Economy

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The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyThere are times when one wants to be wrong. I have felt this way several times in the past 15 months, whether in warning last year that inflation would not prove transitory or cautioning that the Federal Reserve was rapidly falling way behind on its inflation objective and running out of first-best (“soft landing”) policy options.Today, my discomfort relates to the view that the recent jobs report implies that the US will now avoid a recession, a view that several analysts have embraced and which is reflected in prices for stocks and corporate bonds. While I very much hope this view is correct, I believe it is too early to declare the recession watch over, something that the government bond market seems more attuned to.Don’t get me wrong, the report was very strong. Jobs increased by 528,000, twice the consensus forecast and bringing US employment above its pre-pandemic level. At 3.5 per cent, the unemployment rate is at pre-pandemic lows, and wages are now growing at 5.2 per cent, again above consensus. The one disappointment is a labour participation rate that continues to slip lower.The data confirm that, even though the technical definition of recession was triggered by the 0.9 per cent second-quarter GDP decline, the economy is not in a recession using the more holistic concept favoured by the vast majority of economists. But this does not mean that the risk of a recession within the next 12 months has been eliminated. Nor does it guarantee that a recession, were it to occur, would be shallow and short.Forward indicators suggest that the current strength of the labour market should not be taken for granted. This is not just about the inconsistencies between the two surveys that constitute the monthly report (establishment and household).Away from that, job openings are declining at an historically rapid rate, weekly jobless claims are increasing and several companies have signalled their intention to slow hiring and/or lay off workers. Meanwhile, the beneficial effects of the just-passed Inflation Reduction Act by the Biden administration, while consequential over the long term, will do little to immediately alter this.Then there is the policy angle. Going into the release of the report, most economists had dismissed as puzzling the comment by Fed chair Jay Powell on July 27 that policy rates were already at neutral (the level consistent with neither an expansionary nor a contractionary monetary policy).The report confirmed what other data and analytical signals had suggested: the central bank still has a lot of work to do to get rates to neutral and beyond, now that it has allowed inflation to get entrenched into the system.While headline inflation is expected to fall in the next three months (the July reading is due out on Wednesday), core measures are likely to stay uncomfortably high and prove unpleasantly sticky. As the Fed scrambles to regain control of inflation and restore its damaged credibility, aggressive rate hikes and the contraction of a bloated $9tn balance sheet risk pulling the rug from under the economy and markets. These have been conditioned for way too long to function with floored rates and massive liquidity injections.The alternative of an early pause in the hiking cycle is not a good one as it risks leaving the US with both inflation and growth problems well into 2023.The government bond market understands this, as shown by the current inversion of the yield curve with short-term rates rising above longer-term ones. Investors are unusually willing to accept lower compensation for allocating their money to a longer maturity investment. This is a traditional signal of a rapidly slowing economy, and the inversion intensified to some 40 basis points following the release of the jobs report.All this is not reflected in stock prices and corporate bond spreads, which remain well supported by all the liquidity still sloshing around the system and an investor mindset set at exploiting relative rather than absolute valuation. Indeed, the dominant narrative in markets is that company profits will largely bypass lower sales growth, higher wage costs and another leg-up in some other costs.I sure hope the growth optimists are right. Already hampered by slow Chinese growth and the threat of a European recession, the last thing the global economy needs is the twin shock of a US recession and a bigger Fed policy mistake. Indeed, I am looking for reasons to embrace their views. Unfortunately, and to my great regret, my analysis of what is ahead is inconsistent with doing so. More

Bangladesh’s finance minister has warned that developing countries must think twice about taking more loans through China’s Belt and Road Initiative as global inflation and slowing growth add to the strains on indebted emerging markets.AHM Mustafa Kamal also said Beijing needed to be more rigorous in evaluating its loans amid concern that poor lending decisions risked pushing countries into debt distress. He pointed to Sri Lanka, where Chinese-backed infrastructure projects that failed to generate returns had exacerbated a severe economic crisis.“Whatever the situation [that] is going on worldwide, everybody will be thinking twice to agree to this project,” he said in an interview, referring to BRI. “Everybody is blaming China. China cannot disagree. It’s their responsibility.”He said Sri Lanka’s crisis highlighted that China had not been rigorous enough in deciding which projects to support. It needs to “make a thorough study” before lending to a project, he said. “After Sri Lanka . . . we felt that Chinese authorities are not taking care of this particular aspect, which is very, very important.”Bangladesh last month became the latest country in Asia to approach the IMF for financing as surging commodity prices after Russia’s full-scale invasion of Ukraine weighed on its foreign reserves. The country, a participant in China’s BRI, owes about $4bn, or 6 per cent of its total foreign debt, to Beijing.Kamal said Bangladesh wanted a first instalment from the IMF of $1.5bn as part of a total package worth $4.5bn, which would include financing to help it fund climate change resilience projects and buttress its budget.The fund said the total amount of potential lending for Bangladesh had not yet been negotiated.Bangladesh is also seeking up to $4bn more in total from a range of other multilateral and bilateral lenders, including the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank and Japan International Cooperation Agency, Kamal said. He added that he was optimistic the country would secure loans from them.His comments came as China’s foreign minister Wang Yi visited Bangladesh over the weekend for meetings with officials including Prime Minister Sheikh Hasina. In a statement, China called itself “Bangladesh’s most reliable long-term strategic partner” and said the pair agreed to strengthen “co-operation in infrastructure”. The economic hit from the Covid-19 pandemic, as well as the surge in global food and fuel prices amid the Ukraine war, has put many developing countries under strain and some are struggling to repay their foreign debt.Sri Lanka, which defaulted on its sovereign debt in May, is in negotiations with the IMF for an emergency bailout. Pakistan, whose foreign reserves have fallen to enough for just a month and a half’s worth of imports, last month reached a preliminary deal with the fund to release $1.3bn as part of an existing $7bn assistance package.Bangladesh has been hit hard by a rising energy import bill, with fuel shortages forcing daily, multi-hour power cuts. Its foreign reserves have also fallen to less than $40bn from more than $45bn a year ago.However, analysts say the country’s strong export sector, notably its garment trade, has helped shield it from the recent global shocks and its reserves are still enough for about five months’ worth of imports, providing the country with some cushioning.This meant that although “everybody is suffering [and] we’re also under pressure”, Bangladesh was not at risk of defaulting like Sri Lanka, Kamal said. “There is no way to even think of a situation like that.” Bangladesh had total foreign debts of $62bn in 2021, according to the IMF, with the majority owed to multilateral lenders such as the World Bank. The country owes $9bn, or 15 per cent, to state lenders from Japan, its largest bilateral creditor, followed by China.Bangladesh’s economy grew rapidly in recent decades from one of the poorest in the region after its independence war in 1971 to a per capita income of $2,500, higher than India and Pakistan.But climate change poses a significant threat, with the low-lying country of 160mn vulnerable to rising sea levels, erratic monsoon rains and flooding.

The IMF said in a statement this month that its new Resilience and Sustainability Trust would help provide long-term climate change-related financing as part of Bangladesh’s loan programme. “Unprecedented global shocks present countries like Bangladesh with significant uncertainties,” it said.Lack of infrastructure also continues to constrain growth. The government in June inaugurated the $3.6bn Padma Bridge near Dhaka. The project was Chinese-built but financed domestically after international lenders withdrew funding over a corruption scandal, although allegations were never proved. But the government has responded to the economic downturn by cancelling a series of planned infrastructure upgrades, including investments in building a 5G network and upgrading highways.“Whichever projects are essential and are in process and will pay off as fast as possible, we’re only taking care of those,” Kamal said. “To other projects, we’re saying, no thank you.” More

(Reuters) -National Australia Bank flagged higher expenses for the second time in four months on Tuesday, citing higher personnel and leave costs, sending shares of the country’s second-largest lender more than 4% lower in their worst day since mid-June. NAB, Australia’s biggest business lender, bumped up its cost forecast for 2022 to between 3% and 4% from 2%-3%. That excludes the impact of its $882 million buyout of Citigroup (NYSE:C)’s local consumer business, which became effective on June 1.Part of the cost jump comes from expected provisions of between A$60 million and A$100 million ($41.92 million and $69.86 million) related to a previously disclosed agreement with Australia’s financial crime regulator to fix shortcomings in anti-money laundering compliance. NAB shares dropped as much as 4.4% to A$29.36, their biggest single-day drop since June 14. Cash profit at NAB did, however, come in 6% higher at A$1.80 billion for the quarter ended June 30, compared with A$1.70 billion a year ago, as it benefited from an increase in home and business lending, and growth is deposits. The figure was in-line with Morgan Stanley (NYSE:MS)’s estimate of A$1.80 billion.”As the economy changes, continued low unemployment and healthy household and business balance sheets are helping mitigate the impacts of higher inflation and interest rates,” said Chief Executive Officer Ross McEwan. While higher rates, soaring cost of living, and weak consumer sentiment has effectuated a reversal in home prices from record levels reached last year, McEwan said 70% of customer home loan repayments were ahead of schedule.Runaway inflation has prompted the Reserve Bank of Australia to tighten monetary policy this year, aiding margins of banks that grappled with record-low interest rates for the past two years.”Overall, we would view this Q3 update as very much in line with consensus with few surprises,” UBS analysts said in a note.”The commentary on NIM is maybe a bit disappointing in the context of some banks which have already reported, but the underlying margin trend is as expected.”Excluding its markets and treasury business and the impact of the Citi acquisition, NAB’s net interest margin for the April-June quarter was slightly higher than the first half’s quarterly average due to higher interest rates, partly offset by stiff competition in home lending.The country’s biggest lender, Commonwealth Bank of Australia (OTC:CMWAY), will release annual results on Wednesday.($1 = 1.4314 Australian dollars) More

SYDNEY (Reuters) – A measure of Australian consumer sentiment fell for a ninth straight month in August to depths last seen early in the pandemic as another hike in interest rates combined with the surging cost of living to sour the national mood.The Westpac-Melbourne Institute index of consumer sentiment released on Tuesday slid 3.0% in August from July, when it also dropped 3.0%. The index was down 22% from August last year at 81.2, meaning pessimists far outnumber optimists.The grim mood partly reflected the Reserve Bank of Australia’s (RBA) decision last week to raise interest rates by another 50 basis points to 1.85%, warning that yet more would be needed to restrain runaway inflation.The impact was clear on mortgage holders where confidence tumbled 8.9%, while renters actually firmed 0.2%.A separate weekly survey from ANZ showed a sharp drop of 4.5% in its confidence index that wiped out three weeks of gains, even as consumption held up.”Household spending has been robust despite very weak consumer sentiment, with strong employment gains, high levels of household saving and a desire to travel more than offsetting concerns about the rising cost of living,” said David Plank, ANZ’s head of Australian economics.”It remains to be seen whether this divergence between confidence and spending can continue.”Rising borrowing costs is adding to pressures from higher energy prices, housing and food, and saw Westpac’s measure of whether it was a good time to buy a major household item slide 8.4%.The measure of the economic outlook for the next 12 months dropped 8.0%, while the outlook for the next five years fell 1.0%.Measures of family finances steadied a little after months of decline with finances compared with a year ago edging up 0.1%. The outlook for finances over the next 12 months added 2.3%, but was still down almost 18% on the year.(The story refiles to remove extraneous word from lead paragraph.) More

Food prices dropped 8.6% in July from the previous month, particularly because of lower wheat and vegetable oil prices.
Ukraine and Russia’s U.N.-backed export agreement, better-than-expected crop harvests, a global economic slowdown, and the strong U.S. dollar are some reasons behind falling prices.
But analysts have doubts over whether prices will continue to fall, especially since the deal between Ukraine and Russia appears shaky.

Farmers harvest a wheat field near Melitopol in Ukraine. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.
Olga Maltseva | Afp | Getty Images

Food prices dropped significantly in July from the previous month, particularly the costs of wheat and vegetable oil, according to the latest figures from the United Nations’ Food and Agriculture Organization.
But the FAO said that while the drop in food prices “from very high levels” is “welcome,” there are doubts over whether the good news will last.

“Many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,” FAO chief economist Maximo Torero said in a press release.
The FAO food price index, which tracks the monthly change in the global prices of a basket of food commodities, fell 8.6% in July from the month before. In June, the index fell just 2.3% month on month.
However, the index in July was still 13.1% higher than July 2021.

Prices in the short term may fall further, if futures are anything to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.
For example, the wheat contracts closed at $775.75 per bushel on Friday, down from a 12-year high of $1,294 in March, and around the $758 price set in January.

Why prices fell

Analysts cited a mix of both demand and supply reasons for the slide in food prices: Ukraine and Russia’s closely watched agreement to resume exports of grain through the Black Sea after months of blockade; better-than-expected crop harvests; a global economic slowdown; and the strong U.S. dollar.
Rob Vos, the director of markets, trade and institutions at the International Food Policy Research Institute, pointed to the news that the United States and Australia are set to deliver bumper wheat harvests this year, which will improve supply since shipment from Ukraine and Russia have been curtailed.
The higher U.S. dollar also lowers the price of staples, since commodities are priced in U.S. dollars, Vos said. Traders tend to ask for lower nominal dollar prices of commodities when the greenback is expensive.
The widely heralded U.N.-backed deal between Ukraine and Russia also helped to cool the market. Ukraine was the world’s sixth-biggest wheat exporter in 2021, accounting for 10% of global wheat market share, according to the United Nations.
The first shipment of Ukrainian grain — 26,000 tons of maize — since the invasion left the country’s southwestern port of Odesa last Monday.

Skepticism over Ukraine-Russia deal

Global skepticism over whether Russia will keep its end of the bargain hangs in the air.
Russia fired a missile onto Odesa just hours after the U.N.-brokered deal in late-July.
And freight and insurance companies may still think it’s too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any new shock can cause more price surges.
“To make a difference it will not be enough to get a few shipments out, but at least 30 or 40 per month to get the existing grains stored in Ukraine out, as well as the produce of the upcoming harvest,” said Vos.
“To help stabilize markets, the deal will need to hold in full also during the second half of the year since that is the period where Ukraine does most of its exports.”

Even with the existing agreement, arable Ukrainian land may continue to be destroyed “for as long as the war continues,” which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC’s “Street Signs Europe” last week.
“Once this [grain] corridor is over, we might see even more price increases going forward,” Mera said. Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves.
Then there is the pressure of exporting enough grain as quickly as possible from a war zone.
“It’s time that we’re working again. I don’t see us exporting two [to] five million tons per month out of these Black Sea ports,” John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.
“Hungry people, at the end of the day, get hungry very quickly after a week.”
In a note published earlier this month, credit rating agency Fitch Ratings’ analysts wrote that a possible increase in fertilizer prices, which fell recently — but which are still double that of 2020 — could cause grain prices to jump again.
Russia’s restriction of gas supply has led European natural gas prices to spike. Natural gas is a key ingredient in nitrogen-based fertilizers. La Nina weather patterns could disrupt grain harvests later this year as well, they added.

And the fall in food prices is not all good news. Part of the reason why staples have become cheaper is that traders and investors are pricing in recessionary fears, the analysts said.
The global manufacturing purchasing managers’ index has been in decline, while the U.S. Federal Reserve seems bent on raising interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Food staples

Cereal prices, under which wheat falls, fell by 11.5% month on month, the FAO index showed. Prices of wheat specifically fell by 14.5%, partly because of the reaction to the Russia-Ukraine grain deal, and better harvests in the Northern Hemisphere, the FAO said.
Vegetable oil prices fell by 19.2% month on month — a 10-month low — in part because of ample palm oil exports from Indonesia, lower crude oil prices, and lack of demand for sunflower oil.
Sugar prices dipped by 3.8% to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback, and increased supply from Brazil and India.
Dairy and meat prices dropped by 2.5% and 0.5% respectively.

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The finance ministry collected TES UVR bonds due to mature in 2023 in the transactions, in exchange for others maturing in 2025, 2029, 2035 and 2037, as well as for TES COP bonds due to mature in 2026 and 2042.”The transactions were carried out at market prices and contributed to improving the profile of Colombia’s internal public debt,” the finance ministry said in a statement.”This was done without increasing the nation’s net indebtedness,” the ministry added.The transactions followed a number of previous tranches of similar swaps, the most recent of which was carried out in May, for 3.4 trillion pesos.($1 = 4,337.28 Colombian pesos) More

UK consumer spending defied talk of recession in July, data from industry bodies showed on Tuesday, but it still failed to match the pace of overall inflation. The value of UK retail sales grew 2.3 per cent in July compared with the same month a year ago, according to figures produced for the British Retail Consortium, a trade association, in collaboration with the professional services group KPMG. Sales last month were 10.6 per cent higher than in the pre-pandemic month of July 2019.These growth rates were lower than the rate of price increases, however, indicating that it was likely that sales volumes for retailers had fallen both during the past year and the past three years. The BRC said the small rise in the annual value of sales “masked a much larger drop in volumes once inflation is accounted for”. Consumer price inflation rose to 9.4 per cent in June and was last week forecast to reach 13 per cent by December, while prices in June were 12.9 per cent higher than three years earlier. Helen Dickinson, BRC chief executive, said sales of clothing, picnic treats and electric fans had been strong in July, reflecting the heatwave, but that this could not disguise an “incredibly difficult trading period” for retailers. “Consumer confidence remains weak, and the rise in interest rates coupled with talk of recession will do little to improve the situation,” said Dickinson. With energy bills due to rise further in the autumn, “both consumers and retailers are in for a rocky road throughout the rest of 2022”, she added. The underlying gloomy message from retailers was not entirely reflected in separate data from payments company Barclaycard, also published on Tuesday, which showed that consumers were more willing to spend money enjoying themselves last month than in the shops. Barclaycard’s data, which gathers figures from almost half of the UK’s credit and debit card transactions, found spending was 7.7 per cent up on July 2021, though it remained lower than the rate of inflation. This growth rate was up on the June annual spending growth of 6.2 per cent. The company noted that there were still large annual increases in fuel purchases, reflecting the rise in price of petrol and diesel and payment for utilities made on credit and debit cards. But it said that growth in spending on non-essential items was even faster in July as families largely enjoyed the hot weather and prepared for the summer holidays.Reporting that families were more optimistic in July about their finances, José Carvalho, head of consumer products at Barclaycard, said: “Brits [were] increasing their discretionary spending on entertainment, travel and takeaways as we head into high summer.”

Eating and drinking out rose at an annual rate of 9 per cent, while travel agents enjoyed three times the spending of July 2021 and bookings with airlines doubled. But Barclaycard said a “need to buy” mentality was emerging among consumers. It noticed evidence that households were financing increased spending on entertainment by taking a more frugal attitude to regular shopping, whereby they spent less on each supermarket visit but visited more often. Carvalho said: “This shows that, faced with difficult circumstances, many are finding ways to budget and manage their finances successfully, to cope with ongoing inflationary pressures.” More