Aurelia Butler

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. Birkenstock’s shares kept on falling yesterday, and we are starting to wonder if the shoe business is all it’s cracked up to be (see Dr Martens, Crocs and Nike’s recent performance). If you have a theory about footwear-specific investment risks, email us: [email protected] and [email protected]. September’s CPI: looks bad, could be noiseOn the face of it, yesterday’s consumer price index release was bad. Monthly core inflation moved up for the second month running, this time fuelled by a re-acceleration in rent inflation. Supercore inflation, or ex-housing core services, shot up from 0 per cent in August to 0.6 per cent in September. Markets didn’t like it. Yields surged, led by the long end, and stocks sold off. Presumably because small caps hate high rates, the Russell 2000 fell 2 per cent.The three-month trend in core inflation has turned up:The rent inflation uptick, from a monthly 0.3 per cent to 0.6 per cent, feels unsettling because moderation in this category has been such an important part of the disinflation narrative. Weren’t the CPI shelter measures supposed to be following the private-market rent indices like Zillow and Apartment List down by now? The idea was that as new leases pass into the CPI, which also includes existing leases, you’d see convergence.We put that question to Omair Sharif of Inflation Insights, who replied that the Zillow and Apartment List measures “tell you directionality, but don’t take them as gospel for magnitude”. This is because the underlying lease data is different. The CPI runs a recurring survey of a consistent sample of leases, spread across neighbourhoods both shabby and swanky. The private-market measures, in contrast, tell you what is happening to the new leases that happen to show up in online listings, which tend to be higher-end. Sharif’s preferred leading indicator of CPI shelter is the Bureau of Labor Statistics’ recently released new tenant repeat rent index (NTRR). Like Zillow or Apartment List, this measure focuses on new leases, but unlike them, the NTRR uses the same lease data as the CPI. (One downside is that the NTRR is subject to big revisions.) The NTRR leads CPI shelter by about a year and judging by it CPI shelter looks roughly on track:And given that rent inflation in August came in weaker than usual, it’s possible that the September surge is just a reversal from the prior month. The rise in supercore, too, looked noisy. It was driven by the volatile hotels category as well as an 8 per cent monthly rise in sports tickets. Still, though, it is hard to ignore how hot economic growth appears. The Atlanta Fed’s GDPNow measure is tracking third-quarter growth at a staggering 5.1 per cent, of which half is consumer spending. After months of everyone (us included) dismissing this measure as overreacting to early data, there are just two weeks to go until its final third-quarter reading. The average historical error at this stage is 1.2 percentage points. It would take a whopper error for third-quarter growth to be anything but strong.That strength may be showing up in some pockets of inflation, such as hospital services (up 1.5 per cent in September) and apparel (0.7 per cent). Car insurance inflation remains strong, and used car prices, a big recent source of disinflationary impulse, seem to be rising again in wholesale markets. That could show up in CPI soon. Yesterday’s report was not a five-alarm fire, but a bit of market nerviness seems justifiable. It’s too soon to tell if the Fed is really done. (Ethan Wu)The curious case of consumer staplesOver the past five months, the worst performing sector of the S&P 500 is consumer staples:Utilities have performed almost as badly; no other sector is even nearly as bad. This is a little odd. The appeal of the staples group, which features food and drink (Kraft Heinz, Coca-Cola), basics retailers (Walmart, Kroger, Dollar Tree) and household goods (Colgate, Kimberly-Clark), is its stability. A little underperformance in an expansion, fine. But this is ugly.There is a broad explanation that is of some help here. In 2022, when interest rates were ripping upward, the yield curve was inverting hard, and everyone was betting on recession, staples outperformed — a classic flight to safety. In 2023, as economic growth exceeded expectations and the soft landing narrative took hold, staples have simply given all that outperformance back. Here is a chart of the performance of staples relative to the market going back to the start of the pandemic:This is not quite satisfactory, however. Yes, growth is strong, but it is hard to argue that we are in a typical early-cycle expansion where one would expect staples to underperform. Indeed, as the first chart shows, most of the damage has been done to staples when stocks overall are falling. And if the falling staples are about shunning defensive assets, why hasn’t healthcare suffered more?Several Wall Street analysts have explained the downturn by noting that staples are rate-sensitive. The idea is that, especially among lower-income consumers, the rising cost of credit card and auto loans pinch the household budget. But wouldn’t this affect discretionary purchases more than toothpaste, toilet paper and groceries? There might be more switching to cheaper store brands. This might help explain why many of the weakest performers among staples have been branded food companies, from General Mills to Smucker’s. This is consistent with comments from the CEO of ConAgra Brands (Duncan Hines cake mix, Hunt’s tomato sauce, Birds Eye frozen vegetables, etc). On the company’s earnings call last week, he said that After three years of unprecedented inflation, along with other macro dynamics, consumers have felt increased financial pressure . . . This resulted in a near-term reprioritization . . . with the notable exception of summer travel, discretionary purchases have been down almost across the board . . . Within food, convenience-oriented items, typically a top consumer priority have lagged as shoppers have turned to more hands-on food prep to get additional bang for their buck . . . a reduction in wasted food and an increase in the use of leftoversThat sounds like trading down. But then why are the dollar stores — which would presumably benefit from trading down — the worst staples performers of all? And again, why isn’t a pinched consumer showing up in consumer discretionary stocks such as, say, Domino’s, Amazon or TJX? And how do we make the thrift story fit with good economic growth overall, and a tight jobs market?The food companies’ poor performance has also been put down to widespread use of the new GLP-1 diet drugs; a Walmart executive attributed lighter shopping baskets to them. But do Wegovy injections cause lower consumption of toothpaste, toilet paper and bleach?If you can make better sense of what’s going on here than I can, by all means, send an email. Geopolitics and market, revisited A few days ago we argued that, while markets were hardly responding to the outbreak of war between Israel and Palestine, that wasn’t informative, because markets are bad at pricing geopolitical risk. Well, the market continues to be calm: oil and gold, for example, are moving sideways. My argument, simplified, is that markets can’t estimate the risks, so they ignore them. Other market observers argue that the market’s indifference is actually a well-calibrated response because, simplifying again, geopolitical crises usually blow over. The average crisis ends up not mattering much to most investors. And under most definitions of what constitutes a crisis, this is true. Here, for example, is a clear and comprehensive table from George Smith, a strategist at LPL Financial, of several dozen major conflagrations going back 80 years. Note the title: The “on average, things turn out OK” argument is as true as far as it goes. The point, however, is that markets are lousy at estimating which crises are going to metastasise, which is precisely what one would want to know. Note that several of the crises that the market “took in stride” turned out to be very painful for investors, as the fourth column above shows. The second problem with averaging results of past crises is that it smells slightly of the turkey farmer metaphor. In every past instance, says the turkey, when the farmer shows up I have gotten some corn, so why not expect corn this time? A perfectly good inference, until Thanksgiving day. There is another reason — I would speculate — that markets might not bother carefully weighing geopolitical risk. The associated professional risks are asymmetrical. Say I manage money, and reduce risk exposure because I believe a regional conflict creates big risks to my portfolio. If the conflict blows over and the portfolio underperforms, that’s clearly my fault. On the other hand, say I keep my risk exposure high and the conflict turns into a war. Well, in that case, lots of people lose money in wars, and whose fault is it, really? One good readFTX’s seven alternative balance sheets, The New York Times test and Sam Bankman-Fried’s “very valuable” hair.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 hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here 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 our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday and Saturday morningGood morning. European Commission president Ursula von der Leyen and European parliament president Roberta Metsola will visit Israel today on a symbolic trip to “express solidarity with the victims of the Hamas terrorist attacks, and meet with Israeli leadership.”Today, our Warsaw correspondent previews Poland’s hugely important — and increasingly hard-to-call election this weekend, while our trade supremo reveals another negotiated deliverable from next week’s US-EU summit.Have a great weekend.Expect the unexpectedRecent policy U-turns and scandals hitting the Polish government have reinvigorated the opposition ahead of Sunday’s parliamentary elections, writes Raphael Minder.Context: Poland’s ruling Law and Justice (PiS) is seeking a third term in office this weekend, running against former premier Donald Tusk, who has been trailing in the polls. But recent bad news have directly affected the headline messages of the PiS campaign.Among those is Warsaw’s spat with Kyiv, which began with a dispute over grain and turned into a vicious blame game last month, undermining the government’s claims of being Ukraine’s fiercest supporter.A visa-for-cash scandal has left the government struggling to show it’s tough on irregular migration. And recent fuel shortages at stations of state-controlled Orlen undercut PiS’s pledge to guarantee energy security. But perhaps most worrying for PiS is the abrupt resignation of two top army commanders on Tuesday, which cast shadows over the party’s pledges to protect citizens from Russia and other security threats. Tusk poured fuel on the fire by claiming that at least 10 other officers had resigned, though the army said they were normal retirements.In the final days of the campaign, polls have shown Tusk’s Civic Platform narrowing the gap with PiS to about 5 percentage points. But the final outcome will also depend on how their possible coalition partners perform, since neither of the two big parties is likely to get an absolute majority. In fact, there is a 55 per cent chance of a hung parliament after Sunday, according to think-tank Eurasia Group. This would not only leave Polish politics in limbo but could also encourage the losing side to question the result, especially if the difference is narrow. Civic Platform has issued multiple warnings about state-orchestrated manipulation of the election, particularly after the government added a referendum to the parliamentary election. Voters will get four questions on some of PiS’s favourite topics, including migration and border security. Conspiracy theories are already rampant on social media regarding the top military brass leaving to avoid orders to intervene after the vote if PiS loses. In an already toxic campaign, such a menace has done little to ease tensions and reassure voters. Chart du jour: Apocalypse nowSevere droughts in Europe have been a harbinger of what’s to come. The World Meteorological Organization has forecast that the world will experience an “increasingly erratic” water cycle as climate change drives new patterns of both extreme flooding and drought.StealthThe US is prepared to drop objections to the EU’s new carbon border tax as part of ongoing talks to set up a green steel club at a meeting of both powers next week, writes Andy Bounds.Context: Both sides have been embroiled in a trade fight since Donald Trump slapped tariffs on steel in 2018. The tariffs were suspended in 2021, and the US and EU are currently negotiating a permanent end of the trade spat. Part of this is founding the green steel club, aimed at keeping out cheap and carbon-intensive metal imports from China.Without agreement by January 1, Washington will reintroduce tariffs ­on EU imports — 25 per cent on steel and 10 per cent on aluminium — and the EU will reactivate its retaliatory measures against bourbon whiskey and other US products.To avoid another tariff-off, Brussels has committed to a harder line on Chinese products, which the US had been pushing for. But it remains to be seen if an anti-subsidy investigation into Chinese steel will be enough to satisfy US president Joe Biden. But the signs are positive and it seems that in return, the US is ready to accept the bloc’s Carbon Border Adjustment Mechanism, which will force producers abroad to pay for their carbon emissions.According to a draft deal seen by the FT, the US should accept the scheme as talks continue until 2026, when the EU will start levying carbon charges on imported steel and aluminium along with other products.Washington had wanted a free pass from CBAM, but seems to have made peace with the scheme. Though it is an open question whether US steel exporters could still get an exemption from paying the levies in the final days of talks. And, as people on both sides note, a lot can change before 2026. What to watch today EU foreign policy chief Josep Borrell and Chinese foreign minister Wang Yi co-chair EU-China strategic dialogue.UN Security Council meets to discuss conflict between Israel and Hamas.Now read theseRecommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Imagine every death certificate issued in a particular country is lined up in front of you in 10 piles, from those who lived to the ripest of old ages on the left, to the most tragic young deaths on the right.In the pile furthest to the left are the most fortunate people in society: those who won the lottery when it came to genes, jobs and outcome. Today, in developed countries, the average certificate plucked from this pile will show an age at death in the late nineties. This is as true of deaths in the US as it is of those in Italy, Japan or Sweden. If you’re among the most fortunate in America, you will live about as long as the most fortunate anywhere in the world.In the rightmost pile, you’re looking at the least fortunate. Whether it was genetic make-up, socio-economic setbacks, or simply being in the wrong place at the wrong time, these people’s lives ended tragically early. But sifting through the certificates, it will become clear that the fates of the disadvantaged are much more country-dependent. Even the most disadvantaged in Japan and Switzerland typically make it to 60. In France, Germany and Britain, they die at about 55. In the US, it’s just 41.Much has been made of America’s life expectancy deficit, but focusing on a statistic which is an average for the whole population masks truly staggering disparities at the extremes. For men at the bottom of the US economic ladder, it’s even worse. My calculations suggest the average age of death in that group is just 36 years old, compared with 55 in the Netherlands and 57 in Sweden.It hasn’t always been this way. In the 1980s, the most disadvantaged Americans lived about as long as their counterparts in France. By the early 2000s, lives at the bottom had lengthened considerably, and while a deficit was opening up, it wasn’t worrisome. But in the past decade, the lives of America’s least fortunate have shortened by an astonishing eight years. That gap with France has become a yawning gulf. What has happened?It is common to reach for economic explanations. Widening inequalities in American longevity must be due to widening inequalities in American incomes. Shorter lives for those at the bottom must be due to a decline in material wellbeing. But the evidence suggests otherwise.US income inequality was rising throughout the 1980s and ’90s while the lives of the poorest Americans were lengthening, and inequality has been flat as disadvantaged deaths have increased. Rates of material poverty in America have fallen especially steeply over the past decade, just as the life expectancies of the least fortunate have nosedived. Plus, its poorest citizens have incomes on a par with the poorest across the developed world.To understand what is going on, we need to look not only at length of life, but at the causes of those early deaths.In most wealthy countries, if you’re desperately unlucky in the longevity stakes, you succumb to cancer before you reach 60. But if you’re unlucky in the US, you die from a drug overdose or gunshot wound by 40. Which brings us again to the most shocking statistic: among the least fortunate 10 per cent of American men, the average age at death is 36.Looking at different regions within the US paints a similar picture. Conditions such as obesity shorten the lives of rich and poor alike, but the most uniquely American afflictions have steep socio-economic gradients. Wealthy Americans who live in the parts of the country with high opioid use and gun violence live just as long as those who live where fentanyl addiction and gunshot incidents are relatively rare. But poor Americans live far shorter lives if they grow up surrounded by guns and drugs than if they don’t.The reason, then, that the least fortunate in the US live such short lives compared with their counterparts elsewhere in the developed world is not economic. In the case of guns it is sociopolitical, with entrenched positions preventing progress. And in the case of opioids, it was triggered by predatory pharmaceutical practices absent elsewhere in the world. The number of disadvantaged people in the US has not ballooned, and nor have they become poorer. But for the least fortunate Americans, their circumstances are a death sentence in a way that is not true anywhere else. [email protected], @jburnmurdoch More

(Reuters) – The Biden administration is considering closing a loophole that gives Chinese companies access to American artificial intelligence (AI) chips through units located overseas, according to four people familiar with the matter.The United States last year shook relations with Beijing when it unveiled new restrictions on shipments of AI chips and chipmaking tools to China, seeking to thwart its military advances. Those rules are set to be tightened in the coming days. A person familiar with the situation said the measure could be included in those new restrictions. In the initial round of curbs, the Biden administration left overseas subsidiaries of Chinese companies with unfettered access to the same semiconductors, meaning they could easily be smuggled into China or accessed remotely by China-based users.Reuters reported in June that the very chips barred by U.S. regulations could be purchased from vendors in the famed Huaqiangbei electronics area in the southern Chinese city of Shenzhen.Washington is now mulling ways to close the loophole, sources said, a move that has not been previously reported. The efforts to close the loophole show how the Biden administration is struggling to cut China off from top AI technology and how difficult it is to plug every gap in export controls.”Absolutely, Chinese firms are purchasing chips for use in data centers abroad,” said Greg Allen, a director at the Center for Strategic and International Studies, noting that Singapore is a big hub for cloud computing.The Commerce Department declined to comment. A representative from the Chinese Embassy in Washington did not immediately respond to a request for comment. China’s Ministry of Commerce has previously accused the U.S. of abusing export controls and called for it to “stop its unreasonable suppression of Chinese companies.” While it would be illegal under U.S. law to ship those AI chips to mainland China, it is very difficult for the United States to police those transactions, experts said, noting that China-based employees could legally access the chips located at foreign subsidiaries remotely as well.”We don’t actually know how big a problem this is,” said Hanna Dohmen, a Research Analyst at Georgetown University’s Center for Security and Emerging Technology (CSET). The United States has been seeking to halt the rise of China’s artificial intelligence capability, which helps its military develop unmanned combat systems, according to a report in The International Affairs Review, affiliated with George Washington University’s School of International Affairs.China’s AI capability depends on its access to U.S. chips. CSET found in a June 2022 report that out of 97 individual AI chips procured via Chinese military tenders over an 8-month period in 2020, nearly all of them were designed by U.S.-based companies Nvidia (NASDAQ:NVDA), Xilinx (NASDAQ:XLNX), Intel (NASDAQ:INTC), and Microsemi.Washington has been working to close other loopholes that allow the AI chips into China. In August, it told Nvidia and AMD to restrict shipments of the AI chips beyond China to other regions, including some countries in the Middle East. Sources said the new rules on AI chips expected this month will likely apply those same restrictions more broadly to all companies in the market.It is less clear how the U.S. government might close the loophole allowing Chinese parties to access U.S. cloud providers like Amazon (NASDAQ:AMZN) Web Services, which give their customers access to the same AI capabilities. But sources say the Biden administration is grappling with that issue as well. “Chinese persons can completely legally access the same chips from anywhere in the world. There are no rules about how they can be accessed,” said Timothy Fist, a fellow at Washington-based think tank Center for a New American Security. More

TOKYO (Reuters) – The dollar remained firm on Friday, putting pressure across a basket of currencies as stronger-than-expected U.S. consumer inflation revived prospects that the Federal Reserve will have to keep rates higher for longer.U.S. consumer prices were pushed higher by a jump in rental costs in September, data showed on Thursday. Although steady moderation in underlying inflation pressures supported expectations that the Fed would not hike interest rates next month, the data did raise the chance of rates staying elevated for some time.”CPI data for September reveal further challenges with the ‘last mile’ in pushing inflation persistently back towards the 2% target,” said David Doyle, Macquarie head of economics, in a note.The dollar index, which measures the U.S. currency against six of its major peers, sat at 106.49 in the Asian morning.The boost to the greenback overnight saw the yen sliding back toward the sensitive 150-line briefly touched last week, with the Japanese currency last at 149.75 per dollar. Markets fear Japanese authorities may intervene if the yen weakens past the 150 level, considered by some market traders as a line-in-the-sand that could spur action from Tokyo as it did last year.On the day, markets are also focused on a handful of economic data from China out later in the Asian morning, including trade data, consumer inflation and producer prices for September. “Given the shift in language from China’s central government about more significant fiscal stimulus…investors will welcome signs that the data provides ample scope to allow for more of it,” said Kyle Rodda, senior financial market analyst at Capital.com, in a note.Bloomberg News reported earlier in the week that China is considering raising its budget deficit for 2023 as the government prepares to unleash a new round of stimulus to help the economy meet the official growth target.Ahead of the data, the offshore Chinese yuan was flat versus the greenback at $7.3075.The Australian dollar, which often trades as a proxy for China growth, stood at $0.6321, while the kiwi fell to $0.59275.Elsewhere, the euro ticked up nearly 0.1% to $1.0536 after taking a tumble overnight against the dollar.Sterling was last trading at $1.21885. More

SINGAPORE (Reuters) -Singapore’s central bank on Friday kept its monetary policy unchanged, as expected, as inflation in the city-state moderates and economic growth was higher than expected.The Monetary Authority of Singapore (MAS) said it will maintain the prevailing rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred.MAS also said it would move to a quarterly schedule of issuing monetary policy statements from 2024, which would be released in January, April, July, and October.”Against the external outlook, prospects for the Singapore economy are muted in the near term but should improve gradually in H2 2024,” MAS said in a statement. The move to more frequent policy reviews surprised economists.”The shift to a quarterly review is a surprise as the MAS has always emphasised that monetary policy is the medium-term stance rather than short-term,” Maybank economist Chua Hak Bin said.OCBC economist Selena Ling said the increased frequency was a reflection of how the global economic and geopolitical landscape is evolving.Gross domestic product (GDP) rose 0.7% in the July to September period on a yearly basis, according to advance estimates published by the trade ministry on Friday. Economists polled by Reuters had expected growth of 0.4%.Inflation has cooled from a 14-year high of 5.5% in January and February to 3.4% in August.As a heavily trade-reliant economy, Singapore uses a unique method of managing monetary policy, tweaking the exchange rate of its dollar against a basket of currencies instead of domestic interest rates like most other countries. More

Apple Pay, Google Pay and China’s WeChat Pay, which have grown rapidly in recent years, are not currently designated as payment systems, putting them outside Australia’s financial regulatory system.The proposed rules would enable the Reserve Bank of Australia (RBA) to monitor digital wallet payments in the same way as credit card networks and other transactions. It would also give powers to the treasurer to order regulators to check if any payment platforms pose risks to the country. “(The) government is addressing the risks posed by new digital payment services, which are currently unregulated, to protect consumers, promote competition and spur innovation,” Treasurer Jim Chalmers said in a statement.The draft law would expand the definitions of “payment system” and “participant” in Australia’s existing laws, treasury documents showed.Payments infrastructure and the regulatory framework have not kept pace with transitions in finance, particularly in Australia’s digital economy and payments.In a June report, the Australian Banking Association said it was witnessing a “phenomenal shift” in payment preferences in recent years, with the number of mobile wallet transactions in the country surging to 2.4 billion in 2022, from 29.2 million in 2018.Google and Apple have been opposing the government’s move to designate them as payment providers, saying customers only use their phones to use cards issued by banks to make payments.Apple declined to comment on the draft law and instead referred to a submission it made to the treasury in July, when it said any reforms “should be proportionate to the limited, indirect role” digital services had in the payment system. Google has been working closely and consistently with the Australian government in support of its reform of the country’s payments system, Lucinda Longcroft, director of public policy at Google Australia, said in an emailed response. The government has sought feedback from stakeholders on the draft legislation until Nov. 1. The legislation is expected to be introduced to parliament this year. More