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Investment Symposium Series – A regime change for US inflation

Disrupted supply chains, lower participation rates in the labour market, supply and demand thrown out of kilter. These are among the critical factors that have brought about a sea change in the outlook for US inflation. This regime change will be a critic

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Disrupted supply chains, lower participation rates in the labour market, supply and demand thrown out of kilter. These are among the critical factors that have brought about a sea change in the outlook for US inflation. This regime change will be a critical element in shaping the investment environment in 2022.  


This article is part of our Investment Symposium Series, in which we present thinking on the big issues. For this series, we draw on the annual Investment Symposium, a core event where investment professionals at BNP Paribas Asset Management zoom in on the themes shaping the future. It is also a venue for high-level external speakers to cast a new light on the challenges of our time, testing our convictions and diversifying our thinking.  


The outlook for US inflation and the appropriateness of US monetary policy were a major focus of our Investment Symposium. Professor Olivier Blanchard explained why, in his view, a secular rise in inflation is underway that will require policymakers at the US Federal Reserve to implement a more severe and more rapid tightening of monetary policy.

In this article, we review events so far before providing an outlook based on forecasts from our fixed income team.

Autumn 2021, US inflation takes off…

US inflation as measured by the consumer price index (CPI) hit a headline-grabbing 6.2% in October – its highest in three decades. The Fed’s preferred measure, the core personal consumption expenditure index, rose by 4.1% compared with a year earlier.

Data for November showed the CPI rose by 6.8 % compared to 12 months ago — the fastest annual pace since 1982 and a significant pick-up from October (see Exhibit 1).

Prices between October and November jumped by 0.8 %, slightly down from the previous month-on-month increase of 0.9 %.

According to the Bureau of Labor Statistics (BLS), ‘broad increases in most component indices’ fuelled the rise with petrol, shelter, food, and used and new vehicles ‘among the larger contributors’. Stripping out volatile prices for items such as food and energy, core CPI climbed by 0.5 % from October. That pushed the annual pace up to 4.9% from 4.6% in October.

The factors pushing US inflation higher

Faced with solid demand, US businesses had clearly been raising prices for consumer goods and services steadily, while supply bottlenecks and a shortage of qualified workers were driving up costs. 

Our view is that US inflation is being driven primarily by the response to Covid-19. During the pandemic, there has been a huge rebalancing of demand from face-to-face consumer services towards goods, with spending on durables such as cars, appliances and computers increasing particularly steeply. More than three-quarters of Americans made at least one improvement to their home in the first three months of the pandemic, according to Statista.

That demand has encountered supply chain problems in various parts of the world, resulting in widespread shortages and significant upward pressure on the prices of goods and materials, from computer chips to rubber and from coal to medicines. Global freight rates have surged as a result of soaring demand, factors such as Covid outbreaks in ports and the Suez Canal blockage.

Labour markets remain tight

At the same time, Covid has caused extensive disruption in the labour markets – and Americans have been reluctant to return to work.

As well as worries over the risk of contracting the virus, the extremely generous unemployment benefits that helped to support the economy through the crisis have kept workers at home, as have the excess savings households have built up during the pandemic.

US policymakers come under pressure

The rise in inflation in the last quarter of 2021 created an ugly economic situation of weaker growth and higher prices.

The damage inflation does to household purchasing power was stressed by Jay Powell when he spoke, for the first time after his re-nomination as chair of the Federal Reserve before the US Senate on 30/11/2021. Incoming Fed Vice-Chair Lael Brainard echoed that message.

So the Fed changes course

In the face of the continued upward pressure on prices in the final months of 2021, the Fed clearly became uncomfortable with its current extremely accommodative policy stance.

At the FOMC meeting in early November, it took the first step towards tighter policy, scaling back its asset purchases by USD 15 billion a month. On 30/11/2021, chair Powell said he thought the reduction in the pace of monthly bond purchases could move more quickly than the schedule announced at the start of November.

Up until this point, Fed officials had maintained that inflation would be ‘transitory’, a phenomenon Powell defined as not leaving a lasting mark on the economy. The word appeared in the post-meeting statement at the start of November, but by the end of the month, the chairman said it was probably not useful anymore: 

The word transitory has different meanings for different people. To many it carries a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” 

A hawkish pivot, drip-fed to investors?

The Fed’s Federal Open Market Committee last met to consider monetary policy on 15 December and delivered what financial markets interpreted at that time as a benign set of measures (see our post here for a full account of their decisions).

However, the publication on 5 January of the minutes of that meeting changed the markets’ perception of the Fed’s stance.

In the view of our fixed income team, the minutes highlight the fact that most FOMC committee members think it appropriate to begin rolling off the balance sheet shortly after commencing interest rate rises.

The market was taken aback to learn that ‘almost all’ FOMC participants believed that the Fed should reduce the size of its balance sheet (that is, start to sell off the bond holdings acquired through quantitative easing) once there has been an increase in its main policy rate.

Overall, we see these minutes as signalling a hawkish shift. The fact that the notion of a simultaneous balance sheet roll-off and rate rises was not evoked by Powell during the question & answer session after December’s FOMC suggests to us that the Fed is seeking to ‘drip-feed’ a hawkish pivot to investors.

Markets reacted by further extending their expectations of forthcoming US rate rises (see Exhibit 2).

Transitory or regime change?

One of the biggest questions for investors in 2022 is whether the low-flation regime in place since the Great Financial Crisis of 2008/09 is now over. During this period, a number of factors combined to keep US inflation unusually low. These factors included: 

  • Debt – High debt loads discouraged private sector consumption
  • Demographics – Aging populations consumed less and saved more
  • Globalisation – Offshoring allowed cheaper supply chains to replace expensive onshore labour and production
  • Technology – Automation substituted capital for labour; the rise of superstar-companies suppressed labour’s bargaining power. 

Today, there are signs of a regime change arising partly from the pandemic. This has accelerated trends already underway. Among the catalysts are: 

  • Demographics – The falling age of the working population is now reducing labour supply (the baby boom generation is retiring), while demand from older cohorts for services is increasing
  • Protectionism – A rise in populism has resulted in rising protectionism; the focus of supply chains is shifting from efficiency to resilience and reliability, which encourages onshoring
  • Politics – There is increasing political pressure to address income and wealth inequality, likely through redistributive fiscal policies and higher wages
  • Inflation tax on debt – Elevated public debt loads incentivise higher inflation and financial repression
  • Fiscal dominance Central banks may have to accommodate fiscal deficits to deliver on their full employment targets
  • Green transition – A rush to build renewable energy production with limited storage capacity and a lack of investment in traditional energy could lead to higher and unstable energy prices. 

Watch this space as we chart developments in 2022.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Investment Symposium Series – A regime change for US inflation appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Report: Pfizer, NIH Discussing Study of Longer Paxlovid Dosing Regimen

With increasing concerns about COVID-19 reinfection, Pfizer and the National Institutes of Health are discussing potential studies regarding a longer treatment…

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Report: Pfizer, NIH Discussing Study of Longer Paxlovid Dosing Regimen

With increasing concerns about COVID-19 reinfection, Pfizer and the National Institutes of Health are discussing potential studies regarding a longer treatment period with the antiviral medication, Paxlovid.

Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and scientific adviser to the White House, said the plan for the new studies could come over the next few days, Reuters reported this afternoon. During a White House briefing on COVID-19, Fauci pointed out that the rising cases of COVID-19 driven by an Omicron sub-variant are increasing the use of Pfizer’s Paxlovid. So far, more than 660,000 courses of Paxlovid have been administered across the U.S., Reuters said.

However, there is a growing concern that some patients are not shaking the virus as quickly as expected following a treatment regimen of the antiviral. Some continue to experience symptoms, or see a recurrence of their COVID-19 symptoms, following treatment with Paxlovid, Reuters said. Currently, there is no clear indication on the number of patients who are experiencing such a recurrence, or whether or not it is due to the variant type of COVID-19. But, the numbers appear to be enough to warrant such a conversation between America’s top infectious disease expert and Pfizer.

Paxlovid was granted Emergency Use Authorization from the U.S. Food and Drug Administration in December. It was granted EUA for the treatment of high-risk adults and pediatric patients 12 years and older who have been diagnosed with COVID-19 and are at serious risk of hospitalization. A combination of nirmatrelvir and ritonavir tablets, during clinical trials, Paxlovid significantly reduced the risk of hospitalization or death by 89% compared to placebo in non-hospitalized, high-risk adults with COVID-19 within three days of symptom-onset. However, even then, there were cases of a recurrence of symptoms in some clinical trial patients.

Pfizer Chief Executive Officer Albert Bourla has suggested that those patients who experience a recurrence of symptoms should undergo a second round of treatment with Paxlovid. As BioSpace previously reported, Bourla said if symptoms reoccur, “then you give a second course, like you do with antibiotics, and that’s it.”

However, the FDA has balked at that suggestion. Dr. John Farley, director of the FDA’s Office of Infectious Diseases, argued that there is no evidence of benefit for a longer course of treatment, such as 10 days instead of the current five days of administration, or a second five-day round of treatment.

Mark Van Scyoc/Shutterstock

While Pfizer may undertake these additional studies, as BioSpace reported earlier Wednesday, the pharma giant has so far reportedly resisted requests to use Paxlovid in combination studies. The nonprofit Drugs for Neglected Diseases Initiative said that Pfizer rejected a January request to offer doses of Paxlovid to be used in a study alongside an inhaled steroid in Africa.

Also Wednesday, Indianapolis-based Eli Lilly said studies have confirmed that bebtelovimab, the company’s monoclonal antibody against COVID-19, is effective against all variants of the SARS-CoV-2 virus, including BA.2, which is currently the dominant strain in the U.S., Seeking Alpha reported.

 

BioSpace source:

https://www.biospace.com/article/pfizer-nih-in-talks-to-begin-study-of-longer-paxlovid-dosing-regimen

 

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Missouri Bill Prevents Doctors Being Disciplined If They Prescribe Ivermectin Or Hydroxychloroquine

Missouri Bill Prevents Doctors Being Disciplined If They Prescribe Ivermectin Or Hydroxychloroquine

Authored by Naveen Athrappully via The…

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Missouri Bill Prevents Doctors Being Disciplined If They Prescribe Ivermectin Or Hydroxychloroquine

Authored by Naveen Athrappully via The Epoch Times (emphasis ours),

Missouri lawmakers passed legislation that prevents state licensing boards from disciplining doctors who prescribe ivermectin and hydroxychloroquine.

Missouri Gov. Mike Parson signs a bill in Jefferson City, Mo., on May 24, 2019. (Summer Balentine/AP Photo)

Sponsored by Rep. Brenda Kay Shields (R-Mo.), HB 2149 also bars pharmacists from questioning doctors or disputing patients regarding the usage of such drugs and their efficacy.

With a convincing 130–4 vote in the House, HB 2149 passed both chambers on May 12 and currently heads to the office of Gov. Mike Parson to be potentially signed into law.

The board shall not deny, revoke, or suspend, or otherwise take any disciplinary action against, a certificate of registration or authority, permit, or license required by this chapter for any person due to the lawful dispensing, distributing, or selling of ivermectin tablets or hydroxychloroquine sulfate tablets for human use in accordance with prescriber directions,” reads the draft of the bill (pdf).

It adds, “A pharmacist shall not contact the prescribing physician or the patient to dispute the efficacy of ivermectin tablets or hydroxychloroquine sulfate tablets for human use unless the physician or patient inquires of the pharmacist about the efficacy of ivermectin tablets or hydroxychloroquine sulfate tablets.”

Critics of the bill have noted that the Food and Drug Administration (FDA) has not given approval for usage of the drugs. Ivermectin and hydroxychloroquine have been divisive drugs and politically polarized throughout the pandemic.

“But, nevertheless, the Missouri legislature has chosen to ‘own the libs’ by issuing a gag order against every pharmacist in this state from offering their medical opinion on taking either one of those medications—even if it could kill their patient,” wrote former Democratic nominee Lindsey Simmons in a May 12 Twitter post.

Although 22 countries across the world have approved the use of ivermectin in treating COVID-19, the FDA maintains that the current data show the drug to be ineffective. Large doses can be dangerous, it says.

A recent study published in the International Journal of Infectious Diseases analyzed a national federated database of adults that compared ivermectin with the FDA-approved COVID-19 medication, remdesivir.

After using propensity score matching and adjusting for potential confounders, ivermectin was associated with reduced mortality vs remdesivir,” researchers wrote. “To our knowledge, this is the largest association study of patients with COVID-19, mortality, and ivermectin.”

According to The Associated Press, Missouri state Rep. Patty Lewis, a Democrat, agreed to the bill to satisfy a group of conservatives in the Senate. She added that the bill will not change anything significantly as medical boards do not engage in punishing doctors who prescribe drugs legally.

Tyler Durden Wed, 05/18/2022 - 23:25

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“They Shut Us Down”: Michigan Businesses Sue Whitmer For Losses Due To COVID Lockdowns

"They Shut Us Down": Michigan Businesses Sue Whitmer For Losses Due To COVID Lockdowns

Authored by Steven Kovac via The Epoch Times (emphasis…

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"They Shut Us Down": Michigan Businesses Sue Whitmer For Losses Due To COVID Lockdowns

Authored by Steven Kovac via The Epoch Times (emphasis ours),

A coalition of five bowling alleys and family entertainment centers is suing Michigan’s Gov. Gretchen Whitmer, a Democrat, for losses incurred due to her mandatory COVID-19 shutdowns in 2020.

Michigan Gov. Gretchen Whitmer listens to Democratic presidential candidate Sen. Kirsten Gillibrand (D-N.Y.) in Clawson, Mich., on March 18, 2019. (Paul Sancya/AP)

Michigan Dept. of Health and Human Services director Robert Gordon is also a defendant in the case.

The plaintiffs allege that the shutdowns imposed by Whitmer and Gordon were a “taking” of their businesses without just compensation in violation of both the state and the U.S. Constitution.

The case has been winding its way through the federal courts since January 2021.

Fred Kautz runs the lane oiler at Kautz Shore Lanes in Lexington, Mich., on May 13, 2022. (Steven Kovac/The Epoch Times)

The coalition lost the first round of the legal battle when the U.S. District Court for the Western District of Michigan ruled against it.

Oral arguments were recently held before a three-judge panel of the US Court of Appeals Sixth Circuit.

Plaintiff’s chief counsel David Kallman told The Epoch Times after the appeals court hearing, “The oral arguments from both sides were vigorous. The judges asked a lot of questions. It was the kind of proceeding that makes you proud to be a lawyer.

“Even the defense acknowledges that we are presenting ‘novel’ arguments.

“Michigan is the only state in the nation where a governor’s public health emergency powers were overturned as unconstitutional.

“If we lose in the court of appeals, we will take this case to the U.S. Supreme Court.”

Scott Bennett, executive director of the Independent Bowling and Entertainment Centers Association, told The Epoch Times,

“The governor’s actions were devastating to our industry.

“Things went from ‘two weeks to slow the spread’ to indefinite shutdowns.”

Bennett said that the forced closures were not based on solid scientific proof that bowling alleys and family entertainment centers would spread the virus any more than the Walmart stores or the GM plants that were allowed to remain open.

“They were allowed to operate with hundreds and even thousands of people in them but we had to shut down. We feel our industry was unfairly singled-out.

“We cannot stand for a repeat of such arbitrary treatment and don’t want the people of Michigan to forget what was done to them.”

With the recent uptick in COVID cases and the approaching mid-term elections, Bennett said his members that survived the 2020 shutdowns feel like it can happen all over again.

“It’s like operating day-to-day with a hammer held over your head. The uncertainty is altering business plans. The value of our businesses is dropping through the floor,” Bennett said.

Brian and Mindy Hill work the counter at their bowling alley in Imlay City, Mich. on May 13, 2022. (Steven Kovac/Epoch Times)

Fred Kautz, the proprietor of Kautz’s Shore Lanes in Lexington, Michigan, started working in the family business when he was 13.

The business has 12 bowling lanes, a bar, an arcade, a restaurant, and living quarters upstairs.

“We’ve owned this place for 42 years. For me and my family, it’s more than a place to work. It’s a way of life. And it has become an institution in our community—a real gathering place,” said Kautz.

He said he is still smarting from what happened after Whitmer’s executive actions were ruled unconstitutional by the Michigan Supreme Court in the fall of 2020.

“We got a little reprieve. We thought we were in the clear until she came back with another round of forced closures, this time under the authority of the Michigan Department of Public Health.

The first 30 days knocked us right on our butts. But we were willing to cooperate, to do our part. We were all scared and we did not want to see harm come to anybody.

We lost a lot of money at the time. We are coming back slowly, but our overall revenue is still down 20 percent from pre-pandemic days. That’s hard to make up.

“In the spring of 2020, I tried to do what was recommended and go along. Never again!

“If my Dad was still alive, he’d have never closed at all,” said Kautz.

Brian and Mindy Hill, owners of I.C. Strikes, a 16-lane bowling alley, bar, and snack bar in Imlay City said their business was hit hard by the shutdowns.

Brian was the town barber for 25 years, before purchasing the bowling alley where he learned to bowl as a child.

“We took over in December 2018. We’d saved up money to buy this place and make some upgrades. When COVID hit, we were forced to close down. It took all the money we saved for improvements just to survive,” said Brian.

The Hills said they never thought they’d see the day when their own government could do something like that to them.

Mary Bacon, assistant manager of Jump City, a family recreation center, cleans an arcade machine in Imlay City, Mich., on May 13, 2022. (Steven Kovac/The Epoch Times)

They shut us down. They took away our livelihood with no end date in sight. Then they wanted to loan us money. Think about that. They first put us in a situation where we had zero income to pay our previous debt. And then they wanted to loan us more money.

“Lots of small business people lost their businesses but kept their debt. It ruined them,” said Brian.

The Hills did apply for and receive a Small Business Administration loan at 3.25 percent interest for 30 years, and they participated in the Paycheck Protection Program which helped their business survive.

Up the road from the Hill’s bowling alley is Jump City, a large indoor recreation center offering an array of bouncy houses and arcade games for children.

Assistant manager Mary Bacon told The Epoch Times, “We lost a lot of business. We were forced to close for 15 months and had to make our payments with no income.”

Bacon remembers the morning of March 16, 2020, when many area businesses were gearing up for big St. Patrick’s Day celebrations.

“By afternoon everybody had to close. All that food went to waste.

“The shutdown was supposed to be for a couple of weeks. Nobody foresaw it would drag on for a year and three months.

“Oh, they said we could open again, but they so severely restricted the number of customers that we lost all of our big birthday parties. With so few kids allowed in, we couldn’t operate. We were losing too much money.”

Bacon said people are coming back to the center but are still scared, even though the games and bouncy houses are continuously cleaned and sanitized.

Navaeh Smalstig, 8, climbs out of a bouncy house at Jump City in Imlay City, Mich., on May 13, 2022. (Steven Kovac/The Epoch Times)

Before the pandemic, Danny Brown owned a roller rink in Grand Blanc and Owasso, two south-central Michigan towns.

“The lockdowns forced us to sell the Owasso rink for less than half of what we paid for it. We will be trying to make up our loss for years to come.”

Brown, who is a plaintiff in the lawsuit, told The Epoch Times, “To keep going I had to decide to triple our debt. Since the shutdown, I am three-quarters of a million dollars deeper in debt.

“Small businesses put everything on the line. All of our personal and family money. I am personally responsible for our debt. If I die my children will have to pay it.”

Brown said Michigan’s government acted without a real understanding and regarded the state’s small businesses as “nonessential throwaways.”

“One of the reasons we filed suit is to push the government to think differently,” he said.

According to Brown, family entertainment centers like skating rinks, bowling alleys, arcades, pool halls, miniature golf, and go-cart tracks have been nearly wiped out.

“A few years ago, there were 3,500 roller skating rinks in the United States. Now there are 700. There were five rinks in Genesee County, now there are two.” he said.

Brown attributes the decrease to years of ongoing government mandates and interference that led up to the COVID-19 lockdowns.

“They took, they stole our businesses!” he said.

Donn Slimmen, another plaintiff in the case, owns Spartan West Bowling in the west Michigan resort town of Ludington.

“The lockdown just about killed us. It was 14 to 15 months of agony. Our bank payments and utility bills didn’t stop. We went from being two to three months behind to more months behind.

“We entered into survival mode. We ate a lot of pork and beans and hotdogs. We’re still trying to work ourselves out of the hole. By the end of this summer, we might be solvent again.

“We were lucky to survive. We are still hanging on by threads,” said Slimmen.

Along with 16 bowling lanes, Slimmen operates a full-service restaurant.

It’s never come back. Pre-pandemic, we’d serve 200 customers at an ordinary Friday fish fry. Now our best night is 100.

“Our restaurant went from a thriving seated-guest business to a take-out operation grossing only two to three percent of the seated sales.

“We were spending $400 to take in proceeds of $100.

“The politicians and bureaucrats don’t understand. They never cleaned a toilet seat or climbed into a bowling machine to fix it,” said Slimmen.

Slimmen blames Gov.Gretchen Whitmer for the plight of his community and the state.

“You didn’t see Republican governors closing businesses. Their states did so much better.

“Drive through downtown Ludington or Muskegon and look at all the boarded-up storefronts. So many places are out of business. Michigan is in terrible shape,” Slimmen said.

The Tomassoni family has been in the bowling business for 84 years in the western Upper Peninsula town of Iron Mountain, Michigan.

We had to close bowling and our banquet facility a total of 161 days in two different periods of time in 2020. After the second shutdown, we could operate at 25 percent occupancy and only during restricted hours. No wedding receptions, no special events. It was a disaster.

“It ripped my heart out. I am so bitter towards my government,” said owner Pete Tomassoni.

Tomassoni’s business suffered further because of its proximity to Wisconsin which is only minutes away.

“Wisconsin closed for just 30 days. For the most part, they were wide open. That really hurt us.

“Our governor was picking and choosing which of our state’s businesses could operate. To force a business to close with no notice and without proven science is straight out wrong.

“I think that she came down so hard on small business because we, by and large, lean to the right.

“The state dangled the threat of yanking business licenses to keep people in line.

“Some of our businesses tried to defy the state and stayed open

Tyler Durden Wed, 05/18/2022 - 21:25

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