Aurelia Butler

Global stock and government bond prices picked up for a second consecutive day on Wednesday, as investors looked past data showing US inflation had reached its highest level in nearly 40 years to focus on expectations that price rises would soon peak.Wall Street’s blue-chip S&P 500 closed 0.3 per cent higher, while the tech-heavy Nasdaq Composite climbed 0.2 per cent.US equity markets, particularly tech stocks, have had a bruising start to the year amid concerns about the impact of high inflation and rising interest rates.Data released on Wednesday morning showed consumer prices rose 7 per cent year on year in December. However, the news had little impact on investors who had been reassured by comments from Federal Reserve chair Jay Powell earlier in the week.Powell told the US Senate banking committee on Tuesday that the central bank would tackle high inflation and forecast that supply chain bottlenecks caused by pandemic disruptions would ease this year.“We continue to expect significant slowing in the year ahead as the boosts from reopening and fiscal stimulus fade and Covid-related supply constraints eventually ease,” strategists at TD Securities wrote in a note to clients. “But, for now, the data remain quite strong.”The yield on the benchmark 10-year Treasury note, which falls when prices rise, was unchanged at 1.73 per cent. Instead, investors sold out of policy-sensitive two-year notes, sending the yield up 0.02 percentage points to 0.91 per cent.“The willingness of rates to ignore decades-high [inflation] figures is hinting . . . that the Fed’s threshold for inflation to justify rate normalisation has long-since been met and therefore any upside surprise is a shoulder-shruggable event,” said Ian Lyngen, a strategist at BMO Capital Markets. Following Wednesday’s inflation report, traders continued to bet that the Fed would raise interest rates between three and four times this year, to about 1 per cent.These calculations are implied by swaps markets and predicated on a widely held view that current high rates of inflation will fade out as global supply chain bottlenecks caused by the economic disruption of coronavirus lockdowns start to unwind. They have been cited by investors as supportive for equity markets. Despite a tumultuous start to the year, when the S&P 500 index fell in five out of seven sessions and the Nasdaq Composite briefly entered a correction, by the close of Wednesday’s session the S&P was just 1.9 per cent below its all-time high. “Yes, there is a removal of accommodation coming,” said Tim Graf, macro strategist at State Street, speaking before the inflation data. “But does that make a meaningful difference to the financing environment for households and corporations? We don’t think onerously so.”The increased optimism in the US followed similarly positive trading in Europe and Asia. The Europe-wide Stoxx 600 share index added 0.6 per cent and London’s FTSE 100 gained 0.8 per cent. Hong Kong’s Hang Seng index closed 2.8 per cent higher, with its technology sub-index achieving its biggest daily gain since October.The dollar index, which measures the US currency against a basket of peers, fell 0.7 per cent. More

Recent economic data provides overwhelming justification, if any more were needed, that the Federal Reserve should continue or even accelerate its plans to tighten monetary policy. US inflation, as measured by the consumer price index, reached the highest level for 40 years in December, increasing to 7 per cent from November’s 6.8 per cent. That is the fastest rate of increase since the so-called Volcker shock in 1980, when the then Fed chair Paul Volcker hiked up interest rates and pushed the US economy into a deep recession to try to bring inflation under control. Yet while the price data is eye-watering, it is the labour market statistics, published last week, that provide a perhaps even stronger justification for tighter monetary policy. While there are some signs from surveys of manufacturing companies that bottlenecks are easing, cost pressures are becoming more visible in the jobs market. That risks creating the kind of self-sustaining inflation, driven by expectations of price increases, that led Volcker to take such drastic measures more than four decades ago. Although the pace of job growth slowed in December, the labour market still appears tight. Chiefly, annual wage growth accelerated to 4.7 per cent, failing to keep pace with prices but still above the pre-pandemic norm. While employment growth was down — the US added just 199,000 jobs — this appears to be because businesses struggled to find workers: the unemployment rate fell to 3.9 per cent, slightly above the rate in February 2020.This departure of workers from the jobs market means that while inflation and wage data indicate that the US might be very close to what economists refer to as full employment, there are still 3.6m fewer workers in the US than before the pandemic. Jay Powell, the current Fed chair, argues that this should not be a barrier to continued tightening. In testimony during his Senate confirmation hearing this week, he said that these workers will be best served by a prolonged expansion and a gradual tightening. If the central bank falls further behind the inflation curve, it will have raise rates sharply, as Volcker did, provoking a recession.It is unclear how much the Fed can really do for these workers at the moment. A “high-pressure economy”, as suggested by president Joe Biden and the Fed, is delivering wage growth and encouraging workers to seek out better options — quit rates, the portion of workers leaving their jobs voluntarily, have spiked. Indeed if wage growth is sustained it may begin to compensate for 40 years or so of stagnation. This means the workers who have left, however, have probably not done so because there is insufficient demand.For that reason attracting the jobless back will need more structural reforms. Some of the workers are absent because the pandemic has not ended. School closures and coronavirus-related absences at childcare providers mean that parents often still need to stay home. Others may be concerned about infection in face-to-face workplaces or that jobs could once again disappear with another wave of infections. Other problems are deeper. Labour market participation has fallen over the past few decades — and much faster than could be explained by “baby boomers” retiring alone. Indeed, the participation rate for US women is now below that of Japanese women, thanks more to successful reforms by former Japanese prime minister Shinzo Abe than the ultra-loose monetary policy in the country. The Fed has done its part to ensure a strong recovery, it is high time America’s congresspeople similarly did their bit. More

Good eveningIt has been another milestone day for inflation news. Figures published today showed that US prices rose at their fastest rate in nearly 40 years in December, fuelling Federal Reserve fears that inflation is not temporary.The data, showing US inflation hitting 7 per cent, the biggest year-on-year increase since June 1982. It came a day after Fed chair Jay Powell warned that such rates of increase in the cost of living, if sustained, were a “severe threat” to the US jobs recovery. The US is not alone. Inflation across rich nations has surged to a 25-year high. The annual pace of consumer price growth in the OECD group of developed nations hit 5.8 per cent in November, according to data released yesterday, up from just 1.2 per cent in the same month the previous year and the highest rate since May 1996.We also got an insight today into inflation’s impact on companies. British budget hotel operator Whitbread forecast inflation in the hospitality sector would average between 7 and 8 per cent and warned that rising energy and wage costs would mean higher room rates for its guests this year.Wage costs are rising in part because the pandemic has boosted the power of service sector employees to demand higher pay — and this includes gig economy workers. The challenge that poses for gig business models was captured in this FT interview with Niklas Östberg, chief executive of German food delivery app Delivery Hero, who admitted that he will either have to get people to accept higher prices or service levels will suffer.The problems caused by inflation are not just around how to calm price increases. In the UK, there is disagreement about how to measure it, as this piece by Paul Lewis, BBC Radio 4’s Money Box presenter, explains.Latest newsBoris Johnson faces calls to resign after he admits attending No10 partyIEA chief accuses Russia of worsening Europe’s gas crisisNovak Djokovic admits Covid breach and ‘error’ on Australian entry formsFor up-to-the-minute news updates, visit our live blog.Need to know: the economyChina is applying the brakes to its Africa lending. This matters because Chinese banks now make up about one-fifth of all lending to Africa, concentrated in a few strategic or resource-rich countries including Angola, Djibouti, Ethiopia, Kenya and Zambia. The more cautious approach comes amid warnings that several African countries could struggle to repay debts. Some nations have reached the limit of their borrowing capacity and the prospect of default looms.Latest for the UK/EuropeA senior World Health Organization official warned yesterday that more than half of the European population could be infected with Omicron within the next two months. Hans Kluge, the WHO’s regional director for Europe, said that “because of the unprecedented scale of transmission” Europe was now seeing rising rates of hospitalisation.There was better news for the UK with Covid-19 hospital admissions among adults in England beginning to fall, according to official NHS data, raising hopes that the health service has weathered the wave of Omicron variant infections.Global latestTighter US monetary policy is likely to exacerbate an already difficult outlook for emerging and developing economies, according to the World Bank’s outlook for the global economy. Larger and more persistent scars are likely to remain as developing nations face a perfect storm of events, this piece by Chris Giles explains.Need to know: businessThe largest US businesses are set to deliver bumper results in the upcoming reporting season with companies in the S&P 500 stock index forecast to deliver year-on-year earnings growth of nearly 22 per cent for the final three months of 2021, according to Wall Street estimates collated by data provider FactSet. However, the future looks less bright with analysts concerned about high inflation, supply chain problems and the ongoing spread of the Omicron variant undermining performance in 2022.Property continues to have a good run despite the onset of Omicron. Savills significantly upgraded its profit forecasts today after the British estate agent enjoyed a rush to buy expensive homes and warehouses at the end of last year.There was good news also from a clutch of UK retailers today, upgrading their earnings forecasts on the back of better than expected trading over the Christmas period. Further details can be found here.A stalwart of the British high street, Boots, could be bought by private equity with revelations that buyout groups Bain and CVC are preparing a joint bid for the chemist shop chain.One industry that has boomed during the pandemic is Covid test kit manufacturing. Most of us might be glad to see the back of them. But FT columnist Brooke Masters senses a longer term opportunity if test manufacturers can convince patients, insurers and governments that it is worth paying for routine screening for all kinds of diseases.The World of WorkBusinesses across the US are temporarily closing or adjusting working hours as the number of Americans infected with Covid reaches an all-time high, underscoring how disruptions linked to the Omicron variant have rippled through the economy.FT contributing editor Michael Skapinker tackles the management complaint that no one in their team thinks to thank them, noting that bosses would do well to remember that they are there to solve the problems of their employees not vice versa. Read his advice in full here.Get the latest worldwide picture with our vaccine trackerAnd finally…Do you need a break from work, either at home or the office? In this escapist piece from Life and Arts, FT correspondents in Milan, New York, Hong Kong, London and elsewhere share their favourite places around the places where they live.

‘My place of peace’: Martin Wolf recommends Dulwich Park, one of south London’s most beautiful green spaces © Kayode Fashola/iStock/Getty Images More

Aux armes, citoyens. Two years ago, the EU — under the guidance of Ursula von der Leyen’s self-labelled “geopolitical Commission” — adopted the ambitious but vague goal of developing European “strategic autonomy” on a global level.Although invoked almost daily in Brussels, the concept has remained aspirational, even abstract. Meanwhile, the EU faces real and specific menaces, with China blocking Lithuania’s exports and Russia threatening to invade Ukraine. This would be a good time to turn the EU’s undoubted clout in trade policy to strategic ends to resist pressure from hostile governments.Enter, to the sound of bugles and the thundering of horses’ hooves, a cavalry charge led by Emmanuel Macron. The French president is leading the council of EU member states for the next six months — assuming he is re-elected in April — and will aim to overcome EU disunity and France’s own vulnerabilities to build European geopolitical power.In theory, it’s just what the EU needs — leadership from a big member state with its own renowned military, intelligence and diplomatic capability. For the council presidency, Macron has adopted a rallying cry — “relance, puissance, appartenance” (“recovery, power, belonging”) — with more than a whiff of revolutionary zeal. He also has a personal motive to build European strategic power independent of its traditional allies, following last September’s humiliation of being ambushed by the Australia-UK-US (Aukus) security pact and its deal on nuclear submarines.With excellent timing, the EU is creating a new trade weapon, a legal “anti-coercion” instrument, which France wants to fast-track. The tool will allow rapid retaliation with trade, investment and financial measures against illegitimate pressure from foreign governments. In the future, it will hopefully deter the likes of China from bullying EU states such as Lithuania.But multiple vulnerabilities hamper France’s ability to lead the repurposing of EU trade policy for strategic ends.The first is foreign policy disunity within the EU towards China, Russia and the US. Macron is frequently at odds with some member states in the eastern half of Europe, in particular over his previous emollience towards President Vladimir Putin. Given Russia’s belligerence over Ukraine, and the Russia-linked mercenaries sent despite French objections to Mali, where France is winding down a peacekeeping force, that looks to have been a bad bet.Similarly, despite being critical of Chinese trade policy, Macron in 2020 unwisely succumbed to German persuasion to support the EU’s bilateral investment agreement with China. The deal, now mercifully suspended, caused dismay across the EU and within Joe Biden’s incoming administration in the US for making Europe look weak.Indeed, Macron’s sceptical attitude to the US suggests he is overly animated by French interests, particularly the Aukus episode. Given Biden’s foreign policy vacillations and the possibility of another Donald Trump presidency, he is right about the risks from reflexive Atlanticism. But other European countries such as the Baltic states are not confident the EU, with its limited trade and financial sanctions instruments, can take over. The US is Russia’s main interlocutor in this week’s talks in Geneva on European security: the EU institutions are not invited. Support from other member states for France’s fury over the Aukus deal was slow and muted.Second, France is often too politically vulnerable domestically to wield trade as an effective strategic weapon. A slightly childish but symbolically unequivocal way to punish Australia over Aukus would have been to complete the EU’s nearly finished bilateral trade deal with New Zealand, a country that bans nuclear submarines from its ports, while blocking a parallel Australian agreement. But both countries are beef exporters, France’s presidential election is coming up and the country’s cattle farmers are notoriously noisy. Paris has elected to delay both deals until it’s someone else’s problem.Notably, the “strategic autonomy” slogan started life as “open strategic autonomy”, but France last year argued vehemently for dropping even an abstract reference to free trade. There is concern among other member states that the anti-coercion tool that France strongly backs will end up being used for protectionist rather than strategic purposes. Finally, to realise its ambitions for the EU, France needs Germany on board. Macron may have been soft on Russia and China but Germany has hitherto proved mushy to the point of liquefaction. German industry has criticised Lithuania’s defiance towards Beijing and is lobbying against decoupling from China. Earlier this week, Philippe Léglise-Costa, France’s ambassador to the EU, sounded distinctly lukewarm about a confrontation over Lithuania. He told a Brussels seminar that, while member states should show solidarity with Vilnius, the EU should pursue any violations of trade law through the usual channels at the World Trade Organization and seek a negotiated solution.French cavalry charges have historically been magnificent to watch, but in an EU context they are more often heralded than executed. The case for centralising some strategic power in the EU is strong. But Macron’s ability to deliver will require more European unity and French domestic resilience than are currently on [email protected] More