Aurelia Butler

LONDON (Reuters) – Global shares rose on Tuesday, driven by a recovery on Wall Street, where investors focus on earnings reports from the U.S. megacaps, while the yen hit a new 34-year low against the dollar, prompting a warning from Japanese officials. The MSCI All-World index, which on Friday hit a two-month low, was up 0.3%, lifted by gains in Europe, where the FTSE 100 scaled a record high, while the STOXX 600 traded at one-week highs thanks to the technology sector.Adding to the optimism was a series of surveys of business activity that showed Germany returned to growth in early April after months of contraction, while activity in the broader euro zone expanded at its fastest clip in nearly a year.Investors are less concerned right now about the threat of a major re-escalation of tension in the Middle East and more focused on earnings.Against that backdrop, gold is heading for a week-on-week drop of 3.2%, its largest this year, while oil has backed off last week’s highs.”We are turning a bit more positive on risk sentiment. There still remains a fair bit of uncertainty around geopolitics and rising U.S. real yields, but we are more positive than we were a week ago,” Mohit Kumar, a strategist at Jefferies, said.The dollar retreated from its recent highs, but is comfortably supported by the view among investors that no rate cuts will be forthcoming any time soon from the Federal Reserve and by the climb this month in Treasury yields to their highest since November.On Wall Street, big tech shares outperformed ahead of quarterly results this week, sending the Nasdaq 1.1% higher. AI darling Nvidia (NASDAQ:NVDA) gained 4.4% while Amazon.com (NASDAQ:AMZN) rose 1.5% and Alphabet (NASDAQ:GOOGL) jumped 1.4%, although Tesla (NASDAQ:TSLA) dropped 3.4% after it cut prices in its major markets.Tuesday brings a wealth of big-cap earnings, including Tesla, PepsiCo (NASDAQ:PEP), UPS, Lockheed Martin (NYSE:LMT) and Halliburton (NYSE:HAL)”Odds are the earnings reports that we see over the next few weeks will be positive, but obviously there’s still issues around what the Fed will do the next,” said Shane Oliver, chief economist at AMP (OTC:AMLTF), noting that security concerns also remained. “It’s too early to say that problems in the Middle East have gone away.””There are lots of things that could cause volatility between now and the end of the year. And so we’re probably coming to a more constrained, more volatile period for markets.”Aside from Tesla, Meta Platforms (NASDAQ:META), Alphabet and Microsoft (NASDAQ:MSFT) will release earnings this week. MEGA WOBBLE?UBS on Monday downgraded its rating on the mega-cap companies, warning that profit growth momentum of the so-called Big Six technology stocks could “collapse” over the next few quarters.U.S. business activity, quarterly economic growth and a measure of monthly inflation top the macro data bill this week.Traders now expect the first Fed rate cut to come most likely in September and see just 40 basis points’ worth of cuts this year, compared with expectations for 150 bps of cuts at the beginning of the year.Treasuries have been a big casualty of the shift in thinking. The yield on the two-year note, the most sensitive to changes in rate expectations, was up 1.8 bps at 4.898%.In Europe, the picture is different. The European Central Bank is expected to cut in June and this divergence is weighing on the euro. It was last up 0.14% at $1.0667, not far off last week’s five-month low of $1.0601. The yen slid to another 34-year low on Tuesday, but recovered modestly to trade flat at 154.79 to the dollar. Japan’s finance minister Shunichi Suzuki said last week’s trilateral meeting with his U.S. and South Korean counterparts laid the groundwork for Tokyo to take appropriate action in the foreign exchange market.This is the clearest warning yet from Japanese monetary authorities that tolerance for the slide in the currency is wearing thin and official intervention to prop it up is likely.Oil pared earlier gains and fell modestly as investors continued to assess the situation in the Middle East. Brent futures were last down 0.4% at $86.63 a barrel, while U.S. crude fell 0.5% to $81.49.Gold fell for a second day, dropping 1% to $2,320 an ounce, after shedding 2.7% the day before, as investors took profit on the 12% rally in the price so far this year. More

The company now expects 2024 operating profit of $6.2 billion to $6.6 billion, compared with its earlier forecast of $6 billion to $6.5 billion. Adjusted earnings for the year are estimated at $3.80-$4.05 per share, compared with $2.95 per share in 2023. Shares of the aerospace giant were up 4% in trading before the bell.Earlier this month, GE completed its breakup into three companies focused on aviation, energy and healthcare.Wall Street analysts have been bullish on the prospects of the aerospace business, with some calling it the “most appealing” of mega-cap U.S. aerospace companies.Analysts say planemaker Boeing (NYSE:BA)’s production challenges are also expected to be a near-term benefit for GE Aerospace as it increases demand for older engines and allows the company to supply more of its LEAP engines in the aftermarket.The company has a dominant share in the engine market for narrowbody jets and enjoys a strong position in widebodies. More than 70% of its commercial engine revenue comes from parts and services.The business has been benefiting from a surge in demand for after-market services as a strong rebound in travel and a shortage of aircraft due to production and engine issues has forced carriers to keep older jets in the air for longer.CFM International, GE’s joint venture with Safran (EPA:SAF), is the sole supplier to Boeing’s 737 MAX family of jets, which are currently being produced at a lower rate due to an ongoing safety crisis.Engine makers typically sell engines to airlines at a discount and recoup the money by selling parts and services over the life of the engine. “We have yet to see a pick up in older GE powered aircraft being retired, as the supply/demand imbalance in new aircraft deliveries is being exacerbated by the 737 ramp halt and the GTF (geared turbofan) engine recall,” Vertical Research Partners analyst Robert Stallard wrote in a note earlier this month.Last month, GE Aerospace forecast an operating profit of about $10 billion in 2028.On Tuesday, GE Aerospace said GE’s first-quarter adjusted profit, which included results for both aerospace and energy businesses, rose 76% to $1.5 billion, or 82 cents per share. The energy business GE Vernova completed its spin-off on April 2. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of England should be wary of cutting rates too soon after years of above-target inflation, a senior policymaker has warned, as he reiterated the need for “restrictive” monetary policy. The pound rose against the dollar after Huw Pill, the BoE’s chief economist, said that falls in headline inflation were not enough reason to ease policy, though a reduction in interest rates from 5.25 per cent was “somewhat closer”. “After several years of above-target inflation rates and given the threat of persistent inflation dynamics becoming embedded in expectations, in my view there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate,” Pill said on Tuesday. “This assessment further supports my relatively cautious approach to starting to reduce Bank Rate.”Pill’s words suggest he is not yet ready to vote for a reduction in interest rates as the Monetary Policy Committee prepares to meet on May 9. His assessment of inflation risks contrasted with Sir Dave Ramsden, BoE deputy governor, who said last week that inflation could hold around the bank’s 2 per cent target for the next three years. The pound traded 0.4 per cent higher against the US dollar at $1.24.Senior BoE officials including Ramsden and BoE governor Andrew Bailey have in recent days struck an optimistic note about the battle against inflation as price growth falls to 3.2 per cent in March — far below the double-digit levels inflation hit in mid-2022. Bailey said last week that the latest inflation data was “pretty much on track” with the central bank’s February forecasts as he insisted there was less “demand-led” inflation in the UK than in the US.In a speech hosted by the London campus of Chicago Booth School of Business, Pill said he believed there had been “little news” in recent months on inflation. “We are now seeing signs of a downward shift in the persistent component of inflation dynamics,” he said, in a reference to services price inflation, pay growth, and the tightness of the UK labour market. “But we still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2 per cent inflation target on a sustainable basis.”Official figures last week showed that while headline inflation retreated somewhat in March, annual growth in the price of services slowed less than expected, from 6.1 per cent to 6 per cent. Declines in closely watched indicators that pointed to persistent inflation had been “tentative”, said Pill, adding that the MPC still needed to maintain restrictive monetary policy. A cut in the key rate of interest would not entirely undo that restrictive stance of policy given where rates stood, he added.This suggests that Pill sees scope to modestly reduce rates while still keeping downward pressure on inflation. But his comments indicated that the time was not yet ripe for an initial move.Recalling a speech he gave in Cardiff in March, Pill said that his “baseline scenario” then had been that the time for cutting the BoE’s key rate remained “some way off.” “Taken together, the absence of news and the passage of time have brought a Bank Rate cut somewhat closer,” Pill said on Tuesday. “But the same absence of news gives me no reason to depart from the baseline that I established in Cardiff.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK business activity rose more than expected in April, marking the fastest expansion since last May, according to a closely watched survey that also flagged increasing cost pressures in the economy.The S&P Global flash UK composite output index rose to 54 in April from 52.8 in March, well above the 52.6 forecast by economists polled by Reuters, according to data released on Tuesday. A figure higher than 50 indicates expansion.Chris Williamson, chief business economist at S&P Global Market Intelligence, said the UK’s economic recovery “continued to gain momentum” as improved growth in the services sector offset a renewed downturn in manufacturing.He noted the data suggested the UK economy was growing by 0.4 per cent in the second quarter, following an estimated 0.3 per cent expansion in the first three months of the year. However, the data also indicated a steep increase in average cost burdens, which had grown at their fastest pace since May 2023. The PMIs pointed “to growth well in excess of Monetary Policy Committee forecasts and robust inflation pressure”, said Rob Wood, economist at the consultancy Pantheon Macroeconomics.In February, the Bank of England forecast economic growth to remain stagnant at about 0.1 per cent in each quarter of 2024. The survey respondents linked stronger input price inflation to higher staff wages, in part reflecting the nearly 10 per cent annual increase in the national living wage from April. Prices charged by businesses rose at a slower pace than in the previous month but strong demand combined with rising costs could soon reverse that trend, according to the report.“The upward pressure on inflation will add to concerns that a sustainable path to below target inflation has not yet been achieved,” said Williamson. The rise in business activity was exclusively driven by the services sector, with the index increasing to an 11-month high of 54.9 in April, from 53.1 in the previous month. Businesses reported rising consumer spending supported by an increase in real wages, easing inflation and low unemployment. The UK composite figures were higher than 51.4 for the eurozone. Salomon Fiedler, economist at the bank Berenberg, said the figures suggested “the economic rebound started slightly earlier in the UK than on the continent”. More

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 newslettersFinancial markets have capitulated in their expectations of US interest rate cuts this year. At the start of January, they expected at least six quarter-point cuts by the end of 2024. Now they are only sure about one. Traders are even building up bets that the next move might be up. Borrowing costs at the end of 2024 are therefore highly uncertain. Do we know anything more about where interest rates in the US and elsewhere are ultimately heading?Economists define this destination as R-star or the neutral rate of interest. This is the rate that balances desired savings and investment and would apply when output is at an economy’s potential and inflation was at target. It cannot be seen but can be estimated. We know R-star occupies the Fed because chair Jay Powell said last year he was “navigating by the stars under cloudy skies”. The neutral rate was unknown, he said, but the Fed policy rate then (and now) of between 5.25 per cent and 5.5 per cent was restrictive and “well above mainstream estimates of the neutral policy rate”. Even though the median Fed official estimates R-star to be 2.6 per cent, the important question with a resilient US economy and higher than expected inflation is whether the committee can know this. The dilemma also applies to all other central bankers. The easy days There was a time when all estimates of the neutral rate, whether they were based on market prices, structural models or something in between, gave similar answers. R-star had been high and declined until the pandemic. The following well-known chart shows market rates for 10-year government bonds in the US, eurozone, Japan and UK between 1980 and the pandemic in 2019. This can be seen as a very rough proxy for R-star and other economic estimates gave similar results. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Economists and policymakers told many stories explaining the decline in nominal and real interest rates including the control of inflation, secular stagnation, a savings glut from Asian economies, rising inequality increasing savings and lower productivity and growth rates reducing the desire for investment. Borrowing costs have risen since the pandemic, complicating this story and raising the question to what degree has R-star risen too? Do these stories still make sense or have we moved into a persistently higher interest rate world?A world of disagreementI am going to simplify here, but we have a big divergence. Market data, as above, suggests neutral interest rates have risen sharply. These are replicated in some much more sophisticated estimates of R-star. The alternative view, generated by more structural modelling, such as the IMF’s estimates or those from the New York Fed, say that nothing has changed. Soumaya Keynes wrote a fabulous piece about the differences in modelling last year.The broad reasoning behind the difference of view is that methods of estimating R-star which show little change amplify the importance of long run slow-moving concepts such as the potential growth rate or demographics, while those showing the world has changed put more weight on financial market prices. This would be difficult enough if it was not for horrible estimation problems and fundamental uncertainties over the economic meaning and drivers behind R-star.Nightmares for economic researchersEstimating things using econometrics is difficult. There are always data problems. These are extreme when it comes to R-star. In March, for example, the Bank for International Settlements noted that the one standard deviation interval (in which the true value will sit only 68 per cent of the time) around the Richmond Fed R-star estimate for the US was 1.73 percentage points wide. It was 3.2 percentage points for the New York Fed model. For the eurozone, these blew out to totally unusable figures of 5.6 and 12 percentage points wide. In other words, the New York Fed model was reasonably confident that nominal eurozone interest rates were heading to a value between -4.7 per cent and 7.3 per cent. Brilliant.The uncertainty is in many ways worse than that. These models do not even agree with past versions of themselves, partly because the main determinant of R-star in the model is the potential growth rate — itself a made up number. The New York Fed is extremely transparent about its results and publishes these every quarter. I have collated all of its data to produce the animated chart below. When you play the animation, the same model for the same period gives different results depending on when it was estimated. This is partly down to revisions in economic data itself, a regular difficulty for economies. More recently, model specification changes also matter and show that the model is unstable post pandemic for all countries. The New York Fed has stopped publishing UK results. If you are a central banker working with one number in mind for the destination of interest rates and then it changes significantly in new estimates, you have a problem. A big one. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Even more fundamental models such as those produced by the IMF are no more reliable, sadly. As BIS head of economics Claudio Borio and colleagues documented in 2017, the long-run forces, which do a good job in explaining the decline in R-star between 1980 and the 2010s, did not work in previous periods. That suggests strongly that the model is wrong. This point was made forcefully in a recent lecture at the US Monetary Policy Forum by Harvard professor and former Fed governor Jeremy Stein. Nightmares for central bankers and marketsThat is not the end of the difficulty in searching for R-star because market data has a serious problem too. The big decline in all interest rates between 1980 and 2019 did not happen evenly. A remarkable paper by Sebastian Hillenbrand shows that all of the decline since 1989 came in the three-day period around Fed meetings. At all other times there was no decline in borrowing costs at all. If you do not believe this, the ECB has replicated Hillenbrand’s data and the chart below shows both sets of data being essentially identical. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.What this means is that the Fed is clearly important in influencing the market proxies of R-star. This means if officials look to the market to get an estimate of R-star, they will be looking back at their own actions. They are simply looking at the mirror. More fundamentally, the research challenges the whole concept of R-star because it is theoretically supposed to be an anchor set by fundamental forces balancing savings and investment. If, instead, Fed policy influences R-star directly, the honest thing to do would be to think about binning the concept of an interest rate we are trending towards. The same logic applies if governments influence R-star with their stance on fiscal policy. Well before Powell used the cloudy analogy, Borio said: “When the sky is cloudy, it is hard to see where the stars are and even how many there are.” Others have rationalised this result with less catastrophic consequences for central bankers. ECB executive board member Isabel Schnabel said that although the results were “puzzling”, the results would not be difficult to explain if “financial markets . . . ultimately look to the central bank for information about the long-run evolution of the economy”. This is forward guidance on steroids and suggests financial markets have few ideas of their own apart from what they learn from the august central bankers. But there are other theories. Perhaps central banks are important in shaping R-star with their actions not words. If low interest rates create zombie companies that do not invest, it can lower R-star and be self-reinforcing. Or as Stein mused, perhaps low interest rates had become addictive and no longer were as stimulative as before. The upshotIt is clear that numerical estimates of R-star are not worth much even if economists need to think about the concept. We do not know where the Fed or other central bank interest rates are heading. We have lost the anchor we thought we had, but probably never did. That does not mean economic analysis of interest rates is hopeless. Central banks need to constantly assess whether the monetary policy they set is expansionary or contractionary in the short term. There are many measures they can look at to see how the transmission mechanism is working. What they should not do is pluck some R-star number from a model and give it a credence it does not deserve. What I’ve been reading and watchingA chart that mattersWhile almost everyone thinks the Fed now needs to pause a bit longer and assess the inflationary outlook, Tej Parikh, our economics leader writer, thinks everyone is freaking out unnecessarily. He is rather disappointed that Powell also now thinks more time is needed to see disinflation, which he thinks is still on track. In one important chart, he shows how US wage growth is still moderating nicely.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

With the popular 30-year fixed mortgage rate hovering at about 7% for months, U.S. homeowners who secured fixed rates below 5% during an era of cheap debt remain unwilling to list their homes and buy a new one with a higher interest rate.The ‘rate lock-in’ that such homeowners are enjoying has constrained sales of existing homes in the United States, forcing buyers to turn to newly constructed homes.It has been a tailwind for homebuilders, even at a time when high home prices have limited affordability.The Atlanta, Georgia-based homebuilder reported a first-quarter profit of $3.10 per share, above analysts’ average estimates of $2.36, according to LSEG data.Home sales revenue for the quarter came in at $3.82 billion, above analysts’ estimate of $3.58 billion, reflecting an 11% increase in closings to 7,095 homes. More

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