Aurelia Butler

(Reuters) -Minneapolis Federal Reserve Bank President Neel Kashkari said Wednesday it’s ‘appropriate’ for the U.S. central bank to take steps to normalize monetary policy to deal with high inflation, but warned against raising rates too fast or too far. “My caution to my colleagues, and to myself, is, ‘let’s not overdo it,'” Kashkari said at a town hall for United Natural Foods (NYSE:UNFI) Inc. employees, noting that an aging population among other factors will tend to pull inflation down over time. “If we raise rates really aggressively, we run the risk of slamming the brakes on the economy, putting the economy into recession, which would then — we’d be crashing back down into this low inflation environment.” The Fed is expected to start raising rates in March, with the debate currently focused both on how big of an increase it should start with, and how far rates should rise, to deal with inflation that’s the highest it has been in nearly 40 years. Some Fed officials believe the Fed ought to start with a bigger-than-usual half-percentage point rate hike to make clear that it has joined the fight on inflation; others who appear to be in the majority say a smaller quarter-point hike is merited. Kashkari said he and his family had COVID-19 earlier this year, and the experience drove home for him that it will take some time for the economy to get back to normal.”A lot of families are experiencing what we just experienced,” Kashkari said, explaining that his family’s bout with the disease meant three weeks of disrupted work. “This will be a while” before people can be comfortable living with COVID, before workers on the sidelines of the labor force can return to work, and before supply chains will catch up, he said. More

DUBAI (Reuters) -Turkey sold $3 billion in Islamic bonds on Wednesday, in its first U.S. dollar-denominated debt sale since September, before unorthodox rate-cutting despite high inflation sent the lira into a tailspin.Turkey’s economy fell into turmoil late last year as the central bank cut its policy rate by 500 basis points to 14% since September, causing the lira to end the year down 44% against the dollar, its worst performance during President Tayyip Erdogan’s nearly two decades in power. The depreciation sent inflation to nearly 49% in January, its highest in 20 years.The lira has largely stabilised this year after Erdogan announced a new scheme to protect lira deposits, costly government interventions in the currency market and a local currencies swap deal with the United Arab Emirates.Turkey sold the Islamic bonds at 7.25%, tighter than initial guidance of between 7.5% and 7.625% after orders topped $10.75 billion, the document from one of the banks on the deal showed. “We continue to remain underweight Turkey due to the elevated uncertainty,” said Doug Bitcon, head of credit strategies at Rasmala Investment Bank. “However, the pricing of the new 5-year issue is cheap relative to the sukuk curve and broadly in line with the conventional curve. The order book is strong and we expect the issue to trade well at the break.”Investors in the UAE piled into the Islamic bonds, three sources said. Relations between the two countries have pivoted to economic partnership following a charm offensive by Turkey last year, with Erdogan visiting the UAE this week after the UAE’s de facto ruler took a trip to Turkey in November.One of the sources, a fund manager in Dubai, said higher demand from the UAE due to cosier ties may partly explain the large order book despite a risk-averse market.Demand for sukuk has long outstripped supply, and sales of high-yielding bonds have been scarce as investors fret over an imminent tightening cycle, with many analysts expecting as many as seven rate hikes by the U.S. Federal Reserve this year.”Investors are wary about a Fed that’s too hawkish and are averse to longer tenors – Turkey’s tapping into that demand for shorter bonds,” a fixed income analyst in Dubai said.Fitch Ratings last week downgraded Turkey’s sovereign debt rating to “B+” from “BB-” saying the government’s policies have increased risks from high inflation and weak foreign currency liquidity.FX reserves stood at $16.33 billion as of Feb. 4, rising $5.8 billion in a week, likely in part due to the $4.7 billion swap deal with the UAE. Net FX reserves had reached a two-decade low of $7.55 billion last month.Citi, Dubai Islamic Bank, HSBC and KFH Capital arranged the sukuk sale.Turkey has roughly $18.5 billion in bonds maturing this year, with $7.6 billion denominated in dollars and the rest in lira, according to Refinitiv data. More

ANKARA (Reuters) – President Tayyip Erdogan’s government is hoping that Turks will endure soaring living costs for just a few more months before inflation begins easing and tourists arrive, helping the economy leave a winter currency crisis behind. The plan is risky given some small protests have already emerged in the face of annual inflation nearing 50%, and with many economists expecting price and wage pressures to persist throughout the year.The lira, which plunged 44% last year, is also potentially vulnerable to the U.S. Federal Reserve’s interest rate tightening and, closer to home, any Russian military incursion into Ukraine that could strain Ankara’s ties with Moscow and NATO. But for now, Erdogan – whose push for unorthodox rate cuts initially sparked the crisis last year – has managed to regain some confidence among savers and investors with a combination of state-backed deposit guarantees and costly market interventions. That has bought the government time to let cuts in sales taxes work to cool off prices and ease the pain for consumers, while it seeks to boost Turkey’s export sector with the help of low lending rates and planned capital injections into state lenders.Ankara expects those steps, combined with newfound lira stability and eventual base effects, will allow annual inflation to peak in April or May and recede by year end to about 24%, far below analysts’ forecasts. The stakes are high for Turkey’s leader of 19 years who faces an election by mid-2023 that current polls suggest he might lose. Ratings agencies and analysts say that while the budget can fund such measures for now, costs and inflation may spiral if the lira comes under renewed pressure. Simply raising interest rates instead would be a better way of containing inflation and bolstering the currency, they say. Real rates are far in negative territory at 35% and official reserves low and deep in the red when accounting for swaps, leaving Erdogan’s experiment vulnerable to another crisis. “The government is now using the fiscal space to balance the economy to the extent they can, but of course you can only pull this lever so far given inflation and … massively negative real rates,” said Anupam Damani, New York-based head of international debt at investment manager Nuveen. Erdogan’s key goal is to narrow the chronic current account gap – near $15 billion last year – which would replenish official reserves possibly helping the lira, and there are early signs he may have some success there. As Turkey’s beaches begin filling up in May, Ankara forecasts tourist arrivals to return to pre-pandemic numbers with close to $34 billion in revenues expected to wash in, shoring up the sector that accounts for over 10% of the economy. Turkey’s car rental association told Reuters the fleet size should rebound 25% this year, reflecting visitor expectations. However, it is not unusual for Turkey to record current account surpluses in the summer only to swing back into deficit in the winter and it may take an export miracle to change that pattern.CONFIDENCE GAMEAfter a series of cuts last year to 14% in the policy rate, the lira crashed to all-time lows in December and inflation soared. Since then, however, the depreciation-protected deposits and central bank’s forex sales have calmed markets. Households and companies have poured some 350 billion lira ($25.5 billion) into the protected accounts, nearly half converted from hard currencies, according to official data. The central bank has boxed the exchange rate into a tight range near 13.5 to the dollar so far this year, a far cry from the lira’s wild swings in December. Bankers and economists estimate the central bank spent $20 billion in December and $3 billion in January supporting the lira, but next to nothing this month and Finance Minister Nureddin Nebati said last week there was no more need to intervene in markets. Erdogan has promised to protect Turks from “crushing” annual price rises, including 50% for electricity, 55% for food and 76% for energy. The value added tax on basic foods was slashed this month and more relief, possibly for housing, is expected.Nebati has urged patience and said Turks would wake up to a “very different” reality by the middle of the year.He also told investors in London the economy would be in even better shape by the election and said now was the “perfect” time to invest, according to one participant. Yet two days later Fitch cut Turkey’s credit rating deeper into junk territory citing policies that risked even higher inflation, especially if depositors’ confidence is shaken by renewed market stress. Wells Fargo (NYSE:WFC) said the lira was emerging markets’ most vulnerable currency.Goldman Sachs (NYSE:GS) also said that while the state’s deposit protection scheme successfully triggered “a wave of dedollarisation” its success adds to the state’s currency risk exposure.A test of business confidence comes early next month when February data could show an easing of the trade deficit after it soared in January as a result of a stockpiling rush in the face of soaring import prices, analysts said. Meanwhile, the patience the government is asking for is wearing thin. Food couriers, nurses and other workers have carried out strikes in recent weeks, joining other scattered rallies in some cities.Esat Celik, 32, an Istanbul construction worker relying on odd jobs, said he spends more than half his income on food and children’s needs. “I am unemployed now,” he told Reuters. “It is very hard to continue like this but let’s see how long it lasts.”($1 = 13.5958 liras) More

JENKINTOWN, Pa. (Reuters) -Congressman Conor Lamb has a message to Pennsylvania Democrats who wonder whether he is liberal enough to represent them in the U.S. Senate: He is no Joe Manchin.Locked in a tight nominating race with the northeastern state’s progressive lieutenant governor, John Fetterman, the moderate Lamb has drawn comparisons to Manchin, a conservative Democratic Senator from neighboring West Virginia who has routinely acted as a roadblock to Democratic priorities in Congress.Manchin endorsed Lamb for his 2020 congressional bid and has helped him raise money.During a weekend chat with Democratic voters at a coffee shop in Philadelphia suburb Jenkintown, Lamb noted that he voted for President Joe Biden’s sweeping $1.75 trillion Build Back Better spending bill, which Manchin blocked. He also said he supported ending a Senate practice called the filibuster that Republicans have used to block votes on voting rights and other issues.Manchin and fellow conservative Democratic Senator Kyrsten Sinema of Arizona both lined up against lifting the filibuster, blocking Democrats who control the 50-50 Senate due to Vice President Kamala Harris’ tiebreaking vote. Sinema stopped short of fully endorsing the Build Back Better bill, saying she was willing to continue working. “We’re basically two votes away on that long list of priorities, and that’s what the Senate campaign is really about,” Lamb said, without explicitly identifying the two senators.The Senate seat that Fetterman, Lamb and state Representative Malcolm Kenyatta are seeking the nomination for is seen by nonpartisan election analysts as the most competitive Senate contest ahead of the Nov. 8 midterm elections, since its current occupant, Republican Pat Toomey, 60, plans to retire at the end of his term.History and Biden’s sliding approval rating favor Republicans’ chances of winning back control of at least the Senate or the House of Representatives, which would give them the power to block the Democratic president’s legislative agenda for the last two years of his four-year term.Chris Borick, a political science professor at Pennsylvania’s Muhlenberg College, said Lamb’s pitch to voters is that he would be electable in November.”He’s trying to find the sweet spot,” Borick said. “And the sweet spot is, look, you know there is a place for Joe Manchin in the Democratic Party, but I am not Joe Manchin. I am a Pennsylvania Democrat, which means focusing on labor and working-class issues, which has been a good recipe for winning statewide.”Lamb, 37, served in the U.S. Marines and as a federal prosecutor before he was first elected to Congress in 2018.He is trailing Fetterman, 52, in the few public opinion polls on the race and is significantly behind in fundraising ahead of the May 17 primary election, when Democrats will pick their nominee. His rivals have more directly criticized Manchin.”Some Democrats, like Manchin, who are refusing to reform the filibuster, are telling us that allegiance to a flawed Senate rule is more important to them than democracy itself. They’re wrong,” Fetterman wrote in an opinion article on CNN.com last year, one of many times he has directly chided the West Virginia senator.Kenyatta, 31, has criticized Manchin in speeches and social media posts. Asked in a recent interview whether he thought Manchin was a Democrat, the state representative responded, “Occasionally.”Manchin, whose office did not respond to a request for comment, has defended himself from liberal criticism, saying he has never been a progressive Democrat and doesn’t plan on becoming one. The senator — whose state voted overwhelmingly for Republican Donald Trump for president in 2016 and 2020 — has also offered some advice:”All they need to do is, we have to elect more liberals,” he told reporters in September. More

Trying to figure out the root causes of the current bout of inflation in Western economies at the moment is tough. Much ink has been spilt trying to untangle country-specific factors — such as Brexit or Biden’s stimulus programme — from wider economic trends, such as the semiconductor shortage or rising commodity prices, in working out what is pushing prices up.Zeroing in on a cause is all well and good, because, in theory at least, if you find the root of the problem you can fix it with policy. By raising interest rates, say, if inflation is being caused by money being too cheap, or hiking taxes if it’s because people’s wages are rising too fast. Yet one cause we feel that’s been little discussed is how a decade of low economic growth in the West before Covid contributed to the inflationary crisis we’re experiencing now. The idea is simple one. If growth is sluggish, as it was in the 2010s, then, at best, firms won’t be induced to invest to create more capacity. If you’re a grocer, why bother opening another shop if your current one is barely scraping by?At worst, a business will take their most inefficient source of capacity — whether it’s a shop, or a business unit, or a factory — and close it. That’s assuming, as was the case following the financial crisis, it wasn’t forced to shut by the downturn.This isn’t much of a problem during periods of weak demand. Most businesses manage to get by in these times. But with demand for consumer goods ripping, as it has post-pandemic, the issue becomes acute. Atrophied capacity takes time to come back online, if it can be rescued at all, while some businesses may even be wary of pulling forward investment in case the economy reverts back to its pre-Covid stasis.The semiconductor crisis is a great example of this. Former FT Alphavillain Matt Klein spelled out why in an excellent piece for reception-at-a-hedge-fund rag Barron’s this time last year:The first key piece of context is the boom-bust cycle that hit America’s semiconductor industry in the 1990s and 2000s. Sales of American-made semiconductors and related devices fell from $94 billion at the peak in 2000 to less than $66 billion the following year. As of 2019, sales were worth less than $65 billion. Similarly, revenues from printed circuit assembly fell from a peak of $37 billion in 2000 to $24 billion by 2002, and were also $24 billion in 2019.Unsurprisingly, businesses responded to the lack of sales by keeping a tight lid on their investment in property, plant, and equipment. After hitting at a little more than $33 billion in 2000, capital spending on physical manufacturing capacity by the total computer and electronics manufacturing sector was just $25 billion 2019.Producers in the rest of the world made up the difference as demand from the U.S. and elsewhere continued to rise over the past two decades. But . . . those foreign producers were similarly unprepared to handle the surge in demand for chips during the pandemic.Since then, the semiconductor manufacturers have done what you might expect in a demand-driven shortage: invest. One example: a short month ago Taiwan Semiconductor announced it planned to spend $44bn in 2022 on capital expenditure, up almost triple what it spent in 2019.But is this pattern going to be repeated across other industries and firms who aren’t struggling to meet quite the same wave of demand? In the US at least, according to UBS, the answer is a resounding “yes”.This is from a note out Wednesday on S&P 500 cash balances and how they might be spent:US capex has surged following the COVID recession, with S&P 500 capex growth now running at ~15% y/y (+20% ex Energy & Materials). Consensus forecasts still look too low in our view with capex expectations for 2022e at +15%. We see a number of factors that should support investment including above trend economic growth, low interest rates, government initiatives and infrastructure projects. There has been significant underinvestment over the last decade. Capex to depreciation has fallen from ~1.35 in 2021 to just over 1x now. Capex to sales also remains below average. Meanwhile, the average age of corporate fixed assets has increased from 14 to 16 years since the early 2000’s. Areas which may see the strongest investment include IT and equipment/capital goods. Our capex intention tracker points to ~20% growth in 2022. In terms of forward looking indicators our capex intentions tracker has accelerated sharply to over +1stdev, a level consistent with 20% y/y capex growth.20 per cent capital expenditure growth in 2022? Whoosh.Figuring out how much of this extra investment is about creating new capacity, and how much of it is simply bringing old capacity online is tougher. But once this fresh supply does come, it seems pretty safe to suggest that inflation should begin to ease. Unless, of course, businesses would prefer prices don’t come down. More