Aurelia Butler

Good morning. Ethan here; Rob returns next week. Jennifer Hughes’ letter yesterday, called “You don’t remember rising rates”, was met with mail from several distinguished readers who said they did, in fact, remember. For the rest of us living through it only now, the Federal Reserve has taken interest rates to a two-decade high. More on that below. Email me: [email protected] FedYesterday’s well-telegraphed 25 basis point rate increase came with little new information from Fed chair Jay Powell. The pre-presser statement contained just one notable change: the description of growth was bumped up from “modest” to “moderate”. The market reaction was unsurprisingly boring. The policy-sensitive two-year yield dipped, barely. The S&P 500 rose at first, but by the end of the trading day had round-tripped.Powell’s message was unmistakable, if familiar. The Fed is principally worried about lowering inflation, and will accept collateral damage to employment if need be. It wants to see repeated declines in the inflation data that make clear the underlying rate is converging to 2 per cent. Though it has moved towards balance lately, the labour market remains in disequilibrium, with demand outstripping supply. That, the Fed thinks, will keep non-housing core services inflation hot.Pressed on the future path of rates, Powell demurred, saying only that all things are possible. The data-dependent Fed will make “finely judged” calls on a “meeting by meeting” basis, meaning it’ll tell you when it knows — no promises, no secrets. He also shrugged off a recent loosening in financial conditions, insisting markets tend to get in line eventually.More interesting was how Powell responded to questions about the cooler June consumer price index, which, alongside stronger growth data, has shifted perceptions about the likelihood of a soft landing from a near-impossibility to a toss-up. One might think a data-dependent Fed would react well to such encouraging data. But Powell said that although the report was “welcomed”, it was “only one report, one month’s data”.This is surprising, because it is not only one month’s data. As BlackRock’s Rick Rieder notes, once you exclude shelter and used cars, inflation has fallen remarkably far. This is also true of the Fed’s much-feared non-housing services inflation, which is nearing or at pre-pandemic rates:No doubt Powell knows this. His caution points to the central bank’s incentives. Failing to contain inflation in the same cycle as the Fed’s mistaken call that inflation was transitory would be devastating; a mild recession, not so much. So even though inflation is posting encouraging signs without a sharp growth drop-off, too much is out of balance to stop now. Here’s Powell:The overall resilience of the economy, the fact that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labour market [is] a good thing . . . At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response for monetary policy . . . What we see are those pieces of the [disinflationary] puzzle coming together and we’re seeing evidence of those things now. But I would say what our eyes are telling us is policy has not been restrictive enough for long enough to have its full desired effects . . . We think the process still probably has a long way to go.Powell nods above to the possibility that sturdy growth reignites inflation. There is another risk here, too. Falling inflation, by raising consumers’ purchasing power, could sustain spending, which in turn would keep companies hiring and the labour market tight. This risk hinges on what share of current inflation stems from elevated demand, which is not obvious.Is the Fed done raising rates? Futures market pricing shows better-than-even odds that it is finished, and many in the finance commentariat take a similar view. Their argument is premised on continued cooling trends in core inflation and the labour market. Here’s Paul Ashworth of Capital Economics:We suspect that further signs of a significant easing in the monthly core CPI numbers for July and August will ultimately persuade the Fed to hold fire for the remainder of this year particularly if, as we expect, employment gains continue to trend lower too.This makes sense, assuming the data co-operates. But consider the counterargument. Economic data have been volatile this cycle. So suppose they come in mixed across July and August. Short of data that screams rapid disinflation, the Fed’s demonstrated inclination is to err on the side of nudging rates higher. Ed Al-Hussainy, our regular correspondent, expects one more 25bp rate increase, framing the move like this: “Will another hike be material to the inflation outlook? No. I think of this more as the Fed following through on the monetary policy guidance embedded in [its June economic projections].”Don’t rule out another rate increase at the next meeting. If the data is not decisive, the Fed’s incentive is to push higher.One good readMonday’s letter asked if leveraged loans are securities. Over at Alphaville, a proper legal expert weighs in. More

Good morning. Today, our Rome bureau chief previews the visit of Italy’s leader to the White House, where her stance towards China is likely to be quizzed by a president with a soft spot for his guest. And it’s ECB day: Our man in Frankfurt explains why the eurozone’s central bank wants to keep investors in the dark as much as possible.Fast friendsUS president Joe Biden and Italian prime minister Giorgia Meloni have hit it off during their three encounters since Meloni took office last year, as a snapshot of the two walking hand-in-hand at May’s G7 summit in Hiroshima attests.The two leaders are set to deepen their relationship during today’s visit by Meloni to the White House to discuss geostrategic issues, including Rome’s fraught relationship with China, writes Amy Kazmin.Context: Italy and the US are longstanding Nato allies. Washington was dismayed when Rome in 2019 joined China’s controversial Belt and Road Initiative. Meloni must decide by the end of this year whether to allow the deal to renew, or risk Beijing’s ire by formally withdrawing.Meloni has previously called it a mistake for Rome to join the programme. Though she has publicly claimed she is still evaluating her options, Italian officials say she plans to withdraw — in a manner that provokes the least retaliation from Beijing.Meloni is expected to discuss her approach to extricating Italy from the programme with Biden, as Washington seeks reassurances about Italy’s position on China ahead of Rome’s assumption of the G7 presidency in 2024.“The Americans want to be sure that Italy is on board with China,” said a senior Italian official. “The issue is, will the Italian G7 presidency be able to adopt harsh language on China, if need be? . . . Or are the Chinese still able to pollute the waters in Italy?”China isn’t the only item on the agenda. The two sides will discuss the conflict in Ukraine, where the leaders see eye to eye on the need to support Kyiv in its fight against Russia. Meloni is also likely to call for the US to engage more deeply with Africa, where she sees socio-economic development as crucial to both global security and stopping the flow of migrants to Italy and Europe.“There has to be a new attitude to Africa,” the Italian official said. “We can’t allow [Africans] to see us as former colonial powers, and China and Russia as the new guys helping them out.”Chart du jour: Still highThe July figures for eurozone inflation will be released next week. But even if inflation drops from 5.5 per cent in June, it still has a long way to fall before reaching the European Central Bank’s 2 per cent target, something it does not expect until 2025. It also worries that rising wages and resilient demand for services could keep it higher for longer.Keep ‘em guessingInvestors like to bet on what will happen next. Christine Lagarde knows this. So when the ECB president announces its latest interest rate increase today, she is likely to keep the door open for further rises, even if it is getting close to stopping, writes Martin Arnold.Context: The ECB has raised rates by an unprecedented 4 percentage points to tackle soaring inflation in the past year and has signalled that it is likely to raise rates by another quarter point after its meeting today. But there are doubts over how much higher borrowing costs will go.Recent survey data indicates the recent downturn in the eurozone economy is deepening. This suggests the ECB’s tighter monetary policy is working and points to a further decline in inflation.Economists say the ECB is likely to keep investors guessing for as long as possible about when rate rises will stop, to avoid them betting on cuts in borrowing costs that would loosen financial conditions and risk a rebound in inflation.Barclays’ chief European economist Silvia Ardagna thinks this month will be the ECB’s final rate rise. But she also said it would be “prudent and wiser to leave the door open to potential future hikes”.Last month, Lagarde signalled she was thinking along these lines by saying it was “unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached”. Martin Wolburg, senior economist at Generali Investments Europe, agrees the strategy of keeping investors in the dark is the right approach. “By maintaining a hawkish communication they just let the expectation effect work even after the soon-to-be-reached peak rate level,” he said.What to watch today St Petersburg hosts the second Russia-Africa summit and economic forum.EU health ministers meet in Las Palmas, Spain.Now read theseFamily honour: The story of how two cousins rose through the ranks of organised crime in Calabria starts, and ends, with a terrible murder.Dumped: Poland is filing a complaint in Brussels against Germany for illegally sending piles of waste across the border. Clouded horizons: Problems at one of the world’s largest wind turbine suppliers come at a bad time for the sector as wind farms try to expand. More

Federal Reserve chair Jay Powell had a message for global markets on Wednesday after the US central bank raised interest rates again: no one should doubt its resolve to snuff out stubbornly-high inflation in the world’s biggest economy.That could mean more rate rises this year, Powell insisted in the press conference after the Fed’s announcement. It was a stern warning, but economists and investors were largely unmoved. Most of them anticipate that the quarter-point increase, which lifted the federal funds rate to a target range of between 5.25 per cent and 5.5 per cent, a 22-year high, will mark the finale of the Fed’s rate-rising cycle.“Nothing in the policy statement or the press conference led me to doubt our view that this will be the last hike of the cycle,” said Ellen Zentner, chief US economist at Morgan Stanley. “The consumer is slowing, jobs are slowing, inflation is slowing and all those big pieces of the economy have been coming in line with our expectations.”Powell on Wednesday said the Federal Open Market Committee would scrutinise the “totality” of new economic data before making any decisions, suggesting that while further tightening was possible, it was by no means guaranteed.“We have to be ready to follow the data,” he said. “And given how far we’ve come, we can afford to be a little patient as well as resolute as we let this unfold.”Economists broadly expect inflation to keep cooling through the next couple of months. Ian Shepherdson, chief economist at Pantheon Macroeconomics, believes the “core” consumer price index, which strips out volatile food and energy prices, will gain just 0.1-0.2 per cent in July and August, equating to a three-month annualised pace of just 1.8 per cent by the time the FOMC meets again in September.“Numbers like that will make it harder for the Fed to justify hiking again, provided the gentle but persistent downward trend in payroll growth continues,” Shepherdson said. Tiffany Wilding of Pimco also forecasts inflation to drift lower in the second half of the year, and crucially, for labour demand and economic activity to take a hit as the Fed’s earlier rate rises and tighter credit conditions bite. She has not pencilled in further rate increases this year.Jonathan Pingle, chief economist at UBS, also expects that the Fed will stand pat after Wednesday’s move — but said it was far too “premature” for Powell or any official to concede as much, given how far core inflation remains above the central bank’s 2 per cent target.“We’ve had some false dawns before, so as much as we think there is going to be improvement going forward, we’re not out of the woods yet for inflation,” he said. “Until they get more confirmation on inflation, it is going to be hard to signal that they’re done.”One inflationary risk cited by Powell was the enduring strength of the US economy itself, which has chugged along despite the Fed’s historic campaign over the past 18 months to crush demand with punishingly high borrowing costs.The economy’s resilience was “good to see”, Powell said, adding that it boded well for the Fed’s efforts to curb inflation without inducing a significant economic downturn. The central bank’s staff had also become more upbeat about the outlook, scrapping a forecast for recession that they held as recently as last month.

But amid good news, Powell had a warning too: “At the margin, stronger growth could lead over time to higher inflation and that would require an appropriate response from monetary policy.”Economists at Oxford Economics pointed to other lurking shocks that could prompt the Fed to maintain its aggressive grip on the economy, including another bounce in US food prices triggered by El Niño, the weather phenomenon that has disrupted agriculture in the past and is expected to start later this year.Benson Durham, head of global policy at Piper Sandler and a former senior staffer at the Fed, is one of the few voices wagering that the central bank will be cornered by the data into more rate rises — a trajectory in monetary policy that would match the projections officials submitted in June.Those individual forecasts signalled support for the fed funds rate to peak at a target range of between 5.5 per cent and 5.75 per cent in 2023, equating to another quarter-point increase at one of the three remaining meetings this year. Durham expects September to be a close call but for the Fed to opt for November.Either way, Morgan Stanley’s Zentner warned that the next couple of months would be tumultuous given the uncertainties clouding the outlook.“Turning points are always difficult — and very difficult for the Fed to communicate, because policymakers like to be vague and markets don’t respond well to vagueness,” she said. “So it means a lot of volatility as we dissect these next datapoints.” More

There can’t be many international summits where a head of government stays away for fear of being arrested for war crimes, but the Brics grouping has managed it. Vladimir Putin will skip next month’s meeting of Brazil, Russia, India, China and South Africa in Johannesburg because the hosts, as a signatory to the International Criminal Court, would have to detain him under a warrant for Russia’s activities in Ukraine. It’s unlikely he will miss much policy substance. Apart from a lot of defiant rhetoric against the rich world, one of the main themes will be barely hidden tension around the role of China.The Brics are now looking seriously lopsided. Famously invented by Goldman Sachs economists in 2001 as a marketing tool, the grouping became a political entity when the four countries (South Africa joined later) held their first summit in 2009. Dan Ciuriak, a former deputy chief economist at Canada’s trade department and now a senior fellow at the Centre for International Governance Innovation think-tank, has an illuminating paper on the Brics’ economic underpinnings. He notes that only a fortuitous confluence of events in the late 1990s and 2000s made the group look vaguely equal, even in aspiration.While China’s low-cost manufacturing was benefiting from Deng Xiaoping’s economic reforms, Russia and Brazil were emerging from economic chaos (Russia after the fall of communism, Brazil from its stabilisation of the currency after 1994) to ride the commodities boom of the 2000s. India had a burst of growth after the economic liberalisation that followed a balance of payments crisis in 1990-91. South Africa was boosted by the end of apartheid in 1994.But during the 2000s and 2010s, only China managed to move in any significant way towards rich-world status by adopting technological advances to become a knowledge-based economy. The others remained stuck in low-growth models overly dependent on commodities, their policy apparatus hampered by various combinations of political dysfunction and corruption. The Chinese economy now rivals that of the US — it’s larger in purchasing power parity terms — and its size and income fund a belligerent foreign and military policy.The idea of a new Brics currency, mooted in particular by Brazilian president Luiz Inácio Lula da Silva, is essentially fantasy: the renminbi is the only one of the five international currencies with any significant overseas role. The Brics nations set up the relatively small New Development Bank, which has so far extended $32.8bn in loans, while China has probably lent about $1tn bilaterally. Its Belt and Road Initiative not only builds infrastructure and digital projects but also aims at trade and political alignment.Nor is China’s support for other Brics members exactly unconditional. Even leaving its longstanding military rivalry with India aside, while China has given Putin diplomatic cover after the invasion of Ukraine, Beijing is in effect charging for it by buying Russian oil below world market price.Geopolitically, China also unbalances the club. It’s in an economic, technological and strategic rivalry with the US, while other Brics members are trying to stay on good terms with Brussels and Washington. Brazil wants access to European consumers by finalising a trade deal between the EU and the South American Mercosur bloc; India is part of the US’s Quad security alliance in the Asia-Pacific. If Beijing tries to force the other members of Brics to drop their non-aligned strategy and join a China-oriented camp, the strains on the grouping will become intense.China mooted the idea of expanding Brics last year — South Africa claims more than 40 countries are interested in joining — but other existing members including Brazil seemed distinctly reluctant. If nations enter who are beholden to China through ties of debt or investment, Brics will look ever less like a steering group for the emerging world and more like a fan club for an aspiring hegemon.If the Brics remain a pressure group united by resentment against overweening US power through sanctions or military intervention, they can be cohesive, if not particularly constructive. If the group tries to run the show itself, its disparate economic prospects and strategic interests will become a powerful centrifugal force. As Ciuriak points out, if you have a collection of emerging markets whose ambition is to become advanced economies and only the largest one is really on track, you don’t have a cohesive club.It’s now established wisdom to say the Brics grouping has come a long way since it first got together as a political unit. Certainly, its rhetoric and ambition has. The disjointed and unbalanced reality has a lot further to [email protected] More

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HP is working with suppliers to shift production of millions of consumer and commercial laptops to Thailand and Mexico this year, in the top US computer maker’s first substantial move to diversify its personal computer supply chain beyond China.The world’s second-biggest PC maker by shipments after China’s Lenovo, HP is planning to shift some commercial notebook computer production to Mexico, while a portion of its consumer laptop production will go to Thailand, people briefed on the matter told Nikkei Asia. HP is also planning to shift some laptop production to Vietnam starting next year, one of the suppliers said.The output outside of China this year will be a couple of million to 5mn units, they said. HP shipped 55.2mn PCs worldwide last year, data from market researcher Canalys showed.Thailand already has a number of PC suppliers, which could facilitate HP’s shift, while production in Mexico would help the company better serve its primary North American market.HP said in a statement on its website that it was expanding existing operations in south-east Asia and elsewhere and had been “adding incremental notebook PC production” in Mexico.In an email to Nikkei, the company said: “China is a very important part of our global supply chain and we remain deeply committed to our operations in Chongqing.”HP’s plan comes after its competitor Dell launched a more radical campaign to exclude “made in China” chips from its products and significantly reduce its overall use of electronic components produced in the country, Nikkei Asia first reported.Dell, which launched its diversification plan earlier than HP, will make at least 20 per cent of all of its laptops in Vietnam this year, people with direct knowledge told Nikkei. On the component level, it will take Dell until about the end of 2024 to complete its planned shift away from “made in China” chips.Apple, meanwhile, began making MacBooks in Vietnam this year, the first time its laptops were made outside China, fulfilling plans that Nikkei reported on late last year.HP’s move would further help Vietnam and Thailand build up a supply chain ecosystem for PCs, making south-east Asia an even more attractive option for computer makers looking for production options outside China amid geopolitical uncertainties.The company has been relatively slow to shift production out of China compared with other US tech companies, despite having been in talks with suppliers to evaluate such an option since 2019.“HP’s plan is shifting the product assembly to destinations beyond China first, but it has not yet made a clear and strong commitment to massively switch to non-China-made chips and components,” said a supply chain executive with direct knowledge of the matter. However, HP has already spoken with electronics component makers with production capacity in Vietnam about shipping to Thailand, according to three people from different suppliers directly involved in the talks.“HP wants to stay low-key about its plans to shift outside of China. Apart from geopolitical concerns, it also takes into account China’s continued rising manufacturing costs, including challenges in recruiting labour and the increasing labour costs,” said an executive at an HP supplier.The top US PC maker has been a strong supporter of electronics manufacturing in China for decades.Perhaps the best example of this is the inland Chinese city of Chongqing, which HP began developing as a hub for laptop production in 2008. Acer and Asus followed in HP’s footsteps and asked suppliers to move production to the city on the banks of the Yangtze river, which is now also home to numerous HP suppliers, from Quanta Computer and Inventec to Foxconn. Today Chongqing is the top city in China for PC exports.The flip side of this support is that the supply chain for notebook computers is now so deeply rooted in China that many industry experts and analysts say shifting away is difficult.The US is the biggest single PC market for HP and Dell, accounting for about 31 per cent and 40 per cent of their shipments, respectively, in the first quarter of this year, data from Canalys showed. The Chinese market, on the other hand, only accounted for 7.5 per cent and 8 per cent, respectively, over the same period.China’s Lenovo and Huawei together dominated the Chinese PC market in the first three quarters of this year. Dell has a strong political incentive to diversify its production away from China, as the company controls about 73 per cent of the market for US government-use PCs.“The primary purpose of supply chain diversification is to mitigate risk factors related to US-China tensions, or to take advantage of emerging production hubs in Vietnam and other Southeast Asian countries,” said Kieren Jessop, an analyst with Canalys.Jessop said the supply chain diversification was not likely to directly affect American PC makers’ market share in the Chinese domestic consumer market. However, it may affect some government-related bids. “Some opportunities in government or public education [sectors] may be lost because of concerns and policies around domestic sourcing and manufacturing,” Jessop said.Dell did not respond to a request for comment.A version of this article was first published by Nikkei Asia on July 18. ©2023 Nikkei Inc. All rights reserved.Related storiesTSMC, Foxconn hit in biggest Taiwan tech slump in 10 yearsLenovo reduced workforce by 5% amid PC slump: CEOMicrosoft cuts production of Surface accessories amid PC slumpTSMC to send hundreds more workers to speed US plant constructionUS Treasury warned Hong Kong banks on tech exports to Russia More