Aurelia Butler

(Reuters) – Evidence U.S. inflation is cooling will not budge Federal Reserve policymakers from half-point interest rate hikes planned for upcoming meetings in June and July, but may prompt a shift to smaller rate hikes come September if the trend continues. A U.S. Commerce Department report on Friday showed the personal consumption expenditures (PCE) price index rose 6.3% in April from a year earlier.That is still more than three times the Fed’s 2% target. Graphic: The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png While prices are still rising, the pace of the rise has slowed versus the previous month. April’s PCE reading marked the first deceleration in the measure since November 2020.The core PCE index, which strips out food and energy prices to give a clearer read of more persistent price pressures, rose 4.9% – again, far too high for comfort, but marking a second straight month of moderation from what may have been a peak in February of 5.3%.The decline in core inflation is particularly good news for the central bank, along with fresh evidence that household spending continues to grow despite still fast-rising prices. Friday’s report showed consumer spending rose 0.9% last month. “While inflation levels in the 4% range are still too high for the Fed, we are seeing movement in the right direction,” Nationwide Economist Dan Hadden wrote in a note. As long as inflation continues to stabilize or moderate, “it will likely give the (Fed) more flexibility later this year.”The Fed has lifted interest rates three-quarters of a percentage point so far this year, and most policymakers expect to deliver a couple more half-a-percentage-point rate hikes, recent public comments and a record of their May meeting show.That would bring overnight bank-to-bank borrowing costs to a range of 1.75%-2% by the end of July. Anticipation of those rate hikes already appears to be taking a bite out of demand in the housing market, where prices have soared but sharp increases in mortgage rates helped push down home sales for a sixth straight month in April. That softening suggests price increases will also moderate in months ahead and, says Comerica (NYSE:CMA)’s Bill Adams, will start to show up in slower inflation readings late this year or in early 2023.Already at the Fed’s May meeting, “a number” of policymakers thought “monthly data might suggest that overall price pressures may no longer be worsening.” The broad hope at the Fed is to get through this era of price shocks and uncertainty with, at worst, a slowdown in the pace of growth, rather than an out-and-out recession that causes a dramatic rise in unemployment. “Amid rising pessimism about the state of the US consumer, today’s report provides some reassurance that the main pillar of the economy is still standing strong in the face of historic inflation and rising borrowing costs,” Oxford Economics’ Lydia Boussour wrote on Friday.U.S. equity markets, which have fallen fast in recent weeks as investors took stock of how the Fed’s monetary shift might slow the economy, rose on Friday following the inflation data and hope that the Fed’s quest for a “soft landing” might still be in reach.Traders of futures contracts tied to the Fed’s policy rate kept bets that the central bank will downshift to quarter-point rate hikes in September.For that to come to pass the rest of the world will need to cooperate. The impact of the Ukraine war on world commodity prices and the ongoing coronavirus lockdowns in China are two major risks fully beyond the Fed’s control.Fed policymakers also say they are watching inflation expectations closely for signs that current high inflation are getting entrenched into American household and business psychology. Recent data suggests those risks too are at the least not getting worse. Graphic: ICE (NYSE:ICE) inflation expectations index ICE inflation expectations index – https://graphics.reuters.com/USA-FED/INFLATION/akvezxjwrpr/chart.png Fed staff, meanwhile, continue to see headline PCE inflation moderating to 4.3% by the end of the year and to 2.5% by the end of next year as a “historically large” tightening of financial conditions was felt throughout the economy, the Fed meeting minutes this week showed. More

“Substantial damage to Ukraine’s economy and tax-generation capacity has made government debt payment more dependent on international financial support,” the agency said in a statement.The ratings agency said it expected Ukraine’s real gross domestic product to contract by 40% if the conflict persists in to second half of 2022. It also assigned a negative outlook, saying risks from the military conflict could undermine the government’s ability to meet its debt obligations. More

The central bank’s holdings of nearly $9 trillion in assets still allowed the Fed to remit $32.2 billion to the U.S. Treasury in the first quarter of 2022, according to the documents.But the losses on the Fed’s investments, an $8.5 trillion portfolio that surged higher through asset purchases designed to keep financial markets stable through the pandemic, pose a potentially tough political problem for the central bank.Bill Nelson, chief economist at the Bank Policy Institute, said that adjusting for the appreciation in its assets the Fed had seen through the end of last year, the unrealized losses were an even larger $458 billion.Criticized for continuing to buy assets even as the economy was well on the way to healing from the pandemic, it is now trying to reverse course and shrink its holdings, particularly of mortgage backed securities. If it chooses to speed the process by selling some of those assets, the unrealized “paper” losses would have to be booked as a tangible hit.According to the Fed’s first quarter financial statement, the Fed’s $2.77 trillion in MBS purchases has declined on a fair market value basis by $164 billion, and as of March 31 was worth $2.606 trillion.Mortgage rates are even higher now, and as with any interest-bearing security as market interest rates have risen those losses have deepened.A New York Fed report earlier this week flagged potentially large losses to the Fed’s portfolio, given that interest rates are expected to continue rising. The report also flagged a further issue: As the Fed raises its short term interest rate, it will do so by offering larger payments to banks for the reserves they deposit at the Fed, increasing the central bank’s expenses. As its balance sheet shrinks, meanwhile, its interest earnings will decline, potentially pushing the Fed towards operating losses. New York Fed officials in the report said the Fed would be able to fund its operations and conduct monetary regardless.But it could mean sharp declines in a key metric watched closely by elected official: the profits that the central bank remits to the U.S. Treasury.Those have climbed during the era of “quantitative easing” and hit a record $107 billion last year, but could fall to zero as Fed monetary policy shifts. More

US stocks snapped a seven-week losing streak on Friday, as investors bet that softening economic data would be enough to slow the Federal Reserve’s tightening of monetary policy.The blue-chip US equities index, the S&P 500, finished the week 6.6 per cent higher, its best showing since November 2020, ending the longest run of weekly losses since 2001. The technology-heavy Nasdaq Composite also rallied, up 6.8 per cent for the week. Weaker economic data, coupled with early signs that inflation may have peaked, gave investors enough reason to dial back their expectations for how aggressively the US central bank will raise interest rates. Higher rates raise borrowing costs for companies and can curtail future earnings. Despite the bounce in stock prices, some investors remain wary. The positive narrative only holds if softening data does not foretell a recession, and if the Fed’s campaign to curb inflation is successful before it cuts too far into growth. “We still think this is not the end of the downdraft, but more a bear market bounce,” said Alex Veroude, chief investment officer at Insight Investment. Tuesday was the only day stocks recorded a loss, following weak manufacturing data and a report of lower-than-expected new home sales. That data added to nervousness following a number of weak first-quarter earnings reports from marquee retailers such as Target and Walmart last week. And on Wednesday the release of minutes from the Fed’s latest monetary policy meeting confirmed a hawkish tone, but still not as aggressive as some analysts had expected. On Thursday, markets were encouraged by better than expected earnings from large retailers Macy’s, Dollar General and Dollar Tree, helping to offset last week’s concerns about the sector. Friday offered another boost when official data showed personal spending — a sign of inflationary pressure in the US economy — eased slightly. Break-even inflation rates, a market measure of inflation expectations, also dropped over the week. Expectations of where the Fed’s key interest rate would be by December fell from 2.8 per cent to 2.6 per cent, suggesting a smaller series of increases in the future. Investors, scarred by recent losses, have paused to question if the sell-off this year is overdone. Even after the past week’s gains, the S&P 500 is down 12.8 per cent this year, while its aggregate market cap has fallen by $6.8tn from its peak in January.“Sentiment overall is very bearish,” said Paul Leech, co-head of global equities at Barclays. “But people are also trying to reconcile the lack of positive catalysts ahead with how much bad news is already in the price.”Some analysts also pointed to the likelihood that recent gains in Treasury bonds, and losses for stocks, have prompted some investors to rebalance their portfolios back into equities, supporting share prices. In the week to Wednesday more than $21.8bn flowed into US equities, the most in 10 weeks, according to Bank of America. The rise in US stocks helped lift bourses across the globe. The FTSE All World index gained 4.9 per cent for the week, narrowly avoiding a record number of weekly losses. The Europe-wide Stoxx 600 index finished the week 3 per cent higher and the FTSE 100 moved up 2.6 per cent in the UK, where data also showed weakness. Business activity in Britain has flatlined, according to an S&P Global index based on a survey of purchasing managers. The Bank of England has raised interest rates earlier and more aggressively than the Fed, but inflation — driven in large part by higher commodity prices because of the war in Ukraine — is expected to reach 9 per cent in May.Some investors remain on edge, concerned about the conundrum facing central banks, which must either allow inflation to run hot in order to stem falling asset prices and slower growth, or continue raising rates to quell inflation at the risk of triggering a recession. “The market doubts the ability of the Fed to follow through on policy,” noted Société Générale trading strategist Michael Pintar, in a note to the bank’s clients on Thursday evening. “I think we will get to a point over the next few months where it becomes obvious that the market expectations are wrong and rates will move higher along with volatility.” More

ISTANBUL/BRUSSELS (Reuters) – Russian businessman Andrey Melnichenko ceded ownership of two of the world’s largest coal and fertilizers companies to his wife the day before he was sanctioned by the European Union, according to three people familiar with the matter.Melnichenko, who built his fortune in the years following the 1991 fall of the Soviet Union, gave up his stakes in the coal producer SUEK AO and fertilizer group EuroChem Group AG on March 8, the day of his 50th birthday, leaving his wife, Aleksandra Melnichenko, the beneficial ownership of the companies, the people said.Until March 8, Melnichenko owned the two companies through a chain of trusts and corporations stretching from Moscow and the Swiss town of Zug to Cyprus and Bermuda, according to legal filings reviewed by Reuters.Since 2006, Melnichenko’s wife was second in line behind her husband on the list of beneficial owners of the two companies in trust documents, according to the three people, who spoke on condition of anonymity because they aren’t allowed to speak publicly about the couple’s assets. That meant that she stood to inherit ownership of the companies in the event her husband died, the people said.When the war in Ukraine began in February, however, Melnichenko grew concerned that he would be designated under the European Union’s Russia sanctions regime, the people familiar with the matter said. On March 8, Melnichenko notified trustees of his retirement as the beneficiary, the people said. That triggered the same chain of changes in trust records that would have happened if the businessman had passed away, and made his wife the beneficiary.Reuters was unable to reach Melnichenko and his wife for comment.A spokesman for Russia-based SUEK didn’t respond to messages seeking comment. Switzerland-based EuroChem confirmed that Aleksandra Melnichenko had replaced her husband as beneficial owner.”Following the departure of its founder, the primary beneficial ownership of a trust holding a 90% stake in the global fertilizer company has automatically passed to his wife,” the company said in a statement to Reuters on Wednesday.The role of Melnichenko’s wife at EuroChem was first reported by Swiss newspaper Tages-Anzeiger. Her role at SUEK as well as the timing of ownership changes and other details are reported here for the first time.Melnichenko, who founded SUEK and EuroChem two decades ago, was ranked as Russia’s eighth richest man last year by Forbes, with an estimated fortune of $18 billion.The European Union sanctioned Melnichenko, citing his alleged proximity to the Kremlin, on March 9 as part of a Western attempt to punish Russian President Vladimir Putin for the Feb. 24 invasion of Ukraine. The sanctions – which include freezing his assets, banning him from entering the European Union and prohibiting EU entities from providing funds to him – do not apply to his wife nor the couple’s daughter and son. Britain also put Melnichenko, who is Russian but was born in Belarus and has a Ukrainian mother, on its sanction list on March 15. Switzerland imposed sanctions against him the following day. The businessman said in a statement to Reuters in March, after the EU sanctions were imposed, that the war in Ukraine was “truly tragic” and he appealed for peace. A spokesman for Melnichenko said at that time he had “no political affiliations”.Western governments have imposed sweeping sanctions against Russian companies and individuals in an effort to force Moscow to withdraw.But some sanctioned Russian businessmen, including Roman Abramovich and Vladimir Yevtushenkov, have transferred assets to friends and family members, fuelling doubts over the effectiveness of these attempts to pressure Moscow.Melnichenko, whose residence was registered in the Swiss alpine resort town of St. Moritz until he was hit by sanctions, gave his instructions to change the ownership of his companies from a retreat near Mount Kilimanjaro where he was celebrating his birthday, according to a person familiar with the matter. A Boeing (NYSE:BA) 737 emblazoned with the billionaire’s signature “A” on the fuselage had landed in Tanzania on March 5, arriving from Dubai, according to flight-tracking service Flightradar24.A lawyer for Melnichenko didn’t respond to questions about the Kilimanjaro trip.Melnichenko’s transfer of ownership at SUEK and EuroChem had far-reaching implications.After reviews lasting several weeks, Swiss financial authorities concluded that the two companies could continue operating normally on the grounds that Melnichenko was no longer involved with them. SUEK and EuroChem said that British and German financial regulators have reached similar conclusions.The British and German regulators didn’t respond to requests seeking comment.Upon completion of the reviews in late April, SUEK and EuroChem – which had revenues last year of $9.7 billion and $10.2 billion respectively – were able to resume distribution of millions of dollars in interest payments to bondholders.In recent weeks, SUEK and EuroChem have also approached Western clients, showing them documents with the new ownership structure in a bid to reassure them that they can continue doing business with Mr. Melnichenko’s former companies, two people familiar with the matter said.NO MORE PAYMENTS In Switzerland, the Secretariat for Economic Affairs (SECO) said neither SUEK nor EuroChem were under sanctions in the country. SECO said that, as far as it was aware, Melnichenko was no longer a beneficiary of the trust to which EuroChem belonged at the time of his sanction by the EU and Switzerland.SECO also said it sought confirmation from Eurochem that it would no longer provide funds to Melnichenko.”The company and its management have guaranteed in writing to SECO that the Swiss sanction measures will be fully complied with and in particular that no funds or economic resources will be made available to sanctioned persons,” SECO said in response to a query.Swiss authorities have defended their decision not to extend sanctions to Melnichenko’s wife or to his former companies, pointing to the fact that EU authorities had not sanctioned them either.”In this case, we have done exactly what the EU has done,” Switzerland’s Economy Minister Guy Parmelin told Swiss television on Wednesday.Parmelin added that Switzerland was also wary that sanctioning EuroChem at a time when fertilizer prices have soared in most parts of the world could have dire consequences on agriculture markets. EuroChem said it produced more than 19 million metric tons of fertilizer last year – roughly equivalent to 10% of the world’s output, according to U.N. data.The European Commission, the EU’s executive arm, said it had no information about the transfer of Melnichenko’s assets to his wife. The commission has said it is willing to close loopholes allowing individuals and companies to elude its sanctions. Earlier this week, it unveiled proposals aimed at criminalising moves to bypass sanctions, including by transferring assets to family members, across the 27-nation bloc. Under the trust structure, control over SUEK and EuroChem is exercised by independent trustees while beneficial ownership, which was in the hands of Melnichenko until March 8, has moved to his wife.A mathematician who once dreamt of becoming a physicist, Melnichenko dropped out of university to dive into the chaotic – and sometimes deadly – world of post-Soviet business.He founded MDM Bank but in the 1990s was still too minor to take part in the privatizations under President Boris Yeltsin that handed the choicest assets of a former superpower to a group of businessmen who would become known as the oligarchs due to their political and economic clout.Melnichenko then began buying up often distressed coal and fertilizer assets, making him one of Europe’s richest men.The EU said, when it announced its sanctions, that Melnichenko “belongs to the most influential circle of Russian business people with close connections to the Russian government”.Melnichenko was among dozens of business leaders who met with Putin on the day Russia invaded Ukraine to discuss the impact of sanctions, showing his close ties to the Kremlin, the EU said in its March 9 sanction order.At the time, a spokesman for Melnichenko denied that the businessman belonged to Putin’s inner circle and said he would dispute the sanctions in court. On May 17, Melnichenko challenged the sanctions by lodging an appeal with the EU’s General Court, which handles complaints against European institutions, court records show. Russia calls its actions in Ukraine a “special operation” to disarm Ukraine and protect it from fascists. Ukraine and the West say the fascist allegation is baseless and that the war is an unprovoked act of aggression.Italy seized Melnichenko’s superyacht – the 470-foot Sailing Yacht A, which has a price tag of 530 million euros – on March 12, three days after he was placed on an EU sanctions list.SUEK and EuroChem said on March 10, a day after the EU announced sanctions against Melnichenko and 159 other individuals tied to Russia, that their founder had resigned from his board positions at the companies. More

Russia is on the cusp of a unique kind of debt crisis which investors say would be a first time a major emerging market economy is pushed into a bond default by geopolitics, rather than empty coffers.The NSD said it paid foreign currency in coupon payouts on Eurobonds maturing in 2026 and 2036, both of which were due on May 27.Russia rushed forward two payments on its international debt last Friday in its latest attempt to stave off a default, just days before the U.S. decided not to extend a key waiver allowing transactions on Russian Eurobonds payments in foreign currency.Russia was now working on a new mechanism to service its dollar-denominated debt that will allow it to carry out payments on Eurobonds due in June without the license issued by the United States, Finance Minister Anton Siluanov said in a TV interview aired on Friday.Russia is due to pay coupons on Eurobonds maturing in 2027, 2028 and 2048 in late June. Russia has faced the prospect of sovereign default since Western capitals imposed sweeping sanctions in the wake of its decision to send tens of thousands of troops into Ukraine on Feb. 24. The country has been all but cut off from the global financial system and has seen roughly half of its $640 billion reserves abroad frozen.But Russian officials have said the country had enough money to service its debt and that what other countries might consider a default would be a technical and orchestrated event.Siluanov said this week Russia will keep on paying its state Eurobond obligations in roubles if unable to pay in foreign currency, and will defend its role as a reliable borrower by all possible means.Siluanov has said there would be no impact on the economy if the United States declares that Russia is in a technical default on its Eurobonds.But analysts were more sceptical about the impact of a potential fallout on the Russian economy in the long term, as Russia’s deficit could expand very sharply due to its invasion of Ukraine, said Takahide Kiuchi, an economist at Nomura Research Institute.”The Russian economy cannot stand without financing or money from abroad. So in this sense, no access to the global market could reduce the potential of growth of the Russian economy in the long term,” Kiuchi said. More