Aurelia Butler

LONDON (Reuters) – Record euro area inflation rates mean price pressures will top the agenda for European Central Bank policymakers meeting on Thursday.No immediate policy action is expected since the ECB in December laid out plans https://www.reuters.com/markets/rates-bonds/ecb-set-dial-back-stimulus-one-more-notch-2021-12-15 to wind up its 1.85 trillion euro ($2.09 trillion) pandemic stimulus scheme by end-March. But price pressures remain strong and markets want a sense of whether the ECB is getting closer to a more hawkish stance. Here are five questions on the radar for markets.1. Will the ECB shift its language on inflation?Possibly. The ECB has slowly changed its language already and may continue to do so.ECB chief economist Philip Lane said last week the ECB would tighten policy https://www.reuters.com/article/ecb-policy-lane/ecb-would-respond-if-inflation-stayed-above-expectations-lane-idUKKBN2JZ13A if inflation was seen holding above its 2% target, but such a scenario appears less likely for now.Euro area inflation hit 5% in December, the highest on record https://www.reuters.com/world/europe/euro-zone-inflation-hits-5-marking-another-record-high-2022-01-07, and is forecast to drop back below target in the fourth quarter.But some officials view this projection as overly optimistic. January data out the day before the ECB meets could arm the hawks with fresh ammunition to push for a change in tone — the December meeting minutes revealed deep divisions over inflation. GRAPHIC: When will euro zone inflation peak? https://fingfx.thomsonreuters.com/gfx/mkt/myvmnjmkkpr/ECBFEB1.PNG 2. Could a more hawkish Fed force the ECB to speed up normalisation?Not likely. Lagarde reckons the ECB does not need to act as boldly as the U.S. central bank given different economic conditions. Labour markets, for one thing, are much tighter in the United States.”The euro area is not the U.S. and there are no signs of domestic overheating,” said PGIM Fixed Income’s chief European economist Katharine Neiss.”But this is not a typical cycle, so there does need to be a degree of humility and the ECB needs to be alive to the potential that the recovery could be stronger than they judged.”A flurry of U.S. rate hikes could complicate life https://www.reuters.com/business/nimble-fed-narrows-normalisation-window-timid-ecb-2022-01-27 for the ECB if the Fed completes its tightening cycle quicker than in the past, leaving the ECB with a shorter time to act. GRAPHIC: Benchmark bond yields are on the rise, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoaynapx/ECBFEB3.PNG 3. What does the ECB think of market pricing for rate hikes?Lagarde may push back against market rate-hike bets, which are out of sync with the ECB’s ultra-loose monetary policy stance. Higher lending rates in markets could prove problematic if they trigger tighter financial conditions for companies.Money markets are pricing in a 10 basis-point rate rise by October. Deutsche Bank (DE:DBKGn) reckons https://www.reuters.com/article/ecb-rates-deutsche/ecb-to-hike-rates-by-25-basis-points-in-dec-22-deutsche-bank-idUKKBN2JY1TM the ECB will kick off with an aggressive 25 bps hike in December.But the ECB has essentially ruled out lifting rates this year. It aims to reduce its asset buying gradually, but it has no plans for now to stop it altogether and it will not hike rates before it is done buying bonds. GRAPHIC: ECB on track to wind down PEPP by end-March, https://fingfx.thomsonreuters.com/gfx/mkt/movanymlwpa/ECBFeb2Capture.PNG 4. When does the ECB expect second-round effects from inflation to emerge?With inflation higher for longer than anticipated and oil prices elevated, policymakers are watching out for whether this triggers higher wage demands, which in turn push up price inflation.Policymakers stress they do not see wages responding significantly to inflation. Germany’s government believes the economic recovery and higher inflation will likely lead to https://www.reuters.com/article/germany-economy-idUSKBN2K00ZF “somewhat stronger wage growth” this year.”The case for higher wages is extremely good as we are seeing tighter labour markets in places like Germany and the Netherlands. The question is whether it will be a one off?” said Piet Haines Christiansen, chief strategist, Danske Bank.”Wages are the missing piece in the puzzle, and if we see inflation there, we will get a rate hike. And that might come as early as Spring next year.” GRAPHIC: Will wage pressures pick up in 2022? https://fingfx.thomsonreuters.com/gfx/mkt/mopanymqlva/ECBFEB4.PNG 5. How does the changing response to the pandemic impact the macro picture?The Omicron coronavirus variant has weighed on the economy, but with most countries avoiding full lockdowns, data suggests activity is holding up relatively well https://www.reuters.com/world/europe/easing-supply-bottlenecks-give-german-business-glimmer-hope-2022-01-25.Lane has said the Omicron impact will be measured in weeks, not months.For ECB watchers, signs that economic momentum is gaining pace means pressure to remove stimulus quickly could build. Uncertainties also cloud the outlook, such as how lofty oil prices and a China slowdown might derail growth. GRAPHIC: Euro zone PMI versus the COVID-19 case count, https://fingfx.thomsonreuters.com/gfx/mkt/akpezngoyvr/ECBFeb5.PNG More

Splits are emerging in corporate America’s response to a supply chain crisis which growing numbers of executives expect to last all year, heralding a wave of spending on new capacity, better data and support for weaker vendors. This earning season, companies have complained of shortages, delays and spiking costs in a quarter in which they scrambled to procure semiconductors, were left waiting for components and suffered the effects of suppliers’ staffing gaps. The reporting season has also exposed how differently supply pressures are affecting the country’s largest companies, however, with some expressing confidence that they were past the worst while others still struggle to put the disruptions behind them. Apple, which had warned that supply constraints could cost it $6bn in the three months to December, defied Wall Street’s fears that the toll could be as high as $10bn and reassured investors that it expected better conditions this quarter. Groups including 3M, Freeport-McMoRan and General Dynamics similarly hailed their ability to overcome their supply chain challenges, but others reported unexpectedly serious fourth quarter deteriorations or cautioned that the disruptions would last for months to come.GE said shortages of semiconductors, resin, parts and labour had affected its quarterly sales by about 3 percentage points, while Caterpillar admitted that the challenges had been more significant than expected.

Mondelez warned that its supply “headwinds” in North America would grow stronger this quarter, and keep costs elevated for most of the year. The supply chain would be “the fundamental limiter of output” this year, Tesla chief executive Elon Musk told analysts, adding that the chip shortages it faces might not ease until 2023. Companies including VF Corp, the clothing group behind The North Face, said they had moved some production to suppliers closer to their biggest markets. Intel, Tesla and Texas Instruments hailed recent investment in new semiconductor facilities, saying these would give them more control of key components.Companies with more domestic suppliers and those that had moved before the pandemic to broaden their supply chains were faring better than others with more complex, global logistics, said Tim Ryan, chair of PwC US.A mid-January survey of US executives by PwC found that less than half expected supply chain disruptions to ease by the end of the year, and more than 60 per cent planned to raise prices in response. “Overall, it’s still the biggest companies that are able to buy their way out of the tough spots,” added James Zahn, deputy editor of the Toy Book, which tracks the toy business. Even so, he said, some companies that planned to present at February’s Toy Fair were “teetering on not having their samples and prototypes available to show”.The extended impact of Covid-related factory closures, elevated shipping costs and driver shortages is forcing companies to question long-held beliefs about “just-in-time” production, including how few suppliers they depend on, how far critical components must travel and how little inventory they can hold, executives said. Mondelez, owner of Cadbury, warned that supply “headwinds” in North America would grow stronger this quarter © Simon Dawson/Bloomberg“The pandemic has pushed manufacturers to redesign their supply chains in favour of certainty of supply and locating inventory closer to customers,” Ed Elkins, chief marketing officer of railroad operator Norfolk Southern, told investors.Hamid Moghadam, CEO of Prologis, said that clients were telling his property company that they would need 20-25 per cent more warehouse space so they could carry more “safety stock”.“The engineers have designed supply chains around predictability and when that predictability goes away everything goes to hell in a handbasket,” he told the FT.“Most companies are realising that they over-tuned their operation for performance versus resilience,” echoed Rich Lesser, Boston Consulting Group’s global chair, who said in an interview that clients were adopting more of a “just in case” attitude. Holding more inventory was only part of the answer, he said, pointing to companies’ investment in better data to keep track of supply chains and prepare for future dislocations.Executives cited a wide array of supply headaches, from difficulty in procuring specialist components at Danaher to a shortage of welders for the castings Raytheon Technologies needed. The responses were similarly diverse, from Sherwin Williams, the paint company, buying a resin supplier to VF Corp chartering “full-sized jetliners” to secure supplies.

Some have needed to offer financial support to small vendors that are struggling to weather the storm, with Lockheed Martin accelerating more than $2.2bn in payments to suppliers last quarter as “a prudent risk mitigation strategy”. Ambrose Conroy, CEO of a supply chain consultancy called Seraph, said concerns about some suppliers’ financial fragility were widespread. “I have a couple of clients in automotive who are financially distressed: in earlier days they would have gone bankrupt but . . . customers are giving them cash injections,” he said.The prospect of a series of interest rate rises this year have sharpened such concerns, observed James Gellert, CEO of RapidRatings, which tracks companies’ financial health. “When volatility comes in and we begin to have more credit questioning, it will affect the lower end of the credit spectrum and private companies more than it will the large public companies,” he noted.Greg Hayes, Raytheon’s chair and CEO, underscored how critical small producers could be to large groups with complex supply chains. Out of the defence contractor’s 13,000 suppliers, “less than 100 . . . are giving us real concern,” he told investors, “but it only takes one to make us miss a shipment.”Additional reporting by Matthew Rocco in New York and Steff Chavez in Chicago More

How the people of Mariupol view a potential Russian invasionYour browser does not support playing this file but you can still download the MP3 file to play locally.The world’s largest sovereign wealth fund has warned that investors face years of low returns due to permanent inflation, and splits are emerging in corporate America’s response to a supply chain crisis. Plus, the FT’s Europe editor, Ben Hall reports from the Ukraine city of Mariupol about how people view a potential Russian invasion. Subscribe to the FT News Briefing on Apple Podcasts or SpotifyMentioned in this podcast:World’s largest wealth fund warns ‘permanent’ inflation will hit returnsUkrainian frontier city weighs threat of renewed Russian aggressionWinners and losers emerge from lingering US supply chain crisisTui raises €500m fund to finance new hotelsThe FT News Briefing is produced by Fiona Symon and Marc Filippino. The show’s editor is Jess Smith. Additional help by Peter Barber and Gavin Kallmann. The show’s theme song is by Metaphor Music. Topher Forhecz is the FT’s executive producer. The FT’s global head of audio is Cheryl Brumley. Read a transcript of this episode on FT.com See acast.com/privacy for privacy and opt-out information.Transcripts are not currently available for all podcasts, view our accessibility guide. More

The Bank of England is widely expected by economists and financial markets to impose the first back-to-back interest rate rises since 2004 when it meets to decide monetary policy this week. With the central bank grappling with rampant inflation, BoE officials have not sought to quell speculation ahead of Thursday’s Monetary Policy Committee meeting that a rate rise is almost a certainty following the increase from 0.1 per cent to 0.25 per cent approved by the MPC in December. That was the first rate rise in more than three years.In money markets, the probability of a rate rise this week to 0.5 per cent is priced at almost 90 per cent, and the majority of economists concur. They are convinced the bank will need to act because it has failed to anticipate the extent and breadth of price rises under which consumer price inflation reached a 30-year high of 5.4 per cent in December.Economists also think the BoE has underestimated the strength of the labour market, where job vacancies almost match the number of unemployed people for the first time since consistent records began more than 20 years ago. Liz Martins, economist at HSBC, said data since the BoE increased interest rates in December required action to tighten monetary policy, as she also noted that the threat posed by the Omicron coronavirus variant seemed to be dissipating.“The fourth quarter of last year saw the MPC’s biggest inflation forecasting error on record,” she said. “The main source of uncertainty in December, the Omicron variant, appears to be receding, with plan B restrictions [in England] now lifted.” Pointing to the same reasons for the BoE to increase interest rates, Anna Titareva, economist at UBS, said: “There will probably be a strong majority in the [MPC], or even unanimity, in favour of a hike.”BoE officials have said very little in the run-up to the MPC vote on Thursday, but when they have spoken, they have sounded hawkish. Bank governor Andrew Bailey acknowledged last week that energy prices might stay high for longer, keeping inflation far above the central bank’s 2 per cent target well into 2023.Catherine Mann, an external MPC member, said this month that companies’ price and wage growth expectations were not consistent with hitting that target and monetary policy needed to “temper” those impressions. The latest Citi/YouGov survey of the public’s inflation expectations shows people are more pessimistic about price growth in the coming year than at any time since 2006.The BoE said last year that if interest rates rose to 0.5 per cent, it “intends to begin to reduce the stock of purchased assets”, a reference to the £895bn of gilts and corporate bonds the central bank has bought since the financial crisis under its quantitative easing programme to stimulate the economy.It could reduce the stock and shrink its swollen balance sheet by not reinvesting money in further assets when bonds mature, but this is not an automatic move, with the MPC pledging in August to begin the process of quantitative tightening “if appropriate given the economic circumstances”.This suggests the MPC’s nine members will have two votes on Thursday: one on interest rates and another on asset purchases.Most economists think the MPC will vote to begin shrinking the BoE’s balance sheet, though Bailey told MPs last week that he expected any quantitative tightening delivered in this way “not [to] have that big an impact”. George Buckley, economist at Nomura, predicted the BoE would end the reinvestment of money from maturing assets even though there was a large £28bn maturity of gilts due in March.He said that if the economic conditions “were appropriate for a 0.25 percentage point rate hike they would also be for passive sales [of assets]”. Amid the consensus about the MPC tightening monetary policy on Thursday, economists disagree about the number of rate rises likely this year and what level will be reached.Financial markets have priced in four quarter-point increases in 2022, with rates almost touching 1.5 per cent by the spring of 2023. Ruth Gregory, economist at Capital Economics, shared this hawkish stance, saying the MPC might well abandon existing guidance that it will impose only “modest” rate rises over the next few years. “Inflation has risen far higher and far faster than the Bank of England forecast and the past month has brought further evidence the price pressures are broadening out,” she added.But the majority of economists think the BoE will be more measured with its rate rises, hoping to shock people into believing it is serious about bringing inflation down without having to prescribe the painful medicine of markedly higher borrowing costs to limit spending. Cathal Kennedy, economist at RBC Capital Markets, said the BoE could raise rates slowly because the combination of this and quantitative tightening would send a powerful message. The BoE will outline its view of future rate rises in its forecasts on Thursday, based on market expectations for monetary policy.If these show inflation projected to fall back to less than 2 per cent in the medium term, it will signal the bank’s view that financial markets have got too excited by assuming four quarter-point rate rises in 2022. But if the BoE forecasts show inflation higher than 2 per cent in 2024-25, it would signal a radical shift inside the BoE towards sustained rate rises and its intention to defeat the most difficult inflationary episode since the early 1990s. More

HONG KONG (Reuters) – The dollar was near a year-and-a-half high against the euro on Monday with equities markets volatility expected to push it higher in the short-term as traders eyed upcoming Australian, UK and European central bank meetings.The euro was at $1.1148, just off last Friday’s low of $1.1119, its weakest since June 2020. The Aussie dollar was at $0.6991, also languishing near Friday’s 18-month low, while sterling was at $1.34015, near the one-month low hit last week.The greenback had its best week in seven months last week supported by investors seeking safety amid a sell-off in riskier assets and by analysts raising forecasts for U.S. interest rate hikes.MSCI’s 50-country main world index is headed for its worst month since the start of the pandemic. [MKTS/GLOB]Market pricing now suggests a more than 90% chance of at least four rate hikes by the end of the year and a 67% chance of at least five.”The USD ‘smiled’ again, drawing on a combination of rates repricing and much weaker risk sentiment,” said analysts at Barclays (LON:BARC).Looking forward, they said weak and volatile equities could support the dollar but the potential for further dollar gains based on rate hike expectations was limited, as last week’s moves mean an “aggressive normalisation cycle” is now priced in.The dollar index, which measures the greenback against six major peers was at 97.205, just below Friday’s 18-month top of 97.441.The yen was at 115.23 per dollar, in the middle of its recent range, buffeted by the headwind of rising U.S. rates with little prospect of rate hikes at home, but supported by some demand for it as a safe-haven.While U.S. payroll figures are out on Friday, the focus this week shifts a little away from the Fed to other central banks.Australia-watchers await the central bank’s Tuesday meeting, amid rising expectations for an announcement for the end of its quantitative easing programme. That will be followed by a as speech by the RBA’s governor on Wednesday and a statement on monetary policy Friday.The week “will go far to define the psychology of the market for the next few months,” said Westpac analysts. “That QE will cease will not be a surprise, so the real focus is on the RBA’s shifting economic view and its implications for the (benchmark) cash rate.”The Bank of England also has a meeting on Thursday, with a Reuters poll of economists predicting a second rate hike in less than two months, as the BOE reverses more pandemic stimulus, after inflation jumped to its highest in nearly 30 years. The European Central Bank also has a policy meeting Thursday. While no policy change is expected, analysts are starting to warn that approaching rate hikes from the Fed will shrink the ECB’s window for action.In cryptocurrencies, bitcoin was at $37,700, after a quiet weekend for the digital asset. More

CHICAGO (Reuters) – The U.S. Department of Agriculture said on Sunday it will help fund a new container yard for agricultural exports at California’s Port of Oakland, as the government, ports and food companies scramble to ease costly shipping delays.The multimillion-dollar project is set to open in March, and officials said it could be replicated elsewhere. Strong U.S. demand for goods from Asia during the pandemic has boosted imports, clogging West Coast ports. Some ocean vessels have left the United States carrying empty containers after making deliveries, rather than waiting to fill ships with American goods for export. Ships delivering cargo at ports in Los Angeles and Long Beach, California, have also skipped Oakland, a major hub for agricultural exports, to return to Asia more quickly.Oakland’s export volume in 2021 declined 8% from the previous year, the port said, hurting shipments of products like nuts, dairy and produce.”With the delays and disruptions that are occurring, market share is at risk,” U.S. Agriculture Secretary Tom Vilsack told Reuters.The Port of Oakland will open a 25-acre acre “pop-up site” to provide space to prepare empty containers, the USDA said. The off-terminal site will move containers off chassis and store them for rapid pick up, the port said.U.S. Transportation Secretary Pete Buttigieg said in a statement that “inland pop-up ports” improved the flow of goods at the Port of Savannah and the government plans to work with other ports on similar ways to reduce congestion.The USDA will pay 60% of the startup costs and partner with the Port of Oakland to partially cover a $125 per container reimbursement made to shippers, Vilsack said. The USDA estimated the project will cost about $5 million, and the port said the initial start-up will cost about $2 million. “This is for however long it takes to get us back to a place where we have some stability in the market and some stability in the supply chain,” Vilsack said. Though U.S. farm exports reached a record in 2021, they could have been bigger without delays at ports, Vilsack said.In the first nine months of 2021, shipping disruptions cost the U.S. dairy industry about $1.3 billion due to lost business and higher shipping and storage costs, said Jaime Castaneda, executive vice president of the U.S. Dairy Export Council and National Milk Producers Federation.Some importers canceled orders because of delays, forcing U.S. producers to resell their goods at a discount, Castaneda said. Denver-based Leprino Foods, the world’s biggest mozzarella cheese maker, had 99% of its export shipments canceled or re-booked at least once last year, up from 10% in a typical year, Chief Executive Mike Durkin said. Such delays contributed to a 57% surge in the company’s supply-chain costs last year, Durkin said. Costs are expected to jump another 50% in 2022, with a third of the increase related to exports, he said.To deal with port delays, Leprino Foods trucked dairy products normally exported from Oakland to Houston and other ports, Durkin said. It also sent whey products via air to a customer in Asia that needed them to keep operations running, he said.Durkin and dairy groups are working with the USDA, ports and shipping companies to improve exports.”We’ve got to get this somehow figured out,” Durkin said. “The challenge is huge.” More

The writer is chief Asia economist at Morgan StanleyIn Asian economies, a powerful dynamic is unfolding that will unleash productivity growth and drive outperformance over other regions. It is a trend that has been under-appreciated by sceptical investors.Over the next two years, gross domestic product will rise faster in Asia than in the Americas and Europe, strengthening its position as the largest and fastest-growing economic bloc. Asia’s GDP is expected to expand in nominal terms from $33tn in 2021 to $39tn in 2023, exceeding the $34tn for the Americas and $26tn for Europe. The $5.4tn increase for Asia compares with $4.8tn for the Americas and $2.9tn for Europe.This dynamic is the interplay of growth in exports, capital expenditure and productivity. In contrast to other economies that have relied heavily on stimulus, Asia’s recovery from the Covid-19 shock has been fuelled by a sharp upturn in exports. Investors may be tempted to write this off as a reflection of a revival of global growth, but what happens next is arguably much more interesting.As the world’s largest producer gets back to work, unused capacity will be absorbed and corporate confidence will rise, boosting demand for capital equipment. Rising capital expenditures should pull more workers into the labour force, laying the groundwork for a self-sustaining cycle.In fact, Asia’s productivity — or incremental GDP generated by new debt— is poised to turn in the best performance since the 2003-07 cycle. Post-2008, global trade volumes grew at an average of just 1.2 per cent compared with 6 per cent in the 2000s. Without the support of external demand, Asian policymakers had to rely on higher leverage to stimulate aggregate demand, which inevitably gave rise to macro-stability concerns.Now, backed by strong global trade, Asia’s growth will be far less dependent on stimulus and leverage, while inflationary pressures and other macro-stability concerns will be kept at bay.Nonetheless, unique circumstances have kept this productivity dynamic from playing out fully. Typically, a sharp upswing in exports and capex translates into stronger income and consumption growth. This time round, the transmission mechanism has been stalled by successive Covid waves and restrictions damping consumption. But Asian economies outside of China are adapting to life with Covid and are following a path to put pandemic woes behind them.In China, the more transmissible Omicron coronavirus variant could put the zero Covid policy to the test and still constrain the consumption recovery. If Covid variants remain mild, however, policymakers could move away from aggressive implementation of its zero Covid strategy after the Winter Olympics.While Covid restrained China’s growth, the bigger factor was its policy cycle. In 2021, macro policies overtightened and regulatory actions intensified in a broad range of sectors. Debt to GDP was cut by 10 percentage points to 283 per cent, the most aggressive reduction in China since 2003. The policy cycle has clearly shifted from overtightening to easing, and the economy should move from a downturn to an upswing. In late December, top policymakers acknowledged that “China’s economic development is facing three pressures: demand contraction, supply shock and weakening expectations”, suggesting they will continue to ease on all fronts.First, the so-called credit impulse — a measure of credit growth relative to GDP — will normalise towards neutral territory, removing a significant headwind to growth. Second, policymakers are now taking a more structured and institutionalised approach to regulatory tightening, and changes from here on are likely to be incremental.As governments seek to address income inequality, they are expected to not lose sight of the need to continue reforms to encourage the shift towards higher value-added activities to complete the transition to a high-income society. This shift will not be possible without participation from the private sector. Third, measures related to decarbonisation and property will be less stringent, allowing for a gradual pace of adjustment. These should alleviate concerns over further actions weighing on private corporate sentiment. As these shifts play out in the real economy, we expect an upswing in growth to take hold from the second quarter of 2022 onwards.Across Asia, a virtuous feedback loop is about to unfold, of strong external demand and positive spillover effects to capex and consumption.This cycle will very much resemble 2003-07, with productivity playing a larger role in Asia’s growth story, driving its outperformance. The risk is if persistent inflation in the US prompts an aggressive shift in the Fed’s tightening path, which threatens the longevity of this business cycle. More