and we will not be, a ‘climate policymaker.'”

Climate program

A “scenario analysis” is being solicited with the inclusion of the six biggest banks in the US as part of a pilot program the Fed is launching this year.

An institution’s resilience to significant climatic disasters will be assessed through the analysis.

The test will resemble the so-called stress tests used by the Fed to assess how banks might respond to actual economic downturns.

The following banks are taking part in the exercise:

  • Bank of America
  • Citigroup
  • Goldman Sachs
  • JPMorgan Chase
  • Morgan Stanley
  • Wells Fargo

Independence

Throughout his remarks, Jerome Powell discussed central bank independence and maintained that the American people profited from it.

According to Powell, central banks’ independence empowers them to make difficult decisions.

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” he added.

Congress set the highest employment and price stability targets for the Fed and its staff to be independent and use its tools to carry out the goals.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence,” said Powell.

References:

The Fed is not a ‘climate-policy maker,’ Powell says

Powell says Fed might have to make unpopular decisions to stabilize prices

Amazon continues layoffs with 18,000 cuts announced

Avatar photo Jeah Lorraine Adams on January 12, 2023

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Amazon: Mass layoffs, also known as large-scale layoffs or workforce reduction, refer to the practice of a company dismissing a significant number of employees at the same time.

This can happen for various reasons, such as a decline in business, restructuring the company, or outsourcing certain functions.

2022 was a year that witnessed several major corporations announce laying off hundreds of thousands of workers.

Although it has already joined the movement, Amazon says it will continue to lay off employees.

The news

Amazon is one of the world’s largest and most successful online retailers.

The company initially started as an online bookstore but quickly diversified to sell various products, including electronics, clothing, home goods, and more.

In addition to its online retail business, Amazon also offers cloud computing and streaming services.

According to reports, Amazon is laying off more than 18,000 employees.

The company explained that the decision was made due to the worsening global economic outlook.

Memo

Andy Jassy, the CEO of Amazon, said the e-commerce giant would continue its layoffs early next week.

He released a memo that elaborated on the decision, saying:

“Our annual planning process extends into the new year, which means there will be more role reductions as leaders continue to make adjustments.”

“Those decisions will be shared with impacted employees and organizations early in 2023.”

According to Jassy, Amazon has yet to conclude how many other roles will be affected.

However, each leader will communicate with their respective teams when they come to a conclusion.

Additionally, the memo said executives recently met to decide how to trim the company.

Amazon executives will also prioritize what customers value and the business’s long-term health.

“This year’s review has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years,” said Jassy.

The layoffs

In November, Andy Jassy said job cuts at Amazon would continue into early 2023.

Several media outlets reported last fall that the e-commerce giant set a goal of cutting over 10,000 employees.

On Wednesday, Amazon started the layoffs.

The decision to cut jobs is supposed to help Amazon pursue long-term opportunities from a more robust cost structure.

Jassy acknowledged that the cuts are a difficult decision and that it is difficult for people.

“We don’t take these decisions lightly or underestimate how much they might affect the lives of those who are impacted,” he added.

The e-commerce giant will start informing the affected staff on January 18.

“It’s not lost on me or any of the leaders who make these decisions that these aren’t just roles we’re eliminating,” said Jassy.

“But rather, people with emotions, ambitions, and responsibilities whose lives will be impacted.”

Read also: Retailers have Grim Expectations with the 2023 Market

Shifting habit

The e-commerce giants enjoyed a booming business at the onset of the pandemic.

Consumers shifted their habits to online shopping for nearly everything they needed.

However, Amazon was struck hard by the surging inflation in 2022.

In addition, consumers demand dwindled as people started opting for in-person shopping, an area the company is currently focusing on.

Company stock

In October, Wall Street analysts were disappointed with Amazon’s holiday season forecast as it missed their expectations.

The company expected revenue for the final three months to stand between $140 and $148 billion, which was significantly lower than the expected $155 billion.

Rising inflation and recessionary fears affected consumer purchasing decisions, leading to a weaker forecast.

Amazon reported revenue of $127.1 billion for the third quarter.

While it was a 15% increase from 2021, it missed Wall Street estimates.

Other companies

Several tech companies, founders, and CEOs admitted failing to gauge pandemic demand.

As a result, many are cutting off staff.

Meta recently announced it was laying off 11,000 employees, the largest mass layoff in the company’s history.

Meanwhile, after buying Twitter for $44 billion, Elon Musk has been cutting jobs from the company left and right.

This week, Salesforce announced it was cutting off 10% of its employees.

References:

Amazon will lay off more than 18,000 workers

Amazon stock falls 14% on light holiday quarter sales forecast

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