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Inflation, wage data, challenge Fed ‘transitory’ narrative

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November 1, 2021

By Howard Schneider

WASHINGTON (Reuters) – Price and wage increases running at multi-decade highs may challenge Federal Reserve officials this week as they try to maintain a balance between ensuring inflation remains contained and giving the economy as much time as possible to restore the jobs lost since the pandemic.

With investors already wagering the Fed will raise rates twice next year, a much sooner and faster pace than policymakers themselves have projected, economists at Goldman Sachs have become the latest to accelerate their rate hike call – moving it ahead a full year to July 2022.

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By then, Goldman economist Jan Hatzius and others wrote that they expect inflation as measured by the closely monitored core personal consumption expenditures price index, still to be above 3% – a run of inflation not seen since the early 1990s and one well above the Fed’s 2% target.

Aspects of the job market, particularly the labor force participation rate, are unlikely to have recovered to pre-pandemic levels, and would seemingly still be short of the “maximum employment” the Fed has promised to restore before raising interest rates. But at that point, the Goldman team wrote, Fed officials would “conclude that most if not all of the remaining weakness in labor force participation is structural or voluntary,” and proceed with rate hikes to be sure inflation remains controlled.

“Since the (Federal Open Market Committee) last met in September, the unemployment rate has fallen further https://www.reuters.com/world/us/us-job-growth-slows-sharply-september-unemployment-rate-falls-48-2021-10-08, average hourly earnings and the employment cost index have posted strong increases https://www.reuters.com/article/idCAKBN2HJ1N8?edition-redirect=ca, inflation has remained high,” they wrote, challenging the Fed’s narrative that inflation will pass on its own without using a rate increase to tighten credit conditions and slow business and household purchases.

COLLAPSING TIMETABLE

The Fed meets this week and will issue a new policy statement on Wednesday at 2 p.m. (1800 GMT), with a press conference following at 2:30 p.m. (1830 GMT) by Fed Chair Jerome Powell. Officials are expected to approve plans for scaling back their current $120 billion in monthly bond purchases that would phase them out completely by the middle of next year – a first step away from the core policies put in place in early 2021 to battle the economic fallout from the pandemic.

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Fed officials have tried to separate that decision from their eventual, and more consequential, call on when to raise interest rates. The benchmark for a rate hike was established last year when the Fed said its policy interest rate would not be increased until the economy had returned to maximum employment, and “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

At the time, policymakers thought they would have ample time to eventually phase out the bond purchases with little risk of inflation. Even as prices started to accelerate earlier this year Fed officials argued the high pace would prove “transitory” and not rush them into a rate hike.

The timetable, however, may be collapsing on them.

Goldman economists now see a “seamless” handoff from the bond taper to rate increases next year, a view that parallels the view now prevailing in interest rate futures markets.

According to the CME Group’s FedWatch https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html tool, trading in federal funds futures contracts now implies a greater than 65% probability that the Fed will raise rates in June, right as the taper is expected to end, with a second increase expected in November. A month ago, rates market indicators signaled less than a 20% likelihood of a rate hike as early June and an comparably negligible probability for two hikes next year.

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TRANSITORY THESIS ‘NOT AGED WELL’

It may be a confusing moment when it comes to inflation. Blamed at first on what were expected to be temporary supply disruptions and a bulge of consumer spending on goods that were becoming hard to find in some cases, the pace of price hikes has remained higher for longer than expected.

Goods inflation is not only expected to ease next year, but actually reverse in a round of falling prices. But the cost of services is expected to make up the difference, and particularly if a recent jump in employee compensation proves persistent.

The rise in wages and benefits will present a particular challenge to the central bank to determine if employees are getting paid better because productivity is rising, or because job markets and the numbers of available workers have been thrown out of synch by the pandemic.

One would be seen as a positive development; the other as potentially raising inflation risks even higher.

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“All this puts Powell in the hot seat at the November meeting to a much greater extent than seemed likely even a few weeks ago,” as he tried to balance a committee roughly evenly split between those ready to raise rates next year and those ready to show more patience, wrote Evercore ISI vice chair Krishna Guha.

“None of this proves that the transitory thesis will ultimately be wrong,” he wrote, but the “tests for believing that excess inflation will likely prove transitory have not aged well.”

(Reporting by Howard Schneider; Editing by Dan Burns and Daniel Wallis)

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Delta flight from South Africa to Atlanta diverted to Boston for “technical specifications”

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November 28, 2021

(Reuters) -Delta Air Lines said a flight from South Africa to the United States was temporarily diverted from Atlanta to Boston on Sunday for technical reasons.

Flight 201, an Airbus A350, from Johannesburg was initially set to arrive at Hartsfield–Jackson Atlanta International Airport on Sunday but was instead routed to Boston’s Logan International Airport, Delta said.

The diversion “has to do with technical specifications of our A350 aircraft and the payload of this particular flight,” the company said in an email.

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“This can happen on ultra-long-haul flights when optimal operating conditions can’t be met,” it said.

The Federal Aviation Administration told Reuters it would investigate the situation.

The flight, which was initially scheduled to land in Atlanta at 8:15 EST (1215 GMT), was rescheduled to land at in Boston at 9:27 a.m. before departing for Atlanta at 10:40 a.m., it said.

The company did not cite the newly discovered Omicron variant of the coronavirus, which has been detected in South Africa, as a reason for the temporary diversion.

More than a dozen passengers on a flight from Johannesburg to Schiphol that landed Friday tested positive https://www.reuters.com/world/europe/dutch-set-announce-findings-omicron-cases-among-safrica-travellers-2021-11-28 for the new variant, Dutch authorities said on Sunday.

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(Reporting by Peter Szekely in New York and David Shepardson in Washington; Editing by Heather Timmons and Mark Porter)

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Chip shortage to cost Daimler Truck billions in revenues – Automobilwoche

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November 28, 2021

BERLIN (Reuters) – Daimler Truck Chief Martin Daum expects the global chip shortage to hit revenues by several billion euros this year and sees the problem continuing into next year, Automobilwoche reported on Sunday.

The world’s largest commercial vehicle maker, to be spun off from Daimler on Dec. 10, has outlined cost-cutting measure aimed at boosting profit margins as it struggles with chip shortages hurting the entire sector.

Daum said there would be a significant financial hit.

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“It is a huge sum,” Daum told Automobilwoche, saying the company would sell a “mid five-digit number” fewer vehicles than it could have.

With an average price of 100,000 euros ($113,170) per vehicle, this means several billion euros in lost revenues, reported Automobilwoche.

“We also have many vehicles sitting in the factory where just one part is missing. These deliveries are a priority because they are already sold,” said Daum.

He also told Automobilwoche that supply problems are likely to continue in 2022.

($1 = 0.8836 euros)

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(Reporting by Madeline Chambers, Editing by Louise Heavens)

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It’s raining dividends, hallelujah! Canadian banks set to post strong results

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November 28, 2021

By Nichola Saminather

TORONTO (Reuters) – Canada’s top six banks are expected to resume raising dividends and share buybacks after nearly a two-year hiatus and report strong quarterly earnings this week, which could boost the sector’s appeal to yield-hungry investors even as stocks trade close to all-time highs.

The market will also be looking for clues on the banks’ expected expense growth into next year as wage pressures intensify, and long-awaited improvements in net interest margins as interest rates rise.

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The “big six” Canadian banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia (Scotiabank), Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – on average have a dividend yield of 3.3%, according to Reuters calculations.

That compares with the global sector median of 2.5%, according to Refinitiv data.

The dividend increases, which would be the first since the country’s financial regulator imposed a moratorium in March 2020 that was lifted earlier this month, could range from 10% for Scotiabank at the lower end to 34% at National Bank, Gabriel Dechaine, an analyst at National Bank Financial, wrote in a Nov. 22 note describing the coming hikes as a “dividend growth tsunami.”

The banks are also expected to announce repurchases of about 2% of their outstanding shares on average.

“It’s going to be a significant (dividend) increase, and will help them reduce excess capital on their balance sheets,” said Steve Belisle, portfolio manager at Manulife Investment Management. “That flows through to better ROE (return on equity).”

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Even without the higher dividends or buybacks, Canadian bank shares have rallied to record highs, driven in part by better-than-expected earnings due to the release of reserves set aside to cover loan losses that haven’t materialized.

LOAN GROWTH ACCELERATION

The Canadian banks will be reporting their fourth-quarter earnings, with Scotiabank kicking off the results on Tuesday.

Analysts expect adjusted earnings for the top six lenders to jump about 37% from the year-earlier period, helped by a pick-up in business and credit card lending, strong mortgage growth and continued reserve releases.

An acceleration in loan growth is expected, as savings built up during the COVID-19 pandemic have lifted consumers’ and businesses’ purchasing power even at higher prices, with the broader economic recovery adding fuel to the fire, said Philip Petursson, chief investment strategist at IG Wealth Management.

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The one blot on the horizon may come in the form of non-interest expenses. They could be 1% higher than in the third quarter, with much of the anticipated rise driven by variable compensation, and up 4% in fiscal 2022 on rising labor costs and continued investments in technology, CIBC Capital Markets analysts wrote in a note.

Earnings from capital markets earnings could also decline, although higher-than-expected trading revenues could help offset lower investment banking fees, some analysts said.

Profits are expected to be 6.6% lower than in the third quarter, largely due to releases of reserves, which are difficult to estimate and have driven better-than-expected results in past periods, and could again lead to positive surprises, analysts said.

The banks’ improving revenue growth, strong capital positions and expectations for returns on equity to remain in the mid-teens for longer than expected are positives, National Bank’s Dechaine said.

Wealth and asset management units are also likely to have seen further growth, as consumers continued to deploy cash piles they’ve amassed during the pandemic, Petursson said.

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“It’s really hard to see where the warts would be on the banks’ earnings,” he added.

(Reporting by Nichola Saminather; Editing by Denny Thomas and Paul Simao)

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