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Inflation hotter than expected, but temporary, won’t affect Fed policy

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Alex Tovstanovsky, owner of used-car dealer Prestige Motor Works, checks on inventory with his general manager Ryan Caton in Naperville, Illinois, May 28, 2020.

Nick Carey | Reuters

Consumer prices jumped more than expected in May, but the surge in inflation looks to be temporary and should not push the Federal Reserve to tighten policy for now.

The consumer price index rose 5% in May on a year-over-year basis, the highest since the summer of 2008, when oil prices were skyrocketing. Excluding food and energy, core CPI rose 3.8% year over year, the highest pace since 1992. A third of the increase was attributed to a sharp 7.3% increase in used car and truck prices.

Fed officials have described the current period of high inflation as transitory, meaning it should be brief or short-lived. They have expected several months of elevated price increases because of pent-up demand and supply chain lags. The comparison to last year’s weak levels — at a time when the economy was mostly shut down — is also a factor.

“The pick-up in inflation is stronger than expected, but it still looks like it is in transitory categories,” said John Briggs of NatWest Markets. “[Fed officials] can probably get away with talking about transitory.”

The Federal Reserve meets June 15 and 16. There was some market speculation that if inflation looked very hot, the central bank might move up the time frame in which it would discuss moving away from its easy policies.

Economists expect the first step toward easing would be when the Fed publicly discusses its decision to cut back on the $120 billion in Treasury and mortgage securities it buys each month.

The bond buying, or so-called “quantitative easing” program, was designed to create liquidity and keep interest rates low.

After starting the discussion about its bond program, the central bank is then expected to wait several months before beginning a gradual whittling away of purchases until it gets to zero. The Fed would then consider raising its target federal fund rate from zero, but that is not expected until 2023.

Many economists have been expecting the Fed to first talk about tapering bond buying at its Jackson Hole Economic Symposium in late August, before actually cutting the size of purchases in late 2021 or next year.

Mark Zandi, chief economist at Moody’s Analytics, said there’s evidence the price pressures could be fleeting, as the Fed expects.

“A lot of the surge in prices are for things that are just normalizing. … Hotels and rental cars and used vehicles, sporting events, restaurants. Everyone is just getting back to normal, so pricing is just returning to what it was pre-pandemic,” Zandi said.

However, he added that it’s too soon to say inflation won’t be more persistent than the Fed expects. “It’s premature to conclude all of this is transitory and where underlying inflation is ultimately going to land when we get through the price normalizations,” Zandi said. He expects when the surge is over, inflation will be at a higher level than it was pre-pandemic.

The Fed has said it would tolerate inflation running above its 2% target, and it would consider an average range for those price increases. That means it has committed to hold off on raising interest rates as soon as it sees inflation risks rising, as it has done in the past.

Financial markets took the surge in CPI in stride, and stocks jumped after the 8:30 a.m. ET report. The Dow gained more than 200 points but gave up its best gains. The 10-year Treasury was slightly higher at 1.49%, after initially rising as high as 1.53%. Yields move opposite price. Fears the inflation number would push the Fed to shift policy sooner would have driven yields much higher.

The components of higher prices

Economists said some of the price increases were surprising, but the price gains in the bigger contributors to CPI remained relatively subdued.

“The used car component is just stunning,” said Grant Thornton chief economist Diane Swonk. “What’s kind of surprising is how low the shelter component has remained. It’s coming up from where it decelerated. There’s now the question of it picking up. We have to watch that, but I would have expected more of a hotel room increase in shelter.”

Shelter accounts for more than 30% of CPI. The shelter index rose 0.3% in May, and 2.2% over the last 12 months. The rent portion rose 0.2%, and the index for owners’ equivalent rent — or the hypothetical amount a homeowner would charge someone to rent their dwelling — rose 0.3%. Lodging away from home rose just 0.4%, after jumping 7.6% in April.

Another big component, medical care, fell 0.1% after rising in the four previous months. Medical care prices rose just 0.9% over the past 12 months, the smallest increase since the period ending March 1941.

“Medical care and housing are two very large components of inflation. They’re both very sticky and a reason to think inflation will settle at a higher level but not at a level that is uncomfortable,” said Zandi. “The reason for being so sanguine is around medical care and housing.” He said the expansion of the Affordable Care Act has helped hold down medical costs.

The pick-up in inflation is stronger than expected, but it still looks like it is in transitory categories.

John Briggs

NatWest Markets

Grant Thornton’s Swonk said she does not expect much from the Fed next week and the inflation report does not change that.

“The remarkable resilience of the long bond — it gives the Fed the opportunity to think about tapering, because financial markets are buying it as a transitory surge in inflation,” Swonk said, referring to the 30-year Treasury.

Investors have been buying the 10-year and 30-year Treasury bonds since last week’s weaker-than-expected May jobs report. The 30-year yield has fallen to 2.16%. Bond yields move opposite prices.

For now, investors are not fearful the Fed will move sooner, but Swonk says there could still be a few more hot inflation reports.

“It’s higher than [Fed officials] would like. It surprised to the upside. My guess is it lasts longer than they expect. I expect it to last longer and be hotter but still go away,” she said.

But she still expects the Fed to wait until the end of the summer to talk about changing its bond purchases.

“I always expected tapering talk to begin more openly at the Jackson Hole meeting. It hasn’t changed my view. Some people thought the Fed would get closer to full employment before they did liftoff on tapering,” Swonk said.

She said some data in the CPI report dovetails with the jobs data. The economy created 559,000 jobs in May, about 100,000 less than expected.

“If you look at the combination of events — used car prices, insurance costs on vehicles, all of these things accelerated and now they’re rebounding. Prices at the pump, they’re up over 50% from a year ago,” Swonk said. “All of this is making it harder for workers to get to low-wage jobs.”

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Meme stocks hit a wall on Thursday with GameStop, AMC and Clover down big

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The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the logo on a smartphone arranged in Hastings-On-Hudson, New York, U.S., on Friday, Jan. 29, 2021.

Tiffany Hagler-Geard | Bloomberg | Getty Images

The meme-stock mania created by the day-trading Reddit crowd fizzled a bit on Thursday.

It’s easy come, easy go for many speculative names favored by retail investors including AMC Entertainment and GameStop as they suffered double-digit losses on Thursday, pulling back from their recent explosive rallies. The video game retailer shed more than 20% even after announcing two high-profile executive hires from Amazon. The movie theater chain dropped 10% Thursday, turning negative on the week.

Another red-hot meme stock Clover Health, which at one point occupied the WallStreetBets’ message board this week, pulled back 10% Thursday. Clean Energy Fuels, which rallied over 31% just Wednesday, tumbled 15%.

If the January trading mania is any guide, it’s not surprising that these latest rallies are turning out to be short-lived. A CNBC PRO analysis available exclusively to subscribers found that on average, Reddit stocks’ runs lasted nine trading days from the start to their first big drop during the initial frenzy at the beginning of 2021.

CNBC identified the starting point for five stocks popular on message boards earlier this year — GameStop, AMC, Bed Bath & Beyond, BlackBerry, and Koss Corp. — by finding the first time each stocks’ single-day trading volume at least doubled its 30-day moving average of shares traded. That typically represents the point at which a flurry of new investors took interest in a stock that was not being heavily traded.

On Thursday, GameStop investors seemed to be running for the exits after the company said it appointed former Amazon executive Matt Furlong as its new CEO. It also picked another former Amazon executive, Mike Recupero, as chief financial officer. Meanwhile the company’s fiscal first-quarter results showed sales up 25% and a narrower loss than it reported a year ago.

The decline in shares came as GameStop also said it may sell as many as 5 million shares. Additional shares dilute the value of existing shareholders’ stakes. The stock is still up more than 1,100% on the year, however.

AMC is down for a second straight day after soaring 83% last week. The movie theater, which was on the brink of bankruptcy not long ago, managed to sell 20 million shares in two separate deals last week amid the rally, generating around $800 million in capital.

— CNBC’s Nate Rattner contributed reporting.

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Microsoft to launch Xbox Cloud Gaming service for TV

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A gamer plays soccer title Pro Evolution Soccer 2019 on an Xbox console.

Sezgin Pancar | Anadolu Agency via Getty Images

Microsoft is developing dedicated streaming hardware that people will be able to hook up to their TVs to use its Netflix-like cloud gaming service.

The company is betting the future of video games will be a subscription-based model where people pay a certain amount of money each month to get access to a plethora of titles.

Its Xbox Game Pass service does exactly that, offering access to a library of games developed both in-house and by third-party studios.

That’s mostly digital downloads, but last year streaming was added with Microsoft publicly releasing Xbox Cloud Gaming. The feature is sort of like a “Netflix for games,” allowing gamers to play games that are hosted on remote servers and then streamed to users over the internet.

A number of other companies have launched similar game-streaming services, including Google with Stadia and Amazon with Luna.

Now, Microsoft is aiming to push its cloud gaming product to other platforms. It started rolling out Xbox Cloud Gaming to some users via a web browser on iPhones, iPads and PCs in April (Microsoft couldn’t launch a proper mobile app for cloud gaming on Apple devices due to a dispute over App Store policies). And on Thursday, the company announced it wants to expand the service to TVs as well.

One way it plans to do that is by partnering with manufacturers to add cloud gaming to smart TVs. But Microsoft is also developing streaming devices which users can plug into their TV or computer monitor to stream games from the cloud. The company didn’t elaborate on what those devices could look like, though it’s reminiscent of Amazon’s Fire TV and Google’s Chromecast dongles, both of which now support cloud gaming.

In addition, Microsoft says it is working with mobile carriers like Telstra in Australia to offer new Xbox subscription models. It’s also expanding cloud gaming to four new countries — Australia, Brazil, Mexico and Japan —  later this year, and aims to publicly launch the browser-based version of the software to all members of its $15-a-month Xbox Game Pass Ultimate subscription in the coming weeks.

Microsoft said it plans to add cloud gaming to its new Xbox Series X console, which launched last November to compete with Sony’s PlayStation 5. In the next few weeks, the company will also upgrade the servers that power its cloud gaming service from its old Xbox One hardware to the Xbox Series X.

Microsoft competes aggressively with Sony when it comes to gaming. But it’s taking a different strategy to its Japanese counterpart. While Sony is known for blockbuster exclusives that can only be played on a PlayStation console, Microsoft is focusing on embedding its Xbox services onto multiple platforms, including mobile and PC.

Microsoft has been stepping up its investments in gaming, buying the iconic studio Bethesda for $7.5 billion in its biggest video game-related acquisition yet.

The company is holding a joint event with Bethesda on Sunday as part of the E3 gaming conference to show off new games, with fans speculating they will reveal some details about a hotly-anticipated sci-fi game called Starfield.

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fresh calls to investigate the origins of covid

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U.S. President Joe Biden speaks during a meeting with a bipartisan group of members of Congress.

Pool | Getty Images News | Getty Images

LONDON — The European Union and the United States are expected to call for more progress on an investigation into the origins of Covid-19, according to a draft EU document.

The draft document, seen by CNBC, is the foundation for the outcome of an upcoming summit between U.S. President Joe Biden and European leaders which is due on Tuesday. Its wording could change right up until the end of the meeting

Speaking Thursday, European Council President Charles Michel, who chairs European summits, said: “The world has the right to know exactly what happened, in order to be able to learn the lessons.”

We have to know where it did come from.

Ursula von der Leyen

European Commission president

At the same news conference on Thursday, European Commission President Ursula von der Leyen said: “It is of utmost importance that we learn about the origin of the coronavirus.”

“There is this horrible pandemic, a global pandemic we have to know where it did come from in order to draw the right lessons and to develop the right tools to make sure that this will never happen again and, therefore, the investigators need complete access to whatever is necessary to really find the source of this pandemic,” she added.

These statements follow Biden’s call last month for the World Health Organization to carry out a second phase of a probe into the origins of the virus, which was first detected in the Chinese city of Wuhan in late 2019.

A WHO report said earlier this year that the most likely cause of the virus was natural, and dismissed a lab leak theory. But it suggested that further studies would need to be carried out.

The U.S. intelligence community said last month that it “does not know exactly where, when, or how the Covid-19 virus was transmitted initially but has coalesced around two likely scenarios: either it emerged naturally from human contact with infected animals or it was a laboratory accident.”

The discussion on the origins of the coronavirus comes at a time when the U.S. and the EU also intend to talk about their broader relationship with China.

While on the one hand, the U.S. and the EU want to criticize what they describe as human rights violations in China; on the other hand, they want Beijing to engage constructively on climate change policies and to open up certain parts of its economy.

Biden is hoping that the EU will be a partner when it deals with China over the coming years.

“Biden believes that with a broad coalition, you may be able to push China down a more constructive path. International pressure, that is pressure not coming from Washington only, could prove useful on any of these topics,” Jeremy Ghez, associate professor at H.E.C. Business School in Paris, told CNBC last week.

The EU decided in March to put on hold the ratification of an investment agreement with Beijing — a deal that had been presented back in December, just weeks before the inauguration of Biden.

This investment partnership is now frozen following a diplomatic row between Brussels and Beijing. In March, the EU decided to impose sanctions against China for its treatment of the ethnic minority Uyghurs and Beijing retaliated by announcing counter-sanctions against members of the European Parliament.

The ethnic Uyghurs, who live mostly in China’s west, have been identified by the United Nations, United StatesUnited Kingdom and others as a repressed group. China’s Foreign Ministry in March characterized such claims as “malicious lies” designed to “smear China” and “frustrate China’s development.”

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