Aurelia Butler

In a document on fiscal reform below the provincial level, the State Council laid out steps to divide fiscal revenues and spending obligations among local governments, and transfer payments allocations.China has in recent years taken measures to shore up finances of debt-laden local governments, partly via increased transfer payments from the central government.But local governments still faced problems such as “unreasonable division” of fiscal revenues and spending responsibilities, the cabinet said.The cabinet has pledged to increase annual tax cuts to 2.64 trillion yuan ($392.09 billion), from an initial 2.5 trillion yuan, in a bid to support the slowing economy.The central government would boost its transfer payments to local governments to nearly 9.8 trillion yuan this year to help offset any hit on local revenues, the finance ministry has said.City and county-level authorities would have more stable sources of tax revenue, including those from finance, electric power, petroleum, railway, highways, the cabinet said.China would establish a reasonable mechanism for transfer payments, and gradually increase the scale of general transfer payments, prioritising underdeveloped areas, the cabinet said.Local governments would increase spending on education, scientific and technology research, social security, food security, as well as construction of major infrastructure projects, it said.Local governments needed to step up the management of their debts through increasing revenues, cutting costs and selling assets, the cabinet said.China would also improve the debt quota mechanism for local governments, under which their special debt quota should match revenues and project income, it added. ($1 = 6.7331 Chinese yuan renminbi) More

“The summer is not the end of anything, just the beginning,” Kazimir said in emailed comments. “In the autumn, concretely in September, we will continue with raising rates and here I clearly see the need to accelerate the pace and deliver an increase by 0.50%,” he said.The ECB flagged a 25 basis point interest rate hike in July and said a bigger increase may be needed in September as inflationary pressures were increasing and broadening, raising the risk that high price growth will become entrenched.”From my point of view, it is more reasonable to act preventively than scratch our heads afterward why we lingered,” Kazimir, the governor of the Slovak central bank, said. “Incoming data just reassure me that there is no reason to hesitate. Negative interest rates must be the past in September.”The ECB now sees inflation at 6.8% this year, more than three times its target, and price growth could hold above 2% through 2024, raising the risk that businesses and households lose trust in the bank’s commitment to price stability.Kazimir said inflation would remain high for some time, including in double-digits in Slovakia next year.He said the ECB’s tightening was coming as the economy was slowing down.”Regardless of the current setting of monetary policy there are quarters of weak growth ahead of us, possibly even a temporary period of a slight decline in some euro zone countries,” Kazimir said. More

(Reuters) -U.S. two-year Treasury yields rose above 10-year borrowing costs on Monday – the so-called curve inversion that often heralds economic recession – on expectations interest rates may rise faster and further than anticipated.Fears the U.S. Federal Reserve could opt for an even larger rate hike than anticipated this week to contain inflation sent two-year yields to their highest levels since 2007.But a view is also playing out that aggressive rate hikes may tip the economy into recession.The gap between two and 10-year Treasury yields fell to as low as minus 2 basis points (bps), before rising back to around five bps, Tradeweb prices showed.The curve had inverted two months ago for the first time since 2019 before normalising.An inversion of this part of the yield curve is viewed by many analysts as a reliable signal that recession could come in the next year or two. The move follows inversions on Friday in the three-year/10-year and five-year/30-year portions of the Treasury curve, after data showed U.S. inflation continued to accelerate in May.Two-year Treasury yields rose to a 15-year high around 3.25% before easing to 3.19%, while 10-year yields touched the same level, the highest since 2018. Friday’s data showed the largest annual U.S. inflation increase in nearly 40-1/2 years, dashing hopes the Federal Reserve might pause its interest rate hike campaign in September. Many reckon the central bank may actually need to up the pace of tightening. Barclays (LON:BARC) analysts said they now expected a 75 bps move from the Fed on Wednesday rather than the 50 bps which has been baked in. Money markets are now pricing a cumulative 175 bps in hikes by September and also see a 20% chance of a 75 bps move this week, which if implemented would be the biggest single-meeting hike since 1994. UBS strategist Rohan Khanna said hawkish European Central Bank communication alongside the inflation print “have completely shattered this idea that the Fed may not deliver 75 bps or that other central banks will move in a gradual pace”. “The whole idea went out the drain … that’s when you get turbo-charged flattening of yield curves. It is just a realisation that peak inflation in the U.S. is not behind us, and unless we are told so, maybe peak hawkishness from the Fed is also not behind us,” Khanna added.Meanwhile bets on the U.S. terminal rate – where the Fed funds rate may peak this cycle – are shifting. On Monday, they priced rates to approach 4% in mid-2023, up almost one percentage point since end-May. Deutsche Bank (ETR:DBKGn) said it now saw rates peaking at 4.125% in mid-2023. Some Fedwatchers are sceptical the Fed will move faster with rate hikes. Pictet Wealth Management’s senior economist Thomas Costerg noted, for instance, that most inflation drivers such as food and fuel remain outside central bankers’ control.”Over the summer, they will be aware of growth data and housing which is starting to look more wobbly,” Costerg said. “I doubt they will do 75 bps … 50 bps is already a big step for them.”The sell-off in Treasuries has set other markets on edge, sending German 10-year yields to the highest since 2014 and knocking S&P 500 futures 2.5% lower. More

(Reuters) – U.S. Federal Reserve officials, beset by ongoing high inflation and a weakening growth picture, will lay out on Wednesday how they think their increasingly difficult goal of cooling the economy without sending it into a tailspin may play out in the months ahead.That thorny predicament will be on display as Fed policymakers are expected to deliver their second half-percentage-point interest rate hike in a row and issue their latest projections through 2024 and beyond for economic growth, unemployment and inflation. As critically, they will signal the speed and scale of rate rises policymakers believe are needed to quash inflation at a 40-year-high.What is certain is their forecasts are likely to bear little resemblance to those issued in March, which showed inflation going down without a rise in unemployment or policy being particularly restrictive.The meeting comes two weeks after Fed Chair Jerome Powell and U.S. President Joe Biden met amid rising anxiety at the White House that a plentiful jobs picture is being drowned out by soaring costs for everything from rent and food to gasoline and airline tickets.Powell has previously said the central bank, which in March lifted interest rates for the first time in three years, will keep raising them until price increases ease in a “clear and convincing” way. Policymakers already signaled they plan to match this week’s expected rate increase with another half-point hike at their next meeting in July, bringing borrowing costs up to between 1.75% and 2.0% – right where just three months ago they thought they would be at year-end.A hotter-than-expected inflation reading last Friday has even thrown some doubt on those expectations with economists at Barclays (LON:BARC) calling for a three-quarter-point move either this week or in July and Fed funds futures contracts now reflect better-than-even odds of a 75-basis-point rate hike by July, with a one-in-four chance of that occurring next week.”It’s going to be a tricky meeting messaging-wise,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “It’s not a rosy outlook. They don’t have any easy choices to make.”Graphic: There and back again: Fed views of 2022 – https://graphics.reuters.com/USA-FED/SEPS/gdpzyexqmvw/chart.pngNEW FORECASTS, NEW QUESTIONSU.S. consumer price growth accelerated in May to 1.0% as gasoline prices hit a record high and the cost of services rose further, while core prices climbed 0.6% after advancing by the same margin in April, the Labor Department reported on Friday, underscoring the need for the Fed to keep its foot on the brakes. In the 12 months through May, headline inflation rose to 8.6%.The new set of policymaker projections is set to reflect a faster pace of hikes, slower growth, higher inflation and a higher unemployment rate. The key will be how much for each.All policymakers are now agreed the Fed needs to get its policy rate up to neutral – the level that neither stimulates nor constrains economic growth – by the end of this year. That rate is seen roughly between 2.4% and 3%.The median dot for the end of 2022 could easily rise enough to signal at least another half-point increase in September given Friday’s worse-than-expected inflation reading. How far the Fed will have to raise rates overall will also move up, with most economists seeing them topping out between 3% and 3.5%. For the unemployment rate over the next two years, the key is whether policymakers raise it by just a notch or two or show a material rise in layoffs, which would be at odds with their contention that inflation can be tamed without excessive joblessness. Fed Governor Christopher Waller recently said if the Fed could bring down inflation to near its 2% goal while keeping the unemployment rate, currently at 3.6%, from rising above 4.25%, it would be a “masterful” performance.”I don’t think it will change a lot but if it does … that’s a sign they’re worried about the possibility of a serious slowdown or recession,” said Roberto Perli, also a former Fed economist and head of global policy at Piper Sandler.HOW MUCH PAIN THE FED’S WILLING TO SWALLOWSome of the factors keeping inflation so elevated, in particular supply shocks outside the Fed’s control due to Russia’s invasion of Ukraine that have caused a jump in food and oil prices, show no sign of abating. Overall the central bank still faces tremendous uncertainty on the outlook from that and other supply-chain disruptions caused by the COVID-19 pandemic.Nor are officials getting much help yet on the demand side with the healthy finances of U.S. banks, companies and households a possible obstacle to curbing inflation as they raise rates in an economy able so far to pay the price.The longer the Fed struggles to stifle demand and the longer inflation persists, the more likely the rate of price increases becomes embedded and the Fed needs to ramp up its action, reducing the chances of Powell’s hope for what he calls a “softish” landing.Newly sworn-in Fed governors Philip Jefferson and Lisa Cook, who take their place among the 18-strong policymaking body for the first time, are unlikely to diverge from their colleagues’ resolve to lower inflation.”While Cook and Jefferson are expected to be dovish additions to the Fed, that won’t matter much while inflation is 8%, and we doubt they will push back on the Fed’s tightening plans any time soon,” said Andrew Hunter, senior U.S. economist at Capital Economics.If the committee consensus does not align with Powell’s view of what is needed, he has shown by his recent inter-meeting guidance that he is prepared to lead from the front to make sure inflation is decisively dented. David Wilcox, a former Fed research director now director of U.S. economic research at Bloomberg Economics and a senior fellow at the Peterson Institute for International Economics, expects Powell to maintain a razor-sharp focus on the inflation side of the Fed’s mandate like Paul Volcker, the towering Fed chief who tamed inflation in the 1980s.”Powell has every intention of going down in history, if necessary, as Paul Volcker version 2.0,” said Wilcox. More