Aurelia Butler

WASHINGTON (Reuters) – Sharply higher global food and energy prices due to the war in Ukraine are hitting poor countries, and better mechanisms for dealing with sovereign debt stress will be needed to stave off defaults, the IMF said on Monday.”The war in Ukraine is adding risks to unprecedented levels of public borrowing while the pandemic is still straining many government budgets,” Vitor Gaspar, director of the International Monetary Fund’s fiscal affairs department, and Ceyla Pazarbasioglu, the IMF’s strategy chief, wrote in a new blog.”With sovereign debt risks elevated and financial constraints back at the center of policy concerns, a global cooperative approach is necessary to reach an orderly resolution of debt problems and prevent unnecessary defaults.”Spikes in food and energy prices were hitting low-income countries particularly hard, and they may need more grants and highly concessional financing. Countries should undertake reforms to improve debt transparency and strengthen debt management policies to reduce risks.About 60% of low-income countries were already in, or at risk of, debt distress, the authors said. Rising interest rates in major economies could lead to widening spreads for countries with weaker fundamentals, making it more costly for them to borrow. The credit crunch was exacerbated by declining overseas lending from China, which is grappling with solvency concerns in the real-estate sector, COVID-19 lockdowns and problems with existing loans to developing countries, they said.Actions taken by major economies were insufficient, they said, noting that a freeze in official bilateral debt payments adopted at the start of the pandemic had ended, and no restructurings had been agreed under a framework set by the Group of 20 industrialized nations.Options were needed for a broader range of countries, now not yet eligible for debt relief.”Muddling through will amplify costs and risks to debtors, creditors and, more broadly, global stability and prosperity,” they wrote. “In the end, the impact will be most sharply felt by those households that can least afford it.” More

NEW YORK (Reuters) – A rally in U.S. credit markets after the U.S. Federal Reserve started hiking rates last month was short-lived and some corporate bonds hit new lows on Monday amid rising bond yields and concerns over the economic outlook.BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF – an exchange-traded fund which tracks the U.S. junk-bond market – fell 0.6% to trade at $79.76 a share on Monday, its lowest since May 2020.Its investment grade equivalent was also down sharply, by over 1%, hitting its lowest since March 2020.Corporate bonds have had a rough start to the year but credit spreads – the interest rate premium investors demand to hold corporate debt over safer U.S. Treasury bonds – tightened after the Fed hiked rates in March.That was in step with a stocks rally which was partly driven by investors comforted by more clarity on rate hikes and the Fed’s decisive action against surging inflation.However, lingering concerns over the impact of tighter monetary policies on corporate profits and borrowing costs, as well as the possibility of a sharp economic slowdown as the Fed tries to cool the economy, have started to pressure U.S. credit markets again this month.The Markit CDX North American Investment Grade Index, a basket of credit default swaps that serves as a gauge of credit risk, widened 6 basis points from the end of March to 72.843 basis points on Monday, as investors hedged bets on a deterioration in credit quality.”Economic conditions are evidencing some signs of perhaps slowing somewhat down”, said Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott.”That can start to creep into widening credit spreads by way of investors taking perhaps a slightly more sober view about what are the conditions that are going to persist to allow those lower rated credits to continue to fund their debt financing”, he said. U.S. Treasury yields rose last week on the back of hawkish signals by the U.S. central bank – increasingly determined to tighten financial conditions through rate hikes and so-called quantitative tightening, a plan to reduce its balance sheet.On Monday, the benchmark 10-year U.S. Treasury yield rose to its highest level in more than three years as investors awaited key inflation data later this week to determine how hawkish the Fed will need to be on its policy path.”The combination of faster rate hikes along with quantitative tightening is, at least potentially, a cocktail for drawing the liquidity conditions that are best suited to promote high flying equity names as well as the risky components of the fixed income market, credit and lower rated credit in particular”, said Luschini. More

(Reuters) – There are early signs of a cooldown in some of the hottest corners of the U.S. housing market, Redfin (NASDAQ:RDFN) said in a report on Friday, a fresh indication that high house prices and rising mortgage rates are cutting into homebuyer demand. Among those early tells, according to Redfin: Google (NASDAQ:GOOGL) searches for “homes for sale” dropped by double digits in Baltimore, Boston, San Francisco and Los Angeles in the second week of March from a year earlier; tours of homes for sale in California were down 21% as of March 31 from the first week of 2022, data from ShowingTime shows; Redfin agents in San Francisco, Los Angeles, Washington DC, Boston and Seattle reported a drop in requests for homebuying help at the start of this year compared with last year, even as requests nationwide surged; and agents in California say they are seeing fewer offers on each home than previously. Home prices nationwide have risen about 35% in the two years since the COVID-19 pandemic slammed the nation and the Federal Reserve slashed short-term interest rates to near zero, the Zillow Home Value Index shows. The Fed last month began raising its policy rate to bring down decades-high inflation as the economy reopened, and longer-term borrowing costs have climbed swiftly in anticipation of more aggressive rate hikes ahead.The average interest rate on a 30-year-fixed mortgage, the most popular U.S. home loan, rose last week to 4.9%, a fresh three year high, data from the Mortgage Bankers Association (MBA) showed this week. The U.S. housing market is still hot, however, even in cooling California cities. The average home in Los Angeles, for instance, is sold for 5% over its asking price, with a record share selling within a week of listing, Redfin said. But the signs are there already, the report said, of a price slowdown in coming months. More

The Labor Department’s consumer price report on Tuesday would seal the case for the Federal Reserve to raise interest rates by a hefty 50 basis points next month. It would follow on the heels of data last month showing the unemployment rate dropping to a fresh two-year low of 3.6% in March. The U.S. central bank in March raised its policy interest rate by 25 basis points, the first hike in more than three years. Minutes of the policy meeting published last Wednesday appeared to set the stage for big rate increases down the road.”Inflation is reaching a crescendo because of not only what’s happening in Ukraine, but also what happened in the past, such as massive government stimulus and the Federal Reserve printing money,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “We should expect a half a point rate increase next month.” The consumer price index likely surged 1.2% in March, according to a Reuters survey of economists. This would be the largest monthly gain since September 2005 and would follow a 0.8% advance in February. Gasoline prices on average soared to an all-time high of $4.33 per gallon in March, according to AAA.Though gasoline was likely the main driver of inflation last month, strong contributions were expected from food and services such as rental housing. Russia is the world’s second-largest crude oil exporter. The United States has banned imports of Russian oil, liquefied natural gas and coal as part of a range of sanctions against Moscow for its invasion of Ukraine.Russia and Ukraine are major exporters of commodities like wheat and sunflower oil. In addition to pushing up gasoline prices, the Russia-Ukraine war, now in its second month, has led to a global surge in food prices. High inflation readings and the Fed’s hawkish posture have left the bond market fearing a U.S. recession, though most economists expect the expansion will continue.In the 12 months through March, the CPI is forecast shooting up 8.4%. That would be the largest year-on-year gain since January 1982 and would follow a 7.9% jump in February. It would be the sixth straight month of annual CPI readings north of 6%.INFLATION PEAKING?Economists believe March would mark the peak in the annual CPI rate, but caution that inflation would remain well above the Fed’s 2% target at least through 2023. Gasoline prices have retreated from record highs, though still remain above $4 per gallon.Last year’s high inflation readings will also start falling from the CPI calculation.”However, inflation’s descent will remain painfully slow for consumers, businesses and policymakers alike,” said Sam Bullard, a senior economist at Wells Fargo (NYSE:WFC) in Charlotte, North Carolina. “Services inflation, which includes housing, shows no signs of abating anytime soon.” A moderation in prices of used cars and trucks likely resulted in a tame monthly underlying inflation reading.Excluding the volatile food and energy components, the CPI is forecast rising 0.5% after a similar advance in February. That would result in the so-called core CPI increasing by 6.6% in the 12 months through March, the largest advance since August 1982, after rising 6.4% in February.”Factors like used cars and unfavorable base effects could even cause an apparent slowing in core inflation for a few months this spring,” said Veronica Clark, an economist at Citigroup (NYSE:C) in New York. “This would likely be short lived, with further upside risks from higher commodity prices and supply disruptions materializing over the summer that could cause markets to reprice more hawkish expectations for the Fed.”Lockdowns in China to contain a resurgence in COVID-19 infections are seen putting more strain on global supply chains, which could keep goods prices elevated. Separately, rising rents for housing are also expected to keep core inflation hot. A key measure of rents, owners’ equivalent rent of primary residence, accelerated 4.3% on a year-on-year basis in February, the fastest since January 2007. Economists say this gauge tends to lag private sector measures of rents. While these measures have been showing signs of slowing, economists do not expect this to show in the CPI data for a while. Landlords slashed rents early in the pandemic as people deserted cities, but the reopening of the economy has boosted demand for accommodation. “The robust recovery in labor markets, rising labor incomes and healthy household balance sheets should prove supportive of rental demand even amid elevated prices, at least in the near term,” said Michael Pond, head of inflation research at Barclays (LON:BARC) in New York. “The peak in the CPI rents may still be at least a quarter away, but given the recent moderation in private measures of rents, we would caution against extending the trend of well above pre-pandemic levels into 2023.” More

Conservative MPs on Monday expressed concern that a row about the tax affairs of chancellor Rishi Sunak’s family will hurt the Tories in the local elections on May 5.Sunak has been under fire after revelations that his wife has enjoyed UK tax perks after securing non-domiciled status in Britain, and that he held a US green card that put him on a potential path to American citizenship. Health secretary Sajid Javid, who preceded Sunak as chancellor, has also admitted he held non-dom status before entering politics.Several senior Tories privately criticised Sunak’s handling of the row about his wife’s tax status, saying it was likely to damage the party in the local elections. The Conservatives are already braced for losses amid the cost of living crisis and revelations about Downing Street parties held during Covid-19 lockdowns. One minister said May 5 was “already going to be bad, but there’s no doubt having a chancellor that looks like he’s dodging tax in his own household makes it worse”.

Another member of the government added: “Everyone is primarily concerned about the local elections and the Rishi stuff is making our situation worse. People are already concerned about the cost of living and partygate, but this has handed Labour another way to kick us.”Some Tories have questioned whether the controversy over the Sunak family’s tax affairs will undermine the chancellor’s ambitions to succeed Johnson as party leader.One Conservative MP said: “The local elections [in May] will be awful, but at least this way they have someone to blame. Time will tell whether [Sunak] can actually survive all of this.” Another Tory MP criticised Sunak’s handling of the controversy, saying: “I loathe the idea of dragging political spouses into the political fray, but clearly non-dom status and a green card and being chancellor doesn’t work. What was he thinking?”Downing Street said on Monday that Boris Johnson had approved Sunak’s request that Lord Christopher Geidt, the government’s independent adviser on ministerial standards, investigate whether the chancellor has properly declared all his interests since becoming a minister.Number 10 added that the prime minister had full confidence in Sunak, who said on Sunday he had always followed the rules.Sunak’s wife, Akshata Murty, last week announced she would pay UK tax on all of her worldwide earnings after it emerged she was a non-dom.By being a non-dom, Murty, who holds Indian citizenship, was entitled to not pay UK tax on her global income. She owns a stake in Indian technology company Infosys, estimated to be worth more than £500mn, and received £11.6mn in dividend income last year.The controversy around the Sunak family’s tax affairs has provided a second political hit to the chancellor in quick succession: he was criticised last month for not doing more in his Spring Statement to help Britons with the cost of living crisis.

Rishi Sunak and his wife Akshata Murthy at Lord’s cricket ground in London in August 2021. © Zac Goodwin/PA

Asked whether he was out of touch with the British public, Sunak said on Monday: “On cost of living, I know it’s difficult for people . . . I want to make sure that we can do, and I can do, everything we can to get through what are some challenging months ahead.”Labour leader Sir Keir Starmer sought to contrast the behaviour of ministers with the plight of ordinary families contending with the cost of living crunch. “It really is one rule for them and another for everyone else,” he said. Starmer called on Downing Street to come clean on the tax status of all ministers and their spouses. Number 10 was unable to say on Monday whether any other ministers had non-dom spouses. MPs are not allowed to be non-doms under British law.Sunak and his wife said last week that all due tax in the UK was paid by them. The chancellor, who worked in the US before entering politics and has a home in California, relinquished his green card in October last year after consulting with American authorities.Labour meanwhile raised questions about whether Sunak has overseen any tax changes as chancellor that have benefited people with non-dom status.Law firm Vinson & Elkins claimed that a tax scheme in February’s finance act could potentially provide benefits to non-doms.But the Treasury said the scheme was only available to fund managers rather than individuals.Labour also questioned whether Sunak declared a potential conflict of interest when the Future Fund he set up as chancellor during the pandemic to support start ups provided a £650,000 convertible loan to Mrs Wordsmith, an education company.Catamaran Ventures, an investment company controlled by Murty, was a minority shareholder in Mrs Wordsmith, which collapsed less than six months after receiving the loan.Sunak said on Sunday he was confident the review by Geidt would find “all relevant information was appropriately declared”. More

The French president spent several hours mingling with crowds in Denain, where roughly 15% of voters backed him in Sunday’s ballot, compared to 42% who opted for Le Pen. In the evening in Carvin, another town in the area, he sat in a cafe for a live interview with BFMTV and spoke for 20 minutes about pensions, purchasing power and unemployment.Macron said he sees “the divisions and people’s difficulties” and defended his social record, especially a cap on energy bills. He vowed to listen to unions and charities, and said workers should have the same benefits as shareholders when companies are profitable.The trip was a clear attempt by Macron, 44, to try to shed his image as “a president of the rich” as he tries to convince more voters to keep him at the helm of Europe’s second-largest economy on April 24.Le Pen finished 4.7 percentage points behind Macron in Sunday’s first round. While polls give him an advantage heading into the final phase of the campaign, Le Pen has already added more than 10 points to her showing in the 2017 election. To win, she needs to build an anyone-but-Macron coalition and many left-wing voters would have to abstain, or back her. The 53-year-old nationalist didn’t waste any time getting out on the stump, either. She gave a brief press conference in the afternoon and later in the day was in Yonne, a couple hours drive south of Paris, where she spoke about agriculture, food sovereignty and surging food and energy costs.Investors are watching this stage of the election especially closely. If Le Pen were to unseat Macron, it would create a shock for the European Union to compare with Donald Trump’s U.S. election win of 2016. When the gap between them narrowed last week, French 10-year yields held near a seven-year high.Le Pen’s Resilience Makes France’s Election a Much Closer RaceWhile Le Pen has benefited from a tailwind largely thanks to her focus on retail politics, Macron’s momentum stalled amid criticism that he was snubbing voters and neglecting domestic matters because of the crisis in Ukraine. Why France’s Macron Needs Every Vote to Beat Le Pen: QuickTakeAs the president began his charm offensive, his allies were zeroing in on Le Pen’s links to Russia. Finance Minister Bruno Le Maire told RTL radio on Monday that voters have a choice between a president who had put France at the forefront of Europe and an “ally of Vladimir Putin.” It’s not clear how successful that strategy will be. Le Pen secured a loan for her party from a Russian company in 2014 and visited Putin in Moscow in 2017. But she distanced herself from the Russian president after his invasion of Ukraine even as some people close to her have continued to express sympathy. So far, polls show voters don’t care. For his part, Macron has been speaking to Putin regularly first to try to stop Putin’s invasion of Ukraine, and then to try and end the war. His rivals have accused him of naivety in his interactions with the Russian leader who he invited to Versailles within weeks of taking office five years ago.In Denain, Macron was asked if he’ll sit down with Le Pen as planned on April 20 after having refused to debate the other presidential hopefuls. “It’s program against program, so now there will be a debate,” he replied. Read more: France’s Stunning Economic Rebound May Seal Macron’s Re-Election(Updates with comment throughout.)©2022 Bloomberg L.P. More

(Reuters) -Chicago Federal Reserve Bank President Charles Evans on Monday signaled he would not necessarily oppose getting interest rates up to a neutral setting of 2.25% to 2.5% by the end of the year, a pace that would require a couple of 50 basis-point rate hikes at upcoming Fed meetings.”Fifty is obviously worthy of consideration; perhaps it’s highly likely even if you want to get to neutral by December,” Evans told the Detroit Economic Club. But, he added, the Fed should not raise rates so fast that it doesn’t have enough time to assess inflation pressures and adjust policy in response. “I think the optionality of not going too far too quickly is important,” he said. “I would focus the attention on where do we want to be at the end of the year.”The Fed raised rates last month for the first time in three years, and with inflation accelerating is expected to ramp up its pace of rate hikes with half-percentage-point increases for a couple meetings instead of the usual quarter-point increments. Evans, long on the dovish end of the Fed policymaker spectrum, said he had thought the Fed should get interest rates up to a 2.25% to 2.5% range over the next year, but on Monday said he doesn’t think that speeding that process up by three months will hurt the economy. “I think there’s good momentum for the economy” and vibrant labor markets will continue as rates rise toward neutral, he said. But once rates get there, he said, the Fed needs to be “mindful” of the outlook for the economy and the state of inflation.A government report on Tuesday is expected to show consumer prices rose 8.4% last month, far above the Fed’s 2% inflation goal. Fed policymakers like Evans say they expect pressures to recede this year as supply constraints ease and as higher borrowing costs squeeze demand. By the end of this year, Evans said, the Fed will know a lot more.”Is it going to be that some of these pricing pressures have crested, and they start coming down? Or are they going to stay high — or are they going to be higher?” Evans said. “And if it’s because of supply concerns, real resource pressures, there’s going to be a lot of gnashing-of-teeth angst over the inflation versus the concern for the economy. And I think finding the right balance is going to always be at a premium.” More

The writer, former head of the IMF’s European department, is chief economic adviser at Morgan StanleyAfter yet another nasty inflation surprise last month, and with European Central Bank president Christine Lagarde no longer ruling out interest rate hikes in 2022, financial markets have got the message that policy tightening is afoot. Long-term rates have started rising across the eurozone, especially in Italy and Greece, where risk spreads have risen to their highest since the outbreak of the pandemic (165 and 230 basis points, respectively).While it is right that interest rates should rise to cool demand and prevent high inflation from becoming entrenched in expectations, the process may prove to be messy. This is because the ECB, which meets this week, has repeatedly said it will not raise policy rates until it has ended its sovereign asset purchase programme. Officially, there is no terminal date for the programme. In practice, however, the ECB began tapering purchases this month, and markets have been given the sense that the programme underpinning low and stable bond spreads since 2015 will end by early summer.Given the current low levels, there is certainly room for interest rates and spreads to rise. But it is also important that spreads be bounded in some way — not least because spiking and volatility in them impede the transmission of monetary policy across the eurozone.As things stand, there are three paths to monetary tightening.First, the ECB could quickly conclude asset purchases and accept higher long-term interest rates and spreads, and tighter financial conditions; near-term policy rates could be raised shortly thereafter. This strategy could work — but only so long as that other anchor of European stability, head of Italy’s national unity government Mario Draghi, remains in place. A change in the circumstances could easily lead to a spike in spreads in many periphery countries.Second, the ECB could ditch its self-imposed constraint that quantitative easing must end before rates rise. The rationale for this sequencing is that higher rates contract demand, while continued asset purchases stimulate it — so pursuing both at once sends conflicting economic and market signals, akin to driving with one foot on the brake and the other on the accelerator. The concern over mixed signals and uncertain macroeconomic effects is exaggerated. For one, the ECB would be raising policy rates from negative levels, which — on account of banks’ traditional reluctance to pass on these rates to retail depositors — would probably have only limited effect, and so should not be very disruptive at the start. Thereafter, nothing would prevent the ECB from calibrating rate hikes and asset purchases such that the net effect is contractionary. Moderate asset purchases, of say €20bn-€30bn a month, may suffice to maintain stability in bond markets, while allowing a net tightening in monetary conditions. It is not unheard of for central banks to engage in opposing transactions in near-term and long-term assets: the US Federal Reserve has done so more than once with its Operation Twist.Third, eurozone governments could relieve the ECB of the burden of keeping a lid on sovereign spreads. The most straightforward way of doing so would be to create a centralised fiscal facility, like the EU’s coronavirus recovery fund, providing loans and grants to member states facing temporary difficulties. Although the ECB is credited with having kept sovereign spreads low and stable during the pandemic, much of the credit is due to the recovery fund, which is a more tangible signal of European political and economic solidarity than emergency ECB action can ever be. Access to such a facility must come with some safeguards. But the conditions should not be as onerous as the adjustment programmes required by, say, the ECB’s Outright Monetary Transactions facility, which is a political non-starter in countries such as Italy.This option would be the most sensible economically, both facilitating the near-term need for monetary tightening and addressing the long-term gap in the eurozone’s financial architecture. It would also have the benefit of separating monetary considerations from financial stability concerns, allowing the ECB to focus on its core inflation mandate. The upcoming reform of the Stability and Growth Pact is an opportunity to make a centralised fiscal facility a reality, possibly with a more rigorous standard of fiscal probity if member countries so choose.While the case for monetary tightening is becoming urgent, the best solution economically is for now not politically realistic. That being the case, the ECB should drop its current guidance on the sequencing of monetary tightening. The worst thing it could do would be to ignore political and economic realities and simply proceed full speed ahead with the termination of asset purchases and the raising of ECB policy rates. More