Aurelia Butler

Christine Lagarde, the European Central Bank president, has played down the chances of a “measurable tightening” of monetary policy to tackle this year’s record eurozone inflation, saying any shift would be gradual.With financial markets pricing in an interest rate rise in June, Lagarde told the European Parliament on Monday that the ECB saw “no need to rush to any premature conclusion at this point in time — the outlook is way too uncertain”.Her comments were more cautious than last week when she sparked a sell-off in eurozone bond markets by refusing to rule out a potential rate rise this year and saying there was “unanimous concern” about inflation on the ECB governing council.However on Monday Lagarde also said she no longer expected inflation to fall below its 2 per cent target by the end of this year. Eurozone inflation defied expectations for a decline at the start of this year by rising to a record of 5.1 per cent in January. Lagarde said it would “continue to be high in the near term” before declining over the course of the year. Lagarde said there was “a real chance inflation will stabilise” at the 2 per cent target, which she said would lead to a “normalisation of our monetary policy”.The ECB’s governing council next meets in March. If it was confident then that inflation would remain at the target over the next two years, Lagarde said, it would “take the necessary decision”. That would include “gradually reducing” its asset purchases, which it has used to deliver added stimulus to the eurozone economy, and then “hiking interest rates”.Carsten Brzeski, head of macro research at ING, said Lagarde had “tried to put the hawkish genie back into the bottle after an aggressive repricing in markets following Thursday’s ECB meeting”.Eurozone government bond prices continued to fall on Monday, pushing up the borrowing costs of some southern European countries, such as Greece, back to pre-pandemic levels. Bond prices fall as yields rise.

The spread between Italian 10-year borrowing costs and those of Germany — a key measure of stress in eurozone bond markets — rose to 1.63 percentage points, its highest level since July 2020.Frederik Ducrozet, a strategist at Pictet Wealth Management, said: “The lack of change in tone in the face of a significant re-pricing in rates markets is in itself an important signal.”He predicted the ECB was likely to raise rates for the first time in September or December, after having ended its net asset purchases in the third quarter. The bank last raised rates in 2011.Lagarde was asked repeatedly by MEPs whether the ECB would intervene to curb the rise in borrowing costs for peripheral eurozone countries. She said: “We will use any tools, any instruments that are needed in order to make sure that our monetary policy is properly transmitted throughout the whole euro area, to all member states.”The ECB president also emphasised that the eurozone economy had no “labour market overheat” — unlike the US or UK. She said it was in a “completely different” situation in terms of the size of its fiscal stimulus, the strength of demand and the level of core inflation, which excludes energy and food prices.Eugen Jurzyca, a Slovakian MEP, said: “People are genuinely worried about what will happen in the upcoming months as inflation has been much higher than predicted and governments face tough questions of whether they should respond with compensation measures.” More

A former Conservative Treasury minister rounded on the government’s economic policy on Monday, calling the level of interest rates “ridiculous” and its management of the Budget “nuts”. Lord Jim O’Neill, who was brought into government by David Cameron and George Osborne in 2015, argued that the government should spend much more on education, health and devolution and should limit any inflationary pressures with much higher interest rates. But although O’Neill, who was previously chief economist of Goldman Sachs, was highly critical of the government’s monetary and fiscal policy, he supported Boris Johnson’s levelling-up white paper, saying it was “one of the most important things to come out of government for a long time”. However, O’Neill spent almost no time talking about levelling-up and instead criticised general government economic policy. He told MPs on the Commons Treasury committee that the Bank of England had made a mistake in being so late to see the danger of inflation, saying the rise in spending, which pushed prices higher after the coronavirus crisis eased, was “one of the most predictable recoveries we’ve ever had”. O’Neil said he would have voted for raising interest rates and ending quantitative easing throughout the past year because the recovery was so strong. “It seems quite clear not just the Bank [of England] but other central banks should not have behaved as they’ve done in the past two years,” he added. In an outspoken session, O’Neill was clear that he thought UK economic policy should be rebalanced so that government borrowing and public investment was higher and the additional demand was offset by higher interest rates to keep overall spending and inflation under control. “I personally believe the whole framework for inflation targeting has outlived its sell-by date,” O’Neill said. Calling instead for “a shift in the mindset” and much higher government investment and “massive devolution”, he asked: “why is there such confidence in the need to get the deficit down?”“If [government] debt went to 100 per cent [of national income] as a consequence of us having a proper structural approach to education spending so that we do not have the severe number of people who cannot do what they should [be able to] do [coming] out of our primary and secondary schools . . . I would positively welcome it”.

As well as calling for much bigger deficits and higher government investment, he told MPs that interest rates, which rose to 0.5 per cent last week, “are at a ridiculous level” and the BoE should be thinking “of a goal of interest rates of 4 per cent”.“The government has to get out of the jail-like prisoner of circumstances and make sure the trend rate of growth doesn’t keep falling,” O’Neill added.The former Treasury minister also said there had to be a better way to formulate the Budget than to rely on the Office for Budget Responsibility to forecast the deficit and then respond either with a windfall of spending or with austerity. “It’s a mad situation where the biggest change in the next year’s Budget outcome is simply because three people at the OBR have changed the economic forecast,” he said. “It’s completely nuts.”The other economists giving evidence alongside O’Neill disagreed about the causes of inflation and the BoE’s culpability, but all suggested that greater government investment in education and infrastructure had the best chance of increasing the UK’s underlying rate of productivity growth. Roger Bootle, chair of Capital Economics, said the BoE had been too slow in addressing inflation, which is set to rise to 7 per cent, and people would naturally seek pay increases to match. Jagjit Chadha, director of the National Institute of Economic and Social Research, said it was “critically important” that the BoE act to bring inflation down with higher interest rates without causing a recession. Ann Pettifor, director of Prime Economics, disagreed, saying high inflation was primarily caused by an increase in freight, energy and fuel prices, and that “the BoE can’t be held responsible for that”. More

Borrowing costs for southern eurozone governments jumped close to pre-pandemic highs on Monday as investors adjusted to signs that the European Central Bank could raise interest rates as soon as this year in response to the global wave of inflation.The ECB has trodden a careful line on the prospect of rate rises for several months, promising to keep financing conditions favourable until the eurozone economy has rebounded from the pandemic and it is convinced inflation will settle at its 2 per cent target over the medium term.But president Christine Lagarde signalled a “hawkish” shift on Thursday by refusing to rule out a potential rate rise this year — as she had done only weeks earlier — and noting “unanimous concern” on the ECB’s governing council about record eurozone inflation of 5.1 per cent in January.Over the weekend, Klaas Knot, the Dutch central bank head, became the first member of the ECB council to say publicly that it should raise interest rates this year, warning that eurozone inflation would stay at 4 per cent for most of this year. He called for the ECB to end net bond purchases “as soon as possible” in preparation for raising rates in the fourth quarter.In response, a drop in eurozone bond prices sent the yield on Italian 10-year bonds up 0.1 percentage points to 1.84 per cent — back to levels reached in April 2020 shortly after the coronavirus pandemic hit.The spread between Italian 10-year borrowing costs and those of Germany — a key measure of stress in eurozone bond markets — rose to 1.63 percentage points, its highest level since July 2020.The drop was even greater in Greek 10-year bonds, as their yield rose 0.3 percentage points to 2.55 per cent — the highest level since June 2019. Selling pressure was widespread and Spanish 10-year yields rose above 1.1 per cent for the first time for almost three years.Analysts said the bond market was adjusting to the increased likelihood that the ECB could bring net asset purchases to an end in the next few months, opening the door to its first interest rate rise for more than a decade.“We are ending a period of negative rates — even Greek bond yields turned negative last year — and we are seeing a repositioning of the market,” said Carsten Brzeski, head of macro research at ING.However, Brzeski said investors seemed to have “moved completely to the other extreme” by pricing in an ECB rate rise by June, adding that the earliest he could imagine such a move was September.

But selling in Italian, Greek and Spanish debt eased later in the day after Lagarde downplayed the chances of a sudden shift in ECB policy by saying there was “no need to rush to any premature conclusion at this point in time — the outlook is way too uncertain”. Speaking to the European Parliament, she added: “The chances have increased that inflation will stabilise at our target, but there are no signals that inflation will be persistently and significantly above our target over the medium term, which would require a measurable tightening.”The yield on the 10-year Italian government bond pared its gains to sit at about 1.78 per cent. The equivalent Greek yield stood at 2.45 per cent in the late European afternoon, while the Spanish 10-year yield moved back below 1.1 per cent.The ECB has amassed huge influence over eurozone bond markets, particularly in the past two years when it has bought more than 100 per cent of debt, net of refinanced bonds, issued by governments in the single currency bloc. The central bank has almost doubled the total amount of bonds it owns to €4.7tn.In December, it outlined plans to stop net purchases under a €1.85tn emergency programme at the end of March, followed by a temporary doubling of an earlier bond-buying programme before reducing it back to €20bn a month from October.However, some veteran ECB watchers worry it risks repeating the mistake of raising rates too soon, as it did in 2011, just as the eurozone sovereign debt crisis was starting.“We’ll pay the price for the premature tightening as we move through 2023-24 in the form of lower growth, higher unemployment and inflation well below 2 per cent,” said Erik Nielsen, chief economics adviser at UniCredit.Italian stocks also took the strain on Monday. While other parts of Europe’s stock markets pushed a little higher, Italy’s FTSE MIB dropped as much as 1.7 per cent. More

When it comes to drawing conclusions about the state of the economy, it’s often tempting to stick to the established economic metrics — from unemployment, to labour force participation, to CPI — as a basis for your opinions.But at FT Alphaville, we also believe something can be gleaned about the economy from looking at company data, particularly of those who play such an important role in their local economies.Speaking of which, $32bn Tyson Foods — America’s largest producer of chicken, pork and beef — announced its first-quarter results before the bell Monday morning. And they were blow out.Revenues grew 24 per cent year on year, coming in at a shade under $13bn, versus analyst’s expectations of $12bn. While earnings per share tripled to $3.70, comfortably exceeding the $1.94 Wall Street’s finest had pencilled in. In early trading, the shares are up 12 per cent at $98.64.However, what piqued our interest wasn’t Tyson’s top or bottom line growth, but how it got there and, more importantly, what it says about the effect of inflation on some American businesses.It feels obvious to state but for commodity product producers such as Tyson, revenues are simply what you get when you multiply the number of goods sold (aka the volume) by the prices its customers pay. So how did that break down for Tyson and its Amazon-esque 24 per cent revenue growth?Well, here’s the key table from its earnings release:

Cast your eyes over to the second last row in the table — volumes were muted across all its key operating segments bar its international business. The number of beefy goods sold even declined 6 per cent. The reason? Well, for both cow flesh and things that cluck, Tyson cited a “challenging labour environment”. Or, in layman’s terms, it was struggling to get the bodies needed to produce.Now, a decline in a volumes sounds bad, until you look at those price increases in the final row. Holy cow!The average price charged per customer for beef was up 32 per cent year on year, pork 13 per cent and chicken 20 per cent. While wages, along with meat and logistics prices have risen substantially, Tyson’s pricing power more than made up for those higher production costs. The company recorded an operating profit margin of 11.3 per cent — only the fourth time since 1990 that this figure has been in the double digits, according to data from S&P Global.Of course, as the largest company in one of the most consolidated industries in the US, Tyson is in an enviable position where it can use price increases to ameliorate any supply chain issues it might be suffering from.But it is a reminder that in an economy where both wage growth and supply chain bottlenecks are driving inflation, businesses that sell things that people want cannot only deal with the higher costs, but thrive from them.Just don’t tell Elizabeth Warren.Related Links:Chicken collusion? Charted! — FT Alphaville More

Asset manager Abrdn has been forced to delay a shareholder vote on a £1.5bn transaction owing to a shortage of paper caused by international supply chain problems. The FTSE 100 group will contact shareholders on Wednesday announcing the delay to the vote on its proposed acquisition of retail funds platform Interactive Investor.Abrdn had originally intended to complete the ballot before it announced annual results on March 1 — the first set of full-year numbers since chief executive Stephen Bird took the job in September 2020. A vote on the takeover will now be pushed back to mid-March. The delay was first reported by Sky News. “There have been shortages, and other companies expect to be hit as well,” Abrdn said. “We have such a big group of retail shareholders, and it’s not a small document to circulate.” UK takeover rules, which were established in 1968, require that companies send paper versions of documents to all shareholders. The information on the Abrdn deal covers 120 pages and the group has about 1.1mn shareholders. The company has said the document will be issued this week. Demand for paper has surged during the pandemic, with a boom in ecommerce and need for cardboard being exacerbated by container shortages and other transportation issues. Shortages and delays have affected multiple groups including booksellers and publishers.Dan Kemp, chief investment officer at Morningstar, warned that other groups needing to communicate with shareholders may experience similar difficulties. “We’re coming into proxy voting season later in the quarter, so we may see more [of this] happening then,” he said. “This speaks to the inflationary pressures that everyone is focused on at the moment, though it’s tough to say how much is from increased demand and how much is from supply chain issues,” he said. The deal to buy Interactive Investor is Bird’s biggest bet yet to transform the UK-based asset manager, which has £532bn in assets under management but has suffered from outflows and a depressed share price five years after its creation from Standard Life and Aberdeen.

Interactive Investor is the UK’s second-largest funds supermarket, with £55bn in assets under administration. Abrdn believes the purchase will be crucial in transforming the asset manager in an era where fees are being squeezed and individuals are having to take greater responsibility for funding their retirements. However, investors and analysts have mixed views on the deal’s prospects. HSBC analysts have described it as a “game changer”, but some top Abrdn shareholders have expressed reservations over the price and how it will be integrated.Interactive Investor had been expected to list for between £1.5bn and £2bn before Abrdn stepped in to buy it in December. More

WASHINGTON (Reuters) – U.S. officials called on Monday for “concrete action” from China to make good on its commitment to purchase $200 billion in additional U.S. goods and services in 2020 and 2021 under the “Phase 1” trade deal signed by former President Donald Trump.The officials said Washington was losing patience with Beijing, which had “not shown real signs” in recent months that it would close the gap in the two-year purchase commitments that expired at the end of 2021. The comments come a day before the U.S. government is due to release full-year trade data that analysts expect to show a significant shortfall in China’s pledge to increase purchases of U.S. farm and manufactured goods, energy and services.Through November, China had met only about 60% of the goal, according to trade data compiled by Peterson Institute for International Economics senior fellow Chad Bown.U.S. President Joe Biden has said the trade deal did not address the core problems with China’s state-led economy, but U.S. officials have pressed Beijing to make good on the deal as signed.”Because we inherited this deal, we engaged the (People’s Republic of China) on its purchase commitment shortfalls, both to fight for U.S. farmers, ranchers and manufacturers and give China the opportunity to follow through on its commitments. But our patience is wearing thin,” said one of the officials.China continued to engage with U.S. officials on the issue, but Washington was seeking “concrete action”, not “talks for the sake of talking,” the official added.U.S. officials said they would continue to press China to show “serious intent” to reach an agreement on their purchase commitments, but conceded the framework of the deal offered them little leverage to enforce the purchase commitments.Regardless of how the negotiations wind up, U.S. officials said they would continue to target the core problems of China’s state-led economy, while working to boost U.S. competitiveness by diversifying markets and working with allies and partners.Deputy U.S. Trade Representative Sarah Bianchi told a trade conference on Tuesday that China had failed to meet its purchase commitments under the deal and the conversations between Washington and Beijing had been “very difficult.”The agreement, signed by Trump in January 2020, defused a nearly three-year trade war between the world’s two largest economies, but left in place tariffs on hundreds of billions of dollars of imports on both sides of the Pacific.Zhao Lijian, a spokesman for China’s foreign ministry, said on Monday that the United States should work with China to push foward economic and trade ties.”For the specific problems which emerge in economic and trade relations between the two countries, both sides should appropriately solve them in the spirit of mutual respect, equality and consultation,” Zhao told a news conference.China’s Ministry of Commerce did not respond to a faxed request for comment. More