Economy

Nonfarm productivity, which measures hourly output per worker, plunged at a 7.5% annualized rate last quarter, the deepest since the third quarter of 1947, the Labor Department said on Thursday. Data for the fourth quarter was revised slightly lower to show productivity growing at a 6.3% rate instead of the previously reported 6.6% pace. Economists polled by Reuters had expected productivity would drop at a 5.4% pace. The decline was flagged in last week’s first-quarter gross domestic product report, which showed the economy contracting at a 1.4% rate in the January-March period.Productivity fell at a 0.6% pace from a year ago. It has been volatile since the start of the COVID-19 pandemic more than two years ago. Hours worked increased at a 5.5% rate in the first quarter after rising at a 2.5% pace in the fourth quarter. Unit labor costs – the price of labor per single unit of output – shot up at an 11.6% rate. That followed a 1.0% growth pace in the October-December quarter. Last quarter’s jump likely exaggerates the pace of growth in labor costs. Unit labor costs increased at a 7.2% rate from a year ago. The surge in costs followed on the heels of a government report last week showing that compensation for American workers notched its largest increase in more than three decades in the first quarter amid a persistent labor shortage. There were a record 11.5 million job openings at the end of March. The Federal Reserve on Wednesday raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said the U.S. central bank would begin trimming its bond holdings next month as it battles sky-high inflation. Fed Chair Jerome Powell told reporters that “the labor market is extremely tight, and inflation is much too high.”Hourly compensation rose at a 3.2% rate in the first quarter after growing at a 7.4% pace in the fourth quarter. Compensation increased at a 6.5% rate compared to the first quarter of 2021. More

China’s economy has slowed sharply in the second quarter this year, as local authorities raced to stop the spread of record COVID-19 cases, which have led to a full or partial lockdown in dozens of Chinese cities, including a city-wide shutdown in the commercial hub of Shanghai in April. The official jobless rate hit 5.8% in March, a near two-year high.While acknowledging firms are facing more difficulties, the government will follow through on its planned tax cuts and ensure VAT credit rebates will be returned to qualified companies by the end of June, according to a State Council meeting chaired by Premier Li Keqiang. More financial help would also be provided, as policymakers urge financial institutions to extend loan repayment and exempt default interest rates for small firms, the meeting said. To help the foreign trade sector, which is a key source of jobs, the government will focus on securing foreign orders, keeping the yuan basically stable and providing more loans for trade firms, the meeting said. More

MILAN (Reuters) -Italian luxury group Moncler said on Thursday it would open, refurbish or relocate 200 stores in the next three years, mostly in Asia, and diversify into shoes and clothes for warmer weather.The group, which in 2020 acquired streetwear brand Stone Island, also said it expected to beat analyst forecasts for annual sales of 2.43 billion euros ($2.57 billion) this year – up 18.5% from last year – provided a new round of lockdowns in some Chinese cities ended by July.”We think we can do 20%-25% (sales) growth,” Chief Corporate and Supply Officer Luciano Santel told reporters on the sidelines of an investor presentation. Spring-summer collections will account for up to one third of revenues in 2025, and footwear – including sneakers – will reach 10% of sales, Moncler, known for its puffer jackets, said in slides ahead of the event.Currently about 75% of revenues come from outerwear, according to Barclays (LON:BARC) analysts, who cited knitwear as another diversification option for the brand. By 2025, Moncler expects more than 50% of growth to come from China and the United States, the group said.The store expansion plan – which covers both the Moncler brand and the Stone Island label – sees up to 38 openings in Asia, including Japan and South Korea, 22 in Europe and the Middle East, and nine in the Americas in the next three years. The Moncler brand also aims to raise online sales to 25% of total revenues by 2025, up from 15% in 2021.Moncler, which on Wednesday reported a 60% jump in first-quarter sales, has like most rivals seen revenues rebound in Europe and the United States as COVID-19 restrictions eased. But it faces a setback in the Chinese market, the biggest for sales of high-end wares, where a strict lockdown has been imposed in the luxury hub of Shanghai and other cities since March. On Wednesday it said around 30% of its main brand’s stores in China were closed because of the restrictions, up from 10% in March. Just over a third of Moncler’s retail sales came from China last year but the brand is less exposed than rivals to the possibility of a prolonged shutdown as the second quarter is seasonally less important for its annual earnings, analysts say.In its presentation, the group said its planned openings in China included a flagship store in Beijing, adding it would create a China business unit at its Milan headquarters.($1 = 0.9467 euros) More

Initial claims for state unemployment benefits rose 19,000 to a seasonally adjusted 200,000 for the week ended April 30, the Labor Department said on Thursday. Economists polled by Reuters had forecast 182,000 applications for the latest week. Claims had hovered below the 200,000 level since mid-February amid strong demand for workers. Government data this week showed there were a record 11.5 million job openings on the last day of March, which widened the jobs-workers gap to a record 3.4% of the labor force from 3.1% in February.The labor market imbalance is forcing employers to increase wages, contributing to soaring inflation. Compensation for American workers logged its largest increase in more than three decades in the first quarter, government data showed last week.On Wednesday, the Federal Reserve raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said the U.S. central bank would begin trimming its bond holdings next month as it battles sky-high inflation. It started raising rates in March. Fed Chair Jerome Powell told reporters that “the labor market is extremely tight, and inflation is much too high.”Claims, which have dropped from a record high of 6.137 million in early April 2020, will be closely watched for signs of whether rising borrowing costs are curbing demand.The government is expected to report on Friday that nonfarm payrolls increased by 391,000 jobs in April after rising 431,000 in March, according to a Reuters survey of economists. Job growth has exceeded 400,000 for 11 straight months.But there are signs that high labor costs are starting to hurt small businesses, especially those in the leisure and hospitality industry. A separate report from global outplacement firm Challenger, Gray & Christmas on Thursday showed job cuts announced by U.S.-based companies increased 14% to 24,286 in April. The second straight monthly increase in layoffs was led by the leisure and hospitality industry.”Job cut plans appear to be on the rise, particularly as companies assess market conditions, inflationary risks, and capital spending,” said Andrew Challenger, senior vice president at Challenger, Gray & Christmas. “Workers who are being cut will have lots of opportunities and will likely land quickly.”The rise in layoffs was in sync with the ADP National Employment report on Wednesday, which in April showed the smallest private payrolls gain in two years as employment at businesses with less than 50 workers fell. The leisure and hospitality sector added the fewest jobs since late 2020. More

ISTANBUL (Reuters) -Turkey’s annual inflation jumped to a two-decade high of 69.97% in April, according to data on Thursday, fuelled by the Russia-Ukraine conflict and rising energy and commodity prices after last year’s lira crash. The surge in prices has badly strained households just over a year before presidential and parliamentary elections that could bring the curtain down on President Tayyip Erdogan’s long rule.Erdogan first came to power as prime minister in 2003 before switching the country to a presidential system, and the unorthodox interest rate cuts made last year under pressure from him have been blamed for lighting a fire under inflation. Month-on-month, consumer prices rose 7.25%, the Turkish Statistical Institute said, compared to a Reuters poll forecast of 6%. Annually, consumer price inflation was forecast to be 68%.”It’s about food and energy price increases but also the spectacular failure of monetary policy in Turkey – and it’s about the abject and total failure of Erdogan’s unorthodox monetary policy,” said strategist Timothy Ash at Bluebay Asset Management.Last year’s currency slide was triggered by a 500 basis point-easing cycle which began last September under pressure from Erdogan, prompting the sustained surge in consumer prices that was stoked by fallout from Russia’s invasion of Ukraine.The surge in consumer prices was driven by a 105.9% leap in the transportation sector, which includes energy prices, and a 89.1% jump in food and non-alcoholic drinks prices, the data showed.Month-on-month, food and non-alcoholic drink prices rose the most with 13.38% and house prices rose 7.43%.The lira dipped 0.9% to 14.8525 against the dollar after the release of the data.Presidential and parliamentary elections are due by June 2023 and opinion polls show Erdogan’s support declining.”The really remarkable thing here is that opinion polls still suggest that the next election is still in the balance. Perhaps that says as much about the opposition as Erdogan,” Ash said.LITTLE REPRIEVEThe government has said inflation will fall under its new economic programme, which prioritises low interest rates to boost production and exports with the goal of achieving a current account surplus.However, economists see inflation remaining high for the rest of 2022 due to the war, with the median estimate for inflation at year-end standing at 52%. The current account deficit has also widened sharply at the start of the year.Last week’s Reuters poll showed annual inflation was expected to be 52% by year-end. Inflation was last at current levels in 2002, having hit 73.1% in February of that year.Inflation has continued to rise despite tax cuts on basic goods and government subsidies for some electricity bills to ease the burden on household budgets.Last week the central bank forecast annual inflation will peak at around 70% by June before declining to near 43% by year-end and single digits by end-2024.The central bank held its key policy rate steady at 14% in four meetings this year and said measures and policy steps will prioritise so-called liraization in the market. The domestic producer price index climbed 7.67% month-on-month in April for an annual rise of 121.82%. More

The Bank of England has warned that the UK economy will slide into recession this year as higher energy prices push inflation above 10 per cent, a forecast that pushed sterling to a two-year low.Rising prices would cause the worst squeeze in household finances for many decades, the bank’s Monetary Policy Committee said as it voted on Thursday to raise the main interest rate by a quarter-point to 1 per cent, its highest level since February 2009. Three of the nine MPC members voted for a half-point rate increase.The pound added to its losses after the BoE decision, leaving it down 2 per cent against the dollar at $1.2363 in early afternoon trading. The two-year gilt yield, which is highly sensitive to monetary policy expectations, tumbled 0.25 percentage points to 1.37 per cent. Bond yields fall when prices rise. In tightening monetary policy, the committee members decided that this winter’s surge in gas and electricity prices would not cause enough financial pain to bring inflation sustainably back under control, so additional action to raise borrowing costs and damp spending was needed.The MPC said it was “unable to prevent” UK households from becoming worse off and its role was to ensure inflation came down to its 2 per cent target sustainably in the medium term. The message for households suffering a cost of living crisis was less aggressive on interest rates than financial markets had expected, with inflation being forecast to fall well below the BoE’s target if it followed traders’ expectations that rates would rise to 2.5 per cent by the middle of next year. Instead, most MPC members signed up to a statement that said: “Some degree of further tightening in monetary policy might still be appropriate in the coming months.” Two members of the committee thought this guidance that interest rates needed to rise further “was not appropriate”.Speaking of the squeeze on households forecast by the BoE, its governor Andrew Bailey said: “I recognise the hardship that this will cause.” The committee also decided not to follow the US Federal Reserve and start active sales of the £875bn of assets that the BoE built up under its quantitative easing programmes since 2009, preferring instead to “work on a strategy for UK government bond sales” that would start at the earliest in August.Unlike the Fed, the BoE was not confident it could engineer a soft landing for the economy while also bringing inflation down to its 2 per cent target. Instead, unusually gloomy BoE forecasts predicted a recession by the end of the year as gas and electricity costs rise another 40 per cent when the new price cap for most consumers is set in October. It said these rises in energy bills were likely to push inflation up to 10.2 per cent in the fourth quarter of 2022, the highest in 40 years, slash real household incomes because wages would not keep pace and result in UK gross domestic product falling 1 per cent in the quarter. Another dip in GDP was likely in the third quarter of 2023, the BoE added, when the government’s temporary incentives for business investment ended, leaving the economy 0.8 per cent smaller than in the summer of 2022. Unemployment, it said, would rise from 3.8 per cent to 5.5 per cent by 2025 and this would help moderate wage claims and bring down inflation. Thereafter, the MPC now expects the UK economy to recover only weakly from the coming recession, suggesting that the economy could not withstand growth of much more than 0.6 per cent a year without inflation taking off again.This persistent weakness, the BoE said, reflected “further sharp increases in global energy, other commodity and tradable goods prices”. Its latest predictions showed the economy to be 2 per cent smaller by the middle of the decade compared with its February forecasts, just before Russia invaded Ukraine. Economic weakness and a few more interest rate rises would not be enough to bring inflation down, according to the three MPC members — Jonathan Haskel, Catherine Mann and Michael Saunders — who voted to raise interest rates by half a percentage point.This minority on the committee thought that initial momentum in the economy would continue to add to inflationary pressures and a larger increase was needed to “lean strongly against risks that recent trends in pay growth, firms’ pricing strategies and inflation expectations in the economy more widely would become more firmly embedded”. Vivek Paul, chief UK investment strategist at the BlackRock Investment Institute, said the BoE’s dilemma over how to bring down inflation without inflicting pain on the economy was “especially acute”.“While inflation has continued to climb beyond the bank’s previous expectation of an April peak, this is squeezing household income and the UK’s growth forecast is now the weakest among G7 economies, according to the IMF,” said Paul. “Given the weakness of the economic outlook, we expect the bank will ultimately choose to live with some inflation.”Additional reporting by Tommy Stubbington More

The Federal Reserve increased its benchmark interest rate by half a percentage point, in line with market expectations.
In addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month.
The rate move is the largest since 2000 and is in response to burgeoning inflation pressures.
Fed Chairman Jerome Powell underlined the commitment to bringing inflation down but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering.”

WASHINGTON — The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation.
“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference, which he opened with an unusual direct address to “the American people.” He noted the burden of inflation on lower-income people, saying, “we’re strongly committed to restoring price stability.”

That likely will mean, according to the chairman’s comments, multiple 50-basis point rate hikes ahead, though likely nothing more aggressive than that.

The federal funds rate sets how much banks charge each other for short-term lending, but also is tied to a variety of adjustable-rate consumer debt.
Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its $9 trillion balance sheet. The Fed had been buying bonds to keep interest rates low and money flowing through the economy during the pandemic, but the surge in prices has forced a dramatic rethink in monetary policy.
Markets were prepared for both moves but nonetheless have been volatile throughout the year. Investors have relied on the Fed as an active partner in making sure markets function well, but the inflation surge has necessitated tightening.

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Wednesday’s rate hike will push the federal funds rate to a range of 0.75%-1%, and current market pricing has the rate rising to 2.75%-3% by year’s end, according to CME Group data.

Stocks leaped higher following the announcement while Treasury yields backed off their earlier highs.
Markets now expect the central bank to continue raising rates aggressively in the coming months. Powell, said only that moves of 50 basis points “should be on the table at the next couple of meetings” but he seemed to discount the likelihood of the Fed getting more hawkish.
“Seventy-five basis points is not something the committee is actively considering,” Powell said, despite market pricing that had leaned heavily towards the Fed hiking by three-quarters of a percentage point in June.
“The American economy is very strong and well-positioned to handle tighter monetary policy,” he said, adding that he foresees a “soft or softish” landing for the economy despite tighter monetary policy.

The plan outlined Wednesday will see the balance sheet reduction happen in phases, with the Fed allowing a capped level of proceeds from maturing bonds to roll off each month while reinvesting the rest. Starting June 1, the plan will see $30 billion of Treasurys and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasurys will increase to $60 billion and $35 billion for mortgages.
Those numbers were mostly in line with discussions at the last Fed meeting, as described in minutes from the session, though there were some expectations that the increase in the caps would be more gradual.
Wednesday’s statement noted that economic activity “edged down in the first quarter” but noted that “household spending and business fixed investment remained strong.” Inflation “remains elevated.”
Finally, the statement addressed the Covid outbreak in China and the government’s attempts to address the situation.
“In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the statement said.
“No surprises on our end,” said Collin Martin, fixed income strategist at Charles Schwab. “We’re a little bit less aggressive on our expectations than the markets are. We do think another 50 basis point increase in June seems likely. … We think inflation is close to peaking. If that shows some signs of peaking and declines later in the year, that gives the Fed a little leeway to slow down on such an aggressive pace.”
Though some Federal Open Market Committee members had pushed for bigger rate increases, Wednesday’s move received unanimous support.
The 50-basis-point increase is the biggest increase the rate-setting FOMC has instituted since May 2000. Back then, the Fed was fighting the excesses of the early dotcom era and the internet bubble. This time around, the circumstances are quite a bit different.
As the pandemic crisis hit in early 2020, the Fed slashed its benchmark funds rate to a range of 0%-0.25% and instituted an aggressive program of bond buying that more than doubled the size of its balance sheet. At the same time, Congress approved a series of bills that injected more than $5 trillion of fiscal spending into the economy.
Those policy moves were followed by clogged supply chains and surging demand as economies reopened. Inflation over a 12-month period rose 8.5% in March, as gauged by the Bureau of Labor Statistics’ consumer price index.
Fed officials for months dismissed the inflation surge as “transitory” then had to rethink that position as the price pressures did not relent.
For the first time in more than three years, the FOMC in March approved a 25-basis-point increase, indicating then that the funds rate could rise to just 1.9% this year. Since then, though, multiple statements from central bankers pointed to a rate well north of that. Wednesday’s move marked the first time the Fed has boosted rates at consecutive meetings since June 2006.
Stocks have tumbled through this year, with the Dow Jones Industrial Average off nearly 9% and bond prices falling sharply as well. The benchmark 10-year Treasury yield, which moves opposite price, was around 3% Wednesday, a level it hasn’t seen since late 2018.
When the Fed was last this aggressive with rate hikes, it took the funds rate to 6.5% in early 2000, but was forced to retreat just seven months later. With the combination of a recession already underway plus the Sept. 11, 2001 terrorist attacks, the Fed rapidly cut, eventually slashing the funds rate all the way down to 1% by mid-2003, shortly after the Iraq invasion.
Some economists worry the Fed could face the same predicament this time — failing to act on inflation when it was surging, then tightening in the face of slowing growth. GDP fell 1.4% in the first quarter, though it was held back by factors such as rising Covid cases and a slowing inventory build that are expected to ease through the year.

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The writer is co-head of foreign exchange strategy for Goldman SachsThe yen has been the worst performing major currency this year, sliding around 12 per cent against the dollar and underperforming even the Turkish lira and Argentine peso.Relative to a basket of trading partner currencies and adjusted for inflation, the yen has fallen to levels last seen in the early years of the Reagan administration, before the 1985 Plaza Accord. But this state of enyasu (weak yen) will probably be shortlived. The yen is an undervalued haven asset at a time of rising recession risks around the world and structural threats to the dollar. It will find support from long-horizon investors looking to protect their capital. If global inflation pressures remain high, the Bank of Japan will eventually allow bond yields to rise, rather than let the currency spiral downward.Recent yen depreciation reflects shorter-term, cyclical factors: sharply rising bond yields in the US and Europe, higher commodity prices that lead to a larger import bill for Japan and the Omicron Covid wave, which has held back the economic reopening process throughout Asia. The BoJ was right to say last week that Japan’s cyclical position — low core inflation and a more limited rebound in economic output — warrants an easier monetary policy stance compared with its G10 peers.But structurally the Japanese economy is not that different from other developed markets. It had an earlier and larger real estate bubble and bust, but the pattern was largely the same as played out in western economies over the past decade.

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Japanese inflation has been low, but inflation rates elsewhere moved closer to Japan-like levels over the last business cycle. Between 2010 and 2019, Japan’s consumer price index inflation averaged 0.5 per cent, compared with 1.4 per cent in the euro area, 1.1 per cent in Sweden and zero in Switzerland. Over that same period, Japan’s real per capita growth in gross domestic product averaged 1.3 per cent, slightly above the average of the rest of the G10.Moreover, Japan has the attributes of a natural “haven”. Most importantly, it is a wealthy nation with a large stock of foreign assets. Japan holds about ¥1,260tn in foreign assets ($9.6tn) compared with liabilities of about ¥850tn ($6.5tn).This net international asset position amounts to roughly 75 per cent of Japan’s GDP and produces income for the nation worth nearly 4 per cent of GDP every year. The Japanese government has a large debt stock, but this is held mostly as assets by its residents and the BoJ. The Japanese nation is not going broke and its large current surpluses over the years mean the currency is not vulnerable to sudden capital flight.Investors should be warier of Japanese bonds than the currency. If we have entered a period of stubbornly high global inflation pressures, Japan will not be immune. Between 1960 and 1989, when US inflation averaged 5 per cent, Japanese inflation averaged 5.6 per cent — there is nothing about Japan that implies permanently low inflation. Muted wage growth and price inflation trends in the country won’t change overnight. Inflation expectations appear anchored at relatively low levels. It may take repeated upside inflation surprises for the Japanese public to expect a steadily rising price level. But this now seems to be a meaningful risk. Most other economies experienced a wave of price pressures as they reopened. For the BoJ, which has been trying to secure an end to deflation for years, this should be good news. Bringing underlying inflation closer to the central bank’s 2 per cent target will allow it to move nominal interest rates back above zero and improve policy flexibility.BoJ governor Haruhiko Kuroda should be preparing for his victory lap. Ending negative rates and a policy of yield curve control — which effectively caps 10-year government bond yields at 0.25 per cent — would be no tragedy. Instead, it would signal that officials successfully ended deflation through a sustained cross-government macro policy campaign.The yen may very well experience further depreciation pressure over the coming weeks — needless to say, we are in a complex and volatile period for global markets. But beyond the near-term there are a number of paths to recovery for the yen. In a recession, US Treasury yields and commodity prices would likely come down, narrowing interest rate differentials with Japan and lowering the cost of its commodity imports. If global inflation remains high, low interest rates in Japan will eventually move up toward the levels in other developed markets. Investors can anticipate a rebound in the yen over time and should consider owning this haven asset as a hedge against global recession and other tail risks. More