The Red Sea's inflation threat

While this week started with expectations that inflationary pressures around the world were abating, an escalation in geopolitical tensions in the Middle East quickly changed those calculations. The US and UK launched airstrikes on Houthi targets in Yemen to stop its attacks on ships in the the Red Sea, actions the group says are in retaliation for Israel’s bombing campaign in Gaza. Many companies have rerouted their ships away from the waterway—which links to the Mediterranean Sea via the Suez Canal—forcing vessels on much longer routes around southern Africa. The disruptions in the Red Sea have roiled global supply chains and pushed up freight costs. The Houthis have pledged a “big” response to airstrikes, and oil prices—a key driver of inflation—have ticked up.

The military action also underscores the deepening fallout from the Israel-Hamas war: US President Joe Biden has been working since the Oct. 7 attacks in Israel to prevent a wider conflict -- but the airstrikes did, in fact, expand it. “If anything has changed, it’s that the Red Sea may be on its way to becoming a war zone,” Marc Champion writes in Bloomberg Opinion, arguing that the strikes play into the hands of the Houthis and their backer, Iran. Biden didn’t rule out more strikes.
Turkey and Saudi Arabia expressed concern, while Russia and Iran strongly condemned the attacks. The confrontation pits the US against another Iranian proxy, with US forces in recent weeks launching attacks in Syria and Iraq against Iranian-supported militias that have targeted American bases. It’s a strategy Iran has been scripting for years as it assembled what’s been called its “axis of resistance” to Israel and the US. Despite the escalating aggression, the strikes on Yemen will probably have a limited impact on the global economy, according to Bloomberg Economics. But the added costs of recalibrating shipping routes and upward pressure on energy prices are, at a minimum, a thorn in the side of central banks trying to bring inflation to a 2% target.

President Xi Jinping’s sweeping purge of China’s military came after it emerged that widespread corruption undermined efforts to modernize and raised questions about China’s ability to fight a war, according to people familiar. Even still, a war with Taiwan would have devastating human and financial consequences — around $10 trillion in economic damage, Bloomberg Intelligence estimates. That’s equal to about 10% of global GDP — dwarfing the blow from the war in Ukraine, Covid pandemic and global financial crisis. Then there’s Xiongan, Xi’s dream city, meant to lure people from Beijing. It remains nearly empty despite the enormous cost.

Donald Trump’s campaign wants a blowout win in Monday’s Iowa caucus, possibly knocking out Florida Governor Ron DeSantis and putting pressure on a rising Nikki Haley. But Trump aides fear that some voters, seeing his dominance, could stay home on a frigid night in Iowa — and that a less-imposing margin of victory will prolong the primary fight. The GOP field did narrow as Chris Christie dropped out of the race, potentially helping Haley’s chances in the New Hampshire primary. As a reminder of the threat posed by the 91 criminal charges the former president faces — not to mention the 14th Amendment challenge to whether he will be allowed to run again because of his role in the Jan. 6 uprising—Trump spoke at his fraud trial in New York, saying he is “an innocent man.”

The FAA will increase its oversight of Boeing’s production and manufacturing operations, a day after it opened a formal investigation into the planemaker, saying the plugged emergency door on a 737 Max 9 that blew off was a mishap “that never should have happened.” Safety officials were focusing on four bolts they’ve been unable to locate that should have secured the door on the ill-fated Alaska Airlines flight last week. All Max 9 aircraft will remain grounded until regulators deem them safe to fly, Transportation Secretary Pete Buttigieg said. Meantime, rival Airbus sold a record number of planes, outpacing Boeing for the fifth straight year.

For Bitcoin investors and skeptics alike, this week marked a turning point. The SEC approved the launch of exchange-traded funds that invest directly in the digital currency, including from industry heavyweights BlackRock, Invesco and Fidelity, but not before the agency’s X account was hacked. The SEC approval will broaden access to the largest cryptocurrency on Wall Street and beyond. Despite the breakthrough move, SEC Chair Gary Gensler reiterated the agency doesn’t endorse digital assets. Meanwhile, some former customers of bankrupt crypto firm FTX are pushing a judge to change how they will be repaid, saying they are losing out on crypto’s resurgence.

If you happen to be going to Davos this year–and really, who’s not?—here are some dining suggestions. If you want to go elsewhere, Bloomberg has compiled a list of five enticing destinations made even better by a favorable exchange rate against the dollar. Elton John is auctioning off the contents of his former Atlanta home, including a pair of his 1970s era platform boots and a Bentley two-door convertible. It’s expected to bring in $10 million, more than the $7.2 million he got for the house last year.

When central banks such as the Federal Reserve make an interest rate decision, they are reacting to a bundle of domestic and external factors. Those factors used to push down on borrowing costs. Now, after decades of cheap money, they are pushing up. It’s a massive change. In The Rising Cost of Money, we explain what drove the rate lower, what’s about to reverse its decline and what that means for everything from home prices to the stock market and the sustainability of US government debt.