How should policymakers react when two key sectors of the economy are heading in different directions?
This is the question facing the Federal Reserve and its international counterparts as they race to contain soaring inflation.
On the one hand, spending for services like flights are booming as people in the United States and Europe take advantage of relaxed coronavirus restrictions.
“The demand is higher than I’ve seen in my career, and that’s even before business travel fully resumes,” United Airlines
(ALU) CEO Scott Kirby told analysts Thursday. United shares rose more than 9% after reporting earnings.
Yet manufacturing is under pressure as the war in Ukraine drives up the price of energy and key components and continues to scramble global shipping.
(AA) saw its shares fall 17% on Thursday after warning that supply chain disruptions could hurt demand, even if aluminum prices remain high.
Supply chain problems “did exist before the war in Ukraine, but this war has exacerbated them,” Alcoa CEO Roy Harvey said on Wednesday, pointing to the deteriorating situation for automakers. “It also creates implications for whether the economy continues to grow as it has.”
More evidence: The Purchasing Managers’ Index of the 19 countries that use the euro, released on Friday, showed activity in the services sector was at its highest level in eight months, while manufacturing output hit its lowest level in 22 months.
“April saw a two-speed eurozone economy,” said Chris Williamson, chief economist at S&P Global.
He noted that manufacturing “nearly stagnated due to continued supply constraints, rising prices and signs of spending being affected by risk aversion due to the war”, while there was a “record increase in spending on activities such as travel and leisure”.
In the United States, the manufacturing sector looked solid in March, but seems to be losing momentum. A survey of local manufacturers from the Federal Reserve Bank of Philadelphia released this week showed growth continued in April, but at a slower pace.
How to react: This data presents another daunting challenge for central banks as they withdraw support for the economy and try to contain the highest inflation in decades.
Fed Chairman Jerome Powell and European Central Bank President Christine Lagarde want to react aggressively enough to stop soaring prices, but they don’t want to be so tough that they trigger a recession. When parts of the economy diverge, this task is made even more difficult.
Powell, for now, only sounds more hawkish. He said on Thursday that an interest rate hike of half a percentage point in May “will be on the table.” Usually, the central bank raises rates by a quarter of a percentage point.
Lagarde, meanwhile, said Thursday that the ECB continues to monitor economic data, although it did not rule out an interest rate hike in July.
“What makes the job difficult is that you have to navigate between controlling inflation… but we also have to make sure that, you know, there is financial stability [and] there is support for the economy,” Lagarde told CNN’s Richard Quest.
We wondered if Elon Musk would be able to raise enough money to fund his bid to take Twitter private. Not anymore.
The latest: The Tesla CEO said Thursday he had lined up pledges worth $46.5 billion for a deal on Twitter, using a combination of debt and cash.
Despite being the richest person in the world, much of Musk’s wealth is tied to Tesla stock. It was thought it might be difficult for him to incur debt against these stocks given their historical volatility.
So where does the money come from?
Musk said Morgan Stanley and other lenders had pledged more than $25 billion in debt, using his Tesla stock as collateral for part of it.
Musk would then have to shell out an additional $21 billion on his own.
Next steps: In a filing with the Securities and Exchange Commission, Musk said he has yet to receive an official response from Twitter’s board. Last week, he made an unsolicited offer to acquire all the shares of the company he does not own for $54.20 apiece, valuing Twitter at around $41 billion.
Musk said he was “looking to negotiate” a definitive acquisition agreement and “is prepared to enter into such negotiations immediately” – an apparent reversal of his previous position that $54.20 per share was his “best and last”. ” offer.
That means the ball is now with Twitter’s board to assess Musk’s proposal and decide how to move forward.
French voters are expected to give Emmanuel Macron five more years in power on Sunday, favoring the president over far-right candidate Marine Le Pen after a strong performance in a fierce debate. But investors stay alert.
With polls indicating the presidential election is closer than when the two candidates faced off in 2017, traders are bracing for a surprise Le Pen victory that would rock Europe’s second-largest economy amid fears of a recession in the region are growing.
“It could be more important than Brexit. He could be bigger than Trump, if Le Pen wins,” said Michael Hewson, chief market analyst at CMC Markets.
In a study published on Tuesday, Citi strategists estimate the probability of a Le Pen victory at 35%. Still, they encouraged clients to hedge their bets on French government bonds and warned that a Le Pen win would hurt stocks.
“The uncertainty stems from the risk of low voter turnout, as leftist voters refuse to give their vote to Macron, even at the risk of handing over the floor to Le Pen,” they wrote. “Voter turnout is a factor that pollsters find particularly difficult to predict accurately.”
Le Pen’s victory would immediately raise questions about France’s political and economic ties to the European Union, even as she abandoned her promise to pull the country out of the bloc. Its political goals – such as preventing foreign workers from coming to France, which would end freedom of movement in Europe – could still create serious conflicts.
“The most of [Le Pen’s] policies would not be possible inside the EU,” said Grégory Claeys, senior researcher at Bruegel, a think tank in Brussels.
Also today: The US Purchasing Managers Index arrives at 9:45 a.m. ET.