Aurelia Butler

Here’s a look at the week ahead in markets from Kevin Buckland in Tokyo; Ira Iosebashvili in New York and Dhara Ranasinghe, Karin Strohecker and Amanda Cooper in London.1/THE NARROWEST RALLY THIS CENTURYSome investors are growing concerned about how gains in the S&P 500 have become increasingly concentrated in a handful of megacap stocks.The combined weight of five stocks – Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google-parent Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Nvidia (NASDAQ:NVDA) – now accounts for 25% of the S&P 500’s market value, a trend recently supercharged by the AI buzz. Data from Deutsche Bank (ETR:DBKGn) shows the equal-weighted S&P 500 index, a barometer of the average stock, trailing the S&P 500 by its biggest margin since 1999.A rally driven by a handful of stocks raises questions about the health of the broader market and risks igniting volatility if investors ditch those megacap holdings.2/FIRST IN, FIRST OUTEmerging market central banks were quick to tighten policy in early 2021 when price pressures accelerated, front-running major developed central banks, including the Fed. Now they appear to be once again first out of the starting blocks as rate cuts move higher up the agenda.Hungary became the first European bank to lower rates in May, following Uruguay, which kicked off the Latin American rate-cut cycle in April while Sri Lanka stunned markets with a 250-basis point rate cut on June 1.But the picture is mixed: Polish policymakers are seen holding rates at 6.75% on Tuesday even if expectations are rising for a cut later in the year. Markets might have to wait until 2024 for India, where the next decision is due on Thursday. Russia is expected to keep its rate at 7.5% on Friday.3/A CRUDE INVITATIONThe Organization of the Petroleum Exporting Countries and partners agreed on Sunday to extend a set of production cuts into 2024. The event draws in throngs of reporters from all around the world, who jostle for position at the bottom of several flights of stairs at the OPEC secretariat that they race up to get into the pre-meeting press scrum.Reading the runes was already tricky and Saudi Arabia, the group’s biggest exporter, unexpectedly delivered a deep cut to its own output. Saudi Energy Minister Prince Abdulaziz told a news conference the reduction was “a Saudi lollipop”. “We wanted to ice the cake. We always want to add suspense,” he said.Adding to the suspense in the run-up to the weekend, the group banned several major news organisations from attending the press conference, including Reuters and Bloomberg.The price of oil rose as much as 3.4% overnight to a high of $78.73 a barrel. But despite OPEC+’s best efforts, it’s still worth roughly half what it was in March 2022, after Russia invaded Ukraine.4/INTERVENTION WATCHThe yen has fallen over 5% since early March to six-month lows against a resilient dollar.It’s enough to make Japanese officials uneasy, with top currency diplomat Masato Kanda warning that Japan will closely watch currency moves and won’t rule out any options.Currency intervention is viewed as a distant prospect, but traders will likely pay attention to policymaker comments in coming days after officials from the finance ministry, BOJ and Japan’s financial watchdog met on Tuesday. Such meetings can be a prelude to further action.And it’s not just Japan traders on intervention watch. Sweden’s crown is at its weakest against the dollar and euro in over a decade, adding to inflationary pressures. A weak currency is a problem, but intervention would be a last resort, says central bank Deputy Governor Per Jansson.Such resolve could well be put to the test.5/RBA BRINGS THE PAIN The Reserve Bank of Australia says the inflation fight is far from won, and the public should brace itself for more pain. That could be as soon as the next meeting on Tuesday, with markets laying about 30% odds for a hike. The economy had been showing signs of cooling until this week, when a reading of consumer prices jumped much more than forecast for April, sending stocks to a two-month trough. Rates are already at an 11-year peak after a surprise hike last month, which RBA governor Philip Lowe justified by saying he wanted to send a clear message to households and businesses that the central bank will do whatever it takes. Policymakers need to keep an eye on top trading partner China too, where a sputtering post-pandemic recovery risks eroding Australian ore and energy exports. More

A boom in generative artificial intelligence and pandemic-induced workplace shifts will unleash a new era of faster productivity growth across the rich world, economists say, though it could take a decade or more for advanced economies to reap the full benefits. After surging during the initial stages of the pandemic, The Conference Board, a global business research organisation, said this month that it expected productivity to barely grow this year across mature economies. The board believes this weakness is set to continue over the next decade, citing the rising cost of capital and ongoing economic and geopolitical uncertainty. The forecasts highlight the challenges facing advanced economies, where the struggle to boost productivity since the financial crisis in 2008 has held back increases in output and wages.However, economists believe the boom in investment into AI — plus several trends in workplaces that took off during the pandemic — will eventually produce compelling results. Chad Syverson, a professor at the Chicago Booth School of Business, said there was now a “data-driven case for optimism” on productivity, with AI, the formation of new businesses and people switching jobs all set to yield results. While productivity growth remained weak on paper, he believed that the pay-off from the recent changes in workplace practices — plus the eventual benefits of AI — would take time to feed through into the numbers. “Very little of this stuff is plug and play . . . companies have to invest a lot of resources to reconfigure their business model for this new thing,” Syverson said. “New software, regulatory issues, all that stuff has to be figured out. There is a period where the technology is around and you can see the benefits but for lots of reasons . . . productivity goes down.”John Haltiwanger, professor at the University of Maryland, agreed that AI breakthroughs involving large-language models would eventually boost the economy. The US was, he said, now undergoing a transition similar to that of the late 1980s, when the economist Robert Solow said: “You can see the computer age everywhere but in the productivity statistics.”The radical shifts brought about by generative AI could eliminate what John Van Reenen, professor at the London School of Economics, described as “a lot of drudgery” in workplace practices, enhancing efficiency and growth in the process. However, earlier technological leaps have taken decades to deliver meaningful pay-offs in productivity. “It takes an enormous amount of time for companies to change,” said Nick Bloom, a professor at Stanford University, citing the example of the invention of electric motors in an era when most industrial buildings were configured for water or steam power. There are already big claims for generative AI’s transformational effects on productivity. A recent paper published by the Brookings Institution — written with assistance from the GPT4 model — cites evidence that it can help coders work at twice their previous speed, halve the time taken to complete certain writing tasks and make call centres 14 per cent more productive. Investment banks, meanwhile, are encouraging clients to buy into generative AI. Researchers at Morgan Stanley say US productivity is “poised to rebound”, in part because demographic trends, combined with government “friendshoring” policies, will make it harder for multinationals to tap a global pool of cheap labour and force them to automate.An AI-focused “productivity revolution” could be broader than that seen after the introduction of personal computers, they suggested in a recent note, with sectors such as retail and manufacturing “primed to invest”.Haltiwanger pointed to a surge in the creation of new companies, much of it driven by the shift from city centres to suburban homeworking hotspots. Provided these fledgling businesses can weather the rise in US interest rates, and any turbulence in regional banks, the rewards should follow. “Any time you go through a change in the way you’re doing business, spatially as well as in areas of the economy, there is productivity growth down the line,” he said.

Van Reenen was more sceptical that labour shortages would drive innovation. While a smaller pool of workers could change the direction of technological change — as in Japan, where an ageing workforce has spurred investment in robotics — it was likely to also mean fewer new ideas. The Conference Board also sought to temper what it called the “excitement” surrounding technological breakthroughs. Bloom, meanwhile, warned that it was hard to predict when the big turning points in productivity would come. “The development of the steam engine, electric engine, personal computer and internet did not generate a measurable impact on productivity within five years. So it is hard to think what will. I include [generative] AI in this.”

Video: Capture: who’s looking after the children? | FT Film More

The World Bank is under increasing pressure to reform, following a call for $100bn in fresh capital to drive climate and development finance ahead of a summit in Paris to be co-hosted by the leaders of Barbados and France.The proposal for extra capital and $100bn in foreign exchange guarantees are central to a big update, put forward by Barbados’s prime minister Mia Mottley, of last year’s so-called Bridgetown Initiative to overhaul the lending institutions, in a consultation document seen by the Financial Times.Mottley has led a push over the past year by smaller, less wealthy nations to secure more funds to help tackle climate change through reforming the World Bank and the IMF, which were set up after the second world war.The “Bridgetown 2.0” consultation document calls for new funding proposals to cut the “excessive risks” that poorer countries have to take to borrow to fund green investments.The World Bank’s big shareholders, led by the US, have previously rejected calls for more cash. The pandemic, inflation and the European energy crisis have all squeezed government budgets, leading countries to argue that the bank should aim to do more with existing funds. But Germany’s minister for economic co-operation and development Svenja Schulze told the Financial Times on Friday it was potentially open to providing more funding.The World Bank must demonstrate it could be a ‘better bank’ before Berlin would provide more funds, says German minister for development Svenja Schulze © IMAGO/photothek/Reuters“I have called for ‘a better bank’ before ‘a bigger bank’,” she said. However, if reforms were substantial and tangible, “Germany is willing to embark on a discussion about more funding”. A US official also said that as broader reforms were carried out across the bank, the Biden administration would examine whether any more paid-in capital was needed. The official added that fully implementing reform measures would make any paid-in capital more effective. If the new World Bank president Ajay Banga, listed as an attendee in Paris, outlined strong reforms and began to put these in place, “that question [of an increase in paid-in capital] becomes a much more open one”, said Michael Jacobs, visiting senior fellow at the ODI think-tank and a former UK government climate adviser.Mottley and her advisers are consulting other world leaders in a bid to secure support for the updated agenda to the initiative that aims to expand low-interest lending for climate-related projects, several people familiar with the talks said.Foreign exchange risk was one of the “major inhibitors of investments in green infrastructure”, according to one summit participant, because of the “premium for foreign investment in non-major currencies”. An independent review of development banks commissioned by the G20 found that with “very manageable changes to risk tolerance” the World Bank and other institutions could boost lending by “several hundreds of billions of dollars over the medium term” while maintaining the AAA credit rating that allows it to borrow at advantageous terms in capital markets. The Paris summit is expected to focus on several other areas, such as tackling debt for borrower countries, new sources of finance to deal with climate change, including selling carbon credits, and involving the private sector. Mineral supply chains and efforts to preserve biodiversity will also be discussed, a French official said. Working groups, some numbering more than 100 delegates including national representatives, NGOs, sovereign wealth funds and philanthropists have been involved in preparing for the summit, people involved said.President Emmanuel Macron welcomes the prime minister of Barbados at the Élysée Palace in March in preparation for the summit on reforming the World Bank and IMF © Yoan Valat/EPA-EFEPresident Emmanuel Macron of France is also pushing for greater collaboration between the international development banks and other banks working at regional and national level to ensure projects go ahead.A US official said it was pushing for new ways to assess which borrowers should be prioritised for concessional financing, and exploring new allocation models for funds to tackle climate change and pandemics.Other US priorities include mobilising private capital and speeding up debt restructurings for poorer economies, an official said. France has promoted the gathering, on June 22 and 23, as a chance to build consensus for a more inclusive financial system. Claire Healy, of the E3G think-tank in Washington, said the gathering was an opportunity for fresh climate policy suggestions to “get some heft” and a “political, leader-level push”.At least 21 leaders have confirmed they will attend, organisers have said, including German chancellor Olaf Scholz, the presidents of Gabon, Mozambique, Congo and Mauritania, and European Commission president Ursula von der Leyen. Narendra Modi, India’s prime minister and chair of the G20, is not expected. British prime minister Rishi Sunak has not confirmed his attendance, despite being urged to do so in a letter from non-profit organisations. More

Debt is an everything, everywhere, all at once problem. Both public and private debt has been crucial to growth creation since pretty much the beginning of civilisation. But too much of it (particularly when it’s private) slows the economy. The burden of servicing debt depresses real incomes and it also creates greater inequality, since the owners of capital benefit disproportionately as debt tends to fuel higher asset prices — at least until bubbles burst. We’ve heard a lot about this topic recently thanks to the wrangling in Washington over the debt ceiling. Republican concerns about US government deficit levels were belied by the fact that they focused so much of their negotiations on highly political issues such as defunding the Internal Revenue Service. In any case, the areas of the federal budget up for grabs represented only 15 per cent of total spending. The upshot is that instead of federal debt rising to 119 per cent of gross domestic product in a decade, it will rise to 115 per cent.So far, so small. What got lost in the heat and noise of the debate is that the debt created by the government sector turned into growth in the household sector. This is a point made by former banker Richard Vague, now the Secretary of Banking and Securities for the Commonwealth of Pennsylvania, in his upcoming book The Paradox of Debt.Vague notes that in 2020, during the Covid pandemic, the US federal deficit reached $3tn as the government acted to help rescue America’s economy — and to some extent the world’s. At the same time the wealth of the country as a whole increased by around $11tn, thanks largely to the fact that the net worth of US households rose by $14.5tn that same year. In fact, if you look at the full three years of the pandemic from 2019 to 2022, government net worth went down $1.7tn dollars (it was down $6tn at the federal level), while household net worth went up $30.9tn. This is true even when you account for the stock market decline of last year.Why? Because government debt became household income, as well as rising asset wealth from stocks and home values, which have increased along with debt — public and private — since the 1980s. “Debt is, quite simply, required to create GDP growth,” says Vague, who lays out why total debt to GDP ratios in the US, and in all but two of the world’s seven largest economies, have risen in tandem since the 1950s.He refers to this as a “government debt and spending model” in which the benefits of government spending flow to non-financial businesses as well as households. This occurs to varying degrees — in the US for example the benefits go mostly to households, while in Japan they go mostly to non-financial businesses. The notable exceptions to this model are Germany, which relies on trade surpluses to drive growth, and China, where debt from the non-financial sector bolsters household income.The takeaway is basically that debt begets growth. So then, why worry about it, be it public or private? Because debt also comes with problems. Problem number one is that rising debt causes inequality to go up. This is because higher asset values are mostly captured by the wealthy. In the US, this has been particularly true since the late 1980s, when financialisation really took off. Even if incomes are rising, you may get a cost of living crisis (as is evident right now in the US and many other parts of the world) when the price of homes, healthcare or education outpaces wages. Problem number two is that rising private debt becomes a drag on economies, as household debt servicing becomes an increasing burden for those who are less well off. The cycle of debt-driven growth has been with us for centuries. Governments use debt to fund wars, and in their aftermath there tends to be a private sector resurgence which leads to greater financial lending. Eventually, there is too much lending, which leads to debt excesses. Those in turn require government bailouts. It’s a process that is not only exhausting, but leads to economic and political fragility — from stock market collapses and housing crises to debt ceiling debacles and popular revolts against the rich.We don’t yet know how to move beyond the cycle of debt-driven growth but Vague offers up thoughts on how to curb the most dangerous debt excesses and prioritise different stakeholders when the inevitable defaults happen. The key lesson is that, in many cases, the speed of a debt run-up matters as much as the total amount of debt itself. He advises policymakers to watch this metric across both the public and private sector. Debt forgiveness should be thought about less in moral terms than as a practical economic fix. Vague deems jubilees in areas such as student loans and healthcare debt worthy, since they encourage spending. Reducing large trade deficits is another way to deal with debt issues, something that will bolster the arguments from those in the US who want to better balance consumption and production. This goal has been prioritised by both the Trump and Biden White Houses.Of course, one country’s deficit is another nation’s surplus. Just as public and private sector lending are intertwined, so is the debt of the US and the world. [email protected] More

SYDNEY (Reuters) – Asian shares extended a global rally on Monday on optimism the Federal Reserve would pause its rate hikes this month after a mixed U.S. jobs report, while oil jumped as Saudi Arabia pledged big output cuts in July. Brent oil jumped $1.82, or 2.4%, to $77.95 a barrel, while U.S. crude climbed $1.77, or 2.4%, to $73.51. Oil prices have recently come under pressure amid heightened concerns about China’s slowing economic recovery. [O/R]Oil rose as Saudi Arabia announced it would cut its output to 9 million barrels per day in July, from around 10 million bpd in May, the biggest reduction in years, while a broader OPEC+ deal to limit supply into 2024 also underpinned futures.”With Saudi Arabia protecting oil prices from sliding too low … we think oil markets are now more prone to a shortfall later this year,” said Vivek Dhar, a mining and energy commodities strategist at Commonwealth Bank of Australia (OTC:CMWAY).”We think Brent futures will rise to $US85/bbl by Q4 2023 even with a tepid demand recovery in China factored in.”On Monday, Japan’s Nikkei surged 1% to a 33-year high, Australia’s resources-heavy shares gained 1% and South Korea’s KOSPI rose 0.5%. S&P 500 futures dipped 0.1% and Nasdaq futures dropped 0.3% in Asian hours, after a strong rally on Friday, driven by a mixed U.S. jobs report, a resolution to the debt-ceiling issue and the prospect of a U.S. rate pause this month. The tech-heavy Nasdaq rose 1% on Friday and posted its sixth-straight week of gains that marked its best winning streak since January 2020, while the Dow Jones gained 2%, and the S&P 500 added 1.45%. Data on Friday showed U.S. economy added 339,000 jobs last month, higher than most estimates, bolstering expectations of Fed hikes in July, with markets tipping a 50% chance for that. However, moderating wage growth and rising jobless rate in Friday’s jobs report argued for a case of pause in June. Markets are still leaning towards a rate pause from the Fed at the next policy meeting, but have priced out almost any chance of a rate cut by the end of this year.Yields on U.S. two-year Treasuries surged 16.2 basis points on Friday to 4.503% and ten-years rose 8 bps to 3.6903%, in part driven by Fitch Ratings saying the U.S.’ “AAA” credit rating would remain on negative watch, despite the debt agreement. That in turn helped the dollar gain 0.5% on Friday and stay elevated at 104.16 against its peers early on Monday. The greenback jumped 0.8% on Japanese yen to 139.94 while the euro eased 0.5% to $1.0706. The Australian dollar was an outperformer against a strong greenback, up 0.5% to $0.6605, on bets that the Reserve Bank of Australia will have to raise rates higher and for longer on domestic wage pressures. The RBA will hold a policy meeting on Tuesday. In the wake of a strong increase in the minimum wages for the next financial year, markets are now split on whether it would hold rates steady or hike it further to 4.1%.The Bank of Canada will meet on Wednesday. A majority of economists polled by Reuters expect the BOC to keep interest rates on hold at 4.5% for the rest of the year but the risk of one more rate hike was high. More

The final au Jibun Bank Japan Services purchasing managers’ index (PMI) rose to a seasonally adjusted 55.9 last month from the previous peak of 55.4 in April.That compared with the flash reading of 56.3 and was well above the 50-mark that separates expansion from contraction for a ninth straight month.”Firms were buoyed by the easing of the few remaining pandemic restrictions and have noted strong increases in demand, notably from overseas and inbound tourism,” said Usamah Bhatti, economist at S&P Global (NYSE:SPGI) Market Intelligence.”The upward trend looks set to continue in the near and medium term,” as outstanding business expanded at a record rate and business optimism held near an all-time high.The government has scrapped strict pandemic-related border controls and reclassified COVID-19 to the same level as seasonal flu.The number of foreign visitors to Japan climbed to a post-pandemic high of nearly 2 million in April. The subindex measuring outstanding business rose at the fastest pace on record as disruptions caused by the pandemic continued to wane. Business expectations for the coming year remained robust, though the pace of increase slowed slightly from April, the survey showed. Service sector companies hired more workers for the fourth month in a row, with the rate of job creation the second fastest since September 2007.Input prices and prices charged for services continued to rise but at a slower pace than in April.The composite PMI, which combines the manufacturing and services activity figures, expanded at the fastest pace since October 2013. The index advanced to 54.3 in May from 52.9 in April, staying above the break-even 50 mark for the fifth straight month. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.Asian markets are set for a strong start on Monday, extending last week’s upward momentum and rising risk appetite on growing hopes the U.S. economy is headed for a ‘soft landing’ after Congress’s approval last week of a debt ceiling deal that averts U.S. default.Regional and global markets on Friday chalked up solid gains and volatility measures slumped after the release of forecast-smashing U.S. jobs figures. It looks like the ‘sell in May and go away’ maxim won’t apply this year – investors are bullish and they are buying.Some of the moves in major regional stock markets last week are worth noting: the MSCI Asia ex-Japan index on Friday rose more than 2%, its best day in five months; Japan’s Nikkei 225 – at a 33-year high – last week rose for an eighth straight week, its best run in five years; the Hang Seng tech index snapped its longest weekly losing streak on record and rose 3.6%.The Asian and Pacific economic data calendar on Monday will be dominated by a raft of purchasing managers index (PMI) reports, most notably for China, Japan, India and Australia, with Indonesian inflation thrown in for good measure.Asia’s PMIs have been mixed. Manufacturing in India is growing at its fastest pace in two and a half years, South Korea’s is in its longest spell of contractionary readings in 14 years. Market sentiment in Asia on Monday could also get a lift from signs of a potential thaw in U.S.-Sino relations, as a senior U.S. State Department official arrived in Beijing on Sunday with meetings planned for the coming week.On the other hand, oil prices could spike higher on the news that OPEC+ is looking to cut production to counter flagging prices and a looming supply glut. Looking ahead, investors in Asia have plenty of economic events and monetary policy decisions to get their teeth into this week. Inflation data from Indonesia, the Philippines, Thailand, Taiwan and China will be released, starting with Indonesia on Monday. Economists polled by Reuters expect annual CPI inflation eased in May to a one-year low of 4.22% from 4.33% in April.Revised Japanese GDP is out on Thursday, while the monthly ‘data dump’ from China this week includes consumer and producer price inflation, trade, FX reserves and total social financing (TSF), a broad measure of credit and liquidity in the economy. These reports will give a clearer picture on how the world’s second largest economy is emerging from its pandemic lockdown. So far, it has massively undershot expectations, which is why Chinese assets have been under so much pressure.On Tuesday, the Reserve Bank of Australia is expected to keep its cash rate on hold at 3.85%, and on Thursday the Reserve Bank of India is also expected to keep its repo rate unchanged at 6.50%, according to Reuters polls.Here are three key developments that could provide more direction to markets on Monday:- PMIs from China, Japan, India, Australia- Indonesia CPI inflation (May)- Singapore retails sales (April) (By Jamie McGeever; Editing by Diane Craft) More