Aurelia Butler

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersAlmost nobody thought the fashionable question in the northern hemisphere spring would be whether the Federal Reserve would soon have to raise rates again. But that is where we are. Definitively hot US inflation data, unlike that in Europe or Japan, has changed the outlook. Instead of the six to seven quarter-point rate cuts in 2024 that financial markets expected at the turn of the year, they are now expecting roughly one. In options markets, many participants put a probability close to 20 per cent on the next move from the Fed being a rate rise.At the end of the Fed meeting on Wednesday, Jay Powell is likely to be careful not to rule out a hike. The Fed chair will probably stick to his mantra that the committee has become less confident about the ability to cut rates in the short term. Others have been less circumspect. Larry Summers, former Treasury secretary, said earlier this month: “You have to take seriously the possibility that the next rate move will be upwards rather than downwards.” He added that recent inflation data indicated the neutral rate of interest was “way above” the 2.6 per cent level believed by the Fed. To corroborate that, the Fed’s favoured inflation measure has been rising again. Annualised three-month PCE inflation on most measures exceeded annualised six-month inflation however you cut the data. And six-month inflation exceeded 12-month inflation, suggesting there is momentum in US prices and it is not good. 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 better news is that there are many reasons to dispute the idea that the Fed will soon be hiking US interest rates from their 5.25 per cent to 5.5 per cent range. Most important is the consideration of both supply and demand trends to assess inflationary pressures. The first area to look at is the US labour market. There is a lot of labour market data coming out this week after this article goes to print, so caution is required. That said, recent trends still show big improvements in supply of workers from inactivity and immigration hand-in-hand with rapid gains in labour productivity. The combination boosts the ability of the US economy to grow without sparking inflation. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.This improvement in labour supply and productivity has allowed labour market indicators to cool from highs in 2022 despite continued rises in employment.The best way to show this is to get a bunch of labour market indicators and compare their strength with average pre-pandemic levels and their normal variation. This is the “goldilocks” area in the chart below, in which the data sat about around two-thirds of the time between 2001 and the end of 2019.Whether you look at job openings per unemployed person, the quits rate, the Atlanta Fed’s wage growth measure or the Fed’s preferred Employment Cost Index for private sector wages and salaries, the data is moving back towards the goldilocks zone. In many cases, the chart shows it is already back to pre-pandemic levels.This range of data suggests that the Fed’s interest rate is restrictive and bringing the labour market into balance, but that it also has a bit further to go before officials can be comfortable. It does not suggest further rate rises are needed. 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 second broad set of data showing the economy is reacting to higher interest rates comes from the traditionally interest rate sensitive areas of housing and lending. The data is not as well behaved as those showing the labour market, but it still indicates that existing home sales, consumer lending and credit card delinquencies (inverted) are coming back into more normal ranges having been hot. This again suggests the Fed got it right in thinking economic activity and demand is slowing relative to potential supply. You would not expect to see these trends if the monetary policy transmission mechanism was broken. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.A third test is simply to look at traditional measures of inflation and note that these are still well down on last year when measured on an annual basis. There is much wrong with the way Europe measures owner-occupied housing in its harmonised index of consumer prices (it ignores it), but on an equivalent measure, core US inflation is already down to 2 per cent. The US is also well on its way to 2 per cent on the core consumer price index (CPI) measure and the personal consumption expenditure deflator (PCE).Disinflation has not stopped even if it has been disappointing of late.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 fourth argument against rate rises is important although a little circular. Since the start of the year, the movement upwards in expected interest rates has added to the bite exerted by the official overnight rate of 5.25 to 5.5 per cent. Financial conditions have tightened, borrowing rates have risen and this makes the stance of monetary policy tighter than it was at the turn of the year. Of course it is wrong to take this argument too far, as Lord Mervyn King did almost 20 years ago when the former Bank of England governor postulated a “Maradona” theory of interest rates. He suggested the central bank could allow financial markets to do the work for officials, a prediction that was falsified a little over a year later when the BoE raised rates sharply in 2006 before slashing them in the global financial crisis. These four reasons still suggest the Fed’s tightening from 2022 is restricting the US economy and helping to bring inflation down. After three consecutive months of bad US inflation data, however, it is also important to point out what might be wrong with the reasoning above. The data showing a cooling US economy could start to turn and that would be something to worry about. A continuation of recent trends in inflation data should also raise concerns. Disinflation needs to reassert itself soon or it will be hard to dismiss the idea that there is excess demand. I’ve put annualised six-month inflation as the default in the graphic below, but if you want to scare yourself, click on the chart and look at the three-month annualised rates. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Finally, there are still many parts of the US economy that do not seem to be sensitive to interest rates and it will be problematic if these continue to run hot. In the US GDP statistics, despite the cooler 1.6 per cent annualised headline growth rate, quarterly growth rate for real consumer spending of 2.5 per cent was only slightly weaker than at the end of 2023. The savings rate of 3.6 per cent in the first quarter was again low, suggesting few worries among households regarding activity levels. In the jobs market, cooling in vacancies, quits and wage growth has not been matched with a slowdown in government, health and hospitality jobs growth. With a Fed meeting and vacancy, wage and jobs data coming this week, I will check back next week to see if signs of the disinflationary process are reasserting themselves. I am ready with the humble pie if not. But for now, the evidence suggests the next move in the Fed’s rates is still downward. What I’ve been reading and watchingIn two columns, Martin Wolf argues the ECB should start cutting rates soon while the Fed should remain on hold “but cannot wait forever”. On the UK, he correctly argues that the BoE should be willing to ask what went wrong in the inflationary episode and what lessons can be learnt. It is remarkable that the BoE (and others) find this question so uninteresting The Wall Street Journal (£) reports that Donald Trump’s allies are drawing up plans to weaken the Fed’s independence. There is no sign, however, that this has support from the Republican presidential nominee. So far, it’s just people seeking to curry favour with Trump Interest rate moves in emerging markets are diverging. Indonesia’s central bank raised rates last week and a similar increase in Nigeria has boosted its currency. Central banks in Ukraine, Hungary, Argentina and Costa Rica all cut rates in the past weekThe question of UK interest rates will matter for the next UK government. I argued that people are being too negative about prospects for a Labour government. The optimists have a story to tellA chart that mattersLast week the Bank of Japan held interest rates at the new range between zero and 0.1 per cent, expressing few concerns about the declining value of the yen. “Over to you Ministry of Finance,” the BoJ seemed to be saying. Sure enough, on a public holiday on Monday, the yen arrested its decline amid speculation of heavy intervention from the Japanese authorities. The MoF never confirms or denies intervention immediately. It also probably does not like others pointing out the decidedly patchy history of Japanese currency intervention. As the chart below shows, it worked in 2011 and eventually in the mid-1990s, but often fails to achieve its ambition. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Inflation has fallen quickly over the past year but the outlook further out remains clouded by rising energy costs, stubbornly high services inflation and continued geopolitical tensions. De Cos said that inflation was expected to continue declining in the coming quarters, although at a slower pace than last year due to some upward base effects.”The ECB’s governing council considers that if this inflation outlook is maintained, it would be appropriate to start reducing the current level of monetary policy tightening in June,” De Cos, who is also head of the Spanish central bank, said in the Bank of Spain’s annual report.Given the level of uncertainty, he said the ECB would continue to follow a data-dependent approach where decisions are taken at each meeting, without pre-committing to a specific rate path.Regarding Spanish lenders, De Cos said the Bank of Spain was considering setting a “positive level” for banks’ countercyclical capital buffer, now at 0%, and would announce its decision whether to activate it soon.The buffer seeks to mitigate or prevent cyclical risks caused by excessive growth in aggregate credit by requiring lenders to build insurance reserves during times of strong growth which would then be available in the case of a downturn. More

BEIJING (Reuters) -China will step up support for the economy with prudent monetary and proactive fiscal policies, including interest rates and bank reserve requirement ratios (RRR), the Politburo of the Communist Party was quoted by state media as saying on Tuesday.The party’s top decision-making body said it would be flexible with policies in the world’s second-biggest economy, which grew faster than anticipated in the first quarter but is still facing headwinds.The comments by the Politburo were largely in line with expectations, including modest stimulus steps and some support for the property sector with a focus on dealing with housing inventories.But analysts said the comments showed increased urgency to deal with structural woes. “The sustained recovery and improvement of the economy still face many challenges,” the Politburo said, according to Xinhua news agency, after a meeting chaired by President Xi Jinping. The Politburo pointed to problems such as insufficient demand, huge pressures on firms, risks and hidden dangers in key areas of the economy.”At the same time, it must be noted that China’s economic foundation is stable, with many advantages, strong resilience, and great potential,” it said.China has set an economic growth target for 2024 of around 5%, which many analysts say will be a challenge to achieve without much more stimulus.China’s manufacturing and services activity both expanded at a slower pace in April, official surveys showed on Tuesday, suggesting some loss of momentum for the economy.”We need to flexibly use policy tools such as interest rates and reserve requirement ratios, increase support for the real economy, and reduce the overall cost of social financing,” the Politburo said.The People’s Bank of China has in recent months delivered modest cuts in RRR and interest rates to support economic growth.”The meeting hints that there might be cuts in interest rates and RRR in the second quarter,” said Xing Zhaopeng, senior China strategist at ANZ. Amid tepid domestic demand and a property crisis, Beijing has ramped up infrastructure investment and turned to investing in high-tech manufacturing to lift the economy this year.China will issue ultra-long term special treasury bonds as soon as possible, and speed up the issuance of local government special bonds to maintain the necessary intensity of fiscal expenditure, the news agency quoted the Politburo as saying.Beijing plans to issue 1 trillion yuan ($138.14 billion) in special ultra-long term treasury bonds to support some key sectors.”CATCH UP WITH THE TIMES” The party’s central committee will gather in July for a key meeting known as a plenum, the third since the body of elite decision makers was elected in 2022, focusing on reforms amid “challenges” at home and complexities broad.”Reform and opening up is an important tool for the party and the people’s cause to catch up with the times with great strides,” Xinhua quoted the Politburo as saying.Chinese leaders have signalled their willingness to push reforms, amid growing calls from policy advisers for changes to tackle economic imbalances and return to a path of pro-market policies at the cost of increased state control of the economy.Proposals include relaxing urban residency permits to boost consumption, creating a level playing field for the struggling private sector and redesigning the tax system to tackle the root cause of surging municipal debt.”China’s senior leadership has today signalled further fiscal and monetary support for the economy and renewed efforts to stabilise the housing market,” Capital Economics said in a note.”There are also some signs that the leadership may be getting more serious about addressing the economy’s structural problems that threaten the medium-term outlook.” China will coordinate and improve policies to reduce housing inventories and optimise policy measures for new housing, the Politburo added.”The meeting proposed to resolve home inventory and optimise new homes, which means China may allow local governments (to) buy commercial houses…and turn them into affordable houses. This could be a significant turning point for the supply side of the property industry,” said ANZ’s Xing.Shares of beleaguered Chinese property developers have rallied this week on speculation more stimulus measures will be unveiled soon to clear a glut of unsold homes. New home prices fell at their fastest pace in more than eight years in March as developers’ debt woes dragged on demand.Top leaders also emphasised the need to develop “new productive forces” according to local conditions, Xinhua said.The term “new productive forces” was coined by President Xi last September, underscoring the need for economic development based on innovation in advanced sectors.($1 = 7.2392 Chinese yuan renminbi) More

With new economic projections from policymakers not due until the June 11-12 meeting, the statement and Powell’s comments will be the only guide to whether officials still expect to cut rates this year, and by how much, after inflation over the first three months of the year seemed to stall above the Fed’s 2% target. Before policymakers begin to ease borrowing costs, they say they want to see more data confirming that inflation will continue to fall, even if slowly. Here’s a recap of key data watched by the Fed:INFLATION (PCE released April 26; next release CPI May 15):The personal consumption expenditures (PCE) price index, which the Fed uses to set its inflation target, accelerated to a 2.7% annual rate in March, up from 2.5% in the prior month. Core inflation stripped of volatile food and energy prices rose 2.8%, matching the rise in February.Neither number is likely to boost confidence among Fed policymakers that inflation will steadily return to the central bank’s target. But neither will it set them back from thinking the jump in inflation early this year may just have been a “bump” on the way to lower price pressures. The March numbers had already been anticipated by Powell in earlier remarks, and the release of the data matched his expectations. The Consumer Price Index (CPI) accelerated in March to a 3.5% annual rate versus 3.2% in February, a blow to Fed officials hoping for signs inflation would resume its decline after progress stalled at the start of the year. Core prices, excluding food and energy costs, rose at a 3.8% annual rate, the same as in the month before. The CPI numbers led investors to push back to September their expectations for an initial Fed rate cut, and they now see only two quarter-percentage-point cuts this year. Rising gasoline and shelter costs again contributed the bulk of the CPI increase, defying hopes among some policymakers that housing inflation is on the verge of a steady decline.RETAIL SALES (Released April 15; next release May 15): Consumer spending rose more than anticipated in March, and upward revisions to earlier data again defied expectations that stressed households would pull back and slow the economy. Data for March showed retail sales rose 0.7%, more than twice the figure projected by economists in a recent Reuters poll. The unexpected jump is likely to add to already growing sentiment among Fed officials that there is no urgent need to cut rates in an economy that is showing little sign of buckling under the pressure of current credit conditions. EMPLOYMENT (Released April 5; next release May 3):U.S. firms added a larger-than-expected 303,000 jobs in February, and employment gains in the previous two months were revised up by 22,000. The unemployment rate fell unexpectedly to 3.8%, marking the 26th straight month below 4% – the longest such run since the 1960s – and prompting Richmond Fed President Thomas Barkin to remark: “That’s a quite-strong jobs report.”Fed officials have become more comfortable with the idea that continued strong job growth could still allow inflation to fall, especially if the supply of labor keeps growing and wage growth eases. Both did in March: The workforce grew by 469,000, the most since last August, and annual wage growth eased to 4.1%, the lowest rate of increase since June 2021. Still, that rate is above the 3.0%-3.5% range that most policymakers view as consistent with the Fed’s inflation target.JOB OPENINGS (Released April 2, next release May 1)Powell keeps a close eye on the U.S. Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings available to each person who is without a job but looking for one. The ratio had been falling steadily towards its pre-pandemic level, but since October has remained in the 1.35-1.43 range, higher than the 1.2-to-1 level seen before the health crisis. It fell in the most recent release, for February, as the number of people seeking work rose, pushing up the unemployment rate.Other aspects of the survey, like the quits rate, have edged back to pre-pandemic levels. More

WASHINGTON (Reuters) – U.S. central bankers began spreading rate-cut fever late last year, with the economy seemingly on a clear path back to low inflation and officials projecting a steady drop in borrowing costs this year, but since then the policymaking process has essentially ground to a halt.The Federal Reserve’s benchmark overnight interest rate has not budged from the 5.25%-5.50% range since July and won’t be touched at a two-day policy meeting that concludes on Wednesday. Now it seems it may not be changed for a while yet.Inflation has gone sideways since late last year – with some policymakers seeing a risk that progress is stalling – and the outlook for interest rate cuts has shifted steadily outwards with some doubt now about whether they will fall this year at all.How to describe where the Fed stands right now? Unlike earlier in the year when the central bank’s direction of travel towards rate cuts seemed clear – just six weeks ago officials saw three quarter-percentage-point cuts coming in 2024 – the recent language of veteran Fed watchers tells a muddied tale.ON THE SIDELINESTim Duy, chief U.S. economist at SGH Macro Advisors, puts the Fed in the place of an athlete waiting for the moment to play, with coming data on shelter inflation holding a central place in whether policymakers can enter the game with rate cuts.The cost of housing has been driving inflation of late, and Fed officials still expect it to decline and lead headline inflation lower. But strong data keep undercutting confidence in a fast return of inflation to the Fed’s 2% target. Some of the alternate shelter indicators watched by policymakers have shown no clear break yet.As a result, Fed Chair Jerome Powell is expected in his press conference on Wednesday to “reinforce recent messaging that while (Federal Open Market Committee) participants still anticipate cutting rates when they have confidence that inflation is on a path to price stability, they don’t anticipate having such confidence anytime soon,” Duy wrote. Policymakers are “confident that shelter inflation is set to fall later this year. Under this view, the disinflation is still coming, and it has only been delayed.”‘PURGATORY’KPMG’s chief economist, Diane Swonk, puts Fed officials in a deeper state of woe, what she calls “monetary policy purgatory” not so much to pay for past sins but because it’s no longer certain which direction they will be going.With inflation running faster-than-expected through the first months of this year, the Fed is “not quite sure it has done enough to derail inflation and cut rates; a further acceleration in inflation would force the Fed to consider additional rate hikes,” Swonk wrote.”The key question is how far the Fed will want to go to shift the tenor of the debate” in the upcoming statement, Swonk wrote, putting weight on how the March 20 statement was framed in terms of the conditions under which it would be “appropriate to reduce” the benchmark interest rate.Removing the word “reduce” or shifting to a more balanced view of the next policy step would send a particularly strong message of how recent inflation data has been absorbed.Evercore ISI Vice Chairman Krishna Guha puts the Fed on a sort of byroad, stalled en route to a final destination that may itself become less certain.For now he thinks Powell and the other Fed officials will try hard to keep the current baseline view of coming rate cuts intact while acknowledging recent data have not been helpful.Guha said he expects “no changes to the statement policy language,” with Powell using his press conference to repeat that the central bank is “well positioned” to just stay on hold as long as needed for the current level of rates to bring inflation down, and cut once it becomes clear that it will.But depending on how upcoming wage and other data perform, this meeting “could end up just being a way station on the journey to a more far-reaching hawkish reset.” PATH OR TRIBUTARY?Chicago Fed President Austan Goolsbee, known for colorful turns of phrase, has captured the shifting mood of a more complicated channel for the central bank to navigate. Late last year he deemed the Fed on a “golden path” in which inflation was falling without any associated rise in the unemployment rate or drop in growth as has been the case in the past.In comments earlier this month he kept the outcome the same but changed the surrounding geography.The economy in 2023 showed “that maybe we could get the inflation down without having a big recession,” Goolsbee said. “Can it continue in 2024? I hope so. But it is not going to be as extreme … The ‘golden tributary,’ not the ‘golden path.'” More

The company reported a decrease in net income attributable to common stockholders to $215.2 million, or $3.21 per share, from $298.3 million, or $4.31 per share, in the first quarter of 2023. This quarter’s earnings per share fell short of the analyst consensus of $3.39. Revenue saw a slight uptick of 1.5% to $7.4 billion, but still did not meet the analyst expectations of $7.57 billion.The company’s performance in the first quarter was marked by robust service and parts revenue in the retail automotive sector, which grew 9% to a record $746 million. Despite this, profitability was hampered by higher interest costs and lower equity earnings from Penske Transportation Solutions (PTS), primarily due to decreased commercial rental utilization and consumer rental revenue, alongside higher interest rates and average debt balances.Roger Penske, Chair and CEO, commented on the cost control measures, noting the improvement in selling, general, and administrative expenses as a percentage of gross profit to 70.7%.Retail automotive dealerships delivered 126,864 new and used units, a 4% increase, with revenue in this segment rising 3% to $6.5 billion. However, same-store retail automotive gross profit declined by 1%, including a 4% decrease on a same-store basis.The retail commercial truck segment faced challenges with a 12% decline in unit sales due to inventory shortages, although a stronger sales mix led to a 190 basis points increase in gross margin.The company’s liquidity remained strong at $1.7 billion, and it continued its capital allocation strategy by repurchasing shares and completing strategic acquisitions. Penske Automotive acquired Rybrook Group Limited, which is expected to contribute an estimated annualized revenue of approximately $1 billion, and announced the pending acquisition of additional dealerships in Australia.Despite the mixed financial results, Penske Automotive’s focus on cost control and strategic growth through acquisitions indicates a forward-looking approach to navigating the current market challenges. The company’s ability to maintain liquidity and manage leverage, with a leverage ratio of 1.1x, demonstrates financial prudence in a fluctuating economic landscape.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More