Economy

WASHINGTON (Reuters) – U.S. Federal Reserve officials agree inflation is too high and that interest rates should be increased at the upcoming meeting in March.But if everyone seems a “hawk” for now, determined to bring down the highest inflation rates in 40 years, the 14 policymakers currently participating in Fed debates still have different ideas about the risks the U.S. economy is facing and how quickly the central bank needs to raise interest rates and take other steps to tighten credit.The “doves” haven’t gone away.Rather, they are keeping a wary eye on how quickly inflation may slow, and how employment, wages and economic growth respond to rising interest rates. Depending on how these play out as the year progresses, the natural tension between hawks and doves may reemerge.Indeed what distinguishes a Fed dove from a hawk these days is more a matter of nuance – a bit more faith, perhaps, that world supply chains will get sorted and ease inflation, or, on the other side, a bit more willingness to raise rates faster now just in case they don’t. Fed hawks and doves – https://graphics.reuters.com/USA-FED/HAWKSANDDOVE/byprjeokgpe/chart.png It’s captured perhaps most vividly in the divide between a Charles Evans, president of the Chicago Federal Reserve, betting the Fed will get away with “less ultimate financial restrictiveness” than in prior years, and a James Bullard, head of the St. Louis Fed, thinking the Fed will have to carry more of the load in inflation control and that “it’s important to get moving.” Fed officials are also drawing lines around what to do with its stash of asset holdings, with some saying that outright sales of the portfolio might be needed as a way to further tighten financial conditionsWHY ARE INTEREST RATES RISING?Yet even Evans agrees the Fed’s current policy is “wrong-footed” given that consumer prices are rising 7% annually. The Fed aims to hold inflation to 2%. While the central bank uses a slightly different measure for its inflation target, that too has been running far above the Fed’s comfort zone.Monetary policy, meanwhile, remains at full throttle, stoking an economy that at present has no shortage of cash to spend and no lack of desire to spend it. The target interest rate remains near zero, where it was set at the start of the global coronavirus pandemic to fight a sharp economic downturn. While the Fed has curbed the pace of its monthly bondbuying – aimed at stabilizing financial markets and keeping borrowing rates low – there is no firm plan yet to shrink the nearly $9 trillion in government securities the central bank now holds. Fed policy rate and inflation hit a record gap – https://graphics.reuters.com/USA-ECONOMY/FEDFUNDS/movandmydpa/chart.png Given the situation, increases in the Federal Reserve’s target interest rate are inevitable, and will likely be approved in quarter point increments at the next several Fed meetings. As the Fed raises its policy rate, other interest rates tend to rise as well. Home and auto loans become more expensive as a result. Companies may pay more to finance their operations.In theory that all helps slow the pace of price increases.Both hawks and doves will be watching. The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png More

LONDON (Reuters) -Rolls-Royce Chief Executive Warren East will step down by the end of the year after steering the aero-engine maker through the worst of the pandemic, though fresh challenges loom following Russia’s invasion of Ukraine. Shares in the British group, which also has defence and energy businesses, dropped 16% to a seven month low in early Thursday trade as weaker-than-expected 2021 earnings, East’s upcoming departure and geopolitical risks spooked investors. Rolls-Royce (OTC:RYCEY) burned through 5.5 billion pounds ($7.4 billion) of cash during the pandemic as its airline customers stopped or cut back flights. But East, who took the helm in 2015, delivered cost cuts of 1.4 billion pounds a year ahead of schedule. That, along with a recovery in civil aviation, helped cash flows turn positive in the third quarter of last year, and the CEO forecast 2022 as a whole would be modestly positive.Still, East warned geopolitical uncertainty after Russia’s invasion of Ukraine was “fundamentally bad.”From a Rolls-Royce perspective, Russia is less than 2% of total revenue, he said, but about 20% of its titanium comes from the country. “We have been prudently building stocks as the situation has been developing over months,” he told reporters.After the cost cuts, East said a more efficient civil aerospace business was well placed for recovery. “It’s poised for future growth as international travel rises. And it is rising: large engine flying hours rose 57% year-on-year in the second half of 2021,” he said.The end of 2022 was the “right time” to hand over to someone else, he said, adding he would leave Rolls-Royce operationally and strategically in a “much better place”.Underlying operating profit of 414 million pounds contrasted with a restated loss of 2 billion pounds in 2020, but fell short of analyst’ expectations of 597 million pounds.Free cash outflow of 1.44 billion pounds beat market expectations, however, and was also well ahead of the outflow of 4.18 billion pounds in 2020.($1 = 0.7430 pounds) More

LONDON (Reuters) -Prime Minister Boris Johnson said Britain and its allies would unleash a massive package of economic sanctions to hobble the Russian economy after the Kremlin launched an all-out invasion of neighbouring Ukraine on Thursday.Western nations are expected to announce coordinated sanctions after earlier this week imposing a limited initial package that was criticised by some as a weak response to Russia’s recognition of two breakaway regions in Ukraine. “Today, in concert with our allies, we will agree a massive package of economic sanctions designed in time to hobble the Russian economy,” Johnson said in a televised address to the nation.He said the West must end its reliance on Russian oil and gas which had given Russian President Vladimir Putin a grip over Western politics.”Our mission is clear: diplomatically, politically, economically, and eventually military, this hideous and barbaric venture of Vladimir Putin must end in failure.” In earlier comments on Twitter (NYSE:TWTR), the British leader called the invasion a “catastrophe” for Europe, and said he would talk to other G7 group of rich nations. “I will also speak to fellow G7 leaders and I am calling for an urgent meeting of all NATO leaders as soon as possible,” he said.Foreign minister Liz Truss said she had summoned the Russian ambassador to explain Moscow’s actions in Ukraine.Britain, like the United States and European Union, had threatened to impose tougher sanctions on Russia if it invaded Ukraine, a move Russian President Vladimir Putin had earlier said Moscow would never do.On Wednesday, Johnson told finance chiefs he wanted to impose the “toughest possible next tranche” of sanctions on Russia, an action he described as being able to “make a difference and change the outcome”.In his address on Thursday, he told Russians he did not believe the invasion was being carried out in their name, while he vowed to support Ukraine until the flame of freedom “burns bright again”.”I don’t believe that the Russian dictator will ever subdue the national feeling of the Ukrainians and their passionate belief that their country should be free,” he said.”I say to the British people, and all who have heard the threats from Putin against those who stand with Ukraine: We will of course, do everything to keep our country safe.” More

FRANKFURT (Reuters) -Wintershall Dea, one of the co-funders of Gazprom (MCX:GAZP)’s Nord Stream 2 gas pipeline, on Thursday said cancelling the project on political grounds would enable its operator to lodge compensation claims.The group’s remarks come as Moscow launched an invasion of Ukraine only days after Germany pulled the plug on certifying the pipeline in a first wave of sanctions on Russia, where Wintershall Dea has been active for more than three decades. The Germany-based oil and gas firm, which is co-owned by BASF and Russian billionaire Mikhail Fridman’s LetterOne investor group, on Thursday cancelled its annual press conference in light of current events.”The latest military escalation also shakes the economic cooperation between Russia and Europe that has been built up over decades and will have far-reaching consequences,” CEO Mario Mehren said in a statement.”To what extent cannot yet be foreseen.”Wintershall Dea along with Uniper, Shell (LON:RDSa), Engie and OMV is one of the financial backers of Nord Stream 2.It has previously said its loan payments to the project amounted to 730 million euros ($821 million).Uniper, whose shares hit a 14-month low on Thursday, a day earlier said it was assessing whether the pipeline’s suspension would trigger impairments on its 1 billion euro exposure to the project.”Should the commissioning of Nord Stream 2 be prevented by political intervention, we assume that the project company will be able to enforce compensation claims,” the company said in its annual report, referring to pipeline operator Nord Stream 2 AG.”Currently, Wintershall Dea sees no reasonable scenario in which there will be political intervention without compensation,” it added.German Chancellor Olaf Scholz earlier this week revoked a security assessment by the country’s Economy Ministry, saying a new one was needed in light of current events and effectively suspending the pipeline for the foreseeable future.Wintershall Dea said that even if the certification process by the German regulator was delayed it expected Nord Stream 2 to fulfil its contractual obligations towards its financial investors, without elaborating.”I appreciate your understanding that today is not a day to discuss hypotheticals and unknowns,” Wintershall Dea finance chief Paul Smith told analysts on Thursday after presenting the company’s full-year results.He said instead of a questions-and-answers session that is typical for this sort of investor call, the group would set up individual calls in the coming weeks “as and when there is some greater clarity around the events which are unfolding as we speak and we can deal with facts, rather than speculation”.($1 = 0.8895 euros) More

BRUSSELS (Reuters) -European Union leaders will impose new sanctions on Russia, freezing its assets, halting its banks’ access to European financial markets and targeting “Kremlin interests” over its “barbaric attack” on Ukraine, senior officials said on Thursday.An emergency summit starting at 1900 GMT will also discuss offering EU candidate status to Ukraine, Lithuania’s President Gitanas Nauseda said, a step Kyiv has long called for, though it may not win approval from all EU leaders.Russian forces fired missiles at several cities in Ukraine and landed troops on its coast on Thursday, officials and media said, after President Vladimir Putin authorised what he called a special military operation in the east.”President Putin is responsible for bringing war back to Europe,” European Commission chief Ursula von der Leyen said, adding that the EU would hold him accountable.”With this package, we will target strategic sectors of the Russian economy by blocking their access to key technologies and markets,” she said in an emergency statement. “We will weaken Russia’s economic base and its capacity to modernise.Russian assets in the EU would also be frozen and Russian banks’ access to the European financial market would be stopped.However, cutting Russia off the SWIFT global interbank payments system – one of the toughest, non-military sanctions the West could impose – is unlikely to be agreed at this stage, several EU sources said. The EU approved a first round of sanctions on Wednesday, including blacklisting Russian politicians and curbing trade between the EU and two breakaway regions of eastern Ukraine whose independence Putin has recognised.The new measures, to be discussed at the evening summit of national EU leaders, will be “the harshest package of sanctions we have ever implemented”, the bloc’s foreign policy chief, Josep Borrell, said. “This is among the darkest hours for Europe since the end of World War Two … Russia’s leadership will face unprecedented isolation.”The EU will also prepare a new aid package for Ukraine, he added. “We will also be active in supporting evacuation operations, including our own staff in zones affected by this Russian attack,” he said.Shortly after Putin spoke in a televised address on Russian state TV, explosions could be heard in the pre-dawn quiet of the Ukrainian capital of Kyiv. Gunfire rattled near the capital’s main airport, the Interfax news agency said, and sirens were heard over the city. More

SEOUL (Reuters) – South Korea said on Thursday it would join in unspecified multilateral economic sanctions on Russia in response to its military operations in Ukraine, but is not considering adopting unilateral measures.Russian forces fired missiles at several cities in Ukraine and landed troops on its coast on Thursday, officials and media said, after President Vladimir Putin authorised what he called a special military operation in the east.President Moon Jae-in said at a National Security Council meeting that Ukraine’s sovereignty, territory, and independence must be respected, press secretary Park Soo-hyun told a briefing.South Korea will support international efforts to restrain armed aggression and seek a peaceful resolution, including by joining in economic sanctions, Park quoted Moon as saying.A foreign ministry official who later briefed reporters mentioned export controls as part of possible international sanctions.”Of course some countries are considering unilateral sanctions including financial measures but we are not considering that.”Discussions are under way to finalise details, the official added. More

LONDON (Reuters) -Investors piled into U.S. sovereign debt on Thursday, pushing Treasury yields sharply lower after Russia launched an invasion of Ukraine.Russian forces fired missiles at several cities in Ukraine and landed troops on its coast, officials and media said, after President Vladimir Putin authorised what he called a special military operation in the east.The news triggered a slide in world stock markets, pushing investors into safe havens such as U.S. Treasuries and gold. U.S. stock futures were more than 2% lower, pointing to heavy losses at the Wall Street open.And as London trade gathered pace, so did a fall in government bond yields. The yield on the benchmark 10-year Treasury was last down almost 15 basis points (bps) on the day at around 1.85%. It was on track for its biggest daily drop since late November. “There’s clearly no risk appetite this morning and lots of uncertainty,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.Across the U.S. Treasury curve, yields were sharply lower on the day, with two-year yields down around 13 bps at about 1.47%. This echoed moves in European sovereign debt markets, where German Bund yields were set for their biggest daily drop since March 2020 – when the outbreak of COVID-19 threw world markets into turmoil.Money market futures, meanwhile, suggested investors continue to take off their most aggressive bets for interest rate hikes from the Federal Reserve. Markets still price in a 25 bp hike at the Fed’s March meeting but bets on a 50 bps move have ebbed in the face of the escalating geopolitical tensions. Justin Onuekwusi, a portfolio manager at LGIM, said expectations for the number of rate hikes this year were being lowered, despite the impact on inflation from rising energy prices, because of a perception that it could be the wrong time to start taking liquidity out of markets.”Central banks may have to look through an inflation spike, though that means ultimately rate hikes could become substantially bigger,” he said.Commerzbank (DE:CBKG) rates strategist Rainer Guntermann noted a scaling back in rate hike expectations was also reflected in the move lower across the Treasury curve.”You’ve seen the Treasury curve moving lower basically parallel from two year to 10-year overnight, not just the usual liquid part like 10s or so but also 2-years, which is probably a reflection of less rate hikes,” he added.Oil prices surged, with Brent breaching $100 a barrel for the first time since 2014, as Russia’s attack on Ukraine exacerbated concerns about disruptions to global energy supplies.[O/R]As investors rushed to protect against inflation risks, yields on inflation linked bonds fell. The yields on the 10-year Treasury Inflation-Protected Securities (TIPS) fell to as low as -0.71% – its lowest in just over three weeks. More

A lack of investment has limited oil and gas producers’ ability to boost output, leaving the world with few options to ease energy prices after the Russian incursion in Ukraine sent oil racing above $100 a barrel.International oil benchmark Brent rose to $102 early on Thursday, the highest level since 2014. Gas prices have also jumped on rising concern over the escalating tensions in eastern Europe. The rally could accelerate, analysts say, given big producers’ limited capacity to increase supplies in response to further potential disruptions. Russia is the world’s third-largest producer of crude oil and the most important supplier of natural gas to Europe. “Spare capacity is falling and the [oil] market is having to reprice that lack of safety margin,” said Christyan Malek, head of global energy strategy at JPMorgan, which predicts Brent could rise as high as $125 a barrel in the second quarter of this year.Global spare capacity, or the amount of additional production that can be turned online within a matter of weeks, has fallen to 2.8mn barrels per day, according to JPMorgan’s calculations, well below the 5mn b/d historically desired as a buffer against any operational or geopolitical issues. As a result, Malek expects oil prices to climb higher, even if the Ukraine crisis does not disrupt Russian exports.“The oil price is going up, and an oil supercycle is inevitable,” he said. “There is nothing you can do.”Bob McNally, head of Rapidan Energy Group, said the risk of disruption was probably limited to the oil and gas that transits through Ukraine, which he said was approximately 250,000 b/d of crude and roughly 20 per cent of the gas Russia sends to Europe. But given the lack of spare capacity, McNally said the size or likelihood of a possible physical disruption did not matter. “Until it’s clear that there will not be an interruption in oil supplies and in gas, I think you’re going to see upward pressure,” he told an oil market discussion on Tuesday organised by Bloomberg.Global oil demand is expected to return to pre-pandemic levels of approximately 100mn b/d in 2022. But supply was already struggling to keep up. Spending cuts during the pandemic have compounded lower investment in production by an oil industry under pressure to reduce future emissions. Some members of the Opec producer group in particular have struggled to restore output slashed at the start of the health crisis, leading the US and a number of other big consumers to release emergency oil stocks last year to try to calm prices.One of the reasons for the lack of spare global capacity has been the failure of Opec and its allies, including Russia, to meet their production targets since July. In response, the US and other big consumers have repeatedly urged the cartel, in particular Saudi Arabia, to pump more to ease prices and calm inflation.Even if Saudi Arabia agreed to such steps, it was not clear that the proposed actions would be effective, McNally said, since boosting production would only eat further into spare capacity.Natural gas, which jumped on Wednesday to trade at more than €88 per megawatt hour is of greater immediate concern to Europe, given its dependence on Russia for 40 per cent of its supply.Wholesale prices in Europe have already soared by more 450 per cent over the past year owing to resurgent demand as lockdown restrictions have eased and reduced flows from Russia.Laurent Ruseckas, analyst at IHS Markit, a consultancy, said it was unlikely that Moscow would respond to western sanctions by cutting off gas supplies, which arrive in Europe via through pipelines that run through Ukraine, Poland under the Baltic Sea respectively.“I have never seen that as a plausible possibility. So what it really boils down to is could conflict in Ukraine disrupt gas flows somehow,” he said.Ruseckas said there was a lot of “redundancy” in the Ukraine gas pipeline network so the odds of a “stray shell” knocking out supply were low. A big disruption would therefore require intentional action by either Russia or Ukraine. “It’s difficult to assess the likelihood of that but it is certainly not a base case scenario,” he said.Russia’s energy minister Nikolai Shulginov, speaking at an energy conference in Qatar on Tuesday, said Russia was aiming to keep its gas flows “uninterrupted.” If there were a disruption, Europe would find it impossible to replace Russian supply. “There is no single country that can replace that kind of volume,” Qatar’s energy minister Saad al-Kaabi said at the same conference, adding that — much like in oil — there was not sufficient spare capacity in the market to pick up that shortfall.Even before the Ukraine crisis, Russia’s state-owned Gazprom had refused to provide any additional gas to Europe beyond its contractual obligations, leading some European politicians to accuse Russia of weaponising energy exports. In response, Europe was forced to draw on stockpiles, which have fallen to low levels.As part of the European reaction to Putin’s deployment of troops into Ukraine on Tuesday, Germany announced it was halting certification of the controversial Nord Stream 2 pipeline, which was due to bypass Ukraine to deliver Russian gas direct to Germany through the Baltic Sea.“In theory, this should not have any impact on natural gas flows to Europe, given that the pipeline is not yet operational and there is spare pipeline capacity via other routes,” said Warren Patterson, analyst at ING. “However, Russia could possibly retaliate to the suspension process by further reducing overall Russian gas flows to Europe.” More