Aurelia Butler

Joe Biden’s political prospects have just built back better. Last week’s passing of the Chips and Science Act by Congress breathed new life into the White House’s plans for industrial policy and support for US manufacturing. Meanwhile, the famously intransigent West Virginia Democrat Joe Manchin, the king of coal country, performed a shocking turnabout on climate change. He agreed to back clean energy investment and healthcare subsidies to be paid for in large part by a 15 per cent minimum tax on big corporations.Thus, in a week that was even more economically dismal than usual — with the Fed’s latest rate increase to battle inflation, dismal consumer confidence numbers and news that the US was now in a technical recession, Biden managed to score a big political win by doing something almost unheard of in Washington these days — orchestrating compromise. His win matters politically. The question now is what it might mean economically.While the budget bill has yet to pass, and the Senate semiconductor support comes with far fewer strings attached for business than progressives would have liked (Senator Bernie Sanders has labelled it corporate “extortion”), there is a case to be made that simply getting to yes in Washington carries some economic benefits at present.Chief executives have long complained that the uncertainty resulting from political gridlock, as well as a lack of adequate federal investment into things such as basic science research and workforce development, have curbed growth plans in the US. The $280bn Chips and Science Act bill not only has strong bipartisan support but makes big investments into workforce training and basic science research, as well as supporting regional manufacturing hubs (something research shows has a disproportionately positive economic knock-on effect into local communities).One can argue, as Sanders and progressives such as former Clinton-era labour secretary Robert Reich have, that companies like Intel don’t need lavish subsidies to stay in the US rather than moving more investment abroad. Many progressives believe that paying these now could set a dangerous precedent of giving taxpayer welfare to the richest corporations, which will result in them charging a future government ransom to stay in the US.I’m not so sure. Silicon chips are unique, given that they are essential for pretty much everything else. The world needs more geographic diversity of supply in semiconductors. The fact that 92 per cent of high end chips are made in Taiwan, perhaps the second most politically contested country in the world after Ukraine, is worrisome for every nation, which is one reason Europe has its own chip regionalisation effort under way.While it’s still possible for US companies such as Intel to move jobs and factories wherever they like, I suspect that stricter provisions around dual-use technologies coming down the legislative pike will make it harder to outsource strategic industries in the future. Regionalisation of supply chains, not unfettered globalisation, is the future.The ramifications of the proposed budget bill, the name of which has been changed from Build Back Better to the Inflation Reduction Act, are more difficult to predict. The fact that the administration was able to push through a spending bill branded as a way to fight inflation is an impressive piece of political economy ju-jitsu (there is more than $300bn in deficit reduction for those worried about excessive demand, which helps a lot). But it’s still unclear whether the compromise will pass. Even if it does, its effect on short term inflation is very much up for grabs.The upside of the bill is that it would enable the federal government to address rising healthcare costs. It would do so by helping poorer families to pay healthcare premiums, and also by capping out-of-pocket costs for drugs for those on Medicare. It will allow the US to do what most other rich countries do — negotiate with drug companies to reduce prices by using the power of the federal government (the largest buyer of prescription drugs in the world) to leverage scale to lower costs. That’s a no brainer that could save hundreds of billions of dollars in taxpayer money. It also starts to address the outsized power of major lobbying industries such as Big Pharma. This, coupled with the fact that much of the bill would be funded by a 15 per cent minimum tax on big corporations goes a long way to fulfilling the administration’s promise to make the private sector pay its fair share in taxes.Investment in clean energy is also welcome. I’m all for supporting investment in electric vehicles, wind farms, solar panels and lithium battery production. It is crucial to addressing climate change, which comes with its own huge economic costs. It’s the best way to encourage a “productive bubble” of widely shared private sector growth. Ultimately, it will lower the price of energy. But that process will take years.No legislation is perfect. But last week represented an important first step toward bipartisan compromise on core bits of the Biden agenda that could have real economic impact. Restoring some sense of confidence that America can still govern itself comes with a reward beyond dollars. [email protected] More

As inflation soars and recession looms in Poland, a break from mortgage payments will be a much-needed reprieve for Jakub Rdzanek and his wife. The couple have seen their monthly home loan bills soar more than 70 per cent since the start of the year, as the country’s central bank has raised interest rates to combat rocketing prices. “Our mortgage has suddenly become terrifying,” said Rdzanek, who bought their Warsaw flat last August.The Rdzaneks are not the only household breathing a sigh of relief after the Polish government placed a moratorium on mortgage repayments last Friday.The move will allow borrowers to suspend payments for eight months, split between this year and next. But while the Polish government is granting mortgage holders a credit holiday, banks are warning that it will wipe out their profits.Lenders also claim that the rightwing government is gifting borrowers the mortgage holiday to boost its chances of winning a national election next year. The outcome could hinge upon whether Poland’s economy manages to weather the double blow of soaring inflation and the war in Ukraine.It is not just eastern Europe that is seeking to ease the pain; governments around the world are facing the challenge of curbing high inflation by raising interest rates, as the cost of living crisis casts a shadow over the global economy. Banks have been a target for other governments. Hungary recently announced a €2bn windfall tax on lenders and energy companies, while Spain said it would tax banks €1.5bn a year. Romania is also considering relief from mortgage payments for households that are hardest hit by inflation.“This idea is obviously starting to catch on elsewhere, so it’s something we need to watch,” said Simon Nellis, managing director of European banks research at Citigroup. “This is clearly a concern for bank equity holders.”Unlike the Romanian proposal, Poland’s policy is not means tested. Some Polish regulators had urged the government to limit the scope of the moratorium. “There are also rich people who do not need this exemption,” Adam Glapiński, governor of the National Bank of Poland, said at a news conference last month.Glapiński also questioned whether the law went “in a different direction” from the central bank’s monetary tightening efforts. Poland raised its benchmark interest rate in July for the sixth consecutive month to 6.5 per cent, after inflation hit a 25-year-high.Some bankers have even suggested the government has launched a crusade against them. Jarosław Kaczyński, the leader of the main government party, Law and Justice, recently proposed a windfall tax on banks that failed to pay enough interest on deposits.Polish banks were on track to report strong earnings, but they are now estimating a combined cost of about 20bn zlotys ($4bn) if all eligible mortgage holders skip monthly payments. The moratorium applies only to mortgages contracted in zlotys.Poland’s two largest banks, PKO and Pekao, which account for 40 per cent of the domestic mortgage market, will be hardest hit by the change. But the Polish arms of foreign lenders Santander, ING, Commerzbank and BNP Paribas will also suffer.Commerzbank anticipates that 60 to 80 per cent of the mortgage holders of its Polish subsidiary, mBank, will take the credit holiday. The bank is considering legal action against the Polish government. “Unfortunately, the new legislation in Poland causes considerable one-off burdens,” said Bettina Orlopp, Commerzbank’s chief financial officer.Citi’s Nellis expects some banks to take the issue to court, despite the poor record of previous attempts to force governments to change policy on mortgages. “The government is getting involved and retroactively changing contracts, which looks a bit naughty,” he added.Poland’s housing market is highly exposed to rate fluctuations because the overwhelming majority of Polish mortgages carry a floating rather than a fixed rate. In Romania, variable mortgages represent more than 70 per cent of new lending, leading the government in Bucharest to propose mortgage holidays.Some economists are warning that Poland’s credit holiday could prove counterproductive as monetary tightening already threatens to push the economy into a technical recession in coming quarters.“Banks may become more selective in offering financing,” said Marcin Kujawski, senior economist at the Polish subsidiary of BNP Paribas. The moratorium, he warned, “may lead to tighter credit policies, as well as more entrenched inflation, which possibly could require more interest rate hikes than would otherwise be the case”.

In another move, the government is seeking a new interbank lending rate as early as January. However, banks are warning against fast-tracking a reform of the Warsaw Interbank Offered Rate, similar to that undertaken to remove the scandal-tainted Libor rate, which took years to come into effect. BNP Paribas is among banks warning that changing Poland’s rate could lead to international lawsuits.“This is a massive reform, it means repricing all the portfolios and also all the hedging instruments,” said Przemysław Paprotny, who leads the financial services practice of PwC in Poland. “We have to remember that Polish banks are hedging out the interest rate and forex risk — and this is contracted with international parties.”Despite the uproar in the banking sector, Paprotny said the balance sheets of Polish banks were solid enough to withstand the moratorium. “We don’t foresee any dramatic situation that would call for discussions about immediate capital injections,” he said.The Polish banking market is still entangled in a decade-long court battle over who should bear the cost for Polish homebuyers who opted for mortgages in Swiss francs in the early 2000s, when Switzerland had far lower rates than Poland. Following the 2008 financial crisis, the cost of these mortgages surged, in line with the Swiss franc’s appreciation against the zloty.Agnieszka Accordi, an audit partner at PwC, said reviewing how borrowers finance their homes made sense in the context of Swiss mortgages. Poland, she said, should seek to “close the discussion about whether customers understand what they are paying for.” When Rdzanek and his wife bought their Warsaw flat last summer, their real estate agent advised them to use a variable rate for their mortgage. “It’s a decision that I regret for sure,” Rdzanek said. The administration fees charged by his bank had also risen sharply in recent months.Even at a time of intense political polarisation in Poland, the moratorium was overwhelmingly approved in parliament, backed by a leftwing opposition that wants to share the credit for helping consumers rather than banks. More

The US food safety watchdog has suspended emergency imports of baby formula from a Luton-based group to help with shortages after accusing the UK company of submitting altered paperwork to authorities in its home country.The suspension of Global Kosher’s plans to export millions of cans of formula to the US is the latest setback in attempts to address problems caused by the shutdown of a US plant and recall of products made by a major manufacturer.The Food and Drug Administration said it had halted a waiver allowing Global Kosher to ship infant formula to the US after the company “submitted to UK authorities an official letter issued by the FDA that had been significantly modified”.Global Kosher had applied to export more than 4.8mn cans of formula under a waiver scheme aiming to help deal with the US shortages.Global Kosher had planned to send formula manufactured by Kendal Nutricare, a UK producer that makes the Kendamil brand and is also exporting directly to the country under the waiver scheme. Global Kosher had not so far sent any shipments, the FDA said.There is no suggestion that Kendal Nutricare was involved in the altered paperwork. Global Kosher did not respond to a request for comment.Dylan McMahon, growth director at Kendal Nutricare, said: “The volumes forecasted by GK [Global Kosher] were made without them being aware that we had already committed to the FDA to offer all of our available capacity to the USA. In light of this, GK won’t be supplying any product to the USA.”

An employee works on the Kendamil Classic First canning line at Kendal Nutricare, the baby formula producer © Anthony Devlin/Getty Images

The FDA’s agreement with Global Kosher, enabling the import to the US of an initial 150,000 cans of formula followed by monthly shipments of 1.2mn cans, was one of the largest under the Operation Fly Formula programme. The programme aims to help address a crisis that began when a Michigan plant run by US-based Abbott Laboratories was closed in February on contamination fears.It has now reopened but is only producing speciality formulas and has not resumed manufacturing Abbott’s top-selling baby formula brand Similac, which is prolonging a months-long supply shortage across the US.The US market is highly dependent on domestic production from three companies — Abbott, Reckitt Benckiser and Nestlé — with imports to the country making up just 2 per cent of supplies, a market structure that experts say leaves the US vulnerable to shocks.Supply chain disruptions caused by Covid-19, the war in Ukraine and panic-buying by worried parents struggling to source products have contributed to the shortages, forcing retailers to ration sales and leading to empty supermarket shelves. The monthly average availability of baby formula among major retailers such as Amazon Fresh, Kroger and Costco fell to 50.8 per cent in June, down from 74 per cent in January, according to DataWeave, an analytics provider to retailers. It has since increased to 56.9 per cent, in part because of increased imports. The shortages have sparked a political crisis for the Biden administration, which has temporarily eased regulations and scrapped tariffs on baby formula imports in an attempt to boost supplies from overseas.The FDA has so far lifted restrictions for almost a dozen importers to enable 18.4mn cans of baby formula to be flown into the US.Steven Abrams, a University of Texas professor who specialises in care of newborn children, said it is critical US authorities continue to support imports in the short term to address the supply crisis and boost supply chain resilience over the long term.

“Back in March store shelves were completely empty — you couldn’t find any formula. I don’t think we are seeing so much of that now. But we are still very short of formula for special needs, which represents about 5-10 per cent of formula,” he said. “The [import] policy is a good one but it’s going slowly. Shelves are not empty, but choices are limited and families are still frustrated when they’re looking to find one particular formula.”The FDA said in a statement the suspension of imports from Global Kosher is not expected to affect the overall supply of ‘routine formula’ but the watchdog recognises more work is needed to “ensure parents and caregivers have access to safe and nutritious infant formula where and when they need it”. More

TOKYO (Reuters) – The dollar hung near a three-week low to major peers on Monday as markets continued to wager that the Federal Reserve has less tightening to do with the U.S. economy at risk of recession.The dollar index, which measures the currency against six counterparts, edged 0.1% lower to 105.89, slipping back toward Friday’s low of 105.53, a level not seen since July 5.Data at the end of last week tossed the greenback in both directions, rising initially after the personal consumption expenditures (PCE) price index showed the fastest inflation since 2005, only to sink after the final University of Michigan report – closely watched by Fed policymakers – showed slipping consumer inflation expectations.The big economic focus for this week will be the monthly U.S. jobs report on Friday.Traders currently price about 31% probability that the Fed will keep its current 75 basis-point pace of rate hikes at its next meeting on Sept. 21, with 69% odds for a smaller half point increase.”Markets look to be betting the Fed has done the lion’s share of its task on inflation and will be receptive to slowing activity data,” Taylor Nugent, a markets economist at NAB in Sydney, wrote in a client note.The dollar slipped 0.22% to 132.925 yen, heading back toward the six-week low of 132.505 reached on Friday.The currency pair is extremely sensitive to changes in U.S. long-term Treasury yields, with the benchmark 10-year hovering around 2.67% after sliding to the lowest since early April at 2.618% at the end of last week.The euro, however, edged 0.07% lower to $1.0218, continuing its consolidation near the middle of its range over the past week and a half.Sterling was about flat at $1.2186, after hitting the highest since June 28 at $1.2245 on Friday. Markets are laying 67% odds for a half-point rate hike on Thursday, compared to 33% probability of a quarter-point increase.The Reserve Bank of Australia sets policy on Tuesday, and is expected to deliver another half point increase, with traders seeing just a 16% chance of a smaller quarter point tightening.The Aussie dollar slipped 0.19% to $0.69775 on Monday, but after touching a six-week high of $0.7032 in the previous session.”Should the market continue to hear what it wants from the Fed, the Aussie can readily spend more time above $0.70,” NAB’s Nugent said.”But $0.65-0.70 is still seen containing most of the price action in coming months.” More

SYDNEY (Reuters) – Asian share markets got off to a slow start on Monday as disappointing Chinese economic data fed doubts last week’s rally on Wall Street could be sustained in the face of determined policy tightening by global central banks.China’s factory activity actually contracted in July as fresh virus flare-ups weighed on demand. The official manufacturing purchasing managers’ Index (PMI) fell to 49.0 in July, missing forecasts for 50.4. That did not bode well for the raft of PMIs due this week, including the influential U.S. ISM survey, while the July payrolls report on Friday should also show a further slowdown.At the same time U.S. data out Friday showed stubbornly high inflation and wages growth, while central banks in the UK, Australia and India are all expected to hike again this week. “We expect the Band of England to step up monetary tightening with a 50bp hike at its August meeting. The increase in energy prices is likely to be the main driver,” warned analysts at Barclays (LON:BARC).”Central banks focus on the still strong inflation momentum and tight labour markets rather than signals of slowing growth. This could upset markets’ recent ‘bad news is good news’ view.”The caution was evident as MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1% in sluggish early trade.Japan’s Nikkei dithered either side of flat, while South Korea dipped 0.1%. S&P 500 futures slipped 0.4% and Nasdaq futures 0.3%.While U.S. corporate earnings have mostly beaten lowered forecasts, analysts at BofA cautioned that only 60% of the consumer discretionary sector had reported and it was under the most pressure given inflation concerns for consumers.”Our bull market signposts also indicate it’s premature to call a bottom: historical market bottoms were accompanied by over 80% of these indicators being triggered vs just 30% currently,” BofA said in a note.”Moreover, bear markets always ended after the Federal Reserve cut, which likely is at least six months away – BofA house view is for a first cut in 3Q23.” A, NOT-SO, DOVISH PIVOT Bond markets have also been rallying hard, with U.S. 10-year yields falling 35 basis points last month for the biggest decline since the start of the pandemic. Yields were last at 2.670%, a long way from the June top of 3.498%.The yield curve remains sharply inverted suggesting bond investors are more pessimistic on the economy than their equity brethren. [US/]The reversal in yields has taken some heat out of the dollar, which lost ground for a second week last week to stand at 106.010 on a basket of currencies, compared to its recent peak of 109.290.The biggest decline came against the yen where speculators had been massively short and found themselves squeezed out by the sudden turnaround. The dollar was last down at 132.85 yen, having shed a sharp 2.1% last week.The dollar fared better on the euro, which has a European energy crisis to contend with, and made hardly any headway last week. The euro was last at $1.0221, and short of stiff resistance around $1.0278.Jonas Goltermann, a senior markets economist at Capital Economics, was puzzled by the market’s dovish reading of last week’s 75-basis-point Fed hike.”Our sense is that the risk-on response to the Fed is largely down to a combination of wishful thinking and stretched positioning,” he argued.”In our view, there was little in Chair Powell’s remarks to suggest policymakers will abandon aggressive rate hikes while inflation remains so far above target,” he added. “If we are right that markets have misread the Fed’s intention, the dollar will probably resume its rally before too long.”For now, the drop in the dollar and yields has been a relief for gold which is up at $1,762 an ounce after bouncing 2.2% last week. [GOL/]Oil prices drifted back as the market waited to see if this week’s meeting of OPEC+ produced an increase in supply, even if only minor. [O/R] U.S. crude eased 87 cents to $97.75 per barrel, while Brent lost 77 cents to $103.20. More

The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) dipped to a seasonally adjusted 52.1 in July from the previous month’s 52.7 final.That marked the slowest pace of growth since September last year, and was slightly lower than a 52.2 flash reading.Japan’s economy has struggled to mount a sure-footed recovery from the pandemic’s hit, with recurrent flare-ups of COVID in China, the Ukraine war and surging commodity prices all dragging on overseas demand. Manufacturing activity suffered from contractions in output and overall new orders as well as a slower expansion in the backlog of work, the PMI survey showed.All the same, firms continued to add to their staffing levels, while also remaining confident about conditions a year ahead, though the degree of optimism was little-changed from June. “The headline PMI masked some worrying trends when looking at the underlying sub-indices, which add downside risks for the sector,” said Usamah Bhatti, economist at S&P Global (NYSE:SPGI) Market Intelligence, which compiles the survey.New order inflows fell for the first time in 10 months, while production levels saw their first contraction since February, Bhatti added.”Weaker demand conditions also contributed to reduced pressure on operating capacity,” he said.”Backlogs of work increased at the softest rate in 17 months, which hints at a further weakening of output over the coming months.”Official data released on Friday painted a brighter picture of manufacturing activity, which showed Japan’s factories in June ramped up output at the fastest pace in more than nine years as disruptions due to China’s COVID-19 curbs eased.But a government official also warned downside risks for output remained as parts supply delays lingered. That is one of many reasons why the Bank of Japan remains resolutely committed to its ultra-low policies despite a global trend of rising interest rates to fight rampant inflation. More

SYDNEY (Reuters) – Australian home prices slid for a third month in July and the pace quickened as Sydney suffered its worst decline in almost 40 years amid rising borrowing costs and a cost-of-living crisis.Figures from property consultant CoreLogic out on Monday showed prices nationally fell 1.3% in July from June when they dropped 0.6%. Prices were still 8.0% higher for the year reflecting huge gains made over 2021 and early 2022.The weakness was concentrated in the capital cities where prices dropped 1.4% in July, while annual growth slowed to 5.4% having been above 20% early this year.The pullback in Sydney gathered momentum as values fell 2.2% in the month, while Melbourne lost 1.5%. Annual growth in Sydney braked to just 1.6%, a long way from the heady days of 2021 when prices rose by a quarter.”Although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis in 2008, and the sharp downswing of the early 1980s,” said CoreLogic’s research director, Tim Lawless.”In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”Other cities also started to see falls with Brisbane off 0.8%, Canberra 1.1% and Hobart 1.5%.Even the regions started to cool as prices fell 0.8%, ending a long bull run as people shifted to country living and greater space.The retreat in part reflects higher borrowing costs as the Reserve Bank of Australia (RBA) lifted rates for three months in a row and is considered certain to hike again this week in an effort to contain surging inflation. [AU/INT]Markets are wagering the current 1.35% cash rate could reach 3.40% by the middle of next year. The major banks have also sharply raised borrowing costs on new fixed-rate mortgages and tightened lending standards. A sustained drop in prices would be a drag on consumer wealth given the notional value of Australia’s 10.8 million homes had risen A$210 billion ($146.52 billion) in the first quarter alone to reach A$10.2 trillion.($1 = 1.4333 Australian dollars) More