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Delta variant likely slammed brakes on U.S. economic growth in third quarter

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October 28, 2021

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy likely grew at its slowest pace in more than a year in the third quarter as COVID-19 infections flared up, further straining global supply chains and causing shortages of goods like automobiles that almost stifled consumer spending.

The Commerce Department’s advance gross domestic product report on Thursday is also expected to show strong inflation, fueled by the economy-wide shortages and pandemic relief money from the government, cutting into growth. Ebbing fiscal stimulus and Hurricane Ida, which devastated U.S. offshore energy production at the end of August, also weighed on the economy.

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But there are signs that economic activity picked up towards the end of the quarter amid declining coronavirus cases driven by the Delta variant.

“Delta is the biggest reason why we have this noticeable deceleration,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We’re going to see growth re-accelerate in the fourth quarter and the first half of next year as the effect of the Delta variant begins to wane. It doesn’t mean that we won’t have future waves of COVID, but with each passing wave, the economic costs continue to diminish.”

GDP growth likely increased at a 2.7% annualized rate last quarter, according to a Reuters survey of economists. The poll was, however, conducted before the release of data on Wednesday showing a sharp widening in the goods trade deficit in September amid a slump in exports.

The biggest goods trade deficit on record prompted some Wall Street banks to cut their GDP growth estimate, including Goldman Sachs, which trimmed its forecast by half a percentage point to a 2.75% rate. The Atlanta Federal Reserve trimmed its already low forecast to a 0.2% pace from a 0.5% rate.

Regardless of the actual number on Thursday, the economy’s performance last quarter was probably the weakest since the second quarter of 2020, when it suffered a historic contraction in the wake of stringent mandatory measures to contain the first wave of COVID-19 infections. The economy grew at a 6.7% rate in the second quarter. The Delta variant worsened labor shortages at factories, mines and ports, gumming up the supply chain.

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The anticipated meager growth is seen coming mostly from a moderate pace of inventory drawdown. Overall inventory accumulation likely remained weak owing to shortages, especially of motor vehicles. Outside the shutdown in spring 2020, September was the worst month for motor vehicle production since 2010 because of a global shortage of semiconductors.

“The largest boost to GDP should come from a slower drawdown of inventories compared to in the second quarter, as supply shortage issues initially presented through weaker inventories but now have become a constraint on consumption instead,” said Veronica Clark, an economist at Citigroup in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is forecast to have stalled after a robust 12% growth pace in the April-June quarter. Though automobiles will account for a chunk of the anticipated stagnation, the Delta variant also curbed spending on services like air travel and dining out.

GLIMMERS OF HOPE

Inflation, which overshot the Federal Reserve’s 2% flexible target, also reduced households’ spending power. Price pressures and the supply chain disruptions saw the International Monetary Fund this month cutting its 2021 growth estimate for the United States to 6.0% from 7.0% in July.

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Slower growth will have no impact on the Fed’s plans to start reducing as soon as next month the amount of money it is pumping into the economy through monthly bond purchases.

But there is light at the end of the tunnel. The summer wave of COVID-19 infections is behind, with cases declining significantly in recent weeks. Vaccinations have also picked up. The improving public health helped to lift consumer confidence this month. The number of Americans filing new claims for unemployment benefits has dropped to a 19-month low.

That declining trend is expected to be confirmed by a separate report from the Labor Department on Thursday.

According to a Reuters survey, initial claims for state unemployment benefits likely held at a seasonally adjusted 290,000 last week. That would mark the third straight week that claims remained below the 300,000 threshold.

Economists are split on whether business investment in equipment maintained its pace of double-digit growth last quarter. Data on Wednesday showed a surge in shipments of capital goods excluding aircraft in September.

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While some economists saw this as an indication of strong equipment spending, others cautioned that high prices flattered the value of shipments. There are also concerns that the scarcity of motor vehicles hindered efforts by companies to replace or increase their auto fleet.

“Just as the collapse in motor vehicle sales is dragging down consumption, the corresponding collapse in fleet sales is also weighing on business equipment investment,” said Michael Pearce, a senior U.S. economist at Capital Economics in New York. “The sharp fall in auto and truck shipments means that, rather than a double-digit annualized gain, business equipment investment probably contracted slightly in the third quarter.”

Trade was likely a drag on GDP growth for a fifth straight quarter also following a sharp drop in industrial materials exports in September. Expensive building materials and soaring house prices likely weighed on the housing market again last quarter, while government spending probably rebounded.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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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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