Economy

BERLIN/BRUSSELS (Reuters) – Germany said on Tuesday it aimed to expand lending to energy firms at risk of being crushed by spiralling gas prices, the latest effort in Europe to rescue households and industry from an energy crisis sparked Russia’s invasion of Ukraine. The European Union’s securities watchdog is also considering EU-wide measures to help energy firms struggling to find cash to meet rocketing collateral demands after they were caught out by the surging prices as Russia slashed gas sent to Europe. Separate proposals from the European Commision to tackle the crisis are due to be announced on Wednesday, with EU energy ministers scheduled to hold an emergency meeting on Sept. 30 to discuss them. The crisis is already weighing heavily on Europe’s economy, even before the onset of winter when industrial users could face rationing if gas reserves prove inadequate. Industry sentiment in the bloc’s economic powerhouse, Germany, has tumbled. The German Finance Ministry said it wanted to boost state loans for energy firms by using credit authorisations created to offer relief in the COVID-19 pandemic, with a German newspaper putting the value at 67 billion euros ($68 billion). Last week, VNG, one of Germany’s biggest importers of Russian natural gas, became the latest energy firm to ask the government for aid to stay afloat. The German cabinet is expected to approve draft legislation for the boosted credit funds on Wednesday. ENERGY SHORTAGES? A draft of the Commission proposals, seen by Reuters, would impose a cap on the revenues non-gas fuelled generators can make from selling electricity, and force fossil fuel firms to share excess profits. Governments would be required to use the cash to help consumers and companies facing sky-high energy bills. EU diplomats say there is broad support for the revenue cap for non-gas generators, as well as plans to impose electricity demand cuts. But countries are split over other ideas – including a gas price cap, which was not included in the draft Commission proposals. Meanwhile, investor sentiment in Germany fell further than expected in September as concerns over the country’s energy supply increasingly weigh on the outlook for Europe’s largest economy. “The prospect of energy shortages in winter has made expectations even more negative for large parts of the German industry,” said Achim Wambach, president of the ZEW economic research institute. “The question now is how far down the economy can go – and where inflation can still go,” said LBBW bank senior economist Jens-Oliver Niklasch. Separately, the CEO of Ukrainian state energy firm Naftogaz said on Tuesday he hoped to restore production thanks to the recent military successes. Naftogaz produces the lion’s share of Ukraine’s gas, with output totalling 13.7 billion cubic meters (bcm) in 2021. More

The UN is pressing Russia and Ukraine to agree a deal on chemical exports through the Black Sea in a bid to ease global fertiliser prices and solidify Vladimir Putin’s commitment to the current shipment agreement on grain.UN diplomats have been holding discussions with Kyiv and Moscow to reopen a pipeline carrying ammonia — a key ingredient in the production of nitrate fertilisers — from Russia to Ukraine’s Black Sea coast, according to three people briefed on the talks.Rebeca Grynspan, the UN official who has been leading the task force, confirmed the negotiations in a statement to the Financial Times. “Talks are moving in the right direction and every effort is being made by all parties at every level to ensure a positive outcome,” she said, adding that negotiations were continuing “urgently” with the aim of averting “a food crisis on a global scale” in the years ahead.The proposal is part of an agreement on food and fertiliser promised to President Putin in exchange for backing a grain deal between Moscow and Kyiv in July. It would allow Russian ammonia shipments to use the same sea corridor that has transported close to 3mn tonnes of wheat, corn and other foodstuffs from previously blockaded Ukrainian ports.If successful, such a deal would allow 2mn tonnes of the chemical component — worth about $2.4bn at current prices — to be shipped each year from Russia, according to the people briefed on the talks.Negotiators hope it could help assuage a global food crisis as well as bolster the existing deal on grain by giving Putin more of a stake in its success. Discussions have intensified in recent weeks.The Kremlin and the Ukrainian governments did not immediately respond to requests for comment.Putin harshly criticised the grain deal last week, raising fears that the agreement could collapse. His complaints — he wrongly claimed that most of the grain shipments were not headed to poor countries — were echoed by Turkey’s president Recep Tayyip Erdoğan, who helped to broker the grain deal. The two leaders are meeting in Samarkand, Uzbekistan, this week.It is unclear whether the recent military setback Kyiv has inflicted on Russian forces in northeastern Ukraine will weigh on the talks.Ammonia is a key component of fertilisers. Russia was supplying 20 per cent of the world’s seaborne cargos of the chemical ingredient before Moscow’s invasion of Ukraine, according to research company ICIS. Fertiliser prices have more than doubled in the past year, according to the UN, partly because a pipeline linking the southwestern Russian region of Samara to the Ukrainian Black Sea port of Pivdennyi was halted in February. The pipeline used to carry about 2.3mn tonnes of Russian ammonia a year, according to data provider Argus Media.The UN is also seeking the release of 20,000 to 40,000 tonnes of ammonia trapped in Pivdennyi, according to two of the people.Kyiv would benefit from revenues in the “high tens or low hundreds” of dollars in transit and port fees, one of them said. The UN is also pushing Moscow to allow grain shipments from a fourth port, Mykolayiv, which has been under heavy Russian artillery fire and is located close to a current Ukrainian offensive around Kherson in the south.A sticking point is how to share the revenues, and whether to hold them in an escrow account until the war is over.Additional reporting by James Politi in Washington, Emiko Terazono in London, Polina Ivanova in Berlin and Roman Olearchyk in Kyiv More

LONDON (Reuters) – The dollar eased further on Tuesday ahead of U.S. inflation data that could show some signs of softening, while the euro found its footing above parity on hawkish comments from policymakers that rates would need to increase further.The dollar index, which measures the greenback against a basket of six currencies including the euro, eased 0.4% to 107.76, after falling 0.7% on Monday, the largest daily decline since August 10.It’s now fallen over 2.7% from last week’s 20-year peak. The euro rose 0.6% versus the greenback to $1.0180, after hitting a nearly one-month high of $1.0198 in the previous session. The dollar was softer against the yen, down 0.5% at 142.06, as the Japanese currency found support from comments from officials signalling the government could take steps to counter excessive yen weakness.U.S. inflation figures are due at 1230 GMT and the consensus is for the core consumer price index to have risen 0.3% month-on-month in August, at the same pace as July. Headline inflation is expected to decline 0.1% month-on-month. Recent dollar gains have slowed on market expectations that peaking inflation will mean less aggressive interest rate hikes from the Federal Reserve. “I think the Fed will hike by 75 basis points even if it is a soft number,” said Niels Christensen, chief analyst at Nordea. “But they then might say it’s time to slow the pace.” “(Federal Reserve Chair) Jerome Powell was quite firm when he spoke last week. He made it very clear that they will fight inflation.”Fed funds futures are fully pricing in a half point rate rise at next week’s Federal Open Market Committee meeting and currently imply a greater than 85% chance of a larger 75 bp increase.The euro has enjoyed a respite above parity due to hawkish noises from the European Central Bank. Last week, five sources close to the matter said Europe’s benchmark rate could rise to 2% or beyond to tame inflation.On Tuesday, German harmonised inflation was confirmed at 8.8% in August, unrevised from the preliminary reading. Spanish consumer prices rose 10.5% year-on-year in August, slightly higher than the flash estimate.Eyes were also on the gas situation in Europe, with the front month Dutch gas delivery contract, the benchmark for Europe, steady on Tuesday but still down by around 45% from its peak in August. [NG/EU]”The decline in gas prices is one more reason for the bounce in the euro,” Nordea’s Christensen said, although he believes the recent strength to be short-lived as near-term tailwinds for the single currency fade.”The situation would improve for the euro if gas prices were to move even further down, but we have to see that materialising to change our view,” Christensen added, expecting the euro to fall to $0.95 towards the end of the year. Meanwhile, sterling rose to a two-week high against the dollar after the British jobless rate dropped to its lowest level since 1974, while wages excluding bonuses rose by 5.2%, the highest rate since the three months to August 2021.The pound was last up 0.4% at $1.1731. More

(Reuters) – Wall Street banks look set to report better efficiency ratios in the second half of the year, a key metric that deteriorated as global economic gloom sapped income from traditional profit centers and costs surged amid a battle for talent, analysts say. A closely watched measure of performance, the ratio helps analysts gauge how much the company spends for outside interest payments to generate a dollar in revenue. A higher ratio implies that the bank is using capital less effectively. “Our current projections assume a modest improvement in the banking industry’s efficiency ratio from just under 58% in 2021 to just under 57% in 2022,” said Christopher McGratty, Head of U.S. Bank Research at KBW, a Stifel company.The expectation of a marginal recovery in the profit metric foreshadows an uptick in overall revenue growth.Even though capital markets activity has slowed dramatically, net interest income growth is accelerating, McGratty said, adding that overall revenue growth should exceed expense growth.  For the first six months, the efficiency ratio of JPMorgan (NYSE:JPM) leapt to 60% while Citigroup (NYSE:C)’s jumped to 66%, both highest since 2014, according to earnings presentations. Analysts widely consider a range between 50% and 60% as optimal for banks, and see rising efficiency ratios as a negative sign. GRAPHIC: Efficiency ratios of JPM and C in H1 https://graphics.reuters.com/US-BANKS/USA-BANKS/zgvomgqlyvd/ER.png During the same period, Morgan Stanley (NYSE:MS) reported a ratio of 71%, the highest since 2019, while Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC) reported 62% and 77%, the highest since 2020. Early this year, Goldman had set a goal of 60% while Morgan Stanley aimed to stay under 70%. GRAPHIC: Efficiency ratios of MS, GS and WFC in H1 https://graphics.reuters.com/US-BANKS/USA-BANKS/zdvxomqmzpx/ER2.png While Bank of America (NYSE:BAC)’s efficiency ratio improved in the first six months this year to 67% from 69% a year ago, the current figure is still 9.5 percentage points higher than that in 2019, before the pandemic struck.Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo declined to comment. Bank of America did not respond to a request for comment Monday. U.S. banks will report third-quarter results starting Oct. 13. Banks saw efficiency ratios deteriorate this year as profits dwindled in the first two quarters primarily with investment banking activity receding from records set last year. Additionally, a rapid rise in mortgage rates and decline in major stock and bond indices have hammered wealth and asset management businesses and their associated income streams. As a result, banks were compelled to pursue other fee-generating businesses “to help diversify their income streams, while also offsetting loan demand issues,” said Simon Powley, head of advisory and consulting at Diebold Nixdorf (NYSE:DBD).In tandem, expenses have been driven upwards by salaries and benefits, he added. To rein in costs, banks including JPMorgan and Wells Fargo have cut staff in recent months while Goldman Sachs plans to cut jobs as early as this month after pausing the annual practice for two years during the pandemic, according to a source familiar with the matter.”Banks were among the worst-performing sectors in the second-quarter earnings season as revenue growth was meager and profit decline was significant,” said Jason Benowitz, senior portfolio manager at Roosevelt Investments. “We expect some modest improvement from this low level in the third quarter.” More

LONDON (Reuters) -The global Basel Committee of banking regulators will complete work on “robust” rules for how banks must set aside capital to cover cryptoassets on their books, the committee’s oversight body said on Tuesday.The panel, made up of banking regulators from the world’s main financial centres, has proposed punitive capital charges on ‘unbacked’ cryptoassets like bitcoin.It has proposed more lenient treatment of stablecoins, or cryptoassets backed by assets or a major currency, but the collapse of stablecoin TerraUSD in May questioned their apparent stability.”On cryptoassets, members reiterated the importance of designing a robust and prudent regulatory framework for banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability,” the Group of Central Bank Governors and Heads of Supervision (GHOS) said in a statement.”The GHOS tasked the Committee with finalising such a framework around the end of this year.”GHOS also “unanimously” urged member countries to implement the final leg of Basel III, a suite of tougher capital requirements set up in response to the global financial crisis over a decade ago, as fast as possible and in full.”The resurgence of inflation in many jurisdictions, coupled with a deteriorating macroeconomic outlook and tighter financial conditions, may expose vulnerabilities accumulated in the financial system,” GHOS said.More than two-thirds of member countries plan to implement Basel III in full by 2024, GHOS said.The European Union and Britain, both members of Basel and GHOS, have said they aim to implement the remaining rules by the start of 2025, with the EU proposing several changes. More

LONDON (Reuters) -Britain’s jobless rate hit its lowest since 1974 but the drop was due mostly to a fall in the size of the workforce and there were other signs that the country’s jobs boom is petering out, adding to the Bank of England’s inflation headache.The unemployment rate sank to 3.6% in the three months to July, the Office for National Statistics said. Economists polled by Reuters had expected it to hold at 3.8%.However, the fall was not a sign of health in Britain’s economy which is at risk of a recession.The number of people in employment grew by 40,000, less than a third of the increase forecast in the Reuters poll.”We’re now starting to see signs of a labour market losing its momentum,” Jack Kennedy, UK economist at the global job site Indeed, said.The economic inactivity rate – measuring the share of the population who are not in work and not looking for work – increased by 0.4 percentage points on the quarter to 21.7%, its highest since the three months to January 2017. The ONS said the rise was driven by more people classified as long-term sick and by fewer full-time students moving into employment than normal for the time of year.At the same time, pay growth rose by more than expected, reflecting a shortage of candidates for jobs, although it still lagged far behind inflation that is expected to hit 10.2% in the 12 months to August when figures are published on Wednesday.The BoE is worried that tightness in the labour market will add to the recent surge in price pressures.The British central bank raised interest rates the most since 1995 last month. It is expected to increase them again on Sept. 22.Sterling jumped against the U.S. dollar after Tuesday’s data and investors were pricing in an 83% chance of a three-quarters-of-a-percentage-point BoE rate hike next week, which would be its biggest since 1989, excluding an attempt to shore up the pound in 1992 which was quickly reversed.PRICE PRESSURES There were other signs of price pressures in the labour market in the ONS figures published on Tuesday.Wages excluding bonuses rose by 5.2%, the highest rate since the three months to August 2021. The Reuters poll had pointed to an increase of 5.0%. Including bonuses, wages rose by 5.5%.Britain’s labour market defied expectations of a surge in unemployment during the coronavirus crisis, helped by a 70 billion-pound ($82 billion) government jobs protection programme.But there have been signs recently that the jobs boom is losing some of its momentum.As well as the weaker-than-expected increase in employment, the number of job vacancies in the June-to-August period fell by the most in two years, down 34,000, although it remained historically high at 1.266 million.James Smith, an economist at ING, said soaring energy prices might force companies to make bigger staff cuts.”We would expect a more visible impact on the jobs market over the next few months, but the government’s newly announced pledge to cap corporate energy bills as well as households’ should help avoid a sharp rise in unemployment this winter,” Smith said.New Prime Minister Liz Truss announced last week a cap on soaring energy prices.($1 = 0.8532 pounds) More

Markets expect the central bank to enact a third consecutive 75 basis point hike at its monetary policy meeting later this month.
Prins told CNBC on Tuesday that the acceleration of interest rate hikes to soothe the markets was disconnected from the economic reality faced by many.

A trader works on the floor of the New York Stock Exchange (NYSE) as a screen shows Federal Reserve Board Chairman Jerome Powell during a news conference following a Fed rate announcement, in New York City, U.S., July 27, 2022. 
Brendan Mcdermid | Reuters

The U.S. Federal Reserve could be forced to pivot away from its path of aggressive interest rate hikes in three stages, according to author Nomi Prins.
Markets expect the central bank to enact a third consecutive 75 basis point hike at its monetary policy meeting later this month, the fastest pace of monetary tightening since policymakers began using the benchmark Fed funds rate as the principal policy tool in the early 1990s.

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Various Fed officials have reiterated the Federal Open Market Committee’s commitment in recent weeks to reining in inflation, but Prins told CNBC Tuesday that the acceleration of interest rate hikes to soothe the markets was disconnected from the economic reality faced by many.
“This period of accelerating the rate hikes that we’ve seen so far has impacted the real economy because it has squeezed the borrowing costs … for real people, real consumers,” she said.
“Whereas for the Street in general, historically money still remains cheap and leverage still remains high in the system, and the Fed’s book still remains just a touch under $9 trillion, which is double what it was going into the pandemic period, and since the financial crisis of 2008.”

Despite the broad market expectation for further 75 basis point hikes, Prins – a global economist and outspoken advocate for economic reform – said the Fed would likely pivot away from its hawkish trajectory in three stages as the disconnect between wealthy investors and institutions and the “real economy” widens.
Having firstly reduced the pace of rate hikes to 50 basis points and then neutralized policy, Prins expects the Fed to begin reversing course and becoming “accommodative,” with the U.S. already having recorded two consecutive quarters of negative GDP growth.

“Whether that’s to cut rates or to increase the size of its book again, that still remains to be seen,” Prins added.
Inflation worldwide has been driven skyward by supply chain bottlenecks in the aftermath of the Covid-19 pandemic, lingering supply blockages in China due to recurring lockdowns, and Russia’s invasion of Ukraine, which has caused food and energy prices to surge.
Central banks have argued that aggressive action is needed to prevent inflation becoming “entrenched” in their respective economies, and have been particularly wary of consumer price inflation feeding through to wage inflation, which they anticipate could further exacerbate demand and therefore price increases.

At his speech at the Jackson Hole economic symposium in late August, Fed Chairman Jerome Powell responded to market concern about an impending recession caused by tightening monetary conditions by asserting that “some pain” for the economy would be necessary in the fight against inflation.
Prins argued that by targeting wage inflation when wage rises are failing to keep pace with broader inflation was a mistake.
“I think the Fed absolutely is missing this connection between what is going on for real people in the real economy and why, and how that relates to the overall inflation picture, which it has basically positioned itself to fight. There’s just a mismatch here,” she said.
She argued that central banks raising rates as their main tool to fight inflation has caused a “chasm” between the individuals and institutions that were able to leverage themselves into the markets when borrowing costs and prices were considerably lower, and the average consumer.

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Jadson Mankwala has been hit so badly by rising prices that he has been reduced to scavenging twigs for firewood, no longer able to afford the small plastic bags of charcoal for sale in the Malawian city of Blantyre.“I’m struggling to buy energy to cook at home, so I have gathered wood,” said the unemployed 39-year-old, as he held a few thin branches under his arm. The war in Ukraine, combined with currency depreciations triggered by rate rises in the US and years of economic mismanagement at home, have left inflation in Malawi running at 25 per cent. The rising cost of staples such as maize, which makes up nearly half of Malawi’s inflation basket, means there is little cash for other items, even bags of charcoal worth just 30 US cents. While Russia’s full-scale invasion of Ukraine has driven a surge in the price of essentials such as food, fuel and fertiliser across the globe, the human cost has been especially high in more vulnerable African economies such as Malawi. “You really are talking about things [coming] to a head,” President Lazarus Chakwera told the Financial Times. The result, says the International Energy Agency, is that by the end of this year up to 30mn Africans may no longer be able to afford liquefied petroleum gas to cook the food they eat. Such a development would mark an economic regression that the World Bank has said may raise the total number of Africans living in extreme poverty from 424mn before the pandemic in 2019 to 463mn this year. “There is a lot of poverty that is hard to measure but we do know that it is pervasive,” said Jacques Nel, head of Africa macro at Oxford Economics Africa. Many African economies have been hit particularly hard by the global rise in prices because food takes up a relatively larger share of national inflation baskets compared with developed economies, Nel added. Food, for example, accounts for about half of Nigeria’s basket. “If a household is already spending more than 50 per cent of their income on food [and prices increase even further], that is not being spent on other goods, and that has a spillover effect on economies,” Nel said.The situation in Malawi has been replicated in some of the continent’s biggest economies.In Nigeria, which has seen the real naira rate collapse by 25 per cent against the dollar since the start of the year, it costs twice as much to fill a 5kg cylinder of LPG as it did a year ago. This has forced many to resort to cheaper but dirtier energy sources such as kerosene or charcoal. Food inflation is 22 per cent, leading consumers to cut back on meat and fish. Years of under-investment in infrastructure, petroleum subsidies and rampant theft of crude oil have meant Africa’s biggest oil producer has not benefited from rising crude prices. With foreign currency in short supply, many businesses have raised prices to reflect increased import costs.Ladi Delano, co-founder of Moove, a Nigerian vehicle financing company, described the situation as a “perfect storm”. “The cost of living crisis has made it more difficult for people to save,” Delano said, adding that they had removed the requirement for downpayments to encourage buyers.

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Similar woes are affecting Ethiopia, described by a senior economic official in Addis Ababa as facing a “cocktail of challenges” including inflationary pressures and a crippling scarcity of foreign exchange, exacerbated by the war in Tigray. This is adding to a shortage of imported products such as medicines and baby formula. Prices are up 32 per cent and the birr’s value has fallen to about 82 against the dollar on the informal market, down from 60 in early June. Rahel Atnafu, a 46-year-old single mother, cleans apartments and beauty salons in Addis Ababa. She earns 5,000 birr ($95) a month and spends 1,500 birr in rent. Her employers “usually give me cooked food or injera”, she said. “Still, I’m struggling to survive.” The price of onions alone has doubled in the past two months. “How do poor people like me handle and survive the high cost of living?” she asked.With governments lacking the capacity to provide appropriate levels of support across sub-Saharan Africa, the burden is increasingly falling on central banks to provide stability.Monetary policymakers “are throwing everything they have at the problem”, said Virág Fórizs, Africa economist at Capital Economics.With prices up 31 per cent in Ghana and the currency plunging, Accra has in recent months raised rates at the most aggressive pace in 20 years. Nigeria’s central bank has increased rates by 250 basis points since May. But with the dollar continuing to appreciate as markets anticipate further rate rises by the US Federal Reserve and food commodity prices remaining high, economists are sceptical that inflation will reverse any time soon. “Outside South Africa, the likes of Ghana and Nigeria for example, I don’t think we have seen the peak of inflation rates yet,” Fórizs said. “In both of [the Ghanaian and Nigerian] inflation baskets, food is very important — and we do not see food inflation dropping any time soon.”Landlocked, import-dependent Malawi has symbolised the structural weakness of many African economies going into this crisis. In 2021, the nation imported twice as much as it exported, with its $3bn bill dominated by fuel and fertiliser. While Malawi’s president Chakwera believes the country can “weather” the pain through cash transfers and low-interest loans to smallholder farmers, the country is reliant on external support, including approval of a $750mn loan from the IMF. With food costs making up a large part of people’s spending, many remain in desperate straits. “These are the conditions that most [people] are finding themselves in,” said Mankwala. More