Aurelia Butler

The likelihood of the Federal Reserve cutting interest rates in June took a further hit, after Fed Chair Jerome Powell stated that monetary policy needs to be restrictive for longer.”The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell told a forum in Washington, on Tuesday.”Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he said.This view contrasts with his comments to a U.S. Senate panel, just over five weeks ago, that the Fed was “not far” from gaining the confidence in falling inflation needed to cut interest rates.Investors have been steadily marking down the likelihood and timing of Fed rate cuts as economic data have pointed to stronger growth and stickier inflation than previously expected.Until recently, the U.S. central bank had been widely expected to start its rate-cutting cycle in June, with two more cuts happening by the end of 2024.However, now the first cut is generally expected in September and the odds of a second cut are dwindling.U.S. stock futures edged higher Wednesday, rebounding after recent weakness as the corporate earnings season continues apace.By 04:20 ET (08:20 GMT), the Dow futures contract was 105 points, or 0.3%, higher, S&P 500 futures climbed 10 points, or 0.2%, and Nasdaq 100 futures rose by 10 points, or 0.1%.The main indices closed in a mixed fashion Tuesday, with the Dow Jones Industrial Average gaining 0.2%, breaking a six-day losing streak, while the S&P 500 dropped 0.2% and the Nasdaq Composite fell 0.1%.Raised tensions in the Middle East and concerns that the Federal Reserve will delay cutting interest rates until much later in the year have weighed heavily on risk appetite of late. However, the blue-chip DJIA received a boost on Tuesday by strong gains from UnitedHealth (NYSE:UNH), after the health insurer posted strong results for the first quarter.More positive earnings are expected to drive the market higher Wednesday, with United Airlines (NASDAQ:UAL) stock climbing strongly premarket after the carrier posted a narrower-than-expected loss and a beat on revenue after the close on Tuesday.More earnings from the likes of US Bancorp (NYSE:USB) and Travelers (NYSE:TRV) are scheduled to arrive before the opening bell.Chipmaker ASML (AS:ASML) offered up a mixed first-quarter report earlier Wednesday, with its first-quarter profit beating expectations while sales missed forecasts, even with strong sales to China.That said, Europe’s biggest tech firm kept its full-year financial forecasts unchanged, expecting a boost in the second half of the year.ASML is one of the most important semiconductor firms in the world, producing tools known as extreme ultraviolet lithography machines, which are required to manufacture the most advanced chips globally.Sales of its lithography systems to customers in China made up a record 49% percent of the total in the first quarter, with ASML yet to address any impact from U.S. export restrictions to the Asian economic giant in the first quarter.“We see 2024 as a transition year with continued investments in both capacity ramp and technology, to be ready for the turn in the cycle,” said ASML CEO Peter Wennink, in a statement.U.K. consumer price inflation slowed to 3.2% in annual terms in March, the weakest level for two-and-a-half years, down from a 3.4% increase in February.”Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago, according to ONS chief economist Grant Fitzner.”Similarly to last month, we saw a partial offset from rising fuel prices.”Core inflation, which excludes energy, food and tobacco prices, also slowed to 4.2% from 4.5% in February. This followed the release earlier in the week of data showing core wage growth slowed again in the three months to February, posting its weakest rise since the three months to September 2022.The Bank of England maintained its interest rates at the highest level since 2008 at its meeting last month, with Governor Andrew Bailey subsequently stating that Britain’s economy was moving towards the point where the central bank can start cutting interest rates.Bailey also spoke at an International Monetary Fund event in Washington on Tuesday, just hours before the inflation release.”In the UK we’re disinflating at what I call full employment.”I see, you know, strong evidence now that that process is working its way through.”Traders are generally expecting the Bank of England to start cutting interest rates in either August of September.Crude prices retreated Wednesday as lackluster Chinese growth and a rise in U.S. commercial stockpiles created concerns about global demand, outweighing Middle East supply fears.By 04:20 ET, the U.S. crude futures traded 0.6% lower at $84.89 a barrel, while the Brent contract dropped 0.5% to $89.59 per barrel.The Chinese economy grew by more than expected in the first quarter, data showed earlier this week, but several indicators pointed to slowing momentum in the world’s second largest economy in March.Additionally, the American Petroleum Institute suggested that U.S crude inventories rose just over 4 million barrels last week, much more than expectations for a build of 600,000 barrels.The build, released on Tuesday, came after a 3 million barrel rise in the prior week, and was largely driven by U.S. production remaining at record highs above 13 million barrels per day. The official U.S. inventory data, from the Energy Information Administration, is due later in the day. Oil prices soared last week to the highest levels since October, as the prospect of a bigger conflict in the Middle East, especially between Iran and Israel, sparked bets of supply disruptions in the region.  More

Speaking on Tuesday evening after a cabinet meeting, Erdogan said his economic team had made preparations for such steps to strengthen the programme (MTP) and, “hopefully we will share them with the public very soon.””We have three main priorities in strengthening the MTP. These are to increase public sector savings, prioritise investments, and accelerate structural reforms.”Speaking to reporters after the cabinet meeting, Vice President Cevdet Yilmaz said both the finance ministry and the budget authority were carrying out studies on public sector savings, with more than 15 articles being worked upon.”We mean not only reducing expenditures, but making existing expenditures more efficient, prioritising them, and making them contribute more to the economy’s competitiveness, efficiency and social welfare,” state broadcaster TRT reported him as saying.Erdogan also said on Tuesday evening that economic growth will approach 4% this year with a positive impact from exports, and forecast that the current account deficit will be 2.5% of GDP at the end of the year.Official data on Wednesday showed that Turkey’s current account deficit stood at $3.265 billion in February, less than a Reuters forecast for a deficit of $3.7 billion.Central Bank Governor Fatih Karahan told a panel in Washington on Tuesday that Turkey is on track to reach its 36% inflation target by the end of the year after peaking at around 75% in the coming months. More

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. Jay Powell struck a hawkish tone in a speech yesterday. Bond yields only ticked up a bit in response, and stocks kept their composure. It seems that markets had already discounted what the Fed chair had to say. Sometimes markets follow policy and sometimes policy follows markets. The trick is to know which times you are living in. Email us: [email protected] and [email protected] inflation narrative could flip fastJay Powell is worried about inflation again. Here he was yesterday:We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably toward 2 per cent before it would be appropriate to ease policy . . . The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.The bond market had already freaked out last week, after March’s third-in-a-row hot consumer price inflation report, though long yields did close at 2024 highs on Tuesday. Overall, Powell’s comments and the rise in yields add to growing evidence of a vibe shift (ahem, sentiment reversal) that’s taken place over the past month, as we noted yesterday. But it’s good to remind ourselves that Powell is a lagging indicator. He and his colleagues are committed to “data-dependence”, meaning they are led wherever the latest inflation numbers take them. To give just one example, less than a month ago he waved away hot January and February inflation reports, saying they “haven’t really changed the overall story”. March’s numbers have changed his tune for now. But Powell’s stern sounds yesterday could easily turn serene tomorrow.We think the chance of an inflation narrative volte-face in the next few months is particularly high because of the dominance of shelter inflation. Shelter has long been the most important inflation category, but its salience has kept rising as non-shelter prices have settled down. In the consumer price index, most of the remaining inflation overshoot is in two categories: auto insurance and shelter. In the personal consumption expenditure index, which the Fed targets, it’s just housing; core PCE ex-housing is running at 2.1 per cent.Remember the story in shelter inflation. The official data captures paid leases, including both newly signed and existing ones. This makes for a better cost-of-living measure but a worse barometer of live market conditions; conversely, rental data from private providers like Zillow captures newly signed leases, and so are more timely. Because rent inflation on new leases has looked relatively benign, many expect the official data will converge after a lag. Initially, that lag was supposed to be about nine to 12 months, but that hasn’t happened:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Why it’s taking so long is unclear. Some argue that it’s just noise: Zillow and other new-lease data have short histories and their relationship to CPI is poorly understood. Others say it’s signal: unaffordable house prices, expensive mortgages, low unemployment and/or higher immigration are keeping the rental market hot. We’d split the difference: the rental market is somewhat strong, but not CPI shelter at 5 per cent annualised strong. Using month-over-month rates is helpful for comparisons here. In the latest March 2024 CPI report, shelter inflation rose 0.42 per cent, in line with where it’s been since March 2023. In normal times (including in strong rental markets), monthly shelter rates usually oscillate between 0.2 per cent and 0.3 per cent; in 2017-19, the average was 0.26 per cent. In short, there’s (still) compelling reason to think shelter inflation will fall further. Though it hasn’t happened yet, we could turn a corner at any moment.What would happen to broader inflation if it did? One way to visualise it is looking at the past three months of too-hot CPI data, which was driven not just by shelter but also roaring price increases in auto and hospital services. Even then, more normal shelter inflation would’ve offset gains elsewhere. The chart below simulates the past three core CPI reports under different assumptions for monthly shelter inflation:We are not totally calm about inflation. PCE supercore prices (ie, ex-housing core services) have risen 5 per cent in the past three months, and 4 per cent in the past six. That is too high for the Fed, probably reflecting wage growth that has normalised slower than the overall labour market. But wage growth is indeed falling. With that in place, all that’s needed for the inflation narrative to go from “stubborn” to “gradually descending” is the long-awaited shift in shelter. (Ethan Wu)Bank earningsBanks are the most economically sensitive of businesses. They earn a spread by acquiring money at a lower price and lending it at a higher one. The biggest risk to that model is that borrowers don’t pay back their loans, a risk amplified by the fact that banks are highly leveraged. The rate at which borrowers renege is a function of macroeconomic conditions. So, if you are wondering whether the economy is improving or degrading, look at bank results, particularly credit quality. It’s been a little odd, then, listening to banks talk about their first-quarter results over the past few days. Neither the monster national players (JPMorgan Chase, Bank of America, Wells Fargo, Citigroup) nor the regionals (PNC, M&T, et al) have had much to say about the economy’s effect on credit quality. Neither have analysts asked many questions about it. Mostly this reflects the fact that the US economy is, in aggregate, very healthy. These are few disasters to talk about, other than office real estate, and that disaster is moving at a politely glacial pace. That frees the analysts to ask about their two present preoccupations, both of them technical and fiddly: when will the increase in deposit costs, driven by depositors slowly realising that they don’t have to accept zero interest rates, peak? And, for the biggest banks, will they be able to release capital and use it to buy back shares when the latest version of the Basel rules are finalised? The banks’ answers to these questions are, roughly: we don’t really know, but maybe later this year; and we just plain do not know. The uncertainty about deposit costs, in particular, has been expressed in the banks’ conservative outlooks for 2024 lending profits, leading to some bad performance in bank shares. The market is being characteristically short- sighted here. Over time, a higher rates plateau will make banks more profitable. It’s just that the timing of profits is a little tricky in the transition. Listening closely, however, several of the banks did nod to the fact (much discussed by Unhedged) that low-end consumers — those with more debt than assets — have been pinched by the increase in rates. It’s the well-to-do that are keeping the economy growing. Here is JPMorgan chief executive Jamie Dimon:Consumer customers are fine. Unemployment is very low. Home prices are up. Stock prices are up. The amount of income they need to service their debt is still kind of low, but the extra money of the lower-income folks is running out — not running out, but normalising, and you see credit normalising a little bit. And of course, higher-income folks still have more money, they’re still spending it.“Normalising” is a word several of the banks have been kicking around to describe the fact that loan delinquencies, write-offs and reserves have all been ticking up. Here, for example, are the levels of balances in delinquency in Bank of America’s credit card business:Notice that we have surpassed the pre-pandemic levels of late 2019 (the same is true if you look at the delinquencies as a percentage of total loans). Unhedged is not going to make the mistake of predicting whether the problems at the low end of the credit spectrum presage weakening further up the scale. Economic inflection points are impossible to time. The point, instead, is that we can see by looking at the low end that the economy is still processing the jump in rates that began two years ago, and the infusion of fiscal support that proceeded it. The economy is strong in aggregate, and its biggest post-pandemic paradoxes have disappeared. But the situation is still dynamic. Strong consumer spending, as Dimon points out, has been driven by wealthy consumers who have benefited hugely from an asset price rally. That rally might be stalling now.  Bank earnings season has been boring so far. But don’t let that fool you. We’re still living in interesting times. One good readAmerican big-box store sells lots and lots of small bits of metal.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, 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 youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereDue Diligence — Top stories from the world of corporate finance. Sign up here More

Inflationary shocks have reverberated around the globe over the past three years — but the world’s wealthy have largely weathered them, say private bankers and investment managers.Despite a sustained period of higher outgoings — with headline annual inflation still at 3.5 per cent in the US and 2.4 per cent in the eurozone after hitting multi-decade highs two years ago — the world’s billionaires and ultra rich have grown wealthier, according to US media group Forbes. Industry figures say the rich have shielded their wealth from inflation by investing in the tech-driven stock boom, which has outpaced the rise in the cost of living, and by making smart bets on private equity, debt and infrastructure that have delivered strong returns. “Wealthy individuals and their families are sophisticated investors, like hedge funds, that have been part of the stock market rally,” says Hannes Hofmann, global head of the family office group at Citi Private Bank.“They were affected by the cost of living crisis, but many of the big family offices that manage the wealth of the rich have invested wisely in stocks, bonds and private equity.”The wealthy continued to spend despite inflation being higher for goods and services that are largely bought or used by the rich compared with broader consumer prices.Forbes’ annual cost of living extremely well index (CLEWI) — which tracks spending on items such as opera tickets, exclusive school fees, and luxury cars — rose higher than US consumer prices last year.The CLEWI climbed 4.9 per cent in 2023 — above the 3.4 per cent rise in US CPI in the same period — following increases of 7 per cent in 2022 and 10.1 per cent in 2021.Yet this failed to halt the rise in total wealth among the world’s richest people. Forbes’ worldwide billionaire index, published in April, showed that the total wealth of the richest people around the globe had risen to a record $14.2tn in 2024 — a 14 per cent increase on the $12.2tn recorded at the same point in the previous year.The richest 400 people in the US also saw their wealth jump significantly higher than inflation in 2023, with the average net worth of the Forbes 400 wealthiest Americans up 13 per cent, to $11.3bn, year on year.“Ultra high net worth individuals are not that exposed to inflation as their portfolios are usually well diversified,” explains Alessandro Caironi, head of banking, lending & investment solutions at Deutsche Bank Private Bank. “They hold investments such as public and private equity and real estate that protect them.” Rebecca Gooch, global head of insights at Deloitte Private, a division of the Big Four consultancy group, adds: “With inflation showing signs of moderation, it is no longer the number one worry for the wealthy. They are now more concerned about geopolitics [with wars in the Middle East and Ukraine] and global economic uncertainty.”Still, despite the sharp slowing of inflation from peaks of 9.1 per cent in the US and 10.6 in the eurozone in 2022, it remains a threat to investment portfolios.“We are facing the last hurdle in the killing of inflation, particularly in the US,” says Matthew Morgan, head of fixed income at Jupiter Asset Management. “The big question is how quickly will the Fed tame inflation.”Morgan thinks the US Federal Reserve will probably pave the way to a soft landing for America and the world economy, but adds that there are risks of a crash in the event of increasing geopolitical instability.“To what extent is the increase in inflation temporary?” asks John Stopford, head of multi-asset income at investment group Ninety One. “Is it a response to the pandemic? Or will there be a lasting impact?”For wealthy investors, despite the receding threat of inflation, there is still a need to diversify, stresses John Roe, head of multi-asset funds at Legal & General Investment Management.“Inflation can mislead people to think equity markets are doing better than they are. If inflation is rising at 3 or 4 per cent, then stocks must rise more than that or the real capital appreciation is flat.”“Diversification absolutely matters,” agrees Mark Haefele, chief investment officer of UBS Global Wealth Management. “You need to diversify geographically and across asset classes.”Yet, investment managers and strategists remain confident the rich can continue to expand their wealth as they buy assets in private markets that deliver strong returns despite higher inflation. They also expect public equity markets to carry on rising as they hit fresh highs and increase the value of portfolios.“The changing macro environment has created new investment opportunities,” says Charles Jewkes, head of global wealth at Aviva Investors. “Private markets can be attractive in a higher interest rate and inflationary environment.”Grace Peters, global head of investment strategy at JPMorgan Private Bank, adds: “We believe the rally in the US equity markets is sustainable, based on the improving fundamental economic picture globally. Over time, we think US equities should continue on their upward path to drive healthy returns.”  More

Global insured losses from natural catastrophes have been surpassing $100 billion annually in recent years, driven higher by issues such as winter storms. Industry sources see climate change and increased building in exposed areas as contributing to the losses.The insurers’ global combined ratio, a measure of claims and expenses against premium revenue, was 103% in 2022, Capgemini said. A level above 100 indicates an underwriting loss. Property insurers have suffered three years of underwriting losses in the past four years, the report said.Only 27% of insurance executives surveyed believe their firms have advanced predictive modelling capabilities.”Accurate risk prediction and pricing are becoming increasingly challenging and leading to insurability concerns,” Anirban Bose, Capgemini financial services strategic business unit CEO, said in the report. The report gathered information from 18 insurance markets, including Britain, Hong Kong, India and the United States, through polling of insurance customers and interviews with insurance executives and underwriters. More

HANOI (Reuters) – Vietnam has mounted an “unprecedented” rescue of Saigon Joint Stock Commercial Bank (SCB), a lender engulfed in the nation’s biggest financial fraud, according to three bank documents and new official information provided to Reuters by a person with access to the documents.”Without lending, SCB will collapse,” according to the new information provided to Reuters. “If the lending continues, the national treasury will gradually dry up.” Reuters is not identifying the source more specifically due to the sensitivity of the matter.The new information also described the situation as “unprecedented” for the massive volume of the cash injections, the complexity of the operation and the scale of existing and potential damage to Vietnam’s financial system.Reuters was unable to establish whether the conclusions about the impact on state coffers were broadly shared by other officials currently involved with monitoring SCB.Vietnam’s public debt was stable last year at 37% of gross domestic product, while the budget deficit widened slightly to 4.4% of GDP. Foreign reserves were around $100 billion at the end of the year, according to the central bank. That is up from about $90 billion at the end of October, according to the independent regional watchdog ASEAN+3 Macroeconomic and Research Office.As of the start of April, the Southeast Asian nation’s central bank had pumped $24 billion in “special loans” into SCB, according to one of the bank documents seen by Reuters, which provides daily updates since March 29 on overall injections from the central bank. Lending has slowed slightly but averaged more than $900 million a month in the past five months, according to that document, a second document with updates from March 15 to March 20, and a third document from November with monthly updates from October 2022 to October 2023.The central bank did not reply to requests for comment about the rescue effort. The finance ministry referred a question to the central bank. SCB initially told Reuters it would circulate the news agency’s request for comment, but did not respond to subsequent emails. An SCB official declined to comment when contacted by phone.RUN ON BANK AFTER TYCOON’S ARRESTThe State Bank of Vietnam’s previously unreported cash injections into SCB amount to 5.6% of the nation’s annual economic output, or about one-fourth of Vietnam’s foreign-exchange reserves.The central bank placed SCB under its supervision to stem a run on the bank sparked by the October 2022 arrest of real estate tycoon Truong My Lan. Since then, SCB has been using the injections to cover cash withdrawals, according to one of the bank documents, which SCB sent to the central bank in November to account for its use of the loans.After the central bank stepped in, SCB’s deposits plunged 80% to about $6 billion by December 2023, according to the new official information from the source. SCB could run out of deposits by mid-year at the current pace, and bad loans had surged to 97.08% of SCB’s credit balance as of October, it said.    Lan, the tycoon whose October 2022 arrest sparked the bank run, was sentenced to death on Thursday after being found guilty of masterminding the fraud. She had pleaded not guilty to embezzlement and bribery for allegedly siphoning off $12.5 billion in loans from SCB to shell companies while effectively controlling SCB through proxies.Lan, formerly a prominent figure in Vietnamese finance, will appeal the verdict of the People’s Court of Ho Chi Minh City, one of her lawyers said.Despite the official support, as of December SCB continued to face liquidity problems and at times struggled to settle payments on time when its customers transferred money to other banks, and to process payments via the country’s main clearing system, according to the new information. This affected customer “psychology” and created risks to the entire banking and financial system, it said.The central bank had provided SCB, previously one of the country’s largest commercial lenders by deposits, with 592.7 trillion dong ($23.72 billion) in “special loans” as of April 2, according to a recent update produced by the bank on the matter, seen by Reuters.That was up from 478 trillion dong at the end of October, according to the SCB document that was sent to the central bank. That indicates injections of 23 trillion dong ($910 million) a month since November.This has slowed from the initial average of $3.7 billion a month the central bank initially injected in October and November 2022 and the monthly pace of nearly $1.2 billion from then until October 2023, the bank document shows.BANK RESTRUCTURING SOUGHTVietnam’s banking sector is already facing heightened risks from prolonged turmoil in the real estate sector. The fraud prosecution is part of the authorities’ “blazing furnace” anti-corruption campaign, which triggered the real estate crisis, weighing on the economy and clouding the outlook for banks.The central bank and the government have repeatedly sought help for SCB from the private sector, specifically calling on foreign investors, state media say, despite restrictions such as a 30% cap on combined foreign ownership of Vietnamese banks.Late last year the central bank assigned private real estate company Sungroup to craft a plan to restructure SCB, according to the recent information from the source and three people familiar with the plan. Sungroup did not reply to a request for comment.Reuters could not determine whether the Sungroup plan has been approved.Any restructuring plan would hinge on the evaluation of real estate assets used by Lan and her companies as collateral for loans, but the legal status of those assets is often unclear, as many are still seeking permits while some violated rules on public land or permits, according to the new information.Some of the assets include valuable properties in high-end districts in Ho Chi Minh City but most are unfinished projects.The Lan family estimated the assets at $30 billion, a family representative told Reuters this month, while the market appraisal firm Hoang Quan, hired by the central bank for an assessment, valued them around $12 billion, according to a November public document from the police, which detailed Lan’s alleged wrongdoing.Some of Lan’s Hong Kong business partners have expressed interest in the assets, Reuters reported earlier this month. They did not respond to requests for further comment about their interest in the assets after Lan’s trial verdict. More