Traders Await Tuesday’s CPI Report and Wednesday’s FOMC Announcements

Fusion breakthrough | Crude prices rise | Another stopgap spending measure likely
 

 An abbreviated and early dispatch today as I am en route to Kansas to speak at the MKC Ag Symposium.

Stocks wrapped up their worst week since September, as recession fears resurfaced after a hotter than expected report on wholesale price inflation ahead of this week's Federal Reserve policy meeting (announcements on Wednesday). The Fed has delivered four 75-basis point increases to its benchmark rate and is widely expected to raise rates by another 50 basis points this week. The central bank could also raise its forecast for how high rates will go next year, lower estimates for GDP growth and raise estimates for the unemployment rate, analysts note. Investors also are awaiting Tuesday's report on U.S. consumer prices for a reading on whether inflation has receded. For the week, the Dow sank 2.7%, the S&P 500 fell 3.3%, and the Nasdaq Composite tumbled 4%.

$1.171 trillion — U.S. consumer revolving credit outstanding in October, a fresh record, according to the Federal Reserve. Revolving credit, which is mostly credit-card debt, fell sharply at the outset of the pandemic but has since rebounded, possibly a result of households borrowing more to maintain spending amid high inflation.

The Federal Reserve is raising interest rates, pushing up the costs of borrowing. That could make for some tough choices in Washington. "Debt has risen to levels that are high by historical standards, but — until last year — that increase has coincided with very low interest rates that have kept the costs of debt service relatively low. However, the high levels of debt mean that increases in interest rates like those that we have seen in the past year will either have a large impact on our country’s budget deficits or will require increases in taxes or reductions in spending," Brandeis University's Daniel Bergstresser writes at EconoFact (link).

WTI crude futures edged above $71 per barrel on Monday as the Keystone Pipeline that connects fields in Canada to refiners in the US Gulf Coast remained shut, while Russian President Vladimir Putin’s threat to cut production in retaliation to a Western price cap on Russian oil kept markets on edge.

Fusion energy breakthrough by U.S. scientists boosts clean power hopes, the Financial Times reports (link). U.S. gov’t scientists have made “a breakthrough in the pursuit of limitless, zero-carbon power by achieving a net energy gain in a fusion reaction for the first time, according to three people with knowledge of preliminary results from a recent experiment, the FT said.

     The Energy Department on Tuesday plans to announce the breakthrough development, the Washington Post said (link), citing two people familiar with the research.

     It is still at least a decade — maybe decades — away from commercial use, but the latest development, the WaPo said, “is likely to be touted by the Biden administration as an affirmation of a massive investment by the government.”

World’s biggest central banks will this week complete the most aggressive year for interest-rate hikes in four decades with their fight against inflation still not over even as their economies slow. The ECB and the Bank of England are likely to follow the U.S. Federal Reserve with half-point moves, analysts note. And higher borrowing costs are also ahead for Switzerland, Norway, Mexico, Taiwan, Colombia and the Philippines.

The British economy expanded 0.5% in October from September of 2022, the biggest increase in nearly a year and above forecasts of 0.4%. It follows a 0.6% contraction in September, when an additional bank holiday for the funeral of Queen Elizabeth lowered the output.

Manufacturing output in the U.K. unexpectedly increased by 0.7% month-over-month in October 2022, compared with market forecasts and September's print of flat reading. This was the first growth in manufacturing production since May,

U.S. lawmakers have until Dec. 16 to reach a deal on a full-year spending bill or pass a short-term measure delaying the deadline to avoid a partial government shutdown. To reach a longer-term deal, agreement on the biggest hurdle is needed: partisan deadlock between Republicans and Democrats, who are split over $26 billion in nondefense spending in talks to craft an omnibus spending measure.

     Over the weekend, we reported that an omnibus spending bill could include a rice industry aid program. Details in The Week Ahead and in a special report.

Turkey threatens Greece. Turkish President Recep Tayyip Erdoğan warned Greece that a missile could hit the Greek capital unless “you stay calm,” accelerating tension between the neighboring countries. “If you don’t stay calm, if you try to buy something [to arm yourself] from here and there, from America to the islands, a country like Turkey will not be a bystander. It has to do something,” Erdoğan added.

Covid is rapidly spreading through Chinese households and offices, especially in the capital, after the country’s pandemic rules were significantly unwound last week. It’s straining the medical system and rendering official numbers that show infections at the lowest in a month meaningless, Bloomberg reports (link).      The majority of the Chinese population has been vaccinated with the inactivated Sinovac and Sinopharm vaccines, which were designed to target the original virus strain identified in Wuhan in 2020.

Russia/Ukraine update:

• G7 leaders will speak virtually Monday about Ukraine support, following Russian attacks on the country’s energy infrastructure. The topic of helping Ukraine through the winter will also be on the agenda for EU foreign ministers meeting in Brussels.
• All of Ukraine’s thermal and hydroelectric power plants have been damaged by the recent waves of Russian strikes targeting the country’s power grid, Ukraine’s prime minister said. Meanwhile, Kyiv’s military demolished a hotel complex hosting dozens of Russian military personnel overnight with U.S.-supplied long-range artillery, while more Russian drone strikes continued to destroy Ukraine’s electricity grid. Ukrainian President Volodymyr Zelensky said 1.5 million people in Ukraine’s southern Odessa region were left without power after strikes late Saturday. Only critical infrastructure was connected to the power grid, he said, adding that restoring service could take longer than after previous attacks.
• Ukrainian forces struck the Russian-occupied city of Melitopol over the weekend, signaling the importance of longer-range artillery in the next phase of Ukraine’s campaign to recapture land in the south of the country. The attack hit a church that was being used as a base by Russian soldiers, according to the exiled mayor of the city. Ukraine recaptured the city of Kherson in mid-November, forcing Moscow to withdraw its troops to the east bank of the Dnipro River and opening a new phase of the battle for the south of the country, where Russia has recently improved their defenses in the south and east of the country.
• Ukraine can win the war. But the cost may be too high for the West. Western military officials are offering a sobering assessment of what would be needed to push Moscow’s forces out of entrenched positions, according to the Wall Street Journal (link).
   

After completing a trade agreement with Chile on Friday, the European Commission is aiming for other Latin American trade deals in the next few months. Chile was finally unlocked after France dropped its opposition to increased chicken imports, according to reports. And Mexico is expected to give the go-ahead to its deal soon, EU officials said. Hurdle ahead: Mercosur is the region’s largest trading bloc (Brazil, Argentina, Paraguay and Uruguay), but there are now doubts about moving ahead with a pact concluded in 2019 after almost 20 years of negotiations — the EU wants to add a side agreement about protecting labor rights and the environment (i.e., the Amazon rainforest). Argentina has gone public with its doubts. President Alberto Fernández told the Financial Times last week that the deal needed renegotiating as EU imports threatened domestic industry. On Friday, EU trade commissioner Valdis Dombrovskis ruled out any renegotiation of what he described as a “balanced” agreement.

Belgian authorities charged four people with corruption and other crimes in an investigation into suspected bribes from Qatar to current and former European Parliament officials and lawmakers. European Parliament Vice President Eva Kaili was arrested by police on Friday amid the corruption investigation.

Lockerbie suspect to be extradited to U.S. Abu Agila Mohammad Mas’ud, a Libyan intelligence operative charged in the 1988 bombing of an American jetliner over Lockerbie, Scotland, was arrested by the FBI and is being extradited to the U.S. to face prosecution for one of the deadliest terrorist attacks in U.S. history.

Quotable: "That one incident ended up converting more Gen Z'ers into antimonopolists overnight than anything I could have done." — Federal Trade Commission Chair Lina Khan, speaking about Live Nation Entertainment's recent inability to handle demand for tickets to Taylor Swift's tour.

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