Aurelia Butler

BRASILIA (Reuters) – Brazilian Finance Minister Fernando Haddad on Thursday announced a plan to more than halve the government’s estimated deficit this year by boosting revenue and trimming expenditures, helping to lift the real currency to its strongest level in two months.Gains occurred in a session in which various currencies rose against the dollar on the back of weaker U.S. inflation data.Haddad said the government of leftist President Luiz Inacio Lula da Silva, who took office Jan. 1, would aim to reduce the 2023 primary deficit, before interest payments, to between 0.5% and 1% of gross domestic product (GDP), or 90 billion to 100 billion reais ($18 billion to $20 billion).The proposals aimed to allay investor concerns that Lula’s focus on poverty reduction and other election promises could hurt fiscal discipline in coming years, pushing public debt to worrying levels.Treasury Secretary Rogerio Ceron said the proposed fiscal package would keep Brazil’s gross debt on a trajectory around 75% of GDP, without exceeding 80%.The shortfall in this year’s budget had been forecast at 2.1% of GDP, equal to 232 billion reais ($46 billion).Haddad presented a list of proposals with a total impact estimated at 243 billion reais ($47 billion), resulting in a theoretical fiscal surplus. But he said revenue frustrations might occur, as well as unexpected expenses. The measures include actions that Lula has not yet approved, including the end of a tax waiver on fuels, which will only be on the agenda after the new board of state-run oil giant Petróleo Brasileiro S.A., known as Petrobras, takes office. That alone could increase public revenue by 29 billion reais this year, Haddad said.Another proposal involved new rules about how companies can generate tax credits with the ICMS state tax, which could increase federal revenues by 30 billion reais this year.Haddad also announced a tax debt renegotiation program, providing for discounted fines and interest on installments, which could boost tax revenue by 50 billion reais in 2023.His plan accounts for more revenue than previously forecast, less spending on contracts and programs under review, and holding back on some authorized spending.Before taking office, Lula secured congressional support for a 168 billion reais spending package bypassing a constitutional spending cap to meet campaign promises, sparking investor concerns about fiscal discipline.Haddad sought to play down those concerns and struck a conciliatory tone with the newly autonomous central bank, whose president was appointed by Lula’s predecessor with a mandate through 2024.”I don’t have to be satisfied or dissatisfied. I have to work with the central bank, respect institutionality, respect its independence that was approved and seek ways to harmonize policies,” Haddad said.The central bank has lifted Brazil’s benchmark interest rate to 13.75% from a 2% record low in March 2021. After pausing its tightening cycle in September, it has stressed that it remains vigilant and may resume hikes if inflation does not cool as expected, recently signaling increased fiscal risks.($1 = 5.10 reais) More

US stocks and Treasuries rallied after data showed US inflation continued to slide in December, easing pressure on the Federal Reserve to make further sharp interest rate rises.Wall Street’s blue-chip S&P 500 reversed an early dip to close 0.3 per cent higher for the day, its third consecutive day of gains. The tech-heavy Nasdaq Composite rose 0.6 per cent.The moves came after a report from the Department of Labor showed annual consumer price growth in the US fell to 6.5 per cent in December, down from 7.1 per cent in November and broadly in line with economists’ expectations. The closely watched “core” measure of inflation, which strips out volatile food and energy prices, clocked in at a rate of 5.7 per cent, down from 6 per cent the previous month.The latest figures raised expectations that the Fed will further slow the pace of its interest rate rises with a 0.25 percentage point increase at its next policy meeting at the end of January. Last month the central bank lifted rates 0.5 percentage points after a string of larger 0.75 percentage point increases. Investors are increasingly debating the timing of a potential “pivot” by the Fed, despite officials’ insistence that rates are unlikely to fall until 2024. Chris Turner, global head of markets at ING, said expectations of an “easing cycle in the second half of the year, China’s reopening and lower energy prices” were all encouraging investors back into risky assets.Thursday marked the first time the S&P 500 had risen three days in a row since early November, while the Nasdaq recorded its first five-day winning streak since last July. An inflation number “in line with consensus probably allows the risk rally to continue”, Turner said.Prior to Thursday’s data release, rates markets were pricing in a roughly 75 per cent chance of a 0.25 percentage point increase at the next Fed meeting, which would bring its benchmark interest rate to a target range of 4.5 per cent to 4.75 per cent. By Thursday afternoon this had increased to more than 96 per cent.Markets also moderately dialled back where they expect the central bank’s main policy rate to peak later this year, with investors anticipating that borrowing costs will crest at about 4.9 per cent in June.US government bonds rallied across the board, with the yield on the two-year Treasury note, which is particularly sensitive to interest rates, falling 0.1 percentage points to 4.13 per cent. The yield on the benchmark 10-year Treasury note fell 0.13 percentage points to 3.42 per cent. Bond yields fall when prices rise.A measure of the dollar’s strength against a basket of six other currencies fell 0.9 per cent on Thursday, having declined more than 8 per cent over the past three months, partly on the back of cooling core inflation data.Elsewhere in equity markets, Europe’s Stoxx 600 added 0.6 per cent and Germany’s Dax rose 0.7 per cent on Thursday, while London’s FTSE 100 gained 0.9 per cent, inching closer to an all-time high. In Asia, Hong Kong’s Hang Seng rose 0.3 per cent and China’s CSI 300 of Shanghai and Shenzhen-listed stocks added 0.2 per cent. More

This month, Suzanne Clark, head of America’s mighty Chamber of Commerce, has been grilling her members about what they anticipate when contemplating the outlook for 2023. You might expect this prognosis to be grim. A JPMorgan survey of American business leaders last week reported “a sharp fall in optimism about the economy as recession fears loom”, with 65 per cent of executives predicting a downturn in 2023, and just 8 per cent feeling upbeat about the global economy.And when the World Economic Forum issued its annual risk report before next week’s annual jamboree in Davos, it was apocalyptic, noting that “as an economic era ends, the next will bring more risks of stagnation, divergence and distress”. Ouch.But there is a peculiar paradox at play: if you scour that JPMorgan report, you can see plenty of micro-level cheer amid the macro malaise. Most notably, 51 per cent of respondents predicted that profits would rise — not fall — in 2023, and 88 per cent of them expect to keep or add staff. A cynic might say this is because CEOs have to be optimistic in the face of investors. However, Clark believes the scale of the dichotomy, also reflected in the chamber’s own data, is unusual. “Right now, many of our members tell us that while the state of their business is strong, the state of our economy is fragile,” she says. Clark dubs this a problem of “second-hand pessimism” — or the place where corporate reality and public rhetoric diverge. Why has this second-hand pessimism developed? The chamber, in its role as a lobbying group, primarily blames it on America’s politicians. “American business is fed up [with Washington] . . . due to its polarisation, the gridlock, the over-reach, and the inability to act smartly and strategically,” says Clark, lamenting that “businesses don’t have the clarity or the certainty to plan past the next political cycle”.Fair point. But I think this only tells part of the tale. The other reason for this dichotomy is that the C-suite is contending with a baffling world that most are ill-equipped to analyse. This is partly because the challenges that confront businesses right now cannot be easily defined by the intellectual tools that have long been venerated in business schools, such as economic models or balance sheets. To understand this, just look at the Davos risk report, which cites the top 10 dangers that alarm WEF members. A decade ago, these often related to economic problems, such as growth and debt. However this year, such traditional economic issues do not appear in the list at all. Instead they have been displaced by risks such as nuclear war, intensifying alarm about climate change and social conflict.This might be misguided; debt, for example, could still be a serious problem in 2023. But wrong or not, the key point is that “few of this generation’s business leaders and public policymakers have experienced” these big risks, as the WEF makes clear. No wonder that only 8 per cent of respondents in the JPMorgan survey feel cheerful about the global economy. To make matters worse, the big economic issue that is shaping the world — a swing in the financial cycle — is also unfolding in unusual ways. Most business leaders today have lived through various dramatic financial cycle swings, whether the great financial crisis of 2008, 2001’s dotcom implosion or the Asian crisis in 1997. But today’s swing is different. As central banks tighten monetary conditions, this has not caused asset price bubbles to “pop” rapidly in the way we saw in 2008 or 2001. Instead, most asset prices are sliding down steadily, in a manner reminiscent of the slow “hiss” created when air leaks from a balloon.This is partly because of continued uncertainty about whether central banks, including the US Federal Reserve, are truly committed to this tightening. But another key issue is that private capital played a central role in the last bubble, to a far greater degree than in earlier cycles. Since private institutions do not need to mark down depreciating assets in a timely manner, many are still shuffling these around, at inflated marks, while hoping — or praying — that a miracle will rescue them. The consequence of tighter monetary policy is thus still partly concealed or, more accurately, deferred. For politicians, a “hiss” undoubtedly looks preferable to a “pop”. But the problem (as we saw in Japan in the 1990s) is that a world of deferred losses and rising rates is also one of gnawing executive anxiety. To cite one example: the chamber data show that while companies say they can easily access capital now, they assume it will soon evaporate. This is both second-hand and pre-emptive pessimism.So the big questions that investors need to ponder is whether this bifurcation will last — and how it might end. Will micro-level cheer eventually drown out the macro gloom? Or will this pessimism become self-fulfilling, as angst about the future continues to crush C-suite optimism? My own suspicion is that the second scenario is more likely. But I fervently hope I am wrong. Either way, Davos attendees (and the American Chamber) face a business cycle unlike any they have known before; and one that cannot be neatly forecast with economic models alone. [email protected] More

How much profit will Apple suck out of its own supply chain as it moves deeper into making key components for its products? And as it increases its take, might it force changes in its supply base that will actually result, over the long term, in greater risks for its own business?Those questions were brought to the fore again this week with reports that Apple is moving ahead with plans to replace iPhone wireless communications chips made by Broadcom and Qualcomm, and to make its own displays. Those changes are still some way off, according to Bloomberg. But they are part of a seemingly inexorable progression that has already seen Apple take charge of the silicon “brains” in the iPhone and iPad, as well as an increasing number of Macs.The answer to the first question — how much profit can Apple extract — seems to be: a lot. Broadcom and Qualcomm, two of the chip sector’s most profitable companies, each look to Apple for around a fifth of their sales, presenting a juicy target.Yet the push deeper into component technologies is not primarily about claiming a bigger share of the cake for itself. As always with Apple, technology strategy is determined by the needs of the product: the premium prices that mean the profits take care of themselves.Tim Cook laid out the goal in 2009, two years before he became chief executive, when he said that Apple wanted “to own and control the primary technologies behind the products that we make”. He also said it would “participate only in markets where we can make a significant contribution”.Producing its own chips has been the most visible result of this strategy. That has contributed to longer battery life and better overall performance of the iPhone. The M1, the first Apple-designed processor for the Mac and iPad, stunned the chip industry with its high performance when it was unveiled in late 2020.Yet even if not the primary incentive, the financial effects are likely to be significant. To say that Apple “makes” anything is to stretch the meaning of the word: It designs the product and controls the process, but subcontracts the actual assembly or manufacturing to others.As a result, the recent surge in its sales — and profits — has come without the need to pour more capital into its operations. Its return on capital employed jumped nearly 20 per percentage points in 2021, to 48 per cent. Last year it leapt again, to around 60 per cent.That is roughly double the ROCE at Alphabet and Microsoft — companies often thought of as being founded on a software business model that is inherently superior to that of a “hardware maker” like Apple. Yet Cook’s stipulation that Apple only enter markets where it can make “a significant contribution” sets a high bar. Beating some of the tech world’s most successful innovators at their own game takes heavy investment and plenty of time. It is nearly four years since Apple bought the Intel division that makes wireless modems used inside smartphones, raising expectations that it would quickly displace Qualcomm. Even now, that move is still probably two years away, according to Bloomberg. Qualcomm had expected its 5G modems to be in only a fifth of the new iPhones launched by Apple later this year, but said recently the components will now be in a “vast majority” of the phones.The move into screens has also taken time. Apple bought LuxVue, a specialist in low-power screens, in 2014, leading to repeated speculation over the years that it would soon replace suppliers like Samsung and LG. Yet if progress can be slow, the direction of travel is clear.The impact of all of this on suppliers has been profound. As Apple has claimed more of the design work, suppliers have been pushed towards lower-margin and more capital intensive activities. That has led to a focus on scale and a concentration of the supply base.The risks in Apple’s business from this concentration have started to become more evident. They include the violent protests last year at Foxconn’s giant iPhone plant in Zhengzhou over China’s Covid-19 policy. Meanwhile, the potential security threat to Taiwan has highlighted its dependence on chipmaker TSMC.Some diversification looks likely, both in the range of suppliers as well as their location, but the effects of Apple’s technology strategy will be hard to offset. Large parts of the global electronics supply chain have already been remade around the iPhone. The process is far from [email protected] More