Economy

FRANKFURT (Reuters) – The European Central Bank will keep interest rates unchanged at a record high on Thursday and is likely to push back on investor bets for aggressive policy easing this spring, despite recession risks and a rapid slowdown in inflation. The ECB ended its quickest rate hiking cycle in September but has been adamant that even discussing a reversal would be premature, since price pressures have yet to be fully extinguished and crucial wage talks remain ongoing.Investors, however, are betting that the ECB is getting it wrong on both growth and inflation, and will be forced to make an about-face sooner rather than later. Such a pivot will not be on the agenda for now, especially after the central bank rolled out its top brass last week to convince markets that a long plateau in rates was ahead. ECB President Christine Lagarde is likely to argue that underlying price pressures are still strong, particularly for services, while risks remain abundant – from pending wage deals to geopolitical tensions, including the Red Sea blockade.Lagarde and chief economist Philip Lane have repeatedly pointed to first-quarter wage settlements, for which figures become available in May, as a relevant gauge. That has been seen by some as a clue that a first rate cut could come at the ECB’s June meeting. “Pushback on market pricing is likely to be strong, with Lagarde indicating that the early and fast cuts priced by the market are not necessarily consistent with inflation going back to target,” Bank of America said. “We would expect Lagarde to reiterate her line at Davos that we are at the peak for rates and that cuts around the summer could make sense.”Financial markets now see 130 basis points of rate cuts this year, with the first move in April or June, a big change compared to two weeks ago when 150 basis points of reductions were seen, starting in March or April. The ECB will announce its policy decision at 1315 GMT, followed by Lagarde’s 1345 GMT news conference. RECESSIONThe big discrepancy in expectations largely stems from a different outlook on growth and just how much rate hikes are slowing the economy of the 20-country currency bloc. The ECB expects household and government spending to drive a recovery but data appear to be painting a bleaker picture.The euro zone was probably in recession last quarter and got off to a slow start in January, making the current period the sixth straight quarter with broadly flat or negative growth. A weak economy, along with muted commodity prices and high interest rates, will keep pushing down inflation, which last stood at 2.9% and was not expected by the ECB to fall back to its 2% target until 2025.”We continue to expect headline and core HICP inflation rates to fall to 2% already before the middle of this year, a year or more earlier than the ECB forecasts,” Deutsche Bank economists said.This inflation drop will mean rising real interest rates, an effective policy tightening in a recessionary environment. “This would raise the risk of an outright recession and a genuine shock to the labour market,” Deutsche Bank added.It was not alone in fearing that the ECB’s insistence on overwhelming evidence of disinflation risked increasing the chance of a policy error.”Having overlooked the negative impact of monetary tightening on growth until now, the ECB remains biased towards cutting too little, too late,” TS Lombard’s Davide Oneglia said. “The ECB has less to worry about inflation and fewer excuses to keep monetary policy tight than officials think, but over-tightening habits die hard,” Oneglia added. More

M&A activity in the U.S. has shown signs of improvement after a prolonged slump on hopes of a soft landing for the economy – a scenario where inflation eases without a sharp rise in unemployment. Revenue from capital markets jumped 15% to $338 million in the quarter, driven by a rebound in investment banking, while asset management revenue rose 14% to $235 million. Investment banking revenue surged 28% to $181 million. Wall Street heavyweight Morgan Stanley also reported a rise in investment banking earlier this month, helped by fixed-income underwriting.”Investment banking activity industry-wide appears to be on a gradual recovery and our pipeline and new business activity remain healthy,” said CEO Paul Reilly.Total net revenue rose 8% to $3.01 billion compared with a year earlier.Adjusted net income available to common shareholders was $514 million, or $2.40 per diluted share, in the three months ended Dec. 31, compared with $505 million, or $2.29 per diluted share, a year earlier. More

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Fourth-quarter gross domestic product is expected to show growth at a 2% seasonally adjusted annualized pace.
As the Commerce Department’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.
Two other key elements will take the focus as investors digest the report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation.

Consumers shop in Rosemead, California, on Dec. 12, 2023.
Frederic J. Brown | Afp | Getty Images

Economic growth likely slowed to its weakest pace in a year and a half to end 2023, possibly setting the stage for a more pronounced slowdown ahead, according to Wall Street economists.
The consensus outlook for the fourth quarter is that gross domestic product grew at a 2% seasonally adjusted annualized pace, sliding downward from the 4.9% in Q3 and the lowest reading since the 0.6% decline in the second quarter of 2022.

As the U.S. Department of Commerce’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.
The report likely will “represent a sharp deceleration” from the previous period, Bank of America economist Shruti Mishra said in a client note. “Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets.”
BofA has a below-consensus view that GDP — the sum of all goods and services produced during the period — will slow to a 1.5% pace, largely because parts of the economy not directly related to consumer spending, such as nonresidential business fixed investment and housing, will tail off.
In addition, the bank expects a slowdown in inventory restocking to shave close to a full percentage point off the headline number.
Looking forward, BofA forecasts the first quarter of 2024 to show growth of just 1%.

“Consumer spending is likely to slow from its current pace due to lagged effects from tighter financial conditions, higher energy prices, and cooling labor market,” Mishra said.
Elsewhere on Wall Street, expectations are mixed.
Goldman Sachs earlier this week lifted its Q4 estimate to 2.1%, an increase of 0.3 percentage points, taking its full-year GDP outlook to 2.8%. One significant factor Goldman sees is stronger-than-expected state and local government spending, which boosted Q3 growth by nearly a full percentage point and is predicted to show a 4.5% increase in the final three months of the year.
The bank’s economists also see growth holding up fairly well in 2024, ending the year at 2.1%.
Two other key elements will take the focus as investors digest the GDP report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation, specifically how the Federal Reserve might react to personal consumption prices that come out of Thursday’s report as well as a separate Commerce Department release Friday.
“We do expect the economy to slow … further in 2024 as the impact of monetary tightening continues to weigh on economic activities,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to hit a recession.”

RSM expects the GDP report to show a 2.4% gain on solid growth in consumer spending, though some economists say December’s larger-than-expected retail sales increase was fueled by seasonal distortions in the data that will be corrected in January.
Citigroup agrees with the consensus call of 2% growth in Q4 but sees tougher times ahead, mainly because of the lagged effect the Fed’s previous rate cuts will exert, as well as inflation that could turn out to be more durable than anticipated.
“Data released [Thursday] may in retrospect turn out to document the one quarter of true ‘Goldilocks’ conditions,” Citi economist Andrew Hollenhorst wrote. “But we do not share the market and Fed’s sanguine assessment of the macroeconomy over the remainder of the year.”Don’t miss these stories from CNBC PRO: More

This article is an on-site version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a weekToday’s top storiesDonald Trump won the New Hampshire primary in the fight to become the Republican candidate for US president, but last-rival-standing Nikki Haley vowed to fight on. US managing editor Peter Spiegel says incumbent Joe Biden’s zest for a rematch with Trump is “morally ambiguous and strategically short-sighted”.There was welcome news for the UK and eurozone economies in the shape of better than expected PMI surveys. In the UK, the data showed business activity increased at the fastest pace in seven months in January, while in the eurozone it showed the economic downturn appeared to be easing as manufacturing activity picked up, although price pressures appear to be increasing.The FT revealed that the EU was readying more sanctions against Russia and financial support for Kyiv. The package includes a 13th set of restrictions on businesses and individuals connected to the 2022 full-scale invasion of Ukraine, as well as a long-delayed agreement on €50bn for Kyiv over the next four years.For up-to-the-minute news updates, visit our live blogGood evening.Nuclear power generation will reach an all-time high next year, according to the International Energy Agency, but cost overruns in the UK and Russia’s grip on nuclear fuel highlight some of the challenges facing governments as they seek to maximise its role in their energy mix.The IEA says output from nuclear plants will rise 3 per cent this year and next, boosted by new reactors in China and India and the return of plants in France that were shut down last year for maintenance. The growth in nuclear, alongside wind and solar, means the share of electricity supply from fossil fuel generators will fall to a record low of 54 per cent by 2026, the IEA predicts.Nuclear power has staged a remarkable revival since the Fukushima disaster in Japan in 2011, boosted not only by the drive to net zero but also concerns about energy security following Russia’s full-scale invasion of Ukraine.It’s not all plain sailing. As we report today, Britain’s flagship Hinkley Point C plant is facing delays until 2029 and cost overruns rocketing to as much as £46bn. The French state-owned operator and constructor EDF has also experienced long delays on parallel projects in Finland and France. (The UK received a separate blow to its net zero ambitions today when the National Audit Office raised doubts over the carbon footprint of heavily subsidised biomass power plants, which supply about 11 per cent of the country’s electricity.)Another headache for the global nuclear industry is Russia’s dominance of supplies of enriched uranium, the fuel needed for nuclear power. As our Big Read explains, the US is making huge efforts to combat this by rebuilding its nuclear supply chain, ravaged by the collapse in demand after Fukushima and years of neglect. Uranium prices meanwhile have more than tripled since the start of 2021 to a 16-year high. In addition, Kazatomprom, the world’s largest producer of the radioactive material, has warned that its production could be hit by shortfalls of sulphuric acid, used to extract uranium from ore.Despite the challenges, also including the problem of hazardous waste, more than 20 countries at the UN’s COP28 climate summit in Dubai last month agreed to try to triple global nuclear capacity by 2050. Some are sceptical, arguing the target is unrealistic. The foreword to December’s World Nuclear Industry report goes even further: “Nuclear energy is riding a new wave of popularity, and is seen by many policy planners and energy experts as part of the solution to reducing carbon emissions . . . However, given its long lead times and exorbitant costs the prospect of this happening is virtually zero.”Need to know: UK and Europe economyThe UK borrowed much less than expected in December, boosting Chancellor Jeremy Hunt’s plans to cut taxes ahead of the forthcoming general election. Cash-strapped English councils are to get an extra £500mn for social care as they struggle against the threat of insolvency.Also under financial pressure is Royal Mail, the UK postal provider. The Ofcom regulator outlined plans to relax current legal requirements and allow deliveries just three days a week.The EU scaled back plans for tighter controls on outbound investment and sensitive technology exports to avoid a “turf war” with member states. Competition commissioner Margrethe Vestager said Brussels would improve co-ordination with governments to help protect the bloc from authoritarian states such as China.The showpiece €800bn EU recovery fund, intended to finance the digital and green transitions, is being held back by red tape, according to leading industrialists, with less than a third of the resources so far disbursed. Need to know: global economyThe G7-backed mission to boost preparations for future health crises said governments and industry should invest as much on preparing for pandemics as they have on Covid-19 research to avoid costly lockdowns.Artificial-intelligence powered audio deepfakes are emerging as powerful tools in a year of big elections around the world. The latest example this week is a fake robocall in New Hampshire of Joe Biden apparently telling people not to vote. Workers in Argentina are striking today against libertarian President Javier Milei’s economic reforms, which unions say “break the social contract” and renege on deals. Around 40 per cent of the country’s 13mn registered workers belong to unions, many of which are closely allied with the Peronist movement that led the country’s previous government.Investors in Indonesia, south-east Asia’s biggest economy and an emerging powerhouse in green industries, are closely monitoring who will succeed Joko Widodo when he steps down after the general election on February 14. Need to know: businessProcter & Gamble reported strengthening consumer demand in the third quarter even as it raised prices, lifting its share price as well as those of its rivals. Investors were awaiting the results for clues as to whether inflation-wearied consumers may have reached the limits of what they will pay for household brands, such as Tide and Pampers.Novo Nordisk and Eli Lilly have a new challenger in weight-loss drugs: Danish biotech Zealand Pharma. Goldman Sachs says the market could grow from $6bn to as much as $100bn by the end of the decade.Apple has been quietly preparing to bring artificial intelligence to its next generation of iPhones. The company has been more active than its Big Tech rivals in buying AI start-ups, acquiring 21 since the beginning of 2017. The FT editorial board said Tata Steel’s plan to close its UK blast furnaces marked a step into the unknown for the country’s steel industry, leaving it unable to produce “virgin” steel and relying on melting down scrap.EasyJet said strong demand for summer flights meant it was likely to narrow its losses, despite a £40mn hit from the conflict in the Middle East.War’s good for one thing, of course: arms sales. US aerospace and defence group Lockheed Martin forecast a larger than expected increase in 2024. The World of WorkUS banks are toughening up requests for employees to return to the office. Bank of America has sent “letters of education” to workers who have not been showing up, warning them of disciplinary action. Nearly four years since companies sent workers home at the start of the pandemic, 82 per cent of large financial companies still have hybrid arrangements in place.As for those remote workers, should bosses have the right to monitor their computers? Listen to the new Working It podcast.The UK government is being urged by unions and recruiters to scrap a fresh attempt to bring in legislation that would allow employers to break strikes by hiring agency workers to fill in for employees taking industrial action. The annual FT-Vitality survey on Britain’s workplaces suggests different generations have wildly different ways of reacting to stress: the middle aged numb themselves with alcohol while the young succumb to depression. Some good newsDoctors at London’s Great Ormond Street Hospital are testing a “game changing” leukaemia treatment for children who can’t have chemotherapy.Recommended newslettersWorking it — Discover the big ideas shaping today’s workplaces with a weekly newsletter from work & careers editor Isabel Berwick. Sign up hereThe Climate Graphic: Explained — Understanding the most important climate data of the week. Sign up hereThanks for reading Disrupted Times. If this newsletter has been forwarded to you, please sign up here to receive future issues. And please share your feedback with us at [email protected]. Thank you More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The UK government has pledged £600mn in extra funding for local government in the next financial year after a string of warnings about the financial pressures facing councils in England.Some £500mn of the additional funds will be earmarked for social care, the Department for Levelling up, Housing and Communities announced on Wednesday, an increase that mostly benefits county and unitary councils. A further £100mn will be made available to boost the core spending power of all councils, the department said. The announcement comes after more than 40 Tory MPs this week threatened to vote against the local government financial settlement for 2024-25, warning of looming insolvencies, reduced services and higher taxes. The government had been resisting calls to improve its offer.Levelling up secretary Michael Gove said: “We have listened to councils across England about the pressures they’re facing . . . We are in their corner.”A Whitehall official credited Gove with extracting the extra funding, arguing he had “made the case forcefully to No 10 and the Treasury that councils need a lifeline”. But the additional £500mn will only go some of the way towards plugging the £4bn deficit facing councils over the next two years forecast by the Local Government Association representative body.Welcoming the announcement, Tim Oliver, chair of the County Councils Network representing England’s largest local authorities, said: “Whilst this extra funding will undoubtedly help us protect valued frontline services, councils, of course, still face difficult decisions when setting their budgets for 2024-25.“Service reductions will still be necessary for councils in some areas to balance their books, while the majority of councils will still have little choice but to propose maximum council tax rises,” he added. The additional funds bring the government’s total 2024-25 financial settlement for local government to £64.7bn, an increase of 7.5 per cent on 2023-24, according to the levelling up department.The main representative bodies for local authorities had been warning of the risk that many more councils would be forced to issue “section 114” notices, declaring their inability to meet a legal requirement to balance the books.The County Councils Network, which co-ordinated pressure on the government from MPs this week, said that without an improved offer councils would be forced to implement severe reductions to services and levy higher council taxes.  The additional funds will benefit just under half of England’s 317 councils, which are responsible for social care. Spread across the county council and unitary council network according to a relative needs formula, the social care funds will on average add £2mn-£3mn per council, according to Jack Shaw, an expert in local government and fellow at the Bennett Institute think-tank, potentially reducing some of the most severe cuts to frontline services.  “All councils are going to be cutting some social care. Southend for example is cutting dementia care support. This may just mean they have to make fewer savings,” said Shaw.The additional £100mn includes funds targeted at rural areas and those susceptible to flooding, as well as a boost for district councils, which “will help mitigate potentially extensive reductions to valued local services”, said Sam Chapman-Allen, chair of the District Councils’ Network.Bonus season – are you headed for a payout or a doughnut?© Charlie Bibby/FTFor the third year in a row, the Financial Times is asking readers to confidentially share their 2024 bonus expectations, and whether you intend to invest, save or spend the cash. Tell us via a short survey More

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Annual headline inflation in Latin America’s second-largest economy hit 4.90% the first 15 days of January, statistics agency INEGI said, up from the 4.66% in December and above the forecasts of 4.78% in a Reuters poll of economists.Jason Tuvey, Deputy Chief Emerging Markets Economist, said the jump in Mexico’s inflation to a higher-than-expected 4.9% was entirely due to a particularly sharp rise in agricultural goods inflation.He added “it probably means the chances of Banxico starting an easing cycle at February’s Board meeting are now no better than 50-50.”Pantheon Macroeconomics’ chief economist for Latin America, Andres Abadia, said “the key driver of this year’s sharp January increase was perishable-food prices, due to bad weather conditions; a modest increase in energy prices prevented a bigger increase.” Accelerating inflation in November and December led to more careful forecasts at the Bank of Mexico, which has till now held back from reducing Mexico’s key interest rate from its current all-time high.The closely monitored core index, seen as a better gauge of price trends because it strips out volatile energy and food prices, continued to ease and rose 0.25% during the month, while annual core inflation came in at 4.78% in early January, its lowest since August 2021.Pantheon Macroeconomics’ chief economist for Latin America Abadia also added “inflation will continue to fall gradually this year, particularly over H2, but risks remain tilted to the upside, due mostly to bad weather conditions.” A recent Citibanamex survey of economists revealed that a significant portion of the market predicts the Bank of Mexico will commence lowering the key interest rate at its March meeting. More