Aurelia Butler

LONDON (Reuters) -The Bank of England has told top banks to spell out by March how they will keep enough cash in circulation as COVID-19 accelerates its decline, saying it won’t create a new body for distributing notes and coins.Access to cash has become a politically sensitive issue as banks shut branches and more people use cards for payments, raising worries about people’s ability to store, send and receive money. Over 5 million adults still rely on cash in their day-to-day lives, many of whom have limited access to banking.A report for the Bank of England (BoE) last year proposed a “utility” or single entity responsible for distributing cash, which would be funded by banks.The BoE said on Wednesday there was no consensus for this due to doubts over how quickly it could be set up given the complex IT challenges involved.Instead, it was opting for industry-wide commitments to maintain sufficient resilience in cash distribution, improve efficiencies to cope with declining volumes, and reduce the environmental hit from processing cash.Industry body UK Finance said on Wednesday major retail banks such as Lloyds (LON:LLOY), NatWest, Barclays (LON:BARC) and HSBC have agreed that if a community’s core cash service faces closure, cash machine network LINK will have the power to commission new services which the banks would fund.These could include enhanced Post Office services, new free-to-use cash machines, and shared banking hubs.”This is a great start, and I look forward to seeing the impact of industry’s announcements for new and improved cash facilities in local communities across the UK,” Britain’s financial services minister John Glen said.NEW POWERSThe BoE set an end of March deadline for banks to submit individual plans on how they will back up their new commitments.”To help support this, HM Treasury will provide the Bank of England with the powers that it needs to keep the wholesale infrastructure sustainable and resilient into the future,” the BoE said in a statement.The use of cash for payment transactions has slumped from just over half in 2010 to 17% in 2020, with the fall accelerating during the pandemic as some shops refused to handle notes and coins, requiring contactless payments instead.Since lockdowns were lifted, cash withdrawals have gradually increased but in August 2021 cash machine withdrawals were 30-40% lower than the same period in 2019, the BoE said.”Looking ahead, there is considerable uncertainty around the long term outlook for cash demand,” the BoE said.The Bank is also looking at the potential for a digital version of sterling, which could crimp cash usage further.The Federation of Small Businesses said the new strategy would bring hope to communities that are losing bank branches and cash machines.”This strategy marks a very important step forward. We now need government to deliver the access to cash legislation it promised many months ago to cement and build on the progress made today,” the FSB said. More

(Reuters) -Technology stocks helped drive gains in Europe’s major indexes on Wednesday, ahead of the U.S. Federal Reserve’s policy outcome that is likely to signal a quicker withdrawal of its pandemic stimulus.The pan-European STOXX 600 was up 0.4% after a five-session losing streak, which was last seen at the height of a pandemic-led rout in March 2020.High-growth technology stocks, which typically weaken on expectations of rising interest rates, jumped 1.3% after a recent bout of selling.Other defensive sectors such as utility and real estate also supported the index, while miners and retail stocks declined. “We expect the major hike cycle to start next year, as inflation peaks then, which should give the Fed more time to act and then see what the impacts are before being too aggressive,” said Jeremy Gatto, a multi-asset portfolio manager at Unigestion.”With Omicron uncertainty, and the big central bank meetings, it’s going to mean more choppiness going into the weeks ahead.”Anxiety around speedy tapering plans and the swift spread of the new coronavirus strain have turned investors cautious. The STOXX 600 is up about 1.8% so far in December, in what is typically a strong month for global equity markets. Data showed British consumer price inflation soared to a more than 10-year high of 5.1% year-on-year in November ahead of the Bank of England’s meeting on Thursday.The European Central Bank is also meeting on Thursday, with policymakers expected to decide how to adapt the bank’s regular asset purchase programme (APP) once the much larger pandemic-fighting PEPP scheme ends in March.Among individual companies, the world’s biggest fashion retailer Inditex (MC:ITX) dropped 2.6% after reporting lower-than-expected quarterly gross margins. Sweden’s H&M fell 2.5% after meeting quarterly expectations for net sales.Shares of Generali (MI:GASI) inched up 0.6% after Italy’s top insurer pledged to return up to 6.1 billion euros ($6.88 billion) in dividends and buybacks to shareholders.Support services provider DCC jumped 6.7% after announcing its acquisition of Almo Corp for about $610 million.Meanwhile, shares of IAG (LON:ICAG) slipped 2.0% after the British Airways parent said it was in advanced talks to cancel its purchase of rival Air Europa from Spain’s Globalia.($1 = 0.8872 euros) More

The Federal Reserve is expected to announce a swifter scaling back of its enormous stimulus programme and boost its expectations for interest rate increases next year, as it takes a more assertive stance against surging inflation.The US central bank on Wednesday is set to double the pace at which it is winding down or “tapering” its bond-buying programme, slashing its purchases by $30bn a month so that the stimulus ends altogether several months earlier than initially scheduled in November. That would put the Fed on track to cease adding to the size of its balance sheet by the end of March and in a position to raise US rates soon after.Fed officials are expected to signal their support for two rate increases next year, according to new projections to be released on Wednesday after its two-day policy meeting, a far more aggressive path than just a few months ago. Three or four more adjustments are set to be pencilled in for 2023, with another round in 2024.When the so-called dot plot of individual interest rate projections was last updated in September, senior policymakers were evenly split on the prospects of lift-off from today’s near-zero levels in 2022.The abrupt pivot follows a string of robust economic data that suggest a recovering labour market and mounting signs that inflation is not only broadening out, but also at greater risk of becoming more entrenched.Jay Powell, the Fed chair, laid the groundwork for this move at congressional hearings several weeks ago, officially retiring the word “transitory” when talking about inflation and suggesting that stable prices are essential to a long economic expansion.The Fed is expected to scrap the word entirely from its policy statement to be published on Wednesday and revise its language around the economic outlook. Some economists believe the Fed will acknowledge that the inflation thresholds it sought to reach before raising interest rates may already have been met, given that core inflation is now running at 4.1 per cent and has not yet peaked.The central bank has previously said it would keep rates tethered close to zero until it achieved inflation that averages 2 per cent for some time and maximum employment. The Fed has not set a numeric target for the latter goal, but the recent drop in the unemployment rate to 4.2 per cent suggests progress towards it.

The economic projections planned for Wednesday are also due for a revamp, with Fed officials likely to revise their forecasts for inflation upwards and cut their estimates for the unemployment rate.In September the median forecast indicated that the core inflation measure would steady at 3.7 per cent this year before drifting lower to 2.3 per cent in 2022, while the unemployment rate would fall to 4.8 per cent in 2021 before slipping further the following year to 3.8 per cent.Policymakers in September also saw the US economy expanding 5.9 per cent this year, before slipping to 3.8 per cent in 2022. Economists expect the 2021 figure to be shifted marginally lower.Powell is also likely to address more directly the threat posed by the new Omicron variant, which has sparked global alarm and prompted many governments globally to reimpose lockdown measures.The Fed chair has previously warned that Omicron presents “downside risks” to employment and economic activity and could exacerbate inflation as supply chain disruptions intensify further. More

Taper:This may be the easy part. With Fed Chair Jerome Powell having already flagged the possibility of wrapping up bond purchases “a few months earlier,” rates markets have taken the news in their stride. Technology stocks have thrown a bit of a tantrum, yes, but that’s pretty much irrelevant for the Fed. The market’s expectations are centered around an end to asset purchases in March, and a significant deviation here looks unlikely.Dot plot:The plot is likely to see a significant shift. The median for 2022 is bound to acknowledge the current market pricing for two full rate hikes. The plot for 2023 already saw three increases, and I expect it to be unchanged. A shift upward in the 2024 median — currently 1.75% — would be a hawkish takeaway, though a change in the longer-term target rate from 2.50% looks unlikely.Summary of economic projections: Bloomberg Economics expects an upward revision in the headline PCE forecast for 2022 to 2.5% from 2.2%, while NatWest’s Kevin Cummins (NYSE:CMI) predicts the revision to be even higher at 2.7%. He also sees a moderation in the real GDP forecast to 3.5% from 3.8%.Post-meeting briefing & runoff discussion: Powell will aim to do a careful balancing act, especially if the collective dot plot leans on the more hawkish side. He will also emphasize that we don’t know how the labor market will fare in the face of the new variant and how resilient consumer demand will be.Among the more interesting parts of Powell’s remarks will be what the Fed intends to do with its humongous balance sheet. With St. Louis Fed President James Bullard having commented on the prospect of allowing a balance sheet runoff at the end of taper, policy makers will have likely deliberated on the issue, and the remarks will determine how the longer end of the curve reacts to the meeting.©2021 Bloomberg L.P. More

UK inflation has soared to its highest level in a decade, hitting 5.1 per cent in November, far outstripping expectations. The level exceeded economists’ forecasts that the annual rise in consumer prices would jump from 4.2 per cent in October to 4.8 per cent last month, and was significantly higher than the Bank of England’s prediction that it would step up to 4.5 per cent. The BoE did not expect the inflation rate to exceed 5 per cent until spring next year. The rate is now more than two-and-a-half times its 2 per cent inflation target it is supposed to hit at all times. The inflation figure, alongside strong labour market data released on Tuesday, would have been enough to prompt an interest rate rise from the BoE’s Monetary Policy Committee on Thursday. But the rapid spread of the Omicron coronavirus variant has increased uncertainty in the UK economy. The IMF on Tuesday told the BoE not to get bogged down with “inaction bias”, saying it should raise interest rates to prevent inflation becoming ingrained. The UK’s Office for National Statistics said the principal reasons for the rise in inflation were the prices of petrol and second-hand cars, but there were upward contributions to inflation across almost all goods and services, implying broad price pressures across the economy.Grant Fitzner, ONS chief economist, said: “A wide range of price rises contributed to another steep rise in inflation, which now stands at its highest rate for over a decade.”He added: “The price of fuel increased notably, pushing average petrol prices higher than we have seen before. Clothing costs — which increased after falling this time last year — along with price rises for food, second-hand cars and increased tobacco duty all helped drive up inflation this month.”Paul Dales, UK economist at Capital Economics, said there was evidence of “persistent price pressures” in the data with the core inflation rate, excluding energy, food, alcohol and tobacco, rising from 3.4 per cent in October to 4 per cent in November, twice the central bank’s target.“The BoE may still just about be able to ignore surge in inflation . . . for now,” he said. Inflation is expected to remain close to 5 per cent until April, when the next rise in the energy price cap will lead to another jump. The IMF on Tuesday expected the rate to peak at 5.5 per cent, but economists have been surprised almost every month this year by inflation rising faster than they thought.

Samuel Tombs, UK economist at Pantheon Macroeconomics, said the November rate was “uncomfortably high” for the BoE and the rate was likely to “soar to about 6 per cent in April” before falling when this year’s price increases fall out of the annual comparison. He still expected the BoE to take no action this week because “Omicron necessitates a little more patience”.One of the reasons inflation has been high in the goods sector has been very large increases in costs with manufacturing input prices rising at an annual rate of 14.3 per cent in November, according to the ONS. This led the prices charged by UK manufacturers to rise 9.1 per cent compared with the same month last year. The discredited RPI measure of inflation, which still underpins index-linked government bonds, surged in November to an annual rate of 7.1 per cent, the highest on this measure since March 1991, more than 30 years ago. More

China’s economic data indicated further slowing momentum last month, with lingering caution in consumer spending adding to pressure from the country’s struggling property sector.Retail sales, a crucial gauge of consumption, rose just 3.9 per cent year on year in November, well below economists’ forecasts of 4.7 per cent. A slight improvement in industrial activity, which grew 3.8 per cent, was overshadowed by a drop in investment across the real estate industry.New home prices lost 0.3 per cent, their steepest fall since early 2015 and a third consecutive month of declines. Property investment rose 6 per cent in China over the year to the end of November, compared with a 7.2 per cent rise by the end of October.Weakness across China’s vast real estate sector, which accounts for more than a quarter of gross domestic product, is weighing heavily on the economy at a time when the government has reaffirmed its commitment to strict coronavirus prevention measures. Big real estate developers have struggled to bring in enough cash to repay their debts, with several defaulting over recent months, hitting market confidence.“We expect the property downturn to continue into the first half of 2022 before real estate activity recovers somewhat in the second half, as anxiety about property developer defaults eases,” said Tommy Wu, China economist at Oxford Economics.The consultancy pointed to housing starts and housing sales by floor space, which were 22.4 per cent and 16.3 per cent lower, respectively, in November year on year. New home prices fell across China’s 70 biggest cities compared with October, according to data from the National Bureau of Statistics, but they were still higher than in the same month last year.

Last week, Evergrande, the world’s most indebted developer, was finally declared to be in default by US rating agency Fitch after months of missed interest payments on its international bonds.Ahead of the group’s payment deadline last Monday, the People’s Bank of China pumped close to $200bn in liquidity into the financial system by cutting the reserve requirement ratio, an important rate for banks. The decision was widely interpreted as an attempt to calm markets over the developer’s problems. Officials have signalled that they would ease monetary policy to support growth, but they are also expected to commit to measures to cool the property sector and reduce debt levels.Shimao, a more highly rated firm, was the latest developer to find itself at the centre of a market sell-off this week. The company’s $1bn bond maturing next year fell to 64 cents on the dollar, its lowest level on record. In a statement released by its Shanghai subsidiary this week, the company said its operations are “normal”. More

Investors are piling into inflation-linked assets in a bet that consumer prices will continue to soar even as central banks gear up to tighten monetary policy after almost two years of pandemic stimulus. Inflation-protected government bonds, commodity funds and real estate investment trusts are among the products absorbing cash in a search for ways to preserve spending power. Bottlenecked supply chains, higher energy costs, heavy government spending and strong consumer demand have driven inflation up across the globe in 2021. In November, the US consumer price index rose 6.8 per cent year on year, the fastest pace since 1982, while eurozone inflation climbed a record 4.9 per cent. More than three-quarters of countries analysed by Pew Research had higher inflation in the third quarter of 2021 than in the same period in 2019. Central banks including the US Federal Reserve and the Bank of England have signalled a willingness to tighten monetary policy faster than originally anticipated, but rises in interest rates are still likely to be months away. “We expect inflation to remain elevated in the next year, well above the Fed target, particularly as the supply-demand imbalance takes time to sort itself out,” said Roger Aliaga-Diaz, senior economist at Vanguard, the $7.2tn asset manager. Investors are therefore trying to prepare their portfolios for continued price pressures, buying into assets that might profit from or hedge against rising inflation. This year a record $66.8bn has flowed into funds holding Treasury Inflation-Protected Securities, US government bonds that are indexed to inflation, according to data provider EPFR.BlackRock, the world’s largest asset manager, said it expected inflation will persist at higher levels than those before the coronavirus pandemic, and has an overweight position in Tips. In Britain, demand for inflation protection is so robust that the sale last month of £1.1bn in inflation-adjusted gilts maturing in 2073 drew the lowest yield — and highest price — at auction on record. Sonal Desai, chief investment officer at Franklin Templeton, warned that inflation-linked bonds were at risk of “some fairly strange movements” given the Fed’s continued intervention in the market. Instead, she prefers certain energy-based commodities or currencies as indirect hedges to inflation. “Real assets” such as commodities or property have received a second look from investors. A $4.5bn Invesco commodities exchange traded fund, with holdings in futures tracking commodities including copper, crude oil and soyabeans, had $2.4bn of inflows from January to November this year. Through October the inflows were more than double those over the same period in 2020. However, investors have pulled $400m out of the fund so far this month. Gold, historically touted as a haven asset in inflationary times, has not dazzled investors in 2021. The leading gold ETF has had more than $10bn in outflows, according to ETF.com. Cryptocurrencies have drawn some investors seeking protection, but the price of bitcoin has fallen sharply since early November. Energy and inflation are closely linked because energy costs play a large role in inflation calculations. Rising oil or natural gas prices drive up costs for consumers directly — a higher price for a tank of petrol or a more expensive heating bill — and indirectly, by increasing the costs of manufacturing and shipping goods. Bets that energy costs will rise have pushed flows into energy-related stock funds to a record high this year, according to EPFR. “Commodities like oil tend to be pretty good hedges, if longer-term inflation is expected,” said Mike Sewell, fixed income portfolio manager at T Rowe Price. Real estate investment trusts have been a popular bet in the US because they primarily generate income through rents, which tend to rise alongside inflation. Flows into Schwab’s $6.8bn US Reit ETF, the largest in the country, plunged to record lows when rent freezes were imposed during the early months of the pandemic, but they have recovered.

Some smaller investors have sought out inflation protection by purchasing so-called Series I US savings bonds from the US Treasury, which offer a 7.12 per cent interest rate based partly on inflation. Individuals are only allowed to purchase $10,000 in Series I bonds each year, but the Treasury announced it had issued $1.3bn of new bonds in November, the largest monthly figure on record. Vanguard has received strong flows into its Tips products and a commodities fund, said John Croke, the asset manager’s head of active fixed income product management. But he warned “not to overreact to inflation once it is already baked into the market”.Standard inflation hedges, Croke said, are already too expensive. “Inflation protection is not the attractive place that it was. That opportunity has been neutralised and we are going to hunt to put our chips in different places.” More

The writer is chief market strategist for Europe, Middle East and Africa at JPMorgan Asset ManagementIn the face of uncertainty caused by the new Omicron variant of coronavirus, the Bank of England may choose not to raise interest rates this week. But assuming the restrictions required to contain Omicron prove both temporary and limited, then 2022 will see a number of developed world central banks start the process of normalising rates.Once lift-off begins, the question invariably turns to how high can they go?According to bond markets, the answer is not very high. The market currently only expects the US Federal Reserve to raise its benchmark rate to 1.6 per cent. This is far more pessimistic than the Fed itself, which sees its long-term policy rate at 2.5 per cent.The BoE’s interest rate pricing is even more interesting. Its bank rate is expected to rise to 1 per cent in early 2023 but by 2025 the BoE is seen cutting rates back down towards 0.7 per cent. The European Central Bank is barely expected to get its deposit rate back into positive territory.Why is the bond market so pessimistic about how high policy rates can go?Investors might point to secular factors as economies mature. Slowing demographics and weak productivity that dents supply growth have certainly put downward pressure on interest rates in recent decades. But these long-term trends have not worsened since the pandemic. If anything, it’s possible that the technological advancements forced by the pandemic may lift productivity.It may therefore be that investors are leaning on cyclical judgments. I suspect the experience of the past cycle is colouring investors’ perceptions of the coming tightening cycle, given the limited amount of tightening central banks in the developed world achieved prior to the pandemic.But I would caution against using the past cycle as a template for the coming tightening cycle for three reasons.First, the interest rate sensitivity of the household sector has probably decreased. This is due to a combination of less debt, and more of that borrowing being on long-term low fixed rates. In the US, household debt as a percentage of gross domestic product has fallen from a high of 99 per cent in 2007 to 79 per cent today. A flurry of remortgaging activity in the past two years has led to households locking in 30-year fixed mortgage rates as low as 2.7 per cent. In the UK, household debt to GDP has fallen from 97 per cent to 87 per cent. And households are increasingly turning to longer-term, fixed-rate borrowings. Regardless of what the BoE does to rates, these households have their mortgage outgoings protected. Second, fiscal policy is acting as a stimulant to growth, and will continue to do so in the coming years. This sits in stark contrast to much of the past decade when a big priority was reducing the public debt accumulated after the financial crisis. Post-pandemic governments have changed their tune and I do not see a return to austerity. Having issued record high levels of debt at record-low interest rates, they have lost their fear of debt. Priorities have shifted to building back better and providing the infrastructure needed to facilitate the transition to a low-carbon economy. The US, eurozone and UK have already announced sizeable multi-year investment plans.Third, geopolitical uncertainty is unlikely to damp growth as it did in the last cycle. Back when the Fed was trying to raise rates in 2018, then US President Donald Trump was locked in an unpredictable trade war with China. Much of the slowing in economic activity that we saw alongside the last Fed tightening cycle was in investment, which I’d argue was better attributed to trade uncertainty than higher interest rates.Things weren’t much better in Europe. Brexit was a dark cloud over both the UK and EU. This sat alongside tensions between northern and southern Europe that lingered from the sovereign debt crisis. While 2022 will not be free of geopolitical events, I don’t see any of them being as disruptive as those that occurred pre-pandemic. Put simply, in the past cycle the combination of high household indebtedness, fiscal austerity and geopolitical uncertainty acted as a brake on demand. The central banks, therefore, didn’t have to apply much additional pressure for demand to meaningfully slow.But many of these former braking forces are now acting as an accelerant. The central banks might now have to brake harder. Investors should be very conscious of what this might mean for positions in government bonds. If I’m right, then over the coming years government bonds will prove to be anything but the “riskless assets” in our portfolios that they are traditionally seen to be. More