Aurelia Butler

Investor concerns that the US economy is overheating are giving way to recession jitters as analysts fret the Federal Reserve could stifle growth with its rapid tightening of monetary policy. Markets are pricing in an aggressive path for Fed rate rises in the coming months while also signalling expectations that the central bank will then change course next year and begin cutting rates. “We have seen the consumer getting squeezed by the higher cost of living and by monetary policy, which could lead to a consumer-led recession,” said Erin Browne, portfolio manager at Pimco.Economic reports released over the past two weeks have heightened the sense of uncertainty. Key surveys on the US services and manufacturing sectors from the Institute for Supply Management showed corporate America is cutting back on hiring. Weekly figures on unemployment claims have also pointed to slowing momentum. However, the monthly employment report on Friday pointed to robust hiring, while inflation in May reached its highest level since late 1981.Jan Hatzius, chief US economist at Goldman Sachs, said there is “no doubt that a labour market slowdown is under way”, adding that “job openings and quits are declining, jobless claims are rising, the ISM employment indices in manufacturing and services have fallen to contractionary levels, and many publicly traded companies have announced hiring freezes or slowdowns”.Still, Hatzius said that “fears of an imminent US recession have abated somewhat” after figures showed the US economy added 372,000 jobs in June, widely exceeding expectations.The June jobs report also bolstered expectations that the Fed will boost rates by 0.75 percentage points in late July, which would bring the central bank’s benchmark interest rate to a range of 2.25 to 2.5 per cent from 0 to 0.25 per cent at the beginning of 2022. The rate increases have already pushed up US borrowing costs, sparked strong selling in the corporate bond market, ignited the worst sell-off in Wall Street equities for the first half of a year since 1970 and helped send the dollar surging against its peers. The combination has led financial conditions to reach their tightest level since the early days of the coronavirus crisis in 2020, according to an index collated by Goldman. Tighter financial conditions typically feed back into the broader economy, weighing on output. Even after the strong jobs report, a running economic forecast by the Atlanta Fed is pointing to output contracting at an annualised rate of 1.2 per cent in the second quarter of this year, following a fall 1.6 per cent annualised fall in the first quarter. Andrew Hollenhorst, chief US economist at Citigroup, noted that while the strong June jobs report “pushes strongly against the view that the US economy is in recession or imminently will be”, the Fed’s focus on “slowing the economy to tame inflation materially raises the risk of recession in 2023”. He added that “the very-tight job market may make it that much more difficult to obtain a “soft landing”. The US government bond market is also flashing warning signs. Two-year Treasury yields are trading at about 0.04 percentage points higher than those on 10-year notes. The so-called inversion of the yield curve, in which yields on shorter-dated securities are higher than their long-term counterparts, is typically seen as a gloomy sign for the economic outlook. A US recession has followed every yield curve inversion within six months to two years over the past five decades. The first yield curve inversion this year in March would put the US on track for a recession by the start of 2024 at the latest, a prediction also reflected in other parts of the market. “At this point in time there’s a lot of uncertainty. Investors have very different probabilities on whether the recession is going to be in the next 12 months or 24 months,” said John Madziyire, head of US Treasuries at Vanguard. “But what has definitely happened is there has been a deterioration in consumer sentiment and business sentiment.” 

This more downbeat outlook is also reflected in expectations for Fed rate rises. Trading in the futures market suggests investors expect the Fed to raise its main rate to a high of around 3.5 per cent by February 2023, but then begin to cut rates back to under 3 per cent by November that year. A report this week on US inflation will help shed further light on the expected trajectory of Fed rate increases. Wall Street economists expect the annual rate of consumer price growth to have risen to 8.8 per cent in June, from 8.6 per cent in May, according to a FactSet survey. “With last week’s employment report showing still-solid payroll gains amidst a record tight labour market, barring a meaningful disappointment this week on inflation, the Fed should be well on track to hike by another [0.75 percentage points] at its upcoming meeting,” Deutsche Bank economists said. More

As 2022 started it looked likely that inflation would become a major problem that central banks and financial investors could no longer ignore.The leading central banks came to see they had kept rates too low in the past. They had printed too much money to buy bonds. As a precaution, the FT portfolio had 35 per cent in total in cash and short-dated index-linked Treasury bonds, with cash as the largest holding.We took good profits on the big position we held in Nasdaq last year, the US growth companies that had led the bull market of recent years. We decided that growth companies would be hit by higher interest rates affecting longer term valuations.The fund’s main holding in shares has shifted from technology to the broad world index to give more exposure to the sectors and regions that would benefit from the post-Covid recovery.The world index holds more of the oil and commodity companies that held up better. Overall, the index has still fallen substantially as overall economic conditions have deteriorated. Inflation, war, supply shortages and rising interest rates have all battered shares. The world index has declined by 11 percentage points less than Nasdaq.As inflation has risen, so in turn the leading central banks have switched from very loose to tighter policies, ending bond buying and putting up interest rates belatedly in response to the price rises.When the leading central bankers met late last month at Sintra there were admissions that they had got inflation wrong last year. They greatly underestimated how high it would go and how long it would last. There was silence on whether expanding money and credit had anything to do with it. They preferred to talk of the supply shocks than to remember inflation was rising before the Ukraine war, while they ignored it. They implied they could not have avoided the mistakes they made as the inflation came from events beyond their control and they pledged to do more from now to prevent inflation from embedding. The Fed made clear it would slow the economy as much as it takes to end inflation.It is true that the Russian decision to launch a brutal invasion of Ukraine made the inflation we were already suffering worse. As Nato allies imposed sanctions on Russian trade and scrambled to replace Russian oil, gas and food in their supply chains, the prices of these crucial commodities shot up further, adding to the inflationary pressures at fuel pumps and in supermarkets.Conversations in the markets now include the possibility of a sharp slowdown or even recession in many countries. Higher mortgage and other interest rates will slow activity at the same time as the big hit to consumer incomes comes through from high energy and food prices.

This means an imminent loss of business, with customers reducing their spend on discretionary items as bills for basics take more of their income.Share and bond markets have fallen together, worried by the twin threats of inflation and possible recession. Market commentators are dusting down their history books to read more about the stagflation in the past century and the high interest rates it took to curb the price rises. If inflation sets in at too high a level central banks will create a recession to break it.Today we see the strains at central banks staying hawkish to mend past errors of policy while the longer term impact of Russian violence flows through to damaged energy and food markets.Sri Lanka shows us how these pressures can drive an emerging market economy into bankruptcy, as it has failed to meet foreign currency debt obligations. Now it is struggling to get sufficient foreign currency to buy enough fuel and food for everyone’s needs.Other indebted countries relying on essential imports will also need help from the IMF and advanced countries. Otherwise, they will end up going through bankruptcy and debt restructuring in these stressed conditions. The FT fund has a very small exposure to these markets. These dreadful events remind us of the higher risks in many of these places. The US is in a stronger position than Europe, with its own gas, much of its own oil and plenty of grain from its prairies. Europe cannot easily replace all the Russian gas and oil it uses, and today faces Russia turning down the pipeline flows. Last month, I kept cash as the largest position at 25 per cent of the fund pending some resolution of the tension between inflation and recession. It seems likely on both sides of the Atlantic that wage increases will fall short of peak levels of price rises, and that by next year inflation will be on the way down. This also means that output will slow and central banks will come to the view that they have done enough tightening. If and when this becomes clearer, bond and share markets can start to make some upwards progress.But we have not yet seen a full downgrade of expectations for turnover and profits for many companies. There will be pressure on business volumes and margins in many cases. We have not yet reached the point where central banks can start to hint at some end to rate rises to deal with inflation.There remain risks in this scenario. Central banks, stung by criticisms of past mistakes, may overdo the rate rises and create recessions. People still confident of their jobs could spend more of their savings — generating more prolonged inflation if there are still too many areas of shortage.Russia could get tougher, using its energy and food weapons against the leading countries imposing sanctions. The best news is that much of the bad news is now widely known. Valuations of good companies and markets are more realistic. Ending bond buying by central banks was a big change, and we are closer to the slowdown that should trim general price rises and pave the way to recovery in equities.Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]

The Redwood Fund — July 8 2022% PortfolioLyxor Core MSCI Japan (DR) UCITS ETF Dly Hgd GBP A2.86%L&G Hydrogen Economy UCITS ETF1.64%Cash Account [GBP]26.01%iShares Core MSCI EM IMI UCITS ETF USD Acc1.90%Lyxor FTSE Actuaries UK Gilts Inflation Linked (DR) UCITS ETF D4.62%iShares Global Clean Energy1.93%Legal & General Cyber Security UCITS ETF1.86%iShares Core MSCI World UCITS ETF GBP Hgd (Dist)20.47%L&G All Stocks Index-Linked Gilt Index I Acc3.46%Legal & General ROBO GI Robotics and Automation UCITS ETF1.78%iShares $ Short Duration Corporate Bond (USD) ETF10.27%SPDR BofA ML 0-5 Yr EM $ Govt Bd UCITS ETF2.16%iShares $ TIPS 0-5 UCITS ETF GBP Hedged5.77%Vanguard FTSE 250 UCITS ETF GBP Dist4.12%XTRACKERS S&P 500 UCITS ETF5.50%X-trackers MSCI Korea ETF1.48%X-trackers MSCI Taiwan ETF4.17%Source: Charles Stanley More

TOKYO (Reuters) -Japan’s yen-based import prices surged at a record pace in June, data showed on Tuesday, keeping wholesale inflation elevated as the currency’s sharp slump continued to weigh on a fragile economic recovery by boosting commodity costs.The data highlights the challenge Prime Minister Fumio Kishida faces in cushioning the economic blow from rising living costs, which are emerging as a policy priority after his victory in Sunday’s upper house election.The corporate goods price index (CGPI), which measures the price of goods companies charge eachother, rose 9.2% in June from a year earlier, marking the 16th consecutive month of increase, Bank of Japan data showed.The increase, which exceeded a median market forecast for an 8.8% gain, slowed from a revised 9.3% rise in May and a record 9.9% rise marked in April.The yen-based imported goods prices surged 46.3% in June from a year earlier, marking the fastest gain on record, in a sign the currency’s slump was inflating already rising raw material import costs. More

As part of terminating the deal, which is effective immediately, Sezzle would receive $11 million from Zip, the companies added in a joint statement. BNPL firms have seen their market value rapidly shrink over the past months as interest rate hikes to tame supercharged inflation fuelled concerns about a slowdown in consumer finance.This has led to Australia’s Latitude Group pull back its buyout offer for Humm’s BNPL business, and fellow BNPL firm Openpay to pause its operations on the U.S. market.Zip cited “current macroeconomic and market conditions” as a reason for pulling away from the deal, after saying in June “the acquisition of Sezzle remains on track”.The Australian BNPL firm added that it continued to expect to deliver group profitability during FY2024. “We remain dedicated to driving toward profitability and free cash flow and believe this (deal termination) is the best outcome for our shareholders,” said Charlie Youakim, chief executive officer of Sezzle. Sezzle, which was valued at A$491 million ($330.34 million) by Zip while announcing the buyout in February, lost nearly 82% of its value to A84.9 million, as of Monday’s close. ($1 = 1.4863 Australian dollars) More

The Westpac-Melbourne Institute index of consumer sentiment released on Tuesday slid 3.0% in July from June, when it dropped 4.5%. The index was down 23% from July last year at 83.8, meaning pessimists far outnumbered optimists.Westpac chief economist Bill Evans noted sentiment had now tumbled almost 20% since December, the sort of extended slide usually associated with global shocks or recessions.A separate weekly survey from ANZ showed a drop of 2.5% in its confidence index as consumers feared inflation could hit 6% in the months ahead. Figures for the June quarter due later this month are likely to show inflation is already around 6%.The gloom partly reflected the Reserve Bank of Australia’s (RBA) decision last week to raise interest rates by another 50 basis points to 1.35%, warning that more would be needed to restrain runaway inflation.Analysts at ANZ noted that confidence among mortgage holders has fallen 25% since April, while confidence for renters was down just 4%.”The cash rate has increased at a faster pace than we have seen in any cycle since 1994 and this is clearly unsettling for consumers also facing a sharp rise in the cost of living,” said Westpac’s Evans.The rise in borrowing costs adds to pressures from higher petrol prices, housing and food, and saw Westpac’s measure of family finances compared with a year ago fall 2.8%.The outlook for finances over the next 12 months did edge up 0.1%, but that followed a 7.6% dive in June and a measure of whether it was a good time to buy a major household item slipped 0.9%.The measure of the economic outlook for the next 12 months dropped 4.2%, while the outlook for the next five years fell 6.7%. More

WASHINGTON (Reuters) – U.S. tax commissioner Charles Rettig will face questions from legislators over how two former FBI officials vilified by former President Donald Trump were targeted for intensive tax audits, lawmakers and the Internal Revenue Service said on Monday.The Senate Finance Committee will hold a closed-door hearing on July 26 into the circumstances of tax audits for former FBI director James Comey and FBI deputy director Andrew McCabe, said Senator Ron Wyden, the panel’s chairman, in an emailed statement.Comey and McCabe, both fired by the Trump administration, were frequent targets of the former president’s criticism over their roles in the FBI’s investigation into his 2016 election campaign’s alleged connections with Russia.The House Ways and Means Committee is expected to hold a similar hearing, also behind closed doors because the IRS is prohibited from publicly discussing details of individual tax returns.The IRS chief last week asked the U.S. Treasury’s Inspector General for Tax Administration to investigate how both men were selected for National Research Program audits, which some tax professionals call “audits from Hell” because of their intensive nature.The IRS maintains that taxpayers are selected at random for such audits to collect information about tax compliance.Asked about the congressional hearing plans, IRS spokesperson Jodie Reynolds said: “Commissioner Rettig always welcomes a chance to meet with members on tax issues and routinely flags areas of potential concern for key leaders of congressional oversight committees.”Rettig, a former Beverly Hills, California tax lawyer, was appointed by Trump in 2018 to lead the U.S. tax agency and was retained by President Joe Biden.Wyden said that reports about Comey’s selection for an audit in 2019 and McCabe’s selection in 2021 have “raised serious concerns about the possibility that former President Trump encouraged the IRS to investigate his perceived enemies.” More