Economy

The US will allow the UK to keep its exemption from foreign investment screenings for certain real estate and non-controlling deals, after concluding that Britain had set up a strong enough regime of its own.The decision on Friday represents a vote of confidence from Washington in Britain’s new and tougher law on foreign investment, which was implemented last year and has already resulted in the blocking of several high-profile planned Chinese investments.The move to clear the UK was made by the Committee on Foreign Investment in the US (Cfius), an inter-agency body chaired by Treasury secretary Janet Yellen.The US tightened its own foreign investment screening regime through a 2018 law enacted by former president Donald Trump amid growing concern in Washington that some Chinese investments posed a threat to national security. The US rules expanded Cfius reviews to include certain non-controlling and real estate transactions, as well as mandatory, rather than voluntary, filing requirements for ordinary takeovers where there is a change of control.At the time, the Treasury decided to carve out an exemption from those tougher measures for some countries in the Five Eyes intelligence alliance, as long as they could prove that their domestic regimes were tough enough to prevent them serving as backdoor routes to the US for risky foreign investments.Last year the US said Canada and Australia would continue to qualify as “excepted foreign states” under the new rules. But it had to make a decision on the fate of the UK and New Zealand by February 13. New Zealand was also cleared on Friday, meaning all of America’s Five Eyes allies will remain on the US’s foreign investment whitelist.“The United States thoroughly reviews foreign investment for national security risks, and it is critical that our allies also identify and address risks from malign foreign investment,” said Paul Rosen, the US Treasury’s assistant secretary for investment security.“Today’s actions reflect that our Five Eye allies have all stood up and implemented their own robust foreign investment screening programmes. We look forward to continuing to co-ordinate with all of them on matters relating to investment security,” he added.Britain’s National Security and Investment Act, which came into effect in January 2022, gives the UK government much greater powers to block overseas takeovers that raise potential security concerns.The NSIA is among the most far-reaching takeover regimes in the world, covering 17 sensitive sectors, and it can be applied retrospectively to deals going back as far as November 2020.Its introduction came against the backdrop of cooling Beijing-London relations and growing British caution about Chinese investment in UK industry. In 2020, the UK government banned the use of Chinese company Huawei’s equipment in its new 5G telecoms network.The NSIA regime was used to block the sale of Newport Wafer Fab, a Welsh company, to Chinese-owned Nexperia in November.

That intervention came after nine members of the US House of Representatives urged President Joe Biden to reconsider Britain’s status on the white list unless it blocked the deal.In July, the UK government announced a ban on the sale of computer-vision technology from Manchester university to a Chinese semiconductor company. Officials said the rejected buyer, Beijing Infinite Vision Technology, was a Chinese commercial fabless semiconductor group with state links.In December, the government used the NSIA to order LetterOne, an investment company backed by oligarchs, to sell regional broadband provider Upp. More

If nothing else, quantitative easing has constituted a full-employment act for monetary economists. More than a decade on from the birth of the QE era we are still debating what effect it had, if any. A quick search on SSRN yields over 1,000 papers on QE, and over 500 on the National Bureau of Economic Research’s website. Then there are the millions of sellside research reports, think-tank papers, comment pieces and hedge fund letters (and, cough, a few AV posts and comments). Conclusions range from QE being the economic equivalent of crack cocaine that at best only creates “a financial fantasyland” and “underwrites inequality”, to it saving the world from financial cataclysms and even making us bonk more. Strong early contender for paper of the new decade. Easier monetary policy led to more post-crisis babies, Bank of England estimates. https://t.co/AyaLTtMDtJ Your best liquidity and stimulus jokes in the comments please.— Robin Wigglesworth (@RobinWigg) January 2, 2020
The size and perhaps especially the duration of the post-Covid stimulus is particularly controversial, given that stimulus this time actually did seem to lead to faster inflation. (FTAV suspects this is almost all because of fiscal policy and global supply chain issues then compounded by a huge systemic energy shock, but anyways.)A new paper by Andrew Levin, professor of economics at Dartmouth and visiting scholar at the IMF, his undergraduate student Brian Lu and the Bank Policy Institute’s chief economist William Nelson has explored the costs and benefits of this “QE4” programme. They are unimpressed:QE4 was initially aimed at mitigating strains in markets for Treasuries and agency mortgage-backed securities but was subsequently aimed more broadly at supporting market functioning and providing monetary stimulus. Nonetheless, QE4 did not have any notable benefits in reducing term premiums. Moreover, since the securities purchases were financed by expanding the Fed’s short-term liabilities, QE4 amplified the interest rate risk associated with the publicly-held debt of the consolidated federal government. Our simulation analysis indicates that QE4 is likely to reduce the Federal Reserve’s remittances to the U.S. Treasury by about $760 billion over the next ten years.Let’s unpick this a little. That the truly massive dose of stimulus the Fed unleashed when the pandemic stuck — it bought almost $2tn of bonds between March and June 2020 — undoubtedly helped avert what could have been a ruinous financial crisis on top of twin health and economic crises. Levin, Lu and Nelson concede this, and therefore explicitly treat the initial salvo as distinct from later bond purchases that were mostly to balm the economic pain of lockdowns. But they argue that the impact was negligible and the longer-term financial losses that will accrue will hurt taxpayers. Here are their main findings:– Program Design: The evolution of the QE4 program was opaque and inertial. Moreover, the FOMC minutes did not report any substantive discussions of cost-benefit analysis at any stage of the program, as though the costs were minor and the benefits were clear-cut.  — Consequences for Market Functioning: The Federal Reserve’ actions at the onset of the pandemic helped stabilize markets for Treasuries and MBS. Over time, however, QE4 continued to expand the Federal Reserve’s outsized footprint in those markets, which could substantially reduce market liquidity going forward. Indeed, the SOMA now holds nearly 30% of the outstanding stock of Treasury notes and bonds and more than 40% of the total outstanding stock of agency MBS, and its QE4 purchases comprised nearly the entire issuance of agency MBS over the period that the program was being conducted.  — Balance Sheet Normalization. Our baseline projection indicates that the size of the Federal Reserve’s balance sheet will reach a trough in late 2024 and then resume expanding to meet policymakers’ criterion of providing an “ample” supply of reserve balances. However, the composition of the SOMA’s asset holdings will remain far from normal, with a small proportion of Treasury bills and a glacial pace of agency MBS runoff.  — Interest Rate Risk. By purchasing medium- and longer-term Treasuries and financing those purchases by creating short-term interest-bearing liabilities, the FOMC incurred substantial interest rate risk, i.e., risk to the net interest income of its balance sheet. The FOMC’s purchases of agency MBS were associated with even greater risk because mortgage prepayments decline sharply in response to increased mortgage rates. — Implications for Consolidated Federal Debt. The FOMC’s actions substantially reduced the average maturity of the interest-bearing liabilities of the consolidated federal government sector (which includes the Federal Reserve). Thus, while the U.S. Treasury was issuing notes and bonds to “lock in” low interest rates and reduce the expense of financing the federal debt over coming years, QE4 practically canceled out those efforts. — Cost to Taxpayers. Based on the term structure of interest rates at the end of June 2022, our baseline projection indicates that over the next ten years the Federal Reserve’s total net interest income and its corresponding remittances to the U.S. Treasury (and hence the federal government’s total net revenue on a consolidated basis) will be about $760 billion lower than in the counterfactual scenario with no QE4 purchases. Moreover, only a small portion of that cost (about $120 billion) is associated with securities purchases when the Federal Reserve was serving as market-maker of last resort at the onset of the pandemic.  — Assessment of Benefits. The QE4 program did not have any significant effect in reducing term premiums and hence does not appear to have contributed to the very rapid pace of economic recovery in 2020-21. Some of this looks a bit . . . unpersuasive? Here are some initial thoughts on their criticisms. The idea that the Fed should have waited to conduct a detailed and transparent cost-benefit analysis when first rolling out the stimulus in March 2020 seems ludicrous, for example. Speed and scale were of the essence.Just because the FOMC meeting minutes don’t feature detailed subsequent discussion as the stimulus was extended doesn’t mean that it was never discussed by the board or staff either. And this is probably the most discussed and dissected issue of monetary economic of the past decade. What more was there to say? The Fed thinks it works, ergo they did it. The controversial “cost to taxpayers” is also bit of a mirage, as we’ve written before. Firstly, the Fed has already sent Treasury $869bn of profits from earlier QE programmes. You can’t just look at the L part of the P&L. Secondly, who really cares anyway? Normal accounting rules don’t apply to central banks. The Fed can create money and operate with negative equity. It’s not a hedge fund. It sets policy to modulate the economy, not to turn a profit. The idea that the average maturity of the consolidated US public sector debt has been shortened also seems inconsequential. There is no rollover risk! Treasury can always lengthen out maturities further again if it wishes, but doesn’t actually try to time lows in yields and “lock in” low interest rates anyway. Otherwise there would have been helluva lot of expensive 30-year Treasuries issued in 2009, and in 2010, and in 2011, and in 2012 etc etc . . . Lastly, solely looking at term premiums as the only gauge of any economic impact also seems a bit simplistic. One can certainly have an argument about whether the Fed should have curtailed its purchases much sooner, when growth rebounded strongly in 2021, inflation was clearly firming up and becoming problematic. But there are myriad direct and indirect ways that QE4 likely contributed to the vim of the economic recovery.Anyway, take a look at the full paper and let us know your own thoughts. More

LONDON (Reuters) -European stocks fell on Friday as investors fretted about the impact of interest rate hikes on growth, while the yen benefited from reports that academic Kazuo Ueda was set to be appointed Japan’s next central bank governor.The MSCI World Equity Index was down 0.5% on the day at 1258 GMT, on track for its worst week since mid-December.Europe’s STOXX 600 was down 1.5% and on track for a weekly loss, while London’s FTSE 100 was down 0.7%.U.S. stock futures also fell, with Nasdaq e-minis down 1.2% and S&P 500 e-minis down 0.7%.Maximilian Kunkel, chief investment officer for Germany and global family and institutional wealth, said that recent earnings reports, particularly for U.S. technology companies, have hit market sentiment.”The focus is shifting away from the positive impact of disinflation towards concerns around growth.””People (are) realizing that the earning season hasn’t actually been all that great,” he said. “Investors are starting to expect lower profit margins as inflation comes down.”The week was also dominated by hawkish comments from U.S. Federal Reserve officials.Richmond Fed President Thomas Barkin said on Thursday that tight monetary policy is “unequivocally” slowing the U.S. economy, allowing the Federal Reserve to move “more deliberately” with any further interest rate increases.The U.S. dollar index was up around 0.3% at 103.51, while the 10-year U.S. Treasury yield hit a new one-month high of 3.717%.Money markets now expect a peak in the current Fed rate cycle at around 5.15% in July.The yen broadly strengthened after reports that the Japanese government was set to appoint academic Kazuo Ueda as the central bank’s next governor.The dollar was down 0.5% against the yen, with the pair at 130.84.”The news surprised the market as he would bring a bit more of a hawkish tilt to monetary policy than the top contender, Masayoshi Amamiya,” ING said in a note to clients, adding that the market reaction could prove “temporary”.”We don’t think he is expected to immediately change the BoJ’s policy stance,” ING said.In Europe, German government bond yields edged higher, heading towards their most significant weekly rise so far this year as European Central Bank policymakers fought back against market expectations for a quick end to rate hikes.The benchmark 10-year German yield was at 2.347%.Britain’s economy showed zero growth in the final three months of 2022, gross domestic product data showed, narrowly avoiding recession.Meanwhile, oil prices jumped more than 2%, heading for weekly gains, as Russia announced plans to reduce oil production next month.Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures were both up 2.1%.Investor focus will now be on U.S. consumer price data due on Tuesday. More

That was lower than the 4.5% expected by analysts polled by Reuters. In November output topped 7% while in December 2022 it rose 1%.Industrial output for April-December rose 5.4% versus 15.3% in the same period last year when the data reflected a low base effect due to the pandemic.In December, manufacturing rose 2.6% year on year compared with a 0.6% expansion last year.Mining output rose 9.8% versus 2.6% a year earlier.Electricity consumption rose 10.4% against 2.8% last year, the data showed. “The YoY growth in the IIP is likely to improve in the ongoing quarter partly boosted by the typical year-end push in volumes to achieve targets,” said Aditi Nayar, an economist at ICRA.India’s fiscal year starts April 1 and runs through March.Nayar added that a fall in exports due to global weakness will be a key risk to India’s manufacturing sector. More

MOSCOW (Reuters) -Russia’s central bank held its key interest rate at 7.5% on Friday, but suggested that it may have to hike rates this year as a widening budget deficit, labour shortages and a weaker rouble pose inflationary risks.Governor Elvira Nabiullina told a news conference that the pace of price growth in January was probably the highest since last April.”According to our assessment, the balance of risks has shifted more towards pro-inflationary ones,” she said.Last year, the bank gradually reversed an emergency rate hike to 20% made in late February following Russia’s decision to send tens of thousands of troops into Ukraine and the imposition of wide-ranging Western sanctions in response. It has now held rates steady at 7.5% since the last cut in September. It kept its year-end inflation forecast at 5.0-7.0%, retaining hopes that it can return inflation to its 4% target in 2024. Annual inflation was running at 11.8% as of Feb. 6, it said. “If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase at its upcoming meetings,” the bank said in a statement. It said short-term inflation risks had increased again, including the possibility that external restrictions on the Russian economy’s potential prove stronger than previously thought. The bank now sees its key rate in the 7.0%-9.0% range this year, up from 6.5%-8.5% in the previous forecast. After an estimated GDP contraction of 2.5% last year as Western sanctions took their toll, Russia’s economic outlook for 2023 appears brighter, but labour shortages, falling energy revenues and the widening deficit all pose challenges.”In case of a further budget deficit expansion, pro-inflation risks will rise and tighter monetary policy may be required,” the bank said. It adjusted its 2023 GDP forecast to between growth of 1.0% and a contraction of 1.0%, from a 1.0%-4.0% decline previously. The International Monetary Fund expects the Russian economy to grow 0.3% this year.”As for GDP dynamics, quarterly dynamics are already positive in the third and fourth quarters. If we talk about annual indicators, in our opinion, GDP will move into positive territory in the middle of the year,” Nabiullina said.EYES ON OIL PRICEThe decision came in line with a Reuters poll of analysts, who expected both the more hawkish signal and the hold.The central bank also lowered its assessment of the average Urals oil price for 2023 in light of embargoes on Russian crude and oil products, imposed by Western countries over Russia’s actions in Ukraine, to $55 per barrel from $70.10. That has implications for Russia’s 2023 budget, which is currently based on the $70.10 price. In January, Russia recorded a budget deficit of almost $25 billion, as expenditures soared and revenues slumped. Nabiullina said the bank would monitor the impact on oil prices of Russia’s decision on Friday to cut crude oil production by 500,000 barrels per day from March.The next rate-setting meeting is scheduled for March 17. More

TOKYO (Reuters) – Haruhiko Kuroda leaves a mixed legacy after 10 years running the Bank of Japan (BOJ), achieving prices rises after decades of deflation and anaemic growth but without engineering durable expansion fuelled by domestic demand.Kuroda jolted the conservative BOJ and global markets on taking office in March 2013 by announcing unprecedented purchases of bonds and other assets to stoke 2% inflation in two years.He missed that goal by nearly a decade but immediately reversed a crippling rise in the yen and sent stocks and corporate profits soaring in Japan’s export-reliant economy, arguably the biggest achievement of then-Prime Minister Shinzo Abe’s signature “Abenomics” stimulus.Inflation in the world’s third-biggest economy is now double the BOJ target, but it is driven by rising raw-materials prices and the weaker yen. The task of generating self-sustaining growth with robust wage rises will fall to Kuroda’s successor, academic Kazuo Ueda.Ueda, on the BOJ policy board from 1998 to 2005, played a key role battling Japan’s deflation during the an earlier spell of quantitative easing.Kuroda, a pragmatic career bureaucrat who spent years tussling with the markets over a strong yen as he rose to become Japan’s top financial diplomat, believes effective communication with the public as well as investors can enhance the effect of monetary policy, say people who worked under him or know him well.His idea, they say, with setting the two-year deadline for 2% inflation was that the BOJ could enhance the psychological impact of its stimulus policy by showing its determination to meet the target.Kuroda’s approach was in stark contrast to that of his predecessor, Masaaki Shirakawa, who sealed the 2% target with the government and took then-radical stimulus measures – but undercut them with a message that smacked of bureaucratic caution.’CRITICAL STAGE'”When Kuroda became governor in 2013, I had doubts on whether the BOJ could change policy so radically. But it did by pledging by achieve 2% inflation in two years,” former BOJ board member Goushi Kataoka told Reuters.”The move underscored the BOJ’s determination to end deflation. In this sense, the policy was highly effective,” said Kataoka, who retired in July.But the Kuroda shock began to fade as soon as 2014, when plunging oil prices and a sales tax hike derailed Japan’s turn toward growth and inflation.As its huge bond buying faced limits, the BOJ began its shift in 2016, switching to a policy of trying to control interest rates along the yield curve, the start of a gradual dismantling of Kuroda’s radical experiment.”Until 2014, the BOJ’s policies were successful. At the very least, they ended deflation,” said Columbia University professor Takatoshi Ito, a close associate of Kuroda. “But inflation expectations, or people’s perception on future inflation, didn’t change. The BOJ couldn’t make full use of the benefits of an inflation targeting policy.”In his second five-year term, Kuroda shifted focus toward extending the lifespan of yield curve control (YCC), letting longer-term yields move more freely and compensating banks for the pain from ultra-low rates, including some below zero”When Kuroda’s reflationist narrative didn’t work, the BOJ had little choice but to keep doing YCC,” said former BOJ executive Kazuo Momma. “Abandoning YCC would mean the BOJ was retreating from ultra-loose policy, something unacceptable for Kuroda.”Kuroda now blames Japan’s stubbornly deflationary mindset for delaying the achievement of his inflation target, a logic resembling that of the predecessor he denounced when he took office.What the BOJ’s decade-long effort showed was the challenge of breaking Japan’s “adaptive” inflation expectations, which are strongly affected by underlying price moves and external shocks, BOJ Deputy Governor Masazumi Wakatabe said last week.”We need to create a cycle in which wages and price hikes continue stably and sustainably,” said Wakatabe, a vocal advocate of aggressive monetary easing who retires in March. “In this sense, we’re at a critical stage.” More

Refinitiv Lipper data showed investors exited a net $474 million worth of U.S. equity funds after disposing of $473 million worth of funds in the previous week. GRAPHIC: Fund flows: US equities, bonds and money market funds (https://fingfx.thomsonreuters.com/gfx/mkt/egpbyaeeqvq/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg) U.S. large- and mid-cap equity funds saw outflows of $3.82 billion and $675 million, respectively, but investors purchased $2.16 billion worth of small-cap funds.However, investors accumulated some sector-specific funds, with financials and tech witnessing inflows of $1.22 billion and $430 million, respectively. GRAPHIC: Fund flows: US equity sector funds (https://fingfx.thomsonreuters.com/gfx/mkt/gkplwdkkovb/Fund%20flows%20US%20equity%20sector%20funds.jpg) Meanwhile, U.S. bond funds continued to obtain inflows for the fifth week, amounting to a net $2.39 billion.U.S. general domestic taxable fixed income funds obtained $678 million, while short/intermediate investment-grade funds received $1.98 billion, marking a fifth weekly inflow. But investors drew $2.26 billion out of government bond funds. GRAPHIC: Fund flows: US bond funds (https://fingfx.thomsonreuters.com/gfx/mkt/znvnbkmodvl/Fund%20flows%20US%20bond%20funds.jpg) Meanwhile, investors exited $19.78 billion worth of money market funds, their biggest weekly net selling in seven weeks. More

LONDON (Reuters) – The yen strengthened on Friday with Kazuo Ueda reportedly set to become the next Bank of Japan (BOJ) governor but pared gains after he said the central bank’s monetary policy was appropriate.The Nikkei had earlier reported the government would nominate academic Ueda to the BOJ’s top job, sending the yen surging across the board as markets anticipated a possible earlier end to ultra-loose monetary policy. But in comments streamed online by Nippon TV, Ueda said the central bank’s current easy monetary policy was appropriate and that it should continue, prompting some of the earlier yen strength to be reversed.The dollar sank as much as 1.2% to 129.8 yen and was last down 0.5% at 130.93 yen.The euro and sterling both fell more than 1% against the Japanese currency but were last down around 0.9% and 0.6%, respectively. The Australian dollar slipped 0.7%. The BOJ shocked markets in December when it raised the cap on 10-year government bond yields to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero. Since then, speculation has gathered pace the BOJ could adjust or scrap its yield curve control policy, even though it refrained from any changes at its last meeting.BOJ deputy governor Masayoshi Amamiya had been the front-runner to replace incumbent governor Haruhiko Kuroda, but the Nikkei reported that he had declined the job.”Markets had been expecting Amamiya to come in and pick-up where Kuroda left off,” said Simon Harvey, head of FX analysis at Monex Europe.”The BOJ’s exit from ultra-easy monetary policy is still highly dependent on what happens during the spring wage negotiations, but a new regime could mean there’s no love lost on the ultra-loose policy side,” he added.Japanese Prime Minister Fumio Kishida said they’re planning to present the BOJ governor nominee to parliament on Feb. 14, but did not answer a question on whether Ueda would be put forward.James Malcolm, head of FX strategy at UBS, said Ueda’s prospective nomination should be perceived as a “hawkish” outcome, given Ueda’s previous criticism of the BOJ’s monetary policy as far back as 2016. “I’m surprised that dollar-yen is not at 129 already,” Malcolm said. “Maybe that’s just a result of people not knowing who these characters are. To me, this is as hawkish an outcome as having Mr Yamaguchi in the governor role.” Hirohide Yamaguchi, a former BOJ deputy governor, was also in the running for the top job and has previously been a vocal critic of the BOJ’s stimulus programme. The dollar index, which measures the greenback against six currencies including the yen, was up 0.2% at 103.41. For the week, the index is on track for a 0.4% gain, which would be its second straight positive week and a run it has not had since October.The pound was down 0.1% at $1.2106 after Britain managed to avoid a technical recession, with the economy showing zero growth in the final three months of 2022. The euro fell 0.4% to $1.0697 and was set for a second straight week of losses.Meanwhile, the Norwegian crown strengthened against the euro to 10.893 after Norway’s core inflation rate jumped in January to its highest level on record.”Both Norway and Sweden are in a pretty similar boat, struggling to get domestic inflation pressures under wraps,” Monex Europe’s Harvey said. “That’s going to force them to hike rates, most likely more than they’re comfortable with, and that’s now playing out in the currency markets.” On Thursday, Sweden’s central bank raised its key interest rate by half a percentage point to 3% and forecast further tightening in the coming months to combat inflation and headwinds from a weak currency. More