Aurelia Butler

The debt stock reached 5.702 trillion reais ($1.08 trillion) in May after it had increased 0.45% in April over the previous month. April data had not yet been published due to a protest for higher salaries by Treasury employees.According to the Treasury, the average interest rate on the domestic federal debt grew to 11.69% against 11.29% in April, its highest level since May 2017, amid appreciation in inflation-linked and interest rate bonds.The Brazilian central bank has already raised its key interest rate to 13.25% from a record low of 2% in March last year, indicating there is room for another hike in its battle to tame double-digit inflation in Latin America’s largest economy.($1 = 5.2557 reais) More

Talking heads have spent much of the past month reviving the post-financial-crisis mantra that bad economic news is good news for markets, and vice versa. Their chorus reached fever pitch last week. Deep breath now:Last week’s gloomy US and European PMI numbers suggest “a sharp downturn” in both regions, says Ben Seager-Scott of advisory group Evelyn Partners. “But bad news might be good news” if that means central banks no longer have to tighten as hard and fast as originally planned.Business expectations across the UK might be at their lowest ebb since May 2020, but fear not! “Growing evidence pointing towards a weakening real economy could slow the path of Bank of England rate rises,” says Adrian Lowery, analyst at investing platform Bestinvest.Florian Ielpo at Lombard Odier said last week’s decelerating macro data had boosted market valuations; analysts at ING noted that Jay Powell’s recession-mongering was “good news” for equities; while Solita Marcelli at UBS Global Wealth said almost exactly the same. In topsy-turvy marketland, talk of an impending recession and the likely hit to employment was enough to push the S&P 500 to its first week of gains in a month. The previously runaway S&P GSCI Commodity Index, on the other hand, fell 2.6 per cent, while 5 and 10-year US break-evens slipped further from their early-spring highs. As Charlie McElliot at Nomura writes, US policymakers now seem to be pushing the Fed to prioritise growth over fighting inflation — a shift encapsulated by senator Elizabeth Warren’s grilling of Jay Powell last week. “Inflation is like an illness,” she said . . . . . . and the medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse. Right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer. While President Biden is working to increase energy supplies, straighten out supply chain kinks and break up monopolies and bring down prices, you could actually tip this economy into recession. In other words, policymakers still hope there will be a so-called soft landing, and inflation will slow without a recession induced by an overzealous Fed. Yet there remains a risk that economies could end up with the worst of both worlds.

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The Bank for International Settlements on Monday laid out the danger as follows:The mix of high inflation, high and volatile commodity prices and significant geopolitical tensions bears an uncomfortable resemblance to past episodes of global stagflation. An uncertain growth outlook in China reinforces the downside risks. Unlike in the past, stagflation today would occur alongside heightened financial vulnerabilities, including stretched asset prices and high debt levels, which could magnify any growth slowdown.In such an environment, “bad news” might still be just that. More

Rishi Sunak is cooling on the idea of a windfall tax on electricity generators, with the UK chancellor increasingly likely to use broader reforms to electricity markets to prevent excess profits in the industry, senior government figures have said.The chancellor announced in May that the Treasury was examining “appropriate steps” to ensure that the electricity generation sector contributed to a £15bn support package for households hit with rising bills.Officials had briefed that electricity companies could be hit with a windfall tax — similar to one already imposed on UK oil and gas producers — that would raise £3bn-£4bn.One minister told the Financial Times that the government was increasingly worried about the “perverse consequences” of applying a windfall tax.“A lot of companies are telling us they’ll cut investment if we go ahead with the tax,” he said. Another senior figure said that Downing Street had pushed back against the proposal that it first announced a month ago.Billions of pounds have been wiped off the value of London-listed electricity companies since the FT first revealed Sunak’s plans for a windfall tax on the sector.But since then officials have privately signalled to the industry that the plan was proving to be too complicated to instigate.The electricity sector is diverse, ranging from gas-fired power to offshore wind farms, and generators sell their output under a multitude of different contracts. Many have argued that they often sell their electricity far in advance so have not benefited from current high market prices.Some of the biggest electricity companies, including the UK’s SSE and RWE of Germany, have pushed back against a windfall tax. They have warned that it would deter investment in clean energy technologies, which the government is relying on to increase the country’s domestic energy supplies following Russia’s invasion of Ukraine and to reach longer-term climate goals.Sunak said he wanted to tax the excess profits generated by the industry because companies producing nuclear or wind energy were receiving windfall profits due to the price of electricity being closely linked to gas, which has soared in recent months.The government had already signalled in April that it wanted to carry out “comprehensive” reforms of the electricity market, which would decouple electricity prices from those of gas.Now there is a growing belief in government that those reforms could be another way to tax excess profits in the industry without some of the downsides of a straightforward windfall tax, although they could take much longer to implement.Business secretary Kwasi Kwarteng said on Tuesday the fact that the price of electricity was directly related to the marginal cost of gas made sense 40 years ago when most electricity came from coal and gas.“In the 2020s . . . we have a huge diversity of sources of power. So the price you’re paying doesn’t reflect — if it’s being priced off the marginal cost of gas — it doesn’t reflect the cost of generation,” he told the House of Commons business, energy and industrial strategy select committee.Kwarteng said officials were “trying to work at pace” on the electricity market reforms and were looking at two alternative approaches.One was a “bifurcated” market through which renewables would be priced differently to gas-fired power stations. Another alternative would be to look at the average cost of generation across different technologies, he told MPs.“It cannot be the case that we can forever link directly our electricity prices to gas prices when gas is only a portion of the electricity generating mix,” he added.Oil and gas operators lambasted Sunak in Aberdeen last week after he raised taxes on their profits from 40 per cent to 65 per cent.Trade body Offshore Energies UK wrote to the chancellor on Tuesday warning that some banks had reduced oil and gas operators’ borrowing capacity by 15 to 20 per cent in response to Sunak’s so-called energy profits levy, which was “acutely impacting companies that rely on debt capacity to fund and grow their business”.A government spokesperson said: “As the chancellor announced last month . . . we are consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production.“Those reforms will take time to implement, so in the meantime, we are evaluating the scale of these extraordinary profits and the appropriate steps to take.” More

We have now moved into a third epoch in the history of the postwar global economic order. The first went from the late 1940s to the 1970s and was characterised by liberalisation, principally among the high-income countries closely allied to the US in the context of the cold war. From the 1980s and especially after the fall of the Soviet Union, more radical forms of economic liberalism, known as “neoliberalism”, spread across the world. The creation of the World Trade Organization in 1995 and the accession of China in 2001 were high water marks of this second era.We are now moving into a new era of world disorder, marked by domestic mistakes and global friction. Domestically, there has been a failure, particularly in the US, to adopt policies that cushion the adjustments to economic change and provide security and opportunity for those adversely affected. The rhetorical ploys of nationalism and xenophobia have instead focused anger on “unfair” competitors, especially China. In the US, the idea of strategic competition with China has also become increasingly bipartisan, while China itself has become more repressive and inward-looking. With the war in Ukraine, these divisions have deepened.How in such a world might a liberal trading order be sustained? “With great difficulty” is the answer. Yet so much is at stake for so many that everybody who has influence must try.Fortunately, a large number of less powerful countries understand what is at stake. They should be willing to take the initiative, so far as possible, regardless of what the battling superpowers decide to do. In this context, even the limited successes of the WTO ministerial meeting in Geneva are significant. They have at the least kept the machine working.It is more important, however, to clarify and then tackle the more fundamental challenges to the liberal trading system. Here are five of them.First, sustainability. Managing the global commons has become humanity’s most important collective challenge. Trade rules must be made fully compatible with this objective. The WTO is an obvious forum for tackling destructive subsidies, notably for fishing. More broadly, it must be compatible with enlightened policies, such as carbon pricing. Border price adjustments, needed to prevent shifting of production to locations without appropriate pricing, are both an incentive and a penalty. These must be combined with large-scale assistance to developing countries with the climate transition.Second, security. Here one must distinguish the economic from the more strategic and the issues business can handle from those that must concern governments. Supply chains have, for example, shown a lack of robustness and resilience. Businesses need to achieve greater diversification. But this is also costly. Governments may help by monitoring supply chains at the industry level. But they cannot do the job of managing such complex systems.Governments do have a legitimate interest in whether their economies are over-reliant on imports from potential enemies, as Europe is on gas from Russia. Similarly, they must be concerned with technological development, especially in areas relevant to national security. A way to go about this is to construct a negative list of products and activities deemed of security interest, exempting them from standard rules of trade or investment, but keeping the latter for the rest.Third, blocs. Janet Yellen, US Secretary of the Treasury, has recommended “friendshoring” as a partial response to security concerns. Others recommend regional blocs. Neither makes sense. The former assumes “friends” are forever and would exclude most developing countries, including strategically vital ones: is Vietnam friend, foe or neither? It would also create uncertainty and impose heavy costs. Similarly, the regionalisation of world trade would be expensive. Above all, it would lock North America and Europe out of Asia, the world’s most populous and most economically dynamic region, effectively leaving it to China. This idea is an economic and strategic nonsense.Fourth, standards. Debates over standards have become a central element in trade negotiations, too often by imposing the interests of high-income countries on others. A controversial example is intellectual property, where the interests of a limited number of western companies are decisive. Another is labour standards. Yet there are also areas where standards are essential. In particular, as the digital economy develops, shared data standards will be needed. In their absence, global commerce will be substantially thwarted by incompatible requirements. This, by the way, was why the EU single market required the substantial regulatory harmonisation that the Brexiters loathed.Finally, domestic policy. Sustaining an open trading system will be impossible without better domestic institutions and policies aimed at educating the public on the costs of protection and helping all those adversely affected by big economic changes. In their absence, an ill-informed nationalism is bound to sever the bonds of commerce, which have brought such benefits to the world.This new epoch of the world is creating huge challenges. It is possible — perhaps even probable — that the world system will shatter. In such a world, billions of people will lose hope of a better future and shared global challenges will remain unmet. World trade is only one element in this picture. But it is an important one. The idea of liberal trade subject to multilateral rules was noble. It must not be allowed to perish. If the US cannot help, others [email protected] Martin Wolf with myFT and on Twitter More