Aurelia Butler

US stocks have suffered their heaviest weekly fall since the outbreak of the coronavirus pandemic, after investors were spooked by a series of interest rate increases by big central banks and the threat of an ensuing economic slowdown.The S&P 500 index ended the week 5.8 per cent lower, its worst weekly performance since March 2020. An 0.2 per cent uptick on Friday did little to offset damage done in earlier trading sessions. The FTSE All-World index, a measure of emerging and developed markets, also dropped by the most since March 2020, down 5.6 per cent for the week.The share declines are a sign of an increasingly gloomy global market outlook, as the Bank of England and the Swiss National Bank followed the Federal Reserve in raising interest rates this week in attempts to tackle soaring inflation. “The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”The SNB on Thursday surprised markets with its first rate rise since the lead-up to the global financial crisis in 2007, lifting borrowing costs by half a percentage point after inflation in the country hit a 14-year high last month. The BoE joined the trend hours later, with a 0.25 percentage point increase as it warned that UK inflation would climb above 11 per cent this year. A day earlier, the Fed had lifted rates by 0.75 percentage points in its biggest such move since 1994. And in a monetary policy report released to Congress on Friday, the Fed said its “commitment to restoring price stability — which is necessary for sustaining a strong labour market — is unconditional”.“The key turning point [for stocks] is going to be when the Fed has decided it has done its job on inflation, but there’s recognition that they’re a long way from getting there,” said Timothy Murray, a strategist on the multi-asset team at fund manager T Rowe Price, who noted they are keeping an “underweight” position in equities because of economic risks. In Europe, the regional Stoxx 600 index closed 0.1 per cent higher, having lost 2.5 per cent in the previous session. For the week, it was down 4.6 per cent. Some analysts believe the decline in European equities has bottomed out, with Bank of America upgrading its view of the Stoxx 600 from “negative” to “neutral” on the premise that a sharp drop since January’s all-time high has priced in the bad macroeconomic news it anticipates. “We expect central banks’ focus to shift from inflation to weakening growth,” the Wall Street bank said.In government debt markets, the yield on the benchmark 10-year US Treasury note fell 0.4 percentage points to 3.23 per cent, after sharp swings in recent days as investors adjusted to expectations of higher interest rates and an end to the Fed’s bond-buying programme that pumped billions of dollars into the US economy. Bond yields fall as their prices rise.The Fed’s aggressive rate rises have also hit corporate debt markets, with investors pulling $6.6bn out of funds that buy lower-quality, US high-yield bonds in the week to June 15.Meanwhile, Italian bonds continued to rally after European Central Bank president Christine Lagarde told the bloc’s finance ministers that doubting the central bank’s commitment to fighting financial “fragmentation” of the region “would be a serious mistake”.Italy’s debt has rebounded from a heavy sell-off after the ECB said at an unplanned meeting this week that it would speed up work on a new tool to counter surging borrowing costs in the euro bloc’s weaker economies. Italian 10-year bond yields fell 0.17 percentage points to 3.57 per cent on Friday, down from a high of 4.19 per cent earlier in the week.Oil prices fell sharply on Friday over concerns that central banks’ actions could slow economic growth and squeeze crude demand. The price of Brent, the international oil benchmark, settled at $113.12 a barrel, down about 5.5 per cent on the day. It was the lowest close for Brent since May 20.The move lower followed a strong increase in prices over the past six weeks, driven by persistent worries that economic sanctions on Russia over its war in Ukraine will tighten supplies in energy markets. Additional reporting by Justin Jacobs in Houston and Tommy Stubbington in London More

The EU will restart trade negotiations with India after a nearly 10-year pause as western countries try to woo New Delhi away from its historic ties with Russia.Valdis Dombrovskis, European Commission executive vice-president, said on Friday that talks between the EU and India would start at the end of June for agreements on trade, investment protection and other specific regional products known as “geographic indications”.“For the European Union, the partnership with India is one of the most important relationships for the upcoming decade,” Dombrovskis said, adding that the EU was targeting an “ambitious” timeline for the deal to be signed by the end of 2023.The EU has been seeking further co-operation with India since Ukraine’s invasion by Russia, with which India has had historically close ties. During a trip to India in April, commission president Ursula von der Leyen announced a new trade and technology council and the renewal of trade talks.In a joint press conference with Dombrovskis, India’s commerce minister Piyush Goyal said the talks heralded “less competition, more collaboration” and that they sent a strong signal in support of global trade.The announcement followed a tense meeting of the World Trade Organization that concluded on Friday in Geneva. The summit introduced a partial waiver of Covid-19 vaccine patents, cuts to fishing subsidies and the continuation of a ban on taxing digital products such as software that India had pushed against.Goyal called Dombrovskis his “partner in crime” during the WTO negotiations, which ran over by two days.

The two trade envoys said the deal would focus on technology and digital trade, with India set to benefit from Europe’s advances in artificial intelligence and the “internet of things”, as well as sustainable development and climate goals.The EU is India’s third-largest trading partner and second-largest export destination. Annual trade between the two reached about €120bn in 2021. India, by contrast, is the EU’s 10th-largest trading partner but Dombrovskis said this signalled the “untapped potential” for further co-operation. The bloc’s foreign investment into India was €87mn in 2020.Formal negotiations for a trade deal between India and the EU were opened in 2007 but fell apart in 2013 because of disagreements over movement of workers and agricultural tariffs.India has continued to buy arms and energy from Russia despite initial pressure from western countries on New Delhi to show more support for Ukraine. In recent weeks, India has made efforts to diversify its supply by making overtures to countries such as Israel and the US for more military supplies.The European Parliament’s trade committee said in a draft report on Thursday that while trade talks between the EU and India were welcome, a deal “should happen only as long as European values and standards are respected”.The lawmakers said they expected “swift solutions” on difficulties that European companies such as carmakers and pharmaceutical businesses have faced in gaining access to the Indian market and that India “should prohibit discriminatory ‘Buy National’ policies that discourage imports”. More

Vladimir Putin claimed on Friday that his country had weathered the worst of the sanctions imposed by the US and Europe, as Russia’s president vowed to achieve the goals of its military aggression on Ukraine.Putin told a business conference in St Petersburg that “gloomy predictions about the Russian economy’s future didn’t come true” and that the sanctions had hit European businesses harder — a claim that is not supported by estimates published so far. “The economic blitzkrieg . . . never had any chances of success,” he said. “The weaponry of sanctions is a double-edged sword . . . European countries dealt a serious blow to their own economy all on their own.” Since Russia’s invasion of Ukraine in late February, western countries have imposed sanctions which have frozen $300bn of Russia’s foreign currency reserves, cut its companies off from global markets, and disrupted its supply chains.Putin was adamant that Russia would achieve its military goals, indicating it could annex occupied territories or Moscow-backed separatist areas in the eastern Donbas region. “We will defend the interests of the people for whose sake our guys are fighting, getting wounded, and dying,” Putin said. “There’s no other way. Otherwise what are the victims for?”Moscow-backed separatist authorities in the Donbas, whose leaders attended the conference, and officials the Kremlin has appointed to run southern areas of Ukraine have said they want to become part of Russia. Putin said Russia would “respect any choice they make”. He stressed that he saw the entire former Soviet Union as “historical Russia.”

Though he claimed the US had provoked the war by turning Ukraine into an “anti-Russian bulwark,” Putin said Moscow had no objection to Kyiv’s attempts to join the EU because it was not a military alliance. The European Commission on Friday called for Ukraine to be made an official candidate to join the bloc. Putin’s comments that Russia has faced a smaller hit than European economies contradict forecasts from international organisations. Eurostat, the commission’s statistics bureau, will not publish growth figures for the second quarter, which will cover the bulk of the period after Russia invaded, until the end of July. But the surge in oil and gas prices have severely cut estimates. The OECD recently slashed its forecast for the eurozone’s expansion this year from the 4.3 per cent it had estimated in December to 2.6 per cent, and from 2.5 per cent to 1.6 per cent for 2023. For Russia, the downgrades were much steeper. Its economy is expected to contract 10 per cent this year, according to the OECD, a downgrade from the 1.9 per cent of growth anticipated in December. The projection for 2023 was cut from 1.6 per cent growth to a 4.1 per cent contraction.Putin said that Russia had taken inflation under control at 17.6 per cent and boasted that it was below levels in some European countries. This is only true for Estonia and Lithuania, where energy prices have soared after the Baltics moved to cut off supplies of Russian energy once the war began. The eurozone average is, at 8.1 per cent, less than half the Russian rate. Western central banks have blamed the conflict for exacerbating inflationary pressures by triggering sharp rises in the cost of energy and food. Putin rejected the claim, saying the west was using the conflict as a “lifebuoy to blame Russia for their own mistakes”. Western countries were paying the price for years of ultra-loose monetary policy and high government debt levels, he said.

He accused the EU, historically Russia’s largest trading partner, of bending to US pressure. “The EU has lost its political sovereignty. Its elites are dancing to someone else’s tune, harming their own population. Europeans’ and European businesses’ real interests are totally ignored and swept aside,” Putin said.While Putin played down the economic damage wrought by the sanctions, Russian economic officials in attendance were visibly rattled. Herman Gref, chief executive of state-run lender Sberbank and a longtime confidant of Putin’s, said the export-driven economic model was now “poison” because it made the rouble too strong against the dollar.Putin also rejected western accusations that Russia has exacerbated the global food shortage by blockading Ukraine’s Black Sea ports and preventing its grain exports.Instead, he said the sanctions had restricted Russia’s own grain exports. “Famine in the poorest countries will be on the conscience of the US administration and the Eurocrats,” Putin said. The sanctions, which have wiped millions of dollars off the wealth of rich Russians, had vindicated his warnings that Russian oligarchs and executives were taking too many risks by snapping up assets in the west. “Real success is possible only when you tie your future and your children’s future to the motherland,” he said. More

The world’s most-watched central banks are finally stamping down on a surge in inflation. But this week it became clear that they know this comes at a cost.From the UK, where the Bank of England raised interest rates for the fifth time in as many meetings, to Switzerland, which bumped up rates for the first time since 2007, policymakers in almost every major economy are turning off the stimulus taps, spooked by inflation that many initially dismissed as fleeting.But for the big two in particular — the US Federal Reserve and the European Central Bank — the prospect of sharply higher rates brings awkward trade-offs. For the Fed, that is in employment, which is at risk as it pursues the most aggressive campaign to tighten monetary policy since the 1980s. The ECB, meanwhile, this week scrambled an emergency meeting and said it would speed up work on a new plan to avoid splintering in the eurozone — an acknowledgment of the risk that Southern Europe and Italy in particular could plunge in to crisis.Most central banks in developed countries have a mandate to keep inflation under 2 per cent. But the roaring consumer demand and supply-chain crunch stemming from the Covid reopening, combined with the energy price spiral generated by Russia’s invasion of Ukraine, has made this impossible. At first, policymakers considered inflation spikes to be transitory. But now, US inflation is running at an annual pace of 8.6 per cent, the fastest in more than 40 years. For the eurozone, it is 8.1 per cent and in the UK, 7.8 per cent. Central banks are being forced to act far more aggressively.Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation. Central banks have moved “from whatever it takes to whatever it breaks”, says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. The Fed faces realityAbove all, the US Federal Reserve this week dramatically scaled up its response. It has been raising rates since March, but on Wednesday it delivered its first 0.75 percentage point rate rise since 1994. It also set the stage for much tighter monetary policy in short order. Officials project rates to rise to 3.8 per cent in 2023, with most of the increases slated for this year. They now hover between 1.50 per cent and 1.75 per cent. The Fed knows this might hurt, judging from the statement accompanying its rate decision. Just last month, it said it thought that as it tightens monetary policy, inflation will fall back to its 2 per cent target and the labour market will “remain strong.” This time around, it scrubbed that line on jobs, affirming instead its commitment to succeeding on the inflation front. To those familiar with reading the runes of the Fed, this matters. “This was not unintentional,” says Tim Duy, chief US economist at SGH Macro Advisors. “The Fed knows that it is no longer possible in the near term to guarantee” both stable prices and maximum employment.The prospect of a recession in the US and elsewhere has already sent financial markets swooning. US stocks have posted the worst start to any year since the 1960s, declines that have accelerated since the latest central bank pronouncements. Government bonds, meanwhile, have flipped around violently under the competing forces of recession fears and rising benchmark rates.“The big fear is that central banks can no longer afford to care about economic growth, because inflation is going to be so hard to bring down,” says Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. “That’s why you are getting this sea of red in markets.”At first glance, fears of a US recession might appear misplaced. The economy roared back from Covid lockdowns. The labour market is robust, with vigorous demand for new hires fuelling a healthy pace of monthly jobs. Almost 400,000 new positions were created in May alone, and the unemployment rate now hovers at a historically low 3.6 per cent.But raging inflation puts these gains in jeopardy, economists warn. As the Fed raises its benchmark policy rate, borrowing for consumers and businesses becomes more costly, crimping demand for big-ticket purchases like homes and cars and forcing companies to cut back on expansion plans or investments that would have fuelled hiring.“We don’t have in history the precedent of raising the federal funds rate by that much without a recession,” says Vincent Reinhart, who worked at the US central bank for more than 20 years and is now chief economist at the Dreyfus and Mellon units of BNY Mellon Investment Management.The Fed says a sharp contraction is not inevitable, but confidence in that call appears to be ebbing. While Fed chair Jay Powell this week said the central bank was not trying to induce a recession, he admitted that it had become “more challenging” to achieve a so-called soft landing. “It is not going to be easy,” he said on Wednesday. “It’s going to depend to some extent on factors we don’t control.”That more pessimistic stance and the Fed’s aggression against rising prices has compelled many economists to pull forward their forecasts for an economic downturn, an outcome for the central bank that Steven Blitz, chief US economist at TS Lombard, says was a “moment of their own design” by moving too slowly last year to take action against a mounting inflation problem. Most officials now expect some rate cuts in 2024.“Because of their inept handling of monetary policy last year, and their own belief in a fairytale world as opposed to seeing what was really going on, they put the US economy and markets in this position that they now have to unwind,” he says. “They were wrong and the US economy is going to have to pay the price.”Whatever it takes?The ECB has a challenge of a more existential kind. This week it called an emergency meeting just days after its president Christine Lagarde announced a plan to raise rates and to stop buying more bonds in July. That plan makes sense in the context of record-breaking inflation. But it had the awkward effect of hammering government bonds issued by Italy, historically a big borrower and spender. Italy’s 10-year bond yield rose to an eight-year high above 4 per cent and its gap in yields from Germany hit 2.5 percentage points, its highest level since the pandemic hit two years ago. This outsized pressure on individual member states’ bonds makes it hard for the ECB to apply its monetary policy evenly across the 19-state eurozone, risking the “fragmentation” between nations that ballooned a decade ago in the debt crisis. Faced with early signs of a potential rerun, the ECB felt it had to act. Italian central bank governor Ignazio Visco said this week that its emergency meeting did not signal panic. But he also said that any increase in Italian yields beyond 2 percentage points above Germany’s created “very serious problems” for the transmission of monetary policy.The result of the meeting was a commitment to speed up work on a new “anti-fragmentation” tool — but with little detail on how it would work — while also reinvesting maturing bonds flexibly to tame bond market jitters.Some think this is not enough. It has certainly not repeated the trick achieved by Lagarde’s predecessor Mario Draghi — now the Italian prime minister — who famously turned the tide of the eurozone debt crisis in the summer of 2012 simply by saying the central bank would do “whatever it takes” to save the euro. For now, the ECB has halted the downward spiral in Italian bonds, stabilising 10-year yields at about 3.6 per cent with the spread at 1.9 percentage points. But investors are hungry for details of its new toolkit.“All the ECB did [this week] was show it is watching the situation,” says one senior London-based bond trader. “It does not have the leadership that’s willing or able to do what Draghi did. Eventually the market will test the ECB.”The central bank hopes that by introducing a new bond-buying instrument it will be able to keep a lid on the borrowing costs of weaker countries while still raising rates enough to bring inflation down.Hawkish rate-setters at the ECB normally dislike bond-buying, but they support the idea of a new tool, believing it will clear the way to increase rates more aggressively. Deutsche Bank analysts raised their forecast for ECB rate rises this year after Wednesday’s meeting, predicting it could lift its deposit rate from minus 0.5 per cent to 1.25 per cent by December.“Central banks will hike until something breaks, but I don’t think they’re convinced that anything has broken yet,” says James Athey, a senior bond portfolio manager at Abrdn. Financial asset prices have tumbled, but from historically elevated levels, he says, and policymakers who have in the past been keen on keeping their currencies weak — a boon for exports — are now raising rates in part to support them, to deflect inflationary pressures. “The [Swiss National Bank] is a case in point,” he says. “All they have done for a decade is print infinite francs to weaken their currency. It’s a complete about face.”The Swiss surprise leaves Japan as a lone holdout against the tide of rising rates. The Bank of Japan on Friday stuck with negative interest rates and a pledge to pin 10-year government borrowing costs close to zero. The BoJ can afford to bet that the current bout of inflation is “transitory” — a term ditched long ago by central banks elsewhere in the developed world — because there is little sign that the commodity shock is shaking Japan from its long history of sluggish price rises in the broader economy. Consumer inflation in Japan is hovering at about 2 per cent, broadly in line with targets. Even so, the pressure from markets has become intense. The Japanese central bank has been forced to ramp up its bond purchases at a time when other central banks are powering down the money printers, to prevent yields being dragged higher by the global sell-off. At the same time, the growing interest rate gulf between Japan and the rest has dragged the yen to a 24-year low against the dollar, spreading unease in Tokyo’s political circles.The pain from rate rises will be felt globally, Athey predicts. “When the basics that everyone needs to live, like food, energy and shelter, are going up, and then you jack up interest rates, that’s an economic sledgehammer. If they end up actually delivering the tightening that’s priced in then economies are in big trouble.” More

Good eveningGlobal stock markets today were on track for their worst week since the depths of the pandemic after central banks across the world took a hawkish shift in their battle against inflation.The Bank of England and the Swiss National Bank both increased rates yesterday, following Wednesday’s announcement by the US Federal Reserve of a 0.75 percentage points rise, its biggest in decades. The Fed decision and renewed fears of a global downturn have led investors to pull billions of dollars out of corporate bond funds in what has also been a bruising week for fund managers.The European Central Bank meanwhile said it would speed up work on a new “anti-fragmentation instrument” to help address surging borrowing costs in the eurozone’s weaker economies. The news helped Italy’s debt rebound after a heavy-sell off.Japan remains an outlier. The country’s central bank today announced it would stick to its ultra-loose monetary policy and leave rates on hold, keeping bond yields at zero. The yen sank in response.The Bank of Japan, unlike its counterparts in Europe and the US, believes the current surge in inflation is transitory. The BoE by contrast yesterday increased its forecast, suggesting CPI would top 11 per cent by the end of the year. It has however been accused of “going soft” on its core mandate after adopting a less aggressive stance than the Fed. This reflects its view that the UK economy will barely grow at all in the next three years, says economics editor Chris Giles.Traders meanwhile are braced for more volatility ahead. “The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”Latest newsPutin says Russia has weathered the worst of western sanctionsHungary withdraws support for global minimum corporate tax Fed official says rate rise adds to ‘policy uncertainty’For up-to-the-minute news updates, visit our live blogNeed to know: the economyThe second and final voting round in France’s parliamentary elections takes place on Sunday and will determine whether freshly re-elected President Macron has the backing to continue with his reform agenda. Paris bureau chief Victor Mallet’s Big Read outlines how French politics has put personality ahead of party.Latest for the UK and EuropeUK airlines will have to cancel hundreds of flights this summer after London Gatwick, the UK’s second-busiest airport, said it needed to limit operations because of staff shortages. Budget carrier easyJet is likely to suffer the most disruption. Rail strikes next week were labelled as an ‘incredible act of self-harm’ by transport minister Grant Shapps, risking thousands of job losses.Almost half a million fewer people were in paid work in the UK in the first quarter of 2022 than before the pandemic struck, according to a new study. The drop has been mainly due to older workers retiring early, and mostly as a lifestyle choice, rather than through redundancy or ill health.North Sea oil and gas producers upped their protests against the UK’s new windfall tax on their profits, calling it “anti-investment” and “anti-business”. The US has urged European governments to ease the impact of their ban on insuring Russian oil cargoes to avoid driving up global crude prices.The dairy sector, worth £1.5bn a year to Northern Ireland, is set to be a big loser if the UK government goes ahead with plans to rip up Brexit trading rules. Proposals for a dual regulatory regime, where goods entering the region could be produced either to UK or to EU standards, could mean farmers suddenly saddled with unsellable products if guidelines diverged. Legal commentator David Allen Green in this video explains why the Northern Ireland Protocol Bill breaches international law.

Video: Is the Northern Ireland Protocol Bill a breach of international law?

The European Commission recommended Ukraine for candidate status to join the EU. The decision must be endorsed by each of the 27 EU member states at a summit next Thursday and Friday.Global latestThe World Trade Organization agreed a partial waiver for Covid-19 vaccine patents as well as announcing deals in other contentious areas such as fishing subsidies and food export constrictions. The vaccine deal however fell short of demands from India and South Africa to exempt all Covid-related medicines, disappointing campaigners.Two weeks of tense UN climate talks ended with rich countries accused of betraying poor nations over finance to combat climate change. The outcome puts extra pressure on Egypt to find a consensus when it hosts COP27 in five months’ time.China’s Winter Olympics villages have been turned into Covid quarantine camps. The latest outbreak in Beijing has closed entertainment venues and forced millions to queue daily for Covid testing and thousands to go into isolation.The German government appealed to the public to conserve energy after Russia cut flows through the critical Nord Stream pipeline. Italy, Austria and Slovakia also reported more reductions in supply. Separately, Australia urged people to save energy as it invoked emergency powers to block coal exports if necessary. Soaring costs of food staples are having a big effect on Latin American culinary habits and driving a rise in the number of people experiencing hunger. While LatAm economies are generally self-sufficient in food, net exporters face inflationary pressures for produce when prices for goods such as grain are set internationally.Academic Arvind Subramanian outlines the five major changes that are transforming the world economy, from the end of cheap finance and trade hyperglobalisation to the stalling of economic convergence, weakening co-operation among countries and the idea that global integration was good for peace.How should personal investors react to these changes and the turmoil in financial markets? FT Money unpicks the arguments of the bulls and the bears while columnist Merryn Somerset Webb offers a guide through the chaos (she’s not a fan of bitcoin btw).Need to know: businessChina’s Big Tech groups have suffered under Beijing’s strict pandemic restrictions, losing trillions of dollars in market value and mass dismissals of workers. The phrase bailan, roughly meaning “let it rot”, has become popular among the country’s youth to describe how they have given up trying to find a job.Online clothing retailer Asos issued another profit warning, blaming rising inflation for the growing number of product returns, a problem also reported by rival Boohoo. Tesco too highlighted changing consumer behaviour as inflation begins to bite.Ferrari said 40 per cent of its car sales would be fully electric by 2030 after launching its first such model in 2025. Hybrids would take up another 40 per cent and traditional combustion engines would fall to just 20 per cent.Bitcoin miners have been dragged into the “bloodbath” collapse in cryptocurrency prices. The crypto market has shrunk from a high of $3.2tn in November to under $1tn and has left buyers of bitcoin, the world’s most popular digital asset, in the red.Science round upOmicron sub-variants are fuelling a rise in Covid hospitalisations across Europe, most notably in Portugal, Germany, France and the UK. Scientists are still unsure whether it is because they are more transmissible or because immunity is waning.The FT revealed that the World Health Organization was set to back the use of variant-specific Covid jabs as a third shot, a significant shift in thinking and the first move to back their use since Omicron emerged late last year.Advisors to US regulators have backed Covid vaccines for children under five, the last age group without access to jabs. The child-sized shots from Moderna and BioNTech/Pfizer could be rolled out from next week if final approval is granted.Sanofi and GSK, which so far have lagged their rivals in producing Covid vaccines, reported positive test results from their “next-generation” booster which produced a strong immune response against the Omicron variant.BioNTech is ploughing profits from its Covid vaccine into oncology using its mRNA technology. Our Big Read has the details. Get the latest worldwide picture with our vaccine trackerAnd finally…Why do we fall for scams? Dan McCrum, the FT reporter who led the investigation into payments company Wirecard, analyses the dark magic employed by fraudsters in the FT Weekend Essay.© Tom Straw More

The world economy is racked by inflation and struggling with growth. But the situation is perhaps best summed up by one datapoint: the number and variety of policy changes announced by central banks around the world this week. The Federal Reserve made the punchiest move. Its officials now expect core inflation — a measure that excludes the most volatile items — to settle at 4.3 per cent this year. This is a key part of why it delivered on Wednesday a 0.75 percentage point rise in interest rates; the biggest in almost 30 years. At the same time, it is starting to scale down its asset holdings — another form of tightening. The Fed wants people to see that it still has an inner Paul Volcker.The 1980s Fed chair put the US economy through the wringer of extremely tight monetary policy to end the inflationary legacy of the 1970s. Current chair Jay Powell and his colleagues this week presented projections showing they are willing to slow the economy and raise joblessness. He sounded glum about the prospect of a “soft landing”.But for all the downgrading of forecasts, it is important to keep the Fed’s doom in context. Its rate-setters are still forecasting a reasonably benign scenario. They think growth will continue and the most pessimistic forecast is for unemployment at 4.5 per cent. The Bank of England would do anything for such a happy outcome. This week it raised rates by just 0.25 percentage points, even though inflation is expected to hit 11 per cent. But the BoE expects economic stagnation anyway, so does not need to tap the brakes as firmly as the Fed.The European Central Bank, meanwhile, is reliving chapters from its eurozone crisis history books. Investors are jitterier about high-debt eurozone governments, leading to some states in the monetary union suddenly facing higher borrowing costs. The ECB called an emergency meeting to announce measures to deal with this “fragmentation”, and hold the financial system of its caravan of countries together. This has all been hard for investors to follow. Global stocks overall are down on fears of higher borrowing costs and recession, though there were some glimmers. The Fed decision actually led to a rise in share prices, with the S&P 500 up by 1.5 per cent on Wednesday, largely because Powell said the Fed might make smaller increases in future. But it fell by twice as much on Thursday thanks to an unexpected rate rise by the Swiss central bank. The big picture running through these decisions is that stagnation looks more likely than it did last week. This was a week of sudden moves by central bankers — and after a long period when they could fairly be criticised for being too slow. The changes this week should nonetheless be welcomed. This is, fundamentally, a hard time to do the job. The war in Ukraine continues to drive inflation while weighing on growth. Covid-related lockdowns in China may continue having an effect on supply chains. The world economy is facing fast-moving supply pressures, and central bankers are stuck with a slow-moving demand-side toolbox. Furthermore, uncertainty is unusually high. No one has a grip on how strong these unique inflationary pressures will be, nor the effect on growth, trade, jobs and incomes. This week’s sudden lurches by central banks came in response to genuinely new economic information: higher-than-expected consumer prices, some fast-rising eurozone bond yields and a jump in US inflation expectations. Economic policymakers’ strategies ought to be data-dependent, not dogmatic. And that means, at a moment when the data keeps moving, so will their policies. Expect turmoil ahead. More

The author is professor emeritus at the Stern School of Business, NYU and chief economist at Atlas Capital TeamFaultlines in the eurozone are resurfacing. In response to a sharp widening of sovereign bond yield spreads in Italy and other states, the European Central Bank held an emergency meeting on Wednesday. Its governing council decided to work on designing a new facility to address “fragmentation risk”, or the idea that the effect of monetary policy on the 19 nations in the eurozone may vary widely, with potentially destabilising consequences.The dangers are real. Italian long-term yields have surged from below 1 per cent at the start of the year to above 4 per cent in recent days. But fragmentation risk is not the only serious problem for the ECB. In recent months, inflation in the eurozone has also surged above 8 per cent. This is at a similar level to the US, but, unlike the Federal Reserve, the ECB plans to wait until next month to start raising interest rates. This lag behind the Fed and other central banks is due to a variety of reasons. There is more slack in labour and goods markets in the eurozone than the US as the area’s recovery from Covid-19 has been more sluggish.Supply shocks, including soaring energy prices and those of other commodities following the Russian invasion of Ukraine, are a greater factor than excessive aggregate demand in driving eurozone inflation. Wage growth is more modest than in the US, and the rise in core inflation is smaller.Supply shocks that reduce growth and push up inflation present all central banks with a dilemma. To prevent inflation expectations from getting out of control, they should normalise monetary policy sooner and faster. But that risks a hard landing of the economy, with recession and rising unemployment. If, on the other hand, the banks also care about economic growth and jobs — as even the ECB does, in spite of its single mandate of price stability — they may normalise more slowly and risk de-anchoring inflation from its expectations.The US and the UK are currently at serious risk of a hard landing as the Fed and Bank of England aggressively tighten rates. But this risk is at least as large, and most likely greater, in the eurozone than in the US. The recovery from Covid has been more anaemic in the region. It is more exposed to energy shocks from a long war in Ukraine. And given its reliance on exports to China, it is also more vulnerable to a slowdown of Chinese growth stemming from Beijing’s zero-Covid policy.Moreover, the weakening of the euro that arises from the difference in ECB and Fed monetary policies is inflationary. The increase in borrowing costs for the eurozone periphery is larger. Some forward-looking indicators, such as German manufacturing data, signal that the area may be heading for a recession even before the ECB starts raising rates. All of this is happening as ECB hawks, keen to raise rates sooner and faster, are gaining the upper hand in the governing council. The eurozone suffers from weak potential growth and job creation. A hard landing would not only exacerbate these problems but intensify market concerns about debt sustainability, or fragmentation risk. The “doom loop” between indebted governments and banks holding that debt, a feature seared into the minds of many by the eurozone crisis a decade ago, would come back into focus.Designing a new facility to deal with fragmentation risk is easier said than done. ECB doctrine argues that potentially unlimited purchases of some governments’ bonds are acceptable only if widening yield spreads are driven by unwarranted market dynamics. When poor policies rather than bad luck are the driver, ECB bond purchases need to come with conditions attached. This is how the Outright Monetary Transactions facility was designed in 2012 but no government requested it because none wanted to accept the politically fraught conditions. Still, in order to pass legal muster, any new facility will need to include something along these lines.The recent widening in Italian and other spreads is not just driven by irrational investor panic. Italy has low potential growth, large fiscal deficits and a huge, possibly unsustainable public debt that has grown during the pandemic. Now a permanent rise in debt servicing costs looms as the ECB withdraws its ultra-accommodative policies. The risk of a “doom loop” is higher in Italy than in the rest of the eurozone.Next year’s Italian elections may produce a rightwing coalition dominated by parties bristling with scepticism about the euro and the EU. In practice, any new ECB facility designed to rescue Italian bonds may come with conditions unacceptable to the country’s new leaders — and to any other eurozone states under pressure.Before this week’s ECB meeting, executive board member Isabel Schnabel stated that the bank’s willingness to deal with fragmentation risk had “no limits”. This echoed former ECB president Mario Draghi’s game-changing “whatever it takes” statement of 2012. But Schnabel also hinted at the need for policy conditionality when it comes to offering support. Given the current volatility of financial markets, one can expect they will further test the ECB’s ability to protect the currency union by backstopping fragile eurozone states.  More