Aurelia Butler

Bond traders have had a major rethink on the path of US interest rates, reducing bets on a series of cuts after stubbornly high inflation readings and strong economic data.A little more than two weeks ago, traders in the Treasury futures market had put money on the possibility that interest rates could be cut to 4.2 per cent by the end of the year, from the current range of 5 per cent to 5.25 per cent, suggesting three or even four rate cuts. Now that expected tally has dropped to a likely maximum of two, taking rates to 4.7 per cent. The broad shift drags investors more in line with the consistent message from the US Federal Reserve that it has no plans to chip away at rates while inflation remains far above its target. But it also underlines the state of intense uncertainty over where markets are heading next.“If you are feeling confused about the macro outlook, it is important to realise that you are not the only one,” wrote Dario Perkins, an analyst at TS Lombard in London.“A head-clutching Old-Testament-style recession would resolve many of these tensions and bring some clarity to the outlook. But I would not be surprised if the confusion continued for a while longer, with a global macro environment that continues to frustrate both the bulls and the bears.”Since the collapse of Silicon Valley Bank and other regional US lenders this year, financial markets have expected a credit crunch to result in a US recession, which could prompt the Fed to cut rates. Meanwhile, US consumer price rises have been slowing, reaching an annual pace of 4.9 per cent in April. Some investors have taken that, in combination with the regional bank failures, as a sign that the Fed will start to reverse the historically aggressive pace of rate rises that it has executed over the past 14 months.But the Fed itself has never been sympathetic to that view, and in recent weeks a growing number of its policymakers have reminded traders that the fight with inflation is far from over. The US job market has also remained robust, with the unemployment rate hovering at 54-year lows. A brief rise in weekly claims for unemployment benefits earlier in May ultimately turned out to largely be the result of fraud, economists said. Bond markets are caught in these cross currents.“The data flow has been a bit better recently. People got worried [about] the jobless claims number . . . but then finding out it was fraud in Massachusetts and that we’re trending not quite as high is one reason we’ve taken out some of the cuts,” said Jay Barry, head of interest rate strategy at JPMorgan. Barry also noted that the JPMorgan surprise index, which compares investors’ perceptions of economic growth against the reality in the data, has jumped significantly in the past few weeks. Fed Chair Jay Powell on Friday said that the credit crunch expected in the wake of the collapse of the regional banks may limit how much the Fed needs to raise rates.“The sooner we see the Fed stop hiking rates, the less economic damage we’ll see, so the less need we’ll have to cut rates,” said Kristina Hooper, chief global market strategist at Invesco. This adjustment in views on rate cuts could matter for asset managers, who have been piling into shorter-dated bonds, betting that interest rates will come down. The yields on shorter-dated Treasury notes move with inflation expectations, so a rise in yields could be costly. “From here, I think the level of uncertainty remains high and investors will remain extremely cautious given the tail risks ahead and the highly volatile start to the year,” said Kavi Gupta, head of US rates trading at Bank of America.Investors also say that recent progress on debt ceiling negotiations could be pushing yields higher. “This is generally a world where US Treasury bonds rally on a fear of a default by the US government over that horrendous debt ceiling debate, so the fact that bonds have sold off and yields have risen is at least driven in part by hopes and expectations that a deal on that is near,” said Jim Leaviss, chief investment officer for public fixed income at M&G Investments, on a podcast this week.

Analysts at BlackRock suggested investors are falling back in to the habit of assuming that market stresses or economic wobbles will nudge the Fed and other central banks in to backing down on rates.“Most developed markets are grappling with a shared problem. Core inflation is proving more stubborn than expected and remains well above central banks’ 2 per cent targets,” they wrote in a recent note. “We think that means central banks can’t undo any of their inflation-fighting rate hikes any time soon, even if financial markets think the Federal Reserve will start cutting rates before the end of the year. We see recession ahead. But unlike in the past when central banks would cut rates to stimulate a struggling economy, we think the unresolved inflation problem makes that unlikely this time.” More

Ecuador’s president Guillermo Lasso is a US-educated, pro-business conservative. But his government has just signed a trade deal with China, and when he secured $1.4bn of debt relief last year, it was from Xi Jinping.“Xi was very understanding,” said Lasso of the Chinese president.Experts say Ecuador’s experience with China shows how the US and other western countries risk losing further ground in Latin America to Beijing unless they can offer better trade and investment opportunities.Chinese trade with Latin America has exploded this century from $12bn in 2000 to $495bn in 2022, making China South America’s biggest trading partner.Chile, Costa Rica and Peru have free trade deals with Beijing, Ecuador inked its agreement this month and Panama and Uruguay are planning treaties.

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The Biden administration, however, has ruled out new trade agreements, frustrating Latin American nations. The EU has spent 20 years negotiating a free trade deal with the South American Mercosur bloc but has yet to ratify it.Eric Farnsworth, who heads the Washington office of the Council of the Americas, a regional business group, said there was growing bipartisan concern about the lack of an active US trade agenda for Latin America.“You have to compete economically in the western hemisphere or you’ll lose it,” he said. “And we’re not competing effectively.”The US has a patchwork of six existing free trade agreements covering 12 Latin American countries, but the lack of a common framework has led to struggles to integrate regional value chains.Ricardo Zúniga, principal deputy assistant secretary in the US state department’s western hemisphere bureau, conceded that “our political reality right now is that there’s not support for expansion of free trade agreements”. The US was focusing on “taking advantage of trade facilitation and . . . nearshoring opportunities”.Trade is not the only issue. Beijing has won friends in Latin America by building and financing roads, bridges and airports. More than 20 Latin American and Caribbean nations have joined China’s Belt and Road infrastructure initiative and China has lent more than $136bn to Latin American governments and state companies since 2005.The US and EU, meanwhile, have been focusing on corruption, democracy, the environment, human rights and the risks of doing business with China. The EU’s Global Gateway initiative, envisioned as a response to the BRI, has pledged just $3.5bn to Latin America.Among the US’s talking points with Latin America is an entreaty to avoid 5G phone networks built by China’s Huawei, which is sanctioned by Washington — but US and European alternatives to Huawei are often more expensive.A Latin American foreign minister last year compared the American approach to the Catholic religion, telling the Financial Times that “you have to go to confession and you still may end up being damned”.The Chinese, by contrast, were like the Mormons who “knock on your door, ask how you are feeling” and “want to help”.Zúniga rejected the criticism that the Biden administration had put too much emphasis on human rights. “The erosion of human rights and economic performance go together,” he said. “When you have leaders that concentrate powers in their own hands, inevitably they start making economic decisions that are not actually consistent with the national interest.”Yet the contrast between visits made this year by Brazil’s newly elected president Luiz Inácio Lula da Silva to the world’s two top powers was telling.Lula visited Washington with a small delegation for one day in February and met president Joe Biden. A White House statement afterwards said that talks had focused on democracy, human rights and climate change. Trade and investment were mentioned, but no deals were announced.In April, the Brazilian leader spent three days in China, bringing dozens of business leaders and state governors. About 20 agreements worth $10bn were signed. Lula made a point of touring Huawei’s research centre in Shanghai, saying afterwards that “no one will prohibit Brazil from improving its relationship with China”.Brazil also signed agreements to pursue semiconductor technology, renewable energy and satellite surveillance. The deals form part of its strategy of “active non-alignment”, which resists taking sides between the west and China or Russia, including over the war in Ukraine.While China has been steadily investing and building trade, the US has launched initiative after initiative, to little avail. The Trump administration unveiled América Crece (Growth in the Americas) in 2019 to try to counter Beijing’s BRI push, but it delivered few results.The Biden administration then tried Build Back Better World, a proposed infrastructure alliance announced in June 2021. But Panama’s president Laurentino Cortizo told the FT last month that nothing had come of it. “The speeches are very pretty,” he said, adding that the US should “firm up the promises . . . of economic support”.Last June Biden announced yet another US initiative, the “Americas Partnership for Economic Prosperity”. But almost a year later, specific investments have yet to be announced and Brazil and Argentina, two of the region’s top three economies, have not joined. “Latin Americans still aren’t quite sure what it will entail,” said Margaret Myers of the Inter-American Dialogue think-tank in Washington.One obstacle is funding. The DFC, the main US development finance institution, is required to prioritise low and lower-middle income countries, which rules out most of Latin America. Multilateral development banks also have restrictions on lending to upper-middle income and high-income nations. China has no such issue.

People inspect a brine pool at a lithium mine on the Atacama salt flat in the Atacama Desert, Chile © Cristobal Olivares/Bloomberg

European leaders are meanwhile trying to remedy nearly a decade of neglect by convening a summit with Latin American presidents in July. But one EU diplomat admits: “If we fail, there may not be another summit. It’s a last chance to relaunch the relationship.”At the same time, European and US companies have been selling assets in the region, put off by its fraught politics and keen to refocus on “core” geographies. The Chinese are ready buyers.“It’s all very well to talk about investment but US and European companies are shedding their assets in Latin America,” said Myers. “We have to create incentives for them to stay.”

The disinvestment trend includes strategic areas such as renewable energy and critical minerals. Duke Energy of the US sold 10 hydroelectric dams in Brazil to China’s Three Gorges Power in 2016 as it refocused on its home market. Canada’s Nutrien sold its 24 per cent stake in Chile’s SQM, one of the world’s biggest lithium producers, to a Chinese company in 2018.Italy’s Enel sparked concern that it was handing a near-monopoly over Peru’s electricity to the Chinese after announcing last month that it would sell its assets for $2.9bn to China Southern Power Grid. Spain’s Naturgy sold its Chilean power distribution to the Chinese in 2020.Brazil’s finance minister Fernando Haddad complained while in Beijing: “We’re almost going through a period of US disinvestment with companies leaving the country.” Ford is among them; it is discussing selling one of its former factories there to China’s BYD to build electric vehicles.“We are giving lots of directions, mandates and conditionality,” Farnsworth at the Council of the Americas concluded of the US strategy in the region. “What’s missing is market access and investment. The Chinese say: ‘We don’t care how you run your country. Just let us take your lithium.’” More

Before our eyes the shifting political balance in the US is changing the agenda of global economic policy. Following in the footsteps of Donald Trump, the Biden administration is unpicking globalisation as we have known it. We live, we are told, in the era of a new Washington consensus in which nation-centred industrial policy plays an unabashed role.This is sometimes seen as the betrayal of an earlier American vision of a rules-based multilateral order. But, as Martin Daunton’s capacious and timely history of The Economic Government of the World shows us, this sense of rupture and reversal is misleading. As he explains, “shifts in the distribution of economic power within the US” have always been “crucial” to the way in which Washington superintends “international economic order”.In a detailed narrative, which takes us through labyrinthine multilateral negotiations over currencies and trade, Daunton shows how the process of opening the door to the free movement of goods and capital was always messy and uncertain and dependent on domestic circumstances in America, the world’s leading economy.Though the statistics of foreign trade appear to show a steady rise in global integration — merchandise exports as a share of global gross domestic product rose from a high of 14 per cent just before the first world war to 25 per cent by 2008 — building the institutional frame of globalisation was a precarious business. It depended on fragile bargains between various interest groups to satisfy cotton farmers and textile producers, tactical decisions to separate contentious issues such as currencies and trade, and ensuring the maximum discretion for expert technocrats rather than congressional logrolling.

Through to the early 20th century, the US was strongly protectionist. Efforts by the Democratic party, which represented the farm exporters of the South, to reduce tariffs were stymied by the Republicans, who spoke for northern industry. Even in the first 12 months of Franklin D Roosevelt’s presidency, the direction of policy was undecided, an indecision that contributed to the failure of the World Economic Conference in London in 1933.It was not until FDR threw his weight behind the progressive project of the Second New Deal in the mid-1930s that the balance shifted decisively towards a more internationalist stance. Cordell Hull, secretary of state, bounced the Reciprocal Free Trade Act through Congress, which began to reverse the protectionist drift of the Great Depression. Meanwhile, Treasury secretary Henry Morgenthau brokered the Tripartite Currency Pact in 1936, which, after the collapse of the gold standard, stabilised sterling and the dollar against the French franc.To build a new economic order, Washington needed partners. London, still at the head of its empire, was desperate to be involved in shaping the world economy, and in John Maynard Keynes, the economist, it had the visionary for the job. But, after the second world war, Britain was too weak to actually implement the Bretton Woods vision for full exchange convertibility as agreed in the summer of 1944. It took billions in bilateral loans from the US, the Marshall Plan of 1947 and the European Payments Union of the 1950s before Britain and the rest of Europe were ready for convertibility of their currencies in 1958.Lacking a constituency in America, the ambitious vision for the International Trade Organization, which would have promoted a fully multilateral trading system, was abandoned in 1949. Instead, trade liberalisation was driven forward in a more focused way by successive rounds of tariff cuts negotiated within the General Agreement on Tariffs and Trade.The Kennedy Round Gatt talks in Geneva in 1964 — for Daunton the closest thing to a true victory for globalisation in the postwar era © Paris Match/Getty ImagesBy the 1960s, recovery in east Asia and Europe was in full swing. But that posed its own challenges. Under the inspiration of Charles de Gaulle, the European Economic Community looked more and more like a closed economic bloc. To ensure that Europe remained firmly within America’s orbit, the Kennedy administration launched a new round of Gatt talks. In Daunton’s telling, the Gatt round between 1964 and 1967, named in honour of President Kennedy, was the closest thing to a true victory for globalisation in the postwar era. It brought industrial tariffs down to new lows. But it was a Pyrrhic victory. It added to America’s trade deficit. It caused resentment among American business and labour interests and it alienated the developing world.By the 1970s, amid the wreckage of the Bretton Woods system, the protectionist current was running strong in the US. President Richard Nixon took the dollar off gold and announced a new era of nationalism in economic policy. Though presidents Jimmy Carter and Ronald Reagan initiated the era of neoliberalism at home through domestic deregulation and tax cuts, they flanked their domestic policies with slogans not of “free” but of “fair” trade. Market expansion was driven forward through regional deals such as the North American Free Trade Agreement. The Uruguay round of Gatt (1986-94) — dubbed “Gattastrophe” by its critics — took an agonising seven and a half years to deliver modest reductions in industrial and agricultural tariffs.The World Trade Organization that would replace Gatt after 1995 was first taken up, Daunton argues, by Europeans keen to constrain America’s unilateral tendencies. In the US, it always rested on a wafer-thin political majority. It was not by accident that the WTO meeting in Seattle in 1999 was met by dramatic protests.In response to its critics, in the new millennium the leadership of WTO placed global development at the top of its agenda. But in doing so, it over-reached. The wide-ranging negotiations of the WTO’s Doha round, involving 144 national delegations organised into 19 separate coalitions, have been shambolic. Meanwhile, China’s inclusion in the WTO delivered a fatal blow to political support for globalisation in the US.By 2005 there was a substantial bipartisan caucus in Congress calling for the US to leave the WTO. Well before the Trump administration set about sabotaging the WTO’s dispute adjudication procedure, the organisation was paralysed. Nor should it be a surprise that the Biden administration has shown no real interest in reviving it. The prevalent diagnosis in Washington today is that the China-centric globalisation of the 1990s and 2000s was a historic mistake.This clearly marks a new phase in the story of the world economy. But, rather than seeing this as a sudden or unprecedented rupture, if we follow Daunton’s narrative, it is merely the latest expression of a deep uncertainty and ambivalence in US politics towards the world economy.

America’s current crop of geoeconomic strategists, led by Jake Sullivan, President Joe Biden’s national security adviser, insist they are not decoupling. America’s economic leadership will remain intact. But, not for the first time, Washington is changing the terms. In a mass of technical negotiations, anchored in political and interest-group coalitions in the US, it will seek deals with partners in Europe, Asia and in the rest of the world. Offering us a realistic assessment of what American-led governance of the world economy actually entails, Daunton’s account is essential reading. Postheroic and disillusioned, this is a history for our times.The Economic Government of the World, 1933-2023 by Martin Daunton, Allen Lane £45, 1,024 pagesAdam Tooze is an FT contributing editor and writes the Chartbook newsletterJoin our online book group on Facebook at FT Books Café More

For the cover of its latest position paper on doing business in the world’s second-largest economy, the British Chamber of Commerce in China this year deliberately chose red. While the colour is auspicious in China, in the west it can signify negativity and a barrier, such as on stop signs and traffic lights. That ambiguity is meant to capture the situation in China today. While sentiment has improved since 2022, when Beijing’s zero-Covid policy crushed the economy, mixed messages and vague rulemaking in critical areas such as data security are keeping foreign businesses on edge. The latest shock came this week when China banned US chipmaker Micron’s products from critical information infrastructure, following a G7 meeting in Hiroshima at the weekend, in which the group accused Beijing of economic coercion and militarising the South China Sea. The Micron ban comes on top of raids in China on foreign consultancies in recent weeks, which included the detention and disappearance of five employees from US firm Mintz, and a ban on auditor Deloitte. Uncertainty is increasing despite the Communist party starting the year with a more positive message. At the “two sessions” annual meeting of China’s parliament in March, the new premier, Li Qiang, was at pains to stress the country was open for business again. Li said he had chatted with multinationals, including US companies. “They all told me that they were optimistic about the future” of China, he said. He followed this up with speeches and roundtables at the country’s biggest business forums, in which he assured chief executives that the worst of zero-Covid was over. But tension with the US, which is one source of Beijing’s increasing distrust of foreign business, has continued to fester. It was exacerbated by February’s spy balloon controversy.Both sides accuse the other of obstructing attempts at repairing communications. “We’re getting this very mixed message,” says Zou Zhibo, deputy director of the Institute of World Economics and Politics at CASS, a think-tank that is closely affiliated with the Chinese government. He says that efforts to repair relations during a November meeting between US President Joe Biden and Chinese leader Xi Jinping went sour after the US imposed export controls on high tech. “There’s no trust because we don’t know who to trust.”For investors, the clampdown on consultancies has had a chilling effect. The authorities’ targets have ranged from ordinary blue-chip firms such as Bain and deep-dive due diligence firms such as Mintz to expert companies that keep a Rolodex of specialists that investors can call when exploring an acquisition or planning to source goods from a supplier.

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The raids, for which there has been little to no explanation beyond allegations that the suspects were sharing information deemed relevant to national security, have alarmed foreign consultants operating in China. One consultant at a European firm says that the government had always been keen to control information flows. But now it was classifying more and more data as sensitive under the “national security” label. He adds that the increasing emphasis on national security has raised the risks for consultancy staff. “I’m . . . prepared for everything if it becomes really hard businesswise,” he says. “What I’m always worried about is individual employees.”For UK businesses, the problems include uncertainty caused by sudden regulatory changes, such as when the government cracked down on internet platforms in 2021 — and even the end to the zero-Covid policy itself, which caught businesses by surprise. The British chamber said that while its members were less pessimistic — this year 76 per cent were more optimistic about business in China compared with a record 42 per cent who were pessimistic at the end of last year — 70 per cent said they were adopting a wait-and-see approach. All of this is contributing to lacklustre performances in Chinese equities and weighing on the country’s economic recovery. As one consultant at a US company puts it, everyone with clients in China today is advising them regarding risk, ranging from the danger of conflict in the Taiwan Strait to how to make their data compliant with Beijing’s changing requirements. “Board rooms are obsessed with this. They’re not quite sure how to draw the line: ‘Maybe I need to keep a lighter footprint in China, or maybe keep less capital there, or be more nimble’,” he says. [email protected] More

Dividends issued in the first quarter by the world’s largest listed companies hit a record this year, even as prominent investors and asset managers warn of a coming global economic slowdown.The world’s 1,200 biggest public companies collectively issued $326.7bn in dividends in the first quarter of 2023, a rise of 12 per cent on the same period a year ago, according to a quarterly report from fund manager Janus Henderson.Payouts to shareholders were boosted by the largest contribution in nine years from special dividends, as companies such as carmakers Ford and Volkswagen made one-off contributions. The rises reflect the durability of corporate earnings even as stock markets around the world tumbled on Russia’s invasion of Ukraine, high energy prices and rising interest rates.Fund managers have also expressed concerns over the record $1.3tn of share buybacks that companies engaged in last year, seen by some as an alternative to dividends, citing concerns that they did not benefit shareholders as much as company management.Ben Lofthouse, head of global equity income at Janus Henderson, said the growth was “impressive, considering the challenges the global economy faced in 2022”.Stripping out special payments and moves in exchange rates, Janus Henderson said global dividends rose 3 per cent in the first quarter and predicted the total would rise 5 per cent to $1.64tn in 2023. Lofthouse said the banking and oil industries are likely to be among the biggest payers.Mark Donovan, a senior portfolio manager focusing on large-cap US equities at Boston Partners, suggested that the rise in dividend payouts by companies reflected a “growing acceptance” that management have to weigh the benefits of investing profits back into the company alongside returning gains to shareholders.“Energy is a great example where for years and years a lot of executives were biased towards putting money back into projects, many of which yielded low returns and ultimately resulted in poor stock price performance,” he said.“Those executives have figured out that raising a dividend and increasing buybacks is a better way to enrich shareholders and ultimately keep their jobs.”Janus Henderson said UK dividends grew 6 per cent to $15.3bn in the first quarter, driven by payouts from oil companies, airlines and the contract caterer Compass, which raised its dividend back close to pre-pandemic levels amid strong demand.The US was responsible for close to half of corporate dividends issued in the first quarter of 2023, Janus Henderson said, with real estate, tech and healthcare also driving growth. Dividends from mining companies fell due to the drop in commodity prices. Earlier this month Goldman Sachs forecast dividends would rise by 5 per this year, adding that even in a recession scenario dividend payouts were only likely to fall slightly, as they are the “stickiest” alongside spending on research and development.Daniel Peris, a fund manager at Federated Hermes and author of “The Strategic Dividend Investor”, predicted that dividends would increase in popularity, including among tech companies, as companies reduced share buybacks and competed to attract investors in a tougher climate.“The challenge for investors will be to determine which companies can afford to do so — are well positioned for the new cash-based capital markets paradigm — and which are not,” he added.Additional reporting by Chris Flood More

After a closed-door meeting with government officials, top lawmakers and business leaders, Haddad told reporters he expects both houses of Congress to approve the new fiscal rules before the year’s second half, while only the lower house will likely vote on the tax reform in that time frame.The fiscal rules would replace a more rigid cap on spending that limits growth in expenditures to the previous year’s inflation rate. The tax reform aims to simplify the tax code, though details remain murky.”These will give a great deal of tranquility to investors, the monetary authority and ministers, so that they will be able to work for the well-being of the country,” he said.Haddad lauded discussions around both issues, saying his ministry is so far comfortable with the dialogue with lawmakers around spending.Brazil’s proposed fiscal framework bill is set to be voted by the lower house on Tuesday after discussions with party leaders. The bill was officially presented in the chamber Tuesday afternoon. Claudio Cajado, the lawmaker in charge of the bill in the lower house who has previously proposed to toughen the fiscal rules, said later on Tuesday the bill will provide the government the possibility of increasing spending by up to 70% of any increase in tax revenues, as long as it does not exceed a rate of 2.5% above the country’s inflation. More

WASHINGTON (Reuters) – The White House said on Tuesday it would ask workers how their employers use artificial intelligence (AI) to monitor them, as it allocates federal investments in the technology, which is expected to change the nature of work.The White House will hold a listening session with workers to understand their experience with employers’ use of automated technologies for surveillance, monitoring and evaluation. The call will include gig work experts, researchers, and policymakers.Millions of users have tried AI apps and tools, which supporters say can make medical diagnoses, write screenplays, create legal briefs and debug software, leading to growing concern about how the technology could lead to privacy violations, skew employment decisions, and power scams and misinformation campaigns.As part of its evaluation of the technology, the administration will also announce new steps, including an updated roadmap for federal investments in AI research, a request for public input on AI risks and with a new report from the Department of Education on how AI affects teaching, learning and research. The listening session and new measures come after a meeting President Joe Biden hosted this month with chief executives of top artificial intelligence companies, including Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL)’s Google.The meeting focused on the need for companies to be more transparent about their AI systems and the importance of evaluating the safety of such products.President Biden has also used the technology and experimented with it, the White House has said.Shortly after Biden announced his reelection bid, the Republican National Committee produced a video featuring a dystopian future during a second Biden term, which was built entirely with AI imagery.Such political ads are expected to become more common as AI technology proliferates. More