Aurelia Butler

Will the renminbi sink further this year?The renminbi has declined more than 2 per cent against the dollar over the past month, breaking the Rmb7 per dollar level and hitting its weakest point since early December, when the country was still in the process of dismantling its throttling zero-Covid curbs.The decline is in response to warnings from the US Federal Reserve that it may raise domestic interest rates further, while there are growing doubts over the sustainability of China’s economic rebound.Analysts had expected a strong recovery following the unwinding of the country’s coronavirus restrictions last year. But weak Chinese economic data for April, including record youth unemployment and slower than expected industrial production and consumer spending growth, has clouded the outlook.Kiyong Seong, lead Asia macro strategist at French bank Société Générale, now expects the onshore renminbi to fall to Rmb7.3 per dollar in the final quarter, and to remain at that level for the first three months of 2024. That is down from an earlier forecast of Rmb7 per dollar in the first quarter of 2024.“We had thought that stronger sentiment thanks to China’s abrupt reopening and the subsequent improvement in some economic data points would strengthen the CNY,” wrote Seong. “But this has not materialised.”Seong said it was more likely that the People’s Bank of China would cut interest rates than increase them given April’s data, deepening the rate divergence with the US. Any rate cuts “would be neither sufficient nor efficient in terms of promoting sustained growth”, he added.“Further monetary policy divergence between China and the US with no material positive impact on Chinese growth would be a perfect recipe for a weaker CNY.” William LangleyIs UK inflation starting to fall?UK inflation is expected to fall sharply after a fall in energy prices, boosting traders’ hopes that the Bank of England will hold interest rates at its next meeting.Headline inflation to be released on Wednesday is expected to have fallen to 8.3 per cent in April compared with 10.1 per cent in March, according to a consensus of economists polled by Reuters.Samuel Tombs, economist at Pantheon Macroeconomics, who also predicts inflation will have eased to 8.3 per cent, said that outcome “would strengthen the case for the monetary policy committee to keep the bank rate at 4.50 per cent at its next meeting on June 22”.Markets are pricing in that the Bank will raise rates for the 13th consecutive time, pushing the bank rate to 4.75 per cent, the highest level since 2008.The expected fall in UK inflation in April should also narrow the gap with other countries. In March, the UK annual rate of consumer price index growth was double that of the US and much higher than the 6.9 per cent in the eurozone.Ben Broadbent, BoE deputy governor, said this month that March inflation figures marked “probably the maximum gap” with other advanced countries. This is because UK utility bills rose sharply in April last year after Russia’s full-scale invasion of Ukraine. Prices have since fallen back.“We have a very big base effect coming in for the April number . . . those base effects have come through rather faster in continental Europe,” noted Andrew Bailey, BoE governor. Valentina RomeiHow badly have interest rates damped US manufacturing and services activity?Investors will scrutinise business sentiment surveys closely on Tuesday for clues about how much higher interest rates and slowing economic growth are damping US manufacturing and services activity.Economists polled by Reuters expect S&P Global’s manufacturing purchasing managers’ index to give a reading of 50 for May. That number, which reflects industry views on operating conditions, would mark a slight retreat from 50.2 in April, and would land squarely on the line that separates contraction — anything below 50 — from expansion.Last month’s manufacturing reading was the first to post above the “neutral” level for six months, and the highest since October. At the time, S&P’s chief business economist pointed to improved supply chains and new order inflows, hinting at a “tentative revival of demand”.Meanwhile, economists expect the early, or “flash” reading, for S&P’s services PMI to come in at 52.6 on Tuesday — lower than April’s figure of 53.6, but still signalling growth from the previous month.The PMI surveys come as data in recent weeks showed that inflation in the world’s largest economy has continued to ease, hitting its lowest level in two years in April. But economic growth also slowed sharply at the start of this year, at 1.1 per cent on an annualised basis between January and March.Jay Powell, chair of the Federal Reserve, said on Friday that the credit crunch expected in the wake of bank failures could limit how far the central bank needs to raise interest rates. The future path of monetary policy tightening is a crucial contributing factor both to economic growth rates and inflationary pressures on US companies. Harriet Clarfelt More

Europe’s retailers and governments are locked in their fiercest tussle over food costs for 50 years, with policymakers resorting to price controls to tackle the worst cost of living crisis for a generation. Despite lower energy prices easing overall price pressures, growth in the cost of food has continued to soar, prompting increasingly unconventional market interventions from politicians trying to assuage public anger. Food prices in the EU rose 16.6 per cent in the year to April, according to Eurostat, far in excess of a headline inflation rate of 8.1 per cent. Some of the biggest surges have been in the cost of staples, with the cost of eggs rising 22.7 per cent over the period, whole milk up 25 per cent, and sugar by 54.9 per cent.“We haven’t had price controls in a general pattern in the western world since the 1970s,” said Lars Jonung, a Swedish economist and expert on the controversial caps.Central and eastern European states hardest hit by rising prices, such as Hungary and Croatia, have moved to cap the cost of essentials to shield the most vulnerable, who tend to spend more of their income on food. A sign in a shop in Hungary, one of the states hardest hit by rising prices, tells customers about the price cap © Attila Kisbenedek/AFP/Getty ImagesNora, a 32-year-old mother of three in Budapest, said it was “nice” that price controls had made products such as whole milk cheaper. But she noted that supermarkets had started limiting purchases, meaning she had to visit multiple stores or go shopping every day to take advantage. Greece has taken an alternative approach to limit prices by capping retailers’ profit margins on food and other essentials. In richer economies, France has negotiated a looser agreement with supermarkets to offer a selection of items at the lowest possible price. Spain is one of several countries to have cut value added tax on food. Others, such as Italy, are coming under pressure to cap the cost of beloved foodstuffs such as pasta.

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The pressure on retailers to toe the line on price rises has been exacerbated by a sharp fall in the cost of agricultural commodities over the past year. The UN’s Food Price Index was 19.7 per cent lower in April, compared with the same month last year.“While some price hikes may be justified, there is growing suspicion that others are just opportunistic excuses by businesses to inflate prices,” said Monique Goyens, director-general of the Bureau Européen des Unions de Consommateurs, which represents 46 consumer organisations from across the continent, who called on governments to “adopt strong measures to protect consumers against spiralling prices”.The Belgian consumer protection organisation Test Achats has called for a similar measure to France’s original anti-inflation basket proposal, which was tougher than what Paris has been able to implement. Austria’s chamber of labour body, AK, has also called for “price regulation” of foods.However, retailers say that they are not to blame and that, far from price gouging, are having to take the hit on capped goods. Kodály Delikatessen, a small supermarket in Pécs, southern Hungary, has grouped capped products under a sign that warns customers against buying “products of the dictatorship”, saying the wholesale price of certain items was higher than the capped retail price. The Delikatessen added: “The regulation forces us to sell at a loss!”

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Large businesses operating in Hungary — such as Lidl, Spar and the French retailer Auchan — have claimed the same. “If you are procuring sugar, you’re paying 500 forints (€1.35) per kilo and you have to sell it for 300 forints (€0.85),” one representative of an international retailer said. “You make a negative margin for each unit sold, which is completely absurd in a sector like retail that is characterised by high volumes and low margins.”While the measures have been successful in keeping a lid on the cost of essentials, economists think they are a poor fix for high food prices. A World Bank report on Thursday called on European governments to provide more “targeted policy interventions and social safety nets” to support those suffering from the cost of living crisis. However the multilateral lender stressed that price controls and subsidies were “suboptimal as they distort price signals for consumers and producers.”Hungary’s central bank governor György Matolcsy went further in a parliamentary hearing in December. “You can’t win this battle with old tools,” he said. “Price caps and all similar ideas already proved ineffectual during socialism.”“You may cap one type of milk, but the inflation basket contains dozens of types,” said Péter Virovácz, an analyst at ING Bank. But the struggles faced by shoppers hit by the soaring cost of their weekly shop mean economists fear politicians will continue to resort to price caps, regardless of their effectiveness.“As an instrument to reduce inflation, price controls do not work,” said Jonung. “But they are addictive and it’s difficult to kick the habit.”Additional reporting by Leila Abboud in Paris More

G7 leaders are wrapping up a three-day summit in the Japanese city of Hiroshima, where they sent signals to China over everything from semiconductors to “economic coercion” and lending practices. But while they agreed to “de-risk”, they said they would not “decouple” from China.Speaking to German broadcaster ZDF on the sidelines of the Hiroshima summit, Scholz said big investments would still continue, as would supply chains and exports to China.He said that while the countries wanted to limit their risk exposure, no one had an interest in curbing growth in China. More