Aurelia Butler

At every roundtable I’ve attended recently on the UK’s response to a rising China, I’ve heard the same refrain: we are too small, too insignificant, too poor.Faced with the same conundrum, the European Commission has launched a strategy for economic security that emphasises “technological sovereignty and resilience of EU value chains”. The era of industrial ambition has arrived everywhere, except the UK. Uniquely among its rich peers, when faced with the prospect of global competition, the British tendency is to pre-emptively admit defeat.I understand the pull of declinism. For those of us who came of age during the financial crisis, economic decline is all we have known. Politics has become a source of crisis, rather than stability and foresight; as a result, businesses have become wary of the government, and as a nation we lower our expectations for what we can achieve. We barely pay our nurses enough to feed them; how can we build the complex infrastructure needed for high-tech industries?As tech minister Paul Scully put it recently in an interview with the FT: “We are not going to recreate Taiwan in south Wales”. We should indeed concentrate on our strategic advantages in research and development as a nation of top universities, rather than attempt to out-scale existing giants in manufacturing. But Scully’s remark raises the question of what was necessary to create Taiwan in the first place.Taiwan’s then ruling Kuomintang party would have had grounds to feel as defeatist as contemporary Brits, if not more so, at the outset of its economic development push in the 1950s. We may have just had a prime minister whose legacy was compared to a lettuce. Taiwan was run by a regime which had just fled from power after losing a continent-sized country to a guerrilla army of peasants: Mao Zedong’s Communist Party of China.“In Taiwan’s Kuomintang, as with South Korea’s post-independence regimes, state incompetence was staggering. They had to build from scratch,” says economic historian Ha-Joon Chang.None of the “Asian Tigers” that enjoyed development miracles in the late 20th century had starting conditions for optimism. Yet because of their sharp need to survive in the close presence of geopolitical enemies, their governments exemplified ambitious missions. As a small island economy within striking distance of the Chinese mainland, Taiwan has had to learn to thrive in far more hostile an environment than the UK ever has had to face.The Asian Tigers had nothing to lose; they were forced by defeat to think ahead. Perhaps it is Britain’s very wealth, its glorious industrial history, and the sophistication of its institutions that mean that we take decline for granted? It seems easier for us to imagine great loss or great triumph than it is to conceive of what the historian David Edgerton calls “a more modest politics, a politics of improvement”.We can learn from those who start small. Before we try to train a generation of quantum physicists, we need the basics. Industrial policy makes sense in the context of a broader economic development strategy. Land and educational reforms were the first targets for the Taiwanese government; in China, creating a literate population was an essential part of nation-building.We in the UK of course start with much better fundamentals. But we have also long neglected what the economist Karel Williams has termed the “foundational economy”, and what feminist economists call “social infrastructure”: the parts of the economy that supply everyday necessities, such as social care, education, food, housing and utilities. Addressing these root failures, which are so close to our everyday experience of a dysfunctional economy, may also improve our national imagination for what a flourishing economy looks like.Indeed, the term “industrial policy”, meaning policies used to promote structural economic change, can be misleading in the modern age. Any vision for the UK economy will have to encompass the service sector, which provides four-fifths of our output and employment.The economist Dani Rodrik suggests instead using the term “productive development policies”. Doing so highlights how our economy develops from our social fabric. An industrial policy toolkit that is overly focused on rewarding outputs at the point of production neglects the question of where the people making the innovations come from and how they live. We are not a developing economy. But we have much to learn from those that [email protected] More

1. Futures point higherU.S. stock futures edged into the green on Wednesday, hinting at a rebound from declines in the prior session that were sparked by a downgrade of several regional banks by Moody’s.By 05:23 ET (09:23 GMT), the Dow futures contract added 91 points or 0.26%, S&P 500 futures rose by 17 points or 0.37%, and Nasdaq 100 futures gained 65 points or 0.42%.The three major indices on Wall Street slipped on Tuesday, dragged down in particular by bank shares after Moody’s slashed its rating of 10 midsized lenders. The ratings agency highlighted concerns over sluggish deposits, elevated funding costs and risks to commercial real estate assets.The move fanned renewed fears over the health of the U.S. banking sector, which is attempting to regain its footing following the failure of three regional lenders earlier this year. Moody’s also placed six banks on review, suggesting that further downgrades could also be coming.2. Amazon in talks to become anchor investor in Arm prior to IPO – ReutersAmazon (NASDAQ:AMZN) is in negotiations over joining a number of other technology firms as an anchor investor in Softbank-owned chip designer Arm’s planned initial public offering, according to a Reuters report that cited people familiar with the situation.The e-commerce giant would be one of about 10 tech sector players who are reportedly eyeing a cornerstone stake in Britain-based Arm, including semiconductor group Nvidia (NASDAQ:NVDA) and Google-owner Alphabet (NASDAQ:GOOGL). Arm hopes to list on the Nasdaq in September, a source told Reuters, with the company aiming to raise between $8 billion to $10 billion.For Amazon, the investment in Arm would also highlight its increasing focus on cloud computing. Amazon Web Services, the company’s all-important cloud unit, uses Arm’s design to produce a processing chip called Graviton.Both Amazon and Arm declined to comment, Reuters said.3. Disney on deckWalt Disney (NYSE:DIS) is set to headline the earnings calendar Wednesday, with the media conglomerate expected to face tough questions over recent box office busts and its sputtering television business.This summer, “Haunted Mansion,” Disney’s latest push to create a movie franchise out of a famous ride at its theme parks, has delivered disappointing ticket sales. “Elemental,” a new release from Disney’s animation powerhouse Pixar, also debuted in June to a poor opening weekend.Disney’s TV division, which once financed high-profile mergers, has struggled to entice lucrative advertisers. Its streaming unit, meanwhile, is not projected to make a profit until next year.Chief Executive Officer Bob Iger, who returned to the role in November, has been musing publicly about potential strategic initiatives that could help reinvigorate returns. Investors, who have seen Disney’s stock fall by around a fifth over the past one-year period, will likely be keen to ask Iger for more details about these plans.4. ESPN inks sportsbook partnership with Penn EntertainmentIger’s push to revitalize flagging segments of Disney was perhaps illustrated on Tuesday, when its ESPN sports network signed a $2 billion deal with casino owner and online gambler Penn Entertainment (NASDAQ:PENN).Under the terms of the agreement, Penn will rebrand its U.S. sports betting portals, currently known as Barstool Sportsbook, as ESPN Bet. Penn will pay ESPN $1.5B in cash over a 10-year term and grant $500 million in warrants for its stock. ESPN Bet will launch this fall in 16 legalized betting states.The partnership will give ESPN an extra revenue source and access to the increasingly lucrative U.S. sports gambling sector, which has been growing in popularity since the Supreme Court struck down a federal ban in 2018.It also marks a change of heart from Iger, who had previously veered away from tying together a family-friendly brand like Disney with the gambling industry. He said in an interview with Time magazine in April that the “acceptance of sports betting has grown significantly.”5. Chinese consumer inflation shrinksChinese consumer inflation shrank last month, indicating that weak local liquidity and spending are weighing down the world’s second-largest economy.The consumer price index (CPI) fell 0.3% in the 12 months to July, although the number was slightly better than expectations for a drop of 0.4%, data from the National Bureau of Statistics showed on Wednesday. This came after a flat reading for June, and marks the first annual contraction in CPI since September 2021.The inflation print comes after recent figures pointed to a deterioration in Chinese exports and imports as well as flagging growth in Chinese business activity.It remains to be seen if Beijing will roll out further stimulus measures to boost what has been a waning post-pandemic recovery. Chinese officials have so far offered scant details on how they plan to shore up the economy. More

And there it is. Just days after our colleagues at mainFT reported that China has banned the mention of deflation — “Deflation does not and will not exist in China,” according to a stats bureau spokesperson — China is, well:

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JPMorgan points out that headline CPI, PPI and the GDP deflator have all now turned negative in China, and warn that the danger of deflation is going to hang around for the rest of the year:Deflation risk in China reflects unique domestic problems, such as lagging and weaker recovery in domestic demand, high unemployment and lack of wage inflation pressure, weak rental cost, and unexpected large drops in auto prices and pork prices.This is going to be more fuel for those that argue that China is now facing a Japan-style “balance sheet recession”, basically an extended period of deflationary deleveraging. Here’s Nomura’s Richard Koo — the originator of that phrase — talking on Bloomberg’s Odd Lots podcast, with Alphaville’s emphasis below:. . . [A] balance-sheet recession is triggered by this whole notion that people feel uncomfortable with their balance sheets, suppose their debt is too large relative to their assets. And that typically happens after bursting of a bubble. If the bubble is financed with debt and asset prices collapse, but the liabilities remain, people realize that their balance sheets are underwater, and if it’s the balance sheet underwater you have to fix it.Well, how do you fix it? You pay down debt. Well, l that’s the right thing to do at the individual level. But when everybody does this all at the same time, we get into a fallacy of composition problems, in that in a national economy, if someone is saving money or paying down debt, you need someone else to borrow and spend the money to keep the economy going.And in the usual economy you get too few borrowers, you bring interest rates down. Too many borrowers, you push interest rates higher, and then that’s how you keep the economies going. But when the big bubble bursts and asset prices collapse, everyone will be paying down debt. No one will be borrowing money even at zero interest rates because if your balance is underwater, you’re not going to borrow money, even if interest rates come down to zero. And that’s the prospect that Chinese are worried about.And China got this huge bubble, especially in residential real estate. And the amount of price increase that China observed on the residential real estate is almost the same as what happened to Japan 30 years ago in Tokyo and Osaka.And so when the real estate bubble started collapsing last year, all these Chinese economists began to worry about a Japan-like situation where so many people are paying down debt all at the same time and [the] economy could then fall into a deflationary spiral.I think that is actually already happening in China. A lot of people are saying, very few people are borrowing, so many people are paying down debt, even with these low interest rates. And that’s a very bad sign macroeconomically. Individually they might be doing the right things, but collectively, they may be killing the economy.But as Koo points out, there are some big differences between Japan and China, such as the fact that Beijing is well aware of both its economic challenges and how pure orthodox monetary policy is a poor tool to tackle balance sheet recessions. Most of all, it still has space for fiscal stimulus, even if the impact of it is diminishing after repeated rounds to soften the ongoing, secular economic slowdown. And anyway, as JPMorgan points out, a bit of Chinese deflation could be good new for the rest of the world, by helping further quell price pressures elsewhere:. . . The disinflation pressure is in part related to the decline in global commodity prices, especially for China’s PPI and import prices (China’s import prices fell 13.3%oya in USD term in June). But the interesting development in recent months is that China’s disinflation process has started to pass through to lower export prices.For instance, China’s exports fell 12.4%oya in June (in USD term), but the breakdown analysis shows that the price effect dominated, in that export prices fell 10.6%oya and volume only fell 1.8%oya. China’s export prices growth started to turn negative in March and the export prices decline has accelerated in recent months. This could have facilitated the disinflation process in major trading partners. For instance, US import prices from China fell 2.2% in 1H. Similarly, the euro area and Japan observed the steepest declines in their import prices from China (-15% and -17%, respectively, on a 3m%3m saar basis through May). Our recent study suggests a China spillover to global (ex China) core goods inflation of around -70bp over 2H23, all else equal. More

WASHINGTON (Reuters) – The U.S. Commerce Department said on Wednesday that more than 460 companies have expressed interested in winning government semiconductor subsidy funding in a bid to boost the country’s competitiveness with China’s science and technology efforts.The White House is marking the one-year anniversary on Wednesday of President Joe Biden’s signing of the landmark “Chips for America” legislation providing $52.7 billion in subsidies for U.S. semiconductor production, research and workforce development.Biden said in a statement that companies have announced $166 billion in semiconductors and electronics manufacturing over the last year, adding the law will “make America once again a leader in semiconductor manufacturing and less dependent on other countries for our electronics or clean energy supply chains.”The Commerce Department began accepting applications in June for the $39-billion subsidy program for U.S. semiconductor manufacturing as well as equipment and materials for making chips but has not yet issued awards.”We’re finally making the investments that are long overdue to secure our economic and national security,” Commerce Secretary Gina Raimondo told reporters. “We need to move quickly but it’s more important we get it right.”A senior Commerce Department official told reporters the department is moving quickly: “We are in active dialogue with applicants and we expect to be announcing major progress in the months ahead.”The chips law also includes a 25% investment tax credit for building chip plants, estimated to be worth $24 billion.Intel (NASDAQ:INTC) CEO Pat Gelsinger said Tuesday “governments around the world are working at a historic pace to revitalize semiconductor manufacturing and ensure a robust, resilient supply chain. In the U.S., progress is undeniable.”The Commerce Department spent the last year building a team of more than 140 people and writing rules for accepting and assessing applications.The department is also seeking to ensure China will not benefit from U.S. funding and is requiring companies seeking major awards provide access to affordable high-quality childcare and share any excess profits.The department previously said direct funding awards are expected to range between 5%-15% of project capital expenditures and total award amounts generally not exceed 35% of project capital expenditures.”We’re going to be doing our own diligence. We’re not writing blank checks to any company that asks,” Raimondo said in February.Once the Commerce Department decides on worthy projects, officials must decide how much to award in government funds — and how to structure awards with a mix of grants, government loans or loan guarantees.The law also dedicates $11 billion for advanced semiconductor manufacturing research and development. The focal point will be the National Semiconductor Technology Center.Commerce said that discussions are underway between the departments of Commerce, Defense, Energy, and National Science Foundation to establish the center “to better integrate research and development and workforce efforts across the semiconductor ecosystem.” No location has been identified. More

The European Central Bank’s press conferences affect financial markets more than those of the US Federal Reserve, according to an index the Frankfurt institution has created to measure the tone of its communication.The ability to guide investors’ expectations in the desired direction is a vital policy tool for a central bank, so the findings of the ECB’s communication tracking index is likely to attract interest from policymakers and market participants alike.The ECB announced the feature in a blog by staff members on Wednesday, saying its press conferences had “affected markets beyond the immediate impact of policy decisions” when measured against movements in one-year overnight indexed swap rates. “What central banks say can influence prices on financial markets and, ultimately, how the economy evolves,” the ECB staff said. It found the eight press conferences following the start of its rate rises in July 2022 had mostly moved markets in the desired direction.The results were different for the Fed. “In contrast, there has been no consistent co-movement between our measure of changes in the Fed’s policy tone and short-term rates during the Federal Reserve chair’s post-meeting press conferences,” it said.The Fed declined to comment. But the ECB offered a potential explanation, saying markets may respond to “other sources of information not directly captured by the press conference”, such as the “dot plot” table of interest rate forecasts by Fed officials that it updates after each policy meeting.The ECB staff said the index also tracked the tone of speeches, interviews and testimonies before lawmakers by central bank officials, assessing whether they were “hawkish” — signalling a likely tightening policy bias — or “dovish” — signalling a loosening bias.Since the ECB started raising rates in July 2022, the index found swap rates had twice moved in the opposite direction to that signalled by the tone of its press conferences.After its first rate rise in July 2022, swap rates moved up even though its press conference was considered dovish. In February this year, its communication was measured as hawkish and yet swap rates moved down.The ECB blog said the reason for the March discrepancy may have been the governing council’s statement that “risks to the outlook have also become more balanced” and that it would “evaluate the subsequent path of our monetary policy” at the next policy meeting. 

“These statements may have led markets to expect that the pace of rate hikes would slow down after March,” the blog said. “Overall, this evidence highlights the importance of central banks’ policy tone in communicating not only factual information, but also guiding the public’s assessment of the monetary policy reaction function.”“In 2021 and 2022, Fed communication was on average more hawkish than that of the ECB,” it said. “This difference in tone has, however, shrunk recently as the ECB has also become progressively more hawkish in tone.”It found that differences in tone between the ECB and Fed “help to explain changes in the euro/dollar exchange rate” and that communications between policy meetings “can also affect financial markets”.The Fed started raising rates four months before the ECB and has raised them by 5.25 percentage points since last March. The ECB has raised its deposit rate by 4.25 percentage points. Although inflation remains above their 2 per cent targets, investors are betting they are both close to stopping. More

LONDON (Reuters) – Bond traders are eyeing a return to a type of trade that left them battered earlier this year – betting on yield curves returning to a more normal shape as slowing economies force central banks to cut interest rates.The shape of the yield curve has been in the spotlight over the last week, with U.S. and European 10-year bond yields rising sharply compared to their shorter-dated peers.Those moves have put the focus back on “steepening trades” – bets that shorter-dated yields will fall relative to longer-dated yields. Many investors say the big rush into such wagers will come when central banks look poised to cut interest rates to bolster growth.In these trades, investors buy a short-dated bond in the hope that its price will rise and the yield will fall, and short – that is, bet against – a longer-dated bond for the opposite reason. They are likely to use futures contracts, which make it easier to bet on the direction of assets.”Everyone is now re-looking at these curve trades,” said Olivier De Larouziere, chief investment officer for global fixed income at BNP Paribas (OTC:BNPQY) Asset Management.The renewed interest comes as the U.S. Federal Reserve and European Central Bank get close to the end of their aggressive rate-hiking cycles, potentially bringing two years of bond-market suffering to a close.”It’s a typical end-of-cycle trade,” said Fabio Bassi, head of international rates strategy at JPMorgan (NYSE:JPM). “I would expect that in the next quarter, more people will start positioning for a steepening of the yield curve.”A PAIN TRADECentral banks’ rate hikes have pushed up yields on short-dated bonds, which are highly sensitive to short-term borrowing costs. Longer-dated yields have risen less sharply, because investors expect rates to fall at some point in the future.That’s led to a rare situation where the bond yield curve is “inverted”.Many investors thought the situation was untenable at the start of 2023 and that shorter-dated yields would drop as central banks paused rate hikes, or even started cutting in response to a slowdown in growth.Those bets turned out to be wrong. The gap between two- and 10-year U.S. Treasury yields, for example, hit its deepest inversion since 1981 at the start of July at around -110 basis points, as inflation remained stubborn and investors braced for more rate hikes.”The steepening trade has been very painful for a lot of investors,” said Alexandre Caminade, chief investment officer for core fixed income at asset manager Ostrum.DIPPING A TOE BACK INSome investors are creeping back into steepening trades in longer-duration bonds, betting that 30-year bond yields will rise relative to 10-year yields.”We have already started to switch, some months ago, from flattening to steepening in Europe, mainly at the long end of the curve,” said Anne Beaudu, global fixed income portfolio manager at Amundi, who said she is betting on a steepening of the 10-year-to-30-year section of the yield curve.”As long as the ECB stays hawkish and continues to hike rates, it’s a bit too soon to have a steepener at the very short end of the curve.”De Larouziere of BNP Paribas also said he has positioned for a 10-year-30-year steepening. JPMorgan’s Bassi said the longer-end of the curve tends to steepen first as growth slows – weighing on 10-year yields relative to the more independent 30-year yields – but policy rates remain high for a period, keeping shorter-dated yields steady.TIMING IS EVERYTHINGThe market moves over the last week highlight the risk of curve trades. Few investors expected longer-dated yields to start rising faster than shorter-dated yields, in what’s known as a “bear steepening”.Analysts said a key factor in the move is a growing belief that the U.S. economy might avoid any serious downturn. That could complicate bets on a “bull steepening” – where shorter-dated yields drop as interest rates fall.”We have to be a bit humble here, and cautious,” said Franck Dixmier, chief investment officer for fixed income at Allianz (ETR:ALVG) Global Investors.Dixmier and other investors stressed that timing was key and getting it wrong could be painful. “That is a winning trade, potentially to implement in 2024, or maybe a bit earlier. It’s clearly linked to the evolution of core inflation,” he said.Those keen on steepeners may have found some solace in comments from New York Fed chief John Williams, who said in a New York Times interview published on Monday that he did not rule out the possibility of lowering rates in early 2024, adding that inflation was coming down as hoped.Ostrum’s Caminade said: “When we will be sure that central banks will reach terminal rates, and we have a better view on the cuts next year, I think it will be a moment to put the steepeners in the portfolio.”At the moment we think that it’s too early. But it will be the next big, big trade.” More

BANGKOK (Reuters) -Thailand’s central bank might hold or raise its key interest rate at its September review as the economy continues to recover, though it will lower its growth forecasts with exports remaining weak, the bank’s governor said on Wednesday.The Bank of Thailand (BOT) has raised its main interest rate seven times to 2.25% since last August, from a record low of 0.50%, to tame inflation and help the economy with ‘smooth takeoff’.Growth in Southeast Asia’s second-largest economy is now higher than pre-pandemic levels, while long-term inflation is expected to return to its target range, BOT Governor Sethaput Suthiwartnarueput told a central bank seminar.As the economic context has changed, monetary policy has also changed to focus on “landing”, he said, from gradual and measured policy tightening.”Next time, there is a chance that we’ll hold or hike (the key rate)… but we won’t cut,” Sethaput said.”I haven’t said what our terminal rate is… our problem is about landing, getting the plane to land well,” he added.The BOT has no need to raise the key rate above the ‘neutral’ level as it wants to ensure the economy is in a long-term potential growth range of 3% to 4%, with inflation sustainably in the BOT’s target range of 1% to 3%, Sethaput said.Last week, the BOT raised its key rate by a quarter point and will next review it on Sept. 27, when some economists see no change, marking the end of its tightening cycle.Sethaput said inflation was falling faster than expected, but it would gradually pick up again as the economy continues to recover.However, he added the growth outlook would be reduced to the mid-3% range for this year and the next.In May, the BOT forecast economic growth at 3.6% this year, and 3.8% for 2024. Last year’s growth was 2.6%.”Exports have been soft due to global issues,” Sethaput said, adding private consumption and tourism would support the economy with 29 million foreign arrivals expected this year. Second-quarter gross domestic product (GDP) might be softer but it did not mean the recovery was sputtering, he said.The economy expanded by a more-than-expected 2.7% in the first quarter from a year earlier due to tourism. Official second-quarter GDP is due to be released on Aug. 21.Sethaput also said he was not worried about a delay in the formation of a new government in Thailand, though its policies might affect economic stability.The populist Pheu Thai party announced on Monday it was forming an alliance with the Bhumjaithai party and was open to other parties joining in to form a government nearly three months after elections. More