Aurelia Butler

LISBON (Reuters) -Declines in the international market prices of raw materials, energy and foods will need to start making their mark on consumer goods or interest rates will have to be raised further, ECB Governing Council member Mario Centeno said on Friday.”The overwhelming majority of inflationary shocks, if not all, have now reversed,” he told a news conference in Lisbon, adding that the full effects of the reversal had yet to reach final consumers.He said that if economic agents fail to transmit this drop in prices of raw materials, energy and food to consumers, “it will put additional pressure on monetary policy and it will prolong the period of interest rate hikes.”The European Central Bank raised euro zone borrowing costs to their highest level in 22 years on Thursday and said stubbornly high inflation all but guaranteed another move next month and likely beyond that too. While inflation remains high, Centeno said, interest rates will remain in “restrictive territory”, adding that he expected this to continue for some time after the summer.Centeno said that, although “markets anticipate a rate hike in July, the ECB will make its decisions meeting by meeting, based on data”.He said that “the next meetings will be crucial” and the ECB should analyse the evolution of inflation in June and July, indicators of financial stability and “see what is happening to the economy of the euro zone, which is in technical recession and has stagnated”.”Monetary policy takes time to have effect”, he said, adding that the ECB has to “be careful” in monitoring how the economy is adjusting. “Anticipating the results of the meetings is not a good exercise … all statements about the future of interest rates must respect the rule of silence and be based on facts,” he said. More

BEIJING (Reuters) -China’s cabinet met on Friday to discuss measures to spur growth in the economy, state media reported, pledging to roll out policy steps in a timely way amid signs that a post-COVID recovery is fading.”We must take more effective measures to enhance the momentum of development, optimise the economic structure and promote the sustained recovery of the economy,” state media said, citing a regular cabinet meeting chaired by Premier Li Qiang.Officials at the meeting pledged to roll out policies in a timely manner when the conditions are right and to take more forceful measures in response to changes in the economic situation, the report said.While economic growth beat expectations in the first quarter, analysts are now downgrading their forecasts for the rest of the year, as factory output slows amid weak external and domestic demand. “A slowdown in global trade and investment has had a direct impact on China’s economic recovery,” the report added. Several major banks have cut their 2023 gross domestic product (GDP) growth forecasts for China after May industrial output and retail sales data missed forecasts and indicated that Beijing will need to do more to shore up a shaky post-pandemic recovery.The government has set a modest GDP growth target of about 5% for this year after badly missing its 2022 goal.The meeting also passed plans to step up financing support for technology companies and draft rules for supervising private funds. Sources involved in policy discussions told Reuters that China will roll out more stimulus measures to support the economy, but concerns over debt and capital flight will keep measures aimed at shoring up weak demand in the consumer and private sectors. On Friday, policymakers agreed to introduce measures to expedite the introduction of specific policies to promote the development of venture capital funds, provide more support to technology startups and to introduce measures against illegal financing, state media said. More

TOKYO (Reuters) -The Bank of Japan will scrutinise the effects and side-effects of its unconventional monetary policy tools deployed during a 25-year battle with deflation in a scheduled long-term review, Governor Kazuo Ueda said on Friday.Japan’s bitter memories of its decades-long battle with deflation hang heavily over the central bank’s deliberations over taking a first modest step away from ultra-loose monetary policy, even as inflation and wages creep up.Among the side-effects to be weighed will be the effect the central bank’s monetary easing steps had on financial markets and the banking system, Ueda told a press conference.”We’d also like to deepen our understanding of monetary policy” by looking at how structural factors like globalisation and demographics affected corporate and household activities as well as wage patterns, he said of the review that is expected to take a year, or 1-1/2 years.”To draw in diverse expertise, and ensure neutrality and consistency, we hope to take various steps,” such as holding workshops inviting private academics and experts, he said.The BOJ will start releasing information on the review at its website from next month, Ueda said.Ueda unveiled the review plan in April, but offered few details at the time, beyond saying it would aim to draw lessons from the BOJ’s past experience battling deflation.Having joined in the deflation battle as a BOJ board member from 1998 to 2005, Ueda knows all too well the danger of a premature exit from ultra-loose policy.The BOJ became the first central bank to take short-term interest rates to zero in 1999, to fend off a domestic banking crisis and heightening risks of deflation.After experimenting with quantitative easing and purchases of risky assets, in 2013 it deployed a massive stimulus programme under former Governor Haruhiko Kuroda to fire up inflation to its 2% target in roughly two years.When the radical asset-buying programme failed to prop up inflation, the BOJ took short-term rates to negative territory in 2016 and introduced a cap on the 10-year bond yield.While such moves helped keep borrowing costs low for companies, they were criticised by analysts for distorting market pricing and crushing bank margin.Many analysts expect Ueda to start phasing out his predecessor’s radical stimulus programme later this year. More

Not much more needs to be written about the persistence of UK inflation. Idiosyncrasies and/or long-term mismanagement meant the energy shock and skills shortages hit Britain harder than nearly everywhere else — but at least the current direction of travel’s right, right? The worst’s past and we have our best people working on it:Andrew Bailey sets out why we have raised rates by 0.25% today. The economy is doing better, but inflation is still too high. Raising interest rates is the best way we have of making sure inflation falls and stays low. https://t.co/zsyOpkm1FD pic.twitter.com/QHygx1ZFKr— Bank of England (@bankofengland) May 11, 2023
I promised to halve inflation. There’s still work to do, but today’s news shows that we’re making progress 👇 pic.twitter.com/eb4TuhQqW0— Rishi Sunak (@RishiSunak) May 24, 2023
So here’s a thing. Front-end RPI swaps have priced in a second UK inflation spike through the course of next year. And though it’s more shallow than the 2022-23 shock, the market-implied RPI peak of 5 per cent in December 2024 is in sharp contrast to the Bank of England’s target to hit 2 per cent by the start of 2025. Charts below from Barclays:

Selected front-end RPI forwards © Barclays

Moreover, while inflation markets elsewhere did nothing much over the past month, the market response to hot UK data such is this week’s jobs report has been to anticipate a much bigger localised second wave.

RPI, year on year, from fixings marks © Barclays

This is odd because inflation swap traders have tended towards being too dovish. Reported UK RPI overshot the rate implied by markets for seven of the last eight readings, and for all of the last five:

Realized RPI versus fixings © Barclays

A certain type of reader will be jumping to the comment box about now-ish to highlight that RPI includes mortgage interest payments, and that the flip-or-burn nature of UK’s mortgage marketplace creates inflation with a lag. JP Morgan published a deep-dive earlier this month into UK mortgages, showing how the refinancing of fixed-term loans at higher rates will be a two-year problem:

Housing costs are more than a quarter of the RPI by weight. Maybe remortgaging costs are a contributory factor to the 2024 pricing? Not according to Barclays’ rates strategist Jonathan Hill, who reckons traders are just “trying to be too clever by half”:The reality is that uncertainty is extremely high, and trying to get cute with the ebbs and flows of inflation risk in the near or medium term is inadvisable, to say the least, beyond broadly pricing a deceleration in annual inflation (due largely to base effects and energy deflation) but a stabilization at above-target inflation pricing due to upside risk. Clearly, it’s quite silly to imagine that derivatives pricing offers an reliable gauge of where inflation is going to be in 18 months’ time. As noted above, the market has been consistently wrong when asked to estimate UK RPI a month out.Barclays expects the UK inflation curve to flatten — the front end has to rise, the back end has to fall, or some combination of both — but can’t find a way for clients to profit from its current dislocation. Liquidity is too tight and transaction costs are too high. Going by that, we probably shouldn’t be reading too much into the UK inflation second-wave implied by pricing — except perhaps that the rates traders with most conviction appear to be expecting the worst. Further reading:— No, current gilt yields don’t vindicate Liz Truss, please don’t make us explain this again (FTAV) More

Public confidence in the Bank of England’s ability to control inflation has fallen to its lowest level since records began more than 20 years ago, according to polling data published on Friday. In the BoE’s survey of public attitudes on inflation, undertaken before the latest official data on price rises, a majority of those answering said they were dissatisfied with the central bank’s performance. The findings will serve to increase pressure on the BoE, which this week launched a review into its economic forecasting after being criticised by politicians for failing to predict the strength and persistence of inflation. When asked by polling firm Ipsos on behalf of the BoE, 34 per cent of respondents said they were dissatisfied or very dissatisfied with the way the BoE was setting interest rates to control inflation. Only 21 per cent were satisfied or very satisfied. The net satisfaction score of minus 13 per cent was the worst rating the BoE has received since the public attitudes survey on inflation was established in 1999. UK consumer price inflation stood at 8.7 per cent in April, down from 10.1 per cent in March, but significantly above the BoE’s forecast of 8.4 per cent. The official data prompted financial markets to raise their expectations of more interest rate increases by the BoE.Andrew Bailey, BoE governor, admitted on Tuesday it was “taking a lot longer than we expected” to curb inflation when he was grilled by peers on the House of Lords economic affairs committee. The BoE has also recently come under fire from Harriett Baldwin, Conservative chair of the House of Commons Treasury committee, for over-optimism in its forecasting of inflation and the risk that it has lost control of efforts to curb price increases. She said last month that the BoE’s answers to her questions “really worries me and is slightly making me despair”.The BoE will be reassured by other parts of its public attitudes survey, which showed that the median expectation of inflation over the coming year had fallen from 3.9 per cent in February to 3.5 per cent in May. But the public expects inflation of 3 per cent in the long term, a full percentage point above the BoE’s 2 per cent target. The inflation rate for May will be published on Wednesday, a day ahead of the BoE’s next rate-setting meeting.Economists expect the central bank to raise interest rates from 4.5 per cent to 4.75 per cent, in what would be the 13th consecutive increase by the BoE’s Monetary Policy Committee since late 2021. On Friday, Tesco said it saw indications of a moderation in inflation, with price rises having passed their peak.However, Ken Murphy, the retailer’s chief executive, said that “[inflation] does remain stubbornly high”. More

In a meeting at Beijing’s Diaoyutai state guest house, where China’s leaders have traditionally received senior foreign visitors, Xi said he was very happy to see the Microsoft (NASDAQ:MSFT) co-founder and philanthropist after three years, and that Gates was the first American friend he had met this year.”I often say the foundation of U.S.-China relations lies with its people. I place my hopes on the American people,” a video published by state broadcaster CCTV showed Xi as saying.”With the current global situation, we can carry out various activities beneficial to our two countries and people, activities that benefit humanity as a whole,” he said.Gates, who arrived in Beijing on Wednesday, said he was “honoured” to have the chance to meet. “We’ve always had great conversations and we’ll have lot of important topics to discuss today … it’s very exciting to be back.”In a post on his personal blog, Gates said he and Xi had discussed global health and development challenges such as health inequity and climate change. Xi stopped travelling abroad for nearly three years as China shut its borders during the coronavirus pandemic and his international meetings since the reopening have mostly been with other state leaders.A number of CEOs have visited China since it reopened early this year, but most have met with government ministers.Gates stepped down from Microsoft’s board in 2020 to focus on philanthropy in the fields of global health, education and climate change.The last reported meeting between Xi and Gates was in 2015, when they met on the sidelines of the Boao forum in Hainan province. In early 2020, Xi wrote to Gates thanking him and the Bill & Melinda Gates Foundation for pledging assistance to China, including $5 million for its fight against COVID-19.Xi also discussed the global rise of artificial intelligence (AI) with Bill Gates and said he welcomed U.S. firms including Microsoft bringing their AI tech to China, two sources familiar with the talks said.One of the sources said they also discussed Microsoft’s business development in China. NOT PURSUING HEGEMONYThe mood of the foreign business community towards China has turned more cautious as Sino-U.S. tensions intensify and Xi increases China’s focus on national security.Gates’ visit comes ahead of a long-delayed trip to China by U.S. Secretary of State Antony Blinken aimed at stabilizing relations between the world’s two largest economies and strategic rivals.Blinken had a tense call with China’s foreign minister Qin Gang on Wednesday, during which Qin urged the United States to stop meddling in its affairs and harming its security.During his meeting with Gates, Xi said China would not follow the old path of a “strong country seeking hegemony” but would work with other countries to achieve common development, according to the People’s Daily newspaper. China often accuses the United States of pursuing hegemony.Apart from meeting Xi, Gates gave a speech at the Global Health Drug Discovery (NASDAQ:WBD) Institute about the need to use technology to solve global health challenges during his visit.The Bill & Melinda Gates Foundation and the Beijing municipal government, which founded the institute with Tsinghua University, also pledged to each provide $50 million to bolster the institute’s drug discovery capacity. More

Corporate insolvencies in England and Wales jumped by 40 per cent year-on-year in May to the highest level since monthly reporting began in 2019, as businesses struggled with rising borrowing costs and high prices.Official data published on Friday showed that registered company insolvencies reached 2,552 last month, up from 1,825 in the same month last year and nearly double the figure in May 2019, before the onset of the Covid-19 pandemic.“Even though the UK appears to be swerving a recession for now, the triple whammy of the rapid hike in borrowing costs, a super-tight labour market and onerous energy bills have been too much to bear for many firms,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.She added that insolvencies were low during the pandemic because there was greater help available for companies, such as loans and relief measures, “but now, as firms are still battling through an inflationary crisis, insolvencies have surged higher than pre-pandemic times”.Data from the Insolvency Service showed that there were 2,181 creditors’ voluntary liquidations in May, up 38 per cent year-on-year, while compulsory liquidation rose by 34 per cent to 189.Borrowing costs have surged as the Bank of England has progressively raised interest rates from a record low of 0.1 per cent in November 2021 to 4.5 per cent. Combined with stubbornly high inflation and strong wage pressures, the financial markets have priced in that the central bank will raise rates to 5.75 per cent by the end of the year.Nicky Fisher, president of R3, the UK’s insolvency and restructuring trade body, said that “interest rates and inflation will continue to create challenges for businesses seeking funding over the summer, and could be the tipping point for those businesses who are hanging in there at present”.Corporate insolvency is the formal measure taken when a business can no longer pay its debts. Separate quarterly figures showed that at the end of 2022 corporate insolvencies reached the highest level since 2009 and have remained near that level in the first three months of this year.The rise was widespread across industries. Between January and April, the latest period with detailed data, the number of insolvencies rose by an annual rate of nearly 60 per cent for food and beverages producers, by 44 per cent for furniture manufacturers and by nearly 40 per cent for bars and pubs. More