Aurelia Butler

LONDON/SINGAPORE (Reuters) – The dollar was on track for its biggest annual gain since 2015 on Friday, in the last trading day of a year dominated by Federal Reserve rate hikes and fears of a sharp slowdown in global growth.European stock indexes were in the red in early trading on Friday. Asian equities had risen earlier in the session after market sentiment on Wall Street got a boost on Thursday from data showing rising U.S. jobless claims, which suggested the Fed’s interest rate hikes were lowering demand for labour.Traders were also focused on the outlook for China. Optimism about the country’s reopening after three years of strict COVID-19 curbs has been tempered by surging infections which threaten more economic disruptions.The United States, South Korea, India, Italy, Japan and Taiwan have all imposed COVID tests for travellers from China. The World Health Organization said it needs more information to assess the latest surge in infections.In thin trading, the dollar index was down around 0.1% on the day at 103.900.The U.S. Federal Reserve raised rates by a total of 425 basis points since March in an attempt to curb surging inflation.Against a basket of currencies, the dollar has gained around 8.6% so far in 2022 – its biggest annual jump in seven years – but it has pared some gains in recent weeks as investors expect the Fed’s rate-hiking cycle to end next year.”I expect the king dollar to lose its crown and the dollar to make a more decisive turn by the middle of next year,” Bank of Singapore currency strategist Moh Siong Sim said.The euro was flat on the day at $1.066, on track for a 6.2% annual loss versus the dollar, compared to last year’s 7% drop. A combination of weak eurozone growth, the war in Ukraine, and the Fed’s hawkishness has put the euro under pressure this year.European Central Bank policymaker Isabel Schnabel said last week that the central bank must be prepared to raise interest rates further, including by more than the market expects, if that is needed to bring down inflation.The U.S. dollar was down around 0.9% against the Japanese yen, at 131.805. The Bank of Japan’s ultra-dovish stance has seen the dollar gain 14.5% versus the yen so far this year, in the yen’s worst performance since 2013. But the Bank of Japan’s surprise decision to tweak its bond yield control programme saw the yen jump to a four-month high against the U.S. dollar earlier in December.The dollar was down around 0.4% against China’s offshore yuan at 6.9438. The onshore yuan was set for its worst annual performance in 28 years, hurt by dollar strength and a domestic economic slowdown.The Australian dollar, seen as a liquid proxy for risk appetite, was up 0.2% on the day at $0.6793, but on track for a 6.5% drop on the year overall.The British pound was down 0.2%, set for a 11% annual drop.The dollar was up around 0.1% against the Swiss franc, at 0.9233.The Swiss National Bank increased the amount of the Swiss currency it sold in the third quarter of 2022, the central bank said on Friday, indicating that its focus has switched from stemming the franc’s strength to fighting inflation. More

Inflation, which slowed slightly to 11.3% in November from a high of 11.6% the month prior, is no longer driven primarily by energy costs but by a host of factors, BDI President Siegfried Russwurm said in a survey of several industry associations. “A return to a level of 2% is likely to take longer and can only be achieved by the middle of the decade if monetary policy takes effect,” he said. The ECB has raised interest rates by a combined 2.5 percentage points since July – its fastest pace of monetary tightening on record – to counter inflation. Russwurm said more measures would be decided on by the ECB, which the BDI expects to dampen investment activity. The heads of the ZDH German association for skilled trade and the DIHK chambers of industry and commerce also do not see inflation cooling off in the near term.”A noticeable slowdown in price increases is probably not to be expected until summer 2023,” said ZDH Secretary General Holger Schwannecke. “But even then the price level will remain high.”In DIHK President Peter Adrian’s view, the ECB began its interest rate hikes too late, which means it now must raise them all the faster. “This makes corporate financing more difficult and is an additional burdening factor for businesses.” More

America’s massive green subsidies plan risks backfiring by driving European companies closer to China, a top EU policymaker warned as he said that talks with the Biden administration are unlikely to solve all the issues Europe has with the legislation. Valdis Dombrovskis, EU trade commissioner, said that while the $369bn Inflation Reduction Act was in part an attempt by the US to curb its reliance on China, it could have the opposite effect in Europe by making “overtures and propositions” from Beijing more interesting. This, he said, “may work against the stated aim of the Inflation Reduction Act”. Dombrovskis spoke before the release of guidance by Washington on Thursday indicating that EU companies could benefit from a tax credit scheme for commercial clean vehicles — a move Brussels sees as a welcome first step but which does not alleviate all its concerns. The US legislation includes hundreds of billions of dollars worth of subsidies and tax credits for green technologies, including batteries and hydrogen. It attempts to bolster US investment in such sectors while reducing America’s reliance on Chinese products and knowhow. The European Commission has warned that the act discriminates against EU-based companies and threatens the bloc’s industrial base. It has formed a task force with the White House in a bid to resolve the dispute. While there are signs of movement by the Biden administration in the key areas of electric vehicles and batteries, this would only alleviate some of the issues, Dombrovskis said in an interview. “If there are those outcomes, it would solve part of our problems, not all of our problems,” he said, stressing that the IRA involves a “much broader” range of sectors. “When this work is over we will need to take stock of where we are and see what our options are . . . We would need to look at further elements [on] how to rebalance the playing field.”US president Joe Biden said this month during a visit to Washington by French president Emmanuel Macron that “tweaks” to the rules could make it easier for European companies to participate in the regime.Dombrovskis flagged two key areas where the transatlantic discussions are focused. The US legislation requires electric cars to be assembled in North America to be eligible for a $7,500 consumer tax credit — to the dismay of automakers in Europe, South Korea and elsewhere. However, this provision does not apply to commercial electric vehicles. On Thursday night the commission welcomed new US guidance indicating EU companies could benefit from the commercial clean vehicle credits under the IRA, saying it reflected “constructive engagement” by the two sides. However Brussels stressed it remained concerned by discriminatory provisions affecting other clean vehicles.

Responding to the new US guidance, Dombrovskis said: “We welcome this important first step, which is the outcome of our fruitful discussions with the US. EU companies should now be able to take advantage of the US Commercial Clean Vehicle Credits. However, we will continue talks within our joint task force regarding other aspects of the IRA where we have important concerns.”The other focus is on requirements that battery components be sourced from the US or its trade partners. While the EU does not have a trade deal with the US, Dombrovskis hopes that the geographical scope of this can be drawn sufficiently widely to include the bloc.“There are some openings, there is some work ongoing but we are not quite there yet,” said Dombrovskis. At the same time, the EU needed to examine its own subsidies scheme as part of redressing the imbalance created by the US legislation. Part of this is likely to entail further changes to EU anti-subsidy rules on state aid. The commissioner stressed he did not want to see a trade war between the two economies, but said it would be possible to target EU subsidies more effectively. “We need to be careful not to engage in some kind of a subsidy race which may be expensive and inefficient,” Dombrovskis said. “So clearly subsidy is going to be part of the response. But we need to calibrate properly.”While there had been calls for “buy European” provisions in the EU that mirror the obligations to source green products in the US under the legislation, Dombrovskis stressed that the commission did not see this as advisable, because it could “trigger further trade restrictions across the world if we were to go down that avenue”. More

Profit margins are sliding across much of corporate America as companies struggle to keep raising prices, cheering central bankers trying to fight soaring inflation but frustrating investors seeking higher returns. Pre-tax profits for S&P 500 companies hit an all-time high in the second quarter of this year, US Bureau of Economic Analysis data show. They have surged almost 70 per cent since the same period in 2020, fuelled by government stimulus payments designed to boost the spending power of consumers and businesses when Covid-19 hammered the global economy. Wall Street’s estimated net profit margin for the index this quarter has fallen to just 11.6 per cent, however, according to FactSet. That would be down from 11.9 per cent in the third quarter, and from 12.4 per cent in the final three months of last year, to the lowest level since the end of 2020. Analysts have been cutting their earnings forecasts for 2023 and now expect a further decline. BMO Capital Markets recently predicted a contraction of about 5 per cent from this year and some strategists have floated the possibility of an “earnings recession”.The Federal Reserve’s second-in-command, vice-chair Lael Brainard, has said bringing down “elevated” retail margins — the difference between what an item costs a retailer and what a consumer pays — would help alleviate the price pressures that have forced the central bank to ratchet up interest rates. Services-related inflation, including costs related to dining out, travelling and medical care, remains high and by most estimates is likely to keep price pressures elevated through to at least the end of next year. But recent data suggest broader inflation might have already peaked, with gains in other sectors offset by the declining costs of energy and everyday items such as clothing, furniture and household appliances. Brian Belski, BMO’s chief investment strategist, said it would take “profit margin deterioration” to ultimately bring down consumers’ inflation expectations and persuade the Fed to ease up on tightening. For more than two years, most businesses have responded to the rising costs of supplies, logistics and labour by increasing prices. In an earnings announcement in December, for example, cereal maker General Mills noted that it had managed to raise prices by 17 per cent to offset a 6 per cent fall in volumes. Bob Gamgort, chief executive officer of Keurig Dr Pepper, similarly told a recent Bank of America event that despite the soft drinks industry’s “aggressive” price increases to protect margins, “consumer elasticities have held up really, really well”. But executives at other companies are cautioning that their ability to keep raising prices may be reaching a limit. Nike recently reported that it needed to mark down some prices, eroding its margins.Consumer goods giant Procter & Gamble expected to strike a new balance between price and volume growth over the next 12 to 18 months, chief financial officer Andre Schulten told a Morgan Stanley conference this month, because “purely price-driven growth is not going to be sustainable”.Most Fed officials expect their preferred inflation gauge, the core personal consumption expenditures index, to decline to 3.5 per cent by the end of 2023, down from the 4.8 per cent level forecast for the end of 2022.Ian Shepherdson, chief US economist at Pantheon Macroeconomics, expects inflation to fall much more than that, however, not least because the Fed “underestimates the extent of the disinflationary forces already at work in the economy”. Rather, he expects core PCE inflation to decline below 2 per cent on a year-over-year basis in the second half of 2023, in large part because he expects profit margins to contract rapidly.

Complicating the outlook is the fact that many economists expect a US recession next year as the Fed advances its most aggressive campaign to raise interest rates in decades. As of mid-December, most officials expect the US central bank’s benchmark rate to peak above 5 per cent next year, up from the current target range of 4.25 to 4.50 per cent. Against a weaker economic backdrop, Tom Porcelli, chief US economist at RBC Capital Markets, warned that companies would try to protect their profit margins by “going after labour”, suggesting more job losses than the Fed expects. According to officials’ most recent projections, the median estimate for the unemployment rate is 4.6 per cent, nearly 1 percentage point higher than the current level.“As you face margin compression and you try to defend against that, you’re reducing overtime, you’re freezing wages, freezing hiring or even outright lay-offs,” said Carl Riccadonna, chief US economist at BNP Paribas, citing recent cuts across the technology sector.“We’re seeing glimpses of what 2023 could look like: a year of margin compression and lay-offs and pullback and caution,” he said. “If we’re all thrifty at the same time, we’ve pushed ourselves into a recession.” More

(verb) the disentangling of supply chains and investment flowsFor the past half century, the underlying assumption of economic globalisation has been that capital, goods and people can and should move wherever it is most productive for them to do so. But “productive” often ended up meaning cheap. Multinational businesses could move money, jobs and production lines where it suited them; labour was far less mobile. Much of the industrial base of the US migrated to China, and large swaths of the rustbelt were hollowed out. Globalisation created lots of economic growth, but also huge inequality in most countries. Consumers may have got cheaper goods but, in rich countries in particular, that didn’t make up for the fact that all the things that make a person middle class — housing, education and healthcare — were rising in price, even as wages stagnated. That led to calls on both sides of the US political aisle for economic “decoupling” from China, meaning the disentangling of supply chains and investment flows. While Donald Trump put tariffs on hundreds of billions of dollars’ worth of Chinese goods, decoupling really sped up under the Biden administration, which has prioritised reshoring manufacturing jobs, and, in 2022, instituted new export controls on things like high-end semiconductors and capital flows between the two nations. The shortage of crucial goods such as PPE and basic pharmaceuticals during Covid convinced many policymakers that some decoupling was not only necessary, but welcome. Russia’s war in Ukraine has made it even clearer that the model of cheap capital, cheap energy and cheap labour in global markets is over, and that countries need to do more to produce strategic goods at home, or in partnership with allies. Now, each week brings a new twist in the decoupling story, as the global economy becomes a bit more local. [email protected]

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Biden signed the bill, which passed Congress last week, while vacationing on the Caribbean island of St. Croix.The legislation includes record military funding, emergency aid to Ukraine, more aid for students with disabilities, additional funding to protect workers’ rights and more job-training resources, as well as more affordable housing for families, veterans and those fleeing domestic violence.The 4,000-plus page bill passed the Senate on a bipartisan vote of 68-29, with the support of 18 of the 50 Senate Republicans. It passed the House of Representatives on a largely party-line vote of 225-201. More