Economy

For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.“There is nothing to cut back on,” she said.Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.Officials at West Houston Assistance Ministries said its food bank served 200 households on Friday.Meridith Kohut for The New York TimesBut job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”8 Signs That the Economy Is Losing SteamCard 1 of 9Worrying outlook. More

Good morning. After a marathon overnight voting session, the climate, tax and healthcare bill known as the Inflation Reduction Act was passed by a margin of 51 to 50, marking a cornerstone achievement of President Joe Biden’s first term. The bill, which is designed to cut prescription drug prices, invest in energy initiatives and reduce the deficit, is not yet law. It will now go to the House of Representatives, where a vote is expected later this week. Then it will be handed to the president, who completes the final step of signing it off. The approval by the Senate marks the biggest in a string of recent wins for Biden just months before midterm elections, when he will aim to defend slim majorities in both chambers of Congress. The Inflation Reduction Act includes some of the most significant climate change legislation enacted in the US. Read about the bill’s key climate measures here.Five more stories in the news1. China’s military extends drills around Taiwan and ramps up propaganda push Beijing’s largest-ever military exercises around Taiwan had been expected to wind down after navigation warnings for seven areas around the country expired early today. But the Chinese military announced it would continue “joint training under real war conditions”.Go deeper: Have US-China relations entered a “new era”?2. SoftBank posts $23.3bn loss as falling tech stocks weigh on Vision Fund The Japanese group was hit by a ¥3.1tn ($23.3bn) loss in the second quarter, as sliding technology stocks weighed on Masayoshi Son’s flagship Vision Fund portfolio. It blamed “deepening challenges” in the macroeconomic environment, inflation, central bank policy responses and geopolitical tension.3. Investors sell stakes in buyout funds at a record pace Pension and sovereign wealth funds were among those that sold $33bn worth of stakes in private funds in the first six months of the year. The sell-off was partly triggered by the steep decline in stock markets.4. Shortage of job candidates helps PageGroup profits soar Recruitment consultancy PageGroup highlighted improvements in the property and construction, technology and healthcare and life sciences sectors in the US, as well as a record performance in Latin America.5. Gustavo Petro sworn in as Colombia’s president in historic ceremony The former urban guerrilla, who was jailed for his political beliefs in the 1980s, was sworn in yesterday, officially assuming leadership of what is likely to be the most leftwing government in the country’s history.The day aheadCorporate earnings American International Group will publish its second-quarter results after markets close. US meat and poultry processor Tyson Foods is expected to post an increase in third-quarter revenue, boosted by higher meat prices and growth in restaurant demand.News Corp releases fiscal-year results, while Porsche publishes results for the first half. Quarterly earnings are also due for NTT Group and BioNTech.M&A moves: US pharmaceutical group Pfizer is close to acquiring Global Blood Therapeutics for about $5bn. The deal could be announced as early as today, when GBT reports second-quarter results.Joe Biden visits Kentucky The US president has said he will visit eastern Kentucky to visit families affected by fatal floods. At least 37 people died and hundreds were displaced in the state following record rainfall in July.Arms aid for Ukraine The US is expected to announce a further $1bn security assistance package for Ukraine as early as today, Reuters has reported. It would take the total of US help since Russia’s invasion in February up to $8.8bn. Ben & Jerry’s dispute with Unilever The latest court hearing in Ben & Jerry’s row with parent company Unilever over the sale of the ice cream maker’s Israeli business will take place in New York City.What else we’re readingKenya’s presidential election heats up The two main candidates fighting to be the next Kenyan president are neck and neck ahead of tomorrow’s poll. William Ruto, 55, and Raila Odinga, 77, are scrabbling for votes in the midst of the country’s economic downturn, with inflation at a five-year high of 8.3 per cent in July.

A woman dances during a rally for Raila Odinga, presidential candidate, in Nairobi, Kenya © Bloomberg

Bad news for Big Tech Real chinks are starting to show in the core business model of firms such as Amazon and Meta, which hinges on globalisation and the network effect to create scale, argues Rana Foroohar. How cost of living crisis is pushing UK households to breaking point People on low incomes in the UK are facing increasing precarity, with the rising cost of living stretching budgets to their absolute capacity. A single change in circumstance, from the end of a relationship to a pet’s death, can be enough to tip them over the edge.The end of the warehouse bubble The pandemic put industrial sheds centre stage in commercial real estate because they were less vulnerable to Covid-19 lockdowns than offices and shops. But now, warehouses are suffering from rate rises and cooling demand as the global economy causes a slowdown in ecommerce.Climate, war and inflation jolt reinsurers into action Claims for natural catastrophes and pandemic-related losses have wiped out a large part of reinsurers’ profits in the past few years, causing the price of coverage to rise — and the options to shrink for insurers looking to pass on risks.Food & drinkMix up your picnic fare by swapping sandwiches for any number of these can-be-eaten-cold delights. Rowley Leigh offers up a plethora of recipes we can look forward to enjoying at lunch, including chicken and ham pie and kipper pâté. More

For much of the EU, the economic outlook is grim with fears of a recession mounting and government finances constrained. Then there is Ireland.The republic is enjoying an €8bn corporate tax windfall after bumper pandemic-enhanced revenues from tech and pharmaceutical companies. The tax take from companies attracted by Ireland’s 12.5 per cent corporate rate has soared since 2015 and leapt a further 30 per cent last year compared with 2020.Ireland’s economy expanded by 6.3 per cent over the second quarter, against an EU average of just 0.6 per cent. So great was the impact from multinationals that Ireland’s numbers distorted EU figures, despite the nation of 5.1mn making up less than 3 per cent of the region’s economy. With employment and foreign investment also at record highs, “the economy is even hotter than the weather”, said Danny McCoy, head of employers’ confederation, Ibec, noting recent record temperatures.Yet Ireland is not without its problems. Prices rose by 9.1 per cent in the year to June. Families feel priced out of the housing market in Dublin and other cities.“We’re not on bad wages,” said Mark Murphy, 39, a regional manager at a charity, based with his wife in West Cork. He delayed getting married and starting a family to save for a “very modest” home around the €300,000 mark. “But now, the same houses are €400,000 — we just can’t get the credit,” he said.Consumer spending contracted by 1.3 per cent in the first quarter compared with the previous three months. Modified domestic demand, a measure of the size of economic activity that excludes some multinationals’ expenditure and is considered a better indicator than gross domestic product, fell 1 per cent over the first quarter. Officials warn that the corporate tax is vulnerable to fluctuation. Half of the corporate tax receipts of €15.3bn last year came from just 10 companies — among them Apple, Google, Intel, Meta, Amazon and Pfizer. But for now the healthy tax receipts give Ireland a handy cushion, with a very modest fiscal surplus expected if spending levels are maintained, although Ireland, following some EU neighbours including Spain, is now considering an extra tax on energy companies in the 2023 budget on September 27.Dermot O’Leary, chief economist at brokerage Goodbody, said Ireland had no need to go down the “Robin Hood route” because it can use the corporate tax windfall to fund nearly €7bn of spending already announced for the budget.Even after stripping out the multinational sector, Ireland’s domestic economy contracted less in 2020 and rebounded faster in 2021 than the EU average, said rating agency DBRS Morningstar.Leo Varadkar, deputy prime minister, in an event last month presenting record inward investment data, said: “The jobs and revenue created by multinationals helped to keep us out of recession when the pandemic hit and are now giving us the financial firepower to ease the cost of living crisis and avoid recession once again.”But if the world economy experiences a downturn Ireland’s multinational sector could be its Achilles heel. The threat of a recession in the EU and US is mounting. Any downturn would hurt the profits of companies invested in Ireland and feed through into a lower tax take.The central bank said corporate tax receipts, which have exceeded expectations for the past seven years, were €8bn higher than expected last year and brought in nearly €9bn in the first half of this year alone. The government has been reluctant to say whether or how it will use the tax windfall in the budget but the central bank and the Irish Fiscal Advisory Council have warned over reliance on a tax take that could prove volatile.“There is nothing on the horizon that suggests that corporate tax revenues are going to rapidly fall,” said Seamus Coffey, a lecturer at University College Cork and an expert on corporate tax. “But five, six years ago, there was nothing on the horizon that suggested they were going to rise.”John Fitzgerald, a Trinity College economics professor, said the worst-case scenario of a drastic drop in corporate tax receipts would be a loss of 3 to 4 per cent of national income — a big hit to public finances.Ibec cautioned that the Irish economy faced a “turning point”, and that “for Ireland, as a small open economy, shifts in the flow of capital through the global economy can have an outsized impact on our growth model”.The central bank has also warned that construction of homes to tackle Ireland’s chronic housing shortage is flagging. Varadkar calls Ireland a “homeowning democracy” but the Economic and Social Research Institute, a think-tank, recently forecast that one in three people now aged between 35 and 44 will not own a home by the time they retire.Ireland could stay lucky. Although the government forecast that its decision to join an OECD global corporate tax accord setting a minimum 15 per cent rate could cut revenues by €2bn, implementation has been delayed.Foreign direct investment continues to surge, with the number of investments in the first half up 9 per cent on the same period in 2021, including an 18 per cent jump in new names locating in Ireland. Conall Mac Coille, chief economist at brokerage Davy, said he saw “no real reason” that taxes paid by foreign companies investing in Ireland would “collapse any time soon”. For now, Ireland faces the problem of administering abundance. “We’re the equivalent of a household that’s just won the lottery,” said McCoy. “Are we the household mature enough to say ‘actually, this good fortune can be put to work for future generations’? Or are we just going to go daft for half this generation and have so much regret?” More

Flavia Royon, who most recently oversaw energy affairs in the northern province of Salta, will be tasked with trying to cut subsidies to alleviate Argentina’s fiscal deficit, which has led to a depreciation of the peso currency and soaring inflation that is expected to surpass 90% this year. “Everyone’s objective must be our energy sovereignty and the transformation of Argentina into a leader in this area,” said Massa, who took office on Wednesday, in a Tweet.Massa also appointed Federico Bernal as Undersecretary of Hydrocarbons.Massa’s political acumen is widely seen as key to rescuing Argentina’s economy, which has been ravaged by sky-high inflation, crippling debt and chronic overspending.The “super minister,” as some call him, announced a series of fiscal austerity measures and moves designed to boost dwindling foreign reserves in his first day on the job. More

TOKYO (Reuters) – Japan ran a current account deficit for the first time in five months in June as surging imports eclipsed exports, data showed on Monday, highlighting the pressure that higher energy and raw material prices are putting on the economy.The world’s third-largest economy ran a current account deficit of 132.4 billion yen ($980 million) in June, government data showed, reversing 872 billion yen from the same month a year earlier.The data, which marked the first monthly deficit since January, was smaller than economists’ median forecast for a 703.8 billion shortfall in a Reuters poll.High prices for energy sources like oil and coal drove the value of imports to a record, surging 49% year-on-year and outpacing a 20% rise in the value of exports led by “mineral fuels” and steel.The current account data underscored the change in Japan’s economic structure as the country earns hefty returns from its portfolio investments and direct investment overseas, which are offsetting deficits in its trade balance.The current account surplus has declined for four fiscal years in a row through March 2022.While yen weakness has inflated the cost of imports, its boost to the value of exports has not been as great as it once was due to an ongoing shift of exporters’ production abroad.($1 = 135.0400 yen) More

SYDNEY (Reuters) – Asian share markets made a stuttering start on Monday and the dollar held firm after a stunning U.S. payrolls report pushed back against talk of recession but also bolstered the case for more super-sized rate hikes.Markets quickly moved to price around a 70% chance the Federal Reserve will lift rates by 75 basis points in September, sending two-year yields up 20 basis points on Friday and further inverting the curve.The blockbuster data only raised the stakes for the June U.S. consumer prices report due on Wednesday, which could see a slight pullback in headline growth, but likely a further acceleration in core inflation.”Despite sluggish growth and an expected slide to a 0.2%m/m July CPI gain, the Fed will likely raise policy rates 75 bps at its September meeting,” said Bruce Kasman, head of economic research at JPMorgan (NYSE:JPM).”The key question is whether it will decide that a material rise in the unemployment rate is necessary to achieve its objectives,” he warned. “If this is the case, its guidance on rates will move significantly higher, alongside a message that it will likely prove to be less sensitive to near-term growth disappointments.”The risk haunted equity markets with S&P 500 futures and Nasdaq futures both down 0.3% in early trade.MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.2%, after three sessions of gains. Japan’s Nikkei eased 0.3% and South Korea 0.4%.There was little obvious market reaction to news that the U.S. Senate on Sunday passed a sweeping $430 billion bill intended to fight climate change after some compromises on taxation within the deal.”The changes look unlikely to substantially change the net fiscal impact of the legislation, which continues to look likely to be less than 0.1% of GDP for the next several years, as new spending and new taxes roughly offset,” said analysts at Goldman Sachs (NYSE:GS).THE EXCEPTIONAL DOLLARTwo-year Treasury yields were up at 3.24%, fully 40 basis points above 10-year yields.Bonds also got a safe-haven bid due to unease over Beijing’s sabre rattling against Taiwan as China conducts four days of military exercises around the island.Chinese data out over the weekend showed exports picked up unexpectedly in July with a gain of 18%, while imports lagged with a rise of just 2.3%.The jobs boom combined with the jump in yields to bolster the U.S. dollar, which was up at 106.640 against a basket of currencies having gained 0.8% on Friday. [FRX/]”This key data point is a million miles from a current recession, both on a change of employment, and a levels of unemployment basis,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank (ETR:DBKGn).”Data like this will further any thoughts about ‘U.S. exceptionalism’ and is very positive for the USD against all currencies.”The dollar held at 135.26 yen after jumping 1.6% on Friday, while the euro was struggling at $1.0164 and not far from chart support around $1.0095.The single currency was not helped by news Moody’s (NYSE:MCO) had cut Italy’s outlook to negative as Prime Minister Mario Draghi’s resignation shook the country’s political landscape.The rise in the dollar was a setback for gold, though it had managed to bounce from the lows hit on Friday to stand at $1,773. [GOL/]Oil prices continued their recent retreat after suffering the worst week since April on worries about stalling global demand as central banks keep tightening. [O/R]Brent lost 97 cents to $93.95, while U.S. crude eased 89 cents to $88.12 per barrel. More

A look at the day ahead in markets from Alun JohnU.S. payrolls data day is dawning shortly and set to tell us whether markets should be more worried about inflation or a recession. As Rabobank notes — Will a weak print provide more ‘pivot-fuel’ for a market already so drunk on it that it won’t heed the Fed saying “WRONG!” over and over – as they just did yet again yesterday? Conversely, will a strong payrolls number sober the market up?If markets decide good jobs news is also good news for stocks, expect the bouncers at the Fed to shout even louder. A Reuters survey of economists expects U.S. non-farm payrolls to have increased by 250,000 jobs last month after rising by 372,000 in June. But signs from other claims and related data warns of a poor number. The jobs data will likely outshine most morning news in Europe, though Allianz (ETR:ALVG) London Stock Exchange Group (LON:LSEG) are both due to report earnings. Investors have had a night’s sleep to see if they’re happy with their response to the Bank of England raising rates by 50bps to 1.75%, the biggest increase in 27 years – and warning of a long drawn out recession. Two-year gilt yields fell, future hikes were priced out and cuts priced in, while the 10-year yield slipped 3bps to 1.88%. Sterling lost ground on the euro, though clawed back its initial losses against the dollar in U.S. trading. Shares rose in Asia this morning, particuarly in Taiwan, as markets decided China firing missiles near the island after Nancy Pelosi’s visit was less worrisome than it could have been.Key developments that could influence markets on Friday: Economic data: US non-farm payrolls July, Canadian July jobs data, German June industrial output, UK Halifax housing data July Europe earnings: Deutsche Post, London Stock Exchange, Rheinmetall, Allianz, WPP (LON:WPP), Hargreaves LandsdownUS earnings:  Goodyear Tire & Rubber, Western Digital Corp (NASDAQ:WDC) More

The European Central Bank is using its pandemic-era bond-buying programme to shield highly indebted eurozone countries from the effects of its decision to unwind stimulus programmes in its bid to fight inflation.The central bank concluded net purchases under its pandemic emergency purchase programme in March, but is focusing reinvestments of maturing bonds on the bloc’s more financially fragile members. Between June and July, the ECB injected €17bn into Italian, Spanish and Greek markets, while allowing its portfolio of German, Dutch and French debt to fall by €18bn, according to Financial Times calculations based on the central bank’s data. “The deviation now is very large,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, about the ECB’s reinvestments. “It looks like the ECB has been very active by reinvesting almost all the proceeds from core countries into peripheral countries.”The reinvestments highlight the ECB’s eagerness to keep a lid on borrowing costs for countries such as Italy and prevent a eurozone debt meltdown as it pulls back from the accommodative monetary policy that has supported the bloc since the debt crisis a decade ago. It comes after the ECB last month raised interest rates for the first time since 2011 after making the decision to conclude the PEPP programme, and a longer-running bond-buying scheme called the asset purchase programme. Sven Jari Stehn, chief European economist at Goldman Sachs, said the “extent of the flexibility that has been utilised” in reinvesting proceeds of bonds that were part of the PEPP programme was “somewhat more than people had expected”.ECB policymakers and investors are worried that tighter monetary policy will widen the gulf between the region’s strongest and weakest economies — so-called fragmentation risk. These fears pushed wider the difference between Italian and benchmark German 10-year bond yields to as much as 2.4 percentage points in June, a level last seen during the market tumult in the early days of the pandemic in 2020. The spread has since narrowed to about 2.1 percentage points after the ECB committed to pushing back against fragmentation. The ECB last month said flexibility in deploying PEPP reinvestments would be the “first line of defence” in its attempt to keep a lid on so-called spreads. “I think it’s a good thing for them to be bold . . . it’s good for markets to see they’re putting their money where their mouth is,” said Ducrozet, adding that “the clear message is that they’re using this flexibility almost to the max that they could”.The central bank also last month put in place a new transmission protection instrument that can be used in case PEPP reinvestments fail to keep spreads under control. The tool allows the ECB to buy the bonds of any country it deems as facing market pressures outside the economic outlook, at unlimited scale. Investors have been watching Italian spreads cautiously to see when the ECB may step in, with many deeming 2.5 percentage points an important mark.While the ECB is yet to use the new tool, its use of PEPP reinvestments shows how eager policymakers are to keep spreads under control. Jari Stehn said this was “an activation of the first line of defence against fragmentation risk but still means that it’s an open question whether and when the TPI is activated”. More