Aurelia Butler

The vast majority of Federal Reserve officials supported slowing the pace of US interest rate rises to 0.25 percentage points last month, according to an account of their most recent meeting that showed the central bank is still determined to bring inflation back to target.Heading into the meeting, some investors were concerned the minutes from the Federal Open Market Committee would show deepening divisions among policymakers over whether the central bank was right to shift down to a more typical 0.25 percentage point rate increase in February after a string of larger rises.However, the minutes from the February meeting showed “almost all” participants agreed it was appropriate to raise rates by 25 basis points, even though “a few” said they would have preferred a 50bp increase or could have been persuaded to support one.Against the backdrop of inflation that is still well above the Fed’s 2 per cent goal as well as a very tight labour market, “all participants” said they thought “ongoing” increases in the central bank’s benchmark rate would be needed to bring inflation under control.“Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 per cent, which was likely to take some time,” according to the minutes.The quarter-point increase last month marked a return to a more typical pace of tightening for the Fed, which last year increased rates from near zero to more than 4 per cent via a series of jumbo 75bp and 50bp rises.As inflation began to show signs of cooling, the central bank slowed the pace of its increases in response. But officials also said that insufficiently restrictive policy could “halt” recent progress in moderating inflation, and “pose a risk of inflation remaining unanchored”. Jonathan Cohn, head of interest rate trading strategy at Credit Suisse, said the minutes pointed to a reduced likelihood of a half-point rate rise at the Fed’s March meeting.“It seems like the majority of the committee is in line with [Jay] Powell,” said Cohn, referring to the Fed chair, who said following the February meeting that there had been “encouraging” signs on inflation.“I think market pricing will still be data-dependent, but the bar for a reacceleration towards 0.5 percentage points is high,” Cohn added.The initial market reaction to the minutes was muted, with both stocks and Treasury bond yields slightly lower on the day. Since the meeting, the economic picture has changed significantly, with reports on job creation, consumer price inflation and retail sales all suggesting that persistent price pressures are far from falling away. The January payrolls report, released two days after the Fed’s meeting, showed US employers had added more than half a million jobs, nearly triple what economists had forecast, while the unemployment rate hit 3.4 per cent, its lowest level in 53 years. Although the report showed wage growth had slowed, a tight labour market has historically forced employers to raise wages and potentially push inflation higher.A smaller than expected fall in the consumer price index for January compounded fears about persistent inflation, with notable price pressures still evident in sectors including housing.

Some investors and economists believe the Fed will keep rates higher for longer in light of the recent data.“We’re seeing growth moderate slightly but very very slowly, suggesting the Fed’s job is not yet done,” said Gennadiy Goldberg, a strategist at TD Securities.Since the meeting, two Fed officials, Cleveland Fed president Loretta Mester and St Louis Fed president James Bullard, said they would have supported a larger 50bp rate increase at the time. However, neither Mester nor Bullard are voting members of the committee.Despite the majority of Fed officials backing February’s quarter-point rate rise, Eric Theoret, global macro strategist at Manulife Investment Management, said the fact that the committee had even debated whether to raise rates by a half-point was significant.“Coming out of the meeting, we had the step down to a quarter-point and Jerome Powell talking about disinflation,” he said. “It looks with these minutes like the Fed is messaging here to say they should have mentioned the half versus quarter-point debate then.” More

Developing countries’ stockpile of debt hit a fresh record high last year, the Institute of International Finance said on Wednesday, adding to concerns of a wave of sovereign defaults this year. The combined government, household, corporate and financial sector debts of 30 large low and middle-income countries rose to $98tn at the end of December, as their currencies slumped against the dollar. The debt burden for the 30 countries was up from $96tn a year earlier and from $75tn in 2019, before the pandemic began, the IIF, a trade body for the global banking industry, said in the latest edition of its quarterly Global Debt Monitor. Government debts alone hit almost 65 per cent of gross domestic product by the end of 2022 — an increase of 10 percentage points over pre-pandemic levels and the highest-ever year-end total. The dollar soared against most emerging market and advanced economy currencies over the course of 2022, raising the cost of meeting existing debt obligations — many of which are denominated in the US currency. The dollar’s rise followed the US Federal Reserve’s aggressive interest rate increases to combat high inflation, which had a knock-on impact on global borrowing costs. The US currency has weakened since the autumn. However, Ed Parker, head of sovereign research at Fitch, the credit rating agency, on Wednesday warned 2023 would be “another challenging year” as the dollar remained strong by historical standards. Debts and deficits would “remain well above pre-Covid levels”, he said during an event organised by the IIF.Pakistan and Egypt — both included in the list of 30 — are among the countries considered at high risk of default. Both countries sharply devalued their currencies against the dollar in January, partly in an attempt to unlock emergency funding from the IMF. The strength of the dollar against most emerging market currencies last year led investors to dump emerging market stocks and bonds. This trend went into reverse last October after the dollar weakened. However, recent data on the US economy suggesting inflation and interest rates may remain high for longer than expected has led to a fresh bout of dollar strength. Emre Tiftik, an IIF economist, said the dollar’s strength had left low-income countries facing extra funding costs as many relied heavily on dollar-denominated funding to secure interest from global investors. Sri Lanka and Ghana both defaulted on external debts in 2022, following Zambia in 2020. The ratio of debt service costs to government revenues had risen to “exceptional levels”, Parker said. In advanced economies, total debt declined almost $6tn to just under $201tn, leaving the total global debt burden down slightly, from $303tn at the end of 2021, to below $300tn at the end of last year. More

Today’s top storiesRussia and China vowed to strengthen ties despite “pressure from the international community” ahead of the first anniversary of Russia’s invasion of Ukraine. Tobacco group Philip Morris said it would “rather keep” its business in Russia than sell on stringent Kremlin terms, highlighting the challenges facing companies trying to leave the country without taking a huge financial hit.Citigroup forecast that UK inflation could return to 2 per cent by the autumn as gas prices fall. Prime minister Rishi Sunak is considering a 5 per cent pay offer to end public sector strikes after the Treasury received an unexpected boost to the public finances from January’s tax receipts.For up-to-the-minute news updates, visit our live blogGood evening.Today’s announcement by Bentley that it is ending production of its 12-cylinder engine could be a significant milestone on the road to electrification.The carmaker is the first of the luxury brands to ditch what was once considered the pinnacle of engineering in the era of the combustion engine. Bentley’s rivals, including Rolls-Royce and Ferrari, still intend to use the technology for several years while developing their electric models. The shift to greener vehicles, together with a focus on selling fewer but more expensive models to make up for damage from the global chip shortage, is now common across the industry. Stellantis, the owner of Jeep and Peugeot, is the latest example, announcing that it had increased profits by a quarter last year and reached margin targets it had set for 2030, despite an overall drop in sales. Sales of electric cars rose by 41 per cent and the company will launch its first electric pick-up truck next year. Renault told a similar tale last week. It is now the third-largest electric car brand in Europe, and second for hybrids behind Toyota. Volvo’s electric sales have tripled. And for US motorists, the age of gas-guzzling looks to be over.The move towards more environmentally friendly vehicles is likely to accelerate as legislation limiting emissions comes into force. Last week the EU said trucks and coaches would need to cut emissions to “near zero” by 2040, while city buses will have to be emission-free by 2030. However, the targets were criticised by environmental campaigners for not being ambitious enough as well as out of step with plans for combustion engines in cars to be banned by 2025. Heavy duty vehicles are responsible for 28 per cent of CO₂ emissions from road transport in the EU, although they only make up 2 per cent of the total.Some carmakers, such as Toyota and Hyundai, are increasing their bets on hydrogen-powered cars as an alternative. But while the vehicles appear to be environmentally sound — emitting just water vapour as a byproduct — there is still much work to be done to make the production of hydrogen fuel greener and less costly. Green hydrogen should get a significant boost from the subsidies on offer in US president Joe Biden’s Inflation Reduction Act, which sets the country on track to becoming a cleantech superpower. Biden’s plans, however, have attracted flak from the EU, particularly its support for American-made electric vehicle chargers. Manufacturers also looking at ways of producing greener batteries and making them easier to recycle and re-use.Questions remain over the long-term supply of lithium, the key component in batteries, not for nothing nicknamed “white gold”. Although prices in China, the world’s biggest electric vehicle market, have fallen back on recent weaker demand, they remain eight times the level of a year ago. Need to know: UK and Europe economy“The sun broke through in February after six months of gloom” was one economist’s reaction to PMI data showing British business activity bouncing back. The better than expected reading of 53 — where 50 marks the divide between expansion and shrinking — is the highest level in eight months.The eurozone PMI was also better than forecast, rising to 52.3 and reinforcing calls for the European Central Bank to keep raising interest rates to tackle high inflation, depressing stocks in the process.The UK government is exploring changes to plans for an American-style register of “foreign influence” after concerns were raised that it could harm inward investment. The US and EU member states have expressed surprise that businesses and civil society groups from their countries are being grouped with those from nations like Iran, Syria and Russia.Need to know: Global economyRelative newcomer Peter Obi has rattled his two established rivals in the race to become president of Nigeria, the biggest economy in Africa and on track to become the world’s third most populated country. David Pilling and Aanu Adeoye set the scene.Soaring rents in Singapore are undermining its campaign to replace Hong Kong as the top Asian financial hub. Meanwhile, Hong Kong is trying to accelerate its recovery with a new round of spending voucher handouts.Our Big Read looks at the role of the World Bank and its efforts to refocus on climate change.

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Need to know: businessRio Tinto, the world’s second-largest miner, said it expected the global economy to stabilise in 2023 and was optimistic about the prospects for China, on which the company relies for iron ore exports, now that Beijing has relaxed its pandemic restrictions.InterContinental Hotels Group, owner of the Holiday Inn and Crowne Plaza chains, predicted a full recovery for global travel by 2024, led by a strong US economy and the end of Covid restrictions in China. Walmart, the world’s largest retailer, warned sales growth would moderate this year because of the impact of interest rate rises on consumers, despite a solid fourth quarter. Home Depot was similarly gloomy, as was discount chain TJX. Zalando, Europe’s largest online fashion retailer, is cutting 5 per cent of its 17,000 workers as the “pandemic tailwinds” that created a sales boom fade away.The head of Japan’s Kyocera, one of the world’s largest makers of chip components, said China was no longer viable as the world’s factory after the US imposed curbs on access to advanced technology. Smith & Nephew warned that chip shortages were still affecting the medical industry.Cineworld said it was yet to receive any offers to buy the whole company out of bankruptcy following a deadline for interested parties to declare their intention to bid. The world’s second-biggest cinema chain entered into bankruptcy protection last September.The World of WorkMore than nine out of 10 companies that adopted a four-day working week in a UK experiment said they would continue because of evidence of permanent benefits. US office space will drop to 55 per cent of pre-pandemic levels by 2030 as hybrid working takes hold, according to a new report. A quarter was already undesirable and another 60 per cent was at risk of obsolescence and might require “significant investment,” the study said.Do you work in the NHS? We want to hear from porters and nurses to doctors and surgeons about the health service’s survival. Tell us about your experiences via a short survey. Some good newsA third person — Germany’s “Düsseldorf patient” — is said to have been cured of HIV after a stem-cell transplant, following individuals in Berlin and London. More

The World Bank is under mounting pressure. International threats to poverty — from global warming, the spread of disease and war — have become increasingly apparent over recent years. Meanwhile, global debt has surged, geopolitical rifts are denting co-operation, and estimates suggest $125tn of climate investment is needed by 2050 to meet net zero targets. The world is looking to the multilateral development bank (MDB) to provide leadership and finance. With its president David Malpass stepping aside early, now is a vital moment to reform the bank and find the right leader to take it forward.Since its initiation as part of the Bretton Woods system in 1944, the World Bank has undergone several shifts in focus: from rebuilding economies after the second world war, to confronting poverty and supporting the UN’s Millennium Development Goals. Its strategic direction needs refreshing once more. Its country-level approach risks underinvesting in pressing cross-border issues like climate change and public health. This does not mean the bank’s existing goals of ending extreme poverty and boosting shared prosperity should be diluted. But a deeper recognition of how global challenges are interwoven with them is now required. The World Bank needs, then, to take a leading role in addressing climate change at scale and with urgency. Its own estimates suggest that if left unchecked, rising sea levels, droughts, and other harmful effects could drive over 130mn people into poverty in the next decade. Raising its efforts on the green transition and adaptation is key. The bank lags behind other large MDBs in its target for the share of funding going to climate projects. The special adviser to the UN secretary-general on climate action recently accused it of fiddling “while the developing world burns”. Meeting demands for sustainable, inclusive and resilient development means mobilising more finance. The poorest countries, burdened by pandemic debts, must take priority. The World Bank should leverage its existing capital better by considering proposals in a recent G20-commissioned report showing that MDBs could generate hundreds of billions in new lending simply through more efficient use of their balance sheets. They should not, however, take undue risks that undermine their triple-A credit ratings. Encouraging richer shareholders to inject more capital could also significantly boost the World Bank’s lending capacity with only modest increases. More crucial will be drawing on private sector finance and expertise, including through partnerships with investment funds, innovative financing, and by de-risking projects.Operational changes are needed too. The bank has been criticised for being too slow: the average time taken to disburse funds is 465 days, though there are often delays beyond its control. Either way, tackling bureaucracy and working more closely with private sector expertise — from fund managers, to clean tech and construction outfits — to deploy and finance projects quickly is important. With the transformative impact of technological change and the energy transition, the bank will also need to go beyond its national approach and operate at regional and subnational levels, while co-ordinating development efforts at the heart of the MDB system.Malpass’s replacement needs to command the respect of the bank’s shareholders, whose backing is crucial in tackling issues beyond their borders. They will need a mastery of finance and private sector experience, alongside a deep knowledge of development and a commitment to tackling climate change. These are challenging criteria. But making a success of reform will require a leader of the highest calibre. More

Iberdrola will launch a legal challenge against a “discriminatory” windfall tax imposed by Madrid on Spain’s largest energy companies, following in the footsteps of banks that are fighting a similar levy in the courts.Ignacio Galán, Iberdrola chair, said its “legal department is already taking action to defend the interests of shareholders” as the company prepares to appeal against the tax this week at Spain’s National High Court.The Spanish group’s challenge raises the stakes in a battle between some of the country’s biggest companies and the Socialist-led government, which proposed the windfall taxes last year as it seeks funds to mitigate the impact of high energy costs and inflation on citizens.Spanish lenders including Santander and BBVA have decided to challenge the authorities over the temporary taxes after paying their first instalment, which was due by February 20.The energy windfall tax will be levied on companies that had revenues of more than €1bn in 2019, including electricity utilities and oil and gas groups.Iberdrola, Europe’s biggest utility, has already paid a €100mn windfall tax bill for 2023, half of the expected total for this year.Galán questioned the design of the tax for energy utilities because it is a 1.2 per cent levy on their revenues that is charged regardless of profits.“The government are saying they are going to charge based on the windfall profit. I think we have windfall losses,” he said. “We have 19 per cent less profit than the previous year [in Spain].”Gerardo Codes, Iberdrola’s director of legal services, said the tax was “arbitrary and discriminatory”, adding: “We consider that [it] is in breach of the Spanish constitution and European law.” He said the court was not likely to issue a judgment until next year.Aelec, an energy trade group whose three members are Iberdrola, Endesa and EDP, launched its own appeal against the windfall tax at the National High Court last week.The government of prime minister Pedro Sánchez argues that big utilities and banks are making “extraordinary” profits and have a responsibility to help alleviate the cost of living crisis.María Jesús Montero, Spain’s finance minister, said last week that the government was promoting “fiscal justice” so that those with the greatest earnings “make an effort to help the majority in society”.The government has signalled its confidence that the windfall taxes will withstand legal challenges.It is aiming to raise €4bn in 2023 and 2024 from utilities, which have benefited from a soaring gas price that has also lifted renewable power revenues for groups such as Iberdrola because of the way market pricing works.Madrid also wants to raise a total of €3bn from banks, which must pay a 4.8 per cent tax on their income from interest and commissions. Lenders are benefiting hugely from rising interest rates, the government says, citing their latest bumper quarterly earnings as evidence. Iberdrola generated revenues of €54bn in 2022, up from €39bn in the previous year, with more than €16bn made in the final quarter. Strong growth in the US and Brazil helped the company offset weakness in Europe linked to the region’s energy crisis.Galán told the Financial Times in November that clean energy incentives in the US made it a “very much” more appealing place to invest than the EU. On Wednesday he was more complimentary about the EU, saying its efforts to create a European version of the US Inflation Reduction Act were “moving in the right direction”. More

JERUSALEM (Reuters) -Israel’s shekel fell 1.5% versus the dollar on Wednesday amid a plan to overhaul the country’s judiciary, continuing a rapid decline that could prompt central bank intervention.The shekel stood at 3.68 versus the U.S. currency, its lowest level since March 2020, after weakening 1.6% on Tuesday. Since hitting a high of 3.34 on Jan. 25, the shekel has slid nearly 10% on talk of local companies pulling bank accounts from Israel and foreign investors staying away due to the proposed judicial changes.The reform would give the government greater sway on selecting judges, while limiting the Supreme Court’s power to strike down legislation. New bills that received preliminary approval in parliament on Wednesday included one that would bar the Supreme Court from intervening in ministerial appointments.”The weakening shekel trend will most likely continue as long as no reasonable compromise is reached on the judicial reform,” said Jonathan Katz, chief economist at Leader Capital Markets.He noted that foreign exchange intervention was possible to “smooth out sharp volatility” but was not a tool preferred by the Bank of Israel. The central bank – which declined to comment – has bought tens of billions of dollars over the past 15 years to prevent the shekel from strengthening too quickly and its forex reserves stand at $201 billion.”If this (shekel depreciation) continues rapidly, we could see the Bank of Israel hiking rates to 5% in the next rate decision (April 3), and possibly earlier,” Katz said.With Israel’s annual inflation rate at a more than 14-year high of 5.4% in January, policymakers voted to raise the benchmark interest rate by 50 basis points on Monday to 4.25%, its eighth hike in a row. Yet, the move was overshadowed by the judicial change plan that passed its initial vote in parliament on Monday.Following the vote, Citi said it was going long dollar-shekel, targeting 3.95 to the dollar.Critics say Prime Minister Benjamin Netanyahu – who is on trial on graft charges that he denies – is seeking legal changes that will hurt Israel’s democratic checks and balances, foster corruption and bring diplomatic isolation.Proponents say the changes are needed to curb what they deem an activist judiciary that overreaches its authority to interfere in politics.Government bond prices were down as much as 1.9%, while the main Tel Aviv-125 share index fell 1.1%. More

LONDON/NEW YORK (Reuters) – Markets, bracing for a “no landing” scenario where global economic growth is resilient and inflation stays higher for longer, are dialling back appetite for both risk assets and government debt.For months, investors have bet on global growth softening just enough to cool inflation and persuade hawkish central banks to pause their rate hikes.The notion of the U.S. Federal Reserve and other central banks using monetary tightening to engineer a mild, soft landing before pivoting to avoid a deep recession has supported a cross-asset rally since October, depressed the dollar and sent capital flowing into emerging markets. But recent data reflecting still tight jobs markets has traders entertaining a new scenario where economic growth holds up and inflation remains sticky.That means rates could be pushed higher too – a negative for risk assets. World stocks hit one-month lows on Wednesday, while Wall Street had its worst day of the year so far on Tuesday. “We’ve gone from softer landing to no landing – no landing being that (financing) conditions will remain tight,” said David Katimbo-Mugwanya, head of fixed income at EdenTree Asset Management.U.S. jobs growth accelerated sharply in January, U.S. and German inflation remained high, while U.S. and European business activity rebounded in February.Investors have now ditched expectations for rate cuts later this year and renewed their bets on higher rates, which in the U.S. are now seen peaking in July at about 5.3%, up from about 4.8% in early February. Graphic: US rate rise expectations have shot back up https://fingfx.thomsonreuters.com/gfx/mkt/klpygnkjwpg/USmoney2202.png Deutsche Bank (ETR:DBKGn) said this week it expects European Central Bank rates to peak at 3.75% from 3.25% previously.China’s reopening, an easing in Europe’s gas crisis and strong U.S. consumer spending “are probably more bearish than positive for markets,” said Richard Dias, founder of macro-economic research house Acorn Macro Consulting. “We’re getting into a situation where good news is bad news,” he said. For Paul Flood, head of mixed assets at Newton Investment Management, “if wage growth stays high and demand stays high, then the Fed will push up interest rates further and that’s not a good environment for equity or bond markets.” Bond prices fall, and yields rise, when expectations of higher rates on cash make their fixed interest payments less appealing. Stocks typically move lower when bond yields rise to account for the extra risk of owning shares. U.S. 10-year Treasury yields are near their highest since November at almost 4%, up from a January low of 3.3%. An index measuring the dollar against other major currencies is set for its first monthly gain in five as rate-hike bets lift the greenback.GOODBYE RECESSION RISK? In December, most economists expected the U.S. economy to contract slightly this year but the consensus now is for 0.7% growth. Fed officials have signalled that they will likely keep raising rates for longer than previously forecast. Graphic: Economic growth forecasts turn high https://www.reuters.com/graphics/GLOBAL-MARKETS/zjvqjykoxpx/chart.png Euro zone recession expectations mostly faded in mid January as energy prices tumbled. Economists polled by Reuters see inflation in the bloc remaining above its 2% target into 2025 as growth holds up. “The road map was one of a shallow recession and declining inflation,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “That consensus is being challenged by the data.”Many investors still believe inflation will subside, and see recent strong data as probably supported by one-time factors such as an unseasonably mild winter and the remainder of consumer savings accumulated during the COVID-19 pandemic. “There should be more signs of a slowdown as the year unfolds and weather normalises, and there’s just not another pent up savings to spend as we go into the second half of the year,” said Rhys Williams, chief strategist at Spouting Rock Asset Management. Thomas Hayes, chairman and managing member of New York-based Great Hill Capital, said a soft landing is still likely as declining U.S. rental costs start weighing on inflation metrics and labour market participation increases as consumers run out of savings, helping contain wage growth. “If oil doesn’t spike above $100 it is going be very hard for inflation to re-accelerate after the Fed pauses,” he said. Lombard Odier’s Ielpo said he had not changed the positioning of his funds significantly since January but was “happy to not have more” equity risk. Katimbo-Mugwanya at EdenTree Asset Management, said long-dated bonds still offered value as he saw central banks still closing in on the end of rate-rise cycles. But, he added, because “data is a bit more robust on the economic front than maybe we were led to believe at the turn of the year…there’s no pressure on them to start signalling a looser stance just yet.” More

ANTAKYA, Turkey (Reuters) – Turkey has launched a temporary wage support scheme and banned layoffs in 10 cities on Wednesday to protect workers and businesses from the financial impact of the massive earthquakes that hit the south of the country earlier this month.A 7.8 magnitude earthquake on Feb. 6 killed more than 47,000 people, damaged or destroyed hundreds of thousands of buildings in Turkey and Syria and left millions homeless.In Turkey, 865,000 people are living in tents and 23,500 in containers, while 376,000 are in student dormitories and public guesthouses outside the earthquake zone, President Tayyip Erdogan said on Tuesday.Under Ankara’s new economic relief plan , employers whose workplaces were “heavily or moderately damaged” would benefit from support to partially cover wages of workers whose hours had been cut, the country’s Official Gazette said on Wednesday. A ban on layoffs was also introduced in 10 earthquake-hit provinces covered by a state of emergency.Business groups and economists have said the earthquake could cost Ankara up to $100 billion to rebuild housing and infrastructure, and shave one to two percentage points off economic growth this year.Erdogan has promised a swift reconstruction effort, although experts say it could be a recipe for another disaster if safety steps are sacrificed in the race to rebuild. Six people were killed in the latest earthquake to strike the border region of Turkey and Syria, authorities said on Tuesday.It was followed by 90 aftershocks, Turkey’s Disaster and Emergency Management Authority (AFAD) said, adding fresh trauma to Antakya residents left homeless by the previous earthquake.In power for two decades, Erdogan faces presidential and parliamentary elections in May, although the disaster could prompt a delay in the vote. Even before the quakes, opinion polls showed he was under pressure from a cost of living crisis, which could worsen as the disaster has disrupted agricultural production.Moves by the government to control information around the earthquake have been met with public anger.Turkey’s internet authority blocked access to a popular online forum, Eksi Sozluk, on Tuesday, two weeks after it briefly blocked access to Twitter, citing the spread of disinformation. Information Technologies and Communications Authority (BTK) website shows the website was blocked late on Tuesday, without citing any explicit reason. Turkish police last week arresteddozens of people accused of creating fear and panic by “sharing provocative posts” about the earthquake on social media. More