Economy

The Congressional Budget Office on Wednesday said the U.S. Treasury Department will exhaust its ability to pay all its bills sometime between July and September, unless the current cap on borrowing is either raised or suspended.Many past debt-limit standoffs have been resolved without significant market fallout but that hasn’t always been the case: a 2011 debt ceiling showdown roiled markets and led to a downgrade Standard & Poor’s.Here is some background about the debt ceiling debate and its impact on markets:** Though months remain for lawmakers to reach an agreement, there are signs stock investors may already be pricing in risk around the debt ceiling debate.According to Goldman Sachs (NYSE:GS), while debt limit debates typically have had “limited” impact on the broad market, stocks exposed to government spending have commonly lagged in the weeks prior to the debt ceiling deadline. A basket of such stocks has trailed the S&P 500 by a median of 5 percentage points in the weeks ahead of the four most recent debt limit deadlines, Goldman said in a note late last month.** This year, the Goldman Sachs government exposure basket has gained only 4.4% as of Tuesday’s close, compared with a 7.7% gain for the S&P 500. Stocks in the basket belong to a range of industries that could be affected by a shutdown, including healthcare, aerospace and defense, professional services, and materials. ** However, 90% of respondents in a Deutsche Bank (ETR:DBKGn) global financial market survey taken late last month said the debt ceiling has no influence or only limited influence on their 2023 outlook. That led Deutsche Bank’s head of global economics and thematic research Jim Reid to note that markets might be caught off guard by major fallout from a debt showdown.** Stocks fell sharply during the debt-ceiling showdown in 2011, which came alongside economic unease in Europe that roiled markets. The S&P 500 sold off about 17% between late July and mid-August of 2011, while the Cboe Market Volatility index spiked above 40.** An October 2013 showdown was less concerning to risk assets but created “temporary dislocations” in the Treasury market, with Treasury bills maturing in the “default” zone trading at a steep discount to nearby securities, according to Deutsche Bank. ** In 2011 and 2013, equities declined in the month leading up to the date the debt ceiling was raised, but then bounced back, according to Brian Levitt, global market strategist at Invesco. The S&P 500 fell 17.2% and 4% in 2011 and 2013 one month ahead of that date, Levitt said in a note. The index rose 28.1% and 21.4% in the ensuing 12 months in those years. More

The European Union’s embargo on Russian oil products came into effect on Feb. 5, building on the $60 oil price cap implemented by the G-7 (Group of Seven) major economies on Dec. 5.
China, India and Turkey in particular have ramped up purchases to partially offset a fall in Russian crude exports to Europe of 400,000 barrels a day in January.
Russian net oil output was down by only 160,000 barrels a day from pre-war levels in January, with 8.2 million barrels of oil shipped to markets worldwide, according to the IEA’s oil market report.

Russia announced that it would cut oil production by 500,000 barrels per day in March after the West slapped price caps on Russian oil and oil products.
Picture Alliance | Picture Alliance | Getty Images

Bans and price caps targeting Russian oil are having the “intended effect” despite surprisingly resilient production and exports in recent months, according to Toril Bosoni from the International Energy Agency.
The European Union’s embargo on Russian oil products came into effect on Feb. 5, building on the $60 oil price cap implemented by the G-7 (Group of Seven) major economies on Dec. 5.

Bosoni, who’s head of the oil industry and markets division at the IEA, told CNBC on Wednesday that Russian oil production and exports had held up “much better than expected” in recent months. This is because Moscow has been able to reroute much of the crude that previously went to Europe to new markets in Asia.
China, India and Turkey in particular ramped up purchases to partially offset the 400,000-barrel-per-day fall in Russian crude exports to Europe in January, according to the IEA’s oil market report published Wednesday. Some Russian oil is also still making its way to Europe through the Druzhba pipeline and Bulgaria, both of which are exempt from EU embargo.
As such, Russian net oil output fell by only 160,000 barrels a day from pre-war levels in January, with 8.2 million barrels of oil shipped to markets worldwide, the IEA said. The agency added that G-7 price caps may also be helping to bolster Russian exports to some extent, as Moscow is forced to sell its Urals oil at a lower price to those countries complying with the caps, which potentially makes it more attractive than other sources of crude.
Despite Russia’s substantial export volumes, Bosoni argued that this did not mean the sanctions had failed.

“The price cap was put in place to allow for Russian oil to continue to flow to market, but at the same time reducing Russian revenues. Even though Russian production is coming to market, we’re seeing that the revenues that Russia receives from its oil and gas have really come down,” Bosoni said.

“For instance in January, export revenues for Russia were about $13 billion, that’s down 36% from a year ago,” she said. “Russian fiscal receipts from the oil industry is down 48% in the year, so in that sense we can say that the price cap is having its intended effect.”
She also highlighted the growing discrepancy between Russian Urals crude prices and international benchmark Brent crude. The former averaged $49.48 per barrel in January, according to the Russian Finance Ministry, while Brent was trading above $85 a barrel on Thursday.
Importantly, Russia’s 2023 budget is based on a Urals price average of $70.10/bbl, so plunging fiscal revenues from oil operations year-on-year are leaving a substantial hole in public finances.
Bosoni also noted that the indications are that Moscow may not be able to reallocate the trade of oil products in the same way as it has crude exports, which is why the IEA expects exports and production to fall further in the coming months.
“We’re seeing now some reallocation of trade of the products but we haven’t seen the same shift as we saw for crude, which is why we’re expecting Russian exports to fall and production to fall,” she said.

Production cut

Russia announced last week that it would cut production by 500,000 barrels a day in March in response to the latest round of Western bans, amounting to around 5% of its latest crude output.
However, Bosoni said this was in line with the IEA’s expectations.
“This is included in our balances that still see the markets relatively well supplied through the first half of the year, so we’re not too concerned about this decline, we think there’s enough supply to meet demand for the coming months,” she said.
“The question will be when summer comes around, refinery activity picks up to meet summer driving and China rebound really takes off, this is when we can see the market tighten really through the rest of the year.”

In its report, the IEA suggested the production cut may be less about retaliation and more an attempt by Moscow to shore up pricing by curbing output rather than continuing to sell at a large discount to countries complying with the G-7 price caps.

Global oil demand

Global oil demand growth is expected to pick up in 2023 after a sharp slowdown in the second half of 2022, with China accounting for a substantial portion of the projected increase.
The IEA said a pronounced uptick in air traffic in recent weeks highlighted the central role of jet fuel deliveries in 2023 growth. Oil deliveries are expected to surge by 1.1 million barrels a day to hit 7.2 million barrels a day over the course of 2023, with total demand hitting a record 101.9 million barrels a day.
The effects of the West’s latest oil embargo and price cap will be a key factor in meeting that demand growth, the IEA report noted.
“So will Beijing’s stance on domestic refinery activity and product exports amid its reopening. New refineries in Africa and the Middle East as well as China are expected to step in to cater for the growth in refined product demand,” it said.
“If the price cap on products is half as successful as the crude cap, product markets may well weather the storm – but more crude supplies would be required to prevent renewed stock draws later in the year.”

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SINGAPORE (Reuters) – The world’s biggest factory and most populous nation has opened for business after three years, leading to a surge in demand as well as concerns it will add to global inflationary pressures. But economists say investors need not worry too much.China’s swift dismantling of a zero-COVID policy has come as global central banks are saying the fastest rate hikes in a generation will need to go further to rein in rising prices, fuelling worries that pent-up mainland demand will trigger another wave of inflation.Anticipation of a flurry of spending has driven up prices of everything from copper to shares in luxury fashion houses.However, economists see no challenge to global inflation, pointing instead to Chinese President Xi Jinping’s new blueprint for self-sufficiency, broader prosperity and a socialist ideology as checks on big-ticket shopping.The slack in China’s labour markets and Beijing’s growth priorities will also take the edge off inflation, they say.”I don’t think China’s recovery or the reopening will cause any significant global inflation,” said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas (OTC:BNPQY) Asset Management.A recovery is likely to be inwardly focused and unlikely to substantially lift the yuan, reducing the chances of pushing up export prices or driving price rises elsewhere, he added.Worries that Chinese demand could force the U.S. Federal Reserve and other central banks to increase rates further are “overblown”, Lo said. BNP’s portfolio managers are positioning for China’s rebound to boost regional tourism, but not export price rises for manufactured goods.FULL TANKSIn commodity markets too, where China is a price-setter for iron ore and the second-biggest consumer of oil, further sharp price gains due to the reopening are unlikely. Metals markets have already priced in some new demand, with copper futures breaching a $9,000 per tonne level last month for the first time since June. “The old infrastructure spending, basically roads, bridges, airports and ports; China will still build them”, but that kind of spending will not be a priority in the next decade, said Lo, who anticipates only a marginal tailwind for commodities.New kinds of infrastructure spending, such as on technology, is less intensive in terms of bulk commodities, Lo added.China has also benefited from the cheap Russian oil imports, and has stockpiled, curbing oil demand as a source of inflation.There is solace in the near absence of price pressures on the mainland too, given the moderation in economic growth and a rising domestic currency.In 2022, economic growth slumped to one of its worst levels in nearly half a century, at 3.0%.UBS’ APAC Chief Investment Office estimates China’s full-year GDP could potentially reach around 5% this year, but inflation will accelerate “only modestly” to 3%, and J.P. Morgan analysts think it will start to pare back.SUPPLY SIDE A weak labour market will also rein in inflation in China, which has not made the direct stimulus payments that drove hiring and spending in most Western economies.Beijing’s “common prosperity” policy has slashed pay and perks for bankers, while youth unemployment hit a record 20% last year.”There is so much spare capacity in China … it doesn’t feel like you’re going to have a shortage of labour. You don’t have the great resignation like you had in the rest of the world” due to the pandemic, said May Ling Wee, a portfolio manager at Janus Henderson Investors.But inflation could emerge if and when consumers plough their 17.8 trillion yuan of savings into travel and discretionary shopping, analysts cautioned.”The large savings in China can definitely support a recovery of consumption – the question is how much more people are willing to spend,” said Ricky Tang, co-head of client portfolio management at Value Partners Group.Average airfares for flights to and from China in January were more than double 2019 prices, data from ForwardKeys showed, despite there being no immediate surge in travel.It will be “many months” before Chinese tourist crowds arrive in Western airports given curbs on travellers from the mainland, limited flight capacity and high fares, said Olivier Ponti, ForwardKeys’ vice president of insights. “It is also likely that there will be issues with visas and delays renewing passports.”Years spent getting supply chains in order are also helping ease price pressures. Pork production is a case in point.It hit an eight-year high in 2022 and prices fell 10.8% in January. Factory-gate prices are going down, which analysts say raises the prospect of a “Goldilocks” scenario of steady growth without exporting inflation.”I’m very much of the view that (China’s reopening) will be positive for the world in terms of either not being too inflationary, but more widely having deflation in some key new goods and services,” Westpac senior economist Elliot Clarke said. More

NEW YORK (Reuters) – The mutual fund industry is warning the U.S. Securities and Exchange Commission that new proposed rules aimed at better preparing open-end funds to weather distressed market conditions would harm investors saving for retirement.A November proposal from the SEC would require mutual funds, and some exchange-traded funds, to ensure that at least 10% of their net assets are highly liquid. It would also require a hard daily close of 4 p.m. Eastern time for mutual funds, and the use of “swing pricing.” Such pricing, which involves adjusting a fund’s value in line with trading activity so redeeming investors bear the costs of exiting without diluting remaining investors, is an attempt to prevent liquidity issues during market disruptions, such as at the beginning of the pandemic, when many investors tried to exit funds at the same time.SEC Chairman Gary Gensler argued at the time the tweaks would ensure such funds are resilient and protect investors.But industry groups and fund managers criticized the proposal in public comments, describing them as misguided and harmful.”The SEC’s liquidity, swing pricing, and hard close proposal would seriously harm the more than 100 million Americans who use mutual funds to invest for their financial future,” said Eric Pan, chief executive officer of the Investment Company Institute, an industry group.The proposal also does not accurately reflect key characteristics of fixed income investments, many of which rarely trade, said Emmanuel Roman, CEO of PIMCO, which had around $1.74 trillion in assets under management at the end of last year.The plan to require swing pricing presents “overwhelming” operational challenges, said Rick Wurster, president of Charles Schwab (NYSE:SCHW) Corp, and could decrease transparency for investors, who would not know whether it was being applied until after their transaction request.The hard close creates several problems, including for shareholders who own funds through defined contribution plans, which are not able to send in orders by 4 p.m. and may be stuck with the next day’s price for their orders, independent trustees of Fidelity’s equity and high income and fixed income allocation funds said in a letter.The rules could push such plans to move assets to less restrictive financial products, such as collective investment trusts that do not have the same oversight as mutual funds, they said.”This risks reducing protections for investors in general, increasing costs to fund shareholders that remain in registered open-end funds, adversely affecting investor choices and investment outcomes, and generally harming the best interests of tens of millions of fund investors,” they said. More

Painful memories of hyperinflation in the 1990s mean steep price rises are set to endure for longer than many expect in central and eastern Europe, the chief economist of the European Bank for Reconstruction and Development has warned.The lender said in its latest economic forecasts, published on Thursday, that the economies of central Europe and the Baltic states would grow by an average of just 0.6 per cent this year. Growth would also remain weak in eastern Europe, at just 1.6 per cent, and in south east European EU members, at 1.5 per cent.Countries in the region have been among the worst affected by the economic impact of Russia’s invasion of Ukraine, with price rises way above the EU average. High inflation, and central banks’ attempts to combat it with big interest rate increases, have weighed on growth. However, many economists expect inflation to fall sharply this year on the back of the recent slump in global energy costs. While the EBRD does not publish its own inflation estimates, its chief economist Beata Javorcik said many of those forecasts were “optimistic”. The IMF said in October that it expected inflation in all regions covered by the EBRD to decline to 7 per cent by the end of 2023 and by an average of 10 per cent throughout this year. “If you look at previous episodes of [high] inflation, they have taken longer [to dissipate] than what the IMF is expecting,” Javorcik said. She added that the scars left by the economic upheaval of the early 1990s in her native Poland and other former communist countries of the region created the risk of a “self-fulfilling prophecy”. In such a scenario homeowners and farmers would continue to be influenced by fears of lingering inflation, demanding high wage increases and continuing to raise prices. “If you experience hyperinflation in your lifetime, the memory remains with you forever,” she said. Javorcik also questioned the communication skills of the region’s central bankers, which could undermine public trust in officials’ capacity to bring inflation under control. “Interest rates are the main tool in fighting inflation, but the second [most important] tool is communication with the public and influencing expectations.” Since Russia’s attack on Ukraine triggered a surge in energy and food prices a year ago, central and eastern European countries have struggled with inflation at levels not seen since the 1990s. Polish inflation increased to 17.2 per cent in January, from 16.6 per cent in December, according to data published on Wednesday, though the figure was below expectations of a sharper rise. “The odds of inflation falling to single-digit levels by the end of the year have increased substantially,” said Adam Antoniak, economist at ING Bank. However, Antoniak added that in both Hungary and the Czech Republic inflation had recently “surprised to the upside”. Javorcik also said it was unclear how long governments in central and eastern Europe could continue to protect ailing companies. Businesses continue to rely on measures that were introduced to offset the impact of Covid and have since kept the bankruptcy rate in the region significantly below that in western Europe. Should this support be withdrawn, she forecast the disappearance of “firms that were surviving thanks to these emergency measures”. The EBRD’s report covers 36 economies from central and eastern Europe to north Africa to central Asia, which the bank expects to grow on average 2.1 per cent this year, down from its 3 per cent forecast in September and from 2.4 per cent last year. The EBRD expects Russia’s economy to shrink by 3 per cent this year. More

Latvian roofing companies and South Korean trade specialists. Fuel cell manufacturers from Denmark and timber producers from Austria. Private equity titans from New York and concrete plant operators from Germany. Thousands of businesses around the globe are positioning themselves for a possible multibillion-dollar gold rush: the reconstruction of Ukraine once the war is over.Russia is stepping up its offensive heading into the second year of the war, but already the staggering rebuilding task is evident. Hundreds of thousands of homes, schools, hospitals and factories have been obliterated along with critical energy facilities and miles of roads, rail tracks and seaports.The profound human tragedy is unavoidably also a huge economic opportunity that Ukraine’s president, Volodymyr Zelensky, has likened to the Marshall Plan, the U.S. program that provided aid to Western Europe after World War II. Early cost estimates of rebuilding the physical infrastructure range from $138 billion to $750 billion.The prospect of that trove is inspiring altruistic impulses and entrepreneurial vision, savvy business strategizing and rank opportunism for what the Ukrainian chamber of commerce is trumpeting as “the world’s largest construction site!”Mr. Zelensky and his allies want to use the rebuilding to stitch Ukraine’s infrastructure seamlessly into the rest of Europe.Yet whether all the gold in the much-anticipated gold rush will materialize is far from certain. Ukraine, whose economy shrank 30 percent last year, desperately needs funds just to keep going and to make emergency repairs. Long-term reconstruction aid will depend not only on the outcome of the war, but on how much money the European Union, the United States and other allies put up.And though private investors are being courted, few are willing to risk committing money now, as the conflict is entrenched.Ukraine and several European nations are pushing hard to confiscate frozen Russian assets held abroad, but several skeptics, including officials in the Biden administration, have questioned the legality of such a move.Ukraine desperately needs funds just to keep going and to make emergency repairs.Maciek Nabrdalik for The New York TimesThe war, a profound human tragedy, is unavoidably also a big economic opportunity that Ukraine’s president, Volodymyr Zelensky, has likened to the Marshall Plan.Maciek Nabrdalik for The New York TimesNonetheless, “a lot of companies are starting to position themselves to be ready and have some track record for this time when the reconstruction funding will be coming in,” said Tymofiy Mylovanov, a former economy minister who is president of the Kyiv School of Economics. “There will be a lot of funding from all over the world,” he said, and business are saying that “we want to be a part of it.”The State of the WarVuhledar: A disastrous Russian assault on the Ukrainian city, viewed as an opening move in an expected spring offensive, has renewed doubts about Moscow’s ability to sustain a large-scale ground assault.Bakhmut: With Russian forces closing in, Ukraine is barring aid workers and civilians from entering the besieged city, in what could be a prelude to a Ukrainian withdrawal.Arms Supply: Ukraine and its Western allies are trying to solve a fundamental weakness in its war effort: Kyiv’s forces are firing artillery shells much faster than they are being produced.Prisoners of War: Poorly trained Russian soldiers captured by Ukraine describe being used as cannon fodder by commanders throwing waves of bodies into an assault.More than 300 companies from 22 countries signed up for a Rebuild Ukraine trade exhibition and conference this week in Warsaw. The gathering is just the latest in a dizzying series of in-person and virtual meetings. Last month, at the World Economic Forum in Davos, Switzerland, a standing-room-only crowd packed Ukraine House to discuss investment opportunities.More than 700 French companies swarmed to a conference organized in December by President Emmanuel Macron. And on Wednesday, the Finnish Confederation of Industries sponsored an all-day webinar with Ukrainian officials so companies could show off their wastewater treatment plants, transformers, threshers and prefabricated housing.“There’s so many initiatives, it’s hard to know who’s doing what,” said Sergiy Tsivkach, the executive director of UkraineInvest, the government office dedicated to attracting foreign investment.Mr. Tsivkach sipped a beer a couple of blocks from Lviv’s central square. He is glad for the interest but emphasized a crucial point.“They all say, ‘We want to help in rebuilding Ukraine,’” he said. “But do you want to invest your own money, or do you want to sell services or goods? These are two different things.”Most are interested in selling something, he said.Long-term reconstruction aid will depend on how much money the European Union, the United States and other allies put up.Maciek Nabrdalik for The New York Times“There’s so many initiatives, it’s hard to know who’s doing what,” said Sergiy Tsivkach, the executive director of UkraineInvest, the government office dedicated to attracting foreign investment. Maciek Nabrdalik for The New York TimesFor businesses, a crucial issue is who will control the money. This is a question that Europe, the United States and global institutions like the World Bank — the biggest donors and lenders — are vigorously debating.“Who will pay for what?” Domenico Campogrande, director general of the European Construction Industry Federation, said while moderating a panel at the Warsaw conference.Representatives from both Ukrainian and foreign companies were more pointed: Who will decide on the contracts, and how do they apply?“Hundreds of companies have been asking me this,” said Tomas Kopecny, the Czech government’s envoy for Ukraine.Ukraine has made clear there will be rewards for early investors when it comes to postwar reconstruction. But that opportunity carries risk.Danfoss, a Danish industrial company that sells heat-efficiency devices and hydraulic power units for apartment and other buildings, has been doing business in Ukraine since 1997. When the war started last February, Russian shelling destroyed its Kyiv warehouse.Danfoss has since focused on helping with immediate needs in war-torn regions and in western Ukraine, where millions of people displaced from their homes have been forced to settle in temporary shelters.“For now, all efforts are going toward maintaining a survival mode,” said Andriy Berestyan, the company’s managing director in Ukraine. “Right now, nobody is really looking for major reconstruction.”Things had been going better for the company since last summer as Ukraine pushed back Russian advances. By October, new orders for Danfoss’s products were rolling in, and Mr. Berestyan restored Danfoss’s distribution center in Kyiv. Then Russia started dropping bombs en masse. Power and water were widely cut off, forcing Ukraine — and businesses — to swing back to dealing with emergencies.Even so, he said, Danfoss is keeping its eye on the long term. “Definitely there will be rebuilding opportunities,” he said, “and we see a huge, huge opportunity for ourselves and for similar companies.”Andriy Berestyan, the managing director of Danfoss in Ukraine. The Danish company sells heat-efficiency devices and hydraulic power units for buildings. Its Kyiv warehouse was destroyed last year.Diego Ibarra Sanchez for The New York TimesThe question of who will control the money invested in Ukraine is one that Europe, the United States and global institutions like the World Bank are debating.Maciek Nabrdalik for The New York TimesThat groundwork is being laid in places like Mykolaiv, one of the hardest-hit regions, where numerous Danish companies have been working. Drones operated by Danish companies have mapped every bombed-out structure, with an eye toward using the data to help decide what reconstruction contracts should be issued.The information would help companies like Danfoss evaluate the potential for business, and eventually bid on contracts.Other governments that are expected to contribute to Ukraine’s reconstruction are also offering financial support for domestic firms.Germany announced the creation of a fund to guarantee investments. The plan will be overseen by the global auditing giant PwC and would compensate investors for potential financial losses if businesses were expropriated or projects were disrupted.France will also offer state guarantees to companies doing future work in Ukraine. Bruno Le Maire, the finance minister, said contracts worth a total of 100 million euros, or $107 million, had been awarded to three French companies for projects in Ukraine: Matière will build 30 floating bridges, and Mas Seeds and Lidea are providing seeds for farmers.Private equity firms, too, have an eye on business opportunities. President Zelensky sealed a deal late last year with Laurence D. Fink, the chief executive of BlackRock, to “coordinate investment efforts to rebuild the war-torn nation.” BlackRock, the world’s largest asset manager, will advise Kyiv on “how to structure the country’s reconstruction funds.” The work will be done on a pro bono basis, but promises to give BlackRock insights into investors’ interests.Mr. Fink was brought into the effort by Andrew Forrest, a gregarious Australian mining magnate who is the chief executive of Fortescue Metals Group. Mr. Forrest announced a $500 million initial investment in November, from his own private equity fund, into a new pot of money created for rebuilding projects in Ukraine. The fund would be run with BlackRock and aims to raise at least $25 billion from sovereign wealth funds controlled by national governments and private investors from around the world for clean energy investments in war-torn areas.Andrew Forrest, the chief executive of Fortescue Metals Group, in 2021. Mr. Forrest announced a $500 million initial investment in a pot of money for rebuilding projects in Ukraine. David Dare Parker for The New York TimesMr. Zelensky and his allies want to use the rebuilding to stitch Ukraine’s infrastructure seamlessly into the rest of Europe.Maciek Nabrdalik for The New York TimesMr. Forrest has courted Mr. Zelensky, wearing a Ukrainian flag pin in his lapel and presenting the Ukraine president with an Australian bullwhip during a visit to Kyiv last year. But in a sign of how cautious investors remain, Mr. Forrest said capital would be made available “the instant that the Russian forces have been removed from the homelands of Ukraine” — but not before.Eshe Nelson More

Investors who for months had been banking on the Federal Reserve cutting interest rates this year have been forced to back off those bets after a raft of strong US economic data that suggests persistent inflation. Futures markets at the start of February signalled that the US central bank would reduce interest rates at least two times by the end of the year. This week they suggested roughly equal chances of one rate cut or none at all at the Fed’s monetary policy meetings in 2023. The move in futures shows investors merging closer to the Fed’s own message that it will not lower rates until at least 2024. “The market is coming in line with the Fed,” said Priya Misra, head of global rates strategy at TD Securities. “The Fed is data-dependent, and we have seen better than expected data.”The US on Tuesday reported that consumer prices in January had cooled by less than expected, with housing costs in particular bolstering inflation. On Wednesday came statistics that US retail sales, which include items such as food and petrol, rose 3 per cent last month, well above forecasts of a 1.8 per cent increase. “The data this week has brought a dose of reality to markets,” said Kristina Hooper, chief global market strategist at Invesco US. The data followed a US employment report for January which showed the labour market running hot, adding nearly three times the number of jobs forecast. The strong economic indicators come as the Fed has slowed its pace of monetary tightening, lifting its main policy rate by 0.25 percentage points in February after rises of 0.75 and 0.5 percentage points for most of 2022. Prior to the release of the January jobs report, futures markets pointed to the Fed’s benchmark interest rate peaking at 4.9 per cent in the second quarter before dropping to about 4.4 per cent by the end of the year, implying two interest rate cuts of 0.25 percentage points apiece. On Wednesday, pricing showed that investors expect rate rises in March and May, with a peak in rates at 5.25 per cent, but then a less than 0.25 percentage point cut by the end of 2023, equivalent to a virtual coin flip between one cut or zero. Bets on where rates will stand by the end of 2024 have changed even more significantly, rising from expectations at the start of February of about 2.9 per cent to 3.7 per cent this week. Changes in rate expectations have been accompanied with changing wagers on inflation. The so-called one-year break-even inflation rate, showing where investors believe inflation will be in a year’s time, has risen from 2.1 per cent at the start of February to 2.9 per cent. That all puts the market more in line with the Fed’s own forecasts from December. Surveyed officials saw interest rates ending this year at about 5.1 per cent, and 2024 at about 4.1 per cent. They envisaged inflation at 3.5 per cent by the end of 2023, and 2.5 per cent by the end of 2024, as measured by the personal consumption expenditures price index.“The tone is being set by the payrolls numbers and it has been augmented by the inflation data, which suggests a scenario in which inflation is much stickier,” said Alan Ruskin, chief international strategist at Deutsche Bank. More

In a huge hangar in Quonset Point, Rhode Island, welders are aiming blazing torches at sheets of aluminium. The hulls of three new ships, each about 27-metres long, are taking shape. The first will hit the water sometime in the spring, ferrying workers to service wind turbines off the New England coast. The US barely has an offshore wind sector for these vessels to service. But as the Biden administration accelerates a plan to decarbonise its power generation sector, turbines will sprout along its coastline, creating demand for services in shipyards and manufacturing hubs from Brownsville, Texas, to Albany, New York.Senesco Marine, the shipbuilder in Rhode Island, has almost doubled its workforce in recent months as new orders for hybrid ferries and larger crew transfer vessels have come in. “Everybody tells me recession in America is inevitable,” says Ted Williams, a former US Navy officer who is now the company’s chief executive. “But it’s not happening in shipbuilding.” Nor is it happening in any clean energy sector in America. Across the country, a new revolution is under way in sectors from solar to nuclear, carbon capture to green hydrogen — and its goals are profound: to rejuvenate the country’s rustbelt, decarbonise the world’s biggest economy, and wrest control of the 21st-century’s energy supply chains from China, the world’s cleantech superpower. The world is only just beginning to contend with what it means. Less than three years ago, the US had ditched the Paris agreement on climate change and then president Donald Trump was touting an era of American energy dominance based on the country’s fossil fuel abundance. Europeans chided the US for its foot-dragging over climate. Since then, President Joe Biden has passed sweeping legislation to reverse course. Last year’s colossal Inflation Reduction Act and its hundreds of billions of dollars in cleantech subsidies are designed to spur private-sector investment and accelerate the country’s decarbonisation effort. “It is truly massive,” says Melissa Lott, director of research at Columbia University’s Center on Global Energy Policy. “It’s industrial policy. It’s the kitchen sink. It’s a strong, direct and clear signal about what the US is prioritising.”

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The tax incentives have made the US irresistible to investors, say cleantech developers, and are sucking money away from other countries. Since the passage of the IRA last year, $90bn of capital has already been committed to new projects, according to Climate Power, an advocacy group. “The US is now the most opportunity rich, most aggressive growth, most prolific market for renewables investment in the world today,” says David Scaysbrook, managing partner of Quinbrook Infrastructure Partners, a global cleantech private equity group. “And will be for quite some time.” And yet it is a gamble for the US too. The ring of protectionism, and the sheer scale of the state intervention, has alarmed allies — even those who once implored the US to rejoin the global climate fight. France’s president Emmanuel Macron says the IRA could “fragment the west”. Ursula von der Leyen, the European Commission’s president, has complained it would bring “unfair competition” and “close markets”. And the underlying effort to break the dependence on cheap Asian components that have sped the advance of renewables in recent years leaves many analysts sceptical. At a time when the White House is also contending with high inflation and Russian aggression, can the US reset the global energy order, create high-paying cleantech jobs at home and cut emissions — all at the same time? “There is simply no reason why the blades for wind turbines cannot be made in Pittsburgh rather than Beijing,” Biden said in a speech last April. “Global arms race for clean energy? Certainly,” says Daniel Liu, an analyst at Wood Mackenzie. “But there has to be some level of collaboration because no country can do it alone.”Powering growthIn a warehouse in Turtle Creek, just east of Pittsburgh, Pennsylvania, a line of workers are assembling batteries, each about the size of a suitcase, based on zinc — an alternative to lithium-ion that its proponents say will offer competitively priced, non-flammable, dispatchable energy for hospitals, schools and other stationary users. It’s a young cohort of workers, many people of colour and military veterans. “We’re hiring right out of high school,” says Joe Mastrangelo, the Edison, New Jersey-based head of Eos Energy Enterprises, the company making the batteries.

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His goal for the factory in western Pennsylvania is to double its total capacity to 3 gigawatt-hours in 2024, producing a battery every 90 seconds once the plant is fully automated. The workforce will also double, to 500.“We’re doing this in a location that was historically an old energy economy, creating not jobs but career paths for people to get to middle class,” Mastrangelo says. Climate is central to the IRA. But it is industrial policy on a grand scale too, aiming to revamp the US’s decrepit infrastructure and create advanced manufacturing jobs in rustbelt regions like western Pennsylvania, once the heart of the country’s steelmaking industry. From Ohio to Georgia, investment is also pouring into lithium-ion energy storage, the technology that will underpin the electrification of the US auto fleet. All told, the IRA offers $369bn of tax credits, grants, loans and subsidies, many of them guaranteed past 2030. The credits can be sold, too, allowing deep-pocketed investors with enough tax liability to buy the credit — a way to get more capital to developers, quickly. Credit Suisse thinks the public spending enabled by the IRA could eventually reach $800bn, and $1.7tn once the private spending generated by the loans and grants is included.The tax breaks have made marginal projects suddenly economical, say developers. A battery plant can generate tax credits of up to 50 per cent of headline costs, if it meets several criteria including prevailing wage requirements, domestic sourcing of materials and location in a fossil fuel community. This can translate into an effective reduction of 60 to 65 per cent of a project’s fair market value, according to law firm Vinson & Elkins. “It enables us to grow and also enables a further incentive for people that want to invest,” says Mastrangelo. Wood Mackenzie estimates investment in energy storage will more than triple by the end of the decade, reaching $15.8bn. Energy storage capacity additions will grow from 5GW to 25GW per year by 2030, enough to power almost 20mn homes.While juicy subsidies are also available for wind and solar, the IRA’s biggest impact may be on technologies that have yet to achieve scale, including carbon capture and bioenergy. For green hydrogen, a potential clean alternative to natural gas in industries such as steelmaking, the subsidies wipe out about half the project cost, vaulting the US from its position as a global also-ran in the eyes of developers to the most attractive destination for future investment.

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For Europe, which hopes scaling up domestic supplies of green hydrogen can speed decarbonisation and help replace the loss of Russian natural gas, the US now poses a threat. The EU is scrambling to respond, but the US incentives are so comprehensive — tax breaks for every section of the green hydrogen supply chain — that it will be hard to compete, say analysts. “If you look at the price at which a well located green hydrogen project, let’s say in Texas, exporting through the port of Corpus Christi, could generate green hydrogen if they can access low cost renewable power — it’s pretty untouchable,” says Scaysbrook. “It’s a pretty potent trade advantage.” The geopolitics of the IRAGaining a similar advantage over China, however, will be far harder. About two-thirds of the world’s batteries for electric cars and nearly three-quarters of all solar modules are currently produced in China, according to the International Energy Agency. BloombergNEF estimates China invested $546bn in its energy transition in 2022.Meanwhile, the domestic supply of raw materials, parts and processing capacity is lacking too. The lithium refineries, and nickel and cobalt for batteries; the rare earth materials for solar modules; the nacelles and monopoles for offshore wind — almost everything can be sourced more cheaply from abroad.Together, China and Europe produce more than 80 per cent of the world’s cobalt, while North America makes up less than 5 per cent of production, according to the IEA. China also accounts for 60 per cent of the world’s lithium refining. “The Germans make a lot of this stuff. The Chinese make a lot of this stuff. So we are still facing the irony that for the IRA to succeed in the short term, it still relies a lot on China,” says Scaysbrook.Some early progress is being made. Last month, GM announced $650mn to develop the Thacker Pass mine in Nevada, the US’s largest known source of lithium. Honda, Hyundai, BMW and Ford have all announced multibillion-dollar plans to build batteries in the US following the IRA’s passage.

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But it’s a drop in the ocean compared with the scale of Chinese domination. Wood Mackenzie estimates the US will make up 13 per cent of lithium battery manufacturing by the end of the decade, only a 3 per cent upward revision compared with forecasts before the IRA. Asia-Pacific will still account for two-thirds. “There are so many components when you think about building solar and wind. It’s not going to be realistic that the US is going to become totally self-sufficient in that way,” says Marlene Motyka, US renewable energy leader at Deloitte. ‘You have to be able to build the thing’To claim the mantle of cleantech superpower from China will take an extraordinary expansion of infrastructure — but not everyone in the US welcomes it.This month, authorities in Scranton, Pennsylvania — the city Biden regularly invokes to remind Americans of his blue-collar heritage — held a 90-minute zoning board hearing about a proposed solar array on West Mountain, north-west of the city’s centre.The array, said its developers, would have created dozens of jobs and been sited on a former coal mine — exactly the kind of project that the federal government wants to coax along.But residents were less impressed. One of them, Brian Gallagher, said he would be able to see the facility from his porch. “We’re not an asset, we’re a neighbourhood. We don’t want to wake up and look at this,” he said. The board voted 4:1 against the project.The US may have the west’s most generous subsidy regime and its federal government may be committed to reshoring supply chains, but permits to build stuff are another matter. Congressional efforts to loosen the rules have made little progress, leaving states and local authorities with significant power to block projects. Some climate campaigners and conservationists fear a laxer permitting regime would encourage more fossil fuel projects, like the pipelines sought by the oil industry. A woman works at the Eos battery making facility in Turtle Creek, Pennsylvania, which plans to double its capacity to 3 gigawatt-hours in 2024, producing a battery every 90 seconds © John HalpernBut building transmission infrastructure across state lines — crucial if windy, sparsely populated regions such as Oklahoma are to be connected with big consumer centres on the coasts — is especially difficult. Paul Bledsoe, a former Clinton White House adviser who now works for Washington’s Progressive Policy Institute, says the “chronic sclerosis” of current permitting rules means that by the time projects have met all the conditions demanded of them, about 95 per cent have been delayed by five years or more. This could limit the green potential of the legislation. While credible models suggest the law’s provisions could allow the US to cut 45 per cent of emissions compared with 2005 by 2030, putting it within spitting distance of the Biden administration’s target of 50 to 52 per cent, slower permitting could reduce this to 35 per cent, says Lott, at the CGEP.“Until we resolve those things, it doesn’t matter how many production tax credits or incentives you put out there, you have to actually be able to build the thing to take advantage of those tax credits,” she adds. Given the tight timeline to get the projects up and running — both to capitalise on the 10-year tax credits and to meet the Biden administration’s decarbonisation targets — worker shortages are another pressing problem.“We have another generation of mega projects in front of us and the labour market is already strained to the limit,” says Anirban Basu, chief economist at the Associated Builders and Contractors. The ABC estimates the US will need to add half a million more construction workers in 2023 on top of the normal hiring pace to meet demand: a sign that clean energy is creating the jobs, but an alarming prospect for the developers. Yet some of the IRA tax credits also depend on paying prevailing wages and including apprenticeships in the workforce — measures designed explicitly to address the longstanding complaints of American workers who have watched jobs “shipped overseas” over decades of globalisation, but which are also increasing costs. Fields full of mirrors shine sunlight at a solar power boiler used to drive steam turbines in the Mojave Desert. Nearly three-quarters of all solar modules are currently produced in China © Bing Guan/Bloomberg“These standards are actually going to undermine the Biden administration’s clean energy agenda as a whole,” says Ben Brubeck at the ABC. It leaves the pace of the energy transition in the US depending on how, or whether, the Biden administration will be willing to compromise on any of the goals in its sweeping clean energy legislation. Even many supporters wonder how an industrial policy to rejuvenate America’s manufacturing heartlands can happen alongside an effort to decarbonise the economy in less than a decade — all while the US adopts a geopolitical strategy to compete with China in a new clean energy race.Others say one cannot happen without the others. Either Biden ensured the fight for the climate would bring jobs for Americans, or Americans would forget about climate. Either the reliance on foreign supply chains would be broken, or America would be relegated in the new global energy order.“This is the future of ambitious climate legislation that can actually pass,” says Sonia Aggarwal, a former Biden climate adviser who now runs the Energy Innovation think-tank. “We have to actually be more holistic. Without including worker policies, and including this broader global perspective of where we are going, we wouldn’t have the climate policy at all.” More