Aurelia Butler

Australia’s unemployment rate has fallen to its lowest level in almost 50 years, piling greater pressure on businesses struggling to find workers. The unemployment rate dropped to 3.5 per cent in June, lower than the 3.8 per cent predicted by economists. In 1974, the jobless rate fell to 2.7 per cent. Data released on Thursday revealed that 88,000 more people were employed in June from the previous month and that the workforce participation rate hit an all-time high of 66.8 per cent. The number of unemployed people in the country is now almost identical to the number of jobs vacant at about 500,000, according to the Australian Bureau of Statistics. That compares with a ratio of about 3 to 1 before the pandemic. Australia is in the grip of a labour shortage that has often pitted businesses and the public service against each other in the struggle to find enough workers. “The fall in unemployment is very good news, but the gap between the number of unemployed people and job vacancies has narrowed to just 14,000, emphasising the severity of the jobs [staffing] crisis,” said Andrew McKellar, chief executive of the Australian Chamber of Commerce.The shortage has cut across both skilled and non-skilled workers and has had a knock-on effect on supply chains, tourism and mining as well as airports, where chaotic scenes have become commonplace because of staff shortages. The Labor government, which was elected in May, has called a jobs summit for September ahead of an October budget. Prime Minister Anthony Albanese, who is Fiji attending a Pacific leaders’ forum, has held bilateral talks with island nations covering visa and migration policies for workers. Jennifer Westacott, chief executive of Australia’s Business Council, said that Canberra needed to increase migration and widen the pool for long-term working visas to address chronic staff shortages.

“A lack of workers puts a handbrake on new projects and stifles investment. You can’t employ hundreds of Australians on a construction job if you don’t have a surveyor and you can’t tender for a new project without engineers or labourers,” she said. Robert Carnell, regional head of research at ING, said the labour figures would increase pressure on the Reserve Bank of Australia to continue raising interest rates at a rapid rate. “A drop in the unemployment rate was expected this month, but not of the magnitude recorded,” he said. “A drop to 3.5 per cent really does look quite alarmingly tight.”New Zealand has raised interest rates consistently since October, including a further 50 basis point rise this week to 2.5 per cent. Australia has been more cautious, but has raised its rate to 1.35 per cent since May. The low unemployment rate, combined with soaring inflation, has made a further rise more likely, economists said. More

The Federal Reserve is under pressure to abandon its monetary policy guidance for the second month in a row in the face of soaring inflation, as market participants increasingly bet the US central bank will raise interest rates by a full percentage point at the end of the month.Consumer prices across most goods and services rose again in June at a speed that pushed the annual increase to 9.1 per cent, the biggest jump since November 1981. The advance surpassed even the most aggressive forecast by economists and was yet another unwelcome development for a central bank that has emphasised its “unconditional” commitment to tackling high prices — even at the expense of the economic recovery. It also threatens to further muddy the Fed’s communications with investors, given that policymakers have sent clear signals to markets that they intend to raise interest rates by 0.5 or 0.75 percentage points at their next meeting, which concludes on July 27. But following June’s inflation report, economists now expect the Fed to implement a 0.75 percentage point increase at the bare minimum, and traders in federal funds futures contracts put the odds of a full percentage point increase at more than half, according to CME Group. “The mistake they have been making and maybe they’ve learned from is tying their hands and saying we won’t hike more than 25, 50 or 75 basis points,” said Diana Amoa, one of the chief investment officers at Kirkoswald, a hedge fund.“If you are indeed data dependent, then you need to leave the optionality to be able to pivot whichever way the data is pointing,” she added. “What the data is saying is the Fed is only at the early stages of trying to tackle this inflation overshoot.” As such, Amoa said a full percentage point rate rise at the end of the month is the “right thing” for the Fed to do.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

If the Fed does opt for a larger rate increase it would hearken back to the drama surrounding last month’s meeting, when the central bank abruptly abandoned its heavily signalled plans for a half-point rate rise in the days leading up to the announcement. Instead, it implemented the first 0.75 percentage points increase since 1994 after worse than expected inflation data. Raphael Bostic, president of the Atlanta Fed, on Wednesday raised fears of a rerun of that episode when he responded to a question about a full percentage point increase by saying “everything is in play” following the “concerning” inflation report. In an interview with Bloomberg on Wednesday, Loretta Mester, president of the Cleveland branch and a voting member on the Federal Open Market Committee, declined to rule out a 1 percentage point rise.“We don’t have to make that decision today,” she said, noting that the appropriate increase would be discussed at the upcoming meeting and there were still data to be released before then.However, she said that June’s “uniformly bad” inflation report did not point to a rate rise of less than 0.75 percentage points. Also on Wednesday, Mary Daly, president of the San Francisco Fed, told The New York Times that her “most likely posture” was another 0.75 percentage point adjustment, but indicated a full percentage point move this month was in the range of possibilities.Tim Duy, chief US economist at SGH Macro Advisors, said: “The Fed has put itself in a position where to maintain credibility on its intention to restore price stability it almost needs to find a way to escalate with each new bad inflation number.” For Sarah House, senior economist at Wells Fargo, a 0.75 percentage point interest rate rise is now seen as a “floor rather than the ceiling of what they might do in July”. Economists at Nomura changed their prediction to a full percentage point increase.Motivating these bets is the latest alarming inflation reading. While the data captured the period before prices for energy and other commodities started to tumble from recent highs, there were clear signs that price pressures were becoming more entrenched in a wider range of sectors.The “core” measure, which strips out volatile items such as food and energy, increased another 0.7 per cent in June; compared with the same time last year, it is 5.9 per cent higher. That was led by a pick-up in shelter-related costs such as rent, which was up 0.8 per cent over the previous month — the largest increase since 1986. Ex-energy services inflation, which is less likely to fall away quickly, rose 0.7 per cent as well in June, or 5.5 per cent on a year-over-year basis.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The other concern is that prolonged periods of elevated prices will alter how consumers and businesses account for future inflation, with individuals demanding higher wages and companies charging more for goods and services. That would threaten to fuel a vicious cycle of increasing cost pressures. The Fed pointed to this fear in minutes from its policy meeting in June, when many participants concluded there was a “significant risk” of inflation becoming “entrenched if the public began to question the resolve” of policymakers to take bold steps to stamp out soaring prices.

Julian Richers, an economist at Morgan Stanley, said the investment bank’s base case is still for the Fed to deliver a 0.75 percentage point rate rise this month, pointing out that longer-term expectations have not yet become unmoored from the central bank’s 2 per cent target. However, the risk that they will is big enough to compel officials to at least consider a bigger move, he added.“It’s really uncharted territory in a way, [because] usually monetary policy is all about being subtle, operating on the margins and doing things very carefully,” Richers said. “But now because of this renewed focus on credibility that we really haven’t had to deal with in the last 30 years, at least in the US, we’re sort of changing the game a little bit, and it makes the outlook just more volatile.”Other economists believe the Fed will instead extend its string of 0.75 percentage point increases until September rather than switching to smaller increments as previously forecast. More

The writer is chief investment strategist at UBS Investment BankGoogle Trends’ search count for the word ‘recession’ in the US has risen close to the highs last seen around peak Covid-19, reflecting its centrality in narrative of investors. However, the markets aren’t pricing in one. Smaller company stocks are traditionally sensitive to economic downturns but have performed in line with, not well below, larger peers across most regions. Likewise speculative-grade bonds normally suffer in recessions with their spreads over benchmark government bonds rising sharply to compensate investors for increased risk. But such spreads are now at median levels compared with investment grade bonds, not at highs.The volatility of cyclical currencies like the Australian dollar and the Korean Won is relatively benign. And expectations for peak rate levels for most central banks are being revised higher. If we look at the signals across equities, rates, credit, commodities and currencies, markets are collectively pricing in global growth of 3.2 per cent. That’s a little lower than long-term average global growth of 3.5 per cent, but it isn’t a recession.If weaker data raises the likelihood of recession, there is downside risk to the market. Just how much depends on the likely depth of the recession. Of the 17 US recessions over the last 100 years, 7 have been deep, where gross domestic product declined from peak to trough by more than 3 per cent, and 10 have been shallow, through which it declined by less.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The time-weighted average drawdown in the S&P 500 around deep US recessions was roughly 34 per cent. By comparison, the typical drawdown around shallow recessions was only 11 per cent.A US recession, were one to be seen in the next two years, should be shallow. Strong consumer and bank balance sheets should counter the effects from an initial economic shock. Some worry that high inflation and rising policy rates lift the odds of a deep recession. History suggests otherwise. Over the last century, inflation has averaged 6.6 per cent ahead of shallow recessions and 2.6 per cent ahead of deep recessions. The average Fed policy rate was 8.1 per cent ahead of shallow recessions and 4.6 per cent ahead of deep ones. There is nothing automatic about high inflation or tighter policy catalysing a deep recession.If the next recession of developed economies is to be shallow and the market is already down by more than 20 per cent, how can a recession not be already priced? It’s important to recognise the true driver of the market. Our models show that since equities bottomed in March 2020, liquidity’s influence on the rise and fall of returns has been 2-2.5 times more significant than that of growth. US 10-year real yields have risen by 1.9 percentage points from November 2021, when financial conditions were at their loosest. In parallel, returns were driven lower by a derating of multiples.Take the market benchmark developed by the economist Robert Shiller, the cyclically adjusted price/earnings ratio for the S&P 500. Known as the Cape ratio, this compares prices with the average of earnings for the previous decade. it has dropped from 38.5 to 28.7 — although still elevated compared with averages of 14 and 23 ahead of the last century’s shallow and deep recessions, respectively. High inflation and rates may not create a deep recession themselves, but they can cause a significant derating of valuation multiples.So much still depends on the inflation outlook. UBS takes the optimistic view, expecting US and European inflation to pull back below 2.5 per cent over the medium term as supply bottlenecks ease.Even if this is realised, however, it is unlikely that US and global equities will deliver returns close to the annualised 10.3 per cent and 7.5 per cent level seen over the past decade. A switch in liquidity from central bank largesse to a tightening of monetary policy, and the cheapening of bonds relative to equities, point to 5-6 per cent annualised equity returns over the next 5-10 years. Again, that is only if the inflation genie can be put back in the bottle.Supply chain shifts, rising geopolitical competition and climate change regulation could push inflation higher than our projections. Headline US inflation could track 3-3.5 per cent over the medium-term. That has historically pushed central banks to tighten liquidity conditions to levels tight enough that would push the S&P 500’s Cape ratio to around 20-22. In this scenario, equities would need to drop a further 20-25 per cent to get there. That’s not a garden variety decline, even if the recession associated with that is. More

New Jersey-based Celsius listed estimated assets and liabilities on a consolidated basis in the range of $1 billion to $10 billion, according to a court filing in the U.S. Bankruptcy Court for Southern District of New York. Crypto lenders boomed during the COVID-19 pandemic, drawing depositors with high interest rates and easy access to loans rarely offered by traditional banks. They, however, tumbled in the recent months following a crash in cryptocurrency prices and the collapse of major token TerraUSD in May. Another crypto lender Voyager Digital Ltd had filed for bankruptcy on July 6 after suspending withdrawals and deposits. Celsius is not requesting authority to allow customer withdrawals at this time, the company said in a press release on Wednesday, adding that it has filed a series of customary motions with the court to allow it to continue operations in the normal course.The company has $167 million in cash on hand, which will provide liquidity to support certain operations during the restructuring process.Celsius froze withdrawals and transfers last month, citing “extreme” market conditions, leaving its 1.7 million customers unable to redeem their assets. This prompted state securities regulators in New Jersey, Texas and Washington to investigate the decision. More

The Monetary Authority of Singapore (MAS) said it would re-centre the mid-point of the exchange rate policy band known as the Nominal Effective Exchange Rate, or S$NEER. There will be no change to the slope and width of the band, it said.”This policy move, building on previous tightening moves, should help slow the momentum of inflation and ensure medium-term price stability.”The Singapore dollar strengthened on the move.In April, Singapore’s central bank tightened its monetary policy to slow inflation momentum against soaring prices made worse by the Ukraine war and global supply snags.The MAS manages monetary policy through exchange rate settings, rather than interest rates, because trade flows dwarf its economy, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band. It adjusts its policy via three levers: the slope, mid-point and width of the policy band.The policy move came after the central bank said Singapore’s gross domestic product growth rate is expected to come in at the lower half of the 3-5% forecast range for 2022, while core inflation is now projected between 3.0–4.0% for the year, up from an earlier forecast of 2.5–3.5%. More

NUSA DUA, Indonesia (Reuters) -The International Monetary Fund (IMF) on Thursday said it had reached a staff-level agreement with Pakistan that would pave the way for disbursement of $1.17 billion, if approved by the IMF board, and was considering adding funds to the program.In a statement, the IMF said its staff had reached agreement on policies under a review of its Extended Fund Facility (EFF) program that could bring total disbursements under the program to about $4.2 billion, if approved.In order to meet higher financing needs, the IMF board will also consider an extension of the EFF until the end of June 2023, and an addition of nearly $1 billion that would bring total access under the program to about $7 billion, it said.”Pakistan is at a challenging economic juncture,” Nathan Porter, who headed the IMF team, said in a statement, citing the difficult external environment and domestic policies that fueled demand to unsustainable levels. “The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers,” he added.Agreed policy priorities included steadfast implementation of the fiscal 2023 budget, which aimed to reduce the government’s large borrowing needs and boost revenues by targeting higher income taxpayers, while protecting development spending, Porter said.Pakistan also needed to catch up on power sector reforms, engage in proactive monetary policy to guide inflation to more moderate levels and work to reduce poverty.The country’s finance minister told broadcaster Geo earlier that the talks with the IMF had concluded, and an announcement was expected soon.Pakistan entered the IMF program in 2019, but only half the funds have been disbursed to date as Islamabad has struggled to keep on track to meet targets. More

During a visit to Wuhan last month, President Xi Jinping acknowledged that Covid-19 lockdowns were hurting the Chinese economy, but added that it was better to “temporarily affect a little economic development rather than risk people’s health and safety”.On Friday, the National Bureau of Statistics will quantify the “little” price Xi insists is worth paying in the continued pursuit of his “zero-Covid” approach when it releases its estimate for second-quarter economic growth. Here are five things to look for in Friday’s release. How much bigger was the impact of regional lockdowns in the second quarter?The world’s second-largest economy expanded 4.8 per cent in the first quarter of 2022, below the government’s full-year growth target of 5.5 per cent. The NBS’s first-quarter figure captured lockdowns in the northern city of Xi’an and Jilin province, a big agricultural and industrial centre, but not Shanghai’s two-month lockdown that took full effect in April.The second-quarter estimate will also reflect much-curtailed economic activity over recent months in Beijing, which did not implement an extended citywide lockdown like Shanghai but did bring large parts of the capital to a standstill for weeks.As a result, economic expansion will probably be the slowest since the first quarter of 2020, when a de facto nationwide lockdown in response to the original outbreak in Wuhan led to an unprecedented contraction of 6.8 per cent. Will officials acknowledge that their full-year GDP growth target of 5.5% is unachievable?Many other organisations and investment banks have already said as much, as they downgraded their full-year projections for Chinese economic growth.In June the World Bank officially revised its full-year estimate for Chinese economic growth to 4.3 per cent, compared with 5.1 per cent in December. “This revision largely reflects the economic damage caused by Omicron outbreaks and the prolonged lockdowns in parts of China from March to May,” the World Bank said. It also predicted “aggressive policy stimulus to mitigate the economic downturn” in the second half of the year.Global investment banks are similarly pessimistic. Economists at Goldman Sachs, Citi, JPMorgan and Morgan Stanley have all lowered their estimates for 2022 growth to between 4 per cent and 4.3 per cent over recent months. Goldman cited “the Q2 Covid-related damage to the economy” for its revised projection.Is a stimulus wave gathering?One frequent criticism of the Chinese government’s annual growth targets — including, in private settings, from reform-minded officials — is that they are responsible for “artificial” growth driven by local governments for the sheer purpose of achieving the target.Such growth-for-growth’s sake is often debt-fuelled and wasteful, a habit Xi and his economic advisers, led by vice-premier Liu He, have promised to end. But it is a hard habit to break when local governments across the country need more economic growth to create jobs and fund their operations, regardless of the longer-term debts incurred.This reflex is already kicking in. According to people familiar with the related policy discussions in Beijing, local governments across China will be allowed to issue an additional Rmb1.5tn ($220bn) worth of bonds this year to boost flagging growth.The Chinese government set this year’s bond quota, mainly used by local governments for infrastructure projects, at Rmb3.65tn, of which Rmb1.5tn was moved forward to late 2021.In March, the State Council, China’s cabinet, said the remaining Rmb2.2tn in bonds for 2022 should be issued by the end of September. The additional Rmb1.5tn would be brought forward from next year’s quota. Is the tide finally turning for the property sector?Recently released credit figures also suggest that the race to reach 5.5 per cent growth is already under way. New credit totalled Rmb5.2tn, well above expectations and almost 11 per cent higher than in May.The increase was driven in part by cuts in the benchmark interest rate used to price mortgages and Rmb848bn in household loans, in line with the June 2021 figure when China’s escape from Covid seemed more assured. June property sales were down 9.5 per cent year on year, compared with a more than 48 per cent fall in May.Larry Hu, chief China economist at Macquarie, said the “darkest moment for the property sector”, China’s largest economic motor, might have finally passed.Will more lockdowns doom hopes for a second-half rebound?Xi’s Wuhan trip sent an important signal, reiterating the sanctity of zero Covid. The city was the site of the Chinese Communist party’s first victorious battle over the pandemic and the country’s first big lockdown.Similar victories have since been declared in Shanghai and many other cities that have successfully implemented strict lockdowns to crush local outbreaks.Xi visited Wuhan at a time when it appeared life had fully returned to normal in Shanghai, Beijing and many other cities affected by lockdown.But the virus often responds to those declarations of victory with another variant that is more transmissible but not more lethal, raising questions about the wisdom and sustainability of zero Covid. Shanghai residents are already girding themselves for another potential lockdown this week as the BA.5 variant spreads around China.Additional reporting by Cheng Leng in Hong Kong and Sun Yu in Beijing More