As U.S. Eyes New China Chip Curbs, Turmoil Looms for Global Market

Ahead of tomorrow's BOE interest rate decision, a somewhat unique and interesting situation has cropped up. Most relevant for us traders is that it could mean there will be a strong reaction in the pound no matter what the BOE does.

According to the latest survey of economists by Reuters, the consensus is that the BOE will hike rates by just 25 basis points. That option won out by just a couple of votes against the alternative: that the BOE will raise rates by 50bps. Given the trajectory of the Bank so far, that makes sense.

But a review of research analysts ranging from TD Ameritrade, ING and HSBC shows that a majority expect that the BOE will hike by 50bps. The market appears to be agreeing with the analysts over the economists, with forward yields close to 50bps ahead of target. Meaning that if the BOE fails to deliver, there could be a swing towards weakness in the pound.

The expectation for a "double" hike isn't all that firm, meaning the pound could firm up quite a bit if the BOE delivers on expectations. This kind of discrepancy is a classic set up for an erratic market following the rate decision as differing views on the outlook for the economy react differently.

As has been the situation for months now, the BOE is in a very tight place. Inflation is at a multi-decade high, but business and consumer sentiment is posting the worst figures since the start of the post-covid recovery. If the BOE goes too fast, it could materialize what a lot of economists expect to be an impending recession. But if the BOE doesn't do enough to bring down prices, then that could lead to a recession. The BOE hasn't raised rates by more than 25 basis points since before it gained its independence in the 90s.

It might be that record inflation needs a record policy change to deal with it. Whether MPC members will agree with that is a different matter. The vote has been 3-6 several times now, with the dissenters pushing for a bigger rate hike. All they need is to convince just two members more.

But if there is a bare minimum majority 5-4 in favor of a "double" hike, then many traders could think it's just a one-off. That could undermine the tightening effect of the hike. Another possibility is that the vote is 4-5, and the "double" hike loses out by just one vote. That could raise hopes that at the next meeting there will be 50bps and undermine the dovish effect of a smaller rate hike.

While analysts and economists disagree on how much the rate hike at the next meeting will be, there is much broader agreement on the BOE raising rates through the rest of the year. Inflation is forecast to remain high, and economic growth to falter. So it's more a question of whether the BOE decides to take the pain now, or next month.

When US House Speaker Nancy Pelosi insisted on visiting Taiwan, the Standing Committee of National People Congress China, the Foreign Affairs Committee of the Chinese People's Political Consultative Conference (CPPCC) National Committee, the Ministry of Foreign Affairs, the Ministry of National Defence and Taiwan Work Office of the Communist Party of China Central Committee were the first to voice their positions. Overall, the statement was serious, restrained, and principled, but it was the actions of the military that provided the substantive response.

From the evening of Pelosi's arrival in Taipei, the Eastern Theater of the Chinese People's Liberation Army (PLA) will conduct a series of joint military operations around Taiwan Island, conducting joint air and sea exercises in the northern, southwestern, and southeastern sea and air domains of the island, conducting long-range live firing in the Taiwan Strait and organizing test firings of normal conductive fire in the eastern sea of the island. And then, the Xinhua News Agency further published an area graph: significant military drill operations will be conducted, and live firing will be organized from 12:00 to 12:00 on 4 August to 7. In terms of the scope of the military exercise, Taiwan is surrounded by six directions in an 'all-inclusive' live-fire exercise.

In comparing the difference between the PLA's 1996 exercise area and the 2022 exercise area, the former is 12 nautical miles away, and the latter (southwest corner) is less than 9 nautical miles. Moreover, it also means that there is no longer a so-called center line in the Taiwan Strait and that the Taiwan Air Defence Identification Zone has been 'abolished.' It is believed that such drills will become a regular feature in the future.

This is the first time that the PLA has designated the waters and airspace around Taiwan as a military exclusion zone in the name of 'joint military operations.' This objectively creates a risk to aircraft and ships entering and leaving Taiwan during the military exercise, bringing Taiwan's main routes under control. This, in turn, creates a controllable encirclement of Taiwan. The "encirclement without fighting" is a good option for a frightened enemy is a defeated enemy.

Moreover, in fact, the night before Pelosi's arrival in Taiwan, the General Administration of Customs of the People's Republic of China (GACC) had already announced a ban on the import of more than 100 food companies from Taiwan. According to the official website of the GACC, among the 107 Taiwanese manufacturers that have received registration numbers in the mainland under the product category of "biscuits, pastries, and bread," 35 of them, or 32%, have a status of "suspended imports," including many well-known companies. According to news quoted by the Taiwanese media, more than 3,000 products could be involved in the ban. Taiwan's Ministry of Economic Affairs has confirmed the news and is expected to work with Taiwan's Council of Agriculture to assess the potential economic damage and study countermeasures.

On 3 August, mainland China announced that with immediate effect, a moratorium on the import of citrus fruits such as grapefruit, lemons, oranges and chilled white scallops, and frozen mackerel from Taiwan to the mainland would be imposed. At the same time, it has decided to suspend the export of natural sand to Taiwan.

According to statistics from Taiwan's Ministry of Finance, Taiwan's food exports to the mainland in 2021 are estimated at US$1.682 billion. Among them, prepared foods account for the largest proportion, with exports amounting to US$646.21 million; animal products and live animals rank second at US$435.06 million; beverages, alcohol, and vinegar amount to US$337.33 million, while plant products amount to US$231.76 million.

This arrangement is tantamount to an early "practice" of a military blockade and siege of Taiwan, the frequent implementation of which will cripple Taiwan's economy and thus defeat the forces of Taiwan's independence. If such a "blockade" becomes the norm, Taiwan's business environment will deteriorate drastically, and a large amount of capital and industries will exit successively. As a result, the economy will be sluggish, and people's livelihoods will not be protected, which would be the most powerful way to deal with Taiwan's independence.

It has to be recalled that in 2012, China handled the Diaoyu Islands issue effectively by the same method of "the supreme art of war is to subdue the enemy without fighting" and achieved regular cruises over the sea areas of the Diaoyu Islands.

The year 2012 marks the 40th anniversary of the normalization of diplomatic relations between China and Japan. However, in September that year, Noda's cabinet approved the so-called "nationalization" of the Diaoyu Islands. According to the Japanese media, the Noda government would implement eight measures to strengthen its control over the Diaoyu Islands after the completion of the "purchase" process, which in essence was a further illegal seizure of the islands. A few hours later, the Chinese government reacted quickly by announcing for the first time the baseline of the territorial waters of the Diaoyu Islands and its subsidiary islands, declaring China's sovereignty over the islands to the world. This declaration, made in accordance with the 1992 Law of the People's Republic of China on the Territorial Sea and Contiguous Zone, established the legal basis for China's future exercise of sovereignty.

On 11 September, the Noda cabinet continued to go it alone and signed the 'island purchase' contract. As a combination of defense and counter-attack, China then took a series of measures to declare and reflect China's sovereignty over the Diaoyu Islands: it sent more than 20 maritime surveillance and fishing vessels directly to the waters near the islands; it even sent an unprecedented two frigates to demonstrate. On the 15th and 16th, China not only announced the coordinates of the Diaoyu Islands and some of its subordinate islands but also decided to make a submission to the Commission on the Limits of the Continental Shelf, established by the United Nations Convention on the Law of the Sea, for the continental shelf beyond 200 nautical miles in parts of the East China Sea.

Since September 2012, Chinese surveillance ships, fishing vessels, and other law enforcement vessels have begun frequent cruises into the territorial waters belonging to the Diaoyu Islands and have implemented repellent measures against Japanese patrol vessels. Such regular cruises have been continued. According to Chinese official announcements, the China Marine Surveillance Elite Vessel spent two-thirds of its time away from land on missions in 2012, covering nearly 30,000 nautical miles a year. On 22 July 2013, the China Maritime Police Bureau was officially listed as part of the State Oceanic Administration. In 2015, China promulgated a white paper on national defense, which for the first time explicitly proposed a 'combination of near-sea defense and far-sea defense.' On 4 July 2018, the formation of Chinese Marine Police ships 2305 cruised in the territorial waters of the Diaoyu Islands. This was the first time that a Chinese Marine Police formation patrolled the territorial waters of the Diaoyu Islands after the Marine Police team was subordinated to the Armed Police. In July 2020, the Japanese side claimed to have spotted Chinese official vessels around the Diaoyu Islands for 100 consecutive days, setting a record for the longest continuous patrol days since Japan 'nationalized' the Diaoyu Islands in September 2012.

In addition, since the Noda government 'nationalized' the Diaoyu Islands, protests have erupted in hundreds of Chinese cities, sales of Japanese products have plummeted, and human exchange activities such as tourism to Japan have suffered a significant setback. Of course, the Japanese side could also launch an action to boycott Chinese products, but no one in Japan is advocating this. If Japanese people did not purchase Chinese products, from daily necessities to clothing and food in the eatery, they would not be able to access cheap products, and many Japanese would be in trouble due to high prices. Japan is economically powerless against China. The Japanese government had not taken these issues into consideration when it nationalized the Diaoyu Islands. This has dealt an economic hit to Japan. In response to this underestimation, Japanese public opinion, which had been tough beforehand, gradually turned to criticize the Noda government for acting recklessly. Noda also admitted to underestimating the strength of the Chinese reaction and stated that he would take all measures to remedy the bilateral relationship.

This is how Beijing handled the "nationalization" of the Diaoyu Islands 10 years ago. It worked for Japan, not to mention Taiwan. Although China's 'Taiwan issue' is essentially a game between China and the US, the core of the issue is still Taiwan's sovereignty and right to rule. Just as the Japanese Noda government's attempt to 'nationalize' the Diaoyu Islands promoted regular cruises years ago, this Pelosi's visit to Taiwan will not only promote the normalization of cruises to Taiwan but the frequent 'rehearse' of the military blockade and siege of Taiwan. This is an acceleration of the pace of armed reunification.

Turkish inflation rose to a fresh 24-year high of 79.6% in July, data showed on Wednesday as the lira's continued weakness and global energy and commodity costs pushed prices higher, though the price rises came out below forecasts.

Inflation began to surge last autumn, when the lira slumped after the central bank gradually cut its policy rate by 500 basis-points to 14% in an easing cycle sought by President Tayyip Erdogan.

Month-on-month, consumer prices rose 2.37% in July, the Turkish Statistical Institute said, below a Reuters poll forecast of 2.9%. Annually, consumer price inflation was forecast to be 80.5%.

Jason Tuvey, senior emerging markets economist at Capital Economics, said annual inflation may be approaching a peak with energy inflation falling sharply and food inflation appearing close to topping out.

"Even if inflation is close to a peak, it will remain close to its current very high rates for several more months," Tuvey said in a note.

"Sharp and disorderly falls in the lira remain a key risk," he said.

The biggest annual rise in consumer prices was in the transportation sector, up 119.11%, while food and non-alcoholic drinks prices climbed 94.65%.

Inflation this year has been fuelled further by the economic impact of Russia's invasion of Ukraine, as well as the lira's continued decline. The currency weakened 44% against the dollar last year, and is down another 27% this year.

The lira was trading flat after the data at 17.9560 against the dollar. It touched a record low of 18.4 in December.

Annual inflation is now at the highest level since September 1998, when it reached 80.4% and Turkey was battling to end a decade of chronically high inflation.

Last week's Reuters poll showed annual inflation was seen declining to some 70% by end-2022, easing from current levels as base effects from last year's price surge take effect.

The domestic producer price index climbed 5.17% month-on-month in July for an annual rise of 144.61%.

The government has said inflation will fall as a result of its economic programme, which prioritises low rates to boost production and exports and aims to achieve a current account surplus.

Erdogan has said that he expects inflation to come down to "appropriate" levels by February-March next year, while the central bank raised its end-2022 forecast to 60.4% last Thursday from 42.8% previously.

The bank's inflation report showed the estimated range of inflation reaching nearly 90% this autumn before easing.

Opposition lawmakers and economists have questioned the reliability of the Turkish Statistical Institute's (TUIK) figures, claims TUIK has dismissed. Polls show Turks believe inflation is far higher than official data.

Euro zone retail sales plunged more than expected in June as prices at factory gates continued to rise, data showed on Wednesday, signalling a weakness in consumer demand that could herald a recession in the second half of the year.

The European Union's statistics office Eurostat said the volume of retail sales in the 19 countries sharing the euro, already adjusted for inflation, fell 1.2% month-on-month in June for a 3.7% year-on-year decline.

Economists polled by Reuters had expected unchanged monthly sales and only a 1.7% annual fall.

The drop in retail sales, a proxy for consumer demand, comes as producer prices rose 1.1% month-on-month in June for a 35.8% year-on-year surge, Eurostat said, signalling more upward pressure on consumer inflation and downward pressure on demand.

While the euro zone economy grew more than expected in the second quarter, economists said the expansion was likely to have been the last hurrah before a likely recession in the second half of the year.

They said the economy would suffer because of the surging prices, fuelled mainly by high energy costs caused by Russia's invasion of Ukraine, and global supply chain problems.

Eurostat data showed that energy prices in June were almost double compared to 12 months earlier, but even if they were excluded, producer prices were still 15.6% higher year-on-year in June, a rise that is bound to affect consumers' purchasing power.

The biggest drop in retail demand was for non-food products, except car fuel, especially via mail orders and internet where they plunged 12.5% year-on-year, Eurostat said.

Germany, Europe's biggest economy, showed the steepest drop in retail sales of 8.8% year-on-year, with the third biggest Italy also showing a decline of 2.8% in annual terms. Second biggest France still managed a 0.6% year-on-year rise.

Retail sales also dropped 6.1% year-on-year in the Netherlands, 4.8% in Austria, 8.8% in Ireland and 4.5% in Finland.

The savings of millions of people in Britain are set to be wiped out by the rising cost of living, a report has warned.

The UK is set to enter a recession which will hit millions of the most vulnerable households, especially in the worst-off parts of the country, the National Institute of Economic and Social Research (NIESR) said.

More than 2.5 million households will have their savings obliterated, it found, meaning that one in five UK households will have no savings by 2024.

The institute also said the number of households living from salary to salary would nearly double to 6.8 million, from 3.9 million, or 25 per cent of all UK households, in 2024.

The Bank of England is expected to raise interest rates by up to 0.5 percentage points this week in an attempt to bring inflation under control.

Gross domestic product is set to shrink in the third and fourth quarters of this year, and in the first three months of next year.

The report warned of a "three-quarter technical recession, but a relatively shallow one".

However, it also said there was an "increased possibility of a deeper recession".

The threat of stagflation, a nightmare of economists, has returned for the first time since the 1970s, the report said.

Stagflation is where an economy experiences slow growth, high unemployment and rising prices.

The economy is expected to grow this year, the NIESR said, but only by 3.5 per cent, before slowing to 0.5 per cent next year — far from an emphatic bounce-back from the pandemic.

The report found that inflation will peak around the last three months of this year.

Consumer price index inflation will reach close to 11 per cent, but will fall back to 3 per cent by the end of 2023. Inflation currently stands at 9.4 per cent.

"The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously," said Prof Stephen Millard, NIESR deputy director for macroeconomics.

He called on the Bank of England to try to bring inflation under control — interest rates of 3 per cent will probably be necessary for that — and for the new chancellor to support households hit by the recession and cost-of-living squeeze.

Prof Adrian Pabst, deputy director for public policy at NIESR, said: "All households are facing soaring energy and food bills but too many have to resort to credit, build up payment arrears or see their savings wiped out.

"The incoming administration needs to provide immediate emergency support to the 1.2 million hardest hit households and the one in five households that will become financially vulnerable as the energy price cap is lifted and the recession begins to bite."

The report forecast that real incomes will be permanently lower, dropping 2.5 per cent in 2022 alone.

Real incomes will be 7 per cent below where they were headed before Covid by 2026, it said.

About 3 per cent to 5 per cent of this hit will come from Brexit while 1 per cent to 3 per cent will come from energy price rises and the remainder from government policy.

The report called for the government to increase universal credit payments by £25 a week for at least six months from October, which would cost about £1.4 billion, and also to increase energy bill relief payments from £400 to £600 for 11 million poor households, with the total costs amounting to £2.2bn.

The research shows that between the impact of inflation and the refusal of the government to raise benefits in line with inflation, the 10 per cent poorest households will be about 5 per cent worse off, despite the support they have been promised on energy bills.

It makes them the worst hit of any income group in society.

OPEC+ might have to raise oil production to avoid market overheating, OPEC+ member Kazakhstan said on Wednesday, as the group of oil producers meets amid U.S. pressure to add barrels to the market while most members have already exhausted their output potential.

"We have always said that the preferred price corridor is $60-80 per barrel. Today the price is $100. So we might have to raise output to avoid overheating," Kazakh energy minister Bolat Akchulakov told reporters.

The market has been largely expecting OPEC+ to keep output steady or opt for a slight increase.

The United States has put OPEC leaders Saudi Arabia and United Arab Emirates under pressure to pump more oil to help rein in prices boosted by rebounding demand and Moscow's invasion of Ukraine.

U.S. and Western sanctions on Russia have caused prices of all types of energy to soar, resulting in inflation at multi-decade highs and central bank interest rate hikes.

OPEC has been increasing output in line with its targets by about 430,000-650,000 barrels per day a month in recent months and has refused to switch to bigger output increases.

Group sources have cited a lack of spare capacity among members to add more barrels as well as the need for further cooperation with Russia as part of the wider OPEC+ group.

"It seems unlikely OPEC+ will do anything when it meets later today," said Callum Macpherson from Investec, citing rising concerns about a slowing global economy and a lack of spare capacity.

"OPEC+ is struggling to meet the levels its production limits have now been raised to," he said, adding that a surprise decision to raise production would put oil under further pressure to fall below $100 per barrel.

The meeting on Wednesday will discuss production policies from September and possibly onwards.

By September, OPEC+ was meant to have wound down all of the record production cuts it implemented in 2020 after the pandemic slashed demand.

By June, however, OPEC+ was almost 3 million barrels per day below its quotas as sanctions on some members and low investment by others crippled its ability to boost output.

Only Saudi Arabia and the UAE are believed to have some spare capacity left to increase production.

French President Emmanuel Macron has said he had been told that Saudi Arabia and the UAE had very limited ability to increase oil production.