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Fed raising rates over fear of future inflation

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A fear of runaway price rises rather than current economic data is driving the Federal Reserve’s commitment to raise rates in the United States, according to one economist.

U.S. core inflation crept 0.2 percent higher in April, according to fresh data Thursday, falling short of the expected 0.3 percent gain. Fuel and rental prices were the main drivers of price growth but were largely offset by flat prices in health care.

Ian Shepherdson, the chief economist at Pantheon Macro, said to “Squawk Box Europe” Friday that any inflationary impetus that would justify higher interest rates isn’t really there.

“The wage numbers for the last couple of years have been kind of flat at about 2.5 percent and that’s not really scaring anybody, so that raises the question why on earth is the Fed raising rates?,” Shepherdson asked.

“It is because of fear of what might be in the pipeline,” he added.

The last time the unemployment rate in the States reached its current level, inflation ran as high as 6 percent and Shepherdson said the Fed wants to prevent history repeating itself.

In the summer of 2017, core inflation stood at around 1.7 percent and has now hit 2.1 percent year-on-year. Shepherdson said any previous worries about falling prices should now be cast aside.

“I do think that there is no inflation is yesterday’s story, and this idea of global deflation, that story is ancient, ancient news,” he added.

In the U.S., prices at the gas pump have been moving up sharply, topping $3 a gallon in many western states.

Asked if economists were wrong to focus on core inflation, which strips out fuel, Shepherdson said while Fed members are concerned gas price spikes might stoke wage inflation, there was no evidence it had happened yet.

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What PIMCO’s John Studzinski thinks of markets

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Traders on the floor of the New York Stock Exchange.

Source: New York Stock Exchange.

LONDON — Market valuations are strong but we’re “comfortable” with them, John Studzinski, vice chairman of asset management firm Pimco told CNBC, as they reflect expectations for an economic recovery in the second half the year.

“There’s no question the current market reflects what people feel is going to be a reasonable amount of fiscal and monetary purchasing program support,” Studzinski told CNBC’s “Squawk Box Europe” Monday.

“The issue will be if the fiscal support continues well beyond this year — the impacts that might have on things like inflation, or asset valuations. But I think right now we’re comfortable that the valuations in the market, which are strong, reflect the recovery certainly in the third and fourth quarter of this year in the United States, really led globally, of course, by China.”

There have been some concerns that stock market valuations are currently too high, over-inflated by ongoing fiscal and monetary stimulus measures. Governments and central banks have been desperate to mitigate the impact of the coronavirus pandemic, which has disrupted global trade and shut down businesses for extended periods of time.

However, others believe that the market rallies reflect optimism that the global economy will soon recover once restrictive measures are lifted and the pandemic is brought under control, particularly as coronavirus vaccines are rolled out.

U.S. stocks finished mixed on Friday, although all three posted a gain for the week. The Dow registered its fifth positive week in six, while the S&P posted its third positive week in four. The Nasdaq advanced 4.19% last week for its best week since November as shares of Big Tech names pushed the index to a new all-time high.

Nonetheless there has been a surge in coronavirus cases in recent months. This was partly expected, due to the winter season, but has also been attributed to more virulent strains of the virus that have emerged in the U.K. and Europe, South America and South Africa.

Despite highlighting expectations of a recovery later this year, Studzinski did concede that “it’s going to be an uneven recovery, it’s going to be fraught with uncertainty … over mutations (in the coronavirus) and uneven distribution of the vaccines around the world.”

His comments come as the World Economic Forum kicks off this week. The annual event usually takes place in the Alpine town of Davos in Switzerland, bringing together political leaders and heads of business with the aim of discussing global challenges, and trying to find solutions. This year, however, the event has gone virtual. In 2021, a key theme of the forum is rebuilding the global economy on a fairer footing.

Studzinski said there had so far been a lack of global cooperation in tackling the pandemic, but that there could be a renewal in multilateralism under U.S. President Joe Biden.

– CNBC’s Pippa Stevens contributed reporting to this story.

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What happened when one Chinese city shut down after new Covid outbreak

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Volunteers in protective suits disinfect in a residential area of Tonghua, China on January 24, 2021.

Visual China Group | Getty Images

BEIJING — One small Chinese city’s rush to control the coronavirus has left some residents without food, and some officials without jobs.

The fallout shows the extreme lengths to which local Chinese authorities will go to try to contain the coronavirus. While new cases in China so far this year remain far below that of other countries, the stringent prevention measures can quickly cause greater disruptions to work and daily life.

After a spike in Covid-19 cases in mid-January, Tonghua city, about a 10 hour drive northeast of Beijing, announced on Wednesday that no one could leave the city. Authorities added that all apartment complexes were essentially locked down.

People stuck at home and with little time to stock up on food turned to smartphone-based delivery apps, but many complained online that they couldn’t get their orders, according to posts on Weibo, China’s version of Twitter.

On Saturday, the local Communist Party discipline and inspection commission dismissed three officials for their poor performance in the oversight of the pandemic situation, state media said. Eleven other officials received severe warnings, the report said.

Then on Sunday, Tonghua city apologized to its roughly 500,000 residents for “untimely” delivery of daily necessities and general inconveniences. The city added there was a severe shortage of workers but sufficient food.

More than 11,000 people left mostly angry comments on a national state media post about the apology on Weibo. Some users described how they or neighbors were going hungry and hadn’t received their orders for three or four days.

Many user comments noted an inability to place orders on Eleme, a food delivery app backed by Alibaba. The company did not immediately respond to a CNBC request for comment.

Nasdaq-listed Dada, a grocery delivery company which saw a surge in growth during the lockdowns of the initial coronavirus outbreak last year, said neither of its two apps operate in Tonghua city.

Covid-19 first emerged in late 2019 in the Chinese city of Wuhan. Chinese authorities shut down more than half the country in February 2020, and the outbreak stalled domestically within several weeks. Meanwhile, the virus accelerated its spread overseas in a global pandemic.

In the last two months, new domestically transmitted cases have emerged in China amid cold winter weather and a continued trickle of visitors from overseas. The northeastern province of Jilin where Tonghua city is located has become the third-hardest hit region, reporting 273 new confirmed coronavirus cases for January alone.

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Biden rejoining Paris Accords and WHO is well received: WEF chief

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Flags hang over the entrance to the Davos Congress hall during the World Economic Forum in Davos, Switzerland on Jan. 21st, 2020.

Gerry Miller | CNBC

The Joe Biden administration’s latest moves to rejoin global pacts and organizations are likely to be welcome ones for the Davos community. 

Still, the U.S. is far from “out of the woods” on its own domestic challenges and its battle with the coronavirus pandemic, World Economic Forum President Borge Brende told CNBC.

“Already, there are new signals from the U.S. administration on the climate side, re-entering the Paris Agreement, but also looking at how the U.S. can be turned into a low carbon economy are major, major steps,” Borge told CNBC’s Hadley Gamble on Sunday. These plus the administration’s decision to halt the country’s withdrawal from the World Health Organization are “well received,” he said. 

“But we are still in a situation where there (are) geopolitical confrontations,” the former Norwegian minister said, speaking ahead of the WEF’s Davos Agenda summit this week, which is being held virtually. “There is a fractured world, we’ll see how the U.S.-China relationship will develop in the years to come.” 

Some political analysts have pinned the U.S.-China relationship as the single most important geopolitical challenge and question mark for the Biden administration. But domestically, conditions also remain fraught on many fronts and it remains to be seen whether Biden, who pitched his campaign on unity and national healing, can bridge the deep divides that have only worsened over the last four years.

“The reality is that we’re still faced with a very polarized U.S., I don’t think the U.S. is out of the woods when it comes to the pandemic. The numbers are really, really bad,” Brende said. “So there is going to be also a very tough 100 days before President Biden, but I think he’s got a very experienced team with him with his cabinet.” 

The U.S. currently has the highest number of confirmed coronavirus cases and the highest reported death count from the pandemic of any country in the world. More than 419,000 people have now died from the disease in the U.S., and it continues to see record case counts, now well over 25 million since the virus was first identified in the country. The vaccination campaign is underway in the country of 330 million, but so far at a slower pace than initially planned.  

In the week following his inauguration, Biden signed a raft of orders to speed up vaccine distribution, increase testing and mandate mask wearing on federal grounds. The president now faces new and rapidly spreading variants of the virus as well as parts of the population that oppose coronavirus restrictions and distrust vaccination.    

“I think there are now some lights in the end of the tunnel in general, not at least because of the vaccination and the rollout,” Brende said. “But it’s taking time, we just have to hope that the new variants are not immune (to the vaccines).”

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