Aurelia Butler

Analysts at the brokerage now expect China’s residential sales value for fiscal 2023 to contract 10%, compared with a 4% drop estimated earlier.Investments into China’s property market fell for a 17th consecutive month in July and home sales declined, official data showed on Tuesday, as a deepening debt crisis weighs on the sector.A broad set of China data on Tuesday painted a grim picture of the world’s second largest economy, prompting Beijing to cut key policy rates to shore up growth. Analysts have said more support is needed to revitalise the country’s economy.Lisheng Wang, economist at Goldman Sachs (NYSE:GS), said he expects two 25-basis-point cuts to the Reserve Requirement Ratio later this year — in September, and the last quarter ending December.J.P. Morgan said while policy easing would intensify at the local level, it might only stabilize sentiment temporarily and was not likely not trigger any strong recovery in the near term. More

In June, Fitch lowered the score of the U.S. banking industry’s “operating environment” to AA- from AA, citing pressure on the country’s credit rating, gaps in regulatory framework and uncertainty about the future trajectory of interest rate hikes.Another one-notch downgrade, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, analyst Chris Wolfe told CNBC.Lenders were rocked earlier this month after Fitch’s peer Moody’s (NYSE:MCO) downgraded 10 mid-sized U.S. banks and warned it may cut ratings of several others. More

The extraordinary rate meeting came after the rouble plummeted past the 100 threshold against the dollar on Monday, dragged down by the impact of Western sanctions on Russia’s balance of trade and as military spending soars.The rouble pared gains after the decision to stand 0.5% weaker at 98.16 by 1056 GMT, but still significantly above lows near 102 on Monday which had not been hit since the early weeks after Russia invaded Ukraine. President Vladimir Putin’s economic adviser Maxim Oreshkin on Monday rebuked the central bank, blaming what he called its soft monetary policy for weakening the rouble. Hours after Oreshkin’s words, the bank announced the emergency meeting, throwing the currency a lifeline. “Inflationary pressure is building up,” the bank said in a statement on Tuesday.”The pass-through of the rouble’s depreciation to prices is gaining momentum and inflation expectations are on the rise.” Though stopping the rot, analysts largely agreed that the move would not have a long-lasting impact. “As long as the war continues it just gets worse for Russia, the Russian economy and the rouble,” said Timothy Ash, senior EM sovereign strategist at Bluebay Asset Management. “Hiking policy rates won’t solve anything – they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth – unless the core problem, the war and sanctions are resolved.”ECONOMICS OR POLITICS?In its original statement, the bank removed its usual hawkish guidance that it would consider future rate hikes, leading some analysts to speculate that interest rates had peaked. But a little after the decision, the bank issued an additional statement: “In the case of strengthening pro-inflationary risks, an additional increase in the key rate is possible.”Central Bank Governor Elvira Nabiullina has won plaudits for her handling of the economy since Russia began what it calls a “special military operation” in Ukraine, but the plunging rouble and high inflation have put her on the back foot, especially among pro-war nationalists. The Kremlin’s public criticism of her monetary policy adds further pressure as Russia heads towards a presidential election in March 2024, with consumers battling rising prices for basic goods. “While such a depreciation risks boosting inflation, it is also the signal it sends out to the Russian public about the costs of the invasion of Ukraine,” said Stuart Cole, chief macro economist at Equiti Capital in London. “As such, today’s decision will likely have had an element of politics behind it as well as economics.” Andrei Melaschenko, economist at Renaissance Capital in Moscow, said the bank was right to react to inflation risks, but that the meeting, being announced so soon after Kremlin criticism, raised questions about the bank’s independence. “(Nabiullina) has built quite a strong team around her and the central bank has been a strong regulator and I think and the market, both the domestic and international market, sees it that way.” INFLATION PRESSURE The bank last made an emergency rate hike in late February 2022 with a rate raise to 20% in the immediate fallout of Russia’s despatching troops to Ukraine. The bank then steadily lowered the cost of borrowing to 7.5% as strong inflation pressure eased in the second half of 2022. Since its last cut in September 2022, the bank had held rates but steadily increased its hawkish rhetoric, eventually hiking by 100 basis points to 8.5% at its last scheduled meeting in July. The next rate decision is due on Sept. 15.Russia saw double-digit inflation in 2022 and after a deceleration in the spring of 2023 due to that high base effect, annual inflation is now above the central bank’s 4% target once more and quickening. In annualised terms on a seasonally adjusted basis, current price growth over the last three months amounted to 7.6% on average, the bank said. Promsvyazbank analysts said an additional hike may be required if the rouble does not stabilise and that measures to reduce the rouble liquidity surplus were also needed. ‘SLOW THE BLEEDING’Russia’s widening budget deficit and stark labour shortage have contributed to rising inflationary pressure this year, but the rouble’s rapid slide from around 70 against the dollar at the start of the year to more than 100 on Monday pushed the central bank to act. The bank, which blames the rouble’s slide on Russia’s shrinking current account surplus – down 85% year-on-year in January-July – has already tried to limit the rouble’s decline. Last week, it halted the finance ministry’s FX purchases to try to reduce volatility, a step that effectively saw Russia abandon its budget rule. Analysts widely agreed that those measures alone were too minimal in scope to significantly support the currency.”Today’s rate hike will only temporarily slow the bleeding,” said Liam Peach, senior emerging markets economist at Capital Economics in London. “Russia will struggle to attract capital inflows because of sanctions,” he said. “And there’s little ammunition for FX intervention – the central bank has some unfrozen renminbi assets and gold reserves, but the bar for using these is likely to be high.” More

NEW YORK (Reuters) – Here is something to make you feel old: Next year will mark the 40th anniversary of the first TED Talk.By now, we are all very familiar with the format: Subject-matter experts giving smart, pithy speeches about technology, entertainment and design.But while topics can be all over the map – from Brene Brown’s “The Power of Vulnerability” (62.4 million views) to Simon Sinek’s “How Great Leaders Inspire Action” (62.6 million views) – TED talks can also provide valuable insights about our finances.We combed through them for the most helpful advice to get our money lives under control.TAMMY LALLY, TEDXORLANDO, JUNE 2017Advice: Get honest about money shame“What I’ve learned is that our self-destructive and self-defeating financial behaviors are not driven by our rational, logical minds. Instead, they are a product of our subconscious belief systems rooted in our childhoods, and so deeply ingrained in us that they shape the way we deal with money our entire adult lives.“And so many of you are left believing that you’re crazy, or stupid, or just bad with money. This is what I call money shame … the intensely painful feeling or experience of believing that we are flawed and therefore unworthy of love or belonging based on bank accounts, or debts, or homes, or cars, or job titles …“I believe we all have money shame, whether we earn $10,000 a year or $10 million, and it’s because we give money all our power.”DANIEL GOLDSTEIN, TEDSALON NY, NOVEMBER 2011Advice: Imagine your future self“I’m interested in the relationship to the future financial self. I’m talking about the topic of saving. Saving is a classic two-selves problem: The present self doesn’t want to save at all. It wants to consume, whereas the future self wants the present self to save …“So what can we do about this? There’s a philosopher Derek Parfit who said some words that were inspiring to my co-authors and I. He said that we might neglect our future selves because of some failure of belief or imagination. That is to say, we somehow might not believe that we are going to get old.”ESTELLE GIBSON, TEDxDayton, October 2019Advice: Avoid financial dependence“I went through an unexpected divorce, and I was left with a house I couldn’t afford and bills I couldn’t pay. You might be wondering, ‘How does that happen to someone who is educated and skilled at managing people’s money?’“I had reverted back to what I learned growing up, that one person managed all the money. I had handed over my financial power, and I had become financially dependent …“What I had failed to realize was that what felt like freedom was really dependency. My mistake was that I didn’t stay involved, or understand what was going on with our money.”ELISE PAYZAN-LENESTOUR, TEDXSYDNEY, MAY 2016Advice: Know that humans are hardwired to gamble“Many, if not most of us, gamble. In fact, gambling is so pervasive and widespread that the finance community has a name for this pitfall: It is called picking pennies in front of a steamroller.“Indeed, looking at the financial history of the past 40 years, there have been many episodes in which investors ‘picked pennies’. A case in point is the high-yield bond mania at the end of the 1980s, or more recently with mortgage-backed securities just before the global financial crisis. Investors couldn’t get enough of these assets, despite real risk of complete collapse …“How can it be that we are both so smart, and so reckless? Here is the answer: We are greedy and we lack self-control.”MICHAEL NORTON, TEDXCAMBRIDGE, NOVEMBER 2011Advice: Be a giver“Money often makes us selfish and do things only for ourselves. Maybe the reason money doesn’t make us happy is that we’re always spending on the wrong things – in particular, always spending it on ourselves.“We thought, ‘What would happen if we made people spend their money on other people? Instead of being anti-social with your money, what if you were more pro-social? Let’s make people do it, and see what happens’ …“Across all different contexts – your personal life, your work life, even silly things like intramural sports – we see that spending on other people has a bigger return for you than spending on yourself. If you think money can’t buy happiness, you’re not spending it right.” More

Costas Milas is a professor of finance at the University of Liverpool.In his 2013 Nobel Memorial Prize in Economics Sciences lecture, Lars Peter Hansen noted: Part of a meaningful quantitative analysis is to look at models and try to figure out their deficiencies and the ways in which they can be improved.At that time, the quantitative models of the Bank of England had consistently underestimated CPI inflation. A decade later, things haven’t got much better.The BoE has now appointed Fed chair Ben Bernanke to take the lead in reviewing Threadneedle Street’s forecasting models and record. There’s an awful lot for Bernanke and his team to look at, but I want to focus on two interesting areas: the role of public expectations in forecasting, and the impact of quantitative easing on inflation.Public perceptionsTake a look at this chart, which compares CPI with the BoE’s one-year forecast (using the mode, or most likely outcome of the Bank’s fan charts) based on market expectations of interest rates and actual CPI inflation, and public expectations:

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What can we see?— Since 2006, the BoE has under-estimated CPI inflation by an annual average of 68 basis points (the median ‘bias’ is, however, lower and equal to 38 basis points). — Public expectations of inflation have over-estimated actual CPI inflation by an annual average of “only” 10 basis points (the median ‘bias’ is, however, higher and equal to 50 basis points). This suggests that the BoE’s inflation quantitative models could benefit from considering public’s expectations for inflation because the latter potentially caries the same or even better predictive power than the Bank’s own inflation forecasts. Such expectations certainly matter: they increase worker demands for higher wages and, therefore, add to inflationary pressures. As part of this, it is also essential to assess why the public expectations follow such trends — it would be undesirable if, for instance, BoE communications ended up substantially shaping a metric that is then re-imputed into their analysts’ calculations.Easy does itWhat about QE and its role in driving UK CPI inflation higher? One interesting way of examining this is through Divisia M4 growth. Divisia money weights different forms of money according to their likelihood of being spent. Notes and coins have a higher weight than money held in mutual funds, for example. Divisia money feasibly acts as a monetary policy variable, which allows one to capture monetary policy stance when interest rates approach their effective lower bound.Divisia money growth has been found to predict UK growth quite well, and more so when UK growth is quite weak. In fact, very weak annual GDP growth rates since mid 2022 (annual growth in the second quarter was just 0.4 per cent) are directly associated with the big drop in Divisia money discussed below. At the same time, Divisia money growth retains its explanatory power even if additional drivers of UK economic growth and inflation (such as Brexit and financial stress) are considered.Let’s explore this relationship further. Here’s UK CPI inflation and Divisia M4 growth together:

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Divisia money growth reached a high of 19 per cent in the first quarter of 2021, prior to UK inflation peaking at 10.7 per cent in late 2022. This (potentially) suggest that money growth affects inflation with long and variable lags — which is both helpful and unhelpful for BoE forecasters.Putting it togetherTo explore this further, I have built an inflation model which projects UK CPI inflation in terms of expected inflation (based on the public expectations of inflation mentioned above), past inflation (a measure of inflation persistence), excess demand in the economy (based on the Office for Budget Responsibility measure of the output gap), and Divisia M4 growth.Here’s how it looks:

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And here’s the (fairly tight) spread between my model and the actual CPI reading:

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Let’s get into the weeds a bit. This is a “quantile” regression model, where the impact of money on inflation is asymmetric. That is, I allow for the impact of changes in money to vary depending on low versus high levels of existing inflation:The quantitative model (estimated over the sample period 1999-2023 based on quarterly data) confirms that the impact of increased money on UK inflation is inflationary when inflation is already high. At the top 25% of the inflation distribution, an increase in money growth by 5 percentage points lifts UK inflation by approximately half a percentage point in the short run (that is, within a quarter). The impact is much more powerful (and statistically significant) than the corresponding effect on inflation at the bottom 25% of the inflation distribution. Between late 2019 and early 2021, Divisia M4 growth increased by some 15 percentage points, which, according to the model, would potentially add about 1.5 percentage points to UK inflation. That is not much. However, these are direct effects (from money to inflation). Indirect effects also come into play since higher money growth adds to excess demand in the economy and, at the same time, raises inflation expectations. Additional excess demand and higher inflation expectations raise, in turn, inflation further. In other words, an increase in Divisia money growth (a proxy for QE effects) has thrown some fuel into the inflation “fire”. Notably, the same quantitative model “prefers” public expectations of inflation over the BoE’s own inflation expectations. Here’s how the latter looks, to compare — a worse, but not overwhelmingly worse, statistical fit:

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There are several moving parts here, but public expectations of inflation have a better explanatory power than the Bank’s own forecasts in dictating UK inflation movements. This is clearly a problem for the Bank’s policymakers, whose forecasts are (supposed to be) more sophisticated than those formed by the public. More

The annual Global Wealth Report, which estimates the wealth holdings of 5.4 billion adults across 200 markets, says global wealth will reach $629 trillion over the next five years.The upbeat outlook comes despite 2022 recording the first fall in net global household wealth since the 2008 global financial crisis.In nominal terms, net private wealth dipped 2.4% last year, with the loss concentrated in more prosperous regions such as North America and Europe, the report showed. A stronger U.S. dollar was a big factor.The largest wealth increases last year were recorded for Russia, Mexico, India and Brazil. The report forecast wealth in emerging economies, including the BRICS countries – Brazil, Russia, India, China and South Africa – will rise 30% by 2027.It expects the further increases in emerging markets to contribute to a reduction in global wealth inequality in the coming years.The largest declines last year came from financial assets, as opposed to non-financial assets such as real estate, which remained resilient.Broken down on an individual basis, this meant adults were $3,198 worse off by the end of last year.However, “global median wealth, arguably a more meaningful indicator of how the typical person is faring, did in fact increase by 3% in 2022 in contrast to the 3.6% fall in wealth per adult,” the report said.Median wealth has seen a five-fold increase this century, largely due to rapid wealth growth in China. More

THE DEMISE OF CHINA’S GROWTH HAS BEEN MISTAKENLY FORECAST BEFORE. IS THIS TIME DIFFERENT?Activity data has been missing forecasts since the beginning of the second quarter, with the weakness raising worries that China’s economy is coming closer to a crunch point. It would not be for the first time. Alarm (NASDAQ:ALRM) bells over growth rang during the global financial crisis in 2008-09 and during a capital outflow scare in 2015. China came out of those with a shock boost to infrastructure investment and by encouraging property market speculation, among other measures.But infrastructure upgrades have created too much debt, and the property bubble has already burst, posing risks to financial stability. Given China’s debt-fuelled investment in infrastructure and property has peaked, and as exports are slowing in line with the global economy, China only has one other source of demand to tinker with: household consumption.In that sense, this slowdown is different. Whether China bounces back largely depends on whether it can convince households to spend more and save less, and whether they will do so to such an extent that consumer demand compensates for weaknesses elsewhere in the economy. WHY ARE ECONOMISTS FOCUSING ON HOUSEHOLD DEMAND?Unlike consumers in the West, Chinese people were left largely to fend for themselves during the COVID-19 pandemic and the revenge spending spree that some economists expected after China re-opened never took place.But household consumption, as a percentage of gross domestic product (GDP), was among the lowest in the world even before COVID, with economists identifying it as a key structural imbalance in an economy relying too heavily on debt-fuelled investment.Economists blame weak domestic demand for subdued investment appetite in the private sector and for China sliding into deflation in July. If it persists, deflation could exacerbate the economic slowdown and deepen debt problems.The imbalance between consumption and investment is deeper than Japan’s before it entered its “lost decade” of stagnation in the 1990s.HOW BAD CAN THE SLOWDOWN GET?The July activity data has prompted some economists to flag risks that China may struggle to meet its growth target of about 5% for the year without more fiscal stimulus.That is still much higher growth than many other major economies will see, but for one that invests roughly 40% of its GDP every year – about twice as much as the United States invests – it remains a disappointing result.There is also uncertainty about China’s appetite for large fiscal stimulus, given the high levels of municipal debt.Stress in the property market, which accounts for about a quarter of economic activity, raises further concern about the ability of policymakers to arrest the decline in growth.Some economists warn that investors will have to get used to much lower growth. A minority of them even raise the prospect of Japan-like stagnation.But other economists say many consumers and small businesses may already feel economic pain as deep as during a recession, given youth unemployment rates above 21% and deflationary pressures weighing on profit margins.WILL INTEREST RATE CUTS HELP?China’s central bank surprised markets by cutting interest rates on Tuesday.But economists warn the cuts are too small to make a meaningful difference, their primary role being to send a signal to markets that authorities are ready to stimulate the economy.Deeper cuts may also create risks of yuan depreciation and capital outflows, which China will be keen to avoid.WHAT WOULD HELP?Economists want to see measures that would boost the household consumption share of the GDP. Options include government-funded consumer vouchers, significant tax cuts, encouraging faster wage growth, building a social safety net with higher pensions, unemployment benefits and better, and more widely available, public services.No such steps have been flagged at a recent Communist Party leadership meeting, but economists are looking to a key party conference in December for more profound structural reforms. More