Aurelia Butler

SYDNEY (Reuters) -Australia’s central bank on Tuesday raised interest rates for a fourth month running, but tempered guidance on further hikes as it forecast faster inflation but also a slowdown in the economy.Wrapping up its August policy meeting, the Reserve Bank of Australia (RBA) lifted its cash rate by 50 basis points to 1.85%, marking an eye-watering 175 basis points of hikes since May in the most drastic tightening since the early 1990s.Yet, RBA Governor Philip Lowe also made the outlook for policy more conditional.”The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” said Lowe.That was taken as a dovish move by markets given Lowe had repeatedly stated the RBA Board wanted to get rates to a neutral level of at least 2.5%, where it theoretically would neither stimulate nor retard economic growth.Investors reacted by knocking the local dollar down 0.9% to $0.6963, while three-year bond futures climbed 11 ticks to 97.280 as the market trimmed bets on how far and fast rates would ultimately rise.Swap markets lengthened the odds on another half point hike in September and shifted to imply a peak of around 3.31%, down from 3.41% before the RBA statement.”The statement was on the dovish side of expectations, suggesting that the discussion at the September meeting may well move back to the 25bp or 50bp debate,” said Adam Cole, a strategist at RBC Capital Markets.Lowe also updated the RBA’s economic forecasts, saying consumer price inflation was expected to peak around 7.75% compared to 7% previously and 6.1% in the June quarter.Inflation was not seen returning to the top of the RBA’s 2-3% target band until 2024.Forecasts for economic growth were downgraded to 3.25% over 2022 and 1.75% in each of the following years. Previously the bank had forecast growth of 4.2% in 2022 and 2.0% in 2023.KEEPING AN EVEN KEELLowe had argued the economy could withstand the pain with unemployment at 48-year lows of 3.5% and job vacancies at all-time highs. Household demand has fared relatively well, thanks in part to A$260 billion ($178.59 billion) in extra savings amassed during pandemic lockdowns.Yet, higher borrowing costs are proving a heavy drag on spending power given households owe A$2 trillion in mortgage debt and home values are now in sharp retreat after a bumper 2021.The hikes delivered so far will add around A$560 a month in repayments to the average A$620,000 mortgage, and that is on top of surging bills for energy and food.Lowe has come in for some criticism over the rapid series of hikes with one local tabloid calling for him to quit his job.Treasurer Jim Chalmers has defended the central bank’s independence, though he recently launched a review of policy making and the Board to see if it needed modernising.Lowe himself on Tuesday conceded the bank was walking a “narrow path” between taming inflation and keeping the economy on an “even keel”. More

Current policy rates remain accommodative, Bangko Sentral ng Pilipinas Governor Felipe Medalla told a business forum.Policymakers will meet on August 18 to adjust its reverse repurchase facility rate that is currently at 3.25%. More

Good morning. It’s Katie Martin. Exciting times: Rob is on sabbatical this month. It is one of the best perks of working at the FT, better even than the famous weekly cake trolley (available in the London office only).While he is away, I am one of the people invited to help out. I’m tempted to use this opportunity to fangirl over the glorious Lionesses or trash some of Rob’s most dearly held beliefs on his own lovingly curated platform, for example by extolling the virtues of Birkenstocks. He hates them, and he’s wrong. This is a hill I will die on.I will see you again next week. In the meantime, say hi at [email protected], or complain about stuff to [email protected]’ mixed storiesNo one knows what on earth is going on. Or at the very least, market participants are demonstrating extraordinarily high levels of intelligence by holding two opposed ideas in their mind at the same time. Let’s say it is the latter.This observation, from Adam Cole, a currencies analyst at RBC, is amazing and sums up the point rather well. The chart tells you that, yes, investors think the Fed will keep on jacking up interest rates from here (see the blue line), but also that very soon after it’s done, it will start hacking them back again (the black one):

This is weird, “entirely unprecedented”, in fact, in Cole’s words. He adds:Markets have never discounted significant Fed easing within two years while the Fed was still in the middle of a hiking cycle.So, you are not imagining it. We really are swimming through powerful cross currents at the moment. The dominant theme is flipping from doom/despondency to cautious optimism at quite a clip, which makes sense given this apparent confidence that the Fed will hike till it hurts.For now, cautious optimism is winning. Global developed market stocks jumped by close to 8 per cent in July, partly due to some resilient earnings from tech megastocks that still have a (dangerously?) outsized influence on broad market direction. To make this make sense, again, several conflicting things have to be true at the same time. Recessions (proper ones) have to be fine, actually, because of all the easier monetary policy they imply, and/or peak fear is over, and/or markets have already priced in sticky inflation and a hard landing.Maybe, like UBS Wealth Management, people have been crunching the numbers and figured that wait-and-see is for wimps. From UBS Wealth chief investor Mark Haefele’s note on Friday (my highlights):Today, after a 26 per cent derating over the past 12 months, the S&P 500 trades at a trailing price-to-earnings (P/E) ratio of 18.3x, a level that since 1960 has been consistent with annualised returns in a healthy 7-9 per cent range over the next decade . . . The idea that waiting can be riskier than investing immediately is also borne out in the historical data. Since 1960, a strategy that waited for a 10 per cent correction before buying the S&P 500 and then sold at a new all-time high would have underperformed a buy-and-hold strategy by 80x (yes, eighty). Over the same time period, a strategy of investing immediately after a 20 per cent drop would have delivered an average one-year return of 15.6 per cent. Staying in cash for a year after a 20 per cent drop comes at a significant opportunity cost.Sure, but there’s a real danger of overthinking all this. As Luca Paolini at Pictet Asset Management points out:Keep it simple. Equities and bonds are bouncing back mainly because 1H2022 was the worst ever in real return terms. Worse than 1932!His chart here of how a theoretical 50/50 portfolio of US equities and government bonds would have performed over close to a century rather hammers home that point:

Whatever the cause, this rally could very quickly eat its own tail. Brighter markets mean easier financial conditions — the opposite of what the Fed wants to see, especially after consecutive 75 basis point rate increases. This all just gives the Fed a pass to hit the brakes even harder.Readers with short-term investment horizons may still be tempted to see how long this has to run, and good luck to you. Investors with longer game plans are generally less inclined to try and be a hero. A few days before the latest Fed’s supposedly dovish pivot, I asked Sonja Laud, chief investment officer at LGIM, whether stock markets had capitulated yet, whether it was time to be brave and jump in.“To me there’s no rush,” she said. “A number of the big goalposts are shifting. We never really appreciated the value of the globalisation [that we saw] after the fall of the Berlin Wall and the dissolving of the Soviet Union . . . Just-in-time supply chains were a huge benefit to consumers globally and to the profitability of businesses worldwide.”Now, globalisation is not exactly dead, but it is fraying, reshaping profitability and inflation dynamics. “We’re saying goodbye to the American-led post-World War Two order that we all took for granted,” she said. “It’s history in the making.”Seen through that lens, it does seem premature to declare this rough patch in markets to be over. The process of figuring out how supply chains and inflation cope in the face of scratchy geopolitics will not be quick, and false dawns will catch investors out. All the clichés are true: stay humble, stay nimble. Catching Katie’s eyeThe growing bet is that the Bank of England will raise rates by 50bp this week, as BoE governor Andrew Bailey has previously hinted. Doing 25bp is so pre-coronavirus pandemic.Everyone hates Europe. “Investors take a fresh positive look at Europe” is a staple of financial journalism. I know because I’ve written or edited these stories myself on several occasions. Right now, though, Europe is really struggling to maintain a fan club. Goldman Sachs said on Friday it thinks the Euro Stoxx 600 has another 10 per cent to fall this year. “We think the overall market is too complacent about the weakness in growth and risks related to Russian gas supply and Italian politics, which are skewed to the downside,” wrote Sharon Bell and colleagues at the bank.Unlike every other big equities index, the FTSE 100 is now positive on the year. The first person to tell me this is the Truss Effect will receive the hardest of stares.If you haven’t already, read this, on the Russian economy. It’s not pretty. Top line, again with my highlight:a common narrative has emerged that the unity of the world in standing up to Russia has somehow devolved into a “war of economic attrition which is taking its toll on the west”, given the supposed “resilience” and even “prosperity” of the Russian economy. This is simply untrue.If you can bear it, behold the myriad ways in which the crypto industrial complex relieves people of their money and “Meet the ‘psychic’ cryptovoyants selling bitcoin info to thousands”. (Sifted, with a heroic definition of ‘info’ there.)One good readWe can’t get enough of Neom, Saudi Arabia’s part-fun, part-insane desert megacity. Its design jumps between “dystopian Death Star evil empire, the apartheid architecture of a post-apocalyptic security-city and a rendering of a glamorised and unlikely central business district seeking gullible investors”, writes the FT’s architecture critic. More

SEOUL (Reuters) – South Korea’s consumer inflation sped up to a nearly 24-year high in July, data showed on Tuesday, supporting the market’s view for further central bank tightening this year.The consumer price index (CPI) stood 6.3% higher in July than a year earlier, accelerating from a 6.0% rise seen in June. The July inflation rate was the fastest pace since a 6.8% gain in November 1998.It matched the median forecast in a Reuters survey. The data supports expectations by economists that the central bank, which has raised the policy interest rate to 2.25% from 0.5% over the past year, will raise the rate yet further.”Today’s data showed signs that inflation would begin slowing after the current quarter, but it will take longer for inflation expectations to ease due to lagging effects,” said Oh Chang-sob, an economist at Hyundai Motor Securities.The index rose 0.5% in July on a monthly basis, just above a 0.4% rise tipped in the survey of economists but slowing from a 0.6% gain in June, the Statistics Korea data showed. Annual core inflation, which excludes volatile food and energy prices, ended a three-month run of successive acceleration to hold steady in July at the 3.9% rate seen in June. That was a tentative sign of future relief from high inflation.Tuesday’s data will be the only monthly inflation figures released between the central bank’s raising of interest rates in July and its next policy meeting, this month. The July rise, 50 basis points, was bigger than usual.The Bank of Korea, which began tightening policy late last year ahead of its peers, has said that the big-step rate hike on July 13 was unusual and that it would most likely be raising by the usual 25 basis points each time in the future. More

Investors are worried that the juggernaut of Indian industry that is IT outsourcing is slowing down.Shares in Tata Consultancy Services (TCS), the back-office group that is the country’s second-biggest company by market capitalisation, have fallen 14 per cent since the start of the year, compared with 6 per cent for the benchmark Nifty 50. Rival Infosys had tumbled 20 per cent year to date before reporting strong results in July.But N Ganapathy Subramaniam, chief operating officer of TCS, waved away any concerns in an interview with the Financial Times. The “world needs technology talent and it is in short supply today. And India has the largest pool of technology skills anywhere in the world”, he said.IT services are an emblem of India’s outward-facing economy, servicing huge global corporations — TCS clients range from AstraZeneca to Citibank, Microsoft and Marks and Spencer. The sector is also a big creator of skilled jobs, employing more than 5mn people. TCS alone hired 118,880 “freshers”, or new graduates, in its financial year, which ended in March 2022.With more than 600,000 workers, TCS is among the world’s biggest private sector employers, behind Volkswagen with 673,000 employees but ahead of logistics group UPS with 534,000.But some analysts have been sceptical that IT services growth will continue to be strong, particularly if there is a global recession, and are concerned about high levels of employee churn in the industry making salaries more expensive.Earlier this year, Nomura wrote that a slowdown in growth for Indian IT services was “likely sooner than expected”, forecasting that “tough days are ahead for tech spending”. JPMorgan deemed the industry’s “peak sector growth behind [it]”.In early July, TCS missed analysts’ expectations, reporting a 10 per cent increase in year-on-year quarterly revenues to $6.7bn and operating margin at 23.1 per cent, down 2.4 percentage points compared with the first quarter of the previous year.“It has been a challenging quarter from a cost management perspective,” said chief financial officer Samir Seksaria. The lower operating margin “reflects the impact of our annual salary increase, the elevated cost of managing the talent churn and gradually normalising travel expenses”.Other IT services companies are also disappointing investors. Bangalore-based Wipro is down 41 per cent since the start of the year after several downgrades by investment banks. Tech Mahindra, another outsourcer, is also down 41 per cent.Last Sunday, Infosys surprised analysts by reporting quarterly revenues up 17.5 per cent year on year to $4.4bn, ahead of estimates. But earnings margins, a closely watched industry profitability metric, shrank from 23.7 to 20.1 per cent in the same period.Not everyone is pessimistic. In a recent note, Macquarie argued that companies such as TCS and Infosys were well placed to weather an economic downturn: “Unlike [the] 2000s, India Tier-1 IT Services firms are strategic partners — not glorified staffing providers who will be the first to bear the brunt of cuts.”Subramaniam agreed, saying clients might make “some readjustments, but I don’t think spend itself will come down” and while “people may not buy new hardware” they might increase spending on cloud computing, for instance.Yet there are certainly things to worry about. In the past TCS has offset rising costs by increasing productivity and putting up prices, or through foreign exchange gains, said Subramaniam. But this time will be trickier, “because while [the] rupee has weakened against the dollar, [it] has strengthened against other currencies”. Along with the expense of travelling again as lockdowns have eased, Subramaniam said increasing salary costs were also squeezing operating margin, which last financial year undershot its aspirational band of 26-28 per cent, coming in at 25 per cent.But Subramaniam insisted these higher salary costs were “an aberration”. “It’ll taper down, that’s what our feeling is, but in the foreseeable future, at least [for] about two or three quarters . . . if I’m going to hire somebody I’ll have to pay 30 per cent more [than] I’m paying.” He also believes employee churn has peaked. However, he said he was worried about the tens of thousands of new joiners who had been working remotely and “don’t know the culture of TCS”.

Previously, the top choice for millions of graduates with technical skills, companies such as TCS and Infosys now compete with hundreds of start-ups offering high salaries thanks to venture capital funding.Indian start-ups absorbed $38bn in funding last year, according to Fintrackr, three times the previous year.“You can never match a salary that a start-up gives,” said Subramaniam, adding that this year’s slowdown in venture capital funding would “bring in some sanity” to the recruitment market.Meanwhile TCS, which was founded in 1968, is negotiating a changing work culture, with younger staff expecting more flexibility and choice.“Senior people, 10 years and above, they want to come to the office,” said Subramaniam. “The younger ones they feel: look, don’t force me to come.” Younger staff “want to have a lot more flexibility and a lot more involvement in what they will do and how much time they will take to complete it”, he added. “So we have to change our thinking at that level.” More

A health ministry committee recommended on Monday that the country’s average minimum wage be raised by 31 yen, or 3.3%, from the current level to 961 yen ($7.30) per hour, the Nikkei reported.The committee, comprising management and labour union representatives as well as academics, makes the recommendation each year that serves as the nationwide standard for minimum wages.The government sets a goal to raise the median average minimum wage at 1,000 yen or higher “at the earliest date possible.”Boosting wage growth has been a key policy priority for Prime Minister Fumio Kishida, as he seeks to redistribute wealth and cushion the blow to households from rising fuel and food costs blamed on the war in Ukraine.Japan’s core consumer prices rose 2.2% in June from a year earlier, a much slower pace than in many Western economies but remaining above the central bank’s target for a third straight month.($1 = 131.5600 yen) More

Surging costs mean the government is “no longer on track” to restore England’s school spending per pupil to 2010 levels in real terms by the end of this parliament, a leading think-tank warned on Tuesday.A study by the Institute for Fiscal Studies estimated that by 2024-25, school spending per pupil in England would be 3 per cent lower than in 2010.This is because the growth in funding will from next year fall below the pace of expansion in school costs, reducing school budgets’ purchasing power.The IFS report found that inflation-adjusted school spending per pupil fell 9 per cent between 2009-10 and 2019-20. In last year’s spending review, the government allocated extra funding to schools, saying it would restore spending per pupil to 2010 levels in real terms by the end of the current parliament in 2024-25. At present, however, spending plans for future years are likely to be insufficient to meet the cost pressures facing schools. As a result, “the government is no longer on track to deliver on this objective”, the report said.Many factors are adding to the costs that schools face, including increases in pay for teachers and support staff and food and energy prices.Starting salaries for teachers outside London will from September rise 9 per cent to £28,000, marking a step towards the government’s manifesto commitment of starting salaries of £30,000 by 2022-23. Most teachers, who are at or towards the upper end of pay scales, will at the same time receive salary rises of 5 per cent.However, with consumer prices rising at a 40-year high of 9.4 per cent and following pay freezes, inflation-adjusted salaries for most teachers will be about 12 per cent lower in real terms this year than in 2010.Catering and energy will also “weigh extremely heavily” on school budgets, according to the report, as they account for about a quarter of schools’ non-staff costs and are subject to particularly fast price growth rates. Luke Sibieta, IFS research fellow and author of the report, said the big fiscal choice for policymakers this autumn was “whether or not to provide more funding to public services to compensate for rising costs and the significant challenges they face”.The report warned that cost increases would not be felt equally, with institutions that rely more on support staff, such as special schools, likely to experience faster growth in costs.Budget pressures are rising following a period where, because of disruption caused by the coronavirus pandemic, students missed out on learning. The schools white paper published in March set a target of 90 per cent of primary pupils achieving the expected standard in reading, writing and maths by 2030. But the results of this year’s Sats tests, which are taken by 11-year-olds at the end of primary school, showed that pandemic-related disruption had negatively affected attainment levels. Ruth Maisey, education programme head at the Nuffield Foundation, a charity, said it was “essential” that the government addressed the cost pressures highlighted by the IFS analysis “to ensure that schools can deliver on ambitions for student attainment”.The Department for Education said: “We recognise that schools — much like the wider economy — are facing increased costs due the unprecedented recent rise inflation. “To support schools, budgets will rise by £7 billion by 2024-25, compared with 2021-22, with the total core school budget increasing to £56.8 billion,” it added. More