Aurelia Butler

Sweden’s central bank has joined the growing line of monetary authorities to have raised interest rates by a more aggressive half a percentage point in response to soaring inflation.The Riksbank, saying that “price increases are spreading through the economy”, on Thursday announced it would raise its main policy rate by 50 basis points to 0.75 per cent, in line with market expectations, while signalling more increases this year. The central bank said it would shrink its balance sheet faster than initially announced in April when it said it would buy SKr37bn ($3.6bn) of bonds in the second half of the year, half the level of the first six months.The rate rise followed a 25bp increase in April and came in response to a sharp acceleration of Swedish inflation, which rose to 7.2 per cent in the year to May, the fastest increase for 31 years. The central bank’s target rate is 2 per cent.The Riksbank board forecast that “the policy rate will be raised further and that it will be close to 2 per cent at the start of next year”. It said Swedish inflation was expected to remain above 7 per cent for the rest of the year and it aimed to “counteract the high inflation becoming entrenched in price setting and wage formation”.Analysts believe the Riksbank is raising borrowing costs in anticipation of likely rate rises by the European Central Bank and US Federal Reserve in July, which could put downward pressure on the krona.Sweden’s currency has fallen 11.6 per cent against the US dollar and 3.8 per cent against the euro since the start of the year, fuelling more inflationary pressure by increasing the price of imports. After the Riksbank announcement on Thursday, the krona rose slightly against the euro to €0.0936.“The Riksbank holds fewer meetings each year than other central banks, and that means it has to make each one count,” said analysts at ING in a note this week.“The ECB is poised to hike twice before Swedish policymakers meet again in September, and the Riksbank will want to get out in front — not least given the recent depreciation in the krona.” More

Staff at the UK’s largest telecoms group BT will decide on Thursday whether to go on strike for the first time in 35 years, joining a swath of employees across the country demanding higher pay as they face a severe cost of living crisis.If the strikes go ahead, they are likely to cause some disruption to BT and EE customers around the UK, many of whom will be unable to have new phone and internet lines fitted or repaired, and will struggle to reach support staff on phone lines.BT has been embroiled in a three-month dispute with the Communication Workers Union, which accuses management of introducing a low flat-rate pay rise despite soaring levels of inflation. The strike ballot, opened by the CWU on June 15, has canvassed 40,000 members who work across BT and its Openreach and EE subsidiaries.The proposed BT strike action, which would not start before July 14, comes amid a spreading wave of worker unrest. As Britain was hit last week by its biggest rail strike for a generation, union leaders have warned that industrial action will spread across the public sector — to teachers, nurses and care workers — unless the government backs pay rises. Meanwhile, the CWU is also balloting 115,000 postal workers at Royal Mail about proposed strike action.BT offered a £1,500 pay rise to 58,000 frontline workers in April, including engineers, contact centre staff and retail workers, equating to between 3 and 8 per cent depending on their base salary. It said this was the highest pay rise it had offered in 20 years.The package was rebuked by the CWU, which pointed out that “recent uplifts to £20,000 for some of the company’s lowest-paid workers . . . count towards the £1,500 increase, and are deducted from it, meaning that for many the ‘headline’ increase . . is highly deceptive”.Andy Kerr, CWU deputy general secretary, said: “In overall pay pot terms, the deal is worth around 4.8 per cent and we simply don’t believe that’s enough — especially after a pay standstill last year and the full-blown cost of living crisis we are now in.” The UK’s inflation rate hit a 40-year high in May, reaching 9.1 per cent, amid rising food and fuel prices, and economists are predicting it will hit double digits by the autumn.BT’s chief executive Philip Jansen received a 32 per cent pay increase to £3.5mn in the last financial year, due to bonuses and share awards. The CWU pointed out that this equated to 86 times average pay levels across the BT Group.“Mr Jansen is personally benefiting from a 32 per cent rise in his overall remuneration package this year — while piously pontificating that a company that has just declared a £1.3bn profit cannot afford to scrape together enough to pay its workers a rise that even comes close to compensating for the rising cost of living,” the CWU said in a statement.BT said in a statement: “It’s disappointing that the CWU has decided to ballot for industrial action without consulting its members on the outcome of our negotiations. If a strike takes place, nobody wins.” More

Edward Price is a former British economic official and current teacher of political economy at New York University’s Center for Global Affairs.All too often sequels suck, something the euro-area is about to find out.During the euro-area crisis ten years ago, one chart reigned supreme. You remember. The messy one. Sovereign spreads in the euro area.

Oof. When investors realised that lending to Greece was way riskier than lending to Germany, they freaked out. Borrowing costs for European governments diverged. The euro tottered. Now, there’s a different reason sovereign spreads will widen. The ECB is set to tighten monetary conditions. Witness Christine Lagarde’s promise to tackle inflation in “a determined and sustained manner”. The ECB giveth and the ECB taketh away.Just like last time, there are three ways to address the problem that will follow: higher borrowing costs in the European periphery and the threat therein that the euro itself will implode.The first is structural: shrink. Kick weak euro-area countries out of the single currency. Of course, nobody wanted that the first time around, as it would have killed the euro. Even so, most commentators thought some expulsions, starting with Grexit, were likely (although yours truly thought otherwise #winning). The second way to erase sovereign spreads is also structural: soothe. Germany could have placed its full fiscal capacity at the disposal of weaker economies like Greece. This would have palliated markets, and those calmer markets would then have lent to Berlin via Athens. But Germany was like . . . nee. This export money is ours, made and earned in Germany.And then there’s the third option: sing. This is what Europe eventually did the last time. Super Mario saved the day with his power ballad “whatever it takes”. And his smash hit has been number one in the euro area ever since. The cantor-like ECB kept sovereign spreads tight. However, this third solution relied on easy money, meaning it was temporary. Whenever the dead hand of the international macro-machine eventually ruled out a low global R-star, “whatever it takes” would rapidly become “whatever, it’s fake.” And that’s what’s happening now. Peripheral risk premia in the euro area are back, and the ECB is still set on removing its broad monetary support. Facing record euro-area consumer inflation, at 8.1%, the ECB will raise interest rates by 25 basis points next month. Lord help us. Writing on Friday in the FT, Lorenzo Bini Smaghi said the ECB “needs to tighten monetary policy in order to rein in unexpectedly high inflation and at the same time prevent fragmentation of financial markets across the eurozone.”Smaghi is wise. Prices are out of control and the cheap money needs to stop. And yet fragmentation — the break-up of euro markets/the euro — would be terrifying. For now, it seems the ECB has cauterised the wound with its emergency anti-fragmentation instrument. But all told, singing is no longer an option. Only shrinking or soothing remain.What, then, should the euro do? Shrink itself by breaking up or soothe its lenders with fiscal policy?It all comes down to what the euro really is. Exoterically, the European single currency is an upside risk. It is a safe, sound, real currency enabling peace and commerce in Europe. That lobbies for soothing markets with a new pan-European fiscal approach. Esoterically, however, the euro is a downside risk. It is a potentially unsafe, unsound, and unnatural experiment. Rather than long-term prosperity, the euro might have enabled little more than unsustainable debt burps in the Palazzo delle Finanze. That suggests shrinking, and a smaller fiscal club. Or just ending it altogether.

And so, a question: whither the euro? If it looks like the single currency will implode, the ECB Berlin may step in to save the single currency. Welcome to a massive United States of Europe. This mega-pint of a sovereign will sell but one form of debt. Alternatively, if it looks like the euro may implode, Brussels Berlin may kick some other capitals out. Welcome to either a smol United States of Europe, or none. Either way, you can’t escape “the euro”. You just have to choose which “euro” you think you’re looking at. One currency to rule them all? Or one currency to fool them all?Germany, we know you’re busy manufacturing some totally sweet tanks at the moment, but you’re up. More

WELLINGTON (Reuters) -The New Zealand housing market may no longer be a one-way bet, the chief economist of the country’s central bank said, warning that changing dynamics in the sector would act as a handbrake on hefty returns.”For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity,” Reserve Bank of New Zealand Chief Economist Paul Conway said in a speech released on Thursday. “But the tide may well have turned against housing being a one-way bet for a generation of Kiwis,” he added.Conway said slower overall population growth and changes in taxation make it less attractive to invest in housing while policy designed to enable higher housing density are all altering the property market dynamics.”Given the importance of housing in our economy and national psyche, this will be a huge change,” he said.House prices in New Zealand jumped more than 40% in the two years to December 2021. However, a combination of tighter credit, more housing and rising mortgage rates have started to weigh on prices.Conway said even though the market has recently turned, with house prices down over the first half of 2022, property values remain at very high levels in absolute terms and relative to incomes.The central bank forecasts a 15% decline in house prices from their peak in late 2021. More

NEW YORK/LONDON (Reuters) – It’s been a torrid first half for emerging market assets and with the Federal Reserve kicking off its tightening cycle amid soaring inflation shock waves might be on the horizon.Adding to that are supply chain problems out of China, a war in Europe’s bread basket, stalling global growth and fears that the world’s largest economy could tip into recession – all casting a pall over riskier assets.Data from the Institute of International Finance (IIF) showed that small inflows into emerging market debt for the year until end-May were almost all offset by outflows from equities. The IIF predicted that year-on-year foreign portfolio flows to emerging markets could shrink by 42% to less than a trillion dollars in 2022.”If you are a global investor and you are not forced to be in emerging markets, to be honest it is hard to convince you to invest in the asset class at this time,” said Luis Oganes, JPMorgan (NYSE:JPM)’s head of Global Macro Research.Below five take-aways of what’s in store for emerging markets. CURRENCIES Despite the U.S. dollar hitting near-two decade highs against developed-world peers, emerging currencies held up somewhat with the index down 3.8%.Latin American currencies posted sharp gains in the first quarter thanks to rising commodity prices and central banks frontrunning the Fed, and remained in the black despite massive de-risking in the second quarter. Performance will hinge on sensitivity to commodity price shocks, and whether central banks can focus on growth rather than inflation. “EM FX will stay under pressure over the immediate horizon, as fragile investor sentiment keeps USD bid,” said Phoenix Kalen, director of emerging markets strategy at Societe Generale (OTC:SCGLY). Graphic: Emerging market currencies versus the U.S. dollar – https://graphics.reuters.com/EMERGING-MARKETS/OUTLOOK/egpbkgbyzvq/chart.png STOCKSEmerging equities are set for their largest first-half drop since the 1998 Asian financial crisis with the MSCI benchmark down 17% year-to-date while China, the index’s single biggest component, is down 12%.The latter could offer some respite for equity investors, as Beijing needed to stimulate the world’s number two economy, said Ashish Chugh, portfolio manager for Loomis Sayles. “I am bullish on China, because valuations are very attractive due to policy support and significant pressure from government officials to boost growth,” he said. Graphic: Emerging market stocks performance in USD – https://graphics.reuters.com/EMERGING-MARKETS/OUTLOOK/byprjabrwpe/chart.png RATE HIKESEmerging central banks started the rate hike cycle well before the U.S. Fed to curb inflation after the COVID-19 pandemic. Brazil leads the group with the most aggressive monetary tightening cycle, lifting its key rate from 2% in March 2021 to 13.25% this month.But with soaring inflation pushing major central banks to ramp up rates faster, the goal posts are shifting and policy makers in developing nations might be forced to extend or adapt their rate hiking cycles. “Once we see the Fed hike another 75 basis points and that is under our belts, it is all about expectations of where the terminal rates are going to be,” said Nathalie Marshik, head of EM sovereign research at Stifel. Graphic: EM benchmark interest rates – https://fingfx.thomsonreuters.com/gfx/mkt/klvykrjyyvg/emerging%20market%20central%20banks.PNG RISING SPREADSJPMorgan’s EMBIG hard-currency sovereign bond index shows 17 countries’ spreads over safe-have U.S. Treasuries above 1,000 basis points, effectively locking them out of international markets. That number is higher than during the peak COVID-19 rout or the 2008 global financial crisis, and shows the strain economies are facing, particularly frontier markets.World Bank economists estimate 40 poor countries and about half a dozen middle income ones are either in debt distress or at a high risk of it.Sri Lanka, Zambia, Pakistan and Lebanon are among countries negotiating debt relief with creditors or International Monetary Fund bailouts – expect the list to grow in the second half.Emerging hard-currency bonds clocked up negative returns of 20% year-to-date – one of their worst starts to the year in decades.”In a range of scenarios you should be expecting positive total returns for the asset class, which is also looking relatively cheap compared to competitors like U.S. high yield,” said Alejo Czerwonko, CIO for emerging markets Americas at UBS Global Wealth Management.”It’s still a very, very uncertain environment, the dust hasn’t settled in terms of just how far the Fed will go.” Graphic: The most distressed emerging market bonds – https://graphics.reuters.com/EMERGING-MARKETS/OUTLOOK/mypmnrymmvr/chart.png RUSSIA DEFAULTThe single biggest emerging – or global – markets story of the first half of 2022 was Russia’s war in Ukraine. An investment grade emerging market in January, Russia tipped into default after being severed from global financial markets amid sweeping sanctions. The rouble, which hit historic lows in the aftermath of the invasion, is the best performing emerging currency this year – though one subject to strong controls from Moscow and no longer freely traded. While Russia’s ejection from financial markets has largely happened, wider consequences of the war from elevated energy, commodities and food prices and geopolitical instabilities will remain a driving factor over the months to come. Graphic: The Russian rouble under war stress – https://graphics.reuters.com/RUSSIA-ROUBLE/TRADING/byprjdqbype/chart.png More

TOKYO (Reuters) – Japan’s factory output posted the biggest monthly drop in two years in May as China’s COVID-19 lockdowns and semiconductor and other parts shortages hit manufacturers, adding to worrying signs for an economy struggling to mount a strong recovery.The decline also highlights the challenge the world’s third-largest economy faces in overcoming supply disruptions and persistently high prices of raw materials and energy.Factory output slumped a seasonally adjusted 7.2% in May from the previous month, official data showed on Thursday, as production of items such as cars as well as electrical and general-purpose machinery dropped sharply.The decline, which marked the sharpest monthly reduction since a 10.5% month-on-month drop in May 2020, was much bigger than a 0.3% fall expected by economists in a Reuters poll.”The plunge in industrial output in May suggests that Japan’s recovery is disappointing yet again,” said Marcel Thieliant, senior Japan economist at Capital Economics.”The conventional wisdom is that supply shortages are the main culprit,” he added. “However, the fact that inventories were broadly stable despite plunging output suggests that weak demand is playing a role.”The data comes a day after Toyota Motor (NYSE:TM) Corp, the world’s largest automaker by sales, said it missed its already downgraded global production target for May.Toyota produced 634,940 vehicles globally last month compared to its target of about 700,000, which it had lowered by 50,000 from 750,000 in mid-April due to pandemic curbs in Shanghai.While activity in Japan’s services sector is picking up thanks in part due to a modest post-pandemic spending rebound, the country’s manufacturing sector is facing pressure from parts and high-tech chip supply disruptions.The government cut its assessment of industrial production, saying it was weakening.Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rebound 12.0% in June, followed by a 2.5% expansion in July. More

HONG KONG (Reuters) – The latest easing of coronavirus travel rules combined with other encouraging policy signals have began luring some foreign investors back to Chinese stocks, raising the chances that the market can sustain its bounce after months of heavy selling. As the S&P 500 is about to close its worst first half of any year since 1970 and bonds have taken a thrashing, China’s beaten-down equity markets start looking like a shelter from a global storm of runaway inflation, interest rate hikes, and recession fears.China’s blue-chip CSI300 index is up about 20% from April lows, as is the Shanghai Composite after losses of more than 10% in the first quarter.The gains, together with the relaxation of lockdowns and signals that Beijing could ease up both on virus policies and regulatory clampdowns, have tempted money managers, who were quitting China en-masse in March, to return.Those who were on the sidelines, “have shown some increase in appetite for China in the past few weeks,” said Elizabeth Kwik, investment director of Asian equities at British asset manager abrdn. “Some have chosen to add to their position.”Foreign investors bought a net 74.6 billion yuan ($11 billion) worth of China-listed shares in June so far, which is set to be the biggest monthly inflow this year, according to data from Refinitiv Eikon.(Graphics: https://graphics.reuters.com/GLOBAL-MARKETS/jnvwezddnvw/chart.png)This week, travel and gambling stocks leapt as China halved travellers’ quarantine to one week.Investors hope it is a sign Beijing could eventually ease its draconian zero COVID-19 policy, and authorities are making efforts to come good on promises to support the world’s second-biggest economy.”COVID zero policy has been mentioned as the biggest hurdle facing investors as they look to understand China’s current policy focus,” Morgan Stanley (NYSE:MS) analysts said in a Wednesday report. “These latest developments will help rebuild investor confidence that economic growth is being prioritised.”Unlike the rest of the world, China has no inflation problem. Coronavirus COVID curbs and the absence of massive consumption-focused stimulus have kept demand soft and put a lid on prices – allowing the central bank to ease policy while most of its peers keep tightening. Senior officials have also vowed to support capital markets and growth and have eased a crackdown on once-hot sectors such as technology.Shares in e-commerce giant Alibaba (NYSE:BABA), which were pounded through 2020 and 2021, have rallied 60% from a record low in March.J.P. Morgan analysts last Friday advised clients to add to positions in China directly, a shift from earlier advice to keep indirect exposure via commodities or other markets.PARING LOSSESThe market rebound is also helping improve the performance of regional funds that stayed invested last year and through March, when Western sanctions on Russia stoked fears China could also become a target.A Eurekahedge index tracking Greater China-focused hedge funds with long-short strategies gained 1.1% in May, after losing 13.6% in the first four months of 2022.Anatole Investment Management Ltd, a Hong Kong-based firm managing around $1.9 billion with its flagship fund, saw monthly returns turn positive for May and extend in June after a 22% drop in the first four months, people familiar with its performance said. They requested anonymity because they are not authorised to speak publicly. That was partly due to bets on Chinese internet firms after Chinese authorities, concerned about markets, signaled willingness to wind down a regulatory crackdown of nearly two years.When contacted by Reuters, the fund described this month’s expansion as significant and said Greater China remained its biggest exposure.Aspex Management, which manages around $7 billion, reported positive returns in April and May, according to documents seen by Reuters, trimming losses for the first five months of the year to 14.4%. Aspex did not respond to queries.RESET There are still reasons to be cautious and June’s $11 billion in equity inflows are modest against a tide that saw roughly $50 billion in outflows from stocks and bonds over the first quarter, according to the Institute of International Finance.Investors worry Western sanctions on Russia could serve as a blueprint for China, while the health of the property market, once its growth engine, has been a concern ever since developer China Evergrande defaulted on some debts last year. State Street (NYSE:STT) Global Markets Yuting Shao said the firm had not returned to overweight on Chinese stocks, while Ewan Markson-Brown a fund manager at CRUX Asset Management was avoiding anything to do with real estate.”The property market is still a big issue,” he said.Still, money is flowing again and sentiment has shifted.The 20 biggest open-ended and exchange-traded funds traded in Hong Kong with Greater China equities strategy all reported positive returns last month and 17 of them grew their assets in May, according to Morningstar data.Paul O’Connor, head of the multi-asset team at Janus Henderson in London, said China has had its “capitulation” and now it was its chance to outperform.”They have had a valuation reset and they don’t have the policy headwinds we have in other places where central banks are draining liquidity and putting up interest rates.”($1 = 6.7025 Chinese yuan renminbi) More