Markets appear to have bought into the US Federal Reserve’s view that the recent spike in inflation is “transitory” and the result of reopening economies, which will gradually fade in the coming quarters as activity begins to normalise.
However, the plunge in longer-dated Treasury yields to below 1.4 per cent, from above 1.7 per cent, is the most graphic manifestation of this correction in “reflation trade”. This has resulted in the flattening yield curve catching a number of investors off guard and causing a short squeeze in Treasury futures positions that intensified the drop in yields.
Other technical reasons may also have been at play, among them temporarily falling Treasury supply, with the General Account at the Fed being drawn down steadily to about $750 billion at the end of June, from a balance of above $1.8 trillion in July last year. There have also been developments in money markets, where the Fed’s reverse repo programme is raking in hundreds of billions of dollars – hitting almost $1tn at the end of the second quarter.
The banking sector's huge liquidity balances recycled at the Fed still pose a threat to price stability in the medium term, particularly if banks start lending again to the real economy. But if all the monetary largesse of central banks stays with lenders, the inflationary threat is muted – or even absent – as the additional liquidity won't reach the real economy. Should the stance of lenders change – and there are indications that this is starting to happen – then higher inflation rates could stay with us for longer.
Loan growth started to take off early in the pandemic as the Fed stepped in with more than $2tn in lending and supported the provision of bank loans by temporarily relaxing regulatory requirements. The loan growth rate started to fall in March due to the base effects, with the loan-to-deposit ratio of all US banks reaching 50-year lows.
With the pandemic now arguably in its final stages, thanks to rising vaccination rates in many countries, a return to a pre-pandemic environment should lead to increasing loan growth again, which could serve to maintain the recent spikes in inflation for longer. It is no surprise that the Fed’s Senior Loan Officer Survey in late March found that US banks’ willingness to lend was at its highest in years.
If the vaccines reduce the stress to national health systems, Covid-19-induced restrictions may continue to be relaxed, thereby keeping economic activity underpinned
Tim Fox
There are a number of reasons why banks will now seek to grow their loan books again. Firstly, many households used their additional stimulus-related income to pay back at least some of their existing loans during the pandemic. Secondly, when uncertainty was high during the spring of last year, banks took loan-loss provisions similar to the extent last seen during the global financial crisis of 2008-09, naturally weighing on the propensity to make new loans.
This over-provisioning is now being reversed, with JP Morgan, for example, in the first quarter releasing about half of its loan-loss provisions taken in the prior year. Finally, the steepening yield curve increases the profitability of issuing loans, which are typically refinanced via short-term funding – the classic term transformation of the banking sector.
Meanwhile, another reason for the apparent retreat in bond yields appears to be the fear of renewed lockdowns due to the emergence of new Covid-19 variants. In the past few weeks, news about rising infection rates in countries where vaccination rates are high, such as Israel, the UK and the US, has led some investors to fear a relapse for many economies in the second half of the year due to renewed lockdowns and flare-ups in supply disruptions.
The critical variable will be whether the number of hospitalisations remains muted, which would suggest that while vaccinations may not fully prevent new infections with aggressive variants of the virus, they will drastically reduce the probability of any severe disease progression.
If the vaccines reduce the stress to national health systems, Covid-19-induced restrictions may continue to be relaxed, thereby keeping economic activity underpinned.
As far as this debate is concerned, we appear to be approaching a critical moment as the resolve of governments to resist pressure to lock down again in the coming weeks gets tested – the outcome of which will have a significant bearing over whether the current spike in inflation will, in the end, be as “transitory” as the Fed expects.
Tim Fox is a prominent GCC economist and financial markets analyst, and an adviser to Switzerland-based St Gotthard Fund Management
The specs
Engine: 1.5-litre turbo
Power: 181hp
Torque: 230Nm
Transmission: 6-speed automatic
Starting price: Dh79,000
On sale: Now
'The Sky is Everywhere'
Director:Josephine Decker
Stars:Grace Kaufman, Pico Alexander, Jacques Colimon
Rating:2/5
Frankenstein in Baghdad
Ahmed Saadawi
Penguin Press
UAE currency: the story behind the money in your pockets
Zayed Sustainability Prize
Company%20profile
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COMPANY%20PROFILE
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
Our legal consultants
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
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ESSENTIALS
The flights
Emirates flies from Dubai to Phnom Penh via Yangon from Dh2,700 return including taxes. Cambodia Bayon Airlines and Cambodia Angkor Air offer return flights from Phnom Penh to Siem Reap from Dh250 return including taxes. The flight takes about 45 minutes.
The hotels
Rooms at the Raffles Le Royal in Phnom Penh cost from $225 (Dh826) per night including taxes. Rooms at the Grand Hotel d'Angkor cost from $261 (Dh960) per night including taxes.
The tours
A cyclo architecture tour of Phnom Penh costs from $20 (Dh75) per person for about three hours, with Khmer Architecture Tours. Tailor-made tours of all of Cambodia, or sites like Angkor alone, can be arranged by About Asia Travel. Emirates Holidays also offers packages.
Manikarnika: The Queen of Jhansi
Director: Kangana Ranaut, Krish Jagarlamudi
Producer: Zee Studios, Kamal Jain
Cast: Kangana Ranaut, Ankita Lokhande, Danny Denzongpa, Atul Kulkarni
Rating: 2.5/5
UAE currency: the story behind the money in your pockets
RESULTS
Cagliari 5-2 Fiorentina
Udinese 0-0 SPAL
Sampdoria 0-0 Atalanta
Lazio 4-2 Lecce
Parma 2-0 Roma
Juventus 1-0 AC Milan
BULKWHIZ PROFILE
Date started: February 2017
Founders: Amira Rashad (CEO), Yusuf Saber (CTO), Mahmoud Sayedahmed (adviser), Reda Bouraoui (adviser)
Based: Dubai, UAE
Sector: E-commerce
Size: 50 employees
Funding: approximately $6m
Investors: Beco Capital, Enabling Future and Wain in the UAE; China's MSA Capital; 500 Startups; Faith Capital and Savour Ventures in Kuwait
Sholto Byrnes on Myanmar politics
The specs
- Engine: 3.9-litre twin-turbo V8
- Power: 640hp
- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
RESULTS
2pm: Handicap (PA) Dh40,000 (Dirt) 1,200m
Winner: Najem Al Rwasi, Fabrice Veron (jockey), Ahmed Al Shemaili (trainer)
2.30pm: Handicap (PA) Dh40,000 (D) 2,000m
Winner: Fandim, Fernando Jara, Majed Al Jahouri
3pm: Maiden (PA) Dh40,000 (D) 1,700m
Winner: Harbh, Pat Cosgrave, Ahmed Al Mehairbi
3.30pm: Maiden (PA) Dh40,000 (D) 1,700m
Winner: Wakeel W’Rsan, Richard Mullen, Jaci Wickham
4pm: Crown Prince of Sharjah Cup Prestige (PA) Dh200,000 (D) 1,200m
Winner: Jawaal, Fernando Jara, Majed Al Jahouri
4.30pm: Sheikh Ahmed bin Rashid Al Maktoum Cup (TB) Dh200,000 (D) 2,000m
Winner: Tailor’s Row, Royston Ffrench, Salem bin Ghadayer
Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
- Discounts on sales price of off-plan units
- Flexible payment plans from developers
- Mortgages with better interest rates, faster approval times and reduced fees
- DLD registration fee can be paid through banks or credit cards at zero interest rates
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Sunday:
GP3 race: 12:10pm
Formula 2 race: 1:35pm
Formula 1 race: 5:10pm
Performance: Guns N' Roses
What is Diwali?
The Hindu festival is at once a celebration of the autumn harvest and the triumph of good over evil, as outlined in the Ramayana.
According to the Sanskrit epic, penned by the sage Valmiki, Diwali marks the time that the exiled king Rama – a mortal with superhuman powers – returned home to the city of Ayodhya with his wife Sita and brother Lakshman, after vanquishing the 10-headed demon Ravana and conquering his kingdom of Lanka. The people of Ayodhya are believed to have lit thousands of earthen lamps to illuminate the city and to guide the royal family home.
In its current iteration, Diwali is celebrated with a puja to welcome the goodness of prosperity Lakshmi (an incarnation of Sita) into the home, which is decorated with diyas (oil lamps) or fairy lights and rangoli designs with coloured powder. Fireworks light up the sky in some parts of the word, and sweetmeats are made (or bought) by most households. It is customary to get new clothes stitched, and visit friends and family to exchange gifts and greetings.
Ferrari 12Cilindri specs
Engine: naturally aspirated 6.5-liter V12
Power: 819hp
Torque: 678Nm at 7,250rpm
Price: From Dh1,700,000
Available: Now
Read more about the coronavirus
KILLING OF QASSEM SULEIMANI
Sanju
Produced: Vidhu Vinod Chopra, Rajkumar Hirani
Director: Rajkumar Hirani
Cast: Ranbir Kapoor, Vicky Kaushal, Paresh Rawal, Anushka Sharma, Manish’s Koirala, Dia Mirza, Sonam Kapoor, Jim Sarbh, Boman Irani
Rating: 3.5 stars
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