Aurelia Butler

FRANKFURT (Reuters) – A year ago the European Central Bank struggled to explain why it was not lifting interest rates even as inflation rose. This year it will have a similarly tough job explaining why it keeps hiking them even as price growth falls quickly.Inflation, already two percentage points below its peak, will fall rapidly through the spring as energy prices drop, and the bank will cut its own projections next month on lower gas prices and a rebound in the value of the euro.Yet, the ECB has already promised another large rate hike in March and policymakers are also hinting at a move in May, pushing up mortgage costs, thwarting corporate investment and raising governments’ debt burden just as consumers feel their first price relief in a year.The problem is that the inflation outlook is not as good as it first appears.Underlying price pressures show few signs of abating and even if the broader public knows little about core inflation — which filters out volatile food and fuel prices — policymakers are focusing on this figure because it is an indicator of the durability of price growth.”We’ll keep rates high until we see robust evidence that underlying inflation returns to our target in a timely and durable manner,” ECB board member Isabel Schnabel said recently, repeating the bank’s recent mantra about core inflation.At some point over the summer, overall inflation, now at 8.5%, could fall below the core rate and could even drop below 3% by the end of the year as energy costs fall below pre-war levels and become deflationary. But core inflation is proving stubborn and could still rise from last month’s 5.2%.”We have to continue to emphasize that we have this medium term perspective,” Klaas Knot, the Dutch central bank chief said. “And taking a medium term perspective means that of course underlying inflation is relevant for policy.”The issue is not unique to the euro zone. U.S. Federal Reserve officials also see headline inflation falling below core this year, and are particularly concerned that rising prices for services could make it more difficult to return inflation to their 2% target. But communicating this to the public is difficult. The ECB is supposed to target headline inflation at 2% and it is already under fire from investors for sending mixed messages. It has oscillated between focusing on current inflation, future inflation and core inflation. It has also moved between providing policy guidance and applying a meeting-by-meeting approach. Still, its core inflation problem is why Irish central bank chief Gabriel Makhlouf, a moderate on the rate-setting Governing Council, recently said that the ECB’s 2.5% deposit rate could even exceed 3.5%, rising above the market’s current pricing of the peak rate.If inflation does indeed become as stubborn as some fear, the ECB faces the problem of a “high sacrifice ratio,” Croatian central bank chief Boris Vujcic warns. In such a situation, the economic loss associated with lowering inflation rises and the pain associated with each increment goes up.Graphic: Euro zone inflation expectations- https://fingfx.thomsonreuters.com/gfx/mkt/byprlknxqpe/Pasted%20image%201676018837733.png COMPLICATIONSCore inflation is likely to fall, but could still remain at a high level.The big issue is the labour market. Even as businesses prepared for an almost certain recession, they kept hiring at a brisk pace and pushed employment to a record high last quarter, hoarding labour after struggling to hire back workers in the post-pandemic months. This will pressure wages, which are already seen rising by more than 5% this year, the fastest pace in years.”Workers’ pressures to regain lost purchasing power might be significant, especially since upcoming wage negotiations will take place in a context of a tight labour market,” Spanish central bank chief Pablo Hernandez de Cos said. Graphic: The race to raise rates The race to raise rates- https://www.reuters.com/graphics/CANADA-CENBANK/zjpqjwaolvx/chart.png Given high inflation, real wages will still fall this year but unions are now increasingly focusing on past price hikes when making wage demands and such a backward looking wage setting mechanism could easily perpetuate high inflation. Another problem is in services. Wages are the biggest factor in that sector’s prices and services inflation is still just above 4%. So wage growth of the magnitude of 5% or more could push services inflation even higher. Furthermore, the weight of services in the inflation basket rose to 44% this year from 42% as post-pandemic consumer habits change, so quicker inflation there gives an even bigger boost to core figures. But some analysts think ECB fears over core prices are overdone.”It’s just a natural re-juggling of the consumption pattern back to where we came from,” UniCredit economic advisor Erik Nielsen said. “As it puts extra stress on specific ‘high visibility’ sectors, including airlines, hotels and restaurants, many casual observers mistake the price pressure in these specific sectors for general overheating in the economy.” More

Investing.com — President Biden looks to appoint a new Fed vice chair, with a number of policymakers set to speak Thursday. Corporate earnings continue to flood in, while there are also a number of economic data releases to study, including the weekly jobless claims. Chinese growth provides crude markets with confidence, while ECB head Christine Lagarde cements another rate hike. Here’s what you need to know in financial markets on Thursday, February 16th.1. Biden looks to replace Brainard on Fed boardPresident Joe Biden’s decision to name Vice Chair Lael Brainard to be his top economic adviser has resulted in a vacancy in the role of Fed vice chair, with the Wall Street Journal suggesting Chicago Fed President Austan Goolsbee is in the frame.Goolsbee only took on his role in Chicago last month, and previously was an economic adviser to President Barack Obama and a professor of Economics at the University of Chicago Booth School of Business.Thursday sees a number of his colleagues scheduled to speak, including Loretta Mester, Lisa Cook, and James Bullard, and their comments will be studied carefully after this week’s inflation release.The January consumer price index came in stronger than expected earlier this week, forcing market participants to rethink the Federal Reserve’s path. They now expect the Fed to continue raising interest rates through June and no longer see a rate cut as a sure bet this year.2. U.S. stocks to open just lower; earnings in focusU.S. stock markets are set to open marginally lower as investors digest more corporate earnings ahead of the release of a number of significant economic data releases [see below].By 06:25 ET (11:25 GMT), Dow Jones futures were down 32 points, or 0.1%, S&P 500 futures were down 0.1%, and Nasdaq 100 futures were down 0.1%.Earnings reports from major retailers from the holiday quarter are set to pour in next week, and that could give investors something to think about when it comes to the health of the American consumer.Ahead of that, results are due from the likes of Applied Materials (NASDAQ:AMAT), Hasbro (NASDAQ:HAS), and Paramount Global (NASDAQ:PARA) before the bell, while DoorDash (NYSE:DASH) and DraftKings (NASDAQ:DKNG) are scheduled for after the close. Roku (NASDAQ:ROKU) will also be in the spotlight after the streaming device firm’s stock soared premarket and beat quarterly expectations, while Shopify (NYSE:SHOP) slumped after the e-commerce company disappointed with its guidance for the current quarter.3. U.S. data delugeU.S. retail sales increased the most in nearly two years in January, according to data released Wednesday, providing investors with more confidence in the economic outlook, even as the Federal Reserve continues with its aggressive monetary tightening.This has got investors thinking that the resilience of the U.S. economy may still result in a soft landing, with steady growth and low unemployment co-existing with slowing inflation and higher interest rates.This theory will be put to the test Thursday as there is a barrage of economic data releases scheduled for release.Weekly jobless claims will provide a gauge of the health of the labor market; producer prices could provide a guide to underlying inflationary pressures; housing starts will be an important metric for real estate investors; while the Philly Fed index is likely to provide a measure of business sentiment.4. Lagarde signals 50-basis-point hike in MarchThe European Central Bank is set to raise interest rates by another half-point next month.ECB President Christine Lagarde made that much clear in a speech to European Union lawmakers in Strasbourg on Wednesday, as she pointed out price pressures were still strong with underlying inflation remaining elevated.What happens next, though, remains unclear.There are a number of hawkish ECB officials who have stated that March’s hike is unlikely to be the last in what’s already the most aggressive monetary-tightening cycle in the institution’s history.However, Lagarde said the policymakers “will then evaluate the subsequent path of our monetary policy” after next month’s increase, with any future decision likely to be data-dependent.Euro zone inflation could fall faster than earlier thought, ECB policymaker Pablo Hernández de Cos said on Wednesday, while Fabio Panetta, Italy’s appointee on the ECB’s board, called for caution earlier Thursday, saying a streak of hikes that saw the central bank raise rates by 300 basis points since July had yet to be completely felt by the economy.5. Crude edges higher on China demand confidenceCrude oil prices edged higher Thursday, boosted by fresh evidence of a recovery in demand for energy in China, the world’s largest importer of crude, as the country reacts to the lifting of its severe COVID-19 restrictions.China’s January air passenger traffic rose 34.8% from a year earlier, the aviation regulator said at a news conference on Thursday.This increased confidence follows on from the International Energy Agency lifting its forecast for oil demand this year by 100,000 barrels a day from last month’s forecast, expecting China to make up almost half of the additional 2 million barrels per day.This has overshadowed the news from the Energy Information Agency that U.S. crude oil stocks soared last week by 16.3 million barrels to 471.4 million barrels, the highest level since June 2021.By 06:25 ET, U.S. crude futures were up 0.2% at $78.75 a barrel, while Brent crude was up 0.1% at $85.49 a barrel. More

The combined death toll from the quake in Turkey and Syria has climbed to more than 41,000, and millions are in need of humanitarian aid, with many survivors having been left homeless in near-freezing winter temperatures. “The earthquake in Turkey has led to a tragic loss of life and carries meaningful economic implications,” economist Fatih Akcelik wrote in a note to clients. JPMorgan also said it expected now that the central bank would cut interest rates by another 100 basis points at its meeting next week to 8%. “The political leadership signalled further rate cuts even before the earthquake,” he said. “We do not rule out more rate cuts ahead of the elections originally scheduled for June 18. Yet, we believe that the policy rate is less relevant now as the monetary policy transmission mechanism is broken in Turkey.”(This story has been corrected in the headline to say $25 bln not $2.5 bln, and to fix dropped words in paragraph 1.) More

ROME (Reuters) – Italy’s 10-year government bond yield is forecast to average about 5% next year, close to its 2012 level during a dangerous debt crisis. Yet analysts say volatility more than yield will pose Rome’s toughest challenge in managing its debt mountain.Italy’s overall 2022 debt level is estimated at 145% of gross domestic product, the second highest ratio in the euro zone after that of Greece. That compares with 116% in 2011, a ratio that many considered untenable at the time.However, even though the Treasury will have to place 310-320 billion euros ($332-343 bln) of medium- and long-term BTP bonds this year with interest rates at historically high levels, economists are now relatively sanguine about the country’s debt sustainability. The reason is inflation – which may hurt consumers and savers but is a boon for high-debt countries like Italy because it inflates revenues and GDP, making the debt proportionally smaller. “In a world where you have 3% inflation, a 5% yield on BTPs is sustainable for Italy, because that inflation has a positive effect on the debt-to-GDP ratio,” said Philippe Gräub, Head of Global Fixed Income at Union Bancaire Privée (UBP).So far this year BTPs have moved in sync with other euro zone government bonds and the gap, or “spread” compared with equivalent German Bunds has remained within what some analysts see as “safe zone” of 2 percentage points, or 200 basis points. Bunds are seen by investors as the bloc’s safest bets.The real problem for the Treasury is market volatility, analysts say. This has risen sharply in response to mixed messages from the European Central Bank over how high it will raise interest rates, and when they may come down again.This makes it harder for Rome’s debt managers to forecast the so-called “yield curve”, which shows the yield on bonds of various maturities, from short-term to long-term. ERRATIC SIGNPOSTINGThe yield curve normally rises steadily as long term bonds yield more than short term ones, but recent factors – especially the ECB’s erratic signposting – have made it less predictable.Other countries face the same volatility problem, but Italy is in the spotlight because of its huge outstanding debt of roughly 2.3 trillion euros.”The most important issue for the next 12-24 months will be the shape and volatility of the yield curve, much more than the absolute level of yields,” said Filippo Mormando, European Sovereign & Rates Strategist at BBVA (BME:BBVA).In recent months the ECB’s uncertain rhetoric has put bond markets on what Unicredit (BIT:CRDI)’s fixed income strategist Francesco Maria Di Bella called “a roller-coaster ride.”The yield on the 10-year BTP plunged 40 basis points (bps) following the bank’s Feb. 2 policy meeting, before rising 15 bps the following day. A few years ago even a 5 bps point daily fluctuation on the BTP yield was considered large.In the face of this uncertainty, Italy is aiming to lengthen debt maturity and boost bond purchases by retail investors, the Treasury’s debt management agency said in its strategic guidelines for 2023.The ECB has driven up its key deposit rate from -0.5% to 2.5% since July, leading to a flattening of the curve as the yield on short-term bonds has increased, making them more attractive to some investors.The bank has pencilled in another 50 bps hike for March, but what happens next remains highly uncertain.MARKET ASSUMPTION The consensus forecast is that the ECB will raise rates to 3.25% in its quest to tame inflation and then begin cutting them in the fourth quarter of this year, but numerous analysts are questioning this assumption.”There is no reason for the ECB to cut rates before late 2024, as you may still have inflation at 2.5% in 2024 on average,” said Sylvain Broyer, Chief EMEA economist at S&P Global (NYSE:SPGI) Ratings.If Broyer is right, and markets push back their expectation for the ECB’s first rate cut to 2024 or even 2025, the yield curve is likely to flatten even more.Should a 3-year bond yield as much as a 10-year one, the shorter maturity will become more attractive and the Treasury will have to adjust its issuance strategy to meet the demand.An escalation of the war in Ukraine could increase volatility even more, analysts say, and diminish the appetite for risky Italian bonds even among traditional “real money” investment funds focused on long-term debt.Against this uneasy backdrop, the Treasury will be able to rely less and less on bond purchases by the ECB, which last year ended its “quantitative easing” and emergency pandemic bond purchasing programme. The central bank maintains the backstop of its “transmission protection instrument” to support countries in the case of bond sell-off driven by market speculation.Cristopher Dembrik, head of macro analysis at Saxo Bank, saw no prospect of a return to stability in the near term.”There will be much more bond issuance this year and the market is wrongly pricing a cut in interest rates so I assume volatility will increase,” he said.($1 = 0.9340 euros) More

TOKYO (Reuters) -Financial markets will get a first glimpse of the new-look Bank of Japan (BOJ) when Kazuo Ueda, the government’s nominee to become its next governor, testifies before parliament next week.Ueda’s confirmation hearing at the lower house, scheduled for Feb. 24, comes as the central bank’s controversial bond yield control policy faces a renewed attack in the markets, with investors betting on a near-term interest rate hike.The BOJ on Thursday announced new steps to deter market players from short-selling bonds in another indication of the challenge it faces in maintaining its yield-curve control (YCC) policy.”The fact the BOJ had to do this is a sign it’s struggling to maintain YCC,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities.Investors will be listening out for hints on how soon the 71-year-old academic may steer the BOJ out its prolonged ultra-loose monetary policy.Shunichi Yamaguchi, head of the lower house steering committee, told reporters the lower house will conduct the hearing on Ueda’s nomination on Friday morning next week.The government’s deputy governor nominees – former banking watchdog head Ryozo Himino and Bank of Japan executive Shinichi Uchida – will testify in the afternoon after Ueda, he said.The government named Ueda to be next BOJ governor on Tuesday in a surprise move. The markets had expected deputy governor Masayoshi Amamiya to take the helm but saw the choice of Ueda, seen as less dovish than Amamiya, as increasing the chances of an end to YCC.Japan’s banking lobby head Junichi Hanzawa said he expected the BOJ to exit the ultra-loose policy at some point, which would increase market volatility.”To reduce such risks, we hope the BOJ, under the new leadership, will make appropriate decisions that ensure markets function healthily through sufficient dialogue such as forward guidance,” Hanzawa, chairman the Japanese Bankers Association, told a news conference on Thursday.The nominations need the approval of both chambers of the Diet but are effectively a done deal as the ruling coalition holds solid majorities in both.A steering committee for the upper house failed to set a date for the confirmation hearings there, however, the committee’s chief told reporters on Thursday.A former BOJ board member, Ueda will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.With inflation exceeding the BOJ’s 2% target, Ueda faces the delicate task of phasing out its yield control policy, which has drawn public criticism for distorting market functions and crushing banks’ margins.In a column issued last July, Ueda warned against raising rates prematurely but said the BOJ must eventually consider how to exit its ultra-loose policy.Under yield curve control, the BOJ guides short-term interest rates towards -0.1% and caps the 10-year bond yield at 0.5% as part of efforts to sustainably achieve its 2% inflation target. More

TEL AVIV (Reuters) – Israel’s economy grew 6.5% in 2022 – slower than 2021’s 8.6% expansion but still much stronger than most Western countries – the Central Bureau of Statistics said on Thursday, citing solid growth in consumer spending, exports and investment.The full-year reading exceeded the 6.3% projected by the Bank of Israel and the Finance Ministry following a faster-than-expected annualised 5.8% expansion in the fourth quarter, according to an initial estimate. A Reuters poll of economists had forecast growth of 2.5% in the final three months of last year.In 2022, the average growth among OECD nations was 2.8%.On a per capita basis, Israel’s economy – which produced some $500 billion last year – grew 4.4% versus an OECD average of 2.6%.Helped by a surge in immigration from former Soviet states and a decline in mortality, Israel’s population rose 2.2% last year and now stands at 9.66 million.The bureau noted that should this rapid increase continue, Israel’s population will reach 10 million in mid-2024. Should it rise at a more normal rate of 1.8%, the 10 million mark will be hit by the end of next year, it said.Economic growth in Israel is expected to slow sharply in 2023 to a rate of near 3%, with central bank rate hikes expected to dampen spending.The strong growth data come after the bureau on Wednesday reported that Israel’s inflation rate rose to 5.4% in January -its highest rate since October 2008 – from 5.3% in December.The Bank of Israel has steadily raised its benchmark interest rate to 3.75% from 0.1% last April in a bid to rein in inflation. Policymakers are expected to raise the rate to at least 4% at its next rates decision on Monday.Despite rising prices and a very high cost of living, economic growth in 2022 was led by a 7.5% gain in consumer spending – more than half of economic activity – while exports grew 7.9% and investment in fixed assets rose 9.3%.More than half of Israel’s exports come from a booming high tech sector, which accounts for 11% of the country’s workforce and 15% of total economic activity. More