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Mexican auto production and exports are surging as NAFTA talks drag on

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Vehicles stand in a lot before export at the Port of Veracruz in Veracruz, Mexico.

Brett Gundlock | Bloomberg | Getty Images

Vehicles stand in a lot before export at the Port of Veracruz in Veracruz, Mexico.

While President Donald Trump and his negotiators press Mexico for changes in the North American Free Trade Agreement, auto plants south of the border are cranking out vehicles at a record pace.

New data from the Mexican Automotive Industry Association shows exports to the U.S. in 2018 are up 9.5 percent. That is a faster pace of growth than that of all auto exports from Mexico so far this year.

Meanwhile, auto production in Mexico is up 6.2 percent through the first two months of the year. The country is on pace to produce more than 4 million vehicles annually for the first time ever.

The numbers are not surprising since most automakers have not slowed down production in Mexico, despite threats from Trump to slap punitive taxes on cars and trucks built in Mexico and exported to the U.S.

In early 2017, the president tweeted, “Toyota Motor said will build new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax!”

A few months after that tweet was sent out, Toyota announced plans to expand production in the U.S. It was one of several auto companies, including BMW, General Motors, Ford and Fiat Chrysler to announce hefty investments and production increases for its operations in the United States.

While automakers are planning more production in the U.S., they are still expanding south of the border. Both General Motors and Fiat Chrysler increased production in Mexico last year by 14.6 percent and 39.1 percent, respectively. Meanwhile, Mercedes is planning to open a plant in that country later this year and BMW will be opening its first Mexican auto plant next year.



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Deutsche Bank warns of global ‘time bomb’ coming due to rising inflation

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A customer shops for meat at a Costco store on May 24, 2021 in Novato, California.

Justin Sullivan | Getty Images

Inflation may look like a problem that will go away, but is more likely to persist and lead to a crisis in the years ahead, according to a warning from Deutsche Bank economists.

In a forecast that is well outside the consensus from policymakers and Wall Street, Deutsche issued a dire warning that focusing on stimulus while dismissing inflation fears will prove to be a mistake if not in the near term then in 2023 and beyond.

The analysis especially points the finger at the Federal Reserve and its new framework in which it will tolerate higher inflation for the sake of a full and inclusive recovery. The firm contends that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have dire impacts.

“The consequence of delay will be greater disruption of economic and financial activity than would be otherwise be the case when the Fed does finally act,” Deutsche’s chief economist, David Folkerts-Landau, and others wrote. “In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”

As part of its approach to inflation, the Fed won’t raise interest rates or curtail its asset purchase program until it sees “substantial further progress” toward its inclusive goals. Multiple central bank officials have said they are not near those objectives.

In the meantime, indicators such as the consumer price and personal consumption expenditures price indices are well above the Fed’s 2% inflation goal. Policymakers say the current rise in inflation is temporary and will abate once supply disruptions and base effects from the early months of the coronavirus pandemic crisis wear off.

The Deutsche team disagrees, saying that aggressive stimulus and fundamental economic changes will present inflation ahead that the Fed will be ill-prepared to address.

“It may take a year longer until 2023 but inflation will re-emerge. And while it is admirable that this
patience is due to the fact that the Fed’s priorities are shifting towards social goals, neglecting inflation leaves global economies sitting on a time bomb,” Folkerts-Landau said. “The effects could be devastating, particularly for the most vulnerable in society.”

Most on the Street see tame inflation

To be sure, the Deutsche position is not widely held by economists.

Most on Wall Street agree with the Fed’s view that current inflation pressures are transitory, and they doubt there will be any policy changes soon.

Jan Hatzius, chief economist at Goldman Sachs, said there are “strong reasons” to support the position. One he cites is the likelihood that the expiration of enhanced unemployment benefits will send workers back to their jobs in the coming months, easing wage pressures.

On price pressures in general, Hatzius said that much of current spike is being driven by “the unprecedented role of outliers” that will ebb and bring levels back closer to normal.

“All this suggests that Fed officials can stick with their plan to exit only very gradually from the easy current policy stance,” Hatzius wrote.

That will be a mistake, according to the Deutsche view.

Congress has approved more than $5 trillion in pandemic-related stimulus so far, and the Fed has nearly doubled its balance sheet, through monthly asset purchases, to just shy of $8 trillion. The stimulus continues to come through even with an economy that is expected to grow at about a 10% pace in the second quarter and an employment picture that has added an average 478,000 jobs a month in 2021.

“Never before have we seen such coordinated expansionary fiscal and monetary policy. This will continue as output moves above potential,” Folkers-Landau said. “This is why this time is different for inflation.”

The Deutsche team said the coming inflation could resemble the 1970s experience, a decade during which inflation averaged nearly 7% and was well into double digits at various times. Soaring food and energy prices along with the end of price controls helped push that era’s soaring inflation.

Then-Fed Chairman Paul Volcker led the effort to squash inflation then, but needed to use dramatic interest rate hikes that triggered a recession. The Deutsche team worries that such a scenario could play out again.

“Already, many sources of rising prices are filtering through into the US economy. Even if they are transitory on paper, they may feed into expectations just as they did in the 1970s,” they said. “The risk then, is that even if they are only embedded for a few months they may be difficult to contain, especially with stimulus so high.”

The firm said interest rate hikes could “cause havoc in a debt-heavy world,” with financial crises likely particularly in emerging economies where growth won’t be able to overcome higher financing costs.

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Apple is turning privacy into a business advantage

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Apple unveiled new versions of its operating systems on Monday which showed that the company’s focus on privacy has taken a new turn. It’s not just a corporate ideal or a marketing point anymore. It’s now a major initiative across Apple distinguishing its products from Android and Windows competition.

Apple has positioned itself as the most privacy-sensitive big technology company since Apple CEO Tim Cook wrote an open letter on the topic in 2014. Since then, Apple has introduced new iPhone features that restrict app access to personal data and advertised privacy heavily in television ads.

But Monday’s announcements showed that Apple’s privacy strategy is now part of its products: Privacy was mentioned as part of nearly every new feature, and got stage time of its own.

Privacy-focused features and apps announced by Apple on Monday for forthcoming operating systems iOS 15 or MacOS Monterey included:

  • No tracking pixels. The Mail app will now run images through proxy servers to defeat tracking pixels that tell email marketers when and where messages were opened.
  • Private Relay. Subscribers to Apple’s iCloud storage service will get a feature called iCloud+ which includes Private Relay, a service that hides user IP addresses, which are often used to infer location. An Apple representative said it’s not a virtual private network, a type of service often used by privacy-sensitive people to access web content in areas where it’s restricted. Instead, Apple will pass web traffic through both an Apple server and a proxy server run by a third party to strip identifying information.
  • Hide My Email. iCloud subscribers will be able to create and use temporary, anonymous email addresses, sometimes called burner addresses, inside the Mail app.
  • App Privacy Report. Inside the iPhones settings, Apple will tell you which servers apps connect to, shining light on apps that collect data and send it to third parties the user doesn’t recognize. It will also tell users how often the apps use the microphone and camera.

Leveraging Apple’s chip chops

With its focus on privacy, Apple is leaning on one of its core strengths. Increasingly, data is being processed on local devices, like a computer or phone, instead of being sent back to big servers to analyze. This is both more private, because the data doesn’t live on a server, and potentially faster from an engineering standpoint.

Because Apple designs both the iPhone and processors that offer heavy-duty processing power at low energy usage, it’s best poised to offer an alternative vision to Android developer Google which has essentially built its business around internet services.

This engineering distinction has resulted in several new apps and features that do significantly more processing on the phone instead of in the cloud, including:

  • Local Siri. Apple said on Monday that that Siri now doesn’t need to send audio recordings to a server to understand what they say. Instead, Apple’s own voice recognition and processors are powerful enough to do them on the phone. This is a major difference from other assistants like Amazon’s Alexa, which uses serversto decipher speech. It could also make Siri faster.
  • Automatically organizing photos. Apple’s photos app can now use AI software to identify things inside your photo library, like pets, or vacation spots, or friends and family, and automatically organize them into galleries and animations, sometimes with musical accompaniment. Many of these features are available in Google Photos, but Google’s software requires all photos to be uploaded to the cloud. Apple’s technology can do the analysis on the device and even search the contents of the photos with text.

Apple’s privacy infrastructure also allows it to expand into big new markets like online payments, identity, and health, both from a product and marketing perspective.

It can build new products while being sure that it’s following best practices for not collecting unnecessary data or violating policies like Europe’s strict General Data Protection Regulation (GDPR).

In addition, users may feel more comfortable about features that deal with sensitive data or topics — like finance or health — because they trust Apple and its approach to data.

Features introduced by Apple on Monday show how the company is using its user data position to break into these lucrative markets.

  • Monitoring walking health and sharing medical records. Apple’s health app can now use readings from an iPhone, such movement when the user is walking, to warn them that they might be at risk for a harmful fall because they’re walking unsteadily. Apple will also enable users who connect their iPhone to the health records system to share those records with a doctor, friends, or family. Health data is among the most heavily regulated types of data, and it’s hard to see Apple introducing these features unless it was sure that it had a good reputation among customers and internal competence with handling sensitive data. “Privacy is fundamental in the design and development across all of our health features,” an Apple engineer said while introducing the feature.
  • Government IDs, keycards and car keys in the Wallet app. Apple used the trust it’s built in privacy and security when it launched Apple Card, its credit card with Goldman Sachs, in which users sign up for a line of credit almost entirely inside the app. Now, Apple has introduced several new features for the Wallet app that are most attractive for users who believe Apple’s security and privacy are up to the task. In iOS 15, Apple will enable users to put in car or home keys in their wallet app, which means all someone needs to get inside is their phone. Apple also said, without a lot of details, that it is working with the Transportation Security Administration to put American ID cards, like a driver’s license, inside the Wallet app, too.

Cook has said “privacy is a fundamental human right” and that the company’s policies and his personal stance doesn’t have to do with commerce or Apple’s products.

But being the big technology company that takes data issues seriously could end up being lucrative and allow Apple more freedom to launch new services and products. Facebook, Apple’s Silicon Valley neighbor and vocal Apple critic, has increasingly dealt with challenges launching new products because of the company’s poor reputation on how it handles user data.

Americans also say that privacy is factoring into buying decisions. A Pew study from 2020 said that 52% of Americans decided not to use a product or service because of concerns over data protection.

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The Fed is in early stages of prepping markets for tapering asset purchases

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Chairman of the Federal Reserve Jerome Powell listens during a Senate Banking Committee hearing on “The Quarterly CARES Act Report to Congress” on Capitol Hill in Washington, U.S., December 1, 2020.

Susan Walsh | Reuters

The Federal Reserve is in the early stages of a campaign to ready markets for reducing its $120 billion in monthly asset purchases to stimulate the economy.

Comments by Fed officials in the past several weeks suggest the issue of tapering looks likely to be discussed as soon as next week’s meeting, and the Fed may be on track to begin asset reductions later this year or early next year.

At least five Fed officials have publicly commented on the likelihood of those discussions in recent weeks, including Patrick Harker, president of the of the Federal Reserve Bank of Philadelphia, Robert Kaplan of Dallas, Fed Vice Chair for bank supervision Randal Quarles and Cleveland Fed President Loretta Mester, whose comments to CNBC came after Friday’s monthly jobs report.

“As the economy continues to improve, and we see it in the data, and we get closer to our goals … we’re going to have discussions about our stance of policy overall, including our asset purchase programs and including our interest rates,” Mester said Friday.

While the discussion may take place, an announcement of a decision to actually taper would be several months later, perhaps in late summer or early fall. That announcement would then put the beginning of the asset reduction further out, perhaps by year-end or early next year. Since the Fed will taper its purchases, that is, reduce the amount it buys by some amount each month, that timeline would still see the Fed purchasing billions of dollars of assets well into 2022, though at an increasingly slower pace.

All of that is contingent on how the economy rebounds from the pandemic. The recent pace of new job growth, averaging 541,000 payrolls over the past three months, and the recent decline in the unemployment rate look to be more or less in line with Fed expectations. Most Fed officials continue to believe that the recent spurt of inflation will prove temporary, so even big monthly gains are unlikely to speed up the plan, at least for a time.

Avoiding a tantrum

While the decision to taper is based on economic data, it eventually will be converted by Fed officials to calendar dates, though, as the Fed has done in the past, still linked to the data.

Behind the glacial pace of reducing asset purchases is a deliberate attempt to avoid another so-called taper tantrum, the sharp spike in bond yields in 2013 that came after Fed Chairman Ben Bernanke hinted asset purchases could wind down.

One view inside the Fed is that the taper tantrum occurred because it failed to adequately separate in the market’s mind the timelines for hiking interest rates and for reducing asset purchases. This time, the Fed is creating a long runway for tapering, making clear that rate increases only come after this process. It also has set a higher standard of economic improvement required for rate increases than it has for asset purchase reductions.

Quarles late last month made that separation clear, saying: “It will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.” But, he added,  “in contrast, the time for discussing a change in the federal funds rate remains far in the future.”

At the moment, fixed income markets appear to be giving the Fed leeway to follow a gradual timeline. The 10-year note yield has been anchored around 1.60 percent for nearly four months, and the 2-year note rate has hovered around 15 basis points (0.15%). Fed Funds futures do not fully price in a 25-basis point rate hike from the Fed until early 2023.

Fed officials expected volatility around any announcement that it will reduce asset purchases. And it’s clear yields could rise as a result. It’s possible markets may become more aggressive in pricing in rate hikes. The measure of success for the Fed’s current efforts will come if policymakers can move toward reducing asset purchases but see only modest changes in expectations for rate increases.

The key risk now is that the Fed, in trying to avoid a taper tantrum, maintains easy monetary policy too long, allowing inflation to become a permanent, rather than temporary, problem.

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