Economy

NEW YORK (Reuters) – With the recent slowdown in inflation, the Federal Reserve is faced with a conundrum ahead of a plan next month to double the rate at which it is shrinking its massive $8.9 trillion balance sheet. The move to accelerate quantitative tightening (QT), as it’s referred to, is meant to further drain pandemic-era stimulus from the financial system and increase borrowing rates for long-dated assets to weaken inflation. But that is taking place as the U.S. central bank pushes ahead with interest rate hikes to tame stubbornly high inflation, which is currently running at more than three times the Fed’s 2% target.The double tightening, however, makes it harder for the Fed to achieve a “soft landing” in which the economy slows but avoids a recession. With some investors believing the economy is already in a recession, speculation has grown that if something has to give, it could be the pace at which QT unfolds. The odds, however, remain long that the Fed would change its plan in the near term, some bond investors say.”There is some latitude for the Fed to either eventually go on a slow trajectory on quantitative tightening or even end earlier than expected. But it is hard to know (as to how) the Fed balances things out,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management in Dallas.”At what point does the Fed view that financial conditions have tightened enough? That’s nebulous … and you don’t really know until after the fact if you have gone too far.” The U.S. economy contracted in the first and second quarters, amplifying an ongoing debate over whether the country is, or will soon be, in recession.Along with the contractions, two reports last week that suggested inflation had likely peaked in July took some pressure off the Fed to deliver another oversized rate hike at its Sept. 20-21 policy meeting. The annual U.S. consumer price index rose by a weaker-than-expected 8.5% last month, following a 9.1% rise in June, while U.S. producer prices also unexpectedly fell 0.5% on a monthly basis in July. Graphic: US CPI https://fingfx.thomsonreuters.com/gfx/mkt/zdpxozazqvx/US%20CPI.PNG Traders of futures tied to the federal funds rate, the central bank’s policy rate, are now pricing in a 63.5% chance of a 50-basis-point hike at the September meeting. [FEDWATCH]”We really think the Fed slows down sooner rather than later. The data is starting to adjust and we’re seeing a slower economy,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.Still, her base case is for the Fed to run QT as is, but use that as a lever that can be adjusted in conjunction with rate hikes.”If the rate hikes go fast and furious and they reverse, then they have to stop QT,” Jones said. “If the rate hikes slow and level off, they can continue QT for a longer time period and tighten policy through the back door instead of the front door.” Following the tamer CPI reading, several Fed officials said it was too early to declare victory on the inflation front.”Inflation remains far, far above anything that could be considered price stability. It remains a very long journey back towards acceptable levels of inflation,” said Jamie Dannhauser, an economist at London-based asset manager Ruffer LLP.Dannhauser does not believe falling inflation numbers will affect the Fed’s QT plan.He added that more unexpected good news on inflation, to the extent that it alters the baseline view for monetary policy, will be reflected in the downward shift in Fed forecasts for the central bank’s policy rate.’BEHIND THE CURVE’The Fed’s balance sheet was at nearly $9 trillion as of last week. Its holdings of Treasuries and mortgage-backed securities have not declined significantly since June when the Fed started QT, but should come down over time, although it won’t occur in a straight line.”The effects of QT are very small at the moment,” said Thomas Simons, an economist at Jefferies in New York. Graphic: Fed’s balance sheet https://fingfx.thomsonreuters.com/gfx/mkt/mopangygqva/Fed%20balance%20sheet%20-%20QT.PNG But bank reserves held at the Fed have fallen to $3.3 trillion, down about $1 trillion from a high of $4.3 trillion in December 2021. Analysts said the contraction in reserves has been faster than many anticipated. In the Fed’s previous QT, $1.3 trillion in liquidity was withdrawn over five years.The Fed has not announced a target size for its balance sheet. Gennadiy Goldberg, senior rates strategist at TD Securities, thinks the Fed’s ultimate goal would be to reduce the balance sheet to a point where bank reserves reach around 9% of GDP, which is where they stood prior to the September 2019 liquidity crunch.Slowing down QT would be an option if it creates a shortage of bank reserves that starts to limit bank activities such as lending or market-making, analysts said. Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York, thinks the Fed should slow the pace of QT, as the market doesn’t need another $1 trillion reduction in bank reserves.”That would be catastrophic for bonds and stocks,” Hatfield said. “Unfortunately, the Fed almost universally ignores liquidity and money supply. That’s why the Fed is perpetually behind the curve in controlling inflation and anticipating deflation.” More

Annual inflation in Nigeria, Africa’s largest economy, rose sharply in July on the back of soaring energy, transport and food costs, along with a fall in the value of the naira currency.The National Bureau of Statistics said that in July inflation rose for the sixth consecutive month this year to 19.6 per cent, up from 18.6 per cent in June and the highest level since September 2005.The latest rise means inflation is now double the Central Bank of Nigeria’s target of 9 per cent and raises the prospect of another increase in interest rates next month.The statistics agency pointed to an increase in the price of gas and fuel, as well as air and road transport costs, along with food prices. Food inflation rose to 22 per cent caused by an increase in the cost of bread and cereals, as well as other food products such as potatoes, yam, meat, fish, oil and fat.In a sign price pressures are becoming broader, core inflation, which excludes the changes in volatile food and energy products, quickened to 16.3 per cent.The central bank has hiked interest rates by 250 basis points since May to 14 per cent. Policymakers are due to meet on September 26.Razia Khan, chief economist for Africa and the Middle East at Standard Chartered bank, said Nigeria may have fewer tools to combat soaring inflation than other countries.“The action [tightening of monetary policy] remains overshadowed by greater reliance on the central bank’s financing of government,” said Khan, referring to the Nigerian government’s announcement earlier this month that it owed $47bn to its central bank, according to a report by the country’s budget office.The money is owed to the central bank as part of the so-called Ways and Means Advance, a law contained in the central bank act that allows the monetary guardian to fund the government when it experiences a shortfall in revenue.Nigeria’s official oil earnings have not increased despite the surge in oil prices following Russia’s invasion of Ukraine. Theft, pipeline vandalism, years of under-investment in infrastructure and the increasing cost of petroleum subsidies have prevented the nation from profiting.Nigeria’s economy is import-dependent and relies heavily on the US dollar. But importers have struggled to access dollars because of tight restrictions.The central bank stopped selling dollars to retail forex traders in July 2021 to ease pressure on its dollar reserves and support its artificially low exchange rates. The naira is reported to be overvalued by between 10 per cent and 20 per cent against the greenback. The lack of dollar funds from the central bank has raised the cost of importing goods, forcing businesses to raise prices.“Until official forex markets see greater turnover, the difficult to regulate parallel market, itself prone to overshooting, will continue to play a disproportionate role in price-setting behaviour,” said Khan.Most importers access dollars on the black market, where the currency is freely traded. Due to significant demand and limited supply, the naira has plunged to historic lows against the greenback in recent months. The central bank says demand is high from manufacturers and because of Nigerians seeking to pay school and hospital fees abroad.Inflation is expected to rise to more than 20 per cent next month, according to Michael Famoroti, head of intelligence at Lagos-based company Stears.The economy and rising insecurity will be key campaign issues when presidential candidates officially begin canvassing for votes in September to replace the term-limited Muhammadu Buhari as Nigeria’s president. Elections are scheduled to take place in February. More

Good eveningChina today cut a key interest rate as new data confirmed the slowdown in the world’s second-biggest economy.The People’s Bank of China unexpectedly reduced the medium-term lending rate — through which it provides one-year loans to the banking system — by 10 basis points to 2.75 per cent, the first reduction since January and highlighting anxiety in Beijing over shrinking consumer demand.The country’s economy barely escaped contraction in the second quarter, according to new data released after the central bank decision, as consumer and factory activity faltered in the face of repeated pandemic lockdowns. Retail sales and industrial production rose but by much less than expected, while youth unemployment hit a record 19.9 per cent. Growth in the second half of the year is likely to be further hindered by Beijing’s zero-Covid strategy and a slowdown in exports.Chinese stocks fell on the disappointing data, setting them on a different path from rising equity markets in other major economies such as in the US and denting confidence in investors’ global outlook.Several Chinese cities are experiencing new or extended lockdowns and in Shanghai authorities are testing drones to ensure residents scan their health codes on a compulsory smartphone app — dubbed “digital handcuffs” for their use in social control — when entering a building. Falling consumer confidence has been highlighted by weakening sales of high-end goods, such as the market for second-hand luxury watches and bags. Rising geopolitical tensions are also worsening the outlook for industries such as semiconductor manufacturing, while demand for chips used in smartphones and consumer electronics has slumped.Chinese investors, hit by market sell-offs and widespread defaults in the country’s stricken property market, have been seeking alternative assets such as jade, while cash-strapped consumers have started a new trend for soon-to-expire food. Inflation, while lower than in other major economies, remains at its highest level in two years, according to data published last week.Lockdowns and strict quarantine regulations however remain the main drivers of the new pessimism. To take just one recent example, Hong Kong’s international schools are struggling to hire teachers ahead of the new academic year. “China is definitely in a very desperate situation,” said Xingdong Chen, an economist at BNP Paribas. “The problem now is no effective demand. If you don’t allow people to come out and consume . . . there is no demand.” Latest newsInflation in Nigeria hits 17-year high Aldi increases UK warehouse pay by 9% in challenge to rivalsUS manufacturing survey much worse than expectedFor up-to-the-minute news updates, visit our live blogNeed to know: the economyThe UK opposition Labour party unveiled proposals to deal with surging energy prices, including a freeze on bills, paid for by extending the windfall tax on North Sea oil and gas producers. The two contenders to become the new Tory prime minister are under pressure to follow suit.Latest for the UK and EuropeLiz Truss, the frontrunner in the Conservative PM vote, said she would turn Downing Street into the UK’s “economic nerve centre” so it had a greater say over matters normally the prerogative of the Treasury and with increased powers to push through her agenda of tax cuts and deregulation.FT research showed the UK’s bill for debt and welfare payments would surge by more than £50bn next year because of rising inflation and interest rates. James Kirkup from the Social Market Foundation think-tank says the UK needs to make tough decisions on tax and public services.Global latestChina ratcheted up pressure on Taiwan after the visit of a US congressional delegation with a new set of military exercises in its efforts to isolate the island.Some 100mn Americans across a quarter of the US land area are at risk from an “extreme heat belt” by 2053 as temperatures rise, according to a new report. The current sunbelt, which extends from Florida to southern California, is one of the fasting growing regions in the countryRising consumer spending after the lifting of pandemic restrictions helped the Japanese economy grow at an annualised rate of 2.2 per cent in the second quarter. Headwinds remain from a new resurgence of Covid cases, rising import costs and slowdowns in key trading partners. Chief foreign affairs commentator Gideon Rachman reflects on his trip to South Africa and a growing feeling of disappointment with the presidency of Cyril Ramaphosa.Sri Lankan bonds were downgraded to default status by S&P Global after the country missed payments as its political and economic crisis continued. The lack of foreign exchange to pay for imports has caused fuel, food and medicine shortages amid double-digit inflation.We apologise for a misspelling in the last issue of DT. Colombia is obviously spelt like this, rather than Columbia.Need to know: businessRising interest rates and increased building costs threaten to choke off recovery in Europe’s office market. In the UK, the switch to homeworking has seen off whole swaths of city centre restaurants, especially in London’s financial district.Many of the UK’s 5.5mn small businesses, which employ three-fifths of the country’s workforce, could collapse without government intervention to help with surging energy costs on top of increasing wage bills and raw materials costs, supply chain problems and the fallout from Brexit. Talking of which, a new report highlights the damage from EU departure on the country’s labour market. The sale of Britain’s largest semiconductor producer to a Chinese-controlled company has intensified the debate over how to protect the domestic chip industry, as our Big Read explains. Government intervention is also a hot topic in US politics, where conservative interest in rebuilding the country’s industrial base may finally be getting the upper hand over free-market fundamentalism.Gaming companies have been hit as players return to “real-world” pursuits and cut back on spending. Console producers, video game publishers and gaming chipmakers have all reported a fall in demand after the surge in interest during the pandemic.The longlist for the FT Business Book of the Year Award is out. The 15 titles, chosen by FT journalists from nearly 600 entries, highlight some of the greatest challenges facing the business world, from supply chain disruption to changing labour markets and galloping inflation.Energy updateA German energy official told the FT that the country needed to cut gas use by a fifth to avoid shortages this winter. He also warned that the longer-term cost of ending Germany’s dependence on Russia would be a “very high gas price” with big consequences for business.State-controlled Saudi Aramco became the latest oil company to break quarterly profit records following the windfall gains caused by the war in Ukraine. Net income rose to $48.4bn, a 90 per cent year-on-year increase and the group’s highest earnings since listing in 2019. US producers are still refusing to lift output even as they enjoy bumper profits. Oil prices are also the main topic in today’s News Briefing podcast.Coal producers too are enjoying an extraordinary boom. Thungela, South Africa’s largest export of thermal coal, reported profits soaring more than 4,000 per cent in the first half of the year.Mark Carney, former Bank of England chief and co-chair of the Glasgow Financial Alliance for Net Zero, said governments needed to seize the opportunity to switch to sustainable energy, supported by the firepower of the global financial sector.Get the latest worldwide picture with our vaccine trackerSome good news…The start of the UK football season has highlighted the important community work carried out by many clubs and fan-led initiatives. One nice example comes from Partick Thistle supporters in Glasgow who have been successfully raising donations, match-funded by the club, to provide free season tickets for local causes and organisations.Partick Thistle fans have been raising donations to provide free season tickets for local causes © Tommy Taylor/Partick Thistle Football Club More

Stock markets were subdued on Monday as disappointing Chinese economic data and an interest-rate cut by the country’s central bank complicated the global outlook.US equity futures declined, with contracts tracking the S&P 500 falling 0.5 per cent. The broad Wall Street index on Friday closed out its fourth consecutive week of gains. Contracts tracking the technology-heavy Nasdaq 100 gauge slipped 0.3 per cent lower.In Europe, the regional Stoxx 600 share index added 0.1 per cent. Germany’s Dax lost 0.1 per cent. Elsewhere, Chinese shares slipped lower, with the CSI 300 gauge of Shanghai and Shenzhen-listed stocks dipping 0.1 per cent and Hong Kong’s Hang Seng index dropping 0.7 per cent.These moves came after Chinese economic data showed that retail sales in the country rose 2.7 per cent year on year in July, while industrial production was 3.8 per cent higher. Economists had forecast larger increases of 5 per cent and 4.6 per cent respectively.Analysts at Goldman Sachs said the data showed that the growth recovery since lockdowns in April and May spurred by the Omicron Covid variant “stalled and even slightly reversed in July”.“This points to still-weak domestic demand amid the sporadic Covid outbreaks, production cuts in some high-energy consuming industries and [the] adverse impact of recent risk events in the property sector,” they added.In a bid to boost growth, China’s central bank on Monday cut its medium-term lending rate, through which it provides one-year loans to the banking system, by 0.1 percentage points to 2.75 per cent.Commodities markets turned lower, as signs of slowing growth in China raised the spectre of a drop in demand for industrial metals. Copper prices, a barometer of global growth because of the metal’s widespread use, fell 2.5 per cent on Monday.“Usually the Chinese economy has been an important pillar in supporting the global economy. This time, the US and Europe are showing signs of slowing and possibly moving into a recession but the backdrop — China — isn’t there to support the global economy,” said Aneeka Gupta, director of macroeconomic research at WisdomTree. China’s 10-year bond yield dropped by 0.07 percentage points to 2.67 per cent, as the price of the government debt instrument rose.Elsewhere in bond markets, the yield on the 10-year US Treasury note dipped 0.02 percentage points to 2.83 per cent. Data last week offered signs that inflation in the world’s largest economy may be steadying, a trend closely watched by investors as they attempt to assess how far the US Federal Reserve will raise interest rates to curb rapid price growth.Market participants on Wednesday will scrutinise minutes of the Federal Open Market Committee’s latest monetary policy meeting for clues about the central bank’s tightening plans, after Fed officials suggested last week that encouraging data did not necessarily mean inflation had been tamed.The EU, Japan and Canada will also publish inflation data this week, while results from companies such as Walmart and Target will throw up further indicators about US consumer sentiment. Weak earnings from the bellwethers in May sparked some of the biggest declines for US stocks this year.In currency markets, the dollar gained 0.6 per cent against a basket of six leading currencies. More

LONDON (Reuters) -Britain’s Labour Party called on Monday for the energy price cap to be frozen to help people deal with another expected surge in fuel bills, putting pressure on the Conservative government as Britons grapple with the worst cost-of-living crisis in decades.Liz Truss and Rishi Sunak, the two Conservative Party politicians vying to replace Boris Johnson as prime minister, have so far promised more limited help than the 29-billion-pound plan outlined by main opposition leader Keir Starmer. Starmer said his Labour Party, if in power, would cap energy costs at the current level of 1,971 pounds ($2,386) per year for six months from October and would pay for it by extending a windfall tax on oil and gas companies in the North Sea to raise 8.1 billion pounds.Charities in Britain are warning that millions of people could be forced into poverty if the government does not soften the blow with a new support package.”We would make sure these energy price increases do not go ahead in the autumn and so instead of allowing the prices to go up and then trying to rebate people, we’re going to cut the problem at source and stop those price increases,” Starmer told the BBC.”We’re going to pay for it by extending the windfall tax on oil and gas companies in the North Sea who’ve made much bigger profits than they expected.”Labour also said it would backdate the windfall tax to January and remove the government’s investment allowances for energy companies, which would allow firms to get tax savings in exchange for more investment in oil and gas production.Starmer said the emergency package would also lower bills in the longer term by insulating 19 million homes in Britain over the next decade and would reduce inflation, which the Bank of England says will probably exceed 13% in October.But he ruled out temporarily nationalising energy companies which refuse to lower bills – a suggestion made by Labour’s former prime minister, Gordon Brown, who appeared to criticise Starmer for going on holiday last week at a time of crisis.Paul Johnson, director of the Institute for Fiscal Studies think tank, said the plan would probably need to run for a year at a cost of around 60 billion pounds. “If that’s what you want to achieve, that’s what you need to do but you do need to recognise that is a very expensive thing to do,” he told BBC radio.The government has said it is offering a 37-billion-pound package of help, with 8 million of the most vulnerable households receiving 1,200 pounds of direct support.A spokesman for Prime Minister Johnson said the finance ministry and other departments were making “necessary preparations to ensure a new government will have options to deliver support as quickly as possible, but clearly those decisions will rest with the new prime minister”. Russia’s move to cut gas exports to the West following its invasion of Ukraine has driven up bills across Europe, forcing governments in Italy, France and elsewhere to intervene. France has capped electricity tariff rises at 4%.The forecasting group Cornwall Insight estimates that average British annual bills for gas and electricity will jump to 3,582 pounds in October and 4,266 pounds in January. Earlier this year, the price cap was 1,277 pounds.Foreign minister Truss, the favourite to be Britain’s next prime minister, has faced criticism from political opponents and charities for appearing to rule out further “handouts” and, seeking to appeal to fiscally Conservative Party members, has not committed to increasing direct support to consumers.Sunak, the former finance minister, has said a cut in value-added tax (VAT) could save households around 200 pounds on their energy bills. ($1 = 0.8260 pounds) More

The 2023-2027 plan in the Eastern Economic Corridor (EEC) will include investments such as electric vehicles and medical technology, government spokesman Thanakorn Wangboonkongchana said in a statement.The government expects 400 billion baht to 500 billion baht ($11.27 billion to $14.08 billion) in investment per year, which will help the economy grow by 5% a year from 2024, he said.Under the current 2018-2022 plan, the investment in the EEC has reached 1.8 trillion baht, exceeding a target of 1.7 trillion baht, he said.The EEC, which covers three provinces east of the capital Bangkok, is a centerpiece of government efforts to boost growth and encourage investment, particularly in high-tech industries.Southeast Asia’s second-largest economy is expected to grow 2.7% to 3.2% this year, the state planning agency forecast on Monday.($1 = 35.50 baht) More

The grim set of figures indicate the world’s second largest economy is struggling to shake off the June quarter’s hit to growth from strict COVID restrictions, prompting some economists to downgrade their projections.Industrial output grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4.6% increase expected by analysts in a Reuters poll.Retail sales, which only just returned to growth in June, rose 2.7% from a year ago, missing forecasts for 5.0% growth and the 3.1% growth seen in June.”The July data suggest that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector,” said Julian Evans-Pritchard, senior China economist at Capital Economics.”The People’s Bank of China is already responding to these headwinds by stepping up support…But with credit growth proving less responsive to policy loosening than in the past, this probably won’t be sufficient to prevent further economic weakness.”Local shares gave up earlier gains after the data while the yuan weakened to a one-week low against the dollar and the Australian and New Zealand currencies pulled back from their recent two-month highs.China’s economy narrowly escaped a contraction in the June quarter, hobbled by the lockdown of the commercial hub of Shanghai, a deepening downturn in the property market and persistently soft consumer spending.Risks still abound as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after fresh outbreaks of the more transmissible Omicron variant of the coronavirus were found.The property sector, which has been further rocked by a mortgage boycott that weighed on buyer sentiment, deteriorated in July. Property investment tumbled 12.3% last month, the fastest rate this year, while the drop in new sales deepened to 28.9%. [L4N2ZO0MP]Nie Wen, Shanghai-based economist at Hwabao Trust, lowered his forecast for the third-quarter gross domestic product growth by 1 percentage point to 4-4.5%, after the weaker-than-expected data. ING also cut their forecast for China’s 2022 GDP growth to 4% from 4.4% previously, and warned a further downgrade is possible, depending on the strength in exports. BALANCING ACTTo prop up growth, the central bank on Monday unexpectedly lowered interest rates on key lending facilities for the second time this year. Analysts expect the cut is likely to lead to a corresponding reduction in benchmark lending rates next week. [B9N2YU01J]Many believe the room for the People’s Bank of China to ease policy further could be limited by worries about capital outflows, as the U.S. Federal Reserve, and other economies, aggressively raise interest rates to fight soaring inflation.”Very sluggish credit demand in July on the back of weak activity growth, further deterioration in property indicators and lower-than-expected CPI inflation might have contributed to the PBOC’s move,” said analysts at Goldman Sachs (NYSE:GS). “Going forward, whether PBOC would cut interest rates again could be data-dependent in our view.”Official figures on Friday showed new yuan loans tumbled by more than expected in July, as companies and consumers stayed wary of taking on debt.Chinese policymakers are trying balance the need to shore up a fragile recovery and eradicate new COVID-19 clusters. As a result, the economy is expected to miss its official growth target this year – set at around 5.5% – for the first time since 2015.In eastern Zhejiang province, the city of Yiwu, a key global supplier of small and cheap products, has been wrestling with COVID-related disruptions on and off since July. Many parts of Yiwu have been thrown into an extended lockdown since Aug. 11.”We’ve halted factory production since the city imposed a ‘quiet mode’,” said a sales manager at a Yiwu factory that makes consumer goods.Fixed asset investment, which Beijing hopes will compensate for slower exports in the second half, grew 5.7% in the first seven months of 2022 from the same period a year earlier, versus a forecast 6.2% rise and down from a 6.1% jump in January-June.The employment situation remained fragile. The nationwide survey-based jobless rate eased slightly to 5.4% in July from 5.5% in June, although youth unemployment stayed stubbornly high, reaching a record 19.9% in July.”In our view, China’s growth in H2 will be significantly hindered by its zero-COVID strategy, the deteriorating property sector, and a likely slowdown of export growth,” analysts at Nomura said.”Beijing’s policy support could be too little, too late and too inefficient.” More

The South Asian nation, which had defaulted on a bond payment earlier this year and has $12 billion in overseas debt with private creditors, has been battling the worst financial crisis in its independent history.Sri Lanka’s external public debt freeze prevents payment of interest and principal obligations due on the government’s international sovereign bonds. S&P said it did not expect the Sri Lankan government, which remains in default on some foreign currency obligations, to make the bond payments within 30 calendar days after their due dates. The ratings agency affirmed its ‘SD’ long-term and ‘SD’ short-term foreign currency sovereign ratings on Sri Lanka, as well as reiterated the outlook for the island nation at ‘negative’. The country is considering a restructuring of local and foreign debt. It is due to restart bailout talks with the International Monetary Fund (IMF) in August in the hope of securing $3 billion in funding. More