Aurelia Butler

The writer is an FT contributing editor and writes the Chartbook newsletterEconomic policymaking in the US, the most important economy in the world, has a kaleidoscopic quality. At the start of the year, the world was fixated on the Federal Reserve, interest rates and banks. Shake the kaleidoscope and a few weeks later national security adviser Jake Sullivan is declaring the new Washington consensus around active industrial policy and Treasury secretary Janet Yellen is laying down an economic path to avoid war with China.A few weeks after that, there is another shake of the kaleidoscope. The world holds its breath over the debt ceiling and the votes of left and rightwing politicians deciding whether the US will pay its bills.The Dutch economist Jan Tinbergen, in the heyday of mid-20th-century technocratic optimism, laid down the rule that we need one distinct and independent policy instrument for each separate target of policy. That implies an overarching intelligence that assigns policies to targets.In the US right now there is no such overarching intelligence. Monetary policy, industrial policy and fiscal policy are not only assigned to different targets, but follow entirely different logics. The Fed pursues technocratic fine-tuning. Industrial policy is strategic. Fiscal policy is ideological.There is none of Tinbergen’s unified technocratic intelligence here. Nor should one dignify this mess by reference to the wisdom of the 18th-century founders and the principle of the division of powers. The kaleidoscope is driven by the twisted logic of a profoundly divided society and a polarised political class.Jan Tinbergen, left, receives the Nobel Prize in 1969. The Dutch economist set the rule that we need one distinct and independent policy instrument for each policy target © APIf you wanted reassurance you might say that this incoherence in US policymaking isn’t new and that America has muddled through, and the world along with it. But the risks of disaster are real and so too are the risks of more mundane miscalculation. Even though a default has been avoided after the Senate approved a deal this week between the White House and congressional Republicans, the levers of fiscal and monetary policy in the US have now been firmly pushed in a recessionary direction. Although industrial policy brings benefits for some, the overall thrust of Washington’s new protectionism does not lower costs but raises them, at least in the short term. Little wonder that professional forecasters continue to expect a recession for later in 2023. If that is avoided, the more fundamental issue is whether such an incoherent policy process can possibly produce answers to the growing mountain of long-term problems thrown up by the age of polycrisis.Many Americans will simply shrug and say let the politicians compete to devise policy robust enough to withstand the buffeting of partisanship. For the rest let us rely on innovation, technology and entrepreneurship to deliver the goods. For the well-situated in American society that may work, but it is a very limited vision.If private entrepreneurship were self-sufficient, it might be promising. But it is a myth that private innovation lives off its own resources. In fact, it depends on public goods such as world-class government-funded research universities, and those are cash-starved and under threat. If American society were actually made up of robust, well-equipped individuals and families, then a Darwinian social model might not be a recipe for dramatic inequality and dysfunction. But, in fact, a large part of American society is profoundly ill-equipped for the modern world and urgently needs help. Americans, and most of all American children, pay the price for the callous dysfunction of Congress. What gets cut are the programmes that not only help those in need, but help to ensure a collective flourishing. Shameful infant mortality and life expectancy figures tell the story. If the US were an isolated small state whose finances were of no general interest, the rest of the world would not need to worry about the fiscal brinkmanship of its politicians. But it is not; it is the anchor of the world economy. The slightest tremor on Wall Street reverberates around the globe.If the US were a post-nationalist state with no military footprint, one could allow its domestic dynamics to be a national curiosity. But it is not. It is the largest military superpower the world has ever seen.So the egregious failures of banking regulation, the rampant bellicosity, the unilateralism in economic policy, the lack of societal solidarity, the irresponsible partisanship and reality-defying ideology that makes President Joe Biden a socialist, must be taken seriously. The team around Biden are no doubt doing their best. They think they can confront America’s domestic and global challenges with a clever blend of industrial policies. That may be the best option available. But for the sake of context it is worth reminding ourselves that the original Washington consensus of the 1990s and 2000s actually had a solid base within the American political class. In light of conditions today, the idea of a “new Washington consensus” floated by Sullivan a few weeks ago is nothing short of hallucinatory. More

In just two days this week, Elon Musk had more top-level Chinese meetings than Biden administration officials have had in months.The Tesla and Twitter boss secured meetings with three government ministers as well as influential Shanghai Communist party chief Chen Jining. He reportedly even met vice-premier Ding Xuexiang, a confidant of President Xi Jinping.His trip coincided with one by JPMorgan Chase chief executive Jamie Dimon, who also enjoyed access to high-profile government officials in Shanghai, where Chen called on him to attract more international financial institutions to China’s business capital.Beijing has rolled out the red carpet for corporate leaders in an effort to win back their favour after three years of pandemic lockdowns that shut out international business. But the whirlwind of business contacts also underscored the breakdown in official communication between Washington and Beijing, as Sino-US relations languish at their lowest point in decades.The return of corporate leaders to China was putting the country back on the “radar” of the business world, said Bala Ramasamy, professor at China Europe International Business School. But he added: “To what extent is this going to help the political side? I’m still a bit sceptical.”The VIP reception for Musk, Dimon and others such as Apple’s Tim Cook, who visited in March, echoed an earlier period of US-China relations, when Beijing wooed American chief executives in an effort to influence policy in Washington.But analysts cautioned that, while China remained a market US corporate chiefs could not ignore, their ability to ease geopolitical friction is limited. For US policymakers, security concerns over Xi’s assertive military stance and dominance of manufacturing supply chains trump business considerations.“The traditional model of CEOs as credible conduits between the US and China is broken because security considerations now need to be woven into the commercial conversation,” said Han Lin, a professor at NYU Shanghai and country head of the Asia Group advisory firm. 

Elon Musk, left, with China’s foreign minister Qin Gang during a meeting in Beijing on Tuesday © Ministry of Foreign Affairs of the People’s Republic of China/Getty Images

During the pandemic, “people didn’t really talk to each other and that’s done a lot of damage”, said one finance figure present at an audience with Dimon. China’s state media was keen to promote Musk’s trip to fuel optimism over the economic recovery, experts said. After seeing Qin Gang, China’s foreign minister in Beijing on Tuesday, Musk met Jin Zhuanglong, the industry minister and an aerospace expert and commerce minister Wang Wentao. He was also granted rare access to vice-premier Ding, who sits on the seven-member Politburo Standing Committee, Reuters reported.Musk “gets a lot of attention”, said Ker Gibbs, former president of the American Chamber of Commerce in Shanghai. “It will be a shot in the arm for the Chinese populace, make people feel good for about 15 minutes.”But the visit would not have “any substantive impact”, Gibbs added. “People are still really nervous about the economy.”

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At a more strategic level, Beijing is trying to demonstrate that it is open for business, in defiance of what it says are US containment efforts through export controls on high-technology items such as semiconductors, analysts say. In a statement after meeting Musk, foreign minister Qin struck a positive note, saying the US and China needed to brake in time to avoid “dangerous driving” and step on the “gas pedal’ to promote co-operation.Musk responded that the countries were “intertwined” and that Tesla opposed “decoupling and breaking [supply] chains”, according to a government statement — comments that chimed with Beijing’s stance on western countries’ attempts to reduce industrial dependence on China.While Musk sparked a domestic social media sensation, with the cameras following him to famed Peking duck restaurant 1949 — Duck de Chine, Dimon struck a lower profile, holding a closed-door conference for thousands of investors in Shanghai.One attendee said the JPMorgan Chase chief endorsed the role of multinationals in mending US-China ties, saying that “engaging in conversation is good” and geopolitical discord could be resolved. 

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Another conference attendee said Dimon was “much more pensive in private meetings”, however, where he expressed “disappointment in the level of confidence here in China, worries about a slowdown of the economy and how they’re going to deal with that, worries about how they’re going to navigate the political situation with the United States”.The atmosphere has shifted dramatically from past years, when one-time Wall Street bosses such as John Thornton, the former Goldman Sachs banker, Blackstone chief Stephen Schwarzman and former Treasury secretary Hank Paulson reputedly tried to act as go-betweens for the countries. The US political climate was now so hawkish on China that it was “kind of terrifying”, Thornton told a forum in Shanghai in April. “It’s very hard to find senior Americans right now who have anything positive to say about China,” he said. Beijing has also launched raids this year on the offices of US companies Bain, due diligence group Mintz and consultancy Capvision, sending a further chill through foreign corporations operating in the country.

There have been recent signs of dialogue between Washington and Beijing. Chinese commerce minister Wang met his US counterpart Gina Raimondo and US trade representative Katherine Tai last week, though Beijing rebuffed a meeting between its defence minister Li Shangfu, who is subject to US sanctions, and US defence secretary Lloyd Austin in Singapore this weekend.If Beijing did want to use Musk as an envoy, he was an unlikely choice, analysts said. Musk is also “a controversial politicised” figure who may struggle to bend the ear of the Biden administration, according to Jorge Guajardo, a partner with Dentons Global Advisors in Washington and the former Mexican ambassador to China.“My first thought was, ‘I’m not sure he’s the messenger that you want in Washington’,” Guajardo said. Reporting by Joe Leahy in Beijing, Demetri Sevastopulo in Singapore, Thomas Hale in Shanghai, Edward White in Seoul, Kaye Wiggins and Andy Lin in Hong Kong and Andrew Edgecliffe-Johnson in New York More

LONDON (Reuters) – Global stocks and commodities rose on Friday while the dollar headed for its biggest weekly drop since March, as sentiment was buoyed by signs the Fed will skip a rate hike at its next meeting and by the approval of U.S. debt ceiling legislation. Markets are now focused on U.S. jobs data due at 0830 EST (1230 GMT), the most significant macroeconomic release of the week, for more cues on the Federal Reserve’s rate hike path. The U.S. Labor Department’s employment report is likely to show nonfarm payrolls increased by 190,000 jobs last month after rising 253,000 in April, according to a Reuters survey of economists.”The release is really going to dictate the future of Fed policy after the speech of the vice chair-designate Jefferson that likely took a June rate hike off the table,” said Jeff Schulze, head of economic and market strategy at Clearbridge “The only way that (a June rate increase) is going to be in play is if you see a large beat to the upside of both payrolls and CPI.” Vice chair nominee Philip Jefferson said on Wednesday skipping a rate hike at a coming meeting would allow the rate-setting Federal Open Market Committee to see more data before making decisions about the extent of additional policy firming, remarks echoed by several other Fed speakers. Jefferson’s nomination as vice chair is still pending approval from the U.S. Senate. Market pricing indicates roughly a 75% chance the Fed will hold rates steady at its upcoming meeting, according to the CME’s Fedwatch tool, though there is roughly a 50% chance of a 25-basis-point hike at one of the Fed’s June or July meetings. The dovish tone caused a rally in U.S. Treasuries. The 10-year yield, last at 3.6104%, was steady on the day on Friday, but was set for a weekly drop of around 20 basis points, its biggest weekly fall since mid March. [US/] That helped shares to rally, and Europe’s broad STOXX 600 index rose 1% and headed for a second day of gains.European mining stocks increased 4.4%, boosted by a Bloomberg report China is working on new measures to support its property market. MSCI’s broadest index of Asia Pacific shares outside Japan rose 2.3% earlier on Friday, with Japan’s Nikkei ending the day at its highest close since July 1990. (T) Nasdaq and S&P 500 futures were both up around 0.5% after each index reached nine-month closing highs on Thursday. [.N] DEBT DEAL Boosting the mood was the U.S. Senate passing bipartisan legislation backed by President Joe Biden that lifts the government’s $31.4 trillion debt ceiling, averting what would have been a first-ever default.”The fact that this is potentially getting resolved earlier does remove some potential distortions,” said Phil Shucksmith, portfolio manager at Newton Investment ManagementInvestors’ focus now will turn to the market impact of the U.S. Treasury issuing more bonds to refill its empty coffers, which could put pressure on liquidity, or ready cash available to banks. “We’ve probably got some degree of rebuild of that treasury general account,” said Shucksmith, which, along with quantitative tightening, “means I think there’s going to be tightening of financial conditions.” Lower U.S. yields were also playing out in currency markets with the dollar index, which measures the U.S. currency against six major peers, steady on the day at 103.49, but set for a weekly fall of 0.7%, its biggest weekly decline since March. Gains against the dollar have been shared out fairly broadly among other currencies, but sterling was to the fore, set for a weekly gain of 1.4%, its most since December. The euro is up 0.27% against the dollar this week, dragged by lower European yields after inflation showed signs of slowing, welcome news for the European Central Bank and reinforcing market bets that the ECB too could be done with interest rate hikes in the coming few months. [GVD/EUR] The bullish sentiment, softer dollar and China property news helped push oil prices higher, with U.S. crude up 1.7% at $71.29 per barrel and Brent at $75.53, up 1.7%. Markets are also weighing the likelihood of price-supportive OPEC+ production cuts over the weekend.[O/R]Copper prices were heading for their first weekly gain since April with other metals trading higher too. [MET/L]Spot gold was up marginally at $1,979 an ounce, but set for its biggest weekly gain in nearly two months, as a softer dollar and lower yields bolstered the bullion’s appeal. [GOL/] More

COLOMBO (Reuters) – Sri Lanka’s central bank is likely to continue to ease monetary policy, following a 250 basis points rate cut on Thursday, as it tries to boost economic growth and lower borrowing costs for the government in the crisis-hit economy.In a sign of confidence that the worst of Sri Lanka’s financial crisis is over, its central bank surprised markets with its first rate cut in three years on Thursday, signalling a change of course to fuel a rebound in the economy.In a snap poll conducted on Friday, all ten economists and analysts asked said they now foresee further rate cuts in the coming months starting as early as August, with the majority expecting interest rates to end the year at 10%-11% from 13%-14% now.Sri Lanka plunged into crisis last year as its foreign exchange reserves ran out, food and energy prices spiralled and protesting mobs forced the ouster of the country’s then president.Inflation easing at a faster pace than projected and sustained dollar inflows in recent months have likely given the CBSL an opportunity to embark on a loosening cycle earlier than expected and start mending economic growth, analysts said. “We also think CBSL is eager to push market yields lower, to ease the pressure on the financial sector,” Citi Bank economists wrote in a note.”This could be indicative of the likely need to pursue some domestic debt restructuring via the treasury bonds, which we think would help advance negotiations with the foreign creditors,” they added.Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund (IMF) in March and aims to complete restructuring debt talks by September.”The central bank’s rate adjustments will also help it manage borrowing costs and compliment domestic debt restructuring decisions,” said Dimantha Mathew, head of research at First Capital. “With no inflation risk the central bank will cut rates aggresssively to push demand and target growth.” The CBSL expects Sri Lanka’s GDP to contract by 2% in 2023, slightly better than the 3% contraction predicted by the IMF. Five analysts backed CBSL and IMF estimates, two said Sri Lanka would perform better and one projected a steeper contraction of 4.8%. IMF Deputy Managing Director Kenji Okamura wrapping up a visit to Colombo this week said the country is showing a “strong commitment” to implementing economic reforms but must continue this momentum even in a challenging economic environment. () Sri Lanka will begin rolling back import restrictions on 300-400 items from next week, as per a statement from the finance ministry which gave no further details. The island introduced import bans on multiple items including vehicles, cosmetics and alcohol in March 2020 but gradually eased them since last year. For individual polled responses, please see table below:Organisation July August October November 2023 GDP Acuity No change 50 bps cut 300 bps cut No -2% change Advocata No change 100 bps cut No change 100bps -2% to -3% cut First Capital No change 250 bps cut No change No – 4.8% change Asha No change 50bps cut 300bps cut No – 0.5% to -1% Securities change University of No change 200-250 bps cut No change 100-200b -2% to -3% Colombo ps cut Frontier No change 200bps cut No change 100bps -2% Research cut Capital No change No change No change 100bps 3% Economics cut HSBC 150 bps cut each in 3Q and 4Q Citi Bank futher cut of 150 bps for the year CAL Group No change No change 250-300 bps No – 2% cut change More

LONDON (Reuters) – A crash in British home prices is unlikely but they will dip further this year than earlier thought as the cost of living crisis and rising borrowing costs take their toll on indebted buyers, a Reuters poll showed.As in much of the world, home prices soared during the COVID pandemic as buyers sought additional living space and took advantage of low interest rates, but with high inflation proving sticky the Bank of England embarked on an aggressive rate hiking path and is likely not done yet.Average house prices were expected to fall a modest 3.0% across 2023, deeper than the 2.4% drop predicted in a February poll but nowhere near the crash some were expecting, the May 16-31 poll of 23 market specialists showed. The lowest forecast was for a 10.0% fall.They are then expected to flatline in 2024 and rise 3.1% the year after. In the last poll they were expected to rise 1.0% next year and 3.5% in 2025.”The majority of pundits and doomsters are being proved wrong – it is not an edge of the cliff moment. Yes, prices will fall this year but by single digits,” said Tony Williams at consultancy Building Value.From peak to trough home prices will fall 7.5%, the median in the poll showed. Forecasts ranged from a 4.3% dip to a drop of 17.5%.”Persistent core inflation and wage pressures will prevent the Bank of England from cutting interest rates until 2024, which means mortgage rates won’t fall any further until next year,” said Andrew Wishart at Capital Economics.”The resulting high cost of mortgage borrowing will prevent a recovery in demand, lending, and sales until interest rates are cut.”Since December 2021 the BoE has made 12 consecutive increases to Bank Rate, adding 4.4 percentage points in the sharpest increase in rates since 1989. Currently at 4.50%, a separate Reuters poll suggested it would peak at 5.00% next quarter. Markets are pricing in a peak of around 5.25%-5.50%.Those rising borrowing costs – already at a level not seen in almost 15 years – meant house prices fell on average 3.4% in the 12 months to May, the most since 2009, lender Nationwide said this week.Meanwhile, lenders approved fewer loans for house purchases in April than in March and the value of new mortgage lending also dropped, according to BoE data that added to signs of a slowdown in the housing market.When asked what was more likely for home prices this year, two-thirds of respondents to an extra question, eight of 12, said a downturn. The other four said an upturn.”A significant downturn is unlikely, but a downturn is more likely than a recovery in values,” said Michael McGill at real estate firm CBRE.Britain’s largest housebuilder Barratt Developments (LON:BDEV) said earlier this month the “economic backdrop remains difficult” but did report improving buyer interest.Prices for homes in the capital, long a magnet for foreign investors but which were hit by Brexit and COVID, will fall 3.3% this year before rising 0.2% in 2024 and 4.0% the following year, the poll found.”The capital’s housing market has been more affected by political, economic and pandemic turmoil than the regions and has seen a reduction in values over recent years,” said property consultant Russell Quirk.”However, London will always be London as far as property investment sentiment is concerned over the medium to long term, and so we can expect to see the market here spring back to life.”(For other stories from the Reuters quarterly housing market polls:) More

LONDON (Reuters) – The dollar headed for its largest weekly fall since mid-January on Friday as the view took hold among investors that the Federal Reserve will forgo an interest rate hike this month, which would diminish the greenback’s appeal to non-U.S. buyers.The U.S. Senate’s passage of a bill to suspend the debt ceiling and avert a disastrous default also removed a pillar of support for the dollar, which had paradoxically been a key beneficiary of the uncertainty because of its safe-haven status.The Australian dollar surged after an increase in the minimum wage there stoked bets for another raise in rates next week.The dollar index, which measures the U.S. currency against six others, has dropped nearly 0.8% this week, its biggest weekly loss since mid-January. It was last down 0.1%.”With the debt ceiling in the rear-view mirror, focus is very much back on central banks and economic data,” City Index markets strategist Fiona Cincotta said.”The problem is we’ve really had quite mixed messages so, yes, more recently we had two officials mentioning a skip in June, but that doesn’t rule out a hike later in the summer, or even in July, so I think that expectation could still keep the dollar supported,” she said.”Also, let’s not forget inflation is still high.” Philadelphia Fed President Patrick Harker said on Thursday “it’s time to at least hit the stop button for one meeting and see how it goes”, referring to the June 13-14 Fed meeting.A day earlier, Fed Governor Philip Jefferson said “skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming”.Some softness in U.S. manufacturing data overnight supported the case for a pause, although jobs figures continue to print hot, putting even more focus than usual on the monthly non-farm payrolls report at 1230 GMT.Money markets are pricing in a roughly 29% chance of a June hike, down from near 70% earlier in the week.Economists polled by Reuters expect non-farm payrolls to have increased by 190,000 in May, from April’s 253,000 rise.”We have had 13 straight months were jobs numbers have surprised positively and if we get a very strong reading that changes the outlook for the June fed meeting, when the market expects a pause,” Guy Miller, chief market strategist at Zurich Insurance, said.The dollar edged into positive territory against the yen, having logged its longest streak of daily losses against the Japanese currency since last November, with four days of declines. The dollar was last flat at 138.8 yen.The pair tends to track U.S. long-term Treasury yields, which were unchanged on the day at 3.61% after falling to their lowest since Nov. 18 overnight.The euro rose 0.1% to $1.0767, its highest in around a week, thanks to a boost on Thursday from European Central Bank President Christine Lagarde, who said further policy tightening was necessary.Meanwhile, the U.S. Senate passed a bill to lift the government’s $31.4 trillion debt ceiling on Thursday, readying it for President Joe Biden to sign ahead of Monday’s deadline.”This clears the last residual bound to everything getting done and dusted by Monday’s X-date,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank (OTC:NABZY) (NAB).”At the margin, it plays with the grain of the more risk positive view in the market, which is proving to be U.S. dollar negative.”The Aussie rose by as much as 0.93% to $0.663, its strongest since May 24. The primary driver was an announcement by Australia’s independent wage-setting body that it would raise the minimum wage by 5.75% from July 1.Traders currently place a 67% chance the Reserve Bank of Australia (RBA) will raise rates by 25 basis points. Even if a hike doesn’t happen next week, markets expect one by autumn. More

The SNB also stood ready to intervene in the currency markets as necessary to ensure its price stability goal of inflation between 0% and 2%, he said.”We have increasing signs that inflation is spreading to other goods and services, not linked to energy and supply bottlenecks,” Schlegel told an event organised by the Asset Management Association Switzerland in Bern.Although inflation rates around the world had dipped, Schlegel said it was too early to sound the “all-clear” on price rises.The SNB currently forecasts Swiss inflation to fall from an average level of 2.6% this year to 2% in 2024 and 2025, but the outlook remained very uncertain, Schlegel said.”We cannot rule out further tightening of monetary policy to ensure price stability,” Schlegel said.Another factor to be considered was the impact of higher interest rates in Switzerland on rents, which could go up later in the year and add to inflationary pressure, he added.The SNB has raised interest rates four times over the past year to tackle inflation, which although low in comparison to other countries, remains elevated by Swiss standards.Consumer price growth eased more than expected in April to 2.6%, but remained outside the SNB’s target range for the 14th months in succession.SNB Chairman Thomas Jordan earlier this week said the SNB needed to bring inflation back below 2% as soon as possible to prevent inflation perceptions becoming entrenched in households and businesses. May inflation data for Switzerland is due on June 5. The SNB is due to give its next monetary policy assessment on June 22. More