Aurelia Butler

The narrative has recently shifted from only questioning how brutal the US recession was going to be — and whether it had already started — to “no landing”, as employment, spending etc have stayed remarkably strong.But with inflation softening some people think the Federal Reserve will still have to trim interest rates soon so that they aren’t unduly restrictive, whether a recession materialises or not. Lo and behold, Goldman Sachs — a noted bull — has now pencilled in the first Fed cut for the second quarter of 2024. Its economics team reckons that the core personal consumption expenditures inflation rate (the Fed’s own fave measure) will by then have fallen below 3 per cent on a year-on-year basis and under 2.5 per cent on a monthly annualised basis, which will be enough to give the Fed cover. “The motivation for cutting outside of a recession would be to normalise the funds rate from a restrictive level back towards neutral once inflation is closer to the target,” they write.However, the details of the report indicate that their confidence in this call is pretty modest. Here are the main points, with Alphaville’s emphasis below:— Normalization is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady. The FOMC might not cut because inflation might not fall enough or, even if it does, because solid growth, a tight labor market, and a further easing of financial conditions might make cutting seem like an unnecessary risk.— Some Fed officials and investors argue that the FOMC must cut as inflation falls to prevent real interest rates from rising and hurting the economy. We disagree with this logic. Real interest rates should be calculated by subtracting off forward-looking inflation expectations, not realized inflation, and inflation expectations have already fallen to or nearly to target-consistent levels. Moreover, adjusting our broader financial conditions index (FCI) for inflation rather than the funds rate has very little impact on the implied impulse to GDP growth, which is now modest.— We are penciling in 25bp of cuts per quarter but are uncertain about the pace. The FOMC might move slowly if its desire to normalise is only lukewarm and it fears further boosting asset prices and strengthening an economy with an already-tight labor market, or it could cut more quickly from a high starting point if it is more confident that the inflation problem is unlikely to return.— We expect the funds rate to eventually stabilize at 3-3.25%, above the FOMC’s 2.5% median longer run dot. We have long been skeptical that neutral was as low as widely thought last cycle, and larger fiscal deficits have arguably pushed it higher since. Fed officials could raise their longer run dots if the economy remains resilient with the funds rate at a much higher level or they could conclude — as a recent New York Fed blog post did — that the short-run neutral rate is elevated.— Our views have been more hawkish than market pricing this year because we have seen both a lower probability of recession than consensus and a relatively high threshold for rate cuts. This remains true, though the gap has narrowed as recessions fears have faded. We think it is appropriate for the yield curve to be inverted, but not quite as much as it is.Here is that NY Fed paper that Hatzius mentions above btw, and you can read the full Goldman Sachs report here. FWIW an extended wait-and-see period followed by a gentle interest rate trim kinda makes sense given the current trajectory of inflation. But trajectories change. Who knows what could happen in the world between now and then. And the Fed’s perennial worries about its credibility — and the perceived damage done by the “transitory” snafu — makes us think that absent a big economic downturn it’s going to want to see inflation much closer to or even below 2 per cent before it dares to actually cut rates. More

The Wall Street bank said it expects a “vicious cycle” of real estate financing challenges, which could intensify the liquidity stress for developers and their non-bank creditors.Country Garden, China’s largest private developer, is seeking to delay payment on a private onshore bond for the first time after suspending trading in 11 onshore bonds.”Unlike banks, which have holding power and are able to roll over credit to wait for eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,” JPM analysts led by Katherine Lei in a note.Trusts may have to use their own profits to bail out existing investors if they fail to honor payments on issued products, Lei and team warned.This may force banks to fill the funding gap, the note said, although they flagged a low probability of the same.More broadly, rising trust defaults would drag economic growth by 0.3-0.4 percentage points directly, JPM warned.Along with Monday’s disappointing China credit data for July, JPM said there could be a rise in policy support, including a cut to the reserve requirement ratio and a “small-scale” government bail out program for local-government financing vehicles.”However, we do not expect large-scale monetary easing or fiscal stimulus at this moment,” Lei said.($1 = 7.2581 Chinese yuan renminbi) More

Russia’s central bank said it may increase its key interest rate after the rouble fell to less than Rbs100 to the dollar on Monday, prompting policymakers to squabble over how to deal with the economic fallout from President Vladimir Putin’s war in Ukraine.Nearly a year and a half after Putin ordered the invasion, Russia’s technocrats are struggling to balance the competing priorities of economic growth and stabilising the currency, which is at a 16-month low against the dollar.The rouble’s precipitous slide prompted rare public disagreements among top Russian officials on Monday as the Kremlin sought to assuage growing anxiety about the currency while continuing to praise the debt-fuelled growth that had weakened it.Anatoly Aksakov, head of the finance committee in the Duma, told local news site Ura.ru on Monday that “businesses are overloaded and raising production levels” in his native region of Chuvashia in central Russia. “People are getting their salaries. The [region] is living life to the fullest, everyone has a smile on their face, and there is no stress that the dollar rate is nearing 100 roubles,” he added.But the effect has already been noticed even farther from Moscow, which has so far been insulated from most of the war’s consequences.In Surgut, a Siberian oil town, the rolling ticker running across a local news agency’s offices was replaced with text on Sunday that said: “Putin is a dickhead and a thief. 100 roubles to the dollar — you’ve lost your fucking mind!” The news agency said the ticker had been hacked.Maxim Oreshkin, Putin’s economic adviser, wrote an article for the state newswire Tass earlier on Monday that included thinly veiled criticism of the central bank, claiming that “a strong rouble is in the interests of the Russian economy,” which he said was otherwise recovering after a recession last year.Oreshkin blamed the rouble’s fall on the central bank after it eased monetary policy, which he said had led to an extra Rbs12.8tn in debt-fuelled demand that was outstripping the budget deficit and overheating the economy.“The current exchange rate has significantly deviated from fundamental levels and is expected to normalise in the near future,” Oreshkin wrote.But the central bank, which dropped exchange-rate targeting and switched to a free float in 2014, said the rouble was under pressure from other factors including a drop in export volumes and simultaneous rising internal demand for imports amid an increase in government borrowing.The central bank said the potential rate rises at its next scheduled meetings were required in order to stabilise inflation at its target of 4 per cent, but added that the rouble’s decline did not threaten Russia’s financial stability.Ballooning deficits from increased military spending, a drop in export revenues, and a growing reliance on imports have all contributed to the rouble’s fall while speeding up inflation.Inflation grew past the central bank’s target rate to 4.3 per cent in July and is expected to rise to between 5 and 6.5 per cent this year. Though it still remains lower in Russia than in much of Europe, thanks to the country’s energy resources and early shedding of pandemic restrictions, seasonally adjusted inflation in July was at 8.5 per cent, according to Natalia Lavrova, chief economist at BCS Global Markets. Rising inflation has pitched central bank governor Elvira Nabiullina, who has tamed previous rises with aggressive rate tightening, against her hardline critics, who have pushed for lower rates to stimulate borrowing.“The state has essentially raised demand for imports through spending and subsidised borrowing, which fundamentally weakens the rouble,” said Alexandra Prokopenko, a former central bank official and non-resident scholar at the Carnegie Russia Eurasia Center.

She compared the response with the tale of a drunken man who searches for his lost keys under a lamppost rather than in the park, where he lost them. “Blaming the central bank is like a drunkard’s search — looking for the guilty where the light is,” she said.Policymakers are struggling to keep Russia’s economy stable while fuelling Putin’s war machine and mitigating the impact of western sanctions, economists say. “The rouble is gradually losing value because the current prognosis is that the war will, and Russian budget deficits [to fund it] will, go on for years to come, until Putin dies or steps down,” Konstantin Sonin, an economic professor at the University of Chicago, wrote on Twitter last week.The central bank last week said it would stop foreign currency purchases until the end of this year to “reduce volatility”. But the effect that such steps can have on the rouble is limited because more than half of Russia’s foreign reserves are frozen under western sanctions, Sonin said. More

SAO PAULO (Reuters) – Brazilian President Luiz Inacio Lula da Silva said on Monday he hopes for the United States to want to invest in Brazil so the two countries can work to “drive the energy transition forward.”Lula had already said last week he would ask global leaders, including U.S. President Joe Biden and China’s Xi Jinping, to increase investments in Brazil as his administration launches a new ecological transition plan. More

Welcome to Trade Secrets. Today I’m standing in for Alan. Brussels and Washington are increasingly coming under pressure to reach an agreement on a climate-related deal for steel and aluminium. There is some common ground, however: both sides do at least agree that climate change needs to be managed. Charted waters shows how Russia is earning far more from crude oil sales to India than previously recognised by exploiting a loophole in the oil price-cap regime.Get in touch. I’m at [email protected] of a compromise Among Joe Biden’s early measures aimed at keeping the peace with Europe — back before the Inflation Reduction Act inflamed things again — was the suspending of the Trump-era tariffs on steel and aluminium.In the place of national security tariffs levied on European steel and aluminium came a set of import quotas, and some talks aimed at creating a permanent solution to trade in low-carbon steel and aluminium while slapping levies on any so-called dirty producers. This is supposed to tackle overproduction while also lowering carbon emissions.The issue is that despite setting themselves a firm deadline of October this year to seal a deal, the two sides have made virtually no progress. Until now, Trade Secrets has been told, where some amount of panic has begun to set in. The Americans have so far been frustrated with the EU’s insistence on its own way of doing things, judging the European approach as stodgy and plod-footed. We’ve seen this with the IRA, too, where Washington generally acted with minimal sympathy towards European complaints that the generous tax subsidies being handed out to companies building on US soil broke World Trade Organization rules. On that legislation, and again in the steel and aluminium talks, the Europeans see the Americans as cavalier and self-serving. The guardrails of the global trading system are there in black and white, they contend. Washington appears to argue that they are, in fact, grey. Alan has covered the bulk of the current negotiating positions over the steel and ally talks here, so I won’t rehash them.But what is new is an insistence from Washington that the deadline will not be extended. The talks now have very little time to conclude — especially when taking into account the August lull, when both Washington and Brussels are quiet.EU trade commissioner Valdis Dombrovskis has declined to speculate on whether the two sides could prolong their truce, although it’s hoped in Brussels that if enough serious progress is made, an extension could be struck to work through the final details. One point of hope that a settlement could be reached over the next two to three months is that the two sides do agree on one thing: that climate change needs to be managed.As Alan has discussed, David Kleimann of the Bruegel think-tank in Brussels, and formerly of Georgetown University in Washington, makes the point that the US — with its prevalent relatively low-carbon intensity, energy-efficient electric arc furnaces, is creating a “green smokescreen” to protect its higher-intensity steel plants in the electorally wobbly swing-y states of Ohio, Pennsylvania and Michigan. This is, at first glance, a case of the Biden administration pitting electoral politics against saving the planet. But the two things are not always in competition in the long run. Carbon-heavy blast furnaces emit damaging greenhouse gases more than their energy-efficient electric arc furnace counterparts — true. But winning the states of Ohio, Pennsylvania and Michigan could mean Biden holding the White House. The climate maths may look more favourable under a continued Democratic presidency than it would under a Republican presidency — especially if the full force of the IRA’s tax credits are allowed to bed in.The same trade-off can be seen in the US domestic politics of the Mountain Valley Pipeline — climate types hate that the White House has given a green light to this project and helped it leapfrog court challenge. But again, the Biden administration needs Democratic senator Joe Manchin to hold West Virginia so that it can stay in power. The fossil fuel pipeline, in the short term, is the trade-off made.Negotiating your trade agreements according to your domestic political preferences is, of course, totally normal behaviour. But in the case of talks with the Europeans, the climate goals — to reduce global carbon emissions and get at least somewhere close to the Paris Agreement targets — are the same. This means there could be some hope of an agreement — even if, as Alan writes, top European officials may be totally averse to prioritising their transatlantic friendship over global trade rules. They have until October — we’ll see. Charted watersInflated shipping costs are enabling Russian companies to earn far more from crude oil sales to India than was previously recognised, FT analysis has revealed.The principle of the price cap is that oil needs to stay below $60 a barrel (for crude). But Russian sellers now organise the freight when sending to India, so they’ve got a lever to extract more cash. Freight isn’t controlled by the price cap — a loophole that enables Russian companies to charge a significant amount well in excess of the actual cost of shipping.An FT analysis of ships running directly from Russia’s Baltic ports to India suggests that this overcharging, combined with fees earned from shipping the oil on Russia-linked vessels, may have been worth $1.2bn in the three months to July.

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Trade linksZambia’s president Hakainde Hichilema has set a target to more than triple the country’s copper production from about 800,000 tonnes a year to more than 3mn by 2032. But the mission will require significant investment and improved infrastructure — to be addressed even while Zambia is still in talks to finish the restructuring of its $13bn external debt. The FT’s Joseph Cotterill explores why the government is attempting a copper revival.The US is embroiled in a spat about whaling with Japan that threatens its main trade initiative in Asia just as President Joe Biden prepares to host his Japanese and South Korean counterparts for a historic trilateral summit.Clarkson, which sells sea freight space, predicts a rise in shipping rates this year due to a winning combination of energy insecurity, green transition and squeezed shipbuilding capacity. Lex assesses whether the winds are in Clarkson’s favour in its Populi column. Trade Secrets is edited by Georgina Quach today. More