Aurelia Butler

Inflation isn’t new, but price rises can still shock. I recently holidayed in the Hamptons, a tony beach area outside New York, where I was stunned to pay $800 for a single shopping cart of groceries. This wasn’t at some foodie emporium, but rather at the IGA, which is the American equivalent of the UK’s Tesco. Food prices are up everywhere, but in places like this, they have reached nosebleed levels. Wealthy locals and vacation shoppers notice, but seem not to curb their spending. Everyone else is travelling an hour or more to get groceries outside the resort areas, ordering dry goods from Costco and growing their own produce.This story is extreme, but by no means a one-off. To the extent that the wealthy in the US are not yet cutting back on spending, they may be an important and under-explored factor driving the inflation felt by all.The top two-fifths of income distribution in the US accounts for 60 per cent of consumer spending, while the bottom two-fifths accounts for a mere 22 per cent, according to 2020 BLS statistics. Income inequality is not the same as wealth inequality. But the two can go hand in hand. People who make higher incomes tend to receive a greater percentage of compensation in stock. They also have vastly more home equity (which tends to encourage more consumption spending, according to IMF research). The American Enterprise Institute, a right-leaning think-tank, estimated in February that the wealth effect of both asset gains and cash extraction from the refinancing of property (which hasn’t corrected yet, like stocks) represented $900bn, with a consumption impact that started last year and will continue through 2022.Amazon’s Jeff Bezos can build a half-billion-dollar yacht, and it doesn’t change life for anyone but him. But when the top quintile of Americans as a whole enjoy 80 per cent of the wealth effect from rising stock and home values (the AEI’s estimate), I suspect it starts to have a real impact on inflation, and on the overall structure of our economy, which over the course of the past 30 years of real falling interest rates has become highly financialised.Gavekal founder Charles Gave explained the underlying dynamics of all this in a recent piece for clients. “If the market rate [of interest] is too low versus the natural rate, then financial engineering pays off . . . borrowing to capture the spread will lead to a rise in the value of those assets which yield more than the market rate, but also to a rise in indebtedness.”The issue is that fewer new assets will be created — why invest in a factory or workforce training when you can buy back stock? One practical result of this unfortunate Wall Street-Main Street arbitrage is lower productivity. Falling productivity and artificially low rates often equal inflationary recovery periods — just as in the 1970s.The only way out is through the pain of higher interest rates. The market cost of capital must be normalised to reduce financialisation, and the unproductive allocation of resources and inequality that comes with it. Unfortunately, the pain of that paradigm shift (like the benefits of the previous one) won’t be shared equally. Rising rates hit the poor hardest, raising the cost of non-expendable items such as food, housing and payment of credit cards and other loans. The rich can keep spending, while others have to make tougher economic choices.The US housing market is the best example of the economic and social downsides of extremely financialised growth. Historically, high home prices — which are in part a result of more cash buyers and investors in the market, as well as zoning restrictions and financing trends that favour the rich — mean more people are renting. Rents today are rising not just in big cities, but across most of the country.But the people who tend to rent are those least likely to be able to pay the higher prices. According to 2021 Pew Data, 60 per cent of renters are in the lower quartile of American income. If you look at net worth, including asset wealth, that number rises to 87.6 per cent. As more discretionary income goes on basics, the consumption picture is further skewed towards the rich.Of course, no economic paradigm lasts forever. Higher interest rates will eventually bring down artificially inflated asset values. Meanwhile, the Biden White House is doing what it can to buffer inflationary pain for working people. It has been releasing strategic petroleum reserves in a partly successful effort to lower prices at the pump, extending pandemic-era caps on some student loan payments and pushing for antitrust action in areas where corporate concentration (which has grown hand in hand with financialisation) may be responsible for some inflationary pressure. But more changes are needed. The success of corporate lobbyists in overturning efforts to roll back carried interest loopholes are shameful. Student debt forgiveness — no matter how generous it is — will not change the fact that the cost of four years of private university in the US (an elastic cost that can be bid up indefinitely by the global rich) is nearly double the median family income. Housing markets continue to cry out for major reform.I suspect it will take a younger generation to push through these sorts of systemic changes. They simply don’t have as much asset wealth to [email protected] More

SINGAPORE (Reuters) – The U.S dollar extended its rally on Monday, hitting a five-week high on the yen after U.S. Federal Reserve Chair Jerome Powell signalled interest rates would be kept higher for longer to bring down soaring inflation.The dollar rose 0.5% and back above 138 against the Japanese yen to hit 138.34 in early Asia trade, its highest since July 21. Sterling fell 0.4% to a 2-1/2-year low of $1.1680. The euro fell 0.3% to $0.9932.The moves extended dollar gains made on Friday when Powell warned there’d be “some pain” for households and businesses as it will take time for the Fed to control inflation.”Powell made it clear that there is no dovish pivot as some market participants had expected,” Carol Kong, senior associate for currency strategy and international economics at Commonwealth Bank of Australia (OTC:CMWAY).”I think for this week, the (U.S. dollar index) is going to track even higher towards 110 points, just as market participants continue to price in more aggressive tightening cycles by the major central banks.”The U.S. dollar index last stood at 109.24, within a whisker of the two-decade high of 109.29 it hit in July.Markets are now pricing in about a 64.5% chance of a 75 basis point rate hike at the next Fed meeting in September.Despite the potential for a hike that big at the European Central Bank’s September policy meeting, the single currency has struggled with investors more focused on an energy crisis in the bloc.Russian state energy giant Gazprom (MCX:GAZP) is expected to halt natural gas supplies to Europe via its main pipeline from Aug. 31 to Sept. 2 for maintenance.”Fears over a complete shutdown of Russian gas are going to keep euro/dollar heavy and below parity,” said CBA’s Kong.The risk-sensitive Australian and New Zealand dollars were likewise weighed down by fear that aggressive rate hikes around the world will put the brakes on economic growth. The Aussie was down 0.31% to $0.6870, while the kiwi hit a new one-month low of $0.6107 and last traded $0.6113. More

SYDNEY (Reuters) – Asian shares slid on Monday as the mounting risk of more aggressive rate hikes in the United States and Europe shoved bond yields higher and tested equity and earnings valuations.Federal Reserve Chair Jerome Powell’s promise of policy “pain” to contain inflation quashed hopes that the central bank would ride to the rescue of markets as so often in the past.The tough love message was driven home by European Central Bank board member Isabel Schnabel who warned over the weekend that central banks must now act forcefully to combat inflation, even if that drags their economies into recession.”The main takeaways are taming inflation is job number one for the Fed and the Funds Rate needs to get to a restrictive level of 3.5% to 4.0%,” said Jason England, global bonds portfolio manager at Janus Henderson Investors.”The rate will need to stay higher until inflation is brought down to their 2% target, thus rate cuts priced into the market for next year are premature.”  Futures are now pricing in around a 60% chance the Fed will hike by 75 basis points in September, and see rates peaking in the 3.75-4.0% range.Much might depend on what the August payrolls figures show this Friday when analysts are looking for a moderate rise of 285,000 following July’s blockbuster 528,000 gain.The hawkish message was not what Wall Street wanted to hear and S&P 500 futures were down a further 1.1%, having shed almost 3.4% on Friday. Nasdaq futures lost 1.5% with tech stocks pressured by the outlook for slower economic growth.MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7%. Japan’s Nikkei dropped 2.3%, while South Korea shed 2.3%. EURO STRUGGLESThe aggressive chorus from central banks lifted short-term yields globally, while further inverting the Treasury curve as investors priced in an eventual economic downturn. [US/]Two-year U.S. yields were up at 3.44%, far above the ten-year at 3.08%. Yields climbed across Europe with double digit gains in Italy, Spain and Portugal.All of which benefited the safe-haven U.S. dollar as it climbed to 109.15 and just a whisker from a 20-year high of 109.29 reached in July.The dollar scored a five-week high on the yen at 138.21, with bulls looking to re-test its July top of 139.38.The euro was struggling at $0.9937, not far from last week’s two-decade trough of $0.99005, while sterling slipped to a one-month low of $1.1686.”EUR/USD can remain below parity this week,” said Joseph Capurso, head of international economics at CBA.”Energy security fears will remain front and centre this week as Gazprom (MCX:GAZP) will shut its mainline pipeline to deliver gas to Western Europe for three days from 31 August to 2 September,” he added. “There are fears gas supply may not be turned back on following the shut-down.”Those fears saw natural gas futures in Europe surge 38% last week, adding further fuel to the inflation bonfire.The rise of the dollar and yields has been a drag for gold, which was hovering at $1,735 an ounce. [GOL/]Oil prices were little changed in early trading, and have been generally underpinned by speculation OPEC+ could cut output at a meeting on Sept 5. [O/R]Brent dipped 9 cents to $100.90, while U.S. crude firmed 6 cents to $93.12 per barrel. More

(Reuters) -Malaysian budget carrier AirAsia plans to resume deliveries of 362 Airbus SE (OTC:EADSY) A321neos remaining on order starting in 2024, the chief executive of parent Capital A Bhd said, having postponed the arrivals during the pandemic.The airline, one of Airbus’ biggest customers, had only taken four A321neos before COVID-19 decimated air travel. It last year agreed with Airbus to restructure the order with deliveries due through 2035, though it had not provided a start date for the resumption at that time.”We will…be taking delivery of the new Airbus A321neos from 2024, which will further reduce our emissions per seat by 20% while further driving our business growth,” Capital A Chief Executive Tony Fernandes said in a statement late on Friday after the group posted a narrower second-quarter operating loss.The airline said it operated 65 planes during the quarter ended June 30, up from just 15 a year earlier when there were lockdowns and widespread border closures throughout Southeast Asia.”As of August, a total of 108 operating aircraft have returned to the skies and this is expected to increase to 160 by the end of this year to support strong and growing consumer demand,” AirAsia Aviation Group Chief Executive Bo Lingam said, adding a return to full operations was expected by the second quarter of 2023.Capital A posted an operating loss of 491.3 million ringgit ($110.03 million) for the three months ended June 30, compared to a loss of 792.2 million ringgit in the year-ago period.Lingam said the combination of weaker currencies against the U.S. dollar and higher maintenance costs required to bring airplanes back into service had “slightly prolonged” the process of returning the aviation business to profitability.The company last month reported its airline load factor, a measure of the percentage of seats filled, rose to 84% in the second quarter, similar to pre-pandemic levels.Capital A said in June it was evaluating fundraising options for a planned U.S. listing, as it looks to shake off its classification as a financially distressed firm by Malaysia’s stock exchange.($1 = 4.4650 ringgit) More

Annual profit at Fortescue Metals Group, the world’s fourth-largest iron ore miner, took a hit as iron ore prices are pressured due to persistent worries over demand from top steel producer China. Its margins were further crimped by rising costs and a labour shortages.As a result, the Perth-based miner earned average revenue per dry metric tonne (dmt) of iron ore of $99.80 during the year, down from $135.32/dmt for the previous year, when the miner saw record earnings.Also underpinning the drop in profit was the shortage of skilled labour in the aftermath of the COVID-19 pandemic, which has raised personnel costs across Australia’s mining sector.Fortescue, which is about 37%-owned by billionaire Andrew Forrest, reported annual underlying net profit after tax of $6.20 billion, down from a record $10.35 billion a year ago. It was largely in line with a Refinitiv estimate of $6.24 billion. The miner declared a final dividend of A$1.21 per share, down from A$2.11 apiece declared last year. The bleak earnings report comes weeks after rival Rio Tinto (NYSE:RIO)’s earnings and dividend also suffered a blow from iron ore prices retreating from 2021 highs due to worries that demand from top consumer China will slow down. More

Profits at China’s industrial firms fell 1.1% in January-July from a year earlier, wiping out the 1.0% growth logged during the first six months, the National Bureau of Statistics said on Saturday.The bureau did not report standalone figures for July.Factory production and activities in major manufacturing hubs like Shenzhen and Tianjin were hit in the month as fresh COVID curbs were imposed.In July, China’s industrial output growth slowed to 3.8% on-year from 3.9% in June.Searing heatwaves have swept across China’s vast Yangtze River basin since mid-July, hammering densely populated cities from Shanghai to Chengdu.Liabilities at industrial firms jumped 10.5% from a year earlier in July, matching the 10.5% increase in June, the statistics bureau said.China’s economy narrowly escaped contraction in the three months to June, as strict COVID control restrictions and a distressed property sector pummelled demand.Policymakers are striving to prop up the flagging economy by doubling down on infrastructure spending. The industrial profit data covers large firms with annual revenues of over 20 million yuan ($3 million) from their main operations.($1 = 6.8715 Chinese yuan renminbi) More

ORLANDO, Fla. (Reuters) – “Don’t fight the Fed” is a well-worn market maxim, and hedge funds are sticking to it like glue.U.S. futures markets positioning data show that speculators are heeding the increasingly clear signals from Federal Reserve officials that interest rates will be raised as high as is necessary to bring inflation back under control.The Commodity Futures Trading Commission report for the week to August 23 – three days before Fed Chair Jerome Powell’s Jackson Hole speech – show that funds increased their record bet on higher interest rates, and amassed their largest short position in two-year Treasuries futures in over a year.In light of Powell’s relatively hawkish speech in Wyoming, which slammed Wall Street and pushed up the Fed’s ‘terminal rate’ market pricing implied by ‘SOFR’ interest rate futures, it is proving to be a winning strategy.The latest CFTC report shows that speculators’ net short position in three-month SOFR futures stood at a record 1.052 million contracts in the week through Aug. 23.That is up from 956,971 contracts the week before. The net short position has doubled in the space of a month.Funds also increased their net short position in two-year Treasuries to 241,143 contracts, the biggest bearish bet on short-dated bonds since May last year. A short position is essentially a wager that an asset’s price will fall, and a long position is a bet it will rise. In bonds and rates, yields fall when prices rise, and move up when prices fall.JOB NOT DONEAfter Powell’s speech on Friday, traders pushed the Fed’s terminal rate implied by Secured Overnight Financing Rate futures, to be reached by March next year, above 3.80%. Early this month, the terminal rate was around 3.20% and priced for December this year.What’s even more striking than this rise of around 60 basis points is the jump in implied rates for the end of next year. The December 2023 SOFR contract on Friday implied a fed funds rate of 3.45%, 90 bps higher than the 2.55% implied on Aug. 1.Traders’ are molding a pretty firm ‘higher for longer’ view of the Fed, and thoughts of a pivot next year are evaporating. Only 35 bps of easing is priced in for the back end of next year, down from 60 bps a few weeks ago.Even though inflation appears to be cooling, Powell was clear that the Federal Market Open Committee is taking no chances.”The bottom line was that the FOMC’s job is not done, and that it will need to follow through with additional hikes — despite potential economic pain — … and then keep policy restrictive for a time,” economists at Barclays (LON:BARC) wrote on Friday.(The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Alistair Bell) More