Aurelia Butler

Eurozone producer prices have surged at the fastest pace since the launch of the single currency more than two decades ago, prompting central bankers to warn that inflationary pressures are becoming too broad as well as too high.Prices charged by industrial producers in the 19 countries that share the euro rose 37.2 per cent in the year to April, up from March’s all-time high of 36.9 per cent, with wholesale prices of consumer goods such as food and drink contributing to the surge, according to Eurostat data released on Thursday. The figures were published as European Central Bank policymakers prepared to meet in Amsterdam next week, when they are expected to outline plans to raise interest rates in July for the first time in more than a decade in an effort to bring consumer price inflation back to their 2 per cent target.The surge in producer prices came despite a slowdown in the growth of wholesale energy prices, in a sign that inflationary pressures are broadening beyond the sharp increases in oil and gas costs triggered by the fallout from Russia’s invasion of Ukraine in February.“If you look at inflation rates it has been broadening beyond energy for quite a while,” said Oliver Rakau, chief German economist at Oxford Economics.“There is always a chain of events and there’s no denying that higher energy and commodity prices will feed through into other products, like food and drink prices, and that could lead to higher restaurant prices, which pushes up services inflation,” he said.Factory gate prices for non-durable consumer goods, such as food and drink, rose 11.2 per cent — their first-ever double-digit percentage increase. Makers of durable consumer goods, such as furniture and cars, sold them for 8.5 per cent more than a year earlier. Despite a slowdown in wholesale energy prices, they still increased 99.2 per cent in the year to April.François Villeroy de Galhau, French central bank governor and a member of the ECB governing council, signalled it was gearing up to raise rates to tackle soaring prices. “Inflation is not only too high, but also too broad. This requires a normalisation of monetary policy,” Villeroy said in a speech on Thursday. Some ECB council members have said it could follow in the footsteps of the US Federal Reserve and raise its policy rate by a half percentage point in July, especially if core consumer inflation — excluding energy and food prices — kept rising faster than expected.In the year to May, eurozone consumer prices rose by a record 8.1 per cent, while core inflation also accelerated to 3.8 per cent — both faster than most economists expected.Higher factory gate inflation is likely to feed, at least partially, into increased consumer prices, as some businesses pass on their costs to shoppers — although the link between the two is not always clear. More

SHANGHAI (Reuters) -Shanghai residents’ relief over the easing of a two-month COVID-19 lockdown is giving way to frustration as they face hours waiting in line for virus tests and must show negative results to be permitted to enter public spaces.China’s biggest city and business hub lifted lockdowns for most of its 25 million residents on Wednesday. But citizens are required to have proof they have taken a COVID test within the last 72 hours in order to enter areas like malls and offices – or even to use subways and buses. Authorities have built 15,000 testing sites and trained thousands of workers to swab throats. Still, long queues amid early summer heat became a common sight on Wednesday and Thursday, with some people saying they queued for two hours.One picture posted on social media showed a sign at a booth warning of a 4-and-a-half hour wait.”I left the lockdown nightmare only to enter the 72-hour PCR testing nightmare,” said one Shanghai resident on Weibo (NASDAQ:WB), declining to provide her name. “It is troublesome, but we have no choice,” said another, named Xu Xiaojun. “This is for everyone’s good.”Xia Kejia, a city official responsible for PCR screening, apologised for the queues at a news conference on Thursday and said more workers would be deployed and booths’ opening times extended to try to resolve the issues. Other cities including Beijing and Shenzhen have imposed similar requirements under a national zero-COVID policy that aims to cut off every infection chain.Despite the discontent caused by Shanghai’s stringent curbs, China has vowed to stick with its approach. It says the zero-COVID policy is needed to save lives and prevent its healthcare system from being swamped, even as much of the world tries to return to normal despite ongoing infections.That increasingly means COVID testing is becoming a feature of daily life. China’s goal is to have testing sites within a 15 minute walk for everyone in large cities.The ruling Chinese Communist Party’s People’s Daily newspaper published a commentary on Thursday in which it said the zero-COVID policy was most appropriate for China’s situation. It also carried a front-page article describing how Shanghai was returning to normal. “Great, phased results have been achieved in the defence of Shanghai,” it said.ON EDGE Still, some 2.5 million in the city remain under lockdown and the consequences of testing positive are the same as before. All positive cases will be sent to central quarantine and close contacts – including neighbours – barred from leaving home. This has left many Shanghai residents remaining on edge. Two told Reuters that they were informed on Thursday by their compounds that they were required to go back under lockdown and undergo daily testing. On Thursday, videos shared on social media showed people fleeing the luxury International Finance Centre (IFC) mall in the Lujiazui financial district after it stopped people from entering or exiting – a common practice at venues when a positive COVID test result is found. The IFC mall later issued a notice saying that it had reopened at 12.30 p.m. local time after carrying out a full disinfection without confirming whether there had been a positive COVID test at the site. The mall did not respond to calls seeking further comment.Other residents still under lockdown expressed mounting frustration over their situation. Aden Hogan, a British citizen, said his Shanghai compound had not been released as two “abnormal” test results had been found among his neighbours this week. While they were later told that these were false positives, they were still being made to undergo multiple tests and not allowed to leave, he said. “People have done nothing wrong. We’ve taken the test anytime that they have said…and they’ve been forcing us to have tests in the middle of the night. It makes you feel like a criminal.” Shanghai reported eight new asymptomatic coronavirus cases for June 1 and five new symptomatic cases. On Thursday, officials said they upgraded four areas to medium-risk after finding seven new coronavirus cases. More

ORLANDO, Fla. (Reuters) – U.S. Treasury Secretary Janet Yellen this week issued a ‘mea culpa’ on getting it wrong on inflation. If the economy tips into recession in the next year or two, the Federal Reserve may have to follow up with one on the yield curve.The 10-year U.S. Treasury yield falling below the two-year yield – the most closely-watched yield curve ‘inversion’ – is the reliable indicator that has preceded every recession in the past four decades.A stream of Fed communication this year though – from economists’ papers to public comments from policymakers, including Chair Jerome Powell – sought to downplay its predictive power in the current economic and market environment.The curve inverted very slightly and briefly for a few days in late March and early April for the first time since 2019. Then, the risk of recession over the next year appeared improbable, and still low over a 24-month horizon.But things look different now. The Fed’s repeated pledge to do whatever it takes to snuff out the highest inflation in 40 years, and subsequent repricing across markets of higher borrowing costs, have tightened financial conditions dramatically and slammed asset prices. The economic dial has also shifted. Consumer confidence has slumped to levels typically associated with recession, the housing market is beginning to roll over, and a Reuters poll of economists in May put a 25% chance of recession within a year and a 40% probability of one within two years. Recession by the end of next year is now the base case outlook for Deutsche Bank (ETR:DBKGn), and Wells Fargo (NYSE:WFC) economists expect recession this year. JP Morgan chief Jamie Dimon on Wednesday said he no longer sees economic “storm clouds” on the horizon – “it’s a hurricane.”This looming slowdown is being reflected in Fed expectations implied by Secured Overnight Financing Rates (SOFR). Traders are now pricing in a 25-basis point rate cut in the second half of next year. It remains to be seen if these fears will be borne out by events. But the direction of travel seems clear.The brief 2s/10s curve inversion could yet again turn out to be prescient if, as seems likely, the Fed takes monetary policy into restrictive territory in order to quell inflation.”It is only one metric, but I wouldn’t dismiss it,” said Elia Lattuga, cross asset strategist at Unicredit (BIT:CRDI). “Judging from market pricing and recent moves, avoiding recession is (now) the optimistic case.” Graphic: US 2-year/10-year spread – https://fingfx.thomsonreuters.com/gfx/mkt/zgpomeezdpd/2s10sCurve.jpg ‘SORRY’ IS THE HARDEST WORDIn March, Fed Chair Powell downplayed the importance of the 2s/10s curve inverting, saying it was “hard to have some economic theory on why that would make sense.” Instead, the spread between the three-month bill rate and implied three-month rate in 18 months had “100% of the explanatory power of the yield curve.”In a March update to a 2018 paper, Fed researchers also said the rates curve over the next 18 months was a “much more precise” recession indicator, and the predictive power of the two-year/10-year spread is “probably spurious”.Then, the 2s/10s curve was heading for inversion but the three-month/18-month curve was steepening. So was the spread between three-month and 10-year rates, the part of the curve another 2018 Fed paper found to be the most reliable predictor of recessions. Authors Michael D. Bauer and Thomas M. Mertens revisited the subject last month, and found that recession probabilities for the next year based on the three-month/10-year spread remain low. This part of the curve is positively sloping by around 180 basis points. Inversion is some way off. Based on this spread, Unicredit’s Lattuga notes that the probability of recession over the next 12 months is very low, below 5%. But based on the 2s/10s spread it rises to more than a 40% chance. Conflicting signals again. Because the three-month bill rate is closely anchored to the Fed’s policy rate, currently 0.75-1.00%, the tightening cycle needs to be well underway before recession risks are flagged by an inversion of the three-month/10-year part of the curve.If recession does strike this year or next, would Powell follow Yellen’s example and hold his hands up on the yield curve? Phil Suttle, founder of consultancy Suttle Economics in Washington, thinks a dose of humility can only be a good thing.”I wish this trait to admit errors was more prevalent, especially among monetary policy makers. It would be helpful in re-establishing discipline, and perspective, to what policy can and can’t do,” he wrote on Wednesday. Graphic: US 3-month/10-year spread – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezzbzvw/3s10sCurve.jpg Graphic: US 3-month/10-year spread vs 2-year/10-year – https://fingfx.thomsonreuters.com/gfx/mkt/akvezrrxwpr/USYIELDS.png (By Jamie McGeever) More

The Brazilian economy expanded sharply in the first quarter of the year as retail sales and services picked up following the end of coronavirus pandemic restrictions.Official data released on Thursday showed gross domestic product expanded 1 per cent in the first quarter from the previous quarter, when it grew 0.7 per cent. Compared with the same quarter last year, the economy expanded 1.7 per cent.Economists warned, however, that the rally was unlikely to continue as a combination of soaring inflation and rising interest rates chokes off consumption in Latin America’s largest economy. Brokerage XP has forecast a technical recession by the end of the year following two consecutive contractions in the third and fourth quarters.The outlook will be a blow to President Jair Bolsonaro, who is facing a tough re-election battle in October, with the economy ranked as the primary concern for voters. The far-right leader is trailing former president Luiz Inácio Lula da Silva by almost 15 percentage points in polls.“The strong performance of the economy in the first quarter was a surprise considering the slow pace of growth observed since the second half of 2021. But what we observed was a significant growth of the service sector, following the end of restrictions, combined with strong pent-up demand,” said Rafaela Vitoria, chief economist at Banco Inter.“But we keep a cautious view especially for the second half of the year, considering the still-high inflation and the lagging effect of the significant interest rate increase in Brazil and also the expectation of a slowdown in the global economy following tighter financial conditions abroad,” she added.The finance ministry forecasts that annual growth will this year reach 1.5 per cent, higher than economists’ estimates of 0.7 per cent.Since Bolsonaro’s inauguration in January 2019, the Brazilian economy has grown less than 2 per cent, buffeted by persistently high unemployment, shrinking incomes and the impact of the Covid-19 pandemic.

In the past year, inflation has also surged to more than 12 per cent, with rising food and fuel prices frustrating voters ahead of the polls in October. Brazil has the fourth-highest level of inflation among G20 nations, after Turkey, Argentina and Russia.This has forced the central bank into a series of rapid interest rate increases. Economists expect the benchmark Selic rate to reach 13.25 per cent by the end of the year, up from 2 per cent as recently as March 2021.“The economy was stronger than expected at the beginning of 2022. Part of the resilient growth momentum, particularly in February and March, will carry over to the second quarter,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs.“But the second half of the year is expected to be difficult given, among other things, very tight domestic financial conditions, double-digit inflation, record-high level of household indebtedness, and the noise and uncertainty generated by a polarising election in October,” Ramos added.Additional reporting by Carolina Ingizza More

The EU has been courting Taiwan, a major semiconductor producer, to build plants in the bloc, and Taiwan, facing unrelenting pressure from China which claims the island as its own, has been keen to show it can be a good friend to fellow democracies.In February, the EU unveiled a European Chips Act, with the bloc mentioning Taiwan, home to the world’s largest contract chipmaker TSMC and other major semiconductor companies, as one of the “like-minded partners” Europe would like to work with.Wang’s ministry said in a statement that the talks, with Sabine Weyand, director-general for trade at the European Commission, focused on areas including semiconductor cooperation.Wang emphasised that “Taiwan will continue to be a trusted partner of the global semiconductor industry and help stabilise supply chain resilience,” the ministry said.The statement said that Taiwan has “tried its best” to help the EU and other partners resolve a global shortage of chips.The ministry also noted that previous Taiwan-EU meetings were at the deputy level, and this one had been raised to ministerial level.”This shows that in the EU’s blueprint for international economic and trade cooperation, the importance of Taiwan has increased, and this is a major breakthrough in Taiwan-EU relations,” it said.The EU meeting comes a day after the United States agreed to launch new trade talks with Taiwan. The European plan calls for the European Commission to ease funding rules for innovative semiconductor plants. A global chip shortage and supply chain bottlenecks have created havoc for many industries over the past year or more.TSMC has said it was still in the very early stages of assessing a potential manufacturing plant in Europe. The company is spending $12 billion on chip factories in the United States.In one wrinkle for EU ambitions, Taiwan’s GlobalWafers Co Ltd failed in February in a 4.35 billion euro ($4.64 billion) takeover attempt of German chip supplier Siltronic.Neither the EU nor its member states have formal diplomatic relations with Chinese-claimed Taiwan, but the bloc has been keen to show its support for the island, especially as China-EU ties sour over trade and human rights disputes.Taiwan has also been pushing for a bilateral investment agreement with the EU.($1 = 0.9384 euros) More