Economy

WASHINGTON (Reuters) – New research by the International Monetary Fund shows that sustained wage-price spirals are historically rare, and recent sharp interest rate hikes by central banks are likely to help prevent high inflation expectations from becoming entrenched.In an analytical chapter released on Wednesday from the IMF’s forthcoming World Economic Outlook, the Fund said wage and price hike dynamics in 2020 and 2021 were driven by “highly unusual” COVID-19 pandemic shocks, unlike past episodes that reacted to more conventional economic forces.IMF researchers studied 22 episodes of high inflation and falling real wages in advanced economies over the past 50 years and found most subsided quickly.Wage hikes over the past two years were driven by production capacity and labor supply shocks, while prices were driven up largely by a build-up of private savings and the release of pent-up demand as the pandemic eased, the IMF said.Past inflationary episodes usually ended as nominal wages gradually caught up with prices over several quarters, avoiding an upward spiral, the IMF said. This generally happened when economic shocks were viewed as temporary, leading wages and prices to stabilize based on normal labor supply dynamics.1973, 1945 SPIRALSBut the chapter noted a few key exceptions, including the U.S. “stagflation” era that followed the 1973 OPEC oil embargo, when nominal wages failed to increase with prices and further oil shocks in 1979 kept inflation high and real wages falling. This trajectory changed only when the Federal Reserve raised interest rates sharply, prompting years of recession in the early 1980s.Indexing of wages to cost-of-living increases in Belgium also helped fuel a major wage-price spiral there in the 1970s, with wage inflation sometimes exceeding price gains, the IMF said.And the end of World War Two rationing in the United States unleashed massive pent-up demand for scarce consumer goods, fueling double-digit wage and price gains for years until industry fully readjusted to peacetime production and excess demand was sated by 1949.”Overall, the historical evidence suggests that episodes characterized by about a year of accelerating prices and wages have not generally lasted, with nominal wage growth and price inflation tending to stabilize on average” after several quarters, the IMF said.While that may be reassuring in the current environment, the IMF said there is a risk of prolonged price and wage inflation if inflation expectations are backwards looking, anticipating that past conditions, such as the price dynamics of 2021, will continue into the future even absent new price shocks.”When wage and price expectations are more backward-looking, monetary policy actions need to be more front-loaded to minimize the risks of inflation de-anchoring,” the Fund said, backing its call for central banks to push ahead with rate hikes to fight inflation.Inflation is expected to be a key topic next week when the IMF and World Bank hold annual meetings in Washington. More

(Reuters) – Global bond funds saw the biggest outflows in two decades in the first three quarters of this year as hefty interest rate increases by central banks to tame inflation sparked fears of a recession.According to Refinitiv Lipper, global bond funds faced a cumulative outflow of $175.5 billion in the first nine months of this year, the first net sales in that period since 2002. Money flows in global bond funds https://fingfx.thomsonreuters.com/gfx/mkt/movanxwnwpa/Money%20flows%20in%20global%20bond%20funds.jpg Global bond funds declined by 10.2% on average in their net asset values, their worst slump since at least 1990, the data showed. Global bond funds’ performance https://fingfx.thomsonreuters.com/gfx/mkt/myvmndbnkpr/Global%20bond%20funds’%20performance.jpg Governments and companies have borrowed heavily in the past few years, taking advantage of ultra-low interest rates, and they now stare at bigger interest liabilities due to a rise in yields. “The combination of high debt levels and a rise in interest rates has reduced investors’ confidence in the government’s ability to pay back debt, which has resulted in the massive outflows we are seeing,” said Jacob Sansbury, CEO at Pluto Investing. He added that outflows from bond funds might continue into 2023, as a reduction in interest rates and reduced debt loads are unlikely. Emerging market bonds faced an outflow of about $80 billion in the first three quarters of this year, while U.S. high yield bonds and inflation-linked bonds witnessed net sales of $65.81 billion and $16.44 billion, respectively. The iShares UK Gilts All Stocks Index (UK) D Acc recorded outflows of $6.67 billion in the last quarter, while the ILF GBP Liquidity Plus Class 2 and Vanguard U.K. Short Term Investment Grade Bond Index GBP Acc fund saw withdrawals of $2.16 billion and $993 million respectively. Biggest money outflow from global bond funds in the thirdquarter https://fingfx.thomsonreuters.com/gfx/mkt/zdvxolqoapx/Biggest%20money%20outflow%20from%20global%20bond%20funds%20in%20the%20third%20quarter.jpg BONDS ATTRACTIVE NOWHowever, some funds managers said bonds looked attractive after the slump this year. The ICE (NYSE:ICE) BoFA U.S. Treasury Index has fallen 13.5% so far this year, while the Bloomberg Global Aggregate Bond Index has shed about 20%.”The yield cushion now protects the investor against negative total returns significantly more than it did at the beginning of the year,” said Jake Remley, portfolio manager at Income Research + Management.”This almost certainly makes the prospects for bonds better between now and year-end, even if interest rates continue to rise as briskly as they have over the past 9 months.”The yields on 2-year and 10-year U.S. Treasury bonds stood around 4.12% and 3.68% respectively on Wednesday, compared with 0.7% and 1.5% at the start of the year. Similarly, the yield on the ICE BofA U.S. High Yield index, the commonly used benchmark for the junk bond market, stood at 9%, compared with 4.3% at the start of the year.”Some bonds have become the proverbial ‘babies thrown out with the bathwater’ and offer compelling value at these levels,” said Ryan O’Malley, portfolio manager at Sage Advisory Services.”However, it’s important to note that there will likely be further credit stress in many corners of the bond market and risk management is paramount in these uncertain times.” More

Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August, according to ADP.
Trade, transportation and utilities saw a jobs gain of 147,000, while professional and business services and education and health services also posted large increases.

The U.S. labor market showed strength in September, with private companies adding more jobs than expected, payroll services firm ADP reported Wednesday.
Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August.

Those gains came even as goods-producing industries reported a loss of 29,000 positions, with manufacturing down 13,000 and natural resources and mining losing 16,000.
However, a big jump in trade, transportation and utilities helped offset those losses, as the sector saw a jobs gain of 147,000.
Professional and business services added 57,000, while education and health services picked up 38,000 and leisure and hospitality grew by 31,000. There also were losers within the services sector, as information declined by 19,000 and financial activities saw a loss of 16,000 positions.
By size, companies employing 50-499 workers led with a 90,000 gain, while large firms added 60,000 and small businesses contributed 58,000.

The tight job market saw another month of sizeable pay hikes, with annual pay trending up 7.8% from a year ago, according to ADP, which compiles the report in tandem with the Stanford Digital Economy Lab. Those changing jobs saw a median change in annual pay of 15.7%, down from 16.2% in August for the biggest monthly drop in the three years ADP has been tracking the data.

ADP’s report comes two days before the closely watched nonfarm payrolls report issued by the Bureau of Labor Statistics.
The estimate for the Friday report is a growth of 275,000 jobs. Though ADP revised its methodology over the summer, the August total, which was revised up sharply from the originally reported 132,000, was still well shy of the BLS count of 315,000 added jobs.
Federal Reserve officials are watching the jobs numbers closely as the central bank looks to stem high inflation.

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A smaller-than-anticipated rate hike in Australia has fuelled talk that global monetary tightening will slow as the growth outlook turns. For some, the debate is premature with the likes of the U.S. Federal Reserve unlikely to ease up on the brakes until inflation shows clear signs of slowing.Central banks in the 10 big developed economies have raised rates by a combined 2,040 basis points (bps) in this cycle to date, with Japan the holdout “dove.” Here’s a look at where policymakers stand in the race to contain inflation, from hawkish to dovish. 1) UNITED STATESThe Federal Reserve lifted rates by 75 bps on Sept. 21, vaulting the dollar index to a two-decade high. Fed Vice Chair Lael Brainard said on Sept. 30 that it would take time for tighter financial conditions to work through the economy and lower price pressures and until then, policy tightening was expected to remain. The Fed’s projections showed its policy rate rising to 4.4% by year-end, before peaking at 4.6% in 2023. Rate cuts are not expected until 2024. 2) CANADAMoney markets bet the Bank of Canada will raise its policy rate by 50 bps in October to 3.75%. The BoC will do whatever is needed to bring price increases back to target, a BoC official said last month. On Sept. 7, the BoC hiked its policy rate to 3.25%, its highest level in 14 years. Canada was the first among the world’s advanced economies in the current policy-tightening cycle to deliver a 100 bps rate.3) NEW ZEALANDThe Reserve Bank of New Zealand on Wednesday delivered its eighth straight hike – and fifth consecutive rise of 50 bps – to lift rates to 3.5%, the highest in seven years.The RBNZ even debated a larger 75 bps move given intense price pressures, in a reminder to markets that central banks remain very much in a hawkish mood. 4) BRITAINThe Bank of England hiked interest rates by 50 bps last month and forecast a peak in inflation just below 11%, down from an earlier forecast of 13.3%. But the prospect of entrenched double-digit inflation and the need for the BoE to tighten monetary policy has caused investors to raise their rate hike expectations. The new UK government’s announcement last month of more tax cuts funded through borrowing has lifted those expectations even further — markets are pricing in a hefty 100 bps hike in November. 5) NORWAY Norway, the first big developed economy to kick off a rate-hiking cycle last year, on Sept. 22 raised its benchmark rate by 50 bps to 2.25%. The central bank said future hikes would be more “gradual”, weakening the crown currency. 6) AUSTRALIAThe Reserve Bank of Australia delivered a smaller-than-anticipated 25 bps rate rise on Wednesday, saying it had raised rates substantially but further tightening would be necessary. Investors reacted by selling the Aussie dollar.The RBA has delivered 250 bps of hikes, raising rates every month since May and pushing its key rate to a seven-year high of 2.60%.7) SWEDENSweden raised rates on Sept. 22 by a larger-than-expected one percentage point to 1.75% and warned of more to come over the next six months as it gets to grips with surging inflation.The rate hike was the biggest since the inflation target was adopted in 1993, equalling the full percentage point hike of November 1992 during Sweden’s domestic financial crisis when the main rate hit 500% for a short period. 8) EURO ZONEThe ECB was late to the hiking game but is catching up fast.In September, the euro zone’s central bank hiked rates by a record 0.75%, bringing its deposit rate to 0.75% and its main refinancing rate to 1.25%, their highest levels since 2011. The ECB said it was “frontloading” policy to get a hold of inflation and it implied rate rises could continue into early 2023 even as the bloc braces for recession.Money markets now price in around 70 bps of hikes in both October and December. They see rates peaking at over 2.8% in mid-2023, compared to 2.2% before the meeting. 9) SWITZERLANDThe Swiss National Bank (SNB) raised its policy rate last month by another 75 basis points to 0.5% from minus 0.25%, ending the negative rates experiment in Europe. The bank also raised its inflation forecasts for 2022 and 2023 to 3% and 2.4% respectively, adding it couldn’t rule out that further rate hikes will be needed to control inflation. 10) JAPAN The Bank of Japan is the sole remaining policy dove has maintained its ultra-low interest rates and policy guidance.Last month it reassured markets that it will continue to swim against a global tide of monetary policy tightening. But Japanese authorities also intervened to shore up the weak yen, which has been hurt by the policy divergence between Japan and the United States. More

TOKYO (Reuters) -Japan will take “unprecedented” measures to curb rising electricity bills for households and businesses as a weak yen fans inflation and global recession fears pose big risks to the economy, Prime Minister Fumio Kishida said on Wednesday.The government will compile another economic stimulus plan by the end of October, including a rare measure to directly ease the rise of electricity prices that are subject to abrupt price flare-ups, Kishida told parliament, without going into detail.In the past, the government has paid subsidies to fuel wholesalers to keep gasoline and kerosene prices low, but now policymakers are floating new ideas such as providing cash payouts and giving subsidies to utility firms to curb power price hikes.The government is also considering a subsidy scheme for consumer and industrial gas in the upcoming package, which would further increase the size of the fiscal layout involved, Kyodo reported on Wednesday.Faced with falling public approval rates, Kishida’s ruling party is considering a fresh spending package worth at least $100 billion to address inflation. “Rising energy and food prices due to Russia’s invasion of Ukraine, coupled with a weak yen, and the fears of a global economic slowdown are big risk factors to Japan’s economy,” Kishida said.Consumer prices in Tokyo rose in September at the fastest pace since 2014, government data showed on Monday, highlighting the growing burden for households from the yen’s plunge to 24-year-lows, which is adding to already rising import costs. To ease the pain of cost-push inflation for everything from food to energy, Japanese policymakers are urging firms to raise wages, which is essential to kick-start a sustainable growth cycle of higher wages, greater consumer spending and business investment.Four private-sector advisers on Kishida’s top economic advisory panel have urged the government to implement policies that would help achieve real economic growth of 2%-2.5%, in order to make it easier for big firms to implement the 2.07% wage hikes agreed by management and labour unions earlier this year.Analysts polled by Reuters see the economy expanding 1.9% this fiscal year but slowing in 2023 as global demand softens.[ECILT/JP]The advisers said the government should make wage hikes a condition for small firms to receive government support. They also said smaller firms, many of whom are contractors in supply chains, should pass on costs to their bigger clients.With an “unprecedentedly severe fiscal situation” due to repeated extra budgets in recent years, fiscal measures must target those who need aid the most and aim for private sector-led growth, Finance Minister Shunichi Suzuki told the Wednesday panel, according to a government official.Kishida said earlier in parliament that it is important for Japan to link the weak yen to economic revitalisation through a recovery of inbound tourism, bringing companies back to the country and expanding agricultural exports, Kishida said.Kishida said monetary policy was a matter for the Bank of Japan when asked by an opposition lawmaker about the BOJ sticking to its ultra-easy policy, which has helped fuel the yen’s decline, while other major central banks raise interest rates. He declined to comment on the foreign exchange rate outlook.($1 = 144.4400 yen) More

Private employment rose by 208,000 jobs last month, the ADP National Employment report showed on Wednesday. Data for August was revised higher to show 185,000 jobs created instead of 132,000 as previously reported. Economists polled by Reuters had forecast an increase of 200,000 private jobs.The ADP report resumed publishing in September, with the August data, after a two month hiatus as the company sought to improve the methodology for the data following a poor record predicting the private payrolls count in the Labor Department’s Bureau of Labor Statistics employment report. The jury is still out on whether the new ADP report, now jointly developed with the Stanford Digital Economy Lab, will be a useful labor market guide. The report was published ahead of the BLS’ more comprehensive and closely watched employment report for September. According to a Reuters survey of economists, private payrolls likely increased by 270,000 jobs last month after rising by 308,000 in August. With the government sector expected to shed 20,000 jobs, that would lower overall nonfarm payrolls gains to 250,000. The economy created 315,000 jobs in August.Job growth is slowing as employers adjust to cooling demand caused by stiff interest rate increases from the Federal Reserve, which is wrestling high inflation.The government reported on Tuesday that job openings dropped by 1.1 million, the largest decline since April 2020, to 10.1 million on the last day of August. More

Investing.com — The pound and U.K. government bonds fell on Wednesday as U.K. Prime Minister Liz Truss failed to dispel doubts about her ability to safeguard the country’s finances in a keynote speech.By 08:00 ET (12:00 GMT), the pound had slumped 1.2% against the dollar to $1.1326, from an intraday high of nearly $1.15 earlier. At the same time, the yield on the benchmark 10-Year government bond, or gilt, rose back above 4%, after Truss stuck to her previously-announced policies without offering any detail on how she intends to keep borrowing under control.The tax cuts and energy subsidies announced by Truss’s Treasury chief Kwasi Kwarteng are still set to cost the U.K. over 60 billion pounds over the next year, even after Truss abandoned her plan to scrap the 45% income tax bracket for the U.K.’s top 2% of earners.Economists have criticized the plans as likely to fuel inflation, which is currently running at nearly 10%, while her income tax plans went down badly with her own party’s lawmakers, many of whom criticized them for doling out tax cuts to the wealthy at a time of general hardship. In a TV interview earlier in the day, Truss had pointedly declined to answer a question on whether she still trusted her finance chief, Kwasi Kwarteng, to make the right decisions.Truss tried hard in her speech to stress that she won’t let inflation get out of hand. She also clearly backtracked from the threats to end the Bank of England’s control over monetary policy, which she had made during her campaign to become Party Leader over the summer.”I believe in sound money,” she said, adding that her government “will always be fiscally responsible.”As such, she promised to bring Britain’s debt-to-GDP ratio down “over the medium term.”However, she offered no detail on how she intends to achieve that, other than through economic growth. Kwarteng, for his part, has said he won’t publish his spending plans until November 23rd, leaving a long period of uncertainty at a time when global financial markets are unusually volatile.Rory Stewart, a former Conservative Party minister under David Cameron, tweeted that while the speech was confidently delivered and had clear policy lines, it failed to answer the internal contradictions in its logic, such as scrapping legacy EU regulation while keeping access to the EU’s markets, or funding big improvements in the areas of health and defense without sharply increasing the budget deficit. More

MADRID (Reuters) -The Bank of Spain on Wednesday significantly cut its GDP growth forecast for next year due to the impact of higher energy prices in Europe and lower consumer spending.It said it expected gross domestic product to expand 1.4% in 2023, down from a previously expected growth rate of 2.8%, in stark contrast with the government’s forecast of 2.1% growth. Economic activity in the euro zone has been hit by the financial fallout from Russia’s invasion of Ukraine, triggering an increase in gas and power prices that the central bank said would affect the domestic economy in coming quarters.”The high cost of energy and lack of supply are affecting the production of the most energy-intensive industries … Overall, this decline in industrial and household income is leading to a reduction in demand for the production of other industries,” a central bank statement said.In this context, it said it estimates the economy grew 0.1% in the third quarter after expanding a higher than expected 1.5% in the second quarter, following the easing of COVID-19 restrictions and a stronger recovery in tourism. This led the Bank of Spain to revise upwards its economic growth forecast for this year to 4.5% from 4.1%.Due to geopolitical uncertainty stemming from the war and tighter finance conditions in the euro zone introduced to combat soaring inflation, the Bank of Spain said it did not expect the Spanish economy to recover to pre-pandemic levels until the first quarter of 2024, two quarters later than seen in June.It then sees the economy growing 2.9% in 2024, faster than the previously expected 2.6%, as energy market tensions and disruptions in global supply chains are likely to ease, and also thanks to a faster deployment of European Union recovery funds.Last year, the Spanish economy rebounded 5.5% after a record 11.3% slump in 2020 induced by the coronavirus pandemic.The central bank projected annual EU-harmonised consumer inflation to reach 8.7% in 2022, up from a previously expected price increase of 7.2%. It expects a still hefty inflation rate of 5.6% in 2023 before it falls to 1.9% by 2024.”In the coming quarters, inflation will remain above 8%. Only from spring onwards will it slow down,” the central bank’s chief economist, Angel Gavilan, told reporters. Core inflation is forecast to rise to 3.9% this year before easing to 3.5% in 2023 and 2.1% in 2024. More