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Central banks head for stimulus exit, but some take the slow lane

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November 4, 2021

LONDON (Reuters) – A great central bank exit from the extraordinary stimulus unleashed to keep economies afloat during the COVID-19 pandemic is underway, with the United States and Australia this week moving away from hefty policy support.

But policymakers have also pushed back against investor expectations for a slew of interest rate rises, as they wait to see whether inflation remains stickier than expected. The Bank of England surprised markets on Thursday by keeping rates on hold.

Here’s a look at where policymakers stand on the path out of pandemic-era stimulus.

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(GRAPHIC: Central bank balance sheets – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkaneypq/cbanks0311.PNG)

1/ NORWAY

Norway’s central bank hiked its key rate by 25 basis points to 0.25% in September and reiterated on Thursday that it plans to tighten again in December.

That makes Norges Bank the most aggressive of the major developed economy central banks in curbing ultra-loose policy, bolstering Norway’s crown.

(GRAPHIC: Rate hike outlook boosts Norway’s crown – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkregyevm/NOK0311.png)

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2/ NEW ZEALAND

The Reserve Bank of New Zealand last month hiked rates for the first time in seven years, to 0.5%, and markets are pricing in another 0.25% raise at its Nov. 24 meeting.

New Zealand’s Consumer Price Index is surging, the unemployment rate is at record lows and policymakers warn that the country’s red-hot housing market is unsustainable.

Traders bet rates will exceed 2% by August 2022.

(GRAPHIC: Central bank interest rates – https://fingfx.thomsonreuters.com/gfx/mkt/xmvjorgybpr/Rates0311.PNG)

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3/ CANADA

The Bank of Canada last week said it was ending its bond-buying programme given a robust economy, high COVID-19 vaccination rates and a strong jobs market.

It also signalled that rates could rise as early as April 2022 and said inflation would remain above target for much of next year, putting Canada firmly in the hawkish camp.

(GRAPHIC: US jobs key to Fed outlook – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjororkvr/Fed0411.PNG)

4/ UNITED STATES

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The Federal Reserve is taking the slow lane to the policy exit. It said this week it will “taper” its $120 billion monthly asset purchases to zero by mid-2022.

But it stressed that tapering does not mean a rate rise will follow soon, as it expects higher inflation to be “transitory”. Chair Jerome Powell added that the central bank would be patient and wait for more jobs growth before tightening.

(GRAPHIC: Markets react to BOE rate decision – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjorobkvr/GB0411.png)

5/ BRITAIN

The Bank of England dashed market expectations for an interest rate rise on Thursday, with a 7-2 vote by policymakers to keep rates at a record low of 0.1%.

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But the United Kingdom’s central bank said it would be necessary to raise rates “over coming months” if labour market data was in line with forecasts.

After several policymakers gave recent strong signals about the need to raise rates soon only to vote against one, money markets on Thursday scrambled to dial back expectations – an initial hike is now priced in for February.

6/ AUSTRALIA

Australia’s central bank remains in the dovish camp, but only just.

On Tuesday the Reserve Bank of Australia took a major step towards unwinding pandemic stimulus. It abandoned an ultra-low bond yield target and opened the door for a first rate hike in 2023, earlier than a previous forecast of 2024.

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Governor Philip Lowe pledged to be patient with policy, however, and rejected market talk of a hike as early as May.

7/ SWEDEN

Markets expect Sweden’s 0% rate will rise 75 bps by Q3 2024, versus the Riksbank’s view for unchanged rates in this period.

It has ended pandemic-era lending facilities but says rates will rise only if there are big changes in inflation pressures.

Inflation, at more than decade-highs, may top 3% next year, but is expected to ease thereafter. Bank boss Stefan Ingves sees an inflation overshoot as easier to tackle than an undershoot.

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8/ EURO ZONE

The European Central Bank remains dovish. Chief Christine Lagarde reckons a 2022 rate rise is very unlikely as inflation is still too low.

With inflation at a 13-year-high, markets are betting that the ECB will lift rates next year for the first time since 2011, but Lagarde has pushed back against that.

Long-term inflation pressures remain weak and the ECB will likely stick with asset purchases long after its pandemic emergency bond buying programme is scheduled to end in March.

(GRAPHIC: Life after PEPP – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnkmyjpr/PEPP0311.PNG)

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9/ JAPAN

Japan is an outlier. The Bank of Japan last week dismissed concerns that a weakening yen is stoking inflation, which has boosted wholesale price growth to 13-year highs.

The BOJ cut its consumer inflation forecast for the year ending March 2022 to 0% from 0.6% and slashed this year’s economic growth forecast, signs that it will keep its target for short-term interest rates at -0.1% for now.

(GRAPHIC: BOJ – https://fingfx.thomsonreuters.com/gfx/mkt/dwvkregzkpm/BOJ.JPG)

10/ SWITZERLAND

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The Swiss National Bank is likely to lag its peers in lifting from -0.75%, currently the lowest benchmark interest rate in the world.

Unlike the ECB and the Fed, the SNB has not tweaked its framework to introduce a higher inflation tolerance threshold. That implies it would need to act if inflation accelerates above its price stability target of just below 2%.

Swiss inflation is running at two-year highs of 0.94% and markets are pricing in a 25 basis-point rate rise by end-2022.

The Swiss franc is trading near 11-month highs versus the euro, aided by some market speculation that it could tighten before the ECB.

(GRAPHIC: SNB – https://fingfx.thomsonreuters.com/gfx/mkt/egpbkanoavq/SNB.JPG)

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(Reporting by Tommy Wilkes, Saikat Chatterjee, Sujata Rao and Dhara Ranasinghe in London; Compiled by Dhara Ranasinghe; Editing by Catherine Evans)

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Wood’s ARK fund fails to join broad market rally as lockdown stocks slip

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November 30, 2021

By David Randall

NEW YORK (Reuters) – The broad market relief rally on Monday left many so-called stay-at-home stocks behind, dealing another blow to Cathie Wood’s ARK Innovation fund.

The $18.6 billion ARK Innovation fund, which outperformed all other U.S.-based equity funds last year due to its outsized holdings of stocks that rallied during the economic lockdowns, dropped 0.5% in morning trading Monday, well behind the 1% gain in the S&P 500.

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The benchmark index dropped nearly 2.3% Friday on news a new coronavirus variant, now known as Omicron, had been identified in southern Africa, spurring new travel restrictions worldwide. Yet global equity markets made up some of that lost ground Monday on reports the new variant may produce mild symptoms.

Signs Omicron will not deal a severe blow to the economy are prompting investors to remain in cyclical stocks, said Phil Orlando, chief equity market strategist at Federated Hermes.

“This is not February of 2020 when the world is about to shut down. If anything we think the economy will continue to improve from here,” he said.

ARK Innovation’s declines were widespread Monday, with 8 out of the fund’s 10 largest holdings down for the day. Telemedicine company Teladoc Health Inc, the fund’s second-largest holding, fell 5.1%, while streaming company Roku Inc shed 2.6% and Zoom Video Communications Inc lost 3.2%.

For the year, ARK Innovation is down 14%, while the benchmark S&P 500 is up 23.4%. That underperformance places ARK Innovation among the worst-performing mid-cap growth funds for the year to date, according to Morningstar. It remains among the top-performing funds over the last 5 years.

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Ark did not respond to a request to comment for this story.

(Reporting by David Randall; Editing by Mark Porter)

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Oil prices rise on bets OPEC+ will hold off output hike

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November 30, 2021

By Sonali Paul

MELBOURNE (Reuters) – Oil prices climbed on Tuesday, extending a rebound from last week’s plunge on growing expectations major producers would pause plans to add crude supply in January amid uncertainty over the severity of the Omicron coronavirus variant.

U.S. West Texas Intermediate (WTI) crude futures jumped 99 cents, or 1.4%, to $70.94 a barrel at 0105 GMT, adding to a 2.6% rise on Monday.

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Brent crude futures climbed 82 cents, or 1.1%, to $74.26 a barrel, after gaining 1% on Monday.

Oil plunged around 12% on Friday along with other markets on fears the heavily mutated Omicron would spark fresh lockdowns and dent global growth.

The World Health Organization said on Monday Omicron posed a very high risk of infection surges, and several countries stepped up travel curbs. It is still unclear how severe the new variant is and whether it can resist existing vaccines.

With the demand outlook under a cloud, expectations are growing that the Organization of the Petroleum Exporting countries, Russia and their allies, together called OPEC+, due to meet on Dec. 2 will put on hold plans to add 400,000 barrels per day (bpd) of supply in January.

“We think the group will lean towards pausing output hikes in light of the Omicron variant and the oil stockpile release by major oil consumers,” Commonwealth Bank commodities analyst Vivek Dhar said in a note.

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Pressure was already growing within OPEC+ to reconsider its supply plan after last week’s release of emergency crude reserves by the United States and other major oil-consuming nations to address soaring prices.

“Following the global strategic reserve releases and the announcement of dozens of countries restricting travel to and from South Africa and neighbouring nations, OPEC and its allies can easily justify an output halt or even a slight cut in production,” OANDA analyst Edward Moya said in a note.

Also weighing on the market is the prospect of a resumption of oil exports from Iran, following upbeat comments from diplomats as talks resumed on Monday between world powers and Iran on reviving a nuclear pact.

(Reporting by Sonali Paul. Editing by Gerry Doyle)

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Main IKEA retailer’s profits jump despite ‘unprecedented challenges’

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November 30, 2021

By Anna Ringstrom

STOCKHOLM (Reuters) – Ingka Group, the owner of most IKEA stores world-wide, reported on Tuesday a jump in annual profit on the back of record demand for home furnishing as people stay at home more due to the pandemic.

Despite more temporary store closures due to pandemic related restrictions than the year before, and product shortages due to the global supply chain crisis, operating profit in the 12 months through August was up 31% at 1.9 billion euros. Sales were up 6%, to above pre-pandemic levels, with online sales jumping to account for 30% of total sales, against 18% the year before.

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Compared to the pre-pandemic fiscal 2019, profit was still down, by 8%, due to high investment levels. Capital expenditure was up 52% on the year, at 3.2 billion euros, as Ingka accelerated investments in digitalisation, new inner-city store formats, existing stores, and distribution and delivery networks.

Chief Financial Officer Juvencio Maeztu told Reuters he expected sales to grow also in the current fiscal year, and profits to be at least as high as in the past year. Investment levels would probably remain at least as high as in the past year, he said.

“Our journey to create a better IKEA forges ahead in a world that faces unprecedented challenges. COVID-19 will continue to impact our business and the communities we are a part of,” the company said in a statement.

“The global supply and transport crisis will require a resilient, flexible response. Efforts across the value chain will continue to mitigate the challenges with product availability, inflation, prices of raw materials and transport that are expected to continue into FY22.”

Budget furniture brand IKEA operates through a franchise system, with Ingka the main franchisee to brand owner Inter IKEA with 392 stores including city stores, and 73 smaller store formats.

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Inter IKEA, which is in charge of design and supply, in the past year absorbed substantially higher costs for raw materials and transports, but has flagged it will raise prices to its retailers this year in the face of continued high supply related costs.

Ingka’s Maeztu said in the interview that he could not rule out that Ingka would also raise prices this year.

(Reporting by Anna Ringstrom; editing by Richard Pullin)

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