Aurelia Butler

German and UK government bonds were on track to close out one of their worst ever months, compounded by eurozone inflation data on Wednesday coming in higher than feared. The 10-year German Bund yield, seen as a proxy for borrowing costs across the eurozone, has climbed more than 0.7 percentage points in August to trade at 1.54 per cent — reflecting its biggest monthly surge since 1990. The two-year Bund yield, which closely tracks interest rate expectations, has posted its biggest jump in more than four decades — rising 0.04 percentage points on Wednesday to 1.19 per cent.In the UK, short-dated gilt yields have added more than 1.3 percentage points in August, their steepest ascent since 1994 — jumping 0.13 percentage points on Wednesday to 3.03 per cent. Bond yields rise as their prices fall.Those debt market moves came as figures on Wednesday showed that eurozone inflation hit a new record of 9.1 per cent in August, higher than July’s figure of 8.9 per cent. The flash estimate of consumer price growth published by Eurostat was higher than economists’ expectations of 9 per cent.Excluding food and energy costs, core eurozone inflation hit 5.5 per cent, higher than estimates of 5.1 per cent.Wednesday’s data were widely anticipated by investors searching for clues about how far and fast the European Central Bank will tighten monetary policy to curb price growth, which has been stoked by an escalating energy crisis. The ECB is due to make its next interest rate decision a week on Thursday.“The further increases in headline and core inflation in August, and likelihood that they will keep rising, will add to the pressure on the ECB to step up the pace of tightening. The balance of probabilities is shifting towards a 75bp hike next week,” wrote Jack Allen-Reynolds, senior European economist at Capital Economics, after the data release.The ECB raised borrowing costs in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.The moves in German and UK bonds this month follow a much stronger July for both markets, reflecting a drastic repricing by investors of the extent to which the ECB and the Bank of England will hoist interest rates to battle inflation.At a closely watched economic symposium in Jackson Hole, Wyoming, last week, central bankers redoubled their commitment to tackling inflation, even in the face of stuttering economic growth. Hawkish rhetoric at the conference triggered three consecutive days of declines for global equities up to Tuesday’s close.Several European Central Bank governing committee members have since spoken about the need to continue tightening monetary policy. In a speech in Austria on Tuesday, Bundesbank president Joachim Nagel rejected calls to slow rate rises to protect economic growth.Some economists have warned that eurozone inflation will move above 10 per cent in the autumn and stay higher for longer owing to surging gas prices. Contracts linked to TTF, Europe’s wholesale gas price, were up 4 per cent on Wednesday at €278 a megawatt hour after reaching a high point of more than €340 a megawatt hour earlier this month.Russia on Wednesday halted gas flows to Europe via the critical Nord Stream 1 pipeline as Gazprom started three days of planned maintenance on the line.European equities extended their declines, with the regional Stoxx 600 slipping 0.7 per cent, while London’s FTSE 100 lost 1 per cent. Wall Street stock futures slipped lower, reversing earlier gains, with contracts tracking the broad S&P 500 falling 0.1 per cent. In Asia, Hong Kong’s Hang Seng closed the session flat and Japan’s Topix fell 0.3 per cent.The dollar added 0.2 per cent against a basket of six currencies. More

The Office for National Statistics has decided that a £400 discount from the UK government to help households with energy bills will not lower inflation this winter.In a ruling on Wednesday that will come as a blow to the Treasury, the move will see UK inflation jump in October to close to 13 per cent, according to economists, and then move higher in January when retail energy prices are forecast to rise again.Deutsche Bank has estimated that the decision will prevent a 2.7 percentage point reduction in the retail price index measure of inflation, which will cost the government £14bn this year in additional costs for index-linked government debt, according to Office for Budget Responsibility data.The decision was expected by most government officials because the rebate will be paid as a lump sum discount of the same amount to all households, but the classification choice was seen as a close call.Households will receive additional support for their incomes from a £37bn total programme that ministers have announced over the past year to help with energy bills, but none of this aid will show up in lower inflation statistics. Countries such as France, which has capped electricity bills with the government also paying tens of billions of euros to energy providers to cover losses, have lower inflation statistics. In recent days, more economists have been updating their inflation forecasts to reflect the 80 per cent increase in annual typical gas and electricity bills from £1,971 to £3,549 in October. Citigroup is expecting inflation to rise to 18.6 per cent in January and Goldman Sachs warned that inflation would exceed 20 per cent in January if wholesale gas prices stayed at the levels they rose to last week. The Bank of England’s latest forecast showed that consumer price index inflation would rise from its current 40-year high of 10.1 per cent in July to about 13 per cent in October, as the new £3,549 price cap came into force. If the ONS had decided to include the £400 energy bill support scheme in the CPI and RPI measures, it would have taken about 2 percentage points off that inflation statistic. ONS officials said they had looked at many possible classifications for the £400 per household energy price support. The ONS chose not to classify the money as a subsidy to energy companies, allowing gas and electricity suppliers to lower bills, because the money would not influence production decisions and was a flat rate amount rather than linked to household energy consumption. Classifying the payment as a subsidy would probably have counted in the inflation statistics although the ONS has not taken a definitive judgment because it chose to treat the payment as a current transfer paid by central government to the households sector.The ONS also looked at other potential definitions for the payments. It decided against classifying the money as social assistance because it was a universal payment and not targeted on particular vulnerable groups. Nor did the ONS see it as a social transfer in kind, such as a payment for residential care, or a capital transfer to households because it does not increase wealth, such as a debt cancellation, but was designed to support incomes. Those classifications would also probably not have shown up in the inflation statistics.Kate Barker, chair of the advisory panel on consumer prices, a body that helps the ONS think about inflation statistics, said “inflation effects will be less bad than the headlines will scream”, adding that “this looks as if it will be good news for pensioners, but energy is a big part of their spending”. More

Britain’s minister for international trade has said farmers’ anxiety that free trade agreements with Australia and New Zealand would mean the UK market will be flooded with cheap meat are “misplaced”.Anne-Marie Trevelyan, secretary of state for international trade, told the Financial Times in an interview during a trip to Australia that the deals would help curb inflation in Britain by “stripping away” tariffs on imported goods.She said the UK had built safeguards into the free trade agreements in the form of quotas over a period of 15 years to act as a “sliding scale” to rebalance Britain’s agricultural economy after Brexit. New Zealand, for example, already has a large quota for lamb exports to the UK that it does not use because most of its meat is sold in Asia. “Some of the anxiety was misplaced,” she said of the fears expressed by UK farmers. “I don’t think we need to be concerned but because there were anxieties, and we understand why, both governments were very happy to work up a transitional protection, which, you know, tapers away eventually,” she added. The National Farmers Union has said that the cost of the free trade agreements to the UK industry would be £150mn and has warned that the deals could exacerbate precarious trading conditions for the industry. That led to accusations that farmers were trying to take a trade deal designed to improve migration flows and benefit a range of industries “hostage”. The UK government expects the New Zealand trade deal to boost trade by 60 per cent and add £800mn to the British economy. The Australian deal is estimated to boost trade by £10.4bn and add £2.3bn to the UK economy.

Trevelyan is the first British cabinet minister to visit Australia since the election of Anthony Albanese as prime minister in May. She said the enabling legislation for the trade deals would be introduced within the coming few weeks and expects the deal to be fully ratified by early 2023. Trevelyan was also confident that negotiations over Britain’s entry to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTTP, regional trading bloc would be concluded by the end of the year.“It’s a really important trading bloc to us, because it stands up for its values of free and fair trade. So that’s why we’re keen to be a part of it,” she said. Asked whether the UK would support China’s entry into the bloc, Trevelyan said that any prospective member would need to be tested on whether its legislation withstands “gold standard” tests for entry. More

It has always been entertaining to read predictions that fail the test of time. In 1865, as engineers were racing to develop the telephone, an American editor sniffed: “Well-informed people know that it is impossible to transmit the human voice over wires . . . and that, were it possible to do so, the thing would be of no practical value.”A more recent favourite is the 2007 interview with Steve Ballmer, then chief executive of Microsoft, in which he confidently declared: “There’s no chance that the iPhone is going to get any significant market share. No chance.” About one in five smartphones sold globally is now an iPhone.Fun to gloat, perhaps, but less entertaining to have money resting on your own predictions. Unfortunately, investing requires you to do just that. You cannot avoid having to make forecasts. If you own a share today then you must believe that it will be worth more in future. Maybe you think the company has a product that will enjoy growing sales. Maybe you think the share price does not reflect current profits. Maybe you believe you are on to something early and that you will offload your stock once the herd belatedly piles in.Some predictions depend on so many moving parts that you can be wrong even if you are right. Pity the investor who backed 50-year inflation-linked gilts at the beginning of this year in the belief that the market was underestimating the trend for RPI inflation. They were right. At that time RPI was expected to peak in April 2022 at 8.6 per cent. In the event, it hit 11.1 per cent and Citigroup economists now expect it to peak in January at 18.6 per cent. But they failed to account for the response of central banks in raising interest rates and the impact of that on long-duration fixed interest assets. The value of their investment has nearly halved in just eight months.While predictions cannot be avoided, it seems odd how much money is invested in areas where there is a history of forecasts being wildly wrong. Think inflation, the number of months before the next credit crisis, how long a war will last or who will be the next UK prime minister (and what they will do). However, there are some predictions that can be made with considerable confidence. Among these are demographic trends, the move towards power with lower carbon emissions and increased automation of manufacturing. Timing can often prove tricky, but the direction of travel here is pretty certain. Let’s take demographic trends. One prediction seems inescapable: the world’s population will age. The World Health Organisation (WHO) expects the proportion of the world’s population aged over 60 to double by 2050 — from 12 to 22 per cent (it is already over 30 per cent in Japan). That’s 2.1bn people — up from just 1bn in 2020. In the UK the Office for National Statistics estimates there are likely to be an additional 8.5mn people aged 65 and over.The irony of investors exploiting the opportunities this creates to fund their own pensions is not lost on me. We have been waiting for some time to buy a hearing aid maker at a reasonable price. Hearing aids used to be rather basic small loudspeakers that would amplify all sounds and blast them into your ear. Digital hearing aids are tuned to each person’s weaker frequencies and increasingly focused to enhance the sound from the direction in which you are looking and reduce background noise. Wearing a hearing aid is generally something you do reluctantly. The more advanced digital aids are expensive, but they are smaller and less noticeable than the older models.Demand for them is likely to rise — and for some time. The WHO estimates that more than 1bn young people are at risk of avoidable hearing loss due to unsafe listening practices. This must include all those commuters listening to music turned up loud enough to hear against the background clatter of the train. The trend will result in an even larger market for hearing aids as these working generations age. On top of that, adoption in many emerging markets is starting from very low levels.Sonova is the Swiss-based global leader in this area. Like many “quality growth” companies, its valuation soared a couple of years ago, with the price/earnings ratio approaching 45x at one point. The shares have fallen recently as consumers delayed purchases and the company has, like many others, seen input costs inflate. The shares now trade closer to their long-term p/e multiple of 25x. For some this will still look pricey, but this company’s long-term prospects suggest the valuation is worth paying.Similarly, we have recently added a Japanese eyeglass maker to our portfolios. Hoya is a world leader in producing eyeglasses, contact lenses, photomasks for semiconductor manufacturing and glass discs for large data storage. All these sectors have long-term growth potential, and Hoya shares — like many Japanese shares — have fallen back in sterling terms this year. An ageing population supports eyeglass demand. I now seem to carry reading and driving glasses despite having had laser eye surgery 20 years ago. The greater engine of growth is the young — and specifically young people in Asia, where myopia levels have risen astonishingly in the past 50 years. Studies suggest more than 80 per cent of 20-year-olds in Asia are short-sighted and need glasses — more than twice as many as in Europe. Some believe myopia is associated with greater time spent doing close work such as studying and watching screens; others think the problem is too little time spent outdoors. The evidence is mixed, but China’s recent crackdown on private tutoring and the video-gaming industry is in part a response to the problem. Whatever the cause, I am daring to predict that demand for glasses will rise.

Lastly, for some of us cycling seems a good way to travel if only if it were not for hills. Electric bikes — including cargo bikes, which carry modest loads — are selling well around the world. Shimano, the Japanese global leader in regular bike brakes and drives, is benefiting from this trend, yet its shares have fallen from Y35,000 to Y25,000 over the past year. The company is developing more powerful brakes for electric bikes with heavier loads, as well as automatic gears for those who do not want to change gears themselves. Advances in technology sometimes seem more modestly valued in shares listed as “consumer goods” stocks rather than “technology” stocks. With fuel bills eating into household budgets, consumers may defer buying a new bike — as some have deferred buying an expensive hearing aid. However, a longer-term investor might take advantage of the share price weakness.Many shares have tumbled further this year and some might prefer to look through the rubble of those fallen stocks for better bargains, in the expectation that economies will rapidly return to modest inflation, interest rate cuts and steady growth.I do not like to base my investment decisions too heavily on any of those predictions. I prefer very high-quality businesses whose shares have come back to reasonable levels but whose growth can be more reliably predicted. I may be wrong. You can laugh at me later if I am. Simon Edelsten is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund. More

The dollar is on the cusp of its third straight month of gains after reaching a 20-year high against peers, in a stark reflection of diverging outlooks for interest rates and growth in the world’s largest economies. The dollar index, a measure of the currency’s value against a basket of others, has risen 14 per cent since the start of the year. It has continued to climb on expectations that the Federal Reserve will not back down in raising US interest rates to tamp down inflation, as emphasised by its chair Jay Powell at the annual Jackson Hole symposium last week. The US currency’s lead on others also reflects worries that soaring energy prices in Europe stoked by Russia’s war in Ukraine will drive inflation higher and push economies into recession. “Everything is pointing towards a stronger dollar,” said Christian Kopf, head of fixed income at Union Investment. “The dollar is independent from energy imports and not that much struck by the rise in energy prices that we’ve seen particularly in Europe.” August will mark the third consecutive month that the dollar has risen, while sterling and the euro have dropped 7.4 per cent and 6.6 per cent respectively over the same period. Japan’s yen and Switzerland’s franc are down 7.1 per cent and 1.5 per cent over the same three-month period.The Fed has led big central banks in forging ahead with aggressive monetary policy tightening. Higher yields on US government bonds push the dollar up as investors sell debt denominated in other currencies in favour of the better premiums on US Treasuries.The yield on the two-year Treasury note, which moves with interest rate expectations, on Tuesday hit its highest level since 2007, at 3.497 per cent.

Higher yields, and the strong dollar that accompanies them, have also hurt emerging market economies. This is partly because of the flow of capital away from their assets into dollars, but also because many emerging market countries hold debt denominated in dollars. A stronger dollar means higher debt payments for those countries, which has prompted some investors to predict a wave of defaults. Energy prices have hit record highs in Europe as the region searches for natural gas supplies that would otherwise come from Russia. The EU is preparing to announce emergency measures to tackle the region’s spiralling energy costs as businesses and households struggle.“It doesn’t appear that they can really put up a decent fight against king dollar when we’re looking at this really sour backdrop,” Jane Foley, head of FX strategy at Rabobank, said about other major currencies. “If you’re going to sell the dollar, what are you going to buy?”The stress is unlikely to abate soon. US inflation hit 8.5 per cent year on year in July, easing slightly from the previous month, though the Fed remains focused on its target of 2 per cent inflation. EU inflation figures for August were scheduled for release on Wednesday. Powell cemented his “unconditional” commitment to tackling high inflation last week, delivering a hawkish message at Jackson Hole and quashing any doubts that the world’s most powerful central bank would soon ease its monetary tightening. More

The head of the world’s largest building materials company has warned that the industry faces a “second wave” of inflation as spiralling energy prices drive up the cost of everything from wages to logistics. Albert Manifold, the chief executive of CRH, said he was seeing a “second wave of cost increases” following the surge in gas prices that accelerated after Russia’s invasion of Ukraine. The London and Dublin-listed group, which works on big construction projects across Europe and the US and is valued at €30bn, was hit by a 50 per cent increase in energy costs in the first half of the year. Wages and logistics costs had been rising “since June or July”, said Manifold.“The energy cost came through almost immediately after Russia invaded Ukraine,” said Manifold. “That put pressure on the cost of living and that is what is now driving wage inflation. As people absorb energy [cost] increases, they are ramping up the costs for logistics . . . central bankers and politicians have to deal with that challenge,” he added.CRH’s projects include the construction of London’s new east-west Crossrail line and the HS2 railway line in the UK, long-term, government-backed plans that have helped insulate the company from the rising costs. That helped CRH report an almost 30 per cent jump in first-half profits. Manifold’s view that the biggest inflationary worry for the construction industry lies in the second-order effects of higher energy costs was echoed by other big companies.Rob Perrins, chief executive of UK housebuilder Berkeley Group, said rising costs in the second half of the year were likely to slow the construction of new homes, particularly in London. “Energy is the key [to inflation], but the second order is wage inflation and that does have to come through if energy prices and the cost of living keep going up, that’s the worry . . . I see [construction] projects falling off quite heavily in London [as a result of inflation],” he added.

Build costs, including materials, energy and labour, make up roughly half of Berkeley’s overall cost base. If those increased by 4 per cent a year, the company would have to choose between increasing sales prices by 2 per cent or taking an equivalent hit to its margins, said Perrins.In the UK, the rise in inflation is already threatening to drive the economy into recession. Inflation is on track to exceed 18 per cent next year if gas prices sustain their surge, according to economists at Citigroup.The Bank of England is targeting an inflation rate of 2 per cent a year, but the Berkeley boss anticipates that inflation will run at “4-5 per cent” for the next three to four years, even after the energy price spike eases back. More

“After the most recent questioning before the investigative committee in Hamburg, no additional knowledge can be expected from a renewed questioning,” the source, a member of the Bundestag Finance Committee, told Reuters.The president of Germany’s lower house of parliament had previously approved a request by the opposition CDU/CSU conservatives to convene a special session off the Finance Committee to question Scholz on the case. A final decision on the issue is to be made on Wednesday.A grilling by Hamburg lawmakers of Scholz over his handling of the tax fraud case when he served as the city’s mayor ended in a stalemate earlier this month.The Social Democratic chancellor denied any impropriety and opposition lawmakers accused him of obfuscating the truth.”The chancellor must finally come clean about his role in the tax affair,” Thorsten Frei, the CDU/CSU parliamentary secretary, was quoted as saying by Rheinische Post newspaper.Prosecutors said the fraud involved dividend stripping in which banks and investors swiftly traded shares of firms around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.The loophole, now closed, took on a political dimension in the northern port of Hamburg due to authorities’ sluggishness in 2016 when Scholz was mayor in demanding repayment of millions of euros gained under the scheme by local bank Warburg. More

TOKYO (Reuters) -Japan’s factories extended expansion in output to a second month in July as motor vehicle production improved, marking a positive start to the third quarter for manufacturers and broader economic activity.Separate data showed retail sales grew for a fifth straight month in July, adding to hopes that the world’s third-largest economy will benefit from resilience in spending by consumers in the current quarter.Factory output rose a seasonally adjusted 1.0% in July from a month earlier, official data showed on Wednesday, extending the prior month’s near double-digit surge.Output was boosted by higher production of passenger cars and trucks and general-purpose machinery to come in better than a 0.5% decrease expected by economists in a Reuters poll.”There was a big jump in output last month so I had expected a pullback but growth of cars and capital goods pushed up overall production,” said Takeshi Minami, chief economist at Norinchukin Research Institute.”Supply disruptions that were there from the spring onwards such as due to China’s lockdowns and semiconductor and parts shortages appear to be easing.”Production of electronic parts and devices, however, declined a sharp 9.2% largely due to falling output of memory chips, posting their biggest one-month drop since comparable data became available in February 2013.Output of electronic parts and devices had surged 11.6% in June.The data comes after Japan’s main automaker Toyota Motor (NYSE:TM) Corp said on Tuesday its global vehicle production for July had fallen 8.6% year-on-year, missing its target for the fourth straight month.Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rise another 5.5% in August and 0.8% in September.”Given the tendency of firms to issue forecasts that are overly optimistic, we think output will be flat if not outright contract in September, after peaking in August,” said Darren Tay, Japan economist at Capital Economics in a note. Separate data showed retail sales were stronger than expected, rising 2.4% in July from a year earlier to extend its gains to a fifth straight month.Retail sales were helped by stronger sales of medicine and toiletries as well as general merchandise.The rise compared with a median forecast for a 1.9% advance in a Reuters poll. More