Economy

LONDON (Reuters) -U.S. manufacturers are struggling to regain momentum as the sector tries to pull out of the prolonged but shallow downturn, with any help from lower interest rates delayed due to continuing inflation in the service sector.The desultory state of factory and freight activity has limited diesel consumption, postponed the anticipated depletion of fuel inventories, and caused refining margins to soften.The Institute for Supply Management (ISM)’s purchasing index slipped to 47.8 (18th percentile for all months since 1980) in February down from 49.1 (25th percentile) in January.The index has been below the 50-point threshold dividing expanding activity from a contraction for 16 months running since November 2022.The manufacturing downturn has been the most prolonged since the slowdown of 2000-2002 and before that 1981-1983.Both of those downturns were cycle-ending recessions rather than mid-cycle slowdowns, characterised by a far more severe contraction in activity.By contrast, in the current slowdown manufacturing output has declined less than 2%, according to data from the U.S. Federal Reserve.Chartbook: U.S. manufacturing and dieselThe worst of the current downturn was over by the second and third quarters of 2023, but manufacturers have since struggled to regain momentum.The ISM production sub-index slipped to 48.4 (14th percentile) in February from 50.4 (22nd percentile) in January and was no higher than in July 2023.The new orders sub-index fell to 49.2 (20th percentile) in February from 52.5 (34th percentile) in January and was no better than September 2023.Manufacturers often find it hard to regain momentum after a mid-cycle “soft patch” – prompting the central bank to intervene by cutting interest rates.In this instance, however, rate reductions have been postponed by residual strength in services. Persistent inflation in the much larger and more labour-intensive services sector limits scope to provide relief for manufacturers.Makers of expensive items such as cars, furniture and computer equipment need lower interest rates to spur household and business spending and borrowing.But with service sector prices rising more than twice as fast as the central bank’s flexible average inflation target, policymakers have limited scope to supply more stimulus.The central bank is confronted with a two-speed economy and cannot aid manufacturers without risking services overheating.DIESEL CONSUMPTIONU.S. consumption of diesel and other distillate fuel oils has fallen in line with the shallow but prolonged slowdown in manufacturing and freight activity.There has been no sustained growth in distillate consumption since the middle of 2022 as the manufacturing sector has been stuck in the doldrums.Petroleum-derived diesel consumption has actually fallen because of the small but increasing market share captured by biodiesel and renewable diesel.The volume of petroleum-derived distillate fuel oil supplied to the domestic market (a proxy for consumption) was down to 3.6 million barrels per day (b/d) in December 2023.The volume slipped from 3.8 million b/d in December 2022 and 4.0 million b/d in December 2021, according to data from the U.S. Energy Information Administration.Over the same period, biodiesel and renewable diesel supplied increased to 0.3 million b/d from 0.2 million b/d in December 2022 and 0.16 million b/d in December 2021.Despite lacklustre consumption, distillate stocks remain well below the long-term average and have shown no sign of rebuilding.Extensive disruption of fuel manufacturing at BP (NYSE:BP)’s refinery at Whiting in Indiana following a site-wide power failure has added to the diesel shortage.U.S. petroleum-derived distillate inventories were 15 million barrels (-11% or -0.93 standard deviations) below the prior ten-year seasonal average on Feb. 26.The deficit had widened from 11 million barrels (-8% or -0.77 standard deviations) at the end of 2023, according to weekly figures from the Energy Information Administration.Distillate inventories are expected to tighten sharply once manufacturing and freight activity starts to accelerate again, putting strong upward pressure on fuel prices.But slack industrial activity and fuel demand has pushed the expected timeframe deeper into 2024 and caused fuel prices to fall.Prices for ultra-low sulphur diesel delivered in May 2024 are trading at a premium of around $31 per barrel over U.S. crude, but the premium has slid from almost $40 in early February.Related columns:- Persistent U.S. services inflation threatens soft landing (February 14, 2024)- Diesel prices primed to rise sharply in 2024 (February 6, 2024)- U.S. manufacturers poised for resumed growth, diesel shortage (February 2, 2024)John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X More

TOKYO (Reuters) – The U.S. dollar was largely steady on Wednesday, as traders avoided making large bets ahead of congressional testimony from Federal Reserve Chair Jerome Powell, as well as the European Central Bank rate decision and U.S. jobs data later this week.In cryptocurrencies, bitcoin was slightly up but stayed below a record high reached in a volatile overnight session. The absence of catalysts kept the dollar in a tight range, having slipped overnight on data from that Institute for Supply Management (ISM) that showed the U.S. services industry growth slowed a bit in February. The currency is up 2.4% for the year, buoyed by better-than-expected U.S. economic data, but it has stalled in recent sessions as investors look for further clarity on Fed policy.The February U.S. jobs report on Friday stands as a test ahead, with the potential to rock markets. A surprise to the upside could add to the dollar’s rise this year.Traders were also waiting on Fed Chair Powell’s first day of testimony before Congress on the state of the U.S. economy. Powell is expected to reinforce that the Fed will wait for more data before making any rate cuts.”A reiteration of this message is unlikely to alter current market pricing for a June start to the FOMC’s rate cut cycle, and should therefore have limited impact on the USD,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (OTC:CMWAY). Markets have priced in about a 60% chance of a rate cut in June, according to the CME FedWatch tool.The dollar index, which measures the greenback’s strength against a basket of six currencies, was mostly unchanged at 103.82. Elsewhere, the ECB is widely expected to leave interest rates at a record 4% at its policy meeting on Thursday. The focus will instead be on clues about when rates might start to fall, as well as on the central bank’s updated economic projections. The euro remained firm at $1.0852.Sterling was down 0.1% at $1.2695 ahead of the British budget on Wednesday.The yen held around 149.92 per dollar, after the greenback overnight gave up recent gains against the Japanese currency, retreating from last week’s high of 150.85.Markets are also keeping a close eye on the world’s largest cryptocurrency, bitcoin, after it surged to a record high overnight before retreating sharply. It was last up 0.88% at $63,876, taking a breather having rallied hard since October as investors poured money into U.S. spot exchange-traded crypto products and on the prospect that global interest rates may fall. More

HONG KONG/BEIJING (Reuters) – Facing its deepest economic challenges in years, China’s leadership has tasked ministries and local governments with implementing a new mantra from President Xi Jinping: unleash “new productive forces”.In his annual report to China’s legislature on Tuesday, Premier Li Qiang, Xi’s top deputy, vowed a “new leap forward” by supporting developing sectors and industries including electric vehicles, new materials, commercial spaceflight, quantum technology and life sciences.The term “new productive forces” was coined by Xi last September during a trip to a rustbelt city in northeast China, where he highlighted the need for a new model for economic development based on innovation in advanced sectors.State media seized on it and trumpeted the rubric to thepoint where it has been enshrined into Xi Jinping Thought, acore element of doctrine for the ruling Communist Party.By focusing on the prospect for future growth, the slogan shifts the focus from China’s present difficulties, including weak consumer confidence, the overhang of a property crisis and local government indebtedness.But how China will implement the vision – the challenge taken up on Tuesday by China’s parliament, a body controlled by the Party – remains unclear and its success uncertain.”The direction of promoting tech innovation is right, but my worry is how to achieve it – what path and what institutional mechanisms should we rely on to drive technological innovation and boost productivity?” said one Chinese policy adviser who spoke to Reuters on condition of anonymity.”The reality is that market forces are retreating, and the government is dominating the drive.”Beijing hopes the “new productive forces” campaign will strengthen China at a time when geopolitical pressures including steps by the United States to “decouple” or “de-risk” have curtailed access to foreign technology.”Prioritising the ‘new productive forces’ in the agenda reflects leaders’ anxiety over China potentially lagging behind the U.S. in cutting-edge technologies such as advanced chips and artificial intelligence,” said Tianchen Xu, an economist at the Economist Intelligence Unit in Beijing. Li promised more investment in science and technology, steps he said would drive eventual gains in fields such as artificial intelligence and the applications of big data.Expanding domestic demand, a step many economists consider the most pressing priority for China, featured lower in Li’s summary of priorities.‘DOUBLING DOWN’As of this week, every provincial government is on China notice to drive Xi’s agenda, but there are still unanswered questions of how to promote top-down innovation.”They’re just doubling down on Xi Jinping thinking on the economy … the whole report is very top-down,” said Steve Tsang, director of the SOAS China Institute in London.One risk is that the push could usher in a big increase in state subsidies for research and development in areas that never pay off, a misallocation of funding.  Li, in his work report, said Beijing would issue one trillion yuan’s worth of special purpose bonds – equivalent to $139 billion – in 2024 to provide funding for strategic sectors.China’s focus on national security and tight government control could also hamper innovation, foreign investment and the luring and retention of top talent, analysts said.”To support innovation, we should give people more freedom to think and talk, because many innovations result from the collision of ideas. This is a big contradiction,” the policy adviser said.The new mantra was also taken up by China’s state planning agency, the National Development and Reform Commission. Its annual report on Tuesday pledged support for industries including satellite internet applications, China’s BeiDou Navigation Satellite System, and research into nuclear fusion.China has long sought to upgrade its ageing industrial hinterlands, including the coastal Pearl River and Yangtze River deltas, with mixed results as wages and production costs rise, eroding China’s competitiveness vis-a-vis other countries.How it manages this transition, previously dubbed “emptying the cage and changing the bird”, will be critical.”The biggest challenge is that the market still needs to support it. At present, China has invested a lot in industrial upgrading, and the results are still relatively unremarkable,” said a second policy adviser who asked not to be named given the sensitivity of the matter. More

NEW YORK (Reuters) -Citigroup expects investment banking fees to rise by a low-teens percentage in the first quarter versus the fourth quarter of 2023, CEO Jane Fraser told investors on Tuesday at a conference in New York.Markets revenue is expected to drop by 8% to 12% in the first quarter compared with a strong comparable quarter in 2023, she said. Overall, Citi’s financial results are likely to be better than expected for the first quarter, she added. The bank’s sweeping reorganization will be completed by the end of the month, Fraser said. That includes simplifying its structure into five businesses, eliminating some committees and reducing duplication in roles. “It’s not rocket science,” Fraser said. “Stick to the plan, head down, and just relentlessly execute.” The company plans to hold an investor day on June 18 solely for its services business, it announced in a separate statement on Tuesday. The unit provides cash management, clearing and payments services for the world’s biggest corporations and reported record revenue of $18.1 billion last year.Citi is working to address problems laid out by regulators in enforcement actions, called consent orders, that date back to October 2020.It is focused on better data governance, improving risk and controls and automation, Fraser said.”We are being bold,” Fraser said. “We’re being extremely disciplined in how we execute. It’s always a bumpy road, a transformation of this magnitude.”U.S. regulators asked the bank for urgent changes to the way it measures default risk of its trading partners late last year, Reuters reported last month. And the bank’s own auditors found a plan to improve internal oversight to be lacking, according to an email seen by Reuters. The regulatory setbacks could hinder Fraser’s sweeping overhaul as she tries to revive the company’s fortunes. More

BENGALURU (Reuters) – Home prices in most major property markets will rise modestly this year and next, according to a Reuters poll of housing specialists, who expected the shortage of affordable homes to persist for at least another two to three years.The Feb. 15-March 4 survey of more than 100 experts is the latest sign a brief and mild correction following double-digit percentage price rises during the pandemic is well in the past for nearly all of the nine property markets covered.Global central banks’ attempts to tamp down inflation through interest rates hikes pushed mortgage rates sharply higher, making existing homeowners who locked in lower rates during the pandemic reluctant to list their properties for sale.This situation has been particularly acute in the United States, where a 30-year mortgage is common, but it has also encouraged those on attractive fixed rates elsewhere to sit still and wait for rates to fall.While mortgage costs have dipped over the past couple of months as most forecasters expect top central banks to cut interest rates this year, none expect borrowing costs to drop to pre-pandemic levels anytime soon.”In so many markets…supply has been quite constrained. You’ve had quite limited good supply because people are on low mortgage deals, they don’t really want to bring properties to the market and lose those deals,” said Liam Bailey, global head of research at Knight Frank. “The expectation rates are going to fall is now kind of baked in to where people think the market is going to go this year and if rates don’t fall, then we have a problem.”A quick analysis of median forecasts covering nine major property markets – U.S., UK, Canada, Germany, Australia, New Zealand, India, China and Dubai – shows how closely a housing market’s performance is linked to the economic outlook.Of all the housing markets surveyed, prices were expected to fall only in Germany and China this year – both countries are battling an economic slowdown.Home prices rose at least 20% and as much as 50% during the pandemic in many of these markets but fell only a fraction from those peaks last year. That has excluded many aspiring homebuyers from the market, with larger proportions of turnover in recent years driven by demand for luxury housing.Economists in separate Reuters surveys have consistently forecast major central banks will start cutting rates roughly around the middle of the year, with the greater risk the first rate cut would come later than forecast rather than earlier.Despite expensive mortgages, a tight labour market and rising wages in developed economies have kept demand strong. But a lack of supply, especially affordable homes, remains a problem in most markets with no resolution in sight.Asked what would happen to the gap between demand for affordable homes and supply of them over the coming two to three years, 74 of 99 analysts in the poll said it would either stay about the same or widen.Among the remaining 25 respondents, 24 said narrow modestly and one said narrow significantly.A strong 67% majority of analysts who answered an additional question, 73 of 109, said purchasing affordability for first time homebuyers would improve over the coming year. The remaining 36 said it would worsen. Damian Harrington, head of research for global capital markets and EMEA at Colliers, said the biggest challenge is “we don’t have the right type of housing in the right places, rather than enough housing.” “This thing is going to take decades to fix. It’s not going to get fixed in the next two to three years, it is as simple as that,” he said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Implementing an anti-LGBT+ law passed by Ghana’s parliament could derail the west African country’s funding from multilateral institutions, including the World Bank and IMF, the finance ministry has warned.Ghana, which is seeking to recover from its worst economic crisis in a generation, could lose $3.8bn in World Bank financing over the next five to six years if President Nana Akufo-Addo signs the bill into law, according to a finance ministry memo seen by the Financial Times. This potentially included an immediate loss of $600mn in budgetary support for 2024, and $250mn in a separate World Bank commitment, the ministry said.“This will negatively [affect] Ghana’s foreign exchange reserves and exchange rate stability, as these inflows are expected to shore the country’s reserve position,” the memo said. The withdrawal of World Bank support would also negatively affect the country’s IMF programme, which is contingent on reliable financing from development partners. Ghana, which defaulted on its debt in 2022 and is struggling with inflation of 23.5 per cent, agreed a $3bn IMF-supported scheme in December 2022. “Non-disbursement of the budget support from the World Bank will derail the IMF programme. This will in turn trigger a market reaction which will affect the stability of the exchange rate,” the finance ministry memo said.The concern comes after the World Bank said last year it would not consider any new funding for Uganda after the east African state passed its own anti-gay law.Ghana’s parliament last week passed a sweeping anti-LGBT+ law called the Promotion of Proper Human Sexual Rights and Ghanaian Family Values bill. The legislation received bipartisan support and has been welcomed by Christian, Muslim and traditional groups. It expands the criminalisation of consensual same sex relationships and imposes jail time for sexual minorities and people and organisations deemed to advocate on their behalf. The law recommends three years in prison for anyone convicted of being gay, five years for “promoters” of gay rights and five years for those engaging in gay sex, up from three previously. Ghanaian President Nana Akufo-Addo has indicated he will delay giving assent to the law pending a Supreme Court challenge More

DUBAI (Reuters) -Gulf retail giant AlShaya Group, which owns the rights to operate Starbucks (NASDAQ:SBUX) in the Middle East, plans to lay off over 2,000 people as the business suffers from consumer boycotts linked to the Gaza war, people familiar with the matter said. The cuts, which began on Sunday, amount to about 4% of AlShaya’s total workforce of almost 50,000 people and are mostly concentrated in its Starbucks franchise in the Middle East and North Africa, said the people, who declined to be named as the matter is not public. The boycotts have led to tough trading conditions for the company, one of the people said.”As a result of the continually challenging trading conditions over the last six months, we have taken the sad and very difficult decision to reduce the number of colleagues in our Starbucks MENA stores,” AlShaya said in a statement, without confirming the number of job losses.AlShaya said it would support colleagues leaving the business and that it remained committed to the region.”Our thoughts are with the green apron partners who will be leaving, and we want to thank them for their contributions,” a Starbucks spokesperson told Reuters.”Starbucks remains committed to working closely with AlShaya to drive long-term growth in this important region,” the Starbucks spokesperson added.Neither AlShaya Group, nor the sources, said how many staff the group employed at its Starbucks operations. Established in 1890 in Kuwait, AlShaya is one of the biggest retail franchisees in the region with rights to operate businesses of popular Western brands including The Cheesecake Factory (NASDAQ:CAKE) and Shake Shack (NYSE:SHAK).It has owned rights to operate Starbucks coffee shops in the Middle East since 1999. The Starbucks unit runs around 2,000 outlets in 13 countries, across the Middle East and North Africa, and central Asia. U.S private equity firm Apollo Global Management (NYSE:APO) Inc, has been in talks to buy a stake in AlShaya’s Starbucks business, three sources close to the matter told Reuters last month. Western brands have been hit by a largely spontaneous, grassroots boycott campaign over Israel’s military offensive in the Gaza Strip prompted by the deadly Hamas attack in southern Israel on Oct. 7. In the wake of the boycotts, Starbucks in October said it was a non-political organisation and dismissed rumours it had provided support to the Israeli government or army.Starbucks said in January that the Israel-Hamas war had hurt its business in the region as it missed market expectations for first-quarter results.It said sales were significantly impacted due to the conflict, in the Middle East and in the United States, as some consumers launched protests and boycott campaigns asking the company to take a stance on the issue. In January, AlShaya said it was scaling back operations in Egypt due to the country’s ongoing economic troubles including multiple currency devaluations and record inflation. It did not comment on which stores it would close or when they would shut. More

March futures on the S&P/TSX index were up 0.1% at 7:10 a.m. ET (1210 GMT).Monthly figures on U.S. services sector and factory orders data are due after the opening bell which could offer clarity on the health of the country’s economy.Labor market reports in the U.S. are also scheduled through the week, which could guide expectations on the timeline of interest rate cuts by the Federal Reserve, alongside Fed Chair Jerome Powell’s congressional appearances.Back home, the BoC is set to announce its next monetary policy decision on Wednesday, where markets are widely expecting the central bank to hold rates.But money markets participants are pricing in about a 51% chance of a 25-basis-point cut in June. [#BOCWATCH]Materials-linked shares were on track to gain for the fourth session as gold headed towards record highs, driven by mounting hopes of the Fed’s first interest rate cut in June. [GOL/]Nonferrous metals, however, fell on a firmer dollar and disappointment from the lack of fresh supportive measures from China. [MET/L]Oil also slipped as concerns over China’s plan for growth and uncertainty over the pace of U.S. interest rate cuts offset the prospect of a tighter market due to continued OPEC+ supply restraint. [O/R]The Toronto Stock Exchange’s S&P/TSX composite index ended lower on Monday, weighed by declines in energy shares. (TO)The Canada Energy Regulator said on Monday it had approved a toll settlement between pipeline operator Enbridge (NYSE:ENB) and shippers for moving oil along the Canadian mainline.COMMODITIES AT 7:10 a.m. ETGold futures: $2,132.8; +0.3% [GOL/]US crude: $78.47; -0.3% [O/R]Brent crude: $82.66; -0.2% [O/R] More