Aurelia Butler

US producer prices rose at the fastest pace on record in November, piling additional pressure on the Federal Reserve to more swiftly dial down the emergency policy settings it put in place during the pandemic in order to tame surging inflation.The producer price index published by the Bureau of Labor Statistics on Tuesday jumped 0.8 per cent in November, for an annual increase of 9.6 per cent. That is the fastest year-over-year rate since the data were first collected in 2010.“Core” producer prices also minted new records. After stripping out volatile items such as food and energy, prices rose 6.9 per cent from the previous year, the biggest advance since August 2014, when the BLS first began its calculations.The report comes at the start of a two-day meeting for the US central bank, which is actively debating how to adjust the amount of stimulus it is providing to an economy that is currently experiencing the highest inflation in almost 40 years.The Fed is expected to announce on Wednesday it will scale back its asset purchase programme more quickly, doubling the pace it set just a month ago. The aim is to bring an end to the bond-buying programme several months earlier in order to give the Fed the flexibility to raise interest rates sooner.Chair Jay Powell set the stage for this pivot several weeks ago when he signalled his support for an earlier exit in the face of what he said were mounting risks that inflation could become a more persistent problem. Once concentrated to a few sectors most sensitive to pandemic-related reopenings and supply-chain disruptions, such as used cars and travel-related expenses, consumer price inflation has shown clear signs of broadening out.The BLS noted that last month’s increase in producer prices was also “broad-based”, with expenses related to services, transportation and warehousing moving higher. Prices for iron and steel scrap, as well as gasoline and food items rose as well.The Fed on Wednesday is also expected to signal multiple interest rate increases next year, with further adjustments pencilled in for subsequent years. In September, the last time the so-called “dot plot” of individual interest rate projections was published, Fed officials were evenly split on whether lift-off from today’s near-zero levels would occur in 2022.Now, economists anticipate the dot plot to show two rate rises in 2022, followed by three or four subsequent moves in 2023 and again in 2024.Moderate Democrats are pushing the Fed to do more to contain inflation, which has been politically toxic for the Biden administration as it seeks to pass its $1.75tn Build Back Better spending legislation.Republicans and some members of the president’s party have resisted the spending package, which comes on the heels of another $1.2tn bipartisan infrastructure bill, citing the increase in prices and the painful costs imposed on Americans by inflation.White House officials, like most economists, expect inflation to moderate next year, but there is significant uncertainty about when exactly this will begin.“The numbers are going to be pretty strong for at least the next six months, so it means the rhetoric around inflation is going to continue to mount until the peaking occurs late in the first quarter or second quarter,” said Alan Detmeister, an economist at UBS and a former Fed staffer. “This is all just going to build for the next couple of months.”Traders on Tuesday shifted their bets following the inflation report, pricing in just under three quarter-point rate rises next year, based on Fed funds futures. Those trades fell just short of a late November peak for expectations of how quickly the Fed would lift rates next year, before the Omicron coronavirus variant rattled markets.Treasuries sold off, pushing yields on both the two- and 10-year notes up. The selling most acutely hit longer tenors, with the 10-year yield rising 0.04 percentage points to 1.46 per cent. Yields move inversely to a bond’s price.The potential for more hawkish policy from the US central bank also weighed on the country’s $53tn stock market, with the benchmark S&P 500 sliding further from a record closing high struck on Friday. More

You will have seen it play out on the news so often as to become cliché. A bereaved person embarks on a crusade against whichever disease, crime or public safety hazard claimed their loved one. A campaign is set up. Donations roll in. What motivates their efforts is a sincere desire to spare others from the same grief. But so does a deep psychic need to claw back control. Having been done to and acted upon by a capricious world, the feeling of agency, however brief, soothes them. Nations too have losses to process. Whether or not China ever surpasses it, the US has been bereaved of its 1990s unipolarity. It copes with the trauma by dwelling on what could have been done about it. If only China had not been waved into the World Trade Organization 20 Decembers ago. If only successive White Houses had not been so credulous in their dealings with Beijing. The recriminations go back to 1949, when, as some Republicans still fancy, the US “lost” China to communism. On the surface, this self-reproach looks courageous and honest. In fact, it is the easy way out. The alternative is to admit that the much larger and older country was bound for world eminence (again) once it began to open up under Deng Xiaoping in the 1970s. The west might have postponed its arrival at the top table, at some cost. Preventing it outright was never in its power.Impotence is more painful to own up to than guilt. The rest of the democratic world finds it no easier than America. “How the west invited China to eats its lunch”, has the luridness and fake-Everyman patter of a Fox News headline. It is in fact a BBC one, from last week. Consider its two implications. First, the WTO, in 2001, could have plausibly blackballed a fifth of humanity that had just undergone a generation of market-friendly reforms. Second, doing so would have somehow only stymied China, and not the west, even though American and other companies gorged on low-wage labour there ever after. If this were just academically wrong, it need not detain us. But there are political consequences to this fantasy. One theme that Donald Trump rode to the White House was that US elites were derelict and even complicit in China’s rise. Presidents Bill Clinton, George W Bush and Barack Obama are still held to have sold out industrial America (but not credited for the cheap consumer goods that flowed into many of the same households from a trading China). The premise that a mighty China is some kind of aberration, and not just a regression to the historic mean, props up a lot of US populism. Progressives have their own version of this solipsism. A vicious civil war in the Arabian Peninsula? Blame western arms sales. Poverty in Africa? The Washington Consensus. Meltdown in Afghanistan? How dared we abandon it. Even people of a liberal or centre-ground bent have persuaded themselves that Russia is autocratic because Kremlin-friendly magnates are allowed to buy up Mayfair. According to this view of the world, nothing bad happens anywhere that does not trace back to a western root. It is a stab at global consciousness that could not be any more parochial. It is a pretence of humility that is actually the most fantastical claim of omnipotence.The west is forever confronting a harsh “truth” (how guilty we are) in order to duck a harsher one (how marginal we are). To deny that the rest of the world has a mind and will of its own was strange enough in 1949, when the US accounted for a large enough share of global output to at least aspire to shape distant events. To keep it up in this century is to live in a self-flattering delirium. It also gives rise to a jarring intellectual contradiction in Washington. China hawks scold a generation or two of US leadership for enabling its rise. Mike Pompeo, while secretary of state, seemed to wonder if even Richard Nixon’s recognition of the “red” state in 1972 was naive. The trouble with this surface toughness is that it suggests China doesn’t have enough going for it to prosper under its own steam. If so, why the hawkishness? Why the eternal vigilance and military largesse? China cannot be an awesome century-long rival and an unwitting creation of soft-headed free-trade liberals all at once. The truth is that no one takes China more seriously than those who recognise that it is too vast and ambitious to have been contained for long, with or without WTO membership. The real hawks are the fatalists. [email protected] More

The IMF has urged the Bank of England to raise interest rates, warning that demand was too strong in the economy and UK inflation would rise to about 5.5 per cent early next year. Two days ahead of the central bank’s next Monetary Policy Committee meeting, Kristalina Georgieva, the IMF’s managing director, said the UK’s monetary policy needed to “withdraw the exceptional support provided during 2020”.In its annual health check on the British economy, the fund accused the BoE’s interest rate setters of allowing inflation to spiral in the UK economy by finding excuses to do nothing at its regular meetings. “It would be important to avoid inaction bias, in view of costs associated with containing second-round impacts [of inflation],” the IMF said.While acknowledging that timing monetary tightening was difficult, the IMF staff praised the recovery from the pandemic but said inflationary tendencies would not fade quickly. It forecast that inflation would only return to the BoE’s 2 per cent target by early 2024, having risen to “peak at about 5.5 per cent in the spring of 2022”. The economy would settle with output around 2 to 2.5 per cent below the path the fund thought possible before the pandemic, worse than its estimates for other advanced economies, something Georgieva said was due to job market tightness limiting the amount the economy could grow without inflation. “We are in no position today yet to identify to what extent [this labour market tightness] is due to the pandemic and what role Brexit may play in it,” she said. Inflation would come down after that with a combination of lower global energy prices, more effective supply chains and tighter control of consumer spending power.This should come from higher interest rates, the IMF said, and the Treasury spending less in 2022-23 rather than having most of the post-coronavirus spending restraint in the following year. It said this shift would “help contain demand in the short run with the benefit of also reducing the drag on growth in [the medium term]”.The fund acknowledged that the outlook was highly uncertain with the new Omicron coronavirus variant spreading rapidly in the UK. It said that new restrictions would lower growth a little over the winter.

With inflation its top policy concern, it focused on how the central bank should withdraw the support it had provided during the pandemic. This included lowering interest rates to 0.1 per cent and raising the total amount of money created to buy government bonds to £895bn.While the IMF said there was a delicate balance in the timing of the necessary monetary tightening between undermining confidence and allowing inflation to become even more persistent, the BoE should recognise that raising rates would still leave stimulus in place. Without saying the BoE should act immediately, it told monetary policymakers not to delay. “It is important to bear in mind that initial steps [to raise interest rates] would still leave policy accommodative, that changes in policy can provide important signals to dampen inflation expectations, and that policy is best focused on the period 12 to 24 months out, when it has its maximum impact (and this would be beyond near-term Covid-19 developments),” the IMF report said. The BoE declined to comment on the IMF report. More

Hello from London where the arrival of Omicron has meant that tequila shots have been replaced with Covid-19 vaccine booster shots in the build-up to Christmas. The new variant of coronavirus offers an intriguing stress test on the degree to which economies will chug along or revert to behaviour conducive to bumpy supply chains, such as tough border restrictions and supercharged growth in online shopping. Our main piece today is focused on whether ocean shipping disruptions have peaked. While many are confident that the turmoil has reached its nadir, it’s less clear to us that the logistics sector will enter 2022 on the up.Shipping may be cheaper, but delays remain There’s an air of optimism about supply chains right now. A dip in freight rates has led to suggestions from several macroeconomists penning their 2022 outlooks that the mess we have witnessed over the past year and a half is beginning to clear up. Jan Hatzius, chief economist at Goldman Sachs, wrote in a note last week that “transport costs and shipping disruptions are starting to normalise”. Bel Air Investment Advisors, a wealth manager, said that “supply side issues such as shipping prices have already begun to normalise”.Indeed, container spot market freight rates from east Asia to the US west coast have dropped significantly. After peaking at close to $9,000 per 40ft equivalent unit in November, the cost to ship cargo from the world’s manufacturing hub to the biggest consumer market has slumped more than 20 per cent to below $7,000, according to Xeneta, a data provider, and Compass Financial Technologies.Further evidence of green shoots might appear to have come in the form of claims of a reduction in the number of waiting vessels and containers at the Los Angeles and Long Beach port complex. The situation at LA/Long Beach has become harder to assess since mid-November, however, because of new rules that require vessels to remain many miles offshore until given approval to approach. While that has made it seem as if congestion has eased, ships were merely waiting to berth further away. Even so, calls to the ports, which are the busiest in the US, have declined in recent months, from 261 ships in September, to 246 in October and 216 last month, according to Sea/, a data platform owned by broker Clarksons.However, many within the industry are hesitant to say disruption has reached an apex. They are not as confident as the macroeconomists that ocean freight operations are on the road to normalising. “We haven’t seen any discernible improvement in the supply chain. The risk of further disruption has heightened with the new variant,” said Simon Heaney, an analyst at Drewry.He said the recent drop in freight rates was because of the seasonal drop in shipments that would no longer make it in time for Christmas, together with the decision by the likes of carriers CMA CGM and Hapag-Lloyd to freeze rates for those shipping at the last-minute.The decline in rates has also reversed on a global level. The Shanghai Containerised Freight index hit a record high last week at almost five times higher than the level at the start of 2020. That is backed up by Flexport’s Ocean Timeliness Indicator, which measures the time from when cargo leaves an exporter until it is collected from the destination port. Both the China-to-Europe and China-to-US west coast routes remain at or close to records highs above 100 days.Lars Jensen, chief executive of Vespucci Maritime, a consultancy, said that the recent reduction in vessel calls and easing of container congestion at Los Angeles/Long Beach had come at the expense of making the less visible queue of ships wait longer to dock. The number of container ships backed up waiting to berth was at a record 103 on Monday.“At the heart of it, the problem is still you don’t have enough inland capacity to move the containers,” he said.As Trade Secrets noted earlier this week, everyone from procurement managers to central bankers are craving more visibility on freight flows and bottlenecks through long, complex supply chains. Analysts, too, have been lamenting the lack of data tracking throughout the logistics network.“Whether something is improving inland is pretty opaque. There is no easy-to-read index on warehouse capacity or availability. Nothing for chassis numbers. To get a broad picture regionally and globally, that is lacking,” Heaney said.Of the many opacities in the supply chain, Peter Sand, of Xeneta, says that one of the most acute concerns is accurate data on Chinese government policy towards coronavirus outbreaks. A spate of recent cases in Ningbo, a large port that was paralysed for a fortnight in August because of the pandemic, has sparked concerns of another shutdown that would set back any return to normality for ocean shipping. “The lack of transparency . . . is only adding to the mystery,” added Sand.Some say having threads of information without a complete tapestry exacerbates the problems, leading to measures that ease strains in some areas only at the expense of worsening others. Jensen says the lack of a coherent picture not only prevents a solution to supply chain bottlenecks, but may even make matters worse. The reason: remedies for one issue may trigger snags elsewhere.For example, Hamburg changed the rules concerning how early trucks with containers for export could arrive at the port. The idea was to reduce box congestion on the docks, quay and yard. A sensible move from a port perspective, Jensen said, but it led to a hold-up for many trucks already en route to the port, thus removing lorry capacity from Germany’s supply chain.No doubt, a rush of capital-hungry supply chain visibility start-ups will claim they have the tools to provide the kind of useful data we all crave.But if there is one thing that supply chains have proven during the pandemic, it’s that they are far from being technologically advanced enough for anyone to work out just how low shipping can sink. We cannot even call the nadir, let alone mitigate it.Additional reporting by George Steer in LondonTrade linksAir freight rates have soared to fresh highs as exporters rush to get their products on the shelves and into warehouses ahead of Christmas, providing yet more evidence that supply chain snags remain with us. Ahead of a weekend referendum, public opinion in Taiwan favours reviving a ban (Nikkei, $) on US pork imports, a move that would have implications for Taipei’s relations with Washington. Jude Webber has an interesting read on how Dublin’s port boom has revealed a shift in Ireland’s trade after Brexit. Francesca Regalado and Claire Jones More

Click here to listen to the latest news in less than three minutes. Top Stories Today is an audio news digest that gets you up to speed on the day’s headlines.The Omicron coronavirus variant has been discovered for the first time on mainland China, according to health authorities, piling pressure on officials already contending with an outbreak in one of the country’s most important manufacturing hubs.Officials and state media said the Omicron case was “imported” by an arrival in the port city of Tianjin, south-east of Beijing, where travellers are quarantined before they are allowed to continue on to the Chinese capital.President Xi Jinping’s administration is pursuing a “zero Covid” policy across the world’s most populous nation, in part because of concerns about the relatively low efficacy of China’s homemade vaccines and the potential death toll if Covid-19 spread freely among the country’s 1.4bn people.China has reported only about 100,000 confirmed Covid cases since the virus emerged in Wuhan almost two years ago — less than the number of daily cases in the US and UK. The discovery of Omicron in Tianjin came as tens of thousands of people in China have been subjected to new lockdowns owing to Covid-19 outbreaks. Authorities are rushing to contain dozens of cases in the Yangtze river delta, a vital manufacturing centre. The cities of Hangzhou, Shaoxing and Ningbo — all in Zhejiang province, south of Shanghai — have reported almost 200 new cases this week, prompting authorities to impose restrictions on movement until March 2022.The first report of an Omicron case in China comes as the highly transmissible variant, first discovered in southern Africa, begins to take hold in Europe. New infections in the UK are running at 200,000 a day, according to an estimate from the UK Health Security Agency, and is expected to become the dominant variant in London in the coming days. The UK reported its first death from the Omicron variant yesterday. Denmark is also seeing a surge in Omicron cases and its health authority said it expected the variant to become dominant this week.Epidemiologists say the UK and Denmark, which both have sophisticated genetic sequencing operations, offer an early warning of how infections and hospital admission rates could spike across Europe this winter and show the need for effective booster programmes to be in place.Thanks for reading FirstFT Americas. Here’s the rest of today’s news — GordonFive more stories in the news1. Blinken blasts ‘aggressive’ China US secretary of state Antony Blinken has criticised “Beijing’s aggressive actions” against its neighbours on his first visit to south-east Asia since taking office. In a speech in Jakarta, Blinken said that President Joe Biden planned to host regional leaders at a summit to be held in the US in coming months as he tries to rebuild credibility after the damaging impact of Donald Trump’s administration.2. White House scrambles to salvage Build Back Better bill Joe Biden spoke with Joe Manchin, the obstructive Democratic senator from West Virginia, yesterday afternoon as he rushes to pass the $1.75tn Build Back Better bill by the end of the year.3. Israel’s NSO Group considers Pegasus sale or shutdown The spyware manufacturer whose military-grade malware has been condemned by human rights groups is considering a sale of the company or a shutdown of its Pegasus unit, according to two people familiar with the discussions.4. Apple probed over alleged whistleblower retaliation The US Department of Labor is investigating the iPhone maker over claims that it retaliated against employee Ashley Gjovik, a former senior engineering program manager who complained of workplace harassment and unsafe working conditions. 5. Harley-Davidson to spin off electric motorcycle division The motorcycle maker is spinning off its electric bikes division and listing it on the stock market through a merger with a blank-cheque company. Harley’s electric motorcycle unit, LiveWire, is set to merge with AEA Bridges Impact Corp in a deal with an enterprise value of $1.8bn.Coronavirus digestHong Kong is preparing to resume quarantine-free travel to China despite the discovery of the first case of the Omicron variant on the mainland. Carrie Lam, chief executive, said Hong Kong officials would meet their mainland counterparts in Shenzhen today “to take forward the preparatory work”.Developing countries in Asia will grow at a slower pace than anticipated this year and next, the Asian Development Bank said today, after renewed outbreaks of Covid-19 hit the region’s economies.California has become the latest US state to announce it will reinstate its indoor mask mandate in an effort to tame a sharp rise in Covid-19 cases since Thanksgiving. The mandate, which takes effect on Wednesday, will remain in effect until January 15, state health officials said yesterday.Less than three weeks after scientists in South Africa and Botswana first alerted the world to Omicron, researchers are beginning to understand the implication of its mutations. Science editor Clive Cookson explains why the human immune system finds it so hard to detect the new variant.

Thanks to all those readers who voted in yesterday’s poll. More than two-thirds supported the US government’s mandate. A quarter disagreed and nearly 10 per cent were undecided. The day aheadFederal Reserve meets The US central bank begins its final rate-setting meeting of the year and is expected to discuss accelerating the tapering of its stimulus programme.Debt ceiling vote The US Senate is expected to vote today on raising the US government’s $28.9tn borrowing limit. The process cleared a hurdle last week after the House and Senate approved a procedural change that would allow for the debt ceiling to be increased on a one-time basis by using a simple majority vote.Economic data The labour department’s producer price index is forecast to have risen 0.5 per cent month-on-month in November, according to a Refinitiv poll. The PPI is expected to have risen 9.2 per cent year-on-year, topping October’s pace of 8.6 per cent, which was the quickest annual rate of wholesale inflation in records going back more than a decade. What else we’re readingWhy investors are watching the yield curve closely For some investors, the so-called flattening of the yield curve is an ominous sign for the durability of the rebound from the pandemic. Use our interactive charts to explore the significance of the yield curve, and find out what different yield curves sound like.

Spectre of wars pose danger to America’s dominance Joe Biden’s administration is facing militarised crises in Europe, Asia and the Middle East. Collectively, they amount to the biggest challenge to US global power since the end of the cold war, writes Gideon Rachman. Need relief from screen time? There’s an app for that Searching for peace on a smartphone is a perverse endeavour. Yet digital wellness has been a pandemic success story. Mindfulness start-ups seem like a lucrative solution to the problems the tech sector has created, writes Elaine Moore.Ghislaine Maxwell trial shines light on class divide Class is threaded through the story of Jeffrey Epstein, the late sex offender. At its centre was Maxwell, an Oxford-educated socialite, who witnesses said lured them when they were young and poor into a world beyond their imaginations.Crunch time for the ECB The European Central Bank has sounded more dovish than most central banks. But scarred by past criticism of having raised interest rates too soon, the ECB is reluctant to wind back its support after struggling for years with low inflation and sluggish growth.CinemaFilm critic Danny Leigh reviews the best films that take you to Hong Kong. “Paris has romance and New York has the skyline. Hong Kong has heartache, mystery — and . . . a wealth of stylised, site-specific, vastly influential action and crime movies,” he writes as part of the FT Globetrotter guide to the territory.

A portrait of a now-vanished Hong Kong: Maggie Cheung and Tony Leung in Wong Kar Wai’s gorgeous ‘In the Mood for Love’ © Album/Alamy More

All serious investors should pause at least once a year to admit their mistakes. Normally, we learn more from our failures than our successes. So, though painful, this reflection should help us refine our approach and identify whether we need to change it.This year I am struggling to get my head around what has happened, simply because things have been so weird. Global equities have risen 21 per cent in sterling to date. This is after 13 per cent growth last year (with a big wobble in the spring). This adds up to 84 per cent gains over five years and 238 per cent since the low in February 2009. Anyone would think we had enjoyed an economic boom! At university I read the classic text by US economist Paul Samuelson, Foundations of Economic Analysis. He taught that a rise in inflation sees bond yields follow in tandem. In the US, CPI inflation rose from 1.2 per cent in October last year to 6.2 per cent this October. US 10-year conventional bond yields were 0.8 per cent a year ago. They are now 1.4 per cent. They should have risen 5 percentage points, not 0.6, according to Samuelson. This is not normal and I hesitate to call it a new normal.Equity markets have behaved weirdly too. My biggest failing this year has been not buying weird stocks. Some have risen a lot. Take Tesla, which is up 44 per cent this year. It is on course to generate just under $10bn in income in 2022, yet it is valued at more than 100 times that, at $1.09tn. That is a weird valuation.We applaud Tesla’s development, but suspect its competition is about to get tougher. Not everyone can afford the £43,000 entry price. Long-established rivals are rapidly expanding their electric car ranges and competition from unusual directions is imminent. For instance, China’s Great Wall Motors will start selling its Ora Cat five-door hatchback next year, for about £25,000.In our view, Tesla is a perfectly sensible company to invest in ­— just not at this valuation. However, it cannot compare in the weird stakes with Rivian Automotive, whose IPO was recently backed by Amazon and Ford. It is currently valued at close to $100bn — more than Ford or General Motors. It only began delivering its first trucks in October. It has zero revenues.In the old days, such companies would be privately held and come to the stock market only when they could demonstrate success.Hunter S Thompson, the US journalist and author, once said: “When the going turns weird, the weird turn pro.” Some investors who have backed such odd stocks have decided to offer their services as long-term savings managers, on the basis that they “get it” and others don’t. What could possibly go wrong?Time to change tactics?My funds, which in most years have beaten the MSCI global index, have struggled in 2021, lagging behind by about 1 per cent. So am I getting too old for this game? Are the youngsters who claim to get it the ones to follow?Perhaps, but experience screams that starting to buy weird stocks now would be a mistake. Better to carry on trying to reduce the number of old-fashioned investments we get wrong. This year’s disappointments in this regard include some surprises.Our worst investments have been in automation stocks, which dominate the Japanese portion of our portfolio. They performed well in 2020 and order books were generally strong coming into 2021.Unfortunately, supply chain issues and the slowing Chinese economy prevented those orders coming through to sales and profits. However, if 2022 sees more progress towards normal trading conditions, we would expect greater demand for automation. We have taken the opportunity to add some investments, such as US sensor specialist Cognex, alongside our core Keyence holding.Ørsted, the Danish energy group, is perhaps the most ironic disappointment. While world leaders gathered in Glasgow for the COP26 summit, we found ourselves selling the last of our shares in the wind farm specialist. As often happens, when governments prioritise an area such as renewable energy, the cheap loans they offer allow all comers to compete. Some did not need the incentive. The sight of big oil companies piling into the offshore wind industry to reposition themselves as climate change cherubs left me caught between laughing and crying.Renewable energy capacity will be increased, which is great, but all these new players will drive down shareholder returns. Samuelson devotes several pages to the phenomenon, known as “crowding out”. 2022 rate rises will challenge equity valuationsInvestors have done well over the past 10 years simply by buying companies whose products are selling well. There has been very little inflation, so cost issues have seldom arisen to challenge profitability. Valuation discipline has often got in the way of a good story.This may not continue. Scarcities in many supply chains and areas of the labour market are leading to rising prices. Many companies will see their profits squeezed — something they and market analysts are out of the habit of predicting.

Higher environmental standards will also cause inflation — for many years to come. Wind electricity is still more expensive than burning coal in many parts of the world, especially where fossil fuel infrastructure is already in place and you have to factor in the costs of new plant for green energy. China’s massive share of global coal-burning shows that its exports are effectively subsidised by pollution. This will not be acceptable, and higher tariffs on steel and the like are inevitable. Joe Biden, the US president, may end up with a similar China policy to Trump’s, though for different reasons. This will affect the price of traded goods. Meanwhile Chinese ports are raising tariffs by 10 per cent and more. It is difficult to see where or when inflation will peak.Interest rates have been kept low, perhaps on the assumption that current inflation trends are transitory. But central banks are in a difficult position. German retirees, who mainly save in bonds — today yielding pretty much nichts — won’t tolerate 6 per cent inflation for long. So 2022 will see a much greater likelihood of rate rises than recently anticipated — and that will be against a background of a rather anaemic economic recovery, not helped by the new Covid variant. I think it may well be enough to bring a recession in Europe in 2022, though probably not in the US. A more positive scenario is that central banks allow yields to rise gradually towards inflation levels. If this happens, growth companies should be able to outpace that downward pressure on equity valuations, as long as they are not trading on questionable valuations to start with.So what lessons have we learnt? Putting to one side the biggest losers and winners in my portfolio, I cannot help noticing how much of the gains have come from a long list of reliable, very profitable companies that seem to make steady progress year after year: Microsoft, Google, Thermo Fisher, Louis Vuitton and Mastercard. Good companies make good returns and invest for the future. However good you think they are, they often turn out to be better than you expect.Simon Edelsten is co-manager of the Artemis Global Select Fund and the Mid Wynd International Investment Trust More

The Omicron coronavirus variant has appeared for the first time in China, according to health authorities, piling pressure on officials already contending with an outbreak in one of the country’s most important manufacturing hubs.Officials and state media said the Omicron case was “imported” by an arrival in the port city of Tianjin, south-east of Beijing, where travellers are quarantined before they are allowed to continue on to the Chinese capital. “Those infected in Tianjin are currently being treated in isolation in designated hospitals,” the city’s local government said on Tuesday. “This is the first time an Omicron variant case has been discovered in mainland China.”Later on Tuesday, state television reported that a second Omicron case had been discovered in the southern city of Guangzhou. It involved a local resident who had returned to China last month and spent two weeks in quarantine in Shanghai without the virus being detected. President Xi Jinping’s administration is pursuing a “zero Covid” policy across the world’s most populous nation, in part because of concerns about the relatively low efficacy of China’s homemade vaccines and the potential death toll if Covid-19 spread freely among the country’s 1.4bn people. China has reported only about 100,000 confirmed Covid cases since the virus emerged in Wuhan almost two years ago — less than the number of daily cases in the US and UK.The discovery of Omicron in Tianjin came as tens of thousands of people in China have been subjected to new lockdowns owing to Covid-19 outbreaks. Authorities are rushing to contain dozens of cases in the Yangtze river delta, a vital manufacturing centre.The cities of Hangzhou, Shaoxing and Ningbo — all in Zhejiang province, south of Shanghai — have reported almost 200 new cases this week, prompting authorities to impose restrictions on movement until March 2022.There were more than 100 infections in one district alone — Shangyu, in Shaoxing — all of which were traced to a funeral, state media reported.

Many manufacturers have suspended production in the region. Ningbo is one of China’s largest container ports, raising the spectre of further global supply chain bottlenecks.Xia Yanhong, who runs textile factories in Shaoxing, said one of her plants had been forced to close and three others subjected to strict operational controls.“We have products worth at least Rmb120m [$19m] waiting to be sent out,” said Xia, whose customers are mainly European. “If they cannot be shipped soon, it will have a big impact on us.”She added that truck drivers who had previously charged Rmb5,000 to deliver containers to nearby ports were now demanding up to Rmb14,000. Dozens of Shanghai and Shenzhen-listed companies have confirmed similar disruptions. “Except for epidemic prevention and people’s livelihood protection, all other work will be suspended,” Zhejiang Jingsheng Mechanical & Electrical Co wrote in a filing to the Shenzhen Stock Exchange, one of more than a dozen such notices sent to the bourse on Monday.China’s National Health Commission on Tuesday announced 51 new locally transmitted cases nationwide, 44 of which were in Zhejiang and 38 in Shaoxing, a city of 5m people. The case in Tianjin was confirmed after the Municipal Epidemic Prevention and Control Headquarters performed a genome sequencing analysis that indicated it was the B.1.1.529 strain, known as the Omicron variant. Global Times, a nationalist Communist party tabloid, said the case was a Polish national who flew to Tianjin from Warsaw.China’s foreign ministry also routinely uses Tianjin as an alternative venue for meetings with foreign dignitaries rather than risk having them bring the virus to Beijing.

Jin Dongyan, a virologist at the University of Hong Kong, said the presence of Omicron cases would spur government efforts to distribute booster shots. Health officials have already dispensed 2.5bn doses of Chinese-made Sinovac and Sinopharm vaccines. “Even if we are not sure about the vaccines’ effectiveness against Omicron, booster shots must be given, especially to high-risk people,” Jin said.In Hong Kong, Carrie Lam, chief executive, said Omicron’s emergence in China would not change plans to reopen the city’s border with the mainland.Hong Kong has reported seven Omicron cases, including two on Monday. All of the cases involved international arrivals from countries including South Africa, Nigeria, the US and UK.The city already operates one of the world’s strictest quarantine regimes, with arrivals forced to spend up to three weeks in a hotel. For travellers arriving from countries where Omicron is spreading rapidly, the territory requires a first week of quarantine to be spent at a special government facility near the airport.Additional reporting by Wang Xueqiao in Shanghai More

As Christine Lagarde unveiled plans last week to redesign euro banknotes for the first time since their launch two decades ago, the European Central Bank president said they were “a tangible and visible symbol that we stand together in Europe, particularly in times of crisis”.Lagarde’s comment underlines her pride in the united approach taken by European nations and policymakers to tackle the economic fallout from the coronavirus pandemic and — so far at least — prevent it from spiralling into a repeat of the region’s 2012 debt crisis, which threatened to tear the currency union apart.However, the hardest challenge for the ECB still lies ahead. Having overseen the biggest injection of monetary stimulus in the history of Europe’s single currency, including the €2.2tn purchase of mostly government bonds and a similar amount of heavily subsidised loans to banks, the central bank is now preparing to start scaling back its support for the economy.Most central banks have already started to withdraw the generous stimulus policies they introduced to lower borrowing costs and shield economies from the fallout of the pandemic. But the ECB — still scarred by criticism of having raised interest rates too soon in the last crisis — is more reluctant than most to wind back its support, having struggled until recently with years of uncomfortably low inflation and sluggish growth. The eurozone has the added complication that unlike the US Federal Reserve or the Bank of England, the ECB has to make policies for 19 different countries, each with its own economy and — crucially — bond market. So any shift by the ECB to a less accommodative policy risks reawakening the region’s old financial tensions by pushing up financing costs for weaker governments — in particular Italy — and stifling its nascent economic rebound.

There are fears for Italy’s political stability if Prime Minister Mario Draghi, right, steps up to become president, possibly triggering an election that the Eurosceptic League of Matteo Salvini, centre, is a favourite to win © Samantha Zucchi/Mondadori Portfolio/Getty

Managing the recovery phase requires a delicate balancing act by Lagarde and her fellow policymakers as they try to avoid the mistakes the ECB made when it prematurely raised interest rates in 2011 just as the region’s debt crisis was erupting.However, if the ECB waits too long to reverse its stimulus it risks losing credibility and being forced into an even more painful policy correction later on. This could happen if inflation does not fall back below the bank’s main objective of 2 per cent as fast as it expects, having already hit a new eurozone record high of 4.9 per cent in November.Most analysts expect the ECB to continue buying bonds and keep interest rates deep in negative territory at least until 2023, especially after it accepted in a strategy review that inflation could exceed its target for a period.“This is crunch time for the ECB, because if they lose patience when inflation is about to peak, they risk undermining the conclusions of their strategy review and with that, the stability of the bond market,” says Frederik Ducrozet, strategist at Pictet Wealth Management.Vítor Constâncio, a former vice-president of the ECB who is now finance professor at the University of Navarra in Madrid, says “the situation is becoming more difficult for the ECB”.He adds: “The big question is how smoothly the ECB will prepare the aftermath of the pandemic and the gradual winding down of asset purchases.”Covid complicationsWhen the ECB meets on Thursday, Lagarde is expected to announce the first step in the process of slowly withdrawing its stimulus by outlining plans to end net bond purchases in March under the €1.85tn pandemic emergency purchase programme (PEPP), which it launched when the virus hit last year.Complicating its decision is the arrival of the more infectious Omicron coronavirus variant at a time when the Covid infection rate had already risen to new highs in many parts of Europe. The return to varying levels of lockdown is expected to hit eurozone growth, which had been on track to recover from last year’s record postwar recession by the end of this year. At the same time, the latest wave of the virus is also likely to accentuate the supply chain bottlenecks that have already caused vast backlogs of containers at ports and steep increases in the prices of many goods — all of which could keep inflation higher for longer.

ECB president Christine Lagarde, second left, at a meeting of eurogroup finance ministers. The bank has to make policies for 19 different countries, each with its own economy and bond market © Francisco Seco/POOL/EPA-EFE

After eurozone economic output shrank by a record 6.5 per cent last year, the EU has forecast it will increase 5 per cent this year and 4.3 per cent next year — by far the highest levels of growth since the single currency was launched over 20 years ago. Brussels also predicts inflation in the bloc will stay above the ECB’s 2 per cent target for a second consecutive year in 2022 — the first time that will have happened for a decade.The ECB is set to raise its own inflation forecasts this week, but it seems determined to avoid any sudden policy reversal. When the central bank slowed its bond purchases in September, Lagarde denied it was starting to “taper” them down to zero, echoing the late UK prime minister Margaret Thatcher by saying “the lady isn’t tapering”. This month she pledged to “ensure conditions remain favourable” for financing governments, households and firms and described the recent surge in inflation as a “hump” that would decline next year.All this means the ECB looks increasingly like a “dovish” outlier compared to many central banks. In response to a stronger surge in inflation than they expected, the Fed and BoE are this week expected to signal they will stop asset purchases and prepare to raise interest rates in the next few months. In contrast, the ECB has indicated it expects to keep buying bonds for all of next year and Lagarde said it was “highly unlikely” to start raising interest rates before 2023 at the earliest.Analysts expect the ECB to reduce the “cliff edge” in its bond-buying after the PEPP ends in March by ramping up an older quantitative easing scheme, which is still hoovering up €20bn of assets a month. It could do this by increasing monthly purchases under the older scheme to about €40bn or by adding an extra “envelope” of several hundred billion euros to spend over the rest of the year. Some ECB executives have even suggested keeping an option open to restart the PEPP or creating a new “backstop fund” to deal with any market disruption. Others stress the need for “optionality” and hope to delay some decisions on future bond purchases until February. “Given the ECB has made the mistake in the past of tightening too fast it is going to err on the side of caution this time,” says Maria Demertzis, deputy director of the think-tank Bruegel. “If they increase interest rates too fast that will create a direct threat of financial fragmentation while we are still in quite a vulnerable stage of recovery — the US and UK don’t have that concern.”Many share Demertzis’s concern about financial fragmentation, whereby the borrowing costs of weaker eurozone countries could rise much higher than those of safer ones, which stems from the fundamental weakness at the heart of the single currency: it is a monetary union without a fiscal union or a fully unified banking system. The same faultline was exposed in the region’s sovereign debt crisis when investor fears about high government debt levels and toxic bank loans pushed up borrowing costs for countries in Europe’s periphery and forced several of them to turn to the EU for bailouts, including Greece, Spain, Ireland and Portugal.“What is different for the ECB compared to the Fed and the Bank of England is that there is a risk of financial fragmentation in the eurozone,” says Spyros Andreopoulos, senior European economist at BNP Paribas who used to work on monetary policy at the ECB. “It is not democratically legitimised to share large-scale financial risks by using its balance sheet.”However, even though debt levels have again shot up to new highs across the eurozone, economists believe a similar crisis is less likely to happen this time. This is mainly because the EU now has a much more supportive fiscal position after launching a €800bn recovery fund. This innovative scheme enables Brussels to issue debt centrally and send the money to member states to boost their post-pandemic economic prospects by investing in new green energy and digital projects.“Europe has more instruments now to address a situation like the one we faced a decade ago, so it will take a much bigger asymmetric shock to cause a similar crisis,” says Lorenzo Bini Smaghi, chair of French bank Société Générale who was on the ECB executive board until 2011. Life after PEPPWhen the pandemic first hit last year, Lagarde got off to a stuttering start. Asked what the central bank could do to support governments as their economies shut down in March 2020, she said it was not the ECB’s job to “close spreads” — referring to the extra interest that weaker eurozone members have to pay relative to Germany when they sell new debt.Her comment sent euro area bond markets into a tailspin. Investors suddenly doubted the ECB’s commitment to holding the eurozone together at a moment of crisis. Italy, by far the most indebted of the bloc’s big economies, bore the brunt of the bond sell-off.The episode prompted a swift rethink. Lagarde quickly rowed back from the remarks and later that month the ECB unveiled the much larger PEPP. The rearguard action calmed the markets after a few weeks of volatility, and Italy’s bond yields sank for the rest of the year.“Governments had to do massive fiscal stimulus,” says Salman Ahmed, head of strategic asset allocation at Fidelity International. “The role of the ECB was to make sure they could borrow at a rate that makes it affordable.”But this role for asset purchases, even if it was never made explicit by the ECB, raises awkward questions as the central bank plots an exit from its pandemic-era stimulus, which has led the ECB to buy more than the total net debt issued by eurozone governments for the past two years.Bond markets are already showing nerves over the prospect of life after PEPP. In recent days, the spread on Italy’s 10-year debt over that of Germany has reached its widest point in more than a year at 1.3 percentage points. Despite investors’ positive perception of the Italian government — led by former ECB president Mario Draghi — Italy’s €2.3tn bond market remains the favoured playground for investors looking to speculate on renewed fragilities in the eurozone. The biggest worry for some ECB-watchers is that Italy could be plunged back into political instability if Draghi steps up early next year to become president of Italy, which could trigger new elections that Eurosceptic rightwing parties, including Matteo Salvini’s League and the far-right Brothers of Italy, are favourites to win.“There is the possibility of a Salvini government in coalition with the Brothers of Italy next year and that could be a big problem,” warned Constâncio, who was Draghi’s deputy at the ECB for seven years until 2018. “A mild increase in government bond yields is in general acceptable,” he said. “But if peripheral spreads move a lot higher the threat of financial fragmentation will require national and European policymakers to respond.”The sheer size of Rome’s borrowing — amounting to more than 155 per cent of GDP — means a move above 2 percentage points on Italian spreads would reawaken concerns about debt sustainability, according to Ahmed. “It’s a huge credit risk without the backing of the ECB,” he says.The other problem for Lagarde is that extra bond-buying is increasingly difficult to justify with inflation running well above target. Any sign that the more conservative “hawks” are gaining the upper hand could see investors once again question the ECB president’s commitment to controlling sovereign spreads. “The market’s got into its head that it’s going to see additional purchases to replace PEPP,” says Mark Dowding, chief investment officer at BlueBay Asset Management. “If they don’t deliver that there’s a chance the spread in Italy will blow out again.”Some investors worry Lagarde lacks the determination of Draghi, who in 2011 memorably promised to do “whatever it takes” to protect the euro. “You still have that comment [by Lagarde] from March last year ringing in the back of your mind,” says Dowding. “Market participants have a long memory and still don’t trust Lagarde in the way they trusted Draghi.”The recent surge in inflation to levels not seen for more than 20 years has also fuelled rising criticism of the ECB, particularly in richer countries like Germany where its ultra-loose monetary policy has been subject to several legal challenges and suspicions it is supporting profligate southern governments at the expense of prudent northern savers.

German ECB board member Isabel Schnabel says the bank’s actions encourage ‘excessive risk taking’ © Daniel Roland/AFP/Getty

Christian Lindner, the new German finance minister, said last week the government was “sensitive to avoid a situation of fiscal dominance in the future”, referring to the fear that the ECB could be unwilling to withdraw its stimulus due to a fear of pushing up borrowing costs for heavily indebted governments. “The central bank must also be able to respond to monetary developments with its instruments,” he added.“Germans are getting increasingly nervous about rising prices,” says Klaus Adam, an economics professor at the University of Mannheim. “If inflation rates won’t ease in the next few months, as expected, the critics of ECB policy will get more vocal.”Bild Zeitung, the top-selling German tabloid newspaper, warned recently that “prices are skyrocketing, our purchasing power is melting away”, and put the blame squarely on “Madame Inflation” — a reference to Lagarde. Sentiment at the ECB also seems to be shifting against further large-scale bond buying, with Isabel Schnabel, the German board member responsible for market operations, last week arguing that it has pumped up the price of many assets, including residential housing, to dangerous levels and encouraged “excessive risk taking”. 

Christian Lindner, second left, new German finance minister, is concerned the ECB could be unwilling to withdraw its stimulus for fear of pushing up borrowing costs for heavily indebted governments © Filip Singer/POOL/EPA-EFE/Shutterstock

But some investors think the central bank can still keep bond yields in check without having to commit upfront to buy hundreds of billions more in assets. Christian Kopf, head of fixed income at German asset manager Union Investment, says the ECB should announce a new programme that will intervene in markets only if there is a “dislocation”. If investors think the central bank is lurking in the background they will be inclined to keep buying Italian and other lower-rated eurozone debt, doing the ECB’s heavy lifting for it. “The blanket QE approach is dying, and I think that’s a good thing,” says Kopf. “The ECB doesn’t need a permanent presence in markets, but the threat of a presence.”“We hold a couple of billion of Italian bonds, and we are long-term holders,” he said. “If I have to factor in the risk of a self-reinforcing spiral I will be less comfortable holding that debt. But if I know there’s a circuit breaker I will be a lot more comfortable.”Europe’s response to the pandemic has so far been more unified and potent than in previous crises, but the true test will be how it manages the recovery. On Thursday, the ECB will take the first tentative steps towards that objective and Lagarde will be hoping to bring investors along for the ride. More