Aurelia Butler

Ford and General Motors said on Thursday that they are forging stronger ties with semiconductor manufacturers to improve their supply of electronic chips as the car industry confronts a shortage. Ford has signed a non-binding agreement with GlobalFoundries, a New York-based chipmaker, that it said “opens the door” for joint research and development and manufacturing of chips to supply its own assembly lines and others in the US automotive industry. GM president Mark Reuss told investors that as cars and trucks become more electronically complex, demand for semiconductors will be “more than doubling over the next several years”. As a result, the carmaker is pursuing partnerships with Taiwan Semiconductor Manufacturing Company, the world’s most valuable chipmaker, as well as NXP Semiconductors, Qualcomm and others.The auto sector has been squeezed by a lack of semiconductors, limiting sales of new vehicles. Producers were unprepared when the decline in demand for cars and trucks caused by the pandemic last year reversed faster than they expected. They now find themselves competing against consumer electronics manufacturers for supplies of chips. Now the auto industry, where Toyota pioneered the concept of just-in-time manufacturing in the 1970s, is re-evaluating how it secures this key part that is used in everything from brakes and power steering to entertainment systems. Ford said the agreement could boost the company’s supply of chips in a matter of months. GlobalFoundries, which is owned by Abu Dhabi’s sovereign wealth fund Mubadala Investment Company, went public last month. The chipmaker’s shares were up 5.4 per cent at $66.07 on Thursday, while Ford rose 0.3 per cent to $19.92. The companies’ joint R&D effort could expand the advanced chips needed for use in electric vehicle battery systems, semi-autonomous driving and over-the-air software updates, they added. Jim Farley, Ford chief executive, said the agreement was “a key part” of its plan to vertically integrate, a move that gives companies greater control over their supply chains.

GlobalFoundries chief executive Tom Caulfield said that partnering with a carmaker would allow the company to “bring new features to market faster and ensure long-term, supply-demand balance”.David Whiston, an analyst at Morningstar, said it was good to see Ford securing some domestic supply and to change course in keeping with Farley’s comments in April that the company needed to rethink how it assured supplies of critical components. But he added that he doubted the agreement was “something that can be implemented fast unless GlobalFoundries already has the capacity set up and dedicated to Ford”.Terms of the deal were not disclosed, but Ford is not taking an ownership stake in GlobalFoundries. More

It would be easy to get “sticker shock” from the latest UK price data, released earlier this week. The figures, from the Office for National Statistics, show that the rate of inflation reached 4.2 per cent in October, the highest rate since 2011 and more than double the Bank of England’s two per cent target. For many, that on its own is enough to conclude that the central bank erred in failing to raise rates as many investors anticipated it would at its November meeting. Monetary policy has, however, in the words of the economist Milton Friedman “long and variable lags”: it can take a while, often more than a year, for changes in interest rates to affect economic growth and the rate of price growth. The challenge facing central bankers is how to use the data they receive about the present state of the economy to judge the future needs of the economy. On that subject the details of the latest inflation data are less clear. Much of the sharp increase is due to factors that are unlikely to be repeated and will, almost certainly, fade away by this time next year. The largest contribution comes from a surge in natural gas prices and other energy costs. The ONS estimates that roughly 1.3 percentage points of the year-on-year increase in the consumer price index is due to higher fuel costs. Used car prices and higher air fares, following the resumption of plane travel, made transport the second biggest contributor. Higher hospitality prices, partly thanks to the removal of a temporary value added tax cut for the sector, were the third. Unlike in the US, there is only scant evidence of an economy at risk of overheating from too much monetary and fiscal stimulus. Only a few categories of goods hint at an economy with an excess of demand relative to supply: furniture prices have surged, probably owing to more affluent households spending some of their pandemic savings on redecorating, as have the costs of household appliances. Elsewhere, however, price growth is more modest.On the other hand, there is little reason to think that the economy is still in need of the stimulus launched during the depths of the pandemic. Labour market data, published earlier this month, demonstrated that the end of the “furlough” job retention scheme has not slowed the recovery in employment. Bank of England officials have said that uncertainty over the impact of the end of the programme was a major reason why the central bank’s rate-setting committee held off on raising interest rates in November.For the moment there is little sign of any feared “wage-price spiral” in the data — a situation where rising labour costs add to inflationary pressure as employees try to maintain their purchasing power in the face of rising prices. Pandemic-related distortions make headline pay figures less reliable but it is likely that wage growth has now dropped below inflation. Indeed figures from research group XpertHR indicate that the median settlement is stuck around the pre-pandemic norm of 2 per cent.Nevertheless, more workers are quitting to find new jobs and advertised vacancies are at a record high. These are all a sign of a labour market that could soon be “tight” enough to provoke sustained pay increases. In such circumstances there is little reason to think the UK still needs as much central bank support as it once did. Before the November meeting of the Bank of England’s monetary policy committee, this newspaper argued that the case for a rate rise was finely balanced. While the surge in inflation is not as worrying as it may first appear, the labour market data does put more pressure on the BoE to act in December. More

The euro struck its lowest level in 16 months this week as traders bet that the European Central Bank would stick to its accommodative policies even though widespread inflation is prompting US and UK policymakers to raise interest rates.Traders are dialling up their wagers that the Federal Reserve and Bank of England will lift rates from historic lows over the next year at a time when the ECB is pushing back against market expectations that it too will lift borrowing costs in 2022. The result has been a sharp decline in the euro against the dollar — the most heavily traded exchange rate — ending a period in which currencies had largely shrugged off the turmoil raging in bond markets.“The market is positioning for a divergence between the Fed and the ECB,” said Athanasios Vamvakidis, head of G10 forex strategy at Bank of America.The euro sank below $1.13 on Wednesday, its weakest level since July last year and a swift decline from almost $1.16 in the middle of last week.Although part of the euro’s recent weakness is the flipside of a broad rally for the dollar, the single currency has also lost ground against peers benefiting from the prospect of higher interest rates. Against the pound, it has reversed a rally in early November and continued falling to its weakest level since the early stages of the pandemic in February 2020. The latest losses against sterling were triggered by data on Wednesday showing that UK inflation hit 4.2 per cent in October. Investors, who were blindsided by the BoE’s surprise decision to keep interest rates on hold this month, are betting that UK rates will rise to 0.25 per cent in December, from 0.1 per cent currently, in a bid to tame the faster-than-expected price increases.Eurozone consumer prices have also accelerated, with annual gains reaching a 13-year high of 4.1 per cent in October, according to Wednesday’s figures. But investors have more subdued expectations for longer-term inflation — in part a legacy of the ECB’s years of undershooting its 2 per cent inflation target.As a result, ECB president Christine Lagarde’s repeated insistence that wagers on 2022 eurozone rate rises are not in line with the central bank’s guidance is beginning to get through to investors, according to analysts. Markets are now pricing in just a single tenth of a point rate rise in early 2023 after Lagarde told the European parliament on Monday that tightening monetary policy now would do “more harm than good” and conditions for a rate rise were “very unlikely to be satisfied next year”.“Finally markets have cottoned on to the fact that central banks won’t all move together at the same pace,” said Jane Foley, Rabobank’s head of FX strategy. ECB staff are due on December 16 to publish their inflation forecast for 2024. While the weaker euro will boost the competitiveness of exporters in the euro area, it will push up the price of imports that have already been rising rapidly. Isabel Schnabel, an ECB executive board member, told a Goldman Sachs event on Wednesday that the weaker euro would add about 0.2 to 0.3 percentage points to inflation in the bloc.Meanwhile, the ECB is also expected to announce in December that its flagship €1.85tn bond-buying programme, which it launched last year in response to the pandemic, will come to an end in March 2022. However, investors expect the central bank to step up its longer standing asset purchase programme at the same time to support the economic recovery and limit any sell-off in bond markets. 

The central bank has committed not to raise rates before it stops primary bond purchases. Currency traders will be watching December’s announcements closely for any signs that the ECB could end asset purchases earlier than markets anticipate, which could indicate a rate rise is nearer than expected and trigger an appreciation of the euro.Schnabel told the event on Wednesday that the ECB needed to keep “a watchful eye on the upside risks to inflation”, and said it should “retain optionality to be able to act if needed”, so as to “maintain trust in our determination to defend price stability in a symmetric way and prevent a de-anchoring of inflation expectations in both directions”.In recent weeks, expectations of interest rate rises from the BoE, along with the Reserve Bank of Australia and the Bank of Canada, have sparked bouts of selling pressures in global bond markets as investors bet that other central banks would respond similarly to inflation pressures. “Perhaps the surprise is that these moves didn’t happen sooner,” Rabobank’s Foley said. “Up until a week ago investors seemed to be assuming that all these economies were similar. You had global markets getting dragged around by the UK, or Canada, or Australia. It all seemed a little bit backward.”The ECB is also likely to tread carefully in tightening policy so as not to trigger any rise in borrowing costs for more indebted eurozone members such as Italy, according to Leandro Galli, a senior portfolio manager at Amundi.“The Fed always tries not to sound too hawkish, but it’s moving in that direction,” said Galli, who is betting on further gains for the dollar against the euro. “But it’s more difficult for the ECB to walk away from its stimulus, and they have more time.” More