Author: Consultant

U.S. inflation cooling as consumer prices fall; labour market still tight

U.S consumer prices fell for the first time in more than 2-1/2 years in December amid declining prices for gasoline and motor vehicles, offering hope that inflation was now on a sustained downward trend, though the labour market remains tight.

Americans also got some relief at the supermarket, with the report from the Labor Department on Thursday showing food prices posting their smallest monthly increase since March 2021. But rents remained very high and utilities were more expensive.

The report could allow the Federal Reserve to further scale back the pace of its interest rate increases next month. The U.S. central bank is engaged in its fastest rate hiking cycle since the 1980s.

“The mountain peak of inflation is behind us but the question is how steep the downhill is,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. “To be sure, the efforts by the Federal Reserve have begun to bear fruit, even though it will be a while before the promised land of a 2 per cent inflation rate is here.”

The consumer price index dipped 0.1 per cent last month, the first decline since May 2020, when the economy was reeling from the first wave of COVID-19 cases. The CPI rose 0.1 per cent in November.

Economists polled by Reuters had forecast the CPI unchanged. It was third straight month that the CPI came in below expectations.

Gasoline prices tumbled 9.4 per cent after dropping 2.0 per cent in November. But the cost of natural gas increased 3.0 per cent, while electricity rose 1.0 per cent. Food prices climbed 0.3 per cent, the smallest gain since March 2021, after rising 0.5 per cent in the prior month. The cost of food consumed at home increased 0.2 per cent.

In the 12 months through December, the CPI increased 6.5 per cent. That was the smallest rise since October 2021 and followed a 7.1 per cent advance in November. The annual CPI peaked at 9.1 per cent in June, which was the biggest increase since November 1981. Inflation remains well above the Fed’s 2 per cent target.

Price pressures are subsiding as higher borrowing costs cool demand, and bottlenecks in the supply chains ease. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 per cent-4.50 per cent range, the highest since late 2007. In December, it projected at least an additional 75 basis points of hikes in borrowing costs by the end of 2023.

Excluding the volatile food and energy components, the CPI climbed 0.3 per cent last month after rising 0.2 per cent in November. In the 12 months through December, the so-called core CPI increased 5.7 per cent after advancing 6.0 per cent in November.

U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

Prices for used cars and trucks fell 2.5 per cent, recording their sixth straight monthly decline. New motor vehicles slipped 0.1 per cent.

Goods prices dropped 1.1 per cent after decreasing 0.3 per cent in November as deflation in this category becomes entrenched. But services, the largest component of the CPI basket, accelerated 0.6 per cent after gaining 0.3 per cent in November.

They are being driven by sticky rents. Owners’ equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, jumped 0.8 per cent after rising 0.7 per cent in November. Independent measures, however, suggest rental inflation is cooling.

The rent measures in the CPI tend to lag the independent gauges. Healthcare costs gained 0.1 per cent after two straight monthly declines. Even stripping out rental shelter, services inflation shot up 0.4 per cent after being unchanged in November.

Still, the moderation in inflation will be welcomed by Fed officials, though they will probably want to see more compelling evidence of abating prices pressures before pausing rate hikes.

The labour market, which has remained tight, will be key in this regard. The unemployment rate is back at a five-decade low of 3.5 per cent. There were 1.7 jobs for every unemployed person in November.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 205,000 for the week ended Jan. 7. Economists had forecast 215,000 claims for the latest week.

Part of the surprise drop in claims reflects challenges adjusting the data for seasonal fluctuations at the start of the year. Nevertheless, claims have remained low despite high– profile layoffs in the technology industry as well as job cuts in interest rate-sensitive sectors like finance and housing.

Economists say companies are for now reluctant to send workers home after difficulties finding labour during the pandemic. They, however, expect claims to rise by the second half of the year as higher borrowing costs choke demand and push the economy into recession.

The claims report also showed the number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 63,000 to 1.634 million in the week ending Dec. 31.

The government reported last week the economy created 223,000 jobs in December, more than double the 100,000 that economists say the Fed wants to see to be confident inflation is cooling.

Consumer prices fell 0.1% in December, in line with expectations from economists

• The consumer price index fell 0.1% in December, meeting expectations, for the biggest drop since April 2020.
• Excluding food and energy, core CPI rose 0.3%, also in line with estimates.
• On an annual basis, headline CPI rose 6.5% while core increased 5.7%.
• The biggest reason for the easing in inflation came from a sharp drop in gasoline prices, which are now lower on a year-over-year basis.

https://www.cnbc.com/2023/01/12/consumer-prices-fell-0point1percent-in-december-in-line-with-economists-expectations.html

Inflation crisis poses greatest near-term global threat, Davos survey warns

• The World Economic Forum’s annual Global Risks Report found the cost of living crisis and climate change are the biggest short and long-term global risks right now, respectively.
• “We see a return of some older risks that we felt we had made good progress in terms of solving, but are now very much back on the risk map,” Carolina Klint, risk management leader for Continental Europe at Marsh, told CNBC.
• The report says the world must collaborate more effectively on climate mitigation and adaptation over the next decade, to avoid “ecological breakdown” and continued global warming.

https://www.cnbc.com/2023/01/11/inflation-crisis-posing-greatest-near-term-threat-davos-survey-warns.html

China cuts deal with Taliban to extract oil in Afghanistan

The Taliban is cutting its first major energy extractions agreement since taking control of Afghanistan in 2021, agreeing to a 25-year pact with a Chinese company to drill for oil in the country’s Amu Darya basin.

“The Amu Darya oil contract is an important project between China and Afghanistan,” Wang Yu, the Chinese ambassador to Afghanistan, said at a press conference in Kabul, according to a BBC report last week.

The Taliban’s agreement is with China’s Xinjiang Central Asia Petroleum and Gas Company and is set for 25 years, while another Chinese state-owned company is also reportedly in talks with the Taliban to operate a copper mine in eastern Afghanistan.

Afghanistan sits on reserves of natural gas, copper and rare earth minerals estimated to be worth over $1 trillion, which remain untapped amid decades of war and turmoil in the country.

https://www.foxnews.com/world/china-cuts-deal-with-taliban-extract-oil-afghanistan

Goldman Sachs says it no longer expects a recession in euro zone in 2023

Goldman Sachs GS-N -0.59%decrease said on Tuesday it expects the euro zone economy to grow by 0.6 per cent this year, compared with its previous forecast of a contraction, thanks to a fall in natural gas prices and the reopening of China’s borders.

“We maintain our view that Euro area growth will be weak over the winter months given the energy crisis but no longer look for a technical recession,” Goldman Sachs economists led by Sven Jari Stehn said in a note.

The Wall Street bank had in November forecast a 0.1 per cent contraction for the region. A technical recession is typically defined as two consecutive quarters of contraction in gross domestic product (GDP).

Euro zone inflation is expected to be around 3.25 per cent at the end of 2023 compared with 4.50 per cent forecast earlier, the economists said.

In December, consumer price growth across euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week.

Core inflation for the region is also seen slowing to 3.3 per cent by the year-end as goods prices cool, but continued upward pressure is expected on services inflation due to rising labour costs, Goldman said.

Given the “sticky” nature of inflation, Goldman expects the European Central Bank to remain hawkish and deliver 50 basis points hikes in February and March before slowing to 25 bps for a terminal rate of 3.25 per cent in May.

For the U.K., Goldman sees a smaller contraction of 0.7 per cent in GDP, compared with an earlier expectation for it to shrink by 1 per cent, helped by lower wholesale gas prices.

As the U.K. labour market remains overheated, the U.S. bank sees another 100 bps worth of hikes by the Bank of England.

Microsoft reportedly in talks to invest US$10-billion in ChatGPT-owner OpenAI

Microsoft Corp MSFT-Q +0.88%increase is in talks to invest $10-billion in ChatGPT-owner OpenAI as part of funding that will value the firm at $29-billion, Semafor reported on Monday, citing people familiar with the matter.

The news underscores rising interest in the artificial intelligence company, whose chatbot has dazzled amateurs and industry experts with its ability to spit out haikus, debug code and answer questions while imitating human speech.

The funding could also include other venture firms and documents sent to prospective investors outlining its terms indicated a targeted close by the end of 2022, according to the report.

Microsoft declined to comment, while OpenAI did not immediately respond to Reuters requests for comment.

The software giant had in 2019 invested $1-billion in OpenAI, founded by Elon Musk and Sam Altman. Microsoft’s cloud services arm also provides the computing power needed by the AI firm.

Microsoft last year unveiled plans to integrate image-generation software from OpenAI into its search engine Bing. A recent report from the Information said similar plans were under way for ChatGPT as Microsoft looks to take on market leader Google Search.

According to Semafor, Microsoft will also get 75 per cent of OpenAI’s profits until it recoups its initial investment.

After hitting that threshold, Microsoft would have a 49 per cent stake in OpenAI, with other investors taking another 49 per cent and OpenAI’s non-profit parent getting 2 per cent, Semafor said.

Reuters reported last month a recent pitch by OpenAI to investors said the organization expects $200-million in revenue next year and $1-billion by 2024.

OpenAI charges developers licensing its technology about a penny or a little more to generate 20,000 words of text, and about 2 cents to create an image from a written prompt.

It spends about a few cents in computing power every time someone uses its chatbot, Altman recently said in tweet that has raised concerns about OpenAI’s cash burn.

A Wall Street Journal report said last week OpenAI was in talks to sell existing shares at a roughly $29-billion valuation in a tender offer that would attract investment of at least $300-million.

Payment Technology Company Nuvei Signs Deal Valued At US$1.3B To Buy Paya

The Canadian Press – Canadian Press – Mon Jan 9, 8:26AM CST

MONTREAL — Payment technology company Nuvei Corp. has signed a deal to buy U.S. company Paya Holdings Inc. valued at US$1.3 billion.

Under the agreement, Montreal-based Nuvei will pay US$9.75 per share in cash.

The purchase price is a 25 per cent premium to Paya’s closing price on Friday of US$7.79.

Atlanta-based Paya is a payment technology company with more than 100,000 customers and over 2,000 key distribution partners.

Nuvei chair and chief executive Philip Fayer says the deal will accelerate the company’s integrated payment strategy and diversify its business into key areas.

Nuvei expects to finance the deal with a combination of cash on hand, an existing credit facility and a new secured credit facility.

This report by The Canadian Press was first published Jan. 9, 2023.

Companies in this story: (TSX:NVEI)

Gold hits 8-month peak as bets of slower rate hikes dent dollar

Gold prices hit an eight-month high on Monday, as the dollar slipped on bets for slower U.S. interest rate hikes, while investors also cheered top bullion consumer China reopening its borders.

Spot gold rose 0.49% to $1,874.78 per ounce, its highest since May 9, 2022. U.S. gold futures gained 0.53% to $1,879.50.

The weaker dollar is likely the main factor lifting gold, and investors have also started slowly increasing their holdings in exchange-traded funds (ETFs), indicating positive sentiment in gold, UBS analyst Giovanni Staunovo said.

Making gold cheaper for overseas buyers, the dollar index eased 0.2%, still under pressure after recent U.S. data raised hopes for a slowdown in the pace of rate hikes by the Federal Reserve.

Elevated rates dampen interest in non-yielding gold, as they did for the majority of 2022.

“Data suggests that the Fed’s cumulative tightening in 2022 is starting to have its effects felt on the economy and that the Fed can afford to slow its pace of tightening,” said OCBC FX strategist Christopher Wong.

Traders will now assess Fed Chair Jerome Powell’s speech at a central bank conference in Stockholm on Tuesday and U.S. consumer price index data due later this week.

“We believe (gold) prices are trading at the upper end of a fundamentally justified range,” Julius Baer analyst Carsten Menke said in a note, adding that central bank buying had become a new focus area for the bullion market.

China held 64.64 million fine troy ounces of gold, as of end-December.

However, UBS’ Staunovo said while China’s reopening of its borders could support jewellery demand to some extent, the overall impact on gold market may be limited.

Oil jumps 3% on demand optimism as China borders reopen

Oil extended gains on Monday, rising about 3% after China’s move to reopen its borders boosted the outlook for fuel demand and overshadowed global recession concerns.

The rally was part of a wider boost for risk sentiment supported by both the reopening of the world’s biggest crude importer and hopes for less-aggressive increases to U.S. interest rates, with equities rising and the dollar weakening.

Brent crude was up $2.29, or 2.9%, at $80.86 a barrel by 1150 GMT while U.S. West Texas Intermediate crude rose $2.46, or 3.3%, to $76.23.

“If recession is avoided, global oil demand and demand growth will remain resilient,” said Tamas Varga of oil broker PVM, adding that developments in China were the main reason for Monday’s gains.

“The gradual reopening of the Chinese economy will provide an additional and immeasurable layer of price support,” he said.

The rally followed a drop last week of more than 8% for both oil benchmarks, their biggest weekly declines at the start of a year since 2016.

As part of a “new phase” in the fight against COVID-19, China opened its borders over the weekend for the first time in three years. Domestically, about 2 billion trips are expected during the Lunar New Year season, nearly double last year’s and 70% of 2019 levels, Beijing says.

In oil-specific developments, China issued a second batch of 2023 crude import quotas, according to sources and documents reviewed by Reuters, raising the total for this year by 20% from the same time last year.

Despite Monday’s oil rebound, there is still concern that the massive flow of Chinese travellers could cause another surge in COVID infections while broader economic concerns also linger.

Those concerns are reflected in oil’s market structure. Both the near-term Brent and U.S. crude contracts are trading at a discount to the next month, a structure known as contango, which typically indicates bearish sentiment.