Economy

LONDON (Reuters) – U.S. manufacturing production probably peaked during the second quarter, though the data are noisy and conflicting, and a turning point may not become obvious until September or October.U.S. manufacturing output in June was down by 0.4% compared with March though it was still up by 3.6% compared with the same month a year earlier, estimates prepared by the Federal Reserve Board found.Three-month output growth was the weakest since early 2021, and confirms slackening momentum evident in other data on output, orders and jobs (“Industrial production and capacity utilisation”, Federal Reserve, July 15).U.S. manufacturing employment increased by 30,000 in July and by 476,000 compared with the same month a year earlier, according to separate estimates prepared by the U.S. Bureau of Labor Statistics.But the three-month rate of job creation has halved since April, another sign momentum is fading (“Current employment survey”, BLS, Aug. 5).Manufacturers are almost evenly divided on whether business activity is expanding or contracting, based on survey data from the Institute for Supply Management (“Manufacturing report on business”, ISM, Aug. 1).The ISM’s composite activity index slipped to 52.8 in July (50th percentile for all months since 1980) down from 57.1 in March (72nd percentile).But the new orders component was just 48.0 in July (15th percentile) down from 53.8 in March (37th percentile) and 61.7 in February (84th percentile), implying that the sector will slow further in the next few months.The employment component has fallen even more abruptly to just 49.9 in July (30th percentile) down from 56.3 in March (85th percentile).More manufacturers have reported employment reductions than employment increases in each of the last three months (https://tmsnrt.rs/3QdQJCe).TURNING POINT?The reduction in manufacturing jobs implied by the ISM survey is consistent with peaking industrial output but inconsistent with the continued growth reported by the Bureau of Labor Statistics.Over time, changes in the ISM employment index and BLS manufacturing payrolls data have tended to track each other closely, with the ISM measure leading by 3-4 months.If this relationship holds, the weakness evident in the ISM employment index from April and especially May should start to show up in the BLS measure for August or September, each published a month later.The Federal Reserve Bank of Chicago’s National Activity Index (CFNAI) tracks all these indicators and dozens more to estimate whether the economy is growing above or below its long-term trend rate.The CFNAI showed the economy growing below trend in the three months from April to June for the first time since the first wave of the pandemic in 2020.The peaking of manufacturing activity is also tentatively evident in the movement of raw materials, semi-processed items and finished merchandise over the transportation system.Domestic freight movements by road, rail, air, barge and pipeline appeared to have peaked in the first quarter, based on data from Bureau of Transportation Statistics.Freight volumes were down almost 0.5% in May compared with March although still up 2.6% compared with the same month a year earlier (“Freight transportation services index”, BTS, July 15).Consumption of distillate fuel oil, the main liquid fuel used in both manufacturing and freight transport, has been weak since the end of the first quarter.The sluggish state of distillate consumption is partly in response to exceptionally high prices but is also consistent with a peak and then softening of manufacturing and freight demand.Overall, the data are consistent with manufacturing activity peaking in the second quarter of 2022, with declines likely in the third and fourth quarters.The remaining question is whether the slackening of manufacturing activity will be very mild, a mid-cycle “soft patch”, or significant enough to qualify as a cycle-ending recession.Futures prices for both crude oil and middle distillates are already anticipating a significant slowdown that will depress fuel consumption and enable the rebuilding of depleted inventories.Related columns:- U.S. diesel shortage shows economy hitting capacity limit (Reuters, Aug. 4)- U.S. power producers are consuming near-record volumes of gas (Reuters, Aug. 2)- Low U.S. oil inventories imply deeper economic slowdown will be needed (Reuters, July 28)- Oil and interest rate futures point to cyclical downturn before end of 2022 (Reuters, July 22)John Kemp is a Reuters market analyst. The views expressed are his own More

The US played an instrumental role in encouraging 136 countries to sign up to a global tax deal tabled by the OECD last October and hailed as the most important tax reform in more than a century. But over recent days it has become clear that how Washington intends to apply one of two parts of the proposals — a minimum corporate tax floor of 15 per cent — is at odds with how the agreement is likely to work elsewhere. The stripped-back version of president Joe Biden’s tax plans that featured in the Inflation Reduction Act, the White House’s flagship economics legislation that last week narrowly passed the Senate and is expected to pass in the House of Representatives this week, misses out key elements of the deal inked in Paris. That has raised concerns that multinationals will face a web of complexity that will leave them struggling to comply with a set of rules aimed at ensuring they pay a fairer amount of tax. “Companies all want this alignment that they have been working to, but now it’s not what they thought it would be,” said Kate Barton, global vice-chair of tax at accounting firm EY. “Will all countries now just go and do their own thing?” Where does the Inflation Reduction Act fall short? The rules for the global minimum tax, as set out by the OECD, require multinational companies with annual revenues of more than €750mn to pay a top-up tax to an effective rate of 15 per cent in every country in which they operate. This part of the deal, known in tax circles as “Pillar Two”, is designed to “stop what’s been a decades-long race to the bottom on corporate taxation”, as US Treasury secretary Janet Yellen put it when the deal was signed. To bring the US in line with Pillar Two, the Biden administration originally proposed reforms to the US’s global intangible low-taxed income — or Gilti — regime. Under Gilti, a top-up tax of about 10.5 per cent is applied to the profits of subsidiaries of US companies located in low-tax jurisdictions. Gilti was introduced in the US in 2017 to stop US companies shifting profits overseas and Biden’s original proposal was to increase the Gilti rate to 15 per cent to bring the US into line with the OECD deal. These proposals failed to gain approval in the Senate, however, with Joe Manchin, the West Virginian Democrat who was crucial to the Act’s passing, asking for their removal. Instead a corporate tax minimum of 15 per cent will only apply to the “book income” — the amount reported in financial accounts — of companies with revenue of over $1bn. It will also only apply at a group level, rather than on a country-by-country basis — falling short of the deal’s goal of eliminating the practice of setting up subsidiaries in tax havens. It’s “doubtful” that what’s in the act will be deemed compliant with the global minimum tax, said Ross Robertson, international tax partner at accountancy firm BDO.“Ultimately, there could be increased complexity for international businesses in application of the rules once in force — or worse, it could increase the risk of double tax arising,” Robertson added. How are other signatories likely to respond? Peter Barnes, a tax specialist at the Washington law firm Caplin & Drysdale, called Congress’s alteration of the Biden tax proposals “disappointing” but “certainly not fatal” to the deal. One reason why is that, if the US implements the 15 per cent minimum rate in the form detailed in the act and not the deal, then other tax authorities could potentially scoop up more revenue from US companies for themselves. That is because the deal features a complex mechanism that allows other countries to effectively impose a tax of up to 15 per cent on the income of a subsidiary located there if — as is the case of the US — the home country of the parent corporation does not impose a top-up tax. “The [4.5 percentage point] difference between the Gilti 10.5 per cent rate and 15 per cent will be captured by other jurisdictions,” explains Reuven Avi-Yonah, professor of law at the University of Michigan. Pascal Saint-Amans, director of tax administration at the OECD, said: “When you think seriously about [the design of] Pillar Two you realise that it is going to happen anyway.”Barnes agrees and thinks US multinationals may eventually push Congress to apply Pillar Two in a form closer to that agreed at the OECD. However, progress for implementing the global minimum tax has been delayed across the board, with all countries yet to pass legislation for it, despite initially agreeing to do so by the end of 2022. What’s causing the delays elsewhere? The EU issued a draft directive to implement Pillar Two in December, but political divisions have failed to achieve unanimous approval from member states. Hungary, a member state often at odds with Brussels, is blocking progress. The remaining 26 European countries may be able to implement Pillar Two without Hungary, however, by enshrining it in their own domestic legislation. “There remains significant political will in Europe to press forward,” Robertson said, adding that he expected most of Europe to apply Pillar Two from January 2024. Once the EU moves ahead, other countries will probably follow suit to prevent losing out on the top-up taxes.

The other part of the deal, Pillar One, which aims to make the world’s largest multinationals pay more tax in the countries in which they make sales, is even further behind schedule. While the delays and setbacks have proven frustrating for those who are desperate to see companies pay their fair share, practitioners emphasise just how fundamental a reform the deal is. “We’re effectively needing to design an entirely new global tax base,” said Heydon Wardell-Burrus, a researcher at the Oxford Centre for Business Taxation. More

Vladimir Putin must think the leaders of Europe were born yesterday. The Russian president has made it perfectly clear that he will use tight restrictions of natural gas supplies as an economic weapon in the coming winter, but European politicians and central bankers still talk of a Russian embargo as a mere possibility. There is virtually no way to escape a Europe-wide recession, but it need be neither deep nor prolonged. It is also Russia’s last economic card. So long as Europe ensures that its economies survive the cold season, Russia’s blackmail will have failed. It will not claim victory in Kyiv on the backs of shivering households in Vienna, Prague and Berlin. For sure, the European economy is vulnerable. With the Nord Stream 1 pipeline operating at 20 per cent of capacity and other pipelines to eastern Europe under threat, some countries face physical gas shortages this winter. Even with European storage of gas higher than last year, according to the IMF, a full Russian gas embargo would leave Germany, Italy and Austria 15 per cent short of desired levels of consumption. The Czech Republic, Slovakia and Hungary would see shortages of up to 40 per cent of normal consumption. All European countries would face soaring prices. Already, European wholesale gas prices are close to €200 a megawatt hour, compared with pre-crisis prices of about €25, eight times lower.When prices of an imported necessity soar, real incomes and households’ ability to spend money on non-essentials inevitably fall. Recessions are all but impossible to avoid. This was the conclusion of last week’s gloomy but realistic Bank of England prognosis. It will soon be replicated by official forecasters in the eurozone. Even France, with its extensive use of nuclear power, will not find an escape route, because its power sector has its own reliability problems and it is deeply integrated into the wider European economy. The nightmare that Europe must avoid is energy nationalism when Putin turns the screw. If cross-border trade is curtailed and industry is provided no lifelines, Putin will pit the unemployed in one country against the freezing in others. This would reinforce his self-image as the continent’s powerbroker, able to raise or lower the pressure on Europe and Ukraine by pressing a few buttons in gas pipeline pumping stations. But such a bleak outcome is not inevitable. The most important defence is substitution. Already, Germany has replaced much of its gas imported from Russia with liquid natural gas supplies, delivered on ships to the Netherlands or Britain and pumped to German storage facilities. By December, it will be operating the first of four LNG floating storage and regasification units its government has leased.

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Despite protesting otherwise, European industry is rapidly altering production processes to substitute electricity and other fuels for gas where possible, or importing semi-manufactured goods from outside the EU where access to gas is plentiful. Gas-hungry ammonia for the fertiliser industry need not be produced in Europe, for example. Real-world evidence of industries acting to reduce consumption is growing across the continent. In electricity production, coal is sensibly being temporarily reprieved, despite the environmental consequences, and Germany is finally considering slowing its premature closure of the nuclear industry. Renewable electricity generating capacity in Europe is expected to increase 15 per cent this year, further reducing reliance on Russian gas. After substitution comes solidarity within Europe. IMF modelling showed that more cross-border sharing of gas could reduce losses in the worst affected countries significantly, almost halving the hits to the economies of central and eastern Europe at low cost to those allowing gas to flow. As cross-border infrastructure improves, the ability to pump gas eastward from western Europe, which has much better access to LNG, will in future almost eliminate the economic effects of a gas embargo.Finally, households have to play their part. Conservation this winter will be everything. Publicity drives have worked in Japan and Alaska to limit energy consumption in the face of shortages. This would be helped by large increases in the cost of energy to give a significant price signal, offset by lump-sum payments for poorer families. Industry alone should not bear the brunt of Putin’s energy warfare. Such policies could reduce the worst effects this winter from GDP losses of roughly 6 per cent in central Europe to a third of that, with the EU economy taking a hit of only 1.8 per cent, far less than that of the financial crisis, according to the IMF’s modelling. Most important, any fall in economic output would be temporary. Once endured, it would not persist. Every winter, substitution will improve substantially. Advanced western economies will once again show their resilience and flexibility — this time in the face of a deliberate attempt to create chaos. Russia’s economy, on the other hand, would be dealt another severe blow. Already significantly undermined by sanctions and unable to import goods necessary for production, it will soon lose its main export sector, fossil fuels to Europe. As Europe recovers from this winter’s recession, that would leave Russia’s economy high and dry — hoist by its own [email protected] More

The Ukrainian government launched a proposal in July to change conditions on its $2.6 billion of outstanding GDP (gross domestic product) warrants, a derivative security that triggers payments linked to economic growth. “Approximately 93% of Holders of the Notional Amount of Securities outstanding were represented for quorum purposes and approximately 91% of such Holders had voted in favour of the Extraordinary Resolution,” Tuesday’s statement said.Ukraine said that final results will be announced after a meeting on Wednesday.Kyiv is also asking creditors to defer payments on the war-torn country’s international bonds for 24 months as Ukraine seeks to avoid a potential $20 billion debt default. More

Household energy bills in Britain are projected to peak at more than £4,420 a year on average next spring, posing a “fresh shock” for households already enduring a cost of living crisis.The energy consultancy Cornwall Insight on Tuesday raised its forecasts for Britain’s price cap following an announcement by the energy regulator Ofgem of contentious changes to the way the level is calculated. The latest forecasts are likely to heap fresh pressure on Conservative party leadership contenders Liz Truss and Rishi Sunak to offer more support for households this winter. The opposition Liberal Democrats have called for the next rise in the price cap, scheduled for October 1, not to be passed on to consumers — with the difference funded by an increase in the government’s recently imposed windfall tax on oil and gas producers. Oil and gas groups including BP and Shell have been generating bumper profits from the high prices.Cornwall Insight, which is among the most accurate forecasters of British domestic energy bills, warned the price cap could rise from £1,971 a year on average at present to £3,582 in October — an increase of more than 80 per cent. The cap would then jump to £4,266 in January before peaking at £4,427 in April next year, according to the estimates. Britain’s energy price cap dictates a maximum that suppliers can charge per unit of energy and also limits their profit margins. It affects the vast majority of the country’s households — about 24mn of an estimated 27.8mn — that are not on fixed-price deals. October’s price cap level will be announced by Ofgem on August 26.Cornwall Insight has sharply revised up its estimates following methodological changes announced by Ofgem last week that allow energy suppliers to recover the full costs of buying energy for their customers for the coming winter at current high wholesale prices. Before the changes, Cornwall Insight had been forecasting the cap to reach about £3,600 a year in January. Ofgem insisted it had to make changes to the price cap to avoid another slew of energy company collapses. Since January 2021, more than 30 energy retailers have gone bust. The costs of dealing with those failures are expected to exceed £4bn, which will be recovered via a levy on households’ energy bills.

Investec was the first to warn last week that Ofgem’s adjustments could force January’s price cap beyond £4,200 a year on average, although the regulator at the time insisted the forecast was “a long way off” its own “working estimate” of where the price cap might be at the start of 2023.Ofgem said in response to the Cornwall Insight numbers that “the wholesale market continues to move extremely quickly so no forecast for next year is at all robust”.“We cannot stop others from making predictions but we would ask that extreme caution is applied to any predictions for the price cap in January or beyond,” the regulator added.Craig Lowrey, principal consultant at Cornwall Insight, acknowledged that the latest forecasts would come as a “fresh shock” to households already worried about how they will make ends meet this winter. He suggested it “may be time” to reconsider the energy price cap altogether. “If it is not controlling consumer prices, and is damaging suppliers’ business models, we must wonder if it is fit for purpose — especially in these times of unprecedented energy market conditions,” he said. More

MOSCOW (Reuters) – Russia’s Baltic exclave of Kaliningrad is bumping up against quotas imposed by the European Union for sanctioned goods that it can import across Lithuania from mainland Russia or Belarus, the region’s governor said on Tuesday.Lithuania infuriated Moscow in June by banning the land transit of goods such as concrete and steel to Kaliningrad after EU sanctions on them came into force.As part of a deal reached in July, the EU imposed limits on the volume of such goods crossing by land between Kaliningrad and mainland Russia or Belarus, based on average volumes over the last three years, to prevent Kaliningrad being used to dodge sanctions.Kaliningrad governor Anton Alikhanov estimated that the limits permit Russia to ship around 500,000 tonnes of sanctioned goods in total in both directions each year. But he said some quotas had already been reached, making it impossible, for instance, for Kaliningrad to import cement from Belarus – which used to account for around 200,000 tonnes a year.Moscow says trade with its outlying territory should not be subject to limits.”Today, we have already exhausted the limits set by Europeans for the transportation of goods by rail: for instance, certain kinds of iron, steel, oil products, fertilisers, antifreeze and timber,” Russian news agencies quoted Alikhanov as saying at a meeting of the Valdai discussion club on Tuesday.Russia’s former ambassador to Lithuania said that, while the transit deal had helped avoid the “worst case scenario”, the situation was “far from normal”. Alexey Isakov, expelled by Lithuania in March, was quoted by the Foreign Ministry as saying the quota system was “a gross interference in the internal affairs of our country”.The EU has imposed a barrage of sanctions on Russia and Belarus in response to Moscow’s decision to send troops into Ukraine in February, some of them from the territory of Belarus.Moscow says it had to protect Russian-speakers and defuse a military threat to its own security – allegations that Kyiv and the West dismiss as baseless pretexts for a war of acquisition. More

Investing.com — Micron unveils a $40 billion plan to bring its chip manufacturing back to the U.S. as President Joe Biden prepares to sign the Chips and Science Act into law. Alibaba is heading the other way, as Hong Kong approves its plans to move its primary listing back from the U.S. Travel names continue to churn out strong quarterly reports as the tourism boom’s momentum stays strong. Stocks are becalmed ahead of Wednesday’s CPI report, and oil spikes on a report that Ukraine is blocking shipments of Russian crude to central Europe. Here’s what you need to know in financial markets on Tuesday, 9th August. 1. Biden set to sign Chips Act, as Micron lays out $40 billion reshoring planChipmaker Micron (NASDAQ:MU) announced a plan to invest $40 billion by the end of the decade to grow its manufacturing base in the U.S., leaning heavily on the government subsidies outlined in the recently passed Chips and Science Act, which President Joe Biden is due to sign into law on Tuesday.The reshoring of manufacturing capacity reflects, among other things, national security concerns, given the deterioration in U.S.-Chinese relations over recent years, illustrated starkly by China’s reaction to House Speaker Nancy Pelosi’s visit to Taiwan last week. Most of Micron’s manufacturing capacity is located in Greater China and Japan.The announcement comes amid growing concern at a looming glut in chip supply, after a pandemic-fueled surge in demand for appliances, computer gaming, and cryptocurrency. Rival Nvidia (NASDAQ:NVDA) sharply cut its forecasts on Monday, citing weakness in gaming in particular.2. Alibaba heads to Hong KongDeglobalization goes both ways.Hong Kong approved Alibaba’s (NYSE:BABA) plans to transfer its primary market listing to the Hong Kong Stock Exchange, a decision that makes for a neat counterpoint to Micron’s repatriation of its manufacturing capacity.In more practical terms, the move will make it easier for mainland Chinese investors to get access to the stock through the ‘stock connect’ program that links the Hong Kong and mainland exchanges. Whether that will be enough to offset the more restricted access that non-Chinese investors may face in future is open to question.The move is likely to take place before the year-end, according to various reports.Elsewhere in China, Tesla’s Shanghai factory saw its production drop by two-thirds in July from a month earlier, although that was due to scheduled maintenance rather than any expression of U.S.-China tension.3. Stocks becalmed ahead of CPI; Small businesses bemoan inflationU.S. stock markets are set to open flat later, with Wednesday’s release of the July consumer price inflation report casting a long shadow ahead of it.Hopes for a peak in the CPI have grown, with market participants leaping on tentative evidence of a drop in consumer expectations for inflation in the New York Fed’s latest survey that was released on Monday. However, prices have repeatedly risen by more than expected in recent months. Inflation was the top concern reported by small businesses in the monthly NFIB report just released.By 6:20 AM ET (1020 GMT), Dow Jones futures were unchanged, while S&P 500 futures were down 0.1%, and Nasdaq 100 futures were down 0.4%.In addition to chipmakers, other stocks likely to be in focus later include International Flavors & Fragrances (NYSE:IFF) and News Corp (NASDAQ:NWSA) after their strong earnings beat late on Monday. Emerson (NYSE:EMR), Sysco (NYSE:SYY), TransDigm (NYSE:TDG), and Ralph Lauren (NYSE:RL) all report early, while Wynn Resorts (NASDAQ:WYNN) reports after the close.4. Travel is still the strongest sector in this earnings seasonThe global travel sector remains a standout in the current earnings season, with duty-free giant Dufry (SIX:DUFN) and InterContinental Hotels Group (NYSE:IHG) both reporting sharp rebounds in business overnight. IHG – the owner of Crowne Plaza and Holiday Inn, still fell, however, after failing to match the blistering performance of rivals Hilton and Marriott.Both companies noted that revenue had exceeded 2019 levels in North America, with Europe lagging a little (pressure for an EU ban on Russian tourists is growing) and China lagging a lot, due to its zero-COVID policy. Neither predicted any meaningful slowdown in demand in the near future.Norwegian Cruise Line (NYSE:NCLH) is due to continue the theme with its report earnings later.5. Oil spikes on Ukraine reportCrude oil prices recovered on perceptions that the abrupt recent selloff has gone far enough in the near term.The market was also settled by headlines suggesting that Ukraine’s pipeline operator UkrTransNafta has stopped pumping Russian oil across the country’s territory to customers in central Europe, in what would be an unexpected escalation of the energy conflict between Russia and its European neighbors.The headlines would suggest that Ukrainian frustration at continued European purchases of Russian fuel – which it says helps finance the war – has boiled over. The move comes a day after the Biden administration approved a further $1 billion in military aid for Ukraine.The American Petroleum Institute releases its weekly inventory data at 4:30 PM ET, as usual. More

Measures include corporate income tax exemption of up to 15 years for businesses in the area and a tax exemption for dividends, government spokesperson Ratchada Thanadirek said in a statement.The plan is part of the Eastern Economic Corridor, which covers three provinces east of the capital, Bangkok. This is the centrepiece of government efforts to boost growth and encourage investment, especially in high-tech industries.In June, the government approved investments worth $9.6 billion over five years in the industrial east, including infrastructure and utilities.The zone enjoying the benefits will also include the U-Tapao airport, which was completed in the Vietnam War for U.S. Air Force B-52 bombers and has since been used as a low-key civil-military facility.U-Tapao will be linked by high-speed rail to the country’s main airport, Suvaranabhumi, and the Don Muang facility for low-cost aviation. The aviation and logistics industry to be built up at U-Tapao is planned to be the anchor of the special economic zone.Within the zone would be a 1.35-square-kilometre district called an airport city, which would include five-star hotels, high-grade restaurants and entertainment and conference space, Ratchada said.Additional measures, such as personal income tax benefits were being considered, she said.Among other perks, the city will allow alcohol sales around the clock. In other parts of Thailand, shops cannot sell alcohol between 2pm and 5pm or after midnight. More