Aurelia Butler

NEW YORK (Reuters) – The U.S. government bond market is sending a fresh batch of signals that investors are increasingly convinced the Federal Reserve’s aggressive actions to tame inflation will result in recession.The shape of the yield curve, which plots the return on all Treasury securities, is seen as an indicator of the future state of health of the economy, as inversions of the curve have been a reliable sign of looming recession. While Fed Chair Jerome Powell on Wednesday said that he does not see the economy currently in a recession, spreads between different pairings of Treasury securities – and derivatives tied to them – have in past weeks moved into or toward an “inversion” when the shorter dated of the pair yields more than the longer one. These join another widely followed yield spread relationship – between 2- and 10-year notes – that has been in inversion for most of this month.”Curves are flattening and some are negative. They’re ultimately all telling you the same thing,” said Eric Theoret, global macro strategist at Manulife Investment Management.A steepening curve typically reflects expectations of stronger economic activity, higher inflation and interest rates. A flattening curve can signal expectations of rate hikes in the near term and a weaker economic outlook.The Fed is aiming to achieve a so-called “soft landing” that does not entail an outright contraction in U.S. economic output and the rise in joblessness that typically accompanies that. But the moves in the bond market over the past week show waning confidence in the Fed’s ability to achieve so benign an outcome.Some of those moves reversed slightly on Wednesday, with rates at the short end of the curve turning lower on expectations of the Fed being less likely to continue with super-sized hikes. On Wednesday the Fed raised its benchmark overnight interest rate by 0.75% to a range of between 2.25% and 2.50% as it flagged weakening economic data. Powell said on Wednesday that achieving a soft landing for the economy was challenging.The curve is indicating that the Fed will have to start cutting rates after hiking. The part of the U.S. Treasury yield curve that compares yields on two-year Treasuries with yields on 10-year government bonds has been inverted for most of the past month and is around the most negative its been since 2000 on a closing price basis. Powell, however, has in recent months said that the short-end of the yield curve was a more reliable warning of an upcoming recession.”The first 18 months of the yield curve has 100% of the explanatory power of the yield curve, and it makes sense … because if it’s inverted that means the Fed is going to cut which means the economy is weak”, he said in March.Some analysts pointed to another measure, the differential between what money markets expect the three-month federal funds rate to be in 18 months and the current three-month federal funds rate. That went briefly into negative territory on Tuesday, said George Goncalves, head of U.S. Macro Strategy at MUFG.That spread – measured through overnight indexed swap (OIS) rates, which reflect traders’ expectations on the federal funds rate – was about 230 basis points in March.”It’s very similar to looking at the Treasury curve, these are all curves that trade with tiny spreads with each other,” said Subadra Rajappa head of U.S. rates strategy at Societe Generale (OTC:SCGLY). Another measurement of the curve, the 2-year forward rate for 3-month bills, is around the flattest since June 2021.Fed economists have said https://www.federalreserve.gov/econres/notes/feds-notes/monetary-policy-inflation-outlook-and-recession-probabilities-20220712.htm that near-term forward yield spreads – namely the differential between the three-month Treasury yield and what the market expects that yield to be in 18 months – are more reliable predictors of a recession than the differential between long-maturity Treasury yields and their short-maturity counterparts.That spread has not gone negative, though it has narrowed significantly from over 250 basis points in March to about 70 basis points this week, said MUFG’s Goncalves.Another part of the curve that compares the yield on three-month Treasury bills and 10-year notes has flattened dramatically over the past few weeks, from nearly 220 basis points in May to around 15 basis points this week although it steepened after Powell’s remarks.Separately, futures contracts tied to the Fed’s policy rate showed this week that benchmark U.S. interest rates will peak in January 2023, earlier than the February reading they gave last week.”Inverting yield curves, rising inflation, weakening housing data, and slumping surveys have all driven the increase (in recession probability) in the US,” wrote Credit Suisse analysts in a research note on Tuesday, forecasting that the probability of the United States being in recession 6 and 12 months ahead is approximately 25%. “It is likely recession probabilities rise further in the coming months if policy rate hikes cause further curve inversion and cyclical data continue to deteriorate,” they added. 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(Reuters) – Shares of several major U.S. companies tumbled in extended trade on Wednesday following poor quarterly results and forecasts that underscored fears about a potential recession. Meta Platforms fell over 3% after the Facebook (NASDAQ:META) owner posted its first-ever quarterly drop in revenue and issued a gloomy forecast, echoing a warning last week from ad tech rival Snap (NYSE:SNAP).Qualcomm (NASDAQ:QCOM) dropped more than 2% after offering a fiscal fourth-quarter revenue forecast that missed analysts’ expectations as the mobile chipmaker braces for difficult economic conditions and a slowdown in smartphone demand.ServiceNow (NYSE:NOW) slumped 6% after the business software seller cut its forecast for subscription revenues, blaming a stronger dollar. Cloud software heavyweight Salesforce (NYSE:CRM) lost over 2% after ServiceNow’s report.Wednesday’s slew of late-day quarterly reports came after the Nasdaq rose 4% to post its biggest daily percentage gain since April 2020.Most of the Nasdaq’s gains came after the U.S. Federal Reserve raised interest rates by 75 basis points, as expected. Some investors viewed comments by Fed Chair Jerome Powell as signaling the Fed’s fight to tame decades high inflation could be done by year-end.Data due out on Thursday will show how much the U.S. economy expanded – or shrank – in the June quarter.Also after the bell, Best Buy fell 2% after the electronics retailer warned of a deeper-than-expected drop in annual sales, showing that consumers are feeling the pressure of inflation and higher interest rates, and curbing spending on discretionary items such as computers and TVs.Teladoc (NYSE:TDOC) Health, the fifth largest holding in star investor Cathie Wood’s Ark Innovation ETF, collapsed by 20% after the virtual healthcare company reported a quarterly loss of $3.1 billion, with almost all of that from writing down the value of its goodwill. That compared to a loss of $133 million in the year-ago period. More

(Reuters) -U.S. banks JPMorgan Chase & Co (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) raised their prime lending rates by 75 bps to 5.5% on Wednesday to reflect the Federal Reserve’s latest interest rate move.The moves, which will be effective from Thursday, follow the U.S. Federal Reserve’s decision to raise its target interest rate by three-quarters of a percentage point for a second consecutive month to tame soaring inflation. [FED/]”Today’s move is further admission from the Federal Reserve that it was too generous with its monetary policy in 2021 and that it is trying to reverse things quickly,” said Michael Ashley Schulman, chief investment officer at multi-family office Running Point Capital Advisors. Fed chairman Powell during a press conference on Wednesday said he expects another unusually large increase in rates at the next meeting due to an extremely tight labor market and high inflation.”It’s tough medicine, but the Fed needs to get a handle on inflation for everyone’s sake,” said Ted Rossman, senior industry analyst at financial services company Bankrate.”And retailers such as Walmart (NYSE:WMT) are indicating that consumer demand is slowing for all of these reasons. While unpleasant for borrowers, these are perhaps signals that the rate hikes are starting to do their job,” Rossman added. The central bank is walking a tight rope as its aggressive moves to stamp out inflation could tip the economy into a recession.”If the U.S. enters a recession now, it would be a most unusual one with plentiful credit, low unemployment and high inflation – remarkable dynamics not normally associated with an economic slowdown,” Schulman said.Banks usually stand to gain from high interest rates as they earn the difference between rates of borrowing and costs of lending. More

Joe Biden and Xi Jinping will hold a telephone call today, according to a US official, as tensions escalate over the planned visit to Taiwan by Nancy Pelosi, the Speaker of the House of Representatives.The planned call would be only the fifth conversation between the two leaders since Biden became US president 18 months ago. Biden and the Chinese president had been expected to discuss many contentious issues, from military challenges to technology competition. But those plans have been complicated by Pelosi’s intended visit to Taiwan in August.The Financial Times reported last week that the 82-year-old Democrat planned to travel to Taiwan in a show of support as it comes under rising pressure from China, which claims sovereignty over the island. Beijing has privately issued harsh warnings suggesting a possible military response if Pelosi proceeds with the trip. The White House is extremely concerned that her visit could spark a crisis across the Taiwan Strait. Biden has sent top officials, including national security adviser Jake Sullivan, to explain the risks. But that has been complicated by the fact that Congress is independent and he has no formal power to block her visit.Opinion: US and China are entering a trap of their own making. The costs of miscalculation by either side would be lethal, and the risks are only growing, writes Edward Luce. Five more stories in the news1. Fed raises rates by 0.75 points for second month in a row At the end of its two-day policy meeting, the Federal Open Market Committee lifted the target range of the federal funds rate to 2.25 per cent to 2.50 per cent. The decision, which had unanimous support, extended a string of interest rate increases that began in March and have ratcheted up in size as the Federal Reserve’s battle to fight inflation intensifies.2. South Korea probes crypto-linked forex transactions Regulators are investigating $3.1bn worth of “abnormal” foreign exchange transactions at two of the country’s biggest commercial banks for possible money laundering linked to crypto investments.3. European gas price rise accelerates European gas prices have jumped after Russia followed through on its threat to make deepening cuts in gas supplies to the region. Prices rose as much as 13 per cent as flows on the Nord Stream 1 pipeline were cut to just a fifth of normal capacity.4. Facebook parent Meta reports first decline in revenue Meta reported its first revenue decline in the second quarter, laying the blame at macroeconomic pressures and offering investors a gloomy outlook for the coming months. Meta, formerly known as Facebook, is the latest big online advertising player to wilt as advertisers pulled back on spending. 5. Singapore’s GIC warns of hard year ahead Singapore state fund is directing money towards real estate and other inflation-protecting assets as it prepares for several years of disruption from rising prices. In an interview with the Financial Times, GIC’s management said that soaring inflation could reverse gains it had made in recent years.The day aheadFrench president meets Saudi crown prince Emmanuel Macron will meet Mohammed bin Salman in Paris today amid Europe’s continued energy crisis. The trip is part of the crown price’s first trip to Europe since the killing of Jamal Khashoggi. (Politico EU) Earnings The marathon of corporate earnings continues. We’ll have our eye on Amazon, Apple, Barclays, Nissan Motor, Panasonic, Pfizer and more. European supermajors in particular — BP, Shell and TotalEnergies — are expected to report bumper profits over the next week. What else we’re reading and listening to The white elephants stoking fury over Sri Lanka’s debt crisis The Rajapaksas lavished spending on vanity projects that are rotting away in the heat. Today, the unpaid debts and mounting maintenance costs reflect the problems faced by Ranil Wickremesinghe as the incoming president prepares to institute painful reforms.Listen: In this week’s episode of Behind the Money, the FT’s Antoni Slodkowski shares what he’s seen after a week of reporting in Sri Lanka.How bad will the global food crisis get? Food commodity prices are falling, but experts say global production and hunger rates might be even worse in 2023. The war in Ukraine is only one of a multitude of problems that could sustain higher hunger rates for many years to come.

Shrimsley: Truss is the right choice for this Conservative party Today’s Conservative party dislikes hard choices. And this is a problem for Rishi Sunak, because the former chancellor has decided to make facing up to them his key pitch to succeed Johnson. The cakeist candidate is Liz Truss and she is prepared to go full gateau if it gets her to the top.To combat disease, look beyond the Kardashian of proteins If there were a celebrity hierarchy of proteins, P53 would be its Kim Kardashian. The protein scuppers tumour growth: a lack of P53 — for example — predisposes a person to cancer. While P53 is unquestionably important to health, it is also a beneficiary of the “street light effect”, in which a phenomenon that is already illuminated attracts further attention. India’s roaring post-pandemic recovery at risk from inflation In a country that has traditionally maintained close ties with Moscow, Narendra Modi’s government has been buying Russian oil at a discount despite US and European sanctions over Vladimir Putin’s invasion of Ukraine. This has not been enough, however, to cushion the energy shock.

BooksFormer Fed chair Ben Bernanke and historian Edward Chancellor offer conflicting perspectives on the crisis in central banking in two new books reviewed by Martin Wolf. “Chancellor has written an overheated and unbalanced polemic,” Martin writes. “Yet this does not altogether vindicate Bernanke’s managerialist perspective.” More

WASHINGTON (Reuters) – The White House on Wednesday welcomed hearing about a legislative deal aimed at lowering the cost of pharmaceutical drugs as part of a budget bill.White House press secretary Karine Jean-Pierre, learning of the deal while at the podium for her daily news briefing, said she would seek more information about it. More

ABUJA (Reuters) -Nigeria’s Senate passed a motion on Wednesday to summon Central Bank Governor Godwin Emefiele over the “free fall of the naira” and called on the central bank to urgently intervene.The naira has fallen to successive record lows on the parallel market due to dollar scarcity since July last year after the central bank stopped forex sales to retail currency traders to ease pressure on reserves and support the official market.The move funnelled demand to the unofficial market, where the currency is freely traded. Lawmakers on Wednesday said the policy had “contributed to the excessive scarcity of forex in Nigeria,” the Senate president said in a statement.The currency has been trading within a range on the official market.No date was set for the summon to be conducted by the senate’s committee on banking. The central bank did not respond to a request for comment.The naira hit a record low of 695 naira per dollar on the black market on Wednesday, traders said, citing scarcity of foreign currency.Nigeria’s currency woes worsened after foreign investors fled as oil prices collapsed in the wake of the COVID-19 pandemic, widening the country’s funding requirement. Oil prices have since recovered but investors are yet to return.One lawmaker faulted the central bank’s decision to halt dollar sales to bureau de change operators and said the move had contributed to dollar scarcity.Lawmakers feared the currency could hit “1,000 naira by end of the year based on the current rate of depreciation”, citing a lack of foreign investment on insecurity plaguing Nigeria, which is also battling with double-digit inflation and low growth.The Senate plans to question Emefiele on the impact of cheap loans granted by the central bank to certain sectors of the economy to boost local production in a bid to cut imports.(Additional reporting and writing by Chijioke OhuochaEditing by Leslie Adler and Marguerita Choy) More

Only five years ago, China’s leader Xi Jinping proclaimed that the Belt and Road Initiative (BRI) was the “project of the century”. Now the huge programme to build often worthwhile infrastructure in developing countries is morphing into a financial firefighting operation on a grand scale. The total value of loans from Chinese financial institutions to projects in BRI countries that had to be renegotiated in 2020 and 2021 hit $52bn, according to data collected by the Rhodium Group, a New York-based research group. This represented more than three times the $16bn of the previous two years. In this way Xi’s scheme is becoming China’s first overseas debt crisis. The renegotiations — which mostly involved loan write-offs, deferred payment schedules and reductions in interest rates — were necessitated by deteriorating financial conditions in debtor countries plus project-specific problems.The scale of the BRI makes this an issue of global importance. China ranks as the world’s largest source of development credit to the rest of the world, having eclipsed the World Bank and IMF. It also extends more overseas development loans than the 22 members of the Paris Club put together. To be sure, the sharp deterioration of the BRI’s loan portfolio in 2020 and 2021 was driven to a significant degree by the pandemic. But Beijing should also acknowledge that flaws in the programme’s design — including a general lack of transparency, insufficient risk management on projects and the participation of many of the world’s riskiest debtor nations — also took a toll.Environmental and social impact studies are almost always absent from BRI infrastructure projects financed by China’s two big policy banks and its state-owned commercial banks. While this may speed up implementation, it increases risks further down the line. Public protests, chronic delays and allegations of corruption have dogged many a high-profile BRI project.The selection of risky key debtors — including Pakistan, Venezuela, Russia, Angola, Ecuador, Argentina, Sri Lanka, Zambia and Iran — is another design shortcoming. As project loans blow up, Beijing has become obliged to provide “tens of billions” of US dollars in “rescue loans” to BRI countries to stave off default, according to research by AidData, a research group.The pressing issue now for China and for BRI debtors that have already defaulted — such as Sri Lanka and Zambia — is how to quickly resolve crises alongside fellow creditors such as the World Bank, other multilateral lenders and international bondholders.Although co-operating with multilateral lenders goes against the BRI’s bilateral design, Beijing should seek to abide by a broad principle of parity. Rather than positioning itself as a priority creditor, China should agree to loan repayments on close to equal terms with the World Bank and other multilateral bodies, and take a similar haircut on repayments. That would speed up resolutions and reduce economic distress in defaulting nations.Longer term, China should also overhaul the way it extends development loans through the BRI. Here, too, it should adopt a more multilateralist approach, co-operating with multilateral development banks and conducting sufficient risk management studies before finance is forthcoming. In this, it has a ready example to follow. The Asian Infrastructure Investment Bank, a multilateral lender headquartered in Beijing and led by China, performs a full range of risk management studies before it grants loans. In the six years since the AIIB was established, it has maintained one of the highest quality loan books in the world. More

Good eveningThe energy crisis sparked by Russia’s invasion of Ukraine intensified today as gas prices rocketed and the US warned of a fresh surge in oil prices unless big importers agreed to cap the amount they pay for Russian crude.This morning’s rise in European gas prices of another 12 per cent comes on top of an increase of more than a third so far this week. They now stand at roughly 10 times the price last year before Russia began to restrict supplies.Gascade, Germany’s gas network operator, said this morning that flows on Nord Stream 1, which connects Russia with Germany, had roughly halved to 20 per cent of capacity. Russia says the reduction was due to turbine problems, made worse by western sanctions.The EU, which prior to the invasion of Ukraine had relied on Russia for 40 per cent of its supplies, has been struggling to get member states to agree to a voluntary cut in consumption by 15 per cent to help fill storage sites ahead of winter. Agreement has finally been reached but with a long list of opt-outs should the target become binding. Rationing and shortages this winter are a real prospect, especially if Russia tightens its grip.Italy’s outgoing prime minister Mario Draghi highlighted the scale of the challenge, saying his country’s “unacceptable energy dependence” on Russia was the “consequence of decades of shortsighted and dangerous choices”.Energy companies, meanwhile, are benefiting from the turmoil, with Norway’s Equinor and Spain’s Iberdrola today both reporting bumper profits. The European oil and gas majors BP, Shell and TotalEnergies, all of whom report earnings over the next week, are generating more money than ever, raising the prospect of large-scale acquisitions to boost their transition to clean energy.Across the Atlantic, the main concern is high petrol prices, which have been a drag on US consumer confidence. Even though prices have fallen back in recent weeks, the market remains extremely fragile, reports our Energy Source newsletter (for Premium subscribers). The Biden administration is trying to get big oil importers such as China and India to agree to a price cap on Russian crude to prevent an even more damaging rise in fuel costs. India’s reliance on imported oil could yet derail the country’s pandemic recovery, and given its growing importance as a consumer market and manufacturing hub, can only add to fears of a global slowdown.The US is also joining the EU ban on insurance and services for ships carrying Russian oil but fears the expected drop in exports could leave markets short and send prices higher.However, one aspect of European energy policy that the US is unlikely to follow is urging its citizens to be more frugal. Trying to do so would be political suicide, reports US correspondent Myles McCormick.As one industry consultant puts it: “In Europe, they’ve said turn down the thermostats and you’ll find your way to freedom. President Jimmy Carter put on a cardigan and said the same thing — and he lost his re-election.” Latest newsUS president Joe Biden tests negative for Covid-19 Insurance contracts agreed for resumption of Ukraine grain exportsUS durable goods orders rise by a more than expected 1.9 per cent in JuneFor up-to-the-minute news updates, visit our live blogNeed to know: the economyThe US Federal Reserve announces its interest rate decision at 2pm ET/7pm UK today against the backdrop of surging consumer prices and mounting fears of recession. Check FT.com for details and the latest reaction.The IMF issued a gloomy update to its global economic outlook, highlighting risks “overwhelmingly tilted to the downside”. The fund slashed its growth forecast for 2022 to 3.2 per cent, with 2.9 per cent for next year. Its projections for inflation rose to 8.3 per cent this year and 5.7 per cent in 2023.

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Latest for the UK and EuropeLong Covid is costing UK workers £1.5bn in lost earnings and looks like it will have a lasting effect on the economy, according to new research. About 2mn people had symptoms in May and the number suffering with the condition has doubled in the past year.A UK parliamentary committee said the government needed to provide immediate help for households battling with soaring energy costs or risk more damage to the wider economy. Contender for prime minister Rishi Sunak said he would cut VAT on bills. Our Money Clinic podcast offers some practical tips for managing rising prices and higher interest rates.Brussels said Italy’s next government could not renegotiate the basics of the €200bn EU-funded Covid-19 recovery plan and must stick with its pledges on economic reform. Polls suggest the September 25 elections could result in victory for the far-right Brothers of Italy.Global latestEl Salvador said it would buy back $1.6bn of its sovereign bonds to ward off fears of default. The bonds have traded at deep discounts since its adoption of bitcoin as legal tender, alongside the US dollar, in September 2021.What sets the current global food crisis apart is that there are multiple causes, our latest Big Read explains, from conflict in Ukraine, to drought to supply chain problems dating from the pandemic. The UN Food and Agriculture Organization predicts the war alone will raise the number of undernourished people by up to 13mn this year and another 17mn in 2023.The policy of strict inflation targets for central banks has caused economic harm, says financial historian Edward Chancellor. Whenever an institution is guided by a specific target, critical judgment tends to be suspended, he argues. Chief economics commentator Martin Wolf weighs up Chancellor’s arguments against those of former Fed chair Ben Bernanke in our latest books essay. Need to know: businessOne of the most striking aspects of the second-quarter earnings season has been price rises from the big consumer goods companies such as Unilever, Kraft Heinz, McDonald’s and Danone as they respond to higher prices. Retailers too are reporting changing consumer behaviour as times get tough: Walmart, the world’s largest, this week issued its second profit warning in 10 weeks. Ecommerce is not immune: shares in Shopify plunged after it said it would lay off 10 per cent of its workers, explaining that it had made a mistake in believing the pandemic surge in online retail would continue. Amazon blamed inflation as it increased the cost of its Prime membership service in Europe, while Chinese rival Alibaba scaled back its global expansion plans.Energy costs too are a recurring feature of this week’s results stories. Frozen food store Iceland today warned of the hit from keeping its freezers going. Grocers such as Aldi are also facing growing labour market pressures.The tech sector has been a little more optimistic. Microsoft said it was confident of hitting full-year targets despite a weaker PC market and stronger US dollar. Google parent company Alphabet reported “solid growth” in its core markets even as economic uncertainty hit ad spending.Good news too from the luxury sector, where Louis Vuitton benefited from strong US sales and a tourist boom in Europe that helped outweigh the effect of lockdowns in China. German carmaker Mercedes raised its revenue forecasts after profiting from rising demand for its upmarket models.Financial services companies reported mixed fortunes. Lloyds beat profit forecasts thanks to rate rises and mortgage business; Credit Suisse fell into loss; Deutsche Bank scrapped its full-year cost target; and UBS, the world’s largest wealth manager, reported lower-than-expected profits as clients “stayed on the sidelines” amid volatile markets.Post-Brexit regulations will cost the UK chemicals industry £2bn in red tape — twice the initial estimate. Both candidates for UK prime minister have promised to review all retained EU law and scrap onerous rules but replacing them with British regulation is likely to prove costly and disruptive. Experts have also warned of a “chasm” opening up between UK and EU standards on hazardous chemicals.The Qatar Airways chief told the FT that aviation disruption would last for years, as he outlined his company’s hit from staff shortages in Europe, delays in deliveries and a lack of spare parts. Heathrow airport warned it could extend its cap on flights.The World of WorkBosses may be keen to get people back into the office, but many workers who have experienced a new sense of autonomy working from home aren’t so keen. Isabel Berwick and guests discuss how the stand-off can be resolved in the new Working It podcast. Get the latest worldwide picture with our vaccine trackerSome good news…It’s a golden time for sports fans with England’s Lionesses roaring through to the Euro 2022 final on Sunday, heroic feats at the World Athletics Championships and the Commonwealth Games beginning tomorrow. Today is also the tenth anniversary of one of the greatest spectacles ever staged in Britain: the London 2012 Opening Ceremony. Make yourself a nice cup of tea and relive the full experience here. It’s ten years since the games began . . .  © REUTERS More