Economy

NEW YORK (Reuters) – Whether they are selling burgers, pizza or pancakes, major U.S. restaurant chains are short-staffed – and they expect to stay that way. To get by with their existing workforce, they have cut hours and streamlined operations.Staffing at IHOP and at Applebee’s Grill + Bar chains, both owned by Dine Brands Global (NYSE:DIN), is currently at about 90% of 2019 levels – the status quo for at least the past four quarters, Chief Executive Officer John Peyton told Reuters, calling it “the new normal.”IHOP, known for its 24/7 service, is shortening hours at about 400 locations, or almost a quarter of its U.S. restaurants, because they lack overnight shift workers, Peyton said.Restaurants are now facing the grim reality that they are coming out of the COVID-19 pandemic with fewer workers for the long haul, as many had to slash staffing in the early days of lockdowns. Now they are putting employees where they are needed most, using technology to plug gaps and adapting to post-pandemic consumer habits that favor kiosks, delivery and drive-thrus over cashiers at registers.Dine’s net profit margin was 10.1% in its second quarter ended July 3, according to Refinitiv data, down nearly 20% from the same quarter last year because the increasing cost of goods and labor ate into earnings.To be sure, hiring has improved in recent months. Eating and drinking places added 74,100 jobs in July, according to U.S. Bureau of Labor Statistics (BLS) data released on Aug. 5, the strongest monthly growth since February. Restaurant executives say more people are applying for jobs and showing up for work once hired. Some, including Chipotle Mexican Grill Inc (NYSE:CMG), say they are at or above their 2019 staffing levels, and fast food is faring better than full service.Chipotle credits this to its attractive wages and benefits, though most major chains have also hiked pay and extras. Since February 2020, seasonally adjusted average hourly wages for all employees at eating and drinking places rose nearly 18% to $18.42 in June, according to preliminary BLS data – though that has barely kept up with inflation. Despite the wage hikes, the industry is nearly 635,000 workers short of where it was before the COVID-19 pandemic began in February 2020, or 5.1% lower as of July, according to BLS data. A National Restaurant Association survey of operators in early August found 65% did not have enough employees to meet customer demand. Marco’s Pizza, with about 20,000 total employees across more than 1,000 U.S. locations, is roughly 2,200 employees short of staffing needs, an 11% gap, co-CEO Tony Libardi told Reuters.The 1,100 Burger King and Popeyes locations run by franchisee Carrols Restaurant Group (NASDAQ:TAST) Inc currently have about 21 employees per store, 12% fewer than the 24 per store in 2019, Anthony Hull, Carrols’ chief financial officer said in an Aug. 11 earnings call.Many restaurant chains are putting new tech in place to offset the loss of workers where possible, and reassigning employees to wherever they are most needed.Jose Cil, Chief Executive Officer of Popeyes parent Restaurant Brands International (NYSE:QSR) Inc, said in an interview that franchisees are adding equipment that can speed cooking, including fryers with automatic filtration systems. “It helps the employees really focus on the thing that matters, which is serving the guest,” he said.McDonald’s Corp (NYSE:MCD) is testing drive-thru voice ordering in two dozen Illinois restaurants, according to BTIG analyst Peter Saleh. But accuracy was still about 80%, below the 95% needed for wider adoption, Saleh said. Chili’s Grill & Bar, owned by Brinker International (NYSE:EAT) Inc, is considering how to streamline kitchen prep work. Every day, employees count out the shrimp used in some dishes ahead of time, bag the portions and chill them for later. But that could instead be done while cooking the dish.”Why don’t we get rid of that and save millions of dollars in terms of labor that can either be redeployed back into the restaurant or potentially to the bottom line if we can change the amount of hours that we deployed to the business,” Chief Executive Officer Kevin Hochman said in an earnings call on Aug. 24.With 1,128 U.S. Chili’s locations open 362 days per year, one hour of labor saved per restaurant per day would add up to 408,336 hours of labor efficiencies per year across the chain.Privately owned Marco’s Pizza is also using new machines that help cut and roll dough, so the process takes only a couple hours every day compared to 7 or 8 hours previously, Libardi said.”We would like to hire and be fully staffed but we’re preparing for the inability to do that, permanently,” he said. More

Investing.com — Investors weigh up comments from the Federal Reserve’s top policymaker and several other global central bankers, as they pledge to rein in soaring inflation – even if it slows economic growth. The U.S. gears up for another key monthly jobs report later this week and how that figure could play into the Fed’s monetary policy calculus. Oil prices move higher, Bitcoin’s most recent sub-$20,000 period marches on, and preliminary steps to list Porsche are reportedly in the works. Here’s what you need to know in financial markets on Monday, 29th August.1. Tough Talk in Jackson HoleFederal Reserve chair Jerome Powell delivered his long-awaited keynote address at the annual Jackson Hole central banking symposium on Friday and, at least according to ING analysts, he “did what he needed to do.” That task was, chiefly, to promise to keep pushing up interest rates to quell surging consumer prices, despite potential “pain” on households and businesses from a subsequent slump in growth. ING particularly lauded Powell for not pledging to treat markets “gently” in his bid to bring down inflation.At the same time, European Central Bank officials warned that a “sacrifice” would be needed to stamp out price pressures. ECB executive board member Isabel Schnabel and Banque de France governor François Villeroy de Galhau both added that monetary policy in Eurozone would remain tight for the foreseeable future. Traders will get a glimpse into the impact of recent ECB borrowing cost hikes when the latest Eurozone inflation data comes out on Wednesday this week.2. Key Data AheadThe fallout from Powell’s comments carried into Monday, with Asian and European markets sliding into the red. In the U.S., S&P 500, Dow Jones and Nasdaq futures are all trading lower, adding on to a bruising Friday session that saw the three main Wall Street indices lose between 3% to 4%.Meanwhile, the 2-year U.S. bond yield, which is highly sensitive to short-term interest rate expectations, rose to as high as 3.4890% – a level last seen in 2007. The yield on 10-year Treasuries also jumped to 3.114%.The focus now shifts to U.S. payrolls data due out on Friday. The previous labor market report showed an unexpected acceleration in job growth in July, and any additional gains may give the Fed even more reason to maintain its current pace of monetary policy tightening.3. Oil Prices FirmerDespite the gloomy economic outlook out of Jackson Hole, oil prices added on to last week’s gains on Monday. London-traded Brent oil futures rose 0.59% to $99.49 a barrel, while U.S. West Texas Intermediate futures increased by 0.64% to $93.66 as of 06:17 ET (10:17 GMT).Much of this is due to the Organization of Petroleum Exporting Countries and its allies – known as OPEC+ – who have pledged to slash supplies to help stabilize crude prices. Saudi Arabia, which in effect heads OPEC+, also said last week that it will cut its output.The drawdown in supplies would also offset a potential lifting of U.S. sanctions on Iran, which would subsequently release a large amount of fresh crude into the market.Meanwhile, recent data suggest that oil demand in some economies may be starting to recover. The U.S. exported oil at a record level earlier this month, while U.S. crude inventories have also fallen by a bigger-than-expected pace in the past two weeks.European crude demand is also set to pick up this year as the bloc weans itself off Russian natural gas imports. Rising natural gas prices, as a result, are likely to spur more crude use for heating.4. Bitcoin Under $20KThe reverberations from Powell’s speech were felt in cryptocurrencies, as the fears over a potential economic decline stymying interest in riskier assets. Bitcoin is now trading at below the $20,000 mark for the first time since mid-July, with the digital token falling by 0.89% on Monday to $19,818.8.The $20,000 level is seen by many analysts as a potential support for Bitcoin, though some have warned that the actual floor could be even lower.The slump also put an end to a short August rally that sent the price of Bitcoin to more than $25,000. That surge was cut short by rising expectations that the Federal Reserve and other central banks will enact big interest rate hikes.Bitcoin has now lost around a fifth of its value since August 15th.5. Porsche IPO Gearing Up?The first steps in the long road ahead for Porsche’s hotly-anticipated initial public offering are expected in the coming days, according to a Reuters report citing six people familiar with the matter. The boards of parent group Volkswagen (ETR:VOWG_p) and Porsche’s biggest shareholder Porsche SE (F:PSHG_p) could soon make a recommendation on the floatation, the people said, which would then be sent to the boards of both companies for approval.That would then reportedly lead to a formal announcement of the IPO as soon as the first week of September, although no decisions have been formally taken yet.Executives may face a tough battle wooing would-be investors to back the luxury car brand. Only 12.5% of stock in Porsche AG will be made available on the open market, which would limit the impact a stake could have on boardroom decisions. Meanwhile, inflation fears and the less-than-rosy growth outlook – not to mention the impact of the war in Ukraine on European gas supplies this winter – have raised eyebrows about the future health of the entire VW group.Indeed, Reuters reports that VW could scrap the listing altogether if they cannot cobble together enough demand. More

US interest rates are at their highest level since the financial crisis. In recent months, the inflation-fighting Federal Reserve has hiked the cost of money as much as it did in a span of a few years. The hawkish tone of the central bank at the Jackson Hole meeting is taking steam out of a premature rally in US stocks.Higher rates would hurt most for companies whose balance sheets ballooned during the long period of low rates. High energy prices and supply chain disruption will compound the problem. A stagflationary scenario of rising prices, higher interest rates and slowing growth represents the worst of all possible outcomes in the worst of all possible worlds. The resilience of one-fifth of non-financial S&P 500 companies would be tested, according to a Lex data screening. Companies hardest hit during the pandemic such as cruise operator Carnival, American Airlines and casino group Caesars Entertainment are all in the danger zone again. The findings mirror a screening of European companies. Here, interest cover for one-fifth of big listed companies would fall below two times operating profits. We assumed interest costs would rise by half and earnings fall a quarter from current forecasts. Free money handed out during the pandemic — with the enthusiastic assistance of Wall Street — would cushion balance sheets, however. American Airlines might not be able to cover its interest payments from earnings. But $12bn of cash and equivalents represents five years of interest cover, even after adjusting for higher rates.Carnival is in a similar boat. The cruise line has enough cash to meet interest payments for more than four years at past rates. Its rival Royal Caribbean meanwhile can only cover last year’s interest charge 1.5 times with cash on hand.Smaller businesses are at greatest risk. A stress testing of S&P 400 mid-caps found a quarter would fall below two times interest cover in our severe scenario. Available liquidity was also lower as a share of current assets. The little guys always end up carrying the depreciating buck.The Lex team is interested in hearing more from readers. Please tell us how dangerous you think higher rates are to leveraged companies in the comments section below. More

China’s property-driven growth model, which has powered the global economy for at least two decades, is looking increasingly broken. Fixing it — or finding alternative engines for the world’s second-largest economy — could take several years. This is why the choices that now confront Beijing’s policymakers are so crucial.The task requires an accurate assessment of what has gone wrong. On one level this is simple: the biggest property boom in human history has ended and is now turning into a bust. But a deeper level of analysis reveals a more complicated and intractable malaise at the heart of China’s political economy.Local governments, which financed their investment activities largely by selling land to property developers, are finding it harder to repay and service huge debts. This is mostly because developers now have little money or appetite to buy the land. Almost 20 of them are in such dire financial straits that they have defaulted on bonds in the offshore market this year.This dynamic is having knock-on effects. Local government financing vehicles — the thousands of poorly-regulated funds owned by city governments all over the country — are burdened by “hidden” debts that Goldman Sachs has estimated to total Rmb53tn ($8.2tn) — or 52 per cent of GDP — at the end of 2020. Beijing is urging local governments to clean up such “off balance sheet” borrowing, with the result that LGFVs are reining in their horns.The result is that fixed asset investment (FAI), which funds the construction of city precincts, roads, railways, ports and a thousand other pieces of infrastructure, has slumped precipitously this year, robbing the economy of one its main drivers. From January to July this year, FAI grew at just 5.7 per cent — compared with an average of 17.87 per cent between 1996 and 2022.So, the question before China now, as it allocates modest funds to alleviate the pain in its property sector, is stark. If the growth engine that has contributed so much to global prosperity is now gummed up with debt, what — if anything — could replace it? There is one obvious answer. China needs to fundamentally reorientate its economy away from the current over-reliance on investment and towards greater consumer spending. Private consumption accounted for 38.5 per cent of nominal GDP at the end of last year — a much lower ratio than those prevailing in the US or EU.This means that as Beijing charts a way out of its local government debt malaise in coming years, it cannot afford to shift the burden to households. It needs to create an economy in which salaries rise strongly and vibrant, well-regulated financial markets provide a healthy long-term return on savings.In addition, Beijing should remind itself that much of the extraordinary economic progress of the past four decades has derived from the dynamism of the private sector. In recent years, however, the downfall of Jack Ma, founder of Alibaba, and the diminished standing of several leading privately owned tech companies has convinced observers that Beijing has moderated its support for private enterprise.The required shift to embrace the consumer and the private sector will also require a counter-intuitive shift in mindset. Authoritarian governments prefer economic levers that they can control. Mobilising supply through muscular investment plans keeps ruling parties in the driving seat. Catering to the more democratic tastes of consumers does not.Beijing should prepare itself for a long and difficult economic transformation that it can no longer avoid. The world should prepare itself for the end of a four-decade era of supercharged Chinese growth. More

Good morning. Central bankers face a more challenging economic landscape than they have experienced in decades and will find it harder to root out high inflation, top officials and monetary policymakers have warned.The world’s leading economic authorities this weekend sounded the alarm about the forces working against the Federal Reserve, European Central Bank and other central banks as they try to combat the worst inflation in decades.“At least over the next five years, monetary policymaking is going to be much more challenging than it was in the two decades before the pandemic struck,” Gita Gopinath, the IMF’s deputy managing director, told the Financial Times in an interview at Jackson Hole, Wyoming.“We are in an environment where supply shocks are going to be more volatile than we’ve been used to, and that’s going to generate more costly trade-offs for monetary policy,” she said.Jay Powell on Friday delivered his most hawkish message to date on the US central bank’s determination to tame surging inflation by raising interest rates. In the hotly anticipated address, the Fed chair said successfully reducing inflation would probably result in lower economic growth for “a sustained period”.Opinion: Powell’s speech was a chance to address the policy errors of the past 18 months, try to realign monetary policy expectations and establish a path for resetting the Fed’s monetary policy framework. In the event, writes Mohamed El-Erian, his short speech left much unsaid. Thanks for reading FirstFT Americas. Have a great week — GordonFive more stories in the news1. Tempers flare in Brazil’s first presidential TV debate Jair Bolsonaro accused his main election challenger Luiz Inácio Lula da Silva of overseeing “the most corrupt government in Brazil’s history” in the first televised debate of the country’s presidential election campaign. Lula, a leftwing ex-president who is leading most opinion polls in the run-up to the October 2 ballot, countered by accusing the far-right incumbent of “destroying the country”. Go deeper: Minas Gerais has become the key swing state in Brazil’s most heated electoral contest since military rule.2. US intelligence to examine documents seized from Donald Trump The US director of national intelligence has told members of Congress that her office will lead a review into what FBI agents took from Mar-a-Lago as part of their investigation into whether the former president broke the law in his handling of those documents. Government lawyers have until Tuesday to give a fuller account to the courts of what they recovered in the search, as both sides gear up for another week of legal proceedings.3. Singapore to tighten retail access to cryptocurrencies Singapore’s financial regulator has announced it will further restrict retail investor access to digital currencies after a series of scandals in the city state. Ravi Menon, managing director of Singapore’s monetary authority, said in a speech today that cryptocurrencies are not a “viable form of money or investment asset” owing to their extreme price volatility.4. EU set to suspend visa travel agreement with Russia EU foreign ministers are this week set to back suspending the bloc’s visa facilitation agreement with Moscow in an effort to curb the number of travel permits issued after some eastern member states threatened to unilaterally close their borders to Russian tourists.5. China and Russia join forces for Vostok military exercises In a sign of Moscow’s deepening ties with Beijing and of the Kremlin’s desire to project a “business as usual” image despite the mounting costs of its war in Ukraine, Russia and China will embark on a series of military exercises this week. The Russian and Chinese troops will be joined by forces from non-western allies including Belarus and India.The day aheadOutlook for stocks Global stocks fell, Treasury yields climbed and global currencies lost ground against the dollar today following the hawkish comments from Jay Powell on Friday. Moreover bets against the euro have risen to the highest level since the pandemic hit Europe more than two years ago.Nasa launch Bad weather and a fuel leak has not halted the countdown to the launch of Nasa’s huge Space Launch System rocket from the Kennedy Space Center in Florida. It is the first flight for Nasa’s Artemis programme that is capable of carrying humans to the Moon. Watch a live stream here. (FT, Nasa)

What else we’re reading Everyone pays the cost as the rich keep spending Rana Foroohar was shocked at paying $800 for a single shopping cart of groceries in the Hamptons on a recent holiday. She says people like her are not cutting back on spending and that may be an important and under-explored factor driving the inflation felt by all.No country for young men in Silicon Valley For decades, very young company founders have brought to bear the innovation, disruption and vision that the tech sector prides itself on. But the next generation of youthful prodigies hasn’t arrived, which reflects both shifting American demographics and the new landscape of the industry.Can web3 help get us to net zero? A mass of tech ventures are exploring how to fuse concerns about global warming with the public’s interest in web3 technology. From the mundane to the outlandish and wacky, these projects are promising variously to “green” bitcoin, make NFTs sustainable and solve niggling problems in carbon markets once and for all. Can they work?Boom chief fights supersonic travel headwinds The makers of Overture have claimed they can cut flight times from New York to London from 6.5 hours to 3.5 hours, while Tokyo to Seattle would drop to 4.5 hours from 8.5 hours. But the absence of an engine-maker for the supersonic jet is one of several factors fuelling aviation industry doubts about the claims.Liz Truss’s not-so-special relationship Britain’s foreign secretary, on the cusp of becoming prime minister, has at times irked US officials with a not-so-diplomatic style that has been described as blunt, binary and assertive. Some say Truss is quick to take maximalist positions without thinking of the consequences.Europe’s port cities vs the cruise ship Cruises are back on the holiday agenda after a two-year slowdown. But while demand is approaching pre-pandemic levels, residents and politicians in the cities where cruise enthusiasts step ashore have not all welcomed them back with open arms.Reader feedbackLast week I asked you to share your views on Joe Biden’s proposal to forgive student debt for millions of Americans. Here are a couple of the responses I received. Student debt relief that targets lower-income teachers, police, nurses, etc. is a very good compromise. It splits the difference between those who want full relief for everyone, and those who want no relief for anyone. Both are too extreme, and extremism does not make good public policy — Andrew Elk, Atlanta, Georgia.Why is no one addressing the elephant in the room, that is, the long-term excessive increases in the cost of higher education? Many universities now have endowments worth billions and few of them (Grinnell College in Iowa is a notable exception) use these funds to significantly limit the growth in the costs that they pass on to vulnerable students and their parents. President Biden’s order will only incentivize these institutions to continue to raise their tuition and fees — Steve Benton, Golden Valley, Minnesota.Thanks to all those readers who replied. Please keep your emails coming and let me know what you think of this newsletter and any thoughts you have about future coverage — Gordon. More

Globalisation is not just about trade and technology. It is also about politics. Political change, above all the collapse of communism, created the conditions for an age of hyperglobalisation. Now political change, above all rising nationalism, is threatening the dense network of economic ties built up over the last three decades. The enemies of globalisation can be found across the political spectrum, from the nationalist right to the anti-capitalist left, and from the environmental movement to the intelligence services.It is true that deglobalisation has not yet really shown up in the trade figures. As my colleague, Alan Beattie pointed out recently, “most standard measures of globalisation — cross-border movements of goods, services, capital, data and people — (are) doing pretty well.”One possible conclusion to draw is that global economic connections and supply chains are now too intricate to be disentangled. While there may be a will to deglobalise, there is no real way.A sudden retreat into economic autarky by the world’s leading trading nations would certainly cause chaos and hardship. But for all the upheaval involved, international economic ties can break down suddenly. Over the past two years, the pandemic and the Ukraine war have demonstrated how vulnerable international trade is to unexpected shocks. Covid-19 shut down global travel and disrupted supply chains. The war in Ukraine led to a rupture in the west’s economic ties with Russia. And the combined political and social forces that are now pushing against globalisation make it likely that there will be further shocks to come.A decade ago, protectionism was still a dirty word in US politics. But the Trump administration started a trade war with China and the Biden administration has kept the tariffs in place. A bipartisan consensus in the US is now pushing for policies to reduce economic dependence on China and to repatriate key industries, in particular semiconductors. India has followed the decoupling trend, banning Chinese tech companies, such as TikTok, as a response to rising tensions with Beijing. The Chinese themselves are active participants in this process of decoupling. Arguably, they made the first significant move, with a drive to promote domestic production of key technologies. Beijing’s “Made in China 2025” policy was announced in 2015, before Donald Trump’s election. When economic logic was more powerful than geopolitical rivalry, the dominant question was: where is it cheapest or most efficient to buy or produce? That led to the construction of intricate cross-border supply chains. But in a world in which international rivalries are growing, different questions are asked. Where it is safest to produce or buy? And should we even be trading with nations that we regard as a threat?The invasion of Ukraine has not just made it seem imprudent to rely on political rivals for key economic inputs, it has also allowed the west’s national security establishment to seize the moral high ground from the free-traders. Jens Stoltenberg, the secretary-general of Nato, says that “freedom is more important than free trade”. There are not many influential voices making the counterargument.The political and strategic arguments for cutting trade ties are increasingly supplemented by arguments about the environment and social resilience. After the pandemic, governments are reluctant to go back to a world in which the production of vaccines, say, or even rubber gloves, is concentrated in just one or two countries. Insisting on domestic production facilities, which once seemed inefficient, now looks prudent. As one senior industrialist puts it: “We’re moving from just in time to just in case.”The potential vulnerability that is preoccupying national security establishments everywhere is semiconductors — crucial for everything from mobile phones to missiles. According to US president Joe Biden, some 90 per cent of the world’s most advanced semiconductors are made in Taiwan by a single producer, TSMC. One senior US official says that a Chinese invasion or blockade of Taiwan would create a “semiconductor nuclear winter”. Rectifying that situation could take many years. But the drive to do just that is now under way with the passage of America’s Chips Act. The US has long had rules that can restrict inward investment on national security grounds. The Chips Act creates new rules that will restrict outward investment, discouraging US firms from making semiconductors in China. National security hawks believe that globalisation meant that the western democracies naively sponsored the rise of hostile rivals such as Russia or China. Leftwing critics associate the “neoliberal” era of globalisation with widening inequality and environmental degradation. There are elements of truth to both of these critiques. But the pressure to cut trade and investment ties is not simply a product of rising nationalism and economic stress — it is also contributes to both processes. For all the discontents that hyperglobalisation has created, I suspect that, in decades to come, the period from 1989 to 2022 will come to be seen as a golden age of peace and prosperity. The world may soon discover that globalisation is the worst possible system — apart from all the [email protected] More

Investor bets that the euro will fall in value have reached their highest level since the pandemic hit Europe more than two years ago as the risk grows that record energy prices will drag the region into recession.Rising wagers against the euro also reflect bullishness on the US dollar, which has been boosted by signals from the US Federal Reserve — reinforced by its chair Jay Powell on Friday — that it will keep raising interest rates to tackle soaring inflation even in a slowdown.As well as the threat of recession, Europe is also grappling with steeply rising prices. At the annual gathering of central bankers in Jackson Hole this weekend, Isabel Schnabel, European Central Bank executive board member, and François Villeroy de Galhau, the French central bank governor, warned that monetary policy would have to stay tight for an extended period in Europe.Speculators built up net short positions on the euro — a way to bet the currency will drop in value — of 44,100 contracts in the week to August 23, up from 42,800 the previous week, according to data published by the Commodity Futures Trading Commission on Friday. It marks the largest bearish position against the euro since the start of the pandemic in the first week of March 2020, when investors held net short positions of 86,700 contracts as the eurozone economy plummeted into a record postwar contraction.The euro has already fallen 15 per cent, dropping below the value of the dollar in the past year. It hit a 20-year-low last week as wholesale gas and electricity prices surged to all-time highs in Europe on fears of Russia throttling crucial energy supplies.“The euro right now is just purely a function of the European energy shock,” said Mark McCormick, global head of FX strategy at TD Securities. “The biggest driver for the next couple of weeks involves what happens with [the] Nord Stream 1 [pipeline from Russia] and heightened gas prices.”He said TD had entered a short euro trade when it was trading at $103.45 and took profit after it recently fell to parity against the dollar. “There is some room that the euro could push lower . . . the short term set-up’s not great,” he said.Surging natural gas prices have prompted investors to reassess how long inflation could stay high, and how hard it could hit the eurozone economy as sectors from fertiliser production to glassmaking warn that high gas prices are constricting output.David Adams, head of G10 FX strategy at Morgan Stanley, said the rising bets against the euro also reflected the role of the dollar as “a safe port in a storm” as well as the fact that the US is not as exposed to the gas crisis. The weak euro is fuelling inflation, increasing the price of imports including energy. Economists expect eurozone consumer prices will have risen at a record rate of 9 per cent in the year to August when the latest data are published on Wednesday. Some ECB policymakers have proposed stepping up the pace at which it raises rates to rein in inflation, saying it should consider a 0.75 percentage point rise at its meeting on September 8, while Schnabel told Jackson Hole that a larger “sacrifice” will be needed to tame inflation than during previous episodes of monetary policy tightening.One risk for investors betting against the euro is that the longstanding “flow of money” away from Europe to invest in the US and other regions could reverse over the next six to 12 months as the ECB raises rates, making eurozone bonds more attractive, said Adams. “The relative attractiveness of holding European paper is going up,” he said. He added that for European investors, the long-term returns from investing in eurozone government bonds could soon exceed those available from US equivalents after deducting the cost of hedging against currency moves.However, Jane Foley, head of FX strategy at Rabobank, said “investors’ views on the euro are becoming more similar to where the market is at on sterling”, as traders look past expected rate rises and focus instead on the gloomy outlook for the eurozone and UK. “The fear of the market is that this isn’t about one difficult winter, this could actually go on for at least two years,” she said. “[The euro] can’t get any upside traction despite the fact that the market is expecting these interest rate hikes.” More

Inflation isn’t new, but price rises can still shock. I recently holidayed in the Hamptons, a tony beach area outside New York, where I was stunned to pay $800 for a single shopping cart of groceries. This wasn’t at some foodie emporium, but rather at the IGA, which is the American equivalent of the UK’s Tesco. Food prices are up everywhere, but in places like this, they have reached nosebleed levels. Wealthy locals and vacation shoppers notice, but seem not to curb their spending. Everyone else is travelling an hour or more to get groceries outside the resort areas, ordering dry goods from Costco and growing their own produce.This story is extreme, but by no means a one-off. To the extent that the wealthy in the US are not yet cutting back on spending, they may be an important and under-explored factor driving the inflation felt by all.The top two-fifths of income distribution in the US accounts for 60 per cent of consumer spending, while the bottom two-fifths accounts for a mere 22 per cent, according to 2020 BLS statistics. Income inequality is not the same as wealth inequality. But the two can go hand in hand. People who make higher incomes tend to receive a greater percentage of compensation in stock. They also have vastly more home equity (which tends to encourage more consumption spending, according to IMF research). The American Enterprise Institute, a right-leaning think-tank, estimated in February that the wealth effect of both asset gains and cash extraction from the refinancing of property (which hasn’t corrected yet, like stocks) represented $900bn, with a consumption impact that started last year and will continue through 2022.Amazon’s Jeff Bezos can build a half-billion-dollar yacht, and it doesn’t change life for anyone but him. But when the top quintile of Americans as a whole enjoy 80 per cent of the wealth effect from rising stock and home values (the AEI’s estimate), I suspect it starts to have a real impact on inflation, and on the overall structure of our economy, which over the course of the past 30 years of real falling interest rates has become highly financialised.Gavekal founder Charles Gave explained the underlying dynamics of all this in a recent piece for clients. “If the market rate [of interest] is too low versus the natural rate, then financial engineering pays off . . . borrowing to capture the spread will lead to a rise in the value of those assets which yield more than the market rate, but also to a rise in indebtedness.”The issue is that fewer new assets will be created — why invest in a factory or workforce training when you can buy back stock? One practical result of this unfortunate Wall Street-Main Street arbitrage is lower productivity. Falling productivity and artificially low rates often equal inflationary recovery periods — just as in the 1970s.The only way out is through the pain of higher interest rates. The market cost of capital must be normalised to reduce financialisation, and the unproductive allocation of resources and inequality that comes with it. Unfortunately, the pain of that paradigm shift (like the benefits of the previous one) won’t be shared equally. Rising rates hit the poor hardest, raising the cost of non-expendable items such as food, housing and payment of credit cards and other loans. The rich can keep spending, while others have to make tougher economic choices.The US housing market is the best example of the economic and social downsides of extremely financialised growth. Historically, high home prices — which are in part a result of more cash buyers and investors in the market, as well as zoning restrictions and financing trends that favour the rich — mean more people are renting. Rents today are rising not just in big cities, but across most of the country.But the people who tend to rent are those least likely to be able to pay the higher prices. According to 2021 Pew Data, 60 per cent of renters are in the lower quartile of American income. If you look at net worth, including asset wealth, that number rises to 87.6 per cent. As more discretionary income goes on basics, the consumption picture is further skewed towards the rich.Of course, no economic paradigm lasts forever. Higher interest rates will eventually bring down artificially inflated asset values. Meanwhile, the Biden White House is doing what it can to buffer inflationary pain for working people. It has been releasing strategic petroleum reserves in a partly successful effort to lower prices at the pump, extending pandemic-era caps on some student loan payments and pushing for antitrust action in areas where corporate concentration (which has grown hand in hand with financialisation) may be responsible for some inflationary pressure. But more changes are needed. The success of corporate lobbyists in overturning efforts to roll back carried interest loopholes are shameful. Student debt forgiveness — no matter how generous it is — will not change the fact that the cost of four years of private university in the US (an elastic cost that can be bid up indefinitely by the global rich) is nearly double the median family income. Housing markets continue to cry out for major reform.I suspect it will take a younger generation to push through these sorts of systemic changes. They simply don’t have as much asset wealth to [email protected] More