Aurelia Butler

Good morning and welcome to Europe Express.It’s a short but packed week, with leaders exceptionally gathering in Davos for a summer edition of the World Economic Forum (here’s the FT primer on it). One idea that may pop up in the various forums ahead of next week’s EU summit is the idea of seizing and selling off Russian assets to pay for Ukraine’s reconstruction. We’ll also look at what finance ministers meeting in Brussels today and tomorrow for their regular eurogroup-Ecofin combo are likely to discuss. One emerging prospect is the need for an extra EU budgetary top-up, given all the Ukraine-related expenditure, as the FT reports.And with the World Trade Organization’s ministerial meeting fast approaching, we examine its checklist of reforms. EU institutions (and some capitals) are engaging in the tradition of faire le pont (around Ascension day, for those observing), so we’ll be off on Thursday and Friday, and back in your inboxes on Monday.To confiscate or not; that is the questionValdis Dombrovskis, European Commission executive vice-president, struck an uncompromising note last week when asked about the idea of confiscating Russian assets to pay for the reconstruction of Ukraine, writes Sam Fleming in Brussels.There was, he said, a principle of “aggressor pays” that applies, as he called for the net to be cast wide when it comes to examining the confiscation of both private and public Russian assets. “We must make Russia pay for the damage it is creating,” the Latvian commissioner said. Behind the scenes, the topic is proving a divisive one between member states, some of which are wary of the legal and political tripwires the EU will encounter as it examines asset confiscation. Diplomats last week debated whether asset confiscation should be discussed at EU leaders’ level as soon as this month’s European Council meeting, after the topic appeared on draft summit conclusions. Opinions varied sharply. As a reminder, there are two main avenues for Ukraine’s allies to pursue here: either confiscating the frozen assets of Russian oligarchs who have been placed under sanctions, or seeking to liquidate some of the frozen assets of the Russian central bank. The former route is less lucrative in terms of the money raised, but it may be legally easier to pull off than the latter, which would mark an extraordinary precedent and raise complications within international law. The draft European Council conclusions would have EU leaders welcoming “efforts made with a view to providing for appropriate confiscation measures, including exploring options aimed at using frozen Russian assets to support Ukraine’s reconstruction”.But in a meeting of EU diplomats on Friday a number of member states sounded wary about the idea of having a leaders’ debate on the topic, according to people familiar with the meeting, noting how delicate it is, as well as the need to ensure compliance with national and international law. Among the countries that are cautious in this area is Germany, where even enforcement of asset freezes is patchy, because of constitutional law restrictions. The country’s fundamental law explicitly says that expropriation by the government can occur only “for the public good” and must be combined with compensation — which could open the door for massive compensation lawsuits from Russians hit with sanctions.The upshot is that it is not yet clear if the wording will make it on to the EU leaders’ menu when they gather a week from now.That said, the commission is pretty active in this area already. This week it is due to propose a new directive on asset recovery and confiscation, along with a council proposal on adding the evasion or violation of sanctions to criminal law. The latter is important, because it is easier to engineer the seizure of assets as part of a criminal process, and not all member states currently have sanctions evasion on their list of offences. Chart du jour: Deglobalisation talkRead more here about why talk about deglobalisation among companies has mounted in recent weeks. Mentions of nearshoring, onshoring and reshoring on corporate earning calls and investor conferences are at their highest level since in nearly two decades. Fiscal rules, postponed againThe commission is expected today to confirm its proposal that the EU’s debt and deficit rules should remain suspended for another year as it releases a swath of economic recommendations to member states in its “semester” process, writes Sam Fleming.The intended suspension of the Stability and Growth Pact (SGP) until 2024 is not without controversy inside the commission, given that the latest growth forecasts by no means show the kind of nosedive in output that accompanied the EU’s initial decision to freeze the rules in 2020. The commission’s latest forecast was for 2.7 per cent growth this year and 2.3 per cent in 2023, in both the eurozone and the EU as a whole.EU fiscal hawks are already warning of the risks of fiscal indiscipline being taken too far. Germany’s finance minister Christian Lindner said in an interview with the Financial Times over the weekend that the fact that member states are now able to deviate from the SGP doesn’t mean they actually should do so.And for high-debt countries, among them Italy (here is FT’s deep-dive into the country’s economic woes), the message from Brussels remains that current spending needs to be kept in check, even while investment demands rise. One country heeding that message is Portugal, whose finance minister has vowed to push through policies aimed at removing his country from the top three most indebted economies in Europe (just behind Greece and Italy), to protect families and businesses from the impact of higher interest rates. For the commission, the key goal is ensuring the growth rate of current expenditure is kept below potential GDP growth rates in high-debt economies. The semester recommendations come alongside meetings of finance ministers both today and tomorrow. Among the items on the agenda are the eurogroup’s upcoming decision on the next chief of the European Stability Mechanism. And for EU finance ministers tomorrow one key question is whether Poland will finally drop its opposition to the minimum effective corporate tax rate that the EU is seeking to implement pursuant to last year’s OECD deal. France’s finance minister Bruno Le Maire has been pushing for a deal on the corporate tax rules under France’s EU presidency, but the clock is ticking given Paris’s six-month stint expires at the end of June. What’s in a meetingIn Geneva the World Trade Organization is preparing for a much-hyped ministerial meeting that is on course to achieve very little, writes Andy Bounds in Brussels.It is three weeks until trade ministers finally jet in for their get-together dubbed MC12, which has been delayed for a year by the Covid-19 pandemic.The extra time has not brought the big trading blocs any closer together on the issues that need settling, however. There are four priority topics, and despite tireless work by some WTO ambassadors and officials, and director-general Ngozi Okonjo-Iweala, agreement is far away. Here are some of the key topics.An intellectual property waiver to allow developing countries to manufacture Covid vaccines. A deal between the four main interested parties — the EU, US, India and South Africa — was discussed last week and hit heavy opposition. The US wants China excluded from any deal to allow poorer countries patent waivers to make western vaccines. The UK and Switzerland, with big pharmaceutical industries, are demanding a bigger role in talks.Farm policy: Talks on abolishing hidden export subsidies, domestic support, and opening up markets to imports are stalled. But with India determined to defend its vast grain stockpiles and export bans, “WTO members are unlikely to agree on anything substantial on agriculture”, says Peter Ungphakorn, a former WTO official and trade commentator.Fishing: Colombia’s WTO ambassador Santiago Wills has been working overtime to eliminate the most damaging overfishing practices. He said on Friday that there were “positive vibes” but added “we are not done yet”. “It is clear that to reach an agreement before MC12, we must get this done no later than the week of May 30, which I see as ‘fish decision week’”. Again, India is blocking a deal by demanding poorer nations are exempted from some provisions. WTO reform: There has not been a meaningful multilateral trade deal since it was founded in the 1990s. The appeals panel that hears disputes is not functioning because the US refuses to nominate members. Ministers are likely only to agree to set up a group to examine reform to report back to the next ministerial meeting, hopefully in one year’s time. Expectations are low overall. Asked what the best achievement from MC12 would be, one senior EU official said: “Having a meeting.” What to watch today EU affairs ministers and, separately, eurozone finance ministers meet in BrusselsUkraine’s president Volodymyr Zelensky addresses World Economic Forum in DavosEuropean parliament chief Roberta Metsola visits Israel. . . and later this weekEU finance ministers meet in Brussels tomorrowNato and EU leaders speak at the World Economic Forum tomorrow and WednesdayNotable, Quotable

Smallpox jabs: With cases of the new monkeypox disease on the rise, EU’s infectious-disease agency is to recommend that member states devise vaccination strategies with existing smallpox jabs, as there is no approved monkeypox inoculation as of yet. Borne identity: Élisabeth Borne, France’s new prime minister-to be, is the daughter of a Resistance fighter and more of a political animal than most give her credit for, although she still needs to prove she can connect with a broader public.Lithuanian freedom: As of yesterday, Lithuania became fully independent of Russian oil, gas and coal — in what its government described on Twitter as a “mission possible”. More

Behind the counter of F.lli Gondola, a coffee bar and pastry shop in Frattamaggiore, owner Salvatore Gondola keeps a picture of Italian footballer Lorenzo Insigne.Insigne, who grew up in this small town to the north of Naples, and his fellow Azzurri players won the nation’s hearts when they clinched the European football championship against England last year — a fitting symbol for a country bouncing back after a devastating pandemic hit.Italy began 2022 poised for a year of buoyant growth and structural reforms, underpinned by Prime Minister Mario Draghi’s assured leadership and the infusion of EU funds. A once-in-a-generation effort to tackle its chronic weakness and raise its long-term growth trajectory, funded by a €191bn chunk of the EU’s €750bn Covid recovery plan, was under way. On and off the pitch, the glory has faded fast. The Azzurri missed out on qualification for the World Cup after an embarrassing defeat to North Macedonia and the economic outlook has turned so bleak that there is the possibility of a recession this year.

Coffee bar owner Salvatore Gondola, who has seen sales decline and costs rise over the course of 2022 © Amy Kazmin/FT

Any momentum built up in 2021 has been dented by soaring food and energy prices, which are squeezing household incomes and battering fragile small businesses. “Today it’s hard, really hard,” said Gondola. “It’s like during Covid. The only difference is that this time, it’s without a mask.” Italy is hardly the only European economy facing hard times. Brussels recently pared back its forecast for GDP growth in the EU this year to 2.7 per cent, down from a 4 per cent estimate in February. Inflation is higher in economies to the east, in Germany and in the Netherlands. But Italy relies heavily on Russia for its energy, leaving it vulnerable to the conflict in Ukraine. “Some countries are more exposed than others,” said Lorenzo Codogno, former director-general of the Italian treasury. “Within the major countries, Italy is as exposed as Germany, and probably even more, to high energy costs . . . It is a massive terms of trade shock to consumers, which means the whole country becomes poorer.” A deal signed with Algeria to provide gas from north Africa will take years to pay off.

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The economic downturn — and expectations of rate increases from the European Central Bank beginning in July — are reviving concerns about the health of Italy’s longer-term finances. With the second highest debt-to-GDP ratio after Greece and the highest government deficit of any major Eurozone economy, Italy’s position is precarious. Markets have grown gloomier on its prospects. The spread between Italy’s 10-year bond yield and Germany’s, considered a barometer of political and economic risks in the euro area, has climbed as high as 2 percentage points in recent weeks, its widest since the early stages of the pandemic when investors dumped riskier European government debt. “It’s going to become a very delicate environment,” Codogno said.Italy is on a path of fiscal consolidation. A target budget deficit of 5.6 per cent is forecast for this year, down from the 7.2 per cent recorded for last year. But economists warned that a sharp slowdown in growth would raise doubts about the deficit.“If GDP is going to weaken substantially, the dynamic doesn’t look pretty,” said Lucrezia Reichlin, an economics professor at the London Business School. “The market has now become quite pessimistic and possible recession in 2022 is something many people expect.”The influx of EU funds for investment is one positive. Italians also amassed higher-than-usual savings during lockdowns, which can now be drawn down to sustain consumption. But the impact will fade and the hit to disposable income in the coming quarters is, according to Codogno, set to be “massive”. Residents of Frattamaggiore are already feeling the pinch. Sosso Fardello, 74, a retired public transport worker living on a fixed €1,500 monthly pension, has cut out virtually all discretionary spending after his energy bills surged. “We have to think about everything we buy, and what is necessary to live,” he said. The Draghi government this month imposed a 25 per cent windfall tax on the energy companies’ excess profits to generate funds to cushion millions of financially vulnerable families, including pensioners, with energy subsidies and a one-time €200 cash payment.Pensioner Raffaele Rega, 74, who worked at a shoemaker, said such measures were not enough. “Our pension is just enough to survive and pay for food.” Gondola — who runs his pastry shop with his brother, brother-in-law and nephew — said he was struggling to make the business generate enough surplus to sustain four families. Monthly energy bills that used to average €1,200 are now €1,600; the small paper trays on which they serve pastries recently doubled in price; sales are down 30 per cent since January. Gondola had no choice but to pass on these rising costs to his customers, increasing the price of a coffee from 80 cents to €1.20, and of a 1kg fruit tart from €13 to €15. He discontinued his larger 1.5kg tarts, because his customers cannot afford them any more. “We are all trying to squeeze little pieces from a smaller cake,” Gondola said. Additional reporting by Martin Arnold in Frankfurt More

The head of the IMF has warned at the start of the World Economic Forum in Davos that the global economy faces perhaps its “biggest test since the second world war”. Kristalina Georgieva, IMF managing director, said Russia’s invasion was “devastating lives, dragging down growth and pushing up inflation”, and urged countries not to “surrender to the forces of geoeconomic fragmentation that will make our world poorer and more dangerous”.Georgieva’s warning came as Ukraine stepped up its bid to give its citizens hope of a brighter future, if the war can be won, with a $1tn package of reconstruction support, financed from confiscating frozen Russian assets. Speaking on Monday morning at the forum, Yulia Svyrydenko, Ukraine’s deputy prime minister and minister of the economy, said the whole world should get behind Ukraine in supporting its reconstruction and imposing sanctions on Russia. “There is no room for a neutral position, no time to wait for decisions as this war affects every country,” she added. Svyrydenko criticised countries and companies that had not imposed or enforced economic sanctions and said the world was suffering from the consequences of Russian aggression through higher food, oil and gas prices. Calling for a new Marshall Plan plus for reconstruction, she said that it could be financed from the frozen assets of the Russian state and from oligarchs. “You have these frozen Russian assets all around the world and we need to find a clear solution on how to sell these assets for the reconstruction of Ukraine.”Recognising that this was not something that had been done before, she justified the stance on Russia financing reconstruction, saying “this is not a conflict . . . it is a war and it includes all countries”.Ukraine’s former finance minister, Natalie Jaresko, told the Financial Times in Davos that, with bombs raining down every night across Ukraine, the rebuilding costs were likely to be higher than Kyiv’s current estimates of $560bn to $600bn. “I’m putting this at $1tn,” Jaresko said.Ukraine’s representatives at the World Economic Forum have been adamant that sanctions on Russia should be toughened even if they came with economic costs for other countries. Ukrainian delegates have expressed frustration with the actions taken by the US and European countries, as well as the lack of measures taken by other big economies, especially India and China. Svyrydenko said Europe should immediately go ahead with the proposed ban on Russian oil imports and accelerate the move away from Russian gas. “There is no other answer than this: you should launch the second [EU] package of sanctions and ban the purchase of oil and gas from Russia.” The sanctions have contributed to concerns, however, in the global economy that it is moving into a more turbulent period. Increasing numbers of economists have become alarmed that the world is sliding towards a recession, with Chinese production falling sharply as it battles coronavirus, Europe suffering from a cost of living crisis, the US moving from boom to bust and emerging markets facing food shortages.Georgieva urged all countries to lower barriers to trade, help countries in debt distress and modernise cross-border payments systems. But she warned: “There is no silver bullet to address the most destructive forms of fragmentation.” More

For developing countries, the challenge of raising finance to meet the costs of climate change looks impossibly daunting.Rich countries have commonly failed to deliver the amounts they promised — which, in any case, are far short of what is needed. Borrowing holds little appeal for low-income countries, more than half of which are in debt distress or at high risk of it. And blended finance, in which multilateral institutions, such as development banks, attract commercial capital — once seen as having great potential — has proved a damp squib.That has left development economists to conclude that, rather than tinkering with solutions to a fraction of the problem, what is needed is an overhaul of those multilateral institutions to increase their firepower.“One of the key problems is that multilateral financial institutions are fundamentally ill-suited to the challenges,” says Daniel Munevar of the debt and development finance department at the UN Conference on Trade and Development. “The one thing that should be done is to further leverage their balance sheets, but there is not the political commitment to do it.” Putting a figure on the amount of finance that must be mobilised is a challenge in itself. US Treasury secretary Janet Yellen spoke last month of the “trillions and trillions of dollars” needed to tackle climate change in developing countries. A widely cited report by the consultancy McKinsey identified a global need for additional capital spending on energy and land-use systems alone of $3.5tn a year for the next 30 years.A recent UN report says spending on adaptation — dams to hold back rising sea levels or irrigation to deal with droughts — will require as much as $300bn a year by 2030 and $500bn a year by 2050 for developing countries. That is without counting investments in mitigation — such as renewable energy and electric vehicles — where most finance is directed today.But the finance so far delivered is a fraction of those amounts. In 2009, developed countries promised $100bn a year by 2020 to reduce greenhouse gas emissions and finance adaptation in developing countries. This promise has not been met. Between 2020 and 2025, according to Oxfam, poor countries face a combined shortfall of $75bn.Blended finance has disappointed, too. The amount mobilised for development rose from $15bn in 2012 to more than $50bn in 2018, according to the OECD. But that growth then went into reverse and the money delivered, while welcome, will not make much impact.“Blended finance is likely to remain niche,” says Simon Cooke, emerging markets portfolio manager at Insight Investment, who sees greater opportunity in green bonds.In emerging markets, he argues, bondholders can make a particularly big difference, as more than 60 per cent of corporate issuers of green bonds in these territories have no publicly listed equity. Green bond issuance, indeed, has taken off. From a few hundred million dollars in 2012, annual issuance rose to almost $500bn worldwide last year, according to data compiled by Dealogic. About $200bn was issued by companies, including almost $80bn in emerging markets.However, only about $10bn was raised last year by governments and government-backed issuers in developing countries.Ugo Panizza, professor at the Graduate Institute of International and Development Studies in Geneva, says that while green bonds will play a role, “they are not going to be the silver bullet that solves the climate financing needs of poor countries”.One problem is that, while a lot of corporate green bond issuance is for mitigation projects, the costs for governments lie mostly in adaptation. Sovereign issuance is hard to monitor. Corporate green bond issuance is often deposited in a special account for green purposes, but most governments do not allow this. Indeed, the contracts of green sovereign bonds issued by developing countries often contain language that protects the issuer from any action if they fail to meet their green commitments.“A big problem with green sovereign bonds is that they are not enforceable,” Panizza says. “There is too much hype.”Others question the wisdom of encouraging poor countries to issue more debt, green or otherwise, when they are struggling with the debts they have taken on in the pandemic.“The IMF is telling us that 60 per cent of the world, where a good part of emissions is coming from, doesn’t even have the fiscal space to deal with the Covid crisis,” points out Kevin Gallagher, director of the Boston University Global Development Policy Center. “How are they going to mobilise trillions by 2030, when our pledge of $100bn a year is still a drop in the bucket?” A big part of the answer, he and others argue, is for multilateral development banks such as the World Bank to take a less conservative approach.

Studies suggest that two steps — expanding their collateral by including callable capital and accepting a single-notch downgrade from credit rating agencies — would allow them to quadruple the amount of grants and concessional loans they provide to poor countries. This could free up additional annual finance by many trillions of dollars.But the World Bank argues that its own triple A rating is the cornerstone of its financial model and that lower ratings would reduce rather than increase its firepower.Nevertheless, as Yellen and others urge the multilateral lenders to do more, change may come soon. An independent review of these banks’ capital structures commissioned by the G20 group of large economies is due to present its finding by the middle of this year.For EM climate finance, that might just be a game-changer. More

The writer is chair of Rockefeller InternationalAs the US Federal Reserve raises interest rates, debate rages over whether this tightening cycle will trigger a recession or not. History suggests an interesting answer: since the second world war, Fed tightening has led to a range of outcomes for the economy, from hard to softish landings, but has always led to financial crises somewhere — including every major global crisis in recent decades.With the rapid spread of bank and mortgage lending, the first signs of crisis often materialise in rising corporate and household debt, concentrated in real estate. Today, however, these signs are at worrying levels in only a few nations, led by Canada, Australia and New Zealand.But that doesn’t offer much comfort. The constant flow of easy money out of central banks has fed serial crises for decades. Regulators typically try to address the sources of the last crisis, only to divert credit to new targets. After the global crisis in 2008, authorities cracked down on the main sources of that meltdown — big banks and mortgage lending — which pushed the flow of easy money into less heavily regulated sectors, particularly corporate lending by “shadow banks.”This realm beyond regulators is where the next crisis will arise.Shadow banks include creditors of many kinds, from pension funds to private equity firms and other asset managers. Together they manage $63tn in financial assets — up from $30tn a decade ago. What started in the US has spread worldwide, and lately shadow banks have been growing fastest in parts of Europe and Asia.Though it has pulled back recently under government pressure, China’s shadow banking sector is still among the largest in the world at 60 per cent of gross domestic product — up from 4 per cent in 2009 — and deeply enmeshed in risky lending to local governments, property companies and other borrowers. In Europe, the hotbeds include financial centres like Ireland and Luxembourg, where the assets of shadow banks, particularly pension funds and insurers, have been expanding at an 8 to 10 per cent annual pace in recent years. The borrowers to watch most closely now are corporations. In the US, corporate debt as a share of assets remains near record highs, particularly for firms in industries hardest hit by the pandemic, including airlines and restaurants. A third of publicly traded companies in the US do not earn enough to make their interest payments. Any increase in borrowing costs will make life difficult for these companies, which need easy credit to survive. Many of them rely on expensive junk debt, which has doubled over the past decade to $1.5tn, or roughly 15 per cent of total US corporate debt. Their vulnerability was exposed early in the pandemic, when default risks briefly spiked, but was quickly covered up by massive injections of liquidity from the Fed.The biggest booms are under way in private markets. After 2008, as regulators tightened the screws on public debt markets, many investors turned to these private channels, which have since quadrupled in size to nearly $1.2tn. A substantial chunk of it is direct lending from private investors to often risky private corporate borrowers, many of whom are in this market precisely because it is unregulated.Nothing highlights the frenzied search for yield in private markets more clearly than so-called business development companies. Some of the world’s biggest asset managers are raising billions for BDCs, which promise returns of 7 per cent to 8 per cent on loans to small, financially fragile companies. As one investor told me: swing a stick in Manhattan these days and you are bound to hit someone involved in private lending. These risks are symptomatic of the financialisation of the world economy. Optimists say that household finances are healthy so the economy will be fine, even as markets get slammed by higher interest rates. But this again is to make the mistake of focusing on the past and ignoring how much has changed.Over the past four decades, as financial markets grew to more than four times the size of the global economy, feedback loops shifted. Markets, which used to reflect economic trends, are now big enough to drive them. The next financial crises are thus likely to arise in new areas of the markets, where growth has been explosive, and regulators haven’t yet arrived. The even bigger risk, in a heavily financialised world, is that an accident in the markets settles the debate over how hard Fed tightening will hit the real economy. More

The writer is chief investment officer at Franklin Templeton Fixed IncomeThe US Federal Reserve and financial markets are experiencing a long overdue reality check on inflation and interest rates. But markets have barely begun to take into account how far the world has changed.I believe they are still experiencing a severe case of cognitive dissonance. Inflation has surged to levels not seen since the infamous 1970s and remains stubbornly high. The Fed has started tightening, with policy rates already moving up and the central bank set to shrink its balance sheet after ending its market-boosting asset-buying programme.But even after the evidence of inflation rises in recent weeks, most investors still expect interest rates will not rise very much and will not remain elevated for very long. I think this may be very misguided.Markets anticipate that US economic growth will slow as we head into 2023 — and here I would agree. High inflation has taken a toll on purchasing power and will hurt household consumption, even though real income still exceeds pre-pandemic levels. Supply chain disruptions continue to hamper production, and the combination of somewhat tighter monetary policy with less generous fiscal stimulus will hold back activity. Financial markets have been conditioned to believe that the Fed will react to this slowdown in growth in the same way it always has in the post-financial crisis period: by loosening monetary policy quickly and decisively. This is where I expect things will play out differently.This time when growth slows, inflation will in all likelihood still be too high for the Fed to stop tightening. Month-on-month headline consumer price inflation has averaged 0.6 per cent since the start of last year. Even if that monthly pace halves, inflation will end 2022 close to 6 per cent year over year, and will be running at an average of 4.5 per cent in the first quarter of 2023. If financial markets are nonetheless expecting the Fed to quickly ease policy again, it’s at least in part because their cognitive dissonance has been abetted by a significant degree of wishful thinking that seems to inform the central bank’s own outlook.

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The Fed seems to be hoping that inflation will fall back to its 2 per cent target despite policy interest rates remaining negative after taking into account inflation. Bringing inflation down in such circumstances is a feat that the Fed has never managed before.How likely is it that the Fed will pull that off now without a more decisive policy tightening? The Fed seems to be betting that inflation expectations will remain anchored until all exogenous shocks have been worked out of the system. But consumers’ long-term inflation expectations are already running at about 4 per cent and wages are rising at a 5.5 per cent pace (average hourly earnings of all employees).Every month that goes by, inflation expectations become entrenched at a higher level as workers, consumers and businesses learn to anticipate and get ahead of persistent increases in their cost base. When activity slows, it could take some pressure off this very tight labour market. But with labour force participation persistently below pre-pandemic levels, the cooling impact on wage growth might be limited. We have a wage-price spiral developing that will probably make inflation more self-sustaining than the Fed assumes.We operate in a very different environment than we did a decade ago. Inflation has asserted itself as a major social and political issue for the first time in more than 40 years. The year-on-year rate may abate in coming months because it is measured against the higher base of inflation as 2021 progressed. But the effect will be slow and we will always be one supply shock away from inflation bumping back up. During the past 12 years, the Fed could always afford to give priority to supporting economic growth and asset prices because inflation remained blissfully dormant. This is no longer the case.I therefore expect that even as growth slows, the Fed will keep hiking rates during the first half of next year, in order to bring inflation back under control. And that once markets realise the Fed cannot afford to reverse course, long-term yields will also move higher still.We still need to acknowledge fully that inflation has become self-sustaining and bringing it back under control will be harder and more painful than the central bank hopes and financial markets are pricing in. This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect. The corresponding risk to asset prices and economic growth is greater than many like to admit.  More

Representatives of the United States, Australia, Canada, Chile, Japan, the Republic of Korea, and New Zealand said in a joint statement that they had “grave concerns” over the humanitarian crisis in Ukraine. “Reaffirming the importance of the rules-based international order that underpins an open, dynamic, resilient and peaceful Asia-Pacific region, we strongly urge Russia to immediately cease its use of force and completely and unconditionally withdraw all of its military forces from Ukraine,” the nations said. Representatives from Canada, New Zealand, Japan and Australia joined the Americans, led by U.S. Trade Representative Katherine Tai, in walking out of the Asia-Pacific Economic Cooperation (APEC) meeting on Saturday.The walkout took place while Russian Economy Minister Maxim Reshetnikov was delivering remarks at the opening of the two-day meeting of the group of 21 economies.The delegations from five countries that staged the protest returned to the meeting after Reshetnikov finished speaking, a Thai official said. More