Aurelia Butler

Statscan said the economy was essentially unchanged in May when growth in service-producing industries was offset by a decline in goods-producing industries. Analysts had expected the economy to shrink by 0.2% in May from April. June likely expanded 0.1% versus May on higher output in the construction, manufacturing and accommodation and food services sectors, according to a flash estimate.The central bank forecast on July 13 that annualized growth would hit 4.0% in the second quarter, up from 3.1% in the first.That same day, the bank raised its main interest rate by 100 basis points in a bid to crush inflation, its biggest hike in 24 years, and said more increases would be needed. The bank says it wants to front-load its tightening to avoid a recession.The Canadian dollar dipped slightly to C$1.2851 to the U.S. dollar, or 77.81 U.S. cents, from C$1.2836 to the U.S. dollar, or 77.91 U.S. cents before the release. More

Two closely watched inflation reports showed little relief from record-setting price pressures in the US, underscoring the urgency of the Federal Reserve’s historically-fast campaign to cool down the economy. The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the second quarter increased 1.3 per cent. That was roughly in line with the 1.4 per cent jump during the first three months of 2022, which was the biggest quarterly increase recorded in data stretching back to 2004.For the 12-month period that ended in June, pay-related expenses rose 5.1 per cent, well above the 4.5 per cent annual pace recorded last quarter. Wages increased 5.3 per cent compared with the same time last year, after registering a 1.4 per cent quarterly rise.“This is a print that’s going to keep Fed officials up at night and likely sets [a 0.75 percentage point rate rise] as the base case for September,” said Omair Sharif, founder and president of Inflation Insights. “The monthly inflation and activity data are going to have to co-operate in a very big way for the Fed to step down from that [pace].”The data, published by the Bureau of Labor Statistics, were released on Friday alongside the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index. According to the commerce department, the headline index rose 1 per cent in June, after rising 0.6 per cent in May. That lifted the annual rate to 6.8 per cent, above the 6.3 per cent increase during the previous period.Once volatile items such as food and energy were stripped out, “core” PCE still rose 0.6 per cent in June, outpacing the previous 0.3 per cent monthly increase. On a year-over-year basis, it is up 4.8 per cent. The Fed’s target for core PCE is 2 per cent, meaning the central bank has significantly more progress to make to achieve its goals. As such, interest rate increases are expected well into the second half of 2022, extending what has become the fastest tightening cycle since 1981.Consumer sentiment remains near record lows, according to data released on Friday by the University of Michigan and expectations of future inflation five years from now came in at 2.9 per cent.Economists are split as to how the Fed will calibrate the pace of its interest rate adjustments in the months ahead, having implemented a second consecutive 0.75 percentage point rate rise this week to bring the federal funds rate to a new target range of 2.25 per cent to 2.50 per cent. That brings the benchmark policy rate in line with what is broadly considered “long-run neutral” and does not speed up or slow down economic growth when inflation is at 2 per cent.Fed chair Jay Powell said the central bank would shift to a “meeting-by-meeting” approach in terms of deciding on the cadence of forthcoming rate increases, backing away from the previous tactic of providing specific guidance well in advance. Still, Powell sent signals about what is potentially in store for the next policy meeting in September, noting that “another unusually large rate rise” is possible if warranted by the data.

Nancy Vanden Houten, lead US economist at Oxford Economics, said that based on the most recent figures, there isn’t “any evidence that wage growth is slowing”. She also expects another 0.75 percentage point rate rise in September.Officials have previously indicated that they want to see several months of decelerating inflation readings before changing course. As of last month, most expected rates to rise closer to 3.5 per cent by the end of the year, with further increases to come in 2023.Friday’s inflation reports come just one day after new data showed the US economy shrank for a second consecutive quarter, a common criteria for a technical recession. However, given the sustained strength of the labour market, which is still registering healthy monthly jobs growth, most policymakers and economists argue that the conditions for a recession have yet to be met. More

MILAN (Reuters) – Italy’s biggest bank Intesa Sanpaolo (OTC:ISNPY) on Friday posted a bigger-than-expected profit for the second quarter, helped by higher interest rates and trading gains, which offset the hit to net fees from rough markets.Intesa confirmed its financial targets for the year after net profit for April-June came in at 1.33 billion euros ($1.36 billion), down 12% from a year ago but well ahead of analysts’ consensus forecast of 1.03 billion euros in a Reuters poll.Rival UniCredit also beat expectations this week, thanks to stronger revenues and plummeting loan writedowns, doubling its net profit from the previous year and raising its 2022 earnings outlook. Revenues at Intesa reached 5.35 billion euros, surpassing analysts’ average estimate of 5.09 billion.Rising interest rates drove income from lending up 5% from a year earlier despite large impaired loan disposals, which had led analysts to anticipate no major boost from monetary policy tightening.Under a multi-year strategy unveiled in February, Intesa aims to keep its impaired loans at the “near zero” levels typical of Nordic rather than Mediterranean banks.”Overall, a decent quarter from Intesa with surprisingly good net interest income,” broker Autonomous said, adding the decision to approve a 1.1 billion euro interim dividend in November was positive.Intesa, which has made a trademark of its generous payouts, deducted in full from capital in the quarter a proposed 3.4 billion euro share buyback, sending its core capital ratio down to 12.5%, though it is carrying out only half of it for now. Profit was supported too by lower-than-expected loan loss provisions, with Intesa booking 730 million euros in charges in the period, nearly half of which related to Russia and Ukraine.Their presence in Russia has cost Intesa and UniCredit 1.1 billion euros each in provisions against potential losses in the first half.Italy’s top two banks have been struggling to extricate themselves from Russia after it invaded Ukraine, failing to find buyers for their local businesses after international sanctions curtailed the number of potential counterparties. Intesa, whose strong social commitment reflects the Roman Catholic values of its banking foundation shareholders, said it would pay out 500 euros each to 82,000 employees – excluding executives – to help them cope with soaring inflation. ($1 = 0.9776 euros) More

LONDON (Reuters) – One day you’re out and the next day you’re in: the world’s battered sovereign bond markets are back in favour as global recession fears mount.Government borrowing costs from Germany to France and Australia are down sharply this month, with 10-year bond yields down around 50 basis points each in July and set for their biggest monthly falls in at least a decade. U.S. 10-year Treasury yields have slid some 80 basis points from 11-year highs hit in June as decades-high inflation fuelled expectations for aggressive Federal Reserve interest rate hikes.For sure, sticky inflation means not everyone is buying bonds and Friday’s data showing euro zone inflation at another record high was a trigger for fresh bond selling.But a shift appears to be taking place as signs of slowing economic growth suggest a peak in official interest rates is nearing. That means the government bonds investors shunned in the first half of 2022 are regaining their appeal. German Bund yields set for biggest monthly drop since 2011: https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnekjqvq/germany2907.png Bond funds saw inflows worth $3.6 billion in the week to Wednesday, the largest since March, BofA’s weekly analysis of flows released on Friday showed.ING senior rates strategist Antoine Bouvet said he would not be surprised if Germany’s 10-year Bund yield tested 0.5% in coming months. It was at 0.9% on Friday and had risen to almost 2% in June.”The tide has indeed turned, bonds are back to behaving like recession hedges,” Bouvet said. Data on Thursday showed the U.S. economy contracted again in the second quarter. Euro zone data on Friday showed the bloc holding up better than expected although powerhouse Germany is on the edge of contraction. Business activity in major economies is weakening: https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/zdpxobbanvx/chart.png LONG GAMEInvestors are increasing exposure to longer-dated debt on growth worries.Flavio Carpenzano, investment director at Capital Group, which manages $2.6 trillion worth of assets, said he had started to increase duration, which represents sensitivity to moves in underlying interest rates.”Recently we reduced underweight duration (positions) because Europe might enter into recession, and in that case we want to have core assets like German Bunds,” he said. “From that perspective, we gradually started to increase duration through German bonds in the 10-year part of the curve to protect the portfolio to the downside.”Total returns, including capital gains and coupon payments, on Austria’s 100-year bonds are up 33% in July, according to Refinitiv data. But as with most very long-dated debt an investor who had bought at the start of 2022 would be down significantly year to date.The European Central Bank hiked rates by 50 basis points last week and markets had fully priced in a further big move in September. They now attribute a roughly 42% chance of another half-point hike.Markets are pricing in a peak U.S. interest rate of 3.2% by the end of this year and 50 basis points of rate cuts in 2023. Just before the Federal Reserve raised rates by 75 basis points in mid-June, they had priced U.S. rates peaking at over 4% in 2023 and just one quarter-point rate cut by the end of next year. Earlier this week, the Fed delivered another 0.75% rate increase.Seema Shah, chief strategist at Principal Global Investors, said the firm had increased its exposure to U.S. Treasuries and investment grade corporate debt given recession risks.”We expect a recession in 2023 and think the Fed will start cutting rates towards the end of next year and so it’s hard to see a sustained move higher in U.S. bond yields,” she said. U.S. yield inversion a harbinger of recession: https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/byvrjwwmnve/chart.png Investors said the outlook for Europe’s peripheral bond markets such as Italy was more complicated, given growth concerns and political instability. Capital Group’s Carpenzano said he remained underweight in Italian bonds.Others said the downward move in bond yields was not a one-way bet given the fight against inflation was far from won – euro zone price growth rose to a new record high of 8.9% in July.”I feel like the rally in rates is overdone,” said Tim Graf, head of EMEA macro strategy at State Street (NYSE:STT).”German 10-year bond yields at 0.9%, given the inflation picture, is not something I would want to own,” he said, noting Bund yields could move back towards 1.25-1.5% by year-end. More

Russia’s economic landscape changed drastically after Moscow sent tens of thousands of troops into Ukraine on Feb. 24, triggering sweeping Western restrictions on its energy and financial sectors, including a partial freeze of Russian reserves, and leading scores of companies to exit the market.The average forecast among 17 analysts polled in late July suggested the Russian economy was on track to shrink by 5% this year. A similar poll in June had predicted a contraction of 7.1%.Analysts’ forecasts are becoming less pessimistic as officials revise their outlooks and fresh statistics arrive. Data published this week showed industrial output, real disposable incomes and retail sales all fell in year-on-year terms in June, although the unemployment rate stayed at a record low.The economy ministry in April said gross domestic product could fall by more than 12% this year, in what would have been the biggest contraction since the mid-1990s, but forecasts have softened since then as Russia pushes back against restrictions.The rouble soared to over seven-year highs in late June, supported by capital controls Moscow introduced to shield its financial system from sanctions, as well as Russia’s strong current account surplus due to high prices for commodity exports and falling imports.But the currency is seen weakening in coming months as the government is expected to take steps to curb its strength.The rouble is expected to trade at 75.00 against the dollar in a year from now, according to the poll, compared with a rate of 75.73 predicted by analysts in late June. Friday’s official rate was at 60.20 roubles per dollar.Inflation, one of the key concerns among Russian households, is expected to accelerate to 13.4%, from 8.4% in 2021, according to the poll, but below last month’s expectations of a 14.5% annual consumer prices increase.The central bank said inflationary expectations among Russian households declined in July, which may give it room to cut rates further to provide the stranded economy with cheaper lending.”A strong rouble and the economic decline will contribute to a further slowdown of inflation,” said Mikhail Vasilyev, chief analyst at Sovcombank, who forecast a 50-basis-point cut to 7.5% at the next rate-setting meeting on Sept. 16. The consensus forecast suggested the central bank would cut the rate to 7% by year-end from 8% at the moment. In January, before the conflict in Ukraine began, analysts had on average expected the economy to grow by 2.5% with year-end inflation at 5.5%. Russia targets inflation at 4%. More

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 1.1% last month, the Commerce Department said on Friday. Data for May was revised up to show outlays gaining 0.3% instead of 0.2% as previously reported.Economists polled by Reuters had forecast consumer spending would accelerate by 0.9%. The data was included in the advance gross domestic product report for the second quarter, which was published on Thursday. That report showed inflation-adjusted consumer spending increased at its slowest pace in two years amid declines in purchases of goods, particularly food, because of higher prices.Gross domestic product contracted at a 0.9% annualized rate last quarter after declining at a 1.6% pace in the first quarter.Inflation heated up in June. The personal consumption expenditures (PCE) price index jumped 1.0% last month. That was the largest increase since September 2005 and followed a 0.6% gain in May. In the 12 months through June, the PCE price index advanced 6.8%, the largest increase since January 1982. The PCE price index rose 6.3% year-on-year in May.Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May. The so-called core PCE price index increased 4.8% on a year-on-year basis in June after rising 4.7% in May.The Federal Reserve on Wednesday raised its policy rate by another three-quarters of a percentage point. It has now hiked that rate by 225 basis points since March. More