Economy

The market is pricing a further 25 basis point hike from the U.S. Federal Reserve later this month, though a cooler-than-expected June consumer price inflation reading on Wednesday fueled optimism that prices are finally beginning to moderate.
Veteran strategist David Roche suggested the Fed will be hesitant to begin cutting rates back from their current elevated levels until “well into next year.”
The global economy is looking at a period of static growth with rates remaining high, according to Roche.

A Now Hiring sign is seen inside a WholeFoods store in New York City.
Adam Jeffery | CNBC

The global economy will likely avoid a recession and central banks will need to “change the goalposts” on inflation, according to veteran strategist David Roche.
With high inflation proving sticky across many major economies, central banks have tightened monetary policy aggressively over the past 18 months. Further hikes to interest rates are expected later this year amid tight labor markets and resilient economic activity.

It’s led a growing number of economists to believe that the additional rate rises will tip several major economies into recession, with some even suggesting that a downturn could be necessary to achieve the levels of demand destruction and unemployment that would bring about disinflation.
The market is pricing a further 25 basis point hike from the U.S. Federal Reserve later this month, though a cooler-than-expected June consumer price inflation reading on Wednesday fueled optimism that prices are finally beginning to moderate.
Roche suggested that since figures are beginning to reflect year-on-year comparisons to the sudden spike in prices last spring following Russia’s invasion of Ukraine, the Fed will be hesitant to begin cutting rates back from their current elevated levels until “well into next year.”
“I think a real fear is the fact that they could cut too early and be the culprits of engendering higher inflation for a second time, so I think if anything, they will stay the course,” said Roche, a veteran investor and president of research house Independent Strategy.
“Will that produce deflation, will that produce recession? I actually don’t think so, and the reason for that is that labor markets and disposable income — what people have to spend — are behaving differently this time.”

The year-over-year inflation rate dropped from 4% in May to 3% in June, largely due to falling energy and transportation prices, while core inflation — which excludes volatile food and energy costs — slowed to increase by just 0.2% month-on-month. Annual core CPI remained comparatively high at 4.8%.

Roche, who correctly predicted the development of the Asian crisis in 1997 and the 2008 global financial crisis, noted that the global economy is currently seeing a “gradual reduction” in labor demand and a “gradual reduction in hourly wages,” but not the “catastrophic collapse in employment which would create a recession.”
Unlike the oft-referenced “goldilocks scenario” in which borrowing costs are coming down and growth is accelerating, Roche suggested the global economy is looking at a period of static growth with rates remaining high. He said this raises the question of how to bring inflation back towards the Fed’s 2% target without a “long period of pain.”
“Or do you simply change the goalposts, or change the goalposts without really saying so, which is what I think central banks are going to do?” he added.
No chance of ‘immaculate disinflation’
The dismissal of any possible “goldilocks” scenario for the global economy was echoed earlier this week by JPMorgan Asset Management, though on different grounds.
Stock markets and other risk assets rallied Wednesday on the back of the cooler U.S. CPI print, and have enjoyed a bumper first half of the year despite persistent concerns about central banks having to continue driving down growth in order to rein in inflation.
The S&P 500 is up more than 16% year-to-date, while the tech-heavy Nasdaq 100 has soared by almost 40%. Gains in Europe and Asia have been more modest, with the pan-European Stoxx 600 up more than 8% and the MSCI Asia ex-Japan almost 3% higher.
At a roundtable event on Tuesday, JPMorgan Global Market Strategist Hugh Gimber said current market positioning is built on an economic outlook that is “too good to be true,” with investors less well prepared for the “necessary” slowdown that “central banks are determined to achieve.”

“We are skeptical about this notion that we can see what I’d call immaculate disinflation. We don’t think core inflation gets back to target without a meaningful hit to growth, and therefore we’re uncomfortable with the markets seeing inflation coming down and therefore potentially a recession might be avoided,” Gimber said.
He added that core inflation will not reach tolerable levels for central banks without a weaker period for the global economy.
“Therefore, as a result of the market moves that we’ve seen in the first half of this year, we expect higher volatility ahead,” Gimber said.
“We think that ultimately total returns on a 12-month forward basis across risk assets could be coming under significant pressure, and therefore this is a time for investors to be focused on portfolio resilience.” More

In its latest report, the Institute of Grocery Distribution (IGD), whose forecasts on UK food inflation have proved to be broadly accurate, cautioned it did not expect sales on a volume basis to significantly recover until next year.“We predict that food price inflation will slowly and steadily decline over the remainder of 2023, reaching approximately 9% by December,” James Walton, IGD’s chief economist, said.”Although food price inflation appears to have peaked in March, widespread price cuts are unlikely at this time and a depressed volume of sales is expected until March 2024.”Prime Minister Rishi Sunak’s pledge to halve overall inflation in 2023, before a probable 2024 election, is under threat from persistently high food inflation, which has added to strain on household budgets already hit by interest rate rises.In May, the Bank of England forecast overall inflation would drop to just over 5% by the end of this year and below its 2% target by early 2025, but some BoE policymakers have doubts about the models used to make these forecasts and fear inflation will be higher.Food and drink inflation was 18.3% in May according to the most recent official data, and 14.6% in June according to the most recent industry data.All of Britain’s major grocers have recently cut the prices of some staple products, such as milk, butter and bread.However, both market leader Tesco (OTC:TSCDY) and No. 2 Sainsbury’s have cautioned that a permanent rise in labour costs will mitigate the easing of commodity and energy pressures.The IGD’s Walton also highlighted a shortage of labour in the UK food and consumer goods industry.“Labour pressures may be the industry’s Achilles’ heel, driving costs while undermining capacity,” he said.The IGD report also highlighted increased pressure on those with the lowest incomes, with 54% reducing the amount of food and drink consumed at home compared to 36% with higher incomes.EXPLAINER-Why is UK food inflation so stubbornly high? More

Rishi Sunak on Thursday accepted in full the recommendations of independent pay review bodies to give key public sector workers wage rises of about 6.5 per cent, telling trade unions to call off strikes now.The prime minister agreed the awards for 2023-24 after talks with chancellor Jeremy Hunt, when he was reassured they could be funded without increased government borrowing that might have fuelled inflation.“Today’s offer is final,” Sunak told a press conference in Downing Street. “There will be no more talks on pay. No amount of strikes will change this decision.”Sunak received an immediate boost when four education unions backed the government’s proposed 6.5 per cent pay increase for teachers, saying they would recommend the deal to members and call off strikes.Under the review bodies’ recommendations accepted by ministers, police officers will receive a 7 per cent pay increase in 2023-24, teachers 6.5 per cent, senior NHS staff 6 per cent, junior doctors 6 per cent plus a one-off payment, and armed forces 5 per cent plus a one-off payment.More than 1mn NHS staff, including nurses and ambulance crews, have already been offered a 5 per cent wage increase by the government for 2023-24, along with a one-off payment for last year. The prime minister was fully aware of the political risks of fuelling public sector workers’ anger over pay — potentially aggravating a wave of strikes — if he had rejected the review bodies’ recommendations.In a joint statement with Sunak, the NEU, NASUWT, NAHT and ASCL teaching unions said they would recommend the government’s pay offer to members. “This deal will allow teachers and school leaders to call off strike action and resume normal relations with government,” they said.He said the pay offers could be funded without hitting frontline services and urged all public sector workers — including striking junior doctors — to call off their strikes now.In a direct challenge to the British Medical Association to call off strikes by junior doctors in England, Sunak said: “How can it be right to continue disruptive industrial action, not least because these strikes lead to tens of thousands of appointments being cancelled — every single day.”The prime minister has been grappling with the biggest series of public sector strikes in the UK in decades — with NHS workers, teachers and civil servants all demanding higher pay amid the cost of living crisis.Junior doctors who are members of the BMA began an unprecedented five day strike on Thursday. Teaching unions have been holding strike ballots that might result in widespread closures of schools in the autumn.Sunak said that Whitehall departments will have to find efficiency savings and reprioritise spending to help cover the pay increases.This reflects how the wage rises are above the 3.5 per cent originally proposed by the government.But Sunak also announced a plan to raise an extra £1bn by increasing visa fees and a NHS surcharge for legal migrants coming to Britain.Public sector pay could now start to keep up with rising prices. Consensus Economics, which averages leading forecasters, expects consumer price inflation to average 7.3 per cent in 2023 and 3.2 per cent in 2024.Sunak wants to halve inflation to about 5 per cent by the end of this year. It currently stands at 8.7 per cent. More

LONDON (Reuters) -Britain’s public debt could surge to more than 300% of annual economic output by the 2070s, up from about 100% now, and the government is not taking measures to make big changes in the short term, the government’s budget forecasters said.The Office for Budget Responsibility said challenges from an ageing society, climate change and geopolitical tensions were already posing big fiscal risks.But Britain’s plans for stabilising and reducing debt as a share of gross domestic product were modest by historical and international standards, the OBR said in an annual report on the long-term outlook for public finances published on Thursday.Finance minister Jeremy Hunt has set a target of getting underlying debt to fall in five years’ time, something he was only narrowly on course to hit at the time of his budget statement in March.Since then, borrowing costs in financial markets have risen sharply, making Hunt’s target all the harder to hit.The OBR said British government borrowing costs have risen more than in any other Group of Seven (G7) economy and they had been more volatile than at any time in the past 40 years.”While other governments also face rising interest rates on debts close to or in excess of 100% of GDP, several factors make the UK’s public debt position more vulnerable to some shocks than in the past or in other advanced economies,” it said.Britain had the shortest average maturity on its debt on record, the highest proportion of inflation-linked debt of any major advanced economy and more of its debt was held by private foreign investors than most other G7 countries, the OBR said.On the long-term challenges, the OBR said a “baby boom” wave of people going into retirement would push the cost of Britain’s state pensions by 23 billion pounds ($30 billion) a year by the 2027/28 fiscal year compared with the start of the decade.A rising take-up of electric vehicles was expected to cost 13 billion pounds a year in lost fuel duty revenues by 2030 and public investment needed to support decarbonisation of the economy could hit 17 billion pounds a year by then.The OBR also said the government’s hopes of increasing defence spending to 2.5% of GDP from 2% now had a potential cost of 13 billion pounds a year.($1 = 0.7651 pounds) More

The German government has adopted its first ever China strategy with a focus on “de-risking” its relationship with its largest trading partner, which it says is increasingly emerging as a “systemic rival” to the west.“Germany has changed and so we have to change our China policy too,” said foreign minister Annalena Baerbock. Beijing had become “more repressive internally and more aggressive externally”, she added, and while it remained a partner, its role as “systemic rival” was beginning to “dominate”. The milestone strategy, which was long delayed by disagreements between Olaf Scholz’s chancellery and Baerbock’s foreign ministry, rejects the notion of “decoupling” from China but stresses the need for Germany to “de-risk” — that is, diversify its supply chains and export markets away from the country and so reduce its vulnerability to external shocks. The EU labelled China a systemic rival in 2019.In particular, the 64-page document aims to make German companies more aware of the risks they face in doing business with China and make clear that Berlin will not bail them out if they get into trouble.“Companies that are dependent on the Chinese market to a large degree will in future have to bear more of the financial risk themselves,” Baerbock said.She said the responsibility for “risky corporate decisions” must become clearer. “The approach of trusting the invisible hand of the market in good times and demanding the strong arm of the state in times of crisis doesn’t work in the long run,” she said. “Even one of the strongest economies in the world can’t stem that.”

Chancellor Olaf Scholz, left, with Chinese president Xi Jinping in Beijing last November. The relationship between the two countries has long been seen as a pillar of Germany’s economic success © Kay Nietfeld/Reuters

Noah Barkin, a Europe-China expert at the US-based research firm Rhodium Group, said the strategy sent an important signal.“There was a lot of confusion about where Germany stood,” he said. “Now Berlin has made clear that China is no longer just seen as a lucrative one-way economic bet but that it poses threats to the west on multiple levels.”Since Russia’s full-scale invasion of Ukraine, which revealed how reliant Germany had become on Russian gas supplies, Berlin has sought to reduce its dependence on other problematic countries, particularly China.China is Germany’s largest trading partner, with the volume of bilateral trade reaching a record €300bn last year. The relationship was long seen as a pillar of Germany’s economic success and a model of globalisation in practice. Former chancellor Angela Merkel’s frequent trips to Beijing, often accompanied by a huge entourage of German industrial bosses, symbolised the strength of the relationship, one not particularly encumbered by concerns about Chinese human rights abuses in places such as Xinjiang and Hong Kong.But Germany’s misgivings have gradually grown since the ascent of President Xi Jinping, China’s most powerful leader since Mao Zedong, who this year started an unprecedented third term. The country’s increasing authoritarianism, its crackdown on civil rights and ethnic minorities, its sabre-rattling over Taiwan and aggressive posture in the South China Sea have forced Berlin to undertake a fundamental rethink of the relationship, one that accelerated when the China-sceptic Greens entered government in late 2021. The strategy notes that China is pursuing its own interests “far more assertively and is attempting in various ways to reshape the existing rules‑ based international order”. “This is having an impact on European and global security,” it adds.Germany is particularly alarmed at the prospect of a Chinese invasion of Taiwan, a move that would throw global supply chains into disarray and potentially shut off the Chinese market to German companies.Baerbock noted that a military escalation over Taiwan would represent a “danger for millions of people all over the world and for us, too”, noting that half of all the globe’s container traffic moved through the Taiwan Strait.Tensions over Taiwan have come at a time of growing doubts about German companies’ future prospects in the Chinese market, as Beijing pursues plans for global technological dominance.Even companies such as Volkswagen that have been present in China since the late 1980s have reason to be worried. China is still VW’s largest market, accounting for 50 per cent of its total sales in 2021. But it has fallen down the sales rankings when it comes to electric vehicles, a market that is dominated by local producers such as BYD, Chery and Nio.German companies in China are also increasingly concerned about the operating environment, pointing to moves such as a new counter-espionage law that they say hugely increases the risks of doing business there.

The strategy also insists that China remains a partner for Europe and Germany, particularly on climate change. Baerbock said Germany wanted to “expand our co-operation with China — because we need it”. She noted that while China produced a third of global CO₂ emissions, it was now generating more solar energy than the rest of the world put together.That the German government was able to agree on a common strategy is in itself a huge achievement. Scholz’s three-party coalition between Social Democrats, Greens and Liberals is divided on how it should deal with Beijing, with Baerbock’s Greens insisting on a tougher course and Scholz’s SPD advocating a more cautious approach.Differences over China have occasionally caused open cabinet rifts. Scholz supported Chinese state-owned shipping conglomerate Cosco’s investment in a container terminal in Hamburg port, triggering a damaging row with the Greens who opposed the deal on grounds of national security. More

From mainFT:Prices for olive oil are surging further in to record-breaking territory after an extended period of unusually dry weather in southern Europe damaged crops.European prices first moved above €4 per kilogramme in September but have now shot up to more than €7 per kg owing to soaring temperatures and a lack of rainfall in Spain, the world’s largest producer, as well as in Italy and Portugal.The piece’s co-author, former Alphavillain George Steer, made the mistake of mentioning this piece to us yesterday, his innocent query of whether the UK tracks olive oil prices spurring us to spend some time down a rabbit hole.Naturally the article focuses on the fascinating global picture. This article will not.As mentioned in our piece about Beyoncé last week, the UK’s Office for National Statistics is perhaps inexplicably opaque about the data it gathers. Happily, sometimes it is fairly transparent, much like (filtered) olive oil.The ONS tracks the price of a 500ml bottle of olive oil as part of its standard basket of goods used to measure inflation. It represents about 1 point of the 950ish point CPIH basket.In its latest consumer price index report, it found the average cost of such oil was £6.16:

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

It’s a big pickup: olive oil price were 47 per cent higher than a year earlier, as part of a substantial rise that kicked off around the time Russia invaded Ukraine — knocking out the world’s biggest supplier of sunflower oil and generally mussing up the global market for vegetable oils. Twelve-month CPIH inflation in food and non-alcoholic beverages over the same period was 18.4 per cent.Interestingly, this is one of the areas where the ONS fully divulges the different price quotes its agents observed for a product.In May, the ONS observed prices for 244 500ml bottles of olive oil, item code 211408, across 66 different shop types. The ONS uses a combination of physical observation of data — a 2018 document says:A third party company, Kantar TNS, are currently contracted to collect approximately 100,000 prices for around 580 items from a variety of retail stores in around 150 locations across the UK each month.— and data scraped from the web.Olive oil’s a complex product category. Eight different classifications exist:extra-virgin olive oil,virgin olive oil,virgin lampante olive oil,refined olive oil,olive oil composed of refined olive oil and virgin olive oils,olive pomace oil,crude olive-pomace oil,refined olive pomace oil.Most readers will be familiar at least with the basic distinction between regular olive oil (for cooking) and extra-virgin olive oil (for drizzling/dressing). It is not clear from the ONS how fussy they are about the quality of olive oil observed.Regardless, here’s the distribution of prices that they found in May 2023, versus January 2022. We’ve simplified this to include instances where prices has recovered from a sale or bore other comments as being “standard price”. Comparable products mean a new product came on sale that was “similar to the previous product”. Sale price means “sale price or special offer”:

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The shift in the overall distribution is obviously the key trend: — January 2022’s average price is only moderately above May 2023’s lowest price— The average price rose 65.1 per cent between the two periodsThe moves at either end are also interesting:— the price of the cheapest olive oil the ONS found rose from £1.89 to £2.75, which is inflation of 45.5pc. — the most expensive rose from £8.35 to £10.99, inflation of 31.6 per centIt’s worth caveating those figures slightly, by noting that January 2022 had a mild outlier at the most expensive end, while May 2023 has one at the bottom. We’d propose looking at the “cluster” of price near each extremity as a better indicator of the widely-available extremes — we’re defining this is the lowest/highest price that was observed more than once.— Inflation from the lowest January 2022 cluster to that lower-end May 2023 cluster in May was 78.9 per cent— at the highest end it was it was 36.3 per centThis first chart here shows how prices have changed at either end. It’s worth noting there were severe stock issues late last year, after which point prices sprung up in January 2023:

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

And here are those figures as a percentage change:

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

There was some discourse and some data last year about inflation being felt more strongly by people with the least spending power, because they don’t have the option of switching to a cheaper product. The ONS’s conclusion at the time was no.Olive oil is a definite exception. Something to mull on as you drizzle over that caprese salad. More

The UK economy contracted by 0.1 per cent in May, less than expected, but economists warned that recent interest rate rises would hit growth in the second half of the year.An extra bank holiday to mark the King’s coronation contributed to the fall in UK gross domestic product between April and May, Office for National Statistics data showed. Economists polled by Reuters had expected a 0.3 per cent drop.But Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the 0.1 per cent fall, which followed a slight rise in May, confirmed “that the economy was floundering even before the impact of recent interest rate rises are fully felt”.Sterling rose 0.6 per cent against the dollar on Thursday, hitting $1.3063 — its highest level since April 2022 — as traders bet on several more interest rate rises from the Bank of England, but just one more from the Federal Reserve.The Bank of England has increased its policy rate from a historic low of 0.1 per cent in November 2021 to 5 per cent today, with markets anticipating a further rise to 6.25 per cent by the end of the year. Swaps markets are pricing in a 50 per cent chance of the Bank of England raising rates by 0.5 percentage points to 5.5 per cent in August.Thiru added that, while GDP could rebound in June, “the significant squeeze on activity from high inflation, stealth tax hikes and rising interest rates” posed problems for Prime Minister Rishi Sunak’s pledge to deliver economic growth this year.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The UK economy has been largely flat for the past year as high inflation and rising borrowing costs weigh on household finances and business activity. In May, output was only 0.2 per cent above the level in February 2020, at the start of the coronavirus pandemic.Thursday’s ONS data showed that output in the three months to May was unchanged compared with the previous three-month period — marginally better than a 0.1 per cent contraction forecast by analysts.Paul Dales, economist at Capital Economics, said he expected the economy had grown marginally during the three months to June.However, he forecast that the surge in mortgage rates due to the BoE’s tightening would “contribute to GDP falling in Q3 and a mild recession beginning”. This week, the average rate on a two-year fixed mortgage hit 6.6 per cent, the highest level since 2008, and the BoE said monthly payments would rise by £500 or more for 1mn households by the end of 2026.Dales said he did not expect that the BoE would be deterred from further interest rate rises to bring down inflation, which at 8.7 per cent for the year to May is much higher than in the US or the eurozone.Official data this week also showed that UK wages grew faster than expected in the three months to May.Commenting on the ONS data, chancellor Jeremy Hunt said: “While an extra bank holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth.”Industrial production output fell 0.6 per cent during the month and was the largest contributor to the overall fall in GDP. Output fell in eight of 13 manufacturing sectors, with wood and printing among the largest negative contributors.Construction fell 0.2 per cent in May, the third consecutive drop, with the ONS indicating a slowdown in private housing linked to customers’ economic worries as mortgage rates rise.

Darren Morgan, ONS director of economic statistics, said the extra bank holiday in May for the coronation had affected growth. “GDP fell slightly as manufacturing, energy generation and construction all fell back with some industries impacted by one fewer working day than normal.”He added that despite the coronation bank holiday, sales had fallen at pubs and bars after a strong April while employment agencies experienced another poor month.Services were flat overall, with less impact from strikes than in the previous month. After widespread strikes by doctors in April, output in the health sector rebounded 1.1 per cent in May, while continued industrial action in transport contributed to a subdued 0.1 per cent rise. More

The survey on nine “superstar” cities — Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai and Tokyo — showed that demand for office space would be 13% lower in 2030 than it was in pre-pandemic 2019.”Superstar” cities are locations with a disproportionate share of the world’s urban gross domestic product (GDP) and GDP growth.The survey said employees continued to spend far less time working at the office compared to pre-pandemic times. Remote working seemed to have contributed to migration away from prime cities, partly influenced by complete work-from-home models and cheaper housing availability in suburban areas.In the aftermath of the COVID-19 pandemic, tenants have reduced their office real estate and several corporates have switched to a permanent hybrid work model.”The decline in demand has prompted tenants… to negotiate shorter leases from owners,” said the McKinsey report, adding that short-term leases might make it more difficult for property owners to secure financing.Besides rising vacancy rates, commercial property firms globally are battling steep declines in valuation of their properties as a surge in borrowing costs amid high interest rate environment forces investors to look at more profitable avenues.Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the value of property they finance or own, according to the survey.The McKinsey report comes at a time when world economies are navigating an array of macroeconomic challenges such as elevated inflation, high interest rate levels and mounting recession fears. More