Aurelia Butler

The new head of Germany’s central bank has said it is time for Europe to tighten its financial belt by ending the exceptional monetary and fiscal stimulus that helped the economy to rebound swiftly from the pandemic.Joachim Nagel, who took over as Bundesbank president last month, has called for a “normalisation” of eurozone monetary policy in response to record inflation and said EU fiscal rules should be “stricter” to prevent countries ignoring them.“Many countries are beginning to relax the pandemic restrictions,” Nagel told Die Zeit in his first interview since starting the job. “The economy is recovering. The job markets are looking good. That’s an encouraging picture. That is why monetary policy can become less expansive.”His comments are a clear confirmation that the new president will continue the Bundesbank’s inflation-fighting hawkish tradition. The German central bank has always viewed unconventional policies such as negative interest rates and bond-buying with suspicion.Nagel predicted inflation would stay high and average 4 per cent in Germany this year, saying that unless the situation changes soon, he would call for the European Central Bank to reverse its ultra-loose monetary policy when it meets on March 10. “The first step is to end net bond purchases during 2022,” he said. “Then interest rates could rise this year.”He also urged Brussels to tighten EU fiscal rules so that it was harder to “circumvent” them as many countries did in the past, even Germany. The rules limit government debt levels and deficits, but have been suspended since the pandemic hit in 2020.“What applies to monetary policy also applies to fiscal policy: a lot has to change after the pandemic,” said Nagel. “When we put the crisis behind us, it will be time to reduce the high government debt ratios and thus build up buffers again.”“We should think about clearer, simpler and stricter rules,” he said. “The rules should better ensure that high government debt ratios are reduced.” His comments clash with recent calls by the leaders of France and Italy to revamp the rules to allow higher public investment, setting up a battle before the limits are due to be reintroduced next year.Other members of the ECB governing council are also leaning towards normalising policy. “Raising rates would not lower energy prices,” Isabel Schnabel, an ECB executive board member, said on Twitter. “But if high current inflation threatens to lead to a de-anchoring of inflation expectations, we may still need to respond, as our mandate is to preserve price stability.”Nagel, a former executive at the Bank for International Settlements, worked at the Bundesbank for 17 years before leaving in 2016 and was chosen by Germany’s new government to take over from Jens Weidmann who decided to quit after a decade in the job.Last week, he joined several of his fellow ECB governing council members in calling for more immediate action than was ultimately announced at their meeting.

Christine Lagarde, ECB president, caused a sell-off in bond markets by no longer ruling out that the bank could raise interest rates this year. Her comments triggered a sell-off in eurozone government bond markets as investors predicted the ECB could stop net asset purchases and return its negative deposit rate to zero by the end of the year.Nagel said the current situation of high inflation, falling unemployment and resurgent demand was a “textbook template” of when a central bank should act. “We mustn’t ignore the fact that we have provided the markets with plenty, even overabundance, of liquidity over the years because the inflation rate was too low for a long time,” he said.He warned hesitating to act now could force the ECB to take more drastic action later on, which would be more jarring for financial markets and the economy, adding: “In my estimation, the economic costs are significantly higher if we act too late than if we act early.” More

Australia’s rock lobster fisherfolk are an unlikely bunch to be found at the sharp end of an epoch-defining trade dispute, and yet here we are. Along with the country’s winemakers, the snarers of spiny crustaceans have been particularly hard hit by the blocks that China started imposing on Australian exports in 2020 in retaliation against Canberra’s call for an independent review into the origins of Covid.The China-Australia dispute — perhaps the most salient current example of trade policy being weaponised for political ends — is being watched intently by policymakers worldwide, and particularly in Europe. The EU is considering how to support Lithuania against similar punishment by Beijing for establishing overly intimate diplomatic relations with Taiwan. It is also creating a legal “anti-coercion instrument” to deter future action.Fortune seems so far to be favouring the brave. If China was hoping to cow Australia into submission with its absurd list of 14 grievances and make prime minister Scott Morrison’s administration vulnerable to domestic criticism on the issue, it’s largely failed. The blockades have hit some exports hard, but without a significant overall macroeconomic effect. Politically, they’ve hardened the consensus against being pushed around by Beijing.Australia entered the dispute with justifiable trepidation. Its gross domestic product is less than a tenth the size of China’s, and as a commodity exporter (iron ore, coal, grains) it’s highly dependent on exports that feed the Chinese growth machine. But some of those apparent weaknesses can also be strengths. First, commodities are fungible. If China buys barley from other exporters, Australia can fill the new market gaps that have opened up in countries like Saudi Arabia. The replacement won’t necessarily be one-for-one, but it won’t be nil. Growers can also shift to new crops: Australia’s export-oriented farmers are highly productive and competitive. Second, China needs commodity imports from somewhere, and can’t always find alternatives to Australia. Iron ore and gas are not nice-to-have optional extras for a great manufacturing power. Nor is the Chinese state as unified and omnipotent as it would like to suggest. Those rock lobster fishers have apparently been sneaking some sweet-fleshed delicacies to their Chinese customers via Hong Kong.It’s a tougher task for winemakers, whose exports dropped 30 per cent by value in 2021. Strong sales in other export markets like the UK have only partially compensated: even a nation numbing itself to the awfulness of current Westminster politics with a nightly bottle of Jacob’s Creek apiece can’t quite make up for a Chinese blockade. But Australian winemakers are famous for their commercial agility, and even if China remains closed they will seek to expand markets elsewhere.In the event, Australian total goods exports have bounced back strongly from the Covid shock in early 2020. GDP contracted in the third quarter of last year, thanks to lockdowns reducing consumer demand, but net trade contributed positively.The bullying has also helped solidify a China-sceptic political consensus in Australia. The opposition Labor party was originally critical of Morrison’s government for provoking China and being too close to the US. But public opinion in Australia has swung sharply against Beijing. Last month the Labor leader Anthony Albanese told the Sydney Morning Herald he stood with the government on all main aspects of Chinese relations.Australia’s policy response to the export blocks has been to roll with the punches rather than hit back — a wise tactic given the economies’ respective weight classes. Apart from the slow and uncertain process of taking a case over barley exports to the World Trade Organization, the government has focused on what it can do to help exporters diversify.So far the EU is mainly taking the same moderate approach with Lithuania. It has offered rhetorical solidarity with Vilnius and started its own WTO litigation. It may possibly tweak state aid rules for the country to ease public spending, but has done nothing in the way of direct retaliation.The muted response doesn’t give Brussels the muscular strategic autonomy it craves — though this isn’t a great test case since Lithuanian public opinion largely opposes its government’s confrontation with China. In any case, Lithuania doesn’t look like it’s going to suffer too much. It doesn’t export a lot to China and it’s been showered with offers of generous financing from the US Ex-Im Bank and Taiwan. The EU will very likely be content to wait and see how the WTO case turns out.The Australia case doesn’t justify a counsel of complacency, and the transferability of the lessons will differ depending on patterns of trade. Canberra still faces a very difficult question of how to normalise relations with Beijing, especially when it comes to China’s application to join the Asia-Pacific CPTPP trade agreement. But Australia’s experience so far suggests that trade coercion even by an economy’s biggest overseas market is survivable. It’s certainly worth exploring the potential for retaliatory legal anti-coercion instruments, as the EU is doing. But economic flexibility backed by political consensus is the best first line of defence. [email protected] More

Chipotle Mexican Grill, the much-loved $41bn vendor of pulled-pork wraps and overpriced guacamole, reported its fourth-quarter and final-year results Tuesday evening.And, wouldn’t you know it? Inflation, once again, doesn’t seem to be much of problem for a business that makes stuff people actually want.From the results:Restaurant level operating margin was 22.6%, an increase from 17.4% in 2020. The improvement was driven primarily by leverage from comparable restaurant sales and menu price increases, partially offset by wage inflation, higher commodity inflation primarily from freight and beef, as well as increased delivery expenses.So that’s a 5 percentage point increase in its restaurants’ operating margin from 2020, despite all of the extra costs from messy supply chains, higher beef prices, and its decision to raise the average minimum wage at its grills from $13 to $15 — a not ungenerous 15 per cent increase.Of course, 2020 isn’t exactly a fair comparison given the small matter of a pandemic shuttering restaurants all over the globe, but even compared with the halcyon days of 2019, Chipotle’s restaurant margin last year was some 2 percentage points higher.But how much longer can Chipotle depend on pricing to offset rising costs? Well, in an interview with CNBC, chief executive Brian Niccol said the following:I hope the inflationary environment slows down . . .to date we’ve seen no resistance from our customers [to price increases] . . . but the fact we have 6 per cent [price increase] planned so far for 2022 . . . and we have room to take more if we have to.It’s almost as if, dare we suggest it, higher wages means more queso for people to spend on burritos.Related Links:Tyson loves inflation — FT Alphaville More

BERLIN (Reuters) -Germany must focus on existing climate goals and invest further in infrastructure for electric vehicles to protect its position in the global auto industry amid growing competition, including from Chinese players, its auto assocation VDA said on Wednesday.”We don’t need more and more climate goals. The current ones are ambitious,” VDA president Hildegard Mueller told a news conference. “The transformation requires higher speed and concrete policy measures. We as an industry can also be faster in certain areas.” A report by the Center of Automotive Management assessing which automakers produced the most innovative technologies placed German carmakers Volkswagen (DE:VOWG_p), Mercedes-Benz and BMW at the top of the rankings alongside Tesla (NASDAQ:TSLA) but three Chinese companies were also in the top ten for the first time – BYD, Great Wall and Geely. Building out infrastructure to support a rising number of electric vehicles on roads in Germany was key to protecting its position, the VDA said, pointing to a lack of 5G networks and charging stations among other weaknesses.At its current pace of building out new charging stations, just 160,000 would be installed by 2030, the association warned – a fraction of the country’s stated goal of one million.It also needed to form partnerships with energy producers and raw material producers in other countries to make enough clean energy to power electric vehicles, the VDA said, predicting that domestic renewable energy production would not be sufficient.The association expects the domestic car market to grow by 7% in 2022 to 2.8 million new vehicles, an improvement on last year’s historic lows but still below pre-pandemic levels.Globally, it predicted 4% growth in the market this year, with a 5% increase in Europe where recovery from the pandemic has been slower than the United States or China.The ongoing chip shortage would likely continue to plague the auto industry until 2023, VDA president Hildegard Mueller said in a press conference, though there could be some slight relief in the second half of this year.”Europe will not achieve independence on chips, but securing existing supply chains is of central importance and posessing a strategic market share in the global market could boost our negotiating position in the case of future scarcity,” she added. More

The leading central banks hold the financial markets in their hands. Last year they took us to new summits for global share prices. In response to the pandemic they drove interest rates down to zero and below and promoted a long and large bull market in government debts. Now they are wobbling in their support. They show growing remorse for the inflation they see around them while being reluctant to accept the blame for it. China is the exception as the central bank injects some cash to prevent a regulatory attack on property companies from leading to a collapse in the banks that have lent to the sector.China avoided zero interest rates and quantitative easing. It has a more modest level of consumer inflation. It also suffers from the commodity and component inflation seen globally. The fears I expressed in my last column about the prospects for 2022 — inflation, monetary policy tightening and growing political tensions — have become more visible in the first month of trading.Last year, central banks were forced several times to raise their estimates of inflation as price rises started to come through. With one voice, they told us this would be shortlived, reflecting supply disruptions relating to the pandemic measures taken by governments. They promised to look through the turbulence, to carry on promoting growth and to expect a natural subsidence in inflation as more normal working resumed. Bond and share markets were largely untroubled and shares — particularly in the US — performed well.This year, led by the US Federal Reserve, the talk is all of tightening credit and money by ending all official bond buying and raising interest rates. With the exception of Japan, which still faces an inflation rate of under 1 per cent, the advanced countries are all in the same boat. They did not take the action they should have taken last year to control inflation before it set in. Share markets have been losing trust in the wisdom of central bankers. There is a danger they end up doing too much too late.

Inflation is too much money and credit chasing too few goods. Central banks, through their position at the heart of the banking system, can regulate the amount of money around. They control its price through fixing interest rates and intervening in debt markets. Higher rates should lead to less credit and less activity. They can control its volume by setting lending rules for commercial banks, such as ordering higher levels of cash to be held against bank deposits. In the glory days of the German central bank, before the euro, they managed a policy which produced low inflation and good growth from the German economy by controlling the amount of money they allowed to circulate. The European Central Bank took over when the euro launched. It joined the Fed and others in guiding policy not by money figures but by a study of inflationary pressures within the real economy. These banks have a theory that they can judge the total capacity of the economy they serve. If demand is too close to capacity, they say they need to tighten to stop inflationary pressures. If demand is too far below capacity they need to offer monetary stimulus to narrow the gap. They have been changing their mind about where we are relative to capacity in recent weeks. There is more judgment involved in assessing capacity than in measuring the amount of money available in bank accounts and cash holdings. I remember from my days in industry that the capacity of the factories was elastic. You might be able to run an extra shift or two, going from a one- or two-shift day to a two- or three-shift 24-hour pattern. You might have stock to clear. You might have a spare line to reopen.At other times you could not hire good labour quickly, or your component supply was constrained if you wanted to lift output, or your factory was fully stretched and your stocks already too low.

If economies need a sudden surge in face masks, it is possible to step up their production quickly by diverting from other comparable products. If we are all short of microprocessors it takes a couple of years or so to design, build and bring on stream a new large chip factory — or three to resolve the global shortage. Although the central banks do not target money growth, the result of their actions this year will be to slow it down in the advanced countries from the extraordinary rates deployed to counter lockdowns. If they judge this well, do not panic and do not curb it too much they can experience the soft landing that market bulls expect. We could see the worst of the price rises this spring, to be followed by reductions in the pace of increase. This assumes wage growth stays below the high price rises of the peaks, and many of the shortages are gradually resolved by adding more capacity. The dangers are to both sides of this happy median. If scarcity of labour and reluctance to return to the workforce embeds high inflation levels in pay, price rises will persist, forcing tougher central bank action of a kind share and bond markets will not like. If the central banks forget again the long lags and fret themselves into acting too much anyway, chasing historically high inflation after it is tailing off, we will also have a bear market. To those who see inflation in terms of too few goods, the outlook is mixed. We have seen bad shortages of containers and ship capacity, of timber and oil, aluminium and gas, electronic chips and of certain foods. Individual brands and products have run low, reflecting demand surges or shortages of raw materials and components. The worst is the general shortage of energy. Low wind levels in countries depending on wind farms have exacerbated the gas shortage as power generation has switched to fossil fuels. Russia has been playing with gas volumes in Europe, while Opec has kept some controls over oil volumes. The West’s wish to transition quickly to green energy has set in train major reductions in coal and nuclear generating capacity which needs replacing with something better. The shortage of lorry drivers is gradually easing as more people are trained and wages and conditions improved. There are more container ships on order now, promising an easier time from next year. There is also a move towards more national self sufficiency as people learn of the ways in which over-extended global supply chains can leave you short. Markets tell me that as interest rates rise it is the growth sectors that will suffer most as we need to discount their future cash flows at a higher rate. While that is true, higher interest rates can also hit more heavily borrowed cyclical and mature companies and inflation makes life difficult for companies seeking to add modest value to volatile and inflation-prone raw materials. The fund has held 22 per cent in cash against these troubles, the best part of the portfolio in January. I am glad I took substantial profits on some of the global clean energy assets and some of the digital holdings last year. The main equity holding to keep the fund with its balanced rating is in the world index, which fell over the last four weeks. There are good reasons to worry about quite a lot of specialist sectors and strategies in these conditions. Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]

The Redwood fund — February 8 2022 DescriptionPortfolio weightLegal & General Battery Value-Chain UCITS ETF2%Legal & General Hydrogen Economy UCITS ETF2%Cash Account22%iShares Core MSCI EM IMI UCITS ETF Acc2%Invesco EQQQ Nasdaq-100 UCITS ETF Dist2%Lyxor FTSE Actuaries UK Gilts Inflation Linked (DR) UCITS ETF D5%iShares Global Clean Energy ETF2%Legal & General Cyber Security UCITS ETF2%iShares Core MSCI World UCITS ETF GBP Hgd (Dist)22%Legal & General All Stocks Index-Linked Gilt Index Acc4%Legal & General ROBO GI Robotics and Automation UCITS ETF2%SPDR BofA ML 0-5 Yr EM $ Govt Bd UCITS ETF2%iShares $ TIPS 0-5 UCITS ETF GBP Hedged13%Vanguard FTSE Japan ETF2%Vanguard FTSE 250 UCITS ETF GBP Dist4%X-trackers JPX-Nikkei 400 UCITS ETF 1D1%X-trackers S&P 500 UCITS ETF6%X-trackers MSCI Korea ETF2%X-trackers MSCI Taiwan ETF4%Source: Charles Stanley More

The ECB last week walked back on a pledge not to raise rates in 2022 but has also attempted to temper expectations after markets quickly priced in two moves that would bring its deposit rate back to zero in December.Maintaining the Bundesbank’s historically conservative line, Nagel, who took charge of the German central bank in January, said in an interview that acting too late in normalizing policy could be especially costly.”If the (inflation) picture remains unchanged in March, I will be in favour of normalising monetary policy,” Nagel told Die Zeit. “The first step is to discontinue the net asset purchases over the course of 2022. Then interest rates could be raised before this year is over.”Nagel joins Dutch central bank chief Klaas Knot in openly discussing a rate hike this year that would be the ECB’s first increase in borrowing costs since 2011.”The economic costs are significantly higher if we act too late than they are if we act in good time,” Nagel said. “If we act later we would have to raise interest rates more substantially and at a faster pace. Financial markets would then respond with greater volatility.”Nagel also said that inflation in Germany, the 19-country euro zone’s biggest economy, is likely to “significantly” exceed 4% this year, more than twice the ECB’s 2% target and also well above the Bundesbank’s own projection of 3.6%.”There are signs that the rise in energy prices could be more persistent, that it is affecting the prices of other goods and services, and that mounting demand is also behind it,” he told the newspaper.The ECB last week warned that inflation risks were now tilted to the “upside,” suggesting that price growth could remain above target even in 2023, the third straight year. More

TORONTO (Reuters) – As the Bank of Canada prepares to shrink its bloated balance sheet, investors say the move could enable expected interest rate hikes to have more far-reaching impact on economic activity.Canada’s central bank, unlike the U.S. Federal Reserve, has never previously attempted to shrink its balance sheet, a process known as quantitative tightening (QT), having bought government bonds in large scale for the first time during the pandemic.It currently owns about C$420 billion ($330 billion) worth, or 42% of the market, eclipsing the 28% slice of the U.S. market held by the Fed.Reducing its share of the bond market could transmit monetary policy more effectively to the economy. That’s because borrowing costs for households and businesses tend to be determined by longer-term rates rather than the very short-term rate that is set by the BoC.”Because they own so much of the bond market, the bigger risk is that they don’t roll off quickly enough,” said Andrew Kelvin, chief Canada strategist at TD Securities.Another potential advantage of QT would be to reduce the reserves that the BoC created to pay for bond purchases.Unlike the U.S. system, banks in Canada are not required to hold reserves at the central bank, while the excess liquidity has driven CORRA, a measure of the cost of collateralized overnight lending between banks, below the BoC’s 0.25% target.CORRA is expected to become the primary interest-rate benchmark in Canada, likely referencing trillions of dollars of derivatives.The BoC is currently in the reinvestment phase of its asset-purchase program, buying about C$1 billion of bonds per week to replace those that mature. Analysts say the bank could announce a shift to QT as soon as the March 2 policy announcement, should it hike interest rates then as expected, or at the following meeting in April.The BoC has said it will keep its bond holdings constant at least until it begins raising rates. Rather than selling bonds, it is expected to rely on debt rolling off its balance sheet as it matures.A so-called passive approach is likely because of the maturity profile of the BoC’s balance sheet, say analysts. Nearly 50% of its holdings mature by the end of 2024. Bank of Canada bond holdings – https://graphics.reuters.com/CANADA-CENBANK/BONDS/gdpzynnlzvw/chart.png With uncertainty around a number of QT issues, including the need to cap the pace of roll-off and the optimal balance sheet size in future years, analysts are standing by for guidance from the bank.Prior to the announcement, “they’ll talk us through how the sausage is made,” said Ian Pollick, global head FICC strategy at CIBC Capital Markets.For the market, moving to QT would increase the amount of debt that it needs to absorb. By itself, that could be taken in stride, say analysts.The risk comes from central banks globally also moving to shrink their balance sheets. The Bank of England last week announced the start of QT and the Fed could do so later this year.The last time the Fed tried QT, from the end of 2017 to autumn 2019, it only managed to shrink the balance sheet by about 15% or so before it ran into trouble. “The more central banks that are concurrently unwinding their balance sheets, the more potential disruption there may be for markets which have become addicted to such purchase program,” said James Athey, investment director at Aberdeen Standard Investments, in London.($1 = 1.2713 Canadian dollars) More