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Ford, GM juggle high prices, supply chain pressure in Tesla’s shadow

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October 27, 2021

DETROIT (Reuters) -Detroit automakers Ford Motor Co and General Motors Co both took advantage of insatiable demand from U.S. consumers for trucks and SUVs to offset the pain caused by supply chain bottlenecks.

But both automakers warned investors that the cost pressures created by disruptions in the global semiconductor supply chain and price spikes for other commodities will continue well into next year.

For the Detroit automakers, that means sustaining a complex juggling act: Pushing the price envelope on popular vehicles such as the Ford F-150 or Cadillac Escalade while scrambling to stabilize flows of semiconductors and keeping a lid on the costs of raw materials from steel to aluminum to magnesium.

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How much higher prices https://www.reuters.com/business/us-companies-keep-prices-high-supply-chain-headaches-persist-2021-10-27 can go is a key question. The average GM vehicle sold for more than $47,000 during the third quarter. Ford raised prices on vehicles sold in North America by nearly $3,500 each, on average. Both companies said the higher prices offset higher raw material costs in the quarter.

The results Ford and GM reported on Wednesday show managing the supply chain pressure will not be easy, and that investors are watching the companies closely and critically.

GM shares tumbled 5.2% on Wednesday even though the company said its full-year 2021 operating profits would be at the high end of a range between $11.5 billion to $13.5 billion.

Both of the once-dominant Detroit automakers are now overshadowed by electric vehicle maker Tesla Inc, which last week reported stronger profit margins and earlier this week achieved a market capitalization of $1 trillion, more than its top five rival automakers combined.

While relying almost entirely for now on profits from petroleum-fueled trucks, both GM and Ford executives talked up their ambitions to challenge Tesla in the EV market.

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GM Chief Executive Mary Barra told CNBC the company could “absolutely” catch up to Tesla in U.S. sales of EVs by 2025. Ford executives said they will invest $30 billion in battery electric vehicle development from 2020-2025.

Ford Chief Executive Jim Farley said the automaker has orders for 160,000 of its electric F-150 Lightning pickups, and its electric Transit commercial van is “completely sold out.”

Ford reported a stronger-than-expected third-quarter profit https://www.reuters.com/business/autos-transportation/ford-motor-posts-stronger-than-expected-profit-raises-full-year-forecast-2021-10-27 and raised its full-year earnings forecast as strong demand for its trucks helped offset the hit from a global semiconductor shortage.

However, Ford cautioned that higher steel and aluminum prices could cost it $1.5 billion next year, and warned of “inflationary pressure impacting a broad range of costs” in 2022.

Ford reported revenues of $35.7 billion for the latest quarter – more than GM, long the larger company by vehicle unit sales and overall revenue. GM earlier on Wednesday reported quarterly revenue https://www.reuters.com/business/autos-transportation/gm-upbeat-full-year-earnings-despite-quarterly-profit-drop-2021-10-27 of $26.8 billion.

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Barra said the company was hit by pandemic-related shutdowns of semiconductor factories in Malaysia. Ford executives said their supplies of chips improved.

Ford’s net income fell to $1.8 billion, from $2.4 billion a year earlier. Still, Ford said it will restore a quarterly dividend, paying shareholders 10 cents a share or $400 million in total in the fourth quarter.

Ford’s Farley said the automaker expects a rapid recovery as the pandemic and supply chain snarls ease.

Another challenge GM and Ford will share if supply chain pressures do ease in the second half of 2022 is finding a new sweet spot for prices, production volumes and inventories of vehicles at dealerships.

Ford officials said the company wants to aim for 50 days of vehicles in stock, not the 75 that was normal before the pandemic. Barra said GM also wants to keep inventories in tighter check.

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“As availability does improve … the very strong pricing will mitigate some,” Barra said. “But we will be very disciplined.”

(Reporting by Paul Lienert and Ben Klayman in Detroit; Writing by Joseph White; Editing by Cynthia Osterman and Sonya Hepinstall)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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