Economy

The Senate could vote on the emergency spending package next week, but the House will be on recess. Congress could finish by the week of May 9 and send it to Biden for his signature. But if Democrats insist on attaching long-stalled funding for Covid vaccinations and treatment to the package, action could be delayed indefinitely.  “That’s not going to happen. That’s an awful way to do business,” Senator Jim Risch of Idaho, the top Republican on the Foreign Relations Committee, said about combining the two spending requests.Senate Democrats and Republicans previously hashed out a $10 billion compromise on Covid funding, but the effort stalled earlier this month when Republicans demanded a vote on an amendment that would reverse a decision to lift pandemic-related restrictions on migration across the southern border, known as Title 42. Vulnerable swing-state Senate Democrats have come out against lifting Title 42 and could feel compelled to approve a Title 42 amendment. Once the provision is part of the bill, that could poison the measure with Democrats in the closely divided House. Utah Republican Senator Mitt Romney, who negotiated the Covid relief package with Majority Leader Chuck Schumer, said senators still want to vote on extending Title 42. “I think the prospects of each being passed would be greater if they were kept separate and if each had the potential for amendments,” he told reporters. Biden urged Congress to tie the two together in his request. “Let’s get both of these critical tasks done,” he said Thursday at the White House.That has the support of many Democrats. Senate Health Committee Chair Patty Murray told reporters that Covid aid should be included with the Ukraine package.“It needs to get done. We need to have testing and new vaccines developed,” the Washington Democrat said. The administration’s proposal includes $20.4 billion in military and security assistance for Ukraine, $8.5 billion in economic assistance to help support the government in Kyiv, and $3 billion for humanitarian assistance and global food security, according to a White House statement.White House officials said the funding would cover Ukraine costs through Sept. 30, the end of the current fiscal year.The Ukraine aid generally drew support from key Republicans, who stressed the urgency of the situation on the ground. “There is a desperate need for this assistance. We can’t play politics with this. We have to get this done,” Senator Rob Portman of Ohio said.“The sooner the better on Ukraine,” Alabama Senator Richard Shelby, the top Republican on the Appropriations Committee, said.The top Republican on the Armed Services Committee, Jim Inhofe of Oklahoma, said he is “pretty satisfied” with the request for the military although he had expected higher levels prior to the announcement.©2022 Bloomberg L.P. More

As long as U.S. yields keep rising and the Japanese monetary authority sticks to its main yield curve control settings, the yen will remain under pressure as rate differentials play in the dollar’s favor, according to the bank.“We find it hard to see intervention driving a sustained appreciation without any shift in yield curve control expectations,” the firm’s New York-based strategist Karen Reichgott Fishman wrote in a note. “With risks to yields still skewed to the upside, FX intervention seems likely to be less effective.”The yen extended its decline to a 20-year low, breaching the highly-anticipated 130 mark against the dollar, as the BOJ pledged to buy an unlimited amount of bonds every day to cap yields while also delivering a strong message on its super easy stance. The slump led Japan’s finance ministry to step up, vowing to respond “appropriately” to the abrupt plunge in the currency. For Fishman, if the yen keeps depreciating there’s a “high risk of intervention,” based on past behavior of the central bank. The bulk of the BOJ interventions occurred when the yen was trading in the 127 to 130 per dollar range. If the monetary authority reviews the yield curve control settings and Japan’s rate differential to the U.S. narrows by 40 to 45 basis points, the yen could strengthen as much as 3%, according to Goldman. However, the bank doesn’t expect an immediate convergence of rates to the fair value, meaning the impulse to the currency would likely be smaller. ©2022 Bloomberg L.P. More

The White House dismissed a slump in first-quarter growth that was driven by a quirk in inventories and a jump in imports, emphasizing that Thursday’s report on gross domestic product also pointed to underlying strength in consumer spending.G.D.P. declined 0.4 percent in the first quarter after adjusting for inflation, or 1.4 percent on an annualized basis, the Commerce Department said Thursday. Companies had stockpiled inventories in the fourth quarter and built them more slowly at the start of the year, and imports far outstripped exports as Americans bought goods from abroad, driving the decline.“While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength,” President Biden said in a statement following the release, referring to President Vladimir V. Putin of Russia. Mr. Biden also noted that “consumer spending, business investment, and residential investment increased at strong rates.”Mr. Biden and Democrats are facing a challenging midterm election year as inflation runs at its fastest pace in four decades, chipping away at household budgets and eroding consumer confidence. At the same time, the Federal Reserve is raising interest rates to try to keep rapid price increases from becoming permanent, which could begin to meaningfully cool down the economy just as voters head to the polls.The administration has tried to pin high inflation on Russia’s invasion of Ukraine. While the war has pushed gas and other commodity prices higher, inflation was high even before Russia’s attack.Republicans have seized on rising prices to blast Mr. Biden’s economic policies. The decline in growth at the start of the year gave them room to ramp up that criticism.“Accelerating inflation, a worker crisis, and the growing risk of a significant recession are the signature economic failures of the Biden administration,” Representative Kevin Brady, a Texas Republican, said in a news release on Thursday.Representative Kevin McCarthy of California, the House Republican leader, also blamed Democrats for the drop in growth and 40-year high inflation levels.“In 15 months, one-party Democrat rule has squandered America’s recovery and left you paying the price,” Mr. McCarthy wrote on Twitter.The Biden administration’s 2021 economic stimulus, which sent checks to households and provided other relief at a time when the job market was already recovering, has been criticized by economists for helping to stoke excessively strong consumer demand. That probably ramped up inflationary pressures as the economy reopened, some research has suggested.Republicans often seize on that to argue that the burst in inflation is the administration’s fault. But administration officials point out that their policies helped to drive a swift recovery, came at an uncertain moment, and built on a pandemic response started under the Trump administration.In a speech on Thursday, Treasury Secretary Janet L. Yellen defended the scale of the efforts to support the economy. She recalled the dire economic projections in the early days of the pandemic and said that the spending was needed to avert a worst-case scenario, though some economists warned that the final installation in 2021 was too much and too poorly targeted even at the time of its passage.“Throughout 2020, and into 2021, the path of the pandemic, including its severity and the role of future viral strains could not be predicted,” Ms. Yellen said at an event at the Brookings Institution held by the Hamilton Project and Hutchins Center. “Given this uncertainty, the recovery packages sought to protect against tail risk.” More

The US dollar surged to its highest level in two decades on Thursday as investors ramped up bets that aggressive interest rate rises from the Federal Reserve will leave other big central banks trailing far in its wake.The dollar index, a gauge of the US currency’s strength against a basket of other developed world currencies including the euro, the yen, and the pound, climbed as much as 0.9 per cent to just under 104, its strongest level since 2002.Thursday’s move brings the dollar’s gains to more than 8 per cent this year, as markets position for a growing gulf in monetary policy between the US and other major economies. The immediate catalyst for the move came from the Bank of Japan, which on Thursday underlined its determination to buck the global trend towards tighter monetary policy by sticking with its promise to keep bond yields close to zero. The euro and sterling have also suffered as investors have increasingly begun to question whether the European Central Bank and Bank of England will be able to lift interest rates very far this year, with the eurozone’s energy-importing economy threatened by high oil prices and the fallout from Russia’s invasion of Ukraine. The European single currency fell to a new five-year low of $1.047, while the pound sank to its weakest in almost two years at $1.242.At the same time, the recent devaluation of China’s currency as the country battles a Covid resurgence has cast a shadow over the outlook for global growth, further boosting the dollar, which tends to benefit when investors shun risky assets.“We had two decades of the benefits of low inflation, but now central banks are trying to win back their inflation-fighting credibility,” said Jordan Rochester, a foreign exchange strategist at Nomura. “But the ECB is facing stagflation and will struggle to keep with the Fed, and the BoJ isn’t even coming to the party. With lower exposure to China, and lower exposure to Ukraine, the US stands out as resilient.”Markets are pricing in half percentage point interest rate rises from the Fed at each of its next three meetings, as the central bank tries to curb the highest inflation rate in decades — despite data showing the US economy unexpectedly contracted in the first quarter.The ECB is also expected by investors to begin raising interest rates later this year. But currency traders may start to question those expectations the longer the Ukraine conflict goes on, potentially dragging down the euro even further, according to Rochester. “Parity with the dollar is now a conversation that investors want to have,” he said. More

Britain has already launched over 30 public consultations, including on reforming insurance rules on Thursday, to keep London a globally competitive financial centre after being largely cut off from the European Union due to Brexit.”The debate has moved on from alignment with the EU in exchange for future access. Instead, the UK should focus on closer alignment and cooperation with the U.S. and with other markets around the world,” the joint report from New Financial in London and the Atlantic Council in Washington said.Britain should focus on “low-hanging fruit” such as faster tweaking of inappropriate rules inherited from the EU, but be wary of going above and beyond standards implemented internationally, the report said.The report said Britain’s capital markets have the potential to grow by up to 40% if it can close the gap with the United States, this equates to an additional $75 billion annually. More

China’s zero-Covid policy risks creating even greater economic damage, experts have warned, despite the Omicron wave receding in several regions. Covid-19 cases in six provinces, including Shanghai, Heilongjiang and Jilin, have fallen over the past seven days after many residents were prevented from leaving their homes for weeks, suggesting that the worst of the Omicron outbreak could be over for regions that were hit early. But even as cases wane in the most badly affected cities, authorities are still imposing intercity travel restrictions that are clogging up vital transport links between suppliers and manufacturers. “The supply chain impact from this lockdown will be at least as bad, if not worse, than in spring 2020,” said Lu Ting, chief China economist at Nomura. “Wuhan as an industrial base is not as important as Shanghai,” he added, explaining the city and the surrounding Yangtze River Delta area were home to the country’s automotive, semiconductor and textile industries. Lu added that the timing of this Omicron wave, which started in March, was also worse for economic growth than the first coronavirus outbreak when its manufacturing and construction sector was in a lull because of the lunar new year holiday. Logan Wright, head of China markets research at Rhodium Group, a consultancy, said that even though some authorities were beginning to ease restrictions within cities, it was not a “cause for relief” for manufacturers, which rely on the free flow of goods between metropolises. Wright estimated that inter-city road traffic in Jiangsu and Zhejiang, both of which border Shanghai, had plummeted about 70 per cent and 50 per cent respectively this week compared with 2021. The Omicron surge occurred at a delicate time for the country’s economy following a debt crisis at several large real estate companies that spread across the property sector. Beijing is targeting growth of 5.5 per cent this year, which would be the lowest annual rate in three decades. “The deterioration of the property sector has been accelerated by lockdowns. When people are unable to move around, it has a knock-on impact on the service sector and then on incomes,” said Wright. The warnings followed stinging criticism of the government from the founder of one of Asia’s biggest private equity investors. Weijian Shan, whose PAG group manages more than $50bn, said Beijing’s policies had caused “deep economic crisis” comparable to the global financial crash.China’s strict measures are also having a ripple effect beyond its borders, with manufacturers struggling to get crucial components on time. This week, General Electric said “significant supply chain constraints” had resulted in lower output in its commercial aircraft engines business. According to logistics monitoring group FourKites, ships in Shanghai are waiting on average 8.9 days for cargo to change hands, an increase of 162 per cent compared with March 12, just before the city went into a partial lockdown.“This is exacerbating global inflation, with businesses having difficulty getting components from the Chinese manufacturing sector,” said Wright.

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Large electronics makers, including Apple, HP and Dell, could face manufacturing delays with big parts of their supply chain located in badly hit regions around the Yangtze River Delta. A Nikkei Asia analysis revealed that about half of Apple’s top 200 suppliers had facilities in and around Shanghai, where lockdown restrictions have disrupted production and logistics networks. Shanghai authorities have started to allow some people in neighbourhoods with no infections to leave their homes, but much of the city’s 25mn residents remain under lockdown. The financial hub announced more than 10,600 cases on Thursday, the fifth consecutive day reported infections have fallen.

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But as cases in the worst-affected regions during the initial Omicron outbreak have plateaued or started to fall, four provinces — including Beijing and Shandong — remain on high alert as infections rise. The capital reported 50 local infections on Thursday for tests that were administered on Wednesday after the authorities ordered three rounds of citywide tests for its 20mn residents this week.Beijing hopes to avert a Shanghai-style protracted lockdown and instead clamp down on the chains of community transmission much like the manufacturing hub of Shenzhen managed to do in March. As some regions begin to ease curbs, Goldman Sachs estimated that areas that contributed 15 per cent of China’s gross domestic product were under partial or full lockdown, down from 35 per cent in late March. Additional reporting by Xueqiao Wang in Shanghai More

The U.S. economy contracted in the first three months of the year, but strong consumer spending and continued business investment suggested that the recovery remained resilient.Gross domestic product, adjusted for inflation, declined 0.4 percent in the first quarter, or 1.4 percent on an annualized basis, the Commerce Department said Thursday. That was down sharply from the 1.7 percent growth (6.9 percent annualized) in the final three months of 2021, and was the weakest quarter since the early days of the pandemic.The decline was mostly a result of the two most volatile components of the quarterly reports: inventories and international trade. Lower government spending was also a drag on growth. Measures of underlying demand showed solid growth.Most important, consumer spending, the engine of the U.S. economy, grew 0.7 percent in the first quarter despite the Omicron wave of the coronavirus, which restrained spending on restaurants, travel and similar services in January.“Consumer spending is the aircraft carrier in the middle of the ocean — it just keeps plowing ahead,” said Jay Bryson, chief economist for Wells Fargo.But choppy waters may lie ahead. The first-quarter data mostly predates the spike in gas prices that has accompanied Russia’s invasion of Ukraine and the lockdowns in China that have threatened to further disrupt global supply chains. The Federal Reserve in March raised interest rates for the first time since the pandemic began, and several more rate increases are expected this year as policymakers seek to tame the fastest inflation in four decades.“We are watching a bunch of seismic changes in real time,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution.The biggest challenge facing the economy is inflation. Consumer prices rose at a 7 percent annual rate in the first quarter, and Americans’ after-tax incomes, adjusted for inflation, fell for the fourth quarter in a row. So far, higher prices have done little to dampen consumers’ willingness to spend, but that will change if inflation keeps outpacing income gains, said Beth Ann Bovino, chief U.S. economist for S&P Global.“There’s a tipping point,” she said. Sometime this year, she added, “I’m expecting to see households starting to respond either by trading down, looking for deals, being less willing to pay higher prices.” More

The European Central Bank has issued a mea culpa for persistently underestimating inflation, blaming its increasingly large forecast errors on soaring energy prices, supply chain bottlenecks and a faster economic rebound from the pandemic.The ECB said in a paper published on Thursday that it had tried to learn from its mistakes by improving its models. But it warned that the fallout from Russia’s invasion of Ukraine and the further lifting of Covid-19 restrictions meant that inflation would “remain very challenging to forecast in the near term”.Inflation has consistently risen faster than the ECB predicted for the past year, hitting a eurozone record of 7.4 per cent in March, and stirring up criticism even from members of the central bank’s own governing council, about the weakness of its forecasting models. Data published on Thursday showed German inflation increased to a new 40-year-high of 7.8 per cent in April, while Spanish inflation fell from a 37-year high owing to lower electricity and fuel prices. The ECB made its worst ever inflation forecast in December when it predicted eurozone consumer price growth would fall to 4.1 per cent in the first quarter of this year. Instead it shot up to 6.1 per cent, prompting the ECB to accelerate its plans for stopping net bond purchases and opening the door to a potential interest rate rise as early as July.The ECB’s inflation target is 2 per cent.Eurostat is on Friday due to publish its flash estimate of eurozone inflation in April, which is expected to remain close to March’s record level. Luis de Guindos, ECB vice-president, said on Thursday that the peak of eurozone inflation was “very close” and predicted it would decline in the last six months of this year.The ECB said its poor record in forecasting inflation was mostly due to “unexpected developments in energy prices, coupled with both the effects of reopening following the removal of coronavirus-related restrictions and the effects of global supply bottlenecks.”Wholesale gas increased more than six times in the year to the fourth quarter of last year, while wholesale electricity prices rose almost fivefold in the same period. “The exceptional increase in energy prices was largely unanticipated by market participants,” it said, adding that its assumptions were set “according to market-based futures”.The impact of wholesale energy prices on consumer markets had come much quicker than it expected too. “For electricity, wholesale prices were passed on to consumers almost immediately in some countries, despite this pass-through historically having taken three to twelve months,” it said.For many years, the ECB had overestimated future inflation, but Thursday’s paper said its underestimation of price growth started in the first quarter of last year and had “become more pronounced since the third quarter of 2021”.But it added that “international institutions and private forecasters have recently made similarly large errors” and its record was no worse than those of the US Federal Reserve and Bank of England. The Fed stopped insisting inflation was “transitory” last November. Unlike the ECB, both the Fed and the BoE have raised rates in response to price pressures. The ECB said “recent developments imply the need for a more detailed assessment of the energy market,” adding that it had updated its models to include separate assumptions for wholesale gas and electricity prices, to account for their recent decoupling from oil prices.

Inflation in Germany was 7.8 per cent in April, up from 7.6 per cent in March, according to an estimate published on Thursday by the federal statistical agency, which said growth in energy prices slowed to 35.3 per cent, down from 39.5 per cent in the previous month.Spain’s statistics office estimated inflation in the country fell in April to 8.3 per cent, down from 9.8 per cent in March, which was its highest level since 1985. But core inflation in Spain, excluding energy and processed food prices, continued to rise to a 27-year high of 4.4 per cent.Markus Gütschow, an economist at Morgan Stanley, said the ECB “may take some relief” from signs that inflation is nearing its peak, which “could take some pressure off to hike as early as July . . . but the fact that core pressure continues to build is clearly a worrying sign for policymakers”. More