Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Treasury yields at both the short and long end of the curve have been creeping up the past few days. Is the September rate cut, which seemed like a lock after the July jobs report, coming into doubt? Federal Reserve chair Jay Powell speaks in Wyoming on Friday. Email us: [email protected].Retail sales vs jobsEveryone knows that economic forecasting is hard. Less appreciated is how difficult it is to know what the economy is doing now, or even was doing a few months ago. The signals are often equivocal and they generally disagree. Today we have a good example of this from two of the most important US indicators: retail sales and job growth.After the June retail sales report, Unhedged noted that while retail sales were holding up overall, there were signs of tariff pressures, for example in weak sales in import-dependent categories where prices are rising, such as furniture and electronics. The July report showed some of these unpleasant trends (electronics, negative again) but not others (a bounce in furniture). And the June report was also revised up a bit. It comes as a slight a surprise to us, but retail sales have kept on rolling:Those are nominal numbers, but even adjusting for inflation, retail sales are growing at perhaps 2 per cent a year. The solid news is echoed in private data. Bank of America reports that spending on its debit and credit cards rose almost 2 per cent in July, the fastest rate since January.On the other hand, as we have written, job creation has been declining: How to close the apparent gap between steady consumption and weakening job creation? We see four possibilities:The decline in jobs reflects a falling supply of workers, not weakening underlying demand that would also show up in consumer spending. We wrote about this possibility here. Because consumer spending is increasingly driven by the richest cohorts of consumers, the sales data underplays weakness in the economy that shows up in the employment report. Here, for example, is Bank of America’s breakdown of credit and debit card spending by income level:Household balance sheets remain quite strong, so households can continue to spend normally even as the economy and job growth cools. Evidence of balance sheet resilience is contained in the New York Fed’s household debt and credit report for the second quarter, which showed declining rates of transition to delinquency across loan types and age cohorts (with student loans as a significant exception). Here, for example, are credit cards:Consumption will eventually slow to match the jobs trend. Oliver Allen of Pantheon Macroeconomics, for example, writes that “further weakness lies ahead, as the weak labour market and further tariff-related increases in goods prices mean that real incomes essentially flatline. Moreover, the 0.4 per cent drop in food service sales in July highlights that the consumer downturn since the start of this year is weighing on demand for discretionary services too, not just goods.” We’re open to other thoughts from readers.Volatility suppressionLast week we noted that the Treasury market has been remarkably stable in recent months: yields have stayed in tight trading ranges across the curve, and implied volatility has been declining steadily. We ascribed this to an underlying tension between the growth and inflation outlooks, which counterbalance one another. But there is another interpretation: that volatility is being deliberately suppressed.Michael Howell of CrossBorder Capital writes that the suppression of Treasury bond volatility “appears to be a deliberate policy” of the Federal Reserve and the Treasury.His argument runs as follows. The key marginal buyer of long-term Treasuries is basis traders: funds holding highly leveraged Treasury bond positions against short positions in Treasury futures, betting that the small difference in prices between the bonds and the futures will close. With a flattish yield curve and declining interest in Treasuries from foreigners, basis traders are the only buyers for whom long Treasuries are particularly attractive. But as with any highly leveraged trade, low volatility is a must. A rise in Treasury volatility would send the basis traders running for cover.So the monetary and fiscal authorities want to keep the basis traders in the game by keeping money markets flush with cash, which in turn keeps the Treasury market calm. Volatility suppression might be behind a number of policy choices, according to Howell. The decline of the Fed’s reverse repo facility; the pick-up in active Treasury “buybacks” (replacing off-the-run Treasuries with more liquid on-the-run Treasuries); the mooted revocation of banks’ supplementary liquidity ratio (which would allow banks to own more Treasuries)’; and the shift towards shorter duration US debt issuance are all examples.Some readers may find Howell’s view a bit conspiratorial. But Unhedged agrees with it this far: low Treasury volatility is a major support for all corners of financial markets, because Treasuries are the most important form of trading collateral, and the value of this collateral falls as its volatility rises. Almost everyone in markets therefore has an interest in low Treasury volatility, and might engage in implicit co-ordination to protect it. Suppressing volatility — in markets or nature — is hard to do forever. Keep a close eye on the Treasury market.Are data centres wasting assets?Many readers responded to yesterday’s piece about tech’s dominance of markets. Several disagreed with my claim that even if artificial intelligence turns out to be a profits bust, data centre investments will not be a deadweight loss because “all that computer power will be useful for something”. One reader, Nick Banner, correctly surmised that I was thinking back to the fibre-optic overcapacity built curing the telecom/dotcom bubble, which came in very handy after the bust. This will not be the case with the AI data centres, Banner wrote: A strand of glass is a strand of glass, and you achieve ever-higher data rates [over fibre] by upgrading the terminal equipment (lasers, multiplexers, amplifiers, etc).Data centres, on the other hand, are at heart racks of high-end Nvidia chips. But those chips are in effect consumables — they’re (rightly) depreciated over 2-4 years, because they’re superseded in that timeframe. Demand for four-year-old GPUs is pretty low. And the reason why they are in demand now is almost entirely because of [AI] . . . If this is right, a lot is riding on the success of AI as a business (rather than a technology). If the prospects for AI profits dim, Nvidia’s $4.4tn market cap will take a major haircut, and the valuations of Microsoft, Alphabet and Meta will take a knock as well, as multibillion-dollar writedowns will be in the offing and growth expectations will have to be cut, too. Again, the problem looks less like high market concentration and more like high market expectations.One good read No.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is fellow for trade policy at the Council on Foreign RelationsIn early August, Jamieson Greer, the US’s lead trade negotiator, declared that a new system of global trade had taken shape. Naming it after the Turnberry resort in Scotland where the US-EU tariff deal was struck, he claimed that Donald Trump’s approach has finally delivered the success in reforming the global trading system that has eluded past presidents. But what was achieved exactly? The administration has fallen far short of its goal for “90 deals in 90 days”. As for the handful of so-called deals that have been made, they are scant on details. Greer himself admits that deals with the EU, UK, Cambodia, Indonesia, Japan, Malaysia, Pakistan, the Philippines, South Korea, Thailand and Vietnam account for 40 per cent of US trade. What he fails to mention is that agreements with the top three US trading partners — Canada, Mexico, and China — have yet to be made. Even if you take what has been announced so far at face value — reductions in tariffs, co-operation on non-tariff barriers and promises by foreign partners to invest in the US — these deals are less substantial than Greer claims and have yet to produce real economic results. They are also a far cry from the massive market opening that was achieved over decades of sustained trade negotiations and which led to the system we have today. In fact, as research from the Peterson Institute for International Economics has shown, efforts after the second world war to liberalise trade led to average gains in the US of $19,500 per household in 2022. In other words, US GDP would have been $2.6tn lower without the current system, which Greer criticises for being the source of America’s economic malaise, real or imagined. Wealth from that liberalised trade regime has continued to grow, and young people today are actually better off than their parents, despite what the popular rhetoric will have you believe. The only obvious results from all of Trump’s dealmaking to date are higher prices due to an average tariff rate that takes us back to the 1930s, uncertainty and a lack of trust stemming from the ever-changing nature of the tariff regime. Greer plainly states that the deals will be enforced by raising tariffs if partner countries renege. Thus, the US is not only unilaterally setting tariff rates but serving as jury and executioner in evaluating and punishing perceived deviations from trade deals. This unpredictable policy will raise costs for American families and businesses and will probably do little to support the manufacturing renaissance Greer is hoping for. Nor will it elicit the type of global co-operation necessary to address persistent economic challenges such as macroeconomic imbalances and unfair subsidies. What’s striking in Greer’s intellectual reframing of the recent trade chaos is that he tries to give Trump credit for some sort of vision or strategy that is entirely new. He sneers at the postwar trading system as “nameless” and now seeks to paper over it with Trump’s gold foil. In doing so, he misses one critical point. The unravelling of US trade policy does not mark the beginning of a new global trading system, but rather the closing of the American market from the rest of the world. Try as Greer might to call this a “Trump round” of global trade negotiations, it is anything but. In fact, it is more akin to the “American system” of the 1820s that his predecessor, Robert Lighthizer, so praised, and which was characterised by a highly protectionist US market. Back then, like today, the US economy was doing fairly well, but the coalitions driving trade policy were shifting. As economic historian Douglas Irwin explains, the American system of that era was less motivated by economic goals than political ones. Furthermore, while trading partners have been willing to talk to the US about its trade demands, they are not following America’s lead by replicating those policies in their relationships with other countries. In fact, trading partners remain committed to the global trading system, while being willing to reform it, but are simply not acting out in the unilateral and transactional way the US is. If other countries continue to observe the rules, it will leave the US operating in a realm of its own. The Trump administration could still transform global trade; patterns are shifting and allies are looking to diversify their relationships. But it is foolish to think the US can simply will a new order into existence when it hasn’t convinced anyone of the merits of its self-harming approach. A bit of humility is in order. America is not presiding over the creation of a new trade system, but rather is denying itself the benefits of the existing one. More

During his first term in office, John Mahama, who returned as Ghana’s president for a second stint this January, floated the idea of “trade not aid”. That was in 2016. Speaking to the United Nations General Assembly, Mahama said: “Africa does not need your sympathy or development assistance.” Instead, he said, it wanted a “fair chance to trade with the rest of the world” and to increase trade and investment within the African continent. Nearly a decade later, when it comes to aid at least, the world has taken Mahama at his word. Donald Trump, who has himself adopted the “trade not aid” mantra, has declared spending on aid pointless, even anti-American. In February Elon Musk, during his brief time as Washington’s efficiency tsar, immolated the US Agency for International Development and with it a good deal of its roughly $43bn budget. The sweeping cuts are not limited to the US. Overseas assistance budgets have been slashed around the world. Even before USAID was ended by Musk, the UK had scrapped the Department for International Development, folding it into the Foreign Office. It also dropped its pledge to keep overseas assistance to 0.7 per cent of gross national income, reducing it to 0.3 per cent.Other European countries from France to the Netherlands have followed suit. Budgets of global health organisations such as the Global Fund to Fight Aids, Tuberculosis and Malaria and Gavi, the Vaccine Alliance, are under pressure. The UN is also facing financial strain and is relocating staff from agencies such as Unicef and UN Population Fund to cheaper locations, including Nairobi and Panama. “Around a fifth of the total aid budget is gone and we have to accept that,” said one senior UN official, who said the situation was only likely to get worse. “Aid budgets are going — and organisations need to adapt.”While aid agencies and health experts have mostly decried the cuts, there has been surprisingly little protest from Africa itself. Many leaders and ordinary citizens were suspicious of aid in the first place, with some even seeing USAID as a front for the CIA. More generally, critics have complained that too much money was spent on bureaucracy, including high salaries for foreign consultants. Overseas assistance also created unintended consequences, they said, by hollowing out local expertise and giving governments an excuse to ignore their responsibilities for providing services such as healthcare and education. Uhuru Kenyatta, former president of Kenya, summed up the mood when he said: “People are crying, saying Trump is not giving us any more money. Instead of crying, we should ask ourselves, ‘What are we going to do to support ourselves’?”Several African governments, from South Africa to Nigeria, have talked about shouldering more of the burden. Rwanda has been rolling out primary healthcare backed by a sophisticated electronic patient record system that, according to Peter Piot, former executive director of UNAids, is superior to those of many European countries. Cuts in aid have hit local healthcare centres across the continent such as this one in Migosi, Kenya More

This article is an on-site version of the India Business Briefing newsletter. To receive it in your inbox regularly, sign up if you’re a premium subscriber, or upgrade your subscription here.Good morning. At last some good news. Last week, the credit rating agency S&P Global upgraded India’s long-term unsolicited sovereign credit rating to BBB, on the back of the country’s sustained fiscal consolidation and economic resilience. This is India’s first upgrade since 2007!In today’s newsletter, US President Donald Trump’s tariffs draw China and India closer to each other. But first, the goods and services tax gets a facelift.Good and simpler tax?Will India’s goods and services tax finally live up to its billing as a “good and simple tax”? After Prime Minister Narendra Modi announced an overhaul to the value added tax system in his Independence Day speech, a draft blueprint is being circulated to the states. This would remove two current rates, leaving one of 5 per cent on essential products and one of 18 per cent on everything else, except some luxury and “sin” goods and services. They will continue to be subject to a 40 per cent levy. So big cars are likely to be taxed at 40 per cent, small cars at 18. The proposal, GST 2.0 as it is being popularly referred to, also seeks to streamline the current system in order to better enable value addition and provide long-term clarity, stability and ease of accounting. So what are the next steps? The states have to go over this proposal and come to an agreement. The group of state ministers responsible for this is expected to meet on Thursday. Its recommendations will go to the GST council, which will then deliberate on the reforms in September or October. In his speech, Modi indicated the new taxes would come into force before the festival of Diwali, which this year falls on October 20. While there is already some political bickering and one-upmanship at play, the chances are the reforms will go through even as the ruling party and opposition wrestle about who gets to take credit. (Politicking with taxes is an old sport in India, and the main reason why the annual budget announcements are such a spectacle). More importantly, the government is acknowledging the stress in the economy. Modi pitched the reform as a “double Diwali bonus”, hoping the lower taxes would drive consumption growth. The cuts will deal a hefty blow to the government’s revenues, but it is counting on resulting demand growth to help offset an expected hit to GDP from lower exports caused by Trump’s tariffs.This is the first of a series of steps the government is expected to take in order to counter criticism of its failure to secure a deal with the Trump administration. Modi’s government portrays the trade hit as an opportunity for India to focus on its domestic industry and market, and to look inward for growth. In the past couple of weeks, a number of corporate leaders have also suggested that the government should reform various regulations to make it easier for businesses to operate in India. Measures may be announced soon.While India needn’t have waited for a failed trade deal in order to reform its domestic economy, if these do indeed come about it would be a good outcome from a bad situation.Do you think GST 2.0 will succeed in actually being simple? Hit reply or email me at [email protected]Recommended storiesUS to ‘co-ordinate’ Ukraine’s security with Europe; Kyiv offers $100bn weapons deal to Trump.Investors lose billions on meme stocks as ‘pump and dump’ scams multiply.China cracks down on foreign companies stockpiling rare earths.The crypto group backed by Trump’s sons hunts for bitcoin companies in Asia.Is AI hitting a wall? OpenAI’s underwhelming new GPT-5 model suggests progress is slowing.Can a bad marriage be passed down the generations?Join 250+ policymakers, industry executives and investors at the Energy Transition Summit India on September 16 and 17 in New Delhi. Register for a free digital pass here or enjoy 20 per cent off your in-person pass here.India-China thawChinese foreign minister Wang Yi’s visit signals a continued thaw in ties between Beijing and New Delhi More

Client Challenge

JavaScript is disabled in your browser.
Please enable JavaScript to proceed.

A required part of this site couldn’t load. This may be due to a browser
extension, network issues, or browser settings. Please check your
connection, disable any ad blockers, or try using a different browser. More

Client Challenge

JavaScript is disabled in your browser.
Please enable JavaScript to proceed.

A required part of this site couldn’t load. This may be due to a browser
extension, network issues, or browser settings. Please check your
connection, disable any ad blockers, or try using a different browser. More

Client Challenge

JavaScript is disabled in your browser.
Please enable JavaScript to proceed.

A required part of this site couldn’t load. This may be due to a browser
extension, network issues, or browser settings. Please check your
connection, disable any ad blockers, or try using a different browser. More

Client Challenge

JavaScript is disabled in your browser.
Please enable JavaScript to proceed.

A required part of this site couldn’t load. This may be due to a browser
extension, network issues, or browser settings. Please check your
connection, disable any ad blockers, or try using a different browser. More