Aurelia Butler

US equities rose on Thursday even as the chair of the Federal Reserve reiterated hawkish rhetoric and the European Central Bank raised interest rates by 0.75 percentage points. The S&P 500 stock index closed up 0.7 per cent in New York, while the technology-heavy Nasdaq Composite gained 0.6 per cent.In bond markets, the yield on the two-year Treasury note added 0.05 percentage points to just under 3.5 per cent after Fed chair Jay Powell said the central bank needed to act “forthrightly” to ensure high inflation did not become entrenched.Speaking at the Cato Institute think-tank’s annual monetary conference on Thursday, Powell said “we need to keep at it until the job is done”, fuelling expectations of a third consecutive 0.75 percentage point rise in US borrowing costs.Eurozone bonds sold off after the ECB raised interest rates by 0.75 percentage points to 0.75 per cent, having lifted rates in July for the first time in more than a decade by 0.5 percentage points to zero.Germany’s two-year Bund yield, which is sensitive to changes in interest rate expectations, jumped 0.22 percentage points to 1.29 per cent, and at one point touched 1.37 per cent, its highest level since 2011 according to Tradeweb data. The 10-year Bund yield, seen as a proxy for eurozone borrowing costs, added 0.14 percentage points to 1.71 per cent. Bond yields rise as their prices fall.Rate-setters also committed to further rises in borrowing costs, underscoring the central bank’s determination to stamp out inflation ahead of economic growth.“The rate hikes will further raise borrowing costs of peripheral countries and tighten financial conditions,” said Willem Sels, global chief investment officer at HSBC Private Banking, “which may deepen the recession.”He added: “The ECB must have judged that this is the price to pay for crushing the inflation dragon.”The ECB said on Thursday that inflation “remains far too high and is likely to stay above target for an extended period”.ECB president Christine Lagarde reinforced this message at a press conference, saying that reaching the bank’s “neutral rate” would take “front-loading [and] further hikes in the next several meetings of a magnitude and pace that will be determined meeting by meeting and on the data we will receive”.“We should not underestimate the importance of the signal, it’s a highly symbolic, if not historic, decision,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “There was never such a large move in rates. It’s a reflection of the change in the reaction [to inflation].”Inflation reached a record 9.1 per cent in the eurozone in the year to August.Europe’s Stoxx 600 closed up 0.5 per cent, retracing declines earlier in the session. London’s FTSE 100 added 0.3 per cent on the day that UK prime minister Liz Truss announced an estimated £150bn package to shield Britain from soaring energy prices.In currencies, the euro slipped 0.3 per cent lower to trade just below parity with the dollar at $0.997. The pound also lost 0.3 per cent against the greenback to $1.149.In Asian equity markets, Japan’s Topix closed up 2.2 per cent, while Hong Kong’s Hang Seng index slipped 1 per cent. More

(Reuters) -Economic ministers from the United States and 13 Indo-Pacific countries launched negotiations on Thursday on Washington’s first major pan-Asian trade engagement effort in nearly a decade, but this time any deal will not cut tariffs.U.S. Trade Representative Katherine Tai said the Indo-Pacific Economic Framework talks in Los Angeles were aimed at addressing future challenges and achieving “sustainable and equitable growth” in the Indo-Pacific region.The effort was first launched by President Joe Biden during a May trip to Tokyo.Tai, who is leading the talks with Commerce Secretary Gina Raimondo, said the ambitious initiative was making progress, although some critics have questioned its value to participating countries.The talks include ministers from Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Vietnam. Together with the United States the participants represent some 40% of global GDP.NOT TPP 2.0″This framework will be a durable model for the rest of the world to follow,” Tai told the gathering, adding it would bring economic value for small businesses, including the 200,000 in Los Angeles.She said the initiative would target issues such as the digital economy, labor, environment, agriculture and trade.Citing “extraordinary progress in recent months, Raimondo said the initiative could lead to more stable and resilient supply chains, while accelerating work on clean energy technologies and anti-corruption commitments.”This ministerial marks the next critical phase of this framework — moving from defining an ambitious vision to charting the tangible work of implementing the framework,” she said. “We all understand and agree on the need to move quickly to deliver for our people.”Washington has lacked an economic pillar to its Indo-Pacific engagement since former President Donald Trump quit the 12-country Trans-Pacific Partnership trade deal (TPP) in 2017, leaving the field open to China to expand its regional influence.More than two years of TPP negotiations led to an agreement in 2015, but the U.S. Congress failed to ratify it as tariff-cutting free trade deals fell out of favor, blamed for draining jobs and investment to low-wage countries.Biden’s trade chief Tai also shunned new trade deals, focusing negotiations with the European Union on labor, regulation and other non-tariff issues.It was unclear whether all countries would participate in all four negotiation streams: trade, labor and digital standards; clean energy and decarbonization; supply chain resilience; and tax and anti-corruption efforts. To secure broad participation, the countries could choose among those streams.The talks come as the China-led Regional Comprehensive Economic Partnership Free trade deal launched in January, cutting tariffs for many of the IPEF participants. The surviving TPP countries also have launched a limited trade pact.A senior Biden administration official told reporters on Wednesday the IPEF platform was not an alternative to trading with China. “It’s about engaging the economies in the Indo-Pacific in their own right, this isn’t a choice between the United States and China,” the official said.Lori Wallach, head of Rethink Trade, a group advocating against corporate influence in trade policy, supported not offering tariff cuts, but questioned whether the initiative could benefit workers. “Three decades of ‘hyperglobalization’ implemented by these deals already had made the old trade model politically toxic,” Wallach said in a statement. “Then the COVID-revealed supply chain crisis fueled even broader demand for a new approach that reverses the concentration of production of goods and services on which we all rely in too firms in too few countries.” More

World markets survived a one-two punch from the European Central Bank (ECB) and Federal Reserve Chairman Jerome Powell on Thursday, giving investors hope that Asia can end a bruising week on a rare positive note. The ECB raised interest rates by an unprecedented 75 basis points and Powell signalled that the Fed will do so again later this month, further evidence that central banks remain committed to lowering inflation, regardless of the collateral damage. “We expect to raise interest rates further, because inflation remains far too high,” warned ECB President Christine Lagarde, while Powell said “we need to keep at it until the job is done.”This followed a 75-basis point hike from Canada 24 hours earlier, while one of Britain’s largest ever peacetime fiscal packages to tackle the energy crisis suggests UK monetary policy might be tightened more quickly. Given all that, world stocks did well to rise for a second day – marking the first two-day winning streak since Aug, 24-25. Financials, in particular, liked the prospect of higher rates. Even more surprising, bond yields were little changed on the day, with British gilt yields coming back down from an 11-year high earlier. Perhaps there is only so much policy tightening markets can take in a week.The focus in Asia on Friday once again turns to China. On the data front, consumer and producer price inflation for August will be released, while investors will be watching for developments in the crisis enveloping property developer Evergrande.The beleaguered group – the world’s most indebted developer, saddled with more than $300 billion in liabilities – this week appointed a receiver to seize its Hong Kong headquarters.Key developments that should provide more direction to markets on Friday: China CPI and PPI (Aug)Japan money supply (Aug)India FX reservesCanada unemployment (Aug) More

WASHINGTON (Reuters) -The Federal Reserve is “strongly committed” to fighting inflation and remains hopeful that can be done without the “very high social costs” involved in prior campaigns to control surging prices, Fed Chair Jerome Powell said on Thursday, in remarks echoed by other U.S. central bankers as they mull another potentially outsized interest rate increase.Powell, in a 40-minute webcast interview with Cato Institute President Peter Goettler, was not asked about the U.S. central bank’s policy meeting later this month, when it is expected to raise its target interest rate by either half or three-quarters of a percentage point, and the Fed chief did not volunteer any information on his preference.However, investors in contracts tied to the Fed’s policy rate currently anticipate the larger 75-basis-point increase, an expectation that rose through the day after the European Central Bank hiked its policy rate by three-quarters of a percentage point, a decline in U.S. weekly jobless claims pointed to continuing strength in the labor market, and one usually dovish Fed official indicated he was open to the idea.The Fed “could very well do” a 75-basis-point increase at its Sept. 20-21 meeting, said Chicago Fed President Charles Evans, who has tended to be on the dovish side of monetary policy debates. That would mark the third such large increase in a row and push the Fed’s target interest rate above 3% for the first time since 2008.”We are going to have a conversation about that,” Evans said. “I’m going to be listening to everybody. My mind is not made up.”Powell’s remarks on Thursday were his last scheduled before a blackout period begins Saturday ahead of the September meeting, during which Fed officials refrain from making policy statements. The fact that Powell in particular did not openly undercut the likelihood of a larger rate hike made some analysts conclude it was all but a done deal. “Chair Powell did not push back on market pricing,” Bank of America (NYSE:BAC) economists observed in a note on Thursday. “We now expect a 75bp rate hike in September,” up from a half-percentage-point increase previously.The difference may be largely symbolic, with a larger rate hike this month possibly meaning smaller increases later in the year.But it would demonstrate what Powell and his colleagues have made the Fed’s core message: That they won’t back down on planned rate increases even at the risk of slower growth and higher unemployment. “We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done,” Powell said. “The Fed has and accepts responsibility for price stability.”The Fed’s policy meeting this month will include updated economic projections along with almost certain approval of a fifth consecutive increase in the target federal funds rate.The release of a monthly U.S. consumer price inflation report next week will be the final major piece of data for policymakers to evaluate in making that decision. While information since the Fed’s July 26-27 meeting has given some small sense that the pace of inflation may be slowing from 40-year highs, that has not been enough for policymakers to feel confident yet that it has peaked.The job market, meanwhile, remains strong, with an Atlanta Fed wage tracker showing that earnings through August grew at a 5.7% annual pace, a rate some policymakers feel is inconsistent with the Fed’s 2% inflation target.In addition to market-based expectations, more economists are also now anticipating a 75-basis-point increase this month. Economists at Jefferies and Nomura on Thursday also changed their previous view that the Fed would downshift to a half-percentage-point hike after larger increases in June and July, following on the heels of Goldman Sachs (NYSE:GS) economists on Wednesday.”The U.S. is in a luxurious position of a continued strong labor market … there’s a very good chance the Fed can bring down inflation without causing a significant recession,” said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. “The economy and the labor market can absorb a 75-basis-point hike.”VOLCKER’S SHADOW The issue confronting officials is just how high and how fast borrowing costs need to rise to control the worst outbreak of inflation since the 1980s, and whether the monetary tightening can be done without triggering a recession and steep rise in unemployment.New research recently suggested that hopeful scenario is out of reach, with a jobless rate that may have to double from the current 3.7% to dependably lower inflation.The updated Fed projections due to be issued at the end of this month’s policy meeting will show if officials now see a risk of rising joblessness as well.Powell said he continues to hope that can be avoided, as did Fed Vice Chair Lael Brainard in comments on Wednesday.Evans said he thought it would not take a recession to tame inflation, and that the unemployment rate would only rise to perhaps 4.5%, a view shared by his more hawkish colleague, Cleveland Fed President Loretta Mester.Fed Governor Chris Waller, also an advocate of the idea that unemployment need not rise dramatically for inflation to fall, is scheduled to speak on Friday, as is Kansas City Fed President Esther George. Referring to former Fed Chair Paul Volcker’s fight against inflation in the early 1980s, when Fed policy triggered a recession and the unemployment rate topped 10%, Powell noted that Volcker was trying to uproot years of rising inflation expectations that were feeding higher prices and wages.Volcker, who was widely credited with winning that battle, “followed several failed attempts” by earlier heads of the Fed to lower inflation, Powell said.Powell said that because inflation expectations this time remain largely anchored around the central bank’s 2% target, the outcome could be better.”We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play” in the 1980s, Powell said. More

The £150bn energy support plan will help sooth many households fears of soaring gas and electricity bills this winter, but it has put the Bank of England on the spot with international investors watching its response closely.The central bank’s Monetary Policy Committee will need to decide between two very different views of the economy ahead of its meeting next week to set interest rates. First is the assertion by prime minister Liz Truss that her intervention would “curb inflation” at the same time as helping families through a difficult winter. The alternative view, held by almost all economists, is that the additional government borrowing and spending will ultimately be inflationary and that the central bank will need to respond with higher interest rates to foster price stability over the longer term. This latter view forms the foundation of the textbook case for a monetary authority independent of government. Left to politicians there would be a tendency to set policy to ensure pre-election booms that would stoke inflation and lead to a subsequent bust after polling day. The delicacy of the BoE’s balancing act between orthodox economics and not being seen as obstructive to the new Truss government was illustrated on Wednesday. Efforts by governor Andrew Bailey to avoid talking about policy were interpreted as dovish act by international investors sending sterling to its weakest levels against the US dollar since 1985.The key economic aspects of Truss’s intervention are relatively straightforward to analyse for the bank but the exact impact on the deficit remains harder to fathom. With household gas and electricity bills frozen for two years and additional support for business, few in government or in the energy community thought a gross cost estimate of £150bn over two years was very wide of the mark although the costs would vary with wholesale gas prices. There are some offsets to this new fiscal stimulus. Economists agreed the plan was likely to lower the peak of inflation by about 5 percentage points so that instead of peaking around 15 per cent in January, it will stay at roughly the July level of 10.1 per cent before falling gradually in 2023.In the short term, this will cut the cost of inflation-linked government debt by about £25bn, only to push it higher in the medium term because the decline in inflation will not be so steep. There might also be further short-term savings from persuading nuclear and some renewables generators to accept long-term, fixed-price contracts that are well below current wholesale rates but are likely to come at the cost of paying too much for their electricity in the future.The intervention means the government will borrow to cover the cost of much of the gas, with a lot of that money flowing abroad to the UK’s main suppliers in Norway, Qatar and the US. As the strain comes off household budgets, it would likely result in them spending more on other goods and services than the bank had anticipated. This would mean a straightforward increase in demand compared with previous BoE forecasts and would reduce the severity of any recession, but it will leave the UK living further beyond its means. Huw Pill, BoE chief economist made clear he shared that view speaking alongside Bailey on Wednesday. He said the actions of Russian president Vladimir Putin that has caused the energy crisis made the UK poorer and should the country pretend otherwise the policy would “probably lead to slightly stronger inflation” in the medium term, even if it was suppressed this winter.He said interest rates would have to rise in response. “Will fiscal policies generate inflation? We are here to ensure that they don’t generate inflation . . . our remit is to get inflation back to target,” Pill said. “We do have work to do,” he added with the heavy implication that he favoured significantly higher interest rates.Paul Hollingsworth, chief European economist at BNP Paribas Markets, agreed the size of the intervention would “likely” cause higher inflation in future. “We think this points to more [monetary] tightening,” he added.“The bank will need to demonstrate that it is focused on inflation — not on helping the Treasury to finance the debt,” added professor Jonathan Portes of King’s College London.Most economists and financial market traders expect the MPC to raise rates 0.5 percentage points next week from 1.75 per cent level and reaching 3 per cent by the end of the year. Salomon Fiedler, economist at Berenberg, a private bank, said: “Additional large-scale fiscal stimulus is problematic at a time when inflation is already extremely high.” Kwasi Kwarteng, the new chancellor, is expected to announce a further fiscal stimulus in the form of permanent cuts to national insurance and corporation tax in a mini fiscal statement on September 19. Truss promised the Treasury would provide further details of the costs of the energy package and the tax cuts at the same time, leaving the central bank with more to consider going into their meeting next week. More