Aurelia Butler

Argentina and the IMF have agreed a last-minute deal to prevent the troubled South American economy entering into arrears with the fund, offering some stability ahead of October’s crucial presidential elections. After three months of intense negotiations, slowed by the Peronist government’s reluctance to implement unpopular policies in the run-up to the polls, the IMF’s technical team on Friday agreed to disburse an additional $7.5bn of its loan programme.The fund will release $4bn it had withheld at a June programme review and almost $3.5bn that was previously subject to a September assessment. The IMF decided to combine the two reviews because the first was so delayed that data for the later one is already available.However, the fund appears to have rejected Argentina’s calls to bring forward all remaining disbursements for this year, which total $10.6bn.“The fund’s task was to avoid pushing Argentina into the abyss, while also holding firm to stop the government from doing things that will deteriorate the situation further,” said Santiago Manoukian, head of research at Buenos Aires-based consultancy Ecolatina. “The IMF knows it will be negotiating with a new administration in a few months.”Argentina needs the money from the IMF to make loan repayments to the fund itself. The country’s current IMF package, agreed in 2022, is a restructuring of a failed 2018 loan that was meant to lift Argentina out of a debt crisis but quickly went off the rails. Roughly $8.7bn of payments are due by the end of the year.But with the IMF disbursement set to take at least two weeks to arrive, as the fund awaits approval by its board, cash-strapped Argentina is seeking possible bridge loans to make $3.4bn worth of repayments due by August 1. Argentina may be forced to use yuan from its swapline with China to make the payment. It has already resorted to the swapline, which gives it free access to about $10bn worth of renminbi, to pay $1.1bn to the IMF in June. The swapline is also regularly being tapped to pay for imports and intervene in currency markets, with Argentina paying China an undisclosed interest rate that economists estimate is about 6 per cent.Argentina has fallen short of most of the IMF’s targets, including on accumulating foreign exchange reserves and cutting the country’s fiscal deficit.Economy minister Sergio Massa, who is also presidential candidate for the ruling Peronist coalition, United for the Homeland, has blamed the failure to meet the targets on a severe drought, which wiped out more than $18bn of expected export earnings this year.In its statement, the IMF recognised that the “larger-than-anticipated impact of the drought” had contributed to Argentina’s failure to meet the targets, but said there had also been “policy slippages and delays”.The deal should allow the fund to avoid being accused of destabilising Argentina before October’s vote. The country’s economy is the most fragile it has been in two decades, with net foreign exchange reserves about $8bn in the red, annual inflation running above 115 per cent and the peso plunging by a third against the dollar so far this year.Remaining at odds with the IMF or entering into arrears could have triggered a market backlash and a disruptive collapse. But some of the measures Argentina will implement as part of the deal run counter to the IMF’s long-term hope for more orthodox economic policy in the country. Massa successfully resisted calls for a sharp devaluation of the peso’s official exchange rate — which prices the currency at almost twice its value on parallel exchange markets — out of fear of turbocharging inflation. Instead, Argentina has unveiled a set of creative policies designed to weaken the peso for trade purposes, which are controversial among businesses and resemble other multiple-currency policies previously criticised by the IMF.The IMF also agreed to relax targets for foreign exchange reserve accumulation. Originally, Argentina was expected to increase net reserves — a figure that excludes swaplines, IMF funds and other liabilities — to $8bn by the end of 2023. Now it will only need to reach $1bn.

The country will face tough cuts on the fiscal front, however. The IMF said the target for the fiscal deficit would remain at the original 1.9 per cent. As Argentina is not on track to meet that goal, it will require cuts faster than originally planned in the second half of the year to social programmes and energy subsidies, as well as deferring inflation-linked increases to public sector wages.The fund is also expecting a reduction in Argentina’s interventions in parallel currency markets to prop up the peso, which should only be used in exceptional “disorderly market conditions”, sources familiar with the matter said. More

The Bank of England has asked former US Federal Reserve chair Ben Bernanke to review its economic forecasting after it came under heavy criticism for underestimating inflation.The BoE’s governing body, the court of directors, announced Bernanke’s appointment on Friday, adding that the review would seek to strengthen support for the Monetary Policy Committee’s approach to “forecasting and monetary policymaking in times of uncertainty”.Andrew Bailey, BoE governor, said the review would allow the bank “to take a step back and reflect on where our processes need to adapt”. It will begin this summer, with findings published in spring 2024. Bailey conceded in May that there were “very big lessons to learn” after the central bank failed to forecast high and persistent inflation, which reached a peak of 11.1 per cent in October 2022, and the bank announced plans for the review last month.Huw Pill, BoE chief economist, told MPs in May that it was “almost inevitable” that models based on the past 30 years would go wrong in the face of big new shocks to the economy.But the heavyweight appointment of Bernanke, who led the Federal Reserve in its response to the 2008-09 global financial crisis, suggests the UK’s central bank wants the review to look broadly at all aspects of its communication, not just at technical improvements to its modelling. Bernanke was chair of the Fed in 2012 when it began publishing its “dot plot” — the predictions for the path of interest rates made by each of the Federal Open Market Committee’s members based on their own research and forecasting. Most other central banks, including the BoE, prefer to publish a single forecast. However, the BoE often struggles to explain its policy decisions at times of big moves in markets. Its central forecasts for growth and inflation are built on market expectations for the path of interest rates, and this can produce results apparently at odds with the policy stance.“If we want people to understand what we, the MPC, think is the necessary path of interest rates to achieve the inflation target, why not just tell them?” Gertjan Vlieghe, a former external member of the committee, argued in a speech in 2019.

Tony Yates, a former senior BoE official, said the central bank needed to become more transparent about a forecasting process that was “a mystery to the outside world”. He added that, although it published the code underlying its modelling, forecasts published by the BoE were adjusted according to the judgments of the MPC, and the process by which the committee did this was “an indecipherable black box”. Bernanke said he was delighted to be leading the work, as it was “right to review the design and use of forecasts . . . in light of major economic shocks”. More

Mortgage rate cuts by UK banks and building societies have prompted borrowers to reconsider their home loan options, as they look to avoid locking into costly long-term deals in a shifting market.In a sign of changing conditions in the mortgage sector, HSBC, Barclays, TSB and Nationwide — all top 10 UK lenders by size — made rate reductions this week. Other lenders to announce cuts in their range of deals included the Co-operative Bank, Skipton Building Society, MPowered, Pepper Money and Generation Home. The moves are the first significant drop in mortgage rates by big lenders since May. They followed better than expected inflation data from the Bank of England last week, showing the consumer prices index fell to 7.9 per cent in the year to June, down from 8.7 per cent. As a result, markets predict the BoE will raise its official rate next week by a quarter-percentage point, rather than a half. Not all lenders trimmed their rates, with Santander raising the costs of some of its deals. The average rate on a two-year fix on Friday was 6.81 per cent, down by just 0.02 percentage points since Monday, according to data provider Moneyfacts, while five-year fixes remained unchanged at 6.34 per cent.But brokers said the suggestion that mortgage rates may have peaked was enough to cause borrowers to reassess their alternatives. When rates were rising sharply in June following disappointing news on inflation, they rushed to fix before lenders pushed costs even higher. “Borrowers were saying ‘I don’t want to take a fixed rate but I’ve got no choice because I don’t know how bad it’s going to get’,” said Simon Gammon, managing partner at mortgage broker Knight Frank Finance. As mortgage rates have started to come down, people are now shunning longer-term deals for fear they would lock in at a rate that might later prove expensive. That meant borrowers were looking at two-year fixes — in spite of their higher costs compared with a five-year equivalent — or a tracker mortgage, which follows the BoE base rate. “We’ve seen a big shift away from five-year money,” said Mark Harris, chief executive at broker SPF Private Clients.With tracker rates priced as low at 0.14 percentage points above base rate — currently 5 per cent — they are cheaper than average fixed-rate deals. “Currently you can get a two-year fixed rate with Santander at 5.94 per cent in comparison to a two-year tracker at 5.14 per cent with Barclays,” Nick Mendes, manager at mortgage broker John Charcol, said this week.Another attraction of trackers in an unpredictable market is that most waive any charges for borrowers seeking to leave the deal early. If fixed rates were to look more attractive in six months time, borrowers could move without incurring a penalty.“It gives people options,” said Gammon. “The two main reasons for choosing a tracker right now is that if you believe that the markets are starting to show a downward trend, then you can follow that trend with your mortgage tracker product. And secondly, if you get it wrong or the market does not behave as you hope it will, then you have options without paying a charge.” The tracker’s current price advantage is likely to persist for some time yet, in spite of the outlook for base rate rises. “Even though there are a couple of potential Bank of England base rate rises on the short term horizon, the tracker still looks cheap compared to the fixed rate,” said Gammon. Some borrowers, such as first time buyers with tight finances, preferred a fixed rate, as it gave them certainty over the monthly outgoings. But wealthier or more sophisticated homeowners had other options, Harris said. Bankers, lawyers and others in professions where bonuses made up a large proportion of overall pay were willing to take out interest-only loans, since these reduce monthly costs while allowing lump sum reductions. Offset mortgages have also become more popular among well-paid borrowers, as interest rates have risen from the ultra-low era. Though offset rates are at a premium to standard residential mortgages, a lender will “offset” mortgage debt against deposits held by a borrower, reducing overall costs. Harris said money held in anticipation of a future tax bill payment was a common reason for taking an offset. “If you’ve got fluctuating income and potentially a deferred tax situation where you can put money to work against your mortgage until your tax is due, an offset can start to look attractive.”He added that while some of those with finance expertise might select a type of mortgage that underpinned their own view of the economic outlook, others would hedge against the unexpected with a product mix. 

“If I’m borrowing £1mn, I can put some on a fix and some on a variable rate. It doesn’t have to have one product. It’s an alternative we do a lot of now,” he said. Brokers warned that the medium term path of mortgage rates was unlikely to be smooth, or that they would fall as fast as they previously rose. Swap rates, which lenders use to guide their pricing of fixed rates — are affected by a range of forces and have been through a period of high volatility. “Swaps came off quite a bit on the back of the positive inflation data, but have begun to creep up again this week,” said Harris. “The direction of travel is down, but it won’t be a straight line.” More

Buck up, Britain! Enough of the wailing over high inflation and whining about soggy growth. Repeat after me: I am not an emerging market. I am not a developing country. I am not led by a lettuce. Or just listen to chancellor Jeremy Hunt, who recently rejected the “declinist narrative” going around. Careful, he says, or the doom and gloom could become self-fulfilling.Are bad vibes really holding back Britain’s economy? Ridicule is one response. Output per worker was almost 50 per cent higher in America than in Britain in 2021 while UK consumer prices rose by 8 per cent over the year to June, a higher rate than in the eurozone, Japan or America. Fitch, a rating agency, expects debt interest to eat up more than 10 per cent of government revenue in 2023. Perhaps some positive thinking could heal the pain?The more serious riposte is that negative narratives reflect harsh realities. According to a survey by EY published in June, over 17 per cent of investors expected the UK’s attractiveness to decline over the next three years, compared with 4 per cent a decade ago. They cite real factors including an increased regulatory burden, higher costs, a reduction in market size and political instability. Those sounds less like a leftwing plot to talk down the economy than the tedious consequences of government policy. It’s hard to stay upbeat about the pace of economic growth when the Bank of England is actively trying to slow it down.It is possible both that there is a bit too much despondency surrounding the British economy, and that this melancholy could affect real outcomes. Economists have certainly theorised as much. One idea is that because people do not have crystal balls, they struggle to calculate future returns precisely. That means decisions require judgments from the gut, and “animal spirits” can influence whether investments happen. Another option, pushed by the economist Robert Shiller, is that our behaviour is strongly affected by narratives, including viral stories or jokes. Perhaps the image of the UK’s former prime minister fighting to outlast a decaying vegetable stuck in investors’ minds and put them off British assets, raising the government’s borrowing costs, crimping investment and holding back growth. Crises of consumer confidence could matter too, if scary stories about the economy cause them to save rather than spend. What evidence is there that trash talk matters? Ideally you would look at whether changes in mood predicted changes in the real economy. And research does suggest that consumer confidence predicts higher inflation and lower unemployment in future, which is at least consistent with the idea that feelings have real-world effects. But it is difficult to isolate shifts in mood from other things. Are people feeling gloomier about the British economy holding everything else equal? Or are they responding to information about a darker future? Or are they merely feeling more uncertain about tomorrow? If, say, the outlook for interest rates became a lot less predictable, some precautionary saving might make sense.In a recent working paper, Joel Flynn of Yale University and Karthik Sastry of Princeton University try to isolate the effect of pure optimism on hiring decisions in America, and find evidence that it is real. They analyse the wording of US end-of-year reports to measure narratives, and split firms into the optimistic and the pessimistic. Optimistic companies increased their workforce by about 3.6 percentage points more than pessimistic ones over the following year. They also found that optimistic firms did not go on to be any more productive than pessimistic ones, and in fact tended to be less profitable in future. Company hiring is influenced by both positive and negative stories, not just good news.When it comes to Britain, there is little reason to think that its companies would be any more level-headed than American ones. But there is some evidence of recent excessive gloom. Over 2022, consumer confidence slumped to a lower point than seen either during the pandemic or the financial crisis of 2007-09. Even before the rumpus associated with Liz Truss’s botched growth plan, the OBR was predicting a year-long recession. By the end of the year most forecasters were predicting a downturn. But the slump still hasn’t arrived. Between March and May there were 1.3 unemployed people for each job vacancy. Retail sales have held up. It is probably right to gripe that there was too much negativity about Britain’s economic outlook. But so far at least, the economy has escaped the tyranny of its own low [email protected] More

(Reuters) – Wall Street was set to open higher on Friday after data showing easing inflation pressures added to hopes that the Federal Reserve’s policy tightening was ending, while chip stocks surged as Intel (NASDAQ:INTC) posted a surprise quarterly profit.U.S. annual inflation slowed considerably in June, likely pushing the Federal Reserve closer to ending its fastest interest rate hiking cycle since the 1980s.In the 12 months through June, the PCE price index advanced 3.0%. That was the smallest annual gain since March 2021 and followed a 3.8% rise in May.”With inflation going in the right direction, this should give some breathing room for the stocks to refocus on earnings, which continue to outpace expectations,” said Peter Cardillo, chief market economist at Spartan Capital Securities.Market expectations of another 25 basis point rate hike in November were largely unchanged at 29.9% after the data. Chipmaker Intel’s results and forecast pointed to an improving PC market, sending its shares up 6.2% in premarket trading.Peers Nvidia (NASDAQ:NVDA), Micron Technology (NASDAQ:MU) and Marvell (NASDAQ:MRVL) Technology gained over 1% each.Global stock markets eased following Japan’s tweaks to its monetary policy. The Dow snapped its longest winning streak since 1987 in the previous session as U.S. Treasury yields pressured stocks lower after news that the Bank of Japan will allow long-term interest rates to rise.On Friday, the Bank of Japan made its yield curve control policy more flexible and loosened its defense of a long-term interest rate cap, in moves seen by investors as a prelude to an eventual shift away from massive monetary stimulus.The yield on the U.S. 10-year note slipped, but still hovered close to its 4% level hit in the previous session.All three major U.S. indexes are on track to end the week marginally higher, supported by Big Tech earnings, hopes that the Fed’s monetary policy tightening was ending and the world’s largest economy was heading for a soft landing.At 8:40 a.m. ET, Dow e-minis were up 163 points, or 0.46%, S&P 500 e-minis were up 30.75 points, or 0.67%, and Nasdaq 100 e-minis were up 171.5 points, or 1.1%.Ford Motor (NYSE:F) slid 1.7% after Chief Executive Jim Farley outlined a change in the automaker’s product strategy, slowing the ramp-up of money-losing EVs, shifting investment to its commercial vehicle unit and citing plans to quadruple sales of gas electric hybrids over the next five years.First Solar (NASDAQ:FSLR) jumped 11.5% after its second-quarter earnings beat estimates and the company announced plans to spend up to $1.1 billion on its fifth U.S. factory.Enphase Energy (NASDAQ:ENPH) fell 14.6% after the solar inverter maker’s third-quarter revenue forecast missed expectations, Juniper Networks (NYSE:JNPR) tumbled 7.0% after the network operator forecast third-quarter revenue below market estimates. More