Economy

The number of A350s grounded by the airline in the dispute over exposed and damaged lightning protection has reached 23, bringing the value of compensation sought by the carrier to slightly over $1 billion, they said.Neither company had any immediate comment.The two sides have wrangled for more than a year over accelerated surface damage that the airline says raises questions over the safety of the planes, with Qatar’s regulator grounding jets as the problem appears.Airbus, backed by its own regulator, has denied any safety problems and responded to Qatar’s refusal to take any more A350s until the problem is resolved by revoking deals for undelivered A350s, one by one, and axing a separate contract for A321neos.Qatar will on Thursday ask a UK judge to extend a temporary order freezing the decision to cancel the A321neo order pending a final hearing on the A350 case, expected later this year.Bloomberg News reported earlier that Airbus planned to delay a planned increase in A350 production because of the combined impact of the Ukraine war and the Qatar dispute. More

OTTAWA (Reuters) – A record number of Canadian businesses are facing capacity pressures amid intense labor shortages and ongoing supply chain difficulties, with many expecting significant wage and input price growth, a regular Bank of Canada survey said on Monday.The central bank’s Business Outlook Survey Indicator dipped in the first quarter from a record high the previous quarter, but remained far above pre-pandemic levels. The survey was conducted before Russia’s invasion of Ukraine.”The number of firms reporting capacity pressures related to labor or supply chain challenges is at a record high,” the survey said.”Because of persistent capacity pressures and strong demand, firms expect significant growth in wages, input prices and output prices. Plans to increase investment spending and add staff continue to be widespread.”Inflation expectations for the next two years continued to increase, with 70% of firms now expecting inflation to be above the Bank of Canada’s 1-3% control range over the next two years.Canada’s inflation hit 5.7% in February, a 30-year high and the 11th straight month above 3%.Economists said higher inflation expectations bolster the case for the Bank of Canada to hike interest rates by 50 basis points at its decision next week.”If we still needed to cement the case for a half point rate hike in April, the Bank of Canada’s Business Outlook survey provided it, at least in terms of inflation expectations,” said Avery Shenfeld, chief economist at CIBC Capital Markets, in a note.A separate survey of consumer expectations found the general public also anticipates inflation above target for the next two years, before easing. It noted long-term inflation expectations remain well anchored.Money markets estimate a 70% chance the Bank of Canada will go ahead with the larger increase on April 13. A deputy said last month the central bank was ready to act “forcefully” to rein in inflation.The Bank of Canada also did a separate online survey on the impact of Russia’s invasion of Ukraine, which Moscow calls a “special operation,” on Canadian firms. About half said they expect to be affected, mostly due to higher commodity prices and increased supply chain woes. Several firms, notably those tied to energy and other commodities, expect higher sales. The Canadian dollar rose 0.3% to 1.2480 to the greenback, or 80.13 U.S. cents. More

The European Council says further sanctions against Russia are “on their way”. Gruesome images of Russian atrocities in Bucha underline — graphically and horrifically — the need for more action. French president Emmanuel Macron wants the EU to ban imports of the country’s oil and coal. Germany, with its heavy dependency on Russian fuel, has resisted such moves. Could the US tighten economic restrictions on Russia unilaterally, by imposing secondary sanctions?At first blush, the move, mooted recently by US national security adviser Jake Sullivan, appears logical. When foreign organisations transact with entities placed under US sanctions, such as Russian bank VTB, Washington would impose sanctions on them too. That reduces the scope for such businesses to find new counterparties in China, India, Europe or elsewhere.But secondary sanctions are imperfect weapons. The EU created a blocking statute following US sanctions and embargoes on Iran and Cuba. This is intended to protect EU companies from the US extraterritorial threat. It is flimsy because few of them would risk isolation from US markets. China last year implemented its own law “to preserve national sovereignty” by countering US sanctions. This carries a bigger kick than the EU version. Chinese companies are used to being blacklisted by the US and fret less over stand-offs with Washington. Countries can also avoid secondary sanctions using what Tom Keatinge, of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, dubs “burner banks”. These have the sole purpose of dealing with entities that are under sanctions. Examples include the Bank of Kunlun, controlled by state body China National Petroleum Corporation and used as the conduit for oil payments to Iran. Washington imposed sanctions on the bank in 2012, barring it from accessing the US financial system — hardly punitive given Kunlun’s remit.Avoiding US dollars is another defensive tactic. India and Russia are considering a rupee-rouble arrangement for exports. Cryptocurrency payments may also be an option.Secondary sanctions rank alongside selective bans on Russian banks using the payments messaging system Swift. They claim the moral high ground but are of only accretive and compromised usefulness. Secondary sanctions would also fuel the flames of deglobalisation, pushing non-aligned nations away from developed democracies. The only meaningful escalation of the economic war against Russia remains European import embargoes on Russian energy, of the kind advocated by Macron.The Lex team is interested in hearing more from readers. Please tell us what you think the west should do next to put financial pressure on Russia in the comments section below More

JPMorgan CEO Jamie Dimon identified three forces that are likely to shape the world over the next several decades: a U.S. economy rebounding from the Covid pandemic; high inflation that will usher in an era of rising rates, and Russia’s invasion of Ukraine and the resulting humanitarian crisis.  
“They present completely different circumstances than what we’ve experienced in the past – and their confluence may dramatically increase the risks ahead,” he wrote.
“The war in Ukraine and the sanctions on Russia, at a minimum, will slow the global economy — and it could easily get worse,” Dimon wrote. That’s because of the uncertainty about how the conflict will conclude and its impact on supply chains, especially for those involving energy supplies.

Jamie Dimon, CEO of JPMorgan Chase speaks to the Economic Club of New York in New York, January 16, 2019.
Carlo Allegri | Reuters

Jamie Dimon, CEO and chairman of the biggest U.S. bank by assets, pointed to a potentially unprecedented combination of risks facing the country in his annual shareholder letter.
Three forces are likely to shape the world over the next several decades: a U.S. economy rebounding from the Covid pandemic; high inflation that will usher in an era of rising rates, and Russia’s invasion of Ukraine and the resulting humanitarian crisis now underway, according to Dimon.

“Each of these three factors mentioned above is unique in its own right: The dramatic stimulus-fueled recovery from the COVID-19 pandemic, the likely need for rapidly raising rates and the required reversal of QE, and the war in Ukraine and the sanctions on Russia,” Dimon wrote.
“They present completely different circumstances than what we’ve experienced in the past – and their confluence may dramatically increase the risks ahead,” he wrote. “While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes.”

Dimon’s letter, read widely in business circles because of the JPMorgan CEO’s status as his industry’s most prominent spokesman, took a more downcast tone from his missive just last year. While he wrote extensively about challenges facing the country, including economic inequality and political dysfunction, that letter broadcast his belief that the U.S. was in the midst of a boom that could “easily” run into 2023.
Now, however, the outbreak of the biggest European conflict since World War II has changed things, roiling markets, realigning alliances and restructuring global trade patterns, he wrote. That introduces both risks and opportunities for the U.S. and other democracies, according to Dimon.
“The war in Ukraine and the sanctions on Russia, at a minimum, will slow the global economy — and it could easily get worse,” Dimon wrote. That’s because of the uncertainty about how the conflict will conclude and its impact on supply chains, especially for those involving energy supplies.

Dimon added that for JPMorgan, management isn’t worried about its direct exposure to Russia, though the bank could “still lose about $1 billion over time.”
Here are excerpts from Dimon’s letter.

On the war’s economic impact

“We expect the fallout from the war and resulting sanctions to reduce Russia’s GDP by 12.5% by midyear (a decline worse than the 10% drop after the 1998 default). Our economists currently think that the euro area, highly dependent on Russia for oil and gas, will see GDP growth of roughly 2% in 2022, instead of the elevated 4.5% pace we had expected just six weeks ago. By contrast, they expect the U.S. economy to advance roughly 2.5% versus a previously estimated 3%. But I caution that these estimates are based upon a fairly static view of the war in Ukraine and the sanctions now in place.”

On Russian sanctions

“Many more sanctions could be added — which could dramatically, and unpredictably, increase their effect. Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation. I speak later about the precarious nature of the global energy supply, but for now, simply, that supply is easy to disrupt.”

A ‘wake up call’ for democracies

“America must be ready for the possibility of an extended war in Ukraine with unpredictable outcomes. … We must look at this as a wake-up call. We need to pursue short-term and long-term strategies with the goal of not only solving the current crisis but also maintaining the long-term unity of the newly strengthened democratic alliances. We need to make this a permanent, long-lasting stand for democratic ideals and against all forms of evil.”

Implications beyond Russia

“Russian aggression is having another dramatic and important result: It is coalescing the democratic, Western world — across Europe and the North Atlantic Treaty Organization (NATO) countries to Australia, Japan and Korea. […] The outcome of these two issues will transcend Russia and likely will affect geopolitics for decades, potentially leading to both a realignment of alliances and a restructuring of global trade.  How the West comports itself, and whether the West can maintain its unity, will likely determine the future global order and shape America’s (and its allies’) important relationship with China.”

On the need to reorder supply chains

“It also is clear that trade and supply chains, where they affect matters of national security, need to be restructured. You simply cannot rely on countries with different strategic interests for critical goods and services. Such reorganization does not need to be a disaster or decoupling. With thoughtful analysis and execution, it should be rational and orderly. This is in everyone’s best interest.”

Specifically…

“For any products or materials that are essential for national security (think rare earths, 5G and semiconductors), the U.S. supply chain must either be domestic or open only to completely friendly allies. We cannot and should not ever be reliant on processes that can and will be used against us, especially when we are most vulnerable. For similar national security reasons, activities (including investment activities) that help create a national security risk — i.e., sharing critical technology with potential adversaries — should be restricted.”

Brazil, Canada and Mexico to benefit

“This restructuring will likely take place over time and does not need to be extraordinarily disruptive. There will be winners and losers — some of the main beneficiaries will be Brazil, Canada, Mexico and friendly Southeast Asian nations. Along with reconfiguring our supply chains, we must create new trading systems with our allies. As mentioned above, my preference would be to rejoin the TPP — it is the best geostrategic and trade arrangement possible with allied nations.”

On the Fed

“The Federal Reserve and the government did the right thing by taking bold dramatic actions following the misfortune unleashed by the pandemic. In hindsight, it worked. But also in hindsight, the medicine (fiscal spending and QE) was probably too much and lasted too long.”

‘Very volatile markets’

“I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect) and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.”

Fed flexibility

“One thing the Fed should do, and seems to have done, is to exempt themselves — give themselves ultimate flexibility — from the pattern of raising rates by only 25 basis points and doing so on a regular schedule. And while they may announce how they intend to reduce the Fed balance sheet, they should be free to change this plan on a moment’s notice in order to deal with actual events in the economy and the markets. A Fed that reacts strongly to data and events in real time will ultimately create more confidence. In any case, rates will need to go up substantially. The Fed has a hard job to do so let’s all wish them the best.”

On JPMorgan’s surging spending

“This year, we announced that the expenses related to investments would increase from $11.5 billion to $15 billion. I am going to try to describe the ‘incremental investments’ of $3.5 billion, though I can’t review them all (and for competitive reasons I wouldn’t). But we hope a few examples will give you comfort in our decision-making process.
Some investments have a fairly predictable time to cash flow positive and a good and predictable return on investment (ROI) however you measure it. These investments include branches and bankers, around the world, across all our businesses. They also include certain marketing expenses, which have a known and quantifiable return. This category combined will add $1 billion to our expenses in 2022.

On acquisitions

“Over the last 18 months, we spent nearly $5 billion on acquisitions, which will increase ‘incremental investment’ expenses by approximately $700 million in 2022. We expect most of these acquisitions to produce positive returns and strong earnings within a few years, fully justifying their cost. In a few cases, these acquisitions earn money — plus, we believe, help stave off erosion in other parts of our business.”

Global expansion

“Our international consumer expansion is an investment of a different nature. We believe the digital world gives us an opportunity to build a consumer bank outside the United States that, over time, can become very competitive — an option that does not exist in the physical world. We start with several advantages that we believe will get stronger over time. … We have the talent and know-how to deliver these through cutting-edge technology, allowing us to harness the full range of these capabilities from all our businesses. We can apply what we have learned in our leading U.S. franchise and vice versa. We may be wrong on this one, but I like our hand.”

On JPMorgan’s diversity push

“Despite the pandemic and talent retention challenges, we continue to boost our representation among women and people of color. … More women were promoted to the position of managing director in 2021 than ever before; similarly, a record number of women were promoted to executive director. By year’s end, based on employees that self-identified, women represented 49% of the firm’s total workforce. Overall Hispanic representation was 20%, Asian representation grew to 17% and Black representation increased to 14%.”

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“A yield-curve inversion should never be dismissed just because the backdrop has changed,” Seidner, Pimco’s chief investment officer of non-traditional strategies, wrote in a blog post. “The curve’s signal may be less clear than in the past.” Yet some current inversions are “signaling caution, rather than recession.”The Federal Reserve’s plans to likely lift rates at each of its remaining policy meetings this year, after hiking by a quarter-point last month, has unmoored short-term yields and inverted several parts of the Treasury curve. That has brought to the fore an array of opinions over whether an inversion is still the historic foreshadowing event to a recession or not.Two-year Treasury yields exceeded 10-year rates by about 4 basis points at 9:16 a.m. New York time Monday while five-year tenors traded with about a 9 basis-point premium over 30-year yields. Money-market traders are pricing in over 200 basis points of additional Fed rate increases in 2022.“Longer-dated gauges like the two-year/10-year and five-year/30-year Treasury curves can be more valuable than the widely followed three-month/10-year curve, in our view,” Seidner said. “The reason is that the Fed has already laid out its rate-hike projections in its ‘dot plot’ forecast, and looking at market rates over a short-term horizon may be less informative than focusing on what the Fed is saying it will do.”In the Fed’s latest “dot plot,” officials’ median projection was for the target rate to end 2022 at about 1.9% and rise to about 2.8% in 2023. Campbell Harvey at Duke University’s Fuqua School of Business was one of the first to show the historic link of inversions to recessions, focused on the spread between three-month and 10-year yields — which is currently positive by around 185 basis points. High inflation and “geopolitical risk — which we haven’t even felt the economic outcome of yet, besides at the gas pump — is all acting like a tax,” Harvey said last month. “It all indicates slower economic growth.”Read more: Powell-Backed Yield Curve Gives Fed Leeway to Go Max Hawkish (1)Pimco’s Seidner said the most-important sector to watch is the forward curve, which projects the spread between current rates into the future. He notes that the inversion between current one-year rates relative to where they are priced one year in the future in the forward market.“Does this mean a recession is imminent? No, but it is a risk to monitor,” Seidner said. “Pimco is calling for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies. However, the risks of higher inflation and lower growth have increased, along with the risk of recession in 2023,” he said, adding that has sparked the firm to be underweight duration, primarily in the long-end of the curve.©2022 Bloomberg L.P. More

Turkey’s official inflation rate hit its highest level in 20 years as soaring energy and food prices compound the economic challenges confronting President Recep Tayyip Erdogan.The consumer price index rose 61 per cent year on year in March, according to the Turkish statistical institute — up from 54 per cent in February and leaving it at the highest level since March 2002.Food costs, which make up about a quarter of Turkey’s inflation basket, rose 70 per cent year on year. Energy costs rose almost 103 per cent and transport costs rose 99 per cent as a jump in commodity prices caused by Russia’s invasion of Ukraine took its toll on a country that imports almost all of its oil and natural gas supplies.Separate data released on Monday showed that the producer price index, which reflects costs for manufacturers, rose almost 115 per cent year on year. Responding to the inflation figures, finance minister Nureddin Nebati said his country was going through an “extraordinary period” as a result of two years of the coronavirus pandemic followed by the war in Ukraine.Opposition politicians claimed that true inflation was even higher than the official numbers. Ali Babacan, a former economy minister who now leads an opposition party, described price rises as “out of control.”Veli Agbaba, an MP with the opposition Republican People’s party, said the country was heading “step by step towards hyperinflation” — often defined as annual inflation of more than 50 per cent for several consecutive months. Goldman Sachs analysts said they expected the pace of price rises to exceed 65 per cent “and remain above this rate for most of 2022” before declining to around 45 per cent in December.Even before the Russian invasion of Ukraine caused commodity prices to soar, Turkey was grappling with the highest inflation since Erdogan’s party came to power almost two decades ago.The central bank slashed its benchmark rate by a total of 5 percentage points in the final months of last year as Erdogan, a self-described “enemy” of high interest rates, ordered policymakers to prioritise economic growth despite growing pressure on prices.Polling suggests that spiralling living costs have hit support for the Turkish leader, who built much of his early electoral success on delivering economic prosperity for millions of people. But Erdogan, who rejects the established economic orthodoxy that high interest rates help to cool inflation, has refused to allow the country’s central bank to raise borrowing costs.

With the central bank’s benchmark lending rate set at 14 per cent, real interest rates stand at minus 47 per cent once March’s inflation rate is taken into account. The deeply negative real interest rate risks putting further pressure on the lira, which has been the worst-performing emerging market currency after the Russian rouble so far this year, losing about 9 per cent of its value against the dollar. MUFG bank warned that the latest inflation data would “further undermine confidence” in the Turkish currency, adding that monetary policy settings were “way too loose to combat inflation risks”. Nebati told an event in the north-western city of Bursa that supply chain problems in agriculture and energy, in particular, had created inflationary pressures.He insisted that Ankara was taking steps to “permanently” bring down inflation, pointing to the contentious state-backed scheme that seeks to lure savers back to the lira by promising to protect them from exchange rate risk. The government has also announced several rounds of VAT cuts, along with a 50 per cent rise in the minimum wage, in an attempt to limit the pain on households.Analysts warn that the war in Ukraine could also hit Turkey’s tourism sector, which relies on both Ukrainian and Russian visitors and serves as a vital source of foreign currency for the country’s economy. More

Kishida’s government should unleash as much as $400 billion in public spending over the next five years to boost medical and anti-disaster investment, businessman George Hara also told Reuters in an interview on Friday.The vision of Hara, who heads an organisation that aims to reduce poverty around the world, likely served as a backbone of Kishida’s “new capitalism” agenda through which the premier is pushing for greater wealth distribution.As the U.S. Federal Reserve and other central banks move forward with hiking interest rates, the Bank of Japan (BOJ) should follow along to avoid Japan’s yield spreads widening too much, according to Hara, who published a book in 2009 also called “New Capitalism”.”The yen is weakening on yield differentials, so there’s no problem if rates in Japan rise,” said Hara, who added that Japan’s monetary policy should move in line with the rest of the world.Keeping rates around zero was negative for the many people in Japan who rely on savings or pensions to get by, Hara said. He added that those who would be hurt by higher rates in Japan were likely financial players such as hedge funds and high-frequency traders.Hara got to know Kishida during the premier’s 2012-2017 stint as foreign minister when Hara was serving as adviser to Japan’s Cabinet Office, which oversees the government’s long-term economic planning.Hara, who also served as a finance ministry adviser for four years through 2010, said the government should ramp up spending on medical and anti-disaster infrastructure by as much as 10 trillion yen ($81.55 billion) a year over five years.Kishida has so far ordered his cabinet to put together a relief package to offset the economic blow from rising energy prices, which would be funded by special reserves.The premier has also faced pressure, including from his party’s ruling coalition partner Komeito, to compile an extra budget to enlarge the size of that spending.Japan entered the coronavirus pandemic already saddled with debt more than double the size of its $4.6 trillion economy, making it the industrial world’s most-indebted nation as a result of decades of massive spending aimed at reviving growth.($1 = 122.6300 yen) More

CAIRO (Reuters) – Gulf Arab states are channelling up to $22 billion to Egypt to help it overcome a currency crisis, the third such rescue in a decade, as analysts watch for greater exchange rate flexibility to avert future crises. The central bank allowed Egypt’s pound, which had been stable since November 2020, to drop by 14% against the dollar on March 21 after Russia’s invasion of Ukraine prompted investors to withdraw billions of dollars from Egyptian treasury markets. Last week Saudi Arabia said it had deposited $5 billion with Egypt’s central bank and would make additional investments that could bring as much $10 billion in foreign currency into Egypt. Qatar has pledged investment deals worth $5 billion, Egypt’s cabinet said, and details on the purchase of stakes worth a reported $2 billion by Abu Dhabi sovereign fund ADQ are expected soon.”The flurry of Gulf investments into Egypt is reminiscent of the period after the ousting of President Morsi in 2013 when the Gulf pledged $23 billion in financial aid,” said James Swanston of Capital Economics. Saudi Arabia, the United Arab Emirates and Kuwait sent Egypt $23 billion in grants, cash deposits and fuel shipments in the 18 months after Abdel Fattah al-Sisi, then army chief and now president, led the overthrow of Islamist president Mohamed Mursi in 2013. That aid allowed Egypt to put off an IMF accord and spend more on supporting the currency, which came under severe pressure after the 2011 uprising that ended Hosni Mubarak’s 30-year rule. During a second currency crisis in 2016 Egypt devalued the pound by half, and Saudi Arabia deposited about $3 billion and the UAE $1 billion with the central bank, setting up an IMF accord in November 2016. Egypt, which continued to grow during the coronavirus pandemic but saw its current account deficit widen as import costs rise and tourism receipts dwindle, said last week it was in talks with the IMF for potential funds and technical support to hedge against the effects of the latest crisis.Last month Sisi visited Saudi Arabia and hosted the UAE’s de-facto ruler in Sharm el-Sheikh, as Egypt reinforced ties with Gulf allies and participated in an emerging Arab-Israeli axis.HARD ASSETS This time around, Gulf countries seem to be toughening conditions by seeking hard assets in addition to central bank deposits, a demand that could increase the cost to Egypt, analysts said.Inflows from Cairo’s Gulf allies would reassure the IMF and encourage foreign investors to return to Egypt’s high-interest, short-term treasuries, leaving the country still vulnerable to global financial shocks, said Amr Adly, an assistant professor at the American University in Cairo. “This is a message that we have rich friends, and that these rich friends are willing to give up money in times of need,” he said. Egypt’s currency could come under more pressure as higher global commodity prices feed into inflation, putting even more strain on the pound, other analysts said. “We continue to see a more flexible FX regime as critical to Egypt’s long-term external account vulnerabilities,” HSBC said in a note. “But with the bilateral inflows providing relief and seemingly having no policy conditions attached to them, the pressure for substantive change to the FX regime may be set to fade,” it added.On the day of the devaluation, the central bank’s Monetary Policy Committee stressed “the importance of FX flexibility to act as a shock absorber”.Egypt’s pound was at 18.22 to the dollar on Monday, just above the 18.17 to the dollar it fell to on March 21. Monica Malik of Abu Dhabi Commercial Bank said that because Egypt had exceeded its IMF borrowing quota, any new assistance could involve funding from other multilateral institutions and bilateral components such as Gulf Cooperation Council countries. “The GCC support measures are likely to be supportive for Egypt meeting the IMF’s requirement under its exceptional access criteria,” she said. More