Economy

Governments across the world have ramped up borrowing since the COVID-19 pandemic erupted two years ago, as they tried to shield their economies from the fallout. That took global government debt to a record $65.4 trillion in 2021, compared to $52.2 trillion in January 2020, Janus Henderson said. China’s debt rose the fastest and by the most in cash terms, up a fifth or by $650 billion last year, it added. Among large, developed economies, Germany saw the biggest increase in percentage terms, with its debt rising by 15%, almost twice the average global pace.According to Janus Henderson, government debt has tripled in the past two decades but a mitigating factor was low debt servicing costs.With the effective interest rate on all the world’s government debt slipping to 1.6% last year from 1.8% in 2020, debt servicing costs fell to $1.01 trillion.And a strong global economic recovery meant the global debt-to-GDP ratio improved to 80.7% in 2021 from 87.5% in 2020, the report added. Now though, debt costs may rise sharply, the asset management firm forecast, estimating the global interest burden to increase by almost 15% on a constant-currency basis to $1.16 trillion in 2022. “The biggest impact is set to be felt in the UK thanks to rising interest rates, the impact of higher inflation on the large amount of UK index-linked debt, and the cost of unwinding the quantitative easing (QE) programme,” the report said. “As interest rates rise, there is a significant fiscal cost associated with unwinding QE. Central banks will crystallize losses on their bond holdings which have to be paid for by taxpayers.”The Bank of England has raised interest rates three times since December to 0.75%. Financial markets price in rates hitting 2% by the end of this year.With inflation jumping and investors anticipating higher rates from major central banks, sovereign bond yields too have risen sharply. U.S. 10-year Treasury yields, for instance, are up almost 100 basis points this year to 2.45%. The Janus Henderson report said global government bond markets delivered a -1.9% total return in 2021, only the fourth time in 35 years to see a decline. More

Fed Governor Lael Brainard said Tuesday the central bank could start reducing its balance sheet as soon as May and would be doing so at “a rapid pace.”
She also indicated that interest rate hikes could come at a more aggressive pace than the typical increments of 0.25 percentage point.
The Fed already has approved one interest rate increase: a 0.25% hike at the March meeting, the first in more than three years and likely one of many to occur this year.

Lael Brainard, Federal Reserve governor and President Bidens nominee to be the new vice-chair of the Federal Reserve, speaks during her nomination hearing with the Senate Banking Committee on Capitol Hill January 13, 2022 in Washington, DC.
Drew Angerer | Getty Images

Federal Reserve Governor Lael Brainard, who normally favors loose policy and low rates, said Tuesday the central bank needs to act quickly and aggressively to drive down inflation.
In a speech written for a Minneapolis Fed discussion, Brainard said policy tightening will include a speedy reduction in the balance sheet and a steady pace of interest rate increases. Her comments indicated that rate moves could be higher than the traditional increments of 0.25 percentage point.

“Currently, inflation is much too high and is subject to upside risks,” she said in prepared remarks. “The [Federal Open Market] Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”

The Fed already has approved one interest rate increase: a 0.25% hike at the March meeting, the first in more than three years and likely one of many to occur this year.
In addition, markets expect the Fed to lay out a plan at its May meeting for running down some of the nearly $9 trillion in assets, primarily Treasurys and mortgage-backed securities, on its balance sheet. According to Brainard’s Tuesday comments, that process will be swift.
“The [FOMC] will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting,” she said. “Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19.”
Back then, the Fed allowed $50 billion in proceeds to roll off each month from maturing bonds and reinvested the rest. Market expectations are that the pace could double this time around.
The moves are in response to inflation running at its fastest pace in 40 years, well above the Fed’s 2% target. Market expectations are for rate increases at each of the remaining six meetings this year, possibly totaling 2.5 percentage points overall.

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With inflation at a record high 7.5%, the ECB is under increasing pressure to tighten policy, even if rapid price growth is mostly due to soaring oil and gas prices, which are largely outside the bank’s control. But a rate hike would strengthen the euro, so the effective cost of energy would fall since these commodities are mostly denominated in dollars. “Time series models for Germany show that an interest rate increase would decrease headline inflation by 0.2% and heating and fuel prices by up to 4%,” DIW, an influential think tank, said. “At the same time, an interest rate increase would derail industrial production and increase unemployment during an already slow economic recovery,” it added. Although conservative policymakers, including the central bank chief of Germany, are pushing the ECB to put a rate hike on the agenda, the bank has made no commitment on rates, arguing that the war in Ukraine has created exceptional uncertainty. Still, around 60 basis points of rates hikes are now priced in by markets over the course of this year, with investors expecting the minus 0.5% deposit rate back in positive territory for the first time in a decade.The move is still likely to be a dilemma for the ECB given the difficult tradeoffs, DIW argued.”If it decreases inflation, it will also stall economic recovery. Nevertheless, it is crucial that the ECB fulfils its responsibilities and credibly conveys that it will take the necessary action.” More

The SEC conducted a review into the deficiency and found that, as it relates to two adjudicatory matters currently in litigation in federal court, agency enforcement staff had access to certain adjudicatory memoranda they should not have had. The SEC chair immediately notified the other commissioners and started a review, the SEC said in a statement.The access did not impact the staff investigating and prosecuting the cases or the commission’s decision-making in the matters, the review found. The agency’s enforcement and investigative staff tasked with a matter going through agency adjudication proceedings are generally not allowed to participate in the commission’s decision-making in the matter. At issue are proceedings heard by an administrative law judge at the agency. It was not immediately clear from the agency’s statement when the deficiency was first noticed, but the agency noted a control deficiency in a financial report published in November. A review to assess the scope and full impact of the deficiency is still ongoing. More

The Federal Reserve will begin a “rapid” reduction of its $9tn balance sheet as soon as its next policy meeting in May and is prepared to take “stronger” action when it comes to raising interest rates in order to bring down inflation, a senior US central bank official has said.Lael Brainard, who sits on the Fed’s board of governors and is awaiting Senate confirmation to become the next vice-chair, said on Tuesday that the central bank’s “most important task” was to moderate the recent rise in consumer prices, which had disproportionately burdened low- and middle-income families.“It is of paramount importance to get inflation down,” she said in prepared remarks delivered at a conference hosted by the Fed’s Minneapolis branch. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”She also added that if warranted by the economic data, the Fed was prepared to take “stronger action” when it came to tightening monetary policy, suggesting tacit support for more aggressive moves including doubling the pace at which the federal funds rate is raised and delivering half-point rate rises at forthcoming meetings.Wall Street is increasingly anticipating at least two such adjustments in 2022, as a growing number of Fed officials have signalled their willingness to swiftly get to a more “neutral” policy level that neither aids nor constrains growth by the end of the year. Estimates of neutral range from 2.3 to 2.5 per cent.Stronger action could also mean an even faster contraction in the Fed’s holdings of Treasuries and agency mortgage-backed securities, which swelled as the central bank sought to shore up the economy and ensure the smooth functioning of financial markets at the onset of the pandemic. Chair Jay Powell suggested minutes from March’s policy meeting, to be released on Wednesday, would contain details on how swiftly that process could occur. Economists expect an eventual pace of $60bn a month in Treasuries and $45bn a month in agency MBS.In outlining her case, Brainard invoked Paul Volcker, the former Fed chief who tamed inflation in the late 1970s by aggressively tightening monetary policy and in turn causing a painful recession. He previously warned that runaway inflation “would be the greatest threat to the continuing growth of the economy . . . and ultimately, to employment”.Most at risk, she warned, were households with limited resources and tight budget constraints. In a discussion following her remarks, Brainard noted that for a “majority” of workers, increases in consumer prices have outstripped wage growth, meaning reduced purchasing power.Brainard warned Russia’s invasion of Ukraine would put upward pressure on inflation and probably raise already elevated gasoline and food prices. Supply chain bottlenecks could become further extended, especially given new lockdowns that have been announced in China to contain the spread of Covid-19, developments that further underscore the need for the Fed to move in an “expeditious” way to tighten monetary policy.A sell-off in the $22tn Treasury market accelerated on Tuesday, with the yield on the benchmark 10-year US sovereign bond climbing 0.11 percentage points to 2.5 per cent. That put it just below a three-year high last month. While selling was most intense in longer-dated US government debt, yields on policy-sensitive two-year notes also rose, reaching 2.5 per cent.Yields rise when a bond’s price falls.US stocks also slid. The S&P 500 stock index, which had been up marginally before Brainard spoke, closed 1.3 per cent lower on the day. The technology-heavy Nasdaq Composite declined 2.3 per cent.Additional reporting by Eric Platt More

The ECB has kept rates in negative territory since 2014 and has not raised them in more than a decade, but a surge in inflation is now making an increase in the minus 0.5% deposit rate increasingly topical. “Based on the current outlook, so with positive economic growth, we will raise interest rates to 0 by the end of the year,” Wunsch told Belgian magazine Knack. “It’s actually a no-brainer for me.””But I have to say that even within the ECB there has been no discussion about raising interest rates,” he added. Inflation hit a record high 7.5% last month on surging oil prices, but some policymakers still argue that underlying trends are weak and price growth could slip back below the ECB’s 2% target over the medium term.Wunsch took a different view, arguing that the target, even further out in time, has essentially been met, so it is time for the ECB to roll back extraordinary stimulus. He also said that rates could eventually peak at 1.5% or 2%, above the 1% anticipated by markets. The central bank governors of Germany, the Netherlands and Austria, all considered among the most conservative on the rate-setting Governing Council, have also made the case for a rate hike in recent weeks, suggesting that a discussion about a move will soon be on the agenda. Wunsch added that Belgium could suffer a recession if it lost access to Russian gas, but that was still a relatively minor price to pay in the current environment. “That’s not too bad when I see what is happening in Ukraine,” he said. “Even a temporary recession is really just a detail compared to the economic downturn in Ukraine and the thousands of deaths that have already occurred there.” More

Wells Fargo (NYSE:WFC) Securities cut its 2022 earnings per share estimates across the industry on Tuesday, while Barclays (LON:BARC) Plc downgraded the retail sector to a hold-equivalent rating last week. Both were concerned that consumer demand may weaken as prices jump, and Barclays also cited higher input costs for companies.“There is building concern of a potential slowdown in the consumer — as geopolitical events, rising inflation and rising [interest] rates are already impacting consumer sentiment,” Wells Fargo analyst Ike Boruchow wrote in a note. He said annual guidance from the group looks “increasingly unrealistic” and questioned how long consumers can withstand mounting macroeconomic headwinds.The dismal performance of apparel and footwear stocks this year reflects Wall Street’s increasingly negative outlook. The S&P Supercomposite Apparel and Accessories Index is down 19%, versus a 4.6% year-to-date drop in the S&P 500 Index.Pessimism around retail stocks is building just one week before the corporate earnings season starts in earnest. Investors will be closely watching corporate America’s financials to assess how companies have fared amid rising rates and inflationary pressures, Russia’s war in Ukraine and the omicron coronavirus variant.Read more: Goldman’s Kostin Warns Earnings Are Brewing Negative SurprisesBoth Wells Fargo and Barclays downgraded several stocks in conjunction with their broader calls. Wells Fargo cut its recommendations on VF Corp (NYSE:VFC)., the owner of Vans sneakers and North Face apparel, TJX (NYSE:TJX) Cos. and Ralph Lauren Corp (NYSE:RL). VF shares were down as much as 3.7% on Tuesday, while TJX fell 3.1% and Ralph Lauren dropped as much as 4.2%.Barclays last week downgraded Gap Inc (NYSE:GPS)., American Eagle Outfitters (NYSE:AEO) Inc. and Urban Outfitters Inc (NASDAQ:URBN)., as well as online furniture retailer Wayfair (NYSE:W) Inc.“As macroeconomic conditions continue to weaken, we see the end of the ‘buy everything rally,’” CFRA analyst Zachary Warring wrote in a note last week, referring to a period in 2020 and 2021 that saw stimulus and pent-up demand send retail shares broadly higher.Warring recommends investors become more selective and seek out strong brands with proven management teams and consistent growth. He sees opportunities in off-price retailers as consumers return to shopping for deals, and luxury brands, which he expects will continue to have pricing power.©2022 Bloomberg L.P. More

“There will have to be an amendment on Title 42 in order to move the bill,” McConnell said at a news conference. “There are several other amendments that we’re going to want to offer. And so there we’ll need to enter into some kind of agreement to process these amendments in order to go forward with the bill,” he said.U.S. health officials are expected to end what is known as Title 42, a sweeping, pandemic-related expulsion policy that has effectively closed down the U.S. asylum system at the border with Mexico.Republicans argue that doing away with the restrictions, set in place in March 2020 under former President Donald Trump, will encourage more migrants to enter the United States illegally at a time when border crossings are already breaking records.An amendment vote on Title 42 could complicate Democratic plans for a $10 billion COVID-19 relief bill unveiled on Monday. The sum for COVID-19, which dropped international aid from the package, is less than half of the $22.5 billion President Joe Biden had sought. More