Aurelia Butler

Rising economic optimism buoyed stock markets on both sides of the Atlantic on Friday, after eurozone inflation figures and US jobs data boosted hopes of a soft landing this year.But economists warned that while a recent big fall in energy prices has bolstered prospects for 2023, underlying inflation would maintain pressure on central banks to raise interest rates further to keep price rises under control.Philip Rush, founder of consultancy Heteronomics, said: “Inflation won’t be able to sustainably return to the target until this core problem is conquered.”The headline eurozone inflation figures for December — which fell back into single digits — helped European equities to their best performance in the opening week of the year since 2009 as investors discarded some of their end-of-year gloom. Goldman Sachs noted that lower wholesale natural gas prices, down over 75 per cent from their peak in Europe, would “boost real incomes; help to push down inflation; and improve government budgets”. It added a further export boost would come from the end of China’s zero-Covid policy.In the US, the S&P was up almost 2 per cent in mid-afternoon trading after job growth slowed for the fifth consecutive month and hourly wages grew less than expected, providing some comfort against inflationary pressures. A survey showed that activity in the vast US services sector unexpectedly contracted in December, the first fall since the coronavirus crisis in May 2020.But the US rate of job growth was faster than expected, at 223,000 for December, while the unemployment rate fell to an all-time low, giving little indication of a downturn in American economic performance that would bring inflation down quickly. In both the eurozone and the US, the resilient economic data reinforced concerns that central banks will have to keep up efforts to bring inflation down to the low levels that preceded last year, despite clear indications that price rises have peaked. Central bankers worry that inflation may stay around 4-5 per cent rather than falling to its 2 per cent target on both sides of the Atlantic.Dorothee Rouzet, economist at Citi, said the European data “now [point] to a very mild recession, bordering on no recession”. That, she added, would encourage hawks in central banks to be “concerned about wages and [profit] margins taking over [from energy] as inflation drivers”.The fall in gas and petrol prices in the eurozone helped the region’s inflation descend to a lower than expected 9.2 per cent from 10.1 per cent. The slide in energy prices also boosted the EU’s economic sentiment indicator, to only 4 per cent below its long run average. But because prices of services and non-energy industrial goods rose faster in December, the region’s core inflation rate — which excludes energy and food prices — edged higher, reaching 5.2 per cent, the highest since the single currency was created in 1999.The European Central Bank is expected to raise interest rates by another percentage point to 3 per cent across two meetings in February and March with a peak of around 3.5 per cent reached before the summer. The US Federal Reserve is expected to raise interest rates above 5 per cent and hold them there for an expended period until inflationary pressures abate in the US.In indications that the US economy is still hotter than the Fed would prefer, the job gains figures of 223,000 for December outstripped economists’ expectation of a 200,000 increase. The unemployment rate unexpectedly fell to a historic low of 3.5 per cent, according to official data. “This is still a very tight labour market,” said Veronica Clark, an economist at Citi. “For an economist, a low unemployment rate [is] future upside risks for wages.” More

NEW YORK (Reuters) – U.S. stocks are starting 2023 at much cheaper levels after Wall Street’s biggest swoon in 14 years but the potential for a recession combined with higher interest rates means equities may not be priced low enough to lure investors.Since the S&P 500 reached an all-time high a year ago, the index’s price-to-earnings ratio has fallen over 20% from its peaks to levels closer to historic averages.Some investors remain skeptical. Stocks may be more expensive than they appear if current earnings estimates do not fully account for any economic slowdown, while any downturn could further dampen what investors are willing to pay for equities.Even so, a surprise drop in the U.S. jobless rate reported on Friday seems to have raised optimism about a soft economic landing. “Valuations have corrected, but they are still not compelling relative to the macro challenges that exist,” said Keith Lerner, co-chief investment officer at Truist Advisory Services, which rates fixed income as more attractive than equities.”At best, you can say that valuations are average,” Lerner said, “but the question I think you have to ask yourself is average enough given elevated recession risk?”The S&P 500 tumbled 19.4% in 2022, as the Federal Reserve’s aggressive rate hikes designed to tamp down 40-year high inflation punished asset prices. As of midday Friday, the benchmark stock index was 0.8% firmer in the first week of 2023.The market’s 2022 slide cut the ratio of price to forward earnings estimates to around 17 from about 21.7 a year ago, according to Refinitiv Datastream. The current level of 16.3 remains slightly above the index’s 15.8 average of the past 20 years.Valuations may still be too high if a recession comes to pass, as many on Wall Street expect. Fund managers in last month’s BofA Global Research survey cited a deep global recession and persistently high inflation as the market’s biggest risks, with a net 68% forecasting a likely downturn in the next year. UBS economists forecast a recession from the second through fourth quarters of this year, “as rate hikes push a vulnerable economy into contraction.””As growth deteriorates considerably into Q2/Q3, we assume the multiple falls toward 14.5 (times),” UBS equity strategists said in a note. Combined with an expectation of weakening earnings estimates, that would lower the S&P 500 to 3,200, UBS said, roughly 16% below current levels.Any recession could pressure corporate profits more than is factored into projections. Consensus analyst estimates call for a 4.4% increase in earnings this year, according to Refinitiv IBES.Yet during recessions, earnings fall at an average annual rate of 24%, according to Ned Davis Research. If estimates are overly rosy, that means the P/E ratio is higher than it appears, making stocks seem less attractive.The profit picture will start to become clearer as fourth-quarter earnings season kicks off next week. Reports are due from banks Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C), healthcare titan UnitedHealth Group (NYSE:UNH), asset manager BlackRock (NYSE:BLK) and Delta Air Lines (NYSE:DAL).The 2022 surge in interest rates also could undermine stock valuations by making relatively safe assets like U.S. Treasuries more attractive alternatives. Yields on benchmark Treasuries jumped to 15-year highs last year after a long period when relatively safe assets yielded little. “The problem with the valuation analysis right now is the old saying was there is no alternative to stocks because interest rates were so low,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.With interest rates “significantly higher than they were the last decade … that higher multiple you used to pay for stocks may not be as justified,” he added.The equity risk premium, or extra return investors expect to receive for holding stocks over risk-free government bonds, has become less favorable over the past year, according to Truist’s Lerner.The current premium coincides with a 12-month excess return of 3.5% for the S&P 500 over the 10-year Treasury note, but “downgrades to the economy and earnings remain risks,” Lerner said in a note.The S&P 500 rose 1.7% on Friday after the Labor Department said that the unemployment rate last month was a lower-than-expected 3.5%, and November’s was a downwardly revised 3.6%. Nonfarm payrolls rose 223,000, beating estimates and still showing a strong labor market, but less than November’s 256,000 jobs added.A cooling of wage increases raised hopes that the Fed will continute to temper the aggressive rate hikes it delivered last year. The market now shifts attention toward Thursday’s December consumer price index report, which could also influence the Fed’s tightening path this year.Investors are searching for bargains. State Street (NYSE:STT) Global Advisors prefers mid-cap and small-cap stocks to their large-cap counterparts, said State Street’s chief investment strategist Michael Arone.The S&P 400 midcap index and the S&P 600 small-cap index are both trading at around 13 times forward earnings estimates, well below their respective long-term averages, according to Refinitiv Datastream.”As you move down in market capitalization, the valuations become more attractive,” Arone said. More

(Reuters) – Investment management firm AQR’s Absolute Return Strategy in 2022 saw its best year since its inception since 1998, a source with knowledge of the matter said on Friday. The $100 billion firm AQR reaped top performances from several of its strategies, taking advantage of strong trends across futures and markets moved by macro-economic factors, added the source, who did not want to be named discussing performance. Global equities saw some $14 trillion wiped off their value last year, while nearly 300 interest rate hikes and a trio of 10%-plus rallies exacerbated market volatility. AQR’s Absolute Return Strategy, a multi-strategy fund, returned 43.5% last year net of fees, the source said. It benefited from careful portfolio selection, the source said. Its Equity Market Neutral Global Value and its Global Macro strategies both posted record years at 44.7% and 42.0% net of fees. Its Alternative Trend Strategy also had its best year ever, with a 48.9% net of fees, the source added.An index by Hedge Fund Research (HFR), which tracks the performance of the biggest global hedge fund performances, posted a year to date decline of 2.78% through November 2022, whereas a larger index tracking the total industry fell by 3.87% to the end of November 2022. AQR is an investment firm that has hedge fund strategies but also includes long-only and mutual funds.Trend strategies would continue to succeed for AQR during sustained downturns and persistent macro volatility, the source told Reuters. AQR founder Cliff Asness meanwhile published a blog this week, titled “The Bubble Has Not Popped”, which referred to his writing in 2001 about expensive stock market valuations. “Like in 2022, there’s sure to be nasty reversals along the way, but as Wile E. Coyote always finds out, gravity is inescapable,” Asness wrote in the blog post. More

Today’s top storiesEurozone consumer price inflation fell more than expected to 9.2 per cent in December from 10.1 per cent the previous month. Core inflation, however, which excludes volatile energy, food and fuel prices, rose unexpectedly to 5.2 per cent. Here’s our explainer on why the inflation drop is unlikely to halt rate rises.UK ministers announced new anti-strike legislation that would enforce minimum service levels across eight sectors, including the NHS — already stretched by a “twindemic” of Covid and flu cases — in response to a wave of industrial action. Prime minister Rishi Sunak has invited union leaders to talks on Monday.Taiwan is seeking investors to help set up its own satellite communications provider, inspired by the use of Elon Musk’s Starlink in the war in Ukraine. The move is part of efforts by Taipei to strengthen itself against a potential assault from China. For up-to-the-minute news updates, visit our live blogGood evening.The growth in US jobs has slowed further as interest rate rises take their effect on the world’s largest economy but is unlikely to deflect the Federal Reserve from its programme of interest rate rises.Some 223,000 positions were added in December, more than expected but down from November’s 256,000 and far below last February’s peak of 714,000. The unemployment rate also fell more than expected to 3.5 per cent. Fed policymakers have acknowledged that curbing inflation will require job losses and in turn a higher unemployment rate, which economists predict could eventually top 5.5 per cent as the economy tips into recession.A number of US companies have announced lay-offs in recent weeks. Amazon yesterday became the latest tech company to rein in costs, announcing plans to cut 18,000 jobs, hitting the company’s Stores unit — which includes its core ecommerce business — and its human resources division. Software group Salesforce said on Wednesday it was culling 10 per cent of its staff.Separate survey data today showed US services contracting for the first time since May 2020.Hourly earnings in December nudged up 0.3 per cent but this was less than expected and slower than last month.

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In minutes from its last policy meeting published on Wednesday, the Fed said it wanted “more evidence” that inflation was easing before it reconsidered its policy tightening, which has seen rates rise from near zero to just below 4.5 per cent. Gita Gopinath, second-in-command at the IMF, this week urged the Fed to “stay the course” in its fight against inflation, emphasising concerns about the tightness of the labour market. Separate data on jobless claims yesterday showed new applications still at historically low levels.Investors gave a broad welcome to the news that jobs and wage growth were slowing, sending US stocks up higher in morning trading in New York. Need to know: UK and Europe economyUK companies are cutting investment as interest rates rise, according to a Bank of England survey.British taxpayers face losses from almost £1bn in potential fraud and error in grants to help companies cope during the pandemic.Energy suppliers and campaigners in the UK called for a “social tariff” to help people cope with soaring bills as analysts cautioned that wholesale gas prices might not return to “normality” before 2030. The head of Italy’s ENI, one of Europe’s biggest oil and gas companies, called for closer collaboration between Europe and Africa as the EU seeks to replace Russian imports.German industrial orders fell more than expected in November.Spain is enjoying a surge in tax revenues after previously underground business activity was forced out of the shadows by the pandemic.

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Need to know: Global economyChina and Hong Kong confirmed plans to reopen their shared border on Sunday after coronavirus restrictions are lifted, albeit with daily limits on crossings. The easing coincides with Beijing dropping entry restrictions for overseas travellers, including scrapping PCR tests on arrival.Global regulators are set to step up scrutiny of “non-bank financial institutions” such as hedge funds, clearing houses and pension assets after a series of crises. From peak dollar to not-so-big Tech and the return of political orthodoxy, contributing editor Ruchir Sharma offers his investors’ guide to 2023 in the FT Weekend Essay.And lest you despair too much of the bleak warnings that are the stock in trade of Disrupted Times, economics editor Chris Giles has some good news: prospects for 2023 are better than you think. Need to know: businessShell will pay tax in the UK for the first time in five years thanks to $2.4bn in windfall levies from the EU and UK. In recent years the oil and gas giant has received tax refunds on investments in the North Sea and decommissioning activities, which have been higher than any tax owed. Tech investors remain cautious about China’s pledge to support its biggest tech companies after bruising regulatory clampdowns. Profits at Samsung, the world’s biggest memory chipmaker, fell 69 per cent in the fourth quarter as demand slumped in tandem with the slowing global economy.Some mixed news on prospects for air travel. Europe’s air traffic manager warned of “major” disruption this year as skies become more congested, partly because of the war in Ukraine. Ryanair revised up its earnings forecasts after a bumper festive period, sending its shares up 10 per cent, but Southwest Airlines in the US said an operational meltdown in December would cost it up to $825mn. UK retailers Next and B&M reported strong December sales, overcoming fears that hard-pressed Britons might shop less this Christmas. Both companies uprated their forecasts. Over in the US, however, home goods chain Bed Bath & Beyond could become one of the country’s largest retail bankruptcies since the start of the pandemic.Chinese electric-vehicle makers are concerned at the end of government subsidies and semiconductor shortages, even after enjoying a bumper 2022. BYD, the country’s largest electric-car maker, unveiled luxury models to take on western rivals Mercedes and BMW. Tesla meanwhile has cut prices of its electric cars in the country.BYD’s Yangwang U9 sports car can, according to the company, travel from nought to 62mph in two seconds © BYDScience round upThe surge in coronavirus infections in China has raised concerns that a dangerous new strain could emerge. Read our new Covid-19 variants explainer. Science commentator Anjana Ahuja says 2023 could be Covid’s least predictable year yet. The UK is set to embark on a series of research projects that will cement its place as a world leader in genomics. They include the world’s largest genetic medicine initiative and a project to read all 3bn letters of a newborn baby’s DNA to detect childhood diseases.Could this and other projects help realise the UK’s dream of becoming a science superpower or will it remain a low-cost ‘technology sweetie shop’ for the world? Our Big Read examines the substance behind the rhetoric.Chinese researchers say they have found a way to break online encryption using quantum computers. If correct, it would mean that governments could crack other governments’ secrets. “If it’s true — a big if — it would be a secret like out of the movies, and one of the biggest things ever in computer science,” said one expert. And finally, here’s a short video unveiling the FT’s Tech Champions of 2022: the companies chosen by our judges to be the best users of technology to meet today’s business challenges.

Video: FT Tech Champions 2022 – the top 10

Some good newsHere’s the latest example of those UK ambitions: ministers have signed a deal with BioNTech for cutting-edge cancer trials involving 10,000 participants. The German Covid-19 vaccine pioneer has been conducting tests of its personalised cancer vaccines since 2012, and now needs to expand their scale to get a product ready for approval by 2030.Something for the weekendThe FT Weekend interactive crossword will be published here on Saturday, but in the meantime why not have a go with today’s cryptic crossword? More

Surveys of economists at the end of 2022 in the US, eurozone and the UK have been unremittingly bleak, stuffed with predictions of recession, higher unemployment and continued inflationary problems. The head of the IMF, Kristalina Georgieva, talks of a tougher 12 months ahead and expects a third of the world to experience a recession. It is depressing stuff. Fortunately, these narrative are probably wrong. We should all cheer up a little. The evidence suggests 2023 economic performance won’t be as bad as most economists are saying. We are likely to end the year richer, more secure and more content than at the start.There is no doubt the global backdrop for 2023 is difficult. Households and companies have weathered a pandemic, inflation, record energy costs and a food price crisis over the past three years. But their worst effects have already passed.Part of my greater optimism is therefore based on an important and almost universal miscommunication of economic forecasts. Far too often, past events are presented as still to come.The IMF’s latest forecasts from October, for example, predicted global growth falling from 3.2 per cent in 2022 to 2.7 per cent in 2023. This underpinned Georgieva’s comment that this year would be “tougher than the year we leave behind”. The problem is the information these annual average growth rates convey does not tally with the reasonable interpretation of most people.It may surprise you that in the fund’s case, the relatively strong 2022 reading is caused by rapid end-of-lockdown growth in late 2021 and the weakness forecast for 2023 is primarily caused by the energy crisis the previous year.Translated into economic activity that occurs solely within the year in question — aligning with most people’s expectation of a forecast — the story changes completely. Contrary to a tougher year ahead, the IMF expects the global economy to grow 2.7 per cent during 2023, significantly more than the 1.7 per cent it thinks occurred during 2022. The IMF is far from alone in presenting headline growth forecasts that its own officials find difficult to articulate. The OECD said in November that growth in advanced economies would decline in 2023, but the quarterly projections from the same publication show it expects advanced economies’ growth to improve in every quarter this year. Most people would see that as an advance not a decline.These failures in translating numerical forecasts into a compelling, accurate narrative should concern us. They create an unnecessarily gloomy outlook, which has self-fulfilling properties. Recognising these presentational problems should make us happier about 2023. But few Financial Times readers will fail to have noticed a second problem with these forecasts: they are severely out of date. Any assessment of the year ahead must also take account of two important changes to the assumptions underpinning the global outlook. The first reflects natural gas prices. The IMF and OECD forecasts were all made in the autumn and based on financial market expectations for future natural gas prices at the time. The OECD, for example, expected European wholesale gas prices to average €150 per megawatt hour across this year and next.Current market expectations are for prices to be about half that level. The easing of the energy crisis is an unalloyed boost to the European economic outlook. Lower energy prices will improve projections for incomes, growth and public finances while lowering headline inflation. These are of crucial importance for Europe, which is a large energy importer. The second change in assumptions must take account of China ending its zero-Covid policy. The virus is generating misery for many, but the deregulation is likely to prove positive for both Chinese and global economic prospects later this year.India’s devastating Delta variant wave in spring 2021 led to a greater than 8 per cent drop in gross domestic product in the second quarter of that year, followed by an equivalent rise in the third quarter and another 5 per cent gain in the fourth quarter. After the current wave of infection, China’s economic bounceback should, if anything, be stronger because ending compulsory lockdowns will ease supply chain pressures. Global trading bottlenecks should improve.We should, of course, not get carried away on a wave of optimism. Even as inflation falls, fights between workers, companies and taxpayers over the accumulated losses from the economic crises of recent years can linger. As Olivier Blanchard, former IMF chief economist, has warned, these might well keep price rises too high for too long. Equally, such is the huge uncertainty over the severity of these conflicts that central banks might overdo inflation control and undermine economic progress. Macroeconomic policy errors are therefore pretty likely in 2023.But uncertainties of this nature are an ongoing fact of life. As we start the year we can say the following with some confidence. Nearly all current forecasts suggest growth in the world economy is likely to improve in 2023 and future forecasts will be more optimistic still. Contrary to the dismal commentary from economists and officials, we should be cautiously optimistic about the year ahead. [email protected] More

Brompton, the UK’s biggest bicycle maker, has suffered a sharp fall in profits after inflation and supply chain risks reversed the fortunes of one of the country’s most notable corporate success stories during the pandemic.The west London-based producer of folding bikes reported late on Thursday that the rising cost of parts and labour was weighing on margins, adding it would struggle to offset this with higher prices in a cost of living crisis.Brompton has also warned of increasing costs due to Russia’s invasion of Ukraine, as well as plans to diversify its supply chain in Asia in the face of geopolitical tensions surrounding Taiwan, which has long been a key supplier of parts to the bike industry.The red flags from Brompton are the latest sign of the troubles facing European industry. Last month, trade group Make UK reported that investment in British manufacturing was set to fall for the first time in nearly two years as its members cut spending.But inflationary and supply chain shocks have had a particularly stark impact on Brompton, which only recently cashed in on rising sales thanks to a cycling boom during Covid-19 lockdowns.The group said that revenues had continued to rise during the 12 months to March 2022, with the number of bikes sold increasing more than a third to 93,460. But this was more than offset by a 49 per cent increase in costs to £99.6mn, slashing pre-tax profits by almost a quarter to £7.3mn.Pressure on Brompton has continued in the months since, as the Ukraine conflict drives up the cost of metals. Brompton announced the landmark launch of the UK’s first titanium fold-up bicycle only weeks before the war began between the countries, which are both suppliers of the lightweight metal.“That restriction in supply out of Russia and Ukraine means that more people are going to China, the price of titanium is going up. So yes, that is a risk,” chief executive Will Butler-Adams told the Financial Times in December, as the company founded in 1976 prepared to announce the production of its millionth bicycle.“You combine the raw material cost and the labour cost, I’ve never seen that in my career. It is extraordinary,” he said, adding that Brompton plans to offer staff a “cost-of-living [pay] rise” in March that will be higher than last year’s 5 per cent. “We are prepared to take it on the chin for another 18 months and if nothing has stabilised we will then have to put price rises in to try and recover some of that profitability.”Separately, geopolitical tensions in Asia have raised questions about Brompton’s reliance on Taiwan, where up to 40 per cent of its supply base has been located. In August, the visit of then US House Speaker Nancy Pelosi to the island prompted China to launch unprecedented military exercises around Taiwan. Butler-Adams said Brompton was diversifying its supply chain in the region, although he added this was part of a broad strategy and the group would continue to source from these countries while diversifying across Asia. More

According to Refinitiv Lipper data, global equity funds recorded a net $15.42 billion worth of withdrawals, compared with just $791 million worth of disposals in the previous week. Graphic – Fund flows: Global equities bonds and money market – https://fingfx.thomsonreuters.com/gfx/mkt/lbpggorndpq/Fund%20flows-%20Global%20equities%20bonds%20and%20money%20market.jpg Last year, investors pulled out $172 billion and $354 billion from global equity and bond funds, respectively, as U.S. interest rates marched higher due to monetary policy rate hikes from the Federal Reserve.Though the minutes of the Fed meeting released this week showed that policymakers favoured a slower pace of hikes, concerns still linger over inflation as the U.S. job market remains tight. U.S. equity funds suffered $20.72 billion worth of net selling, but investors bought European and Asian funds of $3.16 billion and $1.06 billion, respectively. Graphic – Fund flows: Global equity sector funds – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdklmwbvo/Fund%20flows-%20Global%20equity%20sector%20funds.jpg Among equity sector funds, tech, financials, and healthcare witnessed net selling of $710 million, $503 million and $415 million respectively.Meanwhile, investors secured a net $5.28 billion worth of bond funds in their first weekly net buying since mid-August.Short- and mid-term bond funds received a net $6.02 billion, marking their first weekly inflow in 20 weeks. Government bond funds also attracted $4.37 billion in inflows, but inflation- protected funds had outflows of $108 million. Graphic – Global bond fund flows in the week ended Jan 4 – https://fingfx.thomsonreuters.com/gfx/mkt/zjvqjeqkxpx/Global%20bond%20fund%20flows%20in%20the%20week%20ended%20Jan%204.jpg Also, safer money market funds obtained about $113.37 billion in a second straight week of inflows.Data for commodity funds showed precious metal and energy funds both received a marginal $54 million and $4 million worth of inflow, respectively, after facing outflows in the previous week.According to data available for 24,528 emerging market (EM) funds, investors exited $901 million worth of equity funds in a second straight week of net selling but bond funds drew a net $954 million in inflows. Graphic – Fund flows: EM equities and bonds – https://fingfx.thomsonreuters.com/gfx/mkt/klvygzekwvg/Fund%20flows-%20EM%20equities%20and%20bonds.jpg More