Aurelia Butler

The US Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point to a new range of 5.25 to 5.5, leaving open the possibility of more increases later in the year. Much of the markets had factored in a rate increase this month, but while stocks and bonds dipped slightly in yesterday’s trading they were largely unaffected. At a press conference after announcing the increase, Fed chair Jay Powell would not say if more interest rate increases were planned, stating “I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted”. He added: “It’s possible that we would choose to hold steady at that meeting. We’re going to be making careful assessments . . . meeting by meeting.”Some analysts had more positive outlooks. “We think that the Fed is done raising rates,” said Bob Michele, chief investment officer at JPMorgan Asset Management. “We see enough signs of inflation moderating. By the time they meet in September, that is likely to be evident in both inflation and the growth.”Around the world: The European central bank is also expected to raise rates by a quarter of a percentage point today to 3.75 per cent. Just as new data suggests high rates have pushed business loans in the region to the lowest level on record. There’s a lot happening today, here is some of the big stuff:GDP: The US economy is forecast to have expanded at an annualised rate of 1.8 per cent in the second quarter, according to a Refinitiv poll, a slight slowing from the 2 per cent pace in the first three months of the year. McDonald’s: Investors will be focusing on commentary about consumer demand in an environment of lingering, elevated inflation when the fast-food chain reports this morning. Analysts expect McDonald’s to report a nearly 10 per cent increase in revenue to $6.3bn and earnings of $2.80 a share.Ford: The automaker should update investors on how its new vision is progressing, as it seeks to cut costs in the near term and position itself for a mostly electrified future. Ford recently deepened a price war with Tesla against a backdrop of overall electric vehicle sales gaining momentum in the US.More earnings: Aerospace and defence contractor Northrop Grumman, payments processor Mastercard, pharmaceutical company Bristol-Myers Squib, confectioner Hershey, cruise line Royal Caribbean, industrials group Honeywell, carrier Southwest Airlines and motorcycle manufacturer Harley-Davidson report before the opening bell. Packaged food producer Mondelez will report after the market closes. See our Week Ahead newsletter for the full list.More data: The durable goods report from the Census Bureau will contain details expected to show that underlying investment spending by businesses edged lower in June. Separately, jobless claims were forecast to have risen slightly to 235,000 in the week ended July 22.Five more top stories1. Russia unleashed a missile barrage across Ukraine yesterday as it switched the focus of its attacks from Black Sea ports to inland targets, including an air base. Ukraine’s president Volodymyr Zelenskyy said in an evening address to the nation that “the absolute majority” of missiles fired “were shot down”.Related: Nato will step up air force patrol flights and drone deployments around the Black Sea to counter Russian threats to ports and ships.2. Hunter Biden’s plea deal with federal prosecutors has unravelled after a judge said she was not prepared to sign off on it. The president’s son will now plead not guilty to a firearm charge that under the agreement he was set to avoid. Read more about the Biden legal position here.3. Niger soldiers claimed to have removed President Mohamed Bazoum from power in a television announcement last night, several hours after the presidential guard barricaded the African leader in his residence. If successful, the military coup would be the latest in a region that has turned against the west. Here’s why the removal of Bazoum, a key western ally, could spell further trouble.4. Meta shares rose after it reported its first double-digit revenue growth since 2021, as Mark Zuckerberg said the company’s costly bet on artificial intelligence was already showing signs of paying off. The chief executive has sought to revive the tech giant after a period of sluggish growth and investor concern over his wager on the metaverse. Here’s what Meta is focusing on next.AI: Anthropic, Google, Microsoft and OpenAI have formed a group to research increasingly powerful artificial intelligence and establish best practices for controlling it.Twitter: Days after Elon Musk announced the platform’s rebranding to X, chief executive Linda Yaccarino visited Hollywood in a bid to woo talent agencies and entertainers.5. Computer maker HP plans to move large portions of production from China to Thailand and Mexico primarily to avoid US/China trade tensions. HP’s announcement follows similar moves by Dell, which plans to exclude chips made in China from its products. Read more about HP’s plans here. The Big Read

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Luvsannamsrain Oyun-Erdene, Mongolia’s Harvard-educated, reformist prime minister, wants western mining groups to tap his country’s vast deposits of copper, uranium and other critical minerals essential to the world’s fight against climate change. The government is making sweeping reforms to win over western investors and become less reliant on China and Russia.We’re also reading . . . Joe Lewis: Who is the British billionaire and Tottenham Hotspur owner recently charged by US prosecutors over alleged insider trading?War in Ukraine: Kyiv’s allies expect Russia to attack from multiple directions and employ more air power in its long-planned spring offensive.Centrism’s problems: The ideology is defined really only by what it is against and often claims a political middle that doesn’t exist, writes Jemima Kelly. Graphic of the dayA new peer-reviewed study suggests with 95 per cent certainty that the north Atlantic’s warm water “conveyor belt”, known as the Atlantic Meridional Overturning Circulation, could collapse between 2025 and 2095. The result would be drier summers and storm-filled winters. Take a break from the newsSummer “workcations” are on the rise. Many companies view workcations — essentially doing a job from a holiday location — as a free post-pandemic perk they can give staff in a tight labour market, and that “work from anywhere” weeks can boost productivity.

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Additional contributions by Tee Zhuo, Leah Quinn and Benjamin Wilhelm More

HONG KONG (Reuters) -The Hong Kong Monetary Authority (HKMA) on Thursday raised its base rate charged through the overnight discount window by 25 basis points to 5.75%, the highest in 16 years, hours after the U.S. Federal Reserve delivered a rate hike of the same margin.Immediately after the announcement the Hong Kong dollar strengthened to 7.7951 per dollar, its strongest level in eight months.Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar. The Fed raised interest rates by a quarter of a percentage point, with Chair Jerome Powell saying the economy still needed to slow and the labour market to weaken for inflation to “credibly” return to the U.S. central bank’s 2% target.”Under the linked exchange rate system, Hong Kong interbank offer rates will track the U.S. rates closely so that the spread between the two gradually narrows,” HKMA acting chief executive Arthur Yuen told a press briefing. While companies may face higher costs on Hong Kong dollar bank loans, “we haven’t yet seen that the higher funding costs impacting banks’ clients directly.””Classified loans”, or those that are overdue for at least 30 days together with those that are deemed uncollectible, have stayed steady from the end of last year, at 1.4% in the first quarter.While Hong Kong’s official base rate follows the Fed’s policy rate, banks are not obliged to remain in lock-step with U.S. rates, especially when they see ample liquidity in the system, as interbank rates and banks’ best lending rates are also influenced by demand and supply, analysts said. A seasonal factor that has led Hong Kong interbank offered rates higher in recent months is companies’ demand for the local currency for dividend payments, Yuen said, which traditionally peaks from June to August. This has led the one month Hong Kong interbank rate, the benchmark that banks use to price their residential mortgage loans, to surge to a 16-year high of 5.21% earlier this month, as it caught up and exceeded the one-month U.S. secured overnight financing rate (SOFR) before trending lower this week. “We expect Hong Kong dollar rates to remain high as the Fed is unlikely to reverse its tightening to an easing this year,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. The end of dividend flows from Hong Kong-listed Chinese companies after August will help loosen Hong Kong dollar liquidity conditions, he added. To keep profit margins from being squeezed by the higher funding rates, major banks in Hong Kong on Thursday also raised their prime rates, which are one of the commonly used benchmarks for pricing mortgage loans. HSBC Holdings (NYSE:HSBC) and Standard Chartered (OTC:SCBFF) (Hong Kong) both said they would raise their respective best lending rates in Hong Kong by 12.5 basis points (bps) to 5.875% and 6.125% respectively, while Bank of China (Hong Kong) will raise its prime rate by 12.5 bps, to 5.875%. More

TOKYO (Reuters) – From a rising yen to debt market derivatives, market signals reveal how investors are going for some cheap but fail-safe options to make money on the off chance the Bank of Japan surprises them with a tweak to policy settings this week.The trading pattern in the run-up to the BOJ’s two-day meeting, which ends on Friday, is familiar: Investors have been betting all year the BOJ will finally relent on its stubborn ultra-easy monetary stance and adjust its yield curve control.But this time, wary of repeated past disappointments, many investors are avoiding direct and potentially expensive bets such as short-selling Japanese government bonds (JGBs), a trade often referred to as the “widow-maker” for the crushing losses it inevitably generated.They have instead bought back the yen, and positioned through the bond options market for a spurt in volatility, giving themselves room to gain from a variety of outcomes.At the same time, the rally in the weak yen and the apparent absence of short-selling of JGBs is giving the BOJ room to move without a wild reaction in markets.”Speculative positioning is relatively light, and this presents a good opportunity for the BOJ to take its next incremental move,” said Jimmy Lim, chief investment officer at Singapore-based Modular Asset Management.Lim thinks the odds of an adjustment to yield curve control (YCC), which keeps short-term yields negative and caps 10-year yields at 0.5%, are 60 to 40. He is thus positioned in derivatives, to benefit from market swings in either direction on the day.The options market benchmark for expectations of JGB volatility has tripled to 9.1% in the past month, as investors cottoned on to the idea that, while trying to second-guess BOJ policy decisions could be risky, there was less to lose from betting on a volatile market reaction one way or the other.Analysts at ING pointed to evidence of how nervous markets were in the price of one-week risk reversals, where the premium for buying yen over selling it was trading at 4.1%. That was the most extreme skew towards a stronger yen since March 2020.SLOWLY, STEADILYBOJ sources say the central bank is leaning towards keeping its yield control policy unchanged as policymakers wait for data to affirm wages and inflation will keep rising. Investors think it is time, however, for new BOJ Governor Kazuo Ueda to at least unwind the YCC element of his predecessor’s complex policy, given how much YCC has unduly distorted long-term yields, constricted bond markets and crushed bank profits from lending.”Even if they tweak it, it doesn’t mean that they will turn totally hawkish,” said Nigel Foo, head of Asian fixed income at FSI. “If you look at it in the context of the amount of rate hikes the Fed has already delivered, it’s immaterial.”When former BOJ governor Haruhiko Kuroda unexpectedly doubled the YCC band to 50 basis points in December, he called it a technical adjustment to make stimulus more sustainable.Jim Leaviss, chief investment officer for public fixed income at M&G Investments, also points to the weak yen, among other factors, as a reason the BOJ would be keen to tweak YCC.In the run-up to the BOJ meeting, the yen has settled near the middle of the wide extremes of the past month, when it surged from a nearly eight-month trough at 145 per dollar to a multi-week high near 137. The benchmark 10-year JGB yield also retreated to 0.445% from as high as 0.485%.Leaviss said his fund is long the yen, but does not sell JGBs short.”We don’t short the JGB market. In part, it’s an expensive thing to do – as you know, the Bank of Japan owns 110% of the 10-year JGB market,” he said.Michael Michaelides, an analyst on Carmignac’s fixed income team, is positioned via both JGBs and the yen for the higher odds the BOJ removes its yield bands this week. Ales Koutny, head of international rates at Vanguard, only sees a 50% chance of a move and yet holds short JGB futures in readiness.James Athey, investment director of rates management at abrdn, is also underweight Japanese bonds and long the yen and says the BOJ needs to seize the opportunity “to get policy in a less extreme place”.”Nobody’s calling for them to hike aggressively, just bringing some function back to the JGB market, allowing themselves to step away because the data has given them an opportunity to do so. It just seems prudent,” Athey says. More

Hello and happy European Central Bank decision day. I’m Claire Jones, the FT’s international economy news editor, and I am standing in for Martin Sandbu, who is on holiday this week.With the summer season upon us, it feels like a good time to take stock of the global economy’s performance in 2023 so far. Few feel as though we’re in the throes of a vintage year. But things are not nearly as bad as many thought they would be last autumn, when many economies were dealing with double-digit inflation and central banks were raising rates at a rapid clip. In line with this, the IMF earlier this week upgraded its growth forecasts yet again and its chief economist Pierre-Olivier Gourinchas told our ace US economics editor Colby Smith that the chances of the global economy imploding spectacularly had receded sharply since the spring. His team is increasingly betting on a soft landing in the US and no longer thinks a recession in the UK is likely. And that is largely down to strong consumer spending.Which is what we want to make the focus of today’s Free Lunch.Rising interest rates are supposed to dent demand for goods and services right? Especially when it comes to spending on discretionary goods. So why, after a series of supersized increases in borrowing costs during 2022 — and a surge in the price of essentials such as food and energy — are we seeing Taylor Swift’s latest tour break records and Beyoncé stand accused of boosting an entire country’s inflation rate for driving up prices in Stockholm during her two-night sojourn in the Swedish capital? Nor are spending sprees confined to musicians’ mega fans. Luxury goods markets are booming globally. In Europe, June flights were back close to levels last seen in 2019, suggesting that people are returning to the beaches in their droves (though hotel bookings have been relatively weak in recent months). The twin releases of Oppenheimer and Barbie have led to the highest weekend box office take in the UK since before the pandemic. There are a few reasons why we think spending has held up so well. One — the strength of the labour market — has been written about a lot. What’s also well known is that Covid-era stimulus enabled households in some countries, such as the US, to build up big savings buffers. Today we want to highlight another factor: the enduring impact of more than a decade of ultra-low interest rates and plentiful liquidity on households’ debt servicing costs. Let’s take the biggest debt burden for a lot of households: mortgage. For those unfortunate enough to have to buy a new place, or refinance an existing deal, the pain of higher interest rates is acute. But, taking the economy as a whole, the impact of those rapid rises in central bank rates on households’ borrowing costs has been less profound than you might think. We’re now a year or more into the tightening cycle for most central banks. Yet years of aggressive monetary easing continue to have a big impact on the average interest rate levied on the stock of mortgage debt. Take, for instance, the euro area. Central bank interest rates have risen by 4 percentage points since the summer of 2022 from minus 0.5 per cent to 3.5 per cent. But look at the average rate charged on existing mortgages: it is well below the central bank’s benchmark at just 2.19 per cent. This is far from normal. Up until the turn of this year, average mortgage rates had always been in excess of official rates. For the first time in the ECB’s history, the trend has now reversed. The era of low borrowing costs also had a big impact on the sort of mortgage product that homeowners have gone for. While longer-term, fixed interest rates have long been common in places such as France and the US, years and years of aggressive monetary easing have led to these contracts becoming increasingly popular in markets such as the UK (albeit with a lower average duration). Even in southern Europe, where flexible rates — which immediately adjust to changes in central banks’ benchmark rates — have traditionally dominated the market, ultra-low rates have left their mark. The average rate on an outstanding mortgage in Italy is 2.86 per cent. In Spain, the recent uptick in the cost of the average mortgage has been greater, but at 3.06 per cent, rates remain below the ECB’s 3.5 per cent benchmark. The surge in property prices since the global financial crisis has also priced many younger people out of buying their own home. That rise in the average age of homeowners has meant that an increasing number of owner occupiers are now mortgage free.

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I suspect that central banks’ money printing may also be a factor in lenders’ reluctance to pass on savings rates (a theme I plan on returning to later in the summer). The effects of monetary policy, of course, always take time to feed through. And central banks remain in tightening mode — the ECB is widely expected to follow the US Federal Reserve’s lead and raise rates by a quarter point today, as is the Bank of England next week. At some point, rate-setters’ actions will start to have more of an impact on discretionary spending. There are signs it is beginning to happen. European luxury group LVMH reported yesterday that demand in the US was waning as the dollar’s value declines and the savings buffers built up during the pandemic are finally exhausted. Even if unemployment rates remain low, a greater portion of households will have to eventually refinance existing loans. But shifts in the structure of mortgage markets suggest that the pass-through from higher rates this time around will be far slower than during previous tightening cycles. Ultimately, that says less about Swifties or Beyoncé fans, and more about the actions of rate-setters themselves. Other readablesWant to understand what the Federal Reserve said and did yesterday? Read my FT colleague Colby Smith’s take. Or be like Kyla Scanlon and embrace the chaos that is central banking. The repercussions of Coutts’ decision to unbank Nigel Farage rumble on, with NatWest chief Dame Alison Rose quitting her job yesterday after it emerged that she was the source of stories claiming that the former UK Independence party leader was dropped due to his financial status and not his politics. On the specifics of why exactly Farage was dropped, we would recommend this. The Wall Street Journal has delved into the economic impact of Swifties. Numbers newsThe eurozone economy is in much better health than people thought it would be this time last year. However, while forecasts of a deep winter recession proved incorrect, the story this year has been one of economic stagnation. The purchasing managers’ index for July, out earlier this week, showed signs that the region may enter a deeper downturn in the coming quarters as the impact of rate rises starts to really bite.

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Hi everyone! This is Ting-Fang from Taipei.Last week, I took part in a Nikkei webinar with “Chip War” author Chris Miller and my colleague Lauly Li.Tech industry managers, analysts and government officials from around the world tuned in, and we received hundreds of questions from them before and during the event. Many wanted to know if their country or region was in a good position in the global tech supply chain and could benefit from the once-in-a-generation reshuffle as chipmakers scramble to diversify production.Another frequently asked question was whether geopolitical uncertainty will lead to the creation of a truly diversified supply chain.Miller replied that technology will only grow more complex and chip investment — already an expensive endeavour — will become even more capital intensive, making such a scenario unlikely.“We are going to have the same level of concentration of semiconductor production in 10 years’ time,” he said. And while the geography of that concentration might be somewhat different than it is today, “it’s not likely we can have a large number [of countries] that can build cutting-edge chips”.Hungry for chipsChinese tech champion Huawei, which has been struggling to shake off the impact of a yearlong US clampdown, aims to bring back its 5G mobile chips as soon as this year, Nikkei Asia’s Cheng Ting-Fang writes.The one-time smartphone powerhouse is working with top Chinese chipmaker Semiconductor Manufacturing International Company — which is also on the US trade blacklist — to mass-produce mobile chips using the 7-nanometer process technology, according to industry executives briefed on the matter.If the plan materialises, it would mark a major victory in China’s fight to regain some access to advanced chip technology that has been lost due to sweeping US trade restrictions.For Huawei, access to chip supplies is essential for all of its businesses, from consumer electronics to enterprise solutions, analysts say. But hurdles remain, not least Japan and the Netherlands recently following America’s lead in restricting export of cutting-edge semiconductor equipment.China is not the only country hungry for chips. Russia is doing all it can to gain access to vital semiconductors after the US and its European allies imposed export controls against the country following its invasion of Ukraine.Moscow’s appetite is drawing in companies and countries as far away as the Indian Ocean. Through an analysis of trade records and on-the-ground reporting, Nikkei Asia found the Maldives, better known as a tropical resort destination, has also become a hub for transferring semiconductors to Russia, Nikkei’s Shoji Yano and Katherine Creel report.Some 400,000 US-made chips worth a total of $53.6mn were shipped from the Maldives to Russia in the year after the start of the Ukraine war, second only to China. The value of those US chip shipments is equivalent to 20 per cent of the country’s export figures of approximately $280mn in 2021, according to the latest available data from the United Nations.Scrambling for a hitChinese gaming giant Tencent is playing catch-up after its smaller rival NetEase secured a surprise smash hit with its mobile game Eggy Party, writes the Financial Times’ Eleanor Olcott.The viral mobile game, where players race egg avatars around obstacle courses, put NetEase in direct competition with Tencent in the casual games market, which the larger player usually dominates by embedding its products into its ubiquitous social messaging app WeChat.Eggy Party racked up 30mn daily active users in China and sparked concern at Tencent headquarters about the company’s paltry pipeline of new mobile games. Tencent insiders say the company has become over reliant on squeezing revenue from its legacy titles Honor of Kings and PUBG, and needs to devote more resources to develop new smash hits internally.The success of Eggy Party was particularly painful for Tencent after one of its investee companies, Epic Games, was forced to shelve the publication of a similar mobile app due to a legal dispute with Apple. In the void, NetEase launched Eggy Party, which it is now plotting to release to the global gaming market.No country for young gradsFor many young students in China today, the joy of graduation is overshadowed by worries about their future careers, write Nikkei Asia’s Marrian Zhou and CK Tan.The economy has reopened from the pandemic, but the job market remains gloomy due to plunging foreign direct investment, supply chains shifting overseas and Beijing’s multiyear crackdown on the technology and education industries, the most popular sectors for college students seeking well-paid jobs.Unemployment for the 16-24 age group is at a record of more than 21 per cent, and analysts say the actual figure could even be higher because the official number only includes people actively seeking work. Even the official figure is almost three times higher than in the US and significantly higher than the eurozone’s 14 per cent.The unemployment figure underlines the challenges facing Asia’s biggest economy as it attempts to put three years of Covid restrictions behind it. But it also speaks to a structural problem: China now produces twice as many graduates as it did a decade ago and it does not have enough jobs for all of them.Rapidus speeds upJapan is betting on its new chipmaker Rapidus to return the country’s semiconductor industry to its glory days of global competitiveness.The company, launched in 2022, is in talks to supply top US tech giants such as Google, Apple, Facebook, Amazon and Microsoft with cutting-edge AI chips, president and CEO Atsuyoshi Koike said in an exclusive interview with Nikkei’s Yasu Ota.Rapidus, which counts IBM as a tech partner, is backed by the Japanese government and leading companies such as Toyota.The CEO said Rapidius’ business model will be different from that of Taiwan Semiconductor Manufacturing Company the world’s biggest contract chipmaker, as it will not aim to serve a massive number of clients. Instead, the Japanese chipmaker will start with five chip developer clients and gradually expand to 10, Koike said.Meanwhile, Rapidius is moving forward its schedule for pilot production of cutting-edge 2-nanometer chips from 2027 to 2025. Top global chipmakers TSMC, Samsung and Intel are also targeting 2025 for the start of their own 2-nm production.Koike acknowledged, however, that his company still needs more capital investment to facilitate the development. The company currently has 150 industry veterans, compared with market leader Intel’s 132,000 workforce and the 73,000 employees keeping TSMC’s massive semiconductor production operations going.Suggested readsSamsung releases latest bendable smartphones as competition heats up (FT)TSMC to invest $2.9bn in advanced packaging plant for AI chips (Nikkei Asia)Chipmaker GlobalFoundries criticises planned German subsidies for TSMC (FT)US battery start-up bets on Germany amid fears over Chinese dominance (FT)Foxconn boss demands improvement plan from Sharp in 3 months (Nikkei Asia)China weighs easing tech transfer rules for office gear (Nikkei Asia)TSMC warns over deepening slump in chipmaking sector (FT)Vietnam’s tax agency turns to AI to spot evasion, increase revenue (Nikkei Asia)Start-ups seek to challenge Nvidia’s dominance over AI chip market (FT)Indonesia’s GoTo extends e-wallet app to country’s ‘unbanked’ (Nikkei Asia)#techAsia is co-ordinated by Nikkei Asia’s Katherine Creel in Tokyo, with assistance from the FT tech desk in London. Sign up here at Nikkei Asia to receive #techAsia each week. The editorial team can be reached at [email protected]. More