Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Reserve Bank of Australia has raised its short-term inflation forecast and all but ruled out an interest rate cut this year, joining other central banks in warning that persistent price growth will keep rates higher for longer.Some economists had expected the RBA to begin cutting rates by the end of the year after the central bank in February noted “encouraging” signs that inflation had started to ease.But a disappointing reading for the first quarter, when prices rose 3.6 per cent year on year, led some economists to predict that the RBA might reverse course and raise rates by the end of the year.The RBA on Tuesday held interest rates at 4.35 per cent, noting in a statement that “inflation continues to moderate, but is declining more slowly than expected”. It said it would not rule “anything in or out” on rate moves.The bank added that rates were expected to remain around the current level until mid-2025 — about nine months longer than projected in February — in its modelling.The RBA’s more hawkish view pre-empts the budget due to be delivered by treasurer Jim Chalmers next week, raising concerns that any cost of living measures or investment in green energy subsidies and the government’s manufacturing strategy could stoke further price rises. It also comes as global central banks, led by the US Federal Reserve, have signalled that interest rates are expected to remain higher for longer as they battle to bring down inflation, a shift that has put pressure on the currencies of import-dependent economies.Australia’s benchmark S&P/ASX 200 stock market index climbed 1.4 per cent on Tuesday, while the Australian dollar weakened 0.5 per cent to A$1.52 per US dollar following the RBA’s announcement.In its outlook, the RBA revised down its expectations for economic activity as higher interest rates weighed on household spending and boosted savings rates. The central bank raised its inflation forecast for 2024 to 3.8 per cent from 3.2 per cent previously.While the RBA said inflation would fall to its target range of 2 to 3 per cent by the second half of 2025, it warned that the process of reaching that target was “unlikely to be smooth”.Michele Bullock, RBA governor, said at a press conference in Sydney that the bank had yet to factor potential interest rate rises into its forecasts. Petrol prices and services inflation — which was 4.3 per cent in the March quarter — have driven the short-term price outlook higher. “The recent data suggests we need to be alert and vigilant on this,” she said, adding that the bank’s “neutral” rate stance was still “reasonably balanced”.A tight labour market and wage inflation remain particular concerns, despite signs that consumer demand and retail sales have contracted since the bank raised interest rates 13 times between May 2022 and November last year. Sean Langcake, an economist with Oxford Economics Australia, said the RBA had set out a strong case for a rate rise even as it opted to hold. “There is clearly a very high bar for raising interest rates further given the ongoing weakness in consumer spending and activity more broadly,” he said. “But another upside surprise on inflation will severely test the RBA’s patience.”Harry Murphy Cruise, an economist at rating agency Moody’s, said the RBA’s message was slightly more hawkish but questioned the probability of a rate rise, suggesting that “the threat of future rate hikes can sometimes be enough to damp demand without the need to actually pull the trigger”.“Indeed, we think the most likely outcome is for rates to stay where they are until December,” he wrote in a note.Additional reporting by William Sandlund in Hong Kong More

1. Futures mutedU.S. stock futures were mixed on Tuesday, as investors poured through fresh inflation commentary from Federal Reserve policymakers and looked ahead to a new batch of quarterly earnings.By 03:32 ET (07:32 GMT), the Dow futures contract had gained 46 points or 0.1%, S&P 500 futures were mostly unchanged, and Nasdaq 100 futures had edged down by 10 points or 0.1%.The main indices on Wall Street rose in the prior session, buoyed by hopes that softer-than-anticipated monthly U.S. labor market report may persuade the Fed to slash interest rates down from more than two-decade highs as soon as September. Prior to the data, markets were expected the central bank to roll out a cut in November.Chipmakers were among the best performing stocks on Monday, with Arm Holdings (NASDAQ:ARM) in particular rising 5.2% ahead of its fiscal fourth-quarter results after the closing bell on May 8. Paramount Global shares also advanced following the expiration of exclusive negotiations with Skydance Media over a potential deal, which will give the entertainment giant the opportunity to explore competing bids.Shares in Spirit Airlines (NYSE:SAVE), meanwhile, slumped following a weak current-quarter revenue outlook from the low-price carrier.2. Interest rates “restrictive” enough to cool inflation – Fed’s BarkinInterest rates in the U.S. currently stand at such “restrictive” heights that they can help tamp down demand and cool sticky inflationary pressures, according to Richmond Fed President Thomas Barkin.Speaking in South Carolina, Barkin said he is “optimistic” that the current level rates — a range of 5.25% to 5.50% — should be enough to bring the pace of price growth back down to the Fed’s target.Barkin also said he does not believe the economy is on track to overheat, a concern that has factored into the central bank’s decision not to ratchet down rates earlier this year as initially expected. Should the economy slow significantly, he added, the Fed has the “firepower” at its disposal to supply the necessary support.But Barkin noted that inflation, the central focus of a steep recent tightening cycle by the Fed, is proving difficult to ease.”It’s a stubborn road back,” Barkin said. “It doesn’t mean you won’t get it back. It just means it takes a while.”3. Disney earnings aheadWalt Disney is due to report its second-quarter results prior to the opening bell on Tuesday, weeks after the entertainment giant emerged victorious in a proxy battle with activist investors.In April, shareholders largely backed Chief Executive Bob Iger and his plan to turnaround performance at the company, marking a defeat to a challenge from a cadre of large investors led by Trian Partners boss Nelson Peltz. Shares in Disney have now gained more than 28% in 2024, but remain far below highs touched three years ago.Stakeholders will now be looking for Iger to provide further details on his future strategy for the company, including a goal of making its all-important streaming business profitable by the end of the year.Analysts expect the streaming service, which has been attempting to entice customers by bundling together offerings like Disney+, Hulu, and ESPN+, to post subscriber growth. Operating losses at Disney’s direct-to-consumer unit are also seen narrowing.Group-wide, adjusted earnings per share and revenue are projected to climb to $1.10 and $22.1 billion, respectively.4. Apple developing AI chip for data centers – WSJApple Inc (NASDAQ:AAPL) is developing an in-house chip intended to run artificial intelligence programs in data centers, the Wall Street Journal reported on Monday, as the tech giant seeks to gain an edge in the fast-growing industry.The project is internally code-named ACDC — Apple Chips in Data Centers, the WSJ report said.Apple began designing its own chips for its flagship iPhones and other devices over the past decade, as it sought to cull its reliance on other chip developers such as Intel (NASDAQ:INTC).The WSJ report comes amid growing speculation over just how Apple plans to incorporate AI into its product line-up, given that it has somewhat lagged its U.S. tech peers in rolling out AI products.5. Crude hovers around flatlineCrude prices hugged the flatline on Tuesday after Israeli strikes on the city of Rafah in southern Gaza raised doubts about a potential ceasefire in the region.By 07:32 ET, the U.S. crude futures and the Brent contract were mostly unchanged at $78.47 a barrel and $83.35 per barrel, respectively.Palestinian militant group Hamas on Monday agreed to a Gaza ceasefire proposal from mediators, but Israel said the terms did not meet its demands while planning to continue negotiations on a deal.A lack of settlement between the parties in the now seven-month long conflict has supported oil prices, as investors worry regional escalation of the war will disrupt Middle Eastern crude supplies.That said, the benchmarks posted the steepest weekly losses in three months last week as traders fretted about the prospect of higher-for-longer interest rates curbing growth in the U.S., the top global oil consumer. More

The RBA kept its official cash rate at 4.35%, in line with market expectations. The central bank left the rate unchanged for a fourth consecutive meeting after a surprise hike in November. The bank warned that recent data showed inflation was easing at a slower pace than it expected, and that it was “not ruling anything in or out” in bringing inflation back to its 2% to 3% annual target range. Still, the bank kept shy of directly threatening to raise interest rates further- a threat it had clearly stated in late-2023, but dropped from its recent announcements. Markets were positioning for a more hawkish rhetoric from the RBA after Australian consumer price index inflation read hotter-than-expected for the first quarter, amid persistent stickiness in service costs. The reading also moved further above the RBA’s 2% to 3% annual target.Service price inflation has remained a key point of concern for the RBA, with bank having offered repeated warnings on potential upsides to CPI from services. Tight Australian labor conditions have also largely factored into higher service costs. The RBA reiterated its forecast that CPI inflation will fall within its annual target by mid-2025, and will hit the midpoint of its target range by 2026. The central bank had hiked rates by a cumulative 425 basis points over the past two years, as it moved to curb a post-COVID spike in inflation. While the bank did not directly threaten to hike rates further on Tuesday, its comments still indicated that Australian interest rates will remain high for longer.After the strong Q1 inflation data, markets were seen largely pricing out any expectations of rate cuts by the RBA in 2024.The Australian dollar’s AUDUSD pair fell 0.3% in the immediate aftermath of the meeting, given that the RBA still stopped short of directly threatening more rate hikes. Conversely, Australia’s ASX 200 stock benchmark extended gains to trade 1% higher on bets that interest rates will not rise any further.  More

Global policymakers are imposing new taxes on electric vehicles as the shift away from combustion engines threatens to leave a $110bn hole in government revenues owing to a drop in receipts from fuel duties. The UK, New Zealand, Israel and the majority of US states are among jurisdictions introducing tax changes and charges on EVs and hybrid vehicles designed to raise funds and compensate for declines in petrol and diesel excise taxes. The measures are varied, running from registration fees to road usage charges based on mileage and taxes on public charging points. EV owners and green campaigners say they will slow society’s switch from gas-guzzling vehicles to lower-emissions alternatives.“It is more like a penalty,” said Jeff Shoffner, who drives an electric Chevy Bolt in Tennessee, where annual fees doubled this year to $200. “I’m not averse to paying the extra fee, but I think it’s too high.”The new levies come at a tricky time for electric vehicle adoption. While global sales are expected to reach record highs this year, declining profit margins and slower growth are leading automakers to pump the brakes on their electrification plans.  Last week, Tesla chief executive Elon Musk shut down the group’s entire supercharger division, laying off hundreds of staff in response to falling revenues at the EV maker. “A lot of these policies are not politically popular. It’s hard to raise taxes, but it is needed,” said Rachel Aland, transportation director at the American Council for an Energy-Efficient Economy, a Washington DC-based think-tank.She said fuel tax collection has been falling for some time due to increasing fuel efficiency of internal combustion engine vehicles. The growing prevalence of EVs on the road is putting extra pressure on an important source of government revenues. By 2030 EVs are forecast to displace 6mn barrels a day of global oil consumption, according to the International Energy Agency. Demand in 2023 was 102mn b/d.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.IEA data shows the shift to EVs displaced $10bn in revenues from petrol and diesel taxes globally last year, net of modest gains from new electricity tax revenue. The net loss is projected to rise to $110bn by 2035 if countries meet their electrification targets, robbing governments of vital funds that are often ringfenced to pay for road maintenance and transport improvements.Europe, where countries tend to charge higher taxes on petrol and diesel compared with the US and China, made up 60 per cent of global revenue losses last year. While countries will claw back some funding in electricity taxes, the revenue is marginal compared with the loss in fuel taxes, the agency said.As a growing number of governments set deadlines for the phaseout of combustion engine cars, policymakers are being forced to consider unpopular tax reforms.    Last month New Zealand introduced road use charges based on distance travelled for EVs and plug-in hybrid vehicles for the first time, saying the policy was badly needed to raise revenues for road maintenance as fuel tax collections fell.  Owners of light EVs face charges of NZ$76 ($46) per 1,000km, a fee in line with equivalent diesel-powered vehicles. Plug-in hybrid owners must pay NZ$38 per 1,000km, a lower charge because they already pay tax on fuel. “This transition to road user charges is about fairness and equity. It will ensure that all road users are contributing to the upkeep and maintenance of our roads, irrespective of the type of vehicle they choose to drive,” said Simeon Brown, New Zealand’s transport minister, when justifying the policy change.   The charges were slammed by EV lobby groups and green campaigners, which have warned they will slow uptake of non-polluting vehicles and result in plug-in hybrid EV drivers paying more than those driving standard cars. Israel tax authorities are proposing a similar travel usage charge for EVs, which is intended to come into force in 2026 to tackle congestion and the budget deficit, which has soared due to the war with Hamas. But many governments facing a similar drain on fuel tax revenues, such as the UK and Ireland, have so far baulked at introducing unpopular mileage-based road user charges for EVs. Instead, they have begun to phase out or reduce tax breaks for EV drivers to bolster tax collection.    You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.David Metz, honorary professor, Centre for Transport Studies, University College London, said road user charges were not really being talked about by the UK government because they were such a “hot topic” and there had been significant protests linked to previous attempts to raise fuel excise taxes.  “All the politicians and civil servants feel it’s just too difficult at the moment,” he said.But Metz added that a new system of road user charges was needed, not only to replace the “big chunk” of fuel tax revenues lost through the uptake of EVs but also to reduce road congestion and take polluting vehicles off the roads. He said congestion charges in Stockholm and London, which are levied using CCTV and automatic number plate recognition technology, provided a potential model that could be expanded.  In the US at least 38 states have annual registration fees for EV and hybrid car owners, including some states that otherwise offer incentives to buy or charge EVs that extend beyond a $7,500 federal subsidy for eligible vehicles. Last month New Jersey signed into law a $250 annual fee for EV drivers, requiring new buyers to pay four years’ worth of fees up front, totalling $1,000. The Democrat-led state separately offers up to $4,000 in tax credits to buy an EV, plus rebates for home-charging systems. “It’s discouraging. We were glad to be at the forefront with incentives and adoption rates . . . This particular thing with the registration fees seems to go against that,” said Patrick McDevitt, a Tesla driver in New Jersey. Corey Cantor, an electric vehicle analyst at BloombergNEF, said the annual registration fees had come at an early time in EV deployment and risked hampering their growth. “Any time you’re increasing that upfront cost of an EV, it will by definition be problematic for growth,” Cantor said, calling costs one of the main “barriers to adoption”. But slapping registration fees on EVs will not solve the challenges facing US states and federal authorities posed by dwindling petrol taxes. In February the Congressional Budget Office forecast the US Highway Trust Fund, a federal transportation fund financed by fuel taxes that pays for road and mass transit projects, would be insolvent by 2028 without policy reforms. Climate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More

The Bank of England is likely to signal growing confidence that UK inflation is heading in the right direction, despite recent setbacks in the US, as policymakers weigh the case for an immediate interest rate cut this week.Investors expect the Monetary Policy Committee to keep the key rate of interest unchanged at 5.25 per cent when it meets on Thursday. But recent statements suggest two or more officials are already prepared to vote for a downward move.Dave Ramsden, a BoE deputy governor, last month raised the prospect of a lower inflation forecast when the central bank sets out its latest projections. Some economists read his speech as a sign he feels confident enough to advocate rate cuts.External MPC member Swati Dhingra already voted for rate reductions in February and March. BoE governor Andrew Bailey has hinted he is also getting close to advocating an easing in monetary policy, telling the Financial Times in March that rate cuts were “in play” and that recent data showing inflation was easing was “encouraging to me”.“The market is underestimating the push among MPC members led by Bailey to start cutting rates soon, and while I don’t think it will happen on Thursday they should have enough votes in June,” said Jens Larsen of Eurasia Group, a consultancy.“The underlying data in the UK is quite weak. I don’t see inflationary pressures intensifying, and the UK is a very different place from the US. There is good reason for them to get on with it,” he added.Financial markets are only fully pricing a UK rate reduction from September, as investors point to the US Federal Reserve’s problems with stubborn inflation as grounds to suspect other central banks will tread carefully before easing. The OECD on Thursday said it did not expect the BoE to start reducing rates before the third quarter, as it flagged “sticky” services price growth.Fed chair Jay Powell on Wednesday warned it would take longer than expected for the US central bank to “gain confidence” that inflation was on a sustainable path to 2 per cent. The comments follow a string of disappointing data, including an increase in the Fed’s preferred metric of price growth to 2.7 per cent in March — above analysts’ forecasts.However, leading central bankers in Europe including Bailey and Christine Lagarde of the European Central Bank have been insisting that they will not suffer the same difficulties getting inflation back to target because price growth in Europe and the UK is less demand-led than in the US.“European inflation dynamics are somewhat different,” Bailey said during a visit to Washington in April.UK inflation eased slightly less than expected in March, falling from 3.4 per cent to 3.2 per cent rather than the 3.1 per cent analysts had forecast, while annual growth in the price of services also slowed less than expected, from 6.1 per cent to 6 per cent.However, Bailey quickly made clear that he viewed the BoE’s broader outlook as “pretty much on track” with the February inflation forecast, adding that he expected a further sharp drop in price growth in next month’s numbers.In March, he emphasised that he did not need to see a halving of growth in wages and prices — from about 6 per cent — to feel confident that headline inflation was durably headed to the 2 per cent target. “You need to have confidence that it’s heading in that direction,” he said.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The key question is what MPC members need to see that would allow them to start reducing rates, with markets putting the probability they will remain unchanged at more than 90 per cent.Recent increases in gilt yields and market expectations for BoE rates mechanically push down the bank’s upcoming inflation forecast, said George Buckley of Nomura, although there could also be forces working in the other direction — including notably higher oil prices.“Combining these influences, we think the bank might show a slightly lower end-horizon forecast for inflation,” he said in a note.Ramsden told an event in Washington last month that he saw downside risks to the BoE’s February inflation forecast, which might suggest he sees a good case for an immediate rate reduction.But BoE chief economist Huw Pill subsequently sent a clear signal that he did not believe the conditions were in place for an immediate cut, stating he had “a relatively cautious approach to starting to reduce bank rate”.Pill is likely to be joined by external MPC members Jonathan Haskel, Megan Greene and Catherine Mann in advocating unchanged rates this week.After years of above-target inflation, which peaked at more than 11 per cent, policymakers including Pill are still wary of easing too soon given the risks of high inflation getting embedded in public expectations. Haskel told the FT in March that he was a “gradualist” when it came to rate cuts given the need to be sure that underlying inflation has been decisively quashed. Crucially, the BoE will have two fresh readings under its belt when it convenes in June, as well as extra jobs numbers.Allan Monks, UK economist at JPMorgan, said he expected this week’s meeting to leave “ambiguity that keeps several options open” on the timing of rate reductions.He added: “Members have been at pains to argue they are not following the Fed, and do generally seem happy to signal that an easing shouldn’t be too far off given relative demand weakness in Europe.” More

The government’s gross debt is expected to come in at A$904 billion ($598.54 billion) for the year ending June 2024, A$152 billion lower than projected by the previous government before it lost an election in 2022, according to an extract of the budget due to be released next Tuesday, seen by Reuters. That will save around $80 billion on interest payments over the next decade, with gross debt now expected to peak at 35.2% of the gross domestic product in the 2026-2027 year, lower and earlier than the previous estimate of a peak of 35.4% in 2027-2028. “Because of our efforts, debt in next week’s budget will be much lower than was budgeted for by our predecessors,” Treasurer Jim Chalmers told a press conference on Tuesday. Chalmers is expected to deliver a second budget surplus on May 14, the first back-to-back surpluses in almost two decades. ($1 = 1.5103 Australian dollars) More

The consumer price index rose 3.8% in April from a year earlier, below the 4.1% median forecast in a Reuters poll, and within the central bank’s 3.5% to 4.3% forecast for the month. The April data brought year-to-date inflation to 3.4%, within the central bank’s 2% to 4% target for 2024.The core inflation rate, which strips out volatile food and fuel items, eased to 3.2% in April from March’s 3.4%. A Reuters poll had forecast April core inflation at 3.3%. More

TOKYO (Reuters) – The yen continued to drift lower against the dollar on Tuesday as gaping interest rate differentials weighed on the currency, despite fresh warnings from Japanese officials following two rounds of suspected dollar-selling intervention last week.The Australian dollar hovered close to a two-month high versus its U.S. counterpart with the Reserve Bank of Australia widely expected to keep rates steady later in the day, and traders on watch for a more hawkish stance from Governor Michele Bullock.The U.S. dollar gained 0.22% to 154.235 yen in early Asian trading, adding to its 0.58% rally from Monday.On Friday, it sank as low as 151.86 yen for the first time since April 10, as softer-than-expected monthly U.S. jobs data added to the losses following what Bank of Japan data suggested may have been a total of some 9 trillion yen ($58.37 billion) in official intervention.Japan’s Ministry of Finance has refrained from commenting on whether it was behind the dollar selling, but top currency diplomat Masato Kanda repeated on Tuesday that the government “will continue to take the same firm approach” to disorderly yen moves.However, with a Federal Reserve rate cut likely to take some time and the BOJ taking a cautious approach to tightening following its first rate hike since 2007 in March, the gap between ultra-low Japanese long-term yields and their U.S. counterparts is a vast 370 basis points.”USD/JPY likely remains attractive to market participants because of the still wide U.S.‑Japan interest rate differentials and healthy risk appetite,” Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), wrote in a client note.”The risk is USD/JPY creeps back up and forces Japan’s Ministry of Finance to intervene,” but barring that, the dollar is likely to see a period of consolidation into the Bank of England policy decision on Thursday, she said.The U.S. dollar index – which measures the currency against six major peers, including the yen, sterling and euro – was little changed at 105.13, after dipping as low as 104.52 on Friday.The euro was steady at $1.0765 and sterling was flat at $1.2565.The Aussie edged up 0.17% to $0.6636, heading back towards the high of $0.6650 from Friday, a level last seen on March 8.All but one of the 37 economists surveyed in a Reuters poll expect the RBA to keep rates on hold, with the other predicting a quarter point rate hike, amid stubbornly high inflation.At the RBA’s last meeting in mid-March, policymakers watered down their tightening bias, although Bullock declined to say whether policy has shifted to neutral, saying risks were “finely balanced”, and pushed back immediate rate cuts.”A different set of central bankers would have had the policy rate higher sooner on the same set of data,” Taylor Nugent, a markets economist at National Australia Bank (OTC:NABZY), wrote in a note.”The RBA’s stripes as a reluctant hiker have left the near-term risks from May to August to a hike rather than a cut, even at this late stage of the tightening phase.”($1 = 154.2000 yen) More