Aurelia Butler

This article is an onsite 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. We enjoyed meeting Unhedged readers at Tuesday’s FT Alphaville pub quiz in New York, where a team from GIC, the Singaporean sovereign wealth fund, brought home gold. We would’ve bombed the quiz ourselves. Questions included: “To the nearest thousand dollars, what is the highest value of pizza that Domino’s Pizza’s chief executive may have received as part of his compensation last year?” Email us: [email protected] and [email protected]: stuckIf three data points make a trend, then US inflation looks stuck at 3 per cent. That’s the message of yesterday’s March consumer price index, the third stubbornly hot inflation report in a row. The three-month average of core CPI is running north of 4 per cent, and the longer term averages aren’t far behind:It’s not quite as bad as the chart above suggests, because personal consumption expenditure inflation, which the Federal Reserve targets, is running nearly 1 percentage point lower than CPI. But the recent trend is clear and inflation concern is due.The market reaction on Wednesday was big. Stocks fell, futures markets further lowered rate cut expectations, and yields surged across the curve, led by the two-year which was up 23bp. The two-year is still below 2023 highs but has risen nearly 75bp this year. It all reflects the view that the Fed will keep rates higher for longer, and may not cut at all in 2024.The reaction is justified by the composition of the March CPI data. Core services inflation rose an annualised 6 per cent, and unlike in the past two reports, there were no big anomalies to blame. Arguing CPI looks hot because of a start-of-the-year “January effect” price adjustment only works for so long. Used car prices, which rose in February and lifted overall goods prices, fell 1 per cent in March; goods deflation also resumed. Airfares and hotel prices, two volatile categories which can throw off the data, were both well behaved.Instead, inflation came in strong in services categories that have looked persistently hot for a while: shelter, medical care and auto services. Shelter inflation again bucked longtime predictions that it’ll fall to match the more benign trend shown by new lease data from the likes of Zillow. Medical care was driven by strongly rising prices for hospital services (up 1.2 per cent in March), likely reflecting big recent wage increases at major hospital systems. Meanwhile, car insurance and auto repair shot up 2 per cent and 3 per cent, respectively, in March. These two categories make up 7 per cent of core services inflation and have rather scary-looking longer-term charts:There is still a case for optimism. Though the labour market has broadly normalised already, wage growth has ground down more slowly. The latest data suggest 4 per cent to 5 per cent wage growth, compared to a pre-pandemic 3 per cent to 4 per cent. That could mean it’s only a matter of time until slowing wage growth lessens price pressure on, say, hospital or car repair inflation. Shelter inflation could also fall further, as analysts have long predicted. No one knows the “right” lag time to expect between the Zillow rent and CPI rent data; it could simply be longer than anticipated. Three months of sticky inflation is worrying, but could prove a bump in the road.On balance, we think this CPI report is a blow to fast-disinflation optimism, and creates significant uncertainty around rate-cut timing. So it makes sense markets flinched yesterday. The bigger question for investors: how much did the recent rally depend on imminent rate cuts to begin with? (Ethan Wu)Apple lawsuits: different this time?I have been covering tech companies on and off for a couple of decades, and all through that time intelligent and well-informed people have been telling me, periodically, that some lawsuit or other is going to do serious damage to the super-profitable business model of some Big Tech company. Microsoft is the prime example here, but there is also Oracle vs Google, Motorola vs Qualcomm, assorted efforts to restrain Google’s ad business, and so on. It is only a minor exaggeration to say that none of this has ended up mattering one tiny little bit. Microsoft, which has had more legal targets painted on its back than anyone, is the highest-valued corporation in the world.So it is hard for me not to shrug off the US Department of Justice’s lawsuit against Apple, which alleges the iPhone maker is a monopolist. This kind of thing has never mattered before. Why should it now?Dan Ives, an analyst at Wedbush who has a buy rating on Apple, says “it is different this time because the pressure is building globally and the DoJ has struck when the iron is hot”. He says the litigation is, on a risk scale of 1-10, an eight, whereas other tech litigation in recent decades was a two or three. While he thinks the chances of the justice department forcing an overhaul of the company’s business model are low — less than 20 per cent — this would have a big financial impact.The war on Apple is indeed multi-front. In Europe, the competition authorities have fined the company €1.8bn for suppressing competition from rival music streaming services on its platform. That’s a sum Apple will fish out from the couch cushions, but is a taste of the fines and remedies that could come with the EU investigation of Apple’s and Google’s app stores under the Digital Markets Act. Meanwhile in the US, the legal fight with Epic Games won’t go away. The Fortnite game maker says Apple has violated a judge’s order to allow app developers to steer customers to transaction platforms outside of the app store. And the justice department’s antitrust lawsuit against Google’s search business threatens the payments Google makes to Apple to be the default search engine on the iPhone — a large, pure-margin chunk of revenue.All the legal challenges focus on a single, two-sided issue: Apple’s ability to trap consumers within its iPhone ecosystem, and to extract payments from rivals who want to get at those consumers. This basic issue applied to music streaming, transaction steering, watch-phone pairing, digital wallets, and so-called “superapps”.Nick Rodelli of CFRA Research, who specialises in legal questions, thinks the DoJ has a three-in-four chance of winning the case and the victory surviving Supreme Court review. This outcome might take as little as three years, he says. This puts Apple’s services revenue, which accounts for about a third of operating profit, at risk. His central case is a 10 per cent hit to earnings per share — a lot, for a company that is not growing earnings particularly quickly any more.A more benign while still realistic view comes from Gene Munster of Deepwater Asset Management. He too sees a significant chance of the DoJ successfully enforcing remedies on Apple in many of the areas it is targeting — watches, wallets, superapps, and so on. But he thinks increased openness may not lead to that much consumer switching. “Just because it is easier to switch doesn’t mean people will.” People trust Apple as a brand, he says, because the products work well. “It keeps coming back to who has the good products,” he says. The biggest worry, in his view, is therefore the loss of the Google money.This view chimes with Unhedged’s strong belief about the immense laziness of most people in most domains. Investors need to think about the following equation. Estimate how much better a rival product is than Apple’s, in terms of price or (subjective) quality. Subtract the (subjective) cost of switching. If the result is negative, Apple should be OK. And remember, people loathe switching their digital and financial infrastructure, even if it doesn’t take that long.To simplify even more, the key question about Apple is still not about the legality of its business model. It’s about the quality of its products. Are they still better, or at least not much worse?One good readUptown problems. 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

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is an external member of the Bank of England’s Monetary Policy CommitteeAs an American living in London, people regularly tell me England and America are two countries separated by a common language. As an economist, I always want to point out there are many economic factors dividing them as well. But you wouldn’t guess it looking at the market-implied paths for interest rates in the UK and US, which have closely mirrored one another for the past month. Following surprisingly strong US March CPI inflation, markets now expect the Bank of England will cut rates earlier and by more than the Federal Reserve this year. Macroeconomic fundamentals and inflation dynamics differ in the UK and US, and there’s a greater risk of persistence in the former. The markets are moving rate cut bets in the wrong direction.The most obvious way the UK economy differs is much more constraint on the supply side. The Monetary Policy Committee (MPC) recently estimated potential growth of 1 per cent this year, rising moderately to 1.3 per cent by 2026. The Congressional Budget Office (CBO) estimates US potential growth of 2.2 per cent over the same period. This means the US can withstand more demand in the economy before it turns inflationary. While the UK has long lagged behind the US in potential growth, the difference became much starker during the pandemic.Potential growth has two main components — potential productivity growth and labour supply. As I laid out in a recent speech, the UK looks worse on both. Investment is one way to boost productivity growth. But business investment has been essentially flat in the UK between 2016 — the year of the Brexit referendum — and 2020, though it has grown moderately since. Meanwhile, US business investment growth has outstripped that of other advanced economies since 2016.The difference in labour supply between the two countries is also stark. Overall labour market participation in the UK has not recovered to the pre-pandemic trend. Participation in the US, on the other hand, has exceeded the pre-Covid trend.Lower UK potential growth means greater inflationary pressures, all else being equal. But all else is not equal. Demand in the UK is far more constrained as well. This is largely thanks to the strength of the US consumer. Government spending and business investment have also pushed US demand much higher. Investment, both public and private, in green technologies, semiconductors and other strategic sectors has been boosted by the Inflation Reduction Act, Chips and Science Act and Infrastructure Investment and Jobs Act. With both weaker supply and demand in the UK than the US, we have to look at signs of persistence to compare the inflation dynamics and potential rate paths. I’m worried that second-round effects are having a larger and longer-lasting impact in the UK.Recent inflationary shocks have been global in nature — a pandemic, worldwide supply chain issues, a war in Europe and energy and food spikes — but have reverberated differently across economies. The Ukrainian war had a far bigger impact on energy costs in the UK than the US. Even as global shocks subside, second-round effects in the UK may take longer to abate.Following the energy price shock, UK inflation expectations have been more backwards-looking. This amplifies second-round effects, as companies and households are more sensitive to the initial shock. Higher inflation expectations have translated into higher pay growth, by some metrics now between 6-7 per cent in the UK versus 4-5.5 per cent in the US. Such sticky wage growth is a significant component of services inflation. It will need to slow further to see services inflation return sustainably to target-consistent levels. This last mile may prove the hardest. UK services inflation remains much higher than in the US.The UK economy has faced the double whammy of a very tight labour market and a terms of trade shock from energy prices. Inflation persistence is therefore a greater threat for it than the US. But market pricing for interest rates does not reflect this. There has been encouraging news on UK wage growth and services inflation in recent months. The risk of inflation persistence is diminishing as these indicators come down in line with the MPC’s forecast. But they remain higher than in other advanced economies, particularly the US. Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well. More

A new rise in US inflation is undermining Joe Biden’s re-election message, threatening the president’s effort to defend his economic record in a crucial phase of the campaign against Donald Trump.The 3.5 per cent annual increase in the March consumer price index followed a 3.2 per cent gain a month earlier, and has made it suddenly much harder for Biden to argue that inflation is continuing to move steadily downwards since hitting a multi-decade peak in the summer of 2022.If followed by other higher than expected inflation figures in the coming weeks, it could also lead the Federal Reserve to push back interest rate cuts that would bring relief from high borrowing costs for many American households this year.Even though the US economy has created more than 15mn jobs under Biden’s watch, the jump in inflation during his tenure has cast a cloud over his handling of the economy and remains one of his biggest political weaknesses heading into the November vote.White House officials on Wednesday said that they had always expected the process of bringing down inflation to be bumpy — and that they believe inflation will soon begin easing again.During a press conference with Japanese Prime Minister Fumio Kishida earlier on Wednesday, Biden said he still expected the Fed — which has an official target for inflation of 2 per cent — to cut rates this year. “This may delay it a month or so,” he said.In national polling, Biden has been able to gain back some ground over Trump in recent weeks after the former president held a small lead earlier this year: the race is now essentially tied based on the Realclearpolitics.com average of surveys of a head-to-head match-up. But the political peril for the president is significant. The consumer price index is up 18.9 per cent since he took office in January 2021.Any stalled progress on inflation could threaten to upend any general improvement for Biden — just seven months ahead of the election.“People still feel like the United States has a significant inflation problem,” said Larry Summers, a professor at Harvard University and former US Treasury secretary, told the Financial Times. “Whether that’s because they remember the past, or because high interest rates have raised the cost of money, people are still feeling like inflation is not completely under control.”Republicans pounced on the higher inflation data to blast Biden’s economic policies.“Clearly there is a massive disconnect between the White House and their narrative that the economy is strong, and the exorbitant cost of living that Americans are experiencing,” Andy Barr, a Republican member of the House of Representatives from Kentucky, said in an interview.“This administration’s inflation crisis remains sticky and persistent,” he added.Biden’s top economic aides insist that their top priority is combating these resurgent price pressures, and have proposed or enacted policies specifically designed to bring down expenses for US households.The president spoke about the efforts in last month’s State of the Union address and has since repeated the message at several events.“We’re just going to keep our heads down and continue fighting to lower costs from prescription drugs to junk fees to housing and child care,” said Jared Bernstein, the chair of the Council of Economic Advisers at the White House.“We’ll also keep working to make sure the American people know about this agenda, and how different it is from Congressional Republicans’ focus on cutting taxes for the rich and increasing prices where we’re trying to cut them,” he said.Biden administration officials are also confident that inflation can still be tamed. Janet Yellen, Treasury secretary and former Fed chair, told CNBC on Monday that it was her “expectation” that inflation would come down over time. “I’m hopeful that we can certainly get into the twos,” she said, in a nod to the Fed’s official target.But other problems are looming — especially if politically sensitive petrol prices keep rising further. According to the US motoring group AAA, a gallon of regular petrol cost $3.62 on Wednesday, up from $3.39 in just one month. The monthly increase of 1.7 per cent in March made it a big contributor to the higher inflation data.A White House spokesperson said that US pump prices were “well below their 2022 peak” and said they were “always carefully watching the market and trends”. The administration was “committed to lowering prices at the pump”, the spokesperson said, noting that US oil production was at a record high.But rising fuel costs have always been a political problem for US presidents, and under Biden petrol has generally been much more expensive than it was during Trump’s time in office. Geopolitical tensions in the Middle East could also keep pushing crude prices higher too, making petrol more expensive just as the US holiday driving season approaches.Mike Lux, a Democratic strategist, said “inflation has been a challenge all along and it will be” during the campaign — but that he was encouraged that voters were starting to pin the blame on large companies rather than Biden.“They are understanding very well that the primary cause of inflation is corporate greed and price gouging,” Lux said. “I think that the Biden campaign and other Democrats can pound hard on that theme and tell a convincing story.”Have your sayJoe Biden vs Donald Trump: tell us how the 2024 US election will affect you Bharat Ramamurti, a former White House economic official under Biden, said it was important that wage growth was still rising more quickly than prices — and that consumer sentiment numbers were also improving.“I understand the strong market reaction,” he said, referring to the stock market sell-off that followed the inflation numbers on Wednesday, as traders bet against imminent rate cuts. “But from a political perspective it doesn’t do very much to change the basic trajectory that we’ve been on.”While Fed rate cuts would have some “benefit politically”, their exact timing would not “make a huge difference”. What would be more damaging, he cautioned, was if inflation rose again enough to compel the Fed to raise rates. More

Stay informed with free updatesSimply sign up to the More

SINGAPORE (Reuters) – The dollar was firm on Thursday after hotter-than-expected U.S. inflation data squashed lingering expectations of the Fed starting its rate-cutting cycle in June, while the yen languished at the levels last seen in the middle of 1990.The yen’s slide to a 34-year low of 153.24 per U.S. dollar on Wednesday brought intervention fears back as authorities in Tokyo reiterated that they would not rule out any steps to deal with excessive swings.”Recent moves are rapid. We’d like to respond appropriately to excessive moves, without ruling out any options,” Japan’s top currency diplomat Masato Kanda said.Japan intervened in the currency market three times in 2022 as the yen slid toward what was then a 32-year low of 152 to the dollar.On Thursday, the yen strengthened 0.20% to 152.88 per dollar, just below the 153.24 level touched on Wednesday after data showed the U.S. consumer price index rose 0.4% on a monthly basis in March, versus the 0.3% increase expected by economists polled by Reuters.Kyle Rodda, senior financial market analyst at Capital.com, expects Tokyo authorities to keep talking tough and intervene if things look disorderly. “The very interesting element is how the Bank of Japan eventually handles this … We might see greater hawkishness from here and that would be the catalyst for a more sustained turnaround,” Rodda said.Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank would not directly respond to currency moves in setting monetary policy, brushing aside market speculation that the yen’s sharp falls could force it to raise interest rates.The Japanese central bank last month ended eight years of negative interest rates but yen has remained rooted near 151 per dollar levels since then.Low Japanese rates have made the yen the funding currency of choice for carry trades for years, in which traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding one.FED WAGERSFollowing the inflation data, traders drastically dialled back their bets on interest rate cuts this year as well as when the Federal Reserve will start its easing cycle.Adding to those doubts, minutes from the Fed’s March meeting, released on Wednesday, show policymakers were already disappointed by recent inflation readings before the latest report.Markets are now pricing in an 18% chance of the Fed cutting rates in June, compared with 50% before the CPI data, according to CME FedWatch tool, with September turning out to be the next starting point for rate cuts.Traders are also pricing in 43 basis points of cuts this year much lower than the 75 basis points of easing projected by the U.S. central bank. At the start of the year, traders had priced in over 150 bps of cuts in 2024.The latest trends in core CPI are moving in the wrong direction for the Fed to gain enough confidence on inflation by the time of the June FOMC meeting, according to Kevin Cummins (NYSE:CMI), chief US economist at NatWest. “We now expect the first cut (25 bps) to occur at the September meeting (instead of June) followed by two additional cuts this year.”The hot inflation report led to U.S. Treasury spiking higher and taking the dollar index, which measures the greenback against six rivals, more than 1% higher on Wednesday to near five month peak of 105.30. The index was last at 105.13 on Thursday.The yield on 10-year Treasury notes eased a bit to 4.554% in Asian hours, hovering near the five month peak of 4.568% it touched on Wednesday. The euro was last at $1.0744, having dropped 1% on Wednesday ahead of the European Central Bank meeting later in the day. The ECB is expected to stand pat on rates but the focus is on comments from officials to see whether June will be the starting point for cuts in the region.Sterling was last at $1.2538, up 0.06% on the day. The Australian dollar was little changed at $0.651, while the New Zealand dollar eased 0.17% to $0.598. More

The CME Fedwatch tool showed traders were now pricing in an only 17.5% chance for a 25 basis point rate cut in June- down sharply from the 61.1% seen last week. Expectations for a hold ballooned to a 81.8% probability, more than doubling from the 37.1% seen last week. The tool uses the 30-day prices of Fed fund futures contracts traded on the Chicago Mercantile Exchange to gauge market expectations for the Fed’s policy rate.A hawkish outlook for the Fed saw the dollar index surge to a near five-month high on Wednesday, while 10-year U.S. Treasury yields also shot up to near five-month peaks. Conversely, risk-driven assets tumbled with the S&P 500 losing nearly 1% on Wednesday.Consumer price index data showed on Wednesday that inflation grew more than expected in March. The reading- which beat expectations for a fourth consecutive month- furthered the notion that a downturn in inflation seen through 2023 was now slowing, with inflation likely to remain pinned well above the Fed’s 2% annual target in the coming months. Rising commodity prices- specifically fuel- as well as robust consumer spending factored into the higher inflation print. These factors are expected to remain in play over the coming months, especially with oil prices remaining underpinned by persistent tensions in the Middle East.The minutes of the Fed’s March meeting showed that even before Wednesday’s strong inflation print, Fed officials were already growing concerned over inflation remaining sticky.Several officials posited the need for higher-for-longer interest rates, and even floated the possibility of more rate hikes. A slew of Fed officials had warned in recent weeks that sticky inflation remained the Fed’s biggest concern, and that the trend was likely to delay any potential reductions in rates this year. Relative strength in the U.S. economy- which largely outpaced its developed world peers in recent quarters- gives the Fed enough headroom to keep rates higher for longer.  More