Why Biden Pushes an Assault Weapon Ban Despite the Political Odds

Summary:

Flags are lowered, sorrowful statements are issued, pleas to lawmakers are made, again.

In the wake of two mass shootings in California this week, President Joe Biden has followed a heartfelt and familiar script of outrage and grief over gun violence in America, coupled with a renewed call for Congress to pass legislation banning assault-style weapons.

Such a ban has little chance of passing the Republican-controlled House of Representatives or the Senate, which is narrowly controlled by Democrats, political experts say.

But Biden's stubborn strategy continues: make a ban the focus of public discourse whenever a mass shooting occurs and put pressure on lawmakers who oppose one. The White House hopes to build on already strong public support for stricter gun safety laws overall, and ultimately try to pressure Republicans in Congress into changing their thinking.

Janice Iwama, assistant professor at American University's Department of Justice, Law and Criminology, said that even if Biden fails to win a national ban, bringing attention to the issue could prompt some state legislatures to act.

"And it can happen a lot faster at the state level," Iwama said.

This week, after 18 people were killed over two days in California, the president asked lawmakers to send a bill to his desk as quickly as possible.

"It's really needed badly," he told Democratic leaders at a meeting on Tuesday. "We're going to ban assault weapons again," he said on Thursday at a Lunar New Year reception at the White House, to applause.

Republican opposition has not changed.

"There's not going to be any further legislative action there. We pretty much exhausted the possibilities a few months ago," Senator John Cornyn told Reuters.

The White House says Biden will not give up.

“The president’s strategy has been to make an assault weapon ban a winning issue so we can build a pro-gun safety Congress, and we’re making progress on that,” a second White House official said.

Biden's strategy may have longer-term political benefits going into the 2024 presidential election.

"I do suspect part of Biden's re-election plans over the next year is to try to contrast himself as a moderate, centrist, pragmatic figure versus the extremes," said Dante Scala, a political science professor at the University of New Hampshire.

Simple Math, Not Enough Support

A decade after 20 first-graders and six adults were killed in the Sandy Hook elementary school massacre, the U.S. federal government has put few limits on weapons like the high-capacity AR-15 used in the attack, or on the estimated 400 million guns in the country. Over 150 rounds were fired in just five minutes at the school, investigators said.

The recent shootings in California, which killed 18 people, show how even the strictest state laws can be ineffective thanks to a patchwork of federal regulation.

Biden has railed against assault-style weapons for years and repeatedly throughout his presidency. He was instrumental in getting a decade-long ban passed in 1994.

As vice president, he spearheaded a set of gun control proposals for Barack Obama after Sandy Hook that included a recommendation for a new assault weapons ban. None passed Congress, opposed by Republicans and the National Rifle Association lobby.

Last year, however, Biden signed into law the first major federal gun reform in three decades. It cracks down on overall gun sales to perpetrators of domestic violence and expands some background checks to juveniles.

These and even stricter measures have strong public support.

A June Quinnipiac poll showed nearly three out of four Americans support raising the age at which a person can buy a gun to 21, and 92 percent supported background checks for all gun buyers.

However the Quinnipiac and other polls show that just about half of Americans support an assault weapons ban.

To pass one, the president would need 60 votes in the Senate - nine Republicans and all 51 Democrats and independents - and a simple majority of 218 votes in the House of Representatives, which has 222 Republicans and a Republican speaker, who would have to consent to bringing a bill to the floor for a vote.

The June law won support from 14 Republicans in the House and 15 in the Senate, after mass shootings in Texas and New York killed more than 30 people, including 19 children at an elementary school.

The U.S. Constitution's Second Amendment protects the right to bear arms, and that issue is a hot button one for many Republicans, and backed by millions in donations from gun rights groups and manufacturers.

"Violent crime is on the rise and the people are anxious for solutions. But instead of setting an obvious course - like actually punishing the offenders or addressing our woefully inadequate mental health system - the President is attempting to resurrect an initiative that had zero effect on violent crime," said NRA spokesperson Lars Dalseide.

The White House points to statistics, including from University of Massachusetts researcher Louis Klarevas, that show gun massacres sank 37 percent and gun massacre deaths dropped 43 percent during the 10-year period of the assault rifle ban, compared to the previous decade.

Even though an all-out assault weapons ban seems unlikely, a very thin Republican majority in the House means that something more modest, such as raising the age to 21 to buy assault weapons, could be possible, the University of New Hampshire's Scala said.

Advocates say the White House has other options it can pursue to reduce gun violence even if Congress does nothing for two years, from executive action to budgeting to enforcement of existing laws.

Biden's team says it is cognizant of the political odds.

“Our job is to keep trying. The president is going to keep using the bully pulpit, keep pursuing executive action, keep building on the legislation he got done last summer," the second White House official said.

Source: Reuters

Risk Warnings and Investment Disclaimers

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Outlook 2023: Housing Market Will Weigh On China’s Recovery

Justin

Reviving consumption and domestic demand is top priority

China has made domestic demand expansion – including consumption – the top policy goal this year, whereas last year government officials prioritised containing the virus. The consumption rebound in China will be real, albeit moderate relative to the Covid-19 consumer ‘boom’ in developed economies like the US. The readiness of households for ‘revenge spending’ as curbs are lifted is evident in rebounding cinema ticket sales in January and increased spending on tourism over the lunar new year, both domestically and overseas.

The revival of consumption should help China’s gross domestic product return to potential growth this year of around 5%, after official growth of 3% last year. This will boost global growth, but be significantly inflationary, given that China’s consumption revival will be real but not explosive.

There are four reasons for thinking that China won’t have a consumer boom to the same degree as the US: the design of its pandemic stimulus, its labour market, consumer confidence and the ailing housing market. During the acute phase of the pandemic in 2020-21, the US made huge transfers to households to support consumption demand. By contrast, China focused stimulus on companies and investment, only indirectly supporting households by giving employers tax and financial incentives to maintain payrolls. China didn’t suffer the same kind of mass lay-offs as the US early in the pandemic, but also won’t see the same labour shortages post-pandemic.

Unemployment has risen in China, especially among young people where it is around 17%. Migrant worker jobs are at risk too, with falling exports likely to depress factory jobs. But the offset is that reopening will boost service sector jobs and small- and medium-sized enterprises. The shift of migrant workers to service jobs closer to home has been a medium-term structural issue for manufacturing, leading to labour shortages in the pre-Covid-19 years.

Consumer confidence plunged in China in early 2022, as the Q2 lockdown in Shanghai and elsewhere dragged on. Households saw no end-point for tough restrictions under the zero-Covid policy, with variants becoming more contagious. Once China gets past the exit waves, consumer confidence should gradually rebuild. People will still worry about the economic outlook, but at least one major impediment – zero-Covid policy – is removed.

The housing market faces the prospect of slower recovery than consumption or broad domestic demand, which is a reversal of its usual role. Big cities and high-quality developers should see improving home sales from Q2 onwards, on the back of further policy support – for example, to incentivise upgrader demand. The hundreds of smaller cities will trail behind in a long procession of local market recovery cycles lasting several years.

Early signs of results in developer liquidity support policy appeared in the improvement in bank loan funding for real estate developers in late 2022. The plan is to boost liquidity for high-quality developers, so they can complete projects. This will increase buyer confidence in presale projects by high-quality developers, boosting their sales and thus access to finance. The bank regulators are reported to have given banks criteria to assess which developers are ‘high quality’. This market-based process will be slower than a broad bailout, but deflate financial risks by allowing issues with poor-quality developers to be resolved one way or another.

With this policy context, buyers are likely to be more picky about developers and markets. This means a slower recovery. At the same time, it is worth remembering that the zero-Covid policy has been a lodestone on the housing market too. Buyers are understandably reluctant to invest in a long-term asset in a market that faces the indefinite prospect of lockdowns and economic pain. Reopening should serve as a catalyst for housing sales in markets with fundamentally good supply-demand dynamics like upper-tier cities in the Yangtze River Delta and Pearl River Delta.

Source:Duncan Wrigley

Risk Warnings and Investment Disclaimers

Indonesia Wants More Than a Nickel for Natural Resources

Thomas

Energy

Indonesian Minister of Investment Bahlil Lahadalia suggested that Indonesia is looking into forming an OPEC-style cartel for nickel and other inputs used in battery production. Nickel is becoming a hot commodity as it is a key input in the manufacture of lithium-ion batteries needed for electric vehicles (EVs) - and Indonesia has the world's largest nickel ore deposits.

Given that demand for EVs is expected to balloon in the coming years, countries rich in natural resources are exploring the most expeditious ways to capitalise on the situation.

The idea for an OPEC-style cartel reflects the Indonesian authorities' desire to leverage its control over a scarce and highly sought-after commodity. They seek a more favourable position on the global technological frontier.

Indonesian officials are discontent with the relatively low-value activities of extracting and exporting raw commodities. They want more of the value added during processing and manufacturing. Such value has historically been captured outside of Indonesia.

This was the logic behind a series of recent nickel ore export bans - a strategy that catalysed billions of dollars of investment in Indonesia's downstream nickel processing industry. With mining and smelting activities increasingly localised, several leading global technology companies have made sizable commitments to invest in battery and EV production in Indonesia.

At least in the near-term, the decision to deprive global markets of unprocessed nickel ore achieved its objective of accelerating investment in higher value-added economic activities.

Talk is turning towards building on that success by scaling it up to the level of an OPEC-style cartel. This will allow Indonesia to exercise a greater degree of control over supply and price and maximise economic benefits.

Approach With Caution

It is early days and seems more like a trial balloon than anything, so there are reasons to approach such an idea with caution.

One reason the nickel export bans are working is because they are limited in scope and have a narrow, clearly defined objective - more downstream investment in Indonesian nickel smelters will lead to more investment in battery and EV production.

A global cartel of nickel-producing countries would be much more complex, difficult to organise and could be undercut at any time by a single member or simply by the vagaries of the market.

Not every nickel-producing country is going to have - or be able to achieve - the same objective. This could easily make any such undertaking unwieldy. Canada, a major nickel producer, has already indicated that it would be very unlikely to participate in any such scheme.

Another potential deterrent is that intentionally restricting supply to drive up prices incentivises actors to invest in developing alternative technologies. It would be a big gamble for Indonesia to assume that batteries will always be dependent on nickel.

If the price is too high and supply chains become excessively politicised, companies will start looking to develop batteries without nickel - a process that is already under way. An OPEC-style cartel risks accelerating this process while alienating trade and investment partners in the process.

The downside of alienating partners for short-term economic gain is also worth considering. Though Indonesia has nickel, it cannot manufacture batteries or EVs without the technology and know-how from mature industry players like China's CATL, South Korea's LG Group or Japanese automakers. Indonesia needs their assistance to move up the value chain as much as they need Indonesia's nickel.

Indonesia's Economic Nationalism

Resource-rich emerging markets like Indonesia have a long history of exploitation by more mature economies, particularly in extractive industries. Indonesia is asserting itself in a more muscular form of economic nationalism as a response, at least in part, to these historical imbalances.

This was evident in the blanket export bans on palm oil and coal in early 2022, as high global prices threatened domestic shortages. It is also evident in the way that Indonesia brushed off a World Trade Organization ruling that the nickel ore export ban violates Indonesia's commitments under the General Agreement on Tariffs and Trade.

The Indonesian government is not afraid to leverage its control over in-demand commodities to achieve important economic objectives. More than anything, Minister of Investment Lahadalia is sending a message about Indonesia's willingness to intervene in markets and buck the principles of free trade when it is in its national interest.

This is a message that should be listened to carefully and taken seriously. But trying to cartelise the global production and supply of nickel is a step too far and could easily turn into a case of taking a good hand and overplaying it.

Source: CNA

Risk Warnings and Investment Disclaimers

Four Bank of England scenarios for February's Meeting

Devin

Central Bank Forex

Four Bank of England scenarios for February's Meeting_1

The Bank of England looks more likely to follow the European Central Bank than the Federal Reserve next Thursday, and we expect a 50-basis point rate hike for the second consecutive meeting. While the minutes of the December meeting appeared to open the door to a potential downshift to a 25bp move in February – and this meeting looks like a closer call than markets are pricing – the reality is that the recent data has looked relatively hawkish.

Wage growth is persistently high, looking both at the official numbers and the BoE's own business surveys. Headline inflation came in a little lower than the Bank projected back in November, but services CPI – seen as a better gauge of domestically-driven inflation – has come in above expectations.

Still, if we get a 50bp hike on Thursday then it's likely to be the last. BoE officials have hinted previously that much of the impact of last year's rate hikes is yet to hit, and cracks are forming in interest-rate-sensitive parts of the economy. Headline inflation should begin to come down more rapidly from March too, as the impact of last year's energy bill surges drop out, and core goods/food pressure begins to ease more noticeably.

We expect one final 25bp hike in March, taking the Bank Rate to a peak of 4.25%. The key question for Thursday is whether the Bank itself acknowledges its work is nearly complete. We suspect it's more likely to keep its options open.

Here's what we expect:

The vote split

December's meeting saw the number of policymakers voting for a 75bp hike drop from seven to one, and the committee's two most dovish officials opted for no rate hike at all. The lesson then and throughout 2022 was that the committee tends to move by consensus, and that means that the vote split is unlikely to be particularly narrow, even if the meeting is a tough one to call. Either we'll get a similar number of officials voting for 50bp again, or we'll see the vast majority scale back their vote to 25bp, akin to the kind of shift we saw in December.

Our base case is that we see six of the nine policymakers voting for a 50bp hike, one for 25bp and two for no change.

New forecasts

Calmer markets and scaled-back rate hike expectations since the mini-Budget crisis last year mean we shouldn't be surprised to see the Bank upgrade its growth forecasts. Lower gas prices should theoretically help too, though this is a little more awkward for the BoE given that the government hasn't yet cancelled plans to increase household bills in April, even if such a move now looks unlikely. That also means we'll have to take the new inflation forecasts with a slight pinch of salt, and our own view is that headline CPI will end the year 1pp lower if April's planned increase is scrapped and consumer bills return to levels consistent with market pricing from the third quarter.

Still, it's the medium-term story that matters more. Keep an eye on the so-called 'constant rate' inflation forecasts, where the Bank assumes the Bank rate will remain unchanged from now on. If these show inflation at, or very close to, 2% in a couple of years' time, then that would be a sure-fire sign that policymakers think we're close to the peak for Bank Rate.

Guidance on future policy decisions

Governor Andrew Bailey hinted recently that current market pricing, which sees a peak for Bank Rate at 4.4%, is in the right ballpark. That suggests little reason for the Bank to rock the boat too much on Thursday with new forward guidance, and we suspect it will want to keep options open.

The Bank will likely repeat that it's prepared to act 'forcefully' in future if required (though we learnt in December's minutes that 50bp hikes classify as 'forceful'). We also doubt Bailey will be willing to be drawn on whether the Bank could pivot back to a 25bp hike in March, nor indeed whether that would be the last move in the cycle. Where he may be tempted to push back is on policy easing, especially now markets are almost pricing in one 25bp rate cut by the end of this year. Chief Economist Huw Pill's recent emphasis on the UK sharing the worst bits of the US and eurozone's inflation problems – structural labour shortages with the former, the energy crisis with the latter – feels like a line we'll hear a lot over the coming months as officials try to dampen expectations of policy easing.

Sterling rates to tighten to euro, and a more inverted curve

The sterling rates curve still trades with a remnant of the risk premium that appeared in the run-up to the September budget debacle, making it one of the few markets where we think rates are unjustifiably high. Things have changed since then, however. Markets have come around to our more benign view on the terminal rate in this cycle, now implying hikes will stop around 4.25%. Instead, the discrepancy is to be found in longer maturities where the curve implies the Bank rate will remain elevated longer than at other central banks.

Four Bank of England scenarios for February's Meeting_3

That markets taking a more hawkish view of BoE policy than signalled, for instance in its forecast, is nothing new. What's changed is the way participants look at inflation risk. This has prompted yield curves to take a much more benign view of Fed and ECB policy. Each country is different but we find the treatment of sterling rates increasingly at odds with that of the dollar and euro. As a result, we expect the differential between 5Y sterling and euro swap rates to shrink to 75bp. This convergence should also be helped by the worsening of UK economic surprise indices, just as their eurozone equivalent goes from strength to strength.

Four Bank of England scenarios for February's Meeting_4

We also think the GBP curve is due to flatten further. One likely driver is the market's growing confidence that the BoE, like the Fed, will soon be in a position to cut rates, although we wouldn't expect this before 2024. Another less probable driver would be if the BoE feels the need to tighten policy more than expected in the coming meetings. We very much doubt that longer rates would follow the short end higher, pricing instead a growing risk of rate cuts down the line to cushion the economic hit.

GBP: Temporary strength

The BoE's broad trade-weighted measure of sterling has bounced around 6% since the dark days of September and will marginally ease the BoE's fears of imported inflation. Given that a 50bp hike is not fully priced for Thursday, sterling could enjoy some limited and temporary strength should the BoE indeed hike 50bp. Depending on the post-FOMC state of the dollar, that could briefly send GBP/USD back into the 1.24/25 range and EUR/GBP back to the low 0.87s.

However, the challenges facing sterling have not gone away. Large twin deficits, weak growth and what throughout the year should be building expectations that falling prices – especially from March/April onwards – will provide room for the BoE to cut rates around the turn of the year.

In terms of a profile, we think a continued narrowing in GBP rates premium to the EUR can push EUR/GBP higher through the year towards the 0.90/91 area. GBP/USD should be supported by the better EUR/USD trend, but will probably struggle to hold any gains to the high 1.20s – potentially seen in the second quarter.

Source: ING

Risk Warnings and Investment Disclaimers

Oil Markets: An Early Peek into 2023

Kevin Du

Commodity

Although oil markets are no strangers to volatility, oil prices exhibited notable swings in 2022. Russia's invasion of Ukraine on February 24 created significant uncertainty, and prices spiked accordingly. On March 8, Brent, the industry's main global benchmark, exceeded $133 per barrel – jumping more than $50 compared to the beginning of the year and reaching a level last seen in June 2008, just ahead of the global financial meltdown.

No one knew the geopolitical consequences, and many feared a substantial loss of Russian oil supplies. For example, the International Energy Agency (IEA), predicted that "from April, 3 million barrels per day of Russian oil output could be shut in" – about a third of Russia's total production and almost 3 percent of the global output. The agency warned that this could produce "the biggest supply crisis in decades."

Looking through frosted glass

However, those fears gradually dissipated. Russian oil exports proved more resilient, thanks to the basic functioning of a liquid, global market, which allowed a redirection of trade flow with more Russian crude diverted from Europe to Asia, and more Middle Eastern and other non-Russian oil sent to Europe. Prices eased accordingly and ended the year around the same levels they started. Still, on a yearly basis, they were 43 percent higher compared to 2021.

Many wonder whether the upward march will accelerate in 2023, as largely predicted by the bulls of Wall Street. Although most published oil price forecasts for this year have been revised downward compared to previous estimates, they currently fall within the $90 to $100 per barrel range.

However, the industry's track record of predicting oil prices is poor, and any assumption is likely to prove wrong. That is even more so today, given the high level of uncertainty surrounding fundamental dynamics that directly influence oil markets but are acting in opposite directions – with geopolitics and economic warfare, China and the global economic outlook being the most unpredictable factors for this year and beyond.

Putting a squeeze on a giant

Russia's role in global oil markets cannot be underestimated. It is the world's third-largest producer after the United States and Saudi Arabia and the second-largest exporter after Saudi Arabia. It is also a key member of the OPEC+ group, where it stands as the second-largest producer after the Saudi kingdom, with production more than twice the level of OPEC's second-largest producer, Iraq.

Russia is also the world's most sanctioned country. In less than a year, the European Union alone adopted nine sanctions packages, targeting various sectors, businesses and individuals in the country. Of most relevance are the sanctions imposed on Russian oil. In its sixth package announced in June 2022, the EU announced it would ban imports from Russia of crude oil and refined petroleum products, effective from December 2022 and February 2023, respectively. A temporary exemption was given for imports of crude oil by pipeline into those EU member states that, due to their geographic situation, have no viable alternatives.

Then in the eighth package announced in October, the EU stated it would impose a price cap on the maritime transport of Russian oil for third countries, in line with the G7 recommendation. The cap would allow non-EU countries to continue to trade Russian oil, using EU services such as insurance and tankers, as long as that oil is not paid for above the level set by the cap. The cap was set at $60 per barrel on December 3, 2022.

Interestingly, following that announcement, oil prices decreased. Although the Russian government responded that it would not supply oil to any country abiding by the cap, the statement was thin on the details and the specifics leaving room for potential flexibility. Furthermore, the cap is close to (or in some transactions, well above) what Russian crude oil has been selling for, meaning it has not made any difference to existing purchasers who are de facto abiding by the cap. Concerns about the supply outlook eased "amid signs of a well-supplied crude market and transpiring details about the G7 price cap on Russian crude," OPEC said in its December oil market report.

So far, Russia's oil production has remained essentially unchanged. According to the latest IEA estimates, Russian oil output is just 200,000 barrels per day below pre-invasion levels. However, things might be different this year as the sanctions bite harder.

For instance, some argue that while Russia has been able to redirect its crude oil from Europe to Asia, with China and India being the biggest buyers, the same may not apply to its refined oil products. Countries like China and India already have large refining capacities and prefer to take cheap crude oil and process it domestically rather than buying refined oil. However, it all boils down to economics, and the G7 is yet to reveal the cap on Russian oil products.

On balance, there seems to be a consensus that oil markets will experience a more significant loss of Russian oil this year than in 2022 but estimates still vary. While OPEC, for instance, expects the loss to be around 850,000 barrels per day, the IEA set that figure to nearly 1.5 million barrels a day (mb/d). The larger the loss, the higher the upward pressure on oil prices. JP Morgan warned that Russia could cut up to 5 mb/d of production, driving global oil prices to a "stratospheric" $380 per barrel – an unrealistic scenario in our view.

Enter the Chinese dragon

On the demand side, China's sudden abandonment of the zero-Covid-19 policy announced in early December 2022 is the big story. Since the announcement, Covid-19-related restrictions and requirements have been dismantled. A "reopening" of the Chinese economy will be felt everywhere, particularly in oil markets. China is the world's largest importer of crude oil, the second-largest oil consumer after the U.S. and the second-largest economy after the U.S.

According to the World Bank, nearly half of the growth in oil consumption in 2023 is expected to come from China. Bank of America argued that as the country reopens, more than a billion people will start traveling and spending, increasing demand for energy and other commodities. Goldman Sachs estimates that China's reopening will add 1 mb/d to global demand (or around 1 percent of world consumption), putting an extra $5 a barrel to oil prices.

However, some, like UBS, wisely argue that the oil demand recovery in China is unlikely to be a one-way street – but rather a bumpy road with renewed setbacks, driven by possible temporary reimposed restrictions. Indeed, the rapid spread of Covid-19 among the widely unvaccinated population may well mean that the situation in China will worsen before it improves.

No one knows when the better phase will start and how the state of the rest of the world will be, including whether it will coincide with a slowdown in other major economies. International Monetary Fund (IMF) Managing Director Kristalina Georgieva has noted that for the first time in 40 years, China's annual growth is likely to be at or below global growth, which could drag down worldwide economic activity rather than propel it.

Source: GIS

Risk Warnings and Investment Disclaimers

World's Central Banks Enforce Pay Squeeze Even as They Tighten Monetary Policy

Samantha Luan

Central Bank

Central bankers trying to ensure that surging consumer prices do not feed yet more inflation are doing what they can to keep their own houses in order.

For staff working for US Federal Reserve chairman Jerome Powell, his eurozone counterpart Christine Lagarde and their global peers, annual pay adjustments cannot avoid the impact of a once-in-a-generation cost-of-living shock.

Even if they do not like it, central bank employees face the same hit as everyone else in the labour market at a time when their bosses want to contain rampant inflation in the economies, they oversee by heading off excessive wage increases.

Some are grumbling. While there is little evidence that strikes are imminent, walkouts at Brazil's central bank last year and by some Bank of England staff in 2017 underscore how such organisations can struggle to contain discontent, not least at a time of global labour-union unrest.

Even so, governors face an acute political imperative to ensure wage discipline, particularly in instances when negotiations are not generalised across the public sector.

The bitter alternative if their employees get fully compensated for lost purchasing power is to invite criticism for hypocrisy — and to risk yet more inflation as others follow suit.

"Central banks must be first in line to prevent a wage-price spiral," said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich and a former International Monetary Fund official.

"They are institutions committed to price stability and everyone needs to realise that. They can send an important signal."

In the eurozone, where inflation reached a peak of 10.6 per cent last year — a record in the history of the single currency — European Central Bank staff received a 4 per cent salary increase for this year. That followed a 1.48 per cent raise that had also failed to keep pace with price growth.

It is a similar case at major national central banks in the euro area. At the Bank of France, a 4 per cent raise awarded in July was the first increase in five years.

Germany's Bundesbank — a temple of price stability — lifted pay for staff by 1.4 per cent in April 2021 and then by 1.8 per cent a year later. Public-sector salary talks that encompass the organisation are continuing, with union officials bidding for a 10.5 per cent raise that is likely to transpire far lower, if past accords are any guide.

News that the BoE is also containing wage demands emerged only this week. A 3.5 per cent raise and a one-off 1 per cent salary top-up accepted by union officials for the next fiscal year is half inflation and less than the 5 per cent agreed by the government for 5.5 million public-sector workers. The lowest-paid employees will receive the biggest gains.

"We need to strike a balance between maintaining budgetary discipline with public funds, retaining critical skills and addressing the cost-of-living pressures facing our staff," a BoE statement said.

While the Fed in Washington is reticent in revealing compensation details, its 2023 pay scale published this month indicates a maximum increase of 5.1 per cent in the lower and upper ranges of every salary grade aside from the most junior level. That compares with average US inflation of 8 per cent last year.

Even in Japan, whose central bank wants stronger wage gains to take hold, governor Haruhiko Kuroda is practising restraint. He argues it is difficult to raise salaries at the Bank of Japan before private companies lift theirs. Pay rose a mere 0.2 per cent for staff in the fiscal year that ends in March. Pressure for a bigger raise is likely to mount after inflation there reached 4 per cent in December.

Away from the Group of Seven industrialised countries, a squeeze on public-sector salaries is affecting other central banks, too. In Brazil, staff went on a three-month strike last year that ended unsuccessfully when a deadline passed for new wage increases to take effect.

While UK public-sector unions are agitating for more pay, the BoE itself appears to have headed off the threat of similar action for now. It is well aware of the dangers, having faced the first strike in 50 years in 2017 by staff working in areas from maintenance to security.

Dissatisfaction at the ECB might yet intensify. A staff representative, Carlos Bowles, last month said "we're not happy" with the raise on offer. Subsequently, a large survey of employees showed 69 per cent said confidence in the central bank's leadership had suffered either "a lot" or "somewhat".

On past form, though, any action may be restrained: the ECB's first strike in 2009 was a 90-minute affair. It featured a protest with workers blowing whistles, banging drums and waving placards criticising then-president Jean-Claude Trichet.

While holding firm on pay, central banks can negotiate on other matters. Part of the agreement for BoE staff is a one-off benefits increase worth 1 per cent of salary available in cash if desired. Officials also lifted the leave entitlement to 26 days plus public holidays, and offered dental insurance.

At the top of the pay scale, governors may be far better paid than subordinates but they do face constraints of their own.

At the Fed, Mr Powell's salary will rise by 4.1 per cent to $235,600 this year. Remuneration for ECB president Ms Lagarde will rise by a similar amount to about €445,000 ($486,000) because she gets the same percentage advance as her staff.

BoE governor Andrew Bailey — whose call last year for UK workers to hold off on big pay demands prompted a furious union backlash — said in November he would not accept a raise even if offered.

Japan is different still. Mr Kuroda's own compensation in the current fiscal year rose at twice the pace of staff to 35.2 million yen ($271,000). Even so, the increase amounted to only 0.4 per cent.

Source: The National News

Risk Warnings and Investment Disclaimers

Key Events in Developed Markets Next Week

Devin

Economic

US: A slowdown in the pace of tightening

Two major events in the US will shape market sentiment next week. First is the Federal Reserve policy meeting, where we expect it to raise the policy rate by 25bp. Having raised rates by 75bp on four consecutive occasions last year and then lifted the policy rate by 50bp in December, this marks a clear slowdown in the pace of tightening and appears justified given inflation is moving in the right direction and activity is slowing. However, the Fed remains wary and will again suggest that this is not the end for interest rate increases. The central bank will also be keen to dismiss the notion that it is preparing for potential rate cuts later this year. Financial conditions have loosened given movements in the dollar, Treasury yields and credit spreads and it may feel that any further loosening, fuelled by talk of potential policy easing in the second half of the year, could undermine its current actions in fighting inflation.

We will then be looking at the January jobs report. Employment creation remains strong for now, but job lay-off announcements are coming in thick and fast. We are nervously watching what happens to the temporary help component, which has already experienced five consecutive monthly falls. Given the nature of the role, which is easier to be hired into and fired from, this tends to lead to broader shifts in employment. As such, we expect to see a softer non-farm payrolls increase than seen in recent months, but it is still likely to be well above 100k given the large number of job vacancies that remain.

UK: Bank of England to stick to 50bp hike following recent inflation data

The Bank of England looks more likely to follow the European Central Bank than the Federal Reserve next Thursday, and we expect a 50bp rate hike for the second consecutive meeting. While the minutes of the December meeting appeared to open the door to a potential downshift to a 25bp move next month, the reality is that the recent data has looked relatively hawkish. Wage growth is still persistently high, both in the official numbers and the BoE's own business surveys. Headline inflation came in a little lower than the Bank projected back in November, but services CPI – seen as a better gauge of domestically-driven inflation – has come in above expectations.

Still, if we get a 50bp hike on Thursday then it's likely to be the last. BoE officials have suggested that much of the impact of last year's rate hikes is still to show through, and cracks are forming in interest-rate-sensitive parts of the economy. We expect one final 25bp hike in March, taking the Bank Rate to a peak of 4.25%. The key question for Thursday is whether the Bank itself acknowledges its work is nearly complete. We suspect it's more likely to keep its options open.

Eurozone: ECB to hike by 50bp; Lagarde to make hawkish statement

When the European Central Bank meets next week, all eyes and ears will once again be on communication. A rate hike of 50bp looks like a done deal, but how far and how fast the ECB will go from there is still unclear. We expect hawkish comments by ECB President Christine Lagarde in order to prevent another drop in market interest rates. Current market expectations about ECB rate cuts in 2024 are premature. Key Events in Developed Markets Next Week_1

Key Events in Developed Markets Next Week_1

Source: ING

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