Economy

(Reuters) – Wall Street’s biggest banks expect the Federal Reserve to end the process of shrinking its balance sheet next April, holding the line relative to what they told the central bank in July. The banks also expect the Fed’s balance sheet to bottom out at $6.4 trillion, well above the $4.2 trillion mark seen before the coronavirus pandemic struck in early 2020, according to a survey of so-called primary dealers conducted by the New York Fed ahead of the central bank’s rate-setting Federal Open Market Committee meeting, held last month. These banks serve as counterparties to Fed policy operations. “Most dealers indicated they expected the end of balance sheet reduction to be determined by assessments of reserve levels, [overnight reverse repo] take-up, or upward pressure on money market rates relative to administered rates,” the survey said. “Some dealers suggested that macro factors pose a risk to their outlook for the end of runoff,” it added. The release of the survey on Thursday follows by a day the U.S. central bank’s publication of its minutes of the Sept. 17-18 FOMC meeting. In that document, officials offered little fresh guidance about the balance sheet outlook beyond noting the importance of communicating that the ongoing drawdown can continue even when officials are cutting the Fed’s interest rate target.The latest Fed news on the balance sheet comes as market participants are still making sense of an unexpectedly turbulent end of the third quarter. The final trading day of September saw high short-term rate volatility and the first real world use of the Fed’s Standing Repo Facility, or SRF, a liquidity tool, although conditions have quickly returned to where they were prior to that. For a little over two years, the Fed has been shrinking its holdings of Treasury and mortgage bonds as part of a process called quantitative tightening, or QT. That’s taken overall Fed holdings from a peak of $9 trillion in the summer of 2022 to the current level of $7.1 trillion. For much of the drawdown, QT has effectively tightened monetary policy in tandem with Fed rate hikes, as policymakers sought to tame high levels of inflation. But with price pressures easing considerably the Fed cut its overnight target rate by half a percentage point last month, and for some in markets, that called into question the need to press forward with more balance sheet reduction. WATCHING MONEY MARKETSFed officials however have said repeatedly that what happens with the balance sheet is separate from interest rate policy, the primary lever of monetary policy. Central bankers have also reiterated the balance sheet drawdown will continue until excessive liquidity is removed from the financial system, even as they’re not sure when that point will arrive. “Reserves are still abundant and expected to remain so for some time,” Fed Chair Jerome Powell said after the September meeting. “What that tells you is, we’re not thinking about, about stopping runoff” even as interest rates go down. Those expectations are being tested by money market conditions. On Sept. 30 short-term rates were unexpectedly volatile and for the first time market participants handed over a notable amount of eligible bonds to the Fed in exchange for cash at the SRF. While on the surface that might appear to echo events in September 2019, when the Fed ended its QT process due to interest rate volatility, in the current case the Fed never lost control of the federal funds target rate as it did back then. The daily effective fed funds rate last week never moved off of 4.83% – well inside the current policy target range of 4.75%-5.00% – whereas in 2019 it traded above the established target range at the time. Last week, rates on general collateral open market overnight repo transactions rose 9 basis points for a day, the most in about 11 months, but have since returned to around where they were.Most analysts view the latest turbulence as distinct from five years ago. “Last week’s rate spike was purely a function of dealer balance sheet constraints rather than broader banking sector liquidity issues,” said analysts at Wrightson ICAP (LON:NXGN), adding “reserve balances remained within the range of the past couple of years.” Some market participants contend that tighter conditions in the repo market, where participants borrow and lend bonds, may drive the Fed to end QT relatively soon. The meeting minutes showed that Fed officials and staff responsible for watching markets for signs of liquidity scarcity were keeping an eye on activity in the repo market.Noting that market indicators pointed to still “abundant” levels of reserves, the minutes flagged higher repo market rates amid large-scale Treasury debt sales. The Fed official responsible for implementing monetary policy pointed to the connections between the repo market and the federal funds rate, which drove home “the importance of monitoring a range of indicators to assess reserve conditions and the state of money markets,” the minutes said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The EU is launching an anti-dumping investigation into cheap plywood imports after complaints by the bloc’s domestic producers, opening another front in its trade conflict with China.EU producers say there has been a surge in cheap hardwood plywood coming from China, much of which they believe originates in Russia. Brussels banned Russian wood imports after its full-scale invasion of Ukraine in February 2022.The probe follows the EU’s imposition of tariffs of up to 45 per cent on Chinese electric vehicles last week. China responded to that with provisional tariffs on EU brandy exports and had already opened anti-dumping probes into pork and dairy products, The move has sparked fears by EU member states of an extended cycle of retaliatory moves on important products, while China argues the EU is being protectionist. As tensions heighten, the two sides have also filed multiple challenges to the other’s trade defence measures at the World Trade Organization.“This investigation is crucial to protect the entire EU hardwood plywood value chain,” said the Greenwood Consortium, which represents forest owners, loggers and suppliers to producers. “Unfairly priced Chinese imports — now apparently also using cheap conflict Russian timber that is banned in the EU — threaten the survival of many European businesses and jobs.”Lightweight. durable and made from trees such as beech, birch and poplar, layered hardwood plywood panels are used in roofs, walls and floors, as well as furniture, cars and ships. Capable of enduring very low temperatures, plywood products also line the holds of supercooled liquefied natural gas tankers.The main EU producers are in Poland, Finland, France and the Baltic states. Greenwood says the industry employs 10,000 people.The EU has already put tariffs on birch plywood imports from Kazakhstan and Turkey after finding they included some Russian content. New EU rules to prevent companies dodging tariffs by stockpiling during the investigation, which could take almost a year, will be used for the first time.All imports of Chinese goods will have to be registered at EU borders. If the EU decides to levy tariffs, they would then be applied retroactively.The EU imported about 750.000 cubic metres of hardwood plywood worth €327mn in 2023, according to Eurostat figures.That accounted for more than half of the bloc’s imports and 30 per cent of the total EU market.Several other countries including the US, Morocco, Turkey and South Korea have already placed punitive tariffs on Chinese wood imports. Brussels has condemned China for subsidising industries and exporting its overcapacity in manufactured goods below cost, opening more than a dozen investigations into products including tin plate, glue and monosodium glutamate. Alicia García Herrero, senior fellow at the Brussels-based Bruegel think-tank, said the EU’s fractured single market meant its companies could not compete with Chinese rivals.With Beijing expanding into industries the EU used to lead, the bloc will be forced to protect them.“The European Commission’s duties on Chinese electric vehicles signal that the time in which China-EU relations were governed by engagement is over,” she said. “China and the EU now compete with the same type of products on third markets. It is more important than ever that the rules of the game are fair.”  More

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ST. PETERSBURG, Florida (Reuters) – Hurricane Milton marched across Florida on Thursday, whipping up tornadoes, destroying homes and knocking out power to millions before blowing out into the Atlantic.However, the Tampa Bay area appeared to have escaped without the catastrophic flooding that had been feared.At least four deaths were reported in St. Lucie County on Florida’s Atlantic Coast when an unconfirmed tornado flattened a retirement community, local media reported, citing county officials. Reuters could not immediately confirm the report. More than 3 million homes and businesses in Florida were without power on Thursday morning, according to PowerOutage.us. At least some of them had been waiting for days for power to be restored after Hurricane Helene hit the area nearly two weeks ago.The hurricane also tore a gaping hole in the fabric that serves as the roof of Tropicana Field, the stadium of the Tampa Bay Rays baseball team in St. Petersburg, but there were no reports of injuries. “One of the blessings for us is that we did not see that predicted storm surge. That saved a lot,” Tampa Mayor Jane Castor said during an early morning news conference. In the Tampa area, the storm toppled trees and threw debris across roadways and downed powerlines, video footage from local news showed. Some neighborhoods were flooded, but the extent of the damage will not be known until crews can get out and assess the destruction, Castor said. Emergency crews in the area responded overnight to dozens of calls for help, including one in which a tree fell on a house with 15 people, including children, inside, Tampa Police Chief Lee Bercaw said. All 15 people were taken to a shelter, he said. The winds also toppled a large construction crane in St. Petersburg, sending the structure crashing down onto a deserted street. The state was still in danger of river flooding after up to 18 inches of rain. Authorities were still waiting for rivers to crest, but so far water levels were at or below what they received with Hurricane Helene two weeks ago, Castor said on Thursday morning.”INSTANTANEOUSLY”In Fort Myers on the southwest coast, resident Connor Ferin surveyed the wreckage of his home, which had lost its roof and was full of debris and rainwater after a tornado suddenly hit.”All this happened instantaneous, like these windows blew out,” he said. “I grabbed the two dogs and run under my bed and that was it. Probably one minute total.” The storm hit Florida’s west coast on Wednesday night as a Category 3 hurricane on the five-step Saffir-Simpson scale, with top sustained winds of 120 mph(205 kph). While still a dangerous storm, this was less violent than the rare Category 5 hurricane that had threatened the state as it trekked over the Gulf of Mexico toward Florida.Milton weakened as it crossed land, dropping to a Category 1 hurricane with top sustained winds of 85 mph (145 kph) as it reached the peninsula’s east coast, the National Hurricane Center said. By Thursday morning, the storm was moving away from the Florida Atlantic coast after lashing communities on the eastern shoreline.The eye of the storm hit land in Siesta Key, a barrier island town of some 5,400 people off Sarasota about 60 miles (100 km) south of Tampa Bay.Florida Governor Ron DeSantis said on Thursday morning that crews across the state spent the night clearing debris. U.S. President Joe Biden’s administration had agreed to all of Florida’s request for emergency assistance, he told CNBC. “Our state is a peninsula in the middle of a tropical environment. I mean, we are just built to be able to respond to hurricanes,” DeSantis said. “We’ll survey the damage and get people on their feet. We’ll get through this.”Milton also spawned at least 19 tornadoes, the governor said, causing damage in numerous counties and destroying around 125 homes, most of them mobile homes.St. Lucie County Sheriff Keith Pearson estimated 100 homes were destroyed in the county where some 17 tornadoes touched down, NBC said.In a state already battered by Hurricane Helene two weeks ago, as many as two million people had been ordered to evacuate ahead of Milton’s arrival, and millions more live in the path of the storm.Much of the southern U.S. experienced the deadly force of Helene as it ripped through Florida and several other states. Both storms are expected to cause billions of dollars in damage.As of Thursday morning, 2,209 U.S. flights had been canceled, according to flight tracking website FlightAware, with the highest number cancellations from Orlando, Tampa and southwest Florida. More

Global trade recovered this year from a 2023 slump driven by high inflation and rising interest rates, the WTO report said. In April, the global trade watchdog forecast a 2.6% increase in volumes, which it revised up on Thursday to 2.7%.”We are expecting a gradual recovery in global trade for 2024, but we remain vigilant of potential setbacks, particularly the potential escalation of regional conflicts like those in the Middle East,” said WTO Director-General Ngozi Okonjo-Iweala in a statement. “The impact could be most severe for the countries directly involved, but they may also indirectly affect global energy costs and shipping routes.” Israel’s blitz against Lebanon’s Hezbollah movement in recent weeks, following a year-long war against Hamas in Gaza, has stoked fears of an inexorable slide towards a pan-Middle Eastern war.The WTO also cited diverging monetary policies among major economies as another downside risk for the forecasts. This “could lead to financial volatility and shifts in capital flows as central banks bring down interest rates,” the report said, adding that this would make debt servicing more challenging for poorer countries.”There is also some limited upside potential to the forecast if interest rate cuts in advanced economies stimulate stronger than expected growth without reigniting inflation,” the WTO said. More

Eggs are displayed at a grocery store on September 25, 2024 in Greenbrae, California. 
Justin Sullivan | Getty Images

The pace of price increases over the past year took was higher than forecast in September while jobless claims posted an unexpected jump, the Labor Department reported Thursday.
The consumer price index, a broad gauge measuring the costs of goods and services across the U.S. economy, increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both readings were 0.1 percentage point above the Dow Jones consensus.

The annual inflation rate was 0.1 percentage point lower than August and is the lowest since February 2021.
Excluding food and energy, core prices increased 0.3% on the month, putting the annual rate at 3.3%. Both core readings also were 0.1 percentage point above forecast.

Much of the inflation increase — more than three-quarter of the move higher — came from a 0.4% jump in food prices and a 0.2% gain in shelter costs, the Bureau of Labor Statistics said in the release. That offset a 1.9% fall in energy prices.
Other items contributing to the gain included a 0.3% increase in used vehicle costs and a 0.2% rise in new vehicles. Medical care services were up 0.7% and apparel prices surged 1.1%.
Stock market futures moved lower following the report while Treasury yields were mixed.

The release comes as the Federal Reserve has begun to lower benchmark interest rates. After a half percentage point reduction in September, the central bank is expected to continue cutting, though the pace and degree remain in question.

Fed officials have become more confident that inflation is easing back towards their 2% goal while expressing some concern over the state of the labor market.
While the CPI is not the Fed’s official inflation barometer, it is part of the dashboard central bank policymakers use when making decisions. Though the inflation reading was higher than expected, traders in futures markets increased their bets that the Fed would lower rates by another quarter percentage point at their Nov. 6-7 policy meeting, to about 86%, according to the CME Group’s FedWatch gauge.
In recent days, policymakers have said they see rising risks in the labor market, and another data point Thursday helped buttress that point.
Initial filings for unemployment benefits took an unexpected turn higher, hitting 258,000 for the week ending Oct. 5. That was the highest total since Aug. 5, 2023, a gain of 33,000 from the previous week and well above the forecast for 230,000.
Continuing claims, which run a week behind, rose to 1.861 million, an increase of 42,000.
On the inflation side, rising prices across a variety of food categories showed that inflation is proving sticky.
Egg prices leaped 8.4% higher, putting the 12-month unadjusted gain at 39.6%. Butter was up 2.8% on the month and 7.8% from a year ago.
However, shelter costs, which have held higher than Fed officials anticipated this year, were up 4.9% year-over-year, a step down that could indicate an easing of broader price pressures ahead. The category makes up more than one-third of the total weighting in calculating the CPI. More

JERUSALEM (Reuters) – Bank of Israel policymakers will be watching inflation data and whether the 2025 budget plans to continue a “very expansionary” fiscal policy to help determine if rate hikes are needed to curb rising price pressures, the deputy governor said on Thursday.With inflation rising rapidly in recent months, the central bank on Wednesday held its benchmark interest rate at 4.5% for a sixth straight meeting after a 25 basis point reduction on Jan. 1. This is in contrast with easing inflation and interest rates in the United States and in Europe.Israeli inflation accelerated to 3.6% in August from 3.2% in July – mainly as a result of supply disruptions stemming from Israel’s war with Hamas in Gaza – to move farther beyond the government’s annual 1%-3% target range.”We’ll have until the next interest rate meeting two CPI readings, which we’ll be looking at carefully,” Bank of Israel Deputy Governor Andrew Abir said in an interview with Reuters.The next rates decision is on Nov. 25. Abir noted the cabinet on Oct. 31 is slated to vote on the 2025 state budget draft. “So there’s plenty of important data points coming up, plus how the war is developing,” Abir said. “Monetary policy is restrictive, and the question is whether it’s restrictive enough in order to get the inflation back into the target and to maintain the stability of the market. “It’s not something that we decided upon, but it’s certainly something that has to be debated,” he added. “The facts have changed since we last spoke about it (after the prior rates decision in late August), and the inflationary environment is much more challenging.”‘WE WILL BE VERY CAREFUL’ While much of the inflation spike is due to supply disruptions in tourism, construction and agriculture, Abir said demand is holding up and consumer spending has grown during the war, which began Oct. 7, 2023.He said conducting monetary policy is complicated since it is not just a case of both supply and demand contracting. “But we have supply being constrained at the same time that the demand is pretty strong,” Abir said.”We clearly don’t want to create a situation where demand collapses, so we will be very careful about what we do, but we still need to balance the supply and demand,” he said.A lot depends on fiscal policy, which he said was “very expansionary” – and inflationary – due to a sharp rise in state spending to fund the war. He added that a very expansionary fiscal policy had implications for monetary policy.Despite scant growth of just 0.5% expected in 2024, Abir doubts Israel is headed for stagflation – when growth is slow and inflation high – since unemployment is low and wages are growing well and fuelling demand.”We don’t want to over-react,” he said. “But on the other hand, we need to see that inflation … is in the process of coming back into the target” which is not expected until the latter part of 2025.”Whether we need further monetary constraints to achieve that still remains to be seen,” Abir said. “I don’t think any central bank wants to raise interest rates, but in the end, our job is to keep inflation under control, because of the implications of losing control of inflation on sustainable growth over the medium term.”      More

The report showed the consumer price index rose 2.4% in September from a year earlier, more than the 2.3% economists had expected but down from the prior month reading of 2.5%. After the report, traders moved to exit bets that the Fed could pause at next month’s meeting, and now see quarter-point rate cuts at each of the next several meetings. More