Aurelia Butler

WELLINGTON (Reuters) – New Zealand’s central bank is expected to deliver its fourth straight half-point rate hike on Wednesday, but most economists see rates peaking below policymakers’ forecast after the most aggressive tightening in two decades to tame soaring inflation.Some analysts are even looking for cuts in the official cash rate as soon as 12 months from now, which is keeping markets cautious as they wait to take the pulse of this week’s Reserve Bank of New Zealand’s policy statement. “The outlook is becoming more mixed, with activity softening but inflation pressures even stronger than expected,” said Michael Gordon, Westpac New Zealand’s acting chief economist.Overall, he said in the past few months there has been a shift from markets being focused on inflation to now paying more attention on weakness in the economy.A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ’s hawkish stride to curb the highest inflation in three decades, at 7.3%, has seen rates already up 225 basis points since October.All 23 economists in a Reuters poll forecast a 50 basis point rise at Wednesday’s policy review, taking the cash rate to 3.00% and marking the most aggressive tightening since 1999.While the RBNZ has signalled plans to increase the rate to 4.00% by mid-2023, almost matching the U.S. Federal Reserve, few see it reaching that level. A handful were actually expecting rates to start easing by mid next year.In June, the two-year swap rate topped out at 4.54% but in recent weeks that has dropped to sit at around 3.93% as expectations of when the cash rate will peak have fallen. That shift in market pricing has been driven by signs of a weakening economy amid the tightening in financial conditions. Housing prices, a significant driver of inflation, have started to fall with prices last month recording their first year-on-year drop in more than a decade. (nL1N2ZM2MK)Oil prices and a broad array of commodities have also begun to retreat from their recent record surge, while consumer and business sentiment remain gloomy. (nL1N2Z903B)In the first quarter, New Zealand’s economy unexpectedly contracted due to a surge in COVID-19 cases, and the central bank has said its priority was on preventing inflation from getting out of hand even at the expense of growth. Marcel Thieliant, senior economist at Capital Economics, said that he expects GDP growth in New Zealand will slow to a crawl by the end of the year, which should return inflation to the RBNZ’s 1%-3% target band by the middle of next year.”Accordingly, we’re sticking to our forecast of 75bp of rate cuts from the second half of next year,” he said. More

With no major regional economic reports on tap Tuesday, Asian markets will continue to digest the implications from China’s dismal data deluge on Monday that instantly deepened the gloom surrounding the world’s second largest economy.The central bank’s meagre 10 basis point reduction to some lending rates in response is unlikely to have any discernible impact. China’s economy is in trouble, bond yields are tumbling, and the yuan is feeling the squeeze. The dollar jumped 1% against China’s currency on Monday, one of its biggest rises in years, to push the yuan to its lowest since May. China’s 10-year bond yield is less than 20 basis points from a fresh 20-year trough. The slowdown is alarming, and as Societe Generale (OTC:SCGLY) economists note, Beijing seems less willing than before to halt the slide, never mind reverse it.”Our GDP forecast of 2.7% is right now at the bottom of Street estimates, and yet may still prove too optimistic. The July trajectory points to a below-2% GDP growth rate for 2022, if policymakers remain slow to step up,” they wrote.For the global economy and markets, however, China’s darkening economic cloud may have a silver lining: lower energy prices. Brent crude oil fell around 4% on Monday and is down 23% over the last two months. Its year-over-year rise – crucial for annual inflation prints – is down to around 35% from 100% in March.Asia will look to take heart from Wall Street’s upswing on Monday, which showed investors shrugging off China’s news and an equally surprising and dismal New York Fed manufacturing report. For now, lower oil prices are trumping weak economic data. GRAPHIC: GRAPHIC-Oil prices – current & y/y change (https://fingfx.thomsonreuters.com/gfx/mkt/gdvzyobrkpw/BrentOIL.png) Key developments that should provide more direction to markets on Tuesday: RBA minutes from August policy meetingIndia’s wholesale price inflation (July) More

The IBC-Br economic activity index, a leading indicator of gross domestic product, rose a seasonally adjusted 0.69% in June from May, much higher than the 0.25% growth expected by economists, according to a Reuters poll.In the second quarter, activity increased 0.57% over the previous quarter. The IBC-Br index was up 3.09% on a non-seasonally adjusted basis from June 2021, while in the 12 months through June it grew 2.18%, the central bank said.Official GDP figures will be released by the statistics agency IBGE on Sept. 1.Economy Minister Paulo Guedes recently estimated that the economy will grow above 2% this year, driven by the strength of the labor market and the normalization of economic activities that have suffered during the pandemic, with an emphasis on the services sector.Meanwhile, private economists who started the year projecting a 0.3% rise in GDP in 2022 are now expecting 2% growth, according to a weekly central bank survey.After the IBC-Br figures, Bank of America (NYSE:BAC) revised its GDP growth forecast to 2.5% from 1.5% previously, saying activity data was surprising on the upside as the service sector remained strong.”Increase in social transfers and tax cuts should cushion the slowdown in the second half,” wrote David Beker, head of Brazil Economics at BofA.For the second half, analysts had expected a slowdown amid aggressive monetary tightening led by the central bank to tame inflation, which has already pushed interest rates to 13.75% from a record low of 2% in March 2021. More

WASHINGTON (Reuters) -The U.S. Federal Reserve said on Monday it had finalized guidelines for how it will review requests by banks, fintechs and other firms to access the central bank’s master accounts and payment systems.The final product, which is substantially similar to proposals the Fed floated in May 2021 and March 2022, creates a tiered review system that reserves the closest scrutiny for companies that lack federal deposit insurance and are not traditionally overseen by bank regulators.The new guidelines are aimed at creating a transparent, consistent and risk-based process for reviewing applications for “master accounts,” the Fed said in a statement.The guidelines come as a number of new nontraditional financial institutions, broadly known as fintechs, have emerged and begun seeking access to payment and account services that the Fed typically provided to banks as a way to quickly route and store money. Some firms had complained that the process for obtaining such an account was opaque and subjective.The process came under heightened scrutiny earlier this year, as Republicans accused Sarah Bloom Raskin, a nominee to serve as the Fed’s top bank regulator, of helping a fintech on whose board she served to obtain such an account. Raskin, who previously had served on the Fed’s board of governors, maintained she followed all ethics requirements, but withdrew after failing to garner sufficient Senate support for her confirmation.The new guidelines from the Fed direct regional Fed banks, which process master account applications, to conduct a streamlined review of traditional banks that provide deposit insurance and are already monitored by regulators. Firms that engage in “novel activities” that fall outside the traditional banking system and oversight, including many fintechs, would face more rigorous review of any applications. More

NEW YORK (Reuters) – With the recent slowdown in inflation, the Federal Reserve is faced with a conundrum ahead of a plan next month to double the rate at which it is shrinking its massive $8.9 trillion balance sheet. The move to accelerate quantitative tightening (QT), as it’s referred to, is meant to further drain pandemic-era stimulus from the financial system and increase borrowing rates for long-dated assets to weaken inflation. But that is taking place as the U.S. central bank pushes ahead with interest rate hikes to tame stubbornly high inflation, which is currently running at more than three times the Fed’s 2% target.The double tightening, however, makes it harder for the Fed to achieve a “soft landing” in which the economy slows but avoids a recession. With some investors believing the economy is already in a recession, speculation has grown that if something has to give, it could be the pace at which QT unfolds. The odds, however, remain long that the Fed would change its plan in the near term, some bond investors say.”There is some latitude for the Fed to either eventually go on a slow trajectory on quantitative tightening or even end earlier than expected. But it is hard to know (as to how) the Fed balances things out,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management in Dallas.”At what point does the Fed view that financial conditions have tightened enough? That’s nebulous … and you don’t really know until after the fact if you have gone too far.” The U.S. economy contracted in the first and second quarters, amplifying an ongoing debate over whether the country is, or will soon be, in recession.Along with the contractions, two reports last week that suggested inflation had likely peaked in July took some pressure off the Fed to deliver another oversized rate hike at its Sept. 20-21 policy meeting. The annual U.S. consumer price index rose by a weaker-than-expected 8.5% last month, following a 9.1% rise in June, while U.S. producer prices also unexpectedly fell 0.5% on a monthly basis in July. Graphic: US CPI https://fingfx.thomsonreuters.com/gfx/mkt/zdpxozazqvx/US%20CPI.PNG Traders of futures tied to the federal funds rate, the central bank’s policy rate, are now pricing in a 63.5% chance of a 50-basis-point hike at the September meeting. [FEDWATCH]”We really think the Fed slows down sooner rather than later. The data is starting to adjust and we’re seeing a slower economy,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.Still, her base case is for the Fed to run QT as is, but use that as a lever that can be adjusted in conjunction with rate hikes.”If the rate hikes go fast and furious and they reverse, then they have to stop QT,” Jones said. “If the rate hikes slow and level off, they can continue QT for a longer time period and tighten policy through the back door instead of the front door.” Following the tamer CPI reading, several Fed officials said it was too early to declare victory on the inflation front.”Inflation remains far, far above anything that could be considered price stability. It remains a very long journey back towards acceptable levels of inflation,” said Jamie Dannhauser, an economist at London-based asset manager Ruffer LLP.Dannhauser does not believe falling inflation numbers will affect the Fed’s QT plan.He added that more unexpected good news on inflation, to the extent that it alters the baseline view for monetary policy, will be reflected in the downward shift in Fed forecasts for the central bank’s policy rate.’BEHIND THE CURVE’The Fed’s balance sheet was at nearly $9 trillion as of last week. Its holdings of Treasuries and mortgage-backed securities have not declined significantly since June when the Fed started QT, but should come down over time, although it won’t occur in a straight line.”The effects of QT are very small at the moment,” said Thomas Simons, an economist at Jefferies in New York. Graphic: Fed’s balance sheet https://fingfx.thomsonreuters.com/gfx/mkt/mopangygqva/Fed%20balance%20sheet%20-%20QT.PNG But bank reserves held at the Fed have fallen to $3.3 trillion, down about $1 trillion from a high of $4.3 trillion in December 2021. Analysts said the contraction in reserves has been faster than many anticipated. In the Fed’s previous QT, $1.3 trillion in liquidity was withdrawn over five years.The Fed has not announced a target size for its balance sheet. Gennadiy Goldberg, senior rates strategist at TD Securities, thinks the Fed’s ultimate goal would be to reduce the balance sheet to a point where bank reserves reach around 9% of GDP, which is where they stood prior to the September 2019 liquidity crunch.Slowing down QT would be an option if it creates a shortage of bank reserves that starts to limit bank activities such as lending or market-making, analysts said. Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York, thinks the Fed should slow the pace of QT, as the market doesn’t need another $1 trillion reduction in bank reserves.”That would be catastrophic for bonds and stocks,” Hatfield said. “Unfortunately, the Fed almost universally ignores liquidity and money supply. That’s why the Fed is perpetually behind the curve in controlling inflation and anticipating deflation.” More

Annual inflation in Nigeria, Africa’s largest economy, rose sharply in July on the back of soaring energy, transport and food costs, along with a fall in the value of the naira currency.The National Bureau of Statistics said that in July inflation rose for the sixth consecutive month this year to 19.6 per cent, up from 18.6 per cent in June and the highest level since September 2005.The latest rise means inflation is now double the Central Bank of Nigeria’s target of 9 per cent and raises the prospect of another increase in interest rates next month.The statistics agency pointed to an increase in the price of gas and fuel, as well as air and road transport costs, along with food prices. Food inflation rose to 22 per cent caused by an increase in the cost of bread and cereals, as well as other food products such as potatoes, yam, meat, fish, oil and fat.In a sign price pressures are becoming broader, core inflation, which excludes the changes in volatile food and energy products, quickened to 16.3 per cent.The central bank has hiked interest rates by 250 basis points since May to 14 per cent. Policymakers are due to meet on September 26.Razia Khan, chief economist for Africa and the Middle East at Standard Chartered bank, said Nigeria may have fewer tools to combat soaring inflation than other countries.“The action [tightening of monetary policy] remains overshadowed by greater reliance on the central bank’s financing of government,” said Khan, referring to the Nigerian government’s announcement earlier this month that it owed $47bn to its central bank, according to a report by the country’s budget office.The money is owed to the central bank as part of the so-called Ways and Means Advance, a law contained in the central bank act that allows the monetary guardian to fund the government when it experiences a shortfall in revenue.Nigeria’s official oil earnings have not increased despite the surge in oil prices following Russia’s invasion of Ukraine. Theft, pipeline vandalism, years of under-investment in infrastructure and the increasing cost of petroleum subsidies have prevented the nation from profiting.Nigeria’s economy is import-dependent and relies heavily on the US dollar. But importers have struggled to access dollars because of tight restrictions.The central bank stopped selling dollars to retail forex traders in July 2021 to ease pressure on its dollar reserves and support its artificially low exchange rates. The naira is reported to be overvalued by between 10 per cent and 20 per cent against the greenback. The lack of dollar funds from the central bank has raised the cost of importing goods, forcing businesses to raise prices.“Until official forex markets see greater turnover, the difficult to regulate parallel market, itself prone to overshooting, will continue to play a disproportionate role in price-setting behaviour,” said Khan.Most importers access dollars on the black market, where the currency is freely traded. Due to significant demand and limited supply, the naira has plunged to historic lows against the greenback in recent months. The central bank says demand is high from manufacturers and because of Nigerians seeking to pay school and hospital fees abroad.Inflation is expected to rise to more than 20 per cent next month, according to Michael Famoroti, head of intelligence at Lagos-based company Stears.The economy and rising insecurity will be key campaign issues when presidential candidates officially begin canvassing for votes in September to replace the term-limited Muhammadu Buhari as Nigeria’s president. Elections are scheduled to take place in February. More

Good eveningChina today cut a key interest rate as new data confirmed the slowdown in the world’s second-biggest economy.The People’s Bank of China unexpectedly reduced the medium-term lending rate — through which it provides one-year loans to the banking system — by 10 basis points to 2.75 per cent, the first reduction since January and highlighting anxiety in Beijing over shrinking consumer demand.The country’s economy barely escaped contraction in the second quarter, according to new data released after the central bank decision, as consumer and factory activity faltered in the face of repeated pandemic lockdowns. Retail sales and industrial production rose but by much less than expected, while youth unemployment hit a record 19.9 per cent. Growth in the second half of the year is likely to be further hindered by Beijing’s zero-Covid strategy and a slowdown in exports.Chinese stocks fell on the disappointing data, setting them on a different path from rising equity markets in other major economies such as in the US and denting confidence in investors’ global outlook.Several Chinese cities are experiencing new or extended lockdowns and in Shanghai authorities are testing drones to ensure residents scan their health codes on a compulsory smartphone app — dubbed “digital handcuffs” for their use in social control — when entering a building. Falling consumer confidence has been highlighted by weakening sales of high-end goods, such as the market for second-hand luxury watches and bags. Rising geopolitical tensions are also worsening the outlook for industries such as semiconductor manufacturing, while demand for chips used in smartphones and consumer electronics has slumped.Chinese investors, hit by market sell-offs and widespread defaults in the country’s stricken property market, have been seeking alternative assets such as jade, while cash-strapped consumers have started a new trend for soon-to-expire food. Inflation, while lower than in other major economies, remains at its highest level in two years, according to data published last week.Lockdowns and strict quarantine regulations however remain the main drivers of the new pessimism. To take just one recent example, Hong Kong’s international schools are struggling to hire teachers ahead of the new academic year. “China is definitely in a very desperate situation,” said Xingdong Chen, an economist at BNP Paribas. “The problem now is no effective demand. If you don’t allow people to come out and consume . . . there is no demand.” Latest newsInflation in Nigeria hits 17-year high Aldi increases UK warehouse pay by 9% in challenge to rivalsUS manufacturing survey much worse than expectedFor up-to-the-minute news updates, visit our live blogNeed to know: the economyThe UK opposition Labour party unveiled proposals to deal with surging energy prices, including a freeze on bills, paid for by extending the windfall tax on North Sea oil and gas producers. The two contenders to become the new Tory prime minister are under pressure to follow suit.Latest for the UK and EuropeLiz Truss, the frontrunner in the Conservative PM vote, said she would turn Downing Street into the UK’s “economic nerve centre” so it had a greater say over matters normally the prerogative of the Treasury and with increased powers to push through her agenda of tax cuts and deregulation.FT research showed the UK’s bill for debt and welfare payments would surge by more than £50bn next year because of rising inflation and interest rates. James Kirkup from the Social Market Foundation think-tank says the UK needs to make tough decisions on tax and public services.Global latestChina ratcheted up pressure on Taiwan after the visit of a US congressional delegation with a new set of military exercises in its efforts to isolate the island.Some 100mn Americans across a quarter of the US land area are at risk from an “extreme heat belt” by 2053 as temperatures rise, according to a new report. The current sunbelt, which extends from Florida to southern California, is one of the fasting growing regions in the countryRising consumer spending after the lifting of pandemic restrictions helped the Japanese economy grow at an annualised rate of 2.2 per cent in the second quarter. Headwinds remain from a new resurgence of Covid cases, rising import costs and slowdowns in key trading partners. Chief foreign affairs commentator Gideon Rachman reflects on his trip to South Africa and a growing feeling of disappointment with the presidency of Cyril Ramaphosa.Sri Lankan bonds were downgraded to default status by S&P Global after the country missed payments as its political and economic crisis continued. The lack of foreign exchange to pay for imports has caused fuel, food and medicine shortages amid double-digit inflation.We apologise for a misspelling in the last issue of DT. Colombia is obviously spelt like this, rather than Columbia.Need to know: businessRising interest rates and increased building costs threaten to choke off recovery in Europe’s office market. In the UK, the switch to homeworking has seen off whole swaths of city centre restaurants, especially in London’s financial district.Many of the UK’s 5.5mn small businesses, which employ three-fifths of the country’s workforce, could collapse without government intervention to help with surging energy costs on top of increasing wage bills and raw materials costs, supply chain problems and the fallout from Brexit. Talking of which, a new report highlights the damage from EU departure on the country’s labour market. The sale of Britain’s largest semiconductor producer to a Chinese-controlled company has intensified the debate over how to protect the domestic chip industry, as our Big Read explains. Government intervention is also a hot topic in US politics, where conservative interest in rebuilding the country’s industrial base may finally be getting the upper hand over free-market fundamentalism.Gaming companies have been hit as players return to “real-world” pursuits and cut back on spending. Console producers, video game publishers and gaming chipmakers have all reported a fall in demand after the surge in interest during the pandemic.The longlist for the FT Business Book of the Year Award is out. The 15 titles, chosen by FT journalists from nearly 600 entries, highlight some of the greatest challenges facing the business world, from supply chain disruption to changing labour markets and galloping inflation.Energy updateA German energy official told the FT that the country needed to cut gas use by a fifth to avoid shortages this winter. He also warned that the longer-term cost of ending Germany’s dependence on Russia would be a “very high gas price” with big consequences for business.State-controlled Saudi Aramco became the latest oil company to break quarterly profit records following the windfall gains caused by the war in Ukraine. Net income rose to $48.4bn, a 90 per cent year-on-year increase and the group’s highest earnings since listing in 2019. US producers are still refusing to lift output even as they enjoy bumper profits. Oil prices are also the main topic in today’s News Briefing podcast.Coal producers too are enjoying an extraordinary boom. Thungela, South Africa’s largest export of thermal coal, reported profits soaring more than 4,000 per cent in the first half of the year.Mark Carney, former Bank of England chief and co-chair of the Glasgow Financial Alliance for Net Zero, said governments needed to seize the opportunity to switch to sustainable energy, supported by the firepower of the global financial sector.Get the latest worldwide picture with our vaccine trackerSome good news…The start of the UK football season has highlighted the important community work carried out by many clubs and fan-led initiatives. One nice example comes from Partick Thistle supporters in Glasgow who have been successfully raising donations, match-funded by the club, to provide free season tickets for local causes and organisations.Partick Thistle fans have been raising donations to provide free season tickets for local causes © Tommy Taylor/Partick Thistle Football Club More