Aurelia Butler

NEW YORK (Reuters) – U.S. officials are coordinating urgent talks to rescue First Republic Bank (NYSE:FRC) as private-sector efforts led by the bank’s advisers have yet to reach a deal, according to three sources familiar with the situation.The Federal Deposit Insurance Corporation (FDIC), the Treasury Department and the Federal Reserve are among government bodies that have in recent days started to orchestrate meetings with financial companies about putting together a solution for the troubled lender, the sources said.While the government has been in contact with First Republic and its advisers for weeks, its new involvement is helping bring more parties, including banks and private equity firms, to the negotiating table, one of the sources added. It is unclear whether the U.S. government is considering participating in a private-sector rescue of First Republic. The government’s engagement, however, has emboldened First Republic executives as they scramble to put together a deal that would avoid a takeover by U.S. regulators, one of the sources said. First Republic became the epicenter of the U.S. regional banking crisis in March after the wealthy clients it courted to fuel its breakneck growth started withdrawing deposits and left the bank reeling.U.S. officials view a private-sector deal as preferable to First Republic falling into FDIC receivership, two of the sources said. But many of the options proposed – including selling assets or the creation of a “bad bank” that would isolate its underwater assets – have so far failed to yield a deal, the sources added. Any solution would have to come with coverage for the losses First Republic or a potential acquirer of the bank would assume if there was a transaction. These losses would stem from First Republic’s loan book and fixed-income portfolio, whose low-yielding assets would be marked down to account for a rise in interest rates.  The deal structure that stands the best chance of rescuing First Republic is a special purpose vehicle that would carve out some of the lender’s assets for other banks to buy, two sources familiar with the discussions said.Banks have been reluctant to purchase these assets at a market discount, and First Republic is hoping that U.S. officials can convince them to participate or provide some kind of government backstop for a deal, one of the sources said. CNBC reported on Friday, citing sources, that the government talks are now focused on preparing to put First Republic into FDIC receivership, and that such an outcome was likely. In receivership, an FDIC fund would assume any losses incurred through taking over First Republic’s underwater assets. The FDIC would then recoup those losses from all the banks contributing to its insurance scheme, without a hit on U.S. taxpayers. The sources requested anonymity because the discussions are confidential. “We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients,” First Republic said in a statement.The Treasury Department, Federal Reserve and FDIC declined to comment.First Republic shares were trading down 30% to $4.31 on Friday. Wall Street banks have been trying to find a solution for First Republic since 11 of the biggest U.S. lenders deposited $30 billion at the bank on March 16 to stanch a regional banking crisis that led to the failure of Silicon Valley Bank and Signature Bank (OTC:SBNY). Discussions for a deal took on new urgency this week after First Republic on Monday revealed it had deposit outflows of more than $100 billion in the first quarter. Although the bank said its deposits had stabilized, it disclosed that it was losing money because it had to replace the withdrawn deposits with interest-bearing funding from the Federal Reserve.First Republic is contemplating a major hit, and even a total loss for shareholders, as part of the options that would prevent U.S. regulators from taking it over, one of the sources said. First Republic shares have lost 95% of their value since the regional banking crisis started on March 8. More

Today’s top storiesThe US Federal Reserve pinned the blame for the failure of Silicon Valley Bank on Trump-era changes in regulation. Richard Sharp quit as BBC chair after an investigation found that he breached the rules by failing to declare his role in a loan guarantee made to former prime minister Boris Johnson before Sharp’s appointment.The UK government’s hopes of easing the health workers’ pay dispute in England were boosted after the GMB union said its members had accepted a deal. Although members of the Unite union have voted against, the GMB’s backing is likely to swing a crucial vote at next week’s meeting of NHS employer representatives, unions and the government.For up-to-the-minute news updates, visit our live blogGood evening.Fresh economic data on both sides of the Atlantic today has complicated matters for policymakers ahead of key policy decisions next week from the US Federal Reserve and the European Central Bank.The eurozone returned to growth in the first quarter but the rise in output was a less than expected 0.1 per cent, as weaknesses in Germany, the bloc’s biggest economy, offset better figures from France, Italy and Spain. Meanwhile national data showing inflation remaining high in several eurozone countries such as France led investors to bet that the ECB would stick with the pace of its interest rate-rising programme next Thursday. Just to make the ECB’s job that much more difficult, Germany then reported inflation had slowed more than expected, to 7.6 per cent.Pierre Wunsch, the head of Belgium’s central bank and one of those who will be part of the ECB decision, told the FT this week that investors were underestimating how high rates could still go, especially if wage growth remains stubbornly high.The Fed, which makes its decision on Wednesday, also faces a difficult balancing act.US labour costs, which it sees as one of the most reliable indicators of wage growth and hence inflation, increased by more than expected in the first quarter. Separate inflation data, including the “core” reading of the personal consumption expenditures price index — the Fed’s favoured measure — was also higher than expected at 4.6 per cent in the year to March, down from an upwardly-revised 4.7 per cent in February.Separate data yesterday showed economic growth in the first quarter slowing more than expected to 1.1 per cent. Officials have said that returning to the Fed’s longstanding 2 per cent target for inflation would need a period of below-trend growth as well as a softening in labour market conditions.For comparison, the US economy is now 1.6 per cent larger than in the first quarter of 2022, compared with eurozone growth of 1.3 per cent and 4.5 per cent for China. Need to know: UK and Europe economyThe UK is set to abandon its much-criticised plan to ditch thousands of pieces of EU-derived law by the (arbitrary) deadline of the end of this year, sparking fury among Brexit ultras. The UK also announced the biggest shake-up in the gambling industry since 2005 with new restrictions on online platforms to curb problem gambling and a levy on operators to fund public health initiatives. Brussels is discussing restrictions on certain EU exports to countries that it suspects are re-exporting sanctioned products to Russia, in an effort to prevent critical components from ending up on the battlefield in Ukraine.Coal demand in Europe fell over the winter despite the energy crisis, leaving renewable energy outstripping fossil fuels for electricity generation for the first time.Need to know: Global economyUS president Joe Biden is urging Wall Street donors to help fill a $1bn-plus war chest to fund his campaign for re-election. Republican donors meanwhile are uncertain where to place their bets as would-be contender Ron DeSantis, in London today to burnish his foreign policy credentials, struggles to mount an effective challenge to Donald Trump.American authorities ordered a tanker of Iranian crude oil to redirect towards the US, in a move officials believe was the trigger for Iran’s decision to capture a US-bound tanker on Thursday. The Opec cartel hit out at the International Energy Agency’s calls to halt investment in oil, arguing it was stoking “volatility”.The latest sign of Chinese consumers tightening their belts? Falling demand for cheese lollipops.Our latest piece of visual journalism is an in-depth look at India’s changing population. Can the country’s policymakers seize the demographic dividend of a large youthful population to accelerate growth and help it become an economic superpower?Need to know: businessDeutsche Bank reported its highest profit in a decade in the first quarter, a 12 per cent rise to €1.9bn, but revealed it was subjected to a speculative attack during the recent banking turmoil. It also announced the acquisition of UK broker Numis. Barclays reported a 27 per cent rise in profits to £1.8bn as rising interest rates boosted income from retail banking and credit cards. NatWest shares fell on disappointing deposit figures despite reporting better than expected pre-tax operating profits of £1.8bn. Profits at ExxonMobil and Chevron fell from record highs in the first quarter, but still beat Wall Street forecasts. Exxon made $11.4bn while Chevron reported earnings of $6.6bn.Solid first-quarter results from US Big Tech have buoyed confidence in the sector after a period of cost-cutting. AI is clearly a better investment proposition for Facebook parent Meta than its earlier focus on the metaverse, the Lex column says. Norway’s $1.4tn wealth fund called for AI to be state regulated. British American Tobacco this week agreed to pay a $635mn penalty to US authorities after a subsidiary pleaded guilty to charges that it violated US sanctions on North Korea, in the largest settlement of its kind. Here’s our explainer.Science round upA Japanese company’s bid to make the first commercial Moon landing ended in failure after the module crashed on to the lunar surface. The mission was masterminded by ispace, a start-up that carried the hopes of thousands of investors and a country desperate for success in outer space. Commentator Anjana Ahuja, reporting on historical treasures being made accessible online by the Royal Society, highlights the power of scientific rivalries in driving innovation.US pharma group Eli Lilly is seeking approval for its obesity drug Tirzepatide, which tests have shown can slash body weight by nearly a sixth.US regulators approved the first human pill derived from human faeces for the potentially deadly gut infection C.difficile. It is one of a new class of “microbiome therapeutics” that aim to restore the balance of live bacteria in patients’ guts to boost their immune system and prevent infection.The devastating drought in the Horn of Africa was made 100 times more likely because of climate change, scientists have concluded. The drought that has hit swaths of east Africa since 2021 has led to crop failures, animal deaths and left more than 4mn people in need of humanitarian assistance and 20mn at risk of food insecurity.British companies are finally attempting to make carbon capture a reality after years of encouragement from the government. The big prize is a domestic industry that not only helps reduce domestic emissions but can ensure its profitability by storing carbon shipped in from other countries.Some good newsUS researchers say they have discovered how long-lasting memories form in the brain, potentially shedding light on the causes of neurological illnesses such as Alzheimer’s. Something for the weekendThe FT Weekend interactive crossword will be published here on Saturday, but in the meantime why not try today’s cryptic crossword? Some good news More

Having listened to many officials and government ministers speaking about the global economy in recent months, I have sensed their visceral fear of sounding complacent. The world is uncertain and fragmenting, they say. There are risks of a hard landing. Great power rivalries undermine prospects. We face a world of frequent adverse supply shocks. And things are so bad, we are living through a “polycrisis”.The inevitable conclusion, everyone earnestly agrees, is that now is the time for vigilance. I fully understand why we are hearing this chorus of concern, for nobody wants to emulate the IMF’s spring 2006 global financial stability report. Shortly before the global financial crisis, Gerd Häusler, then the fund’s director of international capital markets, said that stability in financial markets was “as good as it gets” with “sharply improved resilience”. It was an honest assessment, but catastrophically wrong.Nevertheless, I have great sympathy for Häusler’s decision to describe the global economy accurately rather than cover his back. So, in this spirit, it is important to note that the global economy in 2023 has so far gone pretty well and much better than feared. Here are five important reasons to be cheerful.If you look at the world’s largest economies — China, the US, the EU, India, Japan, the UK and South Korea — none is in recession (contrary to predictions) at a time when the Federal Reserve has raised US interest rates five percentage points. That is unusual and positive, said Adam Posen, head of the Peterson Institute of International Economics. The resilience in almost 70 per cent of the global economy alongside the absence of any financial distress in large emerging economies makes a system-wide financial crisis unlikely, he told me. Why then is there so much gloom around? “We’re all scared of sounding arrogant and overconfident,” Posen said. The second reason to be happier about the global economy stems from one of the often repeated weaknesses — that the world is suffering from a series of adverse supply shocks. That is true, but shocks wane as well as wax. Global difficulties in moving goods are fast disappearing, with the Federal Reserve Bank of New York’s supply chain pressure index now well below its historical average. In a separate indicator, a Kiel Institute tracker of the proportion of freight on stationary container ships waiting to get into ports is now also back to normal levels.Europe, specifically, can welcome a positive shock in lower natural gas prices. The speed and solidarity of its response to Vladimir Putin’s natural gas blackmail over the winter ensured no one froze, the lights stayed on and energy consumption fell significantly. All of this came without a recession. Compared with December’s forecasts from the European Central Bank, the current market price of gas over the next three years is more than 70 per cent lower, and almost 10 per cent lower than the central bank’s March forecasts. Sustainably lower gas prices than feared at the start of this year will allow Europe to have higher incomes, higher consumption and lower inflation, making the ECB’s task easier.If the data has been broadly resilient, no one should be naive about the economic risks of the increasingly strained political relationship between China and the US. Mutual antagonism has the potential to split the world into trading blocs, forcing nations to take sides and duplicating production with huge inefficiencies. But the latest moves — notably speeches from Janet Yellen, US Treasury secretary, and Ursula von der Leyen, European Commission president — have sought to reassure China that neither is trying to decouple its economy from the world’s largest manufacturer, nor stop China’s path to prosperity. Encouragingly, Yellen’s remarks were echoed by Jake Sullivan, Joe Biden’s national security adviser, on Thursday. This is progress and lowers a big risk.China’s emergence from its zero-Covid policy provides the fourth reason to look at 2023 with some optimism. Its economy grew at an annual rate of 4.5 per cent in the first quarter, faster than expected, with household consumption and domestic services leading the way. Although IMF officials this month chose to stress negative aspects of this rebalancing, higher Chinese domestic consumption is exactly what the global community has asked of Beijing for decades. It raises living standards, reduces the chances of an over-investment crunch and gives Chinese people more to lose if their government decides on a path of military aggression.The final reason for cheer is slightly parochial to oil-importing economies. At the start of this month, the Opec+ nations agreed to cut oil production by 1mn barrels a day, sending the Brent crude oil price climbing from about $77 a barrel to $85 immediately. It demonstrated a confident oil cartel, willing to pursue a Saudi-first policy at the expense of its customers around the world. The oil price has now sunk back to $77 a barrel. As a consumer-facing a cartel, there is nothing better than seeing it either unable to enforce its production quotas or unable to control the global price. Weakness in Opec+ is good for oil consumers and the global economy.There is no doubt that 2023 will provide further economic hiccups. Further banking stress, a US political impasse over its debt ceiling and persistently high core inflation are significant risks. But the year has started well, certainly better than expected. The global economic landscape in 2023 right now is pleasantly surprising. That is something to [email protected] More

Two closely watched US inflation reports rose by more than expected, highlighting persistent price pressures and resilience in the jobs market that strengthen the case for the Federal Reserve to raise interest rates next week.The labour department’s employment cost index, which tracks wages and benefits paid by private and public sector employers, rose 1.2 per cent in the first three months of this year, up from 1 per cent in the last three months of 2022 and higher than consensus forecasts of 1.1 per cent.Total pay for civilian workers rose 4.8 per cent year on year — down slightly from the previous quarter, but still well above its pre-pandemic average of 2.2 per cent.The index is closely watched by policymakers as a reliable indicator of wage growth, which is one of the biggest contributors to inflation, particularly in the service sector. Pay rises in this sector slowed slightly compared with the previous quarter, from 1.2 per cent to 1.1 per cent.Separately, the so-called Core PCE index — the Federal Reserve’s favoured inflation measure — was higher than forecast at 4.6 per cent year on year in March, while February’s number was revised upward to 4.7 per cent.“The latest readings that we’re getting on inflation pressures just aren’t moving in the right direction from the Fed’s perspective,” said Nancy Vanden Houten, lead US economist at Oxford Economics. “By many measures the [labour] market is still tight, and that may just mean that it takes longer for wage pressures to come down.”The Fed has been battling to bring inflation back towards its 2 per cent target after consumer prices hit a 40-year high last year. It has lifted its benchmark interest rate from close to zero at the beginning of last year to almost 5 per cent today, and is widely expected to announce a further 0.25 percentage point rise next week.However, while most observers are treating next week’s rate rise as a fait accompli, there is less consensus on whether the central bank will need to go further.Data released this week showed economic growth slowed dramatically in the first quarter and jobs growth has begun to slow. However, Friday’s figures are only the latest in a series of indications that some price pressures remain stubbornly high.Vanden Houten said Friday’s data meant a rate rise next week was now “pretty much a done deal”, and would increase the likelihood that the Fed would make a further increase in June. More

Milton Friedman famously declared that inflation is always and everywhere a monetary phenomenon. While this is undeniably true, no policymaker can afford to overlook the behavioural dynamics that are part and parcel of the inflationary process.In confronting an energy price shock it would be helpful, as Huw Pill, chief economist of the Bank of England, implied in a podcast last week, if companies and households stopped trying to maintain their real spending power by passing energy costs on to customers and bidding up wages.Yet the real question is simply how income losses will be shared between capital and labour after supply-side disruptions such as those arising from the Covid-19 pandemic and the war in Ukraine.Judging by company news this week, capital is doing pretty well in the battle. Nestlë, the food group, raised prices by almost 10 per cent in the first quarter, close to the fastest pace for more than three decades, at the cost of minimal loss of sales volume. Among other consumer goods groups, Procter & Gamble, PepsiCo and McDonald’s have all found consumers ready to accommodate sizeable price increases.In the meantime, banks in today’s higher interest rate environment have passed on little of their increased loan interest to depositors, with positive impact on margins. And oil companies, predictably enough, have enjoyed a Ukraine-related bonanza. In contrast few workers have managed to maintain real living standards. European Central Bank president Christine Lagarde worries about a “tit-for-tat” dynamic where the mutually reinforcing feedback between higher profit margins, higher nominal wages and higher prices produces so-called second round effects that cause an upward price spiral. This process goes a long way to explaining why inflation remains so high.Against that background it is surprising that there has been little discussion of the need for inflation accounting. In the inflationary 1970s, Martin Gibbs, a partner in stockbroker Phillips & Drew and one of the most influential voices in the inflation accounting debate, argued that when inflation reached anything like 10 per cent it was essential to find ways of measuring companies’ real, inflation-adjusted profits.Traditional historic cost accounts had become a meaningless mixture of “pounds” of different dates and of differing real values when expressed in terms of today’s pounds. More specifically, amounts set aside for depreciation of plant and machinery were, in a period of inflation, completely inadequate to provide funds for the replacement of those assets.Similarly, profits are overstated where the replacement cost of stock is soaring across the board. Nor does historic cost accounting allow for the decline in the real value of cash or the cost of borrowing arising from inflation.How, then, to explain the non-debate on inflation accounting?The short answer is that the policy framework back then was very different. In addition to corporate taxes being levied on artificially inflated historic cost profits, companies were squeezed by price controls and strong unions. In effect, British industry was going bust, which was reflected in a two-and-a-half-year plunge in the FT All Share index of 72.9 per cent between May 1972 and December 1974. At that level, the dividend yield on the index was 12.7 per cent while the price/earnings ratio on the 500 shares in the industrial index was just 3.6. Only when the then Labour chancellor Denis Healey introduced a tax break for stock appreciation could the equity market recover. Inflation finally peaked in 1975 at 27 per cent on the retail price index. Today, the structure of the advanced economies is very different, with a strong orientation away from manufacturing towards technology, intangibles and finance. That means less vulnerability to rising replacement costs — witness the numbers reported by Apple this week showing that the combined total of its property, plant, equipment and inventory of $49.8bn was less than the value of its net cash and securities pile of $56.1bn. Globalisation and efficient inventory management through cross-border outsourcing also reduces vulnerability to inflation. And, of course, the financial sectors of the US and UK, much bigger than in the 1970s, have no supply chain bottlenecks. The implication is that while company accounts may now be distorted by inflation, the squeeze on corporate cash flow is more bearable.All of this casts interesting light on the downgrading of Big Tech since the tightening of monetary policy. The present value of future earnings has shrunk because those profits are discounted at higher interest rates. Yet stubbornly high inflation highlights the defensive merits of such growth stocks as Apple, Alphabet, Microsoft and Meta, which between them have net cash and securities in the balance sheet of close to $250bn. In a world of renewed inflation, pricing power plus a super-facility for cash generation makes for a great combination of growth and [email protected] More

The Employment Cost Index, the broadest measure of labor costs, rose 1.2% last quarter after increasing 1.1% in the October-December period, the Labor Department said on Friday.Economists polled by Reuters had forecast the ECI rising 1.1%. Labor costs increased 4.8% on a year-on-year basis after advancing 5.1% in the fourth quarter. The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, because it adjusts for composition and job-quality changes. The Federal Reserve is expected to raise interest rates by another 25 basis points next week, potentially the last hike in the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s. The Fed has increased its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75%-5.00% range.Though annual growth in average hourly earnings in the Labor Department’s monthly employment report is slowing, the Atlanta Fed’s wage tracker remains elevated. The Fed’s “Beige Book” report last week noted that “wages have shown some moderation but remain elevated.” There were 1.7 job openings for every unemployment person in February.Wages and salaries increased 1.2% last quarter after rising by the same margin in the fourth quarter. They were up 5.0% year-on-year after rising 5.1% in the prior quarter. Private sector wages increased 1.2%, matching the fourth quarter’s gain. They advanced 5.1% year-on-year. State and local government wages climbed 0.9% after rising 1.1% in the prior quarter. They rose 4.7% year-on-year.Inflation-adjusted wages for all workers were unchanged on a year-on-year basis after declining 1.2% in the fourth quarter. Benefits increased 1.2% last quarter after rising 1.0% in the October-December period. They increased 4.5% year-on-year. More