Aurelia Butler

Higher interest rates have so fundamentally shifted the financial environment that investors must focus on a company’s ability to maintain margins rather than just its growth prospects, veteran private equity executive Chip Kaye said.“This moment is different than anything we have had in the 40 years before . . . with inflation proving stickier and interest rates higher than currently expected — and more complicated great-power politics adding to that dynamic,” said Kaye, who started at Warburg Pincus in 1986 and has been its chief executive for two decades. “If you could pick one characteristic of a business and that’s how you decide whether to invest, it would be pricing,” he told the Financial Times. “Lean into businesses that feel like they have the ability to adapt to a higher-inflation environment.”

Warburg Pincus is a traditional private equity firm with more than $80bn in assets under management that focused on growth investment. Unlike competitors that have sprawled into other areas and listed publicly, it is still a partnership.Kaye said that when the firm looks at a potential investment’s product, whether in goods or services, it considers, “what are the alternatives, what is the ease of switching, and what is the contribution to the customer’s end-product?” Kaye said. The flip side of that advice is that Kaye looks sceptically at lossmaking technology businesses that can no lower rely on free-flowing investor cash to subsidise their services. “When a $4 taco costs $1 to have it delivered, that’s one thing. When the $4 taco costs $8 with delivery, that’s different,” he said.

Chip Kaye: ‘We all misread the pandemic. We read it as a demand shock and it wasn’t really’ © Marco Bello/Bloomberg

Pricing power may vary depending on the situation. If something is a relatively small part of the overall cost, customers may not bother to switch suppliers if the price goes up. It can also be controversial. Researchers at the University of Massachusetts suggested this year that some companies were using pandemic-era shortages to push up margins, dubbing the process “greedflation”, although groups such as Procter & Gamble have hit back.

Kaye argued that Warburg does not seek that kind of profit growth. Instead it works “with portfolio companies across every function to help drive efficiency . . . These steps ultimately deliver better value at lower cost and position companies for stable growth.” Overall, he said, investors are having to come to terms with mistakes made in 2021 and earlier. “We all misread the pandemic. We read it as a demand shock and it wasn’t really — it was more a substitution of goods for services.” “In today’s markets, we are seeing some of the consequences of that natural tendency to underappreciate risk when times are good,” he said.“The investing environment will be more challenging — but the opportunity to differentiate should be exciting to investors.”  More

Economists and policymakers are bracing for a long and rocky road back to the US Federal Reserve’s target of 2 per cent inflation, even as early signs of relief emerge following the worst shock in decades.Recent economic data suggests price pressures are finally beginning to ease, with the consumer price index last week showing the relentless rise in costs for some goods and services is levelling off or is on the verge of doing so.But optimism has collided with lingering concern about how quickly “core” inflation — which strips out volatile food and energy prices — will actually decline from here. Over the past two years, hopes have been raised by encouraging data only for inflation to continue to rise.“It is not only going to be a bumpy road, but what we worry about are the sticking points because [those] make it all the much harder to derail what could be more entrenched inflation,” said Diane Swonk, chief economist at KPMG.Laurence Ball at Johns Hopkins University added: “I’m very cognisant, as people are, that you can get head-faked by a couple months of data.”

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Keeping inflation-fighters on guard is the fact that the sources of higher prices at this stage stem from a wide range of services, from child care to haircuts, which tend to require more effort on the Fed’s part to root out. As the economy recovered from the Covid-19 shock, supply-chain disruptions coupled with lockdowns — which limited how people could spend savings amassed owing to generous federal aid — to produce a historic boom in prices for everyday items such as washing machines and furniture. At one point, the price of used cars was increasingly at an annual pace of roughly 40 per cent as shortages intensified, accounting for more than a fifth of overall inflation.But as initial Covid fears ebbed and restaurants, movie theatres and other venues reopened, services-related inflation started to climb. Housing costs also boomed. Americans, bolstered by a red-hot labour market and better wages, were willing to stomach higher prices that companies began to charge to cover their own swelling expenses, accelerating an inflation surge that has since prompted forceful action from the US central bank.

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In the past 15 months, the Fed has raised its benchmark rate over 5 percentage points, the fastest increase in decades as it has sought to damp demand. Officials are now contemplating whether they have done enough or if they need to squeeze the economy further to ensure inflation — as measured by the core personal consumption expenditures price index — returns to the Fed’s 2 per cent target. As of March, it was running at an annual pace of 4.6 per cent.Following last week’s data, Omair Sharif, president of forecasting group Inflation Insights, said that “most of the pieces are in place” for core inflation to gradually ease from here. But he warned that the Fed’s target will remain elusive for some time.“It’s really hard to see core inflation coming down to anything that’s approaching 2 per cent by the end of this year,” he said. “We’ll be fortunate to be about double that.”Among the positive developments in the latest CPI report was mounting evidence that housing inflation was beginning to ease, reflecting last year’s sharp drop in rents and home prices that experts have been waiting to show up in the data. Also, a closely watched metric of underlying inflation — so-called “core services ex-housing” — decelerated to its slowest monthly pace since July 2022.

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Sharif warned that the gauge can be highly volatile and disproportionately reflect travel-related expenses. But Jay Powell, the Fed chair, said last year that core services once housing is stripped out “​​may be the most important category for understanding the future evolution of core inflation” given it captures wage-related dynamics.Previous bouts of high inflation provide some additional comfort. Alan Detmeister, a former Fed researcher now at UBS, studied inflation surges stretching back decades and concluded that the “best single inflation analogy is likely 1947” rather than the 1970s and 1980s, which became notorious for entrenched inflation. In the post-second world war period, inflation — which, like today, was driven in part by pent-up savings, a sharp run-up in government spending, and an abrupt shift in consumer demand towards goods — declined gradually over time without a sharp rise in interest rates. Detmeister said that suggests the Fed need not further raise its benchmark rate, even though it could be at least a year before the Fed’s target is achieved.

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Most economists polled by Bloomberg forecast it could take until 2025. That is roughly in line with the timeline most Fed officials projected, as of estimates published in March. They also maintain there will be no rate cuts until 2024, reflecting their view that the decline in inflation they need to see to support that would not have transpired before then.“There is just tremendous uncertainty and on the inflation front, a real lack of confidence because you feel like the models that we thought we knew and worked well for quite a while in a period of very low inflation volatility just haven’t worked all that well,” said Bill English, former director of the Fed’s division of monetary affairs.“What the Fed has emphasised is that they really do want to see inflation marching down before they conclude that they’re in a good place,” added English, who is now at Yale University. “Forecasts of inflation coming down aren’t going to cut it.” More

The outline of a deal to raise the $31.4tn debt ceiling and avoid a US government default for the first time in the country’s history has begun to emerge following a weekend of talks between the White House and its political opponents.People familiar with the matter said the gap between senior officials in Joe Biden’s administration and aides to the Republican Speaker of the House Kevin McCarthy had begun to narrow.A pact to limit domestic spending will be at the heart of any deal. Republicans are demanding deep cuts to many government programmes over 10 years, while the White House wants to see more modest curbs over two years.Biden has signalled he is open to applying savings from unspent Covid-19 relief funds to any agreement to help reduce the differences between the sides. He has also indicated he is willing to speed up the permit process for big investment projects.But key differences remain. The White House has rejected Republican calls for the repeal of clean energy tax credits that were part of the Inflation Reduction Act and demands to scrap student debt relief measures implemented by the president.Democrats are also opposed to a Republican demand for work requirements to be applied to anti-poverty and social safety net programmes in areas such as healthcare and nutrition.The risk of the US running out of money and not being able to meet its financial obligations is rising by the day. The Congressional Budget Office warned on Friday that there was a “significant risk” that the US government may not be able to pay its bills in the first two weeks of June if the debt ceiling is not raised. The CBO’s warning follows similar comments from Treasury secretary Janet Yellen.A person close to the talks between the White House and McCarthy said any agreement was unlikely before Biden’s attendance at the G7 summit in Hiroshima this weekend.Glenn Hubbard: The talks on raising the debt ceiling could get ugly but they don’t have to, writes the professor of economics and finance at Columbia University.Here’s what else I’m keeping tabs on today:Argentina: The government in Buenos Aires will push up interest rates to 97 per cent as it tries to stave off the country’s worst economic crisis in two decades.War in Ukraine: Rishi Sunak will promise to send more military hardware to Ukraine when he meets Volodymyr Zelenskyy near London. The Ukrainian president visited other European capitals over the weekend as he prepares to launch a counter-offensive against Russia.Monetary policy: Raphael Bostic, Federal Reserve Bank of Atlanta president, and Austan Goolsbee, Federal Reserve Bank of Chicago president, both appear on business television channel CNBC this morning. Five more top stories1. Turkey’s leader Recep Tayyip Erdoğan and rival Kemal Kılıçdaroğlu appear to be heading for an unprecedented second round of voting in the country’s presidential election. With 99 per cent of the votes counted Erdoğan has 49.4 per cent, just shy of the majority needed, according to state media. Read more on the tight race to lead Turkey.Thailand: Voters delivered a rebuke to Thailand’s military in parliamentary elections.2. The top US cryptocurrency enforcement tsar is promising a crackdown on illicit behaviour on digital platforms, saying the scale of crypto crime has grown “significantly” in the past four years. Read more of the interview with the Department of Justice’s Eun Young Choi.3. Envision Healthcare filed for bankruptcy yesterday just five years after it was taken private by KKR in a blockbuster leveraged buyout that valued the physician-staffing company at $10bn. Read more on the Tennessee-based company.4. A deal to create one of the largest oil and gas infrastructure companies in North America was announced yesterday. Pipeline giant Oneok is buying Magellan Midstream Partners for $18.8bn, creating a company with an enterprise value of $60bn and a sprawling 25,000-mile network of pipelines stretching from North Dakota to Texas. Read more.More deal news: The board of Australia’s Newcrest Mining has unanimously backed a A$29bn (US$19bn) takeover offer by its US rival Newmont.5. The EU is coming under mounting pressure from Europe’s biggest derivatives houses to radically rethink its plans for wresting euro-denominated clearing from the City of London. Finance bosses have warned of the grave risk to financial stability should Brussels’ blueprint be adopted.The Big Read

More than a decade after bailouts and austerity measures pulled Greece from the brink of bankruptcy and a eurozone exit, the country has rebounded and is on the cusp of regaining its investment-grade rating. Read more on Greece’s ‘greatest turnround.’We’re also reading . . . The ‘donut effect’ and US cities: Many commercial business districts in America are struggling but their urban outer rings are often thriving, writes Rana Foroohar.A sanctioned ship’s journey: The FT has reconstructed the five-month covert journey that a sanctions-hit Russian cargo ship, Lady R, allegedly took to secretly transport weapons sought by Moscow.Chinese tech goes global: With the Chinese economy in the doldrums, a wave of tech entrepreneurs, inspired by the success of TikTok and Shein, is looking overseas for growth.Chart of the day

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The hole in the Earth’s ozone layer has stopped growing and begun to close in recent years, according to Nasa’s Ozone Watch. A UN panel says the ozone layer should recover to pre-1980 levels by the middle of this century if current policies remain in place.Take a break from the newsBefore Covid, clothes were earmarked for either office, home or going out. Then lockdowns happened and we all gave into The Great Slobification, writes Emma Jacobs. The world has reopened but the division between work and weekend wardrobes has not returned for many, she writes. Additional contributions by Gary Jones and Annie Jonas More

Demand for supply chain managers has surged following a series of disruptions to global trade, propelling once-overlooked professionals to increasingly important positions in multinational companies.The number of US job postings for supply chain managers on LinkedIn more than doubled between 2019 and 2022, according to data shared with the Financial Times.UK vacancies for supply chain managers on jobs site Indeed rose 22 per cent between 2019 and 2021, when trade issues for many businesses peaked, outpacing an 8 per cent increase in the total number of UK roles advertised. Demand continued to rise last year, when openings were 36 per cent higher than in 2019.Recent crises, including Covid-19 and the war in Ukraine, have led to highly publicised shortages of goods from microchips to vegetable oil — putting supply chain issues at the centre of boardroom discussions.Lucy Harding, head of the supply chain practice at headhunter Odgers Berndtson, said businesses had realised they must “hire more senior people. [Supply chain professionals] have become more important.”She added that executives responsible for supply chains had increasingly been invited into boardrooms and that companies had been expanding teams of analysts who could identify potential supply chain problems before they hit, including those caused by political instability.Before the pandemic, businesses often sought to cut costs in their supply chain — but some blue-chip companies “were caught with their pants down” as shortages emerged, said Richard Wilding, emeritus professor of supply chain strategy at Cranfield University and a consultant to multinational companies.Businesses have since invested to make their supply chains more resilient, he added. BT announced plans in 2021 to recruit 70 people to a new procurement arm based in Dublin. Staff have since been planning how to protect the telecoms group’s supply chain, including by holding “war games” to prepare for a potential conflict between China and Taiwan.An executive at a big food producer said they had created a “resilience team”, which identifies possible issues in the company’s network of suppliers. “We were saying, ‘We need to be better at this. Let’s get some experts in supply chain management’,” the executive said.Job vacancies across a number of vocations have soared over the past couple of years, as employers boosted hiring after Covid-19 lockdowns and workers sought new careers. But headhunters and supply chain managers said the hiring trend in procurement had been particularly notable.Kory Kantenga, senior economist at LinkedIn, said the most intense demand for supply chain professionals had eased as global pressures receded in recent months.The end of China’s zero Covid policy and declines in consumer spending have helped alleviate the strain on manufacturers and shipping.But demand for US supply chain managers during the first two months of this year remained 54 per cent higher than during the same period in 2019, according to LinkedIn data, and businesses may be faced with a shortage of people with the right skills.“There is a crunch in available talent,” said Harding. “These are first-time challenges for a lot of senior leaders.”Wilding added that the relatively small number of people with relevant supply chain expertise had come under pressure.LinkedIn and Indeed do not share data on the actual number of jobs posted on their websites. More

Happiness levels have failed to return to their pre-pandemic norm in the UK, particularly among younger people as the blow of Covid-19 on the nation’s mental health is compounded by the cost of living crisis. Twenty-three per cent of Britons reported their life satisfaction was “very high” in the last quarter of 2022, down from an average of 30 per cent in 2019 before the health crisis, according to new data from the Office for National Statistics. The proportion dropped to 19 per cent for people in their 20s, well below the 32 per cent for those aged 60 and over, the data showed. The figures also indicated that the share of those reporting high levels of happiness was below 30 per cent, down from an average of 35 per cent in 2019. In contrast, anxiety is up from pre-pandemic levels. Andy Bell, chief executive of the Centre for Mental Health charity, said that “mental wellbeing in the UK is deteriorating as the cost of living crisis continues to bite”. He added: “As more people struggle financially, the risks to our mental health grow and more people find themselves experiencing low wellbeing.”

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The official figures chime with a large study by the Resolution Foundation think-tank, conducted in March which found that 30 per cent of respondents — or 16mn adults — said their health had been negatively affected by rising living costs. The proportion rose to two in five for people aged 25 to 34. In March, UK inflation was at 10.1 per cent, while food inflation reached a 45-year high of nearly 20 per cent. Meanwhile, mortgage payments rose to the highest share of income since the 2008 financial crisis.Simon Coombs, founder director of Working Minds Group, a provider of wellbeing support, said that food, water and shelter, key components for feeling secure, are all “currently under threat”.The average waiting time for mental health support on the NHS is now between six and nine months in most areas of the UK, Coombs noted, as the service struggles to cope with the combination of a jump in demand and long-term underfunding. Alexa Knight, director of England at the Mental Health Foundation, said that concerns about finances were reducing people’s ability to get good quality sleep, exercise and spend time with friends and family, causing a “mental health emergency”.

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Inflation and borrowing costs have surged in the wake of the coronavirus crisis which itself took a heavy toll on people’s mental health.Brian Dow, deputy chief executive of Mental Health UK, said the “cost of living has hampered the nation’s recovery from the pandemic, people’s wellbeing has clearly continued to suffer”. More

SYDNEY (Reuters) – Asian stocks started cautiously on Monday as investors braced for a China policy rate decision and economic data this week, while awaiting a host of U.S. Federal Reserve officials to speak to vindicate market pricing of rate cuts this year. Early action was sluggish following a report on Friday showed U.S. consumer sentiment slumped to a six-month low in May and long-term inflation expectations jumped to the highest since 2011, boosting the U.S. dollar and Treasury yields. In emerging markets, the Turkish lira touched a fresh two month low of 19.70 to the dollar as the country appeared headed for a runoff presidential election. The Thai Baht was 0.7% stronger after the opposition secured a stunning election win on Sunday. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.16% lower, while Japan’s Nikkei bucked the trend with a gain of 0.5%, building on the optimism from last week during the earnings season. (T)S&P 500 futures slipped 0.2%, while Nasdaq futures fell 0.3%.Investors are keenly awaiting China’s central bank rate decision on Monday. Market watchers polled by Reuters expect the medium-term policy rate to be left unchanged despite disappointing data last week that fuelled concerns about a global slowdown.The country is due to report monthly industrial production, retail sales and fixed asset investment data on Tuesday. “A big year-on-year improvement shouldn’t surprise given it is measured against a stagnant economy that was in lockdown,” said Chris Weston, head of research at Pepperstone. “However, with China’s data throwing up a few concerns of late – we’ve seen poor import, PPI, and loan data – China’s growth is very much at the heart of market moves,” said Weston. Also this week, a host of Federal Reserve officials are speaking, with Chair Jerome Powell set for Friday, and could generate plenty of headlines to move the dial further. Fed Governor Michelle Bowman said on Friday that the U.S. central bank probably will need to raise interest rates further if inflation stays high. Markets are still seeing this is the peak for Fed funds rates and pricing in 70 basis points in cuts by the end of this year, after the CPI and PPI data last week supported the case of Fed pausing given the slowing inflation. Joseph Capurso, head of International Economics at Commonwealth Bank of Australia (OTC:CMWAY), believes the persistence of U.S. inflation would take out the pricing for near term cuts to the Funds rate, and contribute to a recovery in the dollar in coming months. The U.S. dollar index was hovering at 102.72 early on Monday against a basket of major currencies, after surging 1.4% last week on global growth concerns, the biggest weekly gain since September. Very much on investors’ mind was the uncertainty about lifting the U.S. debt ceiling and the return of bank worries. U.S. President Joe Biden expects to meet with Congressional leaders on Tuesday for talks to raise the nation’s debt limit and avoid a catastrophic default.Concerns about U.S. Congress not raising the debt ceiling on time have created large distortions in the short-end of the yield curve as investors avoid bills that come due when the Treasury is at risk of running out of funds, and pour into alternative issues.The yield on benchmark 10-year notes was little changed at 3.4700%, after rising 6 basis points on Friday, and two-year yields were flat at 3.9914, having also jumped 10 basis points in during the previous session. Oil prices were trying to find a footing after tumbling nearly 2% last week on demand concerns. U.S. crude futures were flat at 70.03 per barrel, while Brent crude down 0.1% to $74.13 per barrel.Gold prices were 0.1% lower at $2,009.49 per ounce. More

NEW YORK (Reuters) – Oil prices settled more than 1% lower on Friday, falling for the fourth consecutive week, as the market balanced supply fears against renewed economic concerns in the United States and China.Brent crude futures settled down 81 cents, or 1.1%, to $74.17 while West Texas Intermediate (WTI) U.S. crude futures fell 83 cents, or 1.2%, to $70.04.Both benchmarks settled about 1.5% lower week on week.The U.S. dollar clung to modest gains against the euro on Friday and was headed for its biggest weekly gain since February, as uncertainty around the U.S. debt ceiling and monetary policy prompted a shift to safe havens. (=EUR)A stronger greenback makes dollar-priced oil more expensive for holders of other currencies. “Lack of confidence in the economy is translating to a retreat to the safer dollar, and is also causing pessimism about oil demand,” said John Kilduff, partner at Again Capital LLC in New York.Concern mounted that the United States – the world’s biggest oil consumer – will enter recession, with talks over the U.S. government’s debt ceiling postponed and concern growing over another crisis-hit regional bank. The U.S. Federal Reserve will probably need to raise interest rates further if inflation stays high, Fed Governor Michelle Bowman said on Friday, adding that data this month has not convinced her that price pressures are receding.Meanwhile, China’s April consumer price data rose at a slower pace than in March, missing expectations, while deepening factory gate deflation refocused doubts about its recovery from COVID restrictions driving oil demand growth.The U.S. oil and natural gas rig count fell this week to its lowest in nearly a year, as gas rigs slumped by the most in a week since February 2016, energy services firm Baker Hughes Co said in its closely followed report on Friday. U.S. oil rigs fell by two to 586 this week, their lowest since June 2022, while gas rigs plunged by 16 to 141, their lowest April last year.The market drew some support from the forecast emerging supply deficit for the second half of the year, even as Iraq’s oil minister Hayan Abdel-Ghani told Reuters on Friday he does not expect OPEC+ to decide on further production cuts when it next meets in Vienna on June 4.An OPEC report on Thursday said the producer group expects July-December demand for its own crude to be 90,000 barrels per day (bpd) higher than previously projected.The Organization of the Petroleum Exporting Countries (OPEC) kept its global oil demand forecast for 2023 unchanged on Thursday, expecting economic risks to be offset by higher Chinese demand growth.The market also drew support after U.S. energy secretary Jennifer Granholm signalled that the country could repurchase oil for the Strategic Petroleum Reserve (SPR) after completing a congressionally mandated sale next month. (This May 12 story has been corrected to say that oil prices fell for the fourth consecutive week, not third, in paragraph 1) (Additional reporting Rowena Edwards in London, Yuka Obayashi in Tokyo and Andrew Hayley in Beijing; Editing by David Goodman, Kirsten Donovan, Nick Macfie and Daniel Wallis) More