Aurelia Butler

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyThere are times when one wants to be wrong. I have felt this way several times in the past 15 months, whether in warning last year that inflation would not prove transitory or cautioning that the Federal Reserve was rapidly falling way behind on its inflation objective and running out of first-best (“soft landing”) policy options.Today, my discomfort relates to the view that the recent jobs report implies that the US will now avoid a recession, a view that several analysts have embraced and which is reflected in prices for stocks and corporate bonds. While I very much hope this view is correct, I believe it is too early to declare the recession watch over, something that the government bond market seems more attuned to.Don’t get me wrong, the report was very strong. Jobs increased by 528,000, twice the consensus forecast and bringing US employment above its pre-pandemic level. At 3.5 per cent, the unemployment rate is at pre-pandemic lows, and wages are now growing at 5.2 per cent, again above consensus. The one disappointment is a labour participation rate that continues to slip lower.The data confirm that, even though the technical definition of recession was triggered by the 0.9 per cent second-quarter GDP decline, the economy is not in a recession using the more holistic concept favoured by the vast majority of economists. But this does not mean that the risk of a recession within the next 12 months has been eliminated. Nor does it guarantee that a recession, were it to occur, would be shallow and short.Forward indicators suggest that the current strength of the labour market should not be taken for granted. This is not just about the inconsistencies between the two surveys that constitute the monthly report (establishment and household).Away from that, job openings are declining at an historically rapid rate, weekly jobless claims are increasing and several companies have signalled their intention to slow hiring and/or lay off workers. Meanwhile, the beneficial effects of the just-passed Inflation Reduction Act by the Biden administration, while consequential over the long term, will do little to immediately alter this.Then there is the policy angle. Going into the release of the report, most economists had dismissed as puzzling the comment by Fed chair Jay Powell on July 27 that policy rates were already at neutral (the level consistent with neither an expansionary nor a contractionary monetary policy).The report confirmed what other data and analytical signals had suggested: the central bank still has a lot of work to do to get rates to neutral and beyond, now that it has allowed inflation to get entrenched into the system.While headline inflation is expected to fall in the next three months (the July reading is due out on Wednesday), core measures are likely to stay uncomfortably high and prove unpleasantly sticky. As the Fed scrambles to regain control of inflation and restore its damaged credibility, aggressive rate hikes and the contraction of a bloated $9tn balance sheet risk pulling the rug from under the economy and markets. These have been conditioned for way too long to function with floored rates and massive liquidity injections.The alternative of an early pause in the hiking cycle is not a good one as it risks leaving the US with both inflation and growth problems well into 2023.The government bond market understands this, as shown by the current inversion of the yield curve with short-term rates rising above longer-term ones. Investors are unusually willing to accept lower compensation for allocating their money to a longer maturity investment. This is a traditional signal of a rapidly slowing economy, and the inversion intensified to some 40 basis points following the release of the jobs report.All this is not reflected in stock prices and corporate bond spreads, which remain well supported by all the liquidity still sloshing around the system and an investor mindset set at exploiting relative rather than absolute valuation. Indeed, the dominant narrative in markets is that company profits will largely bypass lower sales growth, higher wage costs and another leg-up in some other costs.I sure hope the growth optimists are right. Already hampered by slow Chinese growth and the threat of a European recession, the last thing the global economy needs is the twin shock of a US recession and a bigger Fed policy mistake. Indeed, I am looking for reasons to embrace their views. Unfortunately, and to my great regret, my analysis of what is ahead is inconsistent with doing so. More

Bangladesh’s finance minister has warned that developing countries must think twice about taking more loans through China’s Belt and Road Initiative as global inflation and slowing growth add to the strains on indebted emerging markets.AHM Mustafa Kamal also said Beijing needed to be more rigorous in evaluating its loans amid concern that poor lending decisions risked pushing countries into debt distress. He pointed to Sri Lanka, where Chinese-backed infrastructure projects that failed to generate returns had exacerbated a severe economic crisis.“Whatever the situation [that] is going on worldwide, everybody will be thinking twice to agree to this project,” he said in an interview, referring to BRI. “Everybody is blaming China. China cannot disagree. It’s their responsibility.”He said Sri Lanka’s crisis highlighted that China had not been rigorous enough in deciding which projects to support. It needs to “make a thorough study” before lending to a project, he said. “After Sri Lanka . . . we felt that Chinese authorities are not taking care of this particular aspect, which is very, very important.”Bangladesh last month became the latest country in Asia to approach the IMF for financing as surging commodity prices after Russia’s full-scale invasion of Ukraine weighed on its foreign reserves. The country, a participant in China’s BRI, owes about $4bn, or 6 per cent of its total foreign debt, to Beijing.Kamal said Bangladesh wanted a first instalment from the IMF of $1.5bn as part of a total package worth $4.5bn, which would include financing to help it fund climate change resilience projects and buttress its budget.The fund said the total amount of potential lending for Bangladesh had not yet been negotiated.Bangladesh is also seeking up to $4bn more in total from a range of other multilateral and bilateral lenders, including the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank and Japan International Cooperation Agency, Kamal said. He added that he was optimistic the country would secure loans from them.His comments came as China’s foreign minister Wang Yi visited Bangladesh over the weekend for meetings with officials including Prime Minister Sheikh Hasina. In a statement, China called itself “Bangladesh’s most reliable long-term strategic partner” and said the pair agreed to strengthen “co-operation in infrastructure”. The economic hit from the Covid-19 pandemic, as well as the surge in global food and fuel prices amid the Ukraine war, has put many developing countries under strain and some are struggling to repay their foreign debt.Sri Lanka, which defaulted on its sovereign debt in May, is in negotiations with the IMF for an emergency bailout. Pakistan, whose foreign reserves have fallen to enough for just a month and a half’s worth of imports, last month reached a preliminary deal with the fund to release $1.3bn as part of an existing $7bn assistance package.Bangladesh has been hit hard by a rising energy import bill, with fuel shortages forcing daily, multi-hour power cuts. Its foreign reserves have also fallen to less than $40bn from more than $45bn a year ago.However, analysts say the country’s strong export sector, notably its garment trade, has helped shield it from the recent global shocks and its reserves are still enough for about five months’ worth of imports, providing the country with some cushioning.This meant that although “everybody is suffering [and] we’re also under pressure”, Bangladesh was not at risk of defaulting like Sri Lanka, Kamal said. “There is no way to even think of a situation like that.” Bangladesh had total foreign debts of $62bn in 2021, according to the IMF, with the majority owed to multilateral lenders such as the World Bank. The country owes $9bn, or 15 per cent, to state lenders from Japan, its largest bilateral creditor, followed by China.Bangladesh’s economy grew rapidly in recent decades from one of the poorest in the region after its independence war in 1971 to a per capita income of $2,500, higher than India and Pakistan.But climate change poses a significant threat, with the low-lying country of 160mn vulnerable to rising sea levels, erratic monsoon rains and flooding.

The IMF said in a statement this month that its new Resilience and Sustainability Trust would help provide long-term climate change-related financing as part of Bangladesh’s loan programme. “Unprecedented global shocks present countries like Bangladesh with significant uncertainties,” it said.Lack of infrastructure also continues to constrain growth. The government in June inaugurated the $3.6bn Padma Bridge near Dhaka. The project was Chinese-built but financed domestically after international lenders withdrew funding over a corruption scandal, although allegations were never proved. But the government has responded to the economic downturn by cancelling a series of planned infrastructure upgrades, including investments in building a 5G network and upgrading highways.“Whichever projects are essential and are in process and will pay off as fast as possible, we’re only taking care of those,” Kamal said. “To other projects, we’re saying, no thank you.” More

(Reuters) -National Australia Bank flagged higher expenses for the second time in four months on Tuesday, citing higher personnel and leave costs, sending shares of the country’s second-largest lender more than 4% lower in their worst day since mid-June. NAB, Australia’s biggest business lender, bumped up its cost forecast for 2022 to between 3% and 4% from 2%-3%. That excludes the impact of its $882 million buyout of Citigroup (NYSE:C)’s local consumer business, which became effective on June 1.Part of the cost jump comes from expected provisions of between A$60 million and A$100 million ($41.92 million and $69.86 million) related to a previously disclosed agreement with Australia’s financial crime regulator to fix shortcomings in anti-money laundering compliance. NAB shares dropped as much as 4.4% to A$29.36, their biggest single-day drop since June 14. Cash profit at NAB did, however, come in 6% higher at A$1.80 billion for the quarter ended June 30, compared with A$1.70 billion a year ago, as it benefited from an increase in home and business lending, and growth is deposits. The figure was in-line with Morgan Stanley (NYSE:MS)’s estimate of A$1.80 billion.”As the economy changes, continued low unemployment and healthy household and business balance sheets are helping mitigate the impacts of higher inflation and interest rates,” said Chief Executive Officer Ross McEwan. While higher rates, soaring cost of living, and weak consumer sentiment has effectuated a reversal in home prices from record levels reached last year, McEwan said 70% of customer home loan repayments were ahead of schedule.Runaway inflation has prompted the Reserve Bank of Australia to tighten monetary policy this year, aiding margins of banks that grappled with record-low interest rates for the past two years.”Overall, we would view this Q3 update as very much in line with consensus with few surprises,” UBS analysts said in a note.”The commentary on NIM is maybe a bit disappointing in the context of some banks which have already reported, but the underlying margin trend is as expected.”Excluding its markets and treasury business and the impact of the Citi acquisition, NAB’s net interest margin for the April-June quarter was slightly higher than the first half’s quarterly average due to higher interest rates, partly offset by stiff competition in home lending.The country’s biggest lender, Commonwealth Bank of Australia (OTC:CMWAY), will release annual results on Wednesday.($1 = 1.4314 Australian dollars) More

SYDNEY (Reuters) – A measure of Australian consumer sentiment fell for a ninth straight month in August to depths last seen early in the pandemic as another hike in interest rates combined with the surging cost of living to sour the national mood.The Westpac-Melbourne Institute index of consumer sentiment released on Tuesday slid 3.0% in August from July, when it also dropped 3.0%. The index was down 22% from August last year at 81.2, meaning pessimists far outnumber optimists.The grim mood partly reflected the Reserve Bank of Australia’s (RBA) decision last week to raise interest rates by another 50 basis points to 1.85%, warning that yet more would be needed to restrain runaway inflation.The impact was clear on mortgage holders where confidence tumbled 8.9%, while renters actually firmed 0.2%.A separate weekly survey from ANZ showed a sharp drop of 4.5% in its confidence index that wiped out three weeks of gains, even as consumption held up.”Household spending has been robust despite very weak consumer sentiment, with strong employment gains, high levels of household saving and a desire to travel more than offsetting concerns about the rising cost of living,” said David Plank, ANZ’s head of Australian economics.”It remains to be seen whether this divergence between confidence and spending can continue.”Rising borrowing costs is adding to pressures from higher energy prices, housing and food, and saw Westpac’s measure of whether it was a good time to buy a major household item slide 8.4%.The measure of the economic outlook for the next 12 months dropped 8.0%, while the outlook for the next five years fell 1.0%.Measures of family finances steadied a little after months of decline with finances compared with a year ago edging up 0.1%. The outlook for finances over the next 12 months added 2.3%, but was still down almost 18% on the year.(The story refiles to remove extraneous word from lead paragraph.) More

The finance ministry collected TES UVR bonds due to mature in 2023 in the transactions, in exchange for others maturing in 2025, 2029, 2035 and 2037, as well as for TES COP bonds due to mature in 2026 and 2042.”The transactions were carried out at market prices and contributed to improving the profile of Colombia’s internal public debt,” the finance ministry said in a statement.”This was done without increasing the nation’s net indebtedness,” the ministry added.The transactions followed a number of previous tranches of similar swaps, the most recent of which was carried out in May, for 3.4 trillion pesos.($1 = 4,337.28 Colombian pesos) More