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Mnuchin-Powell split shows rare discord as US economy struggles – BNN

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The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy — a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus.

The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that “the full suite” of measures be maintained into 2021.

“This is a significant and disturbing breach at a critical time for the economy,” said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. “We need all the arms of government working together and instead we’re seeing a complete breakdown,” he said, noting that Washington remains at an impasse on fiscal stimulus as well.

Investor reaction to the split was swift amid fears the decision will unsettle markets and impede the economic recovery: futures on the S&P 500 Index were down 0.5 per cent in early Friday trading in Europe, with haven demand sending Treasuries higher and pulling down yields.

Treasury chiefs and Fed chairs typically coordinate closely at times of crisis, appearing jointly before Congress and working in lockstep to ensure funding markets run smoothly. The two agencies were tightly linked in the bailouts of the financial and auto industry more than a decade ago. And they united again in the March 2020 Cares Act economic rescue package, which appropriated cash for the government to finance Fed backstops for everything from municipal to corporate finance after markets buckled when the pandemic hit.

Now, Mnuchin wants some of the money back, arguing many markets are no longer at risk of seizing up and so don’t need further aid beyond next month. In his sights are facilities which sought to ease corporate credit and municipal-borrowing and also offered loans to small and medium-sized businesses. He asked that four other programs be kept in place for an additional 90 days.

“Financial conditions are quite strong,” Mnuchin said in an interview. “The good news is, the markets have recovered significantly,” he said. Companies don’t need more loans, and instead require more grant money, which requires action from Congress, he said.

The Fed has argued that the lack of take-up for some of the programs is a sign they’ve worked.

Mnuchin said that the purpose of his announcement was not to put the Treasury against the Fed, and that he was merely carrying out the law prescribed by the Cares Act. The facilities could be re-activated if needed with either congressional support or with other funds available to the Treasury, he said.

“It appears the Fed may be reading the legislation differently,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

The risk is that divisions between the key economic players undermines confidence at a time when growth is flagging. Fed Bank of Dallas President Robert Kaplan said on Bloomberg TV Thursday that there’s the potential for gross domestic product to shrink this quarter and even next.

The economy is also set to go without fiscal stimulus: Republicans and Democrats remain deadlocked on a new package, and measures including extended unemployment benefits are set to expire next month.

“I was a bit surprised” at the Treasury’s statement, Raphael Bostic, president of the Fed Bank of Atlanta, told Bloomberg TV. “Given where the economy is — and there’s so much uncertainty still out there — it’s prudent to keep those things open so that when people, if they do have stress, they can draw upon it.”

Among the initiatives that will now no longer be able to extend new credit are two Fed facilities that allowed it to buy corporate bonds for the first time. They helped to unfreeze that market, even before the effort was up and running, and businesses have since logged record amounts of debt issuance.

Another, the Main Street Lending Program, has had a slow start, and the Fed recently loosened its terms to help encourage banks and smaller businesses to participate.

Powell himself said at a virtual conference on Tuesday that the time to discontinue the lending facilities was “not soon,” highlighting that typically the central bank keeps its backstops in place for some time after a crisis hits. He has repeatedly praised the Cares Act for what he’s described as “essential” support amid the historic collapse in GDP in the spring.

The U.S. Chamber of Commerce called for a reconsideration of Mnuchin’s decision.

“We strongly urge these programs be extended for the foreseeable future and call on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer,” the chamber said in a statement.

The sun-setting of some of the facilities will now build expectations for the Fed to take some other policy action when it wraps its next meeting on Dec. 16, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.

“The market will now speculate the Fed may have to increase Treasury purchases and/or extend maturities” of the securities it buys through its main asset-purchase program, Emons wrote in a note.

President-elect Joe Biden’s administration could seek to renew the facilities, or press Congress to authorize fresh funding for them, when it takes office in January. Biden said Thursday that he’s made a decision on who he will nominate as Treasury secretary. Republicans in Congress have said the billions of dollars sent to the central bank can be deployed better elsewhere.

Biden’s Treasury could agree to restart the facilities, as Mnuchin pointed to, using the Exchange Stabilization Fund. But meantime, markets may need to contend with going “without a net” for several weeks, Feroli wrote in a note.

“For about three weeks in January the markets will be operating without the backstop they’ve had since the spring,” Feroli wrote.

–With assistance from Kathleen Hays.

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Economy

Wall Street skids on inflation fears; USD, bond yields jump

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U.S. stocks suffered the biggest slump in at least 11 weeks on Wednesday and benchmark Treasury yields jumped after data showed consumer prices in April unexpectedly rose by the highest level in nearly 12 years, prompting bets on earlier interest rate hikes.

A 0.8% jump in the U.S. consumer price index – outpacing a 0.2% forecast – boosted the U.S. dollar as expectations of rising real interest rates burnished the currency’s appeal.

The gyrations in financial markets underscored concerns among some investors that the Federal Reserve could be wrong in its prediction that inflation pressures in the United States are temporary, and that the central bank may have to raise rates sooner than it expects.

The prospect of tighter monetary policy knocked shares lower and the stock market steadily extended losses through the day. The Dow Jones Industrial Average shed 2%, the S&P 500 dropped 2.1%, and the Nasdaq Composite lost 2.7%. [.N]

For the S&P 500 and the Nasdaq Composite Index, Wednesday’s tumble was the biggest fall in a single day since Feb. 25, while the Dow’s decline was the sharpest in a day since Jan 29.

Richard Clarida, vice chair of the Federal Reserve, acknowledged on Wednesday that the latest inflation report was the second piece of data in a week to catch the central bank off-guard, describing it as the “biggest miss in history.”

Yet Clarida maintained the Federal Reserve’s dovish note, saying it will be “some time” before the U.S. economy is sufficiently healed for the central bank to consider pulling back its crisis-level of support.

Some investors continued to challenge the Federal Reserve’s assessment, however.

“We’ve been warning about the prospect of higher for longer inflation in the United States for many months, but even we hadn’t predicted this,” said James Knightley, chief international economist at ING Group.

“We increasingly doubt the Fed’s position that this is transitory and think they will end up hiking rates far sooner than 2024.”

Some money market investors seemed to agree. Eurodollar futures contracts expiring in December on Wednesday priced in a 25-basis-point rate hike by the end of next year, compared with 22 basis points before the inflation report.

DOLLAR GAINS

Weakness on Wall Street mirrored stock market losses in Asia, as surging commodity prices stoked inflation concerns. MSCI’s broadest index of Asia-Pacific shares outside Japan had slumped 0.95% overnight, after hitting its lowest level since March 26.

European shares fared better. London’s blue-chip FTSE 100 rebounded 0.8% as buoyant corporate earnings and a better-than-expected economic growth report bolstered hopes about a sharp recovery from the pandemic-driven recession.

In the United States, the surprisingly strong inflation data lifted Treasury yields. The benchmark 10-year Treasury yield jumped to 1.6952%, its biggest rise in a day since March 18, and the two-year Treasury yield also rose to stand at 0.1668%. [US/]

In keeping with expectations of rising price pressures as the U.S. economy recovers from the COVID-19 pandemic, the yield curve steepened, and the spread between two- and 10-year Treasury yields widened to 152.8 basis points.

The dollar, which could benefit from rising real interest rates, gained after wobbling briefly earlier in the day.

The dollar index, which measures the greenback against six major currencies, rose 0.65% to 90.795.

A stronger dollar dented the euro, which slid 0.6% to $1.2070.

Higher Treasury yields and the stronger dollar dragged on non-yielding bullion. Spot gold slid 1.3% to $1,813.41 an ounce. [GOL/]

Hopes of rising demand on the back of an economic recovery pushed oil prices to eight-week highs.

U.S. crude jumped 1.2% to $66.08 a barrel, the highest close since March 11. Brent crude added 1.1% to $69.32 per barrel, a close last seen on March 5. [O/R]

In cryptocurrencies, ether fell after scaling a new record high overnight, dropping 2% to $4,096.01. The value of the second-biggest digital token has surged over 5.5 times so far this year.

(Reporting by Koh Gui Qing in New York, Tom Arnold in London and Swati Pandey in Sydney; Additional reporting by Sujata Rao in LondonEditing by Alison Williams and Matthew Lewis)

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Oil drops as India coronavirus crisis tempers rally

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Oil prices fell on Thursday, pulling back from an eight-week high as concerns about the coronavirus crisis in India, the world’s third-biggest importer of crude, tempered a rally driven by IEA and OPEC predictions that demand is coming back strong.

Brent crude was down 32 cents, or 0.5%, at $69.00 a barrel by 0145 GMT, after gaining more than 1% on Wednesday. West Texas Intermediate (WTI) was down 31 cents, or 0.5%, to $65.77 a barrel, having risen 1.2% in the previous session.

“The path for crude prices appears to be higher but until the situation improves in India, WTI will probably struggle to break above the early March high,” Edward Moya, senior market analyst at OANDA, said in a note.

Oil demand is already outstripping supply and the shortfall is expected to grow further even if Iran boosts exports, the International Energy Agency (IEA) said in its monthly report on Wednesday.

A day earlier, the Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecast for a strong return of world oil demand in 2021, with growth in China and the United States cancelling out the impact of the coronavirus crisis in India.

But global concern is rising over the situation in India, the world’s second-most populous country, where a variant of the coronavirus is rampaging through the countryside in the deadliest 24 hours since the pandemic began.

Medical professional are still unable to say for sure when new infections will hit a plateau and other countries are alarmed over the transmissibility of the variant that is now spreading worldwide.

Fuel shortages are getting worse in the southeastern United States six days since the shutdown of the Colonial Pipeline, the largest fuel pipeline network in the world’s biggest consumer of oil.

Colonial, which pipes more than 2.5 million barrels per day, said it is hoping to get a large portion of the network operating by the end of the week.

 

(Reporting by Aaron Sheldrick; Editing by Michael Perry)

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Oil prices on track for eight-week high on demand hopes

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Oil prices rose more than 1% on Wednesday, putting the contracts on track for their highest close in almost eight weeks, as U.S. crude exports plunged and on signs of a speedy economic recovery and upbeat forecasts for energy demand.

Brent futures rose 74 cents, or 1.1%, to $69.29 a barrel by 12:05 p.m. EDT (1605 GMT), while U.S. West Texas Intermediate (WTI) crude rose 75 cents, or 1.2%, to $66.03.

That puts both benchmarks on track for their highest closes since March 11. Earlier in the session, WTI on track for its highest close since Oct. 29, 2018 and Brent for its highest close since May 28, 2019.

U.S. crude exports fell last week to around 1.8 million barrels per day (bpd), their lowest since October 2018, while crude inventories declined 0.4 million barrels versus an expected 2.8 million-barrel draw, according to weekly government data. [EIA/S]

“The export (drop) is the bullish element keeping trade propped up,” Tony Headrick, energy market analyst at CHS Hedging, said, noting the crude stock “drawdown combined with the lack of exports is good sign.”

Traders noted one factor weighing on prices this afternoon was the U.S. inventory report also showed total oil products supplied fell 2.2 million bpd to 17.5 million bpd. That was their biggest weekly decline and the lowest weekly demand since January.

The International Energy Agency (IEA) said in its monthly report that oil demand is already outstripping supply and the shortfall is expected to widen even if Iran boosts exports.

Similarly, the Organization of the Petroleum Exporting Countries on Tuesday stuck to a forecast for a strong recovery in world oil demand in 2021, with growth in China and the United States outweighing the impact of the coronavirus crisis in India.

Oil prices today are experiencing a lift on positive demand outlooks released by OPEC and IEA, which both came out with a similar consensus that oil demand will average 96.4 million bpd in 2021,” said Louise Dickson, oil markets analyst at Rystad Energy.

Oil also found support from positive economic data. Britain’s pandemic-battered economy grew more strongly than expected in March, while U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints.

India’s coronavirus death toll crossed 250,000 in the deadliest 24 hours since the pandemic began.

In the United States, fuel shortages worsened as the shutdown of the Colonial Pipeline, the nation’s largest fuel pipeline network, entered its sixth day and gasoline stations from Florida to Virginia ran out of supply in some cities.

Colonial, which transports more than 2.5 million bpd, said it hopes to restart a large portion of the network by the end of the week.

The gasoline crack spread – a measure of refining profit margins – was on track for its highest close since hitting a record high on April 20, 2020 when WTI futures turned negative, according to Refinitiv data.

(Additional reporting by Laura Sanicola in New York, Bozorgmehr Sharafedin in London and Shu Zhang and Sonali Paul in Singapore; Editing by Marguerita Choy and Mark Heinrich)

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