Economy

Investors are betting the European Central Bank will raise interest rates to all-time highs, spurred on by the eurozone economy’s resilience and signs that inflation could prove tougher to rein in than expected.The Frankfurt-based central bank, widely seen as one of the world’s most dovish during its eight-year experiment with negative borrowing costs, is now expected to raise rates substantially this year. Swap markets are pricing in a jump in the ECB’s deposit rate to 3.75 per cent by September, up from the current 2.5 per cent. That would match the benchmark’s 2001 peak, when the ECB was still trying to shore up the value of the newly launched euro.“It is really surprising to see the ECB now looking like the most hawkish of the big central banks,” said Sandra Phlippen, chief economist at Dutch bank ABN Amro. Markets have revised forecasts of interest rates upwards after recent eurozone data on buoyant service-sector activity and wage demands. ECB president Christine Lagarde said on Tuesday that the bank was “looking at wages and negotiated wages very, very closely” — an indication of concern a sharp rise in salaries this year will maintain pressure on prices as companies pass costs on to consumers. The yield on German two-year bonds, which are highly sensitive to changes in interest rate expectations, hit a 14-year high of 2.95 per cent on Tuesday after the S&P Global purchasing managers’ index outstripped forecasts.The prospect of further substantial rate rises in the eurozone contrasts with the US and the UK, which are widely considered to be closer to the end of their interest rate rise cycles, having already increased borrowing costs earlier and by more than the ECB. However, US stock markets fell sharply on Tuesday as upbeat economic data prompted investors to re-evaluate how much further the Federal Reserve may raise rates.Eurozone inflation of 8.5 per cent in January compares with 6.4 per cent in the US. While UK inflation remains in double digits, it has fallen faster than expected and the country’s anaemic growth outlook has diminished pressure on the Bank of England to increase rates.In the past week Goldman Sachs, Barclays and Berenberg have raised to 3.5 per cent their forecasts for how much further the ECB will raise rates. Deutsche Bank on Wednesday raised its forecast to 3.75 per cent.“There is a risk that inflation proves to be more persistent than is currently priced by financial markets,” Isabel Schnabel, an ECB executive board member, told Bloomberg this week. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, forecast ECB rates would peak at 3.5 per cent but added the central bank could “still be in tightening mode by September and that takes you close to a deposit rate of 4 per cent”.The ECB has already raised rates by an unprecedented 3 percentage points since last summer and this month signalled plans for another half percentage point move in March.Wages in the 20-country bloc have been growing at close to 5 per cent in recent months, according to a tracker published by the Irish central bank and jobs website Indeed. Unions are responding to last year’s record inflation by demanding even higher pay rises. FNV, the biggest Dutch union, is calling for a 16.9 per cent pay rise for transport workers, while Germany’s Verdi union wants 10 per cent pay rises for 2.5mn public sector workers.Although eurozone inflation has fallen for three consecutive months, core inflation — stripping out energy and food prices to show underlying price pressures — was unchanged at a record 5.2 per cent in January.“The performance of the economy is obviously good news in the short term for the eurozone, but for the ECB . . . it could suggest they may have more work to do on policy rates,” said Konstantin Veit, portfolio manager at bond investor Pimco. He added that the ECB had made clear that inflation fighting was its “absolute top priority”.Ducrozet at Pictet added: “Even the most moderate doves [in the ECB] are talking about a series of rate rises and not stopping anytime soon.”Resilient economic data across advanced economies this month has led economists and financial experts to bet that interest rates will stay higher for longer than they previously considered.“There has been a repricing in major developed rates markets,” said Silvia Ardagna, an economist at UK bank Barclays. “The fact that US core inflation was a bit stronger than expected last month has made everyone think that maybe it hasn’t peaked yet.” More

The panel is headed by the deputy chief of the top financial regulator, the Financial Services Commission (FSC), and comprises regulators, scholars, researchers and officials from financial industry associations, the FSC said in a statement.Kim So-young, vice chairman of the FSC, said at the panel’s inaugural meeting that it would study ways to boost competition either between existing banks or by allowing entries of niche service providers.The panel would also look into ways to help banks diversify their business practices, currently heavily dependant on interest rate margins, and improve their pay structure, he said.It would also discuss possible measures to strengthen capital buffers against external shocks.President Yoon Suk-yeol and other government officials have said there is growing public discontent over reports of big performance-sharing and early-retirement bonus payments by banks. More

TOKYO (Reuters) – Japan’s Nikkei 225 share index will hit the psychological 30,000 level by end-2023 on a better domestic corporate and global economic outlook in the latter part of the year, according to strategists in a Reuters poll.Strategists expect Japanese companies, many of which rely on exports, to particularly benefit from an improvement in China, which is gaining momentum after ending its zero-COVID policy.”Japanese companies will issue their outlook for 2023 by May, which will be based on the current macro environment. So the forecast will be conservative,” said Hikaru Yasuda, chief equity strategist at SMBC Nikko Securities.”But as the environment is not as bad as companies (now) expect, they will slowly raise their forecast towards the end of the year.”The median estimate of 15 analysts polled Feb. 10-21 was for the Nikkei to be at 30,000 at the end of this year, after rising to 28,000 by end-June. The end-year forecast is the same as the median from a poll taken three months ago, but the mid-year view is 2,000 points lower.The International Monetary Fund last month raised its 2023 global growth outlook slightly due to “surprisingly resilient” demand in the United States and Europe, easing of energy costs and the reopening of China’s economy.”Companies whose businesses are linked with China are expected to perform well,” said Hiroshi Namioka, chief strategist and fund manager, T&D Asset Management.The 30,000 mark would be a 9% gain from Tuesday’s close of 27,473.10. The Nikkei, which fell as low as 25,661.89 on Jan. 4, the first day of trading this year, has been hovering below 28,000 amid uncertainties about the pace of the U.S. Federal Reserve’s interest rate hikes.Investors also await details of the Bank of Japan’s monetary policy after Kazuo Ueda takes over as governor in April, replacing Haruhiko Kuroda who has been defending the central bank’s ultra-low rate policy over the past ten years.Many bond strategists expect Ueda to tweak or abandon the current yield controlling framework, which would push up the benchmark 10-year government yield.The yen strengthened against the dollar after the BOJ widened the trading band of the 10-year government bond yield at its December policy meeting.But the yen has since fallen about 5% from its mid-January high against a rising dollar, which has rallied in recent weeks on expectations the Fed has further to go in raising rates.”Japanese equities are undervalued due to caution for the currency movement,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.”They could be lifted if concerns about the yen’s extreme gain against the dollar will be removed.”(Other stories from the Reuters global stock markets poll package:) More

Macroeconomic data in recent weeks has pointed to a resilient economy with inflation stubbornly far from the Federal Reserve’s 2% target. “Now bond markets are waking up to the risk the Fed hikes rates higher and holds them there for longer,” BlackRock (NYSE:BLK) said in a research note.BlackRock said it was boosting its allocation of Treasuries on its six- to 12-month horizon to take advantage of higher yields. To balance that adjustment, it said it was reducing its exposure to investment-grade credit. It also said it was going “overweight” on Chinese and other emerging-market stocks on its six- to 12-month horizon – a bet on China’s economic recovery after Beijing jettisoned its strict “zero COVID” policy in December.The investment management company said it preferred emerging markets over domestic equities due to “China’s powerful restart, peaking EM rate cycles and a broadly weaker U.S. dollar.”BlackRock also warned that geopolitical risks related to China had increased, and that risks remained related to regulatory intervention. China’s blue-chip CSI300 Index has climbed 7% so far in 2023, outperforming the S&P 500’s 4% recovery.Treasury yields rose further on Tuesday after data showed that U.S. business activity unexpectedly rebounded in February, reaching its highest level in eight months.”Credit spreads have tightened sharply along with stocks pushing higher, reducing their relative attraction. We remain moderately overweight and still think highly rated companies will weather a mild recession well given stronger balance sheets compared with before the pandemic,” BlackRock said.The Fed will release minutes from its Jan. 31–Feb. 1 meeting on Wednesday, which will be evaluated for any new signs of how high the U.S. central bank is likely to ultimately raise rates.The BlackRock Investment Institute is an arm of U.S.-based investment firm BlackRock that provides proprietary investment research. More

Rishi Sunak has been warned by the leader of Northern Ireland’s Democratic Unionists that “very key issues” must be fixed before his party will back a deal on post-Brexit trading arrangements in the region.Sir Jeffrey Donaldson, head of the DUP, met Tory Eurosceptic MPs at Westminster on Tuesday to discuss tactics as Sunak came closer to signing a deal with Brussels to reform the Northern Ireland protocol.While Donaldson praised Sunak’s efforts to find a deal, he said: “There is still some way to go. There are still some very key issues that need to be resolved.”Sunak still hopes to finalise a deal this week but time is running out if he is to close the agreement before events on Friday to mark the first anniversary of Russia’s invasion of Ukraine.Crucially, Sunak has the strong backing of Chris Heaton-Harris, Northern Ireland secretary and former chair of the Tory European Research Group, who carries significant weight with pro-Brexit MPs.After meeting the ERG on Tuesday night, Donaldson said his party could not back a deal unless it changed the rules of trade in the region.“The idea that all goods manufactured in Northern Ireland should align to the EU single market and its rules really inhibits our ability to trade within the UK, and that’s not acceptable,” he said.Sunak hopes that the DUP will not immediately reject a deal and the party has said its officers and executive would consider the plan before deciding how to respond, including whether to go back into the Stormont assembly.Mark Francois, the ERG chair, said his group would also want to study the legal text of an agreement. Its “star chamber” of lawyers, chaired by veteran Eurosceptic MP Sir Bill Cash, would scrutinise the text.

The support of Chris Heaton-Harris and Suella Braverman will be vital for Rishi Sunak as he faces criticism from members of the ERG and Northern Ireland’s Democratic Unionist party © Andy Rain/EPA/Shutterstock

Sunak’s attempt to win support for a deal could rely heavily on the advocacy of Heaton-Harris, who has emerged as a key backer for the outline deal. “He’s telling everyone how good it is,” said one senior Tory. Heaton-Harris has been at the heart of negotiations.Meanwhile, allies of Suella Braverman, the home secretary and another former ERG chair, say she has no intention of quitting the cabinet but is waiting to see details of a final deal.Steve Baker, another Northern Ireland minister who once described himself as a “Brexit hard man”, is seen by Sunak’s allies as a minister who could quit, having been excluded from detailed talks.Baker declined to comment but has told colleagues that he hoped the deal was one that he could support and that he would not be forced to resign. “It ought not to come to that,” he said.The proposed deal seeks to cut friction on trade between Great Britain and Northern Ireland, while addressing the “democratic deficit” of the protocol, which was part of former prime minister Boris Johnson’s 2019 Brexit agreement.A political declaration is expected to set out a role for the Stormont assembly in discussing new EU rules that apply to the region, which remains part of the single market for goods, and specify a limited role for the European Court of Justice in overseeing the deal. Sammy Wilson, the DUP’s chief whip, told the Financial Times that his party’s discussion with Sunak in Belfast last week had been “one of the worst meetings we’ve ever had”. He did not attend the meetings. Wilson said the DUP, which is boycotting the Stormont assembly in protest at the Northern Ireland protocol trade rules, said the party would not “compromise on the union”.Referring to last week’s meeting, Wilson said: “It was very tetchy. It was an attitude of “be grateful for what we have done for you, get back in the assembly like good boys and girls. It was patronising and almost abusive.”

Sunak’s problem is that the DUP speaks with many voices. After the same meeting Donaldson, said that “on very important issues there has been real progress”.The prime minister’s allies say it is key that the DUP does not immediately reject a deal. “The vital thing is that they don’t say No,” said one British official close to the talks.Number 10 has not yet decided whether to put the text to a vote in the House of Commons, although senior MPs believe that parliament would have to have its say on the proposals.One former Tory cabinet minister claimed that if there was a vote, scores of the party’s MPs might rebel against a deal if it failed to satisfy the DUP’s “seven tests” for judging reforms to the protocol, which include cutting border red tape and giving Northern Ireland a say over rules that apply in the region.“The trouble is that it would be an accumulation of things,” the former minister said, arguing that supporters of Johnson might use the issue to try to destabilise Sunak. Labour has said it would support Sunak’s deal in a vote, but the prime minister hopes an agreement will ultimately command DUP support and — by extension — the backing of most of his MPs.Maroš Šefčovič, the vice-president of the European Commission leading the talks, held a video call with James Cleverly, UK foreign secretary, and Heaton-Harris on Tuesday afternoon. “Discussions on the protocol on Ireland/Northern Ireland continue at high intensity,” he said in on Twitter afterwards. “We remain in close touch, focused on finding joint solutions. Set to speak soon.” While Šefčovič said he could see “the finishing line”, some EU diplomats fear that the longer Sunak waits before striking a deal, the more entrenched the opposition to an agreement will become.“The longer he waits, the more difficult it becomes,” said one, pointing out that Brussels had hoped for an agreement on Wednesday. Now that timetable looks likely to slip to the weekend and beyond. More

UK prime minister Rishi Sunak is exploring a 5 per cent pay rise for public-sector workers to end an escalating wave of strikes after the Treasury was given an unexpected £30bn windfall.In a sign of a change of mood after months of strife, the Royal College of Nursing on Tuesday called off a 48-hour strike due next week in England to restart “intensive” negotiations with health secretary Steve Barclay.The Treasury has indicated in a private memo, seen by the Financial Times, that public sector awards of up to 5 per cent for 2023-24 would have only a “low risk” of setting a benchmark for protracted high private sector pay growth.The move came after official figures showed public borrowing was likely to be £30bn lower than expected, due to factors such as high tax receipts, a fall in energy prices and low public investment.The improved outlook for public finances has given the prime minister scope to make improved pay offers, as he seeks to end the industrial action that has dominated politics during his time in office. Nurses in particular have won widespread public support.Sunak’s allies said it had taken several months for both sides to “understand each other’s position” but the prime minister now wanted to move decisively to bring the strikes to a close.Education secretary Gillian Keegan also invited teaching unions to reopen “substantive formal talks” on pay, conditions and reform, but only if the National Education Union called off walkouts set for next week. The NEU, the largest union in the sector, said it was not yet ready to abandon its strikes, because the 3 per cent pay rise proposal it knew of was not enough.However, government insiders confirmed ministers were considering both a pay offer of about 5 per cent for public sector workers next year and a backdated payment to sweeten the deal, even though the headline figure is below forecast 5.5 per cent inflation for the next financial year.

Jeremy Hunt, the chancellor, said pay rises were recurrent and public spending restraint remained vital but added: “We do understand how difficult it is for people on the front line who’ve seen real-terms cuts in their wages.”Government departments on Tuesday made their formal 2023-24 pay submissions to eight public sector pay review bodies, covering areas including the NHS, armed forces, police and prison staff.They said they could only afford 3.5 per cent pay rises in the year starting in April under current Treasury allocations. A further increase of 1.5 percentage points would cost an extra £3.7bn a year for all public sector workers.Hunt’s allies insisted any pay award above 3.5 per cent would have to be funded from existing departmental budgets, for example through efficiency savings.However, Hunt has previously increased departmental budgets to cope with cost pressures, giving the NHS an extra £6.6bn over two years and adding £4.6bn to the schools budget in England in his Autumn Statement.But ambulance workers represented by the Unite union have already rejected a higher pay offer from the Welsh government, and the RCN in Scotland initially rejected a pay offer at a similar level before recommending an improved offer to its members.Rachel Harrison, national secretary of the GMB union, described the government’s offer of talks with the RCN — excluding other health unions — as a “back-room deal” and a “tawdry example of ministers playing divide and rule politics with people’s lives”.Labour health spokesperson Wes Streeting said: “Had the government agreed to these talks two months ago they could have prevented 140,000 appointments being cancelled as a result of strike action.”A 1.5 percentage point increase in public-sector pay would remain well below the windfall in public finances seen by the government on Tuesday.In figures that surprised economists and the Treasury, the Office for National Statistics said the public sector registered a £5.4bn surplus in January, far better than the £7.8bn deficit expected by economists polled by Reuters. In the financial year to January, the public sector borrowed £116.9bn, a figure £30.6bn less than forecast in November by the Office for Budget Responsibility, the UK official watchdog.Additional reporting by Jasmine Cameron-Chileshe and Bethan Staton More

The deal would give INEOS, run by billionaire businessman Jim Ratcliffe, access to the natural gas that is key to its core business at a time of significant disruption in global gas markets caused by Russia’s invasion of Ukraine.”Over the last two decades, U.S. onshore oil and gas production has provided security of supply for the global market and competitive advantage for U.S. industry,” Brian Gilvary, chairman of INEOS Energy, said in a statement.”We believe this acquisition will help us to serve our internal and external customers today as we continue to position our business to meet the energy transition.”The transaction, involving an area of around 172,000 net acres with average net daily production of about 36,000 barrels of oil equivalent, will also grant Chesapeake Energy a complete exit from the Eagle Ford shale basin.The Oklahoma City-based energy producer, under pressure from activist investment firm Kimmeridge Energy Management to shift toward solely producing natural gas, had already agreed to sell part of its position in January to privately owned Wildfire Energy for $1.43 billion.Mark Viviano, managing partner of Kimmeridge’s public investment team, said in a separate statement it commended the company’s move and the re-focus on low-cost gas assets would “maximize value for Chesapeake stakeholders”.Chesapeake said in its own statement the company would receive $1.175 billion at closing – due in the second quarter of this year – and a further $225 million in four annual installments. Proceeds from the deal will be used to repay debt and fund its share repurchase program. More

TOKYO (Reuters) – Big manufacturers in Japan remained gloomy in February and the service-sector mood slid for a second straight month, a Reuters’ poll showed, a sign that the global slowdown is holding back the country’s recovery from COVID-induced economic doldrums.The monthly Reuters Tankan, which closely tracks the Bank of Japan’s (BOJ) key tankan quarterly survey, found the sentiment index for big manufacturers stood at -5 in February, little changed from the prior month’s -6.The mood in the service sector slid for a second straight month to 17, down from a three-year high of +25 seen in December and underlining concerns about private consumption, which accounts for more than half the Japanese economy.Respondents expected gradual improvement in conditions over the coming three months.The survey asks respondents whether the business situation is good, not so good or bad. The resulting index value is the percentage of “good” answers minus the percentage of “bad”.Questions for the Feb. 8-17 poll were sent to 493 large Japanese non-financial firms, of which 244 responded, all on condition of anonymity.Manufacturers in such sub-sectors as electric machinery and automobile and transportation equipment were among the least optimistic, with sentiment indices deeply negative, reflecting the companies’ loss of business from declines in car output and chip shortages.Many firms also complained about rises in energy and commodity prices and weakness of the yen, both factors that have driven up import bills, increasing the cost of doing business, the poll showed.”We have not been able to transfer rising costs of materials, gas and electricity to our customers. On top of that, wages are rising, all of which squeezes the business environment,” a manager of a metal processing firm wrote in the survey.Firms were cautious about increasing capital spending to raise exports in part because of the war in Ukraine, U.S.-China frictions and possible rises in infections in China following the lifting of COVID-19 controls there.”The prolonged invasion of Ukraine by Russia, a spike in energy costs, price hikes and rising interest rates appear to have sapped not only consumer appetite for spending but also business investment,” a manager at a machinery maker wrote.A manager at a transport company commented: “The environment surrounding logistics and manufacturing remains severe due to coronavirus, chip shortages, yen weakness, price rises in raw materials, the Ukraine crisis and shortages of fuel and crops.”The BOJ’s last tankan showed that in December the mood of big manufacturers had soured in the final quarter of 2022 to the lowest level in nearly two years, as cost pressures and the prospect of slowing global demand clouded the outlook.Japan’s economy averted recession in the fourth quarter but rebounded much less than expected as business investment slumped. More