Aurelia Butler

The National Development and Reform Commission (NDRC) published a policy document on its website that called for the revision of legislation relating to monopolies and data security in data-driven online platforms, as well as stronger supervision over areas such as advertising and tax reporting.”Platform operators must not use data, technology, market, or capital advantages to restrict the independent operation of other platforms and applications,” read one of nineteen opinions included in the document, which was jointly written with several other central government ministries and regulators.The document, addressed to all local governments in the country, reaffirms Beijing’s commitment to rein in what it sees as the “disorderly expansion of capital” in the tech sector and the threats this poses to social stability, financial markets and national security.”Clarify the boundaries of platform responsibility and strengthen the responsibility of super-large internet platforms,” read the document, adding that investment made in financial institutions by the companies running these platforms should be strictly regulated.Other suggestions include greater transparency on how online platforms are run and a better supervision system for those that deal with cross-border data flows.The document, dated Dec. 24, highlights the resolve of regulatory authorities to build upon last year’s crackdown on the tech sector, of which a large segment is devoted to developing apps and platforms that, when successful, can quickly acquire huge user bases and similarly large troves of data, which Beijing is looking to wield more control over.At the same time, the notice called for companies running online platforms to “go out” into the world, calling on relevant government departments to support international competitiveness and expansion plans.”Encourage platform enterprises to develop cross-border e-commerce, actively promote the construction of overseas warehouses … promote small and medium-sized enterprises to rely on cross-border e-commerce platforms to expand the international market,” the notice said.Chinese e-commerce giants like Alibaba (NYSE:BABA) have in recent years increased their footholds in large markets such as Brazil and pledged to focus more on overseas operations since falling foul of regulators in China. More

Eurozone inflation climbed to 5% in December, setting a record since the single currency was created more than two decades ago © Kai Pfaffenbach/Reuters

Germany’s 10-year bond yield, a benchmark for borrowing costs across the eurozone, swung above zero for the first time since 2019 as investors bet central banks will need to withdraw stimulus measures to slow inflation. The yield on the 10-year Bund rose as high as 0.013 per cent on Wednesday, the highest level since May 2019, reflecting a drop in the price of the debt. In mid-December, the Bund yield had registered about minus 0.4 per cent.The global rise in yields, led by the US, reflects investor angst that policymakers will need to act quickly to cool intense price growth that has taken hold across big economies. Higher than expected UK inflation figures on Wednesday added to the upward pressure on global bond yields.Underscoring the recent shift in eurozone bond markets, Greece on Wednesday paid the highest borrowing cost on new 10-year debt since March 2019.“You’ve got expectations of tightening everywhere, so the momentum is in favour of higher yields,” said Andrea Iannelli, investment director at Fidelity International. “The eurozone is no exception to that.”The German government’s 10-year borrowing rate had been negative for nearly three years, signifying investors were prepared to pay for the privilege of lending their money to Berlin for periods of a decade or more. But the global debt sell-off at the start of 2022 has been enough to drag the euro area’s most important reference rate above zero.A positive 10-year yield could make the debt more attractive to investors and will have knock-on effects for borrowing costs in other eurozone member states and companies.“It has come to something when a basis point or two starts to look exciting,” said James Athey, a portfolio manager at Aberdeen Standard Investments, referring to moves of a hundredth of a percentage point. “It underlines how bond investors have really been starved for many years.”Eurozone inflation climbed to 5 per cent in December, setting a record since the single currency was created more than two decades ago, and raising doubts over how quickly price pressures will ease this year.At its December meeting, the European Central Bank announced it would continue its asset purchases after its emergency bond-buying programme runs out in March, but at a slower rate than investors had expected.That, in combination with signs that the US and UK are edging towards tighter policy, has pushed German bond yields higher. Markets are now expecting the Bank of England to raise interest rates three times by August, following Wednesday’s data showing inflation at the highest level in 30 years.Carsten Brzeski, head of macro research at ING, described the Bund yield’s shift above zero as “symbolically important” because it “reflects a general change in monetary policy in the US but also in the eurozone with central banks entering the exit lane in response to rising inflation”. Across the Atlantic, the two-year US government bond yield, which is considered to be particularly sensitive to changes in expectations for monetary policy, hit 1 per cent on Tuesday for the first time since February 2020 as markets priced in four rate rises by the Federal Reserve this year. The sell-off in government debt also pointed to investor confidence that the Omicron coronavirus variant will fail to derail a global economic recovery, potentially giving central banks the opportunity to dial back purchases and raise interest rates.Markets are now pricing in two 0.1 percentage point interest rate rises from the ECB by the end of the year, despite the central bank’s insistence that higher borrowing costs in 2022 are not consistent with its guidance. The ECB has committed to maintain “favourable financing conditions” and last year described a rise in eurozone bond yields caused by a spillover from US bond markets as “unwelcome” and pushed back by increasing the pace of its bond purchases. “The rise in bond yields could worsen financing conditions in the eyes of the ECB and they will clearly look into that,” said Brzeski. More

Rising food prices are one of the reasons for the jump in inflation © AFP via Getty Images

UK inflation jumped to 5.4 per cent in December, its highest rate in 30 years, deepening a cost of living crisis that is squeezing household incomes and putting more pressure on the Bank of England to raise interest rates. The large annual rise in the consumer price index reflected widespread increases in the cost of most goods and services, and again exceeded economists’ forecasts of a small rise in December to 5.2 per cent from 5.1 per cent in November. The BoE faces a dilemma, having failed to anticipate the surge in inflation. It is under pressure to raise interest rates to cool spending and bring inflation down towards its 2 per cent target, but it does not want to squeeze household budgets too far and undermine the recovery. The rate of inflation is expected to push even higher in the spring to levels in excess of 6 per cent, with gas and electricity prices due to jump in April to reflect much higher wholesale energy prices.December’s 5.4 per cent rate of CPI inflation is the highest since March 1992, when the inflation rate was coming down from a peak of 8.4 per cent. It also exceeded two peaks of 5.2 per cent in 2008 and 2011. Prices in December were rising significantly faster than earnings, with the latest headline rise in wages at an annual rate of only 3.8 per cent in the three months to November. Rishi Sunak, chancellor, said he understood the “pressures people are facing with the cost of living” and hinted he would take steps to ease the burden, saying “we will continue to listen to people’s concerns as we have done throughout the pandemic”.The Office for National Statistics said the increase in December’s rate of inflation was broad based and pushed higher by rises in food prices, restaurant bills and the rising cost of hotels, furniture, household goods, clothing and footwear in the run-up to Christmas. Grant Fitzner, ONS chief economist, said there was little evidence that the government’s Plan B coronavirus restrictions had pushed up prices. “The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation is negligible,” he said. Inflation rates in the US and other European countries have also risen to multi-decade highs. Economists said the rise would heap pressure on the BoE to act to show it could keep a lid on prices and prevent high inflation becoming something that companies and households considered normal. Samuel Tombs, UK economist at Pantheon Macroeconomics, said the further rise in December left the BoE, “little choice but to hike rates again in February”. Investors ramped up their bets on BoE rate rises following the inflation figures. Markets are now pricing in four increases by November, with rates rising to 1.25 per cent.Most economists expect the inflation rate to increase to at least 6.5 per cent if the government takes no action to stem energy price rises in April, but is likely to hit 6 per cent even if Sunak acts to limit the rise in bills.

Kitty Ussher, chief economist at the Institute of Directors, said: “What is of particular concern is that the change [in inflation] from November has come mainly from an increase in the price of food. Not only does this provide additional evidence that inflation is becoming endemic rather than transitory, it also bodes ill for households facing multiple rises in the cost of living this spring.”Food price inflation rose to a nine-year high of 4.5 per cent. Paul Dales, chief UK economist at Capital Economics, said that if gas and electricity prices rose about 50 per cent in April — and the chancellor did nothing to tame them — the inflation rate was likely to hit 7 per cent. The rate of inflation measured by the retail prices index, which underpins interest on index-linked government bonds and student loans, increased to 7.5 per cent in December, also a 30-year high on this measure. Additional reporting by Adam Samson More

Turkey and the United Arab Emirates signed a $5bn deal to boost Ankara’s foreign currency reserves in the latest sign of warming ties between the two former arch rivals.The two nations’ central banks announced a swap agreement that they said would be worth 18bn dirhams ($4.9bn) and 64bn lira. Khaled Mohamed Balama, governor of the UAE central bank, said that the agreement “reflects each nation’s desire to enhance bilateral co-operation in financial matters, particularly in the fields of trade and investments between the two countries”.His Turkish counterpart, Sahap Kavcioglu, said that it demonstrated their commitment “to deepen bilateral trade in local currencies in order to advance economic and financial relations between our countries”.Turkey, which has a large foreign debt burden, has suffered a renewed dip in its reserves of foreign currency after President Recep Tayyip Erdogan ordered a series of aggressive interest rate cuts in the final months of 2021 despite soaring inflation.The country’s deeply negative real interest rates have put heavy pressure on the Turkish lira, which lost around 45 per cent of its value against the dollar last year. Turkish authorities spent billions of dollars in the final weeks of 2021 in a bid to halt its freefall. The deal — the latest in a succession of swap agreements that Turkey has signed with global central banks — is a borrowing agreement rather than a concrete investment in the country. While it will boost the country’s reported reserve figures, Ibrahim Aksoy, an analyst at HSBC in Istanbul, said that he did not expect the deal to have an “significant impact” on the lira because market players followed the level of reserves excluding swap agreements. Once borrowed money — including swaps with other central banks — are stripped out, Turkey’s net foreign currency reserves are deeply negative.Still, Turkish officials will hope that the agreement is a herald of further investment from the Gulf nation as a thaw in their once bitter relationship gathers pace.Sheikh Mohammed bin Zayed al-Nahyan, the crown prince of Abu Dhabi, promised in November that his country would invest $10bn in Turkey when he met Erdogan on his first visit to Ankara in almost a decade.The head of ADQ, an Abu Dhabi state investment vehicle, told the Financial Times earlier this month that the fund was in discussions with Turkey’s sovereign wealth fund about “a couple of opportunities” in the country, including companies within its portfolio. Turkey and the UAE spent much of the past decade competing for influence in the region after backing opposing sides in popular uprisings that rocked the Arab world in 2011. But both countries have begun recalibrating their foreign policy over the past year, driven by the election of Joe Biden as US president and the desire to boost their economies. Sheikh Mohammed has been shifting his focus towards economic diplomacy as the UAE seeks to bolster its post-pandemic recovery. Erdogan, meanwhile, has made overtures to a string of former regional foes as he seeks to attract foreign investment from the Gulf amid economic turmoil at home.Erdogan, who has also been making moves towards Egypt and Israel, has said that he plans to travel to Saudi Arabia next month. If it goes ahead, the trip will be his first visit to the kingdom since the murder of the journalist Jamal Khashoggi in the Saudi consulate at Istanbul in 2018, which plunged relations between the two countries into crisis. More

Villeroy, who is a member of the European Central Bank’s board of governors, also reiterated to France Info radio the ECB’s determination to do whatever was needed to reduce inflation to around 2%. He added that, given France’s notorious budget deficit, there was no justification for the government to continue with on its extensive stimulus policy to help companies through the COVID crisis. “The ‘whatever it takes’ is not justified any more”, he said. More

TOKYO (Reuters) -The Bank of Japan must be mindful of the risk that inflation may accelerate faster than expected if raw material costs continue to spike and prompt more firms to raise prices, the central bank said in a report on Wednesday.For now, the pass-through of rising raw material costs to consumers has been focused on food products and is not spreading to a broader range of items, the BOJ said in a full version of its quarterly outlook report.”That said, there are both upside and downside risks regarding the extent to which raw material cost increases will be passed on to the consumer price index (CPI),” the BOJ said.The BOJ nudged its inflation forecasts on Tuesday but said it was in no rush to change its ultra-loose monetary policy, as rising prices fan speculation it may soon signal a shift in its decade-old stimulus experiment.In a summary of the report, the BOJ projected core consumer inflation to hit 1.1% both in the year beginning in April and the following year – well below its 2% target.Fierce competition among retailers to lure consumers with discounts could keep a lid on inflation even as the economy emerges from curbs to combat the COVID-19 pandemic, the BOJ said in the full report.”On the contrary, there is also a possibility that raw material cost increases will be passed on to CPI more than expected,” the report said.Recent surveys have shown that companies’ inflation expectations are strengthening and more firms are seeing output prices increase, the report said, adding the inflation outlook will depend on how tolerant consumers become of price hikes.”It is necessary to take into account the possibility that prices will be pushed up by a faster-than-expected pass-through of cost increases,” it said.A separate survey showed on Wednesday the inflation rate consumers expect one year ahead was 2.16% in January, flat from a seven-year high hit in the previous month.On the weak yen, the BOJ report said it is likely to continue having a positive overall impact on the economy, even though it hurts households by boosting prices of imported goods.”Regardless of whether the yen depreciates or appreciates, if the exchange rates change rapidly at a pace that economic entities cannot keep up with, this may have an adverse impact on the economy,” the report said. More

Good morning. Tuesday was a stressful day for stocks. Microsoft, hot off a huge gaming deal with Activision Blizzard, sagged. Yields leapt back near pre-pandemic levels. The Federal Reserve is scaring people. But there are different ways the Fed can be scary — by raising rates, or by shrinking its vast balance sheet. Today we look at the second source of fear. Email us: [email protected] and [email protected] is not much normal in normalisationWith the benefit of hindsight I suspect that, from the point of view of markets, the most important passage in the minutes of the Fed’s December meeting might have been this one:Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate. However, participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate lift-off than in the committee’s previous experience. They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalisation.That is to say: the open market committee thinks that, after it starts raising rates, it probably makes sense to shrink the Fed balance sheet relatively quickly. Why is this so important? Because how balance sheet runoff affects the economy and markets is uncertain, but we have reason to think the effect could be significant. The Fed itself acknowledges the uncertainty. Another passage in the minutes noted the committee’s agreement that (emphasis mine): Changes in the target range for the federal funds rate should be the committee’s primary means for adjusting the stance of monetary policy . . . this preference reflected the view that there is less uncertainty about the effects of changes in the federal funds rate on the economy than about the effects of changes in the Federal Reserve’s balance sheet.So what, if anything, do we know about the impact of a shrinking balance sheet? Ironically, we may know less about what it will do to Treasury yields than about what it will do to other risk assets, such as stocks and corporate bonds. A basic point. Balance sheet runoff is different from both tapering of asset purchases, on the one hand, and outright quantitative tightening, or selling of bonds into the market, on the other. Tapering slows and ultimately ends the expansion of the Fed’s balance sheet. After tapering is done, the Fed still maintains the size of its balance sheet by rolling over maturing bonds into purchases of new bonds. It buys these from the Treasury at a price determined at public auctions (the Fed does not participate in the auctions itself; the allocation to the Fed is an “add on” to the auction). But the Fed can, at some point and at some pace, reduce the amount of maturing bonds it rolls over.When a bond held by the Fed matures, the central bank accepts the principal back from the Treasury in the form of reserves, which it then makes disappear at the stroke of a keyboard. The reserves the Fed created to buy the bond at the outset simply cease to exist. This sets off a chain of other transactions (please read Joseph Wang’s excellent summary over at the Fed Guy blog). The crucial fact, schematically, is that the Treasury still has to finance government operations. The Treasury bonds that once would have been bought by the Fed must be owned by another investor. That investor buys the bonds with cash, cash which ultimately flows, through a bank intermediary, to the Fed in the form of those reserves which (as we said) then disappear. The investor had cash before, and now has a Treasury; the Treasury still owes money, but to the investor not the Fed; the Fed has a smaller balance sheet. What does this mean to markets? Jim Caron, chief fixed-income strategist at Morgan Stanley Investment Management, takes the straightforward view that what Fed bond buying does is limit the supply of longer-duration risk-free assets. This makes the interest rates on these assets lower than they would otherwise be. Shrinking the Fed balance sheet has the opposite effect, pushing rates up. Pushing long rates up in this way allows the central bank to raise short-term interest rates without inverting the yield curve, which would freak everyone out. How much will the Fed shrink its balance sheet? Until risk markets start to squeal, according to Caron — in particular, until credit spreads start to widen meaningfully. What level of 10-year yields would make this happen? Two per cent? Hard to say. Whatever it is, Caron says the question for investors is whether that level is a top for rates, and therefore a buying opportunity. And we just don’t know the answer to that:We can get biblical about this, and say, ‘beware of false prophets’ — be wary of people who know how the balance sheet tightening will play out. This may sound like fence-sitting, but remember the quote up above: the Fed itself has expressed similar uncertainty. The last time the Fed began to reduce its balance sheet was in late 2017, and 2018 was a rough year for stocks:

But, as Caron points out, that is just one data point. Robert Tipp, head of global bonds at PGIM Fixed Income, argues that historically, once the Fed gets around to shrinking its balance sheet, the market has largely anticipated the impact, the top in rates is almost in, and it is time to buy Treasuries. Here is the Fed balance sheet, 10-year yields, and the Fed’s policy rate:

By the time runoff got going in early 2018, Treasury rates were near their highs, and they were falling sharply by the end of that year. But what happens to risk assets as rates decline? They face a stiff headwind, Tipp says, because of the change in investors’ portfolios that balance sheet runoff brings about. “Someone else has to use their balance sheet to buy those Treasuries and mortgages. Are they de-risking to buy them?”Ian Lyngen, head of rates strategy of BMO Capital Markets, agrees. “If there is an impact on rates it is fleeting at best,” he says of balance sheet runoff:The Fed might have thought that by reducing the size of their balance sheet in 2017-2019, the curve would have steepened more, but it flattened during that period — which suggests there is not a one-to-one relationship to the shape of the curve or the outright lever of long rates to the size of the balance sheet.Like Tipp, he thinks the liquidity effect of runoff is likely to hit risk assets:Think about what the Fed did with QE. It was designed to push investors out the yield curve in search of yield, and once it did that, it pushed them out the credit curve, and then out the corporate structure curve [to equities] . . . what happens when this reverses?There is reason to think that shrinking the Fed’s bond portfolio, because of its effect on liquidity, matters more to stocks and other risk assets than to Treasury yields. One good readCentral bankers are often accused of fighting the last war. What about Joe Biden? More

German banks are becoming too complacent about the risk of borrowers defaulting and the potential for interest rates to rise, particularly in the country’s booming mortgage market, the deputy head of its central bank has warned.Claudia Buch, vice-president of the Bundesbank, told the Financial Times that banks had emerged relatively unscathed from the recession caused by the coronavirus pandemic but are overly optimistic about the future.“We think credit risks are underestimated,” said Buch. “The models that banks and market participants are using are based on historical data. These data might underestimate future macro risk, which is an implicit bias.”Buch, a member of Germany’s financial stability committee alongside officials from the finance ministry and the financial watchdog BaFin, added that “we see a shift within the corporate loan portfolios of banks to the relatively weaker firms”.Although the German economy contracted 4.6 per cent in 2020 after the pandemic hit — a record postwar recession — the number of companies going bankrupt has fallen sharply thanks to generous government loan guarantees and wage subsidies for furloughed staff.“All the [risk] indicators we look at, including the credit to GDP gap, are pointing upwards,” said Buch. “We are concerned about mortgages but we are also very concerned about this macro environment, which if you look at recent history looks too benign to be true.”One of the biggest areas of concern is the German property market, where house prices rose 12 per cent and mortgage lending increased 7.2 per cent in the year to September — both reaching multi-decade highs, despite the fallout from the pandemic.Germany’s financial regulators have responded last week by announcing a €22bn increase in the amount of capital they require banks to hold by February 2023 and promising to supervise lending standards more closely.This means German banks will need an extra capital buffer equal to 0.75 per cent of their domestic assets and another equal to 2 per cent of their residential mortgages — both adjusted for riskiness. A more modest version of the policy was proposed in 2019 but then dropped because of the pandemic. The extra capital buffers — which mirror similar plans in the UK, Sweden, Norway and Denmark — are designed to make banks more resilient by allowing them to absorb potential future losses without having to cut the supply of credit to businesses and households. The association of German banks complained that the changes came “at an inopportune time” amid high economic uncertainty and risked “putting a handbrake” on their lending capacity that could push more business to less regulated mortgage providers.But Buch said German banks had increased the excess capital they hold above minimum requirements by about €30bn in the past two years to almost €190bn, meaning only “a very, very small fraction” of them need to raise extra capital now.German interest rates have fallen to record lows in recent years, after the European Central Bank cut its deposit rate to minus 0.5 per cent and bought more than €4.5tn of bonds. Several of the country’s banks are offering 10- or 15-year mortgages at rates below 1 per cent, according to Tatjana Gopp at Baufi24, a German mortgage adviser.

The Bundesbank vice-president said banks had increased their “exposure to interest rate risk” as the proportion of new German mortgages with interest rates fixed for at least 10 years had more than doubled since 2010, when the housing market upswing started. “There is a much longer credit maturity on these mortgages outstanding, meaning that if interest rates increase the banks would have higher refinancing costs but their asset values wouldn’t change that much,” she said.The ECB has said it is “very unlikely” to raise interest rates this year, but markets are pricing in a 0.1 percentage point increase in its deposit rate in October.Low interest rates have helped boost German house prices by almost 60 per cent since 2015 and the Bundesbank estimates the market is now 15 to 30 per cent overvalued.Buch said she hoped the new rules would provide “a bit of an incentive” for lenders to “think twice” about the recent trend for some to provide mortgages for the entire value of a property with little or no deposit. If such high-risk mortgages proliferate, regulators could impose new rules limiting the amount banks can lend against a property.“The intention is not really to tame the property price cycle but to make sure that whatever financing there is sound and the borrowers can actually afford it,” she added. More