Economy

Investors are lining up bets that the pound will fall further after a tough start to 2022 as a “dire” mix of towering inflation and slowing growth darkens the UK’s economic outlook.Wagers that sterling will fall are near their highest level in almost three years, according to Commodity Futures Trading Commission data, which track how speculative investors are positioned in futures contracts, a proxy for sentiment in the $6.6tn-a-day foreign currency market. Even as Boris Johnson survived a parliamentary confidence vote this week — potentially averting a period of political turmoil — markets are focused on the gloomy economic backdrop, say analysts, meaning the UK prime minister’s victory is unlikely to prompt a change in course for the currency.Sterling whipped back and forth around Monday’s vote, but on Thursday traded close to where it was against the US dollar a week ago at $1.254. It has shed 7 per cent this year against the dollar. Currency traders say the implications of Johnson’s win were muddied by uncertainty over who might have replaced him. At the same time, the political twists and turns largely remain a sideshow for a foreign exchange market focused on the potential for a UK recession later this year, which could halt the Bank of England’s efforts to tame inflation by raising interest rates.“The market is very bearish on sterling,” said Sam Lynton-Brown, head of developed markets strategy at BNP Paribas. “Domestic political uncertainty hasn’t been a big driver of the currency. So even if it alleviates, you shouldn’t expect the pound to recover. We still think it can weaken further.”The BoE has lifted interest rates four times since it began to tighten monetary policy in December — well ahead of counterparts such as the US Federal Reserve and the European Central Bank. Even so, the pound has lost ground against the euro and the dollar this year as investors begin to wonder how long borrowing costs can continue to rise with consumers facing an acute cost of living crisis.“By the time we get into the autumn in the UK, the impact on household incomes of inflation but also of higher rates will be so marked that the window of opportunity for the BoE to raise rates will be closing,” said Jane Foley, head of currency strategy at Rabobank. The problem of how to rein in inflation without choking off growth is not unique to the BoE. But some investors worry the UK’s dilemma is more acute than that faced by other big developed economies. The OECD on Wednesday forecast that the UK economy will grind to a halt next year, with only sanctions-hit Russia faring worse among G20 nations.“Even as inflation comes back down in other major economies, we are likely to have a more persistent problem in the UK,” said Mark Dowding, chief investment officer of BlueBay Asset Management. “A stagflationary environment will be pretty dire for all UK assets and for the pound,” he said, describing the blend of surging prices and slowing growth. “We could end up with a scenario where the pound is on its way to parity with both the euro and the dollar.”Recent comments from governor Andrew Bailey that the BoE is “helpless” to fight inflation have not helped, according to Dowding.“Even if they think that — they shouldn’t be telling everyone. It’s only going to push up inflation expectations even further,” he said.Lynton-Brown said stubbornly high inflation would hit foreign demand for UK government debt, which trades at some of the lowest inflation-adjusted yields in the world. Without persistent inflows into gilts to fund the UK’s current account deficit, the exchange rate would have to adjust lower, he said.

For some analysts, the gloom surrounding sterling could actually be a source of resilience in the short term. A global rebound in stock markets would likely boost the pound, which tends to move in tandem with riskier assets, as bearish investors exit their short positions, according to Nomura strategist Jordan Rochester.Investors might also embrace a renewed threat to Johnson’s position, betting that his successor would be less likely to inflame trade tensions with the EU by ditching the post-Brexit trade deal for Northern Ireland, he said.“The market has become so negative on politics in the UK that it tends to lean towards the positive if there’s any promise of change,” said Rochester. “But you have to be careful because we don’t know what a change of leadership means for policy, for spending, or for reform, because we don’t know who comes next.” “The next Tory leader might not be racing to tear up the Northern Ireland protocol, but you could also get an even harder Brexiter,” he added. More

Dovish rate-setters at the European Central Bank are leaving their meeting in Amsterdam disgruntled, after record inflation forced them into making concessions on the pace of interest rate rises over the coming months. “My impression is everybody lost,” one dovish governing council member said of Thursday’s decision. That saw the ECB signalling it was likely to raise its benchmark deposit rate above zero by the autumn — faster than investors expected — to tackle inflation which at 8.1 per cent is now four times the bank’s 2 per cent target.The council member said the ECB had achieved the worst possible outcome; government borrowing costs went higher, particularly for weaker southern European countries like Italy, while the euro fell almost 1 per cent against the dollar — fuelling more inflationary pressure by raising the cost of imports. The dovish rate-setter added: “This is not what you want.”The council’s more upbeat hawks see things differently. “It went well. We finally decided to take action on inflation, so I am very satisfied,” said one rate-setter from this camp. In fact the deal, which was drawn up by ECB chief economist Philip Lane, meant both sides made concessions. After dining together on Wednesday evening beneath Rembrandt’s painting of The Night Watch in the Rijksmuseum with the Dutch king and queen, Willem-Alexander and Máxima, prime minister Mark Rutte and finance minister Sigrid Kaag, the council gathered again on Thursday to unanimously support the compromise.The hawks agreed to back down on their push for the central bank to end its eight-year experiment with negative rates in one go next month via an aggressive half percentage point increase in the deposit rate from a current level of minus 0.5 per cent.Instead, the ECB said it intended to raise rates by 25 basis points in July. But in return the hawks won a commitment that the ECB would raise rates by “a larger increment” in September, as long as the inflation outlook “persists or deteriorates”. Given that inflationary pressures are likely to keep rising for several months, most investors assume this means a 50bp rate rise is highly likely in three months’ time.In a sign of how the hawks now feel more in the ascendancy, several said they still had not entirely given up on the possibility of a 50bp rise in July, especially if eurozone inflation overshoots expectations again when new data comes out at the end of this month. The ECB declined to comment.Germany’s central bank underlined the hawkish shift by announcing on Friday it had more than doubled its forecast for inflation in the country this year from its December projection to 7.75 per cent – the highest level in at least 40 years. It also slashed its 2022 growth forecast for Germany by more than half to 1.9 per cent and said inflation would remain above growth for the next three years. “Euro area inflation rates won’t fall by themselves,” said Bundesbank president Joachim Nagel, stressing the need for “resolute action”. Government borrowing costs rose in response to this week’s hawkish shift. Germany’s 10-year bond yield climbed 0.08 percentage points to 1.43 per cent. Riskier debt sold off more sharply, with Italy’s 10-year yield up 0.24 percentage points to 3.61 per cent.Some investors were disappointed that the ECB did not provide a clearer commitment to launching a new bond-buying scheme if needed to avert a fresh debt crisis among highly indebted southern European countries, such as Italy. The issue was discussed at this week’s meeting and council members agreed that ECB president Christine Lagarde would use her press conference on Thursday to emphasise their willingness to launch a new instrument at short notice if needed to “fight fragmentation” in eurozone bond markets, according to one person involved in the discussions. A severe “fragmentation” in member states’ borrowing costs would mark a return to the days before the ECB began buying bonds in 2014 — a time when the threat of a debt crisis in more vulnerable member states risked triggering a break-up of the currency area. But most council members agreed there was no point trying to design a new instrument to tackle this risk until it materialised, because it could be blocked by the ECB’s own lawyers for not being “proportionate” or attract a challenge in Germany’s constitutional court.Battle lines are already being drawn over the next contentious issue: how soon to start shrinking the ECB’s balance sheet. At the moment, the plan is to keep on reinvesting the proceeds of its €4.9tn portfolio of securities as they mature. The hawks want that to stop sooner rather than later, following the lead set by the US Federal Reserve and Bank of England.

Analysts say it will become increasingly difficult for the ECB justify keeping its balance sheet static when it is also trying to tame record inflation by raising rates. Katharina Utermöhl, senior Europe economist at Allianz, said that, if high inflation warranted rate rises, then “a shortening of the reinvestment horizon” also appeared necessary.Some council members think that as the ECB raises its deposit rate, it risks lifting short-term borrowing costs above long-term rates, especially if it keeps longer-term yields suppressed by reinvesting the proceeds of maturing bonds. This could create an inverted yield curve, with short-term borrowing costs higher than longer-term ones, making life difficult for banks that aim to borrow short and lend long — and earn a profit on the difference. The risk of yield curve inversion could put pressure on the ECB to start shrinking its balance sheet even before the end of this year.But other rate-setters said there would be many factors determining when to start shrinking the ECB balance sheet — a process known as quantitative tightening — including the pace of inflation, the state of the economy and overall government debt levels. “I don’t think we will see this happen any time soon,” said the dovish council member. More

Your browser does not support playing this file but you can still download the MP3 file to play locally.US consumer prices are set to have registered another large monthly advance, the European Central Bank has paved the way for a series of rate rises, and China is offering coronavirus vaccine insurance in an effort to win over scepticsand boost the vaccination rate. Mentioned in this podcast:ECB plans quarter-percentage point rate rise in July as ultra-loose policy endsChina offers Covid vaccine insurance to win over jab scepticsThe FT News Briefing is produced by Fiona Symon, Sonja Hutson and Marc Filippino. The show’s editor is Jess Smith. Additional help by Peter Barber, Michael Lello, David da Silva and Gavin Kallmann. The show’s theme song is by Metaphor Music. Topher Forhecz is the FT’s executive producer. The FT’s global head of audio is Cheryl Brumley.Read a transcript of this episode on FT.com See acast.com/privacy for privacy and opt-out information.Transcripts are not currently available for all podcasts, view our accessibility guide. More

WASHINGTON (Reuters) – Governor Kathy Hochul said on Thursday the Biden administration is seeking changes in a long-planned congestion pricing plan for New York City that could further delay implementation of a system designed to reduce traffic in Manhattan and provide funding to improve mass transit.In March 2021, the U.S. Transportation Department’s Federal Highway Administration (FHWA) said the plan to use tolls to manage traffic in central Manhattan would face an expedited environmental review, after the Trump administration did not act on it.”We submitted our plans on time to Washington in February, and by March, the federal government came back with over 400 questions and areas they want us to make adjustments,” the New York governor said Thursday. “It’s probably not going to happen right now because we cannot get the necessary approvals from the federal government.”New York wants to charge a daily variable toll for vehicles entering or remaining within the “Central Business District,” an area stretching from 60th Street in Midtown Manhattan down to Battery Park, Manhattan’s southern tip.The FHWA’s deputy administrator, Stephanie Pollack, told reporters Thursday the agency was working to resolve questions.”We gave our comments to them months ago. We pretty much have gotten a path forward or a resolution on almost every single one of them,” Pollack said, saying the agency will work “to get this done by whatever time it’s important” to the state, city and the Metropolitan Transportation Authority (MTA), which operates New York City’s subway system and buses, as well as its two commuter rail lines.The plan was first approved by state lawmakers in April 2019 and initially project to start in January 2021.”We need more people taking the subways, the trains, mass transit into the city, and we need more people leaving their cars home,” Hochul said Thursday. “I am committed to getting it done.”The MTA would receive 80% of the congestion fees after costs of operating the program to be used to improve the city’s subways and buses, with 10% each going to the Long Island Rail Road and Metro-North Railroad commuter train lines.According to the MTA, the system would help speed traffic flows and reduce pollution, in addition to raising money for mass transit.New York would become the first major U.S. city to follow London, which began levying a congestion charge on vehicles driving into the city center in 2003. Officials have said the estimated $1 billion in annual tolls would support $15 billion in new debt financing over four years to support mass transit.Hochul said at a gubernatorial debate Tuesday that the federal government put “hurdles in the way” and “this is going to happen over the next year under any circumstances, but now is not the right time.”The U.S. Transportation deputy secretary, Polly Trottenberg, said Thursday the department was working with New York: “We are very committed to helping them get through the process.” More

TOKYO (Reuters) -Japan’s wholesale prices rose 9.1% in May from a year earlier, slowing from the previous month’s increase as the recent spike in fuel costs moderated, data showed on Friday.But the yen-based import prices spiked 43.3% in May from a year earlier, accelerating from the previous month’s 42.2% gain, in a sign the yen’s recent declines were pushing up already rising raw material costs.The increase in the corporate goods price index (CGPI), which measures the price of goods companies charge each other, was smaller than a median market forecast for a 9.8% gain.It followed a 9.8% increase in April, Bank of Japan data showed.Global commodity inflation driven by the war in Ukraine and the yen’s falls to two-decade lows have pushed up wholesale prices in Japan, squeezing profits for retailers.Companies are gradually passing on the higher costs to households. Core consumer prices rose 2.1% in April from a year earlier, much slower than the pace of increase in Western economies but exceeding the BOJ’s 2% target for the first time in seven years. More

A measure of permanent staff hiring by accountants KPMG and the Recruitment and Employment Confederation (REC) fell for a sixth month to 59.2 from 59.8 in April, but remained well above the 50 threshold for growth.The survey’s gauge of temporary staff hiring in May also fell to its lowest since early last year.The Bank of England has expressed concern that the surge in demand for staff could create longer-term inflation pressure after prices recently leapt on the reopening of the global economy followed by Russia’s invasion of Ukraine.The BoE is widely expected to increase interest rates for the fifth time since December on June 16.Neil Carberry, REC chief executive, said the number of vacancies remained high although there was another slight decrease in the growth rate for salaries and temporary pay.”The market for temporary work is stabilising faster than for permanent staff, which could suggest a little caution creeping into employers’ thinking in the face of high inflation,” he said.The loss of about half a million people from the jobs market from before the coronavirus pandemic represented a major strategic issue for Britain, he said. More

BENGALURU (Reuters) – The U.S. Federal Reserve will hike its key interest rate by 50 basis points in June and July, with rising chances of a similar move in September, according to a Reuters poll of economists who see no pause in rate rises until next year.Faced with inflation running at just below a four-decade high and more tightening in the labor market, the Fed is under pressure to quickly take its policy rate to the neutral level that neither stimulates nor restricts – and beyond.All 85 economists in a June 6-9 Reuters poll predicted a 50 basis point federal funds rate hike to 1.25%-1.50% on Wednesday, after a similar move last month. Another such hike was penciled in for July by all but a handful of survey contributors.While more than two-thirds of respondents, 59 of 85, expected a 25 basis point hike in September, more than one-quarter, 23, saw the Fed hiking again by half a point. That is up from one-fifth of the sample last month.”The bad news for the Fed is that inflation is now so far above target that it has little choice but to tighten aggressively,” said Ethan Harris, global economist at Bank of America (NYSE:BAC) Securities. The median of 43 responses to an additional question showed a 50% probability of a 50 basis point hike in September. The median probability for a similar move in November and December was 30% and 25%, respectively.Nearly 60% respondents to an additional question, 24 of 41, said the Fed would pause raising rates in either the first or second quarter of next year. Nine said the second half or beyond, while the rest said sometime this year.Still, analysts saw the fed funds rate breaching the estimated 2.4% neutral level by year-end to 2.50-2.75%, slightly below market expectations of 2.75%-3.00%.The poll expects it to reach a terminal level of 3.00%-3.25% or higher by end-Q2 2023, three months earlier than a poll taken just a few weeks ago.That would be at least 75 basis points above the neutral rate and above the 2.25%-2.50% peak in the last cycle. Rate hike expectations knocked the U.S. stock market briefly into bear territory last month and the U.S. 10-year Treasury yield to trade above 3% for the first time in three years. They have also kept alive recession risks.The survey showed a steady median 40% probability of a U.S. recession over the next two years, with a 25% chance of that happening in the coming year.Economic growth was forecast at 2.6% and 2.0% for 2022 and 2023, respectively, a minor downgrade from last month’s survey.However, price pressures were predicted to persist as supply chain disruptions continue to push up costs globally. Consumer Price Index (CPI) inflation was forecast to average 7.4% this year and remain above the Fed’s 2% target until 2024 at least.Despite those worries, the U.S. labor market, which the Fed also targets, showed little signs of worsening anytime soon.The jobless rate was predicted to average at the current level of 3.6% this year and the next, before mildly picking up to 3.8% in 2024.”The bottom line is that for now, there is little conflict between the Fed’s two mandates … But the Fed’s job could get a lot more difficult next year if inflation remains ‘sticky-high’ and the unemployment rate rises above 4%,” added BofA’s Harris. (For other stories from the Reuters global economic poll:) More

Prices rose more slowly in May than in the two prior months, but annual inflation still reached 8.09%, its highest level in 24 years. In its current monetary policy tightening cycle, Peru’s central bank has raised the key interest rate 525 basis points since mid-2021. Thursday’s decision follows rate hikes this week in Brazil, Chile and Mexico, as authorities respond to inflation that is not falling as quickly as expected. In a statement, the bank repeated guidance from last month that it expects annual inflation to begin to fall in July.”Most leading indicators and expectations about the economy remain pessimistic, but they have recovered in May,” the bank said. More