Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is managing partner of Federal Financial AnalyticsOne big market event for early 2024 will come when the US Federal Reserve makes a decision on whether to close its latest emergency liquidity facility on March 11 as a senior Fed official recently signalled it was likely to do so. Called the Bank Term Funding Program, the facility’s name conveys the usual blandness with which the Fed likes to brand the trillions it throws into the financial system. But the BTFP is anything but dull. Without it, all but the biggest US banks could find it even tougher to raise profitability this year; with it, they’ll find it still harder to lend into what the Fed, President Joe Biden, and pretty much everyone else hope will be a robust recovery.The BTFP is just the latest of the many rescue facilities the Fed brought forth after recent crises, marshalling the new programme as Silicon Valley Bank and Signature bank failed and dozens of other regional banks experienced sudden deposit outflows for which many were woefully unprepared. Facing systemic-scale runs, the Fed, Treasury and FDIC backed uninsured deposits at the failed banks and, by inference, any to follow. This systemic-risk designation backing uninsured deposits was designed to comfort depositors, but even a bit of a run might still have been fatal for any bank with large unrealised losses in its securities portfolio. The BTFP thus provides funds on very generous terms to any bank that needs to liquidate its securities but doesn’t dare do so because it would be suddenly undercapitalised. To prevent this double-whammy, plentiful BTFP funding comes cheap, with a bank’s borrowing capacity based on par — not mark-to-market — valuations of pledged government securities. This facility poses many policy challenges, not least understanding why the Fed and other banking agencies allowed so many banks to be so fragile under such a thoroughly predictable stress scenario. This will be debated for months, if not years, but a critical market question needs to be answered now: what happens to banks facing significant profit squeezes if the central bank shutters the BTFP as it seems set to do? And, what then befalls the recovery?Although it was created under the Fed’s “exigent and urgent” circumstances required for new support windows such as the BTFP, the funding programme is no longer a systemic-risk lifeline. Instead, it’s an arbitrage opportunity that gives banks the chance to sidestep the discount window, the lender-of-last-resort funding the Fed was created to provide when it was chartered in 1913. The Fed has recently pressed banks to ready themselves for discount-window use under stress regardless of whatever stigma it may still convey. But it is unlikely banks would broach this sensitive topic as long as the BTFP is open.That’s because the BTFP charges banks less for funding — 4.89 per cent as of January 10 — compared with the discount window’s 5.5 per cent. Banks that borrow from the BTFP and place funds right back at the Fed as reserves each earn a 0.51 percentage point spread on the round trip, a welcome source of risk-free margin at a time when depositors are demanding more, lots more. It’s no wonder that, as of January 3, the BTFP’s outstanding loans stood at a record $141.2bn, but all this bank money parked at the Fed is bank money out of the US economy. Will the Fed continue to indulge the banks after March 11? Michael Barr, the Fed’s vice-chair for banking supervision, has indicated it is unlikely, saying this week it “really was established as an emergency programme”. An extension would also require approval from the US Treasury.What then? The easy arbitrage profits will be cut, reducing capacity to lend. Many banks will still be sitting on unrealised losses on investment portfolios, a point of vulnerability in any renewed crisis.The Fed didn’t want to throw regional banks a profit lifeline — as Barr suggests, it meant the BTFP only as a short-term, systemic backstop to prevent a regional bank crisis with systemic and macroeconomic consequences.But if the Fed has to subsidise the profitability of banks, that seems both unnecessary and undesirable. As with so much of what the Fed has done in recent years, the BTFP had profound unintended consequences for market functioning. The Fed is right to want to close the window, but fingers will be slammed when it does. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Most conferences are so boring the back of the room is brighter than the stage due to the glare of mobile phones being scrolled. Younger colleagues wonder why such gatherings even exist. Until they have kids.But I have just returned home from a fabulous investor conference in Norway, although two speakers have me worried that my portfolio is wrong. One recommended almost exactly the same allocations — always a warning. The other foretold world war three.Russell Napier is a well-known economic historian and was a brilliant analyst back when I ran global funds. He reckons the only way countries can lower their absurd levels of debt is to deflate them.I half agree — though there are three other options, of course. Austerity is one. But we know how much voters like to suffer these days, particularly post-Covid when even returning to an office is beyond us. Default is another.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 surveyThe best debt killer is faster economic growth, requiring a leap in productivity. As I have written previously, this should not be discounted, especially given that wage rises have correlated with productivity gains in the past.Napier is probably right, though. Few governments have the guts to cut spending radically, while investors have dreamed of a productivity renaissance for decades. And besides, debts are simply too big. Total advanced economy non-financial debt to output is more than 250 per cent.So inflation could well be the solution, as part of a broader policy known as financial repression. Reducing debt requires inflation to exceed interest rates for a prolonged period, which in turn means state control of monetary policy and bank balance sheets.For repression to work, governments must also direct the country’s savings institutions — including asset owners and those managing your pension — to buy domestic assets, particularly their own bonds, to make sure yields remain below inflation.Sounds nuts, eh? But it’s what happened in many countries immediately after the second world war. In the UK, for example, the policy resulted in public sector debt to gross domestic product dropping from 340 to 50 per cent over the following 35 years.Great if you have a mortgage. It doesn’t grow while your wages do. Not bad also if you own equities. Tangible asset values, as well as dividends, rise with inflation. But man, you want to avoid bonds — coupons are fixed.Holders of UK government debt between 1945 and 1982 saw 90 per cent of their money repressed down the loo. Hence why Napier recommends having no fixed-income securities in your investment portfolio whatsoever.He does like short-term government bonds this year, however, as policy rates are most likely coming down — Thursday’s US inflation report notwithstanding. I agree, which is why I bought a 1-3-year Treasury ETF last year.And the rest of my portfolio is nicely positioned for a world he describes too. Japan, with total debt to GDP exceeding 400 per cent, will force its huge savings institutions to sell overseas stocks and bonds and buy domestic ones instead.Happy times for my equity ETF, which is up 13 per cent over the past 12 months. And it’s an added bonus that Japanese shares are still cheap. Indeed, the Topix index is not even a third higher than it was when I joined the Morgan Grenfell Japan Team out of college in 1995.Speaking of attractive valuations, that’s also why Napier is drawn to emerging market stocks — excluding China — as well as the UK. And the former has much lower total debt levels compared with developed nations.What is more, many Asian, Latin American and central European countries have superior debt servicing ratios to developed markets. We wrongly think the lot are basket cases.Far from it. With the exception of Brazil and China (26 per cent and 21 per cent respectively, according to BIS data) many emerging private debt to income ratios are mid-to-low teens — Indonesia and Mexico are single-digit.Compare that with a 20 per cent average for western countries. The notable exceptions include the UK and Japan, at around 15 per cent. Germany and Spain are lower still, which makes me ponder my lack of European equities.The US’s debt service ratio is fine too. But Napier recommends no American equities or bonds because its absolute borrowings are 250 per cent of GDP and foreign institutions would mostly be selling US assets if told to by their governments.The S&P 500 is also expensive relative to other markets and history — the reason I sold all my shares three months ago. That trade was early, but at least I knew that if the rally continued my other equity funds would follow — which they have.Trouble is, the other amazing presentation at the conference has me in two minds between 100 per cent US equities or swapping all my ETFs for weapons and ammo. Chris Miller is a geopolitics expert and winner of the 2022 FT Business Book of the Year Award for Chip Wars.He reckons the world is in an arms race to make advanced processing chips, mostly because the artificial intelligence they power is needed to win modern wars. The west is ahead, for now, with the US far out in front.China is struggling to catch up, but it is close to Taiwan, where TSMC currently makes 90 per cent of the chips every four-star general wants. If the status quo holds, US tech stocks are the winners, and I don’t have any.If it doesn’t, well, you won’t be reading this.The author is a former portfolio manager. Email: [email protected]; Twitter: @stuartkirk__ More

TOKYO (Reuters) – The dollar held steady against peer currencies on Friday, as investors weighed higher-than-expected U.S. consumer price inflation against market bets that the Federal Reserve will cut rates as soon as March.U.S. consumer prices increased in December as rents maintained their upward trend, edging 0.3% higher for the month and up an annual 3.4%, versus economists’ forecast in a Reuters poll for a 0.2% gain and 3.2% rise, respectively. Still, traders are pricing in a 73.2% chance for the first 25 basis point cut to come in March, with several more cuts to follow, according to the CME Group’s (NASDAQ:CME) FedWatch Tool.”Once again, we see a disparity between market pricing, data and the Fed’s narrative,” said Senior Market Analyst at City Index Matt Simpson.”The U.S. dollar didn’t behave in such a way to suggest USD bears are running scared,” he added.The dollar index was hovering around 102.26, down from Thursday’s high of 102.76 but well ahead of the five-month low of 100.61 hit in December when traders began to aggressively price in a raft of Fed cuts for this year. Cleveland Fed President Loretta Mester said on Thursday that the latest CPI figures means that it would likely be too soon for the central bank to cut its policy rate in March. At a separate event, Richmond Fed President Thomas Barkin said that the data did little to clarify the path of inflation. “What is important for the Federal Reserve is that the last mile in bringing inflation back to target appears to be more difficult,” wrote Commerzbank (ETR:CBKG) analysts in a note. “We therefore feel confirmed in our assessment that the Fed will not cut interest rates in March, as the market expects,” they added.The euro stuck around $1.0977 after gaining on the dollar the previous day, while sterling was last trading at $1.277, up 0.07% on the day. The Japanese yen was little changed at 145.27 per greenback but remained off Thursday’s low of 146.41, its lowest since Dec. 11. In cryptocurrencies, bitcoin was last up 0.25% at $46,270.00, having surged to a two-year high overnight after the U.S. Securities and Exchange Commission on Wednesday gave the green light to offer ETFs linked to bitcoin.Ether eased slightly to $2,607.40 after touching its highest since May 2022 at $2690.70 on Thursday. More

There are lingering concerns over real estate projects, although financial markets have been stable since builder Taeyoung’s Dec. 28 announcement to reschedule its debt, it said, after the minister’s meeting with chiefs of the central bank and regulatory agencies. The meeting was held after Taeyoung’s creditors agreed in the early morning to proceed with restructuring the builder’s debt. More

ORLANDO, Florida (Reuters) -The positive correlation between U.S. stocks and bonds is the strongest in years, if not decades, and whether it lasts hinges on just how the economy touches down this year.There is no clear agreement on how the “hard,” “soft” – or even “no” – landing scenarios are defined, so it is reasonable to assume that the path for stocks and bonds in the three eventualities is fuzzy too.That’s especially true of the “soft” and “no” landing scenarios. A “hard” recession, large-scale job losses, severe credit tightening and market volatility would almost certainly be an environment in which safe-haven U.S. Treasuries rise in value and Wall Street stocks head south.In this scenario, the correlation between stocks and bonds will quickly turn negative. But – right now – it’s also seen as the least likely of the three outcomes to play out. Many economists have scrapped their recession calls entirely, the economy is still creating jobs, growth is expected to chug along at around a 1.5%-2.0% pace this year, and corporate earnings growth forecasts are still tracking above 10%.Analysts at SMBC Nikko Securities note that the correlation between rolling 12-month returns on the S&P 500 index and Bloomberg Treasury index is the highest since 1997 and one of the strongest in more than half a century.This positive correlation has been a puzzle for a while. Some analysts essentially boil it down to the ebb and flow of global liquidity, particularly since 2008 – all boats are lifted by the whooshes, and beached by the drainings.But history shows this correlation often snaps back pretty quickly when it reaches extreme levels. Deutsche Bank’s Jim Reid also warns that the tight relationship between stocks and bonds is typically unstable and can flip very quickly.”So enjoy the easy trading correlations for now with the full awareness that it will likely change before too long!” Reid wrote on Wednesday.Of course, many economic and market rules of thumb that investors turned to for guidance have been upended by the Great Financial Crisis and the COVID-19 pandemic. Is this another one?’SOFTISH’ LANDING?It’s easy to envisage that correlation reversing quickly in the event of a hard landing. It’s less easy to envisage what the potential implications of the other two scenarios are.Some might argue that a soft landing will support equities and bonds – growth slows but the economy skirts recession, unemployment drifts higher but is nothing disastrous, and inflation comes back down to the Federal Reserve’s 2% target, which allows the U.S. central bank to cut interest rates. That’s the textbook definition of a soft landing – raising rates to cool an overheating economy or inflation without triggering a recession – but it has only been achieved once in the Fed’s history, in the mid-1990s.But it’s not the only definition. In a paper last year, former Fed Vice Chair Alan Blinder said simply avoiding recession is too narrow a parameter. He argued there have been five “softish” landings after the Fed’s last 11 hiking cycles going back to the 1960s.Stuart Kaiser, head of U.S. equity trading strategy at Citi, expects the long-term correlation between the S&P 500 and the 10-year Treasury bond to turn negative, which is what the relationship was for most of the 1997-2021 period.A soft landing can encompass a mild recession, an environment in which stocks are unlikely to perform well even if the contraction in growth and rise in unemployment is short-lived. Kaiser believes a “no landing” scenario would be positive for stocks because investors will view higher Fed interest rates and bond yields as a consequence of stronger growth more than high inflation or unanchored inflation expectations. However, it is also possible that a “no landing” scenario isn’t particularly supportive of stocks if investors are forced to price out most of the 150 basis points of Fed rate cuts currently baked into the 2024 futures curve.”There’s a lot of nuance in the “landing” terms, but for us strong growth is good for stocks unless it creates another inflation cycle,” Kaiser says. “And even in that case I’d expect stocks to initially respond positively until or unless inflation really accelerates higher,” he notes.(The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Paul Simao) More

The assembly line for South Fork begins miles away from the offshore site, at the State Pier in New London, Conn. The project — which is a joint venture between Eversource, a New England utility, and Orsted, a Danish company — has been a global operation. The biggest components, including turbine blades as long as […] More

KARACHI (Reuters) -The International Monetary Fund’s board has approved a roughly $700 million loan for Pakistan under a $3 billion bailout, the fund and the finance ministry said on Thursday. The IMF’s completion of its first review of the programme and the board’s decision brings the total disbursements under the Standby Arrangement (SBA) to about $1.9 billion, the fund said.”There are now tentative signs of activity picking-up and external pressures easing,” said in a statement Antoinette Sayeh, a deputy managing director at the fund.”Continued strong ownership (of the program) remains critical to ensure the current momentum continues and stabilization of Pakistan’s economy becomes entrenched.” The South Asian country is operating under a caretaker government and the IMF loan programme, approved in July, helped avert a sovereign debt default.Ahead of the bailout, Pakistan had to undertake a slew of measures demanded by the IMF, including revising its budget, a hike in its benchmark interest rate, and increases in electricity and natural gas prices.”Continuing with regularly-scheduled adjustments and pushing cost-side power sector reforms are vital to improving the sector’s viability and protecting fiscal sustainability,” Sayeh said.An IMF mission led by Pakistan mission chief Nathan Porter concluded its visit in November. It reviewed whether Pakistan was on track to meet benchmarks set under the SBA agreed in July and signed a staff level agreement. Under the bailout deal, the IMF also got Pakistan to raise $1.34 billion in new taxation to meet fiscal adjustments. The measures fuelled all-time high inflation of 38% year-on-year in May, which is still hovering above 30%.The fund said that despite elevated inflation, “with appropriately tight policy” it could fall to 18.5% by end-June. It added the exchange rate has been “broadly stable.””IMF funding along with recent inflows from multilateral lenders will further help the Pakistani rupee, that is fairly stable (over the) last few months,” said Mohammad Sohail, CEO of Topline Securities. He added that this new tranche would help Pakistan in getting rollovers from friendly countries like the United Arab Emirates, China and Saudi Arabia and ease external debt repayment pressure.Pakistan’s international bonds, which had already clocked healthy gains earlier on Thursday, soared after the announcement. The 2036 issue enjoyed the biggest gains, jumping 3.5 cents to trade at 62.59 cents in the dollar, Tradeweb data showed.Pakistan’s caretaker government, under interim Prime Minister Anwaar ul Haq Kakar, is meant to oversee a general election.Caretaker governments are usually limited to overseeing elections, but Kakar’s set-up is the most empowered in Pakistan’s history thanks to recent legislation that allows it to make policy decisions on economic matters.The legislation is aimed at keeping on track the conditions for the bailout secured in June.”At a time where there are uncertainties on Pakistan’s upcoming elections, this IMF board decision will provide some confidence to other lenders and markets,” said Sohail. Elections in the politically and economically troubled country have been scheduled for Feb. 8 after several delays. Last week the senate passed a non-binding resolution to further delay the elections, citing security concerns and a harsh winter in northern areas. More

(Reuters) – A look at the day ahead in Asian markets.Japan continues to set itself apart from the rest of Asia – and the world – with the Nikkei breaking through 35,000 points to a fresh 34-year high, while market sentiment across the region on Friday could be set by the latest Chinese inflation data.Chinese producer price inflation and trade figures, as well as bank lending, trade and current account data from Japan, and industrial production and consumer inflation from India, will also set the tone for the final day of the first full trading week of 2024.Asian shares on Thursday snapped a seven-day losing streak – the longest since August – but the MSCI Asia Pacific ex-Japan index will have to rise almost 1% on Friday to avoid a third consecutive weekly loss. No such worries for Japan’s Nikkei. It is up 5% this week, on track for its best week since March 2022, and trading above 35,000 points for the first time since February 1990.You could say that’s a lost 34 years, an indication of just how deep the damage from the late 1980s bubble has run. On the other hand, it hasn’t done too badly since hitting a low of 7,000 points in March 2009. Meanwhile, key Asian economic indicators are due for release on Friday, not least producer and consumer price index figures from China, where attention will also be turning towards the presidential elections in Taiwan on Saturday.Chinese PPI has been running negative on a year-over-year basis every month since October 2022. That is expected to have continued into December, with annual PPI inflation seen slowing to -2.60% from -3.0% in November.Consumer prices have been drifting in and out of deflationary territory for several months too. November’s annual rate of -0.5% was the lowest in three years, and figures on Friday are expected to show that the pace of price declines slowed marginally to -0.4% in December.Deflation remains a bigger risk in China than inflation. With economic activity struggling to properly recover from the pandemic-related shutdowns, pressure on Beijing to inject substantial fiscal and monetary stimulus will persist.Trade activity is expected to have picked up in December year-on-year from November, especially exports. But recent data from Taiwan and Japan – two of China’s largest trading partners – suggest caution is required here. In India, industrial production and inflation will be released. This week, HSBC’s fixed income team said India is their top pick for emerging market local sovereign debt in 2024. They reckon the fair value for the Indian government 10-year bond yield is 6.50-7.00% – it is currently 7.17% – and expect foreign demand for the paper will rise this year.Here are key developments that could provide more direction to markets on Friday:- China CPI, PPI, trade (December)- India CPI (December)- Japan trade, current account (November) (By Jamie McGeever) More