LIVE MARKETS-Monetary policy "jet" getting harder to land

Reuters09-15

* Major indexes red; small caps, transports weaker

* Apple trading lower with its special product event

* Financials weakest major S&P sector; tech leads gainers

* Dollar, crude slip; gold, bitcoin gain

* U.S. 10-Year Treasury yield ~1.29%

Sept 14 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

MONETARY POLICY "JET" GETTING HARDER TO LAND (1345 EDT/1745 GMT)

Today's U.S. inflation data should provide Fed Chair Jerome Powell with some breathing room regarding normalizing policy, according to Vincent Reinhart, Chief Economist at Dreyfus and Mellon.

But while the Fed tried to land the monetary policy "jet," Reinhart says "the deck of the aircraft carrier is rolling."

Mellon expects the Fed to begin tapering asset purchases this December and hiking rates in early 2023, with the option of beginning earlier if necessary, Reinhart told the Reuters Global Markets Forum

On one hand, the Delta variant of the coronvarius could crimp aggregate demand. On the other, U.S. politicians are poised to deliver trillions of dollars of fiscal stimulus, which Reinhart thinks could see inflation uncomfortably overshoot the Fed's target.

This could incline Fed officials to sound more forceful about removing accommodation or to even speed up the process, he added.

The case for a "multiplied boost" from planned U.S. infrastructure spending is historically unpersuasive, according to Reinhart, while higher tax rates could be a negative. Meanwhile, it adds considerably to already massive levels of government debt.

Global debt rose to a new record high of nearly $300 trillion in the second quarter, data from the Institute of International Finance showed.

Countries grow more slowly when government debt is high relative to income compared to their own experience when debt is low," Reinhart said, but record low interest rates have -- for now -- limited the consequences of the debt buildup.

"When Fed policy renormalizes, the results might be dramatic for federal finances...more (central banks) will move with the Fed. As a result, interest costs will rise."

"Meanwhile, for the least well off, the window for forbearance will close." he concluded.

Investment-wise, Reinhart said investors will increasingly need higher inflation compensation in nominal debt securities, while "avoiding longer duration instruments and being suspicious of equity valuations seems appropriate."

(Lisa Mattackal)

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RISING WAGES TO REMAIN IN CORPORATE SPOTLIGHT (1250 EDT/1650 GMT)

Corporate management has an "unprecedented focus" on the risk to profits from rising wages and that will likely be a key market focus in the years ahead, although the sensitivity of earnings to labor costs varies, according to a Goldman Sachs report late on Monday.

The firm's Wage Tracker shows wage growth running at 3.2%, the fastest pace since 2008, but the report said gains should slow in the coming months particularly for low-end workers.

A 100 basis point rise in wage growth would reduce S&P 500 earnings per share by just 1%, in line with the historical relationship between earnings and wages, the report suggested.

"Among sectors, industrials and the consumer sectors appear most vulnerable to rising wages," the report said. "Small-caps are generally more exposed than large-caps, in large part because they have lower profit margins."

Goldman Sachs economists expect the U.S. unemployment rate, which stood at 5.2% in August, will be near a 50-year low of 3.5% by the end of 2022, reigniting concerns over a tight labor market and an outlook for strong wage growth.

"The recent focus of fiscal and monetary policymakers on boosting employment should further increase the importance of labor costs for corporate earnings going forward," the report said.

(Karen Pierog)

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BANKING ON FINANCIALS (1208 EDT/1608 GMT)

In her latest weekly commentary, Saira Malik, Nuveen's CIO and head of global equities, expresses her enthusiasm for financials, although she believes it's important to be selective within the group.

Malik notes that bank stocks are up nearly 30% year-to-date, outperforming the benchmark S&P 500 Index by more than 10%. She thinks this strong relative strength can be attributed to the improving U.S. economy, higher interest rates, increased capital return, strong/and better-than-expected credit quality, and a cheap starting point for valuations.

Malik says that banks are trading well off their 2021 peaks as the 10-year U.S. Treasury yield has retreated from its March highs and reflation expectations have cooled.

However, as she sees it, current valuations "appear fair and fundamentals are mixed," with the 10-year yield churning around 1.3% and "soft loan growth making it more challenging to reach net interest income expectations."

Nuveen believes loan growth is being held back by supply-side disruptions, the roll-off of the small-business Paycheck Protection Program $(PPP)$ lending, economic uncertainty, and diminished demand for credit due to flush corporate and consumer balance sheets. But, Malik believes these factors should subside into 2022, and that today’s market environment for banks and other financial services industries should be fertile ground for bottom-up stock pickers.

"Among the ideas we favor are regional banks with strong expense controls leading to better operating leverage, select credit card names that are less dependent on interest rates, and financial companies returning above-average levels of capital to investors via dividends and share buybacks."

(Terence Gabriel)

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MARKET WINDFALL TO REDUCE U.S. STATE PENSION FUNDING GAP (1118 EDT/1518 GMT)

The gap between the cost of pension benefits promised to public sector workers by U.S. states and the amount of money set aside to pay for them fell below $1 trillion for the first time since 2014 largely due to a more than $500 billion investment windfall, according to projections from The Pew Charitable Trusts released on Tuesday.

Pew analysts projected that the gap, which stood at $1.25 trillion in fiscal 2019, slipped below $800 billion in fiscal 2021, which ended on June 30 for most states, raising the funded ratio above 80% for the first time since 2008.

State retirement systems, which hold about 50% of their assets in stocks and 25% in bonds, saw "once-in-a-generation" investment returns that averaged more than 25% as the stock market bounced back from its pandemic-induced bottom in March 2020 and rallied with the help of trillions of dollars the U.S. government poured into the economy, the Pew report said.

The systems were also aided by a decade of improved fiscal discipline that included increased contributions to pensions from taxpayers and public employees, Greg Mennis, director of Pew's public sector retirement systems project, told reporters.

But headwinds remain.

"It still leaves a nearly $800 billion funding gap and there's no reason to think that future windfalls will be around the corner to let states invest their way out of it and so the remainder ought to be closed through primarily fiscal discipline and possibly other policy changes," said David Draine, the project's senior officer.

(Karen Pierog)

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COOLER HEADS PREVAIL: CPI DATA ENDORSES FED'S 'TRANSITORY' MANTRA (1036 EDT/1436 GMT)

Tuesday data delivered precisely what the doctor ordered: a cooler than expected inflation reading which could potentially convince the Fed to keep its paws off the big red taper button.

The prices urban Americans pay for a basket of goods rose by 0.3% in August, which was softer than the 0.4% Reuters poll. And the core index, which strips out volatile food and energy items, inched up a mere 0.1% versus the 0.3% expected.

The Labor Department's consumer price index $(CPI.UK)$ report

, scrutinized for signs as to whether the current wave of price spikes is as transitory as the Fed assures us, and diving deeper into the data, that would appear to be the case.

Line by line, the big movers appear to be related to the messy business of economic re-opening in the wake of the pandemic. Air fares - which took off for the stratosphere in previous reports - plummeted 9.1%, while gasoline prices rose 2.8% in a sign of robust demand recovery.

"Breaking down the release suggests that supply shortage driven price pressures continue to ease, while the reopening-driven price boom is also starting to fade," writes Seema Shah, chief strategist at Principal Global Investors. "Even so, while the transitory aspects of inflation are fading, there are tentative signs of underlying inflation pressures that the Fed will undoubtedly be watching carefully."

Year-over-year, core CPI rose 4%, a deceleration from the prior month's 4.3% reading and cooler than the mean forecast.

This stands in contrast with Friday's Core PPI report for August, which delivered its hottest annual reading in nearly 11 years.

The graphic below shows core CPI and other major indicators against the Fed's average annual 2% target:

In a separate report, small business attitudes grew a tinge rosier last month.

The National Federation of Independent Business' (NFIB) Business Optimism survey crept up 0.4 points to 100.1 in August

Still, the share of participants who see an improved economy in the cards dropped to the lowest level since January 2013, and a record percentage of firms reported difficulty finding qualified workers.

And inflation remains a concern, with plans to hike prices unchanged at an all-time high of 44%

"The squeeze on businesses from labor shortages and supply-chain disruptions is showing little sign of letting up," says Lydia Boussour, lead U.S. economist at Oxford Economics. "This will likely continue to restrain activity and keep upward pressure on prices."

NFIB's chief economist Bill Dunkelberg would seem to agree.

"The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions," he writes.

It should be noted that the NFIB is a politically-active membership organization.

Prior to the report stock futures were red, but the major indexes moved into positive territory shortly after the opening bell.

However, that initial bump has since faded, with the S&P 500

and the Dow retreating below Monday's closing levels and the Nasdaq now essentially flat.

(Stephen Culp)

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U.S. STOCKS' INITIAL ENTHUSIASM QUICKLY FADES (1004 EDT/1404 GMT)

U.S. stocks opened higher on Tuesday after slowing growth in monthly consumer prices eased fears that high inflation will push the Federal Reserve to reduce stimulus early.

That said, the S&P 500 index hit its high of the day so far in the first minute of trading. After initially popping about 0.4%, it is now in negative territory.

Meanwhile, after hitting a high of 1.35%, the U.S. 10-year Treasury yield is sliding back below 1.30%.

Here is where market stand in early trade:

(Terence Gabriel)

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DOW INDUSTRIALS: DANCING AROUND THE LINES (0900 EDT/1300 GMT)

The Dow Jones Industrial Average , on Friday, ended slightly below its 100-day moving average for the first time since November 2, 2020. This put the blue-chip average down nearly 3% from its 35,631.19 August 16 high:

However, this closing violation of this longer-term moving average went unconfirmed by CBT e-mini Dow futures , and then on Monday, the DJI was able to snap back, reclaim the 100-DMA, and end a five-day losing streak.

Now, on Tuesday, in the wake of the release of the latest inflation data, in which the August CPI month-over-month came in softer than expected , Dow futures suggest the DJI is poised to jump around 100 points early in regular session trading.

With such a move, the DJI can attempt to reclaim its 50-DMA, which ended Monday around 35,045, and the short-term resistance line from the high, now around 35,400, which has a similar slope as the May/June short-term resistance line had. If so, it would suggest new-high potential. Although, the resistance line from early 2018, which now resides around 36,000, or only around 1% above the August peak, may then be a significant barrier.

A failed recovery attempt, which leads to another close below the 100-DMA, which ended Monday around 34,640, as well as Friday's low at 34,599.61 may lead to a more substantial slide.

In that event, the July/June troughs, and the rising 200-DMA, which are around 5%-7% below the mid-August peak, can be seen as the next significant levels.

(Terence Gabriel)

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FOR TUESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE:

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

Disclaimer: The views expressed in this article represent the personal views of the author and do not constitute investment advice from this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, nor does it assume responsibility for any losses arising from the use of or reliance on the information in the article.
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