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Central banks must sacrifice ideal economic landing ambitions

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Evidence is mounting that many of the drivers of last year’s dramatic rise in inflation are dissipating. European gas prices now levels He was last seen before the Russian invasion of Ukraine in late February. Shipping cost of 40ft steel box from Shanghai to Long Beach has crashed From about $8,300 this time last year to $1,500. Used car prices have fallen, even in the UK where they command more than new prices.

Does this mean less aggressiveness of the world’s central banks in 2023? Not right away. After injecting plenty of stimulus into the economy during the early days of the pandemic and then failing to pinpoint the price hike sticking until it was too late, rate setters will start the year as it ended — desperate to restore credibility by speaking tough in the fight against inflation.

This is amazing extremist The rhetoric is not just about rebuilding trust. While headline inflation rates are declining as the underlying effects of last year’s sharp rises in energy and food prices off the indices, price pressures have not completely faded.

Supply chain hurdles no longer lead to a sharp rise in commodity prices, but trends in the services sector and labor market continue to trouble central banks. Then there is the lingering fear that the pandemic and flare-ups of geopolitical tensions have left the global economy with less productive capacity than it did in 2019 — which, if true, means that price setters will have to destroy demand to bring inflation back down. to levels seen a few years ago.

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Whether rate-setters match their tough talk with ample rate hikes will depend on what the Fed does next. If 2022 has taught us anything, it is that the Federal Reserve is the invisible hook on which the decisions of the rest of the world’s interest rate-setters hang.

Central bankers didn’t formally engage in 2022. But they might as well have. When Jay Powell began raising interest rates last spring, the European Central Bank was still in a wait-and-see mode, and the Bank of England was scoffing at the modest quarter-point rate hikes that central bankers (and observers) tend to favour. By fall, the European Central Bank and the Bank of England had both followed the Fed’s lead and made huge interest rate hikes of 0.75 percentage points of their own — a remarkable pace of tightening that shocked investors everywhere. By the end of the year, even the Bank of Japan delivered a hard-hitting surprise.

The American monetary custodian was able to set the rest through the sheer power of the dollar. Central bankers are reluctant to acknowledge the pressures of foreign exchange markets. But the extent to which nearly all major currencies have fallen against the dollar — the euro is down nearly 16 percent at some point in 2022, the pound more than 20 percent, and the yen by nearly a quarter — has spooked them. Their response has been to follow the Fed and outpace interest rate increases.

This year could be one of those rare events when the weakness of the US economy proves not dangerous, but a boon for the rest of the world, if pressure eases on Powell to raise interest rates. If the US central bank switches from a half point to a quarter point rate hike early next year, it will give others space to follow suit. The danger is that the US labor market continues to rise and the Fed is not backing down. Others may once again feel the need to match its firepower – even though their economies are in a much weaker state.

The biggest risk in 2023 is that price setters get so paranoid about losing face that they put their money where their mouths are and not only talk hard, but force several hefty price hikes. Rapid increases in borrowing costs will almost certainly push economies into recession. It could also spark bouts of financial turmoil that made the panic in the gold market last fall look like a storm.

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Disorder would, as in the case of the Bank of England during LDI Panic, and sending mixed signals by forcing policymakers to shore up the pockets of financial markets while trying to tighten credit conditions. Rate setters will come under more political pressure – In Europe, French, Italian and Finnish leaders have already complained that the ECB’s attempts to rein in inflation are putting jobs and growth on the line, along with raising other sovereign debt risks. calamity.

Attention to threats other than inflation is likely to reduce upside rates. This, in turn, could mean that prices will continue to rise by 3 or 4 per cent a year for the foreseeable future, and falling inflation will cease to reach the 2 per cent target that price setters yearn for. This is not ideal. But after a very chaotic 2022, sacrificing the aspirations of a perfect landing for something more realistic might be the least worst option of all.

claire.jones@ft.com

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Top 5 Things to Watch in the Markets Next Week by Investing.com

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© Reuters

Written by Noreen Burke

Investing.com – US inflation numbers and the start of corporate earnings season will be the highlights of an otherwise quiet week in the economic calendar. December inflation data will help influence the size of the Fed’s next rate hike, while corporate earnings will give important insight into the health of the economy amid fears of a potential slowdown. UK GDP, Japanese inflation, and Eurozone data will also be in focus. Here’s what you need to know to start your week.

  1. US consumer price index

The US Consumer Price Index for December is due Thursday as economists expect core inflation to pick up from a year earlier. Any sign of price pressures continuing to ease could not only reinforce the view that the Fed is nearing the end of its most aggressive tightening cycle in decades, but could also fuel speculation that rate cuts could come later this year.

US data on Friday showed that payrolls for December expanded more than expected even as wage increases slowed and services activity contracted, easing concerns about the Federal Reserve’s monetary policy path.

Federal Reserve officials on Friday acknowledged calming wage growth and other signs of the economy gradually slowing, with Atlanta President Rafael Bostick hinting at a quarter percentage point opportunity at the Fed’s next policy meeting Jan. 31-February 1. basis point in December.

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  1. Earnings season begins

Companies are set to begin reporting fourth-quarter earnings next week as investors look for signs of a potential economic slowdown that hit earnings.

On Friday alone, reports are due from the banks Wells Fargo (NYSE:) Citigroup (NYSE:), Bank of America (NYSE:) and JPMorgan (NYSE:), healthcare giant UnitedHealth Group (NYSE:), asset manager BlackRock (NYSE:) and Delta Air Lines (NYSE:).

Analyst consensus estimates put fourth-quarter earnings down 1.6% from the year-ago period, according to IBES Refinitiv. Some predictions for 2023 are still very rosy in this light Recession Risks.

Stocks may be more expensive than they appear if current earnings estimates do not fully account for an economic slowdown, while any downturn could dampen what investors are willing to pay for stocks.

  1. UK gross domestic product

The UK releases November figures on Friday on the back of historic cost-of-living pressures amid twin levels of inflation, transport and public sector strikes, and a housing market slump, as the country faces what is likely to be a prolonged recession. .

Recent data showed that after nine consecutive rate hikes by the Bank of England, and more to come, British mortgage approvals fell to their lowest level in November since the pandemic-induced recession in June 2020.

As price pressures mount and borrowing costs soar, Prime Minister Rishi Sunak has pledged to halve inflation, grow the economy, reduce public debt and cut waiting lists for health services.

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However, analysts at Deutsche Bank see the continuation of high inflation this year, interest rates have not been cut until 2024 and that financial policies have become more austere, while analysts at Barclays expect the British economy to continue to contract until the end of the third quarter of 2023.

  1. Eurozone data

Germany will publish an estimate on Friday that will show the impact of the energy crisis triggered by Russia’s war in Ukraine on the eurozone’s largest economy.

The broader Eurozone will release data on the same day. Higher costs of energy imports have tipped the bloc’s trade balance from a surplus to a deficit, but the deficit narrowed in October as gas prices fell and market watchers will be looking to see if this trend continues in November.

Industrial production is expected to post a slight rebound after falling in October.

  1. Tokyo swell

Market watchers will be closely watching Tokyo’s inflation numbers on Tuesday, after last month’s report first pointed the market to a possible policy shift by the Bank of Japan.

— which tops national numbers, often for several weeks — rose to a four-decade high in November.

Less than a month later, the Bank of Japan adjusted its control of bond yields allowing long-term interest rates to rise further in erratic markets. The move was intended to mitigate some of the costs of prolonged monetary stimulus.

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Prices were boosted to seven-month highs as expectations of a more hawkish turnaround mounted, even as BoJ officials stressed the move was a one-off. The Bank of Japan will hold its next policy meeting on January 18th.

Reuters contributed to this report

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“Mortgage Lottery” to test the finances of middle-income earners in the UK

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Subprime borrowers face falling on the wrong side of a growing debt gap if they are forced to refinance a fixed-rate home loan this year, with younger homeowners expected to be the hardest hit.

With millions of borrowers about to be offered a fixed rate of interest Mortgage Through 2023, the “lottery” of higher costs could plunge more middle-income families into financial hardship, according to a measure of financial resilience by Oxford Economics and Hargreaves Lansdown.

Nearly 90 percent of lowest-income households have poor or very poor financial resilience, but nearly a third of middle-income households now also fall into this category, showing how rising mortgage costs are pushing pressure even higher. in the income range.

“Younger borrowers are particularly at risk, as they are most likely to have extended themselves to buy when rates were higher,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.

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“Making matters worse, at this point in life they’re also unlikely to have as much savings to fall back on, so increasing mortgage payments could mean they end up building up a mountain of short-term debt.”

Some lenders are set to scale back mortgage rates This week as the housing market has slowed, it nonetheless remains at much higher levels than it was a year ago.

The average rate for a two-year fixed loan was 5.8 percent at the end of 2022, according to price comparison site Moneyfacts, up from 2.4 percent at the end of 2021.

The difference would add nearly £500 to monthly costs based on a typical repayment mortgage of £250,000, according to the Financial Times’ calculations.

Although the headline inflation rate is expected to start declining in 2023, economists warn that the cost-of-living crisis is far from over as low-income households remain less financially secure than they were before the pandemic.

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The last quarter of 2022 is expected to be the peak of cost-of-living pressure with nearly 40 per cent of households in the UK having to cut back, cut into savings or borrow to maintain usual spending levels, according to Oxford Economics.

By the end of 2023, this figure is expected to drop to 24 percent of households. However, the report’s authors warned that families without reliable savings were at greater risk of falling into bad debt.

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Chinese real estate corporate financing jumps 33% year-on-year in December by Reuters

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© Reuters. FILE PHOTO: Unfinished apartment buildings stand in a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang Autonomous Region, China on September 17, 2022. REUTERS/Eduardo Baptista/

BEIJING (Reuters) – Chinese real estate firms raised a total of 101.8 billion yuan ($14.9 billion) in December, up 33.4 percent year-on-year, driven by more government support for the debt-laden sector, according to market researcher CRIC.

CRIC surveyed one hundred companies. It added that the figure for 2022 was 824 billion yuan, down 38 percent year on year.

The Central Bank said on Thursday that for cities where new home sales prices decline on a monthly basis and on an annual basis for three consecutive months, minimum mortgage rates for first-time home buyers in Egypt can be lowered or eliminated. stages.

Bloomberg News reported on Friday that China also plans to ease borrowing restrictions for real estate developers by calling its “three red lines” policy.

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In November and December, Chinese regulators began a series of measures to boost liquidity in the sector, including China’s largest state-owned banks pledging at least $162 billion in new credit to ease the sector’s liquidity crunch.

The real estate sector, which accounts for a quarter of China’s economy, was hit hard last year as many developers were unable to finish construction projects which led to some mortgage buyers boycotting. Lockdowns and motion control measures to control the spread of COVID-19 have also hurt buyer sentiment.

($1 = 6.8370 renminbi)

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