ECB steps in to address surge in borrowing costs

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Good evening

It’s a big day for policymakers in Europe and the US as they lay out monetary responses to the deteriorating economic outlook and address the recent turmoil in financial markets.

After a rare emergency meeting this morning, the European Central Bank pledged a new bond-buying plan to tackle surging borrowing costs in weaker eurozone countries. Prices of bonds in heavily-indebted Italy rallied after the announcement, following fears that the country had been heading towards the “danger zone”.

The central bank’s move comes just a week after it had disappointed investors with a lack of detail over how it might tackle the “financial fragmentation” which meant borrowing costs rising more for southern eurozone countries than for those in the north.

The ECB meeting is followed later today (2pm ET/7pm London time) by the US Federal Reserve’s announcement on interest rates. Investors in recent days have come to believe that the Fed might accelerate its policy tightening with a rise of 0.75 percentage points as it ramps up its fight against inflation. However, they remain uncertain about the impact of its “quantitative tightening”.

Recent data highlight the need for action. US producer prices rose 0.8 per cent in May — an acceleration of 0.3 percentage points from the previous month — or 10.3 per cent on an annual basis. Diesel and petrol prices are soaring, while wider retail sales fell unexpectedly in May for the first time in five months as Americans put car purchases on hold.

New surveys have also highlighted a darkening mood in the country. A survey of chief executive officers showed confidence dimming, reflecting “uncertainty driven by the unprecedented times we face as a nation and global community,” in the words of General Motors boss Mary Barra. It follows last week’s FT’s poll of top economists which showed 70 per cent believe a recession is coming next year.

Chief economics commentator Martin Wolf takes a wider view of the challenges facing policymakers, drawing on his experiences as an economist at the World Bank in the 1970s. He argues that they need to avoid repeating the mistakes of that era, a similar time of surging inflation, wars in key commodity-producing regions, declining real wages, slowing growth, fears of tightening monetary policy and turbulence in stock markets.

“What I remember most about that period was the pervasive uncertainty,” he concludes. “We did not have any idea what would happen next. Many mistakes were made, some out of over-optimism and others out of panic. The past does not repeat itself. But it is rhyming. Do not ignore time’s poetry.” 

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Need to know: the economy

Gazprom, the Russian state-owned energy company, cut gas supplies to Germany, its biggest customer, for the second time this week, blaming turbine repairs. It also cut supplies to Italy, its second biggest buyer.

Despite the slowdown in economic growth, the UK labour market is still running hot, with official data yesterday showing the number of full-time employees at a record high, redundancies at record lows and the number of unfilled vacancies at a new peak of 1.3mn. However, save for those lucky enough to earn a bonus, pay in real terms fell sharply.

Latest for the UK and Europe

A new study showed that UK exports to the EU fell by 15.6 per cent, or £12.4bn, in the first six months of last year because of post-Brexit trade frictions over standards and technical specifications. Brexit is also being blamed for delays in introducing superfast broadband across the UK.

Science columnist Anjana Ahuja says leaving the EU’s Horizon research programme “makes a mockery of the government’s self-proclaimed ambition to turn the UK into a global science superpower”. However, the government did this week grant a £500mn upgrade to the country’s largest scientific facility, the Diamond Light Source microscope in Oxfordshire.

The FT revealed that Poland was poised to drop its opposition to a global minimum corporate tax, which could lead to EU adoption of the OECD proposals at a meeting of finance ministers on Friday.

Global latest

Retail sales in China fell for a third consecutive month in May as lockdowns and mass testing hit growth in the world’s biggest consumer market. Industrial production fared slightly better, gaining 0.7 per cent compared with last year, boosted by growth in new energy vehicles and solar cells.

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Global oil supply will “struggle” to meet still rising demand next year, the International Energy Agency said today, despite signs that record prices at the pump are starting to hit consumption. Our Big Read examines US president Joe Biden’s attempts to mend fences with Saudi Arabia and limit the damage to energy markets roiled by Russia’s invasion of Ukraine.

The latest in our Economists Exchange series features the FT’s Delphine Strauss talking to Nobel laureate Christopher Pissarides, who argues that policymakers can no longer bring about social change through monetary and fiscal stimulus that will fuel inflation but not bring any fundamental shift in workers’ bargaining power.

The slowing of New Zealand’s house price boom as interest rate rises bite is being watched closely by markets across the world. “New Zealand is a canary in the coal mine,” said one economist. “It’s a test case for a central bank to push up rates as house prices are soaring to deal with inflation.”

Laos, the latest Asian country to come under serious financial strain from surging energy and commodity prices, had its sovereign debt status reduced to “junk” by Moody’s Investor Service.

Need to know: business

German energy company HH2E’s €1bn investment in a green hydrogen plant is one of the biggest moves so far in the country’s efforts to go carbon neutral as well as weaning itself off Russian gas.

A Bank of America survey showed three-quarters of global fund managers expected company profits to deteriorate, the weakest reading since the 2008 financial crisis. Especially gloomy are those fund managers in Hong Kong, who pleaded with the government to reopen the city borders or risk a “permanent” loss of talent, even as coronavirus cases begin to rise again.

The UK ordered airlines to make sure all summer flights went ahead after disruption meant between 2 and 4 per cent of flights were cancelled during the first week of May, compared with a normal rate of 1 per cent. Unions blamed staff cuts, while operators cited long waiting times for new workers to pass security checks. Next week rail journeys will also be disrupted by the most significant industrial action in 30 years.

Almost half of UK Covid loans went to businesses not facing financial distress, according to a new report. It also found that the loan guarantee schemes could have saved between 150,000 and 500,000 businesses with between 500,000 and 2.9mn jobs.

One particular market has bounced back strongly from Covid disruptions: Europe’s illegal drug business. Cocaine supply has passed pre-pandemic levels while more potent and dangerous drugs are beginning to appear, with increased activity from Mexican gangs, according to a European monitoring agency.

The World of Work

Are you ready to ditch those elasticated waistbands and “Zoom mullets” for more formal attire for the return to the office? The new edition of our Working It podcast discusses how the pandemic has changed what we wear to work.

On-demand services such as ultrafast delivery apps have grown rapidly in recent years, but, says columnist Sarah O’Connor, the growing awareness of how gig workers are exploited, combined with cutbacks in consumer discretionary spending, could spell the end of the “servant economy” model. The latest flashpoint involves ride-hailing app Bolt, which is being taken to court by the UK’s GMB union over employment rights.

Line chart of Share prices rebased ($) showing Gig economy companies' share prices have dropped

Covid cases and vaccinations

Total global cases: 531.2mn

Total doses given: 12.0bn

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And finally…

What’s your favourite book of 2022 so far? We’re collecting reader recommendations for our popular Summer Book series next week and would love to hear from you. Follow this link and share those titles you think fellow FT readers might enjoy.

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