Aurelia Butler

NEW YORK (Reuters) – Central banks’ focus on fighting persistently high inflation could lead to a recession over the next two years and raise the risk of ‘financial accidents’, U.S. investment firm PIMCO said on Wednesday.Rising prices have dominated the global financial markets this year, pushing central banks to increase interest rates to contain demand.But uncertainty around the pace of tighter monetary policies and its consequences for global economies have led to high volatility in markets.Geopolitical instability caused by the war in Ukraine has also contributed to wild price swings across bonds and stocks, while exacerbating inflation by pushing the costs of commodities such as oil and gas.”We see an elevated risk of recession over the next two years,” PIMCO said in a report on Wednesday, with reference to the U.S. and other advanced economies.The possibility of economic contraction is due to a variety of risks including stubbornly elevated inflation and the potential for more geopolitical unrest.It also reflects “central banks’ intense focus on fighting inflation first, which raises the risk of financial accidents on top of the sharp tightening of financial conditions already seen,” said PIMCO.The scramble by central banks to catch up with inflation has been devastating for bond investors this year. U.S. government bond yields – which move inversely to prices – have risen sharply in what has been the worst start to the year in history for bond markets.Because of inflationary concerns, monetary and fiscal responses to a recession, if and when it arrives, could be more muted and slower than in previous cycles, PIMCO said.”Thus, while for many reasons our view is that the next recession is unlikely to be as deep as the Great Recession of 2008 or the COVID sudden stop of 2020, it may well be more prolonged,” it said, and a recovery more sluggish. PIMCO, one of the world’s largest fixed income investors, said investors should build resilience in their portfolios in the face of rising uncertainty, with certain products such as U.S. Treasury Inflation-Protected Securities (TIPS) offering some protection.It also said it will favour high-quality corporate debt due to potentially higher companies’ defaults in a recession marked by lower monetary and fiscal support.”Central banks focused on inflation and governments focused on national security and environmental security considerations will likely be much less inclined to support companies outside of sectors deemed important to the targeted pursuit of resilience,” it said. More

Jay Powell said a US recession is “certainly a possibility” and warned that avoiding a downturn largely depends on factors outside the Federal Reserve’s control.In testimony to the Senate banking committee on Wednesday, the Fed chair acknowledged it was now more challenging for the central bank to root out soaring inflation while maintaining a strong job market. He argued the US was sufficiently resilient to withstand tougher monetary policy without sliding into a downturn but acknowledged that outside factors, such as the war in Ukraine and China’s Covid-19 policy, could further complicate the outlook.“It’s not our intended outcome at all, but it’s certainly a possibility,” Powell said, responding to a question about the risk the Fed’s plans to raise rates this year could lead to a recession.He added that because of the “events of the last few months around the world”, it was “now more difficult” for the central bank to achieve its goals of 2 per cent inflation and a strong labour market. “The question of whether we are able to accomplish that is going to depend to some extent on factors that we don’t control,” he said, in a reference to soaring commodity prices stemming from Russia’s invasion of Ukraine and clogged-up supply chains because of China’s lockdowns.Lawmakers pressed Powell several times about the burden imposed by the Fed’s recent moves to combat inflation, now at 8.6 per cent, the highest in four decades. The central bank last week put in place the biggest interest rate increase since 1994, signalling its support for what is set to be the most forceful campaign to tighten monetary policy since the 1980s.“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work,” said Elizabeth Warren, the progressive Democratic senator from Massachusetts. “I hope you will reconsider that before you drive this economy off a cliff.”Powell said in a separate exchange there would be considerable risks if the Fed did not act to restore price stability, with inflation becoming entrenched. “We know from history that that will hurt the people we’d like to help, the people in the lower-income spectrum who suffer now from high inflation,” he said. “That will hurt them more than anyone. We can’t fail on that task.”The yield on the US two-year Treasury note, which moves with interest rate expectations, fell 0.1 percentage points to 3.06 per cent. US stock indices closed marginally lower, with the S&P 500 down 0.1 per cent. Concerns about a possible recession have grown with worse than expected inflation data this month. While Powell maintained that the US economy was “very strong and well positioned to handle tighter monetary policy”, he acknowledged that further inflation surprises “could be in store”.

“We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time,” he said.Traders have priced in the benchmark federal funds rate reaching roughly 3.6 per cent by the end of the year, an increase that has caused a broader rise in borrowing costs globally. Powell on Wednesday said the tightening of financial conditions was having its intended effect and damping demand.His testimony came at a critical moment for the White House, which is contending with mounting expectations of a sharp slowdown in growth ahead of November’s midterm elections. Many economists have pencilled in a recession by next year.“There’s nothing inevitable about a recession,” President Joe Biden told reporters this week, a message reiterated by Janet Yellen, the Treasury secretary, and Brian Deese, the director of the National Economic Council. Fed officials have begun to prepare market participants for at least one more 0.75 percentage point rate rise at their next meeting in July. Powell said the Fed needs to see “compelling evidence” that inflation was moderating before it relented on its drive to increase interest rates. He said future decisions about the Fed’s actions would be decided “meeting by meeting”. More

US liquefied natural gas producers have announced a string of deals to boost exports as the industry capitalises on shortages that have left Europe with a mounting energy crisis.Cheniere Energy, the biggest American exporter, said it had reached a final investment decision to push ahead with a project that will boost its capacity more than 20 per cent by late 2025, while long-term supply deals also locked in purchases of US gas over the coming decades.The expansion of Cheniere’s facility in Corpus Christi on the Texas coast will add 10mn tonnes a year of liquefaction capacity on top of its current 45mn tonnes. Total US capacity stands at roughly 99mn tonnes. The announcement came amid a flurry of US LNG sale and purchase agreements unveiled on Wednesday as American exporters position themselves to fill the gap as Europe turns away from Russian imports. Venture Global, another exporter on the Gulf of Mexico coast, said it had struck a deal to sell 2mn tonnes per year to oil major Chevron over a 20-year period. Cheniere also inked its own deal with Chevron for 2mn tonnes a year over a 15-year period.The Venture Global deal marked the company’s second major contract in as many days after it announced plans on Tuesday to sell 1.5mn tonnes a year to EnBW, one of Germany’s largest energy companies, in the first binding long-term agreement by a German company to buy US LNG.Chemicals group Ineos, meanwhile, announced plans to start trading LNG. Under the agreement, which is at an earlier stage than the others, Britain’s largest privately owned company would buy 1.4mn tonnes per year for 20 years of the fuel from projects proposed by US company Sempra Infrastructure.Gas prices in Europe have jumped more than a quarter over the past week after Russia cut capacity on its main gas export pipeline to Germany, fuelling concerns that Moscow is weaponising its gas exports in response to EU sanctions following the invasion of Ukraine.Fatih Birol, head of the International Energy Agency, said Europe must prepare immediately for the complete severance of Russian gas exports this winter, urging governments to take measures to cut demand and keep ageing nuclear power stations open. Europe now imports about 20 per cent of its gas from Russia, according to analysts, down from roughly 40 per cent before the invasion of Ukraine.The US is the world’s leading producer of natural gas and its exporters have in recent months been running plants flat-out to increase supplies to the EU. However, a recent fire at an LNG terminal in Texas that is responsible for almost 20 per cent of all US liquefaction capacity has crimped supply and helped drive up prices in Europe, which were trading above €125 per megawatt hour on Wednesday.The EU and Washington announced a deal in March to increase supplies of LNG to Europe in the coming years in an effort to help the bloc break its reliance on Russian gas.Ineos, owned by Jim Ratcliffe, has a sprawling business spanning petrochemicals, refineries and oil and gas production.The company said its agreement with Sempra was part of a strategy to build a network of liquefaction, shipping and regasification capacity to deliver “reliable energy” to its operations and customers in Europe and around the world.

“Our entry into the global LNG market opens new opportunities to supply affordable, clean and reliable energy to the market,” said Brian Gilvary, the former BP executive who runs Ineos Energy. “Long-term supply . . . will help alleviate the structural energy issues in Europe.”The deal is subject to Sempra securing the permits and financing to push ahead with two new projects.Ineos is entering a market dominated by large oil companies and commodity traders. Vitol, the world’s biggest independent oil trader, delivered almost 13mn tonnes of LNG last year. More

Lebanese lenders have warned the IMF that a proposal to seize their assets from the central bank as part of a $3bn rescue plan for the country is illegal and risks causing severe damage to the economy.In a letter to the head of the IMF’s Middle East mission, Carlos Abadi of DecisionBoundaries, a New York financial restructuring advisory firm acting for the Association of Banks in Lebanon (ABL), said the proposed expropriation without compensation of their dollar deposits held at the Banque du Liban was both unlawful and unconstitutional. Some Lebanese banks have sought to distance themselves from the letter. Lebanon has been devastated by a years-long economic crisis so severe that the World Bank has said it could be one of the world’s worst in 150 years. Over the past two years, at least 80 per cent of its population has been pushed into poverty. At the root of its financial collapse is the debt accrued over decades by successive governments. The fund reached a preliminary agreement with Lebanese authorities for a $3bn extended fund facility in April. The terms of the rescue plan remain private, but a person familiar with the matter said it included the appropriation of $60bn out of $85bn in banks’ foreign currency deposits held at the central bank. The ABL’s objections threaten to throw the finalisation of the rescue plan — already moving slowly because the country remains in the hands of a caretaker government after May elections — off course. In the letter, seen by the Financial Times and dated Tuesday, Abadi said the ABL had “serious reservations”. He said the result of seizing banks’ deposits at the central bank would be the expropriation, without compensation, of deposits held at commercial banks by large customers, resulting in “widespread damage to universities, hospitals, factories [and] professional, labour, social security and social welfare institutions”.In turn, this would lead to a reduction in output and in potential economic growth, the letter stated. “Overall, the equilibrium achieved by ‘zeroing-out the books’ will be unstable and shortlived,” it said. The ABL later on Wednesday clarified that it did not “absolutely oppose” the agreement. It stressed that “any solution must reconcile the hierarchy of responsibilities and the distribution of losses, so that the banking sector and depositors are not responsible for all the losses”. The IMF did not respond to a request for comment.The release of $3bn in IMF funds will require the reform of the banking sector and the central bank, widely criticised for its handling of the crisis.Prior to its collapse in 2019, the country’s economic model had relied on a supply of dollars to its commercial banks, which deposited them at double-digit interest rates in the central bank, which in turn bought government debt. But a severe foreign currency shortage led the fragile system to crash. As Lebanon’s parliament repeatedly failed to pass capital controls, banks instead imposed severe restrictions on withdrawals and foreign transfers to stem the haemorrhage of hard currency.Banks have been calling for the Lebanese state to assume the losses in the financial sector, estimated to be greater than $70bn. In its letter, the ABL suggested alternative measures to revive Lebanon’s economy and plug the financial gap, including investment in tourism, agriculture and the knowledge economy, and a recapitalisation of the central bank. Such a recapitalisation would include the mobilisation of state assets worth $20bn, the use of an estimated $15bn in gold reserves and the reversal of recent foreign exchange transactions. The letter sparked anger from some of Lebanon’s biggest banks. Bank Audi said it had not approved its content and that “the only way out of Lebanon’s acute crisis is an IMF programme”. The bank also said in a statement that it had reservations about the IMF plan and that these were “being channelled to the concerned parties”.Marwan Kheireddine, chair of Al-Mawarid Bank, also said his bank had not been made aware of the letter and had not approved its content before it was sent. He said that more information on the IMF’s position “should, in my opinion, be publicly available to any interested party”. More