Aurelia Butler

Officials responsible for the world’s biggest economies must be “vigilant” to the risks posed by high debt levels, volatile commodities markets and deeper-than-expected scarring from the Covid-19 pandemic, the world’s most influential regulator has warned. Klaas Knot, the Netherlands’ central bank chief and head of the Basel-based Financial Stability Board, told economic officials in a letter ahead of G20 meetings in Bali that a deterioration in economic conditions “may test financial [system] resilience”.The central bank governors and finance ministers of 19 of the world’s most powerful countries are meeting against a perilous economic and geopolitical backdrop as countries lurch towards recession while Russia’s invasion of Ukraine continues. Representatives from the EU are also attending, making up the 20th member of the gathering. A Russian delegation received the letter, but its attendance could not be confirmed. Asked if the outlook was better or worse than in early 2020, when the pandemic was declared a global health crisis, Knot told reporters the risks were “different”. The world was now facing lower growth, not the sharp contraction foreseen at the start of the pandemic, but inflation was much higher now.The debt pile built up during the pandemic, coupled with heftier interest payments as central banks across the world raise rates, would weigh on borrowers’ capacity to repay loans. Meanwhile instability in commodity markets, which have been rocked by Russia’s invasion of Ukraine, could have “knock-on effects on the broader financial system”, Knot warned. Energy traders have at times struggled to meet the much higher margin calls triggered by the market volatility, leading to calls for support from the official sector. The FSB was “closely monitoring” possible ricochets from the turmoil. The letter added: “The centrality of key energy, metals and food commodities to the functioning of the global economy means that any disruptions to the financing of producers or traders in these markets could have an outsized impact.” The FSB, which is at the vanguard of global attempts to police cryptocurrency markets, said the recent collapse in the value of several tokens, including bitcoin, had “crystallised some of the vulnerabilities” it warned about. It reiterated the need for “robust regulation and supervision” and is set to table the first global crypto rules to the G20’s October meeting.

The FSB also presented the G20 with an interim report on countries’ efforts to phase out pandemic supports, though it added that recent economic and financial developments — chiefly Russia’s invasion of Ukraine — “exacerbates several challenges” and could imply that “scarring effects” had a greater chance of permanently denting growth. The FSB encouraged leaders to phase out Covid-19 support in a way that reflects “domestic economic conditions” and avoids “excessive financial market reactions”. The FSB said the broader situation would “evolve further” before its final report came out in November. More

Good morning. Ethan here; Rob was out yesterday but will be back in time to enjoy CPI day with the rest of us. Forecasters are expecting an 8.8 per cent headline reading today, but what’s in the inflation report’s guts will be most interesting. Or maybe it will look a lot like last month’s report, and everyone will quickly lose interest. Email us: [email protected] and [email protected] vs inflationWill recession kill inflation? Our knee jerk answer: sure it will. Generically, a recession happens when everyone stops spending at once. Inflation is coming from lots of spending crashing into restricted supply. So if the Fed lowers that spending by raising interest rates, we might get a recession but the inflation problem will go away. Add to that evidence of overstocked inventories, which should bring down goods prices as retailers roll out discounts, and it’s hard to see how inflation would roar through a recession.Markets also seem to expect an inflation-killing slowdown, if not a recession. We’ve been over the indicators before, but to repeat: the 10-year yield is below its peak and trending sideways, two-year inflation break-evens have fallen from nearly 5 per cent in March to 3.2 per cent now, futures markets are expecting rate cuts in 2023, and so on. We’ve heard some version of this assessment from practitioners too. Evan Brown at UBS Asset Management told us last month he is “very confident” recession would significantly curb inflation.For a different view, consider the yield curve. Rather than a disinflationary recession, Jim Caron of Morgan Stanley argues the curve is poised for something rather more stagflationary. He contrasts the 10-year/2-year spread, which he sees as tracking output expectations, with the 30-year/5-year spread, which he sees as an indicator of the inflation risk premium (the 30-year’s longer life means its value can be slowly sapped by secular increases in inflation). The 10/2 is inverted while the 30/5 has been steepening:An inverted 10s/2s is pointing to a near-term recession (though the 10-year/3-month, a more reliable indicator, disagrees), as the Fed raises rates over the next two years but must eventually slash them to revive growth. Yet the steeper 30s/5s reflects a growing chance that inflation won’t remain sustainably low, and so long rates must rise as compensation, Caron argues.These are not massive moves and, in any case, the curve changes its shape quickly these days. Still, Caron’s argument got us thinking about what economic outcomes might get us stuck with proper stagflation in 18 months’ time.In a recent note, Ethan Harris at Bank of America chides markets for getting too sanguine on inflation — a “sticky, slow moving variable” that “tends to move in a gradual lagged fashion”. Harris offers this table of how much trimmed personal consumption expenditure inflation, a measure of underlying price pressures that excludes the most and least inflationary items, has fallen in past recessions. For each downturn, the table looks at how far trimmed inflation falls two years after peaking. The final row compares current inflation to what markets expect in July 2024:

Outside of a 1980s strangle-inflation-to-sleep approach, recessions have tended to apply a bit, not a lot, of downward pressure on price increases. Yet markets are expecting inflation to decline steeply, as in 1980, rather than gradually, as in 1990. Harris puts up five explanations for why markets could be feeling like this time is different (he leans towards 1 and 5):There is something technical going on in the bond markets that overstates the expected drop in inflation, and participants don’t really expect a sharp drop in inflation.The markets think virtually all the inflation is noncyclical and related to the supply side and will go away rapidly once supply chains unclog.The markets expect a massive recession.The markets think the Phillips curve has gone from remarkably flat to remarkably steep, such that a modest increase in the unemployment rate causes a sharp drop in inflation.The markets are simply ignoring economic history.We prefer explanation 2. As we noted yesterday, markets are still pricing in a fair chance of a soft landing. The hope is that falling demand, with an assist from supply, brings inflation down fast enough that the Fed can increase rates only moderately.But the fact that inflation has tended to fall slowly in recessions points to how much the Fed’s reaction function could start to matter. As inflation has spun upward alongside a strong economy, it has been clear what the Fed needs to do. Hawks and doves are in agreement on raising rates. Once inflation begins to ease down, the right policy is less obvious, and the trade-offs are uglier. Stop tightening too early and risk a resurgence in prices; stop too late and risk getting millions fired for no reason. The Fed’s job may get harder yet.Where’s the crypto bailout money coming from?We wrote last week about Sam Bankman-Fried, the chief executive of crypto exchange FTX who has taken the wreckage in crypto as an opportunity to go shopping. He isn’t the only one. Any crypto company with cash to spare is thinking about buying peers who have fallen on hard times. That’s true, notably, of Changpeng Zhao, chief executive of crypto exchange Binance, FTX’s main rival. He told an interviewer last week, “I think you will see that we will be investing, bailing out, saving multiple projects.”These buyouts are chiefly about buying at attractive valuations, rather than stopping contagion. The last big crypto crash in 2018 saw a similar spike in opportunistic M&A. But one FT commenter on Friday’s letter asked an important question: where are acquirers getting the money?Why doesn’t SBF/FTX have the same liquidity issues as others in the crypto industry though? They seem to have a huge amount of capital available.The easiest answer is that crypto trading volume hasn’t fallen as much as you might think. Fake volume makes it hard to get a reliable measure, but The Block’s index of daily volume on exchanges with “trustworthy reporting” is around $17bn, far from peak bull market volume of $89bn, but still well above pre-coronavirus pandemic levels ($2bn in February 2020). Healthy volume translates into fee revenue for crypto exchanges, which means real cash for real bailouts. There are still lots of people interested in trading crypto. And that means there are funds available, and deals to be had.One good readTrump and BoJo are gone, but their successors will be savvier. A typically sharp column from Janan Ganesh. More

On Tuesday, Croatia cleared the final hurdle to achieving its long-held ambition to become the 20th member of the single currency — a move its central bank chief Boris Vujčić said would bring “more security” and “raise living standards for our citizens”.But while Zagreb wants in, foreign exchange markets want out.The euro is now worth just a fraction above a single dollar for the first time since 2002, reviving memories of its difficult early years, when it fell so low traders dubbed it the “toilet currency” and major central banks launched a concerted intervention to instil faith in the project.Making up a fifth of global foreign exchange reserves and a quarter of global bond issuance, the euro is no longer written off as a doomed endeavour. However, parity with the dollar highlights the widening gulf between the economic prospects of the US and the eurozone, which is more exposed to the fallout of the war in Ukraine. The euro’s weakness, which will raise the price of imports, will worry policymakers already grappling with record-high inflation.“There’s a feeling out there that the eurozone economy just won’t be robust enough and will be part of the global slowdown,” said Alan Ruskin, Deutsche Bank’s chief international strategist.The euro’s swift fall, from $1.19 this time last year to $1.0057 as of Tuesday evening, comes amid fears Russia may cut off its already diminished supply of natural gas to Europe, forcing energy to be rationed and triggering a painful recession across the region. “We went on buying the dollar when we started to get worried that the global economic landing might be harder, not softer,” said Kit Juckes, a currency strategist at French bank Société Générale. “The other main currency in the world [the euro] is massively handicapped by the fact that its energy crisis is potentially of a completely different magnitude.”The greenback has soared against most currencies — not only the euro — on the back of a series of rate rises by the Federal Reserve, culminating in a 75 basis point increase last month that took the target range to between 1.5 per cent and 1.75 per cent. “Monetary policy in the US still drives the euro more at this stage than the European Central Bank does,” said Dirk Schumacher, head of Europe macro research at Natixis. “The Fed is the main driver of the euro.”The euro has performed better on a trade-weighted basis, where it is measured against a basket of 42 currencies — falling by only 1.6 per cent since the turn of the year, compared with 11 per cent against the dollar. The ECB is yet to raise rates from their record low level of minus 0.5 per cent, but is expected to do so next week with a modest quarter-point rise. Banque de France governor François Villeroy de Galhau, who sits on the ECB governing council, told France Info radio on Wednesday that a weaker euro was a mixed blessing. “It’s good news for activity as it supports exporters but unfortunately it raises inflation a bit,” he said.A string of increases by the Bank of England has not protected sterling from the greenback’s strength. “The pound also depreciated 11 per cent against the dollar since the end of last year,” said Vítor Constâncio, former vice-president of the ECB.

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Robin Brooks, chief economist at the Institute for International Finance, a banking trade group, said currency traders were betting a severe downturn later this year would prevent the ECB from raising rates much above zero. “The cumulative damage to the eurozone is already great,” said Brooks, a former currency specialist at Goldman Sachs. “Foreign exchange markets are leading the rest of the trading complex on this.” Highlighting the gloom, the ZEW think tank’s monthly gauge of investor expectations for the German economy fell to its lowest level since the eurozone sovereign debt crisis started in 2011 in June.The impact of the strong dollar is especially great at a time when the cost of energy, which is priced in the greenback on international markets, is soaring. Deutsche Bank has estimated the eurozone will suffer a €400bn negative hit to its balance of trade this year if prices remain at current high levels. The decline of the single currency also boosts inflation, pushing up the price of imports and contributing to a record 8.6 per cent surge in consumer prices in the year to June.For every 10 per cent depreciation of the euro against the dollar, an extra 0.2 percentage points is added to eurozone inflation in the next year, Schumacher estimated. “It is not a game changer, but every little helps and I’m sure it would be welcome at the ECB if the euro rebounded,” he added.While the euro’s fall against the dollar mostly reflects cyclical shifts in the global economy and not structural changes, some economists worry the energy crisis could have a lasting impact on Europe’s competitiveness. Maria Demertzis, deputy head of the Brussels think-tank Bruegel, said: “If the change in the energy mix facing the EU changes its competitiveness that could mean the euro starts to come down, and that is one to watch.”

Before inflation shot up to 40-year highs in much of Europe and North America, a weaker currency was considered an economic advantage. Only three years ago, former US president Donald Trump accused the ECB of “unfairly” manipulating the euro down to boost the region’s exporters by making dovish comments on policy. With price pressures soaring, that is no longer the case. “It’s not obvious at all that the US is particularly unhappy with the level of the dollar,” said Francesca Fornasari, head of currency solutions at Insight Investment.Croatia will join the single currency at the start of next year. More

A surge in gasoline prices has caused a shortage of chemicals that are also used to produce goods like car parts and pharmaceutical products, placing further pressure on costs for manufacturing essential items.This year’s rise in oil prices has already increased the costs for so-called petrochemical feedstocks, which are produced from a derivative of crude. But a strong appetite for the chemicals among makers of gasoline has intensified the competition for these key building block materials.Benzene, derivatives of which are used to make rubber, nylon and pharmaceutical products, surged to a record-high of $1,900 per tonne in Rotterdam last month, before easing off to $1,780 at the start of July, according to ICIS, a commodity data firm. Other chemicals such as toluene and xylene, which are used in plastic packaging and textiles, have also spiked to the highest since records began in the 1980s in recent weeks.Petrol prices are sitting near historic peaks despite crude oil trading well below the all-time high that it reached in 2008. For example, UK petrol and diesel prices have soared to new heights with unleaded hitting 191.4p in June, above last year’s average of 133p, according to the RAC. Brent crude prices have slid from more than $120 a barrel to $100 a barrel in the last month, a fall that petrol prices are expected to follow with a lag, but refined products availability is likely to remain restricted.Global supplies became extremely tight because of a shortage of refinery capacity in the US and Europe caused by closures during the height of the pandemic and uncertainty about Russia’s ability to get its diesel and other products to market following western sanctions.Despite the recent fall in crude prices, petrochemical analysts say that sky-high petrol prices have incentivised refiners to use higher value chemical feedstocks on an unprecedented scale to make gasoline. “It’s like using cream instead of milk to blend into your coffee,” said Zubair Adam of ICIS.That has added to the upward pressure on prices of petrochemical feedstocks that tend to follow oil’s price movements.Passing on the increased input costs poses a challenge for petrochemical producers such as divisions of Royal Dutch Shell and TotalEnergies, Germany’s BASF and Covestro and Saudi Arabia’s Sabic when demand for some goods are falling as consumer spending comes under pressure from inflation.Steve Jenkins, vice-president of chemicals consulting at Wood Mackenzie, said refineries and petrochemical producers prioritise their fuel businesses over production of chemical feedstocks. “A refiner is there to make fuel. What’s the difference of not getting fuel on the forecourt and the price of a plastic bottle going up a fraction?,” he said.The challenge of having higher feedstock input costs comes on top of the extremely high price of natural gas in Europe, which has doubled in a month and is relied on to process oil into chemicals at huge complexes.Sriharsha Pappu, global head of chemicals at HSBC, said that chemical producers, which use petrochemical feedstocks in their production processes, usually benefit from inflation, but were suffering from the rising costs and recent downturn in consumer confidence. “The worst thing you can have is demand rolls over and supply is still an issue, so you have a margin squeeze,” he said.Covestro said that “we are of course experiencing higher volatility and macroeconomic price increases” for oil derivatives such as benzene, toluene and propylene but added that “prices are currently below the highs seen in spring”.It added that it largely passes on price increases to customers when demand for its chemicals are high, but it was difficult to assess the degree to which the increase in cost of end products made using its supplies are attributable to its own price hikes.

The pricing pressure is not being felt universally for all chemicals. Mike Boswell, chief executive of Plastribution, a UK distributor, acknowledged the squeeze on “aromatic” chemicals but said there was a glut of propylene, a byproduct of refining with many applications — a stark reversal of shortages during the pandemic when fuel demand slumped.“It’s a tale of two halves,” he said. He predicted that petrochemical producers would reduce production to match demand, adding that “we’ve reached the peak and looking at a soft landing in terms of pricing”.Hakan Bulgurlu, chief executive of Arçelik, a Turkish appliances manufacturer, shared optimism on cost pressures easing after a near 25 per cent increase in polymer prices year-on-year in the first half of 2022. “Over the past six months, surges in energy and oil prices increased costs in the petrochemical industry. This brought on price increases in polymer and derivative products,” he said. “Under pressure from inflationary tides and recession forecasts, demand tightened recently, strengthening expectations for a downtrend in prices in the coming months.”Tesco and Heinz recently settled a dispute over price increases after the British supermarket temporarily withdraw its staples.But Jenkins said that more cracks will show in supply chains over cost pressures. He expects more pressure from high petrochemical costs for fast fashion companies such as Zara owner Inditex, Uniqlo and H&M and consumer goods groups because of the razor-thin margins of the supply base.“There isn’t enough fat in the system margin-wise for these cost pressures to be absorbed,” he said. “The fact that you have public squabbles between brand owners show this pressure is real.” More

SINGAPORE (Reuters) – The euro hovered a whisker above parity on the dollar on Wednesday ahead of U.S. inflation data, with traders wary a sky-high reading could force it to lows not seen in decades.Markets are also wary of a surprise from the Reserve Bank of New Zealand, which sets policy at 0200 GMT, with economists expecting a 50 basis point interest rate hike.The New Zealand dollar, which hit a two-year low of $0.6097 on Monday and inched up to $0.6119 in early trade, is vulnerable to a further drop if the central bank’s statement is focused more on risks to growth rather than inflation.The common currency, meanwhile, is down nearly 12% this year and fell as low as $1.0005 on Tuesday as war on Europe’s eastern edge has triggered an energy crisis that has hurt the continent’s growth outlook. It last bought $1.0030.Economists forecast headline U.S. inflation accelerated to 8.8% year-on-year in June, a 40-year high, which is likely to reinforce expectations of interest rate hikes in response and help the dollar in a market nervous about both rates and growth.”I think the U.S. dollar will keep increasing if the U.S. CPI is stronger than expected,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso in Sydney. “There’s definitely a very good chance that the euro falls below parity tonight.”The euro already fell beneath parity on the Swiss franc last month and is flirting with a drop beneath its 200-day moving average against the pound.Weakness in the euro and yen has vaulted the U.S. dollar index higher and it made a two-decade peak of 108.560 this week, hovering at 108.220 in early trade on Wednesday.The Japanese yen has taken a beating this year as the Bank of Japan sticks with its ultra-easy monetary policy in contrast with tightening nearly everywhere else.It was under pressure at 136.95 per dollar on Wednesday after hitting its lowest since 1998 on Monday at 137.75.The Australian dollar fell 0.2% to $0.6746, just above a two-year trough of $0.6712 made on Tuesday. [AUD/]Sterling has also slipped on the stronger dollar and analysts see it adrift in the wake of the resignation of British Prime Minister Boris Johnson last week. [GBP/]It last bought $1.1877, with gross domestic product data due at 0600 GMT the next hurdle, as traders expect May brought zero growth.Eight Conservatives are vying to succeed Johnson.”The combination of slow growth, debt and high inflation is likely to prove very tricky for the new Tory leadership,” said Rabobank senior strategist Jane Foley.”Although sterling investors will be hoping for a government less distracted by scandal and more focused on providing coherence around the post-Brexit economy, the jury is still out.”Sterling may suffer a lack of fresh direction until the new PM is in place.”The South Korean won was a fraction firmer in morning trade after the central bank raised interest rates by 50 basis points, in line with market expectations.In Wellington, where the New Zealand central bank has been in the habit of surprising markets, investors are fairly sure a hike is coming and are focused on the tone of the statement. “Our dovish scenario comprises a 50bp hike, and a statement which emphasises the downside risks to the global economy,” said Westpac analyst Imre Speizer, something which he expects could knock the kiwi half a cent lower and push down near-term rates.========================================================Currency bid prices at 0058 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0030 $1.0036 -0.07% -11.78% +1.0040 +1.0025 Dollar/Yen 136.9850 136.8200 +0.13% +0.00% +137.0400 +136.9500 Euro/Yen 137.39 137.37 +0.01% +5.43% +137.4700 +137.1300 Dollar/Swiss 0.9823 0.9821 +0.02% +7.69% +0.9826 +0.9819 Sterling/Dollar 1.1876 1.1885 -0.06% -12.18% +1.1889 +1.1875 Dollar/Canadian 1.3032 1.3021 +0.11% +3.10% +1.3034 +1.3020 Aussie/Dollar 0.6746 0.6757 -0.16% -7.19% +0.6759 +0.6742 NZ Dollar/Dollar 0.6119 0.6127 -0.11% -10.59% +0.6128 +0.6119 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More

SEOUL (Reuters) – South Korea’s central bank on Wednesday delivered a historic half-point interest rate hike to wrest control of inflation running at the fastest pace in 24 years.The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 2.25%, the biggest increase since the bank adopted the current policy system in 1999, as pressure mounts for policymakers to act faster. Twenty-seven of 32 analysts expected the bank to go for an unprecedented half-point hike in a Reuters poll, while the remaining five expected a quarter-point hike.The decision could help curb further weakening of the won after the currency tumbled 9.4% against the U.S. dollar this year, making it one of the worst performers among emerging markets. Wednesday’s move keeps the BOK at the forefront of global monetary tightening as inflation threatens to become entrenched for a resource-poor nation grappling with surging energy prices, compounded by the war in Ukraine.The bigger-than-usual hike comes as other major central banks including the Bank of Canada and the Reserve Bank of New Zealand delivered outsized rate hikes in recent weeks. The U.S. Federal Reserve last month raised its key rate by 75 basis points and is expected to carry out similar-sized moves.”We view back-to-back 50 basis points hikes by BOK in July and August to be less likely although Governor Rhee could keep the option of an extra +50 bps rate hike on the table,” said Citigroup (NYSE:C) analyst Kim Jin-woo.”The press conference and the bank’s monetary policy statement could highlight a preemptive monetary policy ‘tightening’ stance to manage inflation expectations.”Governor Rhee Chang-yong will hold a news conference at 0210 GMT.Most analysts see South Korea’s policy rate reaching 2.75% by the end of this year, up from 2.25% in the May poll.The BOK expects the economy to expand 2.7% this year. More

WASHINGTON (Reuters) -The nominee for the U.S. Treasury’s top economic diplomacy job said on Tuesday he wants to limit China’s growing global lending influence by working with international financial institutions and development banks to give countries borrowing alternatives.Jay Shambaugh is President Joe Biden’s choice for Treasury undersecretary for international affairs. If confirmed, the George Washington University professor and former Obama administration economic adviser would fill a crucial Treasury position that has been vacant since the Biden administration took office in January 2021.Speaking to a Senate Finance Committee confirmation hearing, Shambaugh said there is competition between China’s state-driven economic model and the U.S. model driven by rule of law, transparency and markets.He said in working with institutions including the World Bank and International Monetary Fund he would seek to present “a good alternate option to engaging with China for countries, whether it’s in loans or other sorts of engagements.”Shambaugh said China should no longer be considered a developing country eligible for World Bank loans. He also said he wants to ensure that International Monetary Fund Special Drawing Rights monetary reserves channeled to poorer countries are not used to pay off debts owed to China for Belt and Road infrastructure projects.Regarding the Biden administration’s deliberations over whether to cut some tariffs on Chinese goods imposed by the Trump administration, Shambaugh echoed Treasury Secretary Janet Yellen’s comments that some of those tariffs had “less of a strategic orientation to them.” He said these tariffs should be reassessed as the economy has changed since they were imposed.On Treasury’s role in policing currency manipulation by major U.S. trading partners, Shambaugh said his job would extend well beyond producing currency manipulation reports every six months.Regardless of whether Treasury labels countries currency manipulators in the reports, the department still must engage with those countries to ensure that they meet their G7, G20 and IMF commitments to avoid manipulating their currencies for trade advantage, he said.Longtime Treasury assistant secretary Andy Baukol has been fulfilling the duties of the vacant undersecretary position, while David Lipton, a counselor to Yellen and a former senior IMF official, has been playing a key role in developing Treasury’s international economic policy. More