Aurelia Butler

NEW YORK (Reuters) -Large leveraged bets by hedge funds in the U.S. Treasury market could “amplify stress” in global financial markets should rates markets move sharply, the Bank of England said in a report published on Wednesday.Hedge funds have taken record short positions in two- and five-year Treasury futures this year, suggesting that fund managers expect short-term interest rates to continue to move higher. The yield on the 2-year Treasury note fell 10 basis points on Wednesday after touching 5.12% last week, the highest since June 2007.Bond yields move in the opposite direction of prices. Hedge funds, meanwhile, disputed the notion that they are undermining the security of financial markets. “Our members understand the importance of strong capital markets and will continue to work with policymakers to enhance the resilience of the financial system,” the Managed Funds Association, a trade association representing hedge funds and the global alternative asset management industry, said in a statement. The release on Wednesday of U.S. data showing consumer prices on a year-on-year basis rose by their smallest amount in more than two years in June could convince market participants that inflation is ebbing and prompt a reduction in the record short positioning, said Benjamin Jeffery, vice president of rates strategy at BMO Capital Markets. “Really what the market is looking for is a little bit more clarity from the Fed and other global central banks as to where terminal rates will ultimately be, and that will ultimately translate into more conviction in the rates market,” he said.Overall, mutual funds and other institutional investors have been adding to their long positions in Treasuries this year, while hedge funds have been increasing their bets that they will fall, Bank of America (NYSE:BAC) strategists wrote in a July 3 note. “Asset managers continued to add to (Treasury) exposure with leveraged funds taking the other side,” the report noted. More

NEW YORK (Reuters) – Cleveland Federal Reserve President Loretta Mester said on Wednesday that the U.S. central bank’s new real-time money moving system is being designed in a way that should help ensure financial stability should bank stress arise. Mester acknowledged concerns that FedNow, a real-time, all-hours payment system the central bank is making available to banks, could exacerbate banking troubles by facilitating fast outflows from financial institutions, in effect super-charging a potential bank run. She said it will be up to the users of FedNow themselves to use transfer limits. “Banks have tools they could use to mitigate large outflows of deposits,” including limiting how much money can be moved over a given period, restricting who can use the system, and firms can determine which direction money can flow in real time, Mester said in a speech to the National Bureau of Economic Research Summer Institute. “Future releases of the FedNow Service may allow configurable transaction limits by customer type, if such limits are deemed useful,” she added. Mester said banks can also plan for how they can tap Fed emergency lending and private sources of liquidity, should they need it. “In addition to a bank being able to borrow from the Fed during the hours the discount window is open, a bank could use liquidity management transfers to replenish its master account balance from private funding sources on the weekend when the discount window is not accessible, which would help to mitigate the effects of deposit outflows on the health of the bank,” Mester said. Mester’s comments on mitigating the financial stability risks of the real-time payment system were rooted in events in the spring, when trouble at a limited number of banks spooked the global financial system, and were in part rooted in anxious customers moving funds from affected banks very quickly. Mester did not comment on monetary policy in her prepared remarks. More

“Overall economic activity increased slightly since late May,” the U.S. central bank said in its latest “Beige Book” compendium of surveys and interviews conducted across its 12 districts through June 30. Five districts reported some growth, five reported no change and two showed modest declines.”Overall economic expectations for the coming months generally continued to call for slow growth,” the Fed said.Meanwhile, the report largely dovetailed with other recent data suggesting upward pressure on prices was softening.”Prices increased at a modest pace overall, and several Districts noted some slowing in the pace of increase,” the report said, taking note of the differing extent to which businesses were able to pass their input cost increases to consumers.Looking ahead, “Price expectations were generally stable or lower over the next several months.”Employment was also reported to have continued increasing “modestly,” and contracts in a number of districts said wage increases, which have remained higher than Fed officials believe are consistent with low inflation, were returning toward pre-pandemic levels.MIXED PICTUREThe report was emblematic of an economy that is adjusting to the stiff interest rate increases the Fed has delivered, with impacts varying across regions and economic sectors.The Richmond Fed said manufacturers in its district cited rising interest rates’ impact on activity and a pullback in consumer spending as leading to drops in new orders and, in some cases, rising inventory levels.In upstate New York, meanwhile, auto dealers said new car sales have been strong as pent-up demand has been satisfied by ongoing improvements in inventory, although used car sales remained subdued.The report also flagged the ongoing challenges faced by the commercial real estate sector in the wake of the coronavirus pandemic. The switch to work-from-home arrangements for many office workers has upended the office space part of the real estate world, which could bring challenges for financial markets over time.The New York Fed noted, “commercial real estate markets remained mostly unchanged, with persistently high office vacancies,” and said, “conditions in the broad finance sector continued to deteriorate, though at a more subdued pace than in recent months.”The San Francisco Fed, which was at the epicenter of bank troubles this spring, noted in the report relative calm for the financial sector in its district. By contrast, conditions for small and mid-sized regional banks in the New York district declined, citing “lower loan demand across all loan segments, including refinancing. Credit standards tightened for all loan types, and loan spreads continued to narrow.” JULY MEETING AHEADThe report was released two weeks before the central bank is due to make its next interest rate decision, with financial markets widely expecting it to raise rates by a quarter of a percentage point after having opted against a hike last month. Policymakers said then that the hiatus – after raising rates at 10 straight meetings since March 2022 – would allow them more time to assess how the economy was evolving in the face of the aggressive measures they have taken so far to rein in inflation.Data since the June 13-14 meeting have shown an economy still growing despite expectations that the 5 percentage points of Fed rate increases over the last year or so would tip it into recession. Employers have continued to add more than 200,000 jobs a month, and while consumer outlays for goods have weakened, households continue to spend briskly on services.That said, the Beige Book roundup was published just hours after the latest reading on consumer prices presented the most benign view of inflation in more than two years. The Labor Department’s consumer price index rose 3% in June from a year earlier, slightly below economists’ forecasts and down by a full percentage point from the month before. It also marked the smallest annual increase since March 2021.That raised optimism that the Fed’s preferred measure of inflation – the personal consumption expenditures price index – would notch a comparable decline when it is reported at the end of July and bring it closer to the central bank’s 2% target. That figure, last reported at 3.8% for May, will not be published until after the Fed’s July 25-26 meeting.Projections submitted by policymakers last month signaled that their policy rate may rise by perhaps another half of a percentage point from the current 5.00%-5.25% range by the end of this year. The latest CPI data did little to dissuade financial markets from betting on a rate hike later this month, but it did support investors’ current base case that the Fed will stand pat after that point. More

WASHINGTON (Reuters) -U.S. President Joe Biden’s three Federal Reserve Board nominees, including his pick to fill the influential Fed vice chair post, advanced toward full Senate confirmation after winning backing from the Senate Banking Committee on Wednesday.Lawmakers led by the panel’s chair, Democrat Sherrod Brown, voted unanimously in support of elevating Philip Jefferson, a former economics professor appointed to the Fed just last year, to the central bank’s No. 2 position. The vote was 13 to 10, with Republican Mike Rounds joining all Democrats, in approving the nominations of World Bank economist Adriana Kugler to fill the only vacancy on the seven-seat Fed Board, and of Fed Governor Lisa Cook to a new term in that role. The tallies at the committee suggest none of the nominees are likely to face fierce partisan opposition when their nominations are considered by the closely divided Senate. Fed policymakers are locked in a battle with high inflation, and since last March have raised the key U.S. policy rate a full five percentage points to slow lending and investment so as to cool economic growth and persistently high post-pandemic price pressures. A government report out earlier Wednesday offered fresh evidence the Fed’s efforts are having the intended effect, with consumer prices rising just 3% last month from a year earlier. All three nominees in a hearing last month pledged to take their cues from economic data as they do their utmost to bring down inflation without too much of an increase in the U.S. unemployment rate, now at a low 3.6%. The nominations add a measure of diversity to the Fed Board whose members, along with the presidents of the 12 regional Fed banks, set borrowing costs for the world’s biggest economy. Kugler would be the first-ever Latina to serve on the Fed in its more than 100-year history. Cook and Jefferson are Black. “Because these nominees have all served the public during times of economic uncertainty, their judgment will add a unique perspective to the Board as they weigh in on how to make our bank systems resilient and not susceptible to future bank failures,” Brown said. More

Better late than never? The message the EU is sending Latin America and the Caribbean by hosting a summit at the start of next week of leaders from the Old and New Worlds is a decidedly mixed one. Optimists say the mere holding of the meeting counts as a win; critics point out that an eight-year gap since the last such gathering indicates serious neglect.For Europe, Latin America ought to matter. Almost as large as the US and China combined, the region contains nearly a quarter of the world’s forests, close to a third of its fresh water and a quarter of its cultivable land. Most of its 650mn people live under freely elected governments and they are among the better educated in the developing world, with a growing middle class.China has taken notice. While Europe has been distracted by domestic squabbles and crises elsewhere, Beijing has been steadily building trade, investment and influence in Latin America. Long before Brussels, it realised the region’s strategic importance for clean energy (Latin America has more than half the world’s lithium reserves and more than 40 per cent of its copper) and started snapping up mines. China has also developed a voracious appetite for Latin America’s exports of meat, soya and oil. As a result, China is now South America’s main trading partner and buys more from that continent than the EU and the US do combined. (Further north, free trade agreements tie Mexico and Central America’s trade much more closely to the US.)Latin America is not an easy partner. The region’s politics are turbulent and some nations, such as Cuba and Venezuela, are closely aligned with Moscow. It lacks a formal body equivalent to the African Union or Asean. The Community of Latin American and Caribbean States (Celac), the EU’s partner for next week’s summit, has no permanent staff — so preparations have been channelled through the pro tempore presidency of Saint Vincent and the Grenadines, an island state of 110,000.Those difficulties have not put off the Chinese, who are locked in an increasingly fierce competition with the US for trade, investment and influence in Latin America. Next to them, Europe risks becoming sidelined. Hence the coming summit offers an important opportunity to relaunch Brussels’ relationship with the region. This year’s Spanish presidency of the EU provides additional impetus. The challenge is to institutionalise closer co-operation and turn good intentions into tangible results.Brussels is hoping to woo the Latin Americans with promises of investment in green energy, infrastructure and social projects, though it is unclear how much new money is available. Closer co-operation on digital technology is also on offer. Officials stress the two regions’ shared democratic values and common cultural heritage. They tout the prospect of twice-yearly leaders’ summits.But for the relationship to flourish, it needs a strong commercial basis. The EU remains the region’s biggest foreign investor and a major trade partner. The litmus test now is simple: Europe must ratify its trade deal with the South American Mercosur bloc. Twenty years in the making, the Mercosur pact still awaits final approval with some EU member states demanding additional environmental safeguards — which to Latin American eyes look like thinly disguised agricultural protectionism.If the EU wants to show it is serious about its relationship with Latin America, it should find a way to resolve any remaining environmental concerns, in a way that does not require renegotiating the Mercosur pact — and ratify it quickly. That would send a stronger signal than any number of summits. More

Easing US inflation has raised the prospects that the interest rate increase expected from the Federal Reserve later this month will be the last of its historic monetary tightening campaign.The lower-than-expected increase in prices reported by the Bureau of Labor Statistics on Wednesday showed a welcome reprieve in sources of inflation that had proven to be stubbornly persistent. “Core” inflation, which strips out volatile food and energy prices, registered a monthly gain of only 0.2 per cent in June, the smallest increase in nearly two years. Annual headline inflation is now running at 3 per cent, its slowest pace since March 2021.Despite the consumer price index data, the Fed is still widely expected to plough ahead with another quarter-point interest rate increase at its next policy meeting later this month, after forgoing an increase last month. But economists now see dimming prospects the central bank will need to raise borrowing costs beyond that point.“Disinflation is going to kick into a bit higher gear in the second half of the year,” said Andrew Schneider, US economist at BNP Paribas. He expects the July rate rise to be the Fed’s last of this tightening cycle. That translates to the federal funds rate topping out at 5.25-5.5 per cent, a level he forecasts the central bank to maintain at least through the early part of next year.

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According to fed funds futures markets following the June inflation data, traders are also now increasingly convinced the central bank will call time on interest rate increases after its gathering this month.Ceasing to raise rates beyond July would mark a departure from the projections published by the Fed in June, which showed that most of its policymakers forecast two more quarter-point rate rises this year. Jay Powell, the chair, last month described that trajectory as “a pretty good guess of what will happen”, but stressed the Fed would closely monitor incoming data as it determined its next policy steps.Lael Brainard, the director of the National Economic Council at the White House and a former Fed vice-chair, was upbeat about the inflation data and the wider US economy. “The economy is defying predictions that inflation would not fall absent significant job destruction,” she told the Economic Club of New York on Wednesday. Annual CPI growth had eased for 12 months in a row, was close to the average before the financial crisis, and was the lowest among G7 nations, she added. Meanwhile, the labour market was “in a better balance” than it had been earlier in the year, she said. For Omair Sharif, president of forecasting group Inflation Insights, what will give the Fed “ammo” to forgo a rate rise in September and beyond is not only that the more moderate monthly pace of core inflation looks set to be sustained but also that price rises are easing across more spending categories in goods and services. Sharif said core inflation in July, August and September was likely to average just 0.2 per cent in each month.“If that forecast comes to fruition, then the Fed is getting exactly what they wanted to see, [which is] a string of readings showing you that the core numbers are really coming off and the breadth of disinflation has really improved,” he said.

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One complicating factor is that the policy-setting Federal Open Market Committee remains divided, with more hawkish voting members such as Lorie Logan of the Dallas Fed and governor Christopher Waller still chiefly concerned about upside risks to inflation. Logan recently admitted she would have supported a rate rise in June in light of economic data she described as “pretty hot” and signs that the housing market has “bottomed out”.

Diana Amoa, chief investment officer at Kirkoswald, said she expected the Fed to keep all options open following its July meeting, citing lingering concerns about inflationary pressures amid a strong labour market and officials’ caution on stoking market expectations that they will soon slash interest rates.“They can’t really be too explicit that they’ve come to the end of the hiking cycle simply because markets struggle with pricing in rates on hold for a prolonged period of time,” she said. “They will want to keep being data dependent and continue signalling that they need inflation to be at target.”Additional reporting by James Politi in Washington More

Today’s top storiesMicrosoft and Activision Blizzard are exploring a restructured version of their proposed $75bn tie-up in a move that could trigger a fresh UK antitrust probe. A judge yesterday denied a request from the US regulator to block the deal, arguing it had failed to show it harmed competition. Ukraine’s key western allies agreed long-term security commitments aimed at turning the country into a military fortress to repel Russian aggression. The pledge from G7 countries includes supplies of weapons, cash and other assistance.Bank of England stress tests found the UK’s top banks “would continue to be resilient” if the economic environment worsened and were well positioned to support households and businesses through a period of rising interest rates. The cost of two-year fixed-rate mortgages in the UK has surpassed highs reached in the wake of last autumn’s “mini” Budget.For up-to-the-minute news updates, visit our live blogGood evening.US inflation in June fell to its slowest rate since March 2021, in the latest sign that the Federal Reserve’s programme of interest rate rises is bearing fruit.CPI dropped more than expected from an annual 4 per cent to 3 per cent, with a smaller dip in the “core” measure which strips out volatile food and energy costs from 5.3 per cent to 4.8 per cent.The drop tallies with last week’s jobs data which showed growth slowing more than expected, albeit with wage growth remaining stubbornly high and unemployment still at a historically low level.The news pushed US stocks and bond prices higher. The yield (which moves inversely to prices) on the two-year Treasury note, which tracks interest rate expectations, fell to 4.74 per cent, a two-week low. Much of the drop in the headline measure is due to the high number from last June falling out of the annual comparison, while the Fed is also wary that inflation has slowed before only to pick up again. Markets consequently still expect the Fed to raise rates by 0.25 percentage points at its next meeting but are more confident the end of rate rises is in sight.

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John Williams, the New York Fed president, told the FT yesterday that getting inflation back down to the 2 per cent target necessitated not only reducing further the demand for labour but also some increase in unemployment. He did however think the US would now avoid recession.In the meantime, new data shows the effects of high inflation and interest rates on US households. Mortgage costs today topped 7 per cent for the first time since early November, while Deloitte yesterday forecast that the average family would spend 10 per cent less this summer on back-to-school supplies, traditionally seen as a pointer to what households spend in the peak retail season from November to January. Three in 10 of the parents Deloitte surveyed reported being in a worse financial situation than last year, and half said they expected the economy to weaken in the next six months. The end of a pandemic-era moratorium on student loan repayments is also likely to dampen consumption and savings.The bigger picture on where the US is heading is the focus of a new FT series on how President Joe Biden is rewriting the rules of the global economy and embracing “big government” after decades of laissez-faire.Last year’s Inflation Reduction Act and Chips and Science Act, alongside 2021’s Infrastructure Investment and Jobs Act, offer hundreds of billions of dollars of subsidies, grants and loans to spark new investment, particular on the energy transition, encouraging similar moves in Europe and elsewhere. Some moves are already beginning to bear fruit: tax credits have for example contributed to a surge in electric vehicle sales. The push to support domestic manufacturing is almost certainly here to stay, despite criticisms from Biden’s opponents. “I don’t see a lot of politicians walking into a community and saying, ‘I know we like that battery factory where you’ve all got jobs but I’m going to take away the subsidies and send those jobs overseas’,” said one adviser. “That’s not a message that resonates with anyone.”Need to know: UK and Europe economyPay in the UK grew faster than expected in the three months to May, adding to pressure on the Bank of England as it tries to restrain inflation. BoE governor Andrew Bailey and chancellor Jeremy Hunt had joined forces to demand wage restraint the day before the new data. Hunt has also ordered ministers to find £2bn in savings for public sector pay rises.Rising water bills are set to pile further pressure on UK households: companies plan to increase charges by up to 49 per cent to pay for much-needed infrastructure upgrades. Troubled Thames Water co-chief Cathryn Ross came under fire in parliament over her former role as head of the water watchdog.Hunt’s “Mansion House reforms” which aim to channel pension savings into investment in high-growth companies would only have a small effect on UK growth, the FT editorial board concluded.Turkey’s backing of Sweden’s bid to join Nato is part of its efforts to ease tensions and unblock trade with the west and begin luring back foreign investors who have fled during its elongated economic crisis.Need to know: Global economyThe gap in government borrowing costs between emerging and developed markets has hit its lowest level since 2007, as the former plan interest rate cuts and the latter plan further tightening. Said one investment officer: “Emerging markets have done a good job at navigating this inflation shock and I’m not sure you could say the same about some of the western central banks,” Chief economics commentator Martin Wolf says developing countries have good reasons to distrust the west and its hypocrisy, whether over selective support for human rights and international law or failure to fully acknowledge its historic responsibility for climate change.

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More than 130 nations extended a controversial ban on national taxes aimed at Big Tech as they attempted to put together a co-ordinated global fix that would update the international tax system for the digital age.Cash is no longer king in Japan. The number of coins circulating has plunged over the past 18 months, sparked by a combination of the pandemic, banking fees, inflation, and the advance of cashless payment technology.Kenyan president William Ruto is facing mounting criticism for slashing subsidies and implementing austerity measures as his government tries to find enough cash to meet creditors’ demands and avoid the defaults and forced restructurings of African peers such as Zambia and Ghana.Need to know: businessThe EU hit Illumina with a record €432mn fine after the world’s largest gene sequencing company completed an $8bn acquisition without the approval of Brussels, violating what regulators said was the “cornerstone” of their authorityAmazon became the first US company to challenge the EU’s proposed rules forcing Big Tech to police content online, arguing it is being unfairly targeted. The move will be followed closely by the 18 other companies, including Twitter and TikTok, that the EU has said fall within the scope of the law.Cryptocurrency transactions are illegal on mainland China, but not in Hong Kong, where the city is seeking to become a digital assets trading hub, with lightly regulated bricks-and-mortar crypto shops scattered throughout the city’s tourism and shopping districts.Our latest Tech Tonic podcast focuses on the impact of social media on young users’ mental health and how regulation might affect the industry’s business model. The World of WorkThe OECD called on its member states to prepare for the negative side-effects from the mass adoption of artificial intelligence in the workplace. Potential benefits, such as higher job satisfaction and productivity gains, had to be weighed against downsides, particularly for traditionally highly-skilled occupations.If AI does herald a future where machines replace human labour, what might we do instead? Columnist Sarah O’Connor says it’s time to relearn the lost art of leisure.Good chit-chat skills are a key tool of self-promotion in the office. This week’s Working It podcast features a masterclass in schmoozing from Matt Abrahams, author of the forthcoming book Think Faster, Talk Smarter. Healthcare workers have been sharing their experiences of working for the NHS with the FT.Some good newsEmpty office buildings in US cities are being turned into vertical farms. More

Inflation has been the hot economic topic of the last two years, but it is a misleading measure when tracking the pain higher prices are inflicting on households. US annual inflation declined to 3 per cent in June, down from 4 per cent in the previous month and the lowest since March 2021, according to data published on Wednesday. Yet, US consumers are still facing prices 19 per cent higher than in the average of 2019. The headline inflation rate measures the difference in prices with the same month last year. But consumers tend to compare prices to “normal” levels — and things were not “normal” at all last year. In 2022, food and energy prices were pushed up to historically high levels by Russia’s invasion of Ukraine. This is a flattening out the inflation rate, but leaves real prices still well above pre-surge levels.So which countries have been hit hardest? We’ve created a chart to show that this is the case in pretty much all richest economies (you can search the country you want in the box):

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A fixations on annual price comparison is also tricksy because countries have seen energy prices soar at different times due to varying energy contracts and differences in government’s support packages. Spain, for example, saw a quicker rise in consumer prices than Germany or France after the start of the war. This means that the latest inflation figure is up to three times higher in the eurozone largest economies than in the Iberian country. But the accumulated effect since 2019 is similar across all major eurozone economies. The UK stands out for both particularly high annual and cumulative inflation. Not only British inflation is higher than in any other G7 country — at 8.7 per cent in May — but prices are up 22 per cent compared with 2019, the highest accumulated impact of the group. Sure, the inflationary environment will lead to bumper pay increases. But inflation is outstripping wages in 30 countries tracked by the OECD with an average fall in real wages of about 4 per cent across the OECD in the first quarter of 2023. For households, this is effectively a permanent hit to their spending power.If this isn’t all grim enough, the Bank of England has a tool that lets you play with the cumulative misery effect of rising prices.It shows that goods and services costing £100 in 2019, had risen to £122 in May. This compares with an increase of less than £8 In the four years to 2019.There is no doubt that decline in the headline rate of inflation is a step in the right direction for policymakers, but “it far from alleviates these inflationary pressures,” says Victoria Scholar, head of investment at Interactive Investor.“Households are still struggling from the sharp increase in the cost-of-living and businesses continue to deal with a squeezed margins from higher costs.”  More