Economy

Prices climbed 8.6 percent in the year through May, a re-acceleration of inflation that makes it increasingly difficult for consumers to afford everyday purchases and poses a major challenge for the Federal Reserve and White House as they try to secure a strong and stable economy.The Consumer Price Index climbed 1 percent from April — far more quickly than in the previous month — and by 0.6 percent after stripping out food and fuel prices, which can be volatile. That so-called core inflation reading matched April’s reading.Fed officials are watching for signs that inflation is cooling on a monthly basis as they try to guide price increases back down to their goal, but Friday’s report offered more reason for worry than comfort. The headline inflation rate was the fastest since late 1981, as a broad array of products and services including rents, gas, used cars, and food became sharply more expensive.Policymakers aim for 2 percent inflation over time using a different but related index, which is also sharply elevated. Central bankers are raising interest rates to make borrowing money more expensive, hoping to cool off consumer and business demand and give supply a chance to catch up, setting the stage for more moderate inflation.The Fed’s attempt to temper inflation by slowing down the economy is contributing to an already sour economic mood. Consumer confidence has been sinking all year as households shoulder the burden of higher prices, and President Biden’s approval ratings have also suffered. Both Wall Street economists and small business owners increasingly worry that a recession is possible in the next year.That glum attitude spells trouble for Mr. Biden and Democrats as November midterm elections approach. As climbing prices weigh on voters’ wallets and minds, policymakers across the administration have been clear that helping to return inflation to a more sustainable pace is their top priority, but that doing so mainly falls to the Fed.Economists warn that wrestling inflation lower could be a slow and painful process. Production and shipping snarls tied to the pandemic have shown early signs of easing but remain pronounced, keeping products like cars and trucks in short supply. The war in Ukraine is elevating food and fuel prices, and its trajectory is unpredictable. And consumer demand remains strong, buoyed by savings amassed during the pandemic and wages that are rising quickly, albeit not enough to fully offset inflation.“There does seem to be considerable resilience in consumer spending,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said ahead of the report, explaining that he expects consumer prices to still be climbing at 7.3 percent over the year as of December.While uncertainty is high, economists in a Bloomberg survey expect inflation as measured by the Consumer Price Index to remain at 6.3 percent — lower than today, but still sharply elevated — in the final quarter of 2022. More

US consumer price growth resumed its rapid rise in May, accelerating 1 per cent during the month as rising inflation in the services sector added urgency to the Federal Reserve’s plans to aggressively tighten monetary policy. The monthly rise in the consumer price index, published by the Bureau of Labor Statistics on Friday, was significantly faster than the 0.3 per cent increase recorded in April and above economists’ expectations for a 0.7 per cent increase.At that pace, the year-over-year increase rose to 8.6 per cent, the highest level since December 1981. Economists have previously said headline annual inflation should start to retreat as it starts lapping very elevated levels logged last year, but the recent run-up in prices has so far defied that trend.Once volatile items such as food and energy are stripped out, “core” CPI rose 0.6 per cent, maintaining the same momentum as the previous month. However, the annual rate moderated slightly to 6 per cent, compared to the 6.2 per cent pace in April. Services inflation, once energy-related expenses were stripped out, rose 0.6 per cent for the month, and are up 5.2 per cent on the year.The peak in inflation has been delayed primarily by a further climb in energy prices, with national petrol prices approaching $5 a gallon as a result of the prolonged conflict between Russia and Ukraine, and a steady rise in services-related costs — such as those linked to the travel industry. These gains have offset a moderation in expenses for certain goods. The Biden administration has sought to pin the blame on Russian president Vladimir Putin, linking the run-up in commodity prices to the war. A senior White House official on Thursday said supply chain disruptions stemming from China’s Covid-19 lockdowns also maintained upward pressure on inflation in May.Short-dated US government bonds, which are more sensitive to changes in monetary policy, sold off sharply after the report’s release, with the two-year Treasury yield up 0.09 percentage points to 2.9 per cent as investors anticipated the US central bank will need to ramp up its efforts to bring down inflation.The Fed has already committed to moving monetary policy “expeditiously” to a more “neutral” level that no longer stimulates the economy, but further evidence that inflation is becoming more entrenched could compel top officials to lift interest rates even more forcefully than financial markets expect. Policymakers have already signalled that at a minimum, the Fed will deliver a string of half-point rate rises, having delivered the first adjustment of that size since 2000 in May. The Fed is all but guaranteed to implement another increase of half a percentage point at its policy meeting next week, and traders have priced in the federal funds rate rising to roughly 2.9 per cent by the end of the year from its current target range of 0.75 per cent to 1 per cent. Lael Brainard, the vice-chair, recently made clear that the Fed could continue the half-point pace through September and would only consider reverting to more typical quarter-point increments following a “deceleration” in monthly inflation prints.Elevated inflation has become the biggest economic challenge for the Biden administration, whose efforts to engineer one of the fastest labour market recoveries in US history have been overshadowed by the toll that soaring prices have taken on American households.

Treasury secretary Janet Yellen recently admitted she was “wrong” about the extent to which inflation would become a persistent problem. A new biography also alleged she had initially wanted to scale back President Joe Biden’s landmark $1.9tn stimulus package that passed last year.In congressional testimonies this week, Yellen defended the actions undertaken by the White House at a time of extreme economic uncertainty, but acknowledged that inflation is running at an “unacceptable” level. Fighting inflation is the administration’s top priority, she said, calling on Congress to also do more to aid in those efforts. More

COLOMBO (Reuters) – One of Sri Lanka’s richest businessmen will replace the president’s brother in parliament, a ruling party official said on Friday, as the cash-strapped country moves forward on talks for a bailout plan with the International Monetary Fund (IMF).Sri Lanka is in the midst of the worst financial crisis since independence in 1948. Foreign exchange reserves have dropped to record lows leaving it struggling to pay for essential imports of fuel, food and medicine and triggering shortages and months of protests.In early April, President Gotabaya Rajapaksa dissolved the cabinet, which included his younger brother Basil Rajapaksa, who served as finance minister. Basil Rajapaksa on Thursday announced he was also stepping down from his parliamentary seat, vacating a slot in the 225-member legislature where the ruling party can appoint a new lawmaker without the need for a by-election.Dhammika Perera, a major Sri Lankan investor who holds stakes in dozens of companies, will take the former finance minister’s place, the ruling Sri Lanka Podujana Peramuna (SLPP) party’s General Secretary Sagara Kariyawasam said.”Perera’s name has been sent to the Elections Commission to be gazetted as the new member of parliament,” Kariyawasam told Reuters. “We expect it to happen very soon.”Perera, who could be given a ministerial portfolio after his appointment as a lawmaker, was unavailable for comment, his office said. Some analysts said Perera’s appointment as a minister would likely do little to offset Sri Lanka’s larger economic woes. “Regardless of Perera’s appointment we need to get the groundwork done. Sri Lanka is facing serious macroeconomic headwinds,” said Lakshini Fernando, a macroeconomist at investment firm Asia Securities. “Investors will look for an IMF program and debt restructuring.” An IMF delegation will visit Sri Lanka on June 20 and Prime Minister Ranil Wickremesinghe is hopeful a staff level agreement will be reached by the end of the month.Sri Lanka needs about $5 billion for imports this year, Wickremesinghe told parliament this week. More

According to Refinitiv Lipper data, investors withdrew $7.61 billion out of U.S. bond funds after the purchases of $7.09 billion in the previous week, which was the only weekly inflow since Jan 5. Graphic: Fund flows: US equities bonds and money market funds – https://fingfx.thomsonreuters.com/gfx/mkt/lbpgndkxjvq/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg U.S. benchmark 10-year yield surged by over 10 basis points during the reported week amid solid U.S. job additions. It hit more than a 3-1/2 year high of 2.862% on Friday, ahead of a report on consumer prices. Investors expect the Federal Reserve to raise interest rates by 50 basis points next week as inflation data, due later in the day, is expected to show steep rise of 0.7% in May.U.S. investors offloaded taxable bond funds worth $5.21 billion and municipal funds worth $2.4 billion, which were the biggest weekly outflow in three weeks.U.S. short/intermediate investment-grade funds, and short/intermediate government and treasury funds witnessed outflows of $3.63 billion and $2.77 billion, respectively, but investors purchased high-yield funds worth $1.17 billion. Graphic: Fund flows: US bond funds – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrnxmyvm/Fund%20flows%20US%20bond%20funds.jpg Meanwhile, money market funds gained a net $24.79 billion in purchases, after outflows of $9.3 billion a week ago, underscoring risk-off sentiments.U.S. equity funds witnessed net selling worth $1.82 billion after two successive weeks of inflows.U.S. growth and value funds saw outflows totalling $728 million and $869 million, respectively. Graphic: Fund flows US growth and value funds – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwrgqpq/Fund%20flows%20US%20growth%20and%20value%20funds.jpg In equities, investors disposed of tech and consumer staples funds worth $827 million and $558 million, respectively, while acquiring financials and utilities worth $394 million and $332 million, respectively. Graphic: Fund flows: US equity sector funds – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwedbxvo/Fund%20flows%20US%20equity%20sector%20funds.jpg More

LONDON (Reuters) – The Bank of England is satisfied lenders have taken steps to ensure they are no longer “too big to fail” in any future crisis, it said on Friday, though it did find shortcomings at three leading banks.The BoE is aiming to stop banks from requiring taxpayers to bail them out, as happened in the 2007-09 global financial crisis. The central bank said it was satisfied overall that banks could be wound down safely while keeping vital services open, with shareholders and investors in line to bear the costs rather than taxpayers.In its first public assessment of how failing lenders could be dismantled in a crisis, the BoE said it had also identified “areas of further enhancement” for six companies.The three banks found to have shortcomings were Lloyds (LON:LLOY), Standard Chartered (OTC:SCBFF) and HSBC. All three were found not to have produced sufficient analysis of their liquidity needs were they to be wound down.Globe-spanning banks HSBC and Standard Chartered were also found to have failed to produced up-to-scratch restructuring plans.The central bank said the shortcomings identified would complicate its ability to undertake a resolution but it could still do so safely.In separate statements on Friday the three banks said they were making enhancements to address the issues identified and were improving their so-called resolution plans. “Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue,” said Dave Ramsden, the Bank of England’s deputy governor for markets and banking.The other lenders included in the review were Barclays (LON:BARC), NatWest, Nationwide, Santander (BME:SAN) UK and Virgin Money (LON:VM) UK.Analysts cautioned that it is unclear how well the plans would work if they ever had to be put into action.”Some will be sceptical as to whether the resolution framework would work exactly as intended in practice in the event of a failure of a high street lender, given the enormous losses it could result in for shareholders and debt investors,” said Goodbody banking analyst John Cronin.The BoE said it would repeat its assessment in 2024 and review progress made by the lenders every two years after that. The central bank has powers to force lenders to make structural changes if it feels there are barriers to fast and orderly closure.Publication of the review was delayed by a year to free up lenders to deal with the COVID-19 pandemic.In 2018 the U.S. Federal Reserve said that the U.S. arm of Barclays had shortcomings in its resolution plan, but not deficiencies that required a bigger capital buffer. More

The scale of the move has repercussions for the domestic economy as yen-based import prices are surging at a record annual pace, heaping pressure on household balance sheets.The Bank of Japan and the Japanese government on Friday gave a rare joint statement that they may intervene if weakness persists.So far the fallout from the weakening yen has been minimal for broader financial markets, but that could change if the sell-off accelerates.Below are key questions about what a sliding yen means for Japan’s economy and international markets:WHY IS THE YEN WEAK?The yen, the third most-traded currency globally, is now near 134 per dollar after starting 2022 at 115. With the dollar up 16% so far this year, the yen is on track for its biggest annual drop since 2013.The weakness primarily stems from widening interest rate differentials between Japan and elsewhere.While the rest of the world, led by the U.S. Federal Reserve, is raising rates aggressively to tame soaring inflation, the BOJ has doubled down on its easy policy stance. The gap between Japanese 10-year government bond yields and those in the United States is 279 basis points — a near 3-1/2-year high — while the gap with German yields is at 8-year highs.WILL AUTHORITIES INTERVENE?They certainly say they might.On Friday, Japan’s government and central bank said they were concerned by the recent sharp falls, the strongest warning to date that Tokyo could intervene.The yen quickly bounced away from its two-decade lows, but not everyone is convinced actual intervention is likely.Given the economy’s reliance on exports, Japan has historically focused on arresting sharp yen rises and taken a hands-off approach to yen weakness, which is more difficult because yen-buying requires Japan to draw on limited foreign reserves. The last time Japan intervened to support its currency was 1998, when the Asian financial crisis triggered rapid capital outflows from the region. Before that, Tokyo intervened to counter yen falls in 1991-1992.Currency intervention is costly and could easily fail given the difficulty of influencing the yen’s value in global foreign exchange markets.WHAT CAN STOP THE DECLINE?A marked improvement in growth prospects as the country reopens its borders post-COVID and higher inflation could alter the BOJ’s dovish stance. Japan’s core consumer prices in April were 2.1% higher than a year earlier, exceeding the BOJ’s 2% inflation target for the first time in seven years.”The yen’s fall could stop if the BOJ changes tack and becomes hawkish,” said Francesca Fornasari, head of currency solutions at Insight Investments.Any sign that rates outside of Japan are peaking might also prompt a relief rally. There are no signs of that yet though, with U.S. rates set to peak at 3.5% in mid-2023, according to futures markets.DOES A WEAKER YEN BOOST THE ECONOMY?The yen has weakened back towards recent 7-year lows versus the Chinese yuan and is hitting new multi-year lows against the Korean won and the Taiwanese dollar, which should provide some relief for Japan’s widening trade deficit.Some like John Vail, chief global strategist at Nikko Asset Management, say currency weakness is crucial for Japan’s economy to maintain its competitiveness as a secure source of supply-chain diversification. The yen’s decline also boosts the attractiveness of its stock market among foreign investors who consider it undervalued versus European and U.S. markets. Japanese stocks have outperformed rivals in 2022, although they are still down as investors globally dump riskier assets.WHAT DOES IT MEAN FOR FX MARKETS?The yen has long been the currency of choice for investors undertaking so-called carry trades, which involve borrowing in a low-yielding currency like the yen to invest in higher yielding currencies like U.S. or Canadian dollars.A strategy borrowing in yen and investing in an equal basket of U.S., Australian and Canadian dollars would have yielded 13% so far in 2022, according to Refinitiv data.But the speed of the yen’s drop and questions about policymaker intervention is fuelling unease among investors, especially with short bets against the yen near six-month highs.Further volatility and weakness could undermine its appeal as a funding currency.WHAT ABOUT DOMESTIC INVESTORS?The yen’s weakness puts Japanese investors in a bind. Yields are high and rising, which makes foreign bonds much more attractive. But that also means the cost of FX hedging is climbing. So Japanese investors can often only capture the higher yields if they buy foreign bonds unhedged. But with the yen at such depressed levels it is difficult for investors to stomach such currency risk, such as the yen appreciating. Even a modest move back to 115-120, where we were 4 months ago, would eat up years worth of yield advantage. More

LONDON (Reuters) – The Bank of England looks set to raise interest rates next week for the fifth time since December, its steepest run of rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits.While Britain is forecast to have the weakest economy in 2023 among the world’s big, rich nations, investors and most economists are predicting a quarter-point rate hike by the BoE next Thursday.That would take Bank Rate to 1.25%, its highest level since January 2009, when Britain’s economy was holed by the global financial crisis.While historically low, expectations for British borrowing costs over the next couple of years have risen sharply recently and they jumped again this week when the European Central Bank flagged rate hikes at its next two meetings, including a possible half percentage-point rise in September.Investors are betting on the BoE’s Monetary Policy Committee doubling Bank Rate to 2% by September and hitting 3% by March next year. Some economists are ramping up their forecasts too.Sanjay Raja at Deutsche Bank (ETR:DBKGn) said on Friday he now expected rates to peak at 2.5%, up from a previous call of 1.75%, starting with a 0.25% increase next week.”We don’t expect a unanimous decision, however. Instead, risks are skewed to a more split MPC, with at least three members on the committee looking for a bigger 50 basis-point move,” he said in a note to clients. “There’s also a possibility of an even messier vote, with one or two members looking for no change to the Bank Rate.”FIRST MOVERThe BoE was the first big central bank to start reversing its pandemic stimulus in December, before the U.S. Federal Reserve and others began to move to head off the jump in inflation caused by the reopening of the world economy after the coronavirus pandemic and then Russia’s invasion of Ukraine.But that did not stop British inflation hitting a 4-year high of 9% in April, almost five times the BoE’s 2% target.The BoE thinks inflation is set to surpass 10% later in 2022, when regulated energy tariffs are due to jump by a further 40%, and consumers have already reined in their spending while there are signs of a slowdown in the housing market.Governor Andrew Bailey said in April the BoE was walking a very tight line between tackling the surge in prices and causing a recession. But with wage deals starting to climb, the BoE’s priority is to show it means business on fighting inflation.A BoE survey published on Friday showed the public’s expectations for inflation in the year ahead at 4.6%, the highest in records going back to 1999.Since the central bank’s last meeting in May, finance minister Rishi Sunak has given more money to households to soften the cost-of-living squeeze, reducing the risks of a recession and potentially increasing inflation pressures.Billions of pounds of further support are expected from Sunak later this year as Prime Minister Boris Johnson fights for his political life after 41% of Conservative Party lawmakers voted to oust him on Monday.There is also the risk of an escalation in a post-Brexit trade dispute between Britain and the European Union which could also fan inflation.Paul Dales, an economist with Capital Economics, said investors were under-estimating the chance of a half-point rate hike by the BoE next week, especially if economic growth and labour market data due on Monday and Tuesday are strong.”Either way, we think it will be very close with the MPC either voting 5-4 for a 50 basis point hike or 5-4 for a 25 basis point hike,” he said in a note to clients.Markets on Friday were pricing in a 30% chance of a half-point move by the BoE on June 16. More

A former Nato chief is calling for the creation of an economic version of the Article 5 mutual defence pledge that defines the transatlantic military alliance in order to thwart commercial coercion by authoritarian states.Anders Fogh Rasmussen, the former Danish prime minister who served as Nato secretary-general from 2009 to 2014, will on Friday announce a plan for western allies and other democracies to respond more effectively to economic threats from countries such as China and Russia.“Our proposal is inspired by Nato’s Article 5, which states that a military attack on one ally is considered an attack on all,” Rasmussen wrote in a report co-authored with Ivo Daalder, former US ambassador to Nato. “The aim is to produce the same deterrence and solidarity in the economic realm among democracies that Nato produces in the security realm.“It’s time to tell the bullies that if they poke one of us in the eye, we’ll all poke back,” they added.The idea is being floated as western leaders prepare to gather this month in Spain for a Nato summit and in Germany for a G7 summit, where they will grapple with how best to confront economic warfare as well as traditional security threats.The urgency of tackling economic aggression from authoritarian nations has risen in the wake of China’s commercial confrontations with Australia and Lithuania, as well as Russia’s weaponisation of its natural resources in the stand-off with the west over Ukraine.Rasmussen and Daalder are proposing that an economic Article 5 commitment could be implemented through existing structures such as the G7, which has been reinvigorated along with Nato by the co-ordinated western response to the war in Ukraine. But the authors said other democracies would have to be “involved” and a standalone organisation may have to be set up to manage the new guarantee.

In an interview, Daalder said officials in US president Joe Biden’s administration had been consulted about the plan, including at the White House, Treasury and state departments, along with EU officials. While he acknowledged that as recently as last year such an idea would have been unlikely to go very far, he said the Russian invasion of Ukraine meant there was a greater understanding that “the world is changing”.Although the report does not spell out specific retaliatory measures that could be imposed on countries that are deemed responsible for economic coercion, Daalder said these could include sanctions, secondary sanctions, import tariffs and other measures.Even though such punitive actions could have negative economic spillovers on the countries imposing them and trigger a backlash from business, they might help concentrate supply chains in democracies, he said. “There are geostrategic interests . . . that may have to trump economic interests in a way that wasn’t probably true in the last 30 years, but needs to be true in the next,” he added. More