Aurelia Butler

The UK’s largest asset manager has been buying bonds and selling equities in preparation for a “significant” economic downturn, warning that the Bank of England will be forced to tip the economy into a recession despite signs of cooling inflation.Sonja Laud, chief investment officer at Legal & General Investment Management, which manages £1.3tn of assets, said this week’s slowdown in inflation was not a sign that the UK would be able to dodge a recession, while the labour market remained tight and the impact of higher borrowing costs had yet to feed through.“It’s a big relief that inflation in the UK is lower than expected but if you look at the actual number it’s still very high and we should not forget this,” she said in an interview with the Financial Times. “We have no doubt that interest rate rises will slow down the economy because, otherwise, inflation will not come down sufficiently for central banks to take their foot off the pedal.”The UK’s annual inflation rate sank to a 15-month low of 7.9 per cent last month, data released on Wednesday showed, sparking relief in markets after a four-month run of unexpectedly high price rises. Still, the BoE remains far behind its international counterparts in its efforts to bring inflation down to its 2 per cent target. US consumer prices climbed at an annual rate of 3 per cent in June, according to figures earlier this month, while eurozone inflation is running at 5.5 per cent.Laud said she was positioning for a UK recession as part of a broader global downturn, including in the US, where the sharp fall in inflation has prompted widespread predictions of a “soft landing” for the economy. However, she said the UK housing market, where increases in BoE rates feed swiftly through to mortgage borrowers, was particularly vulnerable to higher interest rates. While UK government debt and stocks both tend to suffer in a rising rate environment, Laud expects fixed income to benefit from a renewed appetite for safety.“Whenever inflationary worries are dominating the narrative you have a positive bond equity correlation, but when growth dominates you have a negative one,” she said. “In a recession our expectation is that bonds will work as they always have.”

Sonja Laud said political uncertainty in the UK had deterred foreign investors from investing in the country © Bloomberg

Given the dramatic repricing of UK debt in recent months, Laud said she “likes gilts” and the firm had been buying recently, but warned that their appeal was more limited for investors who were not based in the UK.“The attractiveness of gilts depends on whether you have to hedge the currency or not,” she said. “If you are not in the UK and you have to consider the currency it might not be that interesting.”While gilts have led a bond market rally this week, sterling has fallen 1.7 per cent against the dollar from its peak on Tuesday.Laud’s comments echo a wider trend of domestic investors turning to gilts to scoop up higher yields, while big international investors have been more cautious, fearing the country’s outsize inflation problem and uncertain policy outlook. Figures from BNY Mellon, custodian to about a fifth of the world’s financial assets, show net inflows of £13.4bn for 10-year UK bonds this year, the majority of which are gilts, while cross-border trades have seen net outflows of £6bn.

Laud said political uncertainty in the UK had deterred foreign investors from investing in the country, with questions around how post-Brexit relationships will affect trade flows prompting some investors to wait for more clarity.LGIM is the UK’s largest defined contribution pension provider, and is preparing to implement chancellor Jeremy Hunt’s initiative to invest 5 per cent of such pension funds into unlisted equities by 2030. While Laud said this move would be “helpful” in attempts to revive the ailing UK stock market, she would “like to see an approach that covers all the other aspects as well”.“We can definitely do more to provide the financing initially, but we need to make sure we provide the right environment for these companies to stay, to grow, to have the right labour markets, the right support tech structures — the whole framework matters before a company decides where to list,” she said. More

The writer is executive director of American CompassRonald Reagan and Margaret Thatcher’s agenda of tax cuts, deregulation, trade expansion and union busting emerged more than 40 years ago as a remedy for the economic struggles of the 1970s. But with success came elevation to dogma, as a generation of conservatives believed that “economic freedom” was all that capitalism required.Such blind faith inevitably fostered policy failures. Unnecessary tax cuts fuelled deficits rather than growth. Lax regulation invited a global financial crisis that led to a great recession. Free trade with China yielded massive imbalances and deindustrialisation. With worker power gutted, wages stagnated. Now this stale orthodoxy, unresponsive to the challenges of a new era, has begun fading into obscurity.The problem is not with this trajectory — there’s no shame in the intellectual exhaustion of a successful ideological project — but with the frustration for those left behind. A movement premised on the belief that victims of a changing economy could simply shift into new industries and jobs now faces that challenge itself.A statement of principles released last week by a veritable who’s who of the “old right” personifies the plight. The group includes leaders from business-aligned institutions like the American and Competitive Enterprise Institutes, editors from National Review, anti-tax crusader Grover Norquist, strategist Karl Rove, and commentator George Will. They have a brand, “Freedom Conservatism,” and even a logo. What they lack is anything to say.The statement is, like a classic episode of the sitcom Seinfeld, a show about nothing. Who, for instance, disagrees that “the President should only nominate policymakers and judges who are committed to upholding [constitutional] rights” or that “most individuals are happiest in loving families”?Principles are not policy proposals, but to be useful they must acknowledge trade-offs and give some direction when applied. Instead, the signatories deliver lofty paeans that invariably dissolve into vague mumbling. “The skyrocketing federal debt . . . is an existential threat to the future prosperity, liberty, and happiness of Americans.” Freedom conservatives thus “commit to building a constructive reform agenda that can restore America’s fiscal sustainability”, without giving the slightest indication of how to approach that task.The statement declares that “America is exceptional because anyone — from any corner of the earth — can seek to live in America and become an American”. But it calls only for immigration policy to be “rational” and “built on the rule of law”. Under the heading, “the shining city on a hill”, the statement says: “Americans are safest and freest in a peaceful world, led by the United States, in which other nations uphold individual liberty and the sovereignty of their neighbours.” This is the think-tank equivalent of ageing rockers singing “We Are the World”.The issues here are important ones, hotly debated on the American right. After decades spent pushing tax rates ever lower, does fiscal responsibility now demand increases? Should immigration be accelerated in pursuit of higher growth and lower prices, or restricted in those segments of the labour market where wages have lagged? Nations do not in fact always uphold liberty and sovereignty, so what best ensures the safety and freedom of Americans? Other conservatives are working on more robust responses to contemporary challenges that might actually address America’s problems. But there is little substantive thinking in freedom conservatism beyond a desire to appear thoughtful.They also, to be fair, have a desire to defeat “authoritarianism”, which the statement warns “is on the rise both at home and abroad”. From that vantage point the exercise is perhaps more understandable. Freedom conservatives are promoting an aesthetic — one that affirms their tribal loyalty and virtue. Market fundamentalism has little to say about the economic challenges of the 21st century but, by changing the conversation to one about creeping authoritarianism, the reciters of uncontroversial truisms can proclaim themselves brave truth-tellers. Insofar as they really just wish to remind us of their disdain for Donald Trump, they needn’t have used so many words. The irony is that, to the extent that a destabilised politics has opened the door to anti-democratic forces, the old right’s market-based dogmas bear a substantial portion of the blame for the destabilisation. And in their refusal to offer any coherent alternative to what they see as authoritarianism, freedom conservatives only make its rise more likely. More

Russia has bombed Ukraine’s port cities for a third consecutive night after warning that it would treat grain ships as military targets, a threat the EU said demonstrated Moscow’s “barbarian attitude” as it attacks food supplies. The strikes on the Black Sea port city of Odesa and nearby Mykolayiv early on Thursday killed at least two people while at least 23 were injured, Ukrainian authorities said.The three nights of air strikes targeting Ukraine’s ports came after Moscow said on Monday that it would withdraw from an agreement that has allowed grain to be exported by ship to global markets. Andriy Yermak, Ukrainian president Volodymyr Zelenskyy’s chief of staff, said they were “an attempt to destroy the ability to supply food to the countries of the global south”.Moscow’s move to pull out from the Black Sea Grain Initiative, which since last August has allowed 33mn tonnes of grain to be exported by sea, and its announcement that it would treat any inbound vessels as military threats, has driven up global food prices. Wheat prices have risen 12 per cent in the past week, based on the US benchmark hard red winter wheat for September delivery.Ukraine announced on Thursday that it would also treat Russian vessels as targets. In a formal notification, it said all maritime vessels in the Black Sea heading towards ports in Russian-occupied territory “can be considered by Ukraine as . . . carrying military cargo with all the associated risks”.Diplomatic conversations on grain have now shifted to “stopping [the] escalation”, according to a person briefed on the negotiations. Negotiators expect Turkish president Recep Tayyip Erdoğan, who has retained strong ties to Vladimir Putin even after Russia’s full-blown invasion of Ukraine, will need to do the “heavy lifting” in persuading his Russian counterpart to re-engage on the grain corridor, the person said. Erdoğan has said he expects to speak to Putin by phone this week, when he arrives back in Turkey after international engagements. Putin is also expected to visit Turkey in August. Josep Borrell, the EU’s foreign and defence chief, said 60,000 tonnes of grain had been burnt as a result of Russia bombing the storage facilities in Ukraine’s port infrastructure.“If this grain is not only stopped but [also] destroyed . . . this is going to create a huge food crisis in the world,” he said on Thursday. “It is a very grave situation. This consideration that any ship [is considered as] a war ship and so a target for the military activities of Russia, is a step further in order to continue preventing Ukraine from exporting their grains,” he said ahead of a meeting of EU foreign ministers that will discuss the growing crisis.He said the “massive air attacks” showed Russia’s “barbarian attitude which will be taken into consideration by the Council [of foreign ministers] today”.“The ministers will have to discuss how to proceed, but there is only one solution: to increase the military support to Ukraine. If they are being bombed, we have to provide anti-aerial capacities,” he added.Ukraine’s air force said that the attacks overnight on Wednesday and into Thursday “targeted ports, piers, residential buildings and trade networks” in the southern regions of the country.Before the war, Ukraine accounted for around a tenth of global wheat exports. The latest air strikes indicate Russia will not shy away from directly attacking wheat-export infrastructure and stocks, according to analysts. “Even if the [Black Sea Grain] deal were now to be renewed, it would not be as effective as it was before, due to the damage at the ports,” said Carlos Mera, agricultural analyst at Rabobank. While Ukraine does have alternative export routes for its grain, these involve significantly higher transportation costs. In response to the Russian attacks, Annalena Baerbock, Germany’s foreign minister, said that work was under way to ensure grain would not rot in Ukraine as a result.“Hundreds of thousands of people, not to say millions, urgently need the grain from Ukraine, which is why we are working with all our international partners so that the grain in Ukraine does not rot in silos in the next few weeks, but reaches the people of the world who urgently need it,” she added. Additional reporting by Adam Samson in Ankara More

The UK competition watchdog has warned supermarkets that it will examine any attempts to rebuild profit margins after the recent fall in inflation and called on the government to reform pricing policies to help consumers.The Competition and Markets Authority said in a report on Thursday that it had found high food price inflation was not being driven by weak retail competition, but noted that competitive pressure would be important as input costs fell. Official data this week showed that the rate of consumer price rises declined to 7.9 per cent in June from 8.7 per cent in May, a bigger than expected drop. The CMA said that now some grocery retailers’ input costs were starting to decline, it had detected signs during its probe that they were planning to begin rebuilding their profit margins. The watchdog said it would “monitor this carefully in the months ahead to ensure that people benefit from competitive prices as input costs fall”. Although food price inflation is at near all-time highs, evidence collected by the CMA suggested that it had not been driven up by competition issues in the sector, which registered a fall in operating profits in the past year. That decline was due to retailers’ costs increasing faster than revenues, it said, indicating they had not passed on rising costs in full to consumers.The CMA’s findings in part echo those of the Bank of England, which does not believe that “greedflation” — where companies increase prices beyond the extent that their own price pressures would demand — has played a significant role in the surge in food prices.However, the regulator said rules on unit pricing — which sets out the cost of weighed foodstuffs, helping shoppers compare prices — needed tightening at a “time when food and other grocery prices are rising”.In a study of 18 retailers, the CMA found compliance concerns relating to how some displayed unit pricing, but said these were in part the result of rules that allowed for inconsistencies in practices and left scope for interpretation. 

The watchdog cited as one example tea bags “being priced per 100 grams for some products and others being unit priced per each tea bag”, and found “missing or incorrectly calculated unit pricing information both in store and online”.The CMA urged the government to reform legislation around unit pricing and said it had written to companies that were not fully complying with current rules, warning them of enforcement action. In response, the government said it would consult on the law in this area, which is retained EU legislation, “to make it work for consumers”. A change in the regulation would mean unit prices would have to be clearly displayed in promotions, including loyalty card price per unit. More

ISTANBUL (Reuters) – Turkey’s central bank hiked its policy rate by 250 basis points to 17.5% on Thursday, continuing to reverse President Tayyip Erdogan’s low-rates policy, but the tightening fell short of expectations with inflation expected to rise sharply.It was the second meeting under new Governor Hafize Gaye Erkan, who is leading a change of course after the one-week repo rate was cut to 8.5% from 19% since 2021 despite soaring inflation.The bank said after its monetary policy committee meeting that it will continue to tighten monetary policy and expected further upwards pressure on inflation due to recent tax hikes.”Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” it said.The less-than-expected tightening comes despite expectations that inflation, which fell to 38.21% in June, will rise in the rest of the year. Economists are revising their year-end forecasts to as high as 60% due to the lira’s continued decline and various tax hikes in July.The bank had raised its key rate by 650 basis points to 15% in June and had been expected to hike to 20% this time, according to the median estimate in a Reuters poll. Economists expect the policy rate to rise further to 25% by year-end, still leaving real rates negative. They warn that Erdogan’s influence over the central bank limits how far it can go in tightening policy.The lira traded at 26.9345 against the dollar after the announcement, little changed from beforehand. It has weakened 30% so far this year. However, some markets have performed rather well since Erdogan’s re-election.The low-rates policy advocated by Erdogan sparked a currency crisis in late-2021, with the lira losing 44% that year. In 2022it weakened another 30% despite central bank efforts to counter forex demand by using its forex reserves.The lira depreciation has stoked inflation, sending it to a 24-year high of 85.5% in October last year. The continued decline this year is expected to feed into inflation in coming months given Turkey’s reliance on imports. More