Economy

(Reuters) – Money markets in the euro zone have started pricing in a chance of an ECB rate cut late next year, as traders bet the bank may end up overtightening monetary policy by delivering a series of big rate hikes.Last week the European Central Bank lifted its deposit rate by an unprecedented 75 basis points (bps) to 0.75% to “frontload” policy tightening and get a hold of soaring inflation. The bank implied rate rises could continue into early 2023 even as the bloc braces for recession.Since that meeting, traders have ramped up their bets on larger moves. Money markets now price in around 70 bps of hikes in both October and December. They see rates peaking at around 2.7% in mid-2023, according to ICAP (LON:NXGN) data provided by Refinitiv.Yet because of those steeper expectations, traders have also started to bet the ECB will then start cutting rates — money markets see rates at around 2.6% by February 2024. Before last week’s ECB meeting, an additional 90 bps of hikes were priced in by year-end and rates were seen peaking at around 2.2% and then holding steady.GRAPHICS: Traders start betting on ECB rate cut: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrxnqopm/uzX46-traders-start-betting-on-ecb-rate-cut-after-mid-23-peak.png”With the ECB in front-loading mode and taking a leaf out of the Fed’s book I expect further inversion,” said Antoine Bouvet, senior rates strategist at ING, referring to a rate cut being priced in.The moves in euro zone money markets echo what has been happening in the United States.There, the Federal Reserve has also been frontloading rate hikes, delivering a combined 200 bps of increases since May. Fears that aggressive rate hikes will push the U.S. economy into recession have led traders to price in some 50 bps of Fed rate cuts next year after they peak above 4% in March.For the euro zone, a Reuters poll expects the ECB’s deposit rate to peak at 1.50% and hold there, but investment banks Nomura, BofA and German insurer Allianz (ETR:ALVG) are among those already predicting rate cuts next year or in 2024.The shift since last week implies traders pricing in over a 40% chance of a 25 bps cut by February 2024. But Piet Christiansen, chief analyst at Danske Bank, sees a one-off rate cut as unlikely, and instead says it reflects the market pricing a small probability of multiple 25 bps rate cuts.”I think the hurdle is quite high and also because inflation is going to print above 2% until spring 2024 in Europe so politically, can (ECB chief Christine) Lagarde cut rates with inflation above 4%? I’m not sure,” he added. More

MOSCOW (Reuters) -Russia’s central bank cut its key interest rate by 50 basis points to 7.5% on Friday as inflation slows and the economy needs cheaper lending to limit a slump, but did not repeat recent guidance that it would study the need for further cuts.It was the fifth scheduled board meeting where the rate has been cut this year. In the immediate aftermath of Moscow’s despatch of armed forces into Ukraine on Feb. 24, the central bank had hiked its key rate to 20% from 9.5% in order to mitigate risks to financial stability.The 50-basis-point cut was in line with a consensus forecasts of analysts polled by Reuters earlier this week.The central bank omitted forward-looking rate guidance from the statement, saying that the inflation expectations of households and businesses remained elevated. This suggests the likelihood of another rate cut has declined.”There is no direct signal in today’s press release. And this is a clear indication that the rate-cutting cycle may be over,” said Evgeny Suvorov, an economist at CentroCreditBank.The central bank said will take into account actual and expected inflation dynamics along with risks posed by domestic and external conditions and the reaction of financial markets when making next rate-setting decision.The rouble showed limited reaction to the rate move, hovering near 60 against the dollar.Inflation stood at 14.1% as of Sept. 9 and is on track to finish this year in a range of 11-13%, the central bank said. It reiterated its hope that inflation would slow to 5-7% in 2023.The central bank said a tighter monetary policy could be needed to bring inflation to the 4% target in 2024 if Russia’s budget deficit expands.”It cannot be ruled out that the central bank will start raising rates as early as in the first half of next year,” said Suvorov from CentroCreditBank.High inflation dents living standards and has for years been one of Russians’ main concerns. However, the economy currently needs stimulation in the form of cheaper credit to address the negative effects of sweeping Western sanctions imposed in response to Russia’s intervention in Ukraine.The central bank maintained its forecast for a 4-6% economic contraction this year but said the decline in gross domestic product may be closer to 4%. In late April, it had expected GDP to shrink 8-10%.Central bank governor Elvira Nabiullina will shed more light on the bank’s forecasts and policy in a media briefing at 1200 GMT.    The next rate-setting meeting is scheduled for Oct. 28. More

OTTAWA (Reuters) – Canadian housing starts fell 3% in August compared with the previous month as a decline in multi-unit urban starts offset a slight increase in single-detached, data from the national housing agency showed on Friday.The seasonally adjusted annualized rate of housing starts was 267,443 units in August, down from a revised 275,158 units in July, Canadian Mortgage and Housing Corporation (CMHC) data showed. Analysts had forecast starts would dip to 265,000. More

The United States on Thursday sanctioned the chief executive of the Bank of Russia’s National Card Payment System (NSPK), which runs Mir, saying it was seeking to hold the Russian government accountable for its Feb. 24 invasion and continuing war against Ukraine.”Russia has scrambled to find new ways to process payments and conduct transactions,” the U.S. Treasury said. “Directly and indirectly, Russia’s financial technocrats have supported the Kremlin’s unprovoked war.”The importance of Mir cards for Russians rose substantially this year after U.S. payments firms Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) suspended operations in Russia and their cards that were issued in Russia stopped working abroad.Cuba, South Korea, Turkey, Vietnam and a handful of former Soviet republics accept Mir, which means both “peace” and “world” in Russian, with others such as Iran intending to follow suit soon.The central bank said Mir cards and other NSPK services would continue working as usual in Russia. “Foreign partners themselves take decisions about opening their infrastructure to accept Mir cards,” the central bank said. “At the same time, we intend to continue dialogue about expanding the geography of Mir card acceptance.” The U.S. Treasury said it had blacklisted 22 individuals, including four financial executives whose actions could directly or indirectly support Russia’s war effort by helping it evade financial sanctions imposed on Russia after the invasion.One of those four was named as Vladimir Komlev, the head of NSPK.”Russia created its own state-run card payment system in 2014 out of fear of U.S. and European sanctions,” the Treasury said. “In his role, Komlev has promoted the Mir network in other countries, which ultimately could assist Russia in circumventing international sanctions.”NSPK did not immediately respond to a Reuters request for comment.Moscow says that what it calls a “special military operation” in Ukraine was necessary to prevent its neighbour being used as a platform for Western aggression, and to defend Russian-speakers. Kyiv and its Western allies dismiss these arguments as baseless pretexts for an imperial-style war of aggression. More

(Reuters) -European shares slid 1.2% on Friday as recession warnings from two major global financial institutions and bets of a large interest rate hike from the U.S. Federal Reserve next week knocked down sentiment. The declines put the continent-wide STOXX 600 on track for a weekly drop of 2.4%.All major sectoral indexes were lower as of 0809 GMT, with rate-sensitive tech stocks the top drag, down 1.7%. Post and logistics firms tumbled after U.S. peer FedEx Corp (NYSE:FDX) on Thursday withdrew its financial forecast, warning of a global demand slowdown. Shares of Deutsche Post (OTC:DPSGY), Kuehne & Nagel, DSV Panalpina and Royal Mail (LON:RMG) Plc slumped between 2.9% and 12.0%. The World Bank said late on Thursday that the global economy might be inching toward a recession as central banks aggressively tackle sticky inflation, while the International Monetary Fund said it expected a slowdown in the third quarter. “(The World Bank) highlighted that because the new tightening polices are synchronised across a number of countries, the effects of these interest rates could be compounded and magnified, leading to a steeper-than-expected slowdown in global growth,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, wrote in a note. Ailing German gas importer Uniper SE (OTC:UNPRF) tumbled 14.6% to the bottom of the STOXX 600, as it struggled to keep up with costs after the sudden stoppage of a major natural gas pipeline by Russia earlier in the month.The STOXX 600 has shed a little over 1% so far this month, heading for its second straight monthly decline, as investors fret over soaring prices and an energy and cost of living crisis in the region. UK’s FTSE 100 index fell 0.2% after data showed retail sales fell much more than expected in August, in another sign that the British economy is sliding into recession. But the exporter-heavy index fell the least across Europe as the pound weakened. (L) In a rare positive spot, shares of London-listed South African lender Investec rose 2.2% after Berenberg started its coverage on the stock with a “buy” rating. More

Sterling slid to its lowest level since 1985 against the dollar on Friday after a round of weaker than expected data on UK retail sales amplified concerns that the country was headed for a prolonged recession.The pound dropped 0.8 per cent in London trading to $1.137, the first time it has breached the $1.14 mark in almost four decades, according to Refinitiv data. The decline, which comes 30 years to the day since “Black Wednesday”, when sterling crashed out of the European Exchange Rate Mechanism, reflected broad strength in the dollar as well as particular concern about the state of the UK economy.Sterling was off about 0.4 per cent against the euro at €1.142, its weakest level since early 2021. Retail sales fell sharply in August as UK consumers struggled with soaring prices and high energy costs, according to data published on Friday by the Office for National Statistics. The quantity of goods bought in the UK fell 1.6 per cent between July and August, reversing a small expansion in the previous month.This was a larger drop than the 0.5 per cent contraction forecast by economists polled by Reuters and the largest fall since July 2021, when Covid-19 restrictions on hospitality were lifted.Olivia Cross, economist at Capital Economics, said the figures suggested “that the downward momentum is gathering speed” and supported her view that “the economy is already in recession”. The ONS said that “rising prices and cost of living” were affecting sales volumes, which have continued a downward trend since the summer of 2021, following the reopening of the economy after pandemic lockdowns. The figures highlighted how high inflation has hit consumers and the wider economy. The government’s £150bn energy support package announced this month is expected to limit the blow from the recent surge in gas prices, but it did not dispel the risk of a recession.Victoria Scholar, head of investment at Interactive Investor, said the fact that sterling fell against both the dollar and euro on Friday showed “this is not a dollar move . . . but in fact it is traders selling the pound amid negative sentiment towards the UK’s economic outlook and investment case”. Bank of England data also show that the effective sterling exchange rate, a measure that is weighted to take into account its competitiveness against major trading partners, has declined 6.5 per cent since the start of the year. The gauge is still above the historic lows it reached in 2020 and 2016. The BoE is expected to raise interest rates for the seventh consecutive time at its meeting next week as it deals with an inflation rate nearly five times its 2 per cent target. However, the weak retail sales figures could steer the BoE towards a 0.5 percentage point rate rise when policymakers meet next week, rather than a 0.75 percentage point increase some had expected, said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics. The US Federal Reserve is broadly expected to raise rates by at least 0.75 percentage points next week and a smaller BoE rate rise could further dent the allure of holding the pound. In a sign of the struggles for the UK economy, the quantity of goods bought by consumers was almost down to pre-pandemic levels from a peak of nearly 10 per cent above in April 2021.All main sectors fell over the month, but non-food stores were the biggest driver. This is because of large sales drops in department stores, down 2.7 per cent, household goods stores, down 1.1 per cent and clothing stores, down 0.6 per cent. Notable declines in sports equipment, furniture and lighting gave “an indication of the types of items consumers push to the bottom of their priority list in difficult times”, said Sophie Lund-Yates, analyst at the financial services company Hargreaves Lansdown.Online sales also fell sharply, by 2.6 per cent, with food being the third biggest component of the monthly decline.

While food sales were particularly affected by the reopening of the hospitality sector, the ONS reported that “in recent months, retailers have highlighted that they are seeing a decline in volumes sold because of increased food prices and cost of living impacts”.Fuel sales also dropped 1.7 per cent, and were 9 per cent below their pre-pandemic levels, reflecting the impact of soaring prices at the pump on car trips despite some easing in August prices compared with the previous month. Lynda Petherick, retail lead at the consultancy Accenture, said that “with a difficult winter to come, it will come as a worry to retailers that shoppers have already reined in their spending despite the hot summer”. More

The writer is president of the William and Flora Hewlett FoundationThe failings of the political and economic paradigm known as “neoliberalism” are now familiar. However well suited it may have been to addressing stagflation in the 1970s, neoliberal policy has since then fostered grotesque inequality, fuelled the rise of populist demagogues, exacerbated racial disparities and hamstrung our ability to deal with crises like climate change. The 2008 financial crash exposed these flaws and inspired a reassessment of how government and markets relate to society — an effort given fresh energy by the pandemic, which elicited a range of (successful) public actions at odds with neoliberal bromides.But powerful interests remain attached to neoliberalism, which has served them well. Regrettably, the re-emergence of inflation has given them a hook not merely to criticise US President Joe Biden’s spending, but to condemn efforts to change the prevailing paradigm as “socialistic” moves to destroy capitalism. Though the causes of today’s inflation are complex, we have tools to deal with it and have begun to apply them. Managing the economic fallout from Covid-19 and the war in Ukraine must not be allowed to derail a long-overdue process of adapting governance for a 21st century economy and society.Neoliberals accomplished many things in the 50 years their ideology has been dominant, but none is more impressive than their success in equating a very particular, very narrow conception of capitalism with capitalism itself — as if any deviation from their approach to government and markets is perforce not capitalism or against capitalism. But capitalism, properly understood, requires only that trade and industry are left primarily in the hands of private actors, something no one today seeks to overthrow. This allows room for countless different relationships among private business, government and civil society — possibilities limited only by imagination and choice. Mercantilism, laissez-faire and Keynesianism were all forms of capitalism, as was FDR’s New Deal. As, for that matter, are the social democracies of northern Europe. In all these systems, production remains in private hands and market exchanges are the dominant form of economic activity. Since markets are created and bounded by law, there is no such thing as a market free from government. Neoliberalism limits government regulation to securing markets that operate efficiently as to price. Which is a conception of capitalism, but certainly not the only one. The genius of capitalism has, in fact, been in finding new ways to capture the energy, innovation and opportunity that private enterprise can offer, while adapting to changing circumstances. Mercantilism gave way to laissez-faire, which gave way to Keynesianism, which gave way to neoliberalism — each a capitalistic system that served for a time before yielding in the face of material and ideological changes to something more suited to a new context.We are plainly in the midst of such a transformation today — driven by vastly increased wealth inequality, global warming, demands to address festering racial disparities, the rise of populism and new technologies. These developments have been accompanied by alarming political and social disruption. As faith in neoliberalism crumbles, we observe leaders — from Donald Trump to Jair Bolsonaro, Viktor Orbán and Vladimir Putin — embracing toxic forms of ethno-nationalism, with China’s vision of state capitalism looming in the wings as an alternative. These are terrible options, but we’re not going to forestall them by exhorting people to stick with a neoliberal system in which they have already lost faith. Change is happening; the question is whether it will be change for the better.If capitalism is to survive, it will need to adapt, as it has done in the past. We need to acknowledge how neoliberalism has failed and address the legitimate demands of those it has failed. Alternative possibilities abound: how capitalism should change is something we must debate. The only position that makes no sense is protesting that any change is “anti-capitalism”, as if Milton Friedman and friends achieved some perfect, timeless wisdom in the 1970s.In the end, markets and governments are just devices to provide citizens with the physical environment and opportunities for the material success needed to flourish and live with dignity. Neoliberals lost sight of this and began treating the market as an end in itself. They failed to see how their version of markets was not working for the majority of people. We’re now living with the consequences of their blindness, and we need to rebuild and reimagine, before it’s too late. More

Belgian chemicals group Solvay plans to create the second European site producing rare earths vital for the energy transition, as the continent rushes to break China’s dominance over the hard to extract elements.The company said on Friday that its La Rochelle plant in France would be upgraded to separate a larger range of the 17 rare earths to include neodymium and praseodymium, which are crucial in the production of magnets for electric vehicles and wind turbines.The decision to invest tens of millions of euros in the facility comes two days after EU leaders called for new legislation to address China’s grip over the supply chain for critical raw materials. The Asian nation controls 80 per cent of global rare earths processing capacity.Disruption to gas supplies in the wake of Russia’s invasion of Ukraine has sharpened EU officials’ minds on the risks of relying on one country for materials needed for the transition to a lower-carbon economy.“Lithium and rare earths will soon be more important than oil and gas,” EU commissioner Thierry Breton said this week. “Our demand for rare earths alone will increase fivefold by 2030.”The 78-year-old La Rochelle plant, which supplies rare earths for automotive catalytic converter and semiconductor production, will help bolster Europe’s autonomy over the rare earth supply chain. It will join Neo Performance Materials, which has a separation site in Estonia, in producing the rare earths needed for electric cars and wind turbines. The UK has a rare earths separation project under construction through London-listed Pensana. “Rare earths are essential to ensure the green energy transition,” said Ilham Kadri, chief executive of Solvay, which recently settled a longstanding dispute with an activist investor. “Our investments in the magnets’ value chain will help Europe power its new economy.”However, the rare earth supply chain involves many steps including turning separated rare earth oxides into metals and magnet production that analysts say are required to loosen Beijing’s control over the flow of critical materials and components.“It’s a good step forwards,” said David Merriman, rare earths research director at Wood Mackenzie. “For automotive manufacturers, there are a few stages that need to be filled in to make it directly contact their supply chain.”Europe imports about 16,000 tonnes a year of rare earth permanent magnets from China, meeting approximately 98 per cent of EU demand, according to a report by the European Raw Materials Alliance.Under the proposed EU Critical Raw Materials Act, permitting will be streamlined, funding will be allocated to strategic projects and strategic stockpiles of materials will be built.The EU has been much slower to build raw material supply chain resilience than countries such as Japan, which financed what is now the largest western rare earths producer Lynas, after China unofficially banned rare earth exports to the country a decade ago over a geopolitical dispute. More