Economy

ORLANDO, Fla. (Reuters) – U.S. Treasury Secretary Janet Yellen this week issued a ‘mea culpa’ on getting it wrong on inflation. If the economy tips into recession in the next year or two, the Federal Reserve may have to follow up with one on the yield curve.The 10-year U.S. Treasury yield falling below the two-year yield – the most closely-watched yield curve ‘inversion’ – is the reliable indicator that has preceded every recession in the past four decades.A stream of Fed communication this year though – from economists’ papers to public comments from policymakers, including Chair Jerome Powell – sought to downplay its predictive power in the current economic and market environment.The curve inverted very slightly and briefly for a few days in late March and early April for the first time since 2019. Then, the risk of recession over the next year appeared improbable, and still low over a 24-month horizon.But things look different now. The Fed’s repeated pledge to do whatever it takes to snuff out the highest inflation in 40 years, and subsequent repricing across markets of higher borrowing costs, have tightened financial conditions dramatically and slammed asset prices. The economic dial has also shifted. Consumer confidence has slumped to levels typically associated with recession, the housing market is beginning to roll over, and a Reuters poll of economists in May put a 25% chance of recession within a year and a 40% probability of one within two years. Recession by the end of next year is now the base case outlook for Deutsche Bank (ETR:DBKGn), and Wells Fargo (NYSE:WFC) economists expect recession this year. JP Morgan chief Jamie Dimon on Wednesday said he no longer sees economic “storm clouds” on the horizon – “it’s a hurricane.”This looming slowdown is being reflected in Fed expectations implied by Secured Overnight Financing Rates (SOFR). Traders are now pricing in a 25-basis point rate cut in the second half of next year. It remains to be seen if these fears will be borne out by events. But the direction of travel seems clear.The brief 2s/10s curve inversion could yet again turn out to be prescient if, as seems likely, the Fed takes monetary policy into restrictive territory in order to quell inflation.”It is only one metric, but I wouldn’t dismiss it,” said Elia Lattuga, cross asset strategist at Unicredit (BIT:CRDI). “Judging from market pricing and recent moves, avoiding recession is (now) the optimistic case.” Graphic: US 2-year/10-year spread – https://fingfx.thomsonreuters.com/gfx/mkt/zgpomeezdpd/2s10sCurve.jpg ‘SORRY’ IS THE HARDEST WORDIn March, Fed Chair Powell downplayed the importance of the 2s/10s curve inverting, saying it was “hard to have some economic theory on why that would make sense.” Instead, the spread between the three-month bill rate and implied three-month rate in 18 months had “100% of the explanatory power of the yield curve.”In a March update to a 2018 paper, Fed researchers also said the rates curve over the next 18 months was a “much more precise” recession indicator, and the predictive power of the two-year/10-year spread is “probably spurious”.Then, the 2s/10s curve was heading for inversion but the three-month/18-month curve was steepening. So was the spread between three-month and 10-year rates, the part of the curve another 2018 Fed paper found to be the most reliable predictor of recessions. Authors Michael D. Bauer and Thomas M. Mertens revisited the subject last month, and found that recession probabilities for the next year based on the three-month/10-year spread remain low. This part of the curve is positively sloping by around 180 basis points. Inversion is some way off. Based on this spread, Unicredit’s Lattuga notes that the probability of recession over the next 12 months is very low, below 5%. But based on the 2s/10s spread it rises to more than a 40% chance. Conflicting signals again. Because the three-month bill rate is closely anchored to the Fed’s policy rate, currently 0.75-1.00%, the tightening cycle needs to be well underway before recession risks are flagged by an inversion of the three-month/10-year part of the curve.If recession does strike this year or next, would Powell follow Yellen’s example and hold his hands up on the yield curve? Phil Suttle, founder of consultancy Suttle Economics in Washington, thinks a dose of humility can only be a good thing.”I wish this trait to admit errors was more prevalent, especially among monetary policy makers. It would be helpful in re-establishing discipline, and perspective, to what policy can and can’t do,” he wrote on Wednesday. Graphic: US 3-month/10-year spread – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezzbzvw/3s10sCurve.jpg Graphic: US 3-month/10-year spread vs 2-year/10-year – https://fingfx.thomsonreuters.com/gfx/mkt/akvezrrxwpr/USYIELDS.png (By Jamie McGeever) More

The Brazilian economy expanded sharply in the first quarter of the year as retail sales and services picked up following the end of coronavirus pandemic restrictions.Official data released on Thursday showed gross domestic product expanded 1 per cent in the first quarter from the previous quarter, when it grew 0.7 per cent. Compared with the same quarter last year, the economy expanded 1.7 per cent.Economists warned, however, that the rally was unlikely to continue as a combination of soaring inflation and rising interest rates chokes off consumption in Latin America’s largest economy. Brokerage XP has forecast a technical recession by the end of the year following two consecutive contractions in the third and fourth quarters.The outlook will be a blow to President Jair Bolsonaro, who is facing a tough re-election battle in October, with the economy ranked as the primary concern for voters. The far-right leader is trailing former president Luiz Inácio Lula da Silva by almost 15 percentage points in polls.“The strong performance of the economy in the first quarter was a surprise considering the slow pace of growth observed since the second half of 2021. But what we observed was a significant growth of the service sector, following the end of restrictions, combined with strong pent-up demand,” said Rafaela Vitoria, chief economist at Banco Inter.“But we keep a cautious view especially for the second half of the year, considering the still-high inflation and the lagging effect of the significant interest rate increase in Brazil and also the expectation of a slowdown in the global economy following tighter financial conditions abroad,” she added.The finance ministry forecasts that annual growth will this year reach 1.5 per cent, higher than economists’ estimates of 0.7 per cent.Since Bolsonaro’s inauguration in January 2019, the Brazilian economy has grown less than 2 per cent, buffeted by persistently high unemployment, shrinking incomes and the impact of the Covid-19 pandemic.

In the past year, inflation has also surged to more than 12 per cent, with rising food and fuel prices frustrating voters ahead of the polls in October. Brazil has the fourth-highest level of inflation among G20 nations, after Turkey, Argentina and Russia.This has forced the central bank into a series of rapid interest rate increases. Economists expect the benchmark Selic rate to reach 13.25 per cent by the end of the year, up from 2 per cent as recently as March 2021.“The economy was stronger than expected at the beginning of 2022. Part of the resilient growth momentum, particularly in February and March, will carry over to the second quarter,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs.“But the second half of the year is expected to be difficult given, among other things, very tight domestic financial conditions, double-digit inflation, record-high level of household indebtedness, and the noise and uncertainty generated by a polarising election in October,” Ramos added.Additional reporting by Carolina Ingizza More

The EU has been courting Taiwan, a major semiconductor producer, to build plants in the bloc, and Taiwan, facing unrelenting pressure from China which claims the island as its own, has been keen to show it can be a good friend to fellow democracies.In February, the EU unveiled a European Chips Act, with the bloc mentioning Taiwan, home to the world’s largest contract chipmaker TSMC and other major semiconductor companies, as one of the “like-minded partners” Europe would like to work with.Wang’s ministry said in a statement that the talks, with Sabine Weyand, director-general for trade at the European Commission, focused on areas including semiconductor cooperation.Wang emphasised that “Taiwan will continue to be a trusted partner of the global semiconductor industry and help stabilise supply chain resilience,” the ministry said.The statement said that Taiwan has “tried its best” to help the EU and other partners resolve a global shortage of chips.The ministry also noted that previous Taiwan-EU meetings were at the deputy level, and this one had been raised to ministerial level.”This shows that in the EU’s blueprint for international economic and trade cooperation, the importance of Taiwan has increased, and this is a major breakthrough in Taiwan-EU relations,” it said.The EU meeting comes a day after the United States agreed to launch new trade talks with Taiwan. The European plan calls for the European Commission to ease funding rules for innovative semiconductor plants. A global chip shortage and supply chain bottlenecks have created havoc for many industries over the past year or more.TSMC has said it was still in the very early stages of assessing a potential manufacturing plant in Europe. The company is spending $12 billion on chip factories in the United States.In one wrinkle for EU ambitions, Taiwan’s GlobalWafers Co Ltd failed in February in a 4.35 billion euro ($4.64 billion) takeover attempt of German chip supplier Siltronic.Neither the EU nor its member states have formal diplomatic relations with Chinese-claimed Taiwan, but the bloc has been keen to show its support for the island, especially as China-EU ties sour over trade and human rights disputes.Taiwan has also been pushing for a bilateral investment agreement with the EU.($1 = 0.9384 euros) More

(Reuters) – Sheep herders in the U.S. West have banded together to sue their employers, accusing them of operating an illegal cartel that artificially suppresses their wages, according to court documents filed Wednesday in Nevada.The case could have implications for how antitrust laws are applied to labor markets, according to legal experts, as the Biden administration pushes for greater competition in every sector of the economy. The suit alleges that ranches coordinate through the Western Range Association (WRA), a ranching trade group, to suppress sheepherder wages and avoid competing for labor.Herders apply to jobs through the WRA which then assigns them to ranches, leaving no room for the herders to negotiate or shop around among ranches, the complaint said.The arrangement violates the Sherman Act, a 130-year-old antitrust law that prohibits wage-fixing agreements among employers, the suit alleged.”Even workers who make some of the lowest wages in our economy should be able to benefit from the fair competition that our antitrust laws ensure,” said David Seligman, executive director of Towards Justice, which brought the suit. Ellen Jean Winograd, WRA’s general counsel, said the suit’s allegations “appear to lack merit,” but that the group could not comment in more detail.Sheepherders are typically men from rural Peru who come to the United States on agricultural H-2A visas and live in isolated areas, according to the complaint. Their wages have stagnated even as pay for other agricultural labor has risen in recent years, the complaint said.An earlier version of the suit was dismissed by the U.S. Court of Appeals for the Tenth Circuit in 2017 because the court said the herders had not sufficiently proven collusion. Several antitrust experts have argued the case was wrongly decided.There are around 100,000 sheep farms in the United States that sell about $750 million of sheep, lambs, and wool annually, according to Department of Agriculture data. More

The People’s Bank of China (PBOC) will use various policy tools to step up liquidity injections to keep liquidity in the economy reasonably ample, Pan told a news conference.The central bank aims to stabilise economic growth, employment and prices, Pan said, adding that financial institutions should maintain prudence in their operations and prevent risks.”We will continue to strengthen the implementation of prudent monetary policy and create a sound monetary and financial environment,” Pan said.China’s cabinet has announced a package of 33 measures covering fiscal, financial, investment and industrial policies to revive its pandemic-ravaged economy.China’s trade in goods is expected to maintain a reasonable surplus this year and the relatively stable investment returns in yuan assets will help attract foreign investment, Pan said.The central bank has pledged to step up support for the slowing economy, but analysts say the room to ease policy could be limited by worries about capital outflows, as the U.S. Federal Reserve raises interest rates.China’s cabinet said on Wednesday that it will increase the credit quota for policy banks by 800 billion yuan ($120 billion) to enable them to support infrastructure construction, according to state TV.Premier Li Keqiang has vowed to achieve positive economic growth in the second quarter, although many private sector economists have pencilled in a contraction.Zou Lan, head of the PBOC’s monetary policy department, told the briefing that the credit quota for policy banks will help improve their ability to finance infrastructure projects. More

OTTAWA (Reuters) – An extra C$8,300 ($6,600) in your pocket. That is roughly how much the average Canadian saved during the pandemic, with the central bank betting on C$40 billion in added spending through the end of next year as consumers draw down those stockpiles.But soaring inflation has already offset two-thirds of the buying power of that excess cash, according to one estimate, with some Canadians dipping in to pandemic savings to pay for everyday essentials instead of a new paddleboard or a weekend getaway.”When I adjust for inflation, the extra purchasing power from excess savings has been eroded pretty significantly by higher prices,” said Royce Mendes, head of macro strategy at Desjardins Group. “Paddleboards haven’t gone up two-thirds,” he added. “But the price of everything you consume has gone up 7%. And that is eating in to this buffer that you had to buy the extra goods or go out for dinner that extra time.”Rising food and shelter costs drove Canada’s inflation rate to a three-decade high of 6.8% in April. The Bank of Canada responded with a 50-basis-point interest hike on Wednesday, taking the benchmark rate to 1.5%, and hinted at a more aggressive pace to come.It said stronger exports and robust consumer spending will fuel “solid” second-quarter growth.But spend-happy consumers could vanish more quickly than the Bank expects as their purchasing power dwindles, raising questions about rosy growth projections just as higher interest rates slow the housing market.”In some ways you are already starting to see some cracks emerge in the foundation of consumer confidence,” Mendes said.EXCESS CASHCanadians saved an extra C$300 billion during the pandemic, economists estimate. Of that, some went into stocks, housing and other investments, but roughly C$100 billion remains sitting in bank accounts just waiting to be spent.So far, spending is holding up against higher prices. Credit card outlays are running about 30% above 2019 levels, according to the RBC Consumer Spending Tracker.But BMO’s Real Financial Progress Index found more than 80% of Canadians are adjusting their lifestyle to offset higher costs, with nearly a third reconsidering vacations. And just 14.8% of consumers think now is a good time to buy big-ticket items, the Conference Board of Canada said.The pessimism is fueled by a combination of hot inflation, rising interest rates and the uncertainty caused by Russia’s invasion of Ukraine, said Sohaib Shahid, director of economic innovation at the Conference Board.”Consumers don’t like uncertainty and these tensions have brought about a lot of uncertainty,” he said.On the flip side, higher-income households saved more than others during the pandemic and are far less sensitive to rising prices, said economists.Still, tumbling housing prices and stock market declines are eroding the wealth effect, while surging gasoline prices and rising interest rates are squeezing budgets.”For now, consumers are hanging in,” said Sal Guatieri, senior economist at BMO Economics.($1 = 1.2648 Canadian dollars) More

HONG KONG (Reuters) – China’s proposed cybersecurity rules for financial firms could pose risks to operations of western companies by making their data vulnerable to hacking, among other things, a leading lobby group has said in a letter seen by Reuters. The latest regulatory proposal comes at a time when a string of western investment banks and asset managers are expanding their presence in China, either by setting up wholly-owned units or by taking a bigger share in existing joint ventures.The China Securities Regulatory Commission (CSRC) released the draft Administrative Measures for the Management of Network Security in the Securities and Futures Industry on April 29, and offered a month-long public consultation on the proposals.The draft rules seek to make it mandatory for investment banks, asset managers, and futures companies with operations in China to share data with CSRC, allow regulator-led testing, and help set up a centralised data backup centre. Morgan Stanley (NYSE:MS) and HSBC are among those who have benefited in recent months from China’s opening up of financial sector for foreigners, following Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM), which won nods to run local units last year.Lobby group, the Asia Securities Industry and Financial Markets Association (ASIFMA), in a letter addressed to the CSRC and dated May 27, expressed concerns of its members about the draft rules as they anticipate risks in sharing sensitive data.The letter’s content, which has been reviewed by Reuters, has not been reported before. ASIFMA, which has more than 160 members comprising leading financial institutions from both the buy and sell side, banks, law firms, and market infrastructure service providers, did not confirm the letter and declined to comment on its content. In response to Reuters request for comment, the CSRC said that ASIFMA submitted its opinion on May 31, two days after the consultation period ended. “However, we still highly value the feedback forwarded by relevant associations,” it said, adding the regulator was “carefully studying the opinions and suggestions” and will continue to communicate with them.The proposed new data rules for financial firms also comes against the backdrop of Beijing’s tightened oversight of data security mainly in the tech sector as part of a wider regulatory crackdown, which has roiled the country’s stock markets and stalled offshore company listings.’HUGE RISKS’The draft rules require the sharing of data by financial firms for various purposes, but the lobby group is concerned passing on sensitive data will makes companies in the sector vulnerable to “hackers and other bad actors”.Global banks and asset managers are also pushing back on a requirement to introduce a sector-wide data backup centre.”This not only poses huge risks to all core institutions and operating institutions on an individual basis, but also brings significant systemic risks for the sector in China and globally given the inter-connectedness of the global financial sector, if the data is compromised or leaked,” the ASIFMA letter said.The draft rules also stipulates that the CSRC could conduct penetration-testing — a simulated cyber attack against the operational system — and system scanning on securities, futures and fund firms. However, ASIFMA flagged concerns of global banks that regulator-led or regulator-commissioned penetration testing pose “real risks to firms due to the potentially disruptive nature of penetration testing and the sensitivity of testing results”.”Testing systems and applications without operational context could create significant disruption to firm operations,” the lobby group added.The regulator has not set any timeline for the issuance of the final rules or for their implementation. More

Investing.com — Sheryl Sandberg is leaving Meta Platforms after 14 years. Elon Musk issues an ultimatum to Tesla employees. Oil slides on reports that Saudi Arabia may ramp up production in response to urging from the United States. OPEC is to meet and U.S. stocks are set for a higher open but concerns over the economic outlook linger. Data on initial jobless claims and private sector hiring are due. Here’s what you need to know in financial markets on Thursday, June 2.Meta Platforms (NASDAQ:FB) Chief Operating Officer Sheryl Sandberg announced in a Facebook post late Wednesday that she is leaving the company after 14 years.The announcement initially sent Meta’s shares down 4%, before the stock erased the losses in after-hours trade.Chief Growth Officer Javier Olivan will take over as chief operating officer, CEO Mark Zuckerberg said in a separate Facebook post, but he added that he did not plan to replace Sandberg’s role directly within the company’s existing structure.Sandberg’s departure marks an end of an era for Meta, which is shifting focus toward hardware products and the “metaverse” after years of scandals over privacy abuses and the spread of conspiratorial content on its platforms, as well as plateauing user growth on its flagship app Facebook.Tesla (NASDAQ:TSLA) CEO Elon Musk has issued an ultimatum to workers at the electric car company, calling on them to return to the office for 40 hours per week or resign, according to a leaked email.”Everyone at Tesla is required to spend a minimum of 40 hours in the office per week,” Musk wrote in the email sent on Tuesday night.”If you don’t show up, we will assume you have resigned.”Musk, who has agreed to take Twitter Inc (NYSE:TWTR) private in a $44 billion deal, responded to a screenshot of the leaked emails via Twitter saying, “They should pretend to work somewhere else.”Twitter’s remote work policy could now be under threat. The tech company was among the first to declare a work-from-home-forever policy in the initial days of the pandemic.3. Stocks muted, CrowdStrike eyedU.S. stock markets are seen opening higher later even as market sentiment remained downbeat a day after JPMorgan CEO Jamie Dimon warned that the U.S. economy is facing a “hurricane” caused by the Federal Reserve and the war in Ukraine. He added that his company is “going to be very conservative with our balance sheet.”Stocks likely to be in focus later include online pet product retailer Chewy (NYSE:CHWY) which surged in after-hours trade following quarterly earnings that came in ahead of expectations, while Hewlett Packard Enterprise (NYSE:HPE) reported slight misses in both earnings and revenue.Earnings from big tech names Crowdstrike Holdings Inc (NASDAQ:CRWD) and Asana Inc (NYSE:ASAN) are due after the close, along with results from retailers Lululemon Athletica (NASDAQ:LULU), Designer Brands (NYSE:DBI) and RH (NYSE:RH).The Labor Department will provide the most important data point with its weekly report on initial jobless claims at 8:30 AM ET. ADP will release data on private sector hiring at 8:15 AM ET.The employment data is coming ahead of Friday’s nonfarm payrolls report for May with economists expecting the economy to have added 320,000 jobs last month. While still firm, it would represent the smallest jobs growth in around a year as the labor market transitions to more moderate growth as the effects of the pandemic fade.Investors have been watching economic data closely for clues as to what it might mean for interest rates.Meanwhile, Cleveland Fed President Loretta Mester is due to speak later, a day after St. Louis Fed President James Bullard called for further aggressive rate hikes to bring down inflation, adding that rates could be cut late next year or in 2024.5. Oil slides; OPEC meeting, EIA data in focusOil prices fell around 2% following reports that Saudi Arabia could ramp up oil production to offset a decline in Russia’s output in response to a call from the U.S.Russia’s oil exports have been hit by U.S. and European Union sanctions imposed in response to its invasion of Ukraine.Energy traders were also eyeing an OPEC+ meeting to discuss supply policy for any indications on production plans. OPEC is expected to stick to its plans for modest monthly increases in oil output, despite tighter global markets.Brent was down $2.57, or 2.2% to $113.72 a barrel by 05:31 AM ET (0931GMT), having risen 0.6% the previous day, while U.S. crude fell $2.65, or 2.3%, to $112.51 a barrel, after a 0.5% rise on Wednesday.The Energy Information Administration’s data on U.S. stockpiles are due at 11:00 AM ET, a day later than usual due to the Memorial Day holiday.–Reuters contributed to this report More