Aurelia Butler

Eurozone inflation fell more than expected to 5.5 per cent in June, its lowest rate since the start of last year, but any relief for policymakers was tempered by a slight rebound in core consumer price growth.Annual inflation in the single currency zone was down from 6.1 per cent in May, the EU’s statistical office said on Friday. It was also below the 5.6 per cent forecast in a poll of economists by Reuters.But core inflation, which excludes energy and food, was 5.4 per cent, up from 5.3 per cent in May. This was a setback for the European Central Bank, which has said it will keep raising interest rates until underlying price pressures are clearly falling towards its 2 per cent target.“There is nothing in this release that would deter the ECB from raising interest rates by another 25 basis points at the meeting in July,” said Jack Allen-Reynolds, an economist at research group Capital Economics, adding that there was “a good chance of another hike” in September.European stocks rallied as investors hoped that interest rates in the bloc would soon hit their peak. The pan-European Stoxx 600 added 0.8 per cent, while France’s Cac 40 rose 0.9 per cent and Germany’s Dax advanced 1.1 per cent. The euro fell against the dollar after the release of the inflation data but partly recovered to trade down 0.1 per cent at $1.085.Eurozone energy prices fell 5.6 per cent in the year to June, a steeper fall than their 1.8 per cent decline in May. There was also a slowdown in food, alcohol and tobacco inflation to 12.5 per cent and industrial goods inflation dipped to 5.5 per cent.But these were partly offset by an acceleration in services prices to 5.4 per cent, a record high for the eurozone. The jump reflected a surge in German transport prices after Berlin increased ticket costs for buses and trains from the heavily subsidised levels of last summer.“The core rate rose . . .[and] will remain sticky over the summer, but all other components are on a clear softening trend,” said Melanie Debono, an economist at research group Pantheon Macroeconomics.

Inflation fell in 18 of the 20 eurozone countries, rising only in Germany and staying flat in Croatia. Price growth fell below the ECB’s 2 per cent target in Spain, Belgium and Luxembourg for the first time in over a year.ECB president Christine Lagarde told its annual conference this week in Sintra, Portugal, that it “cannot declare victory yet” in the fight to tame inflation. The bank raised its forecasts for price growth early this month to reflect an expected 14 per cent increase in eurozone wages by 2025, which it thinks may push up prices in the labour-intensive services sector.“We will face several years of rising nominal wages, with unit labour cost pressures exacerbated by subdued productivity growth,” Lagarde said.The eurozone labour market continued to tighten in May, when jobless numbers in the bloc fell by 57,000 from the previous month, while the unemployment rate remained at an all-time low of 6.5 per cent, Eurostat said on Friday.Inflation in the eurozone has fallen more slowly than in the US, where it was 4 per cent in May, but faster than in the UK, where it was stuck at 8.7 per cent last month.Several members of the ECB’s rate-setting governing council told the Financial Times that recent criticism of the Bank of England over its struggle to bring down inflation had served as a cautionary tale. More

Manufacturing activity has contracted in China for the third consecutive month, adding to pressure on Beijing’s policymakers to tackle a slowdown across the world’s second-largest economy.The official manufacturing purchasing managers’ index was 49 in June, slightly up from 48.8 in May, but still showing a month-on-month contraction in activity.While China’s economy is growing compared with last year, when the government’s three-year crusade against Covid-19 reached its most intense period before being abruptly abandoned, the pace of its recovery has lost steam in recent months.The country’s vast property sector, which accounts for more than a quarter of activity, is in a prolonged slowdown, while youth unemployment has surpassed 20 per cent and trade is falling against a weaker global economic backdrop. Exports shrank 7.5 per cent year on year in May.Friday’s official PMI data showed the services sector, which came under sustained pressure during Covid restrictions, is growing on a month-on-month basis, with a reading of 53.2 in June. But it grew at a slower pace compared with May’s reading of 54.5 and missed analysts’ expectations.Beijing is targeting gross domestic product growth of 5 per cent this year, its lowest official target in decades after growth was just 3 per cent last year.Premier Li Qiang said at a World Economic Forum event in Tianjin this week that growth in the second quarter would surpass the 4.5 per cent recorded in the first three months of the year. “We are on track to hit the growth target we set for the year,” Li said.“We have the ability to achieve steady growth of the Chinese economy,” he said in comments that also took aim at attempts by the US and Europe to “de-risk” links to China at a time of deteriorating geopolitical relations.

The People’s Bank of China, the country’s central bank, this month cut interest rates, but authorities have not unleashed any major fiscal or monetary stimulus measures in response to months of disappointing economic data.Economists widely anticipate a clutch of additional measures, from spending on infrastructure to potential relaxations of property purchasing restrictions.Analysts at Citi noted that a construction PMI figure of 55.7, while indicating expansion in the sector, was at its lowest level this year and reflected wider property weakness.They added that an expected meeting of the politburo, the Chinese Communist party’s top policymaking body, in July was likely to be “a window to discuss a more comprehensive package”. More

Central banks may need longer to lower inflation and a fresh bout of financial turbulence could make the process even more protracted, the International Monetary Fund warns.Stability has returned since March’s banks turmoil, but warning lights are flashing elsewhere and tensions in Russia provide another possible trigger for stress. Here is a look at some of the pressure points.1/ REAL ESTATE: PART 1Just as hopes for an end to Federal Reserve rate hikes boost the U.S. housing market, European residential property is suffering under rate hikes.UK rates have jumped to 5% from 0.25% two years ago and 2.4 million homeowners will roll off cheap fixed rate mortgages onto much higher rates by end-2024, banking trade body UK Finance estimates. Sweden, where rates rose again on Thursday, is one to watch with most homeowners’ mortgages moving in lockstep with rates.London Business School economics professor Richard Portes said, euro zone housing markets appear to be “freezing up” as transactions and prices fall. “You can expect worse in 2024 when the full effects of rate hikes come forth,” he said.2/ REAL ESTATE: PART 2Having taken advantage of the low rates era to borrow aplenty and buy up property assets, the commercial real estate sector is grappling with higher debt refinancing costs as rates rise. “The single most important thing is interest rates. But not just interest rates; what it is equally important is the predictability of rates,” said Thomas Mundy, EMEA head of capital markets strategy at real estate firm JLL.”If we were settled on an interest rate, real estate prices could adjust. But at the moment, the lag in the adjustment to real estate pricing is creating an uncertain environment.”In Sweden, high debts, rising rates and a wilting economy has produced a toxic cocktail for commercial property.And HSBC’s decision to leave London’s Canary Wharf for a smaller office in the City highlights an office downsizing trend rocking commercial real estate markets.3/ BANK ASSETSBanks remain in focus as credit conditions tighten.”There is no place to hide from these tighter financial conditions. Banks feel the pressure of every central bank,” said Lombard Odier Investment Managers’ head of macro Florian Ielpo. Banks hold two types of balance sheet assets: those meant for liquidity and those that work like savings meant to earn additional value. Rising rates have pushed many of these assets 10%-15% lower than their purchase price, Ielpo said. Should banks need to sell them, unrealised losses would emerge. Most at risk are banks’ real estate assets. Federal Reserve chief Jerome Powell says the Fed is monitoring banks “very carefully” to address potential vulnerabilities.Lending standards for the average household are also a concern. Ielpo expects consumers will stop paying loan payments in the third and fourth quarters.”This will be the Achilles heel of the banking sector,” he added. 4/ DEFAULT Rising rates are taking a toll on corporates as the cost of their debt balloons.S&P expects default rates for European sub-investment grade companies to rise to 3.6% in March 2024 from 2.8% this March.Markus Allenspach, head of fixed income research at Julius Baer, notes there were as many defaults globally in the first five months of 2023 as there were during 2022.French retailer Casino is in debt restructuring talks with its creditors. Sweden’s SBB has been fighting for survival since its shares plunged in May on concern over its financial position.”We are starting to see distress building up in the corporate space, especially at the low end where you have most floating rate debt,” said S&P Global (NYSE:SPGI) Ratings’ Nick Kraemer.5/ RUSSIA AFTER WAGER MUTINYThe Wagner mutiny, the gravest threat to Russia’s Vladimir Putin’s rule to date, might have been aborted, but will long reverberate. Any changes to Russia’s standing – or to the momentum behind the war in Ukraine – could be felt near and far. There’s the immediate fallout for commodity markets from crude oil to grains, the most sensitive to domestic changes in Russia. And knock on effects, from inflation pressures to risk aversion in case of a major escalation, could have far reaching consequences for countries and corporates already feeling the heat from rising rates. “Putin can no longer claim to be the guarantor of Russian stability and you don’t get that kind of fragmentation and challenges to the system in a stable and popular regime,” said Tina Fordham, geopolitical strategist and founder of Fordham Global Foresight. More

TOKYO (Reuters) -Core consumer prices in Japan’s capital rose 3.2% in June from a year earlier, exceeding the central bank’s 2% target for the 13th straight month in a sign of broadening inflationary pressure, government data showed on Friday.Separate data showed factory output fell more than expected in May, underscoring risks to the export-reliant economy as aggressive U.S. interest rate hikes and soft Chinese growth cloud the outlook for global demand.The inflation figures for Tokyo, which is seen as a leading indicator of nationwide trends, will likely keep alive expectations the Bank of Japan (BOJ) will phase out its massive stimulus this year.The increase in the Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, followed a 3.1% gain in May and compared with a median market forecast for a 3.3% rise.An index that strips away both fresh food and fuel costs rose 3.8% in June from a year earlier after a 3.9% gain in May, the data showed.Japan’s economy is finally recovering from the scars of the COVID-19 pandemic, though risks of a global slowdown and rising food prices hang over the outlook for exports and consumption.With inflation already exceeding its target, markets are rife with speculation the BOJ could soon phase out ultra-loose monetary policy under new governor Kazuo Ueda.Ueda has repeatedly said inflation will slow in coming months as cost-push factors dissipate, and that the BOJ will maintain ultra-loose policy until stronger wage growth ensures Japan can sustainably see inflation hit its 2% target.But he told a seminar on Wednesday the BOJ would see good reason to shift monetary policy if it became “reasonably sure” that inflation would accelerate into 2024 after a period of moderation. More