Aurelia Butler

With financial markets already selling off on fears over the Omicron coronavirus variant, it might have seemed like an odd moment for the chair of the Federal Reserve to make his most hawkish comments on monetary policy since the start of the pandemic. But on Tuesday, Jay Powell effectively jettisoned the Fed’s previous stance on soaring inflation and signalled his support for a faster reduction of the central bank’s massive bond-buying programme, giving policymakers leeway to raise interest rates more quickly than expected. In doing so, Powell sent a clear message to markets: combating inflation, which hit a 30-year high last month, is now the top priority for a central bank that has spent almost two years focused squarely on boosting demand and employment. “Inflation has front-run their plans,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. “This is something they were not anticipating and now they need to pivot and calibrate policy in order to achieve their goals.”During two days of congressional testimony this week, Powell fleetingly acknowledged the emergence of the Omicron variant, which he described as a potential risk to economic growth that was not yet “baked into” the Fed’s forecasts. But he spent most of his time promising to tackle what he described as “persistently higher inflation”.

Powell warned that price pressures that were previously concentrated in a few corners of the economy had broadened out. And he retired the use of the word “transitory”, which the Fed has clung to throughout the year as it insisted the jump in inflation was tied primarily to temporary supply-chain disruptions. By far the clearest sign that Powell is determined not to let inflation become “entrenched” was his revelation that he would support a much quicker “taper” of the bank’s bond-buying programme, with the stimulus withdrawn entirely “perhaps a few months sooner” than planned. Even with roughly 4.2m more people out of work versus the start of the pandemic, and despite the looming threat of Omicron, the need to stimulate the economy has “clearly diminished”, Powell told the Senate banking committee on Tuesday. He stuck to the same script during another hearing on Wednesday. Krishna Guha, a former Fed staffer who now is vice-chair at Evercore ISI, said: “This is a very abrupt pivot from the Fed: the eight-month taper plan was only announced four weeks ago and the New York Fed only began implementing it two weeks ago.” Guha added that the abrupt change of tone would “fuel the sense” that there is a “much higher” chance of the Fed making a “step change” in its interest rate plans. The announcement that the Fed would begin tapering its $120bn-a-month asset purchase programme in early November followed months of deliberations about the underlying strength of the recovery. It also marked the beginning of the end of emergency measures implemented at the start of the pandemic to stave off economic catastrophe. The Fed initially said it would scale back its purchases by $15bn each month, meaning the programme would end in June 2022, while stressing it would be flexible based on economic conditions. But economists at Barclays this week said they now expected the Fed to accelerate its taper at its January meeting so the stimulus programme ends in April. That would pave the way for interest rate rises a month later, added Barclays, which expects a further two rate rises in 2022, followed by four more in 2023.“What is going on here is that Powell is looking at the level of inflation and looking at how fast the economy is growing and is starting to get worried that the Fed has been too easy for too long,” said Tim Duy, an economist at SGH Macro Advisors and the University of Oregon. “They are shifting the narrative.”Financial markets reacted violently to Powell’s comments this week because an earlier end to the asset purchase programme probably means interest rate increases far sooner than anticipated. On Tuesday, US stocks fell sharply and the yield on the two-year Treasury note — which is most sensitive to monetary policy adjustments — soared towards 0.6 per cent, having hovered as low as 0.44 per cent earlier in the trading day. It currently sits at 0.55 per cent.Some Fed watchers are not convinced the central bank will abandon its long-held cautious approach so quickly, however, especially given the huge unpredictability surrounding the new variant. Roberto Perli, who previously worked at the Fed and now leads the global policy team at Cornerstone Macro, zoned in on Powell’s use of the word “consider” this week when discussing the Fed’s tapering plans, and the central bank chair’s emphasis that officials will be watching data closely.

“If the Fed [sped] up tapering now, it would risk either sending a message of panic or admitting that it made a mistake a month ago,” Perli said.Eric Stein, chief investment officer for fixed income at Eaton Vance, agreed that a material tightening of financial conditions might embolden the Fed to revert to its patient approach. But it would take a sizeable deterioration given how “strong and buoyant” risk markets have been, he added.But for others, this was the week that Powell performed a much-needed pivot, turning himself from a soft dove to a hawk and decided to take on inflation more aggressively. “The economy can absolutely handle slightly higher interest rates,” said Constance Hunter, chief economist at KPMG. “This shift in stance is consistent with the economic data and is consistent with maintaining [the Fed’s] credibility so that inflation does not get out of control.” More

Rising Covid-19 infections, a new coronavirus variant and the reimposition of pandemic restrictions are threatening the eurozone’s economic rebound, with fewer people going out to shop, eat at restaurants and visit cinemas, high frequency data show.The slowdown creates a further challenge for the European Central Bank, which must also deal with rising inflation that hit a record 4.9 per cent in November, its highest since the single currency was created over two decades ago.Although the eurozone notched up strong growth in the three months to September, thanks largely to a burst of consumer spending, high frequency indicators that track restaurant bookings, cinema ticket sales and other measures of mobility suggest the rebound lost momentum in November.“Mobility in the eurozone started to slow down even before governments announced new Covid restrictions,” said Bert Colijn, economist at ING.Austria entered its fourth Covid-19 lockdown on November 22, while other countries ranging from the Netherlands and Belgium to Germany, Ireland, Slovakia, Italy and the Czech Republic also stepped up their efforts to curb steep rises in infections.The threat of the Omicron variant has also led to calls for a renewed lockdown in Germany, after the national academy of sciences published a paper advising Berlin to introduce restrictions on public and private gatherings, including for the vaccinated.However even in countries such as Spain, where the health situation has remained more stable, measures of consumer spending have softened as well. Across the eurozone, visits to shops, bars, restaurants and entertainment centres declined sharply in November, according to Google mobility data which shows a fall in the use of public transport and more time spent at home.The eurozone recovery indicator, a measure of activity published by Oxford Economics, also fell to its lowest level since June, while the OECD’s weekly economic tracker, which is based on keyword searches for terms related to spending behaviour and the labour market, turned negative in many eurozone countries.One startling piece of data shows German restaurant bookings dropping below their November 2019 levels.Encouragingly, economic activity has not yet fallen as much as in past periods of high infections. “This suggests that precautionary measures or voluntary changes in behaviour are still mild and that the fear of the virus is not yet very strong,” ING’s Colijn said. Moreover, while virus-sensitive sectors such as hospitality may have been hit, “this has by and large not, yet, spilled over to the rest of the economy”, said Silvia Ardagna, economist at Barclays.Even so, cinema revenues across the eurozone’s largest economies dropped around 20 per cent in the third weekend of November compared with the previous week, according to Box Office Mojo, which tracks revenues. Hotel bookings also fell sharply, data from travel consultancy Sojern shows, reversing a steady improvement through the autumn. Flight numbers saw a similar fall in November after months of recovery.Although the economic impact of pandemic restrictions has been less than in previous waves of infection, Ana Boata, economist at Euler Hermes, nevertheless forecasts that eurozone economic growth will slow to 0.6 per cent in the final quarter of the year from 2.2 per cent in the third quarter.“But it’s not negative growth,” she said, rather “a delayed recovery”.“The labour market is recovering quite strongly and there are high backlogs of work,” Boata added. “It’s a matter of time” before growth returns after the restrictions are lifted.Still, the tension between slowing economic growth caused by tighter Covid-19 restrictions and the Omicron variant’s potential threat, versus rising inflation caused by supply and labour shortages, creates a difficult mix of challenges for the ECB. “If Omicron turns out to be malign enough to prompt tighter restrictions, we suspect that the net result would initially be for inflation to be lower,” Capital Economics’ Simon MacAdam wrote to clients on Wednesday. “But by worsening . . . shortages, restrictions on household activity could end up keeping inflation above targets for longer,” he added.Jay Powell, chair of the US Federal Reserve this week signalled his support for a quicker withdrawal of the Fed’s huge asset purchase programme. But, Boata said, “other central banks could be in wait-and-see mode”. More

The administration of former U.S. President Donald Trump imposed 25% and 10% tariffs on steel and aluminum imports on the European Union in 2018. The tariffs were withdrawn in October of this year, but they remain in place for Britain due to its exit from the EU.In a communication seen by the newspaper, a U.S. Commerce Department official was quoted as saying that talks with the UK on easing metals tariffs could not move ahead.The official cited U.S. concerns about British threats to trigger emergency clause Article 16, the report said https://on.ft.com/3olxsUh, especially from the U.S. Congress. Article 16 is an emergency brake that allows the UK or EU to seek to suspend parts of the Brexit agreement that introduced some checks on the movement of goods to Northern Ireland from mainland Britain if they lead to persistent difficulties.The FT said that the United States had informed the UK about the reason for the delay.The UK department of trade said: “We do not see any connection with this particular issue and the Northern Ireland Protocol and it will in no way affect the UK’s approach. That is because significant changes are needed to the Protocol in order to protect the Belfast (Good Friday) Agreement and Northern Ireland’s place in the UK internal market”.A British government spokesperson said the UK is in regular discussions with U.S. Trade Representative Katherine Tai and Commerce Secretary Gina Raimondo on the issue and remained focused on agreeing a resolution for removal of tariffs.The United States has expressed grave concerns that disagreement between London and Brussels over the implementation of the 2020 Brexit treaty could undermine the Good Friday accord, which effectively ended three decades of violence in Northern Ireland.In September, U.S. House of Representatives Speaker Nancy Pelosi cautioned that there could be no post-Brexit trade deal with Washington if the Northern Ireland peace agreement was destroyed. More

BENGALURU (Reuters) – Global stocks will shake off recent weakness and rise over the next 12 months but at a more tempered pace than this year’s rally, found a Reuters poll of equity analysts who also said a correction was likely in the next six months.Uncertainty around the virulence of the Omicron coronavirus variant and its ability to evade vaccine protection led to a rare sell-off in financial markets last Friday.But some analysts reckon that flight to safe assets and heightened volatility suggests markets may be in for a bumpier ride in the short run.Indeed, when asked if a correction in their local equity market was likely, about three-quarters of respondents – 79 of 106 – in a global poll covering major indexes from over a dozen countries said Yes.Federal Reserve Chair Jerome Powell’s remarks on Tuesday that the U.S. central bank would discuss whether to accelerate the unwinding of its asset purchases programme didn’t help risk assets.”Looking ahead, we continue to see market upside, though more moderate, on better-than-expected earnings growth with supply shocks easing,” said Dubravko Lakos-Bujas, chief U.S. equity strategist and global head of quantitative research at JPMorgan (NYSE:JPM) Securities.”The key risk to our outlook is a hawkish shift in central bank policy, especially if post-pandemic dislocations persist.” The broader poll of over 150 equity analysts around the world taken Nov. 15 to Dec. 1 showed most indexes bouncing back from the current downtrend and touching new highs by end-2022.Of the 17 major indexes polled on, 10 were expected to surpass their lifetime highs over the next 12 months, with five reaching that milestone as early as mid-2022.Driven by earnings and economic growth, the benchmark S&P 500 index will extend this year’s rally and gain 7.5% between now and end-2022 to finish at 4,910.The pan-European STOXX 600 is forecast to rise 7% and reach 500 points by July, 10 points above its lifetime peak hit on Nov. 17.India’s BSE Sensex was expected to falter in the near-term but recoup its current loses and hit a high of 63,000 by the end of next year.Despite scaling new peaks, the majority of the 17 global indices polled on were forecast to neither repeat nor surpass this year’s strong performance next year.Underpinned by a solid corporate outlook, Japan’s Nikkei share average index was expected to reach 31,000 by June 2022, around an 11% gain from Tuesday’s close.When asked to give their outlook on corporate earnings in their local markets over the coming six months, over 85% of strategists polled, 79 of 91, said they expected earnings to improve.”We expect earnings to be the key driver of global equity returns in 2022. In line with our earnings expectations, we expect high single-​digit equity returns in 2022 compared to double-​digit returns in 2021,” said Philipp Lisibach, chief global strategist at Credit Suisse (SIX:CSGN).”Other tailwinds for this asset class going forward include the ongoing economic recovery, and the ‘there is no alternative’ (TINA) argument for equities.” Reuters poll graphic on global stock market forecasts https://fingfx.thomsonreuters.com/gfx/polling/gdpzymrzovw/Global%20stocks.png More

Laos will open a $6bn Chinese-built railway on Friday, the biggest public works project in its history, which analysts warn could expose the poor south-east Asian country to financial risk or political coercion from Beijing.The 414km line, which runs from Boten, near the Chinese border, to the capital Vientiane, has been constructed under China’s Belt and Road Initiative, Xi Jinping’s signature infrastructure programme. Laotian officials hope the railway will cut freight costs, boost exports and usher in more foreign tourists once the Covid-19 pandemic subsides and borders are reopened.Chinese companies have bored 75 tunnels, built a bridge across the Mekong river at the city of Luang Prabang and levelled swaths of rugged terrain to connect landlocked Laos to the Chinese provincial capital Kunming and ease the country’s access to global markets.But analysts warned the project represented a gamble for the heavily indebted country of 7m.“There are potential positives to the project,” said Jeremy Zook, director of Asia-Pacific ratings with Fitch Ratings. “The downside is that this is a very expensive railway, so the question is whether these upsides are enough to make full economic sense in terms of the cost-benefit.” As in the case of some BRI projects — notably a Chinese-built port in Hambantota, Sri Lanka, that was leased to China after Colombo struggled to service its debt — analysts have questioned whether Laos will be able to manage its finances. “This is one of the main concerns I have: how they will service the debt,” said Ruth Banomyong, professor of logistics at Thammasat Business School in Bangkok. “High-speed rail has always been questionable economically.”The railway’s construction costs were equivalent to almost a third of Laos’ GDP. Of that amount, Lao-China Railway Company, the special purpose company building and running the railway, has borrowed $3.54bn from China Eximbank. The LCRC has Chinese and Laotian state-owned companies as its shareholders, with a 70:30 per cent Chinese-Laotian ownership split. To finance its equity stake, Laos borrowed $480m from China’s Eximbank and contributed another $250m of its own funds, in addition to covering the costs of resettling villagers along the railway route. But researchers affiliated with the AidData lab at William & Mary university in Virginia said in a recent report there was a “non-trivial possibility” that Laotian or Chinese authorities would feel compelled to bail out the LCRC if it were to default on its obligations to the bank because the railway is a public infrastructure asset.

Laos already has to repay an average of $1.3bn in public external debt service annually until 2025, according to the World Bank, after borrowing heavily to finance power and other infrastructure projects. Its total debt last year reached $13.3bn, or 72 per cent of GDP, as the government relied on borrowing to finance energy and other projects.The World Bank recently warned that the country’s external debt distress remained high and its foreign exchange reserves low, at about $1.2bn as of May. Laos ceded majority control of its electric grid last year to a Chinese company as it struggled to avoid a default, according to Reuters. “Their sources of financing are becoming more limited, so there’s going to be a challenge in terms of being able to repay and refinance some of their upcoming obligations,” said Zook. Fitch has given Laos a sovereign rating of triple C, indicating that “default is a real possibility”, he added. Follow John Reed on Twitter: @JohnReedwrites More

The writer is an independent investment strategist and founder of the online research marketplace ERICFor the first time foreigners have a large enough position in renminbi-denominated securities to influence Chinese monetary policy. Foreign investment in China has historically focused on direct investment, and investment in portfolio assets was largely confined to foreign currency denominated debt. Things have changed dramatically in the past 10 years. In 2011, foreigners’ holdings of China’s liquid portfolio assets were just 14 per cent the size of China’s reserve assets. In June, they were almost two-thirds the size at $2.1tn.This surge, when combined with the country’s managed exchange rate policy, confers a new power upon foreigners, as evidenced when one considers the size of foreign holdings of China’s portfolio assets in relation to the size of the country’s foreign reserves.In 2011, foreigners’ holdings of China’s liquid portfolio assets of $458bn was 14 per cent the size of China’s reserve assets. Today, that percentage is about 5 per cent, but holdings are much greater in absolute terms at $2.1tn. What happens if these assets are liquidated? Downward pressure on the renminbi exchange rate forces intervention from the People’s Bank of China. And as foreign reserve assets decline, liabilities in the form of renminbi-denominated bank reserves also decline. The action of foreign investors would dictate, through this process, a tighter monetary policy, just as China is struggling with falling residential property prices and growing distress in the private credit system.The consensus among professional investors is that foreign ownership of Chinese portfolio assets can only continue to rise. The reasoning goes that Chinese bonds can provide the uncorrelated returns that boost their value to any diversified portfolio and they will be in large demand. This faith in future inflows to portfolio assets is bolstered by the belief that those who construct benchmark indices of global portfolio assets, those conductors of blind capital, will only raise the weightings of China’s portfolio assets within those indices.However, there is a growing list of reasons why foreign portfolio inflows to China can stop or even reverse. The increased risk of a cold war means it is not clear that foreigners will be permitted to fund, even partially, the Chinese government’s military build-up through their purchase of Chinese government bonds. Growing focus on environmental, social and governance concerns will probably impinge upon foreign investors’ ability to add to their Chinese positions. These key external factors are exacerbated by China’s growing internal problems.The overbuild in China’s residential property market is hardly a new story but prices in it have recently declined amid signs of credit distress among developers. This distress is exacerbated as Xi Jinping, China’s president, seeks to draw a line between what is a public risk, that can be financed by the state-controlled banking system, and what is a private risk that should have no credit from this source. Investors who assumed that companies receiving loans from state-controlled banks were a public risk are in the process of re-pricing such risks. All this is particularly bad news for the informal credit system which has often financed what state-controlled banks are no longer allowed to. The operation of the managed exchange rate is keeping Chinese monetary policy tight, with broad money growth near a postwar low. While foreigners invested in Chinese government bonds may welcome tighter monetary policy, more likely it will frighten foreign capital out of the Chinese equity market.

Xi’s aim to create greater ‘common prosperity’ in China does not necessarily reduce private property rights, but is likely to. Monetary history is the history of how politicians have needed to control the price and quantity of money to pursue their political goals. Xi is currently constrained in his common prosperity goal by the tightness of monetary policy dictated by the operation of China’s managed exchange rate. Sometimes political leaders must choose between a deflationary adjustment or a move to the exchange rate flexibility that allows control over the price and quantity of money and inflating away debts. China’s debt-to-GDP ratio has soared since 2009 and it is now as overleveraged as the developed world. Xi’s political goals are no longer compatible with a stable Chinese exchange rate. Xi has to choose between a flexible exchange rate and monetary independence or a deflationary economic adjustment with its attendant financial and political risks. More