Economy

Good morning. We don’t break years into thirds, but if we did, we’d be saying “the first third was just awful for stocks”. The S&P 500 hit its all-time high on January 3 — opening day for markets — and is down 14 per cent since then. Today I take the measure of what happened: where the damage was done and by what. Tomorrow I’ll turn to what is next. OuchA good way to take the profile of the miseries of 2022 is by looking at sector performance:That is a picture of inflation taking hold, as evidenced by energy stocks’ great showing, and investors moving into a defensive crouch, keeping staples and utilities flat while sectors that have done the best in recent years, paradigmatically tech, sell off hard.Technology, broadly construed, has its fingerprints all over the worst performing sectors. Netflix (-68 per cent year to date) Google (-23) and Facebook (-15) make up 40 per cent of the communications sector. Amazon (-25) and Tesla (-6.5) make up half of the consumer discretionary sectors. Fully half the stocks in the information technology sector are down by 20 per cent or more. (As a reminder: Unhedged is very sceptical of the “tech is selling off because rates are rising and tech stocks are long duration assets” narrative; see here. Instead, we think that (a) small tech stocks are risky and risk is selling off and (b) big tech stocks have done incredibly well, and so some hard profit-taking was inevitable as growth slows.The only relative bright spot in US markets has been value. The Russell 1000 value has fallen a mere 6 per cent, while its growth oriented sister index is down 20 per cent. The US pattern extends to international stocks, where value-tilted markets such as Europe and Japan have taken less pain and commodity-oriented markets, notably Brazil, have outperformed.It’s the Fed, mainlyAs we have argued before, the main culprit is obvious enough. Inflation is out of control and the Fed, after some delay, is coming out guns blazing. Market expectations for where the Fed funds rate will end the year have roughly tripled since the start of the year, from around 100 basis points to around 300. This has flattened the yield curve from 5 to 30 years, and almost flattened the 2-year 30-year. The Fed aims to cut inflation by slowing demand — reducing job creation, lowering investment, cooling consumption — and the yield curve says it will work:Already the Fed’s signalling is having an effect. Mortgage rates have passed 5 per cent, from 3 at the start of the year. Mortgage applications and new home sales are falling. The dollar is stronger against everything, which will drag on manufacturing before long. Manufacturing and services PMI indices are grinding lower.The Fed’s success in dimming the economic outlook has left markets feeling seriously jumpy. A chart from Citi showing volatility in stocks, bonds and the dollar:

Other factorsThe Fed has had two main accomplices in its assault on the stock market. The Chinese government’s Covid policies are first among them. This striking chart from Gavekal Dragonomics shows how exports, production, consumption, investment, and real estate have all taken a hit:

Capital Economics’ China team thinks that China is not growing as fast as the official figures suggest, and that the economy will grow in real terms this year. Its China activity proxy uses figures including car and machinery sales, freight traffic, and property sales to provide a common sense alternative to government figures. It turned down sharply last month:

China’s slowdown creates a headwind to global growth, and makes it harder for the sectors that might otherwise do well in a defensive and inflationary environment — such as materials and cyclically sensitive value stocks.The Fed’s other key accomplice is falling liquidity in the financial system, which nearly always drags down risk asset prices. Matt King at Citibank calls what has happened “sudden stealth quantitative tightening” as the Treasury’s general account rises (meaning taxes are being taken in by the Federal government and equivalent amounts are not being distributed) and the Fed’s reverse repo operations pull liquidity out of the financial system, as well. Here is a chart from the liquidity mavens at CrossBorder Capital, showing how declining liquidity in the US (with some help from tightening in China and the UK) effects the 3-month change in aggregate liquidity provision by all major central banks:

Investors are getting the message as the Fed attacks demand, China becomes a drag on global growth momentum, and liquidity is drained from the system. After a long period of investor inflows to equity ETFs and Mutual funds, cash is now being pulled out, as this chart from BofA’s Michael Hartnett shows:

Are we nearing the bottom — defined as a point where indicators of economic activity, liquidity, and investor sentiment can fall no lower, and can begin to rebound? Much depends, of course, on whether inflation has peaked, giving the Fed an opportunity to move more gradually with rate hikes and reducing its bond portfolio. This is the more or less rosy scenario markets appear to be pricing in. We will consider the question in more detail tomorrow.One good readA nice Lunch with the FT with the psychologist Jonathan Haidt. His book The Righteous Mind really changed the way I think about politics, the media, and even markets. More

Good morning and welcome to Europe Express, coming to you from blooming Washington this week — where the FT’s first stateside Weekend Festival will take place on Saturday.The EU is inching closer towards sanctions on Russia’s oil exports, with German officials telling the Financial Times that Berlin still needs a few months to get everything ready. Other capitals, notably Budapest and Bratislava, are still reluctant to endorse the plans, which are expected to be finalised tomorrow and put to EU ambassadors on Wednesday. With EU energy ministers gathering in Brussels today to discuss issues surrounding the other Russian fossil fuel imports — natural gas — after Russia cut off Poland and Bulgaria’s supplies, we’ll bring you the latest on where things stand and what the central European arguments are. Later this month, a second round of the EU-US Trade and Technology Council will take place in Paris — and we got our hands on the draft conclusions, which see an impetus for faster and deeper transatlantic co-operation prompted by Russia’s war in Ukraine.Crude truthsDo you know your Druzhba from your Adria, and can you tell a barrel of Urals blend from Brent? As EU officials are finding out this week, not all oil is created equal, write Henry Foy in Brussels and Marton Dunai in Budapest. That the EU wants to reduce the amount of cash it hands over each day to Vladimir Putin in exchange for his oil is no secret. The problem is how to make it happen: member state ambassadors and European Commission officials will spend most of their waking hours this week wrestling with that issue.Some countries — including Germany — think the best way forward is a tapered embargo, a countdown timer that gives countries enough warning to find alternative supplies until shipments are banned. Others think some form of price cap mechanism that limits the Kremlin’s income is a better strategy: an idea publicly endorsed by Rome.But finding an agreement that will pass muster with all 27 members is not going to be easy. And Hungary, long criticised by more hawkish members as too pro-Russian, has more than just its prime minister’s ties with Putin giving it second thoughts.Hungary, along with some other eastern EU states, has built its oil infrastructure around piped Russian crude — namely, Russia’s trademark Urals blend, shipped in from the edge of Siberia along the Druzhba pipeline.Just like fuel for your car, crude types matter: you cannot just chop and change what gets pumped into a refinery — and changing refinery specifications costs time and money. Most refineries have less than a week of crude reserves at hand.Hungary also lies on the Adria pipeline, which carries crude from the Croatian coast to south-east European markets. But even assuming the long underinvested route could be upgraded to cope with the higher demand, Budapest would still need to find a suitable blend from another producer to replace its missing Russian supplies.That is less of an issue for most western EU states who have alternative refineries tailored to US, North Sea or Middle Eastern crude types, or have more flexibility with seaports to find alternatives.As with most EU stand-offs, there is a potential solution: money. Even since before the invasion, in those halcyon days when officials discussed what actions merely might have to be necessary should Russia actually attack Ukraine, the idea of solidarity payments — or balancing out the costs incurred by EU members as a result of sanctions imposed on Russia — has been mooted.Now that the time of hypotheticals has passed and the reality of war is here, this week may be the first real example of that concept being firmly put to the test.C for ChinaRussia’s attack on Ukraine has given fresh impetus to the US-EU Trade and Technology Council, which meets for the second time on May 15-16, in Paris, write Andy Bounds and Javier Espinoza in Brussels.The body, originally set up to deal with the rise of China, aims to harmonise regulations to ensure the west sets global rules in areas such as artificial intelligence, data and labour standards. As one diplomat put it, the C in TTC doesn’t formally stand for China, “but maybe it should”. The TTC features European commissioners Margrethe Vestager, Valdis Dombrovskis and Thierry Breton with secretary of state Antony Blinken, secretary of commerce Gina Raimondo and trade representative Katherine Tai on the US side.A lengthy draft statement seen by Europe Express contains lots of pledges to work together but few concrete achievements. However, it does include a commitment not to take legal action against support schemes for green technology and to avoid “subsidy races” in the semiconductor industry as the US and EU attract chip factories to reduce reliance on Chinese production. The two sides will also provide early warning of chip supply problems and collaborate rather than compete on sourcing rare raw materials.Cecilia Bonefeld-Dahl, director-general of DigitalEurope, which represents the tech industry, has just returned from Washington and said the level of engagement from policymakers was “impressive”. “The US administration and many members of Congress are really on board. They are really enthusiastic about it.“The Russian attack on Ukraine is a real game changer on many things but especially cyber security and AI. We need systems that are interoperable if we are to defend ourselves.”EU and US counterparts are also working on a joint crisis mechanism for co-operation on exchanging information where digital plays a prominent role in light of the threat from “foreign information manipulation and interference” and the threats to silence “independent voices”.As part of the concerted efforts, the two sides are considering:the monitoring of information manipulation (including disinformation, propaganda, government controlled media) and the role of online platforms for its spread, amplification and mitigationthe role of online platforms as part of efforts to increase digital security of Ukrainians and other targeted groups (including access to quality media covering Ukraine)mapping of practical instruments for rapid deployment in crisis situations, including funding, digital and support services.The draft adds: “We will look ahead to the actions necessary to address future digital threats around the globe, that are resulting from, or inspired by, Russia’s unlawful aggression. In the event of future crises, when the EU-US crisis protocol is triggered, it could be broadened to include also other partners.”Chart du jour: Sharing costsTelecoms companies have been embroiled in a long debate with regulators about whether big tech companies, which use up a significant portion of network data, should be made to pay for some of the billions being spent on 5G and full fibre rollout. A new industry report says the EU should make Big Tech and streaming companies pay at least some of the estimated €28bn they cost European telecoms groups. What to watch today EU energy ministers hold emergency council on Ukraine war fallout, gas payments to RussiaEuropean parliament holds its plenary session in Strasbourg. . . and later this weekEU finance ministers tune in virtually for a council to approve the national recovery plans of Bulgaria and Sweden tomorrowEU oil embargo proposal to be discussed by ambassadors on WednesdayItalian Prime Minister Mario Draghi speaks in the European parliament on WednesdayFT Weekend Festival in Washington and online on SaturdayNotable, Quotable

Ukrainian returnees: Of the 5mn Ukrainians who fled abroad to safety after Moscow launched its full-scale invasion in February, more than 1mn have returned, after Russian troops have withdrawn from Kyiv’s surroundings. Fresh money: The EU is exploring how to accelerate a Ukraine payment of €600mn under the bloc’s existing emergency support plan and to bring forward a new round of lending. French May Day: Tens of thousands of people joined May Day marches across France yesterday, to protest against president Emmanuel Macron’s plan for pensions reform, after an election season dominated by concerns over the cost of living and soaring fuel prices. Moldova angst: Born in Chisinau to the sound of shelling, in 1992, Paula Erizanu writes about how the frozen conflict in Transnistria was a constant setback for Moldova’s independence from Russia. “No one believed that a real war might re-emerge. That has now changed.” More

Only last year, many economists were expecting 2022 to be a period of strong economic rebound. Businesses would return to full operation post-Covid. Consumers would be free to splash their accumulated savings on all the holidays and activities they had not been able to do during the pandemic. It would be a new “roaring twenties,” some said, in reference to the decade of consumerism that followed the 1918-21 influenza.Fast forward a few months and the more commonly cited parallel is the 1970s, when the Arab oil embargo helped create a prolonged period of economic hardship. Inflation surged to double-digit rates even as economies around the world stagnated — a painful mix of high prices and low growth known as “stagflation”.Now, stagflation is again on the cards. After the double shock of Covid-19 and the Russian invasion of Ukraine, inflation rates have exceeded expectations, surging to the highest levels in decades in many countries, while economic growth forecasts are rapidly deteriorating. The prospect of stagflation’s return strikes fear into policymakers because there are few monetary tools to address it. Raising interest rates may help reduce inflation, but increased borrowing costs would further depress growth. Keeping monetary policies loose, meanwhile, risks pushing prices higher. Most analysts and economists, including the IMF, do not expect a rerun of the bad old days of the 1970s — a decade of economic blight that caused pain to households and businesses alike. Inflation is not yet as high as it was back then; more central banks are independent; and fiscal support is shielding the most vulnerable.But just as the oil crisis reverberated throughout the global economy in the 1970s, so has the double blow of pandemic and war put unprecedented pressure on the supply of goods and services around the world today. Even before war broke out in Ukraine, prices had risen to multi-decade highs in many countries, including the US, the UK and the eurozone, as the pandemic disrupted supply chains, boosted demand for goods and resulted in accommodative monetary policies and expansive fiscal stimuli.

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The war only exacerbated these problems. Russia and Ukraine produce large amounts of the global supply of gas, oil, wheat, fertilisers and other materials, pushing energy and food prices higher, especially in Europe. This is the “largest commodity shock we’ve experienced since the 1970s,” says Indermit Gill, the World Bank’s vice-president for equitable growth, finance and institutions. In the event of a prolonged war, or additional sanctions on Russia, “prices could be even higher than currently projected,” he adds. Forecasts are looking chilly. The consensus is now for global economic growth to average only 3.3 per cent this year, down from 4.1 that was expected in January, before the war. Global inflation is forecast at 6.2 per cent, 2.25 percentage points higher than January’s forecast. Similarly, the IMF downgraded their forecast for 143 economies this year — accounting for 86 per cent of global gross domestic product.Stagflation matters because few economists agree on how to stop it once it has started. It also causes great, potentially long-term pain to businesses and middle class and lower-wage households. “In economic terms, growth is down and inflation is up,” says Kristalina Georgieva, IMF managing director. “In human terms, people’s incomes are down and hardship is up.”The worldwide ebbThe stagflationary shock of 2022 is truly global, with diverging growth and inflation expectations across most countries with many different factors exacerbating the trend in a synchronised way. In country after country, similar trends can be seen playing out — a surprise surge in prices and decline in activity over the past few months — as expectations for the year deteriorate.

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Across Asia, strong growth forecasts have been revised down due to headwinds from the war in Ukraine, and renewed supply disruptions and weaker demand resulting from China’s new lockdowns and Xi Jinping’s zero-Covid policy. Inflation is more muted in Asia than in other countries, but it is edging up following the global surge in food and energy prices. In South Korea, for example, consumer prices hit a 10-year high in March.In some Latin American countries, particularly Brazil, the aggressive monetary policy tightening adopted to tame soaring inflation has resulted in a fast-deteriorating economic outlook. The UN’s Economic Commission for Latin America and the Caribbean revised growth prospects for the region downward on April 27, warning of a “complex juncture” of challenges relating to the war in Ukraine.Despite being confined to Europe, the effects of the war “are being felt worldwide as rising energy and food prices are impacting the most vulnerable, particularly in Africa and the Middle East”, said David Malpass, president of the World Bank.But unsurprisingly the economic shock of the war is being most keenly felt in Europe, especially in those countries heavily reliant on Russian oil and gas. The European region as a whole is highly vulnerable to disruptions to its energy supply, with 40 per cent of the EU’s gas coming from Russia. Consumer energy prices already surged in March, with business and consumer sentiment taking a plunge. Many experts are warning that an EU ban on Russian gas would trigger one of the deepest recessions of recent decades in Germany and the eurozone.

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Russian retaliations on energy exports are also a threat to the region’s economic outlook, partly realised last week when state energy giant Gazprom said it would cut off supplies to Poland and Bulgaria.“If Moscow abruptly halts the flow of its natural gas to Germany and other EU economies, Europe will find itself grappling with a new economic crisis, that like the euro crisis of 2011-12 or the Covid crisis of 2020 could again pose an existential threat to the single currency’s survival,” says Tom Holland at Gavekal Research.Even without gas stoppages, growth in the eurozone slowed to just 0.2 per cent in the first quarter, while inflation rose to a record high of 7.5 per cent. “This will be a year of stagflation” in the eurozone, says Andrew Kenningham, chief Europe economist at Capital Economics. “Higher energy prices will keep inflation elevated, squeeze household incomes and dent business confidence.” Germany is among the hardest hit, with its energy-intensive, large manufacturing sector and export-oriented economy. Over the past six months, economists have halved their 2022 economic growth forecast for Germany, while inflation expectations are three times higher. Outside the EU, the UK economy nevertheless suffers from similar energy price pressures and flattening growth this year, following what is forecast to be the largest drop in real income since records began in the 1950s. However, in the UK, high prices of imported goods are coupled with a tight labour market that raises the prospect of a more persistent high inflation. The UK unemployment rate is at the lowest it has been since the early 1970s and job vacancies are the highest on record, risking a “wage-price spiral” when higher pay demands push prices ever higher.People protest against rising energy and living costs outside parliament in London in February © Andy Rain/EPA-EFE“This combination of supply shocks and a tight labour market tends to give us more of a problem [of persistent inflation],” Andrew Bailey, the governor of the Bank of England, told the Financial Times in an interview this month. But it is the US that faces “by far greatest risk of dramatic inflation and wage-price spirals,” says Anatole Kaletsky, economist at the investment research company Gavekal. Inflation hit 8.5 per cent in March and investors expect it to rise even higher. The economy contracted unexpectedly in the first quarter, defying predictions.The US labour market, meanwhile, is the most overheated in postwar history, with over 5mn more job vacancies than unemployed workers, according to Daan Struyven, economist at Goldman Sachs.The overheated nature of the labour market, said former Treasury secretary Larry Summers in a recent analysis, suggests “a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity”. Struyven notes that signs of tight labour markets are visible in most English-speaking G10 countries, including the UK, Canada and Australia. The health of the labour market affects what policymakers are expected to do about high inflation, which in turn impacts borrowing costs and living standards. Stronger domestic price pressures coming from wage growth and higher core inflation, which strips out energy and food, have prompted expectations for multiple rates hikes in the UK and the US. Futures markets now reflect an 80 per cent chance the US fed funds rate will be at 1.5 per cent in June, implying a half-point increase at each of the next two meetings, according to the CME’s FedWatch tool. That would follow the 25 basis points hike in March, the first since 2018. The Bank of England is also expected to raise rates for the fourth consecutive time at the next meeting, on May 5, to 1 per cent as the country faces the fastest pace of inflation in 30 years. Markets expect further hikes to 2 per cent by the end of the year.

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By contrast, the European Central Bank has not raised rates in over a decade from its current minus 0.5 per cent despite having similar headline inflation rates to the UK and the US, which is also the highest in the history of the currency union. Christine Lagarde, president of the ECB, said recently that the US and Europe were “facing a different beast”. In America, it’s the tight labour market pushing prices up. In Europe, it’s surging energy costs. “If I raise interest rates today, it is not going to bring the price of energy down,” Lagarde said. But even in the eurozone, the exceptional surge in inflation prompted the market to price in 80 basis points of rate hikes from the ECB by the end of the year. The global outlook “for monetary tightening has increased notably, as has the potential for stagflation,” says Fitch, the credit rating company. Turning back the clockThe question now is how long this stagflationary shock will last — and whether a prolonged, 1970s-style slump is still a possibility.Back then, inflation rose to double-digit rates for almost a decade, following a large spike in oil prices after the Arab oil-exporting countries stopped exporting to many western countries as punishment for providing aid to Israel during the Yom Kippur war.

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Persistent high inflation pushed unemployment rates to high levels in many advanced economies, leaving behind the boom years after the second world war.While today’s sharp increases in commodity prices echo those in the 1970s, there are many differences from that period. Many economists expect inflation to slow next year, pointing out that the world’s reliance on fossil fuels is lower now. Households can now cushion the blow of the higher energy costs with the savings accumulated during the pandemic. Many economies, mostly the rich ones, have introduced measures to shield the most vulnerable groups from the hit of rising prices, including subsidising fuel and energy costs. However, other trends are a source of concern for both growth and inflation, adding to a highly uncertain outlook. While oil price growth might be weaker than back then, the increase in gas price has been rapid and was enough to push March’s annual growth of German producer prices to the highest pace since records began in 1949 and double the pace of in the 1970s.Although wages are no longer indexed to inflation as they were in the 1970s, the historically tight labour markets in the US and Europe increase the risk of inflation becoming more entrenched in the economy. Whatever happens to commodity and goods prices in the near term, “the key point remains that high inflation is only likely to be seen on the sustained scale seen in the 1970s if wage-price spirals develop,” says Vicky Redwood, economist at Capital Economics.

Cars queueing at a petrol station in London, during a petrol shortage, in 1973. Back then, inflation rose to double-digit rates for almost a decade, following a large spike in oil prices after the Arab oil-exporting countries stopped exporting to many western countries © Evening Standard/Hulton Archive/Getty Images

Forecasts could also be overly optimistic. Economic data has often disappointed expectations and “growth [this year] could slow further than forecast, and inflation could turn out higher than expected”, says the IMF. More central banks are independent and monetary policy credibility has generally strengthened over the decades, but hiking rates hurts businesses and households at a time when they already see their real income eroded by rising prices. With private and public debt levels at historic highs as a share of GDP, “central bankers can take policy normalisation only so far before risking a financial crash in debt and equity markets”, warns Nouriel Roubini, professor of economics and international business at New York University Stern School of Business. It is also possible, adds Silvia Dall’Angelo, economist at the investment management company Federated Hermes, that the pandemic and the war in Ukraine “have catalysed some structural changes reversing some of the forces that caused disinflation in previous decades”, including globalisation.The result is that global inflation forecasts are being revised upwards for next year, while growth expectations are deteriorating. If these come to pass, it will mean an erosion of business profits and households’ purchasing power for longer, with high inflation affecting lower-income households the hardest. “It may not be exactly like the 1970s,” says Luigi Speranza, chief global economist at BNP Paribas Markets 360, “but it will still feel like stagflation.” More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyFor years, financial markets benefited enormously from the generosity of monetary policy in a world economy deemed by central banks, and the US Federal Reserve in particular, to lack sufficient aggregate demand.To the detriment of markets, this has been changing rapidly as central banks belatedly recognise that today’s problem is not one of weak demand but, rather, insufficient supply. Looking forward, an even more complicated possibility is taking shape: that of stalling demand in the midst of persistent supply disruptions.Central banks felt compelled to maintain ultra-loose monetary policy in a world of muted economic growth and deflation risks. The Fed went further and, in August 2020, shifted to a new monetary framework that postponed the usual policy response to inflation nearing and exceeding the Fed’s 2 per cent target.For markets, this translated into abundant liquidity. The surge higher in asset prices due to ultra-low interest rates was turbocharged by regular injection of funds by the Fed through massive, predictable and price-insensitive purchases of assets.All this has been coming to an end due to the threat to economic wellbeing posed by high and persistent inflation. The cause has been the dramatic change in the macroeconomic paradigm to one in which damaged supply, due primarily to supply chain disruptions and labour market tightness, has fallen well short of overstimulated demand.In such a world, the Fed has no choice but to take its foot off the stimulus accelerator. And as it is very late in doing so, it will need to move aggressively in hitting the brakes, including by “front-end loading” rate increases as it simultaneously starts to reduce a bloated balance sheet that expanded to a staggering $9tn. The risk of recession associated with this is unsettling.Unsurprisingly, markets have not enjoyed the change in the Fed’s approach as illustrated by the sell-off in stocks and other risk assets, including 13.3 per cent fall in April alone for the more interest rate sensitive growth stocks of Nasdaq.This regime change has been made even more painful for investors by the breakdown of traditional “havens” as government bond prices fall and the real return on cash holdings drops deep into negative territory due to 8.5 per cent US inflation.Until now, rising inflation has fortunately not been accompanied by a significant worsening of credit risk or large problems in market-functioning. However, this could well change if demand falters. Already, the prospect of “stagflation” (lower growth and high inflation) is transitioning from a risk to a “baseline” scenario for several reasons.The US is looking at an accelerating erosion in both monetary and fiscal drivers of growth and financial asset valuations. Policymakers will need a rare mix of skill, luck and time to soft land both an economy and markets conditioned by once-unthinkable levels of policy stimulus.Meanwhile, household confidence and purchasing power are being eroded by inflation at a time when the high level of savings that was boosted by stimulus programmes is being run down.The external headwinds are also a worry. China’s stubborn adherence to a “zero-Covid” policy in the midst of the highly infectious Omicron variant is undermining both its global supply and demand roles. Europe is also slowing and could well fall into recession should there be a major disruption in gas supply due to the war in Ukraine. Meanwhile, several commodity-importing developing countries are facing the disruptive mix of high food and energy prices, supply uncertainties, tightening financial conditions and an appreciating dollar. The stronger such headwinds become, the bigger the risk of a general financial deleveraging that affects the functioning of markets. Corporate earnings and labour market strength will be key for investors to watch as offsets to these trends.The good news is that, after years of massive distortions, financial markets are correcting to levels where there is more sustainable value. There is also the prospect of the restoration of more traditional correlations in markets. That will bolster the risk-mitigating characteristics of diversified investment portfolios.The bad news is that transition from the prior paradigm of central bank policies is not complete. With the potential coincidence of both demand and supply complications, markets are likely to remain volatile for investors and more unsettling for the real economy. More

Figures from property consultant CoreLogic out on Monday showed prices in the combined capital cities nudged up 0.3% in April from March, as Sydney dropped 0.2% for a second month and Melbourne held steady. Brisbane again fared much better with a rise of 1.7%, while Perth rose 1.1% and Adelaide 1.9%.Values in the regions climbed 1.4% in April, and 24% on the year, amid a shift to country living and greater space. Combined, prices nationally rose 0.6% in April, to be up 16.7% on the year.”A rebound in migration rates as state and international borders re-opened could partially explain the renewed exuberance, along with persistently low advertised stock levels and strong economic conditions,” said CoreLogic’s research director, Tim Lawless.The market had its strongest year ever in 2021 with the notional value of Australia’s 10.8 million homes rising by A$2 trillion ($1.42 trillion) to A$9.9 trillion.The boom was a windfall for household wealth and consumer spending power, but also caused concerns about affordability that are a hot-button issue for Federal elections due on May 21.The market faces more headwinds as the Reserve Bank of Australia (RBA) is widely expected to hike interest rates for the first time in a decade, perhaps as early as its May policy meeting on Tuesday.Rates are currently at emergency lows of 0.1% but financial markets are wagering they could rise to around 2.5% by the end of the year. ($1 = 1.4130 Australian dollars) More

Activity in the sector was held up by resilience in output, overall orders and optimism about the year ahead, even as producers grew more wary of persisting price pressures, the Ukraine war, logistics logjams and the global economic outlook.The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 53.5 in April from the prior month’s 54.1 final.That was largely in line with a 53.4 flash reading. The 50-mark separates contraction from expansion.”Latest PMI data pointed to a sustained expansion in the Japanese manufacturing sector at the start of the second quarter,” said Usamah Bhatti, economist at S&P Global (NYSE:SPGI), which compiles the survey.”The rate of growth eased from March as firms noted softer growth in new orders and a broadly unchanged expansion in production levels.”The PMI survey showed that input prices jumped at the strongest pace since August 2008, pushing manufacturers to raise selling prices at the fastest rate in the survey history.That saw firms’ optimism about conditions for the 12 months ahead to drop to its lowest since July 2020.”Though still optimistic, Japanese goods producers were increasingly wary of the continued impact of price and supply pressures, and also the impact of the war and extended lockdowns in China,” Bhatti said. More

TOKYO (Reuters) – Japanese mother of three Maiko Takahashi was never one to pinch pennies or accept hand-me-downs for her children even though circumstances for her single-income family have always been fairly modest.But times have changed. Nowadays, she has no trouble with used clothes and her pursuit of bargains and scrimping on the most trifling costs borders on the obsessive.”I’ve started to pay close attention to tips on TV shows, like minimising the number of times you open the fridge to save electricity,” said Takahashi, whose family of five lives in suburbs north of Tokyo. “We’ve started to feel the pinch going about things the usual way so I’ve made adjustments.”Takahashi’s behaviour is mirrored by a growing number of consumers and underlines a worrying trend for Japan.After lifting two years of on-and-off coronavirus curbs in March, the government was counting on what’s known as “revenge spending”, pent-up demand triggering a splurge that boosts consumption and a moribund economy, as has been seen in the United States, China and some other major economies.But with energy, food and other living costs soaring – exacerbated in recent months by a sharp decline in the yen and the war in Ukraine – those hopes are fading fast.Facing the prospect of struggling with rising prices, Japan’s famously thrifty consumers are tightening their belts even as they sit on the remains of an estimated 50 trillion yen ($383 billion) – equivalent to 9% of the economy – in “forced savings”, as the Bank of Japan calls it, accrued during the pandemic.Some bigger companies have answered a government call to raise wages but the gains of some 2% will be swallowed up by higher prices of everything from flour, to diapers and beer, economists say. In March, electricity prices in resources-poor Japan jumped 22% from the previous year – the most in more than four decades.The government recently upgraded its assessment of the economy for the first time in four months, citing an expected recovery in spending, but added a caveat that the outlook was clouded.”The chance of a ‘revenge spending’ burst is becoming smaller than we had expected,” a government official said in unusually candid remarks, noting that prospects were especially uncertain beyond the summer.FINAL FEASTWith more than 90% of consumers saying in the latest government survey that they expected everyday goods to become more expensive over the next 12 months, economists say it is no surprise to see behaviour like Takahashi’s.In addition to accepting used uniforms for her son entering kindergarten, and venturing further in search of discounts, the stay-at-home-mum said she has switched to lower-cost private brands (PB) for mayonnaise, ketchup and other food.She’s not alone. The share of so-called PB items for mayonnaise purchases nationwide rose to 22% in March from 18% a year earlier, according to market research firm Intage Inc. Supermarket giant Aeon Co saw PB food sales jump 15% in the six months to February.The “Golden Week” holiday, which began on Friday, is the first in three years without COVID-19 restrictions, and the economy should see a dramatic improvement in spending but that is likely to be the high point for consumption this year, said Daiwa Securities senior economist Toru Suehiro. “The full-fledged impact of rising costs will emerge in the July-September quarter and later, so the Golden Week will probably be the last feast of the year,” he said.The number of holiday travellers is expected to grow about 70% from last year, but still a third short of pre-pandemic levels, according to JTB Corp, Japan’s biggest travel agency.The yen’s fall to two-decade lows would normally be a boon for in-bound travellers, but Japan, fearing COVID, has kept its borders closed to tourists. In 2019, almost 32 million foreign tourists contributed to the economy.Meanwhile, the weak yen has caused pain for many companies by increasing input costs, making them just as cautious as consumers – and reluctant to raise wages.”Prices keep rising and rising for items we can’t live without, while salaries are flat,” Takahashi said. “I’m constantly racking my brains over what I can skimp on next.”($1 = 130.6400 yen) More

(Reuters) – Australia’s “Big Four” banks are set to report a further squeeze on interest margins in their upcoming results dented by growing competition, though the prospect of a recovery aided by central banks’ rate hikes is expected to bolster their outlook.The banks have tussled with increased competition in home lending amid record low rates and borrowers changing to fixed-rate loans, while costs ramp up due to investment in digital capabilities and broader inflation.These pressures will likely be evident in quarterly results of Commonwealth Bank, and first-half reports from National Australia Bank (OTC:NABZY), Westpac, and Australia and New Zealand Banking Group this month.”We remain cautious on banks. The upcoming results are likely to show significantly weaker net interest margins and signs of rising costs,” analysts at Barrenjoey said.”But we would not be surprised if banks were more optimistic in their outlook, especially around the benefits of rising rates… This may provide them with some near-term support.” Still, earnings at top bank CBA and No. 2 lender NAB would likely have benefited from the flurry of new business they flagged in their reports in February, while No. 3 lender Westpac had also progressed with its cost cutting plan.No. 4 lender ANZ, meanwhile, had forecast a first-half hit from softer performance in its markets business. It has also steadily lost Australian home loan market share since 2019.”Lower NIM, flat mortgage book, removal of certain bank fees, weak trading income and higher expenses are not a great combination,” Barrenjoey analysts wrote of ANZ, adding that they expect a “soft” first-half result.In a prelude of things to come, mid-sized Bank of Queensland last month reported a hit to margins from stiff housing loan competition.RATES TO THE RESCUEThe Reserve Bank of Australia has all but said it would raise rates to counter super-charged inflation, while the Reserve Bank of New Zealand has hiked rates at its last four meetings to levels not seen since June 2019.This would benefit banks at a time when the Australian property market is showing some signs of cooling https://www.reuters.com/business/australia-housing-bubble-slowly-deflating-heat-leaves-sydney-melbourne-2022-03-31 after a bumper 22% surge in prices in 2021 due to record low rates and a shift to working from home during the pandemic.”With the RBA cash rate starting to move higher… investor attention is set to switch to the impact of higher rates on revenue growth and net interest margins with slowing lending growth and house prices,” analysts at Citi wrote.ANZ, in its trading update in February, had forecast rising rates in New Zealand would relieve some pressure on margins in the second quarter. More