Mnuchin says Main Street U.S. companies need grants, not loans

By Andrea Shalal and David Lawder

WASHINGTON (Reuters) – U.S. Treasury Secretary Steven Mnuchin on Friday defended his decision to end several of the Federal Reserve’s key pandemic lending programs on Dec. 31, saying Congress should use the money to help small U.S. companies with grants instead.

Federal Reserve Chairman Jerome Powell and Chicago Federal Reserve Bank President Charles Evans have criticized the Treasury move, saying the programs – while not being used extensively – provided an important backstop for the economy.

Mnuchin told Powell in a letter Thursday that the $455 billion allocated to Treasury under the CARES Act last spring, much of it set aside to support Fed lending to businesses, nonprofits and local governments, should be made available for Congress to reallocate.

Speaking on CNBC, Mnuchin said Congress had always intended for the lending programs to end on Dec. 31, and sought to reassure markets that the Fed and Treasury had many tools left to support the economy.

“Markets should be very comfortable that we have plenty of capacity left,” Mnuchin said, adding that the Treasury could reactivate the facilities by tapping the Exchange Stabilization Fund, a seldom-used fund housed at the department.

“To the extent these need to be reactivated, we have over $800 billion of capacity so I consider that to be a pretty good bazooka,” he said. The $800 billion would be combining the ESF and capital in remaining Federal Reserve facilities.

Mnuchin denied the move was intended to handicap the administration of Democratic President-elect Joe Biden, who will take office on Jan. 20.

“We’re not trying to hinder anything,” Mnuchin said, adding that his department would work closely with the incoming administration “if things get certified.”

He said he and White House Chief of Staff Mark Meadows would speak with congressional Republican leaders later Friday and would redouble their efforts to pass further stimulus measures.

“We want Congress to reappropriate this money,” he said.

(Reporting by Andrea Shalal and David Lawder; Editing by Chizu Nomiyama)

Unsettled by election drama, markets look on the bright side

By Sujata Rao and Tommy Wilkes

LONDON (Reuters) – Those who banked on a big U.S. government spending splurge may be dismayed but two days on from U.S. Election Day, investors are looking on the bright side – less regulatory tightening than feared and a central bank still in full money-printing mode.

Global stocks extended their surge on Thursday as Democratic challenger Joe Biden edged closer to snatching the presidency from Donald Trump, and there is little sign of panic about an election outcome that may end up in the courts.

Disappointment over stimulus appears to have been replaced by relief that without a Biden clean sweep of Congress and the White House, gridlock between a Biden administration and a potentially Republican Senate would scupper any plans to tighten the screws on tech and pharma giants.

Bets on those sectors gathered momentum, even as shares in renewables – where Biden has pledged large investment – rallied on an assumption that climate-friendly assets will emerge winners no matter who the next president is.

“Less regulation…is a huge positive and offsets the probability of reduced stimulus,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.

“You go back into the medium-term scenario of reflation as well as the lower-for-longer scenario,” he said, referring to expectations of rock-bottom borrowing costs alongside a smaller fiscal spending package.

The market gyrations of the past 36 hours represent some position unwinding, given the tighter-than-expected race, investors said, but with the U.S. and global backdrop one of abundant liquidity and rock-bottom bond yields, flows into equities and company debt are likely to continue.

That is especially so for the mega-tech firms – shares in Apple, Amazon and Alphabet extended Wednesday’s rally.

For Jonathan Bell, chief investment officer at Stanhope Capital, the outcome was the best of both worlds.

“Biden being elected increases the chances of a fiscal stimulus deal, but (with a Republican Senate) it also reduces the ability for him to push through significant taxes rise or policies that might constrain the likes of Amazon and Apple,” Bell said.

“Tech seems to be thinking that the disruptors, most of which are anti-trust regulations will not be significant and that the Senate will be able to prevent it.”

Similarly, Didier Saint-Georges, managing director at asset manager Carmignac in Paris, noted the positives for pharma shares.

The election has done little to alter the broadly positive investment backdrop, Saint-Georges said, adding: “Moving from Trump to Biden looks like a revolution but in market terms it may not be that significant.”

FED TO THE RESCUE?

Cue central banks.

Their money-printing largesse has floored bond yields and volatility, sending investment flooding into stocks. The S&P 500 index has gained more than 60% since 2016. This week it is already up 7%.

The bet now is that any fiscal stimulus shortfall may force the Federal Reserve and peers to pick up the slack. The Bank of England on Thursday announced a bigger-than-expected expansion of its bond-buying scheme.

U.S. Treasury yields slid further as “reflation” trades were unwound, with 10 and 30-year yields down more than 15 basis points each in the past two sessions.

The Fed releases its latest policy statement on Thursday. Amid the election uncertainty it is expected to stick closely to its last statement and repeat its pledge to do whatever it can to help the economy.

Investors are hoping policymakers might provide some stronger guidance of future easing.

“I am not sure the Fed will just abandon (calls for fiscal stimulus) and say ‘don’t worry we will do the heavy lifting,’ Carmignac’s Saint-George said.

“But what can’t be done on fiscal will have to be done on the monetary front.”

(Additional reporting by Susan Mathew in Bangalore, David Randall and Lewis Krauskopf in New York; Editing by Angus MacSwan)

Coffee, ketchup and Nike Air Max: it’s the COVID consumer economy

By Nick Carey, Richa Naidu and Siddharth Cavale

(Reuters) – Instant coffee, ketchup, Lululemon yoga pants and Nike Air Max sneakers are all in. Bottled water, pricey diapers and Burberry luxury trench coats are out.

Welcome to America’s pandemic consumer economy. And it’s like nothing we’ve seen before.

“Everything we knew about supply and demand, we can essentially throw out the window because consumer behavior has changed completely,” said Piotr Dworczak, assistant professor of economics at Northwestern University.

A Reuters analysis of a varied basket of goods shows how the COVID-19 crisis has upturned a decades-old consumer model for everything from clothing to food. This has given some companies surprising power to raise prices or withdraw discounts.

Many of the new trends can be attributed to one factor, according to retail specialists: working from home.

Almost overnight, a consumer-driven economy with clearly delineated work and home spending, changed profoundly. Rising demand for certain items, as well as global supply-chain disruptions, has driven up prices.

Americans are now shelling out significantly more than a year before for coffee, eggs, sliced ham, ketchup and cheese, for example, according to the Reuters analysis of the latest pricing data from Nielsen Co, the Brewers Association and StyleSage Co.

Yet it’s a complex picture, and some of the changes in behavior seem counter-intuitive during a time of deep economic uncertainty.

Demand and prices have also increased for more expensive, or “splurge”, items like $106 men’s Nike Air Max sneakers, $105 Lululemon yoga pants and even a $1,500 Louis Vuitton handbag.

Economists put this apparent discrepancy in behavior down to the fact that many people, unable to spend outside, have more cash in hand. Even many workers on furlough are receiving jobless benefits that match their wages under a federal stimulus plan.

“If I were to consider the consumer situation right now, in a strange way, they may have more disposable income, if they kept their job,” said Nirupama Rao, an assistant professor of business economics and public policy at the University of Michigan. “Of course we’re facing mass layoffs, but the bulk of people have maintained their wages and earnings.”

‘UNPRECEDENTED PRESSURE’

Shoppers paid roughly 8% more on average for JM Smucker’s instant coffees, including Folger’s and Dunkin’, at bricks-and-mortar stores in the four weeks to Aug. 8 versus a year before, according to Nielsen data analyzed by Bernstein.

They shelled out nearly 10% more for Kraft Heinz sauces and about 5% extra for Tyson Foods’ sliced hams.

Such inflation might make commercial sense, given the bump in demand for home staples. But some consumer experts complain retailers and big brands are cutting back on promotions and using their power to shore up profits during a health crisis that has led to millions losing their livelihoods.

“Brand manufacturers have been fattening their pockets with profits while putting unprecedented pressure on the consumer who has to pay those higher prices,” said Burt Flickinger, retail consultant at Strategic Resource Group.

JM Smucker said it did not raise prices of its instant coffees in the four weeks to Aug. 8, but did cut back on some promotions for in-demand products. Kraft Heinz declined to comment, but said during earnings in July that second-quarter prices went up as it pulled some offers and discounts for scarce products. Tyson did not respond to a request for comment.

Other industry experts point out that companies have had to grapple with costly production shifts to adapt to the new landscape. They note that before the pandemic, when costs were lower and there were more promotions and discounts, prices of Heinz sauces were declining.

Pre-COVID-19, tens of millions of commuters grabbed a coffee to-go en route to work. Suddenly, instead of 20-pound (9.1 kg) bags of coffee for restaurants, or large containers of ketchup, producers have had to switch to smaller, home-use packaging.

As ketchup, mayonnaise and vinegar sales surged, Kraft Heinz diverted resources to running these production lines around the clock, while suspending others. It added extra shifts for factory workers to make grocery-sized bottles.

Egg suppliers, like market leader Cal-Maine Foods Inc., have had to overcome a shortage of cartons.

“If you look at eggs, before they’d be powdered to send to restaurants and now they have to be put in cardboard containers to go to supermarkets,” said Daniel Bachman, senior U.S. economist at Deloitte. “It took a high price to induce the change.”

Yet consumer companies cannot take demand for granted and can be burnt by raising prices.

Prices for bottled water and disposable diapers have gone up, while demand has fallen for most of the pandemic. People are unwilling to pay out extra when they can drink their own water at home, and can opt for reusable or cheaper generic diapers at a time when there’s a lack of child daycare, some economists say.

“You’re at home anyway so you’re not sending your child off somewhere in a diaper that fails,” said Rao.

A $2,245 COAT, ANYONE?

Lockdowns have meant many Americans do not travel, eat out, or go to movie theaters. As they have not been commuting or taking kids to school, many are using less gas in their cars.

So they can now splash out on other things, perhaps.

Michael Collins, a professor at the University of Wisconsin’s consumer science department, calls this a “substitution effect.”

“It’s pretty clear people behave as if they have different pots of money,” he said. “Now I don’t eat out at all, so I have a couple of hundred dollars of new income not allocated to anything. I can substitute that money away from eating out and treat myself to other things.”

This effect could help explain the rise in demand and prices for the Air Max. Nike sold about 63% of their online stocks of the shoes in July, compared with only 10% a year earlier, according to apparel data company StyleSage which collects sales information from brand websites.

Air Max prices surged 10.5% on average versus a year before.

Prices for Lululemon’s yoga pants rose 7.2%, and about 45% of stocks were sold in July versus 15% the year before.

Meanwhile, the price of Louis Vuitton’s Neverfull MM Monogram handbag has risen 5% on its website since the start of May. In July, Louis Vuitton owner LVMH said sales momentum had picked up since June, even as its star label raised prices for a third time during the pandemic.

There are some limits, though.

Demand for a Burberry woman’s trench coat has declined, with only 3% of online stocks sold in July versus 14% a year earlier.

It’s a snip at $2,245, down 3.5%.

Nike and Burberry did not respond to requests for comment, while LVMH declined to comment beyond its July remarks. Lululemon said it hadn’t raised prices on some of its core yoga pant styles, including Align and Wunder Under, but had seen a significant rise in demand for yoga products since April. The strong July sales reflected its “Warehouse Sale” offer that month, it added.

HOW LONG WILL IT LAST?

Much remains uncertain.

The U.S. epidemic and its economic consequences are moving targets, and it is unclear when – or even if – American life and consumer behavior will revert to “normal”.

The University of Michigan’s Rao said food producers had been reluctant to invest in permanent changes to retool factories. “They’re hindered by the fact there’s so much uncertainty as to how long this will last.”

Indeed, consumer demand, as well as brands’ pricing power, could change in the coming weeks and months as many Americans feel more financial pain.

The government’s first round of COVID-19-related benefits expired on July 31, leaving about 30 million unemployed Americans without the $600 weekly boost that sustained their households and promoted some discretionary spending.

With the money spigot turned off, analysts say recessionary spending behavior should take hold, with consumers cutting back.

The University of Wisconsin’s Collins said loan forbearance on mortgages, credit cards and student loans since the spring had also helped consumers.

“Eventually that will all end, and people could start to tighten up again.”

(Reporting By Nick Carey, Richa Naidu and Siddharth Cavale; Additional reporting by Silvia Aloisi; Editing by Vanessa O’Connell and Pravin Char)

Deal on U.S. coronavirus aid bill elusive as jobless benefit nears expiration

By Susan Cornwell and Patricia Zengerle

WASHINGTON (Reuters) – Just one day before a federal jobless benefit was set to expire, the U.S. Congress was no closer on Thursday to a deal to extend or replace the extra $600-per-week in payments to tens of millions thrown out of work by the coronavirus pandemic.

Senate Republicans were discussing a way to hold a vote, possibly early next week, on just the unemployment benefit. But there were no signs that Democrats, who have been resisting such a narrow response, would go along.

With little prospect of having to be in Washington to vote on a coronavirus-response bill this week, the Senate was mulling beginning its weekend immediately and returning on Monday — after the unemployment insurance benefit has expired.

Democrats have been pushing for extending the jobless benefit as part of a $3 trillion coronavirus-aid bill the U.S. House of Representatives passed in March, while Republicans want $1 trillion overall. They have proposed a $200 weekly benefit, which would come in addition to state unemployment payments.

The past four days of private talks involving top White House and congressional officials have yielded no tangible results and much of Thursday was spent with Republicans and Democrats criticizing each other.

“Republicans don’t want this aid to expire,” said Senate Majority Leader Mitch McConnell. “But the Speaker and the Democratic Leader say they won’t agree to anything unless the program pays people more to stay home than to work,” he added.

He was referring to House Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer.

Schumer answered back, saying a “skinny bill” floated by the White House to provide reduced unemployment benefits did not have the votes to pass the House or the Senate. “It’s a stunt.”

Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows have been meeting with Democratic leaders over how best to help the country recover from the COVID-19 pandemic.

Besides the $600-per-week supplemental unemployment benefit expiring Friday, a federal moratorium that prevented housing evictions ended last week, leaving untold numbers of Americans at risk of losing their homes.

Congress has already passed aid packages totaling $3 trillion to alleviate the effects of the virus, which has killed 150,000 Americans.

Republicans oppose a Democratic call for nearly $1 trillion to aid state and local governments, while Democrats reject a Republican plan to prevent liability lawsuits for businesses and schools as they reopen during the pandemic.

Some Republicans, such as Senator Mitt Romney, continued pushing for a stop-gap measure to prevent unemployed people from being left without any federal benefits that are on top of state aid.

“I do think that we need to have a temporary program that is put in place so we don’t have a gap in people’s receipts,” Romney told reporters.

White House team to meet House Democrats as talks for new coronavirus bill pick up

By David Morgan and Susan Cornwell

WASHINGTON (Reuters) – U.S. congressional negotiations aimed at hammering out an agreement on a new coronavirus aid package intensified on Tuesday as COVID-19 infections and deaths surged to record levels across the United States.

The Republican-led Senate, Democratic-controlled House of Representatives and the White House have less than two weeks to agree on a legislative package before assistance runs out for tens of millions of Americans made jobless by the coronavirus pandemic.

Negotiators, however, remained far apart over how much money to spend and which priorities to spend it on, as the United States leads the world with more than 3.8 million coronavirus cases and over 140,900 deaths.

Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows met with Senate Republicans at midday and were scheduled for a discussion with House Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer later in the afternoon.

Asked if a deal could be worked out by the end of the week, Pelosi replied with a laugh: “The end of the week? You mean the month. I’m hoping for the end of the month.”

Senate Majority Leader Mitch McConnell said Republicans would soon unveil a new coronavirus bill that is expected to have a $1 trillion price tag.

He said it would include $105 billion for schools; assistance for small businesses; direct payments to individuals and families; help for businesses to meet the cost of protecting employees and customers; money for vaccines, diagnostics and treatments; and liability protection for businesses, healthcare facilities, churches, charities and government agencies.

Democrats are proposing $175 billion to help elementary and secondary schools cope with the pandemic and have said they are determined to fight for provisions in a $3 trillion bill that passed the House in May and includes aid to state and local governments, extended unemployment insurance and protections for workers.

“An outcome will require bipartisan discussions. I do not believe there will be anything in our bill that our Democratic colleagues should not happily support,” McConnell said on the Senate floor.

Schumer called on Republicans to begin bipartisan negotiations now rather than first produce their own bill. “I urge all of my Republican colleagues to abandon their one-party, one-chamber approach before it’s too late and immediately begin bipartisan, bicameral negotiations,” he said.

President Donald Trump has called for a payroll tax cut to be included in legislation, a provision Meadows described on Tuesday as “a very high priority.” But Democrats, including House Majority Leader Steny Hoyer, said there was little enthusiasm for such a move.

Trump is seeking a payroll tax cut ahead of the November election and sees it as a major stimulus for the pandemic-stricken U.S. economy, according to the White House. Democrats have said such a move is unnecessary and could threaten Social Security benefits for the elderly.

(Reporting by David Morgan, Susan Cornwell and Richard Cowan; Editing by Scott Malone, Andrew Heavens, Jonathan Oatis and Dan Grebler)

Trump administration looking to infrastructure for stimulus: Mnuchin

WASHINGTON (Reuters) – U.S. Treasury Secretary Steven Mnuchin told CNBC on Wednesday that President Donald Trump was interested in using road, bridge and other projects to blunt the economic effects of the coronavirus crisis and the administration was having talks about creating an infrastructure plan.

“The president has been very clear: he is prepared to do whatever we need to do to make sure that American workers and American businesses are protected,” he said. “If we need more programs, more money, we will be going back to Congress.”

Mnuchin said Trump’s longstanding desire to update the country’s infrastructure had led the administration to talks over the last year with Republican and Democratic lawmakers about possible legislation. Now, as interest rates scrape the bottom, the administration considers this a great time to invest in infrastructure.

Congress is working on its fourth legislative package addressing the coronavirus crisis, as it urgently tries to churn out bills that will both bolster the public health response to the deadly pandemic and alleviate the economic suffering hitting almost every part of U.S. society.

Trump and Democratic House of Representatives Speaker Nancy Pelosi have found common ground in wanting to include capital works projects in this “Phase 4” legislation to provide jobs for millions of newly displaced workers.

“The president very much wants to rebuild the country and with interest rates low that’s something that’s important to him,” Mnuchin said. “We expect there will be more bills and we think it is a great time now to invest in infrastructure.”

(Reporting by Lisa Lambert; Additional reporting by Ismail Shakil in Bengaluru; Editing by Chizu Nomiyama)

Factbox: What’s in the nearly $2 trillion U.S. Senate coronavirus stimulus?

WASHINGTON (Reuters) – The U.S. Senate on Tuesday was negotiating a nearly $2 trillion emergency bill that aims to counter some of the economic toll of the coronavirus pandemic.

The talks were still in flux after Democrats pushed back against initial Republican drafts of the bill, and officials in both parties said final numbers would be known only after disputes are resolved.

Below are some details under negotiation, which would need to be passed by the Republican-controlled Senate and the Democratic-controlled House of Representatives before going to President Donald Trump for his signature:

– About $500 billion in direct payments to people, in two waves of checks of up to $1,200 for an individual earning up to $75,000 a year. Additional payments for families with children could push the total to $3,000 for a family of four, according to Treasury Secretary Steven Mnuchin, who has played a key role in the negotiations.

– Up to $500 billion in “liquidity assistance” for distressed industries. The amount allocates up to $61 billion for passenger and cargo airlines and contractors, including $32 billion in grants and $29 billion in loans, people briefed on the matter said.

A senior administration official said there was agreement the $500 billion fund should have an inspector general as well as an oversight board, with lawmakers selecting members of the board.

Also, the Treasury secretary would have to provide testimony to the board on transactions, and there would be restrictions on things like stock buybacks and chief executive pay at companies that received help.

– Some $350 billion in loans to small businesses, according to Republican Senator Marco Rubio, chairman of the Senate Small Business Committee.

– Up to $130 billion for hospitals. Republicans said on Monday they have agreed to $75 billion. Hospitals sought $100 billion, and Senate Democratic leader Chuck Schumer said on a conference call Tuesday he believed Democrats had secured $130 billion, according to a person familiar with the call.

– Some $250 billion for expanding unemployment insurance. Republicans say they agreed to that in response to Democratic demands.

– Over $10 billion for drug development, and $4 billion for masks, gloves, gowns and ventilators, Republican Senator Steve Daines said.

– Schumer expressed confidence that Democrats had secured $150 billion for state and local governments, the person familiar with the call said.

– The White House has proposed $45.8 billion for federal agencies; both Democrats and Republicans want more.

– House Speaker Nancy Pelosi, a Democrat, unveiled her own lengthy, $2.5 trillion proposal on Monday. It included billions to help states conduct elections by mail.

Pelosi’s bill also would make coronavirus treatment free for patients, and raise the direct cash payments to individuals to $1,500 each instead of $1,200 as in the Senate plan.

Pelosi’s proposal has $500 billion in grants and loans for small businesses, $200 billion for state governments, $15 billion for local governments, $150 billion for hospitals, and $60 billion for schools and universities, a Democratic summary said. It has $61 billion in grants and loans for airlines, but requires air carriers receiving aid to cut their carbon emissions in half by 2050, the summary said.

(Reporting by Susan Cornwell, David Morgan and David Shepardson; Additional reporting by Tracy Rucinski in Chicago; Editing by Scott Malone, Peter Cooney and Bernadette Baum)