Economy

WASHINGTON (Reuters) -U.S. Senate Republican leader Mitch McConnell said on Tuesday that Republicans largely support President Joe Biden’s actions toward Russia over its invasion of Ukraine, but that lawmakers have hit a snag in efforts to agree on aid to Kyiv.”I think there’s broad support for the president in what he’s doing now. Our biggest complaint is, what took him so long?” McConnell told a press conference after the Biden administration ratcheted up sanctions against Russia and its central bank. “Much of this might have deterred the aggression in advance. But, yes, we’re all together behind the Ukrainian people. We’re thrilled at the changes that have occurred within NATO, and I think I’ve seen our country pretty unified. As a matter of fact, the whole world seems to be unified,” McConnell said.The White House is seeking $6.4 billion in humanitarian and security aid from Congress for Ukraine. Democrats intend to include the funding in an omnibus spending bill that lawmakers in the House of Representatives expect to vote on next week.But McConnell said talks have bogged down over the defense segment of the Ukraine aid package, which he said Democrats wanted to fund from a defense spending level agreed to before the invasion.”We’re not going to do that,” McConnell told reporters, adding that in an emergency, the process should be different.”We’ve hit a snag,” he said.Before Russian forces invaded Ukraine last week, McConnell was among a chorus of Republicans calling on Biden to impose sanctions against Moscow in hopes of dissuading aggression by Russian President Vladimir Putin.Other Republicans continue to blast Biden for what they claim to be weak leadership and have used the Ukraine crisis to stump for longstanding Republican policies that include reducing environmental regulation and boosting fossil fuel production.McConnell also rejected former President Donald Trump’s characterization of Putin’s actions in Ukraine as “genius” and “pretty savvy.””What President Putin is, is a ruthless thug who’s just invaded another sovereign country and killed thousands of innocent people. That’s what President Putin is,” McConnell said when asked about Trump’s remarks. More

Timing is not in the president’s favor as elections that could cost his party control of Congress approach, and inflation has yet to fade.[Follow for live updates on Biden’s 2022 State of the Union address.]President Biden is expected to devote much of his State of the Union address to emphasizing how far the economy has come since the pandemic recession, with plentiful jobs and rising wages. But he will also focus on his plans to help slow rapid inflation, underscoring the challenge Democrats face ahead of the midterm elections: Inflation is painfully high, voters are angry, and the tried and true way to bring prices down is by slowing growth and hurting the labor market.Mr. Biden will outline a four-part plan for beating back rapid price increases, including encouraging corporate competition and strengthening a supply chain that has struggled to keep up with consumer demand. Specifically, he will detail an effort to drive down ocean shipping costs, which have soared during the pandemic.But White House policies have historically served as a backup line of defense when it comes to containing inflation, which is primarily the Federal Reserve’s job. The central bank is prepared to move swiftly in the coming months to raise interest rates, making money more expensive to borrow and spend. Higher rates are meant to slow hiring, wage growth and demand enough to tamp down price increases.It is possible that inflation could cool so much on its own this year that the Fed will be able to gently slow the economy toward a sustainable path. But if price gains remain rapid, the Fed’s playbook for combating overheating is by inflicting economic pain.That is why inflation — which is running at the fastest pace in 40 years — is a major liability for the Biden administration. It is undermining consumer confidence by chipping away at paychecks and causing sticker shock for consumers trying to buy groceries, couches or used cars. And the cure could slow a solid economic rebound just as Democrats are trying to make their pitch for re-election to voters.“The biggest problem for President Biden is that there’s no good way to message inflation,” said Jason Furman, a Harvard economist and former White House economic official during the Obama administration. “There’s not a lot that he can do about it, but he can’t get up there and say: The only solution here is patience and the Federal Reserve.”Instead, Mr. Biden plans to argue that his administration’s policies can help to cool down inflation at less of a cost to the economy, by expanding its capacity to produce goods and services, according to White House excerpts from his prepared remarks.“One way to fight inflation is to drive down wages and make Americans poorer,” he will say, referencing the way that central bank policy works. “I have a better plan to fight inflation.”Mr. Furman said that while the solutions the president was expected to lay out — ideas to improve supply chains, produce goods more efficiently, and expand work force opportunities — were “the right things” for the administration to do, the nation should not be “under any illusion that it is going to add up to a lot” in terms of cooling rapid price gains.The president is also expected to use his remarks on Tuesday to try to refocus voters on the economic wins of his presidency.The economy has added 6.6 million jobs back since Mr. Biden took office, unemployment is poised to fall below 4 percent and growth has been more rapid than in many other advanced economies. The strength and scope of the rebound has surprised economists and policymakers, who often credit relief packages rolled out under the Trump and Biden administrations for fomenting such a quick recovery.But some economists warned that the $1.9 trillion legislation the administration ushered through Congress in March 2021 was too big and too poorly targeted, and that it would stoke demand and help to fuel rapid price gains. While fiscal policy was not the only reason inflation popped last year, it does seem to have contributed to high prices by encouraging more consumption.As flush consumers spent strongly in 2020 and last year, and as homebound shoppers bought more goods like easy chairs and computers rather than services like manicures and meals out, supply chains struggled to keep up.The Port of Los Angeles is America’s busiest port. Supply chains have been disrupted as ports became clogged and there were not enough ships to go around.Mark Abramson for The New York TimesVirus outbreaks continued to shut down factories, ports became clogged, and there were not enough ships to go around. The perfect storm of strong buying and limited supply pushed car prices in particular sharply higher, left consumers waiting months on end for new dining room sets, and meant that fancy bicycles were harder to find and afford.And now, inflation has moved past just those goods affected by the pandemic.The cost of food, fuel, housing, vacations, and furniture are all rising rapidly — and as conflict in Russia threatens to further push up gas prices in the coming months, the situation is likely to get worse before it gets better.While the White House spent last year downplaying popping prices, arguing that they would fade with the pandemic as roiled global supply chains righted themselves, nearly a full year of high inflation readings have proved too much to ignore. Climbing costs are eating away at paychecks and helping to drive Mr. Biden’s poll numbers to the lowest point so far in his presidency.“I don’t think that it is going to go away in a way that is going to save the incumbent party by November,” said Neil Dutta, an economist at Renaissance Macro Research. “Even though the labor market is quite strong, it’s not enough to keep pace with the shock people are feeling with respect to inflation.”The Fed is expected to raise interest rates from near-zero at its meeting this month and officials have signaled that they will then make a series of increases throughout the year as they try to put a lid on inflation.The central bank sets policy independently of the White House, and the Biden administration avoids talking about monetary policy out of respect for that tradition. But the timing could be politically tricky. The Fed could prompt an economic pullback that coincides with this autumn’s election season, creating a double whammy for the Democrats in which central bank policy is slowing down job market progress even as inflation has yet to fully fade.That might be especially true if conflict in Ukraine sends fuel prices higher, further stoking inflation and making consumers expect rapid price increases to continue, some economists said.“The Fed has to be more aggressive on inflation,” said Diane Swonk, the chief economist at Grant Thornton. “It could bleed into the unemployment rate by the end of the year.”Mr. Furman said that he thought it was more likely that the Fed’s actions would not inflict too much pain this year, though they might begin to squeeze the job market in 2023. And Mr. Dutta speculated that the Russian invasion of Ukraine could slow the central bank down somewhat, at least in the near-term.“The Fed basically has a choice — they can sink the economy into a recession, or they can let inflation run a little bit,” Mr. Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”The conflict overseas may also give Mr. Biden and Democrats a moment of patriotism to capitalize on. So far, Mr. Biden’s sanctions have been well-received by voters, based on the results of an ABC/Washington Post poll.A diner in New York last month. Inflation is having an impact beyond just the costs of goods. Rent prices are rising, as are the costs of travel and eating out.Amir Hamja for The New York TimesAt the same time, higher gas pump prices resulting from the conflict could further dent consumer confidence. Sentiment has swooned as price increases have climbed, and tends to be very responsive to fuel costs. The price of a barrel of gas climbed above $100 on Tuesday, the highest since 2014, based on a popular benchmark. The question is whether, in the face of rising costs, the administration will be able to turn bright spots — international cooperation and the pace of recent job gains — into something salient for consumers and voters.The answer may hinge on what happens next.Annual price gains are expected to slow down in the coming months as they are measured against relatively high readings from last year, and as supply chain delays ease somewhat. They could moderate even more later this year if the current elevated goods prices come back down, in the most hopeful scenario.If inflation moderates on its own and a relatively small response from the Fed is enough to nudge it down further, the economy could be left with strong growth, a booming labor market and a positive outlook headed into 2023.But increasingly, inflation is expected to fade more slowly.Economists at Goldman Sachs think consumer price inflation could end 2022 at 4.6 percent, more than twice the level it hovered around before the pandemic. That would mark a slowdown — the measure now stands at 7.5 percent — but it would be much higher than what the Fed normally aims for.That would allow the administration to talk about a moderation in price gains, but it might not feel like a significant improvement to consumers as they head to the polls.“Inflation is always political, because it burns, even in a good economy,” Ms. Swonk said. “It creates a sensation of chasing a moving target, which no one likes.” More

Russia’s military incursion is severing key supply chains and setting off a scramble among global companies to comply with new sanctions.WASHINGTON — The Russian invasion of Ukraine has rattled global supply chains that are still in disarray from the pandemic, adding to surging costs, prolonged deliveries and other challenges for companies trying to move goods around the world.The clash in Ukraine, a large country at the nexus of Europe and Asia, has caused some flights to be canceled or rerouted, putting pressure on cargo capacity and raising concerns about further supply chain disruptions. It is putting at risk global supplies of products like platinum, aluminum, sunflower oil and steel, and shuttering factories in Europe, Ukraine and Russia. And it has sent energy prices soaring, further raising shipping costs.The conflict is also setting off a scramble among global companies as they cut off trade with Russia to comply with the most far-reaching sanctions imposed on a major economic power since the end of the Cold War.The new challenges follow more than two years of disruptions, delays and higher prices for beleaguered companies that use global supply chains to move products around the world. And while the economic implications of the war and sweeping sanctions on Russia are not yet clear, many industries are bracing for a bad situation to get worse.“Global supply chains are already hurting and stressed because of the pandemic,” said Laura Rabinowitz, a trade lawyer at Greenberg Traurig. She said the effects would vary for specific industries and depend on the length of the invasion, but the impacts would be magnified because of an already-vulnerable supply chain.“There’s still tremendous port congestion in the United States. Freight costs are very high. Factory closures in Asia are still an issue,” she said.Companies with complex global supply chains, like automakers, are already feeling the effects. Volkswagen, which had already announced it was suspending production at its main factory for electric cars, said Tuesday that it would also be forced to shut down production at several other factories, including its main factory in Wolfsburg, Germany, in coming weeks because of parts shortages.Automakers could see shortages of other key materials. Ukraine and Russia are both substantial sources for palladium and platinum, used in catalytic converters, as well as aluminum, steel and chrome.Semiconductor manufacturers are warily eyeing global stocks of neon, xenon and palladium, necessary to manufacture their products. Makers of potato chips and cosmetics could face shortages of sunflower oil, the bulk of which is produced in Russia and Ukraine.And if the conflict is prolonged, it could threaten the summer wheat harvest, which flows into bread, pasta and packaged food for vast numbers of people, especially in Europe, North Africa and the Middle East. Food prices have already skyrocketed because of disruptions in the global supply chain, increasing the risk of social unrest in poorer countries.On Tuesday, the global shipping giant Maersk announced that it would temporarily suspend all shipments to and from Russia by ocean, air and rail, with the exception of food and medicine. Ocean Network Express, Hapag-Lloyd and MSC, the world’s other major ocean carriers, have announced similar suspensions.“The war just makes the worldwide situation for commodities more dire,” said Christopher F. Graham, a partner at White and Williams.Jennifer McKeown, the head of global economics service at Capital Economics, said the global economy appeared relatively insulated from the conflict. But she said shortages of materials like palladium and xenon, used in semiconductor and auto production, could add to current difficulties for those industries. Semiconductor shortages have halted production at car plants and other facilities, fueling price increases and weighing on sales.“That could add to the shortages that we’re already seeing, exacerbate those shortages, and end up causing further damage to global growth,” she said.International companies are also trying to comply with sweeping financial sanctions and export controls imposed by Europe, the United States and a number of other countries that have clamped down on flows of goods and money in and out of Russia.In just a few days, Western governments moved to exclude certain Russian banks from using the SWIFT messaging system, limit the Russian central bank’s ability to prop up the ruble, cut off shipments of high-tech goods and freeze the global assets of Russian oligarchs.The Biden administration said the technology restrictions alone would stop about a fifth of Russian imports. But the impact on trade from the financial curbs is likely to be even larger, cutting off Russia’s imports from and exports to nearly all of its major trading partners, said Eswar Prasad, a professor of trade policy at Cornell University.“Even when trade flows may take place directly between Russia and its trading partners, the reality is that payments often have to go through a Western-dominated financial system, and usually have to go through a Western currency,” he said.In a statement on Saturday, the president of the European Commission, Ursula von der Leyen, said that Europe and its allies were “resolved to continue imposing massive costs on Russia” and that disconnecting Russian banks from SWIFT would also halt Russian trade.“Cutting banks off will stop them from conducting most of their financial transactions worldwide and effectively block Russian exports and imports,” she said.The economic consequences of these moves are not yet entirely clear. Russia accounts for less than 2 percent of global domestic product, so the implications for other countries may be somewhat limited.The departures board displayed flight cancellations at Sheremetyevo Airport in Moscow on Monday.Sergey Ponomarev for The New York TimesBut for the Russian government and the economy, both of which are heavily dependent on trade to generate revenue, the impact could be catastrophic. Capitol Economics has estimated Russian gross domestic product could contract by 5 percent this year, a change that in isolation would knock just 0.2 percentage points off global growth.Caroline Bain, chief commodities economist at Capitol Economics, said financial sanctions were halting the trade of metals and agricultural commodities, likely exacerbating strains in global supply chains.Credit Suisse and Société Generale have suspended financing for commodity trading with Russia, as has the Industrial and Commercial Bank of China, she said.Russia’s Attack on Ukraine and the Global EconomyCard 1 of 6A rising concern. More

Such is the shock over Russia’s invasion of Ukraine that western sanctions have gone much further than seemed likely even a week ago. Not only have several Russian banks been barred from the Swift messaging network, but the EU, US and UK have placed sanctions on Russia’s central bank, sharply reducing access to its foreign currency reserves. These moves will not stop Vladimir Putin’s war in its tracks. But they will put huge pressure on the Russian economy, and squeeze over time the Kremlin’s capacity to wage its war.Since Russia’s aggression towards Ukraine in 2014, Moscow has sought to protect its financial system from possibly being cut off from international markets by the US. Its central bank amassed $630bn in foreign exchange reserves and shifted them away from the dollar and towards the euro, China’s renminbi and gold. Moscow seemed to believe a disunited Europe, dependent on Russian gas, would not join with the US. But around half of Russia’s total reserves are now frozen.Combined with broader financial sanctions, the impact has been sizeable. The rouble has already fallen by more than during Russia’s 1998 default, even though the central bank has doubled interest rates to 20 per cent. Bank runs have not yet materialised but many Russians have been queueing to get hold of cash. While the west is not seeking to target the Russian people directly, the package will squeeze living standards, potentially eroding support for a leader who came to power promising stability after the chaotic 1990s.Oil and gas payments remain largely excluded from sanctions. That may be regrettable, but for as long as Europe depends on Russian supplies to avoid shortages, sanctions on payments would be pointless. If Moscow’s shipments were only partially restricted and not completely stopped, moreover, higher global energy prices would offset some of the cost to Russia. Some of the measures have been put together at high speed. The west now needs to take stock of their impact. Democracies are seeking both to ensure the Putin regime pays a high price for its increasingly bloody attack, and alter the Russian president’s calculus on how far he is prepared to go in his aggression. They must also take into account that imposing a rapid economic collapse would risk provoking a backlash among Russians, who are not responsible for the war, and driving an increasingly paranoid leader into a corner. Sanctions must be calibrated to impose heavy but controlled pressure.Public messaging around their goal also needs to be united and consistent. Loose talk such as France’s finance minister suggesting the purpose was “total economic and financial war against Russia, Putin and his government” can be seized on by the Kremlin. Dmitry Medvedev, former president and now deputy head of Russia’s security council, warned that economic wars often turn into real ones. Signalling to the Kremlin is needed over “off-ramps” — or under what circumstances sanctions could start being eased — to avoid both sides becoming locked into an escalatory cycle.Urgent political and technical planning is required, too, to manage spillover effects on the western financial system. The negative consequences could be unpredictable, with some investors forced to sell their most liquid, safe assets — such as US Treasuries — to compensate for Russian-linked assets being frozen. The effect may also ripple through supply chains in unforeseen ways, with missed payments from Russian trade partners affecting European and US companies. The west has shown unexpected resolve; it will need to show it can take economic pain as well. More

Australia is grappling with record levels of rain and flooding that have killed eight people so far. It is just one more example of extreme weather events that are becoming far more frequent. In grimly apt timing, it underscores the point of a UN report this week that laid bare the irreversible damage climate change is already wreaking on the planet: it is worse than was predicted. Even if, by some miracle, countries abide by pledges to keep global warming to 1.5C above pre-industrial levels, some consequences are now unavoidable. That requires a sea change in tackling the climate emergency. While trying to cut emissions is fundamental, just as much focus is now needed on adapting to the inevitable — while it is still possible.The report by the UN’s Intergovernmental Panel on Climate Change, and its stark conclusions, may seem distant doom-mongering when civilians are being killed today in Russia’s senseless war against Ukraine. Scenes of conflict on European soil not seen since the 20th century have ushered in equally retrograde calls to revive fossil fuel extraction in the west. Reducing Europe’s energy dependence on Russia will be key over the long term but there ought not to be a dichotomy between security and climate. To safeguard both, governments must now redouble efforts to boost renewable energy. In the short term, the unpalatable truth is that western countries may be forced to look closer to home for their oil and gas just to keep the lights on and avoid political and economic instability. But this is precisely because little more than lip service has been paid by many countries to weaning themselves off their dirty energy habit. More geopolitical risk, more instability and ultimately more conflict is inevitable if they do not try to break this addiction in the longer term.Not least this is because 40 per cent of the world’s population, or as many as 3.6bn people, now live in countries that are “highly vulnerable” to climate change, according to the IPCC report. It concludes that just a small temperature rise could trigger significant risks to life. Unsurprisingly, it is people in the very poorest countries that are most vulnerable. A climate “apartheid” that at the very least could spark mass migration is an all too real prospect. As has been proven true during the pandemic, it is in richer countries’ enlightened self-interest to help others. This will take money. The IPCC tried to sidestep the issue of “loss and damage” — a politically charged term that implies richer nations should pay poorer ones for the damage wrought by historical emissions. Countries led by the US have pushed hard against the concept of climate compensation, and the issue is forecast to be a flashpoint of negotiations during the next COP summit in Egypt later this year. Regardless, richer countries need to keep promises already made. A 2009 pledge to channel $100bn in both public and private climate finance to poorer nations by 2020 still has not fully materialised. Doing nothing will only push up costs in the long run.But how money is spent is also key. Climate finance to date has overwhelmingly focused on mitigation rather than adaptation, as the jargon has it. This has meant trying to cut emissions and curb the rate of global warming. As crucial as that still is, finance is needed to help populations adapt to the dangers they already face. That could be in bolstering coastal defences and early warning systems, in improving water efficiency in cities, in better pest control or in rolling out carbon sequestration and storage. These concrete steps should be taken now, before it is too late. More

Target delivered an upbeat outlook in anticipation that supply chain bottlenecks will gradually ease, as the US retailer looks to build on the growth it generated during the pandemic.The Minneapolis-based retailer forecast low- to mid-single digit revenue growth in fiscal 2022, compared with analysts’ expectations of about 2.2 per cent. Target on Tuesday also predicted adjusted earnings per share would rise by high-single digits, while analysts had expected only a modest increase.Beyond this year, the company predicted revenues will grow in the mid-single digits and adjusted earnings will grow in the high-single digits.The quarter “capped off a year of record growth”, chief executive Brian Cornell said a statement, reinforcing the “durability of our business model and our confidence in long-term profitable growth”.Target’s shares closed nearly 10 per cent higher on Tuesday.Consumers are becoming more price-conscious with inflation accelerating to the highest rate in four decades, driving more shoppers to seek discounts at Target and other large chains that are better able to navigate supply chain and labour disruptions.“We have many levers to combat costs, and price is the one we pull last, not first,” Target’s chief financial officer Michael Fiddelke said on an earnings call.Walmart, which reported an unexpected increase in sales for the holiday quarter, said last month that its stores were offering roughly the same number of price “rollbacks” as they did at the end of the first quarter last year.However, some retailers including Home Depot and Macy’s have cautioned that higher costs for merchandise, shipping and labour will squeeze profits further this year.Target, like its peers, has been hit by increased supply chain costs. The retailer’s fourth-quarter gross margin rate shrank to 25.7 per cent, down from 26.8 per cent in the same period a year earlier, because of higher freight and merchandising costs and increased pay and headcount.But the company allayed investors’ cost concerns with forecast-beating earnings in the holiday quarter and guidance calling for an operating margin rate of 8 per cent or higher in fiscal 2022, compared with 8.4 per cent in 2021. Target cautioned that its operating margin in the first quarter would be “well below” its year-ago level but said profitability would improve as the year progresses.Cornell told analysts that companies were dealing with “supply chain constraints that are steadily working themselves out but will likely take more time”, adding that the Ukraine crisis had made inflation and supply challenges “more uncertain.”Big-box stores, where shoppers can stock up on everything from groceries and cleaning supplies to video games and kids’ clothing, generated robust sales during the pandemic, particularly as consumers favoured home delivery and kerbside pick-up options. Target, as a purveyor of essential goods, remained open during stay-at-home orders in 2020. The company’s revenues increased by almost $28bn, or 35 per cent, over the past two years during the pandemic. Its full-year sales rose to $106bn in 2021, crossing the $100bn threshold for the first time. Fourth-quarter earnings at Target advanced to $3.19 a share on an adjusted basis, beating Wall Street’s estimate of $2.86 and up from $2.67 a year earlier. Sales increased 9.4 per cent to about $31bn, slightly below Wall Street’s forecast for $31.4bn in revenues.Comparable store sales rose 8.9 per cent and digital sales increased 9.2 per cent in the holiday quarter that ended on January 29, compared with a year earlier. Target on Monday said it would invest $300mn more on its workforce this year to boost pay and other benefits as American companies compete to lure back workers. It added it would raise its starting wage for hourly workers from $15 to a range of $15 to $24 an hour. More

Italy’s economy expanded at a slightly faster-than-expected rate of 6.6 per cent last year, while its fiscal deficit came in far below official targets, as investment, consumption and exports bounced back from the shock of the Covid pandemic.Italy recorded a fiscal deficit of 7.2 per cent of gross domestic product in 2021, well below the government’s own official target of 9.4 per cent, as Prime Minister Mario Draghi’s bet on a significant fiscal stimulus helped support a robust rebound after the 9 per cent GDP contraction in 2020. Italy’s public debt fell to 150.4 per cent of GDP, down from the government’s official target of 153.5 per cent. The official figures, released on Tuesday, came just a day after Ursula von der Leyen, president of the European Commission, declared that Italy would soon be able to receive its first €21bn tranche from the EU’s Covid recovery fund. “So far, Italy has made good progress in the reforms needed to make its society and economy fit for the future,” von der Leyen said.Italy is set to be the largest recipient of the EU’s Covid recovery fund, and will potentially be eligible to receive nearly €200bn in grants and concessional loans, though the money will only be released in tranches, and requires Rome to adhere to a time-bound agenda of structural reforms. As well as positive GDP figures, there had also been a surge last year in housing investment, which had been sluggish for more than a decade, Stefano Manzocchi, a professor of economics at Rome’s LUISS University, said. “We had a very strong rebound of housing investment, construction investment, which has been stagnant in Italy for a long time,” he added.However, analysts warned that Russia’s invasion of Ukraine — and the impact of the sanctions imposed on Moscow — would put new strains on the Italian economy.Italy is already starting to feel the effects of higher energy prices, which pushed inflation to 5.7 per cent year on year in February, well above the 4.8 per cent year on year recorded in January, which was already a 26-year-high. Draghi’s government has announced that it will allocate €8bn to shield the poorest consumers from surging energy prices. But it insisted that the additional spending would not affect its ability to reduce its fiscal deficit to its target of just 5.6 per cent of GDP in 2022.Italy also remains vulnerable to higher interest rates. “If energy prices boost inflation, and if that triggers a tightening of the monetary policy of the ECB, you are in a worse position than if you don’t have high debt. That is the real risk,” said Italian economist Marco Magnani. Magnani also said Rome could feel tempted to use EU funds to increase spending on energy subsidies — rather than on productive investment, which he said “is not the best place to put that money.” Manzocchi added that business confidence would also likely take a hit as a result of current turbulence. “Investment spirit — or the investment confidence — of our entrepreneurs will be in a way damaged by the crisis,” he said  More

Government bonds staged a powerful rally on Tuesday as investors bet the economic fallout from Russia’s invasion of Ukraine will push central banks to raise interest rates more slowly than previously anticipated. The biggest moves came in Europe, where Germany’s 10-year bond yield sank below zero for the first time in a month as markets reacted to a string of comments from senior European Central Bank policymakers arguing against any drastic shift in monetary policy until it becomes clearer how the crisis in Ukraine will affect the eurozone economy. Derivatives linked to short-term interest rates show that investors now expect the ECB to lift interest rates by less than 0.2 percentage points from the current record low of minus 0.5 per cent by the end of the year. Two weeks ago markets were pricing in a return to zero this year. UK yields also tumbled as investors dialled down their bets on UK rate rises. The 10-year gilt yield fell 0.28 percentage points to 1.13 per cent, the biggest one-day decline since the day after the Brexit referendum in June 2016. US Treasuries were also swept up in the rally, with the 10-year yield falling by 0.12 percentage points to 1.72 per cent, its lowest since late January. Investors still forecast the Fed to press ahead later this month and deliver its first quarter-point interest rate increase since 2018, but expectations about how aggressively it can tighten monetary policy after that point have moderated. Traders are now pricing in roughly five rate rises this year, down from six on Friday. Bets that the Fed may even consider a double half-point adjustment, which wound down significantly before the invasion following tacit opposition from two senior officials, have now been fully priced out.“There’s a big dovish repricing going on,” said Antoine Bouvet, a rates strategist at ING. “The market has taken the view that the implications from Ukraine are that the ECB and other central banks will move more slowly.”Energy prices have surged since the Russian invasion began last week, adding to the headache for central bankers trying to keep a lid on the highest inflation in decades across many global economies. That leaves the Fed to grapple with both the inflationary impacts of the war and the potential for an economic slowdown. “This also has a significant impact on growth globally and in the US,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “This is clearly going to keep inflation high for a longer period of time. But much of these dynamics are not in the Fed’s control.”He added: “The Fed’s going to have to move but growth will moderate to the point that as you get into the second half of the year I’m not sure the Fed is in a rush.” Rieder said the potential for a slower-moving Fed had made yields on short-term US government debt attractive.Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge fund managers, echoed that view, telling the Financial Times on Tuesday that the Ukraine situation “pushes back” central bank rate rise expectations.Ahead of next week’s policy meeting, ECB officials said the crisis in Ukraine was likely to push up eurozone inflation from its already record levels by aggravating pressures in energy markets and could lower growth by disrupting trade and hitting confidence of businesses and households. “It would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer,” said Fabio Panetta, an ECB executive board member, in a speech on Monday. “We should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer,” he added. This marks a shift in tone from the ECB. Several of its officials signalled before Russia invaded Ukraine that they expected it to “normalise” monetary policy by ending asset purchases earlier than planned ahead of an interest rate rise later this year. The ECB governing council is due to meet next week, when it will publish new economic forecasts that are expected to signal inflation stabilising close to its 2 per cent target over the next two years — a key condition for it to start raising interest rates. However, the heads of the Greek and Portuguese central banks both said on Monday that the war in Ukraine increased the chances of the eurozone economy suffering a period of stagflation — a toxic mixture of stagnant growth and inflationary supply shocks. “I am convinced that the traction of growth that the economy was following will prevail,” said Mário Centeno of Portugal, who is an ECB governing council member, while warning: “A scenario close to stagflation is not out of the possibilities that we can face.”Yannis Stournaras, head of the Greek central bank, said: “We will review the evidence carefully, since we do not want to repeat past mistakes of tightening too early, especially in the face of such an important supply shock like the one caused by the Ukrainian crisis.”Additional reporting by Eric Platt More