Aurelia Butler

Receive free Agricultural commodities updatesWe’ll send you a myFT Daily Digest email rounding up the latest More

This article is an on-site version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a weekToday’s top storiesUK prime minister Rishi Sunak confirmed the cancellation of the northern leg of the HS2 rail project in favour of other local transport schemes. He also announced education reforms and a raising of the smoking age in his keynote speech to the Conservative party conference. Sunak’s strategy makes opposition leader Keir Starmer the real election issue, says UK chief political commentator Robert Shrimsley.Kevin McCarthy was ousted as Speaker of the US House of Representatives, becoming the first leader in the history of the lower chamber of Congress to be removed from the position. The move highlights the sharp divides in the Republican party and threatens to bring in a new era of dysfunction in Washington. US national editor Edward Luce laments the return of American isolationism.Russia warned it would oppose efforts to reach a global agreement to reduce the use of fossil fuels, setting the course for a clash with the EU and US at this year’s UN climate summit. Sultan al-Jaber, president-designate of COP28, told the FT that the oil and gas industry must prepare for an inevitable “phase down” and not be seen to work against decarbonisation efforts.For up-to-the-minute news updates, visit our live blogGood evening.“No one knows when this is going to stop,” said Chris Turner, global head of markets at ING. “It feels like something is going to snap but I’m not quite sure what.”Despite a partial recovery today after weak US private payrolls data helped temper concerns that continued domestic economic strength meant interest rates would have to stay higher for longer, analysts have warned that the sharp moves of recent days in global bond markets are likely to inflict damage on parts of the financial system. The sell-off began after the US Federal Reserve hardened its commitment to the higher for longer approach two weeks ago and was further fuelled by better than expected economic data, raising expectations of a “soft landing” for the economy. Prior to today’s payrolls data, bond yields in the US and Europe hit their highest levels for more than a decade.Benchmark 10-year US Treasuries reached a 16-year high of 4.88 per cent before falling to 4.74 per cent, while German 10-year Bund yields — a benchmark for the eurozone — dropped back to 2.92 per cent after reaching 3 per cent in early trade, the highest level since 2011. Falling eurozone retail sales data today suggests higher borrowing costs are hitting consumer spending. In the UK, the 30-year gilt yield passed 5 per cent this week, the highest since the aftermath of former prime minister Liz Truss’s “mini” Budget, before falling again. The rise in borrowing costs comes at a difficult time for chancellor Jeremy Hunt as he prepares his Autumn Statement on the public finances, which will take place on November 22.And in Asia, Japan’s central bank this morning bought $12.7bn of bonds as yields also reached their highest levels in a decade. The property market is one of the most visible victims of higher yields. US mortgage rates hit their highest levels in almost 23 years last week while home loan applications fell to the lowest point since the mid-1990s. European mortgage holders are also exposed, especially in the UK where interest rates are higher and where there are more people on short-term fixed-rate deals. Investment strategist Edward Yardeni, the man who coined the term “bond vigilantes” in 1983, writes in the FT today that they are back with a vengeance, challenging Treasury secretary Janet Yellen’s policies by raising yields to levels that threaten to create a debt crunch. If yields pass 5 per cent, he says, Yellen needs to tell President Joe Biden that these vigilantes could also wreck his chances of re-election.Listen to the Unhedged podcast on the “increasingly odd” bond market.Need to know: UK and Europe economyUK retail inflation fell to its lowest level in a year in September, according to trade body the British Retail Consortium. Shop prices rose at 6.2 per cent, down from 6.9 per cent. The services sector contracted less than estimated in September, according to updated PMI survey data. The original estimate two weeks ago caused a slide in the pound amid fears of an imminent UK recession.The European Commission confirmed it was postponing key elements of its environmental policies including toxic chemicals regulation. Germany and France are trying to resolve a stand-off over nuclear power and help unblock reforms to the EU’s electricity market. The EU is looking at export controls in sensitive technology in semiconductors, artificial intelligence, quantum computing and biotechnology as part of “de-risking” relationships with China and other authoritarian regimes.The Russian rouble yesterday sank beyond 100 to the US dollar as western sanctions hit export revenues. Russia specialist Alexandra Prokopenko says oligarchs are losing out as Vladimir Putin courts a new class of loyal asset owners.Ukraine’s accession to the EU would give Kyiv about €186bn over seven years and turn “many” existing members into net payers for the first time, according to modelling seen by the FT. European house prices had their first annual fall since 2014 in the three months to June after banks increased mortgage rates and tightened lending criteria to put an end to almost a decade of rising house prices in the region.Need to know: global economyIMF chief Kristalina Georgieva told the FT she backed reforms that would give China more voting power, warning of “devastation” if the institution did not have enough resources to help struggling countries. Despite its importance to the world economy, China has just a 6 per cent share of the votes.India and its neighbours are expected to grow more quickly than other regions this year, the World Bank said, “kind of the polar opposite” of China and east Asia. Growth in the south Asia region, including Pakistan, Bangladesh and Sri Lanka, is forecast to be 5.8 per cent, upgraded from 5.6 per cent.Indian companies are beginning to make forays into Jammu and Kashmir, driving a revival of construction, tourism and entertainment, two years after the government cracked down on the northern territory, home to a decades-long separatist project. Cars, watches and handbags could be targeted by new anti-money laundering controls in Singapore in the aftermath of a S$2.8bn (US$2bn) scandal.After a brutal civil war, Ethiopia needs $20bn to rebuild. A Big Read assesses its chances of success. Need to know: businessThe FT revealed that the Premier League was revamping the sale of its TV rights in the UK in favour of fewer, bigger packages to drive proceeds.Tesco, the UK’s largest supermarket group, raised its profit forecast for the year after a jump in pre-tax earnings in the first six months to £1.2bn.Chinese electric-vehicle makers’ push into Europe has echoes of how Japanese car companies broke into the US in the 1970s, says Asia Lex editor June Yoon. To compete, European rivals need to drive down production costs using proven technologies, she writes, even if that means early models lack the character of their petrol counterparts. Company ratings on ESG — environmental, social and governance performance — are coming under intense scrutiny for the first time from regulators and politicians. Here’s an FT deep dive into the debate.A fall in Covid-19 infections has meant a reversal in fortunes for vaccine makers, with shares sliding on sales uncertainty and questions on their future growth.The World of WorkUK migration advisers called for the abolition of the “shortage occupation list”, one of the main routes through which employers can hire overseas workers. The Migration Advisory Committee said the current system led to the driving down of wages and exploitation by bosses.Smashing the class ceiling: the Working It podcast discusses what employers can do on social mobility and ensure people from disadvantaged backgrounds are not held back. Interested in applying for an MBA? Get expert advice from admissions officers, successful alumni and others with our newsletter course: MBA 101. Learn everything you need to know about applying for the best programme for you — in just six weeks.Some good newsA vaccine-like drug administered once a year to prevent HIV could be ready just after 2030, according to drugmaker ViiV. The prospect could transform management of a virus that has led to the deaths of nearly 40mn people over more than four decades. Recommended newslettersWorking it — Discover the big ideas shaping today’s workplaces with a weekly newsletter from work & careers editor Isabel Berwick. Sign up hereThe Climate Graphic: Explained — Understanding the most important climate data of the week. Sign up hereThanks for reading Disrupted Times. If this newsletter has been forwarded to you, please sign up here to receive future issues. And please share your feedback with us at [email protected]. Thank you More

From mainFT:UK services activity contracted by less than first estimated in September, according to a closely watched survey published on Wednesday.The final S&P Global/Cips UK services PMI business activity index, a measure of the health of the sector, was 49.3 last month — down slightly from 49.5 in August, but well above the flash estimate of 47.2.It contrasts quite sharply with another mainFT report, written September 22nd:UK economic activity has fallen at the fastest pace since January 2021, according to a closely watched survey that suggests the chances of a recession have increased.That data release coincided with the pound reaching a six-month low.We’ve written a lot recently about economic statistics and narratives so, uh, let’s continue to do that.The well-worn cliché (itself a well-worn cliché) about PMIs (purchasing managers’ indices), in evidence above, is that they are closely watched. And it’s true, because the surveys — based on businesses’ responses to a number of questions about conditions — have tended to do a pretty good job of acting as faster indicators for growth.They are not, however, without issues. The onset of the pandemic exposed some of the problems PMIs have with handling acute movements within some sub-components. Former Alphavillain Claire Jones wrote about this a lot.Many PMIs arrive in two phases: the “flash” reading, released before the end of the month being measured and based on the responses received at that point, and the “final” reading, released early in the subsequent month. The new beef is over the gap between these readings.For September, the gap between flash (46.8) and final (48.5) readings in the “composite” PMI, which combines the services and manufacturing surveys, was the third biggest on records going back to 2006 (a PMI score below 50 indicates a contraction compared with the previous month, if you didn’t already know that please scroll up to enjoy the cover image joke):You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Commenting on the flash report, S&P Global economist Chris Williamson said:The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. While in today’s update, economic director Tim Moore says:Although only modest and slower than indicated by the earlier ‘flash’ PMI reading, the downturn in UK service sector output was the greatest seen since the beginning of this year and stood in contrast to solid growth during the spring months.The size of the miss has prompted some raised eyebrows in the City. Allan Monks, from JPMorgan, wrote in a note today:Revisions to growth have been in the spotlight recently, with the ONS having taken up its estimate of GDP during the pandemic by a couple of points. But the revisions to the PMI deserve a lot more attention. The average revision in the final survey has been a positive 0.2%-pt since 2006. But since 2021, that upward bias has grown to 0.4%-pts. And in 2023, it stands at 0.5%-pts. This should be borne in mind in future months.So, currently flash PMIs look about two-and-a-half times as inaccurate as the long-run average. Not very helpful.Alphaville chucked the numbers into a chart, which came out like this:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.How consequential could this be? Notably, the Bank of England’s Monetary Policy Committee was given advanced access to the (misleading) flash data ahead of its knife-edge decision to hold rates on September 21st. From the minutes of that meeting:Ahead of its final meeting, the Committee was made aware of the flash S&P Global/CIPS UK composite PMI for September that would be released publicly on Friday 22 September.For JPMorgan’s Monks, that could have been enough to shift the narrative:The upward revision to the September PMI feels especially consequential . . . Had the initial print been closer to the latest data, it is possible rates would have instead risen 25 bps in September, as had been expected at the time. That said, a big downside surprise in inflation on the eve of the decision had in any case made the outcome look very close.JPMorgan is forecasting slow annualised growth of 0.8 per cent, despite the negative reading. Monks, who thinks the real slowdown point is at 46, told FTAV:It tells you that a net balance of respondents are indicating lower output over the month, but not by how much. Some firms output will matter more for GDP than others. So a level below 50 doesn’t automatically mean falling GDP.What went wrong? We reached out to S&P Global’s Moore, who kindly answered our questions and provided us with the data we’ve used in this article.He told us there were some “strong late responses on the UK Services PMI survey” after the flash cut-off, meaning those gathered from September 21st to 27th, and than there had been “a slightly higher than usual number of final responses relative to flash” (we’ve chart this below). There was no unusual variation in total response numbers, he added.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.This is interesting, but doesn’t really solve the mystery.One person who saw this coming is Pantheon Macroeconomics’ Samuel Tombs, who had a very sceptical response to the flash readings. From his note last month:The composite PMI has incorrectly signalled falling GDP many times before, and likely is too downbeat again now.We can’t be sure until the final report, but seasonal adjustment likely is depressing September data too much.It makes little sense for the economy to be struggling more now, given the emerging recovery in real wages.He continued:One plausible theory is that big swings in activity during the pandemic might have distorted the seasonal factors. A large increase in activity is now ‘expected’ by the adjustment process, given the strong post-lockdown growth in September 2020 and 2021. S&P’s bespoke seasonal adjustment procedure also might be throwing a spanner in the works. It uses the outdated X-12 method, rather than the X-13ARIMASEATS package now used by most statistical authorities; and it has a “proprietary method” for removing the impact of outliers . . . August’s services PMI would have been 0.6pp higher than reported if S&P had adjusted the raw data using X-13 and made no discretionary tweaks.Vindicated by the change today, Tombs said:The composite PMI is no longer an implausible outlier, after the sharp upward revision to the flash estimate. At the time, we suggested that September’s first estimate was too low due to erroneous seasonal adjustment, but we’ll never know for sure, given that S&P only publishes the unadjusted data with the final estimate.Where does that leave us? Alphaville has pretty much limitless patience for the data wonks who are trying to get this stuff right, but, once again, the forces of Big Macro Statistics seem to have to brought Britain down.And in the case of the BoE — obviously they will never disclose the impact one bit of data had on their decision making, but citing a survey that turned out to be wrong is not a great look. More