Aurelia Butler

Investing.com — Retail sales data for January and the minutes from the Federal Reserve’s last policy meeting are set to dominate the day’s trading, as fears of a Russian invasion of Ukraine continue to ease. The process of detente is looking likely to be slow and drawn-out, however. Airbnb stock is on the up after a bright update late on Tuesday. Wynn Resorts (NASDAQ:WYNN) and ViacomCBS (NASDAQ:VIAC) are not so fortunate. Inflation continues to advance in the developed world, but there are tentative signs of an improvement in China. Here’s what you need to know in financial markets on Wednesday, 16th February.1. Retail Sales, Industrial Production dueBelt up and get ready for the latest big U.S. economic numbers, heading your way at 8:30 AM ET. Retail sales are expected to have posted their biggest jump in 10 months in January, at 2.0%, after their biggest monthly decline in nearly a year in December.That kind of volatility is an eloquent testimony to how the pandemic, with its various waves, has disrupted the usual consumer spending patterns. Investors will once again need to look through such distortions – this time from the Omicron wave – to distinguish noise from signal.Industrial production data due at 9:15 AM ET will also be subject to some of the same factors. It’s expected to have risen 0.4% last month. The National Association of Homebuilders monthly housing market index, meanwhile, is due out at 10 AM ET.2. Global markets still jittery after Russia de-escalates only a littleGlobal markets are still jittery about the situation on the Ukrainian border, amid warnings from the Ukrainian government and from NATO that Russia still has high troop concentrations capable of launching an invasion.Russian newswires, in turn, cited diplomatic sources on Wednesday as saying that troop withdrawals – from regions including Crimea – will continue over the next three to four weeks.The Russian ruble strengthened to its highest in nearly a week, suggesting that locals, at least, have become more sanguine about the chances for peace. However, European natural gas futures, which have eased in recent days, started to edge up again.   3. Stocks set to drift lower; Fed Minutes eyed; Airbnb’s bright updateU.S. stock markets are set to open mostly lower, as participants hold fire ahead of the big economic data later. Late trading in particular will be dominated by the minutes from the last Federal Reserve meeting, which are due for release at 2 PM ET.In recent months, the Fed’s minutes have developed a habit of being more hawkish than its policy statement and press conference, causing volatility toward the end of the trading day.By 6:15 AM ET, Dow Jones futures were down 68 points or 0.2%, while S&P futures and Nasdaq 100 futures were down by a similar amount. All three had posted solid gains on Tuesday on relief at the apparent de-escalation on the Ukrainian border.Stocks likely to be in focus include Airbnb, whose fourth-quarter results reinforced perceptions that the pandemic has permanently shifted customer behavior in a way that will be profitable for it. ViacomCBS and Wynn Resorts, however, are headed in the other direction after weaker-than-expected updates. Hilton Worldwide and Kraft Heinz lead the early earnings roster, while Nvidiaand Cisco report after the bell.4. Inflation roars ahead in U.K., eases in China; Canada data dueThe Great Inflation Narrative continues to progress all over the world. U.K. consumer prices again overshot expectations in January, leaving the annual rate of inflation at 5.5%. Producer price inflation accelerated to 9.9%. also above expectations.  That all adds to pressure on the Bank of England to raise its key rate for a third straight meeting in March. The pound rose 0.3% to its highest in nearly two weeks.There was better news from China, where both consumer and produce price inflation eased in January. The picture was the same in South Africa. Canada, whose central bank is also fingering the interest rate trigger, will release its CPI at 8:30 AM ET.In the corporate sector, meanwhile, brewer Heineken (OTC:HEINY) warned that input inflation pressures were “off the charts”, but was still confident that it could offset them through what it calls “premiumization” – i.e., higher prices.5. Oil rebounds after sharp drop; EIA inventories eyedCrude oil prices regained their upward after falling heavily in response to Wednesday’s news out of eastern Europe.By 6:20 AM ET, U.S. crude futures were up 0.8% at $92.77 a barrel, while Brent crude was up 0.9% at $94.07 a barrel.U.S. inventory data, due from the government at 10:30 AM ET, appear likely to confirm a picture of ongoing tightness due to strong demand and a sluggish response from domestic and foreign producers. The American Petroleum Institute’s numbers showed a 1.08 million barrel drop in crude stocks last week – albeit that was a little less than expected. More

While emerging market equities have trailed their developed brethren for more than a decade, high-yielding EM bonds have done much better. They have consistently attracted yield-seeking foreign funds. Now a global bond sell-off has shaken investors’ confidence. Rightly so, because risks are greater than in the past. Foreigners hold more emerging market bonds today than they did last time the US Federal Reserve threatened to tighten credit availability, the so-called taper tantrum of 2013.Some will argue EM markets already price in the worst. As a group, the top 10 largest emerging market debt issues offer the highest inflation-adjusted (real) yields this century. Compared with the US high yield market, the spread is the widest since at least 2014, according to data from Bank of America. Moreover, in large economies such as Brazil, Mexico and South Africa, inflation rates show signs of peaking. Yet the real test for these markets lies ahead. In March, the US Fed should raise interest rates for the first time in the pandemic era. While emerging market bond investors did reasonably well during the last tightening cycle, inflation then was less entrenched than today. Supply shortages for both raw material and labour refuse to go away. Worldwide, central bankers sound more hawkish on rates.In the past, the big emerging market economies such as Brazil, Russia and South Africa had current account weaknesses that led to currency crises. This time the issue is fiscal. Debt as a proportion of gross domestic product has increased, even excluding China’s borrowing binge in the past decade. Since 2014, Latin America’s debt-to-GDP ratio has climbed by half to 75 per cent. At the time of the taper tantrum, which triggered a sharp sell-off by catching many emerging market investors off guard, foreign holdings of EM bonds amounted to perhaps 45 per cent of new inflows from overseas. Today, foreign holdings easily exceed 100 per cent of those inflows, and not just for hard currency debt. In some markets such as Peru and Malaysia, foreigners own more than 40 per cent of the local currency bond supply. The first of a series of US interest rate bumps is expected next month. So it is best to wait before trying to bottom fish in emerging market bonds. More

The chair of the world’s most powerful financial watchdog has called on western leaders to “think twice” before imposing sanctions on Russia, warning that some penalties risked undermining global financial stability. Klaas Knot, chair of the Financial Stability Board, told the Financial Times that suspending Russia’s access to the Swift international payments system, which underpins trillions of dollars of transactions a year, could result in a “severe disruption in payment flows”. “When applying severe measures, one should always think twice and also be aware of the consequences” — Klaas Knot President Vladimir Putin has eased tensions in the crisis and drawn down some Russian troops from border areas to enable “dialogue” with the west while still keeping the threat of invasion hanging over his neighbour. US and European shares rallied after Putin said he was prepared to hold negotiations if the US and Nato agreed to discuss Moscow’s grievances, including its demand that the transatlantic alliance never admit Ukraine. Analysts treated with caution Moscow’s latest announcement that it was ready to de-escalate, as Kyiv revealed another round of cyber attacks against government websites and banks. Washington has disclosed more intelligence about an alleged Russian coup plot for Ukraine, but President Joe Biden reiterated yesterday that there was still “plenty of room for diplomacy”.Explainer: Can the Minsk accords help de-escalate Russia-Ukraine tensions? French and German leaders are keen to revive stalled talks. Poland, meanwhile, is preparing for an influx of refugees fleeing Ukraine.Thanks for reading FirstFT Americas. Have feedback on today’s newsletter? Share your thoughts with us at [email protected] — Wai KwenFive more stories in the news1. Global financial watchdog calls for ‘urgent’ action to contain crypto risks The FSB also warned that big banks and other systemically important financial institutions were “increasingly willing” to gain exposure to crypto and pointed to global stablecoins as causing particular risks to financial stability.2. Argentina’s president struggles to sell IMF deal to a sceptical Congress The country’s agreement with the IMF to restructure $44.5bn in debt is being threatened by a rupture within the government’s own ranks just weeks ahead of a looming deadline for finalising the deal.3. Eric Schmidt creates $125mn fund for ‘hard problems’ in AI research The former Google chief executive is launching a $125mn philanthropic project to fund artificial intelligence research that solves difficult issues in the field, including issues of bias, harm and misuse, geopolitical conflict and scientific limitations of the technology.4. Iran calls for US commitment on nuclear deal In an interview with the FT, Iran’s foreign minister Hossein Amirabdollahian sought assurances that Washington would not abandon the nuclear accord as it did under former president Donald Trump, as Tehran proposed that Congress make a “political statement” on the deal.5. Biden’s petrol problem: president eyes gas tax cut as pump prices soar Rising petrol prices, already at seven-year highs, are feeding wider inflation and threatening to derail Biden’s presidency, say political analysts. On Tuesday, the White House said it could scrap federal gasoline taxes in a bid to bring immediate relief to drivers.Coronavirus digestOpinion: San Francisco’s unified front on mask wearing begins to fray. The city, which was quick to enforce rules at the start of the pandemic, is now relaxing them, writes Dave Lee.The European Medicines Agency is unlikely to grant conditional marketing authorisation to Merck’s Covid-19 antiviral pill molnupiravir this month as it grapples with “problematic” data. China’s president Xi Jinping has told Hong Kong to “take all necessary steps” to contain the city’s biggest coronavirus wave in a rare directive that analysts believe could pave the way for more stringent measures.Opinion: We must face the looming threat of prolonged and messy but necessary debt restructuring, writes Martin Wolf.The European Central Bank must consider “unprecedented” house price rises in assessing high inflation levels, executive board member Isabel Schnabel said.The day aheadNato defence ministers meet The alliance gathers in Brussels for two days to decide whether to deploy troops to south-eastern Europe amid tensions over the Ukraine-Russia border. (Reuters)1MDB trial A former Goldman Sachs banker at the centre of the multibillion-dollar scandal is expected to take the stand in a New York federal court to testify in the criminal trial of his former colleague, Roger Ng. EU rule-of-law funding decision The EU’s top court has dismissed Poland and Hungary’s legal challenge to the bloc’s rules, opening the way for Brussels to withhold funding from member states for violations of the rule of law.France’s dinner for military partners Emmanuel Macron will host France’s military partners in the Sahel at the Elysée Palace on the eve of an EU-Africa summit in Brussels as Paris attempts to reorganise its counter-terrorism operation in west Africa. Inflation The UK and Canada report January consumer price index data. Economists polled by Reuters forecast Britain’s annual pace of inflation to land at 5.4 per cent, as it did in December, a 30-year record. Stay up to date with our inflation tracker. In the US: Retail sales are expected to have rebounded last month on online orders and auto purchases. Minutes from the Federal Reserve’s January meeting, when the central bank signalled rate rises, are also out. (WSJ, FT)What else we’re reading Inflation tracker: latest figures as countries grapple with rising prices The FT analyses the rise in consumer and house prices globally and assesses how long trends may last.

Unilever’s tea business tests PE’s conscience Workers on a Kenyan tea estate are still seeking medical compensation from the consumer goods group after seven people were killed and 56 women raped in a 2007 attack fuelled by ethnic tensions. Now, CVC’s $4.5bn deal to buy brands such as PG Tips means it will also be responsible for plantations in Africa.

A worker at Unilever’s tea plantation in Kericho, Kenya © Hollandse Hoogte/eyevine

Citi’s Jane Fraser ditches big league dreams Citigroup has conceded its ambition of becoming a top-three Wall Street investment bank in order to focus on businesses that offer growth opportunities while being less capital intensive. But making the case for the strategy will put its chief executive’s communication skills to the test.BP’s bruised but buoyant ‘worrier’ chief Shortly after taking the helm, Bernard Looney’s plan to turn the 112-year-old oil major into an integrated energy company stalled and its shares fell to a 25-year low. But Looney is still optimistic, if a little chastened from his bruising introduction.Why the infancy of NFTs may last a long time Measured in financial terms, the market looks big: about $24bn worth of non-fungible tokens have been traded to date. But when you count users instead of dollars, the industry is tiny, writes the FT’s global tech correspondent Tim Bradshaw.Nine of the best fitness trackersCheck out these wearables for every kind of workout.

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Argentina’s agreement with the IMF to restructure $44.5bn in debt is being threatened by a rupture within the government’s own ranks just weeks ahead of a looming deadline for finalising the deal.President Alberto Fernández is lobbying lawmakers from his own leftwing coalition to try and win support for an outline deal, which requires congressional approval. But securing a simple majority in congress is proving a challenge before the house adjourns on March 1. “Fernández is trying to hold the puzzle pieces of his coalition together,” a close adviser to the president told the Financial Times in Buenos Aires. “There are pieces that don’t want to be part of the puzzle and are breaking away.”The surprise resignation on January 31 of Máximo Kirchner as leader of the Peronist bloc in the lower house of congress in protest at the IMF outline deal has exposed deep rifts within the governing coalition, a mix of moderates aligned with the president and a radical wing led by Kirchner and his mother, Cristina Fernández de Kirchner, the country’s vice-president. Lawmakers in the governing coalition who are aligned with the Kirchners may decide to vote against or abstain, further complicating the quorum needed to ensure the deal passes. They argue that the original IMF deal broke the fund’s rules — which the fund denies — and that the lender should grant Argentina favourable treatment in any new deal.Germán Martínez, who has replaced Kirchner as leader of the Peronist bloc told the FT that so far the number of votes backing the IMF deal was “unclear”. “We are digesting what happened in January,” Martínez said, referring to Kirchner’s resignation, and “clearing any doubts” among deputies who are undecided. Martínez said he was working to “close the gap” in the coming weeks by calling or meeting representatives one by one to reassure them that the deal is the best option for Argentina. Any delay in Congress could imperil a deal announced in January, which followed months of discussions between Argentina and the IMF to restructure the debt from the record $57bn bailout in 2018 negotiated by the previous centre-right government of Mauricio Macri. The deal must still be finalised at the IMF as well. Argentina owes the fund $19bn in repayments this year due to the bailout, including a sizeable $2.8bn instalment due on March 22, which analysts see as a de facto deadline for approving the deal as the country’s international reserves dwindle. Fernanda Vallejos, a Peronist lower house representative for the province of Buenos Aires, is among those who plan to vote against the deal. “Politics aside, it is a question of mathematics,” she said. “For debt that is unpayable . . . you cannot refinance it, you have to restructure it.” The current outline agreement, which envisions Argentina reducing its primary fiscal deficit gradually from 2.5 per cent of gross domestic product this year to 0.9 per cent in 2024, does not change the terms of the original 2018 loan, Vallejos said, and risks “a long cycle of debt”, that Argentina has seen before.Net central bank reserves have fallen into negative territory by some calculations after the government paid just over $1bn in principal and interest on its loan to the fund in February. Inflation is running above 50 per cent a year and the parallel exchange rate is more than double the officially controlled level.If this deal is approved it will be the 22nd arrangement in the country’s history with the fund since it joined in 1956. Economists have expressed scepticism about whether a divided and unpopular government facing elections next year will be able to deliver on its commitments. “Every three months we’re going to face uncertainty over our ability to pay and that is no solution,” said Vallejos, who described the congressional debate as being far from homogeneous.

With no consensus among the ruling Peronist coalition over the deal’s terms, more moderate opposition lawmakers have said publicly they are likely to vote against it, or abstain. Leaders of the opposition lambasted the ruling party’s “irresponsibility” for not presenting a united front on an issue of such importance during a press conference last week.Kristalina Georgieva, managing director of the IMF, has recognised “the limitations” of what can be done in Argentina over the coming years, citing political opposition.The IMF itself does not require any congressional approval to finalise the deal, although the fund has highlighted the need for broad political support for an agreement. Carlos Melconian, former head of the Bank of Argentina, said that Fernández in theory could negotiate a deal without Congress’s full support — although doing so would be politically costly ahead of the 2023 election. More

UK inflation has accelerated to the highest rate in 30 years, further squeezing living standards and increasing pressure on the Bank of England to raise interest rates again.Consumer prices rose at an annual rate of 5.5 per cent last month, up from 5.4 per cent in December and well above the 0.7 per cent recorded in January 2021, data published by the Office for National Statistics showed on Wednesday.Inflation in January was more than double the BoE target of 2 per cent — the highest since March 1992 when it reached 7.1 per cent.Jack Leslie, economist at the Resolution Foundation think-tank, warned that high inflation “could drive the deepest squeeze on living standards in six decades”.Core inflation, which excludes energy, food, alcohol and tobacco — goods with the more volatile prices — rose to 4.4 per cent in January, up from 4.2 per cent in the previous month. The figures exceeded forecasts by economists polled by Reuters, who expected CPI inflation to remain at 5.4 per cent and core inflation to increase to 4.3 per cent.The BoE expects inflation to peak at more than 7 per cent in April, when Ofgem, the energy regulator, will increase its default energy tariff price cap. Rishi Sunak, chancellor, said on Wednesday that high inflation is a global challenge, but added that the government has “stepped in to provide millions of households with up to £350 to help with rising energy bills”.However, Elizabeth Martins, economist at HSBC, argued that even with the fiscal support, higher inflation meant the squeeze on income would be “more intense” than previously expected. Together with the strong employment data published on Tuesday, high inflation supports economists’ expectations that the Bank of England will raise borrowing costs again this year.“With inflation now tracking above expectations on a consistent basis and no further CPI report set for release ahead of March’s BoE meeting, markets are likely to run with the idea of a 50 basis point hike from the bank at their next meeting,” said Simon Harvey, head of FX Analysis at Monex Europe, a foreign exchange company.Samuel Tombs, economist at Pantheon Macroeconomics, said the strength in CPI inflation will persuade the BoE’s Monetary Policy Committee to increase bank rates to 0.75 per cent in March and 1 per cent in May.Martins said there could be an additional rate rise in August, while wider market expectations are that policy rates will climb above 2 per cent within a year. The central bank raised rates in December and February from their historic low of 0.1 per cent to 0.5 per cent.Grant Fitzner, ONS chief economist, said that “clothing and footwear pushed inflation up this month” together with the rising costs of some household goods. Energy prices continued to rise fast in January, with an annual pace of 23.2 per cent recorded. The Russia-Ukraine crisis could keep inflation higher for longer by triggering a further surge in wholesale energy costs, warned Suren Thiru, head of economics at the British Chambers of Commerce.However, high inflation was broad-based last month, hitting a number of sectors. The price of food rose 4 per cent, with clothing and household goods up 6.3 per cent and 9.1 per cent respectively. The cost of second-hand cars and bikes rose at double-digit rates, reflecting supply chain disruptions and high demand. The retail price index, which is linked to government bonds and affects the costs of public borrowing, rose to 7.8 per cent in January, the highest since March 1991. Isabel Stockton, economist at the Institute for Fiscal Studies, projected central government spending on debt interest this financial year to reach £69bn, £11bn higher than previously forecast. More

Good morning. Markets sniffed peace in the Ukraine today, and rose. We hope they are right, but we suspect the rollercoaster ride ain’t over yet. Email us: [email protected] and [email protected] inflation is not going away soonYesterday we discussed house price inflation and, tangentially, whether it is a leading indicator for rent inflation. This is important just now because rent, broadly construed, makes up about a third of the CPI inflation calculation. And CPI inflation is making markets go bananas. Yesterday’s conclusions, roughly, were that it is unclear how much house price inflation contributes to rent inflation; that house prices have risen by a huge amount in the last two years; but that the increases appear to be over for now, and could reverse at the end of this year.That does not imply rent inflation has plateaued, as well. Start with some basic data. Here is annual change in asking rents for new leases, as reported by the online brokerage sites Zillow and Apartment List:This looks awful. The CPI measures of rent and owners’ equivalent rent were up just 3.8 and 4.1 per cent year over year in January. The CPI measures lag, both because they include slower-moving renewing leases and because the survey-based owners’ equivalent reading tracks slow-moving expectations. But if the double-digit broker numbers are indicative, the official figures are going to rise a lot in coming months.Things look a little different when you look at the same data on a month-over-month basis:Here you see that the normal seasonal decline in rents has happened this winter. This is a relief. But look closely. The decline has not been as steep as in previous years. Seasonally adjusted, rent is not on fire, but still looks unusually warm. The big question is whether this will continue through this year and beyond.The Zillow and Apartment List data may understate how warm rent inflation it is. RealPage, which makes software for property companies, has data on actual closed leases. This is better, because rental unit occupancy rates are historically high right now, so renters often pay over the ask price to secure an apartment, as RealPage economist Jay Parsons pointed out to me. The RealPage closed leases data show a 0.6 per cent month over month increase for new renters in January, very high for winter, and higher than the Zillow and Apartment List figures. Another eye opening set of data comes from Invitation Homes, which is a real estate company that rents more than 70,000 single-family homes across the US. Its fourth-quarter numbers include a 17 per cent rise in rents on new leases, and a staggering 9 per cent on renewals. Look at the acceleration from a year ago:

Here, for contrast, are the results from the fourth quarter of pre-Covid 2019:

Things are really, really different now. What explains this? The housing economists I spoke to all tell the same story. There appears to have been a spike in household formation, which has not yet been captured in the official numbers. This has run up against a national housing shortage. The very large millennial generation is hitting the age where they dump their roommates and move into their own homes, and the housing bust following the great financial crisis led to years of slow new construction, a trend that is only ending now. Add pent-up demand to this picture, after new household formation paused in the first year of the pandemic. Layer on top of that stimulus programmes that padded millennials bank accounts, and you get the rent increases you are seeing now.The pandemic “slowed down household formation and now we are seeing that release . . . but the inflation will continue after the burst ends”, said Daryl Fairweather, chief economist at Redfin, another brokerage. Parsons of RealPage wrote that he expected “rent growth to remain significant throughout 2022 in essentially all markets and all price points”.Economists at the San Francisco Fed agreed. Earlier this week they published a study that used asking rents — that same Zillow data we saw above, in fact — and house prices in major US cities to project future increases in CPI and PCE (personal consumption expenditure) rent inflation. They note that Zillow asking rent inflation is a decent predictor of CPI rent inflation a year later. Here is their chart of the relationship:

Combining this with house price data:Our panel model predicts that future rent inflation could increase by about 3.4 percentage points in both 2022 and 2023 relative to the pre-pandemic five-year average. This prediction translates into an additional 1.1pp increase in overall CPI inflation for both 2022 and 2023. In terms of overall PCE inflation, the measure used by the Federal Reserve to assess price stability, our prediction translates into an additional 0.5pp increase for both 2022 and 2023.A percentage point more CPI inflation over the next two years is a lot. What’s more, the model makes sense, given the demographic and housing supply issues, low unemployment, strong household balance sheets and wage growth we are seeing. It is, as we keep repeating, very hard to predict things right now. Rent inflation is highly cyclical. A significant economic slowdown could change things fast. And the rent inflation story has special characteristics that will not apply to other goods and services — Unhedged has not given up its neutral status in the transitory/permanent debate. But with those provisions, the idea that rent inflation will stay high though 2023, and push up CPI meaningfully, is strong.Gold is bugging out“Gold is a hedge against real rates” is a piece of conventional wisdom we basically agree with. Since the late 1970s, the link has stayed tight. Real rates up, gold down. The data is clear, and the reasoning is simple: real rates are the opportunity cost of holding yield-free gold. But things have been weird lately, and gold is no exception. The metal has been moving up right alongside real rates:

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(The chart above uses two-year Treasury yields to capture the impact of recent Fed action on real rates, but 10-year inflation-linked Treasuries offer the same picture.)Perhaps, with real rates below zero, moving from very negative to somewhat negative just doesn’t matter. That’s what occurred to us, at least, but we don’t know much about gold. So we asked someone who does, John Hartsel at Donald Smith & Co, a longtime gold stocks investor, who added:I think people are starting to look more towards protection against dollar devaluation and wealth preservation and those other aspects of gold. But the real rates thing — it has been a very tight relationship obviously. But it is kind of odd: real rates are derived from the difference in pricing of two securities where the government is massively involved in price determination . . . It depends on how you measure real rates.This last point is important. For as neat as the “real rates are the opportunity cost of gold” theory is, the mechanism keeping gold linked to rates is harder to see. The “true” real rate is more a concept than a measurable variable. How much does quantitative easing distort real rates, for instance? There are estimates, but they are ultimately just guesses. And what if one-month T-bills minus inflation is closer to the true real rate? By that measure, real rates have been falling, not rising.The vagueness here could explain why gold has gone on extended run-ups with real rates, like in 2005-06 (credit to Strategas for noting this), before reverting back to trend. Real rates and gold head in opposite directions over the long term. But that leaves room for some fun in the here and now. (Ethan Wu)One good readThe FT’s Jonathan Wheatley lays out the bear case on emerging markets in 2022. Are any brave Unhedged readers willing to take the other side of the argument? More