Crypto News: Another sign of peak inflation

Hello. Today we look at signs of relief in crisis-level agricultural prices, who's next in the sovereign debt default club, and warning signs of a Chinese property bubble.

Soaring prices of agricultural goods, triggered in part by Russia's invasion of Ukraine and its impact on fertilizer and wheat supplies in particular, have been one of the most painful elements of the cost-of-living shock in economies spanning the globe.

But there are now signs the wave may be cresting.

The UN Food and Agriculture Organization's food-price index dropped for a third straight month in June. And an index of agricultural commodities compiled by JPMorgan Chase was tracking a 10% drop in early July, thanks especially to a correction lower in wheat prices. The bank expects the FAO's gauge will probably follow that overall pattern.

"Food inflation is set to come off the boil" assuming agricultural commodities stabilize, JPMorgan economists Nora Szentivanyi and Katherine Marney wrote in a note on Thursday. "Given the larger share of food in emerging-market consumption baskets the resulting moderation in headline inflation could be sizable, especially in EMEA, which is most sensitive to wheat prices."

The Wall Street bank's base case features a halving in global food inflation from a 13% annual rate in the second quarter to 5.5% to 6% in the final three months of the year. That could offer a 1.5-percentage-point drag from the consumer price index — and an even larger 2-percentage-point damper on inflation in emerging markets.

This in turn could alleviate some pressure on central banks to tighten monetary policy, the duo wrote — while cautioning that economies with volatile exchange rates could see less benefit.

Underscoring the differences across countries, Morgan Stanley analysts observe that there are notable variations in the extent of the pass-through of global food prices to local inflation rates.

In the regions of central and eastern Europe, and Middle East and Africa, South Africa and Poland are the most insulated to global food shocks, Morgan Stanley found. By contrast, "the Czech Republic and Russia tend to see an almost complete pass-through of global to domestic food prices within 12 months of a shock," the bank's analysts wrote Thursday.

It can also take time for the pass-through to local inflation to occur — making it all the more difficult for central banks to determine the right policy approach.

As with other components of inflation, any recession would likely damp food prices — they dropped sharply during the downturn triggered by the great financial crisis. One slim silver lining in a dark cloud, perhaps.

—Chris Anstey

Got tips or feedback? Email us at ecodaily@bloomberg.net

A soaring debt pile of $237 billion due to foreign bondholders in notes trading in distress looms over a developing-market world that's bracing for a potential domino effect of defaults.

After Russia and Sri Lanka, Bloomberg Economics now sees five economies as most vulnerable to a default: El Salvador, Ghana, Egypt, Tunisia and Pakistan.

With limited external buffers and depleted foreign-currency reserves, lower-income nations are struggling to beat back inflation as unsettled populations stoke political tension. Investors are turning increasingly cautious, pulling money out and in turn accelerating those economies' demise.

At stake is global economic stability that could be rocked by a cascade of defaults, worsening the yawning Covid-era gap between developed and developing markets. Multilateral development banks and emerging-market debt specialists alike are eyeing the risk of further turmoil while a surge in cost of living sends households into the streets in protest.

A quarter of the nations tracked in the Bloomberg EM USD Aggregate Sovereign Index are trading in distress, generally defined as yields more than 10 percentage points above those on similar maturity Treasuries.

Samy Muaddi, a portfolio manager at T. Rowe Price who helps oversee about $6.2 billion in assets, calls the current sell-off one of the worst for emerging-market debt "arguably in history."

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Coming up | The U.S. releases labor-market data for June, which is predicted to show non-farm payrolls rose 268,000, average earnings increased 5% from the previous year and unemployment stood at 3.6%.
Shinzo Abe | Abe, formerly Japan's longest-serving prime minister, was assassinated on Friday. He was known for policies of unprecedented monetary easing and regulatory reform — labeled "Abenomics."
Jumbo-jumbo hike | Two of the Fed's most hawkish voters voiced support for a 75-basis-point hike this month to beat back inflation, saying US recession fears are overstated
Asia tour | US Treasury Secretary Janet Yellen is heading out on her first trip to Asia since taking office, aiming to use sit-downs with counterparts to help build momentum for an effort to cap prices for Russian oil.
Green strain | The European Central Bank's first major climate stress test shows banks facing a hit of 70 billion euros from increasing natural disasters and sweeping changes across industries.
Krona crunch | A weakening Swedish currency is piling pressure on the Riksbank to do more to tamp down on inflation, only a week after it hiked its main interest rate by the most in two decades.
UK warning | The government's budget watchdog has cautioned the hopefuls to replace Prime Minister Boris Johnson that cutting taxes would drive up inflation and put the public finances under pressure. Here's a look at the people who may vie to replace him.

Charlene Chu, famed among China watchers for warning about a debt bubble when at Fitch Ratings, says that pain is only just beginning for credit extended to Chinese property.

In the wake of Beijing's sweeping crackdown on leverage built up in real estate, China Evergrande Group and others have defaulted on a slew of bonds.

Chu, a senior analyst at Autonomous Research, a division of Sanford C. Bernstein, estimated that "we have 30 companies who've defaulted with total liabilities of around $1 trillion."

With that ongoing drag from the real estate sector, she concluded that "we are entering an era here where we are going to be looking at low-to-mid single-digit growth in China at best."