Economy

(Reuters) – Online prices fell 0.5% in April and U.S. consumers pulled back on electronic commerce, possibly reflecting a change in consumer behavior and the Federal Reserve’s efforts to curb inflation, tech firm Adobe (NASDAQ:ADBE), which monitors online prices, reported.A surge of inflation during the pandemic reversed years in which electronic commerce had helped hold overall inflation lower.Some relief may be coming, the tech firm reported. The decline in April compared to a record 0.3% increase in March. On a year-over-year basis, inflation for the 100 million goods monitored by Adobe fell to 2.9% in April versus 3.6% in March.Online sales fell to $77.8 billion in April from around $83 billion in March.”As the cost of borrowing and economic uncertainty rises for consumers, we are beginning to see the early impact on bothonline inflation and spend,” said Patrick Brown, vice president of growth marketing and insights at Adobe.The Fed is raising interest rates to try to slow demand for goods and services and, over time, to moderate the pace of price increases.New government data on consumer prices will be released at 8:30 a.m. ET (1230 GMT). More

Almost half of mothers with young children who left the work force cited child care as a reason for the move, according to a survey released Wednesday, and 69 percent of women looking for a job said child-care benefits could sway their decision on where to work.The survey of more than 1,000 workers, by the consulting firm McKinsey & Company and Marshall Plan for Moms, a campaign focused on the economic participation of mothers, adds to research exploring how the lack of child care continues to drag on the economy and tighten an already-hot labor market.“Companies are scrambling for talent,” said Reshma Saujani, who founded Marshall Plan for Moms and Girls Who Code, a nonprofit aimed at closing the gender gap in tech. “Our report shows that you can attract, retain and advance women in the work force only through the provision of offering child-care benefits.”Child care has long been too scarce or too expensive for most families. And during the pandemic, the industry more or less collapsed, as day-care centers struggled to stay open and child-care workers quit en masse.Many executives and child-care activists had hoped that President Biden’s sprawling infrastructure plan would provide support for the industry. But the pared-back bill was signed into law without big investments in child care. Ms. Saujani says the onus is now on the private sector.Most salaried and hourly workers do not have access to child-care benefits. Six percent of hourly workers surveyed and 16 percent of salaried workers said they had access to child-care subsidies. The same percentage of hourly workers, and even fewer salaried workers, reported that their employer provided backup child care or offered pretax flexible spending accounts that could be used to pay for care. About 30 percent of respondents said they had flexible working hours.Ms. Saujani’s campaign is forming a business coalition that includes Patagonia and Archewell, the production company founded by Prince Harry and Meghan, the Duchess of Sussex. To sign on, companies must offer a child-care subsidy or benefit or intend to provide one, Ms. Saujani said. Once they join the coalition, businesses can share and learn best practices from one another.Synchrony, a financial services firm that is part of the coalition, found that offering its employees creative child-care options led to a surge in job satisfaction and an influx of applications for job openings, said Carol Juel, the company’s chief technology and operating officer.In the summer of 2020, the company created a virtual summer camp, putting high school and college children of their employees in charge of keeping 3,700 campers occupied in exchange for mentorship training and college credit. And the company would “send out, every Friday, the next week’s schedule so that workers could plan their meetings around this,” Ms. Juel said.Fast Retailing USA, which operates apparel brands including Uniqlo, Theory and Helmut Lang and is also part of the coalition, has started offering monthly child-care stipends of up to $1,000 for many employees, including store managers. The money can be spent in any way they see fit rather than being tied to specific providers.“A lot of the people who were involved in sponsoring this policy, myself included and some of our heads of human resources, all have kids the same age,” said Serena Peck, Fast Retailing’s chief administrative officer and general counsel. They were seeing firsthand how “the market was shrinking for good child care” and “felt like we had to do something.” More

“The Monetary Council would continue the cycle of interest rate hikes until the outlook for inflation stabilised around the central bank target and inflation risks became evenly balanced on the horizon of monetary policy,” it said.The next regular policy meeting is due on May 31. More

European firms get 70-80% of their financing from bank loans and the rest from securities, making them vulnerable when banks are less forthcoming with lending or during a banking crisis. “By making new equity tax-deductible, just as debt is at present, this proposal reduces the incentive to add to (companies’) borrowing and allows them to make financing decisions based on commercial considerations alone,” Commission Vice President Valdis Dombrovskis said.The total debt of corporations in the European Union was 14.9 trillion euros in 2020 or 111% of EU gross domestic product.In the United States, the corporate financing proportions are reversed and the EU is striving for that under its capital markets union project to increase non-bank financing for firms.”Our proposal will help companies build up more solid capital, making them less vulnerable and more likely to invest and take risks,” EU Economic Commissioner Paolo Gentiloni said.The Commission expects the combined approach of equity allowance and limited interest deduction on debt to boost investments by 0.26% of GDP and GDP itself by 0.018%.Under the Commission proposal the tax deduction would be made on the difference between net equity at the end of the tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate. The allowance on equity would be deductible for 10 consecutive tax years, as long as it did not exceed 30% of the company’s taxable income.The proposal will now have to be agreed with EU governments and the European Parliament before it becomes law. More

“There is only one bill that matters and that’s the finance bill”, says a former minister about Tuesday’s Queen’s Speech. The government’s legislative programme has a mix of good ideas, bad ideas and some which might prove valuable in the future. What it does not have is anything to restore Tory electoral fortunes. In fairness, these occasions rarely move the dial. But this one has been used by Boris Johnson’s Downing Street team to fortify his position by sharpening political dividing lines with so-called “wedge issues” which animate activists and appeal to the Brexit voters. Measures that alienate supporters or with little political punch, such as audit reform, have been diluted or delayed in favour of “red meat” legislation. The need for a new approach was amplified by last week’s local elections, which saw heavy Tory losses to the Liberal Democrats and, to a lesser extent, Labour, in the south of England. The temptation is to double down on cultural divides, new Brexit conflicts and strong policies on crime, immigration and public order. The flaw with this plan is that it does not address the issues which caused the defeats: the cost of living crisis and the fact that “partygate” has made Johnson a drag on the Tory vote.A further weakness is that the losses have revived fears about the southern “blue wall”, the theoretical obverse to the northern “red wall” Leave-voting seats the Tories won from Labour in 2019. The pollster Steve Akehurst defines the blue wall as 41 seats held by the Tories since 2010, with majorities below 10,000 and where Labour has outperformed the national swing. These are largely Remain-voting constituencies, some of which have seen an influx of younger families fleeing cities to find affordable homes. While accepting that some areas like Worthing and Woking may be susceptible over time, leaders dispute the notion of the home counties as a hotbed of liberalism. They say private polling shows wedge policies are popular with southern Tories too. Yet as the ex-minister suggests, this misses the bigger picture, which holds from blue wall to red. Polling shows no issues have close to the same salience for voters as inflation and the economy. The analysis is shared by one cabinet member. “What matters is whether we can get back to a low tax, higher growth economy. Rishi and Boris assure us that what’s happening now is only temporary and normal service will soon be restored. We await with anticipation.” One southern Tory goes further: “The problem with wedge issues is you end up doing trivial things, like privatising Channel 4, and everyone asks ‘why doesn’t the government care about the things I care about?’” The MP adds: “In Kent, Surrey, Sussex, people are mildly disgusted with partygate but they want order and competence and this government radiates incompetence.” The limited help offered in the chancellor Rishi Sunak’s Spring Statement left Tory MPs in despair.Southern focus groups show the cost of living and housing as pivotal issues. Yet households struggling with bills are told to wait for the autumn budget. Planning reforms to force the promised raft of housebuilding have been curtailed to quell local opposition. This is self-defeating: home ownership, on which the Tory vote relies, has been falling among the under-45s. There is no coherent plan to grow an economy weakened by Brexit and by inconsistency over taxes and trade. Ambitions on levelling up and energy security face doubts over delivery amid internal disputes. In as far as the Queen’s Speech offers an economic direction, it is away from interventionism and towards long-term supply-side reforms and deregulation. While other issues may cheer activists, they are a sideshow. The overwhelming political imperative is inflation and the need to put more money in people’s pockets. Yet the instinctive but unstated Treasury strategy for tackling inflation is a period of depressed spending, hence the desire to wait even as fears turn from inflation to stagflation. Public services, notably the NHS, are struggling to recover from the pandemic and meanwhile see their budgets eroded by rising prices.On top of this, in the words of James Johnson, a Conservative pollster, the leader is toxifying the party. “As long as Boris Johnson is the messenger, voters won’t listen” he says. James Frayne, another favoured pollster, writes that while Labour’s weakness keeps the Tories competitive “another Conservative leader might do a lot better”.So if Johnson seeks a meaningful tactic he has only one option, income tax cuts. It will cheer his MPs. It is even a good idea. Extra energy subsidies or welfare are useful but not policies where he can outbid the opposition.Tax cuts might also restore what was once a Conservative selling point — until Sunak raised the burden to levels not seen since the 1950s. It is not a complete plan, far less an economic strategy. But if Johnson wants impact on an issue that speaks to voters real concerns, tax cuts large enough to draw a dividing line with Labour are the best bet. So the cuts are coming. Johnson is planning them even as he stresses the limits of government help. Labour has already demanded a mini-budget and many Tories are uneasy waiting until voters are feeling even more pain. As the economic and political pressure mounts many wonder if Johnson’s nerve can hold till the [email protected] More

On both sides of the Atlantic, central bankers are faced with the unenviable task of hiking rates into a possible recession. The higher rates go, the greater the risk that the Federal Reserve and the Bank of England control inflation at the expense of jobs. There is, however, a (partial) solution: using their bloated balance sheets — swelled by financial crisis and pandemic crash-fighting as an alternative to blunt interest rate increases.After all, quantitative easing was used to stimulate economic conditions after the financial crisis and the pandemic. So why not actively use the balance sheet now as a means of tightening things? It might result in price stability with lower short term rates than would otherwise be the case. Interestingly, that seems to be what the Fed is doing, while the BoE appears to shun the idea. Why?As a central disclaimer, nobody actually agrees on how QE works, let alone its scary sibling “quantitative tightening”. But it does seem at least theoretically possible that central banks could use QT to do so some cooling through reverse “wealth effects”.While no central bank has enough evidence to actually outline the likelihood of this sequence of events, the Fed hasn’t been shy in articulating a role for its balance sheet in bringing price pressures back to earth. Take this statement from Fed vice chair Lael Brainard in April: The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections. I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year, with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves.Nobody from the BoE has said something remotely similar, instead, officials there have delivered a series of confusing and somewhat contradictory statements about how the balance sheet fits into its overall monetary policy strategy. Deutsche Bank economist Sanjay Raja pointed out to FT Alphaville that the BoE has gone out of its way to downplay the impact of its own nascent version of QT. Its August 2021 monetary policy report explicitly stated that while the intention of QE was to impact market expectations of rate paths (a reminder of the long-lost world of “lower for longer”) QT would not have the opposite effect: First, increasing the target stock of purchased assets may have provided a signal about the MPC’s aim to loosen the overall stance of policy in the past, depressing the expected path of Bank Rate. In contrast, the MPC would not intend to use its decisions about the process of reducing the stock of purchased assets to signal a need for a higher path for Bank Rate.This, according to Raja, was an effort to “remove a lot of the tightening element” that comes with eventual unwinding. Why is the Fed so much keener to big up the balance sheet as a policy tool than the BoE? One reason could be the totally different maturity profile of their balance sheets. The Fed’s portfolio is fluid enough to allow a ‘run off’ on different bandwidths depending on the pace with which it wishes to tighten. The BoE doesn’t have this option. According to FTAV’s calculations, about 20 per cent of Treasuries on the Fed’s books are due to mature next year, and 58 per cent within the next five. That gives it ample room to adjust the extent to which it withdraws liquidity from the market. Along the same time horizons, only 29 per cent of the BoE’s gilts are due to come off its books.

This means that the only way for balance sheet shrinkage to be an active policy tool for the BoE is through out-and-out bond sales. This process would have to be explicitly designed, rather than just adjusting the pace of an already booked-in taper. The complexity of designing such a program may at least partially explain why the BoE is behind the Fed according to James Smith, an economist at ING:When the BoE set out their plan for QT in August 2021, they made clear that active sales would be considered when they reached a 1 per cent bank rate. There’s no way that, at that time, the bank would’ve expected to get there within a year. In short, they may just need time to work through the operational aspects of selling.This interpretation certainly fits with the MPC’s actions last Thursday: tasking bank staff to go away and actually come up with a plan for selling gilts. We shouldn’t discount relatively compelling technical explanations for the behaviour of central banks. But it would be remiss of us not to point out an alternative, infinitely more interesting argument that puts varying levels of QT-hesitancy down to something else altogether — different levels of confidence as to what it will actually do. The Fed has been here before. Some economists therefore think Powell and co may just have enough experience to judge how much reduced liquidity markets can handle without becoming distressed. The BoE, on the other hand, has zero experience with QT. This makes the risk-reward profile of its own great unwinding more uncertain. Jo Michell, an economics professor at UWE Bristol, pointed FTAV towards the harsh truth that the Bank “can’t tolerate” financial markets breaking down via a botched effort at QT. On the other hand, it can pass the responsibility for any rate increase-triggered rise in unemployment to the Treasury. As interest rates climb, there is nothing stopping fiscal support being delivered to households, pointed out Michell. But would Rishi Sunak be keen to step in here and offer additional assistance? We’re doubtful.Given the uncertainty as to how the markets would react to out-and-out sales — and the BoE’s mandate to protect both price and financial stability — perhaps QT hesitancy is the correct call. Our best guess, though, is that if there’s no help from the government, ignoring the usefulness of balance sheet shrinkage as a means to help control inflation might end badly for the BoE. More

Dear reader, To twist an adage, when China sneezes the rest of the world’s manufacturers catch a cold. That more than ever applies to electric vehicle maker Tesla.The extent of disruptions to Tesla’s production at its Shanghai factory has caught the attention of its investors. Covid-19 lockdowns in the city, now in their sixth week, have reduced output and caused logistics woes for Tesla. But things look much worse for its global peers, which rely on petrol cars for most of their earnings.China matters to Tesla, and its chief executive Elon Musk touched on this in his interview at the FT’s Future of the Car summit on Tuesday. The electric car maker achieved a new sales record in China last year, with its turnover there swelling to almost half of its US sales. As a result of the lockdowns, which included China’s largest auto manufacturing hubs of Shanghai and Jilin province, car sales in China have tumbled. In April, total sales fell 36 per cent, the most in two years (during the pandemic), to 1mn autos.Tesla suffered badly, shipping just 1,500 cars from its Shanghai plant in April, according to China Passenger Car Association data. Normally, about 66,000 cars leave this plant each month. Moreover, production at Tesla’s factory in Shanghai has also grown in importance to global supply.The China plant, Tesla’s first outside the US, had initially produced vehicles for the domestic market. But earlier this year, about 36,000 cars made there were exported to other parts of Asia and Europe each month. Any disruption at its China plants means an increasingly bigger problem for the global supply of these electric cars. The hit to Tesla’s China sales should be shortlived, once lockdowns ease, which Musk also pointed out. But the same cannot be said for other companies that have been hit with wider, more lasting disruptions. Toyota this week announced another round of production suspensions starting next week, which would affect the output of about 40,000 vehicles. Volkswagen, which also has plants in China, has already struggled with temporary shutdowns at some plants in Europe.Even once lockdowns in China do ease and production schedules normalise, the prolonged closure of key auto parts makers elsewhere means a shortage of components threatens automakers’ output for the medium term. On top of a continuing chip shortage, low-tech parts such as wire harnesses, which are used to bundle and organise cables within cars, are in critically short supply as Ukrainian makers of these remain closed. This is where Tesla has an advantage. Electric cars have far fewer parts, with about 20 moving parts in an electric engine. Compare that with up to 1,000 components for internal combustion engines. Automakers such as Toyota — late to the shift to battery electric cars — are most vulnerable to the latest shortage. Any resulting price rise on automotive parts thus hurts. Toyota warned on Wednesday of an “unprecedented” jump in raw material prices, as it expects its materials costs to more than double to ¥1.45tn ($11bn) in the year to next March. Toyota says such an increase could slash a fifth off its full-year profit. That piles on more misery for shareholders. The Japanese automaker also reported a sharp decline in operating profit for the quarter to March that was well below analyst expectations. The latest round of suspensions, which affect a larger number of production lines and factories than previously expected, suggest any hopes that global disruptions might ease soon have been misplaced. Enjoy the rest of your week.June YoonLex writer More

Christine Lagarde has signalled she would support raising the European Central Bank’s main interest rate in July, leading economists to declare that the first increase for more than a decade is almost certain to go ahead. The ECB president said in a speech in Slovenia on Wednesday that she expected the bank to stop expanding its balance sheet through bond purchases “early in the third quarter” and to then raise rates “some time” after that, which “could mean a period of only a few weeks”. Lagarde added that “actions that demonstrate our commitment to price stability” would be critical in ensuring businesses’ and households’ expectations of future inflation did not rise any further and test the credibility of the central bank. Eurozone inflation hit a record 7.5 per cent in April — almost four times the central bank’s target of 2 per cent. The remarks are a clear sign that Lagarde supports the growing number of governing council members that have called for a 25 basis point rise to the ECB’s deposit rate at the July 21 policy meeting. The deposit rate is now minus 0.5 per cent and has been in negative territory since 2014, when it was lowered to help fight the region’s debt crisis. Economists have been bringing forward their forecasts of when the central bank will raise rates. Reinhard Cluse at UBS on Wednesday predicted a 25 basis point increase in July would be the first of seven such moves to lift its deposit rate to 1.25 per cent by next year. Frederik Ducrozet, a strategist at Pictet Wealth Management, tweeted that a July rate rise by the ECB seemed “a done deal”.ECB officials are increasingly concerned that the fallout from Russia’s invasion of Ukraine will keep inflation high for longer and embed expectations of rising prices among consumers and companies.Lagarde said the war was “likely to accelerate two ongoing structural changes which, during the transition they entail, could lead to further negative supply shocks and cost pressures.” The ECB’s new quarterly forecasts to be published in June were “increasingly pointing towards inflation being at least on target over the medium term,” she said. Luis de Guindos, vice-president of the ECB, predicted eurozone inflation would be as high as 5 per cent at the end of this year — higher than its forecast in March for inflation of 4 per cent in the fourth quarter of the year. Several other ECB governing council members have spoken out in recent days to say they would support starting a series of rate rises in July and a majority on the 25-member rate-setting body now seems to favour such a move. Fabio Panetta, the most dovish member of the executive board, is the only one to argue against a July rate increase, preferring to wait until second-quarter growth figures are published a week later. Austria’s hawkish central bank governor Robert Holzmann even said it could raise rates in June, though he is seen as an outlier. Frank Elderson, the newest member of the ECB’s executive board who joined in January, said earlier on Wednesday that it could consider raising rates in July “dependent as always on the incoming data”. He added that a eurozone recession was not envisaged, providing the war in Ukraine did not escalate further.The hawkish shift brings the ECB closer in line with the US Federal Reserve and the Bank of England, which both raised rates recently. However, the eurozone’s monetary policymakers still lag far behind their peers in the US and UK in the cycle of raising interest rates and were the only ones of the trio to deploy negative rates as a policy tool. Lagarde said the Ukraine war was “creating a challenge for monetary policy by tempering growth rates and pushing up inflation further”. While “it looks increasingly unlikely the disinflationary dynamics of the past decade will return”, she said consumption and investment were still below pre-pandemic levels in the eurozone, meaning the ECB would aim to “normalise” rather than “tighten” monetary policy — signalling that it would only raise rates slowly to continue supporting activity. “After the first rate hike, the normalisation process will be gradual,” she said, adding “flexibility will be key” — a reference to a possible “new instrument” the central bank has discussed to tackle any sudden surge of a country’s borrowing costs by buying its bonds.The additional borrowing costs investors demand to hold Italian debt over that of Germany climbed higher than 2 percentage points last week for the first time in almost two years, underscoring concerns that any ECB tightening of monetary policy will mainly affect eurozone countries with higher debt burdens. More