Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Normally, import bans and tariffs between China and Taiwan would not warrant global attention. But this week, the power play over trade is notable. It underlines Beijing’s attempts to influence approaching elections in Taiwan. On Thursday, Beijing announced the end of tariff cuts for certain chemical imports from the island. The affected list of 12 products includes acrylic and p-xylene. This follows China’s complaint last week that Taiwan had adopted discriminatory measures on importing mainland products. It wants Taiwan to take measures to remove trade restrictions. The latest moves could have an impact on Taiwan’s biggest petrochemical companies, including Formosa Plastics, which has a market value of $16.2bn, and state-owned CPC Corporation. China is the world’s largest importer of chemicals such as p-xylene, accounting for three-quarters of the world’s total.The affected list has a relatively narrow focus. China’s imports of p-xylene, for example, stand at about $11bn. The impact from changes to tariff cuts is unlikely to be severe. But the timing is telling. Taiwan’s hotly contested presidential election is looming in the second week of January. Beijing has put pressure on Taiwan’s independence-leaning ruling party by sending military aircraft and warships near the island almost daily this month. Since 2000, Taiwan’s presidents have served two terms, or eight years, which highlights the importance of this election for Beijing. But this tension goes well beyond trade politics over chemicals. The rise of AI and the importance of Taiwan-made chips have raised the stakes. Chipmaker Taiwan Semiconductor Manufacturing Company makes more than 90 per cent of the world’s advanced chips. Meanwhile, the US has cut China off from advanced chips and chipmaking equipment. For now, investors have ignored any geopolitical risks for TSMC. Its local share price has climbed 23 per cent over the past year. TSMC has faced growing US pressure to manufacture its products in America. It has been investing and building a new plant in Arizona, threatening to widen any technological gap with China. As Beijing runs out of options, influencing Taiwanese elections has become that much more important. Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore More

BEIJING (Reuters) -China, the world’s top processor of rare earths, on Thursday banned the export of technology to extract and separate the strategic metals, in a further step towards protecting its dominance in several strategic metals.The commerce ministry sought public opinion last December on the potential move to add the technology to its “Catalogue of Technologies Prohibited and Restricted from Export”. It also banned the export of production technology for rare earth metals and alloy materials as well as technology to prepare some rare earth magnets.The catalogue’s stated aims include protecting national security and public interest.China has significantly tightened rules guiding exports of several metals this year, in an escalating battle with the West over control of critical minerals. It introduced export permits for chipmaking materials gallium and germanium in August, followed by similar requirements for several types of graphite since Dec. 1.The move to protect its rare earth technology comes as Europe and the United States scramble to wean themselves off rare earths from China, which accounts for 90% of global refined output.Rare earths are a group of 17 metals used to make magnets for use in electric vehicles, wind turbines and electronics. China has mastered the solvent extraction process to refine the strategic minerals, which Western rare earth companies have struggled to deploy due to technical complexities and pollution concerns.It is not clear to what extent the technology is actually being exported. China has discouraged its export since 2007, said a rare earths analyst, who declined to be named because of the sensitivity of the topic.”Other countries like the U.S., Japan and France all have the separation technology but China has the top efficiency and cost advantage,” he said. More

Stay informed with free updatesSimply sign up to the More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayGreetings. This is my last newsletter before Christmas, but fear not — my colleague Valentina Romei will step in for uninterrupted Free Lunch service next week. I will be back in the new year. As we prepare for the festive season, can I ask you to read our deputy editor’s missive about the FT’s charity work on financial literacy and inclusion? If you are moved to contribute to the cause — or just need to find a unique present for someone (or yourself) — please consider bidding for lunch with one of our columnists, including yours truly. With that, let me wish you peaceful holidays and a happy new year.White smoke at last! EU finance ministers last night agreed how to reform the bloc’s fiscal rules, which have been in suspension since 2020 and have been maligned for much longer than that. To master the details, even EU economics nerds will need to spend some time going through the legislative texts. But here is how I would describe the new rules in a nutshell.There is one overarching conceptual change. The previous rules applied the “reference values” in the EU Treaty rather literally, with too little consideration of the economic context. This obliged all countries to get public debt below 60 per cent of gross domestic product and the budget deficit below 3 per cent of GDP, requiring tougher consolidation the further they fell short, to the point of counterproductive and unrealistic policy advice.The new rules differentiate countries by their starting point, growth prospects and content of public spending, requiring them principally to put debt on a downward trajectory after an adjustment period. This requirement is formulated through a single indicator rather than the previous multiplicity of constraints: an agreed path for annual government expenditures net of interest and cyclical and one-off measures.Out go the blind numerical rules, in other words, in come forward-looking debt sustainability analyses, country differentiation, and an option to extend the adjustment (from four to seven years) if a country adopts reforms and investments expected to boost growth. However (there is always a “however”), at the insistence of Germany and some other “frugal” countries, elements of the old system were added back in, in the form of “safeguards” to prevent the agreed expenditure paths from being too soft. The result is a hybrid system, where the new approach has old-style numerical constraints bolted on, and whichever is more binding applies. High-debt countries will need to reduce their debt ratio by an average of 1 per cent of GDP per year throughout the adjustment period (less for medium-debt ones). And beyond the adjustment period, deficits should get within 1.5 per cent of GDP to keep a “safety margin” to the old 3 per cent limit. The “excessive deficit procedure”, the EU’s naughty corner for fiscal violators, remains, requiring annual structural deficit cuts of 0.5 per cent of GDP. Again “however”: countries worried about being caught out as the rules snap into force have negotiated transitional arrangements whereby rising interest costs and EU-funded post-pandemic recovery plan investments will be exempt from the calculations until 2027.Taking it all together, how should we judge the reform? The original motivation, remember, was that the old rules were ineffective, too complex and often encouraged bad economic policy like procyclical budgets and skimping public investments.On the surface, one could argue all the effort has not come to much. The blind numerical rules remain. And some are very strict indeed: according to the last figures I have seen, a 0.6 per cent of GDP cumulative deviation from the agreed expenditure path over the adjustment programme (which, remember, can last seven years, so less than 0.1 per cent per year) is enough to trigger a reaction.In addition, the higher-debt countries failed to get acceptance for either a “golden rule” or a carve-out for investment spending, as many of them had wanted. And they traded stricter discipline in the long term for short-term flexibilities — which is really not the way one should approach a system of rules that should have some staying power.So if the outcome is austerity 1-investment 0, we have ended up in a bad place. But that would be unfair. While blindly numerical rules remain, they are on the whole looser than before, is the argument heard in some high-debt government circles. And that is true. The notorious 1/20 rule is gone (it demanded debt ratio reductions of 1/20 of the excess above 60 per cent every year — which implied 5 per cent of GDP debt reduction per year for Greece, 4 for Italy, and 3 for France, Spain, Portugal and Belgium). A 1.5 per cent deficit “safeguard” replaces a medium-term requirement for structural near-balance. So there is more room for deficit spending, which one must hope will be used for investment.There is some beauty in the eye of the beholder, of course. Note how our coverage leads on Germany getting its way on tough numerical constraints, while Reuters describes the agreement as a “deal for more lenient fiscal rules”. The focus naturally varies with how each government can sell the deal as a victory at home.But this distracts from what I see as the more profound improvements. The long haggling over precise numerical parameters has distracted from the fact that the biggest changes are institutional:First of all, countries will now have to prepare multiyear fiscal, reform and investment plans and the EU-level discussion will focus on these, not year-by-year budgets. National fiscal councils will have a role in assessing them. Second, when a government changes, it may update the fiscal plan it inherits. Third, both new and revised plans must be justified to the commission and the EU Council. Fourth, in the excessive deficit procedure a number of “relevant factors” can be invoked, including green, digital and defence priorities. Fifth, there is now a country-specific escape clause that would suspend the rules in the case of a serious downturn afflicting only some countries.Put all of this together, and a very different process emerges for how capitals engage with their peers and with the EU over national budgets from the previous “computer says no” system. The new set-up should encourage a more open back-and-forth, based on economic arguments, about how best to achieve the common goals of sustainable budgets and growth. There will be both more national ownership and more European politics, in other words. The essence of the problem with the previous rules was precisely that they aimed to substitute algorithmic decisions for both ownership and politics. That was never going to be democratically sustainable — and therefore not ultimately conducive to either economic or fiscal sustainability either.If the reform welcomes back sound democratic politics in budgeting, that will be a much greater achievement than the months-long quibbling over decimal points would make you think. It may even — fingers crossed — draw citizens’ interest back to what their economic policymakers do.Other readablesNumbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

NEW YORK (Reuters) – As 2024 comes into view, investors, economists, business leaders and everyday consumers from London to Lyons to Los Angeles share a common hope: Let the interest rate cuts begin!Central banks from most major developed economies closed out 2023 with a blitz of policy meetings in December that effectively shut the books on the aggressive rate hikes that have dominated the economic and financial landscape since 2022. The lone outlier, the Bank of Japan (BOJ), never managed to kill off its negative rates policy and signaled this week at the year’s final meeting of a Group of Seven central banks that a shift away from that stance was not imminent.Allowing the rest of the big central banks to call time on rate hikes was the favorable turn inflation took over the course of 2023. After starting the year with annual inflation rates that were on average 3.7 times the 2% target shared by the U.S. Federal Reserve, European Central Bank (ECB), Bank of England, Bank of Canada and BOJ, the pace of price increases is now down to 1.5 times that target.Of course that means more work to do to complete the “last mile” in the inflation fight. Central bankers are loathe to declare victory prematurely and are battling with over-eager financial markets to retain maximum optionality, prompting the drum beat of pledges to hold rates high for a longer period or raise them again if necessary – the latter in particular being seen increasingly as an empty threat.Inflation, however, does not need to drop all the way to 2% in order for rate cuts to begin, and 2-handle inflation rates could soon be the norm. WHY IT MATTERSHolding rates steady as inflation rates slow further is another form of policy tightening that may not be appropriate for much longer.That is something some Fed officials have begun openly bandying about as a reason for the rate cuts they flagged last week as being in the cards next year, especially if they hope to deliver a “soft landing” for the U.S. economy. Keeping rates restrictive for longer than necessary risks a harsher outcome, one featuring a rapid slowdown in economic activity, a painful rise in unemployment and a recession that much of the world has managed to dodge so far despite that scenario being the more traditional end to rate-hike cycles.Rate-sensitive economic sectors everywhere – such as housing and manufacturing – have felt the pinch of higher rates for more than a year. While services activity generally has continued to expand, S&P Global’s measure of manufacturing activity in developed economies has been in contraction since October 2022, although there are indications the worst may be over with the latest reading at the highest level since the spring. Emerging market factory output, which has been at stall speed for much of 2023, also edged higher.WHAT IT MEANS FOR 2024A major game of chicken is underway as market actors have set expectations for far more policy easing than central bankers are likely to be willing to provide. For instance, while last week’s projections from Fed officials themselves indicated they expect 75 basis points of rate reductions over the course of 2024, bond and rate futures markets are now positioned for twice that amount. That led at least one U.S. central bank official, Chicago Fed President Austan Goolsbee, to confess that he was “confused” by the market’s behavior.Across the Atlantic, meanwhile, sources familiar with the matter told Reuters it is unlikely that the ECB will be in position to cut rates before June, three months later than market pricing there now reflects.The key to it all, of course, rests with inflation since policymakers have said they are willing to stomach some level of economic pain, if necessary, to finally return price pressures to their target levels.Politics may play a hand as well, with general elections scheduled for later in the year, in the U.S and UK in particular. Central bankers who prize their political independence may not want to be seen taking major action too close to elections lest they be accused of trying to tip the outcome.And as the year closed, a potential new spoiler was emerging that could complicate the rate-cut thesis: Attacks by Iran-backed Houthi rebels on cargo vessels in the Red Sea forced shippers to halt or reroute traffic, a supply chain hiccup that could impede further swift progress on inflation. More

1. Futures higher after stocks slipU.S. stock futures were higher on Thursday, pointing to a rebound in equities following a day of losses on Wall Street in the previous session.By 04:57 ET (09:57 GMT), the Dow futures contract had added 192 points or 0.5%, S&P 500 futures had risen by 27 points or 0.6%, and Nasdaq 100 futures had gained 124 points or 0.7%.The main averages retreated in an afternoon sell-off on Wednesday, with the tech-heavy Nasdaq Composite snapping a nine-day winning streak and the benchmark S&P 500 slipping to its biggest one-day fall in three months. Analysts said a recent rally in stocks, which had been charged by investor hopes for Federal Reserve interest rate reductions early next year, hit resistance levels.”This could be due to an overbought market as rate cuts optimism ran out of steam,” said Tina Teng, market analysts at CMC Markets, in a note.Adding to the downbeat sentiment was a disappointing annual forecast from logistics group FedEx (NYSE:FDX). Shares in the parcel deliverer, which is often seen as a bellwether for the state of the U.S. economy, slumped by more than 12%.2. U.S. Treasury yields fallThe nose-dive on Wall Street came despite a drop in U.S. Treasury yields, which touched five-month lows on Wednesday on enthusiasm for Fed rate cuts.Bets that the Fed will move to slash rates from over two-decade highs in the spring have grown since last week, when the central bank hinted that it may soon embark on a dovish policy pivot. According to Investing.com’s Fed Rate Monitor Tool, there is a more than 68% chance that the Fed will lower borrowing costs by 25 basis points as early as March.These expectations were bolstered by Philadelphia Fed President Patrick Harker, who told a local radio station that officials “don’t need to raise rates anymore.” Harker added that the outlook for inflation was improving after a post-pandemic period of red-hot price growth.His statements suggested that loosening in policy may be coming in 2024, although some members of the rate-setting Federal Open Market Committee have attempted to temper such predictions in recent days.3. Micron’s upbeat forecastShares in Micron climbed in premarket trading in New York on Thursday after the memory chipmaker unveiled a better-than-expected second-quarter revenue forecast.Idaho-based Micron said that now sees revenue at $5.3 billion, plus or minus $200 million, during the period, topping Bloomberg consensus estimates of $4.99B.In prepared remarks, Chief Executive Sanjay Mehrotra said the outlook was boosted by “a strong inflection in industry pricing” that will allow the company “to benefit from higher prices” next year and into 2025.Aiding Micron has been soaring hype around generative artificial intelligence. The trend has boosted corporate demand for the firm’s high-bandwidth memory chips that help power the large language models underpinning AI technology.”We are in the very early stages of a multi-year growth phase catalyzed and driven by generative AI, and this disruptive technology will eventually transform every aspect of business and society,” Mehrotra noted.4. Paramount, Warner Bros Discovery in early merger talks – reportsWarner Bros Discovery (NASDAQ:WBD) and Paramount Global have discussed a potential tie-up that would bring two of the world’s largest media companies, according to multiple media reports.Citing people familiar with the matter, reports said that Warner Chief Executive David Zaslav and his counterpart Bob Bakish at Paramount held talks at a lunch in New York this week. The sources warned news outlets that these were early stage discussions and may never materialize.Axios, which first reported on the talks, said that the companies were considering a deal that would see Warner Bros buy either Paramount Global or its parent National Amusements Inc.A possible merger was widely viewed as a move by Warner and Paramount to shore up profitability and lower costs during a time of fierce competition from streaming rival Netflix (NASDAQ:NFLX).5. Oil rises amid trade disruption fearsOil prices edged up on Thursday as concerns remained over global trade disruptions due to tensions in the Middle East.By 04:58 ET, the U.S. crude futures traded 0.4% higher at $74.50 a barrel, while the Brent contract climbed 0.4% to $79.97 per barrel.Gains were limited, however, after the Energy Information Administration announced on Wednesday that U.S. crude inventories rose by 2.9 million barrels last week, compared with expectations for a 2.3 million barrel drop. The figures served to exacerbate worries over demand in the world’s largest consumer.The EIA also said U.S. crude output increased to a record 13.3 million barrels per day last week, up from the prior all-time high of 13.2 million barrels.Crude prices have surged this week after shipping operators announced plans to avoid the Suez Canal following attacks by the Iran-backed Houthi group on vessels in the Red Sea, potentially impacting oil supplies to the important Asian market. More

JAKARTA (Reuters) -Indonesia’s central bank held policy rates steady on Thursday to support the rupiah and keep inflation at bay, but indicated there was room for monetary easing in the second half of 2024.Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate unchanged at 6.00%, as widely expected by economists in a Reuters poll. Its two other policy rates were also kept steady.While inflation in Southeast Asia’s largest economy has cooled faster than the central bank expected, growth has weakened this year amid shrinking exports driven by falling commodity prices and sluggish global trade.BI has kept monetary policy tight due to volatility in the rupiah exchange rate, which has been hit by capital outflows as the Federal Reserve aggressively hiked interest rates. BI raised Indonesian rates by a total of 250 basis points rate between August 2022 to October.The current level of its policy rate was consistent with BI’s focus on rupiah stability to ward off imported inflation and keep the inflation rate within target in the next two years, Governor Perry Warjiyo told a press conference.Global market uncertainty has begun to ease, with policy rates in many central banks already at their peak, Warjiyo said, predicting the Fed would start cutting rates in the second half of 2024 by as much as 50 bps.However, when asked if BI would follow the Fed’s footsteps, Warjiyo said: “No. We take (federal funds rate) into consideration but we will not follow. What we aim for is inflation within a 1.5% to 3.5% target range in 2024 and 2025.” “We can better measure FX risks in the second semester of next year,” he added. “If the rupiah strengthens earlier and inflation can stay low, the room (for easing) may be open, but we will not rush.”The central bank said it expects upward bias in volatile food inflation next year due to supply issues, and policymakers will continue to monitor the situation.BI maintained its outlook for GDP, forecasting 4.5%-5.3% for this year and 4.7%-5.5% in 2024.Myrdal Gunarto, economist with Maybank Indonesia, said the earliest BI could trim policy rates was in May or June, as prices would peak during the Eid al-Fitr holidays in April. The magnitude of cuts will likely match the Fed’s easing, he added. Capital Economics predicted BI would move before the second half of next year.”…with economic growth set to struggle and inflation likely to remain subdued, we think easing will come sooner than that. We have cuts pencilled in for the central bank’s April meeting,” Ankita Amajuri, its economist said in a note.All economists polled by Reuters before Thursday’s decision had expected BI would start loosening monetary policy in the third quarter of 2024.The rupiah has strengthened in the past week as dovish comments by Fed policymakers boosted emerging market assets. The rupiah was largely unchanged after Thursday’s announcement. More