by tyler | Jun 22, 2023 | CNN, economy
Turkey’s central bank almost doubled interest rates to 15% Thursday in a dramatic reversal of its unorthodox policy of cutting the cost of borrowing to tame painfully high inflation.
Annual consumer price inflation has come down from a two-decade high of 85.5% in October but was still 39.6% in May.
The central bank said that there were indications that underlying inflation in Turkey was increasing, even as inflation in many other countries trends downwards.
“The strong course of domestic demand, cost pressures and the stickiness of services inflation have been the main drivers,” the central bank said in a statement.
This is the first rate decision by Turkey’s central bank since last month’s reelection of President Recep Tayyip Erdogan.
It is also the first rate increase in more than two years, and the central bank’s first decision since the appointment earlier this month of new governor Hafize Gaye Erkan, a former Goldman Sachs banker and the first woman to hold the position.
In its statement, the central bank said it hiked rates to bring down inflation “as soon as possible,” and that it would continue to do so gradually “until a significant improvement in the inflation outlook is achieved.”
Liam Peach, senior emerging markets economist at Capital Economics, wrote in a Thursday note that there were “encouraging signs” from the central bank that further rate hikes were ahead.
The London-based research firm expects Turkish interest rates to rise as high as 30% later this year.
Erdogan had ordered his central bank to cut rates nine times since late 2021, taking them to 8.5%, even as inflation around the world started to accelerate and most economies were doing the opposite. In that time, the value of the Turkish lira crashed 170% to a record low against the US dollar.
A weaker lira has aggravated Turkey’s cost-of-living crisis by making foreign imports more expensive, and pushed the government to use up billions of its foreign currency reserves in an attempt to boost the currency’s value.
Erdogan — who has fired four central bank governors in as many years — has since tried to reassure investors that he intends to normalize Turkish economic policy by filling key posts with more orthodox figures such as Erkan.
This month, Erdogan also appointed Mehmet Simsek, Turkey’s former deputy prime minister and finance minister, and a former economist for US wealth management firm Merrill Lynch, as his finance minister.
But the lira weakened further after Thursday’s rate hike news, dropping more than 2% to a new record low of 24 to the US dollar.
Craig Erlam, senior market analyst at Oanda, noted that the rate hike had come in at the lower end of market forecasts, and investors couldn’t afford to relax too soon.
“Erdogan hasn’t really hesitated to sack [central bank] governors that raise rates in the past, so investors will never feel fully at ease as long as he’s president,” he wrote in a note.
by tyler | Jun 16, 2023 | CNN, economy
The dust has barely settled on the Federal Reserve’s decision to pause its aggressive rate-hiking campaign — but in public appearances Friday, central bank officials have a clear message: Keep hiking.
Fed Governor Christopher Waller and Richmond Fed President Thomas Barkin both said Friday that additional rate increases are necessary to bring inflation down to the central bank’s 2% target.
“We’re seeing policy rates having some effects on parts of the economy. The labor market is still strong, but core-kind of inflation is just not moving and that’s going to require probably some more tightening to try to get that going down,” Waller said in a moderated discussion hosted by the Norges Bank and the International Monetary Fund in Oslo.
Barkin echoed that sentiment, saying he’s “still looking to be convinced, both that demand is settling and that any weakness is feeding through to inflation,” he said in remarks during a conference hosted by the Maryland Government Finance Officers Association.
The Fed’s latest Summary of Economic Projections shows that most officials estimate that the bank’s benchmark lending rate will top out at a range of 5.63-5.87% in 2023, suggesting there will likely be two more quarter-point rate hikes this year. Officials had already expressed concern over inflation not being on a certain path to 2% just yet in speeches prior to the Fed’s decision on Wednesday.
The Fed’s latest set of projections showed most officials expect the Personal Consumption Expenditures price index — the central bank’s preferred gauge of inflation — to hover slightly above the central bank’s 2% target in 2024, but not fully reach 2% until 2025.
Officials said in their post-meeting statement Wednesday that skipping a rate increase “allows the Committee to assess additional information and its implications for monetary policy.” The consequences of holding rates steady only to raise them again remains unclear, but it is reminiscent of the failed stop-and-go strategy the Fed employed in the 1970s.
The Fed’s decision to restart hikes depends on what data show in the coming weeks and months. But some signs point to future disinflation.
“There is little the Fed will learn about the direction of travel of inflation and employment between now and the end of July — we will only get one more CPI print and jobs report,” wrote Gregory Daco, chief economist at Ernst & Young, in an analyst note. “What is more, the next inflation data will likely show an easing of inflationary pressures — thereby contradicting any logical (and supposedly data-dependent) argument for a June pause and July hike.”
Powell said in his news conference following the Fed’s decision on Wednesday that he’s optimistic about inflation’s descent, adding that lower rent prices will be a source of disinflation in the future. Shelter costs make up more than 40% of the Consumer Price Index’s core measure.
“I think any forecast that people are making right now about inflation coming down this year will contain a big dose — this year or next year — will contain a good amount of disinflation from that source,” he said.
But economic forces pushing up consumer prices remain, such as the resilient labor market and spending supported by higher-income consumers, Barkin said. If those factors don’t evolve to allow for further disinflation, a rate hike remains on the table.
“I want to reiterate that 2% inflation is our target, and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target. If coming data doesn’t support that story, I’m comfortable doing more,” Barkin said.
“I recognize that creates the risk of a more significant slowdown, but the experience of the ’70s provides a clear lesson: If you back off inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage. That’s not a risk I want to take.”
At the conference in Norway, Waller also said the Fed’s interest-rate strategy should remain firmly in place because inflation is still well above the central bank’s target, even if there are lingering stresses in the banking sector. He said that’s because the Fed already has the tools to address financial instability.
“Let me state unequivocally: The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation. It is the job of bank leaders to deal with interest rate risk and nearly all bank leaders have done exactly that,” Waller said. “I do not support altering the stance of monetary policy over worries of ineffectual management at a few banks.”
Regional banks currently face headwinds such as low profitability, higher cost of capital, commercial real estate issues, forthcoming regulation, and maturity issues on Treasuries, Michael Gapen, managing director and head of US economics at BofA Global Research, told CNN in an interview earlier this week. Gapen said regional banking stresses at the moment “aren’t getting worse but they’re probably not getting a lot better either,” pointing to the size of the Fed’s emergency lending only coming down slightly.
Federal Reserve Bank of St. Louis President James Bullard discussed a paper on the effects of economic policy before Waller’s remarks at the same conference.
by tyler | Jun 13, 2023 | CNN, economy
US inflation is leaving those sky-high days behind: Consumer prices in May rose at the slowest annual pace since March 2021, according to data released Tuesday by the Bureau of Labor Statistics.
The Consumer Price Index, a key inflation gauge that measures price changes for a basket of goods and services, increased 4% for the year ending in May.
That represents a sharp pullback from April’s 4.9% and is slightly below economists’ expectations for a 4.1% gain, according to Refinitiv. On a monthly basis, prices ticked up 0.1%. Economists were expecting prices to increase by 0.2% from April to May.
It’s the 11th consecutive month that inflation has slowed, and it’s a welcome reprieve from the painful shock of persistently high inflation endured during the past two years. This time last year, that CPI print was more than double at 8.6%.
“It’s another step in the right direction,” Nancy Vanden Houten, lead US economist at Oxford Economics, said in an interview with CNN.
A drop in energy prices and a slowdown in food price hikes helped bring down the headline number, as did the influence of what is known as base effects: A year ago, inflation was marching upward and setting fresh 41-year highs before topping out at 9.1% in June.
While 4% is a far cry from 9.1%, it’s also still well above the desired inflation target for the Federal Reserve, which has been in the throes of a historic monetary tightening campaign since March 2022. The Fed would like to see inflation (as measured by the core Personal Consumption Expenditures index) settle in at 2%.
“Inflation is still much too high, but the trend is in the right direction, and the Fed is ready to take a break from raising interest rates,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a statement. “They’ve raised rates for 10 consecutive meetings in a row and the [5 point] increase is the most and fastest pace in decades, so they want to wait and see if their actions are sufficient to keep inflation moving in the right direction.”
Tuesday’s CPI report comes as Fed officials sit down for the first day of their monetary policymaking meeting and is one of the last major pieces of economic data to digest before they announce their rate decision on Wednesday.
Since March 2022, the Fed has increased its benchmark interest rate 10 consecutive times in an attempt to bring down historically high levels of inflation, but is widely expected to pause that hiking campaign this time to digest the cumulative — and lagging — effects of monetary tightening as well as the impacts from stricter lending standards within the banking industry.
Markets are currently pricing in a 95.3% probability that the Fed pauses on Wednesday, according to CME FedWatch.
Food inflation continued to decline on an annual basis; however, price increases did pick up slightly in May for groceries as well as food away from home, by 0.1% and 0.5%, respectively.
Within food, there were some bright spots — particularly bright yellow yolky ones.
Egg prices, which skyrocketed last year as a deadly avian flu hit US flocks, sank 13.8% from April, marking the largest monthly drop for that category since 1951. That latest downswing means that egg prices are actually now down from last year.
Prices for groceries and food away from home increased on a monthly basis When stripping out the more volatile components of food and energy, core CPI measured 5.3% for the year, slightly down from April’s annual reading. On monthly basis, the core index ticked up 0.4%.
The core readings are right in line with economists’ predictions, according to consensus estimates on Refinitiv.
Underlying inflation (as well as the overall reading) has been propped up by price gains in categories such as shelter and used cars, as well as services excluding rent, according to BLS data. The first two, however, are expected show some considerable easing sooner than later, Vanden Houten said.
Shelter, which is largely a measurement of rental leases as the implicit rental value of owner-occupied properties, carries a lot of weight in the CPI calculations; however, it comes at a significant lag because of how infrequently the data is collected (and how infrequently rents change in leases).
There’s been a slowdown recently in the cost of rents and new leases, which could manifest as a slowing in annual shelter inflation during the course of the coming year, researchers for the Federal Reserve Bank of Richmond noted earlier this year.
Additionally, wholesale used car prices have shown a cooldown in recent months and that could be a guide for what consumers end up seeing at the dealerships in the coming months, Vanden Houten said.
“It looks like this increase in US car prices in the past two months should fade away, maybe in June or perhaps July,” she said. “And we can feel fairly confident that given what’s going on with rents over the last year, this will start to trend lower. And once the turn happens, I think that those housing costs will move lower pretty quickly and that should help bring down core CPI.”
Tuesday’s CPI report did provide a hint of progress on an index that has held particular interest for the Fed: The services excluding housing category declined by 0.2% on a monthly basis and fell to 4.2% on an annual level.
Inflation within that category has been an ongoing source of concern, because it has greater potential to be “sticky.” Because labor costs are more heavily weighted in services businesses than goods, the tight labor market and wage increases have a greater potential in keeping inflation elevated.
Numerous studies have shown there’s no evidence of wage growth driving inflation; however, some economists have expressed concern about how a strong labor market and resilient consumer spending could result in demand-side pressure on inflation.
“Food Away from Home price inflation posted a 5.8% annualized growth pace for the month; Leisure & Hospitality employment gains have slowed this year and overall employment in this collection of industries remains well below pre-pandemic levels,” Kurt Rankin, senior economist for PNC Financial Services, wrote in a note. “So, wage growth pressures remain due to lack of labor supply and Food Away from Home price gains will likely be unrelenting as summer spending kicks consumer spending on recreational activities into overdrive.”
PNC economists, as well as others, continue to predict that a mild recession is in store for the United States later this year.
“Inflation’s inability to reach the Fed’s average 2% year-over-year target as a result of persistent consumer demand will provide cover for keeping interest rates high, which in turn will eat away at business activity and increase costs on households as they accumulate more high-interest debt in support of their spending habits,” Rankin wrote. “These forces will ultimately combine to force a slowdown in consumption, which is the prerequisite for any US recession.”
by tyler | Jun 8, 2023 | CNN, economy
White House officials on Thursday hailed the unclogging of supply chains and suggested that further easing of bottlenecks will help cool inflation.
The one-two punch of the Covid pandemic and Russia’s invasion of Ukraine brought fragile supply chains to the breaking point. That supply stress sent consumer prices surging, left some store shelves nearly empty and severely delayed online shipping orders.
Now, many metrics show supply chains have largely recovered from recent shocks.
“Critical supply chains are significantly more fluid and resilient than they were when the President took office,” White House officials wrote in a supply chain scorecard shared first with CNN.
The report, coming exactly two years after a 100-day review launched by the Biden administration to address critical supply chain weaknesses, found “significant progress” made in implementing recommendations.
“President Biden’s work to increase the stability and resilience of our supply chains has helped to bring down core goods inflation, providing breathing room for working families,” Lael Brainard, director of the National Economic Council, told CNN.
The Biden administration cited a series of indicators that paint the picture of supply chains that have bounced back in a big way.
For instance, ports moved record levels of cargo in both 2021 and 2022. The traffic jam of vessels backed up ports, once a symbol of the supply chain crisis, has all but disappeared.
Consumers are no longer faced with half-empty store shelves. About 92% of goods at grocery and drug stores are now in stock, the scorecard said, citing statistics from IRI. Not only is that substantially better than the worst of the supply chain crisis, it’s even slightly better than the pre-Covid average.
Shipping costs, which spiked in 2021, are down by about 90% since their peak, the report said.
Independent metrics also point to easing supply chain stress. The New York Federal Reserve’s global supply chain pressure index spiked to record highs in 2021 but has since returned to its pre-Covid average.
“Key supply chain indicators are now fully back at 2019 levels,” Torsten Slok, chief economist at Apollo Global Management, wrote in a recent report.
Although Covid-related supply chain stress has eased, new risks have emerged.
Most notably, hundreds of thousands of UPS workers could authorize a strike this week that threatens to paralyze the world’s biggest package courier. Work disruptions are already causing headaches at West Coast ports, where vessels have begun to build up.
In the scorecard, the White House argued its focus on supply chain resilience and collaboration with industry has helped to ease the bottlenecks.
The scorecard said more than 70 recommendations from the 2021 supply chain report have been completed to date, including providing financing to accelerate the battery supply chain, using the Defense Production Act to diversify supply chains and speeding up computer chip manufacturing.
White House officials said the private sector has committed to invest more than $470 billion in manufacturing semiconductors, electric vehicles, EV batteries, clean energy and pharmaceutical and medical products.
“As global supply chains have gradually recovered from pandemic-era and commodity market disruptions, there has been a clear cooling in the inflationary pressures on core goods,” the White House Council of Economic Advisers wrote in a blog post shared first with CNN.
In a “strong sign of supply normalization,” the blog pointed to a closely watched metric of slower delivery times in the Institute of Supply Management’s manufacturing survey. After spiking to a record high in May 2021, this indicator of supply chain pressure has stayed below its pre-Covid average since December 2022.
All of this is encouraging news for consumers dealing with a high cost of living.
The White House economists said it is a “positive development for consumers” and struck a hopeful tone it will continue. The blog post said there is a high correlation between producer prices and supply chain pressures, suggesting the easing in supply chain pressure may continue to cool inflation.
Of course, the inflation problem has not gone away. Consumer prices are still rising much faster than the pace the Federal Reserve considers normal.
Although the price of goods has cooled, White House economists acknowledged “we still have work to do on overall inflation.”
by tyler | Jun 8, 2023 | CNN, economy
US companies wary about their economic prospects are battening down the hatches.
Recent job market data shows more and more businesses have taken to “labor hoarding” and maintaining headcounts even as demand softens.
Hiring has scaled back and so have layoffs (to an extent), as firms try to ride out any impending storm with what they have.
“I think there is quite a bit of hoarding going on in the labor market,” said Dana Peterson, chief economist at the Conference Board. “And that’s why we haven’t seen this big collapse in the labor market, because you still have some industries that are trying to catch up from pandemic losses; and then you have a whole number of businesses that are just holding on to people, waiting for the bad things to happen and then go away so they could get back to business.”
Headcounts have become increasingly stable at US businesses, according to the Conference Board’s survey of chief executive officers as well as a separate survey released Wednesday by the Business Roundtable.
Both reports, which tracked CEO sentiment during the second quarter, showed that executives’ hiring plans diminished, net workforce reduction expectations nudged slightly higher, and those who expected little to no change in headcount became the largest camp.
“CEOs have been saying for at least a year that they expect there will be a recession in the US, but it’s going to be shallow, and it’s going to be short,” Peterson said in an interview with CNN. “So if you think that the recession is not going to be too bad, and it’s not going to be too long, and you spent a lot of money trying to attract and retain labor, you’re less likely to let those people go.”
As with any emerging industry, volatility is to be expected, but the cannabis industry in California has been particularly fraught.
Legal cannabis sales have declined in the Golden State and a growing number of firms have closed up shop amid issues such as increasing debt burdens, rising tax bills and declining wholesale prices.
CannaCraft, a cannabis grower, producer and retailer based in Sonoma County, is trying to keep its business sure-footed amid the California industry’s tumult and overall economic uncertainty, said Tiffany Devitt, the company’s chief of regulatory affairs.
“The cannabis industry in California and, frankly, nationwide has been rather unstable,” she said. “To a very large extent, our operational mission has been ‘stability, stability, stability,’ and part of that stability is our workforce.”
CannaCraft wasn’t immune to the “epidemic” of layoffs that hit the industry pre-pandemic, Devitt said. The company had to conduct a couple of rounds of job cuts and is running lean now, she said, adding that’s not expected to change in the next six to 12 months — even if there’s a downward turn in the economy or demand.
To weather volatile times, CannaCraft pulled back on new product releases; focused on cautious, strategic growth; and is prepared to shift employees to different roles as needed, she said.
“We cross-train our workforce [across areas such as agriculture, manufacturing, distribution and retail] and flex different parts of the organization to minimize seasonal employment and maximize full-time employment,” she said.
At this point, the majority of industries have recouped their losses and have returned to or exceeded their pre-pandemic employment levels, Bureau of Labor Statistics data shows.
As such, the overall labor market is showing more signs of slack.
One of the areas where that’s showing up most clearly is in the unemployment claims data, with continuing claims — those filed by people already receiving unemployment insurance benefits — on an upward trend since last fall, said Stephen Juneau, senior US economist with Bank of America.
That suggests spells of unemployment are becoming more lasting, Juneau said.
“So if you do lose your job, you maybe aren’t seeing the same rehiring rate as you were earlier on in the pandemic recovery,” he said. “When you look at initial claims, on the flip side, they’re running at such low levels. That’s really a sign that we’re seeing these high retention rates.”
Labor turnover data also shows a similar trend. As of April, the rate of new hires as well as workers who quit their job as a percent of total employment matched their respective rates seen in February 2020, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) data released last week.
However, the layoff rate dropped to 1%, landing a tick above an all-time low and remaining below the 1.3% pre-pandemic average, according to JOLTS data.
Additionally, average hours worked have been on a decline since hitting a peak of 35 hours in January 2021. In May 2023, that average was 34.3 hours, BLS data shows.
“To us, that’s a signal that businesses are cutting back first on hours worked even though they’re still trying to fill open positions,” he said. “That speaks to that retention mentality.”
Matt Bigelow, the president of American-made apparel company USA Brands, has seen a pullback in e-commerce sales for the company that makes and sells clothing under the Vermont Flannel Co., All American Clothing and Diamond Gusset Jean Co. brands.
However, the company has been fortunate that its retail stores are located in tourist destinations and have been able to capitalize on the post-pandemic travel surge, he said.
While Bigelow is closely monitoring for any softening in demand for apparel, he’s maintaining an approach of employee engagement and a focus on retention. He said he personally tries to spend an hour per week with each employee.
“When you have good people who believe in your mission and demonstrate your values, obviously you’re going to want to weather these temporary downturns,” he said. “Human capital is irreplaceable.”
And that’s especially true when there are fewer workers with these particular skills.
“It’s no secret that the apparel industry left the US en masse [in recent decades], so when we have the opportunity to hire someone with sewing experience or cutting experience, we do it,” he said.
In an industrial building located in the first-ring Twin Cities suburb of Roseville, Minnesota, Grey Duck Outdoor runs a “lean and mean,” 2.5-employee operation.
About 18 months ago, Rob Bossen, Grey Duck’s founder and then sole employee, made a decision to diversify the business and try to “onshore” the firm that sold stand-up paddle boards manufactured in China.
Bossen, a lover of canoeing trips in Minnesota’s scenic and remote Boundary Waters, first tested the new product waters by collaborating with Canadian manufacturer Rheaume Canoes. Following that launch, Bossen was approached by an experienced canoe-maker who became Grey Duck’s second full-time employee and helped produce canoes in Roseville.
After blockbuster sales in 2022, it’s been fairly quiet this year, Bossen said, noting retailers’ demand for the canoes and paddle boards have softened as sales patterns appear to be normalizing.
Grey Duck’s sales picture will become clearer in the next three months, Bossen said.
“We’re going to do whatever it takes to keep that staff employed and productive, even if things slow down,” he said.
And if the economy holds on through the summer, it’s likely Grey Duck will add some more workers next year, he said.
“We might waddle through the winter and then ramp up in the spring,” he said.
by tyler | Jun 8, 2023 | CNN, economy
The 20 countries that use the euro fell into a mild recession around the turn of the year, as high inflation discouraged consumer spending and governments tightened the purse strings.
In the first three months of the year, economic output in the eurozone dropped 0.1% compared with the previous quarter, according to revised official data published Thursday. In the fourth quarter of 2022, output also dipped 0.1%, the figures showed.
A recession is typically defined as two consecutive quarters of economic contraction.
The broader European economy, however, avoided the downturn. Across the European Union, gross domestic product ticked up 0.1% in the first quarter after falling 0.2% late last year.
Commenting on the eurozone data, Andrew Kenningham, chief Europe economist at Capital Economics, said consumption by households had been “hit hard” by high prices and rising interest rates.
But it could have been worse, given the magnitude of the “shock” to incomes once they are adjusted for inflation, according to a tweet by Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
Inflation in the eurozone jumped last year when Russia’s full-scale invasion of Ukraine sent energy prices soaring. Although easing, it remains high, with overall consumer prices in May 6.1% higher than a year ago.
A sharp fall in government spending was another key driver of the decline in GDP early this year.
Both the eurozone and the whole of the EU are now lagging the US economy. GDP across the Atlantic rose 0.3% in the first quarter after a 0.6% increase late last year, according to data from the Organisation for Economic Co-operation and Development. On an annualized basis, favored in the United States, its economy grew 1.3% in the January-March period compared with the previous quarter.
Earlier official estimates of the eurozone’s economic output pointed to a slight increase in the first quarter.
Thursday’s downward revision was mainly due to downgrades for Germany, Europe’s biggest economy, and Ireland, noted Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
German GDP fell 0.3% in the first three months of 2023, compared with an earlier estimate of zero growth, as last year’s energy price shock took its toll on consumer spending.
The evidence of a recession in the eurozone will complicate the task of the European Central Bank when it meets next week to set interest rates. Inflation is still more than three times the bank’s target, but raising rates further to cool it could hurt the economy.
“We think GDP is likely to contract again in [the second quarter] as the effects of monetary policy tightening continue to feed through,” Kenningham at Capital Economics said in a research note.
