Federal Reserve unsure of US economy’s direction as Wall Street meltdown worsens
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For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 35 in our series for 2022 and today’s date is Friday September 30.
And I’ll be talking to KPMG economist Sarah Hunter about what’s ahead for the RBA and the economy.
But now, let’s talk to Martin Fitz.
Federal Reserve Chair Jerome H. Powell has acknowledged that there are a few things he does not know about the U.S. economy. He doesn’t know if it is doomed to fall into recession. He doesn’t know how long high inflation in the world’s biggest economy will persist. And he doesn’t know if healthier supply chains will be much help. “It’s very hard to say with precise certainty the way this is going to unfold,” Powell told reporters “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.” Public confessions of doubt are rare in official Washington. But they have become commonplace for Powell, 69, whose candor reflects the uncertainties shrouding the global economy as well as a revolution in Fed communications since the days when then-Chairman Alan Greenspan cultivated an image of singular economic mastery. But Powell’s latest remarks come asthe Fed’s anti-inflation is making only slow progress, leaving the institution and its boss vulnerable to criticism over the cost to workers and businesses of continued rate hikes. On Friday, the Dow Jones industrial average fell for the fourth straight day and the fifth decline in the last six weeks, sinking below 30,000 for the first time since June and wiping out everything investors had gained since November 2020 The S&P 500 remains in bear territory. “We are now in another downswing in the ongoing bear market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “This year, there have been four drops and three rallies—and we are down quite a bit. That doesn’t feel good.” Wall Street also remains concerned that the Fed’s rate-hiking plan, could continue to increase borrowing costs, hurting the corporate profits that support their stock prices. And if the Fed is serious about slowing the economy down to gain control of runaway inflation, a recession could cause some real pain for consumers who buy the products that publicly traded companies make. The market sell-off could continue for some time, as stock valuations are compressed by the Fed’s actions, said Ivan Feinseth, chief market strategist of Tigress Financial Intelligence. Investors “may not see a bottom until there’s confirmation that inflation indicators turned significantly lower, he added.
The British pound crashed to a record low against the US dollar on Monday on growing fears about the stability of UK government finances. The plunge of nearly5% to just above $1.03 came during trading in Asia and Australia on Monday and extended a 3.6% dive from Friday, spurring predictions the pound could plunge to parity with the US dollar. It recovered slightly as European traders came online, rising back to $1.07. The currency slump follows British Chancellor of the Exchequer Kwasi Kwarteng’s announcement on Friday that the United Kingdom would implement the biggest tax cuts in 50 years at the same time as boosting government borrowing and spending. The new tax-slashing fiscal measures, which include scrapping plans for an increase in corporation tax and slashing the top rate of income tax, have been criticized as “trickle-down economics” by the opposition Labour Party and even lambasted by members of the Chancellor’s own Conservative party. Kwarteng doubled down at the weekend, hinting in TV interviews Sunday of more tax cuts to come, saying Friday’s measures were “just the start” as the government goes all out for growth. Former Tory chancellor Lord Ken Clarke criticized the tax cuts on Sunday, saying they could lead to the collapse of the pound. The pound has been hammered by a string of weak economic data, but also the steep ascent of the US dollar, a safe haven investment that sees inflows in times of uncertainty.
Liz Truss’s £45 billion ($A75 billion) tax-cutting spree has set Britain on course for a bailout from the International Monetary Fund. A leading economist nicknamed Dr Doom has warned could spell trouble as fears grow that the pound could fall to parity with the dollar. Nouriel Roubini, an economist who predicted the financial crisis, has warned that British investments are trading “like an emerging market” as he drew parallels with the economic chaos of the 1970s. Mr Roubini said on Twitter that Britain is heading “back to the 1970s” and “eventually the need to go and beg for an IMF bailout” following huge tax cuts unveiled by Kwasi Kwarteng in his mini-budget. On Twitter, he said: “Truss and her Cabinet are clueless.” The unfunded cuts have stoked -worries about a flood of debt and rising inflation, dragging sterling to its lowest level in 37 years against the dollar It came as Crispin Odey, one of Britain’s best-known hedge fund tycoons, warned that sterling risks heading to dollar parity for the first time ever after the Chancellor’s announcement contributed to a market rout on Friday. Andrew Bailey, Governor of the Bank of England, is expected to discuss the currency turmoil in his regular conversation with the Chancellor early this week. The UK turned to the IMF for a bailout in 1976 after a plunge in the pound and tax cuts by Anthony Barber, chancellor at the time, stoked inflation. The $US4 billion loan was granted in return for spending cuts and higher interest rates. Mr Roubini, who earned the moniker “Dr Doom” for his frequently gloomy forecasts, won plaudits for forecasting the coming financial crisis in a paper in 2006.
Moody’s Analytics on Monday predicted the global economy to grow at 2.7% in 2022 and slow to 2.3% in 2023. In its latest report, Moody’s Analytics said the global environment is more fragile as record high inflation in the US and Europe continues to gain momentum while growth decelerates. Stagflation risks have risen worldwide, but a stagflationary environment would take months to be realised. Business sentiment remains muted and is consistent with a global economy that is just avoiding recession, Moody’s Analytics said. According to the report, the global economy is at a crossroads, as the nascent post-pandemic recovery has quickly morphed into a darker and more fragile environment. Record-high inflation in the US and Europe from supply shortages and surging commodity prices following Russia’s invasion of Ukraine are weighing on the global expansion and are compounded by an aggressive monetary policy response. At the same time, China’s economy is facing challenges on multiple fronts, including a cooling property market and a buildup of risks in the financial sector. According to the report, the performance remains uneven among the world’s major economies — the US, China, Japan, India, and the five largest economies in Western Europe. Outcomes will continue to diverge through 2023 due to differing trade and investment linkages to Russia and Ukraine, particularly in relation to energy products.
The IMF’s lending to economically troubled countries has hit a record high as the world’s lender of last resort battles simultaneous crises that have pushed at least five countries into default, with more expected to follow. The pandemic, Russia’s attack on Ukraine and a sharp rise in global interest rates have forced dozens of countries to seek IMF assistance. A Financial Times analysis of IMF data shows that at the end of August, the volume of loans disbursed by the fund amounted to $US140 billion ($215 billion) in 44 separate programs. The figure, which is expected to grow further in the coming months as borrowing costs soar, is already higher than the amount of credit outstanding at the end of 2020 and 2021, when levels reached record annual highs. Experts predict that further large rate rises by major market central banks will push up borrowing costs around the world and risk triggering a severe recession. Some analysts say the IMF’s lending capacity could soon be stretched to its limits, as poor countries which are locked out of international debt market are forced to turn to the fund for support. The IMF’s total commitments, including loans agreed but not yet disbursed, already stand at more than $US268 billion.
The OECD has significantly downgraded its forecasts for the global economy and warned of a darkening outlook abroad that will drag on local activity in the year ahead and blunt Australia’s growth trajectory. Despite the setback, the nation’s coveted AAA credit rating remains steady, according to global rating agency S&P, with the next major test for the Albanese government Labor’s first budget next month. The OECD club of wealthy nations on Monday slashed its June forecasts for global growth from 2.8% to 2.2% in 2023, which included a downgrade for Australia from 2.5% forecast in June to 2%., Global growth this year held steady at 3%, with a large 1.3 percentage point fall in China and 1 percentage point in the United States offsetting revisions elsewhere. Australia slipped from 4.2% to 4.1%. The dips reflected the continued fallout of Russia’s invasion of Ukraine, which has sparked a global energy crisis, driven inflation higher and forced central banks to ratchet up interest rates faster and farther than expected.
The federal government estimates that rising interest rates will push up the cost of servicing debt by about $125 billion over the next decade. At the March budget, the 10-year government bond yield was assumed to be about 2.3% over the next four years. If today’s market bond yield of about 3.8% was used, interest payments on debt would jump by $16 billion over the four years to 2025-26, including $7 billion in that year alone. Treasurer Jim Chalmers says the cost of servicing about $1 trillion debt will be “tens of billions of dollars” extra because of rising interest rates. Longer term, interest payments are forecast to blow out to $65 billion in 2032-33, above the $41 billion originally projected. Chalmers said debt interest costs were one of the fastest growing expenses in the budget.
Rio Tinto is reeling from allegations that a worker in its iron ore operations sexually assaulted a woman and threatened her with a makeshift weapon at one of the miner’s accommodation villages. The mining giant removed the man, who is now facing criminal charges, from the site over the alleged attack on a co-worker at an accommodation village attached to one of Rio’s mines in the Pilbara. Rio is spending $200 million this year on security and safety upgrades at mining camps in the Pilbara after a series of reports lifted the lid on sexual assaults and the harassment of women in the WA mining industry. In response, Rio has installed 16,000 new locks on rooms across 24 villages in the Pilbara. It has introduced security body cameras at one site and is beefing up lighting, CCTV and security guard coverage at the villages. The latest incident happened just months after Rio released a major review of its workplace culture and follows a WA parliamentary inquiry into sexual assaults and harassment in the mining industry. The Rio review, carried out by former Australian sex discrimination commissioner Elizabeth Broderick, found bullying, sexual harassment, racism and other forms of discrimination throughout the company.
Star Entertainment has accepted the findings of a review into its operations by Adam Bell SC, which found it unsuitable to hold a licence for a Sydney casino. In a statement, the company said it had taken “significant and urgent remedial steps”, including ceasing junkets and upgrading surveillance — and has developed a comprehensive multi-year plan. Star chairman Ben Heap has asked the NSW Independent Casino Commission (NICC) to allow it to keep operating under strict supervision. The Star was given until Tuesday to respond to a “show cause” notice from the NSW Independent Casino Commission (NICC) to explain why its licence should not be permanently revoked, or face and fines up to $100 million, after the Bell inquiry found serious failures of corporate governance and culture. In his letter, released to the market on Tuesday morning, Mr Heap urged the Commission to show mercy, arguing “the appropriate action NICC should take is to allow The Star Entertainment Group (TSEG) to continue to operate the licence, under strict supervision and being held accountable to the milestones on the Remediation Plan.”
Westpac is pitching its offer of a 4% wage rise for employees earning up to almost $95,000 directly to its staff for a vote, bypassing opposition from the Finance Sector Union (FSU). Amid high inflation and stiff competition for skilled staffWestpac, National Australia Bank and Commonwealth Bank all have enterprise agreements (EAs) that expired this year. The FSU has been seeking wage rises of about 6% in talks with NAB and Westpac, while CBA and ANZ have announced pay rises for staff covered by their agreements without negotiating with the union. Westpac, which has been renegotiating a collective agreement covering about 30,000 Australian-based staff, on Tuesday said it had failed to reach an agreement with the union, and it would now put its offer to a vote next month.
Employers would have to take a proactive approach to preventing sexual harassment and discrimination in the workplace under laws to be introduced into parliament on Tuesday. Australia’s human rights watchdog would be empowered to enforce a positive duty on businesses to protect their workers from harassment after the government committed to fully implementing the recommendations of the landmark 2020 Respact @Work report. The changes, to be introduced under the Anti-Discrimination and Human Rights Legislation Amendment (Respect at Work) Bill, implement seven recommendations from Sex Discrimination Commissioner Kate Jenkins, including expressly banning hostile conduct on the basis of sex, and requiring the public sector to report on its performance on gender equality.
Australia’s second largest telco Optus is facing a potential class action lawsuit following last week’s massive data breach, with law firm Slater and Gordon assessing legal options for the estimated 10 million affected customers. Slater and Gordon, which previously acted on behalf of thousands of asylum seekers who had their personal information leaked online in 2014, is encouraging any concerned Optus customers to register their interest in a lawsuit on its website. “This is potentially the most serious privacy breach in Australian history, both in terms of the number of affected people and the nature of the information disclosed,” Slater and Gordon senior associate Ben Zocco said. Mr Zocco said the fact that some customers appear to have had identification information such as drivers’ licence and passport numbers disclosed is extremely concerning. Optus on Monday announced it will pay for a credit monitoring service for affected customers, amid concerns that criminals could gain unauthorised access to bank customers’ accounts, or open bogus accounts for criminal purposes.
As class action law firms circle and Optus promised customers credit monitoring services free-of-charge to shield them from scams, Home Affairs Minister Clare O’Neil vowed to overhaul laws regulating the storage of consumer data and rebuked Optus. “Responsibility for the security breach rests with Optus and I want to note that the breach is of a nature that we should not expect to see in a large telecommunications provider in this country,” Ms O’Neil told question time on Monday. In the war of words with Optus where the Albanese government escalated its attacks on Optus over the company’s massive data breach, demanding to know why customers were not informed their Medicare numbers may have been accessed as part of the cyberattack that hit almost 10 million accounts, Ms O’Neil urged Optus to provide free credit monitoring for affected customers, Ms O’Neil said 2.8 million Australians had had a “significant” amount of data taken. She said the cyberattack highlighted the need for the increased protection of data, raising the prospect of stiff penalties. “A very substantial reform task will emerge from a breach of this scale and size, and there are a number of policy issues that I think the public will soon become quite aware of,” she said. “One significant question is whether the cybersecurity requirements we place on large telecommunications providers in this country are fit for purpose. I also note that in other jurisdictions, a data breach of this size will result in fines amounting to hundreds of millions of dollars.” Global household names have faced hefty penalties for failing to protect personal data properly. Online retail giant Amazon was fined $US877 million last year for failing to comply with European privacy laws.
And that’s it for this week. And next week, I’ll be talking to Ben Gill, Head of Asia Pacific, BrainBox AI about Brisbane Airportexpanding the use of AI to reduce emissions, which marks Brisbane Airport as the first in the world international airport to leverage this technology for reducing energy consumption and achieving sustainability targets. And I‘ll be talking to Rabobank economist Michael Every about the collapsing pound, the struggles of the RBA and the prospect of a global recession.
In the meantime you can catch me on Facebook, Twitter, Instagram, LinkedIn and YouTube. And if you want leave a comment. For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.