Category: Economy

Amid heightened concerns about inflation, respondents to the CNBC Fed Survey believe the Federal Reserve will announce a decision to taper Wednesday and begin hiking interest rates considerably sooner than previously forecast.

Respondents to the survey overwhelmingly forecast that the Fed will announce a decision to reduce its monthly asset purchases in the statement Wednesday and begin tapering in November. The Fed is expected to reduce its $120 billion in monthly purchases of Treasurys and mortgage-backed securities by $15 billion a month, which would bring purchases to an end by May.

Respondents also moved forward their forecast for the first rate hike to September 2022 from December in the last survey.

But the September average masks a more aggressive outlook: 44% of the 25 respondents believe the Fed will raise rates by July, meaning rate hikes will follow the end of taper by just a few months.

Expectations for a modest pace of both tapering and hiking rates from the Fed were a source of criticism from many respondents: 60% believe inflation is a big enough concern that the central bank should halt all asset purchases now.

“The Fed’s current idea of dealing with inflation is to take their balance sheet from $8.5 trillion to about $9 trillion by next July and still have rates at zero,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, noting that the Fed will still be adding to its balance sheet while it tapers. “Inflation and the bond market response are about to run over the Fed.”

That criticism extends to the Fed’s go-slow approach on rate hikes.

“At some point, the Fed is going to have to accelerate its timetable for rate hikes or risk losing credibility,” said John Ryding, chief economic advisor at Brean Capital.

Fed funds futures markets have a 58% probability of the first rate hike in June and a 73% chance of a second increase by December.

Calls for faster tightening come as concern about inflation has risen to the No. 1 risk facing the economy, according to respondents, eclipsing Covid.

Forecasts for the consumer price index in 2021 rose for the seventh straight survey, standing now at 4.8% year over year, up from 4.4% in September. For 2022, the CPI is forecast to rise 3.5%, up from 3% in the September survey, a sign that inflation is believed to be moving further away from the Fed’s 2% target.

While 64% continue to say the recent increase in inflation is temporary, many still continue to sound the alarm bells. In fact, 40% want the Fed to address the problem with rate increases now. Just 26% say inflation has peaked, with expectations that the rate of price increases will continue to rise through January.

“The correct question to ask is, ‘Will inflation come back down to the Fed’s 2% target without a recession?’ I don’t think it will. I’d characterize the recent increase in inflation as ultimately temporary but very persistent,” said Robert Fry, chief economist at Robert Fry Economics.

Spending bills in Congress are adding to inflation concerns and prompting calls for more aggressive Fed tightening.

Forty percent say new spending by Congress will be inflationary if it is not offset by higher taxes and 36% say it will be inflationary even if it is offset. Twenty-four percent say it’s not inflationary and none of the respondents agreed with the administration’s claim that the spending would result in disinflation.

Nearly two-thirds believe the Fed should offset new spending by quickening the pace of its taper, and 40% prefer faster rate hikes in response compared with 56% who opposed such measures.

Respondents are sharply divided over the impact the spending bills will have on growth: 33% say they will add to GDP, 29% say they will reduce growth and 38% believe they will have no impact. On employment, 38% believe the new spending will add to jobs, 29% say it will reduce job growth and 33% expect it to have no effect.

On overall growth, the outlook continues to decline, with GDP forecast around 5% this year, down from 6.6% in the July survey and 3.6% forecast for next year.

On the outlook for stocks, CNBC launched a new question in the survey, the Risk/Reward Index, where it asked respondents to gauge the probability of a 10% upside and downside move in stocks over the next six months.

The first results show a 48% chance of a 10% downside move and a 39% chance of a 10% upside move, yielding an index of -9. Along similar lines, 72% believe that stocks are overvalued relative to their outlook for growth and earnings, up from 56% in the prior survey, but not as high as it was in the summer when it neared 90%.

Respondents believe the S&P 500 will actually fall half a percentage point between now and year-end and rise just 3% next year. Stocks are forecast to face a rising 10-year Treasury yield that hits 2.2% in 2022.

Treasury Secretary Janet Yellen said she has discussed with President Joe Biden how he should proceed on naming a Federal Reserve chairman and praised the current holder of the position.

Though she did not disclose any specific plans Biden has, Yellen said she gave solid marks to Chairman Jerome Powell.

“I talked to him about candidates and advised him to pick somebody who is experienced and credible,” Yellen told CNBC’s Ylan Mui. “I think that Chair Powell has certainly done a good job.”

Appointed to the top post by former President Donald Trump, Powell’s term expires in February. Biden is expected to name someone soon, and Powell is widely expected on Wall Street to be renominated.

However, the Powell Fed has come under criticism in recent weeks following disclosures that regional presidents — and Powell himself — had been buying and selling securities tied to the stock and bond markets at a time when Fed policy was underpinning Wall Street.

Two regional presidents resigned shortly after the disclosures. Powell faced some criticism over the matter in a recent congressional appearance, and leading progressive Sen. Elizabeth Warren, D-Mass., said she would vote against Powell if he is nominated for a second term. The Fed has since established an edict barring policymakers and senior officials from owning anything other than mutual funds in most cases.

Despite the controversy, Yellen said Powell has led the Fed well during an extraordinary time. Yellen was Powell’s immediate predecessor as the Fed chair.

“He responded very admirably to the crisis that we saw after the pandemic, and he’s established with his colleagues a new framework that is very focused on achieving full employment,” she said.

The Fed meets this week and is widely expected to announce that it soon will start slowly withdrawing the unprecedented economic help it has been providing since the early days of the pandemic.

Billionaire hedge fund manager Bill Ackman called Friday for the Federal Reserve to begin reining in the support it has provided for the U.S. economy during the coronavirus pandemic.

In separate tweets, the head of Pershing Square Holdings, with $13.1 billion under management, said the central bank should start turning off the monetary juice right away.

He teed up his position by saying he met last week with officials at the Fed’s New York branch, which houses the trading desk that carries out the wishes of officials regarding interest rates and the monthly asset purchase program.

“The bottom line: we think the Fed should taper immediately and begin raising rates as soon as possible,” he said.

“We are continuing to dance while the music is playing,” Ackman added, “and it is time to turn down the music and settle down.”

The statements come just a few days before the Federal Open Market Committee is set to begin its two-day policy meeting Tuesday.

For Ackman, insisting on the taper isn’t anything radical: Investors widely expect the FOMC on Wednesday to announce that it soon will start pulling back on its monthly asset purchase program in which the Fed is buying at least $120 billion of bonds. Markets are looking for monthly pullbacks of $10 billion in Treasurys and $5 billion in mortgage-backed securities, possibly starting in November and concluding in the summer of 2022.

Calling for interest rate hikes is another matter.

Fed officials have stressed that the initiation of tapering shouldn’t be construed as a path to rate hikes. The central bank has been holding its benchmark overnight borrowing rate near zero since the early days of the Covid-19 pandemic, and most FOMC officials have indicated that the first increase won’t come sooner than late 2022.

However, traders lately have been pricing in more aggressive moves, with futures contracts pointing to at least two quarter percentage point 2022 rate hikes, beginning in June, according to the CME’s FedWatch tool. There’s also just shy of a 50-50 chance of another increase coming in December. The recent anticipation of hikes comes with inflation running around a 30-year peak.

Ackman said he’s beginning to position his portfolio for higher rates.

“As we have previously disclosed, we have put our money where our mouth is in hedging our exposure to an upward move in rates, as we believe that a rise in rates could negatively impact our long-only equity portfolio,” he tweeted.

Pershing Square is up 15.7% gross in 2021 and 12.2% net of fees this year, lagging the S&P 500’s 22.5% return, according to company statements. That comes after a stellar 2020 during which the fund returned 70.2% on net. The firm has attracted about $1.3 billion of additional assets this year.

— CNBC’s Yun Li contributed to this report.

The U.S. economy grew at a 2% rate in the third quarter, its slowest gain of the pandemic-era recovery, as supply chain issues and a marked deceleration in consumer spending stunted the expansion, the Commerce Department reported Thursday.

Gross domestic product, a sum of all the goods and services produced, grew at a 2.0% annualized pace in the third quarter, according to the department’s first estimate released Thursday. Economists surveyed by Dow Jones had been looking for a 2.8% reading.

That marked the slowest GDP gain since the 31.2% plunge in the second quarter of 2020, which encompassed the period during which Covid-19 morphed into a global pandemic that resulted in a severe economic shutdown that sent tens of millions to the unemployment lines and put a chokehold on activity across the country.

Declines in residential fixed investment and federal government spending helped hold back gains, as did a surge in the U.S. trade deficit, which widened to a near-record $73.3 billion in August.

The drops mostly offset increases in private inventory investment, a meager gain in personal consumption, state and local government spending, and nonresidential fixed investment.

Consumer spending, which makes up 69% of the $23.2 trillion U.S. economy, increased at just a 1.6% pace for the most recent period, after rising 12% in the second quarter.

Spending for goods tumbled 9.2%, spurred by a 26.2% plunge in expenditures on longer-lasting goods like appliances and autos, while services spending increased 7.9%, a reduction from the 11.5% pace in Q2.

The downshift came amid a 0.7% decline in disposable personal income, which fell 25.7% in Q2 amid the end of government stimulus payments. The personal saving rate declined to 8.9% from 10.5%.

Federal government spending fell by 4.7%, which the Commerce Department said was due to a halt in services and processing for the Paycheck Protection Program, a pandemic-era initiative aimed at providing bridge funding to businesses impacted by the shutdown.

“Overall, this is a big disappointment given that the consensus expectation at the start of the quarter in July was for a 7.0% gain and even our own bearish 3.5% forecast proved to be too optimistic,” wrote Paul Ashworth, chief U.S. economist at Capital Economics. “We expect something of a rebound in the final quarter of this year — if only because motor vehicles won’t be such a drag and any negative impact from Delta should be reversed.”

In a separate economic report, jobless claims totaled 281,000 for the week ended Oct. 23, another pandemic-era low and better than the 289,000 estimate. The total marked a decrease from the previous week’s 291,000. Continuing claims fell by 237,000 to 2.24 million, and those receiving benefits under all programs dropped by 448,386 to 2.83 million.

Stock market futures remained higher after the report while government bond yields also climbed.

The July-to-September period saw a major clogging of the nation’s supply chain, which in turn dampened a recovery that began in April 2020 following the shortest but steepest recession in U.S. history.

Shortages in labor and soaring demand for goods over services contributed to the bottleneck, which is not expected to ease until after the holiday season.

Despite the Q3 weakness, economists largely expect the U.S. to bounce back in the fourth quarter and continue growth into 2022.

Another significant factor for the Q3 number was the summertime rise of the Covid delta variant, a situation that has reversed itself in much of the country. Consumer activity, particularly in the vital services part of the economy, appears to have picked up and could fuel a late-year growth burst.

“As Delta cases continue to subside, there may be more growth in the fourth-quarter as consumers will be more willing to spend on services involving in-person interactions,” said Dawit Kebede, senior economist at the Credit Union National Association. “The supply chain challenges, however, will likely continue until next year making it difficult to satisfy increased consumer demand.”

Companies during the current earnings season have noted the issues with supply chains, but many say customers are willing to pay higher prices. That in turn has helped fuel inflation, which is running close to its 30-year high and also is expected by most economists and Federal Reserve policymakers to cool next year.

Thursday’s data indicated that at least the pace of the inflation rise had taken a step back.

Core personal consumption expenditures, which exclude food and energy and are the preferred gauge by which the Fed measures inflation, rose 4.5%, a deceleration from the second quarter’s 6.1% increase but still well above the pre-Covid pace. The headline PCE price index increased 5.3% in Q3, down from 6.5% in the previous period.

Correction: The personal saving rate declined to 8.9% from 10.5%. An earlier version misstated the move.

Pending home sales, which are a measure of signed contracts to buy existing homes, fell an unexpected 2.3% in September compared with August, according to the National Association of Realtors.

Analysts were predicting a slight monthly gain. Sales were 8% lower compared with September 2020.

Pending sales are a forward-looking indicator of closed sales in one to two months.

Sales may have dropped due to higher mortgage rates. The average rate on 30-year fixed-rate mortgages fell below 3% in July and stayed there until the first week of September, according to Mortgage News Daily. Then it began rising and crossed over 3%, ending the month at 3.15%.

Buyers are also still contending with very high home prices. Price gains have been close to 20% year over year. There was a sign, however, in August that the market was cooling, with fewer bidding wars and slightly more supply coming up for sale.

“Contract transactions slowed a bit in September and are showing signs of a calmer home price trend, as the market is running comfortably ahead of pre-pandemic activity,” said Lawrence Yun, NAR’s chief economist. “It’s worth noting that there will be less inventory until the end of the year compared to the summer months, which happens nearly every year.”

Regionally, pending sales in the Northeast fell 3.2% month over month and were down 18.5% from a year ago. In the Midwest, sales dropped 3.5% for the month and 5.8% annually.

Sales transactions in the South decreased 1.8% for the month and 5.8% from September 2020. In the West sales fell 1.4% monthly and 7.2% from a year ago.

Mortgage rates have been on a tear this month, rising yet again last week to the highest level in eight months, according to the Mortgage Bankers Association. That caused mixed demand for mortgages last week, resulting in no change from the week before.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.30% from 3.23%, with points decreasing to 0.34 from 0.35 (including the origination fee) for loans with a 20% down payment. That rate was 30 basis points lower one year ago.

As a result, refinance demand fell 2% week to week, seasonally adjusted. Volume was 26% lower than the same week one year ago. The refinance share of mortgage activity decreased to 62.2% of total applications from 63.3% the previous week.

“The increase in rates triggered the fifth straight decrease in refinance activity to the slowest weekly pace since January 2020. Higher rates continue to reduce borrowers’ incentive to refinance,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a release.

Mortgage applications to purchase a home increased 4% for the week but were 9% lower than the same week one year ago. As home prices continue to rise, and most of the sales are in higher price tiers, the average loan size rose to its highest level in three weeks.

“Both new and existing-home sales last month were at their strongest sales pace since early 2021, but first-time home buyers are accounting for a declining share of activity,” added Kan.

The latest read on home prices from S&P Case-Shiller showed prices up nearly 20% nationally, but the annual gain, which has been rising steadily for the past year, did not change from the previous month. That could be a sign that higher mortgage rates are taking at least a little bit of the heat out of prices.

Mortgage rates edged down slightly to start this week, but that could just be a brief reprieve before next week. The Federal Reserve is widely expected to announce next Wednesday that it will taper its purchases of mortgage-backed bonds. That should send rates even higher.

There are signs that price growth could be cooling off in the otherwise red-hot housing market.

Prices rose 19.8% year over year in August, which was the same as the previous month, according to the S&P CoreLogic Case-Shiller Indices. That is the first time the annual gain hasn’t increased since early 2020.

The 10-city composite annual increase was 18.6%, down from 19.2% in July. The 20-city composite rose 19.7% year-over-year, down from 20% in the previous month. Prices in all cities covered are at an all-time high.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by a reaction to the Covid pandemic, as potential buyers move from urban apartments to suburban homes,” said Craig Lazzara, managing director and global head of index investment strategy at S&P DJI. “August data also suggest that the growth in housing prices, while still very strong, may be beginning to decelerate.”

Phoenix, San Diego, and Tampa saw the highest year-over-year gains among the 20 cities in August. Phoenix led the way with a 33.3% year-over-year price increase, followed by San Diego with a 26.2% increase and Tampa with a 25.9% increase.

Eight of the 20 cities reported higher price increases in the year ending August 2021 versus the year ending July 2021.

Price gains were partly fueled by a drop in mortgage rates in July and August. The average rate on the popular 30-year fixed loan fell below 3% in July and stayed there until mid-September. It then began to rise sharply and is now around 3.25%, according to Mortgage News Daily. Higher interest rates could take some of the heat out of home prices in the coming months.

Home prices, however, are unlikely to cool significantly, as both homebuyer demand and investor demand are still high. The supply of homes for sale, especially at the lower end of the market, remains extremely lean. Some new supply did come on over the summer, but it is falling yet again.

“Persistently strong demand among traditional homebuyers has been amplified by an increase in demand among investors this summer,” said Selma Hepp, deputy chief economist at CoreLogic. “While strong home price appreciation rates are narrowing the pool of buyers, particularly first-time buyers, the depth of the supply and demand imbalance and robust demand among higher-income earners will continue to push prices higher.”

Twitter co-founder Jack Dorsey weighed in on escalating inflation in the U.S., saying things are going to get considerably worse.

“Hyperinflation is going to change everything,” Dorsey tweeted Friday night. “It’s happening.”

The tweet comes with consumer price inflation running near a 30-year high in the U.S. and growing concern that the problem could be worse that policymakers have anticipated.

On Friday, Federal Reserve Chairman Jerome Powell acknowledged that inflation pressures “are likely to last longer than previously expected,” noting that they could run “well into next year.” The central bank leader added that he expects the Fed soon to begin pulling back on the extraordinary measures it has provided to help the economy that critics say have stoked the inflation run.

In addition to overseeing a social media platform that has 206 million active daily users, Dorsey is a strong bitcoin advocate. He has said that Square, the debit and credit card processing platform that Dorsey co-founded, is looking at getting into mining the cryptocurrency. Square also owns some bitcoin and facilitates trading in it.

Responding to user comments, Dorsey added Friday that he sees the inflation problem escalating around the globe. “It will happen in the US soon, and so the world,” he tweeted. Dorsey is currently both the CEO of Twitter and Square.

It’s one thing to call for faster inflation, but it may be surprising to some that Dorsey used the word hyperinflation, a condition of rapidly rising prices that can ruin currencies and bring down whole economies.

Billionaire investor Paul Tudor Jones and others have called for a period of rising inflation. Jones told CNBC earlier in the week that he owns some bitcoin and sees it as a good inflation hedge.

“Clearly, there’s a place for crypto. Clearly, it’s winning the race against gold at the moment,” Jones said Wednesday.

But most of the major investors have not gone so far as to call for hyperinflation like Dorsey.

Billionaire bond investor Jeffrey Gundlach said Friday that inflation in consumer prices likely will remain elevated through 2021 and stay above 4% through at least 2022.

Citing pressures from shelter costs and rising wages, the head of DoubleLine Capital told CNBC that he sees the current inflation run as non-transitory and instead likely to persist well into the future.

“We believe that it’s almost certain that 2021 will end with a 5-handle on the [consumer price index], and it’s going higher in the next couple of readings, thanks primarily to the price of energy,” Gundlach said on CNBC’s “Halftime Report.” “And we don’t think inflation is going below 4% anytime in 2022.”

His comments come with the CPI, which measures a broad basket of consumer goods prices, increasing at a 5.4% annual pace when including food and energy costs, the fastest in 30 years. The Federal Reserve’s preferred gauge, which measures personal consumption expenditures excluding food and energy, is at a 3.6% year over year pace, well ahead of the central bank’s 2% target.

Fed officials insist that the current price increases are transitory and driven by supply-chain shocks, extraordinary demand for goods over services, and a labor shortage, all related to the Covid-19 pandemic.

While Gundlach conceded that some of the increases, such as lumber and some other commodities, are temporary, others are not.

One factor he cited is shelter costs, which make up about one-third of the CPI and have been rising steadily this year, though not a pace equal to the headline surge.

“It’s almost certain that we’re going to get persistently high inflation thanks to the shelter component going up, and perhaps the wages, too,” he said.

The result, he said, has been negative real interest rates as government bond yields remain low while inflation runs high. He called the negative rates “wickedly unattractive” from an investing standpoint.

Billionaire hedge fund manager Paul Tudor Jones believes inflation is here to stay, posing a major threat to the U.S. markets and economy.

“I think to me the No. 1 issue facing Main Street investors is inflation, and it’s pretty clear to me that inflation is not transitory,” Jones said Wednesday on CNBC’s “Squawk Box.” “It’s probably the single biggest threat to certainly financial markets and I think to society just in general.”

Jones said the trillions of dollars in fiscal and monetary stimulus is the impetus for inflation to run hotter for longer. To rescue the economy from the Covid-19 pandemic, the Federal Reserve has added more than $4 trillion to its balance sheet through its open-ended quantitative easing program, while the U.S. government has unleashed over $5 trillion in fiscal stimulus.

“Inflation can be much worse than what we fear. We have the demand side of the equation … and that is $3.5 trillion greater than what it normally would have … just sitting in liquid deposits,” Jones said. “They can go into stocks, or crypto, or real state, or be consumed, so that’s a huge amount of dry powder just sitting waiting to be utilized at some point, which is why inflation is not going away.”

The longtime trader said price pressures will continue to rise in the coming months. Inflation ran at a fresh 30-year high in September amid supply chain disruptions and extraordinarily strong demand.

The core personal consumption expenditures price index, which is the Fed’s preferred measure of inflation, increased 0.3% in August and was up 3.6% from a year ago.

“It’s absolutely dead for a 60/40 portfolio, for a long stock, long bond portfolio. So the real question is how you defend yourselves against it,” Jones said.

The founder and chief investment officer of Tudor Investment Corp. said that it’s time to double down on inflation hedges including commodities and Treasury inflation-protected securities, and that investors should avoid fixed income in this inflationary and low-rate environment.

“You don’t want to own fixed income,” Jones said. “You do not want to hold that whatsoever because what they’re saying, what they’re telling you by their actions, is that they’re going to be slow and late to fight inflation and somewhere down the road, somebody will have to come in … and put the hammer down.”

Still, the legendary investor didn’t sound too dire about stocks, saying they could be a decent bet amid persistent inflation. Jones said if the Fed moves to address inflation, it could compress equity multiples.

“Equities are interesting. Certainly in an inflationary world, they are a much better bet than fixed income,” Jones said.

The S&P 500 is up about 20% in 2021, sitting less than 1% from its all-time high reached in early September.

Jones shot to fame after he predicted and profited from the 1987 stock market crash. He is also the chairman of nonprofit Just Capital, which ranks public U.S. companies based on social and environmental metrics.