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FT report says eurozone rates could go up in 2 years
The Big Story 💥
The European Central Bank expects to hit its elusive 2 per cent inflation target by 2025, according to unpublished internal models that suggest it is on course to raise interest rates in just over two years.
This would be at least a year earlier than most economists expect the ECB to raise its deposit rate from a record low of minus 0.5 per cent. Many analysts predict benchmark rates in the 19 countries that share the euro will have stayed negative for a decade since being cut below zero in 2014.
However, some investors are pricing in a rate rise by the end of 2023. This scenario appeared to be confirmed by the ECB’s longer term inflation outlook, which its chief economist Philip Lane discussed in a private call with the economists of German banks this week.
The internal forecast is likely to intensify debate about how quickly major central banks will reverse the massive stimulus programmes they launched to counter the pandemic last year, and when they will start raising rates in response to rising inflation.
The ECB has struggled for several years to lift inflation up to its target and consistently overestimated future price growth, which is the main factor in its decisions on setting interest rates and adjusting asset purchases.
While some analysts predict the US Federal Reserve could start to raise interest rates as early as next year if the economy continues to rebound from the pandemic, most of them expect the ECB to do so much later.
The BlackRock Investment Institute this week pushed back the point at which it expects the ECB to raise rates, saying: “The likely lift-off date has moved further into the future beyond our five-year horizon — and we might only see the ECB raising rates later this decade.”
Inflation has shot up this year around the world and in the eurozone hit a decade-high of 3 per cent in August. The ECB has said this is because of “transitory” factors and has predicted price growth will fade back below its target next year before reaching 1.5 per cent in 2023.
The European Central Bank rejected the accuracy of a Financial Times report on the euro-area’s interest-rate outlook. Bund futures had dropped on the article, which said the ECB could hit its 2% inflation target by 2025 based on unpublished internal models that raised the prospect of earlier than-expected rate hikes.
Overnight Action 😴☕
Stocks and U.S. futures were steady this morning as risks to the global recovery from China and the prospect of reduced Federal Reserve stimulus subdued sentiment. Iron ore was on track for a record weekly slump.
Equities made modest gains in Japan and Hong Kong and fluctuated in China, where the central bank boosted cash injections into the financial system as traders monitor the fallout from the debt crisis at China Evergrande Group. Miners sapped Australian shares amid a slide in iron-ore prices.
S&P 500 and Nasdaq 100 futures were little changed. U.S. stocks closed mostly lower after swinging between gains and losses ahead of Friday’s quarterly expiration of options and futures, which can trigger volatility.
Treasury yields and the dollar stayed higher following surprise strength in U.S. retail sales, which eased economic worries sparked by the delta strain and highlighted the case for less expansive Fed support. Jobless claims increased, likely reflecting volatility in weekly data as the labor market broadly recovers. Iron ore has halved in value since May on steel curbs.
Global equities are on course for a second weekly drop, restrained by the impact of the delta virus variant on economic reopening, the implications of elevated inflation and the upheavals in China. The Fed’s policy meeting next week is a possible source of volatility as traders await more clues about the timeline for paring bond purchases and eventually hiking interest rates.
Investors should be prepared for much more muted returns over the next five years than what we’ve really benefited and enjoyed over the last five. That view incorporates the prospect of lower valuations for Chinese firms facing more government involvement.
NewsFlow 🆕📰
PBOC injects $13.9B in Evergrande
The People’s Bank of China injected 90 billion yuan ($13.9 billion) of funds on a net basis via seven-day and 14-day reverse repurchase agreements today, the most since February. That was the first time this month that the authorities added more than 10 billion yuan of short-term liquidity into the banking system in a day. The operation comes as crisis facing Evergrande fuels concern over the health of the nation’s real estate and credit markets. Adding to the stress is a seasonal spike in demand for cash, as banks become less willing to lend toward quarter-end as they prepare for regulatory checks. Liquidity also tends to tighten before a one-week holiday in China at the start of October.
Wall street trading groups step up crypto efforts
Several of Wall Street’s biggest trading companies have unveiled plans to stake out territory in cryptocurrency markets, opening a new front in their battle to win lucrative business from institutional investors. Jump Trading, GTS and Jane Street, among the largest players in the US equity market, are stepping up their trading in digital assets after years of secrecy surrounding their early forays into these markets. They are some of the most competitive trading companies that fight for every trade on global equity, currency and futures markets. Now they are planning a land grab as the bridge between the crypto world and asset managers keen to trade the fast-growing market.
India's $24B farming data trove
Amazon.com Inc., Microsoft Corp. and Cisco Systems Inc. are among technology giants lining up to harness data from India’s farmers in an ambitious government-led productivity drive aimed at transforming an outmoded agricultural industry. Prime Minister Narendra Modi’s administration, which is seeking to ensure food security in the world’s second-most populous nation, has signed preliminary agreements with the three U.S. titans and a slew of local businesses starting April to share farm statistics it’s been gathering since coming to power in 2014. Modi is betting the private sector can help farmers boost yields with apps and tools built from information such as crop output, soil quality and land holdings. Jio Platforms Ltd., the venture controlled by billionaire Mukesh Ambani’s Reliance Industries Ltd., and tobacco giant ITC Ltd. are among local powerhouses that have signed up for the program, the government said this week.
Renault plans for EV, and laying off workers
Renault SA plans to eliminate 2,000 more jobs while still making nine new models in France as the struggling automaker reshapes operations in its home country and shifts to electric vehicles. The company is in talks with French unions to cut 1,600 engineering and 400 support positions between 2022 and 2024, according to a statement Thursday. During the same period, it will recruit 2,500 people, including in data science and battery chemistry. With the French state looming as Renault’s largest shareholder, Chief Executive Officer Luca de Meo has a fine line to walk in his effort to turn the company around. The carmaker announced last year it would eliminate about 14,600 jobs worldwide -- including 4,600 in France -- and lower production capacity by almost a fifth.
In Europe, soaring electricity prices hurt energy giants
A supply crunch that sent European energy prices to records is squeezing profits for some of the continent’s industrial giants, threatening to derail the region’s economic recovery. Europe’s top chemicals firm BASF SE said it has been unable to fully swerve the impact of record-breaking electricity prices despite producing 80% of its own power. Aurubis AG, the continent’s biggest copper producer, said energy costs have already dragged down profits and will continue to weigh on margins for the rest of the year. Things got so bad in the U.K. that a major fertilizer producer shut two plants, with no estimate for when output would resume. Energy prices have rallied from the U.S. to Europe and Asia as economies emerge from the pandemic and people return to the office. European gas prices have more than tripled this year, while power costs almost doubled as the region faces a supply crunch that risks upsetting the recovery.
Crypto Outlet 🐳
Jump Trading, GTS and Jane Street, among the largest players in the US equity market, are stepping up their trading in digital assets after years of secrecy surrounding their early forays into these markets.
The net amount of $ETH leaving exchanges just hit a new record.
Over $1.2B worth of $ETH left centralized exchanges yesterday.
Last time $1B+ left CEXs, #Ethereum increased by 60% within 30 days.
The Estonian-based decentralized finance protocol Minterest has just secured $6.5 million in funding for a long-term yield optimization platform.
Credit rating agency Standard and Poor (S&P) Global believes the country of El Salvador has severely harmed its credit rating after enacting its Bitcoin Law recognizing BTC as legal tender nationwide on Sept. 7.
South Korea’s Minister of Strategy and Finance, Hong Nam-Ki has vowed that the controversial crypto tax code will come into effect on January 1st, 2022 despite moves this week by the majority Democratic Party to postpone it to 2023. The tax code will levy a 20% tax on income generated by crypto transactions in excess of 2.5 million KRW, or about $2100 USD.
Power price surge could hurt margins and slow European equity rally
Gas and power prices plunged in Europe on signs this year’s relentless rally is prompting energy-intensive industries to curb consumption at a time when supplies started to improve. Still, worries are growing that a surge in the cost of gas and electricity will pressure net profit margins for European companies that are at the highest since 2008. @Bloomberg
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