Big jump in key US inflation gauge
• Sharpest surge since 1990s • New overheating fears • White House issues $6tn budget
Key for most was that the Core PCE was +3.1% YoY vs +1.9% in March slightly higher than F/cast but not as high as some had thought.
The article worries about new overheating fears but the market took the news well; with many viewing it as putting the Fed in a sweet spot.
It quotes Paul Ashworth chief US economist at Capital Economics; “The combination of falling real consumption and soaring prices last month gives off a faint whiff of stagflation,” he also said he expected Treasury yields to “resume their rise before long” based on the latest inflation data.
The market is certainly expecting more discussion within the Fed about tapering.
It mentions also that the White House released its budget plan for 2022 which also suggests that it beleives it can spend heavily without stoking inflation.
The fact that the Core PCE was not shocking I think means the markets will continue to believe the Fed’s line that the inflationary pressures are transitory and if inflation does show signs of permanence it has the tools to control it. I actually doubt that. Next up will be Friday’s Jobs data with significant job creation expected but little wage pressure. I still think there is a job location/skill mis match. I also remain worried about the amount of cash in the system much of which is going into savings in the US.
Lukashenko seeks an ally
Looks at the meeting between Putin and Lukashenko
Plus inside Lukashenko plays victim to curry Putin sympathy whilst at present Russia is seemingly happy to back him it may become more complicated because so few countries recognise Lukashenko as a legitimate ruler after last years elections. The UN’s International Civil Aviation Organization is to investigate Minsk’s forced Ryanair grounding and that could raise further questions about Lukashenko’s position and Russia’s support.
Also Person in the News Belarus’s brutal leader reasserts his authority The ‘uncompromising’ president has crossed a red line with the arrest of Roman Protasevich, writes James Shotter
Russians behind SolarWinds hacking target 150 global foreign policy bodies.
‘Russian hackers who breached several US government agencies last year have hijacked an email system at USAID, the development organisation, to target more than 150 government bodies, human rights groups and NGOs worldwide, according to Microsoft.’
Names the group as Nobelium who it says have now targeted more agencies, think-tanks, non-governmental organisations and consultancies. Targets who opened the emails allowed the hackers to perform “a wide range of activities from stealing data to infecting other computers on a network”.
Likely to increase the pressure on the US to tkae some form of retaliatory action and coming ahead of the Biden Putin meeting it will be intersting to see how it is handled.
Labour shortages hit Berlin’s reopening
Lack of hospitality workers threatens to hold back expected economic rebound.
Like many cities and countries Berlin’s hospitaility sector is finding it difficult to find staff for various reasons. Migrant workers who returned home unable to travel back.
Some have moved to other sectors and some it suggests have made lifestyle changes prefering to earn less and have more social time. It mentions students and again until campuses re-open many of the students will remain at home away from the cities.
It does seem likely that wages in the short term will need to be increased in order to attract people to take up the positions.
Italian economy roars back to life
Sentiment index rises at fastest rate in eurozone as Covid restrictions ease. ‘Italy is seeing a rapid improvement in economic sentiment, with measures of confidence, hiring and holiday bookings all sharply up in recent weeks.’
Interesting that the Italians do not seem to be suffering the same hiring problems that are being seen in Berlin.
Swiss prepare for EU chill after quitting market access talks.
Although they have never been members of the EU they have enjoy access to the common market but have found increasingly that the demands from Brussels to be unreasonable and so have decided to end negotiations about retaining the access agreements.
It is interesting that many are finding the demands from Brussels unacceptable. What is supposed to be a simple concept ‘a common market’ has become a complicated web of rules and regulations.
Lab leak theory fuels research doubts
Critics of pathogens studies say risk of a virus escaping and causing pandemic is too great.
Looks at ‘The work, known as “gain of function” research, involves manipulating pathogens, often to make them more lethal.’
Work that was taking place at the Wuhan Institute of Virology.
An interesting read that raises questions about whether that form of research should be being done at all because of the potential risks involved.
FT BIG READ. ASIAN BUSINESS
Wall Street’s new love affair with China
At a time of growing geopolitical competition, US and European investment firms are plunging into the Chinese market. But they risk a backlash in Washington, which is increasingly on a cold war footing.
Looks at how US financial institutions and those from other countries want access to the Chinese population to sell them savings products.
It says that China is opening up but remains cautious about giving foreign firms too much access. The article says its because they need their expertise on building a savings infrastructure to help manage the growing demographic crisis. I wonder about that the Chinese financial institutions are I believe well versed in providing financial savings products and have been at the forefront of finding innovative products to meet savers requirements. It is difficult to see what new products Goldmans or Blackrock are going to bring to China that are not already available.
The article does mention that one of the risks of operating in China is the fact that the Communist Party does have the ultimate control. it notes too ‘It also sits uneasily against the geopolitical backdrop, where tensions between China and the west have flared over issues from the coronavirus pandemic to technology, from Xinjiang to Taiwan. Domestic politics in the US, also, are more than ever driven by what President Joe Biden this year called the country’s most serious competitor.’ It will be interesting to see how the banks manage their committment to key social issues like human rights when operating in China.
It mentions that currently most of China’s savings are in property and cash and that the capital markets infrastructure is relatively young. It quotes the China chair of Amundi who says “The government believes that foreign asset managers and foreign banks can represent a new sort of institutional investor, a new player, with best practice, a well established process and good standards,”. That may be true to an extent but western banks are no stranger to scandals.
For the banks the carrot as for so many businesses is the size of the Chinese population but it must be remembered that they are already being served by the imcumbant Chinese banks and other financial institutions. Foreign banks face the complexities of a new market it quotes Richard Gray a partner at EY who says ‘while Chinese regulators and western firms have operated on a pragmatic basis so far, the biggest risk is the political environment changing. Gray says the foreign firms could eventually find themselves becoming “a forced seller of something you helped create” or have problems repatriating earnings, if they fall foul of regulators.
“Entering a different market, you’re very much at the mercy of the local regulators,” he says. “When you’re not part of the club, there is no political shield against regulators regulating you harder than some of the local players.”
In an example of how quickly the mood can change, last November’s initial public offering of Ant Group — once considered a fintech national champion — was pulled by the government at the last minute.’
Obvisouly the western financial institutions greatest hope is that China relaxes the controls on outflows and that they will be able to offer cross border products. This is soemthing Chinese institutions have been seeking to do for years and it explains their keeness to buy overseas financial institutions. It was something that was high on the list when I was at Haitong International and can be seen in Lenovo’s stake in Bank Internationale a Luxembourg. But I doubt that China is going to relax the regulations anytime soon. Interestingly it might after the introduction of a digital currency which would allow it to maintain more control over how the money was being used. But certainly recently China has been much stricter about money leaving its system.
It looks at the political risks and the complexitities of trying to keep ‘onside’ with both the western governments and China. I imagine that China is actually more intent of having them operate in China in order to bring it more lobbying power against the West as we have seen in cases of HSBC and Standard Chartered. Once these firms are sufficently dependant on the business from China then it will be able to exert pressure.
It concludes by quoting David Solomon, Goldman Sachs chief executive, who said ‘the US-China relationship is “incredibly complex”. “There are places where obviously we co-operate, there are places where we’re confrontational,” he said. “We try to navigate that in an appropriate way.”’
I think that is the biggest driver for China, more political leverage over the western banking system, it is not thinking short term but I think, hopes longer term that the Rmb can be the worlds reserve currency.
A good read.
The convenience store can be a magical emporium By John Gapper
Looks at the history of the convenience store; originated in the US and perfected in Japan. A good read.
Why crisis benefits spell trouble for a universal basic income By Merryn Somerset Webb editor-in-chief of MoneyWeek
An interest read about the impact of increased benefits on the willingness of people to return to work.
Worth a read ‘If you give citizens the kind of financial support that allows them to withdraw their labour, many will’
COMPANIES & MARKETS
Oil & gas. Rights cases
Dutch ruling against Shell sets stage for further climate litigation
Business models of polluters from steelmakers to airlines are under mounting threat
Worth a read because it sets a legal precedent. ‘The Shell case was brought on the basis of “unlawful endangerment” under the Dutch civil code. With equivalent laws in other western jurisdictions such as in England, de Jong said, “it’s a universal argument which can easily be translated into other systems”.’
‘Gucho’ looks to reignite HK bourse’s global ambitions
Looks at Nicolas Aguzin the new head of Hong Kong Exchange, who is not a Chinese speaker. The key being the need for Hong Kong to connect to the rest of the world.
An interesting read and he says he wants to build the exchange whilst being ‘China anchored’. It will raise expectations that the bourse is looking for acquisitions.
Tin prices hit 10-year high amid shift to homeworking and supply disruptions.
Another commodity seeing a surge in price driven by its use in smartphones and other electronics and supply disruptions in China and the Democratic Republic of Congo (DRC).
In China the lack of rain has caused a hydroelecric power shortage in Yunnan meaning the closure of smelters. A volcanic eruption in the DRC is causing problems there which impacts about 8% of the worlds supply.
That suggests that part the price surge should be temporary but whilst demand for smartphones and eletronics remains high the current cycle looks set to continue. +VE news for China’s Yunnan Tin which is already +43% this year on the Shenzhen stock exchange.
Retail investors send ‘meme stocks’ soaring as crypto falls
Thrill-seeking amateur traders chase momentum instead of themes amid bitcoin wobble
Makes the point that a lot of retail traders are not following traditional formats but creating a new style; they are looking at assets with strong momentum, large upside potential and supportive newsflow. They are also following on-line forums rather than traditional broker reports and recommendations. Additionally they are using more derivatives giving them the ability to leverage their moves. The fact that they are able and willing to move from one stock, sector or theme means that markets are going to see more volatility.
The jury is still out on whether they will develop into ‘the type of investors who seek longer term capital appreciation instead of rushes of highs and lows.’ It notes that many warn that this could end badly but at present for many it hasn’t. It will be interesting to see if, when we get a market correction whether they will manage to navigate that successfully. For the most part and most in the news has been their willingness to take on shorted stocks and play the upside. The question is will they look at going short if the markets turn down?
Demand for Fed’s cash parking facility at record size as alternatives lose lustre.
‘A facility that allows money market funds and banks to park their cash at the US Federal Reserve was tapped in record size this week, underlining the dearth of options for investors given the collapse in yields for the ultra-safe, short-term securities that they typically invest in.’
Comes as the Fed has scaled back on issuing short term debt in favour of long term issuance. It notes that the facility is working as intended in mopping up excess liquidity and keeping rates from trading below zero.
I worry though is that this is money that isn’t being invested. It is likely that some of this money is from the stimulus programmes and the fact that it is not being spent is good news for those that worry about inflation. Although the fact that it is not being invested in long term investments remains a concern about peoples faith that inflation is not going to be an issue in the longer term.
Worth a read.
Corporate America defies supply-chain pressure in earnings
Makes the point that despite the increased reference to supply chain issues companies are reporting good earnings and margins. The supply issues are leading to concerns about inflation but so far the impact has been muted. Mentions that ‘Companies are safeguarding their margins by cutting costs, improving yield or by raising prices.
Colgate-Palmolive, Kimberly-Clark, Mondelez and Whirlpool are among those that have planned to kick these costs to customers.’
That passing of costs on means that inflation is coming and importantly that will lead to wage inflation which the Fed seems to be focusing on.
Some interesting facts from the article
Global logistics company CH Robinson said ships at West Coast ports in the US are waiting between 15 to 20 days to berth, compared with no waiting period in a normal market.
For every truck, there are more than seven loads of freight to be carried compared with three in more normal times.
The ISM’s April survey showed an order backlog that was the highest on records that date to 1993.
In April, the average lead time for sourcing production materials rose four days to 79 days, the highest since ISM began collecting this data in 1987.
Margins haven’t been eroded yet. The blended net profit margin; how much profit is produced as a percentage of revenue, for the first quarter is 12.8 per cent, which, if it holds, will be the highest since FactSet began tracking this metric since 2008.
Deal brewing with banks over Treasury bonds as Biden officials seek reforms By John Dizard
Makes the case for there being central clearing party (CCP) for the Treasury market. An interesting read because it concludes ‘CCPs are a cyclical recurring structure. They work well in medium-size crises and are abandoned when hit with big crises. History will repeat.’
The Long View
Calm reigns in bond markets despite fears over inflation
By Michael Mackenzie
Looks at why there is calm in the markets but also highlights why there are reasons to be worried.
'“The paradox is that the more successful central banks are in driving up valuations of risky assets using stimulus, the harder it becomes for them to exit,” says Matt King, global markets strategist at Citi.'
'“The Fed says it has the tools to fight inflation, and it does,” says Steven Blitz, chief US economist at TS Lombard. But a question also awaits answering, he says: “Is it willing to accept the end of capital market pricing distortions that their policies have created?”'
That I think is the crucial point at present the market is largely ignoring the potential impact of rising yields on the hugely increased amound of debt that there now is in the system.
A good read.
AstraZeneca and Oxford face setbacks and success as battle enters next phase
Deadly side-effects and EU lawsuit among blows but there are reasons to believe the jab has a healthy future.
An interesting read
A review of Noise which follows ‘Thinking, Fast and Slow’
A humbling lesson in human inaccuracy
The role played by random error in our decision-making — and what to do about it. It does make you want to read the book.
This finely constructed work looks at how privilege and success have long been intertwined — but says the divisive system is not beyond repair. By John Lloyd Reviews ‘The Aristocracy of Talent: How Meritocracy Made the Modern World’ by Adrian Wooldridge
Economics with a humanities face
The discipline must overcome petty squabbles if it is to fulfil its potential to guide us to a better future. By Felix Martin Reviews Bettering Humanomics: A New, and Old, Approach to Economic Science by Deirdre Nansen McCloskey she is professor emerita of no fewer than six separate disciplines at the University of Illinois in Chicago, and a truly unclassifiable scholar who has made major contributions to economic theory, history, methodology, and statistics.
The couple at the heart of Yan Lianke’s newly translated novel become the Bonnie and Clyde of Maoist fanaticism, writes Boyd Tonkin. Reviews Hard Like Water by Yan Lianke translated by Carlos Rojas Chatto & Windus. Interesting because Yan Lianke started as a propaganda writer for the People’s Liberation Army, ‘Yan still lives in Beijing and — although state censors have regularly banned his books — has refused either to self-exile or fall silent.’