Aurelia Butler

WASHINGTON (Reuters) – Hotel executives see no letup in demand even with the Federal Reserve trying to stomp on spending. Air travel is hovering near or above 2019 levels and based on the most recent Fed household data U.S. consumers likely still have a few hundred billion dollars of extra savings to burn.Another summer of strong spending may lie ahead, in other words, in the part of the economy Fed policymakers feel is proving most troublesome to their goal of returning inflation to their 2% target – and where their attention is focused as they debate whether interest rates may need to rise further or not. The Fed begins its latest two-day policy meeting on Tuesday, with investors and economists largely expecting the U.S. central bank to hold interest rates steady after 10 consecutive rate hikes since March 2022 increased the benchmark federal funds rate from near zero to its current level between 5% and 5.25%.But the Fed is also expected to show it is poised to raise rates again in July following that brief respite. Hours before the meeting starts, policymakers will receive new inflation data for May that could influence the debate. The headline rate may drop under the influence of slower-rising food and energy prices, but economists expect little improvement in the underlying measure of “core” inflation that covers much of the U.S. services sector. In a recent Reuters poll economists said they expect the core consumer price index rose at a 5.3% annual rate in May versus 5.5% in April, a stodgy pace of decline in an index that has largely moved sideways this year. ‘PRETTY RESILIENT’Services account for about two-thirds of the U.S. economy. Though some services, like the provision of housing, are expected to help lower headline inflation in coming months, much of the rest of the service sector has kept the overall pace of price increases uncomfortably high.While Fed officials keep waiting for consumers to relent, and watch data on credit card delinquencies and other fine points for signs that demand is beginning to crack in earnest, the changes have been modest so far.”At some point you will see some slowing. I think realistically, it’s more late third quarter and into the fourth quarter,” Hilton Worldwide Holdings (NYSE:HLT) Inc Chief Executive Christopher Nassetta said in late April on the company’s first quarter earnings call. “There’s enough momentum in our business. The economy broadly is pretty resilient. There’s more confidence in the Fed.”Even with average prices about 17% higher now than in 2019, U.S. hotels over the first four months of the year sold roughly as many nights, at 404 million, as they did in January through April of that year, according to data from hospitality analytics firm STR.Demand is expected to remain healthy, said Jan Freitag, national director of hospitality analytics at CoStar Group (NASDAQ:CSGP).“It was very interesting to see that when the right to travel was taken away, suddenly in consumers’ minds is ‘that won’t happen to me again,’” with travel booming as restrictions and health fears eased, Freitag said.Consumers may be choosing less expensive items when they eat out, but data from OpenTable shows seated diners still near or above levels seen last year and the rate of job openings in the industry remains among the highest in the country. The pace of price increases could still ebb even with demand strong. According to STR, for example, the average daily room rate in April had increased just 3.4% over the same month a year ago, a far cry from the year-over-year increases in excess of 30% in some months of 2022.But it isn’t just travel, hospitality and other favorite “revenge spending” targets that have elevated the price level. Deutsche Bank (ETR:DBKGn) Chief U.S. Economist Matthew Luzzetti said he now expects fast-rising wages “should filter into strong healthcare inflation over the coming months” and be a “strong tailwind” to overall inflation.’TOUCH AND FEEL’Since prices began accelerating in 2021, the Fed has waited for a series of changes to help ease the pace as the economy reopened from the pandemic and established a new balance. Some of those changes have happened. Supply chains for goods are largely repaired, and the pace of goods price inflation has eased. Global food and energy prices have moderated from shocks around Russia’s invasion of Ukraine. But the U.S. services market, more labor dependent than other parts of the economy and still experiencing worker shortages and rising pay, isn’t there yet.For the Fed that presents a tough judgment over whether to move interest rates higher and try to break inflation faster, or stop at a slightly lower rate for a longer period in hopes inflation will gradually subside without major economic damage in the form of rising unemployment.The two approaches carry different risks – the one of taking policy a step too far, tightening financial conditions too much, and causing unnecessary job loss; the other that inflation hangs around so long it starts to change public perceptions, becomes embedded in planning, and thus gets stuck at a higher level.There’s no good overall way to measure which provides the better tradeoff, said former Fed monetary policy director William English, now a professor at the Yale School of Management.”A lot of it is touch and feel,” English said, given that so little is understood about how public expectations about inflation are formed, for example, and how those expectations influence the path of prices and wages.But for now the Fed has put its priority on not letting expectations begin to move – and the longer headline inflation rates stay elevated the greater the concern. 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LIMA (Reuters) – World Bank President Ajay Banga wants the lender to focus on more “scalable, replicable” projects across Latin America and elsewhere for transport and infrastructure and digitization of government and financial services to speed development.Banga, on his first foreign trip since taking office, told Reuters on Monday that he wanted the bank to prioritize its work and “pick a few things and push them really hard, so that in my lifetime, I can measure the impact.”While that may mean fewer projects in some countries, it will focus more resources on those that promise bigger improvements in people’s lives, incomes and productivity.Bank staff have developed and implemented many successful projects, but often do not standardize them and apply the lessons learned to other countries, Banga said. “I’m trying to get away from bespoke stuff to scalable, replicable things,” Banga said, adding that standardization can help draw more private-sector capital into development by making it easier to securitize groups of loans.Banga has been tasked with transforming the World Bank to vastly expand its lending capacity and revamp its business model to fight climate change, pandemics, food insecurity and other crises, in addition to its traditional anti-poverty mission.TRANSIT TRANSITIONProjects that should be replicated in other crowded cities include Lima’s Metropolitano Bus Rapid Transit (BRT) system, Banga said after touring a World Bank-financed expansion line. The system opened in 2010 using bus-only lanes and raised-platform stations to cut to 30 minutes a traffic-choked two-hour commute, ensuring access to jobs in the city center for more residents.The bank has given a $93-million loan for a 10-km (six-mile) extension into some of Lima’s poorest areas. World Bank officials say the total project cost is about $10 million per km, far lower than the $182 million per km cost of an underground metro rail line now being built in Lima. “We should be building the BRT in 20 cities in Latin America,” Banga said, adding that only three similar projects had been launched in the region in 13 years.Other infrastructure projects that can be standardized and replicated are those concerned with water supply, sanitation, roads, bridges, hospitals, and education, he said.Banga also visited one of dozens of free government legal aid offices, partly financed by the World Bank, that are aimed largely at women.The project has benefited from a parallel effort to provide digital access to Peru’s justice system, allowing the most vulnerable to secure court filings and proceedings. Such efforts also can also be standardized and scaled up, Banga added, because they reduce poverty and increase inclusion of the poor.But there will still be room to accommodate differences among countries and projects that meet their specific needs, he said. More

The chief executives of Goldman Sachs and Morgan Stanley yesterday said they were seeing “green shoots” in their struggling investment banking businesses.Speaking at an industry conference organised by Morgan Stanley, the bank’s chief executive James Gorman said: “We’re clearly seeing more green shoots. I’m having more discussions with CEOs.”Gorman, who plans to step down as chief executive within the next 12 months, said it was “unlikely” Morgan Stanley would pursue any further large-scale dismissals in the near future after it announced several thousand job cuts last month.Goldman Sachs chief executive David Solomon told CNBC he was also seeing “green shoots” and that he would expect to see activity in the capital markets pick up at the turn of the year. “I would expect capital markets activity to pick up as we head into 2024. At the end of the day, people need capital, they can defer some of those activities but at the end of the day, they can’t postpone them indefinitely.”Investors appeared to share the executives’ optimism. Yesterday the S&P 500 closed at its highest level for more than a year, powered by a rally in large tech stocks.Related: The Financial Times is launching a podcast version of its popular Unhedged newsletter. Find out more. Here’s what else I’m keeping tabs on today:Trump indictment: Donald Trump will become the first former US president to face federal charges in a courtroom in Miami today. Here’s what to expect.Economic data: Annual consumer price rises are expected to have slowed last month to the lowest level in more than two years, according to economists’ predictions. Monetary policy: The Federal Reserve is expected to pause interest rate rises at the end of its two-day policy meeting which starts today. UK Covid inquiry: A public inquiry into the UK’s response to the Covid-19 pandemic that is expected to last until at least 2026 kicks off with its first public hearing.The FT Women in Business Summit Europe goes live online and in London today. Hear from leaders at BP, Beauty Pie, Harvey Nichols and more.Five more top stories1. The two-year yield on UK government bonds surged this morning to their highest level since 2008. Strong UK wage growth data heightened investors’ concerns about stubborn inflation. The pound was also higher, rising to $1.256. Read more Related: The Chinese renminbi dropped to a more than six-month low against the dollar after the country’s central bank cut its short-term lending rate.2. The US Federal Trade Commission has asked a federal court in California to stop Microsoft from closing its $75bn acquisition of Activision Blizzard. The deal is in serious jeopardy after the UK’s competition regulator blocked the agreement in April. Read more on why the move piles pressure on the gaming industry’s biggest deal. 3. Defaults in the $1.4tn US junk loan market have climbed sharply this year, as the Federal Reserve’s aggressive campaign of interest rate rises increases the pressure on risky companies with “floating” borrowing costs. Read more on the Goldman Sachs analysis of PitchBook data.4. Bond pioneer Howard Lutnick, who launched the eSpeed electronic trading platform in the late 1990s, is poised for a third attempt to break CME’s stranglehold on Treasury futures trading. Read more on Lutnick’s plan to shake up the $550bn a day Treasury futures market.5. JPMorgan Chase yesterday agreed to pay up to $290mn to settle one of two bombshell lawsuits over its 15-year relationship with Jeffrey Epstein. The bank did not admit any liability to the claims of profiting from human trafficking or ignoring multiple internal warnings about their former client’s sex crimes. Read moreDeep dive

Nearly 1.4mn kilometres of metal-encased fibre criss-crosses the world’s oceans, speeding internet traffic seamlessly around the globe. But driven by fears of espionage and geopolitical tensions, the subsea cable market is in danger of dividing into eastern and western blocks, experts say. The FT explores how the US is pushing China out of the infrastructure underpinning the internet in this visual story.We’re also reading . . . Trump and Johnson: The reactions of Boris Johnson and Donald Trump to their latest travails are strikingly similar, writes Gideon Rachman. Both are fabulists for whom the truth is simply what is politically or personally convenient. Saudi Arabia gaming: The kingdom is spending billions in a bid to dominate the global games and esports sector as part of its push to diversify beyond oil.Obituary: Silvio Berlusconi, the tycoon and former Italian prime minister who has died at the age of 86, wielded power in a manner that defied the conventions of western democracy.Chart of the dayWith Russia’s invasion of Ukraine leading to a sharp increase in defence spending and geopolitical tensions over Taiwan also rising, economists have turned their attention back to an age-old question: how to pay for wars.

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Take a break from the newsWhat’s the best way to see Venice? To escape the crowds of tourists, the FT’s travel editor Tom Robbins drove a rental boat to explore the Italian city and its lagoon in a voyage of unplanned delights and moments of blessed solitude.Additional contributions by Tee Zhuo and Benjamin Wilhelm More

Happy May-inflation-data day everyone!Goldman Sachs economists have previewed today’s US consumer-price index report, highlighting a few underlying inflation components and their estimates for those figures. The most important is the cost of shelter, which was the largest single contributor to April’s acceleration in headline inflation, the BLS said last month. Shelter costs could decelerate in today’s report, the bank says, flagging some “softness” in rents for online home listings. GS excludes hotels from its gauge of shelter inflation, so the following analysis isn’t entirely comparable to the BLS’s figures. But the bank finds that shelter has been a very large contributor over the past year: We forecast additional slowing in shelter inflation. We believe the March/April slowdown in shelter categories was genuine and reflected a waning boost from post-pandemic lease renewals — or equivalently, the catch-up of continuing-tenant leases to market rates. Looking ahead, the softness in online rent listings shown in Exhibit 4 suggests additional disinflation in tomorrow’s report and beyond. We forecast +0.50 per cent for both rent and OER in tomorrow’s report (vs. 0.51pc-0.52pc on average in March/April and the winter monthly trend of 0.7-0.8pc).

So a slowing of, uh, one to two basis points may not significantly move the needle for the broader report. Indeed, the bank’s economists are forecasting a 0.44 per cent monthly increase in core CPI for May, above the Wall Street consensus of 0.4 per cent. That would make for a 5.3 per cent annual jump in core CPI and 4.2 per cent increase in headline CPI. In other words, GS certainly isn’t arguing that inflation is beat/whipped/etc. (Related: the bank’s economists published a separate note on a debate over whether the Fed should respond to higher inflation by simply increasing its inflation target. As you might guess, they don’t like the idea.) There are a few other notable categories that could make outsized contributions to persistent inflation in today’s report. Hotels are one. GS’s economists expect the cost of away-from-home lodging to rise 2 per cent in May from the prior month, arguing that Americans started their summer vacationing early this year. They cite data from hotel-tracker STR Global showing that rates hit a record high in May:

Used-car inflation could also come in hot, even though the Manheim index of used-car prices has retreated somewhat. That’s because Manheim is a wholesale auctioneer, meaning it sells to car dealers, and it’ll take some time for dealerships to adjust their rents consumer used-car prices lower.

The bank expects car-insurance costs to keep climbing in May, too. (That market is not pretty, as we’ve covered.) As GS puts it: “we forecast a 1% increase in the car insurance category, as carriers continue to offset higher repair and replacement costs.” Even so, the economists are forecasting “monthly core CPI inflation to step back down to the 0.3-per-cent range in the next few months, reflecting declines in used car prices and continued moderation in shelter inflation,” they wrote. “We forecast year-over-year core CPI inflation of 4.2 per cent in December 2023 and 2.8 per cent in December 2024.”2.8 per cent almost sounds like victory after the past few years. And now that we think of it, that may provide some insight into why certain commentators are urging the Fed to raise its inflation target. More