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Stock futures slip after Dow, S&P 500 hit fresh records

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A Wall Street street sign is displayed in front of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, Feb. 11, 2021.

Bloomberg | Getty Images

Futures contracts tied to the major U.S. stock indexes slipped at the start of the overnight session Sunday evening, suggesting Wall Street could see mild losses on Monday to curb last week’s strength in U.S. equity markets.

Dow futures lost 30 points around 6 p.m. in New York, while contracts tied to the S&P 500 shed 0.15%. Nasdaq 100 futures fell 0.1%.

The movement in the futures market on Sunday followed yet another record close for the Dow Jones Industrial Average on Friday, when it gained nearly 300 points to end at 33,800.6. The S&P 500 gained 0.8% and hit its third straight record close.

Stocks linked to the recovering economy led many of last week’s gains as vaccinations efforts throughout the U.S. accelerated. Both the Dow and the S&P 500 climbed at least 2% last week. The Nasdaq rallied 3.1% over the same period as some traders snapped up big tech names, with Apple up more than 8% and Amazon and Alphabet each gaining more than 6%.

The first-quarter earnings reporting season gets underway in the week ahead, with expectations set for broadly positive news and an uptrend for U.S. equities thanks to a recovering economy. Many of the nation’s largest banks, including Goldman Sachs and JPMorgan Chase will report results for the three months ended March 31.

The coming week is also packed with Federal Reserve speeches and key economic data including a hotly anticipated inflation reading Tuesday, when the consumer price index is released.

Fed Chairman Jerome Powell begins a week of multiple Fed appearances with a Sunday evening interview on “60 Minutes.” He also speaks Wednesday at an Economic Club of Washington event.

“A positive fiscal shock, strong housing tailwinds, a large stock of savings, and the Fed letting inflation run above 2% mark a fundamentally different economic backdrop,” Evercore ISI equity strategist Dennis DeBusschere wrote in an email. “US data is expected to be strong this week and US vaccinations are increasing. Real rates are still too negative and are headed higher, supporting risk-on factor outperformance.”

Investors will also keep an eye on President Joe Biden’s effort to advance his infrastructure plan known as the American Jobs Plan. Biden, who with other Democrats promised significant an infrastructure overhaul in the 2020 elections, will meet with a bipartisan group of lawmakers on Monday to try to persuade Capitol Hill to back the $2 trillion package.

Congress will return to Washington this week and be in session for the first time since Biden debuted his proposal, which earmarks hundreds of billions of dollars for roads, bridges, airports, broadband, electric vehicles, housing and job training.

The president’s plan would also increase the corporate tax rate to 28% and crack down on other overseas tax avoidance strategies.

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‘Everything ultimately will settle down’

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A worker on an auto assembly line in Smyrna, Tennessee.

Luke Sharrett/Bloomberg/Getty Images

The concentration of price pressures in a handful of categories means markets shouldn’t yet be worrying about inflation after Wednesday’s U.S. surprise, economists have told CNBC.

The U.S. Consumer Price Index for April rose 4.2% from the same period last year, its sharpest rise since 2008, while the monthly climb in core inflation, which excludes volatile food and energy prices, was the fastest since 1981.

The readings triggered significant sell-offs across global stock markets, as investors feared that the surge in inflation could prompt the Federal Reserve to alter its accommodative monetary policy stance. 

Used car and truck prices, seen as a key inflation indicator, surged 21%, including a 10% increase in April alone. Airlines and shelter also featured heavily due to the sudden upswing in demand as travel restrictions were lifted. 

The automotive industry has been hamstrung this year by a global shortage of semiconductors which has led major carmakers to cut production. Nissan on Thursday became the latest to announce that it would make half a million fewer cars in 2021 due to the shortage. The used car price spike has been attributed to the knock-on effect from this crisis.

“It’s not inflation but it is a legitimate supply problem, and every new car that’s not sold is a used car that’s not created,” said Carl Weinberg, chief economist at High Frequency Economics. 

“At the same time, the rental agencies are jumping to the used car market because they can’t get new cars either, so we have a shift in demand to the right and upward and a shift in supply at the same time to the left and that’s causing the rise in prices,” he added, noting that this did not constitute inflation. 

Weinberg also noted, in line with the position of many Fed officials, that the sudden shift from total shutdowns of the services sector to a more balanced distribution of price pressures across the economy would eventually stabilize inflation. 

“We are seeing transient shocks, bottlenecks along the way as we get back up to speed, and everything ultimately will settle down,” he added. 

Marco Valli, head of macro research and chief European economist at UniCredit, also told CNBC that the Italian lender believes the inflation spike to be temporary, but admitted that Wednesday’s numbers had caused “a bit less confidence” in that projection. 

Noting the concentration of price pressures in categories directly affected by supply problems in the automotive industry or the reopening of the services sector, Valli suggested the Fed would need to see much broader and more sustained inflation. However, he predicted that the currently robust price growth would likely continue for several months.

“The risk has increased, but we also think it is transitory and to understand where this is really going to get concerning for the Fed, you really have to look at the broadness of the categories of price increases that you see,” Valli said. 

Further data from the U.S. Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) spiked 6.2% year-on-year in April, the largest increase since the agency started tracking the data in 2010.

Inflation surge the ‘least bad outcome’ for the Fed 

Fed officials have repeatedly suggested that along with inflation, employment will also have to pick up in a substantial and sustainable fashion before policy changes.  

Weinberg suggested that the employment rate is in fact the priority for the central bank, with a higher-than-desirable inflation rate a price it would be willing to pay. 

“Is the problem inflation, is that the biggest risk right now, or is the problem sustained unemployment, which could force the government into subsidizing people’s incomes for an unaffordable period of time or leading to a crash?” he said, adding that this is the scenario the Fed is most committed to avoiding. 

“So if it is going to take some inflation risk along the way, that may not be the best possible outcome, but it’s certainly the least bad outcome, rather than risking continued runaway unemployment.”

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Nissan to make half a million fewer cars in 2021 due to chip shortage

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The Nissan Versa Note is introduced at the 2013 North American International Auto Show in Detroit, Michigan.

Stan Honda | AFP | Getty Images

Japanese car maker Nissan is planning to make half a million fewer vehicles in 2021 as the global chip shortage continues to wreak havoc on the automotive industry.

Nissan Chief Executive Makoto Uchida told CNBC’s “Squawk Box Europe” on Thursday that the company is also grappling with a surge in raw material prices.

“The impact we foresee as of speaking is about 500,000 units in terms of the production this year,” said Uchida, adding that the company will take steps to try to get production back on track.

Today’s cars rely on computer chips for everything from the management of engines to driver assistance systems.

Rivals including Ford, Volkswagen and Stellantis have also warned that their production lines could see further hits as a result of the semiconductor crisis.

Britain’s Jaguar Land Rover said last month that it was stopping car production for a “limited period” at its Castle Bromwich and Halewood manufacturing plants in England as a result of the chip shortage.

It came just two months after the company announced it was going to cut 2,000 non-factory jobs.

Elsewhere, Mercedes-maker Daimler said last month that it was cutting the hours of up to 18,500 workers and pausing production at two plants in Germany for at least a week.

Analysts predict that the global chip shortage will last well into 2022, and possibly even into 2023.

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Why Elon Musk is worried about bitcoin’s environmental impact

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Pavlo Gonchar | LightRocket | Getty Images

Elon Musk’s decision to stop Tesla from accepting bitcoin as payment has led to fresh scrutiny of the cryptocurrency’s environmental impact.

Musk said Wednesday that Tesla had halted purchases of its vehicles with bitcoin due to concerns over the “rapidly increasing use of fossil fuels for bitcoin mining.”

He alluded to data from researchers at Cambridge University which shows bitcoin’s electricity usage spiking this year.

Tesla won’t sell its bitcoin — the automaker is sitting on $2.5 billion worth of the digital coin — and Musk said it intends to resume transactions with bitcoin once mining “transitions to more sustainable energy.”

“We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction,” Musk said.

Musk’s comments roiled cryptocurrency markets, which have shed as much as $365.85 billion in value since his tweet.

Why is Musk worried?

Critics of bitcoin have long been wary of its impact on the environment. The cryptocurrency uses more energy than entire countries such as Sweden and Malaysia, according to the Cambridge Bitcoin Electricity Consumption Index.

To understand why bitcoin is so energy-intensive, you have to look at its underlying technology, the blockchain.

Bitcoin’s public ledger is decentralized, meaning it isn’t controlled by any single authority. It’s constantly being updated by a network of computers around the world.

So-called miners run purpose-built computers to solve complex math puzzles in order to make a transaction go through. This is the only way to mint new bitcoins.

Miners do not run this operation for free. They have to shell out huge sums on specialized equipment. A key incentive of bitcoin’s model, known as “proof of work,” is the promise of being rewarded in some bitcoin if you manage to solve its complex hashing algorithm.

It’s worth noting that dogecoin, which has risen wildly in price lately on the back of support from Musk, also uses a proof-of-work mechanism.

Carol Alexander, a professor at the University of Sussex Business School, explains that bitcoin’s mining “difficulty” — a measure of the computational effort it takes to mine bitcoin — has been going “up and up” over the last three years.

“More and more electricity is being used,” Alexander told CNBC. “That means that the network difficulty will also be going up (and) more miners are coming in because the hash rate’s going up.”

Bitcoin’s price is up almost 70% so far this year. As it goes up in price, the revenue to miners also increases, incentivizing more participants to mine the cryptocurrency.

Meanwhile, Musk isn’t the only one who’s worried about the environmental impact of bitcoin. In February, Treasury Secretary Janet Yellen warned that the digital coin is “extremely inefficient” for making transactions and uses a “staggering” amount of power.

Does bitcoin actually harm the environment?

It’s complicated. On the one hand, bitcoin’s network uses an unfathomable amount of energy. Much of the mining of bitcoin is concentrated in China, whose economy is still heavily reliant on coal.

Last month, a coal mine in the Xinjiang region flooded and shut down. This took nearly a quarter of bitcoin’s hash rate — or computing power — offline, according to crypto industry publication CoinDesk.

In March, China’s Inner Mongolia region said it would shut down cryptocurrency mining operations in the region due to concerns over energy consumption.

On the other side of the debate, bitcoin investors have attempted to push back on the narrative that it’s harmful for the environment.

While it’s difficult to determine the energy mix that powers bitcoin, some in the crypto industry say miners are incentivized to use renewables as it’s getting cheaper to produce them. In China, the province of Sichuan is known to attract miners due to its cheap electricity and rich hydropower resources.

Last month, Jack Dorsey’s fintech company Square and Cathie Wood’s Ark Invest put out a memo claiming that bitcoin will actually drive renewable energy innovation. However, critics said they had a vested interest in doing so.

Alexander said the debate around bitcoin’s environmental impact was misguided as most transactions with the digital asset aren’t happening on the blockchain.

“Almost all the trading is not done on the blockchain,” she said. “It’s done on secondary markets, centralized exchanges. They’re not even recorded on the blockchain.”

ESG concerns

Regardless of whether bitcoin is actually a polluter or not, the negative connotations around its energy consumption have worried investors conscious of companies’ ethical and environmental responsibilities.

ESG, or environmental, social and corporate governance, has become a growing trend in financial markets, with portfolio managers increasingly incorporating sustainable investments into their strategies.

Some Tesla shareholders may be worried that the company is betting big on bitcoin while also claiming to be a green energy company.

“Bitcoin backers will be wondering where this leaves the future of the cryptocurrency,” Laith Khalaf, a financial analyst at investment firm AJ Bell, said in a note Thursday.

“Environmental matters are an incredibly sensitive subject right now, and Tesla’s move might serve as a wake-up call to businesses and consumers using Bitcoin, who hadn’t hitherto considered its carbon footprint,” Khalaf added.

“Tesla’s decision certainly puts pressure on other big companies who accept Bitcoin to review their practices, because boardrooms will now be wary about getting it in the ear from ESG investors on the shareholder register.”

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