Aurelia Butler

(Reuters) -The Federal Reserve will do what it needs to do to bring down very high inflation, Minneapolis Fed President Neel Kashkari said on Friday, though how much it will need to do depends in part on how quickly energy and other supply constraints dissipate. “I’m confident that my colleagues and I have the conviction to do what we need to do to bring inflation back down,” Kashkari said at the start of a conference on energy and inflation co-hosted by the Dallas and Minneapolis Fed banks. “I hope we have to do less, and we’ll only be able to do less if more supply comes on line.” U.S. central bankers spent much of last year hoping and expecting more supply would come on line and ease what was then seen as a transitory bout of inflation. By the end of the year it became clear that supply chains were taking longer than expected to get unstuck, workers were not returning to the labor market nearly as as fast as had been hoped, and inflation was building, not cooling. In March, as Russia’s invasion of Ukraine began pushing up energy prices globally and COVID-19 lockdowns in China slowed supply chains further, the Fed began raising interest rates. Fed Chair Jerome Powell now says that while he’d welcome an easing of supply constraints, he won’t count on it, and has all but promised more big rate hikes ahead. Experts convened for the Fed’s energy conference Friday appeared to dash any Fed policymaker hopes for quick resolution, at least as far as energy production goes.”It’s going to get worse,” Occidental Petroleum (NYSE:OXY) CEO Vicki Hollub said, on the outlook for gas and oil prices. “We are struggling to meet what demand is..we are headed for an environment where we just can’t amp up supply very quickly.”Cindy Taylor, CEO of Oil States International (NYSE:OIS), said that while her services company is going all out to help get more oil out of the ground, she permanently lost a lot of workers in highly technical jobs during the COVID-19 shutdowns. “You can’t turn on a switch,” she said. “It’s going to take a while, and workers and supply chain challenges are going to be key to that.” More

(Reuters) – Battered U.S. and German government bond markets have just put in their best weekly performance since early March, suggesting a painful surge in yields due to high inflation may finally be abating as the focus turns to growth fears.Gilts in Britain, where the Bank of England warned of a potential recession, saw their best performance since 2011.Central banks have only just started tightening policy and inflation remains elevated, so there’s reason for caution.But here are four key shifts that suggest a turning point for the world’s biggest debt markets. 1/ NO CONVICTIONKey benchmark 10-year bond yields have failed to hold above critical levels: 3% on U.S. Treasuries, 2% on British gilts and 1% on German Bunds.”The fact that we didn’t hold onto that was taken as a signal that … there wasn’t that much conviction behind high yields,” said ING senior rates strategist Antoine Bouvet.Investors are covering underweight positions in U.S. bonds sensitive to rates swings, usually the longest dated, at levels last seen in early 2021, BofA said in an investor survey on Friday. Respondents considered short positioning on rates — bets that yields will rise further — as the most overcrowded trade. 2/ PEAK INFLATION?Market inflation expectations have fallen particularly sharply since the U.S. Federal Reserve jacked up rates on May 4. Inflation breakevens, which measure the difference between nominal and inflation-adjusted yields, fell further after U.S data this week suggested inflation may be peaking. The 10-year U.S. breakeven rate is at 2.7%, down from over 3% in April. It’s dropped 20 bps this week alone, the sharpest weekly fall since April 2020. The euro zone’s the five-year, five-year breakeven forward inflation swap, tracked by the European Central Bank, fell to roughly two-months lows at around 2.16%. Those falls have been driven by soaring inflation-adjusted , “real” yields. U.S. 10-year real yields have jumped 25 bps over the last two weeks, Germany equivalents are up 43 bps. U.S. inflation-linked bonds (TIPS), a key hedge against future inflation, have seen outflows for the last three weeks, according to BofA citing EPFR data. If markets are right, “central banks’ inflation problems are less dire than the market considered them to be weeks or months ago,” said Arne Petimezas, senior analyst at AFS Group. Graphic: U.S., euro inflation breakevens fall-https://fingfx.thomsonreuters.com/gfx/mkt/gkplgkrqbvb/breakevens.png 3/ LOWER TERMINAL RATEWith inflation expectations falling, markets have reduced bets on the “terminal rate” — where this hiking cycle ends. That’s a sign investors believe less hikes may be necessary to contain inflation. In the United States, money markets imply rates will rise to around 3% in mid-2023, compared to around 3.5% in early May. In the euro zone, where economists have warned rate hike pricing has been excessive, the ECB’s policy rate is seen at roughly 1.2% in 2024, down from around 1.5% last Friday.”The big move in bonds has been accompanied by a rerating of the rate outlook for the Fed, (Bank of England) and ECB,” said Divyang Shah, strategist at Refinitiv’s IFR Markets.That is “very different to the prior corrections for bonds that did not last as expectations were still rising.” Graphic: ECB rate hike bets- https://fingfx.thomsonreuters.com/gfx/mkt/mypmnydqavr/ECB%20pricing.PNG 4/ SAFE HAVENFinally, this week’s stellar bond performance came with a 4% slide in world stocks, putting top-rated government bonds back in the safe-haven seat.That inverse correlation had recently been absent as equity and bond prices dropped together in the face of surging inflation.In the United States, it’s the first week since late March where 10-year bonds and the S&P 500 are set to end in opposite directions.”The bit that’s been missing is that risk-off means bonds rally,” said Nick Hays, head of sterling rates and credit at AXA Investment Managers. “That doesn’t always work but we can’t go on for too long where bonds don’t behave as a safe-haven.” Graphic: Treasuries vs S&P500-https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyazjavw/sp%20vs%20usts.png (This story corrects para 27 to say ‘late’ not ‘early’ March). More

The world’s largest carmakers have warned supply chain disruptions and higher raw material prices threaten the rollout of electric vehicles, even as demand for battery-powered models vastly exceeds manufacturers’ current production capacities.Speaking at the Financial Times’ eighth Future of the Car summit this week, Tesla boss Elon Musk cast doubt on his company’s ability to reach its target — put in place just months ago — of delivering 20mn electric cars a year by the end of the decade, calling it an “aspiration, not a promise”. “We may stumble and not reach that goal,” an unusually conservative Musk told the conference. “There are some raw material constraints that we see coming, in lithium production, probably in about three years, and in cathode production,” he added.Musk’s comments were echoed by several other industry leaders at the annual event, in contrast to past summits where executives have announced ever more ambitious electric vehicle targets. In 2021, even as the semiconductor shortage showed few signs of abating, Mercedes-Benz boss Ola Källenius told attendees that his company would go “faster” when it came to phasing out combustion engine models and building electric alternatives.But the tone at the summit this week was markedly more reserved. Not a single leading executive announced higher targets for electric vehicle sales, or battery production. Tesla’s closest competitor, Volkswagen, which has long aimed to overtake its rival in electric vehicle sales by 2025, played down its prospects of reaching that goal, calling it “very, very tight”.“Many people are now, I think, a bit over-optimistic,” said VW chief executive Herbert Diess, referring to the rollout of electric vehicles worldwide.Speaking from the back seat of VW’s latest electric model, an emissions-free version of the 1960s camper van, he added: “We need the energy, we need the charging networks, we need the infrastructure, for sure, we need the cars, but we also need the batteries and the raw materials.”Industry analysts, Diess said, were not taking the “amount of effort which has to go in to make this change happen seriously enough”.The warnings by the top two electric vehicle producers came as consumers’ appetite for battery-powered vehicles continues to exceed the sector’s expectations. After VW, which plans to sell roughly 700,000 electric vehicles in 2022, revealed it has sold out of battery models in the US and Europe for the rest of the year, Mercedes-Benz’s Källenius told the summit that this was “largely true for us as well”. Tesla’s Musk said he thought “zero about demand generation and a lot about production and engineering and supply chain”, adding that he would not rule out buying a mining company to secure the raw materials necessary to ramp up electric vehicle manufacturing.Persistent bottlenecks in the supplies of crucial raw materials for batteries have tempered analysts’ expectations for the electric car industry as a whole. Researchers at Wells Fargo who this week examined the raw material prices for components in a Tesla Model Y found “several ‘surprises’ that challenge the notion of imminent [battery electric vehicle] adoption”.Tesla boss Elon Musk being interviewed at the FT’s Future of the Car summit this week © Em Fitzgerald/FT“The rise of battery raw materials costs has delayed [battery electric vehicle] cost parity to [internal combustion engines] by at least a decade,” the bank warned, referring to the moment at which emissions-free vehicles become as cheap as petrol or diesel equivalents.As a result, Wells Fargo analysts downgraded General Motors and Ford, as the US manufacturers would “likely be forced to sell money-losing compliance [battery electric vehicles]”, to meet ever-stricter regulatory targets. Their assessment was matched by Renault chief executive Luca de Meo, who told the FT conference that supply chain crises meant “the game has changed” and that carmakers “have to play by new rules”, which would see them reliant on the efforts of energy and mining companies.He cautioned that the French group might not achieve cost parity for mid-range models by 2025, and that this could damp demand for electric cars. “We know that the purchasing power [of] people in many regions of the world will not necessarily increase,” said De Meo.At the same time, generous subsidies for purchasers of electric cars in China will be phased out by the end of the year, making it harder for those on low incomes to switch.Stellantis, which owns budget brands such as Dacia, warned that batteries would become scarce in just two or three years’ time, complicating the rollout of affordable electric cars.

“The speed at which everybody is now building manufacturing capacities for batteries is possibly on the edge to be able to support the fast-changing markets in which we are operating,” said Stellantis boss Carlos Tavares.“We are not addressing this transformation on a 360-degree strategic approach,” he added. “Everybody is going to pour EV vehicles on the market. So what’s next? Where is the clean energy? Where is the charging infrastructure? Where are the raw materials?”To help with the commodities crunch, Mercedes’ Källenius called for Europe to mimic the raw materials procurement strategies implemented by China and the US and develop “more bilateral trade agreements . . . beyond maybe the three traditional regions”. The EU, he said, should look at inking deals with mineral-rich countries such as Australia and India as well as South American states, and create closer relationships with “economies that may have some of those raw materials that we need for electrification”.But most executives agreed the industry’s woes would not fade fast.“[This is] totally different from what I used to say one year before, that you know, we are improving, we are getting better, one day we will be perfect,” said Nissan’s chief operating officer Ashwani Gupta.“For me today, the supply chain crisis is the new normal.” More