Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The market’s stubborn hopes of a first cut to US interest rates in March were finally crushed over the past week by strong economic data and firm messaging from Jay Powell, chair of the Federal Reserve. Beyond next month, however, traders have a different outlook for the Fed’s monetary policy than officials inside the US central bank. The divergence sets the stage for volatility and potential losses if the Fed sticks with its plans. US interest rates have been perched at a 23-year high since the Fed undertook an aggressive campaign to rein in inflation. When and how fast it begins to lower them from their current level of 5.25 per cent to 5.5 per cent has been a fixation for investors across financial markets. Powell reiterated on a television show over the weekend that central bankers saw three cuts as their baseline scenario this year, the same message conveyed in the Fed’s closely watched “dot plot” projections issued in December. But since December, traders in the futures market have only slightly pulled back their expectations — pricing in five cuts over the course of the Fed’s seven remaining meetings this year, instead of a more optimistic six cuts. And bets on cuts happening earlier have been very hard to shake. Until last week traders were putting better than even chances on a cut in March. It took a definitive statement from Powell in the press conference after the Federal Open Market Committee meeting last week — March was not the Fed’s “base case” — followed by a surprisingly strong US jobs report on Friday and his statements on the 60 Minutes news programme to bring the odds down to 20 per cent today.“We’re slowly coming into line with the Fed,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income. “There was a sense in December that the market could push the Fed to cut sooner. But the data hasn’t co-operated with the market. The data has not been weak enough to pressure the Fed to cut early.”“Markets finally started listening to Powell after the jobs number on Friday,” Desai said.Bond markets have swung dramatically in the past four trading days, recording their biggest daily moves in months, as investors have grasped that March is likely to come and go without a rate cut. The yield on the two-year Treasury note, which moves with interest rate expectations, on Friday rose 0.16 percentage points after the payrolls report, which showed employers added 353,000 jobs in January. The yield rose again on Monday to 4.48 per cent, its highest level in a month. More swings like that may be in store if the market is forced to adjust to the Fed’s view. After hitting a four-month low in January, the ICE BofA Move index, which maps expectations of volatility in the Treasury market, has ticked up in February as rate expectations have changed.US stocks, meanwhile, rose to all-time highs on Friday after the strong jobs report, before dipping on Monday. But anticipation of more cuts than the Fed is expecting could also be bolstering prices.Amanda Agati, chief investment officer at PNC Financial Services, said: “The market is craving the sugar high from additional policy stimulus, but that doesn’t mean they’ll get it. It sets the stage for a choppy first half.”The persistent tension between what the market is pricing and what the Fed is signalling on interest rate policy has also made it more challenging for corporate borrowers to map out funding plans in advance, fuelling a wave of opportunistic borrowing.A sharp rally across financial markets at the end of last year created a relatively benign backdrop for companies in the first few weeks of 2024, leading to record January US investment-grade bond issuance, along with significant volumes for junk-rated names. Market participants noted companies were choosing to issue debt while the going was good — with demand high because many investors had been starved of new supply for months and had cash on the sidelines.Torsten Sløk, chief economist at investment firm Apollo, said: “I think corporates both in investment grade and high-yield [and in] loans view this as ‘Take it while you can get it’ — and in January, it turned out to be a good idea.”However, highlighting the increasing challenges of timing such issuance, Sløk added that “the question after the [labour market] data on Friday is whether that window is closing”.Calvin Tse, head of Americas macro strategy at BNP Paribas, said he does not believe the current gap between the Fed officials’ and the market’s expectations of rate cuts is significant. Traders in the futures market are betting on a range of possible outcomes, while Fed officials are making more precise forecasts. But Tse’s outlook does diverge significantly from the Fed’s. Tse believes the Fed will start reducing interest rates in May and continue to cut by 0.25 percentage points at each of the five subsequent meetings this year. That’s because he expects inflation to slow dramatically this year, and the Fed will be forced to adjust policy accordingly.Tse said: “If the Fed doesn’t cut rates, and inflation comes down as much as we think it will, that would mean policy was becoming more restrictive. And Powell has already said that policy is sufficiently restrictive.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China’s national chip champions expect to make next-generation smartphone processors as early as this year, despite US efforts to restrict their development of advanced technologies.The country’s biggest chipmaker SMIC has put together new semiconductor production lines in Shanghai, according to two people familiar with the move, to mass produce the chips designed by technology giant Huawei. That plan supports Beijing’s goals of chip self-sufficiency, with President Joe Biden’s administration tightening export restrictions for advanced chipmaking equipment in October, citing national security concerns. The US has also been working with the Netherlands and Japan to block China’s access to the latest chip tools, such as machines from the Dutch maker ASML.According to two people with knowledge of the plans, SMIC is aiming to use its existing stock of US and Dutch-made equipment to produce more-miniaturised 5-nanometre chips. The production line will make Kirin chips designed by Huawei’s HiSilicon unit and destined for new versions of its premium smartphones.While 5nm chips remain a generation behind the current cutting-edge 3nm ones, the move would show China’s semiconductor industry is still making gradual progress, despite US export controls.“With the new 5nm node, Huawei is well on track to upgrade its new flagship handset and data centre chips,” said one person familiar with the plans.Huawei had surprised the industry and analysts with its advances when its Mate 60 Pro premium smartphone launched in August featuring a 7nm processor. The phone helped it to increase shipments in China by nearly 50 per cent in the fourth quarter, according to Canalys research, as it proved a big hit with consumers.If production is judged successful enough for smartphones, Huawei’s most powerful artificial intelligence processor, the Ascend 920, will also be produced at 5nm by SMIC, the two people said, narrowing the gap between China’s alternative AI chips and Nvidia’s highly sought-after graphics processing units. Meanwhile, SMIC has increased its current 7nm production capacity to make more Kirin chips and AI GPUs, said two people familiar with the matter. Huawei’s 7nm Ascend 910b chip is considered by analysts and industry experts to be among the most promising alternatives to Nvidia’s market-leading AI processors.The move to create more advanced chips has incurred additional costs, however. Three people close to Chinese chip companies said that SMIC was having to charge 40 to 50 per cent more for products from its 5nm and 7nm fabrication nodes than Taiwan’s TSMC does at the same nodes. However, SMIC’s yield — the number of chips considered good enough to ship to customers — is also less than one-third of TSMC’s.“Could this be just a demonstration by Huawei and SMIC to show the Chinese government it can be done?” said Douglas Fuller, an expert on China’s semiconductor industry. “If money is no object, then it might happen.”Huawei declined to comment. SMIC did not respond to a request for comment.The 7nm and 5nm chip fabrication lines comprise US machines stockpiled by SMIC before it was hit by the restrictions. Its fab also boasts ASML lithography machines shipped last year. The Dutch government recently revoked an export licence for some of the most advanced machines, which has blocked ASML from selling to China.“SMIC is facing a more significant roadblock for production expansion after the US and its alliance tightened export restrictions on advanced chipmaking gear,” said one person close to the company.“Still, the fate of China’s chip industry and its technological development in the coming years will depend on these production lines by SMIC.”Video: The race for semiconductor supremacy | FT Film More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is co-head of investment and group chief investment officer at SchrodersEquity markets have largely made a strong start to 2024 as investors rushed to price in a monetary policy pivot — in the form of anticipated rate cuts — from central banks. That has left valuations looking stretched across asset classes.But it is already clear that 2024 will bring many different events that will lead to a reshuffling of the pack of investment opportunities.Some of these events are already clearly marked on investors’ calendars, such as the many elections taking place around the world this year — most notably the US presidential election on November 5. Other events are less foreseeable, such as the attacks on shipping in the Red Sea and subsequent reaction from western nations. We do not know how current epicentres of conflict will evolve; whether they will become more entrenched, for example, or draw in more participants. Overall, it makes for a complicated, and at times alarming, environment for investors to navigate. It’s important to remember, though, that not all the events of 2024 will be significant from a financial market perspective. The US presidential election is clearly one where the stakes are high, but that’s not the case for every poll.A practical approach for investors is to focus on understanding how divergent policies and events — financial and geopolitical — give rise to different risks and opportunities.Let’s take fixed income. The global economy is still in slowdown, which should be a benign environment for bonds, but we need to keep an eye on the long end of the yield curve as the US election approaches. Thanks to the dollar’s status as reserve currency, America has had the luxury of being able to run a large deficit. But signs of fiscal profligacy from candidates may push the patience of markets too far and could result in higher volatility for longer-dated bonds.Europe, by contrast, has run more conservative fiscal policies. This is supportive of the bloc’s bonds.Again, in emerging markets many countries have run orthodox monetary policies that now leave their debt markets in a good place. We are quite positive on local currency emerging market debt.Equities have not moved as quickly as bonds to incorporate rate-cut expectations. While equity valuations have risen, they are not at extreme levels. Much of the move last year was concentrated in the so-called Magnificent Seven large-cap US stocks — and even these are underpinned by earnings. There may be scope for equities to move up further.This will be particularly relevant to investors currently holding cash. Our recent analysis, looking at data from 22 rate-cutting cycles stretching back to 1929, has found that the average return for US equities has been 11 per cent in the 12 months following the first US rate cut.If we do get the “soft landing” of slowdown but not recession, that should be supportive for equities. The question comes back to divergence: will those gains spread out to neglected areas of the market, including undervalued regions such as the UK?China continues to face a growth problem as it copes with the ramifications of its property crisis, and while the outcome of the US election could bring significant changes for markets, we don’t think a shift in stance towards China will be one of them. The current protectionist tilt and race for technological supremacy is likely to remain intact regardless of who wins.This weaker economic picture for China, and slowdown in the global economy more generally, does not create a bullish backdrop for commodities. But a strategic allocation to commodities can still make sense as a diversifier, especially in the context of intensifying geopolitical strains. One area of commodities where the outlook does look positive is gold. It typically performs well in periods when central banks cut rates.For the dollar, an about turn in the consensus around early rate cuts could result in near-term strength versus other currencies.Ultimately, the main thing is to remain invested in order to take advantage of these diverging opportunities as they emerge. It’s a truism as old as the hills but well worth saying again: there is a temptation during periods of uncertainty, noise and alarming headlines to seek “safety” on the sidelines. And unlike much of the past decade, it is now possible to obtain an attractive nominal return on cash. But, even if US rate cuts aren’t as imminent as some may hope, cash rates are still likely to come down, making cash less of a winner. At the same time, market moves can play out very rapidly. A position on the sidelines could mean missing out. More

The following is a chronology of the Reserve Bank of Australia’s interest rate moves since 1990. Each move is measured in basis points (bp), which are one-hundredths of a percentage point.Nov 7 2023 Up 25 bp to 4.35Jun 6 2023 Up 25 bp to 4.10 May 2 2023 Up 25 bp to 3.85Mar 7 2023 Up 25 bp to 3.60Feb 7 2023 Up 25 bp to 3.35Dec 6 2022 Up 25 bp to 3.10 Nov 1 2022 Up 25 bp to 2.85 Oct 4 2022 Up 25 bp to 2.60Sep 6 2022 Up 50 bp to 2.35 Aug 2 2022 Up 50 bp to 1.85 Jul 5 2022 Up 50 bp to 1.35Jun 7 2022 Up 50 bp to 0.85 May 3 2022 Up 25 bp to 0.35Nov 3 2020 Down 15 bp to 0.10 Mar 19 2020 Down 25 bp to 0.25Mar 3 2020 Down 25 bp to 0.50Oct 1 2019 Down 25 bp to 0.75 Jul 2 2019 Down 25 bp to 1.00Jun 4 2019 Down 25 bp to 1.25Aug 2 2016 Down 25 bp to 1.50 May 3 2016 Down 25 bp to 1.75 May 5 2015 Down 25 bp to 2.00 Feb 3 2015 Down 25 bp to 2.25 Aug 6 2013 Down 25 bp to 2.50 May 7 2013 Down 25 bp to 2.75 Dec 4 2012 Down 25 bp to 3.00Oct 2 2012 Down 25 bp to 3.25 Jun 5 2012 Down 25 bp to 3.50 May 1 2012 Down 50 bp to 3.75 Dec 6 2011 Down 25 bp to 4.25 Nov 1 2011 Down 25 bp to 4.50 Nov 2 2010 Up 25 bp to 4.75 May 4 2010 Up 25 bp to 4.50 Apr 6 2010 Up 25 bp to 4.25 Mar 2 2010 Up 25 bp to 4.00 Dec 1 2009 Up 25 bp to 3.75 Nov 3 2009 Up 25 bp to 3.50 Oct 6 2009 Up 25 bp to 3.25 Apr 7 2009 Down 25 bp to 3.00 Feb 3 2009 Down 100 bp to 3.25 Dec 2 2008 Down 100 bp to 4.25 Nov 4 2008 Down 75 bp to 5.25 Oct 7 2008 Down 100 bp to 6.00 Sep 2 2008 Down 25 bp to 7.00 Mar 4 2008 Up 25 bp to 7.25 Feb 5 2008 Up 25 bp to 7.00 Nov 7 2007 Up 25 bp to 6.75 Aug 8 2007 Up 25 bp to 6.50 Nov 8 2006 Up 25 bp to 6.25 Aug 2 2006 Up 25 bp to 6.00 May 3 2006 Up 25 bp to 5.75 Mar 2 2005 Up 25 bp to 5.50 Dec 3 2003 Up 25 bp to 5.25 Nov 5 2003 Up 25 bp to 5.00 June 5 2002 Up 25 bp to 4.75 May 8 2002 Up 25 bp to 4.50 Dec 5 2001 Down 25 bp to 4.25 Oct 3 2001 Down 25 bp to 4.50 Sept 5 2001 Down 25 bp to 4.75 Apr 4 2001 Down 50 bp to 5.0 Mar 7 2001 Down 25 bp to 5.5 Feb 7 2001 Down 50 bp to 5.75 Aug 2 2000 Up 25 bp to 6.25 May 3 2000 Up 25 bp to 6.0 Apr 5 2000 Up 25 bp to 5.75 Feb 2 2000 Up 50 bp to 5.5 Nov 3 1999 Up 25 bp to 5.0 Dec 2 1998 Down 25 bp to 4.75 Jul 30 1997 Down 50 bp to 5.0 May 23 1997 Down 50 bp to 5.5 Dec 11 1996 Down 50 bp to 6.0 Nov 6 1996 Down 50 bp to 6.5 Jul 31 1996 Down 50 bp to 7.0 Dec 14 1994 Up 100 bp to 7.5 Oct 24 1994 Up 100 bp to 6.5 Aug 17 1994 Up 75 bp to 5.5 Jul 30 1993 Down 50 bp to 4.75 Mar 23 1993 Down 50 bp to 5.25 Jul 8 1992 Down 75 bp to 5.75 May 6 1992 Down 100 bp to 6.5 Jan 8 1992 Down 100 bp to 7.5 Nov 6 1991 Down 100 bp to 8.5 Sep 3 1991 Down 100 bp to 9.5 May 16 1991 Down 100 bp to 10.5 Apr 4 1991 Down 50 bp to 11.5 Dec 18 1990 Down 100 bp to 12.0 Oct 15 1990 Down 100 bp to 13.0 Aug 2 1990 Down 100 bp to 14.0 Apr 4 1990 Down 100-150bp to 15.0 to 15.5 Feb 15 1990 Down 50 bp to 16.5 to 17.0 Jan 23 1990 Down 50-100bp to 17.0 to 17.5 More

The RBA kept its official cash target rate at 4.35%, in line with market expectations. The move was largely priced-in by markets, amid growing bets that easing Australian inflation will give the RBA little impetus to raise interest rates further.But the bank challenged this notion by warning that while inflation had fallen in recent months, it still remained “too high,” which in turn kept Australia’s economic outlook uncertain. The RBA stuck to its earlier forecast that it only expects inflation to come back within its 2% to 3% annual target range by 2025, and that inflation will reach a midpoint in that range only by 2026. “While recent data indicates that inflation is easing, it remains high… The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the RBA said in a statement.The RBA hiked rates by a cumulative 425 basis points over the past two years to combat a post-COVID spike in inflation.Australian consumer price index inflation has fallen considerably in recent months, with a reading for the fourth quarter- released last week- showing a sharp slowdown in inflationary growth.But CPI inflation still remained well above the RBA’s annual target.Governor Michele Bullock has also repeatedly voiced concerns over upside risks to inflation, with particular emphasis on services price inflation, which was proving to be more sticky than headline inflation. Recent economic data showed that the Australian economy was cooling under the weight of high interest rates and inflation. Retail sales data for December showed a large, unexpected decline in consumer spending. The labor market- another key consideration for the RBA in changing interest rates- also showed some signs of cooling in 2023, although the central bank said on Tuesday that the sector still remained tighter than it was comfortable with. The Australian dollar rose 0.3% after the RBA’s announcement, while the ASX 200 index slightly deepened its losses. More

In its quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said inflation was now expected to be back in the central bank’s 2-3% target range in late 2025 and reach the midpoint of 2.5% in 2026. “Inflation is expected to decline a little quicker than previously thought,” said the RBA. “But, services inflation remains high and is expected to decline only gradually as domestic inflationary pressures moderate.”The central bank noted that while the growth in demand has slowed, the level of demand is still robust and is assessed to be above the economy’s capacity to supply goods and services, thereby creating inflationary pressures. Overall, policymakers judged the risks to the domestic outlook were broadly balanced.The RBA is widely expected to hold interest rates steady on Tuesday at 4.35%, having last hiked in November, but the focus will be on whether the central bank retains a hiking bias after recent downside surprises on inflation and growth. Markets have already priced out any chance of further hikes and wagering a cut in June is a coin flip. Futures imply about two quarter-point cuts by the end of the year.Consumer inflation, which slowed to 4.1% in the fourth quarter, is now forecast to be a fraction lower at 2.8% by the end of 2025, and is seen hitting 2.6% by mid 2026. The key trimmed mean measure of inflation is also seen slowing at much the same pace. Reflecting weak consumer spending, the economy was now expected to expand at an annual 1.3% pace in the June quarter this year, down from 1.8% previously. Growth for end 2024 was lowered to 1.8%, while the forecast for late 2025 and June 2026 were the same at 2.4%.That in turn meant unemployment rate – which was running at 3.9% – is now seen to hit 4.4% in June 2025 and to remain there for the rest of the forecast period. The forecasts, the central bank judged, were consistent with a return to full employment without adding to inflationary pressures.The projections were based on the technical assumptions that interest rates remain around the current level of 4.35% until mid-2024, before falling to 3.9% by the end of this year. Markets are pricing in around 40 basis points of easing.The cash rate is assumed to then decline to 3.2% by mid 2026. More

The Treasury secretary will offer an upbeat assessment of the economy on Tuesday, a year after the nation’s banking system faced turmoil.Treasury Secretary Janet L. Yellen will tell lawmakers on Tuesday that the United States has had a “historic” economic recovery from the pandemic but that regulators must vigilantly safeguard the financial system from an array of looming risks to preserve the gains of the last three years.Ms. Yellen will deliver the comments in testimony to the House Financial Services Committee nearly a year after the Biden administration and federal regulators took aggressive steps to stabilize the nation’s banking system following the abrupt failures of Silicon Valley Bank and Signature Bank.While turmoil in the banking system has largely subsided, the Financial Stability Oversight Council, which is headed by Ms. Yellen, has been reviewing how it tracks and responds to risks to financial stability. Like other government bodies, the council did not anticipate or warn regulators about the problems that felled several regional banks.“Our continued economic strength depends on a solid and resilient U.S. financial system,” Ms. Yellen said in her prepared remarks.Last year’s bank collapses stemmed from a confluence of events, including a failure by banks to properly prepare for the rapid rise in interest rates. As interest rates rose, Silicon Valley Bank and others absorbed huge losses, creating a panic among depositors who scrambled to pull out their money. To prevent a more widespread run on the banking system, regulators took control of Silicon Valley Bank and Signature Bank and invoked emergency measures to assure depositors that they would not lose their funds.The bank failures — and the government’s rescue — prompted debate over whether more needed to be done to ensure that customer deposits were protected and whether bank regulators were able to properly police risk.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

MANILA (Reuters) – Philippine annual inflation was at 2.8% in January, versus the previous month’s 3.9%, the statistics agency said on Tuesday.Economists in a Reuters poll had forecast annual inflation of 3.1% in January, within the central bank’s 2.8% to 3.6% projection for the month. More