Economy

BENGALURU (Reuters) – Bank Indonesia (BI) is expected to leave its policy rate unchanged at record lows on Tuesday, a small majority of economists estimate in a Reuters poll. BI is one of a few major Asian central banks that have not lifted interest rates from pandemic-era levels despite many policymakers around the world raising them to battle high inflation. In an Aug. 12-19 poll, 16 of 27 economists, or nearly 60%, said it would keep its benchmark seven-day reverse repurchase rate unchanged at 3.50% at its Aug. 23 meeting.Eleven economists expect the central bank to raise rates by 25 basis points to 3.75%.While growth in Southeast Asia’s largest economy has stayed strong there are signs of price pressures heating up.Calls for a rate hike gathered pace after last quarter’s growth showed the economy had outperformed expectations. However, Dody Budi Waluyo, the central bank’s deputy governor told Reuters BI would only raise rates when it sees a persistent rise in core inflation.While headline inflation rose to a seven-year high of 4.94% in July, core inflation was 2.86% and within the BI’s 2% to 4% target range.”The main reason for BI to hold rates is due to benign core inflation, reflecting that demand recovery is not yet robust enough for a rate hike cycle. BI will wait until core inflation heats up,” said Irman Faiz, economist at Bank Danamon Indonesia.”On top of that, IDR is quite resilient.”Among 13 of the 16 economists who said the central bank would keep policy rates unchanged at the upcoming meeting and provide long-term forecasts, 10 said it would move in September. The remaining three forecast it would wait to raise rates in the fourth quarter. Several economists have warned about capital outflow pressures if Indonesia keeps rates on hold as other countries raise rates, adding further pressure on the rupiah which is down about 4% this year.The poll found economists expect further tightening ahead. The rate was seen reaching 4.25% by end-2022, with eight of 22 forecasting rates to go even higher. Among the smaller sample of respondents who had a view until end-2023, 10 of 15 saw rates at 4.75% or higher, including six who forecast borrowing costs to reach 5.00% or higher – where they were before the pandemic. More

Wealth managers have urged retail investors to take account of the impact of rising inflation in the wake of a 10.1 per cent surge in UK consumer prices revealed this week.Savers should look to pay off debt, review present and future spending intentions and retirement plans, and try to reduce the effects of inflation on their portfolios, as a result of soaring prices, financial experts said.The official inflation statistics for July broke through the double-digit barrier for the first time in more than four decades to hit an annual 10.1 per cent. UK households face the highest inflation in the G7 group of advanced economies.As well as intensifying worries about the cost of living, inflation leads to rocky market performance, which makes it harder for savers to guard their wealth through investing. Only gold and residential property investments gained ground in inflation-adjusted terms in the year to the end of June, according to analysis from investment platform Interactive Investor, while other asset classes lost value in real terms. “Rising inflation continues to attack consumers from all angles and shows no signs of easing off any time soon,” said Les Cameron, savings expert at M&G Wealth.Cameron said that official inflation statistics were more useful as a broad economic gauge than as a guide for households rethinking their budgets. “The inflation measure is ‘one size fits all’, so depending on your age and lifestyle your reality may seem wholly different,” he said.Rather than assuming that prices will rise about 10 per cent across the board, people need to dig into their personal budgets to see how much they spend in different categories and how much those costs are going up. Those on lower incomes, who spend a larger share of their income on food, will be hit harder as food prices rose 12.7 per cent, for example. Housing costs went up by an overall 9.1 per cent increase in the year to July, an impact split between renters and homeowners, many of whom will have to worry about the knock-on effects on their mortgages. Adrian Lowery, financial analyst at UK wealth manager Evelyn Partners (formerly Tilney, Smith & Williamson), said higher inflation increased the pressure on the Bank of England to raise interest rates. “[This] should really focus the minds of borrowers who can take steps to try and lock in at rates that are on the market now,” he said. “Some lenders will be considering withdrawing their best rates after this inflation data.”“The increasing cost of servicing mortgage debt is inflicting something of a double whammy for homeowners, and particularly those with larger loans that are coming up for renegotiation in the coming year,” he added. The cost of other borrowing is also expected to rise, so experts suggest households pay down as much debt as possible before higher interest rates bite even harder. Retirees face particular challenges as rising prices make it tempting to take more out of their pensions savings, at the same time as markets have hammered portfolios. “The natural thing to do in response to rising living costs might be to take more income from your pot to maintain your standard of living, but this increases the risk of your fund running out early,” said Tom Selby, head of retirement policy at AJ Bell. “This risk will be further exacerbated if larger withdrawals are combined with substantial market falls — something many have already experienced in 2022.” Among AJ Bell customers, 16 per cent of pension investors were increasing their withdrawals. But a larger cohort, 24 per cent, were cutting back their income as the markets fell, and 60 per cent were holding steady. “In order to retire, people will need bigger pension pots than before to cope with rising prices, but at the same time, they are likely to feel even more cautious about using their retirement savings, for fear of running out of money too soon. They are caught between a rock and a hard place,” said Becky O’Connor, head of pensions and savings at Interactive Investor.The simultaneous sell-off in stocks and bonds for much of this year has been particularly hard on do-it-yourself investors, since conventional wisdom holds that losses in one asset class should be counterbalanced by the other. Interactive Investor said the average Isa portfolio on its platform lost 16 per cent in the year to June. Dan Howe, head of investment trusts at Janus Henderson, said: “It is essential in inflationary environments like this that families and individuals take action to protect their savings . . . Diversification is our friend in times of uncertainty.” More

LONDON (Reuters) – The prospect of a global recession and doubts over economic stimulus in China, the world’s biggest user of raw materials, add to the challenges of mining companies as they grapple with energy costs, raising the risk of downsizing and layoffs.None of the major diversified miners is under financial strain after years of strong commodity prices.But leading miners Rio Tinto (NYSE:RIO), Anglo American (LON:AAL) and Antofagasta (LON:ANTO) are among many to have posted a fall in half-year earnings and lowered shareholder payouts.Even those whose profits stayed high, including BHP Group (NYSE:BHP) and Glencore (OTC:GLNCY), flagged the risk sluggish commodity demand over the coming months could lower returns. The IMF forecast that global growth could slow to 2.9% in 2023, stalled by higher interest rates, inflation and a prolonged energy crisis. At the same time, China, the world’s second biggest economy that accounts for more than 50% of global demand for raw materials, is sticking to its strict zero-COVID policy, enforced by recurrent lockdowns that slow output and demand.So far, it has fought shy of the huge amounts of stimulus it introduced when Chinese economic weakness led to a drop in demand and a commodity price crash in 2015-6.”Many industry players seem to be banking on the fact that China will launch a big stimulus package very soon,” said Jean-Sebastian Jacques, former CEO of Rio Tinto, one of the miners most exposed to demand from China, the leading buyer of its iron ore.”But unless there is an immediate domestic agenda, it is difficult to see why China would launch a large stimulus package that would benefit the world especially in the context of a fragile geopolitical environment.”DARKENING MOODEconomically interdependent, China and the West saw their relations worsen this year after Russia’s invasion of Ukraine began in February.The mood deteriorated further this month after the U.S. House of Representatives Speaker’s visit to Taiwan against Beijing’s wishes. If commodity demand falls and lowers prices, companies could be forced to consider reducing capex, review discretionary spending and slow recruitment, Jacques said.The next phase would be “restructuring marginal assets that are not making money, be aggressive on headcount reduction and, even more difficult, reopening supply agreements,” Jacques said, referring to long-term contracts with clients that may not reflect current costs.While the miners’ profits rise or fall in line with the raw materials they produce, they are mostly punished by higher costs for energy as their own production is not enough to fuel their energy-intensive operations.The invasion of Ukraine by leading energy producer Russia has driven energy costs for most of the world, pushing inflation to the highest in decades and making global recession ever more likely.Europe’s biggest economy Germany is especially vulnerable because of its high dependence on Russian gas supplies, which Russia has reduced as tensions with the West have risen.The government’s emergency planning would include rationing supplies to industry to protect consumers and emergency services and would be expected to reduce production at major commodity users such as automakers Volkswagen (ETR:VOWG_p) and BMW Group.The auto industry is already reporting signs of lower consumer demand as inflation cuts spending power.”The nightmare scenario would be that due to the energy shortages, some industries, the German car industry and chemical industry for example, are forced to take extended shutdowns,” said Ian Woodley, portfolio manager at Old Mutual, which holds shares in Anglo, BHP and others. “These are huge consumers of commodities, so that would obviously have kick-on effects as well as further impacts on a shaky supply chain.”  Energy bills have forced zinc and aluminium smelters in Italy, Norway, Slovakia, Spain and the Netherlands to halt production, and more cutbacks are likely, companies have said. “There is no point in us producing if there are no automotive producers that want to buy parts,” Paal Kildemo, CEO of aluminium maker Norsk Hydro (OTC:NHYDY) said after earnings in July. More

Investing.com — It’s the dog days of summer, and there’s nothing on either the data or earnings calendars to really fire the imagination. The vacuum has been filled by an egregious pump-and-dump in Bed Bath & Beyond stock by Ryan Cohen, which appears to have spilled over into crypto markets, as his army of retail investor followers was forced to cover losses on their bets. Stocks are set to open lower, after disappointing earnings from Kohl’s and Xiaomi. Deere and Foot Locker are due to report. European power prices ease as water levels in the Rhine recover, but a drought in China is cutting output at factories along the Yangtze basin. Here’s what you need to know in financial markets on Friday, August 19.1. Bloodbath and BeyondBed Bath & Beyond (NASDAQ:BBBY) stock plummeted in premarket trading after Chewy (NYSE:CHWY) founder Ryan Cohen unloaded his entire stake in the company, booking an estimated profit of around $60 million on a five-month investment.The move came at the end of a three-week long short-squeeze on the ‘meme’ stock, which retail investors had aggressively stoked on the hope that Cohen – who became chairman of the original meme stock company GameStop (NYSE:GME) after accumulating a stake in a similar fashion – would stay on board to oversee a turnaround at the struggling retailer.That seems a forlorn hope now. The company is still losing customers and has yet to replace its last chief executive.2. Crypto liquidationsThe abrupt reversal of BBBY stock may have contributed to one of the worst days in weeks for the cryptocurrency universe.Data analytics company Coinalyze showed hundreds of millions of dollars’ worth of crypto liquidations in the hours following the disclosure, although that may have included unrelated selling out of Asia. Bitcoin fell 7.6% to its lowest in three weeks, while Ethereum fell 6.2%.Ethereum has been under pressure since pioneer Vitalik Buterin said on Wednesday that the long-anticipated switch to a system that uses less energy to mine new coins won’t lead to a reduction in so-called ‘gas fees’, the payments individuals make to complete a transaction on a blockchain.3. Stocks set to open lower; Kohl’s, Xiaomi flop; Deere in the spotlightU.S. stock markets are set to give up most of their weekly gains at the open, as faith in the recent rally weakened amid signs of continued hawkishness at the Federal Reserve.By 06:15 ET (10:15 GMT), Dow Jones futures were down 205 points or 0.6%, while S&P 500 futures were down 0.8%, and Nasdaq 100 futures were down 0.9%.Stocks likely to be in focus later include Applied Materials (NASDAQ:AMAT), after an impressive earnings beat late on Thursday, while Deere (NYSE:DE), Foot Locker (NYSE:FL), and Madison Square Garden (NYSE:MSGS) report earnings before the open. Overnight, Chinese smartphone maker Xiaomi (HK:1810) reported a 20% drop in revenue and an 83% drop in profit that may have a read across to the chipmaking and electronics sectors. Kohl’s Corp (NYSE:KSS) also disappointed late on Thursday.4. Rhine recovers, Yangtze dries outEuropean power prices moderated a little after rainfall in the middle of the week allowed German authorities to forecast a significant rise in water levels in the river Rhine next week. They had fallen so low over the previous weeks that many power stations in southern Germany were unable to receive coal and heating oil shipments via the crucial waterway.The effects of surging energy prices were visible in another blockbuster set of German producer price data that kept up the pressure on the European Central Bank to raise rates by 50 basis points at its September meeting. Across the North Sea meanwhile, energy price woes drove U.K. consumer confidence to a new all-time low.Drought issues aren’t confined to Europe. The river Yangtze in China has also sunk to half its usual depth due to a drought that has cut hydropower supplies, forcing a variety of industries to cut or even stop production. Thousands of factories that make processor chips, solar panels, and auto components in Sichuan and Chongqing shut down this week for at least six days, according to the Associated Press.5. Oil heads for weekly loss on strong dollar, economy fearsCrude oil prices weakened again on Friday and are on course to book a hefty weekly loss, as fears for the global economy mount. A rising dollar, which makes oil more expensive for non-dollar-based economies, is also making things worse.By 06:30, U.S. crude futures were down 1.8% at $88.93 a barrel, while Brent crude futures were down 1.8% at $94.89 a barrel.Some tension that had mounted after Russia’s threats regarding the Zaporizhzhya nuclear power plant receded, as those threats failed to materialize. Also weighing on prices were reports that Russia’s exports rose again in July, finding a way to energy-hungry emerging markets after being rejected by Europe, Japan, and the U.S. More

China’s Huawei has signed a deal to build 161 telecoms towers across the Solomon Islands in a sign of strengthening ties between the Pacific nation and Beijing just months after they agreed a controversial security deal. China signed a security and economic pact in April with the Solomon Islands that ratcheted up geopolitical tensions in the Pacific and triggered a stern reaction from the US and Australia in a bid to counter Beijing’s growing influence in the region.The contract between the Solomon Islands and Huawei will be funded by the Export-Import Bank of China, which leads the country’s state investments overseas. The bank will loan almost Rmb450mn ($66mn) to the country over a 20-year period at a 1 per cent interest rate to fund the project.“This proposal will be a historical financial partnership with the People’s Republic of China since the two countries established diplomatic ties in 2019 as the two countries work closely to ensure the successful implementation and operation of the project,” the Solomon Islands government said in a statement.Telecom networks have become a focal point of friction in the Pacific. Australia agreed to fund a subsea cable to the Solomon Islands in 2018 to prevent Huawei from winning the contract. It then bankrolled Telstra’s acquisition of Digicel, the dominant telecoms company in the Pacific islands, this year to stop any potential sale to a Chinese operator. Canberra is also funding the construction of six towers in the Solomon Islands. Fergus Hanson, a director at the Australian Strategic Policy Institute think-tank, said that the Huawei agreement was a “slap in the face” for Australia’s prime minister Anthony Albanese, who was assured by his Solomon Islands counterpart Manasseh Sogavare last month that Canberra remained the country’s top partner. “This is another blow to the credibility of Australian diplomacy in the region,” Hanson said, adding that the deal raised national security and debt diplomacy concerns.

Work will begin next year and 48 of the towers are due to be erected before the start of the Pacific Games in Honiara in November 2023. China is also funding the construction of a stadium for the event. The Solomon Islands said that the tower build was a financially viable project. But one senior telecoms executive was sceptical that the government would generate enough money from the network to pay back the loan, given the size of the lending package, low population density outside Honiara and low average revenue per user levels across the Pacific.Huawei’s 5G equipment has become the epicentre of the tensions between Washington and Beijing in recent years, as countries including Australia and the UK opted to ban the Chinese supplier and its domestic rival ZTE from building networks. More

U.K. inflation jumped to a 40-year high of 10.1% in July as food and energy costs continued to soar, exacerbating the country’s cost of living crisis.
The Bank of England expects consumer price inflation to top out at 13.3% in October.
The country’s average energy bills (set via a price cap) are expected to rise sharply in the fourth quarter to eventually exceed an annual £4,266 ($5,170) in early 2023.

A high street decorated with British Union Jack bunting in Penistone, UK. The End Fuel Poverty Coalition has warned “a tsunami of fuel poverty will hit the country this winter.”
Bloomberg | Bloomberg | Getty Images

LONDON — Facing soaring energy bills, rising costs and rapidly declining consumer purchasing power, small businesses across the U.K. are struggling to make ends meet.
New data on Wednesday showed U.K. inflation jumped to a 40-year high of 10.1% in July as food and energy costs continued to soar, exacerbating the country’s cost-of-living crisis.

The Bank of England expects consumer price inflation to top out at 13.3% in October, with the country’s average energy bills (set via a price cap) expected to rise sharply in the fourth quarter to eventually exceed an annual £4,266 ($5,170) in early 2023.
On Wednesday, a director of U.K. energy regulator Ofgem quit over its decision to add hundreds of pounds to household bills, accusing the watchdog of failing to strike the “right balance between the interests of consumers and the interests of suppliers.”
Real wages in the U.K. fell by an annual 3% in the second quarter of 2022, the sharpest decline on record, as wage increases failed to keep pace with the surging cost of living.
A new survey published Friday also showed consumer confidence falling to its lowest level since records began in 1974.
‘Absolute madness’
“While the energy price caps do not apply to businesses directly, millions of small business owners are still experiencing increased energy bills at a time when costs are rising in most operational areas,” said Alan Thomas, U.K. CEO at insurance firm Simply Business.

“Simultaneously, consumer purchasing power is going down as Brits cut back on non-essential spending, harming the books of SME [small and medium-sized enterprise] owners.”
This assessment was echoed by Christopher Gammon, e-commerce manager at Lincs Aquatics — a Lincolnshire-based store and warehouse providing aquariums, ponds and marine livestock.
The business has seen its energy costs rise by 90% so far since the war in Ukraine began, Gammon told CNBC on Thursday, and its owners are provisioning for further increases in the coming months.

“We are combating the rising cost with switching everything to LED, solar panels, wind turbines (planning in process) and closing down unused systems,” Gammon said.
“We have also had to increase the price of products — most of these have been livestock as they are now costing more to look after.”
Customers are increasingly withdrawing from keeping fish and reptiles due to the cost of maintenance, and on Wednesday the store had a customer bring in a snake they could no longer afford to care for.
The spiraling costs forced Lincs Aquatics to close a store in East Yorkshire, laying off several workers, while trying to offer pay rises to staff at its two remaining locations in Lincolnshire in order to help them through the crisis.
The business is also working to expand its online shop due to rising in-store upkeep costs, as heating water for marine aquariums and purchasing pump equipment become ever more expensive.
In early July, a quarterly survey from the British Chambers of Commerce found that 82% of businesses in the U.K. saw inflation as a growing concern for their business, with growth in sales, investment intentions and longer-term turnover confidence all slowing.

“Businesses face an unprecedented convergence of cost pressures, with the main drivers coming from raw materials, fuel, utilities, taxes, and labor,” said BCC Head of Research David Bharier.
“The continuing supply chain crisis, exacerbated by conflict in Ukraine and lockdowns in China, has further compounded this.”
BCC Director General Shevaun Haviland added that “the red lights on our economic dashboard are starting to flash,” with almost every indicator deteriorating since the March survey.
Phil Speed, an independent distributor for multiservice company Utility Warehouse, based in Skegness, England, liaises with brokers to find energy deals for business clients.
He told CNBC earlier this week that for the first time in 10 years, he had been unable to obtain a better deal for a client than their out-of-contract rate — the typically expensive rates paid when a business or individual does not have a contracted deal in place.
“I think the unit rate she was quoting was 60p [pence] a unit for gas, which is just ridiculous. I’d imagine a year ago, we’d have been looking at 5 or 6p. It’s just absolute madness,” Speed said.
“We’ve got no idea what’s going to be presented to us, because we’ve got no idea what’s going to happen. The price is just going ballistic. No-one’s going to buy it.”
The cost of gas for both businesses and consumers are only expected to increase through the colder winter months. Speed noted that local cafes cooking on gas will likely struggle, as they have no choice but to continue using it, unless they can replace gas appliances with electric ones.
‘Scream very loudly at somebody’
Rail strikes have already brought the country to a halt on multiple days throughout the summer and look set to continue, while postal workers, telecoms engineers and dock workers have all voted to strike as inflation erodes real wages.
Conservative leadership favorite Liz Truss was earlier this month forced into a dramatic U-turn on a plan to cut public sector pay outside London, which would have axed wages for teachers, nurses, police and the armed forces alike.
Local authorities recently offered state school support staff a flat pay rise of £1,925 per year, meaning a 10.5% increase for the lowest-paid staff and just over 4% for the highest earners, after pressure from three of the country’s largest unions.
One woman in her early fifties – a member of support staff at a state school in Lincolnshire who asked not to be named due to the sensitive situation and concerns on public reprisals – told CNBC that years of real-terms pay cuts had left many low-paid public sector workers struggling to make ends meet.

The British government in 2010, in the aftermath of the global financial crisis, announced a two-year pay freeze for public sector workers, followed by a 1% average cap on public sector pay awards which was lifted in 2017, with average pay rises increasing to roughly 2% by 2020.
While the 10.5% rise for the lowest-paid school support staff will ease the pressure, the woman said her energy costs had doubled and her private landlord had attempted to increase her rent by £40 per month, which she had not agreed to and which may mean she would need to sell her car to cover basic living expenses.
She called on the government to temporarily reduce the “standing charge,” a fixed daily amount households have to pay on most gas and electricity bills no matter how much they actually use, and to up its efforts to recoup one-off “windfall taxes” from energy companies such as BP, Shell and Centrica, which are reporting record profits..
“I think this is an even bigger crisis than [the Covid-19 pandemic], because this is going to affect not just lower earners, but maybe even middle earners as well, because I don’t see how anybody can absorb those kinds of energy costs,” she said.

The pressure being exerted on businesses and the government to increase wages in the face of skyrocketing living costs has raised further concerns about inflation becoming entrenched – but this consideration is far removed from the reality of working families increasingly being forced to cut back on essentials.
“It’s alright saying ‘we can’t keep putting people’s pay up, that will make the cost of living worse,’ but the cost of living is out of control already, and the only way for people to survive is if their wages increase,” the woman said.
“I know it’s a catch 22, but I don’t see a way around that really — you’ve got to eat.”
The situation in recent months, even before the anticipated worsening of the energy crisis, has already begun to take a toll.
“I just think I’m a very honest, hardworking person. I’ve never committed a crime, always done things right, but now I’m starting to feel like that gets you nowhere in this country,” she said.
“For the first time in my life, I want to go out and march in protest and scream very loudly at somebody, and you just think ‘what does it take?'”

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Good morning. Ethan here. Rob is on hiatus and, after today, so is Unhedged. Regular service resumes September 5, when Rob will make his much-anticipated return. While we’re off, why not read Martin Sandbu’s always interesting Free Lunch or listen to Katie Martin talk about quantitative tightening? For the next couple weeks I’ll be helping out elsewhere in FT-world. In the meantime, complaints, ramblings and new ideas are always welcome: [email protected]. The Fed-markets disconnectHere are some snippets from Federal Reserve officials’ speeches yesterday. Hard to scream much louder than this:[St Louis Fed president James] Bullard said he isn’t ready to say inflation has peaked and it remains important for the Fed to get its target rate to a range of 3.75 per cent to 4 per cent by year-end . . . He also said that he sees about an 18-month process of getting price pressures back to the Fed’s 2 per cent target“We need to get inflation down urgently,” [Minneapolis Fed president Neel] Kashkari said . . . “We need to get demand down” by raising interest rates. Economic fundamentals are strong, he said, but whether the Fed can lower inflation without sending the economy into a recession, “I don’t know”.[Kansas City Fed president Esther] George said the pace and ultimate level of future rate rises remained a matter of debate. “To know where that stopping point is . . . we are going to have to be completely convinced that [inflation] number is coming down.”The Fed is insisting, loudly and repeatedly, that it’s serious about raising interest rates. Markets, as we’ve discussed before, and has been widely noted, are not buying it. Why the disconnect? I can think of three potential reasons:Markets are optimistic about inflation. They think it will moderate fast enough that the Fed can pivot to slashing rates. Unhedged disagrees, but you can find smart people like the Institute of International Finance’s Robin Brooks or JPMorgan’s Marko Kolanovic making this case.Markets don’t believe the Fed’s commitment to fighting inflation. They think a weakening economy will force the Fed into lowering rates, even if price pressures stay hot.Market pricing, for some reason, isn’t reflecting a fundamental view of the economy. I have no idea how to assess the likelihood of this. But for what it’s worth, the FT reported yesterday that technical factors, such as hedge funds closing out short positions, have been behind the recent equities rally.Whatever the reason, former Fed vice-chair Bill Dudley argues in an op-ed yesterday that markets’ disbelief is harming the US central bank’s policymaking. It is loosening financial conditions right when the Fed wants them tighter. Dudley wants chair Jay Powell, who will speak publicly next Friday, to ram his message through Mr Market’s thick skull:Powell must take care to disabuse markets of the notion that the Fed will soon be done tightening monetary policy. Many investors appear to have reached this conclusion based in part on Powell’s statement in July that future interest-rate increases will be data-dependent, ignoring his repeated [insistence that the Fed is projecting] a peak considerably above what financial markets expected . . . Powell must make clear that even if the Fed pivots to smaller interest-rate increases in coming months, that does not necessarily indicate a lower peak . . . Many see his warning as mere rhetoric, designed to keep inflation expectations down. They think that once the economy slows, unemployment rises and inflation falls, the Fed will start cutting interest rates long before the 2 per cent target has been achieved.Dudley’s point is about messaging. And yes, if markets think the Fed’s inflation-fighting pledge is suspect (reason 2), some tougher talk — perhaps a Bank of England-style promise to prioritise inflation over growth — could scare them straight. But if, instead, markets believe inflation is about to subside (reason 1), what can Powell say to dispel that? The Fed has no more insight into where the economy is going than investors. And if markets are right, it’s hard to believe the central bank would raise rates in an economy that’s slowing fast while inflation numbers tumble. That is the bind of the Fed being data-dependent: it applies on the way down, too.Readers reply on credit risk Wednesday’s newsletter made the point that how scary credit risk looks depends on where you think interest rates are going. A number of readers wrote in to register their thoughts.Pascal Blanqué of the Amundi Institute noted a few reasons to be optimistic about corporate credit:Defaults were after all rather muted in the 70s. Corporates reimburse in nominal terms. Real rates are still low. This happens when you target nominal growth with low real rates. Buying time.Inflation helps debtors, and that’s no less true for corporate debtors. But there is a more pessimistic view — that inflation will stop central banks from intervening when the credit cycle turns down.Deutsche Bank’s Jim Reid makes this argument well (thanks to Dec Mullarkey at SLC Management for sending along). Reid argues that structurally higher inflation will limit how much loose monetary policy is possible. If a US recession comes in late-2023, chances are Congress will be controlled by Republicans, likewise limiting fiscal policy. A recession plus little policy support gives you a big rise in defaults:

This view, of course, hinges on the Fed sitting back and watching it happen. Would it do that? Mullarkey adds:I think there will continue to be sensitivities around the risk of financial contagion and employment dislocations when recessions hit. Therefore, some version of stewardship will continue. However, if dogged inflation neutralises central banks’ flexibility then high real rates will likely prevail and push average default rates higher.In the end, it’s all about inflation.One good readRIP to Pixy, the flying selfie drone. More

Energy-rich Middle East states are set to reap up to $1.3tn in additional oil revenues over the next four years, according to the IMF, as they enjoy a windfall that will bolster the firepower of the region’s sovereign wealth funds at a time when global asset prices have sold off.The IMF’s projections underscore how high energy prices driven by Russia’s war in Ukraine are buoying the Gulf’s absolute monarchies while much of the rest of the world grapples with soaring inflation and fears of recession. Jihad Azour, IMF director for the Middle East and north Africa, told the Financial Times that relative to expectations before the war in Ukraine, the region’s oil and gas exporters, particularly Gulf states, “will see additional cumulative oil revenues of $1.3tn through 2026”.The Gulf is home to some of the world’s biggest oil and gas exporters, and several of its largest and most active SWFs. These include Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority, Abu Dhabi’s stable of vehicles, including the Abu Dhabi Investment Authority, Mubadala and ADQ, and the Kuwait Investment Authority.The $620bn PIF, which is chaired by Saudi Crown Prince Mohammed bin Salman, invested more than $7.5bn in US stocks in the second quarter, including in Amazon, PayPal and BlackRock, as it sought to take advantage of falling stock prices, according to market filings.Gulf SWFs were similarly active during the pandemic as they looked to capitalise on the market volatility triggered by the Covid-19 crisis. During the global financial crisis in 2009, they took advantage of the turmoil to snap up stakes in distressed western companies. In recent years, many of the funds have been focusing on sectors such as technology, healthcare, life sciences and clean energy as governments pursue returns on investments, but also seek to diversify economies and develop new industries. Azour said it was important that the Gulf states used the latest windfall to “invest in the future”, including preparations for the global energy transition. “It’s an important moment for them to . . . accelerate in sectors like technology [domestically] as this is something that will allow them to increase productivity,” he said. “In addition, their investment strategy could benefit from the fact that asset prices have improved for new investors, and the capacity to increase their market share in certain areas are also opportunities.”

The IMF’s Jihad Azour said Gulf states should use the windfall to ‘invest in the future’ © Karim Sahib/AFP/Getty Images

But he added that it was critical that they maintained fiscal discipline and momentum on reforms designed to reduce their countries’ dependence on oil. Traditionally, the health of the Gulf states’ economies has tracked the volatility of oil prices with state spending, fuelled by petrodollars, the main driver of business activity. As a consequence, booms have often been followed by downturns. The bonanza comes after years of subdued growth across the Gulf that caused governments to raise debts, tap into their reserves and slow state projects.But Saudi Arabia, the world’s top oil exporter and the region’s biggest economy, has been on a massive spending spree led by the PIF, which has been tasked with developing a raft of megaprojects intended to modernise the conservative kingdom while seeking out investments overseas. The PIF is expected to be one of the main beneficiaries of the oil boom as Saudi Arabia is on course to record a budget surplus of 5.5 per cent of gross domestic product this year — its first surplus since 2013 — and forecast to produce economic growth of 7.6 per cent, its fastest pace in a decade.

The IMF estimates that for the second consecutive year the PIF is expected to undertake more investment in 2022 than the government. In a report this week, the fund cites “pressures to spend oil windfalls and deviate from fiscal prudence” including through the PIF, as one of the kingdom’s downside risks. “What is going to be really important is how they [Gulf states] manage this new cycle and how they maintain, at the same time, the benefits of the additional liquidity and the policies that will not lead them into procyclicality,” Azour said. The IMF forecasts that economic growth in the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar and Oman, will accelerate from 2.7 per cent in 2021 to 6.4 per cent this year. More