Economy

FRANKFURT (Reuters) -The European Central Bank’s tough talk on Thursday may not have convinced investors hoping for an early end to rate hikes, but ECB policymakers largely agree on how much more is needed to tame inflation, six of them said. The central bank for the 20 countries that share the euro has raised interest rates by a combined 3 percentage points since July, the most in its history, and on Thursday promised another big move in March. Yet markets still pared bets on further rate hikes overnight, interpreting the bank’s lack of guidance on subsequent moves as evidence its commitment to fighting inflation is waning. A similar disconnect can be seen in the United States, where markets are pricing in rate cuts this year despite Federal Reserve chair Jerome Powell saying he does not see this happening.But on- and off-record conversations with half a dozen policymakers suggest the ECB’s 26-member Governing Council is more united on the need for further rate increases than markets perceive, and differences on the final destination mostly small.There appears to be little or no disagreement that rates will rise again in May after hitting 3% in March, taking the deposit rate to at least 3.25% but possibly 3.5%. The central bank governors of Belgium, Slovakia and Lithuania publicly backed such a step, while others advocated it privately.”The March rate hike is not the last one,” Lithuania’s Gediminas Šimkus said. “It could be 50 basis points in (May) or 25, but hardly 75.”For now, there appears to be little appetite to go much further beyond that. Several hawkish policymakers who spoke on condition of anonymity said they were comfortable with the 3.5% peak rate financial markets had priced in before Thursday’s meeting. That would put the gap between policy hawks and doves at just 25 basis points – a small margin considering the deposit rate was minus 0.5% when the ECB started hiking, so that a move to 3.5% would represent a rapid shift of 400 basis points. PEAK IN SIGHTThe caveat is that sticky underlying inflation, which excludes volatile food and energy prices, could alter views and push rate hike expectations higher.”If core remains persistent, if we keep seeing core momentum being close to 5%, for me a terminal rate of 3.5% would be a minimum,” Belgian central bank chief Pierre Wunsch told Reuters, arguing that rate moves to 4% or above in the United States and Britain could be seen as reference points for the ECB. On Thursday, ECB President Christine Lagarde cited high core inflation to explain why “we have more ground to cover and we are not done”. Underlying inflation has been hovering above 5% in recent months, even as overall inflation is declining fast because of falling energy prices and base effects. If push comes to shove, conservative policymakers seem to have a clear numerical advantage. Most swing voters now see a greater risk in doing too little than doing too much, the sources said, and have sided with the hawkish camp, as evidenced by the clear majority for Thursday’s moves and the relative ease with which they were agreed. Investors and economists have also focused on a peak in the deposit rate of between 3.25% and 3.5%, which suggests just one or two moves after the March hike and an end by mid-year. “In the grand scheme of things, we can be relatively confident about a terminal rate of 3.25%-3.50%,” UBS economist Reinhard Cluse said. He said the Bank of England is likely to have stopped raising rates by June, while the Federal Reserve may be getting there, with the U.S. economy shrinking.”We’ll have external weakness creeping into the European economy so we’ll be at a point where the ECB can say ‘we have done enough’,” Cluse added.Economists at Deutsche Bank (ETR:DBKGn), BNP Paribas (OTC:BNPQY), Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM) all see the terminal rate at 3.25% while Goldman Sachs (NYSE:GS) Asset Management sees it at 3.5% and Societe Generale (OTC:SCGLY) at 3.75%. More

COPENHAGEN (Reuters) – Thousands of people gathered in Copenhagen on Sunday to protest a bill put forward by the government to scrap a public holiday to help finance increased defence spending.The demonstration was organised by the country’s biggest labour unions which oppose abolishing the Great Prayer Day, a Christian holiday that falls on the fourth Friday after Easter and dates back to 1686.Unions organising the protest estimated at least 50,000 people took part, which would make it Denmark’s biggest demonstration in more than a decade. Local police don’t give such crowd estimates.The holiday abolition was proposed in December to help raise tax revenues for higher defence spending in wake of the Ukraine war, and is part of the newly formed government’s sweeping reform programme aimed at overcoming challenges to the country’s welfare model. The government has proposed moving forward by three years to 2030 a goal of meeting a NATO defence spending target of 2% of GDP. It says most of the extra 4.5 billion Danish crowns ($654 million) needed to meet the target could be covered by the higher tax revenues it anticipates from abolishing the holiday. However, unions, opposition lawmakers and economists have questioned the effect of the proposal. Some economists have said it is unlikely to have long-lasting effects, as workers would find other ways to adjust their working hours.In the Danish labour market, pay and working hours are primarily regulated by collective agreements between highly-organised worker and employer groups without intervention by the state. However, the government, which holds a slim majority in parliament, says it intends to push the bill through regardless of any opposition.”Normally these things are discussed with the working people, and now this model is about to be overruled. We are protesting to hopefully make them listen,” said plumber Stig De Blanck, 63, who was demonstrating in front of parliament. Danes work less hours than most countries in Europe according to OECD data. (This story has been refiled to remove a superfluous ‘a’ in paragraph 1) More

MUMBAI (Reuters) – India’s central bank is widely expected to raise its policy interest rate by a quarter percentage point to mark its final increase in the current tightening cycle on Wednesday before pausing to assess the impact of its hikes, economists said.”With inflation now having clearly passed the peak and domestic demand showing signs of softening, we think the MPC (monetary policy committee) will mark the end of the tightening cycle with a final 25bp hike to the repo rate,” said Shilan Shah, senior India economist at Capital Economics.Annual retail inflation edged down in December from the previous month and remained within the central bank’s comfort zone 2%-6% range for a second consecutive month amid cooling food prices.”This policy decision is likely to be a very close call between a pause and a final hike of 25 bps,” said Aditi Nayar, chief economist at rating agency ICRA.”Given the expected moderation in inflation in Q1FY24, uneven domestic demand and uncertain external demand, it may be an opportune time to pause,” she added.A Reuters poll, conducted before the government announced its 2023/24 budget on Feb. 1, found 40 of 52 economists and analysts expected the RBI to raise the repo rate by 25 basis points to 6.50%.The remaining 12 predicted no change at the Feb. 8 meeting.Interviewed by television channel CNBC-TV18 after the budget, Finance Minister Nirmala Sitharaman said the downtrend in inflation should reduce pressure on the RBI to keep raising interest rates at the same pace, while adding that it was the Monetary Policy Committee’s decision.The budget contained one of India’s biggest ever increases in capital spending to create jobs, while also targeting a reduction in the fiscal deficit.Markets reacted positively to the lower-than-expected borrowing numbers but investors are concerned about demand for government debt falling in the second half if demand for credit from private firms for capex gathers steam.With this in mind, investors will scrutinise the RBI’s commentary regarding the future trajectory of rate hikes, liquidity and management of the government’s borrowing programme. Economists at State Bank of India said, of the record gross borrowing of 15.43 trillion rupees in 2023/24, around 2 trillion rupees may not find adequate demand from market participants.To balance the demand-supply in second half of the financial year, the SBI economists said the central bank may need to resort to open market purchases of bonds, or conduct a cash neutral debt switch – buying back bonds maturing in the near future and replacing them with longer maturity bonds. Barclays (LON:BARC) said they expect the policy stance also to be changed to neutral, where it was last in December 2018, when the repo was 6.50%. More

Many EU leaders are worried the local content requirements of $369 billion of green subsidies in the U.S. Inflation Reduction Act will encourage companies to relocate, making the United States a leader in green tech at Europe’s expense.Habeck said the European Commission was taking the lead on the trade issue, but added: “We want to lend support.””And supporting means: in the working atmosphere that we have developed, to explore ways in which the problematic parts of the Inflation Reduction Act – that is, this industrial project – can perhaps be resolved,” he said.”And I am quite confident that maybe not today and tomorrow but in the next few days and weeks we will succeed in finding further solutions,” he added.Habeck and French Finance Minister Bruno Le Maire will hold talks with U.S. Treasury Secretary Janet Yellen on Tuesday. More

Good morning. We spent the weekend wondering how the China spy balloon saga could be turned into an extended metaphor for what is happening in the stock market. No luck; sometimes a balloon is just a balloon. So we wrote about the jobs report instead. Email us: [email protected] and [email protected]. The blowout jobs report and the disorienting economyUnhedged is feeling confused about the economy. Is it firing on all cylinders? Cresting into a mid-cycle slowdown? Hurtling towards a Fed-induced recession? Friday’s jobs report didn’t help. It showed the US economy adding half a million jobs in January, blasting through expectations and making any recent labour market cooling look marginal indeed. It’s not just the jobs data. As Jay Powell put it last week: “This is not like the other business cycles in so many ways.” We’ve summed up several data points we look at below. If there’s an obvious overriding story, it eludes us:

Whaddya make of this?Strong signalsMixed signalsWeal signalsEmploymentWage growthRetail salesCredit/debit card spendingCorporate earningsManufacturingRisk appetites in financial marketsCredit conditionsYield curve Consumer spending on servicesConsumer spending on goods Housing sales Big tech outlooks

Whatever is going on, the labour market is an important part of it. The Fed is worried about a category of prices called non-housing core services, which it sees as the beating heart of sticky inflation. And historically, that category has looked awfully sensitive to wage growth. This chart from Deutsche Bank shows the close correlation (ECI is the employment cost index, a wages measure):

With that in mind, Friday’s whopper jobs number presents a question. Does a strong data surprise in the labour market make a soft landing more likely, or less? The question is a bit pat; one month of data can always be a blip. But the rock-solid labour market has been surprising everyone for months now. Is it good news for investors or bad news?The range of opinion runs wide. Some in the “soft landing more likely” camp, like BlackRock’s Rick Rieder, take employment strength as a sign the economy can muscle through higher interest rates without a recession. He wrote on Friday:Central banks are embracing the slowdown in excessive levels of inflation witnessed over the past year, while maybe not having to sacrifice as many jobs as previously thought. We think the Fed would be well-served to consider this as a success and think that slowing down the pace of hikes (and potentially ending them over the next few months) would allow the job market to bend, but maybe not break. Today presents good evidence of a job market not breaking and evidence of how the economy can adapt and adjust to remain vibrant in the face of major headwinds (such as higher interest rates).Others emphasise how wage growth (slowly decelerating) and employment (still growing) have decoupled. The hope is that we might get the best of all worlds — a high-employment disinflation — as long as the Fed’s anti-inflation zeal doesn’t get in the way. Preston Mui at Employ America writes:For months, the Fed has been telling a story that “pain” in the labour market will be necessary to bring down inflation …The Fed should revise its views based on the last few months of data. The unemployment rate is at a historic low. The prime-age employment rate, while not at a historic high, is at its highest level since COVID began.Meanwhile, nominal wage growth has been slowing …Along with recent disinflationary data from the CPI, we are seeing what many said to be impossible: slowing inflation in prices and wages even as levels of labour market strength remain strong across the board.On the “less likely” side, Don Rissmiller of Strategas argues that the Fed is focused on its price stability mandate to the exclusion of all else. Inflation is high, so rates must remain restrictive until that’s no longer true. Labour market resilience just prolongs the process:The default position remains that the US labour market is overheating, with the unemployment rate making a new cycle low. Underlying inflation pressure remains, so central banks are mandated to move policy to a restrictive stance & hold there.The FOMC still looks set to take fed funds above 5 per cent in early 2023. The US labour market will likely have to show more slack to create an end game for tightening — we’re not there yet with the surprising momentum we’re seeing in 1Q.Aneta Markowska at Jefferies points out that a structurally tight labour market combined with falling price inflation is a recipe for pinched margins and, ultimately, lay-offs. Yes, wage growth has been slowing, which in theory eases margin pressure, but can that last? Markowska calculates that in December there were 5.3mn more job vacancies than unemployed people, but only 1mn in potential workers who could join the labour pool:In this context, labour should still enjoy a great deal of pricing power . ..Price growth is likely to slow much more sharply. Put differently, firms are losing pricing power faster than labour. This points to a steep slowdown in top line growth, while costs remain sticky. The result: margin compression.So, despite softer wage growth than we envisioned in January, data are still tracking broadly in line with our scenario. The base case continues to be margin compression in 1H, triggering more lay-offs around mid-year and recession in 2H. In the meantime, it is possible that the Goldilocks narrative [ie, slowing wage growth and low unemployment] remains alive and kicking for several more months. But we doubt it will live past this summer.Markowska’s scepticism about wages and employment decoupling for long seems right to us. Both are functions of workers’ bargaining power, which is high. Wage growth is still elevated by any measure, and a little deceleration seems weak evidence that a high-employment disinflation is coming.But a generous helping of modesty is due. The chance of a soft landing comes down to how easily inflation falls. No one really has any idea what will happen, in large part because of the mass transition from goods spending to services spending in the aftermath of Covid: we’ve never seen an economic event like it. A comparison to history illustrates the enormity of the change. As far back as the data go, there is no real precedent, including the second world war:Remember that the cooling inflation reports that markets have cheered on lately have all come on the back of goods disinflation. How long will that inflation drag last? Is today’s services inflation, like goods two years ago, just a temporary Covid distortion working its way through the economy? Or is it a more entrenched expression of the labour shortage? We simply don’t know. (Ethan Wu)One good readFTX’s in-house shrink had two prescriptions: more pills and more dating. More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyLast week was a lesson in central bank “unusual” — developments that are less common and deserve to be thought through carefully as they speak directly to the future wellbeing of the global economy. I am talking here of two notable contrasts: first, larger differences in policy implementation among major central banks. Second, and more important, a notable variance between the latest signals from the US Federal Reserve and the financial conditions through which monetary policy delivers outcomes.At Wednesday’s press conference that followed the announcement of a widely expected 25 basis point rate hike, Fed chair Jay Powell referred to disinflation some 11 times. In contrast, the word did not come up at all in this week’s press conferences of Christine Lagarde, the president of the European Central Bank, and Andrew Bailey, Bank of England governor.The disinflation narrative helps explains why markets, which had done very little in response to the release of the Fed policy statement before the press conference, then took off in a generalised fashion as Powell answered questions from reporters.But the difference between the Fed on the one hand and the ECB and BoE on the other is not limited to words. We are also seeing a divergence in policy developments and prospects.The Fed appeared last week to have taken a hard turn towards expecting a soft landing — that is, inflation heading down to target with little damage to growth and economic growth. The other two central banks seem more worried about inflation persisting and, therefore, a hard landing such as a recession or, worse, stagflation.Needless to say, there are implications for the global economy given the systemic influence of these central banks.Compare this situation with the prior monetary policy regime when we had a high degree of correlation, if not initial co-operation, between central banks. After normalising malfunctioning financial markets, central banks doubled down on unconventional monetary policy to pursue broader macroeconomy outcomes (growth and employment in particular).Another, and potentially more consequential contrast is between how the Fed portrayed financial conditions and what the most widely followed indices are telling us.Financial conditions matter for the effectiveness of monetary policy. As an illustration, think back again to how the prior regime of floored interest rates and sizeable liquidity injections repressed both economic and financial volatility.This time around, and according to longstanding indices, developments in financial conditions have divorced themselves from monetary policy. They are as loose today as they were a year ago before the Fed embarked on its 4.50 percentage point rate hiking cycle; and this loosening has been turbocharged since the December Fed policy meeting. All of this is consistent with last Friday’s stunning US payrolls report.This disparity has been the subject of much discussion among market participants. Yet it is not what the Fed sees, judging from Powell’s comments at last Wednesday’s press conference, where he repeatedly referred to financial conditions having tightened quite a bit in the last twelve months.It could well be, as suggested by vice chair Lael Brainard a few weeks ago, that the Fed is guided by a slimmed down view of financial conditions. That would be similar to its approach for inflation where it is now paying a lot of attention to core prices in services excluding housing. One way of figuring this out would be by knowing how the Fed reacted internally to Wednesday’s roaring market price action and Friday’s strong jobs report. Unfortunately, such information is highly elusive unless some key Fed officials come out in the next few days, or Powell himself at his scheduled February 7 event, to “correct” the markets’ understanding of what they heard and seen.The longer this “financial conditions paradox” remains unresolved, the larger the scope for another policy mistake.For many years, major central banks were celebrated for being effective repressors of economic and financial volatility. We are now in a different world. They have to be careful to avoid their communication being an undue source of such volatility. This is even more important in a global economy navigating the uncertainties associated with changing globalisation, the energy transition, the rewiring of supply chains and, in the case of the US and UK, exceptional labour market conditions.  More

Under the proposed all-stock deal, Life Storage shareholders would receive 0.4192 share of Public Storage (NYSE:PSA) for each Life Storage share or unit, which equates to $129.3 per share based on Public Storage’s closing share price on Friday.Shares of Public Storage traded at $308.47 each on Friday, giving the California-based company a market value of nearly $54.2 billion, while Life Storage’s shares were at $100.58. Public Storage said Life Storage had rejected an offer under similar terms in January, with the target saying the it was “not for sale” and the deal was not in the best interest of shareholders. Life Storage did not immediately respond to a request for comment.Public Storage said the combination would save costs and make Life Storage’s business more efficient. “We believe your shareholders deserve to be informed of our proposed transaction and to have the opportunity to make their views known, and we are making this letter public in light of your refusal to engage in any meaningful dialogue,” Public Storage said in a letter to Life Storage’s management. Real Estate Investment Trusts (REIT) was a bright spot for mergers and acquisitions in 2022, bringing $83 billion in deal volume, the second highest for the sector since 2007, according to National Association of REIT. Prologis (NYSE:PLD) Inc’s acquisition of Duke Realty (NYSE:DRE) Corp and private equity buyers like Blackstone (NYSE:BX) contributed to the largest deals in the space. More

“China has to change its policies because low income countries cannot pay,” she said. “What we are working towards is to bring all creditors, the traditional creditors from advanced economies, new creditors like China, Saudi Arabia, India, as well as the private sector, and put them around the table with the debtor countries.”Georgieva said last month the first such gathering will take place on the sidelines of a meeting of Group of 20 finance officials in India. Georgieva, the first person from an emerging market economy to head the International Monetary Fund, has said debt relief was critical for heavily indebted nations to avoid cuts in social services and other repercussions. “China is going to participate at the level of minister of finance and the governor of People’s Bank of China,” she told 60 Minutes. More