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Bank Of Canada Hikes 50bps To Stem Inflation, Launches QT On April 25

Bank Of Canada Hikes 50bps To Stem Inflation, Launches QT On April 25

As preview earlier (see below), moments ago the Bank of Canada indeed…

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Bank Of Canada Hikes 50bps To Stem Inflation, Launches QT On April 25

As preview earlier (see below), moments ago the Bank of Canada indeed hiked rates by 50bps to 1%, as expected, the second rate hike in the post-covid era following a 25bps hike in March.

And, as also expected, the BOC announced that it is also ending reinvestment and will begin quantitative tightening (QT), effective April 25, adding that maturing bonds on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time, although there were no additional details.

In its statement, the BOC said that with the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The bank said that "the timing and pace of further increases in the policy rate will be guided by the Bank's ongoing assessment of the economy and its commitment to achieving the 2% inflation target."

Courtesy of Newsquawk, here is a redline comparison of the current and last BOC statements:

The BOC offered some perspectives on on the impact of the Ukraine war:

  • Price spikes in oil, natural gas and other commodities are adding to inflation around the world.
  • Supply disruptions resulting from the war are also exacerbating ongoing supply constraints and weighing on activity.
  • These factors are the primary drivers of a substantial upward revision to the Bank's outlook for inflation in Canada.

Of course, the BOC also discussed the Canadian economy, where "growth is strong and the economy is moving into excess demand." More details:

  • Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising.
  • Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.
  • While the COVID-19 virus continues to mutate and circulate, high rates of vaccination have reduced its health and economic impacts.
  • Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter.
  • Consumer spending is strengthening with the lifting of pandemic containment measures.
  • Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices.
  • Housing market activity, which has been exceptionally high, is expected to moderate.

Since the BOC announcement was fully priced in, the market reaction was at best muted with the CAD unchanged on the day at 1.2646, Heading into the decision, the USDCAD traded around the 1.2658 region. As the Central Bank hiked rates by 50bps (18/29 analysts surveyed expect a 0.50% hike to 1.00%. the others expect a 0 25% move) and announced the start of QT, the initial reaction saw USD/CAD knee-jerk lower to 1.2625 (just shy of its 200 DMA at 1.2623) before retracing the move, potentially as details on balance sheet rundown remain light. The pair stabilized around pre-announcement levels shortly after whilst the 50 DMA is seen at 1.2661 and the 100 DMA at 1.2687.

Our preview published earlier: BoC rate decision due Wednesday April 13th at 10am EDT

  • 18/29 analysts surveyed expect a 0.50% hike to 1.00%, the others expect a 0.25% move.
  • BoC is likely to reveal its QT process.
  • The MPR will likely see inflation revised higher for the year before cooling in 2023, any revisions to the neutral rate will also be sought.

SUMMARY: The BoC is expected to hike rates by 50bps to 1.0%, although the survey was not unanimous with 11/29 expecting a 25bp move, but market pricing is more or less fully priced in for 50bps in April. The Central Bank will also likely announce the details of their Quantitative Tightening (QT) process after hints from Governor Macklem and Deputy Governor Kozicki where they are expected to announce the end of the reinvestment phase. The balance sheet runoff is expected at a relatively fast pace as roughly 40% of their bonds are set to mature within the next two years. The meeting will be accompanied by the Monetary Policy Report, which will likely see inflation for the year revised higher following the spike in commodity prices, but it is expected to cool next year, albeit it is still not seen returning to target until at least 2024. Some analysts also expect a revision higher to the neutral rate forecasts, perhaps to 2.75% from 2.25%, but others suggest it will be left unchanged. The rate decision will be accompanied by a press conference with Governor Macklem where commentary will be eyed on the magnitude of the rate hike as well as details about the QT process.

RATE PATH: The Bank of Canada is expected to hike rates by 0.5% on Wednesday, taking its Overnight rate to 1%, according to 18/29 surveyed by Reuters. The others expect a smaller 0.25% move, but the poll highlights that all five of the largest Canadian banks are expecting a 0.50% move, followed by another 0.50% in June. However, the wider poll, in a close margin, expects the pace of rate rises to slow to 0.25% each month, reaching 2% by year-end - 10/22 expect two 0.50% hikes in 2022, while nine expect just the one and three believe there will be zero 50bps hikes from the BoC. In 2023, the poll saw the overnight rate at 2.25% in Q2 23, before pausing until the end of 2023.

50BPS: Currently, a 50bps hike in April is more or less fully priced in, but there is a risk of a smaller 25bp increment. Although after the 25bp move in March and with inflation still rising above the BoC's target range, calls for 50bps have increased while the labour market remains strong and well above pre-pandemic levels, where it has been for some time. Deputy Governor Kozicki highlighted the primary focus is to return hot inflation to its target and that she is prepared to act "forcefully" with rate hikes to do so. She added the pace and magnitude of hikes will be discussed at the April BoC meeting. Kozicki also noted that inflation is too high while labour markets are tight and there is considerable momentum in demand. The latest BoC Business Outlook Survey also raised the alarm on inflation, where firms’ inflation expectations remain elevated. "More than two-thirds of businesses anticipate inflation will be above 3%, on average, over the next two years, while two-fifths expect it to be above 4%" - above the top end of the BoC's 1-3% target range. However, most firms expect inflation will be close to target in three years due to the expected rate hikes from the BoC and an improvement in supply chains. Kozicki was cautious about the high indebtedness, suggesting it could amplify the impact of rising rates and could worsen the impact of a future shock. However, she noted households on average are in better financial shape now than at the start of the 2017-18 tightening cycle.

OUTSIDE RISKS: Although the majority expect a 50bp move, there is a risk for a 25bp hike. As the BoC is expected to provide details of QT, it could be deemed as "overly hawkish" if they were to do this alongside a 50bp move. Meanwhile, analysts at Capital Economics highlight Governor Macklem “has developed a bit of a track record for doing less than markets are pricing in" after the BoC left rates unchanged in January and only hiked by 25bps in March. Cap Eco also highlighted the Central Bank may have concerns about the housing market as local real estate board data in Toronto showed average selling prices declined in March, which comes before the anticipated rise in mortgage rates. It is worth noting that analysts at Scotiabank, who have been calling for a more hawkish BoC, have suggested a larger 75bp hike cannot be ruled out as it believes the Central Bank is seriously behind in its fight against inflation.

QT: Based on recent commentary, it is likely we will see details on the BoC's Quantitative Tightening (QT) process; Governor Macklem said QT was the logical next step after rate rises begin and the timing of it will be transparent, while Deputy Governor Kozicki said QT will start in April. Governor Macklem noted when QT starts, the Bank will stop purchasing Canadian government bonds and maturing bonds would not be replaced when they roll off the balance sheet, suggesting a different approach to the Fed's proposed phase-in agenda. He suggested the balance sheet will shrink relatively quickly, with around 40% of the BoC's bonds set to mature within the next two years. The pace of QT will be determined by wage growth and longer-run inflation expectations. Macklem noted that when QT starts the BoC does not intend to actively sell bonds.

MPR: The meeting will also be accompanied by the latest Monetary Policy Report. We will likely see inflation forecasts revised higher in the short term amid the commodity price rally while the Reuters poll has inflation cooling next year, but it is expected to remain above the BoC's target until at least 2024. At the January MPR, CPI in 2021 was seen at 3.4%, then 4.2% in 2022 and 2.3% in 2023. GDP growth in 2021 was seen at 4.6%, 4.0% in 2022 and 3.5% in 2023. The Output Gap was seen as being essentially absorbed at around -0.75 to 0.25%. The Neutral Rate midpoint was at 2.25% (1.75% to 2.75%), some expect this to be revised higher to 2.75%, although others suggest it will be left unchanged.

Tyler Durden Wed, 04/13/2022 - 10:13

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Russia’s energy war: Putin’s unpredictable actions and looming sanctions could further disrupt oil and gas markets

Russian President Vladimir Putin has not hesitated to use energy as a weapon. An expert on global energy markets analyzes what could come next.

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The new Baltic Pipe natural gas pipeline connects Norwegian natural gas fields in the North Sea with Denmark and Poland, offering an alternative to Russian gas. Sean Gallup/Getty Images

Russia’s effort to conscript 300,000 reservists to counter Ukraine’s military advances in Kharkiv has drawn a lot of attention from military and political analysts. But there’s also a potential energy angle. Energy conflicts between Russia and Europe are escalating and likely could worsen as winter approaches.

One might assume that energy workers, who provide fuel and export revenue that Russia desperately needs, are too valuable to the war effort to be conscripted. So far, banking and information technology workers have received an official nod to stay in their jobs.

The situation for oil and gas workers is murkier, including swirling bits of Russian media disinformation about whether the sector will or won’t be targeted for mobilization. Either way, I expect Russia’s oil and gas operations to be destabilized by the next phase of the war.

The explosions in September 2022 that damaged the Nord Stream 1 and 2 gas pipelines from Russia to Europe, and that may have been sabotage, are just the latest developments in this complex and unstable arena. As an analyst of global energy policy, I expect that more energy cutoffs could be in the cards – either directly ordered by the Kremlin to escalate economic pressure on European governments or as a result of new sabotage, or even because shortages of specialized equipment and trained Russian manpower lead to accidents or stoppages.

Dwindling natural gas flows

Russia has significantly reduced natural gas shipments to Europe in an effort to pressure European nations who are siding with Ukraine. In May 2022, the state-owned energy company Gazprom closed a key pipeline that runs through Belarus and Poland.

In June, the company reduced shipments to Germany via the Nord Stream 1 pipeline, which has a capacity of 170 million cubic meters per day, to only 40 million cubic meters per day. A few months later, Gazprom announced that Nord Stream 1 needed repairs and shut it down completely. Now U.S. and European leaders charge that Russia deliberately damaged the pipeline to further disrupt European energy supplies. The timing of the pipeline explosion coincided with the start up of a major new natural gas pipeline from Norway to Poland.

Russia has very limited alternative export infrastructure that can move Siberian natural gas to other customers, like China, so most of the gas it would normally be selling to Europe cannot be shifted to other markets. Natural gas wells in Siberia may need to be taken out of production, or shut in, in energy-speak, which could free up workers for conscription.

European dependence on Russian oil and gas evolved over decades. Now, reducing it is posing hard choices for EU countries.

Restricting Russian oil profits

Russia’s call-up of reservists also includes workers from companies specifically focused on oil. This has led some seasoned analysts to question whether supply disruptions might spread to oil, either by accident or on purpose.

One potential trigger is the Dec. 5, 2022, deadline for the start of phase six of European Union energy sanctions against Russia. Confusion about the package of restrictions and how they will relate to a cap on what buyers will pay for Russian crude oil has muted market volatility so far. But when the measures go into effect, they could initiate a new spike in oil prices.

Under this sanctions package, Europe will completely stop buying seaborne Russian crude oil. This step isn’t as damaging as it sounds, since many buyers in Europe have already shifted to alternative oil sources.

Before Russia invaded Ukraine, it exported roughly 1.4 million barrels per day of crude oil to Europe by sea, divided between Black Sea and Baltic routes. In recent months, European purchases have fallen below 1 million barrels per day. But Russia has actually been able to increase total flows from Black Sea and Baltic ports by redirecting crude oil exports to China, India and Turkey.

Russia has limited access to tankers, insurance and other services associated with moving oil by ship. Until recently, it acquired such services mainly from Europe. The change means that customers like China, India and Turkey have to transfer some of their purchases of Russian oil at sea from Russian-owned or chartered ships to ships sailing under other nations’ flags, whose services might not be covered by the European bans. This process is common and not always illegal, but often is used to evade sanctions by obscuring where shipments from Russia are ending up.

To compensate for this costly process, Russia is discounting its exports by US$40 per barrel. Observers generally assume that whatever Russian crude oil European buyers relinquish this winter will gradually find alternative outlets.

Where is Russian oil going?

The U.S. and its European allies aim to discourage this increased outflow of Russian crude by further limiting Moscow’s access to maritime services, such as tanker chartering, insurance and pilots licensed and trained to handle oil tankers, for any crude oil exports to third parties outside of the G-7 who pay rates above the U.S.-EU price cap. In my view, it will be relatively easy to game this policy and obscure how much Russia’s customers are paying.

On Sept. 9, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control issued new guidance for the Dec. 5 sanctions regime. The policy aims to limit the revenue Russia can earn from its oil while keeping it flowing. It requires that unless buyers of Russian oil can certify that oil cargoes were bought for reduced prices, they will be barred from obtaining European maritime services.

However, this new strategy seems to be failing even before it begins. Denmark is still making Danish pilots available to move tankers through its precarious straits, which are a vital conduit for shipments of Russian crude and refined products. Russia has also found oil tankers that aren’t subject to European oversight to move over a third of the volume that it needs transported, and it will likely obtain more.

Traders have been getting around these sorts of oil sanctions for decades. Tricks of the trade include blending banned oil into other kinds of oil, turning off ship transponders to avoid detection of ship-to-ship transfers, falsifying documentation and delivering oil into and then later out of major storage hubs in remote parts of the globe. This explains why markets have been sanguine about the looming European sanctions deadline.

One fuel at a time

But Russian President Vladimir Putin may have other ideas. Putin has already threatened a larger oil cutoff if the G-7 tries to impose its price cap, warning that Europe will be “as frozen as a wolf’s tail,” referencing a Russian fairy tale.

U.S. officials are counting on the idea that Russia won’t want to damage its oil fields by turning off the taps, which in some cases might create long-term field pressurization problems. In my view, this is poor logic for multiple reasons, including Putin’s proclivity to sacrifice Russia’s economic future for geopolitical goals.

A woman walks past a billboard reading: Stop buying fossil fuels. End the war.
Stand With Ukraine campaign coordinator Svitlana Romanko demonstrates in front of the European Parliament on Sept. 27, 2022. Thierry Monasse/Getty Images

Russia managed to easily throttle back oil production when the COVID-19 pandemic destroyed world oil demand temporarily in 2020, and cutoffs of Russian natural gas exports to Europe have already greatly compromised Gazprom’s commercial future. Such actions show that commercial considerations are not a high priority in the Kremlin’s calculus.

How much oil would come off the market if Putin escalates his energy war? It’s an open question. Global oil demand has fallen sharply in recent months amid high prices and recessionary pressures. The potential loss of 1 million barrels per day of Russian crude oil shipments to Europe is unlikely to jack the price of oil back up the way it did initially in February 2022, when demand was still robust.

Speculators are betting that Putin will want to keep oil flowing to everyone else. China’s Russian crude imports surged as high as 2 million barrels per day following the Ukraine invasion, and India and Turkey are buying significant quantities.

Refined products like diesel fuel are due for further EU sanctions in February 2023. Russia supplies close to 40% of Europe’s diesel fuel at present, so that remains a significant economic lever.

The EU appears to know it must kick dependence on Russian energy completely, but its protected, one-product-at-a-time approach keeps Putin potentially in the driver’s seat. In the U.S., local diesel fuel prices are highly influenced by competition for seaborne cargoes from European buyers. So U.S. East Coast importers could also be in for a bumpy winter.

This article has been updated to reflect conflicting reports about the draft status of Russian oil and gas workers.

Amy Myers Jaffe does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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