Month: April 2022

Fed Signals Rate Rises of Half-Point Could Be Warranted Minutes from last month’s Federal Reserve meeting also revealed how officials expect to shrink asset holdings much faster than they did last decade as part of an aggressive effort to curb inflation.

(…) “Many participants noted that one or more [half-percentage-point] increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified,” the minutes said. (…)

Officials neared agreement on a plan that, after a roughly three-month ramp-up, would allow up to $95 billion in securities to mature every month without being replaced. (…)

Officials agreed last month to follow a template similar to the one they used when they shrank their asset holdings between late 2017 and mid-2019, in which they allowed a fixed amount of securities to run off the portfolio every month without being reinvested.

The minutes showed officials discussed allowing up to $60 billion in Treasurys and $35 billion in mortgage bonds to mature every month. That would allow the portfolio to run off considerably faster this time than last decade, when it shrank by up to $50 billion every month.

Because higher mortgage rates are likely to lead to slower reductions in loan redemptions as refinancing plummets, officials also discussed plans to actively sell mortgage-backed securities at a later date to more quickly return their holdings to an all-Treasurys portfolio.

At a news conference last month, Mr. Powell said the portfolio runoff might provide the equivalent of another quarter-percentage point rate increase this year. (…)

U.S. bonds had their worst quarter in more than 40 years during the January-to-March quarter. Yields on short- to medium-term Treasurys logged their biggest quarterly jumps in decades.

The housing market could be an early case study of the Fed’s rapid pivot. Rising interest rates rob buyers of their purchasing power. A general rule of thumb holds that a one-percentage-point rise in interest rates is equivalent to a 10% increase in the cost of purchasing a home. (…)

• Redfin March 24: Housing Market Update: Prices Reach New High as Few Americans Put Homes Up for Sale Housing prices jumped the most since summer—up 17% year over year to a new high—as a 7% drop in new listings kept homebuyer competition elevated amid rapidly rising mortgage rates. Nearly 3 in 5 homes were snapped up within two weeks, an all-time high, and half sold for over the asking price.
• Redfin March 31: Housing Market Update: Surging Mortgage Rates and Home Prices Sideline More Buyers

Mortgage rates are shooting up at the fastest pace in history, sending the typical monthly mortgage payment for a homebuyer up more than $500 since the beginning of this year. As rates quickly approach 5%, we expect their impact on homebuyer demand to change from a motivator—driving a sense of urgency to buy before rates rise further—to a deterrent—causing buyers to step back as the cost of homebuying exceeds their budgets. There are a number of early signs that this shift is beginning to take place.

Fewer people are starting online home searches and applying for mortgages than this time last year, and year-to-date growth in home tours remains far below 2021 levels. An increasing share of sellers are also reducing their prices after putting their homes on the market. The share of homes that sell quickly (within 14 days) continues to grow, but at a slower pace than earlier this year.

Still, the market still feels very hot, with homes selling faster and for more money than ever before. That’s largely because supply remains near record lows, with fewer homeowners putting their homes on the market. (…)

As of this month, Redfin has started receiving fewer requests than a year ago for agents’ service in pricey coastal markets including Seattle, San Diego, Boston and Washington, D.C. These markets are experiencing year-over-year declines in pending sales, though they’re still seeing homes sell relatively quickly and are not yet seeing outsized growth in the share of sellers cutting their list prices. Declines in searches, touring, and mortgage applications are larger in California than elsewhere. (…)

“Bidding wars are still common, but homes that would have brought in 10 or more offers earlier this year are now getting half that many. Homes also aren’t selling as astronomically over the asking price as before. A house that might’ve gone for $700,000 over the list price two months ago may now go for $300,000 or $400,000 over. (…)

Redfin agents say they’re starting to see some sellers put their homes up for sale earlier than planned because they’re worried they’ll miss out on the market’s peak if they wait. (…)

However you look at it, anyone who can still afford such mortgage payments will need to cut somewhere else…

The Chase card spending tracker broke down abruptly last November, recovered a little in January, softened in February and looks like its weakening some more in March (through March 28). Note that the data is in nominal dollars so real spending is actually weaker.

This map illustrates how discretionary spending behaved across the U.S. since Russia invaded Ukraine: the more populous coastal states seem to be experiencing more spending restraints  than the Midwest:

Recall that stimmies caused retail sales to jump starting in March 2021. The YoY comparisons will become more challenging going forward. As a case in point, Cardify data for the week ended March 27 show total consumer spending down 9.3% YoY with some very weak categories: Computer & Electronics: -14.8%, Home Improvement & Furniture -25.0%, Department & Specialty Stores -23.2% while Travel is up 19.0% and Convenience & Gas +8.2%.

Also recall that the Chicago Fed Advance Retail Trade Summary was warning us of very weak retail sales during the first 2 weeks of March.

KKR’s Henry McVey analyses the effect of higher oil prices on consumer spending and concludes that

(…) higher commodity prices will be a headwind, but — in isolation — they are not likely to cause a consumer recession. Remember that the top 20% of Americans account for around half of all consumer spending, and their net worth is actually at a record high. Moreover, the wealth bracket just below the top 20% now has more cash in their bank accounts than the top 20% did just before the pandemic. However, experiences will vary by consumer, and unfortunately, we do not see either real wages rising fast enough or savings acting as a buffer to the low end consumer.

Here’s Henry’s supporting evidence:

(…) the recent oil shock, if sustained, amounts to an increase in the U.S.’s annual oil bill of $245 billion, or 1.3% of GDP. However, as we mentioned before, the consumer in aggregate can create a $257 billion windfall by taking his or her savings down by 1.4% to five percent and still have a cushion — in aggregate — that is in line with historical trends.

Key to our thinking is that U.S. consumers, in aggregate, can take savings down by another 1.4 percentage points, which totals approximately $257 billion dollars, before behavior patterns and demand destruction occur. Consumers are also benefitting from strong home price appreciation.

My rebuttal simply extends McVey’s chart another 40 years to respectfully show that his “Pre-GFC norm of ~5%” is nowhere near the actual historical norm, if there is one.

The fact is that a 5% or lower savings rate only occurred when Americans borrowed heavily to speculate on housing in the early 2000s. Even if they wished to do that now, there are so few available houses nowadays, particularly at the mass affordable price levels, it seems unlikely it could happen to a similar extent.

Forecasting that the U.S. will avoid a consumer recession on the hope that the so-called “excess savings” will kick in and offset broadly surging inflation defies 62 years of data. I would also add that:

• all of the excess savings is among the wealthiest segment of the population who really don’t need to use their savings to consume.
• the correlation between the savings rate and inflation is +32% between 1959 and 2022, low but positive, meaning that higher inflation is more likely to be accompanied by higher savings.
• For what it’s worth, the savings rate rose from 6.1% in January to 6.3% in February. It was 7.3% in December 2019.

McVey also points out that inflation, particularly from energy, will be more problematic for European consumers which could see their energy bill as a percentage of total household expenditures jump by 3% with less than half of the increase being potentially offset by reduced savings.

Asia too will feel the pain. One particular area that Frances is monitoring closely is the linkage of food and fuel inflation to potential unrest. As half of Asia is still ‘emerging’, food and fuel inflation will be extremely painful and politically unsettling. Every country will have its own nuance, but in general, most countries will be balancing weaker growth with higher inflation.

• Apartment List National Rent Report

Rent growth is continuing to pick up steam again, after a brief winter cooldown, with our national index up by 0.8 percent over the course of March. So far this year, rents are growing more slowly than they did in 2021, but faster than the growth we observed in the years immediately preceding the pandemic. Year-over-year rent growth currently stands at a staggering 17.1 percent, but most of that growth took place last spring and summer. In the first three months of 2022, rents nationally have increased by a total of 1.8 percent, which is twice as fast as the growth that we saw over the same period in 2018 (0.9 percent) and 2019 (0.8 percent).

On the supply side, our national vacancy index is continuing to slowly inch up, indicating a gradual easing of the tight market conditions that have characterized the rental market over the past year. Our vacancy index hit 4.6 percent this month, continuing a seven month streak of increases after bottoming out at 3.8 percent last August.

• Rent growth isn’t popular of course, but here’s one benefit: LOTS of new apartment construction to meet the tidal wave of demand, and hopefully boost vacancy / availability. New completions will top 400k units for the first time in 40+ years in 2022 — and even more in ’23.

@jayparsons

• Grantham Warns Oil Spikes This Severe Always Trigger Recessions (…) Grantham ticked off a number of potentially troubling trends, including that the war in Ukraine will cause food prices to rise and that developing countries eager to grow will contribute to “repeated commodity boom cycles.”

Wish the Fed Luck as It Seeks a Soft Landing on Inflation

By Alan S. Blinder (a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96):

(…) The Fed is trying to engineer a soft landing by the end of next year, with unemployment about where it is today (3.6%) and inflation down to 2.6%—as measured by the Fed’s favorite index, the inflation rate for personal consumption expenditures excluding food and energy, or core PCE for short.

How likely is the Fed to achieve those ambitious goals? A few months ago I would have answered that it had a fighting chance—probably below 50%, but not trivial. (…) To pull off a soft landing, a central bank must be both lucky and good. The Fed has managed it several times over the years, if you aren’t too fussy about the definition of “soft.”

The Powell-led Federal Reserve is skillful and smart. I trust it to be “good.” But the luck part turned strongly against it when Russia invaded Ukraine. That brutal war is now causing substantial adverse supply shocks around the world because Russia and Ukraine were major suppliers of both food and energy. As we all remember from the 1970s and ’80s, adverse supply shocks like these are stagflationary. They drive inflation up and real economic growth down.

By how much and for how long are impossible to know today because no one knows the future course of the war. The direction is clear, however: Inflation is headed higher, and economic growth will slow down. Both of these developments will make it harder to achieve a soft landing. The Fed’s odds are now substantially below 50-50.

(…) So the Fed is trying to cut 2.8 percentage points from the [core PCE] inflation rate without causing a recession. It was going to be a heavy lift before the war, and it looks even heavier now.

The bloody conflict in Ukraine is already driving food and energy prices higher, which will boost headline inflation in the coming months. Core inflation won’t be immune because food and energy prices seep into virtually all other prices, albeit in muted form. What product doesn’t include energy in its cost, either directly (to keep the lights on) or indirectly (via delivery trucks)?

Beyond that, the longer inflation remains high, the more it gets embedded into wages and other contractual arrangements. When workers see inflation coming, they want to be compensated for it. And once higher inflationary expectations get entrenched, they affect price- and wage-setting throughout the economy, making a soft landing harder to achieve.

Fortunately, expected inflation doesn’t appear to have gotten out of hand, at least not yet. The 10-year “break-even” inflation rate implied by bond prices is only 2.8%. That’s a bit higher than the Fed would like, but only a bit. The key questions: How long will the expectations dam hold if high inflation continues? If the dam breaks, how much will the Fed have to raise interest rates to beat down inflationary psychology?

Before the war, it looked as if the Fed might glide by. Inflation appeared likely to turn down soon, and expectations of future inflation probably would have followed. Now, unfortunately, that optimism looks rather out of date.

So let’s all join Lefty Gomez in wishing Jay Powell and company good luck. They’ll need it.

• Inflate My Pay, Please. Workers Ask for Raises to Fight Rising Prices. Fast-rising consumer prices are pushing many employees to go to the mat for bigger pay increases than usual

(…) Employers say they set aside an average 3.9% of total payroll for wage increases in 2022—the most since 2008—according to the Conference Board, a research group. (…) In a Mercer survey of more than 300 U.S. companies in February, 66% said they weren’t changing salary budgets because of inflation. (…)

In this especially tight labor market, people aren’t just switching jobs: Many say inflation and a surplus of jobs are emboldening them to push for raises harder than they might have in the past, even if those factors aren’t the focus of a pitch for more money. (…)

Improved salary-tracking websites, plus salary transparency laws in Colorado, New York City and other states and cities have made it easier to get more accurate compensation data that is harder for employers to dismiss, he points out. “There are a lot better tools now than there were prepandemic,” he says. (…)

Goldman Sachs:

The jobs-workers gap, which measures employment plus job openings minus the labor force suggests the labor market is significantly overheated both in absolute terms and relative to the population. Given that the 5-6% pace of recent wage growth is also likely broadly inconsistent with the Fed’s inflation target, we think GDP growth may need to slow to the 1-1.5% range, even weaker than our below-consensus 2022 forecast of 1.9% (on Q4/Q4 basis), to restore balance to the labor market.

That said, we believe a recession is far from inevitable as previous episodes of labor market overheating didn’t have a source of incremental labor supply comparable to the 1-1.5mn prime-age workers that may be poised to return to the workforce, and few of the financial imbalances that made the US economy vulnerable to self-feeding recessionary forces in the past are visible today, which is reflected in market’s somewhat sanguine pricing of near-term recession risk.

But we do think Fed officials could decide that a larger tightening of financial conditions is desirable to generate a more negative growth impulse, which we believe suggests upside risk to our terminal funds rate forecast of 3-3.25%, especially in light of the limited traction that the Fed’s hawkish pivot has had so far.

Eurozone retail sales disappoint in February

The 0.3% increase from January was weaker than expected, slashing hopes of a strong first quarter for consumption on reopening effects. From here on, sales are going to hit severe weather as consumer confidence has plummeted and inflation has jumped.

The increase comes on the back of a large drop in December and mild improvements in January, which means the first quarter retail sales figure will be weak on base effects. (…)

The weak figures for February do increase expectations a bit for March, but sales are expected to come under severe pressure thereafter. With real incomes dropping dramatically as inflation is 7.5% and nominal wage growth is just 1.5% in the eurozone, purchasing power is being squeezed. While we don’t know the consumer response to the income squeeze, plummeting consumer confidence in March is a bleak hint at what is to come for household consumption in the months ahead. The big unknown is how reopening effects will affect spending. We have seen a strong positive effect in February still, but the question is how long this will continue to provide a tailwind for consumption. Still, with the type of negative real wage developments, we do expect a strong decline in household consumption in the second quarter.

USA: Private sector business activity growth accelerates to fastest for eight months in March

US service providers registered a sharp upturn in business activity in March, according to the latest PMI™ data. The expansion in output quickened to the fastest for four months, amid stronger demand conditions and a steeper rise in new orders. Client demand strengthened despite a record rate of charge inflation. Output prices increased markedly as a faster rise in cost burdens was largely passed through to customers.

At the same time, pressure on capacity built despite employment rising at the steepest pace for almost a year. Backlogs of work expanded at the strongest rate since the series began in October 2009. Longer term growth expectations were less upbeat, however, as confidence in the year-ahead outlook slipped to the weakest for five months.

The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 58.0 in March, up from 56.5 in February, but lower than the earlier released ‘flash’ estimate of 58.9. The increase in business activity was steep and the quickest in 2022 so far, accelerating further from January’s Omicron-induced slowdown. Many companies stated that the easing of COVID-19 restrictions boosted footfall, with stronger client demand and a steeper rise in new business driving up output.

Service providers signalled a marked rise in new orders at the end of the first quarter, as new client acquisition and the further easing of COVID-19 restrictions strengthened demand conditions. The pace of new business growth was the fastest since June 2021 and quicker than the series average.

Total new sales were also supported by stronger foreign client demand during March. New export orders rose at a robust rate that was the sharpest for ten months. Companies noted that fewer restrictions on travel encouraged customer spending and drove new business from abroad.

On the price front, firms recorded a substantial increase in output charges during March. The rise in selling prices was the sharpest on record (since October 2009), as service providers reportedly passed through higher costs to clients, where possible.

The rapid uptick in output prices stemmed from a faster increase in input prices.The rate of cost inflation accelerated to the quickest since December’s series-record high, and was the third-steepest on record. Where higher cost burdens were reported, firms linked this to broad-based increases in input prices. Companies once again highlighted hikes in fuel, energy and wage bills as driving inflation.

In line with a faster rise in new orders, services firms recorded the quickest accumulation of backlogs on record in March. The pace of increase in the level of outstanding business accelerated for the first time since last October. Companies also stated that input shortages exacerbated challenges in working through incomplete business.

Higher levels of backlogs of work were noted despite employment rising at the fastest pace in almost a year. Although firms hired additional staff in response to greater business requirements, the receipt of new orders continued to place pressure on capacity.

Meanwhile, business expectations regarding the outlook for output over the coming year remained upbeat at the end of the first quarter. Optimism was buoyed by increased marketing activity and hopes of greater client demand and the reduced impact of any further COVID-19 variant. That said, the degree of confidence dropped to a five-month low amid inflation concerns.

The S&P Global US Composite PMI Output Index* posted 57.7 in March, up from 55.9 in February, to signal a sharp expansion in business activity across the private sector. The rate of growth was the fastest since last July, as manufacturers and service providers recorded steeper upturns in output.

Supporting the sharper uptick in activity was the quickest rise in new business since June 2021. Domestic and foreign client demand strengthened as easing COVID-19 restrictions continued to boost new sales.

Meanwhile, inflationary pressures intensified as supplier costs soared. Input prices rose at one of the fastest rates on record, whilst costs passed through to customers drove up output charges at the joint-sharpest pace since data collection began in October 2009.

Although private sector employment grew at a steep pace, pressure on capacity mounted amid severe raw material shortages, with backlogs of work expanding at a series-record rate.

Fed’s Brainard Says Reducing Elevated Inflation ‘Is of Paramount Importance’ Federal Reserve governor Lael Brainard expects the central bank to approve significant reductions in its $9 trillion asset portfolio at its policy meeting early next month.

(…) “It is of paramount importance to get inflation down,” Ms. Brainard said Tuesday at a virtual conference hosted by the Federal Reserve Bank of Minneapolis. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest-rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”

Longer-dated Treasury securities sold off sharply after Ms. Brainard’s remarks, which emphasized how the portfolio runoff would be larger and faster than the last time the Fed shrank its holdings. The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, jumped to 2.554% Tuesday, from 2.465% just before she spoke and 2.409% on Monday.

Ms. Brainard’s remarks were notable not only because she is one of Fed Chairman Jerome Powell’s top lieutenants in shaping the central bank’s monetary-policy agenda but also because she had been one of the most vocal advocates last year warning against prematurely pulling back its stimulus. Ms. Brainard focused her remarks on the potential for higher inflation to hit low-income Americans hardest, and her shift underscores the Fed’s alarm at high inflation and its urgency to withdraw stimulus quickly. (…)

Ms. Brainard said on Tuesday that the Fed would allow the portfolio to shrink faster than last time and that it would have a much shorter phase-in of the larger reinvestment caps. (…)

Ms. Brainard expected that the asset-portfolio runoff would further remove stimulus beyond those projections so that the Fed would reach a “more neutral position later this year,” she said. “The full extent of additional tightening” after that will depend “on how the outlook for inflation and employment evolves.”

Ms. Brainard didn’t provide a forecast for inflation in her prepared remarks, but she said Russia’s invasion of Ukraine was a “seismic geopolitical event” that had delivered a global commodity supply shock likely to further boost inflation and exacerbate disrupted global supply chains.

At the same time, Ms. Brainard said she expected several factors to bring supply and demand into better balance this year, which could bring inflation down. She cited factors including a slowdown in foreign growth, a decrease in U.S. federal spending, an increase in the supply of workers and a drop in demand because of higher borrowing costs. (…)

• BIS Head Says Era of Weak Inflation Might Be Over Agustín Carstens suggests possibility of painful adjustment as public gets used to higher interest rates again

(…) “We may be on the cusp of a new inflationary era,” Mr. Carstens said. “The forces behind high inflation could persist for some time. New pressures are emerging, not least from labor markets, as workers look to make up for inflation-induced reductions in real income.”

What’s more, “some of the structural disinflationary winds that have blown so intensely in recent decades may also be waning,” Mr. Carstens said. “In particular, there are signs that globalization may be retreating,” he said, adding that between pandemic impacts and geopolitical issues, some companies might be pulling back from the sprawling global supply chains that had been delivering low inflation over recent decades. (…)

He said that central banks might not be able to continue shrugging off supply-related price shocks. Central banks generally don’t push up rates to try to temper such increases, but Mr. Carstens said that might need to change, because these supply shocks can be the tinder for a broader inflation fire. (…)

“It seems clear that policy rates need to rise to levels that are more appropriate for the higher inflation environment,” Mr. Carstens said, and “most likely, this will require real interest rates to rise above neutral levels for a time in order to moderate demand.” (…)

Add Declining Immigration to Problems Weighing on the Labor Market Industries that depend on foreign-born employees face high job vacancy rates and wage pressures. It’s a struggle for many nursing homes and house builders.

(…) For several years after the 2007-09 recession, roughly a million people moved to the U.S. annually. That pace started to slow during the Trump administration and fell to a trickle after the Covid-19 pandemic started.

The slowdown has left the U.S. with 2.4 million fewer immigrants of working age—about 1% of the working-age population—than if pre-2017 immigration trends had continued, according to Giovanni Peri, a labor economist at the University of California, Davis. The change is being felt as the economy rebounds and many employers struggle to replace workers who were laid off or quit since early 2020, contributing to wage pressure and inflation. (…)

In the 12 months ended last June 30, about 247,000 people moved to the U.S., less than a quarter of the 2016 level and half that of 2019, according to U.S. census data. Those figures don’t distinguish between people who came to the U.S. legally and those who didn’t.

In five top countries where people receive green cards to work in the U. S.—Mexico, the Dominican Republic, Vietnam, the Philippines and China—the fiscal year ended last September saw declines of half to two-thirds in green-card issuance from two years prior, according to Department of Homeland Security figures. (…)

The Fed is thus clearly engaged in trying to reduce demand to fight largely restricted supply-induced inflation. This when the war in Ukraine is totally upsetting world supplies of energy, food and semi-conductors. So far, businesses have been able to pass on their cost increases. But if the Fed successfully crimps demand, profit margins will initially decline faster than inflation.

• Global manufacturers are stockpiling inputs to protect revenues and margins, boosting demand and prices along the way.

From my lens, Europe, UK and China appear most vulnerable to a margin squeeze from slower revenue growth and broadly rising prices, particularly energy costs.

North American economies look relatively better but that hawkish Fed could upset financial markets before actually stifling demand.

China: Services activity drops in March as virus containment measures tighten

The recent rise in COVID-19 cases in China and restrictions to limit the spread of the virus led to a marked drop in service sector activity at the end of the first quarter of 2022. The fall coincided with a steep decline in new work, which was often linked to restrictions on mobility and reduced customer numbers. Average input costs rose at an accelerated and solid pace, while prices charged by services companies rose only slightly. The ongoing pandemic and war in Ukraine meanwhile weighed on business confidence, which edged down to its lowest for just over a year-and-a-half in March.

The seasonally adjusted headline Business Activity Index fell from 50.2 in February to 42.0 at the end of the first quarter, to signal a renewed contraction of services activity. Furthermore, the rate of reduction was the steepest seen since the initial onset of the pandemic in February 2020 and sharp. Businesses frequently mentioned that tighter virus containment measures had disrupted operations and weighed on client demand in March.

Chinese services companies registered a solid and accelerated fall in total new work at the end of the opening quarter. Notably, the rate of decline was the fastest since March 2020. Pandemic-related restrictions, notably those on mobility, were frequently attributed to lower customer numbers and softer demand conditions. New export business fell for the third month running. Though modest, the rate of decrease was the fastest since October 2020.

Staffing levels at services companies fell in March, as has been the case throughout the first quarter, though the rate of reduction was only fractional. Panel members indicated that the pandemic and softer demand conditions had reduced firms’ appetite for additional staff.

At the same time, disruption to business operations led to a further increase in the level of outstanding business at Chinese service providers. Though mild, the rate of accumulation was the quickest seen since last December.

March survey data signalled a stronger rise in input costs faced by services companies. The rate of inflation was solid overall and quicker than the series average. Companies cited greater costs for raw materials, energy, food, transport and greater expenditure on pandemic-protection measures as having driven up cost burdens in the latest survey period.

Although expenses rose at a quicker pace, fees charged by services companies rose only slightly during March. Moreover, the rate of increase was the softest seen in the current seven-month period of inflation. While some firms raised their charges due to higher input costs, others mentioned that pricing power was limited due to subdued demand conditions and efforts to attract new business.

When assessing the 12-month outlook for business activity, Chinese services companies were generally upbeat that output would expand over the next year. However, the degree of optimism slipped to its lowest for19 months amid concerns over how long business operations would be impacted by the pandemic, and the war in Ukraine.

German Factory Orders Fall as Economy Faces Ukraine War Fallout Demand declined 2.2% in February from the previous month, driven by a slump in foreign orders. That’s worse than all but one prediction in a Bloomberg survey of economist, which saw a median estimate of a 0.3% drop. (…) A panel of advisers to Chancellor Olaf Scholz last week lowered its growth projection to 1.8% from 4.6% for this year, while warning that a recession is possible because of the country’s high dependence on Russian energy. Inflation reached 7.6% in March — the highest level since records began after reunification in the early 1990s. Companies including BMW AG, BASF SE and ThyssenKrupp AG have already warned that their earnings will slip. On Monday, Deutsche Bank AG Chief Executive Officer Christian Sewing said a recession “would presumably be inevitable” if Germany was cut off from deliveries of Russian oil and natural gas. (…) A total energy embargo against Russia is now unstoppable, whatever Germany thinks The dam has broken after the Bucha massacre. European public opinion will not tolerate the continued funding of Vladimir Putin’s war machine with purchases of oil, gas, coal. Nor will German public opinion. An energy embargo has become unstoppable as systematic atrocities against civilians come to light. The West’s phoney war against Russia is giving way to a harsher phase, entailing real sacrifices and necessary risks to uphold our liberal principles. (…) This has large and unpredictable consequences for the global economy. Equity markets have not yet priced in the political escalation. (…) A greater test comes this month as pre-invasion sales contracts fade from the picture and shippers struggle to secure insurance and financing for fresh Russian cargoes. The International Energy Agency says sales of crude and petroleum products could fall by 3m barrels per day in April out of total Russian exports of 7.8m barrels per day. But as long as Europe is still buying Russian oil, it is politically impossible to pressure India and the consuming states of East Asia, let alone China, to forgo discounted barrels on the open market. The oil will make its way out somehow. Germany’s corporate elites are fighting a rearguard action to head off further sanctions, warning of a dangerous chain reaction if governments succumb to the mood of the moment. “Emotionally, one can understand an embargo. But if it comes, it will very probably tip the whole European economy into a recession with long lasting consequences. We mustn’t let this out of our sight,” said Christian Sewing, president of the German banking federation (BdB). Martin Brudermuller, head of the chemical giant BASF, predicted a catastrophic wave of bankruptcies. “If gas supplies from Russia were cut off overnight, it could push Germany into the worst crisis since the end of the Second World War. Do we really want to destroy our whole economy?” he told the Frankfurter Allgemeine. Mr Brudermuller said BASF might have to shut down its plant at Ludwigshafen, the biggest integrated chemical plant in the world. Consumers would learn a hard lesson in supply chains. “People seem to make no connection at all between a boycott and their own job. As if our economy and our prosperity were set in stone,” he said. Chancellor Olaf Scholz has stuck closely to the script, bowing to the great industrial combines much like his predecessors. He has lashed out at German academic economists for suggesting that a full embargo is  manageable if the country is willing to accept some contraction of GDP, angrily calling them “irresponsible”. The academics are right. There is by now a small literature on how it can be done, by the Bruegel think tank, by the IEA, and by the University of Bonn. The winter is over and Europe has enough gas to muddle through until next November, relying on supplies from Norway, North Africa, and Central Asia, extra liquefied natural gas from the US, and a reprieve for Holland’s Groningen gas fields. Old-fashioned “demand destruction” can do the rest in extremis but might never be needed. The calculated gamble is that Putin would be forced to the table long before then. Europe imports 4.5m barrels per day of Russian oil, gasoil, jet fuel, and so forth. That is a frightening quantity but remember that global oil demand collapsed by 29m barrels per day in the early phase of the pandemic. Washington is releasing 1m barrels per day from its petroleum reserve, and has secured a commitment from US drillers to accelerate production as a patriotic duty. Citigroup expects the US to add a further 1.3m barrels per day this year, mostly from shale. The IEA has revised down its global demand forecast for this year by almost 1m barrels per day. Venezuela and Iran could add 1.8m barrels per day between if and when sanctions are unwound, though not immediately. The Saudis and Opec Gulf states have so far refused to tap their estimated 2m barrels per day of spare capacity, keeping prices at nosebleed levels through cartel practices. But if they persist, they endanger the US defence umbrella. They will have to decide which side they are on soon enough. Everything has to come together but the West can withstand an oil embargo on Russia. The effect of any shortage would be spread globally through the price mechanism, with China and India suffering much of the brunt. They would have a strong incentive to push for an end to war in Ukraine. It all comes down to whether Europe is willing to give up its comfortable status quo. For the German coalition it means recognising that its position is untenable, and risks frittering away 70 years of hard-won moral and diplomatic credibility. (…) Two-thirds of the population wants an end to business-as-usual appeasement. They back the Polish plan for a full cut-off of energy purchases, a full ban on Russian ships entering EU ports, and a full expulsion of all Russian banks from SWIFT. The splash across the front of Die Welt last night accused the German government of “joint guilt for the massacres of Bucha and Mariupol”. This is the new mood. Former Chancellor Gerhard Schroder, and now a paid Kremlin agent, has become a pariah. This week it is the turn of President Frank-Walter Steinmeier to explain his actions, after the Ukrainian ambassador refused to be in the same room and accused him of “creating a spider’s web of contacts with Russia for decades”. (…) Wolfgang Münchau from EuroIntelligence says Germany (and Italy) is objectively “the financial sponsor of Russian war crimes” and risks paying an exorbitant reputational price the longer it goes on. The fate of the European project is itself in question this week. “If Germany resists, I expect at least some member states to question the wisdom of aligning themselves strategically with a country that keeps pursuing its self-interest at the expense of others,” he said. Mr Münchau said the EU has a bad record of standing up to Germany, allowing Berlin to frame the eurozone debt crisis falsely as a morality tale of fiscal profligacy, rather than a tale of financial imbalances caused first and foremost by German economic policy itself. But strategic collusion with the Kremlin is becoming too much to swallow. “Forget the platitudes about the EU showing unprecedented unity. We Europeans like to congratulate ourselves on the half-measures we take in response to every crisis. If we fail again, as we did so many times in the past, the moral case for European integration can no longer be made,” he said. Germany is going to have to decide where its priorities lie. This morning: Charles Michel, President of the European Council, confirmed that the bloc is banning imports of coal from Russia as part of a fifth wave of sanctions. He said: “I think that measures on oil, and even gas, will also be needed sooner or later.” European Commission President Ursula von der Leyen added: “These sanctions will not be our last sanctions. Now we have to look into oil and revenues the Russia gets from fossil fuels.” (The Telegraph) Germans to Face Higher Meat and Dairy Prices as War Boosts Costs German consumers should expect to pay more for dairy produce and meat as production costs hit “extraordinary” levels, according to the country’s farmers union. Moscow’s invasion of Ukraine has boosted key input costs such as fertilizer, which has tripled in price in Germany. Natural gas has also spiked and is starting to feed through into the prices charged in Germany’s food chain. Further jumps are likely in June as half-year contracts between food processors and retailers are renewed, said Udo Hemmerling, deputy secretary general at farmers union DBV. “This week, dairy processors increased their prices on some goods by 10% due to the extraordinary cost of energy,” Hemmerling said in an interview. “In June, we will see higher prices and then the farmer can get a share.” Already Stalled In U.S., Global Minimum Tax Hits European Roadblock Poland has vetoed an EU plan to implement a 15% minimum tax rate by the end of 2023, leaving an international overhaul agreed upon last year in limbo.