Aurelia Butler

Good morning. On Wednesday I looked at discount retailers’ results and wrote that it is “increasingly clear that lower-income consumers are under pressure and are changing their spending habits meaningfully.” Yesterday Dollar General, another discounter, reported results that confirmed this ugly trend emphatically. “We continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on [store] brands and items at or below the $1 price point,” the CEO told analysts. The shares fell by a fifth. Economic slowdowns do not unfold smoothly; they are the sum of an irregular series of unpleasant surprises. Email me: [email protected] case for not freaking out about the jobs report This morning’s jobs report has been even more keenly anticipated than usual. The reason is that investors’ confidence that interest rates have peaked and will soon fall has been replaced by nagging uncertainties. There is a nasty suspicion that rates will stay higher for longer — as those Cassandras down at the Federal Reserve have long warned — or, worse, might rise another notch or two.A recent speech by Fed Governor Philip Jefferson signalled to the market that a rate increase is unlikely at this month’s Fed meeting, but further down the road the range of possibilities is wide. Recent equivocal economic data — a hot job openings report, a cool manufacturing ISM survey — have only focused more attention on the jobs numbers.If the jobs report comes in much stronger than the consensus estimate of 195,000 new jobs, there might be a bit of a market freak out. But there is reason to remain calm: a tight labour market might not be as important a contributor to inflation as is generally believed.The labour market receives so much attention in part because Fed chair Jay Powell told everyone to watch it closely. In a press conference last November, he split core inflation into three categories: goods, housing services, and non-housing services (NHS). The first two are likely to fall with time, he said, butcore services other than housing . . . may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labour market holds the key to understanding inflation in this category“The key to understanding inflation”! Yowza! Since then, as Omair Sharif of Inflation Insights pointed out to me yesterday, Powell has tried to walk back this comment somewhat. Nonetheless, it is common to see the Fed’s inflation challenge described as, in essence, the challenge of cooling the labour market.But two economic luminaries — Ben Bernanke and Olivier Blanchard — have just released a paper in which they argue that the labour market has not been a major contributor to recent inflation. The paper is framed around the argument, earlier in the pandemic era, between inflation optimists and pessimists. The optimists, including the Fed leadership, thought heavy fiscal stimulus would not spark inflation because the Phillips curve has flattened (that is, inflation has become less sensitive to the level of employment), and because inflation expectations had been so low for so long. The pessimists, Blanchard among them, contended that[The] increase in aggregate demand likely to result from the unprecedentedly large fiscal transfers, together with the cumulative effects of the easing of monetary policy begun in March 2020, could cause more overheating of an already-tight labour market than the optimists expected. An extremely low unemployment rate might in turn cause the Phillips curve to steepen. Moreover, higher and, consequently, more psychologically salient levels of inflation might lead inflation expectations to de-anchor, raising the potential for a wage-price spiralWhile the pessimists were right about inflation rising sharply, they were wrong about the role of the labour market, according to Bernanke and Blanchard. Using a “bare-bones” economic model, they find that “both the Fed and its critics underestimated the inflationary potential of developments in goods markets”, and that “that labour market tightness made at most a modest contribution to inflation early on”. My colleague Martin Sandbu argued yesterday that the Bernanke/Blanchard analysis supports the “team transitory” view of inflation. On that view, inflation was caused by a series of bad supply shocks that are working there way through various sectors of the economy. If this is so, the right policy response is to step back and let this process work itself out, rather than continuing to tighten policy (Bernanke and Blanchard themselves are more hawkish).The Bernanke/Blanchard model may be “bare bones”, but it is not easy for a non-economist like myself to follow the specifics. Happily, Adam Shapiro of the San Francisco Fed published a paper arguing for the same conclusion with a simpler argument.First, Shapiro tracks the impact of surprise increases in wages (as measured by the employment cost index) on core inflation (as measured by the personal consumption expenditures index), while controlling for other variables. In particular, he looks at NHS inflation, where wages are the largest component of costs. What he finds is thatThe impact of the ECI on NHS inflation is statistically significant, but the magnitude is quite small. A 1pp increase in the ECI increases the contribution of NHS inflation to core PCE inflation by 0.15 percentage points over four years — an effect of 0.04pp per year. As ECI growth has increased by about 3pp from its pre-pandemic level, this means that labour costs have added approximately 0.1pp to current core PCE inflation.That’s not much! Next, Shapiro looks at the different effects of wage increases on supply- and demand-driven inflation. He distinguishes the two kinds of inflation by looking at the movements of prices and unit volumes. With supply-driven inflation, prices move up but volumes fall (there is less stuff to sell, so the price of each unit goes up); with demand-driven inflation, the two move together (suppliers raise prices and sell more stuff to eager customers). He finds surprise increases in ECI wages have no impact on demand-driven inflation, suggesting that “businesses tend to raise prices when wages rise because their costs increase, not because demand increases”.Sharif, of Inflation Insights, makes broadly the same point without any economic model at all: he just takes a close look at the NHS inflation data. He notes that about two-thirds of big surge in NHS inflation in 2021-2022 versus the pre-pandemic baseline was driven by transportation services, a category that includes airfares, auto insurance, and auto repair. How much of the increase in transportation services inflation was driven, in turn, by wage increases? Not much, Sharif thinks. He points to the example of the airlines industry. Looking at the total increase in quarterly industry operating costs between the second quarters of 2021 and 2022 (as reported by the Bureau of Transportation Statistics), increased labour costs accounted for less than a fifth of the change. Fuel was the main culprit, followed by things such as maintenance, food for passengers, advertising, and insurance (the “transport related” and “other” expenses in the table below):

All of this suggests we should not obsess too much about labour market tightness — or at any rate, obsess about it less than we have in the last year or two. Of course, accepting this, we still have to think carefully about what else is driving inflation and what is likely to happen next. But that is another discussion. For now, just don’t freak out about today’s jobs report.One good readThe invasion of the Ukraine is not costing Russia much money, unfortunately. More

The writer is chief Emea economist at S&P Global Ratings This year marks 30 years of the European single market. In many ways, it has been a success and has driven significant economic growth across the region. However, it is not yet a full economic union. The banking and capital markets union is still incomplete — and this is holding the EU back. As a result, the free movement of goods and workers in the bloc is not being matched by the free movement of capital. Data shows that private capital flows across borders within the EU have not increased since the global financial crisis, with cross-border financial claims accounting for nearly 100 per cent of EU gross domestic product in 2022, the same as in 2007. What’s more, this private investment, driven by private savings, isn’t reaching the areas that really need it. Capital flows are moving within the north and the core of the EU, as investors perceive risk in eastern and southern Europe to be too high, despite better potential returns. In 2022, southern European countries received roughly 50 percentage points less financing from other European countries than in 2008. The growth of domestic savings pools across Europe appears at odds with this picture. Why is this a problem? The east and the south need investment to catch-up with the rest of the EU. Without such investment, the EU will not reap the full benefits of its single market. The current situation also limits the bloc’s ability to respond to external shocks, as the union remains financially fragmented. With some European countries staring down the barrel of a recession, it’s more important than ever that the union is resilient to shocks.There are two ways that the EU can solve this financing conundrum.First, it could fill the private investment gap with public subsidies, similar to the post-pandemic recovery Next Generation EU plan. Data shows that more public investment in developing regions can maintain appetite from private investors, although so far there is mixed evidence to suggest it can be increased. Years of cohesion and regional development funding have undoubtedly fostered economic growth in the south and the east of the EU, but they have barely improved capital markets’ perception of risk there, as intra-EU financial claims have stagnated since the global financial crisis. Therefore, to support the development of these regions, and to ensure that the bloc is resilient to further shocks, more public funding will be needed. The north and core of the EU will bear this cost — its scale is difficult to quantify and, for national leaders, it will be politically unpopular.Alternatively, the EU can decide to complete its banking and capital markets union. This would increase private risk sharing, making it easier for pools of private capital to be distributed to the countries that need it. It would help poorer EU countries avoid becoming ever more reliant on public transfers and it is also a cheaper solution. There is evidence that the EU can leverage private risk sharing within its original banking and capital markets union framework. While bond financing and bank lending to southern EU countries have diminished substantially — by 50 percentage points of the southern nations’ GDP since the global crisis, according to our calculations — cross-border equity has been a much more stable source of funding. Unfortunately, cross-border equity is also the most marginal source of capital. Cross border equity invested in southern EU economies accounts for less than 7 per cent of those countries’ GDP. So the capital markets union, which aims to promote equity financing, is a wise political choice.The rise of Luxembourg and Ireland, both small economies in terms of EU GDP, as hubs for cross-border funds, is another sign of hope. Thanks to a competitive legal and regulatory framework, Luxembourg has become Europe’s main location for undertakings for collective investment in transferable securities (UCITS) and alternative investment funds, with 27 per cent market share, ahead of Ireland (19 per cent).Of course, completing a banking and capital markets union is not easy. We have already made progress but we need to move forward before the next crisis. The less progress we make between now and the next crisis, the more likely it is that public risk-sharing will have to increase to absorb that shock.If there is another crisis, the governments of EU nations could be faced with a stark choice. Put more public money in to provide fiscal and monetary stimulus to support the bloc’s fragile economies. Or make the banking and capital markets union work. The EU’s stability and prosperity relies on such improvements. More

The UK should join a pan-European agreement on goods trade to limit the damage to its car industry from looming post-Brexit tariffs instead of seeking a delay to their introduction, according to senior officials in Brussels.From next January, electric vehicles shipped between the UK and the EU will need to have at least 45 per cent of their parts sourced from within the two regions or face 10 per cent tariffs, under “rules of origin” terms set out in their post-Brexit trading agreement. The limit rises to 60 per cent for batteries, which make up a significant part of the value of an EV, and is particularly problematic as the UK and EU still import many from China, South Korea or Japan.London wants the EU to delay the introduction of the levy until 2027. The move is backed by carmakers in the UK and EU, which have warned they will not be able to comply with “rules of origin” from next January due to the lack of battery manufacturing capacity in Europe.But two senior officials in Brussels said they would instead encourage the UK to sign up to an existing pact among more than 20 other European, Middle Eastern and North African countries that treats goods assembled in one country from parts made in another signatory state as originating in the exporting country, thereby avoiding tariffs and quotas.“The simple way to solve this is for the UK to join the Pan-Euro-Mediterranean convention,” said one, citing its “harmonised rules on trade”. After leaving the EU, the UK decided not to join PEM.The European Commission has dismissed the idea of an extension of the current EU-UK tariff exemption. “If you go down that route [of an extension] we will never be able to build our own battery supply chain in Europe because [companies] will lock in long-term supply from China,” Maroš Šefčovič, vice-president responsible for UK relations, told the Financial Times.The concession for EVs was originally agreed as part of the UK’s post-Brexit Trade and Cooperation Agreement with the EU to allow fledgling battery industries to develop on both sides of the Channel.The commission sees the impending change to the rules of origin requirements as a lever to encourage EU carmakers to invest in battery plants in the region, partly at the expense of the UK industry, which has struggled to attract investment in the sector.UK membership of PEM might help European carmakers eventually as signatory states such as Norway and Turkey develop a domestic EV battery-making sector, but trade experts warned it would do little in the short-term to solve the UK-EU tariff issue given the need to import batteries from Asia.“PEM might help in some areas, but it’s not necessarily an immediate fix,” said Sam Lowe, trade expert at consultancy Flint Global. “PEM membership doesn’t address the main problem at the moment for EU and UK carmakers, which is that they need to import batteries from Asia which is not part of PEM,” he added.

But David Henig, at the European Centre for International Political Economy think-tank, said the move would help avoid future post-Brexit tariffs in other sectors such as food. “It would go some way to removing barriers to UK manufacturers staying part of supply chains.”He added that commission officials had told him the EU and other PEM signatories would approve UK membership but he warned of a possible delay. “PEM rules are in the process of being updated, and the UK probably couldn’t accede until that process is complete.”Government insiders said ministers believed that a solution that avoided tariffs on electric vehicles from 2024 could be achieved within the framework of the TCA. The government declined to comment.

Video: The Brexit effect: how leaving the EU hit the UK More

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen on Thursday told incoming World Bank Group President Ajay Banga to “get the most out of the bank’s balance sheet” and mobilize more private capital for climate finance and global development objectives, the Treasury said.During a meeting with Banga a day before the former Mastercard (NYSE:MA) CEO takes office at the World Bank, Yellen “conveyed her strong desire for Treasury to continue close collaboration” with him on the lender’s evolution to address climate change and other global challenges.That includes continuing to implement recommendations from last year’s G20 report on capital adequacy, which argued that changes to multilateral development banks could unlock hundreds of billions of dollars in new lending.Under Banga’s predecessor, David Malpass, the bank’s shareholders in April approved an initial round of balance sheet changes to boost lending by $50 billion over 10 years while maintaining its top-tier AAA credit rating. But Yellen has insisted that further lending reforms and other changes be made on a “rolling basis” in coming months.Yellen said continuing to implement these reforms would “get the most out of the Bank’s balance sheet,” and mobilize more private capital “for our shared development objectives and to refine the operating model to increase the responsiveness and agility of the bank,” the Treasury said.She also said the World Bank needed to work more closely with its sister development banks.”Secretary Yellen stressed the need to support the poorest of the banks’ member countries as they continue to face multiple crises, including continuing global macroeconomic headwinds exacerbated by Russia’s war in Ukraine,” the Treasury added.Banga, 63, was elected to a five-year term as World Bank president by the lender’s board of governors on May 3. Nominated by U.S. President Joe Biden, the Indian-born finance and development expert was the sole contender for the job.The U.S., the World Bank’s largest shareholder, has traditionally chosen an American to run the World Bank, while Europe has chosen the head of the International Monetary Fund. Banga, a U.S. citizen since 2007, starts his new role on Friday.In a parting LinkedIn post, Malpass highlighted the growth in the bank’s climate finance for developing countries during his tenure, more than doubling it to a record $32 billion last year, as well as $440 billion mobilized by the World Bank for overlapping crises starting with COVID-19, the war in Ukraine, food and energy price shocks, supply chain disruptions, and unsustainable debt.Malpass has pushed for more debt transparency and restructuring, particularly on China’s loans to poorer countries. He said the huge buildup of government debt threatens to sap dynamism from the global economy.”Without change, the world will likely face a long period of slow growth — and developing countries will be hit the hardest,” he added. More

TOKYO (Reuters) – SoftBank Group Corp shares jumped 5% in early Friday trade as the technology investor – which is preparing an initial public offering of chip designer Arm – was caught up in a frenzy for semiconductor and artificial intelligence-related stocks.The Japanese conglomerate, which has been hit by the slumping value of its tech portfolio, has seen its shares gain 17% since last week’s close.Still, they are up only 6.4% year-to-date, compared with 172% for U.S. chipmaker Nvidia (NASDAQ:NVDA) Corp – an expected beneficiary of investment in AI – and 39% in the Philadelphia SE Semiconductor Index.On Friday, SoftBank passed the psychological level of 6,000 yen for the first time since February.”We expressed a view that SBG stock will rally ahead of the ARM IPO later in the year… But given (the) market’s fascination for semi-stocks, we think it makes sense to move early,” Jefferies analyst Atul Goyal wrote in a client note, upgrading his recommendation on the stock to “buy”. Other beneficiaries of enthusiasm for chip-related stocks included equipment makers Advantest Corp and Tokyo Electron Ltd, which have climbed 109% and 50% respectively year-to-date. SoftBank CEO Masayoshi Son, who has argued that the rise of artificial intelligence drives his investments, has also been caught up in recent enthusiasm for generative AI, which proponents compare to the arrival of the internet.”He feels that ‘finally my time has come’,” SoftBank Chief Financial Officer Yoshimitsu Goto told reporters at an earnings briefing last month. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.Asian markets are looking for a positive end to the week on Friday following a solid rally on Wall Street the day before, as the U.S. debt ceiling vote passed its first congressional hurdle and hopes rose that the U.S. economy will achieve a ‘soft landing’.South Korean inflation for May is the main regional economic indicator on the calendar, and the won could also get a jolt from revised first quarter GDP growth figures. Otherwise, Friday’s impetus looks set to come from Thursday’s ‘Goldilocks’ trading on U.S. markets.A batch of indicators suggested U.S. inflationary pressures are cooling, which could allow the Fed to pause its rate-hiking cycle later this month, while other data showed the labor market remains strong. A win-win for risky assets. A weaker dollar and lower Treasury yields also helped fuel the surge in U.S. stocks, with the Nasdaq and tech sector once again the highest fliers. The Nasdaq is on track for a sixth straight weekly gain, which would be its best run since 2019. Contrast that with China, where purchasing managers index reports for May were mixed, broader economic data is weak, the central bank is expected to ease policy soon, and investors are pulling their money out of the country. Little wonder the yuan is sliding further below 7.00 per dollar to fresh 2023 lows on a near daily basis. The dollar’s strength against the yuan on Thursday is telling, because it was not replicated across Asia. The Indian rupee registered its biggest rise in three months after PMI data showed factory activity in India grew last month at the fastest pace in two and a half years. This follows Wednesday’s surprisingly strong GDP data.The Australian dollar had its best day in six weeks, and the Japanese yen rose for a fourth consecutive session – its longest winning streak since November.Global markets on Friday will take their cue from the U.S. employment report for May but its release comes after Asian markets close, leaving Korean CPI and revised GDP as potentially the main market-moving economic indicators. Annual inflation is expected to ease to 3.30% from 3.70% in April, which would be the lowest since October 2021.Here are three key developments that could provide more direction to markets on Friday:- South Korea CPI inflation (May) – South Korea GDP (Q1, revised)- Japan monetary base (May) (By Jamie McGeever) More

The lowest-paid employees will receive A$22.61 ($15.34) an hour from July 1, according to Reuters calculations based on the current rate of A$21.38. The decision from the Fair Work Commission would affect more than 2 million workers. “The level of wage increase we have determined is, we consider, the most that can reasonably be justified in the current economic circumstances,” said the Commission in a statement. “In our consideration, we have placed significant weight on the impact of the current rate of inflation on the ability of modern award-reliant employees, especially the low paid, to meet their basic financial needs.”Some economists have feared that a sizeable increase could set a benchmark for other wage expectations and complicate the Reserve Bank of Australia’s job of returning inflation back to 2-3% target range. So far, aggregate wage growth – which accelerated to a decade-high of 3.7% last quarter – has lagged forecasts, with Governor Philip Lowe warning of upside risks to wages from weak productivty growth, rather than nominal wages.($1 = 1.4743 Australian dollars) More