UK economy in ‘a lot better shape’ than bleak figures suggest, fund manager says

Summary:

Figures published earlier this month showed that the U.K. GDP contracted by 0.5% in December, as the economy flatlined over the final quarter of 2022 to narrowly avoid a technical recession.

LONDON — The U.K. has thus far avoided a widely anticipated recession, and the signs from the business world are that the economy may be holding up better than feared, according to veteran Schroders fund manager Andy Brough.

Figures published earlier this month showed that the U.K. GDP contracted by 0.5% in December, as the economy flatlined over the final quarter of 2022 to narrowly avoid a technical recession.

The Bank of England projects that the British economy has entered a shallow recession in the first quarter of 2023 that will last for five quarters, however, as energy prices remain high, and rising market interest rates restrict spending.

But Brough, head of the pan-European small and mid-cap team at British asset manager Schroders, said that his interactions with businesses suggested greater resilience than the weak GDP figures and official forecasts imply.

“The consumer’s still out there spending. Every number is a surprise to the market, isn’t it? I walk up and down the streets or cycle into work, [and] there’s still lots of people out there, and people are still buying houses, still buying cars, they’re still shopping,” he told CNBC’s “Squawk Box Europe” on Wednesday.

“There’s seven wonders of the world, and the eighth wonder of the world is how GDP is calculated,” he said, adding that he was “surprised” by the scale of the December contraction.

In their latest earnings reports, British banks mostly increased their loan loss provisions — money set aside to insure against customers defaulting on their debts.

Brough advised the market against reading this as a sign that tightening financial conditions are heightening default risks among U.K. consumers, and said that companies he is speaking to are actually “doing okay.”

“Underneath companies’ profitability x-minus today, we’re seeing pretty good dividend increases, pretty good earnings statements, so, underlying, I think the economy is in a lot better shape. And it’s very easy to alight on something like a Lloyds Bank

and the other financial companies and say things are tough, but actually it’s a mechanical calculation, this provision.”

Lloyds Bank on Wednesday announced a £2 billion ($2.42 billion) share buyback and increased its final dividend to 1.6 pence per share. It was the latest in a string of major U.K. businesses to report strong fourth-quarter earnings and boost capital returns to shareholders.

‘Signs of life’ in business investment

Uncertainty over future relations between Westminster and Brussels have hammered business investment since the U.K. voted to leave the European Union in 2016, in turn hampering productivity expansion and adding to the direct costs of Brexit on the U.K. potential growth.

Real business investment in the fourth quarter of 2022 was only fractionally higher than before the Brexit vote, but recent trends look more hopeful, according to Kallum Pickering, senior economist at Berenberg.

“Albeit from a low base following the pandemic-related slump, real business investment increased by c10% during 2022 — with a 4.8% [quarter-on-quarter] rise in Q4 alone,” Pickering said in a research note on Tuesday.

“It remains an open question whether momentum can remain strong in the coming quarters as firms brace against the headwinds of tighter financial conditions and sky-high energy costs, but firms have both the need and the means to further step up investment.”

He added that the outlook “appears favourable,” if political uncertainty continues to ease — with Prime Minister Rishi Sunak’s government moving away from the populism of fallen predecessors Liz Truss and Boris Johnson, while the main opposition Labour Party shifts to the center under “reliable pragmatist” Keir Starmer — and the U.K. avoids a bad recession.

Pickering also highlighted that U.K. businesses are “lacking confidence, not opportunity,” as the weakness in business investment cannot be attributed to concrete factors, such as difficulty financing capital spending or a lack of viable technologies that may help production processes.

“Non-financial corporations are sitting on deposits equivalent to c23% of annual GDP. Non-financial corporations’ debt is low too. At c75% of GDP in late 2022, debt is at late-1990s levels, well below the GFC peak of 103% in 2009 and far below the current Eurozone level of c145%,” he highlighted.

“With its paltry productivity performance in the post-GFC era — output per worker rose by just 5.5% between Q2 2008 and Q3 2022 — the U.K. is desperate for a wholesale uplift in its capital stock.”

In the six years of “noise and chaos” since the Brexit vote, the diminishing risk of a retaliatory trade confrontation with the EU should offer comfort to U.K. businesses and financial markets, and Pickering suggested better times are ahead.

“It is normal for politics to go awry from time to time and for the economy to suffer as a result. Before the UK’s latest wobble, this last happened in the 1970s, but once things started to get back on track by the early 1980s, economic performance improved rapidly,” he said.

“With any luck, the worst of the political uncertainty that has held back business investment since the Brexit vote is coming to an end.”

With business investment accounting for around 10% of the U.K. GDP, a recovery to pre-Brexit-vote growth rates of around 5.5% could add between 5 and 6 percentage points to annual GDP growth over the next few years, Berenberg forecasts.

“Is that feasible? For a while, yes. Facing persistent labour shortages and a host of global supply frictions, U.K. firms badly need to add to domestic capacity in order to meet growing demand,” Pickering said.

“A period of more settled politics in the years ahead can provide a suitable backdrop for them to do so.”

Source：CNBC

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Alex

Close your eyes and imagine a world without Russia.

If you’re in the Baltics, Poland, Ukraine or any of the other territories that have suffered through the centuries under Russian repression, the scenario might sound like deliverance.

“Russia is going to disintegrate,” former Czech Foreign Minister Karel Schwarzenberg, a prominent aristocrat and longtime Václav Havel confidant, recently predicted. “Large parts of it will seek independence as soon as they can.”

The prince should be careful what he wishes for.

While most experts say Schwarzenberg’s prediction remains unlikely, the risk that Russia explodes under pressure from its failed assault on Ukraine has nonetheless set alarm bells ringing from Berlin to Washington, as military and diplomatic strategists contemplate a postwar scenario in which the country fractures into a patchwork of warlord-controlled fiefdoms, similar to those that dominated Afghanistan in the 1990s or present-day Libya.

“When in history have the Russians faced a truly major defeat and their politics remained intact?” asked Peter Rough, a former official in the administration of U.S. President George W. Bush who now heads the Center on Europe and Eurasia at the Hudson Institute, a Washington-based think tank. “I don’t see how a major military defeat could allow Putin to remain and the borders of the Russian Federation to remain what they are today.”

Scenarios range from uprisings among Russia’s more than 20 ethnic territories sprinkled across the country’s 11 time zones to a full-scale descent into the kind of conflict and lawlessness that has gripped Libya since the fall of its dictator Muammar Gaddafi. Either would pose grave threats to regional stability, with potentially profound consequences for Europe, including further disruption of supply chains, clashes between nuclear-armed factions and new waves of refugees fleeing a destabilized Russia.

The subject is so sensitive that the officials refuse to speak publicly about their deliberations or even acknowledge their contingency planning for fear of giving Russian President Vladimir Putin a welcome talking point and fueling Russian support for the war. (A recent event and report by the Hudson Institute on the issue prompted an angry response from Russian Foreign Minister Sergey Lavrov, for example.)

When asked by POLITICO to discuss such scenarios during the Munich Security Conference last week, Western officials declined to address the subject on the record.

“Could it happen? For sure,” said Ivan Krastev, a political scientist and chairman of Bulgaria’s Center for Liberal Strategies who has advised a number of European leaders. Krastev stressed that disintegration “isn’t likely, but not impossible.”

“But focusing on this option is totally counterproductive,” he added. “If you say, ‘we’re here to dismantle Russia,’ you’re making a strong argument for Putin’s narrative that the West is the aggressor.”

In fact, the Russian president returned to that theme again Tuesday in an address to the country’s political and military establishment on the state of the country ahead of the first anniversary of his full-scale assault on Ukraine. “The elites of the West do not hide their purpose,” he said, suggesting that the U.S. and its allies aim to destroy Russia.

On Wednesday, former Russian President Dmitry Medvedev went even further, saying Russia will “disappear” if it loses the war in Ukraine, which he blamed on the U.S.

“If Russia stops the special military operation without achieving victory, Russia will disappear, it will be torn to pieces,” Medvedev said in a Telegram post, using the euphemism for Russia’s invasion of Ukraine.

Uprisings

That message resonates in a country repeatedly wracked by military conflict and still traumatized by the collapse of the Soviet Union.

Russia’s travails during World War I helped spark the Russian Revolution and a civil war that pitted Vladimir Lenin’s Bolsheviks against a motley group of royalists, capitalists and other political forces known as the White Army. The war, one of the bloodiest in Russian history, included a number of pogroms targeting Jews. It ended in 1923 with the Red Army prevailing but left deep divisions in the society.

The dissolution of the Soviet Union in the 1990s — which saw the breaking away of countries like Ukraine, Belarus and Kazakhstan, as well as EU countries like Estonia, Latvia and Lithuania — played out more peacefully, but it’s far from certain similar agitation from the peripheries today wouldn’t be met with a more forceful response.

The structure of the Soviet Union made its breakup relatively straightforward from a legal standpoint. In contrast, the Russian Federation is a single country with a very powerful central administration. Unlike the Soviet Union, where half of the citizens were non-Russian, 80 percent of the population of modern-day Russia identifies as Russian.

The most important factor preventing bloodshed in 1991 was that Russia didn’t object to dismantling the Soviet Union. It’s difficult to imagine that either Putin or a potential successor would idly stand by — or that a majority of the population would allow them to — if regions like Bashkortostan in the southern Urals or Siberia, Russia’s “treasure chest,” where most if its natural resources lay buried, tried to break off.

One worry among Western planners is that if the war in Ukraine ends with the Kremlin’s defeat — as most hope — Russian soldiers will return home and carry on the fight there, helping to fuel the country’s disintegration.

Many of the men fighting for Russia in Ukraine come from underprivileged Russian territories including the mountains of eastern Siberia, where much of the population has ethnic and cultural ties to Mongolia, and the North Caucasus, an area of diverse ethnicity that includes Chechnya and Dagestan.

The Chechen leader Ramzan Kadyrov, who played a central role in crushing the Islamist uprising in Chechnya in the early 2000s, recently said he intends to set up a private army modeled on the Wagner Group, a brutal mercenary force controlled by Putin ally Yevgeny Prigozhin.

Speaking in 2011 in the North Caucasus, Putin made little secret of his distaste for the percolating independence movements there.

“If this happens, then, at the same moment, not even an hour, but a second, there will be those who want to do the same with other territorial entities of Russia … and it will be a tragedy that will affect every citizen of Russia without exception,” he said.

That suggests any move by regions to free themselves of Moscow’s control would be bloody, both between the central government and would-be secessionists and among the regions themselves.

“New statelets would fight with one another over borders and economic assets,” Marlene Laruelle, who directs the Institute for European, Russian, and Eurasian Studies at George Washington University, wrote in a recent essay. “Moscow elites, who control a huge nuclear arsenal, would react with violence to any secessionism.”

Infighting

What makes the possibility of a Russian collapse so alarming is, of course, the country’s nuclear arsenal — a strategic ace-in-the-sleeve Putin has repeatedly made mention of over the past 12 months. On Tuesday, the Russian president announced he was suspending Russia’s participation in the New START Treaty, the last remaining nuclear arms control pact between Moscow and Washington.

In the run-up to the collapse of the Soviet Union, the U.S. and its allies were far from sanguine about the nuclear threat. U.S. intelligence warned at the time that tactical nuclear weapons, possibly including so-called suitcase bombs, could end up on the terrorist black market if steps weren’t taken to secure them.

While Washington welcomed the independence of the Baltic states, there was deep concern that parts of the Soviet nuclear arsenal could fall into the wrong hands in other corners of the empire, including Kazakhstan and Ukraine, with disastrous consequences.

That’s less of a threat in Russia today for the simple reason that there aren’t nuclear weapons in the potential breakaway regions, according to Western analysts.

The more worrying prospect is the outbreak of conflict between members of the Russian establishment, and a struggle for control of the armed forces. Political infighting has already broken out between the Wagner Group chief, Prigozhin, and the Russian defense minister, Sergei Shoigu, and the chief of the general staff of the armed forces, Valery Gerasimov.

On Tuesday, Prigozhin — a Putin ally whose soldiers have been fighting near the Ukrainian town of Bakhmut — accused his rivals of withholding ammunition and air transport, adding that their actions could amount to “treason.”

A big question in any scenario of Russian disintegration is what role China would play. While instability in its resource-rich neighbor would present Beijing with a host of opportunities to fuel its voracious appetite for raw materials, from natural gas to potash, most observers believe it will not seek to redraw Russia’s borders.

“China is going to be very careful,” Krastev said.

Nor is there likely to be much demand by local Russian populations in Siberia or elsewhere to seek out Chinese domination. Russia’s outer regions are generally poor and rely heavily on the central administration in Moscow for money, one more reason for them to stick with the devil they know.

What’s clear is that while the crack-up of Russia might still be a low-probability event, it’s not one that Western planners can afford to ignore. As Russia watchers debate the prospects for the country’s “decolonization,” they shouldn’t dismiss the possibility that Putin’s attempt to reassemble the Kremlin’s lost empire could end up costing it at least some of its territory.

“The tragedy of Russia is that it doesn’t know where its borders are,” Schwarzenberg, whose family fled Soviet-controlled Czechoslovakia in 1948, said.

The danger is that this could quickly become tragic not just for Russia, but for the rest of the world too.

Source：POLITICO

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Owen Li

Market Picture Bitcoin closed below $24K for the first time in 8 days on Wednesday. On Thursday morning, however, buyers regained the upper hand, pushing the coin up to $24.4K. BTC came under pressure on Tuesday and Wednesday amid falling stock indices. Last night, the decline paused, which helped the crypto market recover some of its losses, bringing its total capitalisation back to $1.11 trillion.

Bitcoin Maintains a Positive Short-term Outlook_1

Interestingly, according to Bloomberg, the monthly correlation between bitcoin and the S&P 500 has fallen to its lowest level since 2021. And it was easy to see how long cryptocurrencies ignored the decline in equities.

In our view, these markets remain interconnected and only “hear” each other’s murmurs when they are persistent and pronounced. Less pronounced trends are perceived as noise that is filtered out.

The technical view of bitcoin’s short-term momentum leaves room for further upside, as the most recent downside momentum was stopped at 61.8% of the upside momentum from last week’s lows. Without the strong negative momentum of the equity indices, bitcoin retains a chance to test the 25,000 level before the end of the week. Such sustained attempts to climb higher could well take it there.

News Background

New York’s financial regulator is stepping up its crypto market oversight as its Department of Financial Services (NYDFS) has announced an update to its tools for monitoring illegal cryptocurrency activity among its regulated entities.The Ethereum team has scheduled the rollout of the Shanghai-Capella (Shapella) update to the Sepolia test network for 28 February. This update will follow The Merge and allow validators to withdraw funds from stacks. After Sepolia, the hardfork will be tested on the Goerli network and then (probably in March) implemented on Mainnet.Shops in France will start accepting bitcoin payments thanks to a partnership between the Binance exchange and credit card company Ingenico. The programme will later be extended to European countries where Binance is licensed to operate, including Italy, Lithuania, Spain, Cyprus, Poland and Sweden.

Source：FXEMPIPE

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Samantha Luan

MOSCOW/WASHINGTON - The United States is concerned by greater alignment between China and Russia, the US State Department said on Wednesday after Russian President Vladimir Putin hailed “new frontiers” in ties with Beijing and signalled China’s President Xi Jinping would visit his country.

Word of Mr Xi’s visit comes as Washington has said China is considering providing weapons for Russia’s war in Ukraine, a move that would threaten to escalate the conflict into a confrontation between Russia and China on the one side and Ukraine and the US-led Nato military alliance on the other.

Mr Putin welcomed China’s top diplomat, Mr Wang Yi, to the Kremlin on Wednesday, telling him bilateral trade was better than expected and could soon reach US$200 billion (S$268 billion) a year, up from $185 billion in 2022.

“We await a visit of the President of the People’s Republic of China (PRC) to Russia, we have agreed on this,” Mr Putin told Mr Wang, referring to Mr Xi.

“Everything is progressing, developing. We are reaching new frontiers,” Mr Putin said.

US State Department spokesman Ned Price said Mr Wang’s visit to Russia on the eve of the war’s one-year anniversary was further evidence of Beijing’s alignment with Moscow.

“We are concerned because these two countries share a vision,” Mr Price told a press briefing. “It is a vision... of an era in which big countries could bully small countries, borders could be redrawn by force, an era in which might could make right,” he said.

“We have not yet seen the PRC provide Russia with lethal aid, but we don’t believe they’ve taken it off the table either,” Mr Price added.

Russia’s Tass news agency cited Mr Wang – who held a separate meeting with Russian Foreign Minister Sergei Lavrov – as saying China would “firmly adhere to an objective and impartial position and play a constructive role in the political settlement of the crisis” in Ukraine.

The Russian Foreign Ministry said it welcomed China taking a more active role in resolving the conflict and said it valued China’s “balanced approach”. But in a separate statement, the ministry said Mr Lavrov and Mr Wang had not discussed a reported Chinese peace plan.

For Mr Putin, China’s big-power support amid the biggest confrontation with the West since the height of the Cold War allows him to cast Russia’s isolation in the West as a tilt towards Asia.

Mr Wang told Mr Putin that relations between the two countries had withstood a volatile international situation.

The relationship between China and Russia, Mr Wang said through an interpreter, was not directed against any third party but equally would “not succumb to pressure from third parties” - a clear jab at the US.

“Together we support multi-polarity and democratisation in international relations,” Mr Wang told Mr Putin.

When Mr Xi met Mr Putin face to face just before Russia sent troops into Ukraine in February 2022, they sealed a “no limits” partnership that triggered anxiety in the West.

Russia is now more dependent on Beijing than ever and is a junior partner to a resurgent China, which already leads in many 21st century technologies.

US Secretary of State Antony Blinken on Saturday warned Mr Wang of consequences should China provide lethal support for Russia’s invasion, something Beijing has denied doing.

After Mr Blinken’s warnings, which he gave without evidence, China said the United States was in no position to make demands.

Mr Xi has stood by Mr Putin during the conflict in Ukraine, resisting Western pressure to isolate Moscow. Chinese-Russian trade has soared since the invasion, and China is Russia’s largest buyer of oil, one of the key sources of revenues for Moscow’s state coffers. REUTERS.

Source：THE STRAITS TIMES

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Kevin Du

JERUSALEM: The Israeli military said Palestinian militants fired six rockets from the Gaza Strip toward the country’s south early Thursday, hours after an Israeli army raid in the occupied West Bank triggered a fierce gunbattle in which 11 Palestinians were killed.

The rocket attacks, which were not immediately claimed by Palestinian militant groups, appear to be triggered by the Wednesday morning raid in Nablus.

The Israeli military said air defenses intercepted five of the rockets which were fired toward the cities of Ashkelon and Sderot. One missile landed in an open field. Israeli aircraft then struck several targets in northern and central Gaza. There were no reports of injuries in Israel or Gaza.

Among the dead in Nablus were three Palestinian men, ages 72, 66 and 61, and a 16-year-old boy, according to health officials. Scores of others were wounded.

It was one of the bloodiest battles in nearly a year of fighting in the West Bank and east Jerusalem and raised the likelihood of further bloodshed. Israeli police said they were on heightened alert, while the Hamas militant group in Gaza said its patience was “running out.” Islamic Jihad, another militant group, vowed to retaliate.

The four-hour operation left a broad swath of damage in a centuries-old marketplace in Nablus, a city known as a militant stronghold.

In one emotional scene, an overwhelmed medic pronounced a man dead, only to notice the lifeless patient was his father. Elsewhere, an amateur video showed two men, apparently unarmed, being shot as they ran in the street.

Israel has been carrying out stepped-up arrest raids of wanted militants in the West Bank since a series of deadly Palestinian attacks in Israel last spring.

Israeli officials liken these operations to “mowing the lawn,” saying they are necessary to prevent a difficult situation from turning worse. But the raids have shown few signs of slowing the violence, and in cases like Wednesday’s operation, can raise the likelihood of reprisals.

The Israeli military said it entered Nablus, the West Bank’s commercial center, to arrest three militants suspected in previous shooting attacks. The main suspect was wanted in the killing of an Israeli soldier last fall.

The military usually conducts raids at night in what it says is a tactic meant to reduce the risk of civilian casualties. But military spokesman Lt. Col. Richard Hecht said forces moved quickly after intelligence services tracked down the men in a hideout.

Hecht said Israeli forces surrounded the building and asked the men to surrender, but instead they opened fire. One militant who tried to flee the building was shot and killed. He said the military then fired missiles at the house, flattening the building and killing the other two men.

At the same time, he said, troops that had set up an outside perimeter came under heavy fire, setting off an intense gunfight. The military said others hurled rocks and explosives at the troops, and officials released a video taken from inside an armored vehicle as crowds of Palestinian youths pelted it with stones. There were no Israeli casualties.

The influx of wounded overwhelmed the city’s Najah Hospital, said Ahmad Aswad, the head nurse of the cardiology department.

The 36-year-old medic told The Associated Press that he saw many patients shot in the chest, head and thighs. “They shot to kill,” he said.

In a moment he said will haunt him, he and a colleague carefully extracted a bullet from a 61-year-old man’s heart. After the chaos subsided and they pronounced their patient dead, they looked at the man’s face. It was his colleague’s father, Abdelaziz Ashqar.

His colleague, Elias Ashqar, was overcome and went silent. “It didn’t feel like we were in reality,” Aswad said.

In the Old City of Nablus, people stared at the rubble that had been a large home in the centuries-old marketplace. From one end to the other, shops were riddled with bullets. Parked cars were crushed. Blood stained the cement ruins. Furniture from the destroyed home was scattered among mounds of debris.

Time-stamped security footage widely shared online appeared to show two young men running down a street. Gunshots are heard, and both fall to the ground, with one’s hat flying off his head.

The two men did not appear to be armed, but the video did not show the events that led to the shooting.

Hecht called the video “problematic,” and said the military was looking into it.

Various Palestinian militant groups claimed six of the dead — including the three targeted in the raid — as members. There was no immediate word on whether the others belonged to armed groups. Later, officials said a 66-year-old man had died from tear gas inhalation.

As the bodies were paraded through the crowd on stretchers, thousands of people packed the streets, chanting in support of the militants. Masked men fired into the air.

Israel’s police force said it was beefing up security in the West Bank and east Jerusalem in anticipation of violence.

Last month, Israeli troops killed 10 people in a similar raid in the northern West Bank. In response, Palestinian militants fired rockets from Gaza. The following day, a lone Palestinian gunman opened fire near a synagogue in an east Jerusalem settlement, killing seven people.

Days later, five Palestinian militants were killed in an Israeli arrest raid elsewhere in the West Bank. That was followed by a Palestinian car ramming that killed three Israelis, including two young brothers, in Jerusalem.

The fighting comes at a sensitive time, less than two months after Israeli Prime Minister Benjamin Netanyahu’s new hard-line government took office.

The government is dominated by ultranationalists who have pushed for tougher action against Palestinian militants and vowed to entrench Israeli rule in the occupied West Bank. Israeli media have quoted top security officials as expressing concern that this could lead to even more violence as the Muslim holy month of Ramadan approaches.

The Cabinet includes a number of West Bank settler leaders. In a move that could further raise tensions, Yesha, the settlement council, announced that Israeli planning officials had granted approval to nearly 2,000 new homes in settlements across the West Bank. There was no immediate confirmation from the government, but an announcement was expected Thursday.

The Palestinians and most of the international community say settlements built on occupied lands are illegal and obstacles to peace. Over 700,000 settlers now live in the West Bank and east Jerusalem, territories captured by Israel in 1967 and sought by the Palestinians for a future state.

In Washington, State Department spokesman Ned Price said the US recognizes Israel’s “very real” security concerns, but was also “deeply concerned” about the deaths and injuries from the raid.

He urged both sides to avoid steps that could “inflame tensions,” including the possible approval of new settlements.

The Israeli decision comes in the wake of a UN presidential statement that strongly criticized settlements. The US blocked what would have been a stronger, legally binding council resolution.

American diplomats claimed to have extracted an Israeli pledge to halt unilateral action to block the resolution. The approval of new settlements by Israel would appear to undermine that claim.

The Palestinian ambassador to the UN, Riyad Mansour, urged the international community “to put an end to these massacres against our people.”

In the Gaza Strip, Abu Obeida, a spokesman for the ruling Hamas militant group, warned that Hamas’ “patience is running out,” he said.

Late Wednesday, Palestinian activists burned tires along Gaza’s frontier with Israel in protest.

Hamas has battled Israel in four wars since seizing control of Gaza in 2007.

Islamic Jihad leader Ziyad Al-Nakhala called the Israeli raid a “huge crime.”

“It is our duty as resistance forces to respond to this crime without hesitation,” he said.

Nearly 60 Palestinians have been killed in the West Bank and east Jerusalem this year, according to an AP tally.

Last year, nearly 150 Palestinians were killed in those areas, making it the deadliest year there since 2004, according to figures by the Israeli rights group B’Tselem. Some 30 people on the Israeli side were killed in Palestinian attacks.

Source：ARAB NEWS

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Thomas

What types of foreign firms are most affected when the Federal Reserve raises its policy rate? Recent empirical research used cross-country firm level data and information on input-output linkages and finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods. The research also finds that financial factors drive differences, with U.S. monetary policy spillovers having a much smaller impact on firms that are less financially constrained.

The Global Monetary Tightening Cycle

The Fed and other monetary authorities have embarked on a tightening that has taken interest rates to their highest level since before the Great Recession. The speed and magnitude of rate hikes have provoked speculation that this tightening could end up being more restrictive than needed to bring inflation back to targets, and thus could lead to a greater reduction in economic activity than necessary. In particular, it has been argued that the historic interconnectivity of the global economy amplifies the contractionary impact of monetary tightening—an amplification that central bankers are failing to factor into their rate decisions.

Recent work helps shed light on this debate by assessing the effect of U.S. monetary policy on foreign firms. Using cross-country firm-level data for 1995—2019, this research examines how U.S. monetary policy shapes global firms’ sales and investment spending. The richness of the sample enables the authors to explore not merely the impact of these shocks on the average foreign firm, but also how country- and firm-specific characteristics intensify or dampen this impact. In addition, they use information on country-sector input-output linkages from the World Input-Output Database (WIOD) to determine how exposure to globalization via trade connectivity plays into international transmission of U.S. monetary policy.

U.S. Monetary Tightening Curbs Foreign Firms’ Sales and Investment Spending

The authors employ a panel regression model to identify and quantify the international transmission of Federal Reserve policy to foreign firms. In order to measure the spillover specifically from U.S. policy, they first control for local factors using macroeconomic indicators (including domestic real GDP growth, short-term interest rates, exchange rate fluctuations, and financial market volatility), and firm characteristics (including size, net worth, and the change in cash flows). To measure changes in U.S. monetary policy, they use a constructed monetary policy shock variable that isolates the “surprise” component of a Fed policy rate change.

The baseline model identifies a large and statistically significant negative impact of a U.S. monetary policy tightening on investment and sales for the average foreign firm. In particular, a 100-basis point monetary tightening in a given year lowers the ratio of investment spending to fixed assets in the subsequent year by an amount equivalent to the sample average of the annual change in this ratio observed in the data. As for sales, the authors follow the literature and measure the impact on sales relative to the level of a firm’s fixed assets. Here, a 100-basis point tightening lowers the sales to fixed assets ratio by an amount (in absolute value) nearly three times the magnitude of the median increase in the sales ratio observed in the data sample.

Splitting the sample into industrial economies and emerging market economies (EMEs), the authors find that the estimated negative effect of a U.S. monetary policy on sales and investment is stronger in emerging market economies than foreign industrial economies, where a 100-basis point U.S. monetary policy tightening has roughly 20 (50) percent higher impact on the average foreign firm’s investment (sales) in EMEs.

A More Globalized World Amplifies Spillovers

To explore the baseline results further, the authors test for a few competing channels through which U.S. monetary policy shocks are transmitted to foreign firms. First, they investigate whether exposure to the globalization forces—specifically, trade exposure and integration in global value chains (GVC)—can impact the extent to which a foreign firm is affected by U.S. monetary policy. The analysis finds firms with a higher ratio of exports to total output curb investment spending more in response to a tightening than similar firms with lower such ratios. Intriguingly, when these total export ratios are separated into final and intermediate exports ratios, it is only intermediate goods trade that significantly amplifies the impact of a tightening. The key result is that integration in the GVC amplifies the impact of a tightening on foreign firms’ real outcomes.

The results for intermediate exports and a network-based measure of GVC importance hold whether one considers overall trade or bilateral trade with the U.S. only, showing that it is not merely specific exposure to the U.S. demand that amplifies the effect of a U.S. tightening, but also exposure to the fluctuations in global demand stemming from this tightening. The trade exposure regression results are economically significant: Moving from the bottom to the top quartile of global intermediate exports exposure implies that more exposed firms’ subsequent year’s investment share falls by about 25 percent more relative to the average firm in response to a 100-basis point U.S. monetary policy tightening.

Less Financially Constrained are (Partially) Insulated

The authors next investigate the effect of a firm’s financial conditions and find that the contractionary effect of U.S. monetary policy on foreign investment spending is smaller for firms that are less financially constrained, a result that is robust across several proxies for financial constraints. The authors quantify the degree to which the effects of U.S. monetary policy shocks are attenuated by moving across the size-distribution of firms from smaller to larger, with size here used as a proxy for how financially constrained a firm is. In general, the effect of U.S. monetary policy is significantly smaller for large firms. For example, a firm in the upper decile of the firm-size distribution suffers half the impact of such a tightening as the average firm. A key finding, then, is that large firms that are heavily involved in the trade of intermediate goods are fairly sheltered from shifts to tighter U.S. monetary policy.

Source：NEWYORKFRD

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Damon

WASHINGTON — Federal Reserve officials at their most recent meeting indicated that there are signs inflation is coming down, but not enough to counter the need for more interest rate increases, meeting minutes released Wednesday showed.

While the Jan. 31-Feb. 1 meeting concluded with a smaller rate hike than most of those implemented since early 2022, officials stressed that their concern over inflation is high.

Inflation “remained well above” the Fed’s 2% target, the minutes stated. That came with labor markets that “remained very tight, contributing to continuing upward pressures on wages and prices.“

Consequently, the Fed approved a 0.25 percentage point rate increase that was the smallest hike since the first of this tightening cycle in March 2022. The move brought the fed funds rate to a target range of 4.5%-4.75%. But the minutes said that the reduced pace came with a high level of concern that inflation was still a threat.

“Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes said.

The summary repeated that members believe “ongoing” rate hikes will be necessary.

Stocks fell following the release of the minutes while Treasury yields shed most of their losses from earlier in the session.

Though the quarter-point hike received unanimous approval, the minutes noted that not everyone was on board.

A “few” members said they wanted a half-point, or 50 basis point, increase that would show even greater resolve to get inflation down. A basis point is equal to 0.01%.

Since the meeting, regional Presidents James Bullard of St. Louis and Loretta Mester of Cleveland have said they were among the group that wanted the more aggressive move. The minutes, however did not elaborate on how many a “few” were nor which Federal Open Market Committee members wanted the half-point increase.

“The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way,” the minutes said.

Though the summary noted the discussion about larger increases, there was “no effort in the minutes to flag the possibility of stepping back up to a 50bp pace of hikes,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

Since the meeting, Fed officials have emphasized the need to stay vigilant even while expressing optimism that recent inflation data has been encouraging.

In a CNBC interview Wednesday, Bullard repeated his belief that going higher sooner would be more effective. But even with his push for more aggressive near-term policy, he said he thinks the peak, or terminal, rate should be around 5.375%, about in line with market pricing.

Economic data from January showed inflation running at a lower pace than its summer 2022 peak but still percolating.

The consumer price index rose 0.5% from December and is up 6.4% from the same point last year. The producer price index, which measures input costs at the wholesale level, rose 0.7% on the month and 6% annually. Both readings were above Wall Street expectations.

The labor market also is hot, indicating that Fed hikes, while hitting the housing market and some other rate-sensitive areas, have yet to seep through to much of the economy.

Even with the comments from Mester and Bullard, market pricing still indicates the strong likelihood of another quarter-point increase in March, followed by a couple more to bring the funds rate to a peak of 5.25%-5.5%. If the rate would land around the midpoint of that target, it would be the highest funds rate since 2001.

Markets are concerned that if the Fed moves too quickly or too far, it could tip the economy into a recession.

The minutes noted that “some” members see the risk of recession as “elevated.” Other officials publicly have said they think the Fed can avoid a recession and achieve a “soft landing” for the economy that sees growth slowing considerably but not contracting.

“Participants observed that the uncertainty associated with their outlooks for economic activity, the labor market, and inflation was high,” the minutes said.

Among the risk factors cited were the war in Ukraine, the economic reopening in China and the possibility that the labor market could remain tighter for longer than expected.