Aurelia Butler

(Reuters) -New Jersey sued the Biden administration on Friday seeking to block New York City’s plan to impose tolls on vehicles in Manhattan to fight congestion and pay for mass transit, saying it was unfair to residents of the neighboring state.The city aims as early as next year to charge a daily toll of up to $23 on vehicles in central Manhattan between 60th Street in Midtown and Battery Park on the southern tip. In its lawsuit in U.S. District Court in Newark, New Jersey said the federal highway administration’s environmental review of the plan was inadequate. The body also ignored the financial and environmental burdens on New Jersey residents, it said. Tens of thousands of drivers commute from New Jersey to Manhattan for work. New Jersey said it would suffer because some drivers would reroute into the state to avoid the toll and it would not receive money from New Yorkers who enter New Jersey. “New Jersey will bear much of the burden of this congestion pricing scheme—in terms of environmental, financial, and human impacts—but receive none of its benefits,” the lawsuit said.New York City, which has the most congested traffic of any U.S. city, would become the first major city in the U.S. to follow London, which implemented a similar charge in 2003.In 2022, New York said the charge would cut traffic, improve air quality and increase transit use by 1% to 2%. The toll would generate $1 billion to $1.5 billion a year and support $15 billion in debt financing for mass transit improvement.”As any one in New Jersey knows, if you screw Jersey, buckle up. We’re not backing down,” New Jersey Democratic Representative Josh Gottheimer said. New York Governor Kathy Hochul said the plan was crucial to reduce congestion in New York City and said most New Jersey residents commuting to New York City use public transportation and would benefit from better mass transit. The federal highway administration declined to comment. More

NEW YORK (Reuters) – A feared liquidity drainage in the U.S. banking system as the Treasury refills its coffers has not materialised yet, on the contrary reserves increased recently, assuaging some concerns the bond spree could lead to further credit tightening. The U.S. Treasury started rebuilding its account through T-bills after the government’s debt ceiling was suspended last month. Since early June, the Treasury General Account at the Fed has increased by about $460 billion.Generally, an increase in government borrowing coincides with a decline in demand for the Fed’s overnight reverse repo facility (ON RRP), through which money market funds lend to the Fed, or with a drop in bank reserves parked at the central bank.When banks absorb the new debt issuance they have less money to lend – a scenario which had some investors worried given ongoing fears of excessive credit tightening amid higher interest rates.Federal Reserve data this week, however, showed that in the week ending on July 19 reserves increased by about $58.5 billion to $3.22 trillion, while demand for the ON RRP facility declined by $87.3 billion.”The risk of reserve scarcity in the near-term has receded as more cash has left the RRP facility,” said Gennadiy Goldberg, Head of US Rates Strategy at TD Securities USA.”We’ll be watching balance sheet runoff in the next several months to see if that materially changes, but I think the risk has declined as things stand now,” he added.Demand for the Fed’s ON RRP has been declining steadily from $2.3 trillion at the end of May to $1.7 trillion as of Friday.”At the end of May, we had expected more of the drain to come out of bank reserves, as we expected money market funds to keep their money in ON RRP due to still-hawkish Fed messaging at the June FOMC (Federal Open Market Committee) meeting,” Citi analysts said in a note this week.”However, money market funds shifted their allocation out of the RRP facility into outright purchases of T-bills and private repo markets,” they said.Fed officials increasingly track the combined total of reserve and ON RRP balances to get a fuller picture of sector liquidity as they proceed with reducing the central bank’s bond holdings at a targeted rate of nearly $100 billion a month. Together they now total $5.3 trillion, the lowest in about two years and down by $700 billion since April with most of that drop coming from ON RRPs, but Fed officials do not yet sense it is threatening reserve scarcity.Going forward, Citi analysts said they expected the ON RRP to continue declining, although at a smaller pace as the Treasury’s financing operations are expected to lose some steam. More

The Acropolis has stood above the city of Athens for centuries, its ancient walls and pillars withstanding war, siege and conquest. But as temperatures crested 40C across southern Europe this month, Greece’s top tourist attraction briefly fell victim to extreme heat. Officials shut the site for several hours during the hottest parts of the day, after holidaymakers queueing to enter required medical attention.The Cerberus heatwave — named after the three-headed dog who guarded the gates to hell in Greek mythology — has shone a spotlight on just how vulnerable the Mediterranean’s huge tourism industry is to the heatwaves that are becoming increasingly common in Europe. But the economic impact of what experts warn could be a new era of record-breaking heat goes far beyond tourism. Industries ranging from construction, to manufacturing, agriculture, transport and insurance are all bracing for changes to the way they do business as high-temperature days become more routine because of climate change. A visitor cools off at the Acropolis hill during this month’s heatwave in Athens. The economic impact of what experts warn could be a new era of record-breaking heat goes far beyond tourism © Louiza Vradi/ReutersScientists are clear that extreme weather events, including heatwaves, will become more frequent and intense with every fraction of a degree of warming. In July, with average temperatures already at least 1.1C hotter globally than pre-industrial levels, swaths of the US, Europe and Asia sweltered under “heat domes.” Record highs were reached from China to Italy. Business leaders and policymakers are now counting the cost of shuttered companies and decreased productivity. A study published by academics at Dartmouth last year found that heatwaves, brought on by human-caused climate change, cost the global economy an estimated $16tn over a 21-year period from the 1990s.Extreme heat is “pulling down our growth,” says Kathy Baughman McLeod, director of the Adrienne Arsht-Rockefeller Foundation Resilience Center at the Atlantic Council, and “dragging down our economies . . . the runways are buckling, metros are closing, restaurants have to shut down because the kitchen staff are too hot.”But those costs are likely to spiral in coming decades as economies reorient themselves for peak seasons of ever more extreme heat, to mitigate against the risks and disruption they will bring. “Extreme heat is one of the very serious consequences of climate change,” says Dan Jørgensen, Denmark’s climate minister. “The very tragic news is that this is probably only going to get worse.”Too hot to workOne of the main reasons that extreme heat poses an economic threat is because it makes it harder to work. High temperatures go hand in hand with low productivity.In hot conditions, human beings typically “work slower, we take on more risk, our cognitive function decreases”, says Laura Kent of the Institution of Mechanical Engineers, a professional association which recently produced a report on how industry will need to adapt to extreme heat. A study by the International Labour Organization, the UN agency for workers, projected that by 2030, the equivalent of more than 2 per cent of total working hours worldwide would be lost every year, either because it is too hot to work or because workers have to work at a slower pace. Around 200mn people in cities today are at risk from extreme heat, a number that is expected to grow eightfold by 2050, according to Sachin Boite, director of climate resilience at the C40 network of mayors pushing for environmental action.Yet few countries have a maximum temperature for when work must stop. In the UK, for example, where extreme heat has not historically been a problem, there is only a recommended threshold for stopping work in cold, not hot, temperatures.The poorest and least able to cope are often hit hardest by extreme heat — with productivity losses often concentrated in jobs where wages tend to be lower than average. Travellers at Liverpool Street railway station during a heatwave in London earlier this month. Few countries have a maximum temperature for when work must stop © Jose Sarmento Matos/BloombergOutdoor workers — especially those in agriculture or construction — are particularly at risk of death, injuries, sickness and reduced productivity because of heat exposure, according to the ILO. Between 1992 and 2016, 285 construction workers in the US died from heat-related causes, about a third of all the country’s occupational deaths from heat exposure, according to academic research.But those working inside are at increasing risk as intense heatwaves become more frequent, including the world’s 66mn textile workers, who often work inside factories and workshops without air conditioning. Many are situated in the global south, where peak temperatures are even more extreme and dangerous. After British Columbia in Canada suffered a devastating heatwave in 2021, heat-related workplace injuries requiring compensation increased by 180 per cent when compared to the previous three-year average, according to research. More than a third of those came from indoor workers, compared to 20 per cent on average. The impact of extreme heat on workers has become “an issue of human rights,” says Italy-based environmental economist Shouro Dasgupta, and one that calls for stronger labour protection policies. “The right to a safe and healthy working environment is a human right [that] is being eroded,” he adds. “Governments will need to step in.”Sectors at riskBeyond the consequences of extreme heat on their employees, industries are being forced to rethink more existential issues, such as where their businesses are based and how they operate.The construction industry is one area that might require a radical reinvention, says Daisie Rees-Evans, who works on policy at the Chartered Institute of Building, a professional body.“Not only do extreme weather conditions impact construction work on sites but it actually impacts material,” she says. Steel can warp in hot conditions, while concrete becomes difficult to work with and sets much more quickly — leaving it more prone to cracking and affecting its strength and durability. There is also the risk concrete will spoil before it can be poured. All of this adds up to additional costs for the sector, says Rees-Evans. Companies faced with having to reorder materials such as steel that warped often find themselves battling with other companies who also need to repurchase goods, driving up prices in the process.Any delays to projects can also come with additional costs, including fines levied for exceeding the agreed completion date, she adds. Manufacturing is another sector that faces significant changes. Factories and warehouses “are just not designed for the temperatures we are seeing now and expected to see,” says Kent of the mechanical engineers’ association. Along the Rhine, one of Europe’s most important waterways, companies have faced disruptions due to low water levels for three out of the past five years © Wolfgang Rattay/ReutersThis means that equipment might not work as effectively or wears out more quickly, which comes with higher operational costs. “A vast majority of our industry rely on some sort of heating or cooling process,” she says. “If you are heating or need to cool down to a certain temperature and the ambient temperature is already hotter, that difference is harder to overcome.” At the same time, the availability of water can come under intense pressure during periods of higher heat — a huge problem for the industrial sector, which needs water for functions from cooling and transportation. Along the Rhine, one of Europe’s most important waterways, companies have faced disruptions due to low water levels for three out of the past five years, including in 2018 when barges struggled to travel, hitting fuel and chemical supplies. “For the longest time, we have put industries next to rivers,” says Johanna Lehne, programme lead at climate consultancy E3G, but companies are now faced with questions about where they should be based and what they are able to produce. Then there is the risk to infrastructure. Heat stress is “going to shorten lifespans”, says David Carlin of the UN Environment Programme Finance Initiative. That affects everything from train tracks to roads and airports. “Not only do you have potential infrastructural damages like bridge collapses, but you also have the need to replace these things faster, which is increasing costs.”For agriculture, extreme heat can result in decreasing crop yields, fuelling rising prices and food insecurity in the process. Research from Arsht-Rock found corn, the most widely produced US crop, is losing about $720mn in revenue annually because of extreme heat, which will increase to a projected $1.7bn by 2030. As work becomes riskier in a range of sectors, insurance costs will rise. Climate change “will significantly shape how the sector will choose to manage and absorb risks,” says Mohammad Khan, general insurance leader for consultancy PwC’s UK arm.According to data from reinsurer Swiss Re, heat-related catastrophe losses for insurers, such as crop failures from drought or wildfire damage to properties, amounted to $46.4bn in the five years to 2022, up from $29.4bn in the previous five years.In California, one of the areas most affected by wildfires, some big US insurers have pulled back. Allstate cited the growing bill from wildfires as among the reasons it paused selling new home insurance policies in California last year. State Farm, another big home insurer, warned of “rapidly growing catastrophe exposure” when it did the same earlier this year.That has fed a growing debate about the affordability of insurance for both individuals and companies as climate change effects intensify, with more people falling into public safety nets. Adapting for changeA couple of generations down the line, humans will have to find new ways to adapt their societies as temperatures rise ever higher.Climate pledges made by countries put the world on track for temperature rises of between 2.4C and 2.6C by 2100. This is far ahead of the 1.5C threshold after which scientists have warned of potentially irreversible changes to the planet and devastating consequences for citizens. “This [extreme heat] is not going to go away anytime soon. It’s going to be more frequent, it’s going to be more intense, it’s going to be longer as well,” says Carolina Cecilio, policy adviser at E3G. Some countries are waking up to the issue. Greece appointed its first chief heat officer in 2021, while Spain said earlier this year it would ban outdoor work during periods of extreme heat.A local resident fights a forest fire with a shovel during a wildfire in Tabara, north-west Spain. The country said earlier this year it would ban outdoor work during periods of extreme heat © Bernat Armangue/APCompanies are introducing measures such as using “misting” on animals and employees to keep cool. Others are switching working hours, trying to do more at night or during the early hours of the morning — although this can be met with objections from local governments and residents. As the world warms, so-called passive cooling is likely to become more important for economies, says Kent. Many of the materials that buildings and roads are made from — such as tar and concrete — absorb and retain energy from the sun’s rays, warming their surroundings, while factories and warehouses are often found in industrial parks that lack green spaces and allow heat to build up. Cost effective solutions included “cool roofs” that are painted white to reflect the heat, or adding shade through the use of “overhang” on buildings or increased tree cover.Rees-Evans says construction firms are starting to use AI to factor forecasted weather into a project’s running order. This would allow them, for example, to hold off ordering steel if they expected a prolonged period of hot weather was on the cards. People walk under ‘dry mist’ in the July heat in central Paris. Swaths of the US, Europe and Asia have sweltered under ‘heat domes’ © Apaydin Alain/ABACA/Reuters Internationally, adaptation is expected to be high on the agenda of the international COP28 climate negotiations. Politicians are increasingly looking at how money can be raised to help countries, especially those in the global south, deal with extreme temperatures because of climate change. But Baughman McLeod says businesses and policymakers needed to act now to prepare for extreme heat. A big rethink of our economies may be needed, she says, as countries that depend on tourism see visits plummet during peak seasons, or companies can no longer do business for key months of the year. “There is not a solution for every place, but there is a solution for every person.” More

The median forecast of 10 analysts see annual headline inflation at 4.77% in the first 15 days of the month, its lowest level since March 2021. Core inflation, which strips out volatile food and energy products, is forecast to have slid to 6.73% year-on-year, marking the eleventh consecutive fortnight of slowdown.Both still remain well above the central bank’s target of 3%, plus or minus 1 percentage point.Last month, Mexico’s central bank board members made the unanimous decision to hold its benchmark interest rate at 11.25% for the second time, and warned that it will be necessary to keep it at that level for a prolonged period of time for inflation to converge to its target.Banxico first paused its rate hikes in May after a nearly two-year hiking cycle that began in June 2021.In the first half of July, consumer prices were forecast to have risen 0.27% compared with the previous two-week period, while the core index likely rose 0.22%.Mexico’s statistics institute will release inflation data for the first half of July on Monday. (Report by Noé Torres; Editing by Marguerita Choy) More

Today’s top storiesUK public sector borrowing fell unexpectedly in June while retail sales grew much more than anticipated. Net public sector borrowing hit £18.5bn last month, £400mn lower than in the same month in 2022, according to data published by the Office for National Statistics on Friday. Walls close in on Western businesses in Russia as companies looking to get out are struggling with a dearth of buyers and hardening Kremlin attitudes.Rishi Sunak’s Conservative party lost two seats in big by-election defeats. The once-safe Tory seat of Selby and Ainsty in Yorkshire went to Labour while the Lib Dems won the south-western seat of Somerton and Frome.For up-to-the-minute news updates, visit our live blogGood evening.Heatwaves have dominated the news this week, with scorching temperatures across much of southern Europe and the US south. Scientists have blamed a specific jet stream pattern that creates a series of “heat domes” which in turn drive up temperatures.The fast-moving band of air has been locked for weeks in a pattern characterised by five large U-bend shapes scientists have called “wavenumber 5”.Long periods of extreme heat at or near 40C aren’t just a feature of our climate’s future, FT’s John Burn-Murdoch argues; they are already here.The south-western US state of Arizona has long been affected by very high temperatures but now it’s clear those very high temperatures are climbing. Between 1970 and 1990, an average of 16 people per year died from “exposure to excessive natural heat”. Between 1990 and 2015, the average rose to 38. In 2020, it was 210, and 257 in 2022.

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In his column John tries to explain why Phoenix in Arizona, where maximum temperatures have now exceeded 40C for 26 successive days, is America’s fastest growing big city.Meanwhile in Germany, efforts to build a future supply of energy based on renewables is, perhaps surprisingly, being led by German coal giant Leag, which is headquartered in the Lausitz city of Cottbus.All coal-fired power plants in Germany must be switched off by 2038, making the success of Leag’s transition towards renewables crucial for sustaining the livelihoods of its 7,000 workers.Fabian von Oesen, a civil engineer who has spent much of the past decade working on offshore wind, leads Leag’s renewables division. But environmental groups are sceptical about a coal company leading the energy transition, with one activist saying: “It’s like asking a villain to change course.”

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But Von Oesen and others hope this will help to secure future generations’ career prospects in the region that witnessed an exodus of talent after the fall of the Berlin Wall.In the UK, on the other hand, efforts to boost renewable energy have suffered a significant setback after one of the country’s biggest wind farm projects, Vattenfall’s Norfolk Boreas site, has been halted after costs surged 40%.Need to know: UK and Europe economyUK consumer confidence plummeted in July, according to research group GfK. The consumer confidence index, which measures how Britons view their personal finances and wider economic prospects, fell six points to minus 30 in July compared with the previous month.Turkey’s central bank lifted interest rates for a second consecutive month but the limited increase has prompted concerns that policymakers are prioritising growth over fighting inflation. After Wednesday’s gigafactory announcement from Tata Group, the UK’s business and trade secretary Kemi Badenoch writes in the FT that the UK can’t pick winners but it can help the car industry succeed.Need to know: Global economyRussia is pushing a plan to supply grain to Africa and cut Ukraine out of the global market after Moscow’s withdrawal this week from a UN-backed deal. The Kremlin warned earlier this week it would treat all grain ships heading to Ukraine’s ports as military targets, a threat the EU said demonstrated Moscow’s “barbarian attitude” as it attacks food supplies.China’s low-profile billionaires have come out in support of the Communist party’s efforts to restore private sector confidence as Beijing looks to reinvigorate the slowing post-pandemic recovery.For the first time since 2017, net inflows into ‘ex-China’ emerging markets were more than $41bn, exceeding those into mainland Chinese equities, according to Goldman Sachs data.Taylor Swift is the latest frontline in the ongoing war between Singapore and Hong Kong over leading financial hub status. The American singer, like Harry Styles and Coldplay, is performing in Singapore but skipping Hong Kong for next year’s international tour, which is being seen by many as a snub.Just weeks after it was accused of being infiltrated by China’s Communist party, the Asian Infrastructure Investment Bank, Beijing’s answer to the World Bank, has approved one of its highest-profile international partnerships. The proposal will issue $1bn in credit guarantees against sovereign-backed loans made by the World Bank’s lending arm, the International Bank for Reconstruction and Development.Need to know: businessMcDonald’s has overhauled its UK complaints procedures after sexual assault and bullying claims emerged in a BBC investigation published earlier this week.US cinema owners are hoping for box office success by cashing in on the meme-driven “Barbenheimer” phenomenon which has led to hundreds of thousands of film-goers buying tickets to see Barbie on the same day as Oppenheimer this weekend.FTX has sued its founder Sam Bankman-Fried in an effort to claw back more than $1bn allegedly misappropriated in the months leading up to the bankrupt cryptocurrency exchange’s collapse last year.The world’s largest contract chipmaker TSMC has warned that it expects its 2023 revenue to drop by 10 per cent as the AI boom fails to offset economic woes and China’s delayed recovery.Record profits have been forecast by low-cost airline EasyJet this summer thanks to high ticket prices and strong demand for travel but concerns have been raised over “unprecedented” air traffic control disruption.Science round-upThe FT revealed that the UK’s decision on rejoining the EU’s Horizon research programme would be delayed until the autumn.Eli Lilly’s new Alzheimer’s drug donanemab, which phase 3 trials showed could slow memory loss and cognitive decline, was hailed as a “watershed moment” in the fight against the disease.Farm robots like Harvard’s Wyss Institute’s “Robobees” — though yet to be tested outside the lab — could eventually perform tasks such as crop pollination and environmental monitoring. Microsoft, OpenAI and Cohere are experimenting with “synthetic data” to train their AI systems as they reach the limits of information created by humans. John Thornhill, the FT’s innovation editor, explores the promises of AI-assisted healthcare.How do machines learn? Pretty much the same way as humans: repeating a process and making adjustments after mistakes, to gradually improve outcomes. Here’s how they can be trained to recognise images. And here’s our explainer on the EU’s proposals for AI regulation.Something for the weekendTry your hand at the range of FT Weekend and daily cryptic crosswords.Some good newsFilip Cegar, an Aberdeen teenager who broke his back sledging at a golf course in the Bieldside area last December, has successfully climbed the 674 steps of the Eiffel Tower. After learning to walk again, he’s raised more than £4,000 for the Royal Aberdeen Children’s Hospital. More

HOUSTON (Reuters) -SLB on Friday flagged weakening North America oilfield activity even as the company topped analysts’ estimates for second quarter profit, helped by a rebound in offshore and international drilling.SLB, the largest oilfield service company and former Schlumberger (NYSE:SLB), joined rivals Halliburton (NYSE:HAL) and Baker Hughes in forecasting tepid North American activity, sending its shares down 3.3% to $55.30 in morning trading.North America revenue for the current quarter will be slightly down, Chief Executive Olivier Le Peuch said in a post-earnings conference call with analysts, saying activity in the region was moderating.However, the company expects third quarter revenue from international markets to grow by a mid-single digit percentage, citing a resurgence in offshore and Middle East drilling.In comparison, last quarter’s international revenue rose 21% to $6.3 billion and North America’s climbed 14% to $1.75 billion.Analysts at Tudor Pickering Holt noted that international revenue missed its estimate by $1 billion, while North America slightly topped its forecast. U.S. and Canadian producers have kept a tight rein on spending since the 2020 downturn.SLB continues to expect year-on-year revenue growth of more than 15% and adjusted earnings before interest, tax, depreciation and amortization to rise in the mid-20s.”The year is playing out largely how the company expected with a more muted outlook for North America and overall profit margins picking up in Q2 through pricing power, technology adoption, and strength in key international markets,” said Peter McNally, an analyst at research firm Third Bridge.The company reported net income excluding items of 72 cents per share for the three months ended June 30, compared with analysts’ average estimate of 71 cents per share, according to Refinitiv data.Revenue of $8.1 billion fell slightly below analysts’ estimate of $8.2 billion. More

(Reuters) – The U.S. commercial property market has faced severe challenges since the pandemic due to lingering office vacancies, diminished retail activity and higher interest rates. That stress has caused banks and other lenders to tighten their standards for new loans and scrutinize existing ones. While regional banks carry the greatest exposure to the commercial real estate (CRE) sector, second quarter earnings show that a number of big banks have prepared for potential defaults, primarily on office loans.Here are the highlights across the sector:BANK OF AMERICA CORP:Chief Financial Officer Alastair Borthwick said the bank had $17 million in charge-offs, or debt owed to a bank that is unlikely to be recovered, on its office loan exposure during the second quarter versus $15 million in the first quarter. The value of assets under review for credit risk rose by $1.7 billion from the first quarter, due mainly to its CRE exposure. However, Borthwick noted the bank’s office CRE exposure was low relative to its overall loan portfolio, at 2%.GOLDMAN SACHS GROUP INCThe investment bank reported about $305 million in net losses within a private portfolio, driven by markdowns on office CRE, it said. The Wall Street giant also said its debt investment revenue of $197 million had declined year-on-year due primarily to “weaker performance” in its real estate investments. Goldman Sachs Group (NYSE:GS) CFO Denis Coleman said the bank’s provision for credit losses stood at $615 million in the second quarter. CRE loans represented just 15% of the bank’s overall lending book, while only 1% of the CRE loan portfolio was office-related.JPMORGAN CHASE & CO While its CRE revenue grew to $806 million in the second quarter from $642 million in the first, JPMorgan (NYSE:JPM) reported $1.1 billion in credit loss provisions driven by its office portfolio. While the portfolio was “quite small”, Chief Financial Officer Jeremy Barnum told investors the bank increased provisions “to what felt like a comfortable coverage ratio.”WELLS FARGOThe bank said it had a $949 million increase in its allowance for credit losses, primarily CRE office loans. At the same time, it saw a quarter-on-quarter rise in CRE revenue as a result of higher interest rates and loan balances. “While we haven’t seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out,” CEO Charlie Scharf said.CITIZENS FINANCIAL SERVICES Citizens’ nonaccrual loans – those on which a payment hasn’t been made for 90 days – grew by $195 million to roughly $1.2 billion, while its net charge-offs increased by $19 million to $152 million. Both increases were driven largely by the bank’s CRE holdings.Citizens recorded a credit loss provision of $176 million in the second quarter. It increased its allowance for credit losses to $2.04 billion from $2.01 billion at the end of the first quarter, which included $41 million in connection with its general office portfolio. “We believe losses are manageable and readily absorbed by reserves,” Bruce Van Saun, Citizen’s CEO, told investors.EAST WEST BANCORP The bank highlighted that its CRE portfolio had a low average loan-to-value (LTV) ratio of 61%, a key metric used to determine the credit risk of a loan. East West’s office portfolio had a weighted average LTV of 52%. While almost three-quarters of the bank’s office loans are to borrowers in the troubled California market, it noted a “high percentage” of its CRE loans carry full recourse and personal guarantees from individuals with “substantial net worth.” “All of these characteristics help to keep this portfolio strong,” Dominic Ng, East West’s chairman and CEO, said.FIFTH THIRD BANCORPThe regional bank’s allowance for credit losses increased 0.09% from the first quarter to $2.53 billion, due in part to a 0.27% increased allowance for its commercial mortgage loans. Fifth Third’s nonperforming CRE loans declined to 0.13% in the second quarter from 0.29% in the first quarter. Its percentage of CRE loans at least 30 days delinquent grew to 0.29% from 0.04%.”We have limited office exposure,” Fifth Third CFO James Leonard told investors Thursday, noting the bank “had deemphasized office even before the pandemic.”MORGAN STANLEY The investment bank said provisions for credit losses in the second quarter amounted to $97 million versus $82 million the same period last year, primarily driven by deterioration in CRE. WEBSTER FINANCIAL CORPThe regional bank’s nonperforming CRE loans ticked up to $47.9 million last quarter from $35.8 million in the first quarter. Meanwhile, it divested $80 million in CRE loans last quarter, “the vast majority of which were secured by office properties,” resulting in $13 million in charge-offs, Webster CFO Glenn MacInnes told investors. The bank reduced its office exposure by 25% over the last four quarters with a “minimal hit to capital,” CEO John Ciulla said. More

The writer, a former member of the Bank of England’s Monetary Policy Committee, is now a distinguished fellow at Chatham HouseThe latest data showing UK inflation at 7.9 per cent in the year to June was a welcome break from the past seven months and a potential turning point in taming the cost of living crisis. Yes, inflation had been falling from its peak of 11 per cent last October but too slowly to prevent the rise in mortgage rates or to be sure that policy was on track. While the Bank of England is likely to increase its rate somewhat further, the latest figures suggest that inflation is now firmly on a downward track. The probability of a soft landing, rather than a recession, has risen. The good news goes beyond the headline consumer rate, which itself is the lowest since March 2022. Producer input prices actually fell by 2.7 per cent since June of last year, mainly due to the fall in oil prices, which affects manufacturing and transport costs. Even imported food prices fell by 4 percentage points in June compared with May. It takes time for input prices to feed through to consumer prices but this is now happening and becoming more widespread. On a month-to-month basis, producer prices have been falling since March and the consumer price index has been slowing since April. Beyond energy and food, the core CPI is an indication of how embedded inflation has become in the rest of the consumer’s market basket. The annual rate of core CPI fell from 7.1 per cent in May to 6.9 per cent in June. This is still too high for the BoE to relax but at least core CPI has finally turned a corner. Another measure watched by the BoE is services annual CPI, where most jobs are found and where wage costs are most significant. This, too, fell from 7.4 per cent in May to 7.2 per cent in June. Of course, monthly data can be erratic. Moreover, new shocks threaten, with Russia again blocking grain exports from the Black Sea and heatwaves in southern Europe damaging fruit and vegetable crops. One swallow does not make a summer, of course, but these latest inflation figures arguably show at least a small flock arriving. With inflation on the decline, two related questions become pressing. First, how much higher will rates need to be to maintain downward pressure on inflation? And, second, how resilient will the economy be to interest rates that remain higher for longer? Both questions present a challenge to the BoE’s forecasting model, which last November predicted a lengthy recession and a rapid fall in inflation. Neither has happened and, indeed, BoE governor Andrew Bailey has told the Treasury select committee that there are “very big lessons to learn” about relying on their forecasting model in setting policy. In this transition period, while the economy is adjusting to a higher interest rate environment, it is right that policymakers rely more on current data developments than on an analytical forecasting model. This should also apply to the BoE’s communications strategy. Consumer confidence and business investment can take unwarranted hits from misplaced emphases.The problem is that the model’s parameters are derived largely from the abnormal period since the global financial crisis, when real interest rates were negative and quantitative easing distorted normal market signals. Even rates rapidly rising from their near-zero levels since 2009 have had less impact than expected on inflation and the real economy because they started from such a low base with the markets awash with liquidity. And even now, with inflation at 7.9 per cent, a Bank rate of 5 per cent is negative in real terms. The two-year gilt rate is hovering around 5 per cent. Given the uncertainty around how fast inflation will fall, a guiding objective for the BoE should be to aim for positive real rates at the two-year horizon until inflation is back to target. On current assumptions, this might imply a plateau of about 5.5 per cent in the Bank rate that lasts for an extended time. Could the UK economy withstand such rates without a long recession? The historical evidence is encouraging.

Consider the decade before the triple shocks of the financial crisis, the Covid-19 pandemic and the war in Ukraine. Between 1997 and 2007, the Bank rate averaged 5.4 per cent, while gross domestic product grew at an average annual rate of between 2.8 and 2.9 per cent. Inflation averaged 1.8 per cent. Households could enjoy positive real returns on simple savings products and business investment was strong, rising by 4 percentage points per year in real terms. While economic growth depends on many factors, and no two decades are alike, the combination of moderately higher interest rates with significantly lower inflation may make for a soft landing ahead. More