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Wall Street Floats 100 Basis-Point Fed Hike as Inflation Stings

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© Reuters. Wall Street Floats 100 Basis-Point Fed Hike as Inflation Stings

(Bloomberg) — Pockets of Wall Street are raising the possibility that the Federal Reserve could go to extreme lengths on Wednesday in an attempt to control the hottest US inflation in four decades. 

While the consensus expectation for the US central bank’s interest rate increase at this week’s meeting is a half-percentage point, higher than expected consumer price index data last Friday prompted two banks, Barclays (LON:BARC) and Jefferies, to revise their calls for the potential of 75 basis points. 

Now, some are suggesting a full-percentage hike is on the table. 

“The Fed’s trying to erase any perception that they’re behind the curve,” said Steven Englander, global head of G-10 FX research at Standard Chartered (OTC:SCBFF) Bank. “Fifty was the big round number six months ago. Meanwhile, 75 is a very middling type of hike. So the Fed might say: ‘Look, if we want to show commitment, let’s just do 100.’”

As the Fed attempts to bolster its credibility on inflation, it could reach for a more drastic increase if it’s compelled to demonstrate a “Volcker moment,” Englander said. He was referring to Fed Chairman Paul Volcker, who crushed inflation with a series of historic rate increases, starting in 1979. With that possibility, Englander predicts there’s a 10% chance of a 100-basis-point increase at the Wednesday meeting, with his baseline still a half-percentage point increase. 

Fed-dated swaps are now pricing in one 75-basis-point move over the next three policy meetings, up from less than three 50-basis- point moves priced before Friday’s inflation data. Around 57 basis points are now priced into Wednesday’s decision, or 28% chance of a 75 basis point move. Further out, the terminal rate is now peaking just below 4% level by the middle of next year, up from 3.35% before CPI data. 

That’s prompted a wave of new bets against short-term Treasuries on expectation for higher yields.

The topic of inflation has become all-consuming. “Amazingly enough, I don’t even remember this being the case in the 70s,” Englander recalled. “Inflation is all anybody talks about these days.” The pandemic and the Ukraine war, he added, have all but evaporated from conversations about the economy. “The only issue is inflation.”

Once the extreme, 50 basis points has now become the expectation. “The Fed has been remarkably successful in having 50 the baseline,” Englander said. “Fifty was the neutron bomb even six months ago.”

Yet to some economists, the odds that the Fed opts for an 100- basis-point hike remain very low. “I’d say even a 1% chance might be generous,” said Jonathan Millar, an economist for Barclays, who is on the team of the bank’s strategists who revised his forecast to 75 points on Friday. 

With inflation pressures still largely spurred by supply shocks — as opposed to an out-right spiral — the Fed won’t likely be moved to “kill the economy” to stop it, according to Millar. Even so, a three-quarter percentage point hike is Barclays’ baseline for the Wednesday meeting. 

“They already signaled they would do 50 in June and July, so deviating from that would indicate they are panicking,” said Philip Marey, senior US strategist at Rabobank. He’s expecting 50 basis points for Wednesday. 

At the same time, bond markets are also flashing fears that this aggressive tightening will weigh on economic growth down the line. On Monday, a closely-watched part of the US yield curve inverted on growing concern that more aggressive rate hikes will take a bigger toll on economic growth. A record low reading in consumer confidence on Friday hasn’t helped the growth outlook either. 

The risk is if the Fed goes too far in hiking, which could cause an “abrupt slowing that requires an about face,” Englander said. “It’s worse to look as if you have to backtrack, or have that speculation emerge at all. Slow and steady often works better.” 

©2022 Bloomberg L.P.

 

Economy

Large US companies by market cap begin to think more about cutting investments and staff – survey

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biggest us companies by market cap

The chief executive officers (CEOs) of the largest US companies by market cap are revising downward their plans for hiring and investment amid a worsening outlook for the US economy, a quarterly Business Roundtable (BRT) survey showed.

That’s because of high inflation and rising costs, said the association, which includes dozens of major U.S. corporations. The S&P 500 and U.S. 100 indices are also declining amid the developments.

The index, which gauges the economic outlook, fell 11 points this quarter, to 73 points. The indicator is still above the 50-point mark, indicating that the economy is growing. However, it fell below the long-term average of 84 points for the first time since the third quarter of 2020.

The index of planned investments fell 7 points to 68 points and expected sales fell 8 points to 91 points, according to the BRT report.

What will the biggest U.S. companies do by market cap?

About 39% of CEOs plan to increase the number of employees at their companies in the next six months, while 28% of respondents intend to downsize. Last quarter, those numbers were 47% and 19%, respectively.

Nearly half (49%) said that labor costs are a major expense at their company. Twenty-one percent of CEOs plan to reduce capex in the next six months and 40% plan to increase it. In the third quarter these proportions were 18% and 43%, respectively.

U.S. CEOs on average forecast that U.S. GDP will increase by 1.2% in 2023. 142 CEOs participated in the BRT survey, which ran from October 31 to November 28.

Earlier, we reported that Saxo Bank presented “shocking predictions” for the next year.

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Saxo Bank predictions 2023: Saxo Bank presents “shocking predictions” for the next year

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Analysis Saxo Bank

Saxo Bank predictions 2023: The Danish Bank has published ten “shocking predictions” for 2023. They concern a series of unlikely and underestimated events because of which, however, “the world markets can be covered with a powerful shock wave”..

Saxo Bank analysis – what’s going to happen next year?

Against the backdrop of rising energy prices, leading U.S. technology companies and “billionaire technophiles” will create a multi-billion dollar project aimed at exploring new opportunities in the energy sector, the bank predicts. According to the bank, this project will be comparable to the “Manhattan Project” to study atomic energy and the creation of the nuclear bomb, and investments in the new project will be about $1 trillion.

Inflationary pressures and geopolitical instability will continue to affect not only the global economy but also the financial markets, says the Danish bank. Against this background, states will take a more conservative policy, reducing investments in more complex financial instruments, and investing in traditional assets such as gold. And traders at the same time are considering Gold Futures.

Increased demand for gold in 2023 will, according to Saxo Bank, cause its price to rise from the current $1,800 to $3,000 per ounce.

Earlier, we reported that Apple has postponed the release date of an unmanned electric car for a year.

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Apple postponed the release date of Apple’s electric car by a year

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Apple's electric car

U.S. Apple Inc. (NASDAQ:AAPL) has pushed back the release date of Apple’s unmanned electric car by a year to 2026 and somewhat tempered its ambitions about the extent of its self-driving capability, Bloomberg reported, citing sources.

Earlier, Apple announced electric cars. According to the sources, the Titan project has been in limbo for the past few months because top executives at Apple have concluded that their vision of a fully self-driving car with no steering wheel and no pedals can’t be realized with existing technology. The APPLE Price Chart showed a slight decline amid this news. 

In this regard, the company has decided to adjust the project and now plans to create a less autonomous car, with a steering wheel and pedals, with the possibility of fully unmanned driving on highways, sources said.

The driver of the car is expected to be able to do his or her own thing while driving on the highway, such as watching a movie or playing a game, and will receive advance notifications to switch to manual control when approaching city streets or deteriorating weather conditions.

Apple shares fell 2.5 percent in trading Tuesday. Since the beginning of this year, their value has fallen by 19.5%.

We previously reported on World Economic News now through the morning of Dec. 6.

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