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US rates outlook in focus at Jackson Hole Economic Symposium – Industry roundup: 24 August

Fed chief Powell to provide US rates outlook at Jackson Hole Symposium

The US Federal Reserve’s annual Economic Policy Symposium at Jackson Hole, Wyoming gets underway today, with Chair Jerome Powell due to deliver his much anticipated keynote speech tomorrow at 10:05 am Eastern time.

This year’s theme for the three-day event, “Structural Shifts in the Global Economy,” promises in-depth discussions on critical economic transformations. In addition to the outlook for inflation and interest rates potential discussions will address topics such as deglobalisation, green transitions, artificial intelligence (AI) and government debt.

Up to 120 participants will convene at Jackson Hole, with the event playing a pivotal role in shaping global central banking events. The event dictates policy themes for the remainder of the year and beyond. Markets keenly observe the conference to glean insights into the direction of monetary policy.

According to Bloomberg, Powell’s speech to global central bankers “comes as policymakers enter what he’s called the most difficult stage of the inflation fight — calibrating how much more tightening is needed, with little certainty about how their actions have affected the economy.”

Additional Fed officials traditionally engage in media interviews during the symposium, offering perspectives on the trajectory of monetary policy.

In his speech at the 2022 Symposium, Powell warned warning of economic pain ahead to rein back resurgent inflation. “While higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said. The US consumer price index (CPI) had hit a 41-year high of 9.1% in June 2022, which proved t be the peak. After steady falls, the CPI ticked up last month for the first time since then, from 3% to 3.2%.

Chris Rupkey, chief economist at research company FWDBONDS, said that last year Powell wanted to remind his audience that the road back to the Fed's target of 2% inflation was long. However, he would be shocked if Powell used tomorrow’s speech to signal that a rate hike was definitely on the table at the Fed’s September meeting. After consistently raising rates from March 2022 onwards, the Fed kept them on hold in June this year before sanctioning a further 0.25% increase last month to 5.25%-5.50%.

“The Fed may be closer to the end certainly than the beginning, and I would expect Powell’s speech to reflect that,” said Rupkey.

Bank of America analysts suggest that should Powell express comfort with the current rate hike pace, markets might interpret this as a signal for a potential pause in September and a likely hike in November.

Goldman Sachs forecasts softer tones from Powell’s speech as expectations of a US recession in 2023 have lowered as the year progresses. Current scenario indicates the potential for a smoother transition and, this time around, the prospects for the US economy to achieve a “soft landing” are higher than in the past year.


Euro zone business activity dips more than expected

Euro zone business activity appears to have declined far more than anticipated this month, with preliminary surveys indicating that the slide in Germany was particularly fast, while some inflationary pressures returned.

This month’s purchasing managers’ indexes (PMIs) complicate matters for the European Central Bank which wants to dampen still rampant price rises without tipping the region into a recession.

The ECB is expected to pause interest rate hikes in September, according to a narrow majority of economists polled by Reuters, despite elevated inflation. A further rise in rates by year-end is widely expected however, following the central bank's most aggressive policy tightening cycle.

“The continuing sharp drop in the PMI data will test the ECB's growth optimism,” said Mark Wall, chief European economist at Deutsche Bank. “We are expecting the ECB to pause in September, but it is not clear that inflation is where the ECB wants it yet. A pause should not be misinterpreted as the peak.”

Activity in the bloc's dominant services industry declined for the first time this year and the contraction in manufacturing output continued, although there were some signs of a turnaround for factories.

Hamburg Commercial Bank’s (HCOB) flash Composite PMI for the bloc, compiled by S&P Global and seen as a good barometer of overall economic health, dropped to 47.0 in August from July's 48.6, its lowest since November 2020.

That was well below the 50 mark separating growth from contraction and lower than all expectations in a Reuters poll which had predicted a slight dip to 48.5.

A chunk of that activity was driven by firms completing old orders, with the backlogs of work index falling to its lowest since June 2020 when the COVID pandemic was cementing its grip on the world.

Business activity in Germany, Europe's largest economy, contracted at the fastest pace for more than three years as a deepening downturn in manufacturing output was accompanied by a renewed contraction in services, an earlier survey showed. German firms emained pessimistic about the outlook as rising interest rates, customer uncertainty and high inflation continued to weigh on demand.

In France, the dominant services sector contracted further as falls in demand and new orders hinted there would be a contraction in the euro zone's second-biggest economy this quarter.

The UK economy, outside the European Union, looks on course to shrink in the third quarter and risks falling into a recession as its PMI showed a slump in factory output and broader weakness in the face of higher interest rates.

Euro zone inflation was 5.3% in July, official data showed, more than double the ECB’s 2% target but well below readings seen late last year.

Manufacturing activity has been in decline since mid-2022, but the latest PMI survey offered some hope the nadir may have been passed. The headline index rose to 43.7 from 42.7, its first uptick in seven months and confounding expectations in the Reuters poll for a dip to 42.6.

Optimism among factory purchasing managers improved, also suggesting the worst may be over for manufacturers.


BRICS invites six countries to become members

This week’s BRICS Summit in South Africa has concluded with the current five members of the bloc – Brazil, Russia, India, China and South Africa – inviting six more countries to join their alliance.

Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates have all been invited to become members of BRICS, said South African President Cyril Ramaphosa, who hosted the three-day summit of the emerging markets group in Johannesburg.

Their membership will take effect from January 1, 2024.

“We value the interest of other countries in building a partnership with BRICS,” Ramaphosa said. “We have tasked our Foreign Ministers to further develop the BRICS partner country model and a list of prospective partner countries and report by the next Summit.”

Earlier this week the New Development Bank (NDB), aka the Development Bank of the BRICS group of nations confirmed that it would not be announcing new members at the Summit, when its Chief Financial Officer (CFO) Leslie Maasdorp spoke to Reuters.

The bank, which was set up in 2015 to give the five BRICS members a greater say in financing infrastructure than in Western-led institutions such as the World Bank, is keen to attract new members to boost its capital base after U.S. sanctions on Russia hobbled its lending.

The NDB, which now includes Egypt, Bangladesh and the United Arab Emirates (UAE) as shareholders, is under pressure to boost local currency fundraising and lending as the BRICS nations seek to reduce dependence on the US. dollar and develop the BRICS bloc into a counterweight to the West.

“The process of ratifying new countries is happening at the discussion of the (BRICS) leaders, which they are having without us as the bank,”Maasdorp told Reuters. “There will be no announcements this week," he said, adding that it was likely there would be more new members applying this year, but that the timing was dependent on political processes in the countries that want to join.

Maasdorp told Reuters that the Bank aims to increase local currency lending, most of which has so far been in the Chinese yuan, from about 22% to 30% by 2026, but that there were limits to de-dollarisation.

The NDB has already announced plans to begin lending in South African and Brazilian currencies in order to defy reliance on the US dollar. The bank’s president, Dilma Rousseff disclosed this in a recent interview with the Financial Times.

Rousseff also said the Shanghai-based lender was considering applications for membership from about 15 countries and was likely to approve the admission of four or five. She declined to name the countries but said it was a priority for the NDB to diversify its geographic representation.

The President said, “We expect to lend between US$8 billion-US$10 billion this year,” Rousseff told the newspaper. “Our aim is to reach about 30% of everything we lend . . . in local currency.”

She said the NDB would issue debt in rand for lending in South Africa and do “the same thing in Brazil with the real. We’re going to try to either do a currency swap or issue debt. And also in rupees.”

Rousseff said lending in local currency would allow borrowers in member countries to avoid exchange rate risk and variations in US interest rates. She said, “Local currencies are not alternatives to the dollar.

“They’re alternatives to a system. So far the system has been unipolar . . . it’s going to be substituted by a more multipolar system.”

Earlier this week the Bank’s chief operating officer, Vladimir Kazbekov, revealed that the NDB plans to issue its first Indian rupee bond by October, in response to calls for it to raise and lend more in local currencies. It follows the issue of its first rand bond in South Africa last week and local currency issuance in members Brazil, Russia and United Arab Emirates could follow, he confirmed at a press briefing.


Credit card delinquencies point to coming recession, warns Wells Fargo

Late payments on credit card balances are rising, which could be a harbinger of difficult times to come in the US economy, according to Wells Fargo.

Strategists at the bank pointed to a sharp rise in credit card delinquencies among commercial banks. And for banks outside of the top 100 in asset size, late payments on credit card balances hit an all-time high, it said in a note earlier this week.

Rising late payments put more pressure on small- and medium-sized banks, strategists said, during a time when markets have been increasingly concerned about bank stability and rising debt levels in the US.

Earlier this month, Moody's downgraded several US banks, with Standard & Poor’s (S&P) making similar moves early this week. Meanwhile, US credit card debt also reached US$1 trillion for the first time in early August, according to Federal Reserve data.

Surging credit card delinquencies have also been historically associated with recessions, although a downturn hasn't yet been officially declared and Wall Street forecasters are increasingly expecting a US economic soft landing.

“The economy still has a cash cushion, but many consumers are exhausting their credit, while income growth has slowed sharply,” strategists said in a note on Tuesday. “Our outlook remains for a short, moderate recession and then recovery for most of 2024 and likely into 2025.”


KredoBank partners with EU and EBRD on trade finance for Ukraine

The European Union and the European Bank for Reconstruction and Development (EBRD) are backing food security and other key industries in wartime Ukraine through a new risk-sharing agreement in favour of KredoBank, a subsidiary of PKO Bank Polski. The arrangement will also broaden technical know-how and offer investment incentives to qualifying businesses.

A risk-sharing agreement was formalised between the EBRD and KredoBank four weeks ago, whereby the EBRD commits to a €25 million guarantee. This covers 50% of the credit risk for new financing provided by KredoBank, up to an overall value of €100 million and a portfolio cap of 50%. The facility is to be delivered in two equal tranches.

This risk-sharing facility enables KredoBank to extend financing to Ukrainian firms engaged in essential industries, including primary agriculture and agricultural services, food processing, transport and logistics, retail, and pharmaceuticals. 

It will also contribute to securing food safety and maintaining livelihoods in Ukraine, where vital economic sectors were profoundly affected by Russia’s invasion last February.

Furthermore, as an aspect of the EU’s SME Competitiveness programme (EaP SMEC), €15 million of the overall €100 million covered portfolio will be open to micro-, small- and medium-sized enterprises (MSMEs) to buy greener technologies and equipment. This aids Ukrainian MSMEs in adhering to EU technical and sanitary norms.

Joining the EaP SMEC programme will also result in KredoBank and its customers gaining access to expert advice through training and support from consultants. Eligible borrowers may obtain grant aid in the form of investment incentives when their investment projects are completed.

The EBRD’s facility will be augmented by a 50% donor-funded first-loss risk cover within the Bank’s resilience package arrangements. The current risk-sharing facility raises the aggregate volume of financing facilitated to €468 million under similar guarantees since the war’s commencement.


Turkey's central bank hikes rate from 17.5% to 25%

Turkey's central bank has announced a much bigger interest rate hike than most analysts anticipated, with an increase from 17.5% to 25%. Consensus was that the hike would be to no more than 20%, with some economists expecting a smaller increase after hikes in previous months remained below expectations.

The Central Bank of the Republic of Türkiye (CBRT) embarked on a tightening cycle in June, after President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as governor.

As part of the policy change, the bank tightened its one-week repo rate by 900 basis points, raising it from 8.5% to 17.5%, still far below annual inflation at 47.83%.

The CBRT had promised to gradually tighten policy further as necessary to avoid the negative impact of high rates on the economy.

The median estimate of 17 institutions polled by Reuters was for a 250-basis-point hike in the policy rate to 20%, with forecasts ranging from 18% to 20.50%.

“Durable disinflation is unlikely in an environment where the real policy rate is set to remain deeply negative, even if modest policy rate hikes are complemented by macro-prudential tightening,” HSBC said in a note.

Announcing the increase, the CBRT said that "the [Monetary Policy] Committee decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior."


China launches blockchain-powered data exchange

Chinese government officials have unveiled a new data exchange powered by blockchain technology at the 2023 Hangzhou Summit held in Hangzhou. More than 300 enterprises, including Alibaba Cloud and Huawei, participated in the exchange’s debut.

According to local news reports, the new Hangzhou Data Exchange will facilitate the trading of enterprise information technology data using distributed ledger technology (DLT). Officials said the platform would ensure exchange trades are immutable and traceable.

Chen Chun, director of the National Laboratory of Blockchain and Data Security, commented: “[The Hangzhou Data Exchange] utilises research blockchain, privacy computing and other technologies to realise trusted sharing and effective use of data across departments and regions under data security and privacy protection.”

In 2022, Hangzhou’s digital economy sector surpassed yuan (CNY) 500 billion (US$69 billion), accounting for nearly 27% of the city’s gross domestic product.

Despite a severe crackdown on private blockchain enterprises for much of the year, China is a staunch supporter of government-controlled blockchain efforts. At the opening of the 2023 Shanghai Cooperation Organisation (SCO) Conference, Chinese President Xi Jinping said that central bank digital currencies (CBDCs) played an important role in “expanding the share of local currency settlements of SCO countries.” Recently, over CNY100 million worth of the digital yuan CBDC was airdropped to Chinese residents to stimulate domestic spending. 

Other initiatives have fared less well. At the end of 2022 reports stated  that the country was supposedly in the final stages of launching its national nonfungible token exchange, CDEX, but eight months on the platform apparently still remains under development.

Sime Darby, MUFG pioneer Islamic green trade finance facility

MUFG Malaysia has closed a US$25 million Islamic green trade facility with the automotive arm of trading conglomerate Sime Darby. The transaction represents one tranche of a US$50 million facility. The other US$25 million tranche is exclusively an Islamic finance facility.

It is the first short-term trade transaction that is both shariah-compliant and aligned with the Green Loan Principles and the guidelines of Bank Negara Malaysia, the country’s central bank, for both MUFG and Sime Darby Motors, the lender says.

The facility will be used to provide working capital needed for the production of electric vehicles (EVs) as well as support other green requirements. “This is a reflection of our commitment to engaging in sustainable partnerships, in driving sustainable innovation and technology,” said Andrew Basham, Sime Darby Motors’ managing director.

Colin Chen, MUFG’s head of ESG finance for Asia Pacific, said the bank is committed to creating “a just and equitable transition across Asia”. “This transaction’s unique structure further aligns Sime Darby Motor’s financing programme with their goal of greening their vehicle portfolio,” he added.

MUFG says it wants to invest a cumulative total of yen (¥) 35trillion (US$239 billion) in sustainable finance globally by 2030 and achieved just over 70% of this target between 2019 and 2022. It became the first Japanese bank to offer Islamic banking products and services after establishing an Islamic banking arm in Malaysia in 2008.

Early this year MUFG extended a trade finance facility to help India’s Tata Power develop two solar power projects expected to generate a combined 220 megawatts (MW) of renewable energy for the country. It is the first “sustainable trade finance facility” MUFG has offered in India.


Citi revamps chequing accounts in US

Citigroup Inc. will make sweeping changes to its chequing-account offerings as the banking giant makes a deeper push into wealth management.

The company is ditching standard account packages and will instead adopt “relationship tiers” that are based on customer’s deposit and investment accounts, according to a statement. Customers who put more money into their Citigroup accounts will automatically be moved into new accounts that offer additional rewards.

In its release, the group announced: Citi’s US Retail Bank introduces simplified banking, a more straightforward way of banking. By retiring account packages and introducing Relationship Tiers, Citi is streamlining its benefits and services and enhancing the customer experience. New customers can benefit from these changes immediately and Citi will begin converting existing customers to simplified banking in 2024.
“Customers are at the heart of everything we do, and we are excited to offer even more enhanced offerings with convenient benefits and services that grow with customers as they move through life’s stages,” said Craig Vallorano, Head of Retail Banking at Citi. “These latest changes are designed to create a more seamless experience for our customers and make it easier for them to get personalized advice and access their finances.”

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