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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.British retail sales beat analysts’ expectations of a contraction and remained flat last month, as growth in clothing purchases offset falling food sales.The quantity of goods bought in Great Britain was unchanged between January and February following a 3.6 per cent increase in the previous month, the Office for National Statistics said on Friday. Economists polled by Reuters had forecast a 0.3 per cent drop, with many citing the impact of wet weather. The better than expected reading, on the back of strong growth in January, adds to signs of the UK economy recovering from last year’s technical recession. Heather Bovill, ONS senior statistician, said clothing sales had rebounded after recent falls as people invested in the new season’s collections. But “these were offset by falls in fuel sales, possibly affected by rising prices, and a reduction in food sales”, she added.Online sales increased, particularly for clothing retailers, as wet weather hit footfall. The statistics agency said it also affected food sales. According to the Met Office, the UK’s national weather service, last month was a wetter than average month, with the south of England experiencing its wettest February since the data series began in 1836.Analysts said the flatlining of retail sales despite the wet weather was a good sign for the economy, pointing to some resilience since Britain entered a technical recession after two consecutive quarters of economic contraction in the second half of last year.  “Unchanged retail sales volumes in February, as shoppers largely shrugged off the unusually wet weather, provided further evidence that a rebound in retail activity, and perhaps the wider economic recovery is under way,” said Alex Kerr, economist at research company Capital Economics. “And as inflation continues to fall, rising real household incomes should support retail activity throughout 2024.”Rob Wood, economist at consultancy Pantheon Macroeconomics, predicted that retail sales volumes were on track to “rebound strongly in Q1, helping the economy leave last year’s recession behind”. “If overall retail sales volumes hold flat in March they will rise 1.7 per cent quarter-to-quarter in Q1, the strongest since the post-lockdown surge in the summer of 2021,” he added. The ONS figures come as separate data published on Friday by research company GfK showed UK consumers’ confidence in their personal finances in the year ahead had turned positive for the first time in more than two years.Andrew Bailey, Bank of England governor, told the Financial Times this week that Britain had “an increasingly positive story to tell on” taming inflation after official data showed price growth fell to 3.4 per cent in February, its lowest since 2021. Noting that cuts to the BoE’s benchmark interest rate — now at 5.25 per cent — were “in play”, Bailey added that the technical recession last year was small and that there were signs of an upturn in train. Sales volumes fell by 0.4 per cent in the three months to February compared with the previous quarter, according to the ONS, and by 1 per cent compared with the three months to February 2023, reflecting the impact of the cost of living crisis and high interest rates.Sales volumes last month were also 1.3 per cent below their pre-pandemic level, although consumers spent 18.5 per cent more than in February 2020 as high prices reduced purchasing power.Charlie Huggins, head of equities at investment broker Wealth Club, said the “economic tea leaves read less grimly” after the fall in inflation and rise in expectations of rate cuts. “Perhaps most importantly, real wages are rising and this is putting more money into consumers’ pockets,” he added. More

This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. Yesterday I asked why a private equity firm (Apollo, see below) would want to buy a movie studio (Paramount’s). Reader answers varied from “they want the back catalogue, it is leverageable” to “rich guys in suits want to stand next to Jennifer Lopez”. Either way, the FT reports that Shari Redstone, who controls the studio, doesn’t like the Apollo bid. Tough break for the rich guys in suits. Email me: [email protected] Interview: Torsten SlokTorsten Slok is one of Wall Street’s most closely followed economists. After earning his PhD, he has worked for the IMF, the OECD, and Deutsche bank. He is currently a partner and chief economist at Apollo Global. He spoke with Unhedged last week.Unhedged: We’ve been reminded in the last four or five years that economics is not a predictive science. Given that Wall Street is in the prediction business, what is the role of someone with economics training in markets?Slok: Connecting the dots. When I look at my screen, there are 20 different stories and they go in all kinds of directions. There is a 30 year Treasury auction at 1pm. Some economic data comes out. An Fed governor is giving a speech. The yield curve is flattening. How is all this connected? The economics textbook can provide a framework for thinking about what’s going on. Maybe there’s more Treasury supply coming in the long end, so it is not only driven by what the Fed is doing, it is also driven by supply. So it’s saying why are things trading the way they are, putting that into an economic framework, and explaining it in intuitive terms. And that’s the real differentiator between all the Wall Street chief economists: can you communicate what’s going on, or can you not?Unhedged: One of your out-of-consensus views is that there will be no cuts this year. Can you connect the dots on that?Slok: It starts very simply with the story that was told all of last year. There are lagged effects of Fed hikes. They will slow the economy down, and it takes 12 to 18 months. As a result, everyone went into last year saying, we will have a hard landing because of the negative effect on consumers, firms, and banks.Which consumers have been impacted? Look at delinquency rates for credit cards for people in their 20s and 30s. Young households have three characteristics. They have more debt, lower credit scores, lower incomes. It’s not surprising that those households have been negatively impacted by rates going up. Likewise, for auto loans, people in their 30s are now falling behind on their loans at a faster pace than during the pandemic. Think about that: 2008, people lost their jobs, so of course they stopped paying the bills. Today, no one’s lost their job. We just created 275,000 jobs and still more and more young households are falling behind.This is exactly what the textbook would have predicted. If you raise interest rates, more indebted households begin to see negative consequences. You see the same thing when you look at savings — the amount of money people have in checking and savings accounts across the income distribution. Look at people who make less than $25,000 a year. They are out of stimulus cheques, unemployment benefits, childcare tax credits, and the money they might have saved because they didn’t go to restaurants, hotels or sporting events. Their savings today are lower than where they were in 2019. Likewise for people making between $25,000 and $45,000 a year. The median income in the US is $70,000: they have a little bit left, but all the excess savings and all the support for consumer spending is today coming from the top 20 per cent of incomes. The top earners account for 40 per cent of consumer spending. These are the households still paying thousands of dollars for Taylor Swift concert tickets, Super Bowl tickets. They still go to hotels, cruise lines, sporting events, concerts. The bottom line is that the Fed raised rates and rates going up has had a distributional impact. Those who have debt have been negatively impacted, those who have assets that have been positively impacted because the stock market is at all-time highs, home prices are very high, even Bitcoin prices are high.Unhedged: You’ve just given me some reason to think that the Fed needs to cut, and you think they’re not going to. This seems paradoxical.Slok: Young households don’t account for a significant share of consumer spending. Now look at the firms that are being impacted. Again, it is what the textbook would have predicted. When rates go up, the most highly levered companies experience the most distress. They have high debt, low coverage ratio, weaker earnings. As a result of that we’ve seen a lot of distressed exchanges, with firms lowering debt and increasing equity, and not mass layoffs. That is by definition a default, according to the rating agencies. That’s why default rates have been moving higher. But again, the investment-grade market is about $9tn outstanding. High yield and loans are around $1tn each. So even with those two seeing distress, at the macro level we have not seen the slowdown many expected.Unhedged: So we had a hard landing for 10 per cent of the economy. Slok: Exactly. Rate hikes have had an impact. But it has only had an impact on those highly-levered balance sheets for consumers, firms and banks that are vulnerable to commercial real estate. That was the story last year, and that story continues. But the story today has changed dramatically because of what the Fed did in December, and because of the [Fed governor] Christopher Waller speech in November. The Fed sits down around the table and says, OK, what do we think the fed funds rate will be by the end of 2024? And starting in 2021, at every meeting they came back and said, ‘rates will go higher than we thought last time’. Rates are going higher, higher, higher was the message from the Fed for 18 months. And it was only when they came in last December and said, ‘You know what? We don’t think rates are going higher; we can begin to cut rates.’This meant that a lot of people who were sitting on the fence and waiting, now they’re saying, ‘This is the green light for risky assets to go up!’ Check out how much the stock market has risen on the back of this. Financial conditions have eased spectacularly. The S&P 500, investment grade spread, high yield spread, loan spread, the level of rates, home prices, crypto, M&A activity, IPO activity; everything improved after the Fed signaled that rates are going lower. But the bottom line is, financial conditions have a strong correlation with real [gross domestic product]. So if you ask me what is the outlook for the economy right now, it may be not surprising that payrolls were strong in January and February. And the economy has begun to reaccelerate. The conclusion is the Fed pivot and the easy financial conditions that followed are creating exactly what we’re seeing.Similarly, we may be seeing re-acceleration in inflation. Look at CPI [the consumer price index]. The Fed target mandated by Congress is that it should be 2 per cent. We’re at 3; we’re just not there yet. Look at the three months and the six months annualised change in core CPI. We’re beginning to see inflation go up again, because of this strong tailwind coming from easy financial conditions.[After the Fed meeting on Thursday, Unhedged emailed Slok to ask if he had changed his pre-meeting views. He replied: “Story is the same. Easy financial conditions since the FOMC’s dovish pivot in December has triggered a significant tailwind to consumer spending, financial markets, and capital markets, and this is causing growth and inflation to reaccelerate and keep rates higher for longer. The strong inflation and payrolls data for January and February shows that the last mile is a lot harder”].Unhedged: Is the economic combination you have described — strength overall, with acute pressure at the perimeter from higher rates — sustainable, or is it fragile?Slok: Everyone is saying we’ll have a soft landing. But there are a bumps on this road that we are driving down. The bump on the left is rates staying higher for longer because inflation stays higher for longer. If the Fed still does quantitative tightening and reverse repo balances go down to zero in May and June, you can have things go wrong in the plumbing of the financial system, in the regional banks, in commercial real estate. There are just a lot of different balance sheets that are being impacted as the Fed continues to withdraw liquidity more and more, and keeps interest rates at higher levels. The bump on the right is that you actually begin to see an acceleration of growth that’s so strong that the Fed has to hike again. That’s not my base case at all, but that would be the mother of all pain trades. No one is preparing for that risk.And let’s not forget — and this is the topic of the year — yesterday we had a 10-year Treasury auction. Today we have a 30-year auction. The Treasury Borrowing Advisory Committee thinks Treasury issuance will be way up all across the yield curve in 2024. Look at five-year notes: auction sizes will be 41 per cent bigger in 2024. Across the whole curve it’s 35 per cent. Normally, it’s very easy: when the economy goes down, long rates go down. When the economy goes up, long rates go up. But today there is a new factor in town, which is Treasury supply. Who’s going to buy, when auction sizes increase so much? What does it mean when you think about the fiscal deficit?Unhedged: The picture you’re drawing is one on which the Fed might face very difficult decisions. The last mile of inflation is difficult to defeat, and yet there are significant fragilities in the financial system that high rates exacerbate.Slok: I think that the financial system is very stable. I would not characterise it as having a lot of fragilities. I would say simply that if you keep the cost of capital high, page one in your finance textbook will tell you that will have some consequences for households and firms that have a lot of debt, and on banks that have vulnerabilities to interest rates. We can then debate, where are those vulnerabilities? Are they dramatic? Are they small? But it’s very clear that the Fed turning dovish has unleashed some significant easing of financial conditions, and that’s helpful for alleviating some of these problems, but you still have this background of the cost of capital biting into balance sheets every single day.Unhedged: What keeps the Fed from cutting this year?Slok: Financial conditions are so easy, which is supporting consumer spending over the next several quarters in a very significant way. Excitement about AI [artificial intelligence] is also easing financial conditions. Now there’s a whole exogenous story that has just come from left of centre. We can spend a lot of time thinking about whether AI is great or not, but if the stock market wants to go up, think about it in terms of financial conditions. The Fed is trying to slow the economy down. Very simply, the goal of raising interest rates is for you and me to buy fewer cars, for you and me to spend less money on our credit cards, for you and me to buy fewer houses. It is supposed to slow the economy down. Now out of the blue AI comes along, the stock market goes up, financial conditions ease dramatically. It doesn’t take much creativity to say, well, maybe the Fed actually has to keep rates higher for longer, maybe even hike a little bit, to make sure that it can neutralise the effects of the AI story.We will see strong spending for consumers in the next several quarters. We’ll see particularly strong spending for services: airlines, hotels, restaurants, concerts, sporting events, everything that’s getting a huge tailwind as a result of people having more money, both cash flows from their fixed income investments and also in the assets that they’re holding, stocks and houses.Unhedged: We’re struck by how tight credit spreads have become. They are about as tight as they ever get. We’re sitting here thinking, why wouldn’t you just own the Treasuries?Slok: There are four reasons why credit spreads are so tight. By far the most important one is that the Fed is now telling me that inflation is no longer a problem. If you are a fixed income investor, you want to lock in this level of yields before it starts moving lower. The three other things are more technical. When rates went up, pension funds saw the stock market go up and rates go up. A lot of pension funds had not been fully funded. So they switched out of equities and locked in credit [to match their assets with their liabilities]. This has unleashed significant demand for credit. The third thing is that annuity sales have gone up for life insurance companies. Remember that when rates go up, annuities pay a higher return. So the insurance industry has sold more annuities and used the proceeds to buy credit. The final thing is retail. Households are saying, if the Fed tells me rates are going to go down and I’m hunting yield and I have some extra cash in money market funds, why don’t I buy credit? I get some extra spread.Unhedged: I see the demand story, but how appealing is credit, really, as opposed to just owning the sovereign?Slok: In some cases triple C, even single B credit looks more vulnerable, because those are the firms that are more vulnerable to higher interest rates. These firms still have good earnings and decent cash flows because the economy is still doing fine. But the fact that rates going up has had this negative impact. That’s why in credit you need to be much more selective, so that you stay away from those firms that have the highest leverage, the lowest coverage ratios and the weakest cash flows.Unhedged: To return to inflation, core inflation looks scary, but a huge chunk of that is the shelter inflation story, where we haven’t seen the CPI measure converge with more timely indices from places like Zillow. What’s going on?Slok: Look at the Zillow and Apartment List indices. Then look at the Case-Shiller home price index. What’s Case-Shiller doing? It’s rebounding. Housing is recovering. So it wouldn’t take much to come to the conclusion that maybe OER [owner’s equivalent rent, a CPI component] is not going to come crashing down. Maybe it is beginning to flatten out. Could it be that OER is moving more slowly down because the housing market is actually recovering? Absolutely. You see it right here.You can slice and dice the inflation data, and trust me, I’ll sit here with my PhD in economics and do that all day long. But you are in the FOMC [Federal Open Market Committee], sitting around the table, you’re saying inflation has come down from the peak in 2022. That’s great. And went down from 9 per cent to roughly 3. But honestly it looks like inflation is sticky at 3, and we are just not moving down to 2. And I know people love excluding this, that and the other thing, and you get something that’s low. But let’s be honest, that’s just not what the data is showing. We’re sticking a 3 on headline, on core we are beginning to reaccelerate.The dot plot also tells you that there is quite a debate [in the FOMC] about where we’re going. There are some [members] who think that the fed funds rate in the long run is going to be a lot higher than the two and a half per cent [median]. Yes, it’s been relatively easy so far. But when inflation begins to reaccelerate with a strong tailwind from easy financial conditions, that is neutralising a lot of the rate hikes they have done so far. We have a bumpy road ahead.Unhedged: Let’s turn to equities. Consensus says the excitement at the top end of the stock market is grounded in fundamentals, unlike in 1999. You seem to disagree.Slok: Look at the trailing price/earnings ratio. The forward P/E can be anything; if we have a soft landing the future will look good, if we have a hard landing, the future will look bad. What is the trailing P/E ratio of the top-10 stocks in the S&P 500 today? They are more overvalued than the top-10 were in the tech bubble. You can say there’s earnings, but there was earnings in 1999 too. Maybe the Magnificent Seven look good. But all the literature on bubbles tells you there might be a few winners, and that could be a handful of stocks. We’ll figure it out over time. But there is a whole crowd of other firms that come running into the same idea. OK, Nvidia did well, and maybe that stock should be trading maybe where it is, maybe not. We can discuss that. But all the other firms that are coming in, if you have 10 tech firms the best guess is that out of those 10 firms, nine firms will go bankrupt.Unhedged: So you think we’re in a bubble?Slok: We are absolutely in an AI bubble, and the side effect of that is that when tech stocks go up, it eases financial conditions. That’s making the job a lot harder for the Fed.One good readVanessa Friedman on the meaning of Kristen Stuart’s clothes.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

Global chief executives including Apple’s Tim Cook, ExxonMobil chair Darren Woods and HSBC’s Noel Quinn are expected to attend China’s version of Davos in Beijing this weekend, as international criticism mounts that Chinese industrial oversupply could lead to a “slow-motion train accident” for world trade.Almost 90 CEOs, as well as heads of multilateral organisations such as the IMF, are expected to attend the China Development Forum. US executives in particular are returning to the event this year in greater numbers, attendees said, in a sign that bilateral tensions have eased slightly after they plumbed new lows last year due to a spy balloon incident.The organisers of the conference, held in the scenic Diaoyutai State Guesthouse in Beijing, announced on Friday that China’s second-ranked official premier Li Qiang would preside over the event this year and deliver a keynote speech.There has been no confirmation of reports that he will cancel a roundtable with the CEOs, traditionally one of the few annual chances for foreign business leaders to engage with Chinese government officials of his stature.In one apparent signal of support for the event, President Xi Jinping this week made a rare visit to an enterprise with foreign investment — German chemicals group BASF’s battery joint venture in central Hunan province — and his cabinet announced a 24-point plan to support foreign businesses.Beijing will be seeking to counter international criticism of its response to weak demand from a property slowdown, which is to further stimulate manufacturing. This policy is incentivising oversupply and dumping on global markets, threatening the “deindustrialisation” of trading partners, analysts said.Releasing a report this week detailing China’s efforts to “de-risk” its economy by reducing its dependence on foreign suppliers, Jens Eskelund, president of the European Union Chamber of Commerce in China, called for immediate talks between policymakers in China and the EU to avert trade tensions as European producers struggle to compete with dumped products.“I think what we see right now is the unfolding of a slow-motion train accident,” Eskelund said at a briefing on the report. “I think there’s still a possibility of finding off-ramps, and that’s what we hope.”He said overcapacity in Chinese industry was “across the board” and “I don’t think we’ve seen the full impact yet”.“There needs to be an honest conversation between the EU and China on what is this going to be,” he added, “because it is hard for me to imagine that Europe will just sit by quietly and witness the accelerated deindustrialisation of Europe.”Jon Harrison, managing director of emerging markets strategy at TS Lombard, said China’s manufacturing-led economic model would continue to generate trade tensions, whether Donald Trump or Joe Biden won the US election this year.“Further escalation is inevitable simply because the US and also Europe will be unable to absorb the flood of manufactured exports from China, led by high-tech and green transition products,” Harrison said in a research report.The CDF and China’s other international flagship conference, the Boao Forum for Asia on the southern island of Hainan, traditionally follow the annual meeting of its rubber-stamp parliament, where the party announces its economic growth targets for the year.This year’s goal of 5 per cent gross domestic product growth is considered ambitious by analysts. Foreign direct investment in China plunged to its lowest level since the 1990s last year as an expected strong recovery from pandemic-era lockdowns failed to materialise.Foreign and domestic investors have been rattled by a long slump in the property sector, which has undermined domestic demand and created deflationary pressures, leading to stock market falls last year that were only arrested by heavy state intervention.Last year’s China Development Forum was marred by the detention of five local staff of US-based due diligence group Mintz just days before the opening ceremony. The incident was the first in a series of raids on foreign consultancies in China on security grounds. One year later, the Mintz employees are still in detention on undisclosed charges.Along with the raids on consultancies, which have threatened investors’ ability to conduct due diligence, businesses have been spooked by amendments to an anti-espionage law that they see as too broad, as well as new data security rules that they argue are too vague.Despite these uncertainties, US business leaders will attend this year’s event in greater numbers, according to Han Shen Lin, China country head at advisory consultancy The Asia Group. Ahead of the forum, Apple’s Cook was pictured walking along the Bund in Shanghai, while an interview in the state-owned China Daily newspaper portrayed him as endorsing Xi’s latest Communist party buzzword “new quality productive forces”, which many interpret as moving up the value chain.“I think it is essential and it is the future,” the paper quoted Cook, whose company employs hundreds of thousands of workers in China, as saying.Lin said US business leaders attending the CDF tended to come from financial services, asset management, biopharmaceutical and other industries that require scale and for which “the rule still applies that if you have no China strategy you have no global strategy”.The European Chamber’s Eskelund said everyone at the CDF would be looking for answers from policymakers on the key challenges facing the economy, including oversupply, local government indebtedness and the future of reform.“I think people are looking for pointers as to where China’s going,” he said. “All of the talk about sort of unwavering commitment to reform and opening up — what is that going to mean in concrete terms?” More

The Bank of England governor has signalled markets are right to expect more than one interest rate cut this year, saying he is increasingly confident inflation is heading towards target.Andrew Bailey told the Financial Times that rate cuts were “in play” at future meetings of the BoE Monetary Policy Committee amid signs that tighter policy had quelled the risk of a wage-price spiral. “It’s like the Sherlock Holmes dog that doesn’t bark. If the second-round effects don’t come through, that’s good because monetary policy has done its job,” he said.“We have an increasingly positive story to tell on that,” Bailey added. “The global shocks are unwinding and we are not seeing a lot of sticky persistence [in inflation] coming through at the moment. That is the judgment we have to keep coming back to.”Major central banks including the Federal Reserve and European Central Bank have put summer interest rate reductions on the table as officials become increasingly optimistic that they have vanquished the worst inflationary outbreak for a generation. The MPC met this week and held UK rates at 5.25 per cent as official figures showed inflation has receded to 3.4 per cent, its lowest level in more than two years.Speaking in an interview at the BoE after the meeting, the governor struck a more optimistic tone about the UK economy, stressing how small the technical recession in the second half of last year had been and pointing to signs that an upturn is now in train. “This is obviously good news,” he said. Strikingly, the UK was “effectively disinflating at full employment”, Bailey added, underscoring how unusual this situation was, given that battles with inflation have typically been won at the cost of higher unemployment.It did mean the BoE was walking a “narrow” path in setting policy as it tried to assess how tight the labour market was, he said.Bailey’s upbeat comments will be welcomed by Prime Minister Rishi Sunak, who is building his election strategy around hopes of an improving economy, including falling inflation and a cut in interest rates before polling day.Sunak claimed this week that 2024 would be the year the economy “bounces back” and urged Conservative MPs to hold their nerve and stick with his economic plan. An election is expected in the autumn.While headline inflation has receded sharply, the BoE is closely watching wages and prices in the services sector, where price growth is still more than 6 per cent.Bailey confirmed that there was a range of views in the MPC about how reassuring these indicators had been, as he stressed the BoE’s job on inflation was not yet done. “Some people are more comfortable with the evidence they are beginning to see, and others feel, no, we are further off from being confident.”Asked if he was in the former category, he said: “What we are seeing is encouraging to me.” Andrew Bailey: ‘I would not say we or I have become decisively more or less cautious. We have learnt a lot’ More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.When US political strategist James Carville, then a senior aide to presidential candidate Bill Clinton, declared that one of the keys to winning the 1992 election was “the economy, stupid”, he was stating one of politics’ most fundamental truths.Dozens of elections over several decades had reliably shown that voters don’t react well to economic woes and will punish the incumbent party, while a government that leaves the electorate feeling richer stands a good chance of fending off a challenge.But if Carville had given the same advice to any of Clinton’s successors as Democratic presidential candidate, both its veracity and effectiveness would have been much less clear.Much has been written about the disconnect between the increasingly healthy state of the US economy and Americans’ gloomy perceptions of it, but the striking development over the past 18 months has been that even as public sentiment has finally begun to climb, it has done nothing for President Joe Biden’s approval ratings. In other words, it’s not that Americans don’t accept the economy is improving: even when they do, they don’t give him any credit for it.It would be easy to dismiss this as an anomaly triggered by the Covid-19 pandemic and a once-in-a-generation inflation crisis, But in America, it’s not been “the economy, stupid” for more than a decade. Research by political scientists John Sides, Michael Tesler and Lynn Vavreck first drew attention to the phenomenon in their 2019 book Identity Crisis, highlighting how Barack Obama’s approval rating trended steadily downwards despite economic sentiment rising during his presidency.Sides and his colleague Robert Griffin found that this decoupling continued during Donald Trump’s presidency. While there was a brief return to the old pattern in 2021 as Biden’s approval numbers declined in lockstep with rapidly souring views of the US economy, this turned out to be only a brief echo of the past. The new rule — that “It’s no longer the economy, stupid” — has since reasserted itself.What makes this apparent shift all the more notable is that it appears to be an exclusively American phenomenon. The age-old relationship between economic sentiment and a government’s popularity has evaporated in the US, but it remains almost as strong as ever in western Europe, with the favourability of French and German governments still closely linked to economic fortunes. The same is true in the UK, albeit to a lesser extent.This contrast between continents supports the theory that the hyper-partisan nature of US politics is behind the decoupling. The US electorate is now cleanly divided into Democrat and Republican factions, more hostile to one another than ever before, making it harder for economic trends to move people between political camps. If anything, voters’ politics are now shaping their economic perceptions, not the other way around.In one particularly ingenious piece of analysis last year, US political scientist Brian Schaffner demonstrated that even when there did appear to be a relationship, in 2022, between US voters’ assessment of their economic circumstances and their approval of the president, this was a mirage. Rather than the real severity of people’s struggles determining their level of criticism of Biden, those who disapproved of him the most were also the most likely to say they were struggling even when they weren’t.In this context, the incentives to adopt good economic policy are completely broken. Gross domestic product growth that Europe would kill for, robust job creation and disinflation without rising joblessness appear likely to be neither here nor there when Americans consider their vote this November.Contrast all this with, say, Germany, where economic sentiment tends to be very similar among supporters of the governing coalition and opposition parties alike. Even supporters of the hard-right AfD generally evaluate the economy in line with backers of the mainstream parties.In America, the polls currently point to a second term for Trump, whose pivot to tax cuts and protectionist trade policies could well send inflation jumping again — it shouldn’t be taken for granted that the US will continue to streak away from a sluggish Europe.And while Europe’s economies have been struggling, at least the voters share a common assessment, making for a rational political system that rewards good economic [email protected], @jburnmurdoch More

SINGAPORE (Reuters) – The U.S. dollar was set for a second week of broad gains on Friday, with even a rate hike in Japan unable to dislodge it, as investors figure U.S. rates are high and not falling yet.The Swiss National Bank delivered the biggest surprise of a week crammed with central bank meetings, cutting its main interest rate and citing the strength of the franc as a reason.The franc, which in real terms has been rising for years, dropped more than 1% overnight to 0.8894 per dollar, its weakest in four months, and slid to a nine-month low on the euro nudging it closer to parity. The Bank of Japan announced an historic shift out of negative short-term rates and longer-run yield caps, but it was so well telegraphed that the yen fell on the news and was last a whisker from multi-year lows at 151.63 per dollar.The U.S. Federal Reserve left its funds rate on hold between 5.25% and 5.5% this week and stuck with projections for three cuts by year’s end.But it said it will not start moving until it has more confidence that inflation is sustainably falling toward 2%. Market expectations for U.S. rate cuts increased after that but only very slightly. About 80 basis points of cuts are now priced in for this year – much lower than the 160 or so that had been priced in at the start of the year.”With this tweaking and pricing out of the number of Fed cuts, we see the dollar support slowly beginning to come back into the picture,” said Patrick Hu, G10 currency trader at Citi.”This is one of the key factors in why dollar/yen did not fall but it actually started to trickle higher.”Dollar/yen is up 1.6% this week and near levels that prompted Japanese intervention in 2022, which has investors nervous but also looking for other currencies to buy and pocket the “carry”, or difference between interest rates.Euro/yen hit its highest since 2008 this week at 165.37 and the Aussie broke above 100 yen for the first time since 2014.Against the dollar the euro has slipped about 0.2% this week into middle of a range it has held for a year at $1.0862.Sterling fell overnight after the Bank of England left interest rates unchanged, this time backed by the two hawkish committee members who’d previously voted for a hike.For the week sterling is down 0.6% at $1.2661. [GBP/]The Australian and New Zealand dollars moved in opposite directions this week. Thursday data showed New Zealand slipped into a technical recession, while Australian jobs surged ahead.The Aussie/kiwi cross is up 0.8% this week. The Australian dollar has eked a 0.2% gain on the U.S. dollar to $0.6572 for the week, while the kiwi has plumbed four-month lows and lost about 0.6% to $0.6046. [AUD/]The U.S. dollar index is up for a second week in a row, climbing 0.5% to 103.94.Bitcoin is eyeing its sharpest weekly drop since January as crypto markets have taken a step back from a powerful rally this week – though it will trade through until Sunday.It was last at $65,800.Other morning moves in Asia were slight. The yen had no major reaction to mixed Japanese inflation data. Retail sales figures in Britain and Canada are due later in the day.========================================================Currency bid prices at 0100 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0865 $1.0860 +0.05% +0.00% +1.0868 +1.0861 Dollar/Yen 151.5250 151.6350 -0.07% +0.00% +151.6900 +151.4500 Euro/Yen 164.63 164.63 +0.00% +0.00% +164.7700 +164.5700 Dollar/Swiss 0.8975 0.8977 -0.02% +0.00% +0.8979 +0.8971 Sterling/Dollar 1.2672 1.2660 +0.10% +0.00% +1.2674 +1.2656 Dollar/Canadian 1.3524 1.3530 -0.04% +0.00% +1.3531 +1.3520 Aussie/Dollar 0.6574 0.6569 +0.08% +0.00% +0.6577 +0.6570 NZ Dollar/Dollar 0.6049 0.6045 +0.07% +0.00% +0.6052 +0.6046 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More