Aurelia Butler

Eurozone inflation rose slightly to 7 per cent in April, complicating the picture for rate-setters at the European Central Bank when they meet on Thursday to set borrowing costs.The figure for consumer prices was worse than the flat reading — from 6.9 per cent the previous month — that economists polled by Reuters had forecast. Eurostat, the EU’s statistics agency, said annual core inflation, which strips out energy and food prices to give a better indicator of underlying price pressures, fell to 5.6 per cent in April, from 5.7 per cent the previous month. ECB officials have said they do not expect to stop raising rates until underlying inflation declines significantly.The month-on-month inflation rate slowed from 0.9 per cent in March to 0.7 per cent in April.Separately, demand for loans from eurozone businesses has fallen at the fastest rate since the 2008 financial crisis, according to ECB data. The ECB said banks indicated “a further substantial net tightening in credit standards for loans to firms and for house purchases” in the first quarter as rising borrowing costs and fading confidence weighed on economic activity.Rate-setters said the results of its quarterly survey of banks, which was carried out in the final week of March and first week of April, could be a decisive input in their discussions on how much to raise rates by at this week’s meeting.The behaviour of banks is being watched by central bankers because of the recent turmoil in the sector that triggered the collapse of Silicon Valley Bank in the US and pushed Credit Suisse into the arms of its rival UBS in March.Economists say the tumult — which continued with the seizure of First Republic and sale of the US lender’s assets to JPMorgan Chase on Monday — will intensify the contraction of lending and squeeze demand, reducing the need for the ECB to raise rates.The ECB said eurozone banks had tightened their credit standards by the most since the eurozone debt crisis erupted in 2011. “The tightening for loans to firms and for house purchase was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics,” it added. Banks expected “a further, though more moderate, tightening of credit standards” in the second quarter.It said the main drivers for banks’ retreat from lending were “higher perceptions of risk” and “lower risk tolerance”. But the ECB’s unprecedented increase in borrowing costs and its reduction of liquidity in recent months pushed up funding costs for banks and “had a tightening impact on credit standards”.

The ECB has increased its deposit rate from minus 0.5 per cent last summer to 3 per cent in March. Policymakers have said another increase is likely to be announced after its meeting on Thursday but incoming data will determine whether it sticks to a half-percentage point rise or slows to a quarter-point move.The withdrawal of liquidity from the banking sector is set to accelerate in June when €480bn of ultra-cheap ECB funding to eurozone banks matures and the central bank is expected to accelerate the pace of shrinking its €5tn portfolio of bonds.“Access to retail and wholesale funding deteriorated in the first quarter,” the ECB said, adding that the recent turmoil in the banking sector may have reversed an improvement in lenders’ access to funding from money markets and bond issues. The level of loan applications being rejected by banks increased to its highest level since the ECB started asking the question in 2015, it added. More

Assets under management by active manager T Rowe Price fell more than $200bn over the past year, as a rocky year in markets hurt the traditional equity house and knocked fees.While total assets under management fell 15 per cent since the same time last year, the Baltimore-based manager’s worst outflows were in equities, with a 22.5 per cent drop, down to $687bn from $886bn. Not all of this was due to reduced market values — clients withdrew more than $16bn net from the manager this quarter, with $23.5bn in net outflows from equities. Rising rates and a brutal year for equities also resulted in a large drop in fees it charges on investments, trading, as well as for its advisory servicesThe quarter “showed some encouraging signs, despite the challenging environment…However, the market environment continues to be uncertain and our equity flows remain under pressure,” said Rob Sharps, chief executive officer. More

Several Federal Reserve officials stressed the need for “flexibility and optionality” at its last policy meeting in March, as a string of bank failures injected new uncertainty into its fight against persistent inflation. This approach will remain a priority for members of the Federal Open Market Committee at this week’s policy meeting, which could deliver the final interest rate rise of a historic monetary tightening campaign. Markets anticipate another increase of a quarter of a percentage point, bringing the benchmark federal funds rate from close to zero just over a year ago to a new target range of 5 to 5.25 per cent. The focus for economists is not the rate decision itself but the guidance that Fed officials provide about their future intentions. As recently as March, most Fed officials saw 5 to 5.25 per cent as this year’s peak rate. Officials this week are set to revive debate over whether it is time to pause further increases.Enduring concern that inflation is still far too high has made it difficult to rule out further rate rises, even as turmoil in banking sparks worries over tougher credit conditions. The meeting concluding on Wednesday comes on the heels of the fourth US bank failure since March, with the shutdown of California-based First Republic. “There’s little doubt that given how high inflation still is . . . they are going to need to keep policy tight, but I think there is a serious case to be made that we are reaching a peak with interest rates,” said Karen Dynan, a former senior Fed staffer. However, “it would not serve them well to tie their hands or be really specific about where they think things are heading”. When the Fed last revised guidance in March, the policy committee signalled it was closer to ending its rate-rising campaign than just a few months ago. Rather than highlighting the need for “ongoing increases” in the benchmark rate, as had been the case for a year, the policy statement said “some additional policy firming may be appropriate”. Fed chair Jay Powell urged reporters at the time to focus on the words “some” and “may” in that phrase. In a realm where subtle changes in wording are closely scrutinised, one option for the Fed is to repeat its March language or to make marginal tweaks, such as specifying that additional policy firming may “yet” be appropriate. This would suggest that while the Fed may not raise rates again at its meeting in June, it could still tighten policy further, economists said. Some economists think the Fed will echo the language it used towards the end of a previous rate-raising cycle in 2006, when it declared that “the extent and timing of any additional firming that may be needed will depend on the evolution of the outlook for both inflation and economic growth”.Striking the right balance is critical, said Şebnem Kalemli-Özcan, an economist at the University of Maryland and a member of the New York Fed’s economic advisory panel. If officials nod too clearly towards a pause and the economic data suggests even higher rates are necessary, it could force them to backtrack.“That is very dangerous,” she said. “That is exactly the situation I think they should avoid.”Inflation data has been somewhat mixed in recent weeks. First-quarter wage data came in stronger than expected, with the so-called employment cost index now up at least 1.1 per cent in each of the past seven quarters. Thomas Simons, senior economist at Jefferies, said Fed officials “have to be alarmed that there hasn’t been any material slowing here”.Core US inflation has slowed per the personal consumption expenditures price index, but the underlying pace still remains elevated at nearly 4.5 per cent, estimates Tim Duy, at SGH Macro Advisors.Jan Hatzius, chief economist at Goldman Sachs, said officials would guard against strongly signalling a pause given concerns that could then reinforce expectations for the Fed to abruptly reverse course this year and slash rates. Futures markets show most traders wagering the central bank will cut rates later this year to below 4.5 per cent by the start of 2024, an idea Fed officials have contested. “There’s going to be a desire to keep the market from concluding that we’re about to see cuts and so I think the signalling is going to be that the risks are tilted towards additional hikes from here,” Hatizius said. He does not forecast the Fed cutting rates until 2024, given his view that inflation will descend slowly from here and without a sharp downturn in the economy.

The biggest unknown stems from turbulence in the US banking system. After a tense weekend of negotiations, the Federal Deposit Insurance Corporation early on Monday orchestrated a deal with JPMorgan Chase for the country’s largest bank to acquire most of First Republic, resulting in the second-biggest bank failure in US history. Aside from the threat of more banks going bust, regional lenders have retrenched, pulling back on lending and adopting a more conservative stance as they await harsher supervisory standards that the Fed has warned are on the way.Fuelling further uncertainty is a looming deadline to raise the federal debt ceiling, which Treasury secretary Janet Yellen on Monday warned could be breached as early as June 1. A default would be an economic catastrophe, policymakers have warned.Officials already appear divided over the intensity of the coming credit shock, which could mean future rate decisions are made by a more fractured monetary policy committee. Ajay Rajadhyaksha, global chair of research at Barclays, said the Fed had made clear the process to get inflation under control would not be painless. “They want some jobs to be lost. They want some eggs to break. They do not want a widespread banking crisis because then the collapse in demand is non-linear and longer. But a credit contraction? Yes.” More

INCHEON, South Korea (Reuters) – Japanese Finance Minister Shunichi Suzuki and his South Korean counterpart Choo Kyung-ho on Tuesday met on the sidelines of the Asian Development Bank (ADB) annual meetings held this week.It was the first bilateral finance leaders’ meeting in seven years, highlighting improving relations between Japan and South Korea in the face of North Korea’s frequent missile launches and China’s more muscular role on the global stage. More

Banga, 63, the sole contender to replace departing president David Malpass, is expected to win the consensus-based vote handily after a three-week charm offensive that saw him meet with government officials, business executives and civil society groups around the world, the sources said. If approved, Banga could start in the new job in early June after the June 1 departure of Malpass.U.S. President Joe Biden nominated Banga, an Indian-born executive who is now a U.S. citizen, in late February.One of the sources said Banga had impressed shareholders in recent weeks as a “true change maker” who will help accelerate reforms at the global development bank, which is under pressure to increase its lending to help developing countries address global challenges such as climate change and conflict.U.S. Treasury Secretary Janet Yellen told Reuters last month she is insisting that next steps in the World Bank’s evolution be taken “on a rolling basis” in coming months, after the bank’s board approved an initial set of reforms at its spring meetings.She said attracting more private capital for development goals would be a key area of focus for Banga if he is approved.The World Bank has been led by an American since its founding at the end of World War Two, while the International Monetary Fund has been led by a European. More

WASHINGTON (Reuters) – U.S. lawmakers responded to news that the federal government could be unable to pay its bills as soon as June 1 by digging in on partisan positions, even as Democratic President Joe Biden agreed to meet with lawmakers on the debt ceiling next week.Democratic Senate Majority Leader Chuck Schumer on Monday began to clear the way for a vote for a bill that would suspend the government’s $31.4 trillion debt limit for two years without conditions.Republicans in the Senate and House have said repeatedly that they would not vote for such a measure, instead lining up behind a bill passed by the Republican-controlled House of Representatives last week that would raise the debt limit by $1.5 trillion or until March 31, whichever comes first, with $4.5 trillion in spending cuts over 10 years.Biden and Republican House Speaker Kevin McCarthy have not met since February, with the White House insisting that it would not negotiate on raising the debt ceiling, a move needed to cover the costs of spending and tax cuts previously approved by Congress.U.S. Treasury Secretary Janet Yellen said in a letter to Congress that the agency may be unable to meet all of its debt obligations as soon as June 1 if the debt ceiling is not raised, putting new urgency on talks in Congress.The potential June 1 deadline was earlier than Treasury’s prior June 5 forecast, though it said it was possible that the actual “X-date” would not come until weeks later than June 1.”It’s about time. I’m glad Biden is finally doing his job,” Republican Senator Rick Scott said on Twitter, after the White House said Biden would meet with the top two Republicans and Democrats on May 9.Democrats urged prompt action to raise the limit, necessary to cover the costs of spending and tax cuts previously agreed to by Congress.”This is nothing to fool around with. The money has been spent. We do not want to default. Let’s get the debt ceiling taken care of, but let’s talk about how we can reduce the deficit and common sense ways,” Democratic Senator Jon Tester told reporters. “If we don’t get the debt ceiling, then we go into a depression.”PRIOR RATING CUTCongress’ last long standoff, in 2011 when Democrat Barack Obama was president and Republicans controlled the House, led to a historic downgrade of the nation’s credit rating, which hammered markets and raised borrowing costs.The May 9 date for Biden to meet with McCarthy, Schumer, top Senate Republican Mitch McConnell and top House Democrat Hakeem Jeffries is also the next time both chambers of Congress are scheduled to be in session, after a week-long House recess. In all, Congress is scheduled to convene for no more than a dozen days before the June 1 deadline.Some lawmakers said they wished the meeting were sooner.”I’m happy they’re going to sit down and talk. Why not tomorrow and over the weekend?” Republican Senator Mitt Romney said. “I’m not going to try and scare anybody. But I’ll tell you that as soon as people start realizing what we’re talking about here, I think there are going be a lot of very upset people.”McConnell told reporters that he had had a “good conversation” with Biden on Monday, but offered few other details.Democrats said they could not accept the bill House Republicans passed last week.”Republicans’ failure to agree to cleanly raise the debt ceiling has brought the United States to the brink of economic catastrophe,” said Democratic Senator Sheldon Whitehouse, chair of the Senate Budget Committee. “Hostage-taking is not the way this country governs. We must change course, cleanly raise the debt ceiling, and avert widespread economic pain and instability while we still can.”No. 2 Senate Republican John Thune told reporters that word from the Treasury Department that the “X-date” beyond which the government will no longer be able to meet all its obligations could arrive by June 1 was a wake-up call.”It reinforces the need for the president to get up here or to get McCarthy down there to meet with him, one way or the other. I mean, time is a-wasting.” More

See below some of their comments:EDWIN CONWAY, GLOBAL HEAD OF BLACKROCK ALTERNATIVES:”This is a difficult environment to navigate. There’s so many more asset classes today than ever before. You just need to be very careful. There are still meaningful returns to be made, but risks are higher.”KAREN KARNIOL-TAMBOUR, CO-CIO AT BRIDGEWATER ASSOCIATES”The problem is that when you get paradigm shifts that really change the nature of the market environment, it takes a long time for that to get fully digested by investors.”DAVID HUNT, PRESIDENT AND CEO OF PGIM”I think that the market fundamentally underestimates the strength of the U.S. economy and therefore is underestimating both how high rates will need to go and how long they will need to stay there.”BROOKS RITCHEY, CHAIRMAN AT K2 ADVISORS”There’s a fairly sizable refinancing cycle coming up in both real estate and industrial companies. That’s going to put some pressure on highly indebted sectors. So fixed income long-short hedge fund managers feel that there’s going to be very interesting distressed opportunities in eight, ten, twelve months.”JACOB KOTZUBEI, CO-PRESIDENT OF PLATINUM EQUITY”We are in an amplified uncertain environment. You have to be prepared for higher (interest rates) for longer.” More