Economy

MEXICO CITY (Reuters) -The Bank of Mexico hiked its benchmark interest rate by three-quarters of a percentage point to a record 8.5% on Thursday, mirroring the U.S. Federal Reserve’s most recent policy decision as inflation surged to an over two-decade high.The five board members of Banxico, as the central bank is known, voted unanimously for the second 75 basis point hike in a row, saying the board would “assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.”Analysts said that language gave its forward guidance a slightly dovish bias, moderating the tone of its prior monetary policy statement on June 23 when it said the board intended to continue raising rates and would “evaluate taking the same forceful measures if conditions so require.”This comes after slowing U.S. inflation may have opened the door for the Federal Reserve to temper the pace of its future hikes, though U.S. policymakers stressed they would continue to tighten monetary policy until price pressures were fully contained.”We still think that Banxico will follow the Fed in the hiking cycle to preserve the historical 600 bp rate differential,” analysts at Actinver Research said in a note to clients.Banxico has increased rates by a total of 450 basis points over its last 10 monetary policy meetings.Annual inflation in Latin America’s second-largest economy climbed to 8.15% in the year through July, its highest level in nearly 22 years.Banxico said Thursday that the balance of risks for the trajectory of inflation “remains biased significantly to the upside.”The rate increase, which was in line with expectations in a Reuters poll, brings the key rate to its highest level since Banxico’s current regime was put in place in 2008.Its latest policy move comes alongside several others in the region.Earlier in the day, Argentina’s central bank raised its key rate by 950 basis points, a mere two weeks after its last hike, amid soaring inflation, which is forecast to hit 90% by the end of the year.Peru’s central bank is expected to hike rates later on Thursday by 50 basis points, after annual inflation slowed slightly but remained at a multi-year peak. More

TORONTO (Reuters) – Canada’s inverted yield curve is signaling the Bank of Canada may raise interest rates to a level that triggers a recession, placing the central bank in a tough spot as it aims to tame high inflation and engineer a “soft landing” for the economy.The yield on the Canadian 10-year government bond has fallen some 50 basis points below the 2-year yield. That’s the biggest inversion of Canada’s yield curve in Reuters data going back to 1994 and deeper than the U.S. Treasury yield curve inversion.Some analysts see curve inversions as predictors of recessions. Canada’s economy is likely to be particularly sensitive to higher interest rates after Canadians borrowed heavily during the COVID-19 pandemic to participate in a red-hot housing market.”It makes sense that we should see more of an inversion this cycle than we have in the last few just because there is so much more of a central bank overtightening component to this,” said Andrew Kelvin, chief Canada strategist at TD Securities.”That’s what happens when central banks fall behind the curve.”The Bank of Canada, like many other central banks, held that inflation was “temporary” or “transitory” into the fall of 2021, and did not start raising borrowing costs until March 2022, when inflation was more than double the 2% target.Canada’s annual inflation rate hit 8.1% in June, its fastest pace since 1983.Investors have worried that central banks around the world will be unable to cool price pressures without triggering downturns. The Bank of England last week built a lengthy recession into its forecast.Meanwhile, the BoC has continued to project Canada will experience a “soft landing” in which the economy slows but does not tip into recession. “Such an outcome is not entirely impossible, but I don’t think they’d ease up (on rate hikes) because of a recession if inflation proves to be persistent,” said Derek Holt, head of capital markets economics at Scotiabank.Since March, Canada’s central bank has raised its benchmark lending rate by 225 basis points to 2.50%, including a full-percentage-point hike in its last policy decision in July.After U.S. data on Wednesday showed an easing of inflation pressures, money markets reduced their bets that Canada’s central bank would hike rates by another three-quarters of a percentage point next month.Still, the BoC’s policy rate is expected to climb to a peak of about 3.50% in the coming months, moving above the top of the 2%-3% range that the central bank estimates to be a neutral setting, or the level at which monetary policy is neither stimulating nor weighing on the economy. Such a restrictive setting would likely test the resilience of Canada’s economy, including the housing market, which has slowed rapidly in recent months.”In Canada, investors are worried about the impact a downturn in housing markets – and a longer-term household deleveraging cycle – could have on the wider economy,” said Karl Schamotta, chief market strategist at Corpay.”Under the central bank’s mandate, price stability trumps near-term economic growth considerations.” More

A global pandemic, a major war in Europe — both were risks that seemed almost unimaginable, until they happened. Now the tensions with China provoked by US House Speaker Nancy Pelosi’s trip to Taiwan last week, coming just months after Russia’s invasion of Ukraine, have forced businesses to confront the possibility that a danger long seen as similarly distant could yet come to pass: a US-China conflict, or something close to it.Companies face a rapid shift in mindset. In the post-cold war era, and after Beijing’s 2001 accession to the World Trade Organization when the belief persisted that deepening commerce with the west could pull China into the liberal world order, businesses grew used to operating in a largely benign global environment. Purely economic considerations — where it made most commercial sense to build a factory or source supplies — could take priority. With Beijing’s emergence as a geopolitical rival, security considerations again trump economic ones. Western governments now view it as vital to build supply chains that rely less on potential foes such as China and are instead based around strategic allies — so-called friendshoring. The corporate world, which has a great deal invested — in all senses — in the previous status quo, has under-appreciated the extent of the change in government thinking.In reality, Donald Trump’s trade tariffs on Beijing, China’s clampdown on democracy in Hong Kong and its persecution of Uyghurs in Xinjiang had prompted many companies to begin reviewing reliance on China years ago. The pandemic, too, prompted them to reconsider dependence on single suppliers for critical components, and work on making supply chains more robust.The pressure to pull out of Russia after its assault on Ukraine has now forced nearly every US company to confront the question of what it would do if China invaded Taiwan. McDonald’s withdrawal from Moscow — where its arrival in 1990 was a pivotal moment in the advance of globalisation — was heavy with symbolism. Western companies have understood a crisis over Taiwan could similarly lead to investments being stranded, unwound or written off and throw supply chains into chaos, but on a vastly larger scale.Unlike Russia, China, together with Taiwan — which makes 90 per cent of the world’s most advanced semiconductors — is both a crucial production hub and a vast market. Anything that forced western business to freeze or withdraw from operations there would be a punishing double blow.As many companies have already discovered, it is difficult to replace China in many industries. Attempts to create supply chains within specific blocs have also run into problems; even simple products can involve hundreds of global inputs. Wholesale “decoupling” of western companies from China, for fear of future frictions or conflict, is unachievable and undesirable. It would push up costs and weaken western economies.But multinationals should not simply conclude reducing China exposure is too hard and hope Beijing finds a peaceful resolution with the US over Taiwan. The Kremlin’s attempt to redraw European borders has shown the perils of wishful thinking. Companies that derive a significant part of their revenues and profits from China do need to find ways, where possible, to hedge exposure to this market. Investors should demand more disclosure on their vulnerability.Boards should also be devoting more time to geopolitical risk assessment and contingency planning — for evacuating staff or relocating operations. As Ukraine and the Taiwan stand-off have shown, not only can the unthinkable happen, it can do so very suddenly. More

The former president of tech group Arm has made a “bitter sweet” resignation from the board of China’s biggest chipmaker as rising tensions between Washington and Beijing put pressure on the country’s technology sector. Tudor Brown, who worked at Arm for 22 years and was an independent director at Semiconductor Manufacturing International Corp, announced his resignation in a LinkedIn post on Thursday.“Bitter sweet day today. After 9 years I resigned from SMIC board,” he wrote. “The international divide has further widened.”He later changed the post to remove any allusion to an “international divide” and wrote that he was “sad to leave” but had “opportunities to do other things”.His resignation comes as growing tensions between China and the west, as well as Beijing’s strict zero-Covid policies, threaten to accelerate economic decoupling between the two superpowers. Brown said he had not fallen out with the company and that “the only thing that’s frustrated me is the lack of travel”. “It’s hard to engage when that goes on and on,” he said in an interview with the Financial Times, adding that SMIC has been a “great company” to work with.Washington’s expanding sanctions and export restrictions have forced SMIC to abandon plans to manufacture some types of advanced chips and stalled its global growth, with the company’s shares dropping more than 30 per cent in value over the past year. The US Department of Commerce added SMIC to its “entity list”, an export blacklist that requires US companies to obtain licences to sell technology to businesses on it, in December 2020.That followed months of US regulatory scrutiny of the chipmaker, with the commerce department saying that sales to SMIC carried an “unacceptable risk” of being diverted to “military end use” earlier that year.“I’m the last westerner on the board . . . which is inevitable, it’s the way it is,” Brown said. “US people aren’t allowed to be on it because of the entity list. I am because I’m British and I’m freer.”“Part of my value is that I’m different and I have a different perspective. It’s good to have differences of opinion,” he added. Officials in the US and allied countries have also been pressuring international chip groups to disentangle themselves from China. The Financial Times reported this week that Taiwan security officials wanted Foxconn, the Taiwanese electronic component manufacturer, to drop its stake in Chinese chipmaking conglomerate Tsinghua Unigroup, as the country seeks to align itself more closely with the US.

US officials have also urged the Netherlands to ban ASML, the world’s premier manufacturer of the vital lithography equipment required to produce chips, from exporting even lower-end technology to China, according to a Bloomberg report. The country already prohibits exports of ASML’s highest-tech systems to China.China’s chip sector is reeling from a wide-reaching anti-graft campaign, which has seen at least five executives linked to its largest chip investment campaign put under investigation in the past two months. The probe follows the collapse of Tsinghua Unigroup, which began a court-ordered restructuring last year. Brown, who co-founded UK chipmaker Arm in 1990 and has been a feature of the British tech scene since, remains an independent director at Chinese electronics group Lenovo, the world’s biggest maker of personal computers, according to his LinkedIn entry.SMIC did not respond to requests for comment. More

BERLIN (Reuters) – German Chancellor Olaf Scholz promised a new package of measures on Thursday, including tax relief, to help people struggling with rising prices and higher energy bills.Speaking at his first annual summer press conference, a tradition he inherited from predecessor Angela Merkel, Scholz said such measures would still mean sticking to the government’s debt brake – which limits federal borrowing to 0.35% of economic output per year but which has been suspended since 2020 – going into next year.”Citizens can count on us not to abandon them,” he told journalists in Berlin in a press conference that lasted for more than 90 minutes. Since taking power in December, Scholz has grappled with fallout from the war in Ukraine, which has threatened to tip Europe’s largest economy into recession, driven up gas prices and led to a shake-up of energy, defence and foreign policy. The chancellor, 64, has also faced growing scrutiny in connection with the long-running “cum-ex” scandal, one of Germany’s biggest fraud investigations, dating back to his time as mayor of the northern port city of Hamburg. Questioned about his role, Scholz on Thursday denied any impropriety and said he had no knowledge of how more than 200,000 euros ($206,680) was reportedly found in the safe of a party colleague. “Two and a half years of an unbelievable number of hearings, an unbelievable number of files have brought only one result: there is no evidence that there was any political influence,” he said. He is due to testify to a committee in Hamburg next week. TALKING TO MERKELGermany has accused Russia of waging economic warfare against Europe and cutting gas supplies on spurious pretexts in retaliation for punitive sanctions on Moscow.Scholz’s Social Democrat-led government has introduced an energy levy to ease the strain for companies buckling under high gas prices, and is combining that with relief measures for struggling households. But proposals put forward by Finance Minister Christian Lindner to raise income tax thresholds have sparked criticism from within the three-way ruling coalition this week. Scholz threw his backing behind Lindner’s suggestions but separately rejected calls for Germany to impose a new profit tax, for example on oil companies.On foreign policy, Scholz said Germany would tackle the energy crisis in solidarity with the European Union and that he was pushing for the construction of a new pipeline from Portugal through Spain and France to diversify European supplies. Speaking about a proposal to cap the price of Russian oil, made at a Group of Seven summit that Scholz chaired in June, the chancellor said it would need buy-in from other countries to work.He also stressed the importance of German companies not becoming too dependent on the Chinese market and said no date had yet been set for a visit to Beijing. Scholz was criticized for dragging his feet over heavy weapons supplies to Ukraine in the first months of the war. But the country has considerably ramped up arms deliveries to Kyiv since then, and Scholz said Berlin would continue to do so. Asked whether rising prices could trigger social unrest, Scholz said: “No, I don’t think that we will see unrest in this country in this form, on the grounds that Germany is a welfare state.”Scholz took power when Merkel stepped down after dominating German politics for 16 years as chancellor. Asked about their relationship, Scholz said: “I like telephoning her, but I also like being chancellor.”($1 = 0.9677 euros) More

Under a provision of the $430 billion climate and energy bill that was passed by the Senate on Sunday, U.S. buyers of zero-emissions electric vehicles (EVs) would be eligible for tax credits worth several thousand dollars.However, domestic content conditions would apply to the tax breaks to push the EV industry away from reliance on China and spur local investment in battery minerals and manufacturing.”We think it’s discriminatory, that it is discriminating against foreign producers in relation to U.S. producers,” said European Commission spokesperson Miriam Garcia Ferrer. “Of course this would mean that it would be incompatible with the WTO.”Garcia Ferrer told a news briefing the EU agreed with Washington that tax credits are an important incentive to drive demand for EVs and promote the transition to sustainable transport and a reduction in greenhouse gas emissions.”But we need to ensure that the measures introduced are fair and … non-discriminatory,” she said. “So we continue to urge the United States to remove these discriminatory elements from the bill and ensure that it is fully compliant with the WTO.”A group of major automakers said last week that most EV models would be ineligible for tax credits because of requirements for vehicles’ batteries and critical-mineral contents to be sourced from the United States.The EV tax break is part of the Inflation Reduction Act, which is likely to be passed by the House of Representatives this week and then sent to the White House for President Joe Biden to sign it into law. More

The producer price index, a gauge of final-demand wholesale prices, decreased 0.5% in July due to a slide in energy prices. The year-over-year gain was 9.8%.
The annual increase was the lowest since October 2021 and the monthly move was the first decline since April 2020.
Jobless claims rose to 262,000 last week, just below the estimate.

Wholesale prices fell in July for the first time in two years as a plunge in energy prices slowed the pace of inflation, the Bureau of Labor Statistics reported Thursday.
The producer price index, which gauges the prices received for final demand products, fell 0.5% from June, the first month-over-month decrease since April 2020, the month after Covid-19 was declared a pandemic. Economists surveyed by Dow Jones had been expecting an increase of 0.2%.

On an annual basis, the index rose 9.8%, the lowest rate since October 2021. That compares with an 11.2% increase in June and the record 11.7% gain in March.
Most of the decline came from energy, which dropped 9% at the wholesale level. That contributed to a 1.8% fall in prices for final demand goods, while the index for services rose 0.1%.
Stripping out food, energy and trade services, PPI increased 0.2% in July, which was less than the expected 0.4% gain. Core PPI rose 5.8% from a year ago.
The numbers come a day after the consumer price index showed that inflation was flat in July though up 8.5% from a year ago. The easing in the CPI also reflected the slide in energy prices that has seen prices at the pump fall below $4 a gallon after hitting record nominal levels above $5 earlier in the summer.
Federal Reserve officials are watching the inflation data closely for clues about where the economy stands after more than a year of wrestling with high inflation.

Before July’s easing, prices had been running at their highest levels in more than 40 years. Supply chain issues, demand imbalances, and high amounts of fiscal and monetary stimulus associated with the pandemic had driven the annual CPI rate past 9%, well above the Fed’s 2% long-run target.
This week’s data could give the Fed reason to dial back rate increases that have come in successive 0.75 percentage point increments in June and July. Markets are now pricing in a 0.5 percentage point move in September.
A separate Labor Department report Thursday showed that weekly jobless claims totaled 262,000 for the week ended Aug. 6, an increase of 14,000 from the previous week though 2,000 below the estimate.
Claims have been elevated in recent weeks in a sign that a historically tight labor market is shifting. Continuing claims rose 8,000 to 1.43 million.

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(Reuters) – U.S high-yield bond funds are attracting heavy investments, a turnaround from the selloffs of the first half of this year, as investors bet that the Federal Reserve will limit future interest rate hikes to try to avert an economic slowdown. Fund managers are also increasing their investments in junk bonds to take advantage of widening yield spreads, as bonds trade at steeper discounts than at the start of the year. Refinitiv data shows U.S. high-yield bond funds received an inflow of $4.8 billion in July, the first monthly inflow in 2022. GRAPHIC: US high yield bond fund flows (https://fingfx.thomsonreuters.com/gfx/mkt/jnpwenazxpw/US%20high%20yield%20bond%20fund%20flows.jpg) So far in August, U.S. high-yield bond ETFs increased by $2.18 billion, the data showed. GRAPHIC: Biggest money inflows into US high yield bond ETFs in July (https://fingfx.thomsonreuters.com/gfx/mkt/byprjyqdxpe/Biggest%20money%20inflows%20into%20US%20high%20yield%20bond%20ETFs%20this%20month.jpg) “High-yield bond funds are getting inflows due to enthusiasm that the U.S. economy will avoid a recession or, if it does have one, that it will be mild,” Thomas Samuelson, chief investment officer at Vineyard Global Advisors, said. “Less severe recessions cause less stress on corporate cash flows and thus fewer defaults of riskier high-yield bonds.”U.S. high-yield bond funds witnessed a cumulative outflow of $52.25 billion in the first half of this year, as the U.S. central bank raised its interest rates aggressively to tame soaring price pressures. But a drop in commodity prices in recent weeks has reduced expectations of higher inflation. The ICE (NYSE:ICE) BofA U.S. High Yield Index, a benchmark for the junk bond market, has risen by more than 7% since July, after declining 14% in the first half of this year.The yield spread between the junk bond index and U.S. Treasuries stood at 452 basis points on Thursday, much higher than 285 basis points at the start of the year. TOO SOON FOR ‘ALL-CLEAR’ SIGNSome fund managers said high-yield bonds also helped to diversify portfolios and had provided some safety meaning many firms issuing junk bonds had stronger balance sheets. CreditSights data found the U.S. high-yield distress ratio, a measure of risk in the bond market, declined to 10.6% in July, from 15.2 in June, suggesting default rates are moderating. “Structurally, we are seeing high-yield asset allocators being more dynamic on how they are allocating using core/satellite approaches which is common in equity, but was not common in high-yield bonds,” said Manuel Hayes, senior portfolio manager at Insight Investment.Some investors are still wary. “We think it’s too soon to plant the ‘all-clear’ sign ..” said Vineyard’s Samuelson.”We are maintaining our underweight position on high-yield bonds until we see more evidence that the Fed is closer to the end of its tightening cycle and the risk of a recession subsides.” More