Aurelia Butler

Investors in German debt are increasing their bets that the European Central Bank’s interest rate rises will push the European economy into a deeper downturn, as a closely watched recession indicator hit its most extreme level since 1992. The gap between 2-year and 10-year German bond yields, which serve as the eurozone’s de facto borrowing benchmark, reached a 31-year low on Tuesday of minus 87 basis points, as markets repriced for higher interest rates despite recent signs that the eurozone economy is cooling.The differential widened after Christine Lagarde, president of the European Central Bank, on Tuesday called for “persistent” high interest rates to kill off a second phase of inflation fuelled by rising labour costs. When longer-term yields sink lower than shorter-term counterparts, markets normally have increasing conviction of economic trouble ahead that will prompt rate cuts in the future. In the US, the inversion of the Treasury yield curve is closely watched because of its record in predicting recessions.“The message that is coming is pretty clear” said Lyn Graham Taylor, a senior rates strategist at Rabobank. “The market believes that the ECB will be determined to stick with higher rates and markedly slow the economy by doing so.”Germany’s yield curve has become increasingly inverted as more hawkish messaging from the central bank convinces traders to bet on rates staying higher for longer. Swaps markets are now pricing in a peak ECB deposit rate of 3.9 per cent by December, compared with projections of a peak of 3.7 per cent in October before its rate-setting meeting on June 15. The yield on 2-year German debt, which is sensitive to interest rates expectations, rose 0.07 percentage points to 3.15 per cent on Tuesday, while 10-year yields rose 0.04 percentage points to 2.34 per cent. Expectation for higher rates comes as economic clouds loom over the eurozone. The bloc is already in a “technical recession”, with gross domestic product contracting by 0.1 percentage points in each of the past two quarters. Lagarde reiterated at the ECB’s annual conference on Tuesday that the central bank would keep interest rates “sufficiently restrictive” for “as long as necessary” to prevent a wage price spiral. The ECB’s latest projections show it expects wages to grow by 14 per cent between now and the end of 2025. Eurozone annual inflation is expected to drop to 5.6 per cent in June when fresh price data is released on Friday — still well above the ECB’s 2 per cent target but down from a peak of 10.6 per cent in October as energy and food prices continue to slow.George Buckley, chief European economist at Nomura, said the deepening yield curve inversion could be showing that Europe has suffered a series of shocks that have yet to feed through to the wider economy. “Rewind nine months ago, we were standing on the edge of an [economic] abyss, the outlook was really awful,” he said. “The market could be saying the recession that hasn’t really happened is yet to happen and will hit,” he said.However, he added that another interpretation is that price momentum is already slowing substantially, especially when you look at producer price increases and a slowdown in manufacturing. The benchmark purchasing managers’ index, a measure of activity in manufacturing and services, for example, fell to a five-month low of 50.3 last month, below the 52.5 forecast by economists. If prices continue to fall and wages remain strong, Buckley said it is possible that the ECB could bring rates down without triggering a deeper recession. He added that this is the base case of many economists, who forecast a lowering of inflation and return to economic growth and lower interest rates. “You could not make up a more perfect scenario than that, and it makes me worry that we won’t get it,” he said. More

When the US talks, the world listens. It is, after all, the world’s most influential power. This is not due only to its size and wealth, but also to the potency of its alliances and its central role in creating the institutions and principles of today’s order. It played the decisive part in creating the Bretton Woods institutions, the General Agreement on Tariffs and Trade and the World Trade Organization. It promoted eight successive rounds of multilateral trade negotiations. It won the cold war against the Soviet Union. And from the early 1980s, it pushed for a deep and broad opening of the world economy, welcoming China into the WTO in 2001. Whether we like it or not, we all live in the world the US has made.Now, suffering from buyer’s remorse, it has decided to remake it. Janet Yellen, US Treasury secretary, outlined the economic aspects of the new US vision in a speech delivered on April 20. Seven days later, Jake Sullivan, the national security adviser to Joe Biden, gave an even broader, albeit complementary, speech on “Renewing American Economic Leadership”. It represented a repudiation of past policy. It could just be seen as a return to Alexander Hamilton’s interventionism. Yet, this time, the agenda is not for a nascent country, but for the world’s dominant power.What was Sullivan saying? And what might it mean for the US and the world?The starting point is domestic. Thus, a “shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class. A pandemic exposed the fragility of our supply chains. A changing climate threatened lives and livelihood. Russia’s invasion of Ukraine underscored the risk of over-dependence.” More narrowly, the administration sees itself as confronting four huge challenges: the hollowing out of the industrial base; the rise of a geopolitical and security competitor; the accelerating climate crisis; and the impact of rising inequality on democracy itself.In a key phrase, the response is to be “a foreign policy for the middle class”. What, then, is this supposed to mean? First, a “modern American industrial strategy”, which supports sectors deemed “foundational to economic growth” and also “strategic from a national security perspective”. Second, co-operation “with our partners to ensure they are building capacity, resilience, and inclusiveness, too”. Third, “moving beyond traditional trade deals to innovative new international economic partnerships focused on the core challenges of our time”. This includes creating diversified and resilient supply chains, mobilising public and private investment for “the clean energy transition”, ensuring “trust, safety, and openness in our digital infrastructure”, stopping a race to the bottom in corporate taxation, enhancing protections for labour and the environment and tackling corruption.Fourth, “mobilising trillions in investment into emerging economies”. Fifth, a plan to protect “foundational technologies with a small yard and high fence”. Thus: “We’ve implemented carefully tailored restrictions on the most advanced semiconductor technology exports to China. Those restrictions are premised on straightforward national security concerns. Key allies and partners have followed suit.” It also includes “enhancing the screening of foreign investments in critical areas relevant to national security”. These, Sullivan insists, are “tailored measures”, not a “technology blockade”.This is indeed a fundamental shift in the goals and means of US economic policy. But both the depth and the durability of these shifts depend on how far it reflects a new American consensus. Where it is nationalist and protectionist, it already surely does. Where it downplays the priorities of business and the role of markets, it could also prove durable. Donald Trump’s populist Republicans could surely accept almost all of this.Do the new objectives make sense? In some fundamental respects, yes. Having just published a book called The Crisis of Democratic Capitalism, I agree that the anger and disappointment of what Americans call “the middle class” is a dangerous reality. I agree, too, that climate is an important priority, supply chains need to be resilient and national security is a legitimate concern in trade policy. Russia has surely taught us that.Yet will it actually work to make Americans and the rest of us better off and safer? One doubt concerns the scale. Sullivan states, for example, that it is “estimated that the total public capital and private investment from President Biden’s agenda will amount to some $3.5tn over the next decade”. That is at most 1.4 per cent of gross domestic product over that period, which is far too little to be transformative. Another is that it is hard to make industrial policy work, especially for economies on the technology frontier. Another concerns how disruptive this new approach will be for economic and political relations with the rest of the world, notably (but not only) with China, especially on trade.In particular, it is going to be hard to distinguish purely commercial technologies from ones with security implications. It is also going to be tricky to distinguish US friends from foes, as global reactions to Russia’s invasion of Ukraine shows. Not least, it is going to be hard to persuade China that this is not the beginning of an economic war upon it. Yet China already holds many cards in such a fight, as Harvard’s Graham Allison has noted for the case of solar panels. Rare earths are another such case.Above all, the new approach will only work if it leads to a more prosperous, peaceful and stable world. If it leads to a fractured world, environmental failure, or outright conflict, it will fail in its own terms. Its authors need to be careful in calibrating the execution of their new strategy. It could backfire [email protected] Martin Wolf with myFT and on Twitter More

The decision is the latest multi-million dollar fine in Moscow’s increasingly assertive campaign against foreign tech companies. Google was fined 2 billion roubles in February 2022. The Federal Antimonopoly Service (FAS) at the time said Google’s YouTube had a “non-transparent, biased and unpredictable” approach to “suspending and blocking users’ accounts and content”, the TASS news agency reported. Google ultimately appealed that decision. The U.S. company did not immediately respond to an emailed request for comment on Tuesday. The FAS said the previous fine it imposed on Google had been doubled due to non-payment. “The company must additionally pay more than 4 billion roubles to the Russian Federation’s budget,” the FAS concluded. YouTube, which has blocked Russian state-funded media globally, is under heavy pressure from Russian state bodies and politicians, but Moscow has stopped short of blocking it, a step taken against the likes of Twitter and Meta’s Facebook (NASDAQ:META) and Instagram. Google stopped selling online advertising in Russia in March 2022 after Russia’s invasion of Ukraine but has kept some free services available. Its Russian subsidiary officially filed for bankruptcy after authorities seized its bank account, making it impossible to pay staff and vendors.Google must pay the fine within 60 days, TASS reported.($1 = 85.0250 roubles) More