Aurelia Butler

Europe’s biggest economy contracted by 0.4% in the final quarter of 2022 and its vast industrial sector is just starting to recover while high inflation is weighing heavily on consumption.”German economic activity will probably fall again in the current quarter,” the Bundesbank said. “However, the decline is likely to be less than in the final quarter of 2022.”While a recession – two consecutive quarters of negative growth – remains the most likely outcome, the labour market is proving resilient and the central bank said it expects continued positive developments for employment. The European Central Bank has raised interest rates by 350 basis points since July, the fastest pace on record, to tame runaway inflation but price growth could still hold above its 2% target through 2025. Overall inflation in Germany is likely to tumble in March as high energy prices get knocked out of year earlier figures, even if price growth will remain uncomfortably high.”That being said, the core rate is proving exceptionally persistent,” the bank said. “It could even increase slightly towards the middle of the year.”Euro zone core inflation, which excludes volatile food and fuel prices, has been inching up even as the overall inflation rate falls, as high energy prices of the past year are seeping into the other costs and wages. More

Good morning. Shares in Europe and Asia are falling today after a frantic weekend of talks to sell Credit Suisse failed to quell investors’ questions about the health of the global banking system.Shares in UBS are among the heaviest fallers after the Swiss bank agreed to buy its beleaguered rival for $3.25bn following an intervention by regulators.UBS agreed to pay about SFr0.76 a share in its own stock, up from an earlier bid of SFr0.25 that was rejected by the Credit Suisse board. The offer remains far below Credit Suisse’s closing price of SFr1.86 on Friday.As part of the deal announced yesterday evening, Switzerland’s national bank has offered a SFr100bn liquidity line backed by a federal default guarantee. The government is also providing a loss guarantee of up to SFr9bn, but only after UBS has borne the first SFr5bn of losses on certain portfolios of assets.The combination creates one of the biggest banks in Europe. UBS has $1.1tn of total assets on its balance sheet and Credit Suisse has $575bn.But under the terms of the deal, some of Credit Suisse’s additional tier one bonds (AT1), which are designed to take losses when institutions run into trouble and to transfer the risk of a bank failure from taxpayers to investors, are being wiped out.As a result the prices of bank shares and bonds are down today across Europe. In Asia, markets fell as lenders like HSBC and Standard Chartered sunk in value and futures trading is indicating that US stock markets will also fall at the open of Wall Street today.In a sign of the growing strains in the global financial system, the Federal Reserve and five other central banks yesterday said they would switch from weekly to daily auctions of dollars from today and run the daily swaps until at least the end of next month.If like me you’re wondering about what to make of the rapidly growing crises on both sides of the Atlantic, I recommend reading:Go deeper: While Credit Suisse was Europe’s problem child, other banks are not necessarily immune, writes Martin Arnold.Here’s what else I’m keeping tabs on today:Xi in Moscow: Chinese president Xi Jinping tests his “no limits partnership” with Russia’s Vladimir Putin when the two leaders meet in Moscow.France: Emmanuel Macron’s government faces a no-confidence vote in the French assembly over its unpopular pension reforms.Thank you for your feedback on FirstFT’s redesign. Please send us your thoughts on today’s update to [email protected]’s top news1. Top Democrats in Congress have called for a federal investigation into the role played by Goldman Sachs in the collapse of Silicon Valley Bank, and urged regulators to examine whether the investment bank’s profits handling a $21bn trade for SVB should be repossessed.White House response: Joe Biden is calling on Congress to make it easier for regulators to punish executives at failed banks.2. New York Community Bank has agreed to buy most of the operations of failed Signature Bank, including “substantially all” of its deposits and just over a third of its assets. Read the full story here.3. EXCLUSIVE: The US proposal for a new carbon credit system has begun sizing up potential interest from countries and corporate backers to help finance the shift of poorer nations away from fossil fuels. Here’s how it could dovetail with “just energy transition” efforts.4. Microsoft is preparing to launch a new games store on iPhones and Android smartphones as soon as next year if its $75bn acquisition of Activision Blizzard is cleared by regulators, according to the head of its Xbox business.5. EXCLUSIVE: Big Pharma has asked for a slice of the US’s $280bn chip industry support package as part of an effort to build up the country’s biotechnology industry and stave off Chinese competition. Read more about the tax breaks and subsidies that drugmakers are requesting. The Big Read

Microbial fertilisers such as those being developed at Loam Bio lab are more affordable than nitrogen fertilisers and longer-lasting © Monique Lovick

There are few problems larger than the climate crisis. But one potential solution is so small it cannot be seen with the naked eye: microbes. In 2019, Tegan Nock, a 32-year-old former rancher, co-founded farming start-up Loam Bio and has developed a microbial fungi that when applied to soil might not only improve its health but greatly enhance its ability to store carbon. These small but mighty micro-organisms could be the way forward.We’re also reading . . . Banking in Mexico: Less than half of Mexico’s adult population has a bank account. That may now be changing thanks to a new initiative by Latin America’s largest convenience store operator.Wirecard scandal: Like his grandson Jan, the mastermind of the Wirecard fraud, Hans Marsalek was suspected by Austrian authorities of being a Russian spy.Leadership: From SVB to the BBC: why did no one see the crisis coming? Michael Skapinker explains.Chart of the dayAfter the global pandemic, Hong Kong and Singapore saw an opportunity to challenge traditional offshore financial centres such as the British Virgin and Cayman Islands. Rule changes have attracted pension funds and family wealth offices to the rival Asian financial centres. For Singapore, the strategy has been widely popular.

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Take a break from the newsFor anyone looking to buy a home near Lake Tahoe, higher mortgage rates are curbing what they can afford. As a result, home sales have fallen sharply and properties that are selling are going below the list price.

A four-bedroom, three-bathroom mountain home in Tahoe Donner on sale for $1.85mn

Additional contributions by Tee Zhuo and Annie Jonas More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyMany commentators have rushed to embrace the view that Federal Reserve policy is now in a new world following the sudden failure of three US banks and the deployment of “bazooka measures” to safeguard the financial system. But in reality, the developments represent the amplification of a longer-running predicament. They put the Fed in a deeper policy hole and make this week’s decision on US interest rates particularly important.The failures of Silicon Valley Bank, Signature Bank and Silvergate reflected mismanagement at each of the three companies — and supervisory lapses. They forced the Fed, the Department of Justice and the Securities and Exchange Commission to launch investigations. The Fed will also now consider strengthened regulation for midsize banks. Yet this is only part of the story. The failures were also a reflection of the mishandled shift in the country’s interest rate regime. After allowing financial conditions to be too loose for way too long, the Fed slammed on the brakes only after a protracted and damaging mischaracterisation of inflation as transitory.It should not come as much of a surprise that this caught some institutions offside and there is now a risk of a generalised tightening of lending standards as a result. This is despite the fact that after the SVB collapse, the Fed was quick to open an attractive funding window that allows banks to get cash at par against high-quality securities that are worth less than that in the open market.The Fed faces an intensified trilemma: how to simultaneously reduce inflation, maintain financial stability, and minimise the damage to growth and jobs. With financial stability concerns seemingly running counter to the need to tighten monetary policy to reduce high inflation, it is a situation that complicates this week’s policy decision-making.Market pricing for this week’s monetary policy action by Fed has gone from a 70 per cent probability of a Fed 0.5 percentage point rise less than two weeks ago to favouring no increase followed by significant cuts. This is despite the re-acceleration of core inflation and another month of better than expected US job creation. The predicament highlights, yet again, the risks posed by the dominance of the financial sector.It would not surprise me if the Fed is tempted to fudge this week, hiding again behind the veil of “data dependency”. Yet it is less easy to do this now because the approach yields two competing options: react to hot economic data by raising rates by 0.25 percentage points; or react to market data by keeping rates unchanged or cutting them.The past few years’ decision-making process at this Fed suggests that, unfortunately, it could well opt for an intermediate solution, believing that it would keep its policy options open at a particularly volatile and uncertain time. It would leave rates unchanged and accompany this with forward policy guidance that signals that this is a “pause” rather than the end of the raising cycle.But this would not prove an effective compromise. Instead, the trilemma would deepen as growth prospects dim due to tightening lending standards, vulnerabilities in banks and other financial companies add to financial stability risk, and inflation has become stickier.The muddled middle would not provide the US with the monetary policy anchor it has desperately lacked and urgently needs. Instead, it would set up more policy flip-flops that fail to deliver a soft landing while amplifying unsettling financial volatility.All this leads to two policy priorities. In the short-run, the Fed should follow the European Central Bank in clearly communicating the risks of using monetary policy for multiple and competing objectives and highlight the distinctiveness of its policy tools rather than commingle them. It should also increase rates by 0.25 percentage points (less than the ECB’s 0.5 point rise).Over the longer term, and as I have argued in an earlier column, it is critical to address the Fed’s structural vulnerabilities including weak accountability and lack of cognitive diversity. It needs to reformulate the “new monetary framework” adopted in 2020, and consider the case for changing the 2 per cent inflation target to reflect the structural pivot from a world of insufficient aggregate demand to one of insufficient supply.This is not easy for the Fed. Yet it is a lot better for America’s wellbeing. The alternative of continuing with the current policy approach is sure to fail to deliver low inflation, maximum employment, and financial stability. That would also increase political pressure on the Fed’s operational independence. More

“The international situation has now reached a new turning point. There are two winds in the world today, the east wind and the west wind . . . I believe, that the east wind is prevailing over the west wind.” Those comments might read like an advance copy of the remarks that Xi Jinping intends to make during his visit to Moscow this week. In fact, they come from a speech made by another Chinese leader, Mao Zedong — visiting Moscow in 1957.Echoing Mao, Xi often claims that: “The east is rising and the west is declining.” Xi, like Mao and Putin, also believes that Russia and China share an interest in accelerating the decline of western power. Two weeks ago, the Chinese leader accused the US of pursuing a policy of “containment, encirclement and suppression” aimed at China.Russia and China’s leaders are also, once again, meeting against the backdrop of a fear of nuclear war. In Moscow in 1957, Mao urged his audience to consider the upside of nuclear conflict: “If the worst came to the worst and half of mankind died, the other half would remain while imperialism would be razed to the ground and the whole world would become socialist.” Even for his Soviet audience, this was strong stuff.President Xi, by contrast, will present himself in Moscow as a man of peace. He arrives basking in the glow of a real diplomatic achievement — a Chinese-brokered rapprochement between Iran and Saudi Arabia. China has also recently put forward a 12-point peace plan to settle the war in Ukraine. It is possible that, while in Moscow, Xi will propose an immediate ceasefire. After his summit with Vladimir Putin, the Chinese leader is likely to call President Volodymyr Zelenskyy of Ukraine. Zelenskyy will doubtless take that call. Xi has enormous leverage over Putin; should he choose to use it. But Zelenskyy and the western coalition backing Ukraine will also be appropriately sceptical about China’s peace proposals. The reality is that Xi is very unlikely to be either willing or able to broker an end to the Ukraine war.Unlike with Saudi Arabia and Iran, China is not mediating between two parties who are ready to come to an agreement. Beijing is also not a neutral player in this conflict. Although China has abstained in UN votes condemning Russia’s invasion of Ukraine, it has consistently used Russian terminology to describe the conflict. Qin Gang, China’s foreign minister, recently lauded relations between Russia and China as a “driving force” in world affairs. The Chinese can also be counted upon to dismiss the International Criminal Court’s indictment of Putin.The current Chinese “peace plan” says nothing about Russian withdrawal from occupied Ukrainian land. If Xi proposes a ceasefire in the war, the Russians can safely feign enthusiasm — knowing that Ukraine will reject the idea while their lands are occupied. Even if a ceasefire was declared, Russia could always violate it — as it has in the past.For Xi, however, it is useful to present China as a pragmatic peacemaker — interested, above all, in trade and shared prosperity. America, by contrast, is portrayed by China as an ideological warmonger, dividing the world into friends and enemies — and fixated on preserving its own hegemony. That narrative helps China in the battle for opinion in the “global south” — and it worries the Americans.But behind the talk of peace, the substance of the Xi-Putin summit will push in the opposite direction — since it will involve increased Chinese support for Russia, as it wages a war of aggression. Alexander Gabuev, one of Russia’s leading China watchers, now in exile, comments: “Make no mistake: the trip will be about deepening ties to Russia that benefit Beijing, not about any real peace brokering.”The big question will be what ties Xi sees as beneficial to China. The economic part is easy. As the west weans itself off Russian energy, China is able to buy oil and gas at reduced rates. Putin and Xi are likely to agree to accelerate work on another gas pipeline between their countries. Supplying Russia with goods that it can no longer buy in the west, in particular semiconductors, is also a lucrative move for Beijing — although some Chinese firms will be wary of falling foul of western sanctions. The Russian and Chinese leaders are also likely to continue efforts to promote alternatives to the dollar as a global currency.The really sensitive question will be Putin’s requests for Chinese weapons — in particular artillery shells and missiles to make up for the shortages that are undermining Russia’s war effort. The US warned last month that China was considering making this move. Whatever Putin and Xi agree is likely to remain a closely guarded secret. Also hidden from view will be any tensions between Russia and China. Some American strategists hope that one day they might be able to engineer a second Moscow-Beijing split — like the one that led to the US-China rapprochement of the 1970s. But that currently seems even further over the horizon than a successful Chinese peace initiative over Ukraine.The pictures of Xi and Putin together in Moscow will send a clear message. Russia and China remain close partners — linked by their joint hostility to America and its [email protected]

Video: Former PLA officer says China is restraining Russia over use of nuclear weapons More

Little more than a week ago, investors thought it was a done deal that the Bank of England would press ahead with yet another increase in interest rates when its Monetary Policy Committee meets this week.By the end of last week, pricing in financial markets suggested that the chances of a policy move on Thursday would be no better than even.Successive scares in the financial sector did not deter the European Central Bank from raising interest rates by 50 basis points last week, sticking to the script it had set earlier in the year.But even before the collapse of Silicon Valley Bank — let alone the weekend’s frantic negotiations to forge a rescue deal for Credit Suisse — the case for a further rise in the UK’s benchmark interest rate, which has climbed from 0.1 per cent to 4 per cent in just 14 months, was less clear-cut.“For central banks that believe they have a lot more tightening to do, for now it’s business as usual,” said Philip Shaw, economist at Investec. “Those that aren’t sure could put rates on hold. That’s the category into which we put the Bank of England.”When the MPC last met in early February, it abandoned its previous guidance that further rate increases were needed, saying instead that it would act only on evidence of “persistent inflationary pressures”.BoE governor Andrew Bailey warned investors earlier this month not to assume that UK interest rates would rise further, as the UK’s inflation dynamics did not necessarily match those of the US and EU.“At this stage, I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more,” he said on March 1.Data released since then has shown that the economy was more resilient than expected in January, with GDP growth of 0.3 per cent pointing to a shorter, shallower downturn than feared.This could be seen as vindication of the arguments put forward by Catherine Mann, the most hawkish member of the MPC, who argued in February that a year of policy tightening had not yet had as much of an effect as expected, and that more was needed “sooner rather than later”.Kallum Pickering, economist at Berenberg, said that “short of something going drastically wrong”, this pointed to a further 0.25 percentage point rate rise on Thursday, as “with less worry about recession, policymakers will probably feel more confident to lean a bit harder on domestic inflation pressures”.Andrew Goodwin, at the consultancy Oxford Economics, took a similar view, saying that while the situation was “incredibly volatile”, he expected the MPC to vote through one last quarter-point increase.“A majority of MPC members will want to raise interest rates by 25 basis points to make sure they aren’t going easy on inflation too soon,” said Paul Dales, at the consultancy Capital Economics.The MPC will also need to take account of measures announced by chancellor Jeremy Hunt in last week’s Budget, including further support for household energy bills, help with childcare costs and a £9bn tax break to boost business investment.Although these could eventually strengthen the supply side of the economy, in the short term they are more likely to lead to stronger demand, which the BoE would need to offset to keep inflation on target.However, other data could strengthen the arguments made by the more dovish members of the MPC — such as Swati Dhingra, who thinks that external price pressures are already easing and that there is little evidence of wages spiralling upwards at a pace that would keep inflation too high.Inflation fell to 10.1 per cent in January, in line with the BoE’s forecasts, but a sharp drop in service sector inflation could be more significant because this is a better reflection of underlying pressures.The backdrop in the labour market also looks more benign. Although there are still more than 1mn vacant jobs, private sector wage growth is finally slowing and the workforce is starting to grow again.The MPC will see one more key set of data — February’s inflation print is out on Wednesday — before taking its decision. It will also have a clearer view of the extent of problems in the global banking sector, and will know whether the US Federal Reserve sees these as sufficient reason to slow or pause its own rate-raising cycle.“By far the biggest issue . . . will be inflation versus financial stability,” said Thomas Pugh, economist at RSM, who thinks that the flare-up of risks will lead the MPC to “press pause earlier”.The BoE’s own message on Sunday, after Swiss authorities engineered the takeover of Credit Suisse, was that the UK banking system was “well capitalised and funded and remains safe and sound”.But even if the problems seen so far are contained, and do not become broader systemic issues, they show that rising interest rates are now having a tangible effect on both the financial sector and the real economy, with tighter financial conditions now likely to do some of central banks’ work for them.“The situation is still very much in flux,” Dales said. “The fact that problems in the banking system . . . can be traced back to the rises in global interest rates means it is natural for the MPC to become more wary about further tightening the screws.”

Video: Fractured markets: the big threats to the financial system More

TOKYO (Reuters) – Bank of Japan (BOJ) must be ready to work further towards improving market functions if needed, a central bank policymaker was quoted as saying at a March meeting, underscoring the bank’s concern over the rising cost of its bond yield control policy.At the March meeting, the BOJ maintained its ultra-loose policy, including a controversial 0.5% cap for the 10-year bond yield that had come under attack from markets betting on a near-term interest rate hike.Many BOJ board members at the March meeting said the central bank must maintain its massive stimulus to support the economy and ensure Japan would sustainably achieve the central bank’s 2% inflation target, the summary of opinions at the meeting showed on Monday.But some members voiced concern over lingering distortions in the yield curve, which the BOJ sought to contain in December by raising the 10-year bond yield cap to 0.5% from 0.25%.”Although the widening of issuance spreads on corporate bonds has paused, the effects of deterioration in the functioning of the Japanese government bond (JGB) market remain and warrant close monitoring,” according to one opinion.While steps taken since December have been effective to a certain extent, market functions have not been fixed fundamentally, according to another.”It’s necessary to ensure the transmission of the effects of monetary easing is sustainable and effective by, if necessary, working to improve market functioning, including that of the corporate bond and swap markets,” the official who made the second opinion added. More

WASHINGTON (Reuters) -A subsidiary of New York Community Bancorp (NYSE:NYCB) has entered into an agreement with U.S. regulators to buy deposits and loans from New York-based Signature Bank (NASDAQ:SBNY), which was closed a week ago.The Federal Deposit Insurance Corporation (FDIC) said the deal would see the subsidiary, Flagstar Bank, assume substantially all of Signature Bank’s deposits, some of its loan portfolios and all 40 of its former branches. Roughly $60 billion of Signature Bank’s loans and $4 billion of its deposits would remain with it in receivership, the agency said.The Sunday announcement addresses one of two failed banks the FDIC is holding under receivership.The statement did not refer to the other, Silicon Valley Bank (SVB), a much larger bank that regulators took over two days before Signature.Signature had $110.36 billion in assets, whereas SVB had $209 billion.Reuters reported earlier on Sunday that the FDIC would relaunch its auction for SVB’s assets after failing to attract buyers for the whole bank.Under the arrangement for Signature Bank assets, Flagstar will buy $12.9 billion of loans at a discount of $2.7 billion.The FDIC estimated the deal would cost its Deposit Insurance Fund approximately $2.5 billion. The agency previously reported that the fund had held $128.2 billion at the end of 2022. More