Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A top Federal Reserve official has said the US central bank is within “striking distance” of returning inflation to its 2 per cent goal, but cautioned rate-setters would “take our time” before cutting borrowing cuts from their current 23-year high. Christopher Waller, a governor on the Fed’s board, said at an online event hosted by Washington’s Brookings Institution on Tuesday that recent economic and jobs data showed the central bank’s effort to contain price pressures was bearing fruit.“Based on economic activity and the cooling of the labour market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2 per cent PCE inflation,” he said, referring to the personal consumption expenditures index. Waller also said job openings may have declined to a point where any further downturn in the labour market could trigger a sharp rise in unemployment. “From now on, the setting of policy needs to proceed with more caution to avoid over-tightening,” he said. But Waller also cautioned against a rush to slash interest rates, saying the bank must “take our time to make sure we do this right”. The cautionary tone despite Waller’s confidence on inflation points to the Fed’s unwillingness to commit to rate cuts as quickly as March, as some market participants expect.Waller’s remarks are being closely watched after a speech he made in November suggested he was increasingly sure the Fed now had the worst bout of inflation for a generation under control, enabling it to take a more dovish stance on interest rates. The bank’s more dovish shift emerged again at the Fed’s December meeting, which revealed policymakers planned to cut rates by as much as 0.75 percentage points in 2024, compared with current level of 5.25 per cent to 5.5 per cent.Those 2024 projections have boosted markets’ hopes of a cut as soon as March — although Fed officials have repeatedly rowed back against the idea that it could cut as soon as that. On the timing of the first cut, Waller said that while the Fed was “close” to achieving its 2 per cent goal, he would “need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably towards our inflation goal”. It was “hard to believe” that waiting an additional six weeks — the time between rate-setters’ meetings — to cut rates “would have a huge impact on the state of the economy”, Waller added. He also signalled expectations by some investors that the central bank could make as many as six cuts next year were too aggressive, saying there was “no reason to move as quickly or cut as rapidly as in the past”. Market pricing of a March cut was barely changed on Monday, at about a 70 per cent probability. Treasury yields extended gains from earlier in the session following Waller’s remarks on Tuesday. The 10-year yield was up 0.09 percentage points on the day at 4.04 per cent, while the two-year yield was 0.09 percentage points higher at 4.23 per cent. Bond yields rise as their prices fall.The reaction in stock markets was muted, with Wall Street’s S&P 500 trading 0.3 per cent lower. Waller also played down data last week which showed inflation as measured by the consumer price index, which is not policymakers’ preferred gauge, had ticked up from 3.1 per cent in November to 3.4 per cent in December, suggesting revisions could show the measure overstated the rise in price pressures. “Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains,” he said. “In mid-February, we will get the January CPI report and revisions for 2023, potentially changing the picture on inflation. My hope is that the revisions confirm the progress we have seen, but good policy is based on data, not hope.” Additional reporting Harriet Clarfelt in New York and Jennifer Hughes in Chicago More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Big investors are turning to riskier assets such as emerging markets and high-growth companies as their confidence increases that global interest rates are set to tumble without a sharp economic downturn, according to a closely watched survey.Only 17 per cent of the fund managers polled by Bank of America expect a so-called hard landing — which typically implies a recession — for global growth, the smallest proportion in 19 months. The growing faith in a “soft landing” for the global economy, in which central banks succeed in bringing inflation under control without sparking a downturn, comes after large economies — most notably the US — outperformed expectations despite the effects of high interest rates.The overwhelming majority of investors now believe borrowing costs are set to fall, with 91 per cent of respondents saying short-term interest rates will be lower in 12 months’ time.“Investors have never been as bullish on short-term rates as in January 2024,” BofA analysts wrote, adding that “growth optimism over the past month has coincided with rising global equity prices”.The combination of falling rates and a benign economic outlook has led fund managers surveyed by BofA in January, who collectively manage $669bn in assets, to favour riskier assets.A quarter of fund managers said stocks with long-term growth prospects such as biotech and renewable energy companies would be the biggest beneficiaries of US Federal Reserve rate cuts, making them the most popular choice. Value stocks, such as banks and real estate companies, were chosen by just under a fifth of investors, while a similar proportion picked emerging market equities.Long-term US government debt dwindled in popularity compared with December’s survey following a big rally over the past month.Managers retained their overweight position in US equities, while remaining underweight UK and eurozone stocks. Small-cap stocks are expected to outperform large caps for the first time since June 2021.Meanwhile global investors’ pessimism on China’s economy deepened, with net growth expectations turning negative and dropping to levels last seen in May 2022. Short positions in Chinese equities were seen as the second most “crowded” trade after long positions in the Magnificent Seven megacap tech stocks that dominate US equity markets.Investors also said they were most concerned about the US shadow banking sector as the source of a systemic crisis, replacing a Chinese property crash as the number one risk, echoing recent warnings from regulators.Geopolitics again took the top spot as the biggest tail risk to markets, amid concerns about an escalation to conflict in the Middle East, US-China tensions and volatility in a year in which half the world’s population will vote. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.European Central Bank officials are pushing back against investors’ bets that they will start cutting interest rates this spring, despite consumers’ increasing belief that the worst of eurozone inflation is over.Consumer expectations for eurozone inflation have “declined noticeably” to their lowest level since shortly after Russia’s full-scale invasion of Ukraine triggered a surge in prices almost two years ago, according to an ECB survey published on Tuesday.Economists said the change in expectations would be welcomed by the ECB as its officials looked for signs of whether price pressures would ease sufficiently to bring them down to its 2 per cent inflation target in the next year.The data seemed to strengthen investor bets that the ECB would start cutting rates in April. The euro fell 0.6 per cent against the dollar and Germany’s 10-year bond yield dipped slightly on Tuesday after the survey results were published.However, several members of the ECB governing council spoke out to question whether markets were being too optimistic ahead of their meeting next week to discuss monetary policy. “It’s too early to declare victory,” French central bank governor François Villeroy de Galhau told the World Economic Forum in Davos on Tuesday. While the ECB’s next move was likely to be a rate cut, the timing was unclear, he said, adding: “The job is not done yet.”Finnish central bank board member Tuomas Välimäki said the ECB should be careful not to jump the gun by cutting rates too early only for inflation to pick up again. “It’s better to wait a bit longer than doing a premature exit from this restrictive level, and then perhaps having to do a reversal,” he told Reuters.German central bank head Joachim Nagel went further, saying: “The markets are from time to time, they are optimistic — maybe from time to time they are over-optimistic. It’s their view. I have a different view.” Speaking to Bloomberg TV in Davos on Monday, he added: “Maybe we can wait for the summer break or whatever [to decide whether to cut rates].” Swap markets have priced in 1.5 percentage points of cuts in the ECB’s deposit rate next year from its current record level of 4 per cent, starting as early as April. Yet IMF deputy head Gita Gopinath said at a Davos event on Tuesday that markets were being “a bit premature” as rate cuts were “more likely in the second half of this year”.Eurozone inflation has fallen from a peak of 10.6 per cent in October 2022 towards the ECB target over the past year, but it picked up again from 2.4 per cent in November to 2.9 per cent in December because of the phasing- out of government energy subsidies.The ECB said its survey of consumers in November found their median expectation for inflation in the single currency bloc in one year’s time dropped from 4 per cent to 3.2 per cent, while their outlook for inflation in three years fell from 2.5 per cent to 2.2 per cent.Tomasz Wieladek, an economist at investor T Rowe Price, said the decline was unexpected because Israel’s conflict with Hamas started in November and could have raised fears that energy prices could rise again. “Normally, Middle East conflict should have led to a significant rise in medium-term expectations,” he said. “The fact that this didn’t happen is an indicator of very strong disinflationary forces shaping consumers’ inflation expectations.”Speculation that the ECB would start cutting rates in the first half of this year helped to brighten investor sentiment about the outlook for the struggling German economy, according to a survey by the ZEW Institute.ZEW president Joachim Wambach said more than half of the investors it surveyed expected the ECB to cut rates in the first six months of this year. That raised its index of expectations for conditions in six months’ time in the German economy from 12.8 to 15.2, its highest level for almost a year.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Clear evidence of a slowdown in UK wage growth is one of the crucial changes that Bank of England policymakers want to see before they can conclude that inflation is sustainably on the way down and start cutting interest rates. Tuesday’s official data, showing a sharp decline in the pace of earnings growth in the three months to November, raised hopes among some economists that pay pressures had already eased enough for inflation to fall below the BoE’s 2 per cent target within months.Such a decline could pave the way for a loosening of monetary policy, with investors betting that the BoE will starting lowering its benchmark rate from a 15-year high of 5.25 per cent from May.But others said the true state of the labour market was still clouded in uncertainty, while the Office for National Statistics continued to grapple with problems that have prevented it publishing many of the figures on which policymakers usually rely.On the face of it, the data suggests the central bank now stands a much better chance of steering the economy into the kind of “soft landing” it would like to achieve: cooling the labour market and returning inflation, which stood at 3.9 per cent in November, to target without a painful jump in unemployment.The ONS said vacancies, while still above pre-Covid levels, fell for the 19th month in succession in December, while the number of payrolled employees remained broadly stable. Annual growth in earnings — both including and excluding bonuses — remains high by historic standards, at 6.5 per cent and 6.6 per cent, respectively. But it is well below the peaks reached in the summer of 2023. Monthly figures, while volatile, show average earnings in the private sector have barely risen since August.“This means that annual pay growth will continue to fall in early 2024 — and is no longer fuelling inflation,” said Hannah Slaughter, senior economist at the Resolution Foundation think-tank.Jack Meaning, economist at Barclays, said private sector wage growth was now below the rate consistent with keeping inflation on target at 2 per cent. This suggested that the BoE had “baked in too much caution” when it published forecasts in November that estimated private sector wage growth of 7.25 per cent for the final quarter of 2023, he added.But Chris Hare, senior economist at HSBC, said a “cloud of uncertainty” around labour market data made it hard to assess the extent of any slowdown in wage growth, or to tell what was driving it.The big issue is the ONS’s continued inability to publish its usual estimates of employment, unemployment and economic inactivity while it contends with a drop in the response rate to its labour market survey and reweights the results to take account of new population estimates. The agency, which last released full figures in September, had been due to resume publication this week. But it has delayed for another month to perform further checks for quality.In the meantime, it is publishing stop-gap estimates based on tax and benefits records. On Tuesday, these suggested unemployment had remained steady at 4.2 per cent since last summer — below the 4.5 per cent level the BoE now thinks is consistent with inflation remaining sustainably at target.But business surveys and recent trading updates from big recruitment companies suggest the jobs market may have softened more than this. Hays, Robert Walters and PageGroup have all reported weaker hiring conditions in the past week.James Smith, economist at ING bank, said that “part of the issue for policymakers is that we still don’t have a true grip on what’s happening to unemployment”. He added that the Monetary Policy Committee would want to see “more progress” on wages in both official data and alternative surveys “before kick starting an easing cycle”.The central bank has called attention to discrepancies between the official earnings figures and other survey-based measures of wage growth, which mean it is not placing too much weight on any single data source.Michael Saunders, a former MPC member now at the consultancy Oxford Economics, said the ONS data, recent company pay awards, and survey evidence all suggested pay growth was still too high for inflation to return sustainably to 2 per cent. “Lower inflation and rising unemployment may reduce pay growth further . . . but it’s far from guaranteed,” he said.Economists said there were other reasons why the BoE might want to wait until early summer before cutting interest rates.By then, it should have a clearer view of unemployment. It will also want to see how April’s planned uprating of the minimum wage, the state pension and working-age benefits affects overall pay growth and feeds through to consumer spending. It will also be able to assess the likely impact of any tax cuts announced in the Budget on March 6.“The MPC will need to see pay growth subside further before it seriously contemplates bringing interest rates down,” said Philip Shaw, economist at Investec.Saunders said that even if inflation fell rapidly in the near term, “the MPC’s focus will be mainly on whether conditions for a sustained return to 2 per cent inflation are in place”. “On this score, the evidence looks less reassuring,” he added. More

Just over a century ago, John Maynard Keynes lamented the dangers of being complacent about globalisation. In 1919, in his book The Economic Consequences of the Peace, Keynes noted that, before the recently ended first world war, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”He (economists assumed, then, that economic actors were male) could “adventure his wealth in the natural resources and new enterprises of any quarter of the world” and “secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality”. Moreover, this state of affairs was “normal, certain, and permanent, except in the direction of further improvement”.Thus “the projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion were little more than the amusements of his daily newspaper.” In plain English: people had taken globalisation so completely for granted that they rarely gave it much thought — and assumed that the free movement of people, money and objects would continue indefinitely. War had seemed like a relic of the past.Fast forward a century, and it is tempting to laugh or cry at this state of affairs. After all, during the 1914-18 conflict, such sunny complacency had been shattered by massive economic destruction, the closure of borders, disruptions in trade and a fractured capital market.Globalisation had gone into reverse. Further, the war was followed by the 1929 economic crash, depression and protectionism in the 1930s and, then, another world war. Although globalisation resumed in the middle of the 20th century, it was not until the century’s end that the world returned to the type of globalisation that Keynes observed — ie, a world where it seemed so normal to move goods, capital and ideas around that most observers assumed this would continue indefinitely, and deepen. The only big difference between 2013 and 1913 was that, in the modern era, no one expects to travel “without passport or other formality” across borders. Today, there are inevitably bureaucratic controls.The chilling question we face is whether we are about to see a replay of Keynes’s tale — namely, an era when globalisation suddenly goes into reverse, as geopolitical conflict rears its head again. So far, the answer is “not entirely”. For, while the political rhetoric in many countries has become lamentably populist, protectionist and nationalist, globalisation is far from dead.To appreciate this, look at an annual survey from the DHL shipping group and NYU Stern School of Business. This explores globalisation in terms of four measures: the movement of people; information; money; and trade. The latest reading, conducted in May 2023, shows that the flow of people is lower than a few years ago, primarily because travel has yet to recover from Covid-19.But exchanges of information continued to rise in 2022 (albeit at a slower pace than before), while cross-border money flows remained moderately strong and those of goods and services actually rose — leaving world trade 10 per cent higher in 2022 than in pre-pandemic 2019. As a result, the overall globalisation metric, as calculated by DHL and NYU Stern, is still rising slightly.An outdoor screen in Beijing shows a news programme about President Biden meeting President Xi in California in November to discuss economic co-operation More

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