Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK wage growth slowed in the three months to November, according to official data that suggests inflationary pressures had already eased by more than the Bank of England thought when it published its most recent forecasts for the economy in November.The annual pace of growth in average earnings, including bonuses, slowed to 6.5 per cent in the three-month period, the Office for National Statistics said on Tuesday. That was down from a summer peak of 8.5 per cent and compared with a pace of 7.2 per cent in the three months to October.Meanwhile annual growth in earnings excluding bonuses slowed to 6.6 per cent, in line with analysts’ expectations and compared with 7.3 per cent the previous month.The pound weakened after the figures were released and was down 0.72 per cent against the dollar by late morning at $1.2634, partly driven by a broader strengthening of the US currency.Chancellor Jeremy Hunt said it was “heartening” that the data meant wages had now risen faster than prices for five consecutive months.However, UK rate-setters are watching wage growth closely because they believe pay increases could keep inflation high, despite easing energy and food price rises. In November, inflation stood at 3.9 per cent. The BoE said in November that it expected annual private sector regular pay growth to fall to about 7.25 per cent in the fourth quarter of 2023, before declining “markedly” to roughly 5 per cent by the end of 2025.However, the central bank will probably want to see clearer and more sustained evidence of pay pressures easing before it feels confident that it can start cutting interest rates from their current level of 5.25 per cent.Ashley Webb, economist at the consultancy Capital Economics, said the “big drop in wage growth” suggested “domestic inflationary pressures are fading fast” but added that tightness in the jobs market would “probably mean that the BoE maintains its hawkish bias” at next month’s policy meeting.  Thomas Pugh, economist at audit firm RSM UK, said the sharp drop in wage growth could “set the stage for the first cut in interest rates to come as early as May” since there were now “clear signs that the economy is on the edge of recession, inflation is falling faster than expected” and also “evidence that the labour market is easing”.Ben Broadbent, BoE deputy governor, said in December that because much of the official labour market data usually scrutinised by policymakers was unavailable, the bank’s Monetary Policy Committee would “require a more protracted and clearer decline” before it could conclude things were “on a firmly downward trend”.Rate-setters are finding it hard to gauge how much the jobs market has weakened as higher interest rates weigh on economic activity, because the ONS has for several months been unable to publish a full set of data as it struggles to overcome problems with the labour market survey that underpins it. For now, the agency is publishing stop-gap figures based on tax and benefits records. It said on Tuesday that these alternative measures suggested unemployment had remained steady at 4.2 per cent on the quarter, while employment rose by 0.1 percentage point to 75.8 per cent.An alternative measure of employment showed that the number of payrolled employees fell slightly in December, after rising slightly in upwardly revised figures for November.The ONS also said the number of vacant jobs in the economy had continued falling in the three months to December — extending the longest-running decline on record — but remained above pre-Covid levels.The agency’s efforts to begin publishing more comprehensive data are running behind schedule. It said last week that it needed more time to run quality checks and would delay publishing fuller figures until next month. It was also vague about the timetable for moving to the new “transformed” labour force survey that is meant to replace the faulty one, saying it would share “indicative analysis” ahead of the transition in the spring.   “We will likely have to wait a few more months before we can be confident in labour market dynamics. This could be problematic for the MPC, which may ultimately be forced to initiate the cutting cycle without a clear read on official labour market data,” economists at Barclays wrote this week.Additional reporting by Mary McDougallBonus 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

NEW YORK (Reuters) – Cracks are forming in the market’s bullish consensus for bonds, as resurfacing fiscal concerns duel with expectations that cooling inflation will push the Federal Reserve to cut interest rates in coming months. Bullish investors believe the explosive rally bonds experienced in late 2023 is likely to continue into this year, if the Fed loosens monetary policy as expected. Futures tied to the Fed’s main policy rate on Friday showed investors pricing in more than 150 basis points of cuts – twice the amount policymakers projected last month.Not so fast, say the bears. While expectations for Fed easing may be driving bond prices now, some believe U.S. Treasury issuance, expected to nearly double to $2 trillion in 2024, could be a counterweight. Yields – which move inversely to bond prices – would have to rise from current levels to entice demand for the flood of new debt, they say. Such concerns helped drive Treasury prices to 16-year lows when they intensified in October.So far, Treasuries have seen a nascent early year selloff, with yields on the benchmark 10-year Treasury up 16 basis points from their December lows. Net bearish bets on some long-term Treasury maturities in the futures market have surged to their highest level since October, data from the Commodity Futures Trading Commission showed.”There’s really an outrageous amount of U.S. Treasury supply coming from the lack of fiscal discipline in this country, and we don’t necessarily see who the buyers are,” said Chris Diaz, portfolio manager and co-head of fixed income at Brown Advisory.That is “going to be a real headwind for the long-end of the market to continue to rally,” he said, as longer-dated maturities are more vulnerable to fiscal concerns.In a survey of investors by BofA Global Research, 23% said a bet on lower Treasury prices was their “highest conviction” trade for 2024, while 21% said the same for bets on higher Treasury prices. This was a “moderate reversal” of earlier bullish calls on bonds, the bank’s analysts wrote on Friday. Worries over U.S. debt sustainability heated up last year, when a credit rating downgrade by Fitch and higher Treasury issuance plans last summer fueled a bond selloff that saw the 10-year yield top 5%, its highest level since 2007. The slide in bonds also sharpened investor focus on the measure of term premiums – the additional compensation bond holders demand for the risk of holding long term debt – which turned positive in September for the first time in two years. Mounting expectations of a dovish Fed pivot saw bond prices reverse in the final months of 2023. But some investors believe bonds may have already factored in future declines in interest rates, making them vulnerable if fiscal concerns return.”As we get into 2024, the total level of Treasury issuance is going to be very critical, whether there’s buyers for that paper,” said Tony Roth, chief investment officer at Wilmington Trust. Signs that inflation is stickier-than-expected could complicate the picture, Roth said, as inflation erodes the value of future bond payouts, making so-called real yields less attractive.FED TO THE RESCUE?Some of these worries could be offset by the return of the Federal Reserve as a buyer in the Treasuries market, potentially helping contain rising long-term yields.Since June 2022, the Fed has reduced its balance sheet by over $1 trillion through quantitative tightening – a reversal of the massive central bank bond purchases undertaken to support markets as the coronavirus hit in 2020. But some Fed officials recently said the central bank should start considering slowing down and ending the shrinkage of its bond holdings.JPMorgan analysts said last week that an earlier-than-anticipated end of quantitative tightening could improve supply-demand balance in the Treasury market as fewer government bonds would be sold to the private sector.The end of the balance sheet runoff “could lead to duration rallying and a little more support for 10- and 30-year (Treasuries),” said Pramod Atluri, fixed income portfolio manager at Capital Group.A return of the Fed in the market could also, over time, change the composition of Treasury issuance, with longer-term debt securities gaining a larger share after increases in their sales were contained in recent months.”If the Fed goes back to buying bonds, maybe the Treasury can go back to issuing in more normal fashion,” said John Luke Tyner, fixed income analyst and portfolio manager at Aptus Capital Advisors. “The Fed’s balance sheet can soak up some of those bonds.” More

As the head of China’s biggest jewellery retailer, Kent Wong has his finger on the pulse of consumers in the world’s second-largest economy — and they are wary.Wong, managing director of Chow Tai Fook, said the chain’s customers have been pivoting from diamonds and other gemstones to gold, a store of wealth in tough times. “In the short term, people will continue to be more cautious no matter [whether it’s] consumption or investment,” he said, adding though that he expected consumer confidence to return in a year or two.Wong’s subdued outlook for 2024, shared by many analysts, comes as policymakers in Beijing brace for a decisive year in their battle to restore the economy’s animal spirits and escape the threat of a debt-deflation spiral.In a speech at the World Economic Forum in Davos, Premier Li Qiang said on Tuesday that China’s gross domestic product grew an “estimated” 5.2 per cent last year. While that would slightly exceed the official target of 5 per cent, economists said 2024 was likely to be more challenging, with a Reuters poll of analysts predicting growth will slow to 4.6 per cent.A property downturn is well into its third year, exports are weak, wary investors are steering clear of China’s financial markets and policymakers are fighting what Morgan Stanley analysts say is the country’s longest run of deflationary pressure since the 1997-98 Asian financial crisis.“I think it’s a critical year for the Chinese economy in the sense that deflation could be entering a vicious cycle,” said Robin Xing, chief China economist at Morgan Stanley.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Xing said companies had started cutting debt and refraining from capital expenditure and hiring, while the job market was tough and salary expectations were deteriorating. “To break that cycle, we need to have some very meaningful policy efforts,” he said.Analysts expect the annual meeting of the National People’s Congress, the rubber-stamp parliament, to again set an economic growth target of about 5 per cent when it meets in early March.While robust compared with developed economies, last year’s target was China’s lowest in decades. After harsh lockdowns battered the economy in 2022, it should have been easy to achieve, analysts said, but the government was forced to step up fiscal support after growth wavered in the middle of the year.The base effect of comparison with 2022 probably flattered China’s GDP growth last year by about 2 percentage points, said Hui Shan, chief China economist at Goldman Sachs.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.As with last year, the property sector is the biggest uncertainty facing the economy in 2024, analysts said. The government has announced multiple initiatives, recently revealing that the central bank in December channelled Rmb350bn ($49bn) into banks through a facility known as “pledged supplementary lending”.It did not explain what the loans were for, but analysts expect they might be earmarked for the “Three Major Projects” — a stimulus programme to help the housing construction industry.Chris Beddor, deputy director of China research at Gavekal, said this scheme could be enough to put a floor under moribund construction activity, but property sales would be a bigger unknown. In December, China’s property sales were still only 60 per cent of pre-pandemic 2019 levels in 30 major cities.Beddor said if the property crisis deepened further, authorities might be forced to launch a “bazooka” stimulus package that would surprise the market on the upside. But he added that his base case was for stabilisation rather than a rebound. “There will be some pretty modest pick-up this year, in other words at least things just stop getting worse,” he said.Beyond the property sector, economists argued that a much broader stimulus package coupled with reforms was urgently needed to reflate the economy.“Deflation is tremendously worrisome for a country like China that is accumulating public debt faster than Japan ever did,” said Alicia García-Herrero, chief economist for the Asia-Pacific at Natixis. During times of deflation, prices and wages fall, but the value of debt does not, raising the burden of repayments.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The central government needs to provide a fiscal package that targets consumption rather than more investment in manufacturing, said Morgan Stanley’s Xing. This could benefit China’s hundreds of millions of migrant workers, for instance, by offering them more access to social benefits, reducing their incentive to hoard savings rather than spend.“We need a decisive shift to fiscal easing,” Xing said. “Of course the size matters and the speed matters. If policy continues to undershoot, eventually the policy ask to break this debt-deflation trap could be even bigger.”Economists argued that exports, which shrank in dollar terms last year, could not be relied on to rescue the economy, given soft global demand. China’s stimulus policies, which prioritise expansion of state bank lending to manufacturers, have resulted in overcapacity and increasing friction with trading partners such as the EU.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Despite market calls for Beijing to ease policy and China’s own efforts to present an investor-friendly face, analysts said policymakers continued to send mixed signals.The People’s Bank of China left an important lending rate on hold on Monday despite market expectations of a cut. Last month, the government shocked investors by announcing tough draft restrictions on video games after previously offering reassurances that a tech crackdown had ended. The government tried to calm concerns by firing the official responsible for the draft rules, but analysts said the damage was done.All of this would make hitting a GDP growth target of 5 per cent this year ambitious, economists said. Shan at Goldman said the government would need to reduce the drag from the property sector, implement more expansive fiscal measures, and “get lucky on exports”.“If the government really wants to, one way or another it will figure out a way to get to 5 per cent. But it’s going to be a difficult task,” Shan said.Additional reporting by Andy Lin in Hong KongVideo: Has China’s Belt and Road Initiative been a success? More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyDespite a sharp decline in US inflation over the past year, the monthly US data release on movement in prices continues to garner significant attention, extending beyond economists and market participants. It shapes perspectives on economic growth prospects, central bank policy and market performance. It also has social and political consequences.And now the data has sent a warning shot. Last week’s release showed that on an annual basis, headline inflation increased from 3.1 per cent to 3.4 per cent, surpassing the consensus forecast of 3.2 per cent. After that rate had hit a peak of 9 per cent in 2022, the US economy has led to a generalised fall in consumer price inflation across the advanced world. Surprisingly, this impressive disinflation has not impeded growth or employment. The US economy has continued to outperform internationally, growing almost 5 per cent in the third quarter of 2023 and, according to consensus forecasts, above 2 per cent in the final quarter of the year. Meanwhile, unemployment has remained at a low 3.7 per cent, with impressive monthly job creation and low weekly jobless claims.This unique combination anchors consensus expectations of a very soft landing for the economy. It is the primary reason why markets are pricing in rate cuts (starting in March) double the 0.75 percentage points signalled by Federal Reserve officials, and analysts forecast that markets will build on last year’s impressive rally. It has offered hope to the Biden administration that voters will put behind them the unanticipated inflation shock and, instead, focus more on the recent real wage gains, robust job creation and legislative measures supporting future growth and productivity.However, caution was already warranted in the “last mile” of the inflation battle before last Thursday’s data release. There are even more reasons now given the numbers and the most recent geopolitical developments.Going into the release, reaching the Fed’s 2 per cent inflation target quickly required accelerated disinflation in the services sector to accompany the persistent slowing of price growth (and in some cases outright deflation) for goods. The task was to be made more difficult due to less favourable year-on-year comparisons, so-called base effects.Thursday’s data highlighted the degree of difficulty. While core inflation edged lower from 4.0 per cent to 3.9 per cent in the month, this was higher than consensus market forecasts of 3.8 per cent. Meanwhile, the data is yet to reflect cost pressures already in the pipeline. The current disruption to Red Sea navigation will impact inflation directly, by increasing input and final goods prices, and indirectly, by delaying the availability of goods. The economy will also need to absorb higher labour costs.The implications for growth depend largely on whether the Fed is willing to tolerate a longer period of inflation above its 2 per cent target. There is little risk to economic and financial stability in running an implicit inflation target closer to 3 per cent for now. Indeed, it is warranted, given the current global period of less flexible aggregate supply — a multiyear environment that is opposite to the world of insufficient aggregate demand that dominated the decade after the 2008 financial crisis.Politically, the Biden administration cannot simply rely on lower inflation to alleviate voters’ concerns about its economic management. It needs to communicate more effectively the exceptionalism of US economic performance relative to other advanced economies, as well as translate into more accessible language how its policy approach promotes more inclusive and sustainable growth in the future.Finally, financial markets need to recognise that the Fed’s guidance of 0.75 percentage points of rate cuts starting later in the year is more reasonable than the significantly more dovish current market pricing. In terms of strategy for investors, this translates into a greater focus on individual name selection in investments (as opposed to passive index investing), sound structuring and solid balance sheets.Returning quickly to 2 per cent was never going to be easy for the US economy, especially considering the Fed’s initial mistakes of analysis and policy reaction. The recent data serves as a surprisingly early warning of the long and winding road ahead in the last mile of the inflation battle. What would make things a lot more reassuring this year — for the economy, the markets and the Biden administration — is a set of domestic and international measures that promote the supply flexibility that enables the “immaculate inflation” that many have been hoping for.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK motorists are being quoted a new record sum of almost £1,000 for the average annual insurance policy, after a dramatic acceleration in prices that has prompted concerns over extra pressures on household budgets. Motorists were quoted an average of £995 for annual policies in the final quarter of 2023, an increase of 58 per cent on the year before, comparison site Confused.com and insurance broker Willis Towers Watson said on Tuesday. Confused.com, on whose platform the index of quotes is based, said it was a “bleak time for drivers and their car insurance”. People just eligible to drive, at 17 years of age, received quotes of £2,877 on the average policy, according to the data. That represented a 98 per cent year-on-year increase in price for those motorists, which insurers view as higher risk.Insurers lifted their premiums sharply last year in response to a surge in the cost of their claims, driven by big increases in the price of car parts, second-hand cars and labour. That cost inflation pushed the sector to its worst underwriting loss in a decade in 2022, triggering profit warnings and share price falls. But conditions in the sector have stabilised over the past year as insurers started to push through big price rises to counteract the claims costs. Prices are set to increase this year, according to industry forecasts, even as politicians and consumer groups voice concern about the impact of rising costs on the millions of households reliant on a car for work and family life. “It’s important that insurers remember that the mandatory nature of the cover means that pricing [here] will always be subject to much greater scrutiny than other lines of business,” said Duncan Minty, an independent consultant on ethics in insurance.Citizens Advice has previously urged the government and insurers to consider “bold ideas” that can take pressure off cash-strapped households for a financial product it deems an “everyday necessity”.Tuesday’s index showed an 8 per cent increase in the cost of the average policy between the third and fourth quarters of 2023, meaning the rate of growth decelerated compared with earlier in the year. Drivers in inner London, the most expensive part of the UK to insure, paid £1,607 on average.Louise Thomas, motoring expert at Confused.com, said that while data suggested “increases could be slowing for now”, drivers should consider adding antitheft features, such as wheel locks, to their car, or reviewing how many miles they drive, to bring costs down. The index reflects prices that are quoted to customers, who might go on to find cheaper cover elsewhere. By contrast, the average annual policy cost £561 in the third quarter of 2023, a yearly rise of 29 per cent, according to the most recent edition of the Association of British Insurers’ own index, which is based on premiums paid by customers.The Confused.com data set runs back to 2006, but its methodology was amended a few years ago, with historic figures restated to be comparable. More

Stay informed with free updatesSimply sign up to the More

(Reuters) – A look at the day ahead in Asian markets.Another day, another leap to a fresh 34-year peak. Is there anything that will stop the Japanese equity juggernaut?There isn’t much on the Asian economic and policy calendar to give markets a steer on Tuesday – volume will pick up as U.S. markets reopen after the Monday holiday – but Japanese producer price figures could give Japan bulls pause for thought.Or the green light for another whoosh higher.The consensus view in a Reuters poll of economists suggests the year-on-year disinflation in the country’s goods-producing sector seen over the last year flipped into outright deflation in December.The annual rate of goods inflation is expected to fall to -0.3% in December from 0.3% in November, sliding below zero for the first time since February 2021. A year ago in December 2022, prices were rising at a 10.2% annual rate.These figures will be closely scrutinized. Easing producer price pressures will likely keep consumer inflation on its downward path toward the Bank of Japan’s 2% target, relieving the pressure on the central bank to “normalize” policy.The Japanese bond market reflects the extent to which investors are rethinking the BOJ policy path, with the two-year yield on Monday falling below zero for the first time since July.The Nikkei 225 index registered its sixth consecutive rise on Monday through 36,000 points. The cumulative gain in those six sessions is almost 10%, so perhaps a hotter-than-expected producer price report will be the catalyst for some profit-taking.On a longer-term horizon, the market may be ripe for a correction too. Otavio Costa at Crescat Capital notes that Japanese stock market cap is around 150% of GDP, which he reckons makes it one of the most overvalued in the world.In China, meanwhile, the central bank on Monday surprised markets by keeping its medium-term policy rate steady, dashing hopes for a cut to shore up the country’s uneven post-pandemic recovery.The People’s Bank of China disappointed market expectations for a cut as it held the rate on almost 1 trillion yuan worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50%. The MLF was last cut in August 2023, from 2.65%.The PBOC is in a tight spot. The economy needs stimulus but cutting rates will probably push the already weak yuan even lower, which could risk domestic capital flight and deter investment from overseas.The onshore yuan weakened anyway on Monday, sliding to a one-month low of 7.1813 per dollar, an indication of just how delicate the PBOC’s task is.Here are key developments that could provide more direction to markets on Tuesday:- Japan corporate goods prices (December)- Australia consumer sentiment (January)- South Korea import, export prices (December) (By Jamie McGeever; Editing by Lisa Shumaker) More

DAVOS, Switzerland (Reuters) – Bitcoin’s price could breach $170,000 next year, driven by demand for newly listed exchange traded-funds and April’s halving event, hedge fund SkyBridge’s Anthony Scaramucci said in an interview on Monday.”If bitcoin’s at $45,000 on the halving, where it roughly is right now, it’ll be $170,000 by mid- to late 2025,” the SkyBridge founder and managing partner told the Reuters Global Markets Forum in the Swiss ski resort of Davos.The halving is a technical event that reduces the rate at which new bitcoin are released into circulation.”Wherever the price is on the day of the halving in April, multiply it by four, and it’ll reach that price in the next 18 months,” Scaramucci said ahead of the World Economic Forum’s annual meeting.Bitcoin’s price jumped above $49,000 last week as spot bitcoin ETFs received approval to trade on U.S. exchanges, but has since slipped back to around $42,000.Scaramucci ascribed this decline to investors rotating out of the Grayscale Bitcoin Trust into the new funds, adding that it will likely take another eight to 10 trading days to see the impact of the newly listed funds on prices.The landmark U.S. regulatory approval for spot bitcoin ETFs came after years of campaigning and applications from numerous firms, including SkyBridge, which saw an application rejected in 2022.Skybridge also plans to launch a new fund that combines investments in crypto tokens and digital asset-focused venture capital, Scaramucci said, adding that he also expects a strong performance in structured credit.(Join GMF, a chat room hosted on LSEG Messenger: ) More