Aurelia Butler

The European Central Bank is expected to halt the most aggressive series of interest rate rises in its history when policymakers meet in Athens this week.Yet, with eurozone inflation running at more than twice its target and the Israel-Hamas conflict pushing up energy prices, ECB president Christine Lagarde is expected to make clear that rates are likely to stay at — or above — their current level for some time. Most investors, looking at this year’s near-stagnation of the eurozone economy and the downward trajectory of inflation, view the chances of a further rise in eurozone rates as slim. “They will keep the option open for additional rate hikes, but the bar is pretty high for that to happen,” said Konstantin Veit, a portfolio manager at US investment group Pimco. Yet the idea of eurozone interest rates staying higher for longer than anticipated earlier this year is gaining ground, despite signs that the region’s economy is hardly growing. “Only a month ago, the market had three full rate cuts priced in for the ECB next year, but now it is pricing in slightly more than two,” said Veit. “There are still a lot of risks for inflation out there and it is too early to say exactly how soon the rate cuts will start.”In response to a double-digit surge in Europeans’ cost of living, the biggest for a generation, the ECB has raised borrowing costs at 10 consecutive meetings. This lifted its benchmark deposit rate from an all-time low of minus 0.5 per cent to a record high of 4 per cent.Officials remain cautious however about how long it will take to complete the “last mile” of their journey in returning inflation to their target of 2 per cent. Lagarde said this month that price pressures remain “undesirably high”, despite dropping to nearly a two-year low of 4.3 per cent last month. The rate is expected to drop even further in October, though data is not published until a few days after this week’s meeting. More evidence that economic activity was weakening and inflation was cooling came on Tuesday, when the latest survey of purchasing managers pointed to further declines in eurozone business output, a stepping up of job-cutting and a drop in price pressures affecting companies. The ECB’s own survey of banks also showed a continued contraction in the supply of credit to households and businesses from eurozone banks.  However, the conflict between Israel and Hamas has raised fears of wider tensions in the Middle East and pushed up oil and gas prices in recent weeks, which economists worry could keep inflation stubbornly high.“The attacks on Israel, and the potential knock-on effects on the oil market, pose a new upside risk to inflation,” said Dirk Schumacher, a former ECB economist who is now at French bank Natixis. “Downside risks to growth, at the same time, have also increased, complicating the picture further for the ECB.”Greek central bank governor Yannis Stournaras, who is one of the ECB’s 26 governing council members, told the Financial Times recently that it should avoid a “knee-jerk reaction” to the jump in energy prices caused by the Middle East conflict. ECB chief economist Philip Lane also played down fears, saying higher borrowing costs should prevent higher prices from causing a broader surge in consumer prices. “When rates are restrictive then the ability of firms to pass on those energy price increases into consumer prices is less,” Lane told the Dutch newspaper Het Financieele Dagblad.But Lane also voiced concern about soaring incomes, which rose 4.5 per cent in the region in the year to the second quarter. “We need to see wage growth slow down,” he said. “If inflation shocks are sufficiently large or persistent, the ECB will have to be open to doing more.”Rate-setters are also expected to discuss the possibility of tightening monetary policy via their balance sheet. Up for debate is whether to stop reinvesting the proceeds of a €1.7tn portfolio, bought in response to the pandemic, earlier than expected. The recent sell-off in bond markets, which drove government borrowing costs up to their highest levels for a decade, has made some nervous about shrinking the balance sheet, however. They say the ECB needs the flexibility to target the proceeds of maturing bonds more towards the debt of any country hit by a sharp divergence, or fragmentation, in financing costs compared to others. Italy’s borrowing costs have already risen more than those of Germany on concerns about Rome’s rising fiscal deficit, taking the closely watched spread between the two countries’ 10-year bond yields above 2 per cent for the first time in months.“Given the rise in long-term yields — with 10-year Italian yields around 5 per cent and additional fiscal risks — we expect the ECB to move cautiously,” said Sven Jari Stehn, economist at Goldman Sachs.Some ECB council members are also pushing for it to cut the interest it pays to commercial banks. Rate-setters would do so by increasing the minimum amount of reserves the sector needs to park at the central bank, on which lenders earn nothing. The idea is controversial as it seems mainly designed to reduce the heavy losses some eurozone national central banks are racking up rather than contributing to the fight against inflation.“If concerns about central bank losses intrude into policy and the ECB seems to have other objectives apart from price stability then it could negatively affect central bank credibility,” said Veit at Pimco. The debate is unlikely to be settled until the ECB completes a wider review of its operating framework. That review, which will assess the optimum size of its balance sheet, is due to be completed next spring. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK business activity shrank for the third consecutive month in October, according to a closely watched survey, indicating that high interest rates and prices are continuing to weigh on the economy.The S&P Global/Cips Flash UK composite purchasing managers’ output index, a measure of the health of the manufacturing and services sector, marginally increased to 48.6 in October from 48.5 the previous month.The reading remained below the 50 mark, indicating that a majority of businesses continued to report a contraction in their output.“The UK economy continued to skirt with recession in October, as the increased cost of living, higher interest rates and falling exports were widely blamed on a third month of falling output,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.The PMI indices are closely watched as a near real-time gauge of the economy as official statistics lag by several months. The PMIs suggested that high interest rates are hitting demand, employment and confidence across the economy.Ruth Gregory, economist at Capital Economics, said the readings supported “our view that a mild recession is under way and that the Bank of England has finished hiking interest rates”. The BoE is widely expected to leave interest rates unchanged at 5.25 per cent when it meets on November 2. However, economists warned that the PMIs are not a perfect predictor of economic growth. The flash estimates for September were later heavily revised. October’s preliminary results may be “taken with a pinch of salt”, said Sandra Horsfield, economist at Investec.The flash UK estimates, based on a survey conducted between October 12 and 20, showed that the services sector index ticked down to 49.2 in October from 49.3 in the previous month, indicating a modest decline in output. The final reading will be released at the end of the month. The manufacturing index improved to 45.2 from 44.3 in the previous month but marked eight consecutive months in negative territory — the longest such period since the financial crisis. Forward looking indicators, such as new orders, deteriorated in October with panellists citing caution among corporate clients, alongside stretched household budgets due to cost of living pressures. Business outlook for the year ahead also dropped to its lowest level since December 2022.Business lamented weaker exports, especially in the manufacturing sector, while companies reduced their job count for the second consecutive month.Some economists expect high inflation to come down this year, boosting real incomes and spending in the final quarter. But Thomas Pugh, economist at RSM UK, said: “Growth is likely to remain marginal over the next year, meaning that it wouldn’t take much of a deterioration, in sentiment or economic conditions, to tip the UK into a recession.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Taiwan’s leading presidential candidate has blasted China over a probe of Apple supplier Foxconn, accusing Beijing of unfairly targeting the Taiwanese company ahead of an election early next year. “China must not demand Taiwanese enterprises take sides,” said vice-president Lai Ching-te, the candidate from the ruling Democratic Progressive party and frontrunner for the January polls, accusing Beijing of pressuring Taiwanese companies “every time an election nears or [ordering] them to support certain candidates”. Such tactics “hurt everyone”, he added at a campaign event on Tuesday. “If they [Foxconn] are hit without their own fault, they will only lose confidence in China,” he said. “Once they start being afraid, they will gradually move to other countries and set up their production bases.”“That is a loss for China, too,” said Lai.The Global Times, the Chinese state-owned nationalist tabloid, reported on Sunday that Foxconn subsidiaries in several Chinese provinces were being investigated for tax and land use issues. Foxconn has said it will co-operate with the investigation.Taiwan was for many years one of the largest sources of foreign direct investment in China after Taipei lifted a ban on such activity 30 years ago. Although new Taiwanese investment in China peaked 10 years ago, Taiwan-owned companies such as Foxconn, the world’s largest contract electronics manufacturer, rank among the country’s largest private exporters and employers.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Beijing has denounced Lai as a separatist, and he has historically been aligned with a more pro-independence wing of the DPP, but he has pledged to maintain incumbent president Tsai-Ing-wen’s policy of preserving the status quo across the Taiwan Strait. Beijing claims Taiwan as part of its territory and has threatened to seize it by force if Taipei refuses to submit to its sovereignty.Chinese authorities have in the past also pressured local subsidiaries of Taiwanese companies at politically sensitive times, and have repeatedly urged Taiwanese companies to support peaceful ties.Foxconn’s billionaire founder Terry Gou is also vying for the presidency as one of three opposition candidates. He quit the Foxconn board last month after launching his campaign but he still holds a 12.5 per cent stake in the company.Gou has not commented on the probe, and his campaign office did not respond to requests for comment.The news of the Foxconn probe prompted unusual unity between Taiwan’s ruling party and its political opposition, with Ko Wen-je, candidate for the small Taiwan People’s party, also attacking China’s move.“China calls itself a great power. No matter if it is towards Foxconn or others, they should explain [the investigation],” Ko said at a meeting with foreign journalists on Tuesday.Ko, who is neck and neck in the polls with the candidate of the Kuomintang, the largest opposition party, has mostly campaigned on criticism of the government in Taipei, and advocates for a resumption of dialogue with China, which Beijing cut off after Tsai came to power in 2016.Lai called on China to “take good care of and cherish” Taiwanese companies, which he said had helped boost China’s economy, develop its industry and stabilised its society by creating large numbers of jobs.“Taiwanese companies have made a big contribution to China,” he said. “This is like the water benefiting the fish and the fish benefiting the water; it is a win-win situation.” More

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SenseTime, once the darling of China’s artificial intelligence sector, has been pushing to diversify away from unreliable government revenues by snapping up high-powered chips that every AI company wants.Its effort now seems doomed by the latest round of US government export controls preventing Nvidia and its rivals from selling the powerful chips, needed to train the latest AI systems, to Chinese customers and their foreign subsidiaries. Since it went public in 2021, SenseTime has been seeking to reduce its reliance on its core surveillance business, which sells AI-powered security cameras to Chinese authorities. However, the Hong Kong-based company’s move into data centres packed with cutting-edge AI chips — which it rents out to AI companies — now appears stymied by the US-China “chip war”. To add to SenseTime’s problems, analysts point to investors shying away.“No one wants to touch this space in China,” said Andy Maynard, head of equities at China Renaissance, noting that many foreign investors cannot invest in the surveillance sector due to the Biden administration’s recent move to ban some US investment in China’s quantum computing, advanced chips and artificial intelligence. “SenseTime needs a dramatic catalytic event in the company to turn its share price around,” he said.Shares in SenseTime have dived more than 75 per cent since June 2022. That was the date, six months after its initial public offering, that its cornerstone investors were allowed to sell the stock. The company — which is yet to turn a profit — now has a market capitalisation of $5.9bn, compared with $16.5bn at the time of its listing. The US last week said it was tightening rules on AI chip sales to China, in a blow to Chinese groups like SenseTime that rely on Nvidia and other companies selling high-performance semiconductors in the country.Washington’s tighter controls come as Chinese AI groups such as SenseTime and iFlytek are pivoting away from their traditional strength in surveillance technology, which relies heavily on unstable revenues from cash-strapped local governments. A digital news officer produced by SenseTime. Its A100 chips are highly prized following the growth of domestic AI start-ups More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.At China’s Belt and Road Forum last week, where Beijing marked the 10th anniversary of its lavish $1tn infrastructure programme, foreign leaders and executives were repeatedly invited to participate in China’s “high-quality development”.One of President Xi Jinping’s favourite slogans, the term is vaguely defined. But few sectors probably encapsulate its underlying ambition better than China’s green technology industries, particularly its electric-vehicle makers. Not only has China become an EV leader with its own brands and advanced technology, it is also rapidly increasing its exports. But while few could argue with the pursuit of high-quality industry, the broader question for Beijing is whether prioritising these sectors at this moment is the right answer for China’s more immediate malaise — slowing economic growth driven by a deep and sustained real estate slump.Central to this question is whether new sectors such as EVs can generate as much employment and economic growth as the once-mighty property sector. At its height three years ago, before a government crackdown on debt led to defaults among developers, real estate accounted for about 30 per cent of China’s economy, dwarfing EV production’s low-single digit share. But in a new report, Goldman Sachs analysts Maggie Wei and Xinquan Chen argue that each renminbi of “final demand” in “new energy vehicle” production generated only marginally less domestic value-added for the economy compared with the residential housing construction sector. Grouping EV production with battery production for other uses, as well as investment in wind and solar power generation, these “New Three” industries over time could partly offset the long-term decline in real estate. But even as they grew bigger, there would still be an average net negative 0.5 percentage point drag from the property sector’s decline on China’s gross domestic product growth over the five years until 2027, the report said.This would tail off in 2027, by which stage EV production would have risen from 6.7mn units last year to about 18mn units. They would account for about 60 per cent of total passenger car production in China by then, from about 29 per cent in 2022. Much would depend on the willingness of Chinese consumers to spend. In a low-growth scenario, production growth would rise 2 per cent a year, mostly driven by exports. In a higher-growth situation, Chinese consumers would replace their existing combustible engine car with more than one EV. But complicating the prospects for higher consumption is that the new greener industries also produce fewer jobs. The Goldman analysis pointed to 3mn net urban jobs losses next year for the property, internal combustion engine vehicle and “New Three” sectors combined. Growth in the “New Three” sectors would offset about half of the 6mn job losses in the property and internal combustion engine vehicle industries. Herein lies the challenge for Beijing. While the government fetes advanced industry as the future, particularly at a moment when it is facing geopolitical challenges from the US, these sectors generally do not employ as many people.Meanwhile, families had about 80 per cent of their wealth in property prior to the downturn. They are watching this deflate, with house prices falling again in September despite incremental government support measures. “It is too early to call the bottom for the property sector,” says Nomura chief China economist Ting Lu.Until the government can find a way to restore confidence among homeowners, as well as among businesspeople and entrepreneurs, the economy will continue to struggle. Worse still, from the government’s perspective, there will be fewer people willing to buy the shiny products pouring out of China’s new high-quality industries at a time when developed countries are shutting the doors.Many economists argue that Beijing not only has to stabilise the property market if it really wants to get people to feel secure enough to unlock their savings and begin spending again. It also needs to implement deeper reforms, such as providing better social welfare and access to quality healthcare. To be sure, such structural reforms are difficult. But doing so might finally bring about what the state-run media calls “high-quality consumption”. [email protected] More

TOKYO (Reuters) – The dollar softened against a basket of currencies on Tuesday, mirroring a dip in Treasuries yields as investors awaited key U.S. economic data before the Federal Reserve’s monetary policy meeting next week.The dollar index last sat around 105.57, having lost over 0.5% in the previous session as U.S. Treasury yields tumbled.The greenback found support last week after Fed Chair Jerome Powell said U.S. economic strength might warrant tighter financial conditions, which pushed the benchmark 10-year yield above 5% to its highest since July 2007.Bitcoin returned the market spotlight with the virtual currency soaring on speculation that the United States could soon approve a bitcoin exchange-traded fund.Market attention now turns to some of the last bits of U.S. economic data before the Fed’s meeting on Oct. 31 – Nov. 1, with the flash purchasing managers’ index (PMI) out later on Tuesday and gross domestic product due on Thursday.The PMI data could set the market expectations ahead of the GDP report, said Matt Simpson, senior market analyst at City Index.”If the data leans far enough one way it could prompt a strong dollar rally or breakdown with the Fed in a blackout period,” he said, referring to the period before the policy meeting in which limits are placed on public communications from central bank officials.The Fed is expected to hold rates at its meeting next week. The European Central Bank is also expected to leave interest rates untouched at their meeting on Thursday, after raising its key interest rates 25 basis points in September.The euro was mostly flat at $1.0665, holding gains against the dollar on Monday.Meanwhile, the dollar’s retreat gave the battered yen some slight relief. The Japanese currency had hit the sensitive 150-level both on Friday and Monday and was last flat against the greenback at 149.77.Traders see the 150 threshold as a possible line-in-the-sand for Japanese authorities to intervene in the currency market. However, the data out of the United States this week could have the yen inching back into the danger zone if it comes in strong.”The yen will be particularly sensitive to hot U.S. data, especially if it causes Treasuries to blow through what’s looking like a key resistance level of 5% or so,” said Kyle Rodda, senior financial market analyst at Capital.com.In cryptocurrency markets, bitcoin leapt as much as 14% to a 2-1/2 year high of $34,283. More