Economy

A closely watched recession signal flashed red on Tuesday, as investors fretted that the Federal Reserve’s efforts to tame inflation will bring about a sharp slowdown in US economic activity.Two-year Treasury note yields rose above those of the 10-year for the first time since August 2019, inverting a portion of the yield curve monitored closely by Wall Street and policymakers. Inversions typically signal malaise about the economy’s long-term growth prospects and have preceded every US recession in the past 50 years. Typically, a recession has followed in the two years after an inversion of this measure of the yield curve. Two-year yields, which move with interest rate expectations, rose as high as 2.45 per cent, the highest level since March 2019. The two-year yield has risen by 1.64 percentage points this year as the US central bank has tightened monetary policy, including its first rate rise since 2018 in order to combat inflation that’s at a 40-year high. The 10-year yield, which moves with inflation and growth expectations, fell as low as 2.38 per cent. The benchmark yield has also risen this year, albeit at a slower pace, as tighter Fed policy has curtailed inflation and growth forecasts. After inverting, the gap quickly widened and the yield curve turned positive again, where it hovered at about 0.02 percentage points. At the start of the year, it stood at 0.77 percentage points.The spread between five- and 30-year yields, another measure of the yield curve, on Monday inverted for the first time since 2006. Investors argue, however, that the inversion may not be as reliable a recession indicator this time round because the Fed’s massive bond purchases during the coronavirus crisis have skewed the yields. “The yield curve inversion is a factor that will worry markets,” said Gennadiy Goldberg, a US rates analyst at TD Securities. But, he noted that these inversions “may also be distorted due to the enormous Covid quantitative easing programme undertaken by the Fed”. The Fed, as part of its intervention in financial markets during the market collapse in March 2020, began buying huge swaths of US government debt to shore up the economy. The central bank this month ended that $120bn-a-month bond-buying programme and as it has pulled back, the flood of Treasuries to the market has driven prices lower and yields higher. Expectations have increased that the Fed will ratchet higher the pace at which it is tightening monetary policy, with investors girding for the central bank to deliver a half-point rate increase as early as its meeting in May. The central bank typically moves in quarter-point increments, as it did earlier this month, but mounting inflationary pressures have raised the risk of more aggressive action. Some officials have also suggested rates this year need to rise above the so-called neutral level that neither aids or hinders growth and that is forecast to be 2.4 per cent.The effects of the Fed’s intervention may mean that this yield curve inversion is one driven by technical factors in the market, rather than economic fundamentals.The traditional signs of a slowing economy are also not yet present. The US economy last year grew at the fastest annual pace since 1984 as it rebounded from the pandemic-driven recession, which lasted for the first two quarters of 2020. The labour market has also roared back, with strong jobs growth reported in recent months. More

Philadelphia Fed President Patrick Harker said Tuesday that he doesn’t think the U.S. is heading for recession.
His comments come despite fears over an inversion of 10-year and 2-year Treasury yields that has been a harbinger of previous downturns.
Harker said he remains open to the idea of more aggressive rate hikes ahead but favors moving by a quarter-percentage point in May.

Despite on ominous indicator hanging over the economy and higher interest rates on the way, Philadelphia Federal Reserve President Patrick Harker said Tuesday that he doesn’t think the U.S. is heading for recession.
That view, expressed in a CNBC interview, comes in the face of a looming inversion of the 10- and 2-year Treasury yields and market expectations that the Fed is about to embark on a substantial rate-hiking cycle aimed at curbing inflation.

Harker said he thinks the current state of the economy is strong enough to withstand both tighter monetary policy and bond market fears of what that will mean to growth.
“What I’m looking for is a safe landing,” he told CNBC’s Sara Eisen during a “Power Lunch” interview. “It may be bumpy along the way. It was bumpy going up, it’s going to be bumpy coming down. We’ve all been on those planes. We land safely, but it would be a bit of a thrill ride. I don’t want that. So that’s why we’re being cautious and careful about how we implement policy.”
The comments came with the curve about flat between the benchmark 10-year and its 2-year counterpart. The curve has inverted, with the 2-year yield above the 10-year, in most recent U.S. recessions, though it has not been a guarantee.
Harker cautioned against relying too much on one relationship when trying to predict the future.
“The evidence is mixed. If you look at the data, it clearly correlates with recessions. But causation is not very clear,” he said. “So we need to make sure that we’re looking at lots of different data.”

Yield curve inversions are considered an important sign as they reflect investor fear that the Fed will tighten conditions too much so that they restrict further growth. They also tend to inhibit lending from banks who worry that future returns will be lower.
However, U.S. unemployment is back to near where it was pre-pandemic, when the jobless rate hit a 50-year low. Consumers remain flush with cash and property values continue to rise.
But the Fed has been wrestling with inflation levels running at a 40-year high, prompting Harker and his colleagues to embark on a rate-hiking cycle in which markets expect increases at each of the remaining six meetings this year, with possibly as high as half a percentage point.
Harker said he thinks the Fed at its May meeting should increase its benchmark rate by only a quarter-percentage point, or 25 basis points. Markets, though, are expecting a hike of 50 basis points, and Harker said he remains open to the idea depending on the data.
“I wouldn’t take it off the table,” he said of the higher move.
Even with the prospect of much higher rates, he said he thinks the Fed can engineer its way through the current situation, with a focus on bringing down inflation first.
“That’s job one,” he said. “I don’t want to overdo it, though, and try to just stomp the brakes hard and have growth end.”
“I think it will be a bumpy ride, and there may be some problems where we get into a period of below-trend growth for a while,” he added. “But I think we can pull this off.”

WATCH LIVEWATCH IN THE APP More

Downing Street is exploring yet another delay to post-Brexit border checks on goods entering Britain from the EU to prevent what industry has warned would be a supply chain disaster. Ministers are considering whether to push back for the fourth time the introduction of full checks on imports from the EU, which were supposed to come into effect on July 1, as part of a drive to tackle trade friction and the crisis in the cost of living, officials briefed on discussions said.Jacob Rees-Mogg, Brexit opportunities minister, argued at a private meeting this week that one advantage of leaving the EU would be to allow Britain to apply only loose checks on imports. Goods arriving from the EU are not subject to safety and security declarations, while food and plant products are not physically checked.Senior figures in Number 10 are “sympathetic” to the idea of further delays beyond July for the new checks, according to the officials.Boris Johnson, the prime minister, has not yet made a firm decision but is being urged to extend the “grace period” for EU imports by Rees-Mogg and former Brexit minister Lord David Frost.“Ministers are looking at this again in the light of cost of living pressures and supply chain pressures. The war in Ukraine has also changed the economic context,” said one aide, adding that Britain had managed without checks for the past few decades.British exports to the EU have been subjected to the full panoply of EU border checks since the first day of Brexit in January 2020 — while imports from European competitors have enjoyed a far smoother entry into the UK. Checks were first delayed in June 2020, followed by further deadline extensions in March 2021 and again in September 2021.Shane Brennan, chief executive of the Cold Chain Federation, said imposing full veterinary controls on food imports from the EU would lead to “a collapse in supplies” for UK businesses that relied on frequent deliveries of small volumes of fresh food products from the EU. “Given the ongoing inflationary costs and supply chain stress, a further delay makes sense, even if it entrenches the ongoing unfairness between the experience of EU importers and UK exporters,” he said.

James Withers, chief executive of Scotland Food and Drink, said any decision to delay would anger many exporters. “There is a logic given the ripples in the supply chain created by the Ukraine crisis, but there’s no doubt this will stick in the throat of a lot of exporters who are now 15 months into navigating a tsunami of paperwork that our EU competitors are not facing,” he said.However, the Food and Drink Federation, the UK’s main trade body for food processors, said that while full controls were important in the long term, the crisis in Ukraine — which is particularly hurting supplies of wheat, sunflower oil and white fish — justified a delay. Britain’s trade performance has recovered from the pandemic much more slowly than equivalent developed economies. The Office for Budget Responsibility, the independent fiscal watchdog, last week held to its assumption that “leaving the EU will result in the UK’s total imports and exports being 15 per cent lower than had the UK remained a member state”.One person close to Rees-Mogg said that the “self-imposed costs” were out of proportion with the risks on the ground. “At a time of high and rising inflation and supply chain difficulties, we should not introduce burdensome checks that will impose costs on ourselves, on businesses and consumers,” he said. His position echoes that of Frost, who said last month: “We have to put up with EU controls. But . . . we should have a light-touch border to the whole world. That’s a Brexit opportunity.”Rees-Mogg has urged fellow ministers to await the conclusions of government plans to digitise border processes to create “the most effective border in the world” by 2025, which he now has responsibility for. More

Economist Mohamed El-Erian warned that the Fed’s efforts to combat inflation could tip the economy into recession.
Investors are watching the relationship between bond yields for clues on how close the U.S. is to contraction. So far, recession risks appear low.
However, El-Erian said consumers are facing “a cost-of-living crisis.”

The Federal Reserve’s efforts to fight inflation threaten to sink the U.S. into contraction, according to economist Mohamed El-Erian.
Following the U.S. central bank’s decision earlier this month to increase interest rates for the first time in more than three years, markets now expect the Fed to get even more aggressive.

Current pricing suggests a half percentage-point hike in May and a cumulative boost of 2.5 percentage points to benchmark rates through the end of the year, from the near-zero level where they started 2022.
Doing that could take a big toll on U.S. growth, said El-Erian, chief economist advisor at Allianz and president of Queens’ College, Cambridge.
“The bond market believes inflation is too high, the Fed is well behind the curve, and the Fed risks … pushing the economy into recession as it tries to catch up,” El-Erian told CNBC’s “Squawk Box” in a Monday morning interview.

Watching the curves

Indeed, some market measures are indicating that recession risks are building.
Some shorter-term government bond yields are running higher then their longer-duration counterparts, historically a warning sign that investors believe economic growth ahead will slow. For instance, the 3-year Treasury note was running ahead of both the 10-year note and 30-year bond in Monday trading.

However, a more reliable indicator has been the relationship between the 10-year and the 3-month note, and that yield curve is well apart. The spread between those yields at the end of last week was still about 1.93 percentage points, a margin that implied only a small chance of recession over the next year.
Still, El-Erian said consumers will be struggling with inflation in the coming months. The Fed will try to contain inflation with rate hikes that could constrict economic growth.
“We are looking at a cost-of-living crisis. That’s what we are looking at for the next two quarters, three quarters, where the consumer is going to be hit hard by inflation, they’re gonna get hit hard by lower consumer sentiment,” he said.
El-Erian noted that U.S. stocks have held up relatively well so far, as there are still few alternatives for investors.

Economic signs ahead

A slew of data points this week will help shed light on how quickly the Fed needs to move.
The Job Openings and Labor Turnover Survey for February, due Tuesday, will give insight on labor market slack. The previous month’s report indicated a gap of about 4.8 million between job openings and unemployed potential workers.
On Thursday, the Commerce Department will release the Fed’s preferred inflation gauge, the core personal consumption expenditures price index. That is expected to show a 12-month gain of 5.5% in February, above the previous month’s 5.2% and well ahead of the Fed’s 2% goal.
Then on Friday, the March nonfarm payrolls report is expected to show a 5.5% 12-month increase in average hourly earnings. Economists fear a wage-price spiral that could exacerbate the current 7.9% inflation pace, which is the highest in 40 years.
Consumers flush with cash from pandemic-related stimulus programs have been able to absorb much of the higher costs. But El-Erian said inflation and higher rates will take a toll.
“The corporate sector has pricing power. It has pricing power because demand is still solid. So we’ll be able to pass through the higher costs,” he said. “Overall, we are gonna go through a difficult period where the cost of living is going to be on everybody’s mind.”

WATCH LIVEWATCH IN THE APP More

Americans are more worried about inflation than at any point since 1985, and that concern is quickly escalating, according to a new poll, a potential problem for Democrats and the White House ahead of the midterm elections in November.A Gallup poll released Tuesday showed that rising prices were the No. 1 economic concern for Americans, with 17 percent calling inflation the “nation’s most important problem.”Inflation stress divided slightly among income groups — 63 percent of adults earning $40,000 or less were very concerned, compared with 58 percent of those earning $100,000 or more — and starkly along political lines. About 79 percent of Republicans were seriously worried about inflation, versus 35 percent of Democrats.“That reflects the ongoing phenomenon we’re seeing in polarization,” said Lydia Saad, director of U.S. social research at Gallup. She noted that people increasingly answered economic questions differently when their party controlled the White House, and often in a way that reflected the administration’s messaging. “Democrats are just going to downplay problems, just like Republicans did when Trump was in office,” she said.President Biden’s administration initially expected rapid inflation to fade. As it has lingered, the White House has switched to arguing that it is part of a global phenomenon and has been exacerbated by Russia’s invasion of Ukraine. That is accurate but probably not the full story, since inflation in the United States is higher than in many other developed economies.Prices in the United States rose 7.9 percent in the 12 months through February, according to the latest reading of the Consumer Price Index released this month. That was the highest level of inflation since early 1982.Ms. Saad said it might be a “silver lining” that the worry index was lower now than at the start of the 1980s, when about half of American adults ranked rising prices as the nation’s top problem. Inflation had been elevated for years back then, peaking at about 14.6 percent in 1980.Even so, rising prices have been undermining confidence in the overall economy, according to the Gallup numbers and other consumer sentiment readings. Survey data from the University of Michigan shows that Republicans have been more pessimistic about the economy than at any point since 1980. Democrats, while more optimistic, were less confident in March than they had been at any point since Mr. Biden’s 2020 election victory. More

Home prices nationally rose 19.2% year over year in January, up from 18.9% in December, according to the S&P CoreLogic Case-Shiller Index.
The 10-city composite annual increase was 17.5%, up from 17.1% in the previous month. The 20-city composite rose 19.1%, up from 18.6% in December.
Phoenix, Tampa, Florida, and Miami saw the biggest annual gains at 32.6%, 30.8% and 28.1%, respectively.

After cooling off ever so slightly toward the end of last year, home price gains reaccelerated in January.
Home prices nationally rose 19.2% year over year in January, up from 18.9% in December, according to the S&P CoreLogic Case-Shiller Index. The 10-city composite annual increase was 17.5%, up from 17.1% in the previous month. The 20-city composite rose 19.1%, up from 18.6% in December.

Phoenix, Tampa, Florida, and Miami saw the biggest annual gains at 32.6%, 30.8% and 28.1%, respectively. Sixteen of the 20 cities reported higher price increases in the year ended in January 2022 versus the year ended in December 2021.
Washington, D.C., Minneapolis and Chicago saw the smallest annual gains, although they were all still up double digits from a year ago.

A “For Sale” sign is seen in front of a home in Miami, Florida.
Joe Raedle | Getty Images

Tight supply and strong demand appear to be outweighing rising mortgage rates, which would usually take some of the heat out of housing.
While the index is a three-month running average, mortgage rates began to climb in January. The average rate on the 30-year fixed ended 2021 at around 3.25% and ended January at 3.68% according to Mortgage News Daily. It is now flirting with 5%.
“The macroeconomic environment is evolving rapidly. Declining COVID cases and a resumption of general economic activity has stoked inflation, and the Federal Reserve has begun to increase interest rates in response. We may soon begin to see the impact of increasing mortgage rates on home prices,” said Craig Lazzara, managing director at S&P Dow Jones Indices.

Higher mortgage rates have already started to affect sales in the first months of the year. Pending home sales, which measure signed contracts on existing homes, have now fallen for four straight months, according to the National Association of Realtors.
“The monthly payment for a median-priced home has jumped 30% in the past year, far outpacing even fast-rising consumer prices, up almost 8% from a year ago,” said George Ratiu, senior economist at Realtor.com, in a release. “While the small number of homes-for-sale will keep upward pressure on prices as we move through the Spring buying season, I expect conditions to undergo noticeable adjustments in the months ahead.”

WATCH LIVEWATCH IN THE APP More

Job openings last month remained near record levels, and the number of workers voluntarily leaving their positions increased, the Labor Department said on Tuesday.The data, released as part of the agency’s monthly report on job openings, layoffs and quitting, serve as indicators of how much demand there is for workers in the U.S. economy and the extent to which employers are still struggling with labor shortages months after the economy began recovering from the pandemic’s worst damage.There were about 11.3 million job openings in February, essentially the same as the month before and down a little from a record in December, though the number of hires overall edged up by 263,000 last month, to about 6.7 million.After falling during the peak of Covid-19 lockdowns in 2020, the rates at which so-called prime-age workers — those aged 25 to 54 — are working or seeking work has rallied back to prepandemic levels. Yet with the economy growing faster than in decades, demand for labor has outpaced the availability of workers — at least at the wages and benefits employers are offering.There are still roughly three million or so people who have not returned to the work force, according to the government data.“Looking at how poorly our labor force has grown so far this year, if companies want to win the war for talent they need to engage the people who may not be actively seeking work right now, or be the first option people see when they do return,” Ron Hetrick, a senior economist at Emsi Burning Glass, a data and research company, wrote in a note.That echoes the sentiment of many unions and labor activists, who have been saying that even though wage growth has picked up, people aren’t feeling valued enough by employers. It’s led to fresh questions about how bosses might get to know the “love language” of their hires and find sometimes unconventional ways to show them that they care. There are also more straightforward requests: Several progressive economists have noted that employers could, for instance, take some jobs generally expected to be low-wage — such as fast food service and cashiers — and entice workers by offering higher pay and better benefits.Large public companies and small businesses alike often say that they have already substantially raised pay from before the pandemic and that with inflation raging at highs unseen since the early 1980s, raw material and other costs have made business more difficult. An expensive surge in commodity markets suggests that price increases for food and energy could worsen, especially if firms raise prices further.Still, despite widespread frustration with inflation and shortages of some products and materials, some surveys suggest businesses are becoming more optimistic about the future. The MetLife and U.S. Chamber of Commerce Small Business Index recently reached a pandemic-era high, with about three in five of the small business owners surveyed saying their business is in good health. More

At the end of January, Russia held foreign currency reserves worth $469bn. This hoard was born of the prudence taught by its 1998 default and, hoped Vladimir Putin, also a guarantee of its financial independence. But, as his “special military operation” in Ukraine began, he learnt that more than half of his reserves were frozen. His enemies’ currencies ceased to be usable money. This action is not only significant for Russia. A targeted demonetisation of the world’s most globalised currencies has big implications.Money is a public good. A global money — one that people rely upon in their cross-border transactions and investment decisions — is a global public good. But the providers of that public good are national governments. Even under the old gold exchange standard, that was the case. In our era of fiat (government-made) currency, since 1971 that has been even more obviously the case. In the third quarter of 2021, 59 per cent of global foreign currency reserves were denominated in dollars, another 20 per cent in euros, 6 per cent in yen and 5 per cent in sterling. China’s renminbi still made up less than 3 per cent of global reserves. Today, global monies are issued by the US and its allies, including small ones. (See charts.)This is not the result of a plot. Useful monies are those of open economies with liquid financial markets, monetary stability and the rule of law. Yet the weaponisation of those currencies and of the financial systems that handle them undermines those properties for any holder who fears being targeted. Sanctions on Russia’s central bank are a shock. Who, governments ask, is next? What does it mean for our sovereignty?One can object to the west’s actions on narrowly economic grounds: the weaponisation of currencies will fragment the world economy and make it less efficient. That, one might respond, is true, but ever more irrelevant in a world of severe international tensions. Yes, it is another force for deglobalisation, but many will ask “so what?”. A more worrying objection for western policymakers is that using these weapons might damage them. Will the rest of the world not rush to find ways of transacting and storing value that circumvent the currencies and financial markets of the US and its allies? Is that not what China is trying to do right now?

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

It is. In principle, one could imagine four replacements for today’s globalised national currencies: private currencies (such as bitcoin); commodity money (such as gold); a global fiat currency (such as the IMF’s special drawing rights); or another national currency, most obviously China’s. The first is inconceivable: the market value of all cryptocurrencies is currently $2tn, a mere 16 per cent of world foreign exchange reserves, while transacting in cryptocurrencies directly is impossibly cumbersome. Gold can be a reserve asset, but is hopeless in making transactions. There is also no chance of agreeing on a global currency of sufficient weight even to replace reserves, let alone be a global transactions vehicle.This leaves another national currency. An excellent recent pamphlet by Harvard’s Graham Allison and colleagues on The Great Economic Rivalry concludes that China is already a formidable peer competitor of the US. History suggests that the currency of an economy of its size, sophistication and integration would become a global money.So far, however, this has not happened. That is because China’s financial system is relatively undeveloped, its currency is not fully convertible and the country lacks a true rule of law. China is very far from providing what sterling and the dollar provided in their heyday. While holders of the dollar and other leading western currencies might fear sanctions, they must surely be aware of what the Chinese government might do to them, should they displease it. As important, the Chinese state knows that an internationalised currency requires open financial markets, but that would radically weaken its control over China’s economy and society.This lack of a genuinely credible alternative suggests that the dollar will remain the world’s dominant currency. Yet there is an argument against this complacent view, laid out in Digital Currencies, a stimulating pamphlet from the Hoover Institution. In essence, this is that China’s Cross-Border Interbank Payment System (Cips — an alternative to the Swift system) and digital currency (the e-CNY) might become a dominant payment system and vehicle currency, respectively, for trade between China and its many trading partners. In the long run, the e-CNY might also become a significant reserve currency. Moreover, argues the pamphlet, that would give the Chinese state detailed knowledge of the transactions of every entity within its system. That would be an additional source of power.Today, the overwhelming dominance of the US and its allies in global finance, a product of their aggregate economic size and open financial markets, gives their currencies a dominant position. Today, there is no credible alternative for most global monetary functions. Today, high inflation is likely to be a greater threat to trust in the dollar than its weaponisation against rogue states. In the long run, however, China might be able to create a walled garden for use of its currency by those closest to it. Even so, those who wish to transact with western countries will still need western currencies. What might emerge are two monetary systems — a western and a Chinese one — operating in different ways and overlapping uncomfortably.As in other respects, the future promises not so much a new global order built around China as more disorder. Future historians may view today’s sanctions as another step on that [email protected] Martin Wolf with myFT and on Twitter More