Aurelia Butler

Consumer prices in the eurozone rose by a record 5.1 per cent in January from a year earlier, keeping inflation higher than expected and increasing the pressure on the European Central Bank to respond with tighter monetary policy.Steeper increases in the price of energy and food were only partly offset by slower growth in prices of manufactured goods, which meant annual inflation rose from its previous eurozone record of 5 per cent in December, Eurostat said on Wednesday.That clashed with widespread expectations for eurozone inflation to fall at the start of this year. Economists polled by Reuters had on average forecast a eurozone inflation rate of 4.4 per cent in January.Compared with the previous month, consumer prices rose 0.3 per cent, indicating that underlying inflationary pressures continue to build in the 19-country bloc. The highest national inflation rate was 12.2 per cent in Lithuania, while France had the lowest at 3.3 per cent.Eurozone energy prices rose by a record 28.6 per cent from the previous year in January, while growth in unprocessed food prices accelerated to 5.2 per cent. Services prices continued to rise 2.4 per cent while growth in goods prices slowed to 2.3 per cent.Core inflation, stripping out more volatile energy and food prices, was 2.3 per cent. That was down from 2.6 per cent in December but it had been expected to fall below 2 per cent.The rising cost of living is likely to dominate the first ECB governing council meeting of the year on Thursday, even if most economists expect the bank to stick to its timetable for keeping interest rates unchanged while it steadily reduces asset purchases over the course of this year.The euro climbed 0.4 per cent against the dollar to $1.131 on Wednesday while the price of German bonds fell as the 10-year yield reversed earlier losses to rise 2 basis points to 0.05 per cent, its highest for almost three years.Higher than expected inflation has led the US Federal Reserve and the Bank of England to shift to a more “hawkish” policy stance than the ECB. The BoE is expected to raise rates for a second consecutive time on Thursday, while the market is pricing in five rate rises by the Fed this year. The ECB has rebuffed investor bets that it will raise rates this year, saying it will not do so before it stops asset purchases, which it plans to continue at least until October. Markets this week pulled forward expectations of a tightening in eurozone monetary policy, with a rise in the ECB’s deposit rate to minus 0.25 per cent — from its current rate of minus 0.5 per cent — now priced in by December, according to trading in short-term funding markets.

Bert Colijn, senior economist at ING, said he expected the ECB to “push back against early rate hikes” on Thursday. He said the fall in core eurozone inflation and the deceleration in goods prices showed “there is still no evidence of widespread second-round effects” whereby higher prices trigger sharp increases in wages.Yet economists are expecting wage growth to pick up after the eurozone unemployment rate hit an all-time low of 7 per cent in December and a quarter of EU companies reported labour shortages — a new high.The persistence of inflation above the ECB’s 2 per cent target has already caused widening divisions on its governing council. The “hawkish” heads of the German, Belgian and Austrian central banks complained at last month’s meeting that it was committing to continue bond purchases for too long.“The patience of the hawks is likely to wear thin as underlying inflation pressures continue to build over coming months,” said Frederik Ducrozet, a strategist at Pictet Wealth Management, adding that inflation was on track to be 1 percentage point higher than ECB forecasts in the first quarter.Ducrozet, however, added that ECB president Christine Lagarde was likely to continue “resisting panic” over high inflation and he forecast the bank would only start to raise its deposit rate in March 2023. More

To say that Argentina has a troubled history with the IMF is an understatement. A relatively wealthy nation, the South American grain exporter has negotiated no fewer than 21 IMF deals since joining in 1956. Most have failed. There is little reason to think that a 22nd agreement now under negotiation will be any more successful.To be sure, both sides have pressing reasons for wanting a deal to restructure $44.5bn in debt owing from the IMF’s ill-starred bailout to Buenos Aires in 2018. Argentina’s economy is in dire straits, with inflation running at more than 50 per cent a year, fuelled by central bank money-printing to finance an unsustainable budget deficit. Net international reserves are perilously low and with payments of $19bn to the fund due this year, default is a matter of time.The IMF is keen to put behind it the embarrassing failure of its biggest-ever bailout, avoid the spectre of Argentina falling into arrears and show sensitivity to the need for stronger social policies as countries rebuild post-pandemic.The roots of the latest crisis run deep. The Peronist government inherited a mess when it took office in 2019. The economy was mired in recession and the mountain of foreign debt run up by the previous president, Mauricio Macri, was unpayable. The IMF erred in lending so much in 2018 on over-optimistic assumptions without insisting on a private debt restructuring and measures to prevent capital flight. President Alberto Fernández succeeded in restructuring $65bn of private creditor debt in 2020 but internal divisions within his party stymied efforts to follow this up with a rapid IMF deal. Radical Peronists argued that the original bailout should not be repaid in full because it violated IMF statutes by financing capital flight (the fund denies rules were broken).As the economy deteriorated further amid the strains of the pandemic, the pleas from Buenos Aires for special treatment grew louder and the commitment to resolving long-running structural problems weaker.Last Friday’s outline agreement did little more than paper over the cracks. The IMF would refinance the $44.5bn it had lent Argentina with a four-and-a-half-year grace period. In return, Buenos Aires would gradually reduce the budget deficit over three years and curb central bank money-printing.Little was said about the distortions imperilling the economy: ineffective price controls, an official exchange rate of less than half the parallel rate and unsustainable subsidies for public sector tariffs. But the fundamental issue was whether a divided and unpopular government facing elections next year could deliver even on these minimal conditions.The ink was barely dry on Friday’s agreement before a key Peronist politician gave his answer. Announcing his resignation as party leader in the lower house of congress, Máximo Kirchner delivered a withering critique of the deal. He speaks for a powerful faction that believes no deal with the IMF is preferable to accepting limits on spending. Kirchner is the scion of a political dynasty: both his parents were presidents and his mother Cristina is now the powerful vice-president. Last week she excoriated international lenders for promoting austerity policies that she said encouraged drug trafficking. Faced with such an unenviable task, it is easy to understand why the fund is willing to do a fresh deal with Argentina involving minimal conditions. But to proceed without insisting on broader measures to tackle the economy’s fundamental structural problems is to extend and pretend. The IMF should think again. More

NEW YORK (Reuters) – Low inflation had spoiled U.S. investors for so long that last year’s sudden surge came as a shock.As those who lived through the late 1970s and early 1980s can attest, inflation can be a “portfolio killer” because it erodes purchasing power.Inflation revved up to 7% in December compared to the year prior, the highest level in decades.Even at 3% annual inflation, in 20 years you would need $181 to match what $100 buys today, according to the calculator at fintech site SmartAsset.How does that change the money or asset mix you need for retirement?”Many investors have never experienced inflation like we have seen the last few months, so it may be a good time to revisit your portfolio and confirm whether you still feel confident,” said Naveen Malwal, an institutional portfolio manager at Boston-based financial giant Fidelity Investments.After all, some asset classes tend to perform better during higher-inflation periods. Among 15 major asset classes in inflationary periods since 2000, the top performers included oil (41% return), followed by emerging markets stocks (18%), gold (16%), and cyclical stocks (16%), according to a Wells Fargo (NYSE:WFC) study.On the flip side were a couple of bond categories. Emerging markets fixed income lagged with -8% return, while investment-grade fixed income returned -5%.Economists generally agree that inflation will back off from current overheated levels. Over the next 10 years, they expect the Consumer Price Index to average a modest 2.55% annually, according to the Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia.”Look at the things driving inflation: There is too much money chasing too few goods,” said Scott Wren, senior global market strategist for Wells Fargo Investment Institute.”There is money supply growth, there are transfer payments which increased savings, there is supply chain disruption. By the end of the year, we should see some easing, and all those things will help the inflation story.”Which investment areas should benefit from rising prices, and which will not? Here is what the experts say:ESCHEW CASHDuring inflationary periods, the value of your cash holdings will erode over time, perhaps substantially so.”Investors are sitting on way more cash than they should,” Wren said.With indexes like the Nasdaq touching correction territory, now may be a good time to start putting that cash to use, and accumulate harder assets that should hold up during periods of higher inflation.TIPS ARE YOUR FRIENDSFixed income markets tend to get hit hard by inflation. A bond paying out a rock-bottom yield for an extended period is a poor option when prices and interest rates are rising.One corner of the bond market has the answer: Treasury Inflation-Protected Securities (TIPS), whose principal increases with inflation and throws off interest twice a year at a fixed rate.”That’s one way to stay invested in the bond market, and they are literally designed to provide you inflation protection,” Malwal said.LOOK AT HISTORYInvesting has no guarantees, but past performance during inflationary periods can provide some clues.”In higher-inflation environments, things like commodities do well,” said Wells Fargo’s Wren. “So do mid-cap and small-cap stocks. The energy sector typically does well, and equity REITs (real estate investment trusts). I also think financials, industrials, and materials will all benefit.”DO NOT OVERREACTJust because inflation is uncomfortably high, do not expect that to last forever. Minor portfolio tweaks may be in order, but wholesale changes are probably a mistake.Forecasters see inflation drifting down over 2022 as supply chain problems ease up, labor markets normalize, and COVID-related emergency cash infusions recede. “Most people agree we’re headed lower. The question is how much lower and how long will it take to get there,” said Fidelity’s Malwal. “It could be closer to 3-4% by the end of the year.” More

Iraq has become one of the biggest beneficiaries of Xi Jinping’s Belt and Road Initiative as China deepens its economic ties across the Middle East through billion-dollar construction and energy contracts. Beijing struck $10.5bn in new construction deals in Iraq last year, part of a “strong shift” in its engagement towards the Middle East despite a broader downturn in Chinese outbound investment. The findings were revealed in a report published on Wednesday by the Green Finance & Development Center at Fudan University in Shanghai and reviewed by the Financial Times.Beijing’s efforts to foster deeper economic ties with Iraq, Opec’s second-largest oil producer, coincides with a growing perception among Arab leaders that the US is disengaging from the Middle East. The researchers noted that the Chinese Ministry of Commerce’s five-year plan to 2025 promised investment overseas, including non-BRI projects, of $550bn, down 25 per cent from $740bn in 2016-2021. But in Middle Eastern and Arab countries, the level of construction investments and contracts rose 360 per cent and 116 per cent, respectively, mostly in energy and transport infrastructure. Christoph Nedopil Wang, director of the Green Finance & Development Center, said the researchers were “surprised” by the extent of China’s engagement with Middle East and Arab states. “We believed that the focus would be much more on south-east Asia, including infrastructure,” he said. “But actually it was particularly driven by Iraq . . . and a strong shift towards Africa and Middle Eastern countries.”China has cemented its position in the region in the same year that President Joe Biden formally ended the US combat mission in Iraq and the Taliban retook control of Afghanistan after the chaotic exit of coalition forces. The US retains about 2,500 troops in Iraq, where they have been integral to fighting Isis militants, but they have transitioned to a training and advisory role. While Beijing relies on the Middle East for most of its energy imports, Arab states are expanding the relationship, tapping into Chinese technology and extending trade relations with the world’s second-biggest economy. Ties between Beijing and Baghdad strengthened under Adel Abdul Mahdi, the former Iraqi prime minister, who in 2019 described Sino-Iraqi relations as poised for a “quantum leap”.Iraq is already the third-biggest exporter of oil to China, but officials in Baghdad have been keen to secure Chinese investment to help upgrade decaying infrastructure. Many western companies have been reluctant to invest in the country, which is still blighted by political instability and sporadic bouts of violence, outside the oil and gas sectors. New deals signed between Chinese and Iraqi groups include the big Al-Khairat heavy oil power plant in Karbala province, rebuilding the international airport in Nasiriyah and developing the Mansuriya gasfield near the Iran border.In December, Iraq signed an agreement with Chinese companies Power Construction Corporation of China and Sinotech to build 1,000 schools, which will be paid for through oil products. Kirk Sowell, publisher of Inside Iraqi Politics, a newsletter, said that while Iraq had been seeking to increase ties with China in recent years “it’s not like Iraq is becoming an economic colony of China”. He added: “The concern among Iraqi critics of the China agreements is how much of Iraq’s oil is being mortgaged off to pay for Chinese investment, and that’s a question we don’t know the answer to.”Xi launched the BRI in 2013 but after years of rapid growth, the pace of lending on the initiative has recently slowed. There was a total of $59.5bn in Chinese finance investments and contractual co-operation across the 144 BRI countries in 2021 — down from $60.5bn in 2020, according to the Green Finance & Development Center report. Contract values reached $45.6bn — up from $37bn, as investments shrank to $13.9bn from $23.4bn.

Total BRI engagement remains down about 48 per cent from pre-pandemic levels. Fudan University researchers did not expect the BRI to return to the heights of the late 2010s, owing to closer scrutiny of deals in many foreign capitals as well as tighter controls in Beijing over outbound investment.According to the report, no new coal projects received financing or investments in 2021, while green energy deals increased slightly to a record $6.3bn. That also reflected a preference for smaller and more sustainable projects, the researchers said.The latest BRI data came amid renewed international debate over whether China was pushing developing countries into so-called debt traps, under which Beijing could seize assets when it is owed money. Anxiety over China’s rising international dominance has prompted the US and EU over the past year to try to counter the BRI with new international development finance efforts. More

NEW DELHI (Reuters) – India’s growth-focused budget for the upcoming fiscal year, on the back of record market borrowing, has fuelled worries among bond traders who fear the central bank may now be forced to act on the inflationary risks, despite its dovish policy stance.Coupled with global crude oil prices at seven-year highs and expectations for the U.S. Federal Reserve to raise rates more aggressively, traders fear the government’s plans mean the Reserve Bank of India may need to act sooner rather than later.India announced capital expenditure of 7.5 trillion rupees ($100 billion) for 2022/23, or 2.9% of gross domestic product, an increase of 35.4% from the last fiscal year.The government is also set to borrow a record 14.95 trillion rupees, exceeding market expectations for a maximum of 12 trillion to 13 trillion rupees.”We expect the RBI to focus on reining in inflation to 4% from current high levels through next year with domestic growth on a relatively better footing and assuming no surprises on the COVID-19 front,” said Upasna Bharadwaj, an economist at Kotak Mahindra Bank.India’s central bank has held its key repo rate at a record low of 4% since May 2020, and assured markets it will continue to keep its policy stance accommodative until economic recovery is firmly entrenched. Consumer prices accelerated to a five-month high of 5.59% in December, however, close to the upper end of the central bank’s mandated inflation band of 2% to 6%.”The RBI should look to revise their accommodative stance as a countermeasure to the expansionary budget,” said Sandeep Bagla, the chief economic officer at Trust Mutual Fund.”The longer RBI waits to normalise, the more markets will lose the confidence in RBI’s ability to control inflation and inflation expectations.”Bhardwaj said a policy review due on Feb. 9 should undertake a one-shot hike of 40 bps in the reverse repo rate so as to restore normalcy and provide clarity.”However, sentiment in the bond markets has weakened further post the budget and hence, RBI may prefer to postpone the decision to the April policy,.” she added.Economists believe the benchmark bond yield, which has risen about 45 bps in 2022, after last year’s rise of 55 bps, is likely to keep heading higher in the near term, in the absence of open market operations or liquidity-neutral operation twists.”The budget definitely makes RBI’s job tougher from the yield management perspective,” said Yuvika Singhal, an economist with QuantEco Research. Economists polled before the budget had expected the repo rate to be raised 25 basis points in the June quarter and then go up by a total of 75 bps over the next fiscal.The reverse repo rate was forecast to be raised at next week’s policy review and increase by a total of 90 bps in FY23.Six economists and market participants said they now expect an swifter pace and quantum of rate hikes as the RBI alone must tackle inflation.”Across the yield curve, over the course of the year, we will expect bond yields to rise by 20 bps to 30 bps for now,”said Arvind Chari, the chief investment officer at Quantum (NASDAQ:QMCO) Advisers. “The RBI will also have to start hiking its policy rates and we would expect at least a 100 bps increase in rates in FY23.” ($1=74.9330 Indian rupees) More

TOKYO (Reuters) -Bank of Japan Governor Haruhiko Kuroda said on Wednesday he “cannot accept” the view the central bank’s ultra-loose monetary policy has led to regional lenders’ deteriorating health.”It’s true Japan’s low interest rate environment has had an impact on regional lenders through various channels,” Kuroda told parliament.”But Japan’s economy has expanded moderately thanks in part to the BOJ’s aggressive monetary easing” and helped boost growth in areas the regional banks operate, he said.Speaking in the same parliament session, Prime Minister Fumio Kishida said mergers and consolidation are “among options” for regional lenders.”But what’s important is that any decision the lenders make would help regional economies,” he said.”Regional lenders play a very important role in their communities, including by supporting regional businesses. We need to keep that in mind in guiding policy,” Kishida said.The BOJ has been under fire from some lawmakers for the rising cost and diminishing return of its prolonged ultra-easy policy, which has failed to fire up inflation to its 2% target and narrowed the margin commercial banks earn from lending.The hit from ultra-low rates has been particularly hard for regional banks, which are grappling with a dwindling population and an exodus of borrowers to bigger cities.As part of efforts to ease the strain on regional lenders, the BOJ has put in place a scheme incentivising them to consolidate or streamline operations. More

The writer is chief investment strategist at Charles Schwab Don’t fight the Fed. The saying was popularised by the late Marty Zweig, this author’s first boss and mentor on Wall Street in the 1980s and 1990s. Zweig also coined the phrase: “Don’t fight the tape”. The tape — the record of stocks transactions through the day — is decidedly not fighting the US Federal Reserve, with the prospect of monetary policy normalisation clearly behind a very rocky start to the year for US shares. It is typically a pothole-riddled path that is created when central banks begin to normalise policy — even more so during this anything-but-normal pandemicycle (there’s a new word for you).Conceding that inflation is not quite a transitory phenomenon, the Fed is now on a mission. The launch point for the Covid-19 tightening cycle is unusual, in part due to what appears to be a much later phase in the cycle for the economy than the calendar might suggest. The post-2020 recession expansion is only 21 months new but the inflation, labour market and asset valuation backdrop is decidedly later-cycle.Much recent analysis of past tightening cycles have been limited to just the prior three rounds of Fed rate rises, but those only date back to 1999 — an era characterised by secular disinflation and the attendant positive correlation between bond yields and stock prices. It is different this time. The inflation cat is out of the bag; and arguably, the Fed opened the bag on purpose when, in August 2020, it implemented a more flexible monetary policy strategy. In, short, the Fed has been actively pursuing higher inflation. The aim is to let inflation run hot to compensate for the lengthy era of disinflation.Another key difference between the current path towards policy normalisation and past episodes is the Fed’s $9tn balance sheet. Markets are perhaps keenly aware of the perceived implications of its quantitative easing programme of bond buying on yields and asset prices; but they have much less experience with pending quantitative tightening. The plumbing system that connects QE (or QT) to asset prices is indirect and complex. But the psychological system connecting them tends to be more direct. Signals from the Fed about balance sheet plans have been important market drivers — highlighting the power of the Fed’s words, aka jawboning.Fed officials are now explicitly stating their desire for tighter financial conditions in the interest of moving away from hyper-stimulative policies, squeezing aggregate demand and bringing inflation down. No, imminent rate rises do nothing to solve the semiconductor backlog problem, nor do they bring down the number of container ships sitting off the ports of Long Beach. However, coupled with the Fed’s jawboning, they can arguably change the trajectory of inflation expectations and/or aggregate demand via consumers’ behaviour.The hope is that both the economy and financial markets can adjust to monetary policy normalisation in an orderly fashion. But here is where things might get tricky. The notion of a “Fed put” has been in and out of play since the Alan Greenspan era; with many market participants believing the central bank will step in if markets begin to riot. Do not count on that in this era.For now, financial markets are volatile, but functioning properly. The volatility and weakness are occurring alongside the repricing of risk assets — not being driven by any serious deterioration in liquidity conditions or financial system functionality. In fact, the equity market is a component of most indices measuring financial conditions. As such, equity market volatility-induced tightening of financial conditions could arguably be a feature, not a bug, as it relates to prospective Fed decisions.Back in 2018, Fed chair Jay Powell spoke about the crucial difference between financial market volatility and financial system instability. They are not one and the same.The Fed’s job is to try to bring about policies — and often create new tools — to ease instability in the financial system. There are times that market volatility can lead to financial system instability. However, if market volatility occurs in a vacuum, it is not the Fed’s job to contain it — unless it actually threatens the stability of the financial system.This year’s increased volatility and correction in stocks is indicative of a less friendly monetary policy. For all the benefits having accrued to the economy and investors’ portfolios of asset appreciation, the Fed is keenly aware that it is time to begin reining in some of the excess liquidity. Absent the renewal of the Fed put, not fighting the Fed remains the market’s modus operandi. More

The move would be part of Prime Minister Fumio Kishida’s initiative to defend Japan’s economic security mainly against China, such as by preventing leaks of sensitive technology and building more resilient supply chains.In the proposal, the panel called for crafting legislation that allows the government to order companies to provide advance information when updating software or procuring new equipment, and vet purchases that could put Japan at risk of cyberattacks.The regulation would target companies in industries critical to national security such as energy, water supply, information technology, finance and transportation, the proposal said.”Due to rapid digitalisation in today’s world, almost all areas of economic activity including those involving critical infrastructure are targets of cyberattacks,” the panel said, in explaining the need for fresh legislation.”It’s important to ensure any regulation does not excessively restrict business activity,” it said.The proposal by the panel of academics will serve as a platform for legislation the government will submit to parliament later this month.Advanced economies, including the United States and Japan, have faced several major cyberattacks recently including those with ties to Russia and China.Japan is under pressure to follow in the footsteps of the United States in boosting counter-measures against cyberattacks and compete with Beijing’s growing push to export sensitive technologies such as commercial drones and security cameras.Aside from domestic efforts, Tokyo is coordinating with its allies to help Asia boost resilience against risks to economic security, Masato Kanda, vice finance minister for international affairs, told Reuters.”Japan is working with the United States and Australia to support the creation of trustworthy communication infrastructure in Asia, mainly through funding aid via state-owned financial institutions,” Kanda said. More