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Biden says he will make Fed nomination announcements ‘fairly quickly’

GLASGOW: President Joe Biden said on Tuesday that the White House will be making an announcement about his nominations to lead the U.S. Federal Reserve “fairly quickly.”

Biden told reporters that he has been thinking about personnel decisions, including whether to re-nominate Fed Chair Jerome Powell, and that he expected there would be “plenty of time” for his central bank nominees to be cleared by the Senate before current terms expire.

2014 vs 2021: How a Fed taper can move asset prices

The Federal Reserve‘s taper in 2014 was preceded by sharp gyrations in Treasury markets and helped lay the foundations for a massive rally in the U.S. dollar.

With the Fed widely expected to soon begin an unwind of its $120 billion in government bond buying, here’s a comparison between the market backdrop around the time of the Fed’s most recent unwind and today.

TAPER TIME
The Fed’s taper of the $85 billion a month bond buying program, which it began in response to the 2007-2009 financial crisis and recession, ran from January 2014 until October of that year.

Since then the central bank’s balance sheet has ballooned to $8.6 trillion as policymakers slashed rates to near zero and rolled out a raft of measures, including monthly government backed bond purchases, as they fought to support the economy in the wake of the COVID-19 outbreak last year.

The central bank concludes its November monetary policy meeting on Wednesday.

THE DOLLAR

While U.S. monetary policy was far from hawkish in 2014, it stood in contrast to the ultra-dovish trajectories of central banks in Europe, Japan and other countries, who were still fully supporting their economies with stimulus while the Fed was curtailing its bond buying.

A widening between the yields on U.S. Treasuries and government bonds in other countries helped spark a rally in the dollar, which rose nearly 13% against a basket of major currencies in 2014.

The global monetary policy picture is different this time around, with some investors betting that central banks in the U.K., Canada and other economies are likely to soon raise interest rates to combat a global surge in inflation.

Signs that the Fed is more concerned about inflation than it has previously indicated, however, could buoy U.S. rates and potentially support the greenback, analysts said.

BOND YIELDS
Bond yields rocketed higher in 2013, after then-Fed chief Ben Bernanke alluded to the policymaker’s thinking on plans for pulling back its monetary support in an appearance before lawmakers.

This time around, Fed Chair Jerome Powell has tried to prepare markets for the start of a taper well in advance.

Still, U.S. bond markets have experienced gyrations in recent weeks as some investors bet the central bank will need to be more hawkish than expected to combat inflation.

Meanwhile, rising yields on expectations of tighter monetary policy and rebounding growth have put the U.S. bond market on track for its worst year since 2013. Yields move inversely to prices.

STOCKS
The S&P 500 stood near record highs as the Fed kicked off its taper in 2014 and continued to fresh peaks after the unwind began.

Though stocks are at records today as well, valuations have ballooned over the years, leading some investors to worry that some areas of the market–including the big growth and technology stocks that make up a large chunk of the S&P 500–may be more vulnerable to higher yields and a more hawkish monetary policy stance.

Crude outlook: Oil prices may hit 20-year low

WTI crude settled below $30, tumbling by 25%, the most since 2008 on signs of a breakdown in the OPEC+ as end of the talks without a deal raises the prospect of another war for market share among producers, which had exacerbated crude’s collapse back in 2014 amid a global glut. The breakdown is the biggest crisis since Saudi Arabia, Russia and more than 20 other nations created the OPEC+ alliance in 2016.

Markets had expected OPEC+ calling for a bigger oil production cut in another sign of impact of coronavirus worldwide after cartel decided for additional 1.5 Mbpd output cut along with a 1.7 Mbpd output cut decided in December, 2020 for the whole year of 2020. Now, the oil market faces double jeopardy. It won’t just miss out on the 1.5 million barrel-a-day output cut Saudi Arabia was pushing, but the group’s existing 2.1 million-barrel-a day supply reduction won’t continue beyond the end of this month.

Brent cash-3 Months spread, the difference between December contracts in consecutive years — sank deeper into bearish contango, reaching the lowest level since 2016. Oil prices pared some of their gains as data from EIA revealed that the US crude supplies rose by 785,000 bpd. EIA data also showed supply declines of 4.3 Mbpd for gasoline and 4 Mbpd for distillates.

The global advance of the coronavirus has shaken confidence across major economies, prompting central bankers to proffer stimulus measures, including lower interest rates. In addition to the Federal Reserve’s emergency cut this week, Canada and Australia also eased. Investors’ flight to safety was also evidenced by the latest fall in US government bond yields.

For now, central bankers are doing what they can to keep financial markets running smoothly. Kaplan said that one option the Fed has is encouraging banks to go easy on borrowers affected by the virus who are otherwise creditworthy. The US central bank will make sure that there is an ample supply of reserves in the banking system. Investors are also concerned about how coronavirus outbreaks in Japan and South Korea will hit two of Asia’s biggest economies. Forecast showed that it would blow a $211bn hole in regional economies this year, cutting Asia-Pacific’s annual growth rate to the lowest level since the global financial crisis.

Saudi Message: Saudi Arabia is set to raise oil production next month, in an apparent attempt to put pressure on Russia after Moscow refused to join other nations in curbing output to support the price of oil. Reports suggest that Saudi Arabia can increase oil output next month, well above 10MBpd to 12Mbpd to punish Russia, this means as much as an extra 1.3 million bpd could flood the market next month – just as demand is taking a major hit from the economic fallout of the global coronavirus epidemic.

This was only one bullet of two fired by Saudi, the other was massive cut to their official selling prices (OSPs) for April. The OSP for Saudi Aramco‘s benchmark Arab Light grade was cut by $6 a barrel for Asian customers, the destination of about two-thirds of the kingdom’s exports. This was the largest monthly cut in records stretching back to 2003.

Saudis slashed the Arab Light OSP for Northwest Europe by $8 a barrel to a discount of $10.25 a barrel to Brent, and the United States got a reduction of $7 a barrel to a discount of $3.75 against the Argus Sour Crude Index. The other Middle Eastern producers such as Kuwait, Iran and Iraq will have little choice but to match the Saudi price cuts, as will other exporters around the world, unless they are prepared to lose market share or shut-in wells.

Kremlin Sacrifice: On the other hand, if Russia’s plan here really is to try to kill the US shale industry, Novak and other leaders should be prepared to sustain it for a long and painful haul as when the crash in oil prices that began in late 2014 did ultimately result in hundreds of shale producers declaring Chapter 11 bankruptcy, the net result of that process is that most of those companies reorganize themselves and come back with far less debt load.

The strategy also fails to recognize that most producers have already put hedges in place for most of their equity production through the remainder of 2020 and beyond. While Russia would also be impacted by a significant decline in oil prices, it appears to have some room to manoeuvre before it feels the pain. Saudi Arabia needs a price of about $83 to balance its budget, while Russia only needs a price of about $42.

Meanwhile, shale oil producers spend more to extract oil and generally break even with an average price of $68 per barrel. Brent’s 3M spread widened sharply as oil for prompt delivery collapsed against later shipments. It moved deeper into contango, a sign of bearishness and oversupply, making it profitable for physical traders to buy crude and put it in storage, either in onshore tank farms or at sea on tankers.

While Brent-WTI premium fell to lowest levels in more than two years, at $2.77 a barrel, narrowing from an average of more than $4 last week. The other disadvantage is with coronavirus already wreaking havoc on the stock market, Trump may find it to be more difficult to tout his economic achievements as his re-election campaign moves forward.

Additionally, the national debt and deficit has continued to rise substantially, with Trump’s signature tax cuts having greatly reduced revenues, while primarily benefiting the wealthiest Americans and corporations.

Conclusion
For oil markets, OPEC has been very clear that it will not undertake further production cuts without Russia thus sending markets tumbling to lows not seen since 2016. It remains to be seen what will come from this meeting in Vienna; however, the outlook is bearish with continued transmission of the virus and the potential for Libyan exports to resume, which had been a supporting factor as the country faced supply outages. Markets would be looking for signs of whether Saudi Arabia, Russia or any of the other OPEC+ nations could actually increase production after Energy Minister Alexander Novak said Russian companies are free to ramp up idle capacity from April 1.

With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will go even lower. The oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price sell-off. Forthcoming flood of supply, overwhelmed inventories and coronavirus-led demand shock can see price tumble to nadir of $20 a barrel, lowest oil prices of the last 20 years. What still has to become clear is what do crude oil exporters do in response to the Saudi action, beyond the short-term move of also cutting prices? Also, will importers actually buy more crude, or switch their supplier mix in response to cheaper oil? The coronavirus is still hitting demand and it’s likely that storage tanks will soon be filling up, with only China likely in a situation where it can meaningfully add to its strategic inventories. OPEC+ members can choose to raise output from Q2 onward, a wave of oil will be unleashed onto markets.

Technical Views Crude Oil
As seen on chart, MCX Crude oil has managed to take resistance at Rs 3,880 level and is now trading below the same. Immediate support is placed at Rs 3,550 and resistance is at Rs 3,880. Bias remains weak as long as price holds below the resistance level of Rs 3,880. Any pullback near immediate resistance level of Rs 3,880 should be taken as a shorting opportunity targeting support level of Rs 3,550.

Natural Gas
MCX Natural gas has been trading in a downward sloping channel forming lower top and lower bottom pattern, which signifies sustained weakness. Currently, prices are trading below important resistance level of Rs 142 and weakness is likely to continue until prices are trading below the same. Momentum indicator MACD is continuously trading in negative territory suggesting further weakness in counter. Important support is at Rs.118 and resistance at Rs 142 levels. Recommendation is to go short targeting support level of Rs 118.

Gold poised for best week since early May as dollar, yields ease

Gold was set on Friday for its best week in more than five months as a retreat in the U.S. dollar and Treasury yields lifted the metal’s appeal despite a looming Federal Reserve taper.

FUNDAMENTALS

* Spot gold held steady at $1,794.09 per ounce by 0115 GMT but was up 2.1% for the week so far. On Thursday, prices hit a one-month high of $1,800.12.

* U.S. gold futures inched down 0.1% to $1,795.50.

* Both the dollar index and benchmark U.S. 10-year Treasury yields pulled back from their multi-month highs.

* Despite a broadly shared view that the U.S. labour market has healed enough to allow the Fed to start reducing its monthly bond purchases as soon as next month, policymakers are sharply pided over inflation and what they should do about it.

* The International Monetary Fund’s steering committee on Thursday urged global policymakers to monitor pricing dynamics closely, but to “look through” inflationary pressures that are transitory and will fade as economies normalise.

* The number of Americans filing new claims for unemployment benefits dropped below 300,000 last week for the first time in 19 months.

* The Labor Department said its producer price index for final demand rose 0.5% in September, the smallest gain in nine months.

* Miner Barrick Gold Corp on Thursday reported a nearly 5% rise in third-quarter gold production from the previous three months, as output jumped at its Veladero mine in Argentina.

* Spot silver fell 0.4% to $23.45 per ounce but was headed for its biggest weekly gain in seven.

* Platinum eased 0.1% to $1,054.09, having hit a peak since Aug. 2 at $1,062.50 on Thursday.

* Palladium rose 0.2% to $2,132.21.

Fed officials saw taper starting in mid-November or mid-December

Federal Reserve officials broadly agreed last month they should start reducing emergency pandemic support for the economy in mid-November or mid-December, even as the delta variant continued to create headwinds.

“Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” minutes of the Sept. 21-22 Federal Open Market Committee meeting released Wednesday said.

“Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.”

Fed officials last month signaled they were close to beginning to scale back their $120 billion in monthly asset purchases and Chair Jerome Powell told reporters the process could start as soon as November and would likely end around mid-2022. The record of the closed-door debate showed U.S. central bankers grappling with high uncertainty on both sides of their mandate for full employment and stable prices.

Inflation is rising at the fastest pace in years and is well above the Fed’s 2 per cent goal. Some officials say supply bottlenecks and production tangles — blamed on disruption as the economy reopens from the pandemic — could sustain price pressures for longer than they expected. Consumer prices rose 5.4 per cent in September from a year earlier, the Labor Department reported Wednesday.

Fed officials last month projected price pressures would ease back close to their goal next year, but nine of 18 forecast at least on interest-rate increase during 2022, up from seven in June. The FOMC left rates near zero and said they would stay there until the labor market has reached maximum employment and inflation was on track to exceed 2 per cent “for some time.”

US economy likely logged its weakest performance in 74 years in 2020

WASHINGTON: The US economy likely contracted at its sharpest pace since World War Two in 2020 as COVID-19 ravaged services businesses like restaurants and airlines, throwing millions of Americans out of work and into poverty.

The Commerce Department‘s snapshot of fourth-quarter gross domestic product on Thursday is also expected to show the recovery from the pandemic losing steam as the year wound down amid a resurgence in coronavirus infections and exhaustion of nearly $3 trillion in relief money from the government.

The Federal Reserve on Wednesday left its benchmark overnight interest rate near zero and pledged to continue injecting money into the economy through bond purchases, noting that “the pace of the recovery in economic activity and employment has moderated in recent months.”

President Joe Biden has unveiled a recovery plan worth $1.9 trillion, and could use the GDP report to lean on some lawmakers who have balked at the price tag soon after the government provided nearly $900 billion in additional stimulus at the end of December.

“Last year was awful for the economy,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “This was the first service industry recession in recent memory where a lot of jobs were lost.”

Economists are forecasting that the economy contracted by as much as 3.6% in 2020, the worst performance since 1946. That would follow 2.2% growth in 2019 and would be the first annual decline in GDP since the 2007-09 Great Recession.

In the fourth quarter, GDP is estimated to have expanded at a 4% annualized rate, according to a Reuters survey of economists. The virus and lack of another spending package curtailed consumer spending, and partially overshadowed robust manufacturing and the housing market.

The anticipated big step-back, following a historic 33.4% growth pace in the July-September period, would leave GDP roughly 2.3% below its level at the end of 2019. With the virus not yet under control, economists are expecting growth to further slow down in the first quarter of 2021, before regaining speed by summer as the additional stimulus kicks in and more Americans get vaccinated.

“No doubt it will be a challenging few months as the vaccines struggle to get distributed and lockdowns remain in place,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “However, as COVID gets under control, we expect growth to ratchet higher, running at around a 7% pace in the second half of the year.”

K-SHAPED RECOVERY
The services sector has borne the brunt of the coronavirus recession, disproportionately impacting lower-wage earners, who tend to be women and minorities. That has led to a so-called K-shaped recovery, where better-paid workers are doing well while lower-paid workers are losing out.

The stars of the recovery have been the housing market and manufacturing as those who are still employed seek larger homes away from city centers, and buy electronics for home offices and schooling. Manufacturing’s share of GDP has increased to 11.9% from 11.6 at the end of 2019.

A survey last week by professors at the University of Chicago and the University of Notre Dame showed poverty increased by 2.4 percentage points to 11.8% in the second half of 2020, boosting the ranks of the poor by 8.1 million people.

Rising poverty is likely be underscored by persistent labor market weakness. The Labor Department is expected to report on Thursday that 875,000 more people filed for state unemployment benefits last week, according to a Reuters survey.

About 16 million Americans were receiving unemployment checks at the end of 2020. The economy shed jobs in December for the first time in eight months. Only 12.4 million of the 22.2 million jobs lost in March and April have been recovered.

Lack of jobs and the expiration of a government weekly jobless subsidy likely restrained growth in consumer spending to about a 3% rate in the fourth quarter. Consumer spending, which accounts for more than two-thirds of the U.S. economy, notched a record 41% pace in the July-September quarter.

Renewed business restrictions likely kept spending on services subdued. Demand for goods that complement life at home probably boosted business investment, with double digit growth expected again in the fourth quarter.

Businesses were also rebuilding inventories last quarter, which is likely to have contributed to GDP growth. But the inventory accumulation included imports, likely leading to a larger trade deficit, which subtracted from growth.

Another quarter of double-digit growth is expected from the housing market, thanks to historically low mortgage rates. Government spending was likely weak, hurt by state and local governments, whose finances have been squeezed by the pandemic.

JPMorgan board holds CEO Jamie Dimon’s annual pay at $31.5 million

NEW YORK- JPMorgan Chase & Co Chief Executive Officer Jamie Dimon will not get a raise in his annual pay and will receive $31.5 million for his work in 2020, the bank said on Thursday.

Dimon’s total compensation will include the same annual base salary of $1.5 million and a performance-based incentive of $30 million, according to a regulatory filing.

The bank said directors based the pay decision on “the firm’s strong performance” last year during the coronavirus pandemic and over the long term across business results, risk controls and conduct; client, customer and stakeholder focus; and teamwork and leadership.

The rationale provided by the board was similar to that offered for Dimon’s compensation for 2019.

Under Dimon, who turns 65 in March, JPMorgan produced net income of $29.1 billion for 2020, down from $36.4 billion a year earlier, and a return on tangible common equity of 14%, down from 19%.

Profits at JPMorgan, the biggest U.S. bank by assets, and other banks were hurt by massive expense provisions for expected loan losses due to the pandemic. Low interest rates fostered by the Federal Reserve to support the economy also reduced lending margins.

Incentive compensation for Dimon and other top JPMorgan executives is largely composed of restricted stock instruments.

The bank also disclosed awards to other executives of restricted stock units, indicating their total compensation for 2020, including:

Gordon Smith, co-president and CEO of Consumer & Community Banking, $22.5 million, unchanged from the year before.

Daniel Pinto, co-president and CEO of the Corporate & Investment Bank, $24.5 million, up 9%.

Mary Erdoes, CEO for Asset & Wealth Management, $21 million, unchanged.

Marianne Lake, CEO of Consumer Lending, $15.7 million, up 2%.

Doug Petno, CEO of Commercial Banking, $13 million, unchanged.

Chief Financial Officer Jennifer Piepszak, $12 million, up 20% for her first full year as CFO.

US industrial production jumps 1.6% in December

US industrial production rose 1.6per cent in December, a third straight monthly gain, but remains below its pre-pandemic level. The December gain in industrial output followed a 0.5per cent increase in November and a 1per cent increase in October, the Federal Reserve reported Friday. Even with those gains, industrial output is still about 3.3per cent below its level in February before the pandemic hit.

Manufacturing increased 0.9 per cent, its eighth straight monthly gain, even as production of motor vehicles and parts declined 1.6per cent.

That follows a string of gains for the auto sector, including last month’s strong 5per cent increase. Without the drag in the auto sector last month, manufacturing posted gains of 1.1per cent.

Mining production rose 1.6per cent, while utilities’ output rose 6.2per cent as a rebound in December demand followed a 4.2per cent decline in November due to unseasonably warm weather.

U.S. industry operated at 74.5per cent of capacity in December, still below the pre-pandemic rate of 76.9per cent in February.

While Decembers topline numbers were better than economists had expected, there is concern that rising coronavirus infections and a rocky vaccination campaign could further hamstring an already uneven recovery for the U.S. economy.

On Thursday night, President-elect Joe Biden unveiled a USD1.9 trillion coronavirus plan that would speed up vaccines and deal financial help to those struggling with the pandemics prolonged economic fallout.

Oren Klachkin, an economist with Oxford Economics, said a financial relief package would provide a much-needed immediate boost for the economy, but added that in the long-term, “vaccine roll outs will shift consumer spending more towards services, softening consumer goods demand and weighing on industrial activity.”

The Institute for Supply Management reported Tuesday that American factories grew in December at the fastest pace in more than two years.

The manufacturing sector has weathered the pandemic better than the battered services sector, but continues to face virus-related headwinds such as factory shutdowns needed to sanitize facilities and difficulties in hiring new workers as the virus surges again.

US economy contracted 19.2% during COVID-19 pandemic recession

The U.S. economy contracted at a record average annualized rate of 19.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020, government data showed on Thursday, confirming that the COVID-19 recession was the worst ever.

The pace of recovery from the pandemic downturn, the deepest going back to 1947, was equally stunning. The Commerce Department’s Bureau of Economic Analysis said gross domestic product rebounded at a historic average rate of 18.3% between the second and fourth quarter of 2020.

Mandatory shutdowns of nonessential businesses in March last year to slow the first wave of coronavirus infections left the economy reeling, throwing a record 22.362 million people out of work. The government provided nearly $6 trillion in pandemic relief, while the Federal Reserve slashed its benchmark overnight interest rate to near zero and is pumping money into the economy through monthly bond purchases.

The National Bureau of Economic Research, the arbiter of U.S. recessions, declared last week that the pandemic downturn, which started in February 2020, ended in April 2020.

Massive fiscal stimulus, the Fed‘s ultra-easy monetary policy and vaccinations against COVID-19 have allowed economic activity to resume, with GDP pulling above its pre-pandemic level in the second quarter. The government also said the economy shrank 3.4% in 2020, instead of 3.5% as previously estimated. That was still the biggest drop in GDP since 1946.

Revisions to growth in other years and quarters were minor. From 2015 to 2020, GDP increased at an average annual rate of 1.1%, unrevised from previously published estimates.

The BEA said in 2018 it had fully addressed a methodology problem, or residual seasonality, which analysts had argued tended to understate economic growth in the first quarter.

While growth likely peaked in the second quarter, economists see GDP increasing around 7% this year, which would be the strongest performance since 1984.

The International Monetary Fund on Tuesday significantly raised its growth forecasts for the United States to 7.0% in 2021 and 4.9% in 2022, up 0.6 and 1.4 percentage points respectively, from its forecasts in April.

debt markets | Emerging market debt is safer now, unless oil crashes

By Lisa Abramowicz

Remember when emerging-market debt investors used to fret about Federal Reserve interest-rate hikes?

Apparently, they don’t care anymore, or at least not very much.

Even though it’s almost a sure thing the Fed will bump up overnight borrowing costs next week, investors are racing into these bonds. Funds focused on this debt received more than $2 billion of deposits in the past week, the second-biggest flow in 2017, according to Wells Fargo Securities analysts.

Investors are demanding the lowest amount of extra yield to own these notes relative to similarly rated US debt since 2013.

Dollar-denominated bonds of developing nations are performing better this year than US investment-grade and high-yield corporate credit.

This all comes as developing nations build up record amounts of dollar-denominated obligations. This makes them more vulnerable if the greenback strengthens — as many expect it to do as the US central bank tightens monetary policy. Meanwhile, any global economic downturn tends to disproportionately harm these nations, which rely on faster growth.

That sounds pretty bad, and it would be easy to dismiss this rally as a display of irrational exuberance, with debt buyers simply blindly searching for extra yield.

But that’s too simplistic. This rally, especially in the face of a Fed rate hike, marks a pretty profound shift. As my Bloomberg Intelligence colleague Damian Sassower has pointed out, these nations have changed. They’ve developed. They’re also very different from one another. With more than 80 countries included in the Bloomberg Barclays EM Hard Currency Aggregate Total Return index, it’s a more perse universe than, say, a corporate credit index reliant only on the US or Europe or Japan.

And these smaller nations tend to be less leveraged than bigger, more established ones, which have relied heavily on non-traditional stimulus efforts that caused their debt outstanding to balloon. Meanwhile, the global economy suddenly looks more resilient than it did just a year ago, with inflation picking up and signs of sustained growth.

So while emerging-market debt isn’t immune, it seems less vulnerable than it used to be against selloffs in developed markets.

There is, of course, a catch. Many of these bonds are in a vulnerable position if oil prices materially weaken.

More than a quarter of dollar-denominated corporate and quasi-sovereign debt in emerging markets is tied to oil and gas production, according to Bloomberg Intelligence. That compares with 14.4 per cent of the US high-yield index and 12 per cent of US corporate bonds more broadly.

Bonds in Russia and Qatar — of Lukoil and Ras Laffan LNG, for example — may be particularly vulnerable because they rely on oil revenues as well as national economies that are highly dependent on the same type of income.

When the Fed raises rates next week, emerging-market credit can easily keep on rallying. It’s really falling oil prices that would put a halt to this party.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners)