Economy

NEW YORK (Reuters) – Wall Street’s biggest banks shifted ahead of last month’s Federal Reserve meeting toward predicting the U.S. central bank would end its balance sheet reduction process later this year than previously thought, according to a survey released on Thursday by the New York Fed. Banks, referred to as primary dealers, now believe the process known as quantitative tightening, or QT, will end in the fourth quarter, according to a poll taken ahead of the Fed’s Dec. 12-13 policy meeting. In the primary dealer survey done ahead of the policy meeting that ended on Nov. 1, the banks collectively viewed the third quarter as the stopping point for QT. If the dealers are right, the Fed’s balance sheet will contract to $6.75 trillion from the current level of about $7.764 trillion. The dealers also predicted ahead of the December meeting that there would be $375 billion in the central bank’s reverse repo facility when QT ended, versus the expected $625 billion in the October survey. In the December survey, respondents said they expected bank reserves to be at $3.125 trillion at the end of QT, versus $2.875 trillion in the prior poll. The QT process has complemented the rate hikes delivered by the Fed as part of its effort to lower inflation back to its 2% target. The central bank aggressively bought Treasury bonds and mortgage-based securities at the start of the coronavirus pandemic in the spring of 2020, causing its overall holdings of cash and bonds to more than double to around $9 trillion by the summer of 2022. The Fed has been shrinking its holdings since last year, but has not given much guidance about how long the process will play out. Minutes from the Fed’s meeting last month, which were released on Wednesday, noted that some officials are now ready to talk about the how and when of ending QT. The question has been on the minds of investors and traders given the apparent end of the current rate hiking cycle and rising bets in financial markets that the central bank will be cutting rates as soon as next spring as inflation pressures wane. MONEY MARKET METRICSThe challenge for the Fed in dialing back stimulus is that it is trying to achieve a level of liquidity in the financial system that will allow it to retain control over short-term rates, with a cushion to deal with the volatility that can often strike money markets. But there’s no clear sense so far on how to measure the needed amount of liquidity. Michael Feroli, chief U.S. economist at J.P. Morgan, said in a note on Wednesday that more guidance on the QT endgame will be forthcoming soon. Given the nascent debate seen in the minutes of the December meeting, “we suspect this means that we could see a fuller discussion of potential balance sheet plans in the minutes” of the next Fed policy meeting, which takes place later this month, he said. Barclays economists said they expected money market rates like the federal funds rate and the Secured Overnight Financing Rate, will loom large in the Fed’s thinking. They also believe the Fed may be more cautious about testing how far it can go with running down the balance sheet relative to the view of primary dealers ahead of the December policy meeting, saying in a note that “we look for the Fed to err on the side of caution” and end QT in June or July before any signs of stress emerge. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, also thinks QT will end sooner than the survey suggests based on the meeting minutes. “There is now a compelling argument that the balance sheet rundown will be ended prior to the first cut of the cycle,” he said in a note to clients. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Today in notable charts: That’s London consultancy Drewry’s index tracking the cost of container shipping worldwide. It’s up more than 60 per cent this week, as readers can see, thanks to continued Houthi attacks in the Red Sea and ongoing diversions of container ships. The regional pressures become obvious in the underlying data: The cost of shipping containers from Shanghai to Europe (Rotterdam or Genoa) has more than doubled, according to Drewry. Container-shipping costs from Shanghai to New York or Los Angeles are up closer to 30 per cent. It could be worse. Some spot rates cited on Maersk’s website have more than tripled since October, JPMorgan said in a note this week. Most large Maersk customers won’t face that price increase outright since their rates are decided in contracts, the analysts wrote, but smaller customers are exposed. And the new (old) route around Africa is nevertheless adding 10 days to containerships’ journeys: Carriers re-routing ships around Africa indicates that a quick fix is considered unlikely (otherwise they would wait in the Red Sea) and indeed disruption has now been ongoing for over a month.Thursday’s detonation of an unmanned one-way surface vessel by Houthi rebels, described by mainFT as “a defiant escalation”, doesn’t engender confidence that the conflict is nearing an end. Or as RaboResearch wrote in a note last month: Welcome to how the world used to work before British, then US, naval supremacy. This is what a multipolar world is going to look like, if we see one.So what does it mean for the economy? Well, first of all, spot rates don’t make as big of a difference for inflation as some might fear. Large retailers usually lock in freight costs ahead of time, and hedge their exposure as well. But JPMorgan adds two caveats.First, when rates dropped sharply, freight partners did in some cases renegotiate contracted rates down, meaning that upward renegotiations could be possible in the current scenario (carriers may ask for disruption surcharges for example). Second, many container shipping customers (including retailers) agree 12 months contracted rates on Asia-Europe, with many these renegotiated on a calendar year basis. We understand that some customers were previously delaying agreeing new contracts as spot rates weakened. In other words, the immediate impact on inflation and retailers’ margins should be small. But “bargaining power on contract negotiations has now firmly moved in favour of carriers,” the analysts wrote, and cost pressures will increase if/as the conflict drags on. Oh, and the Red Sea and Suez Canal aren’t the only pain points for container shipping! A severe drought in the Panama Canal also delayed shipping and raised freight costs late last year. Analysts at Bank of America gamed out the doomsday scenario in December. They looked at the possible consequences if both the Panama and Suez Canals become impassable. The two passages handle 8 per cent and 28 per cent of global container volumes, respectively: The Panama Canal and Suez Canal, key chokepoints for global trade, are causing delays, diversions, and higher freight rates. Drought has cut Panama Canal transits, while rocket attacks recently drove Maersk and others to pause Red Sea transits. Our Shipping Equity Research team pointed out that these bottlenecks will impact container trade most, with 8.1% of global container volume traversing the Panama Canal and 28% flowing through the Suez. A closure of these key thoroughfares would boost container demand by 1.5% and 7% respectively. For tankers and bulkers, the closure of the Suez Canal would add roughly 30% to transit distances and boost fleet demand between 1-2%, according to their estimates. Longer supply lines tie up more vessels, boost freight rates, widen origin-destination spreads, and lift bunker demand. Furthermore, a worsening supply chain may be bullish goods demand as companies over-order to ensure adequate inventories. In other words, supply-chain disruptions are BACK IN for 2024. JPMorgan’s economists said rising freight costs could help keep global core inflation “near 3%, which won’t resolve the immaculate disinflation debate”. It was fun while it lasted though. More

(Reuters) -Wilson tennis racket maker Amer Sports on Thursday revealed a 30% revenue surge for the first nine months of 2023 in its filing to go public in the U.S., joining other high-profile firms looking to take advantage of recovering investor appetite. U.S. initial public offerings, which went through an arid period that lasted most of 2022 and 2023, are projected to rebound as the stock market hovers near record highs. “We expect 2024 will look like a ‘normal year’, but after 2022 and 2023, normal might feel like a flood of IPOs,” said Matthew Kennedy, senior strategist at IPO-research firm Renaissance Capital.Social media firm Reddit, cloud security company Rubrik and software startup ServiceTitan are also expected to go public in 2024 as fears of an economic downturn wane and investor sentiment recovers. ICONIC SPORTING BRANDSFounded in 1950, Amer Sports operates in three segments and is home to iconic sports and outdoor brands including Arc’teryx, Salomon, Atomic and Peak Performance. Its world renowned Wilson brand is associated with several legendary athletes including Roger Federer, Russell Wilson and Jamal Murray. The Wilson tennis racket has been used by 643 Grand Slam title winners. “It skirts a dual role between luxury and high-end sports brands that investors may find appealing, especially as people continue to crave and spend on experiential trips and vacations,” said Michael Ashley Schulman, Chief Investment Officer at Running Point Capital Advisors. “Investors may see Amer sports as an alternative or diversifier to brands like Nike (NYSE:NKE) and Adidas (OTC:ADDYY),” Schulman added. Wilson is also the official partner for a number of professional sports leagues, including the National Basketball Association and National Football League as well as the U.S. Open and Roland-Garros Grand Slam Tennis Championships. Amer Sports’ revenue was $3.05 billion in the nine months ended Sept. 30, compared with $2.35 billion a year earlier. Adjusted EBITDA, or core earnings, surged to $422.1 million versus $261.8 million. “It looks like the company had a terrific 2023, in terms of both growth and EBITDA profitability. The enormous debt level is a turn off, but the IPO will help in that regard,” Kennedy added. Founded in Finland, Amer went private in 2019, after a consortium led by China’s Anta Sports acquired it in a deal that valued it at more than $5 billion. The Salomon ski boots maker did not reveal the price and size of its offering. Amer’s shareholders include Chinese conglomerate Tencent Holdings (OTC:TCEHY) and private-equity firm FountainVest. The billionaire founder of yoga-inspired athletic apparel company Lululemon Athletica (NASDAQ:LULU), Dennis “Chip” Wilson, has been nominated to sit on its board in connection with the IPO, a filing showed. Another supplier of major U.S. sports league headware New Era Cap LLC has also kicked off preparations for an IPO in New York that could value it at $4 billion to $5 billion, Reuters reported in September. It is looking to list on the New York Stock Exchange and trade under the ticker symbol “AS”. Goldman Sachs, BofA Securities, JPMorgan, Morgan Stanley, Citigroup and UBS Investment Bank are the lead underwriters for the offering. More

NEW YORK (Reuters) – The U.S. solar industry will experience modest growth in 2024, as electricity prices decline and support from the Inflation Reduction Act (IRA) rolls in, SolarEdge (NASDAQ:SEDG) Chief Financial Officer Ronen Faier said on Thursday. “We’ve bottomed in the last two quarters,” Faier told investors at a Goldman Sachs conference in Miami, Florida. Macroeconomic uncertainties in the back half of the year weighed on demand for solar products in the United States, he added. The solar product manufacturer sees demand improving with expectations for lower interest rates this year.Incentives from the IRA in top solar markets like California are also beginning to improve the economics and prices of solar products and components, said Faier.The U.S. Department of the Treasury in December unveiled proposed guidelines for manufacturers of clean-energy products seeking to claim a tax credit, created under the IRA, in a bid to power the energy transition with American-made products.Battery installation is also expected to continue to grow in both the U.S. and European markets, Faier said, as manufacturers clear out large inventories of battery panels and other equipment. More

LONDON (Reuters) -Billionaire investor Cliff Asness’s AQR Capital Management finished 2023 with double digit returns in several of its funds, buoyed by stock selection, bonds, European natural gas and iron ore, a source familiar with the matter said on Thursday.The $99 billion investment manager, known for its quantitative strategies, returned a net 18.5% for the year in its AQR Absolute Return strategy, its longest running multi-strategy, the source familiar with the firm’s performance said.This compared with an almost 44% net return in 2022, the source said.Stock selection and in particular, value investing helped explain last year’s success for AQR’s fund, the source added. Asness predicted in January 2023 that this kind of investing which means “going long cheap companies and shorting expensive ones” within certain sectors would be “unusually attractive” for the year. A short position is a bet an asset price will fall in value.AQR Apex Strategy, a newer multi-strategy fund, also benefited from positive stock trades as well as success from some economic trends said the source, posting a net 16.2% performance versus 17.1% in 2022. Generally, systematic hedge funds and particularly those trading trends had a choppy year. The effects of global interest rate hikes trickled through economies and markets in 2023, with a banking crisis, and soaring bond yields taking many by surprise. Hedge funds in 2023 averaged a 5.7% return in the year through November, according to hedge fund research firm PivotalPath. Equities and credit-focused strategies were the best performers, while macro and managed futures lagged.But AQR’s alternative-trend following Helix Strategy returned a net 14.3% in 2023 versus 49.1% in 2022 and saw tailwinds in bonds and commodity markets such as iron ore, European natural gas and power prices, said the source. The AQR Equity Market Neutral Global Value strategy returned a net 20.6% in 2023 versus a 44.7% return in 2022. Bloomberg first reported the news of the performance earlier on Thursday. More

NEW YORK (Reuters) -Alberto Musalem, an economist and former New York Federal Reserve staffer, has been tapped to become the new president of the St. Louis Fed, the regional bank said on Thursday.Musalem, 55, succeeds James Bullard, who led the St. Louis Fed from 2008 until his unexpected resignation last July, when he announced he was leaving to become the dean of Purdue University’s business school. Kathleen O’Neill, the St. Louis Fed’s first vice president, will continue to serve as its interim leader until Musalem starts his new role on April 2. Musalem will bring extensive market, public policy and central bank experience to the St. Louis Fed. He recently served as co-chief investment officer and co-founder of Evince Asset Management and was also an executive vice president at the New York Fed between 2014 and 2017, focusing on the financial sector and broader policy issues. He also was a partner and managing director at Tudor Investment Corporation and worked as an economist at the International Monetary Fund.Musalem is currently an adjunct professor at Georgetown University. He also serves on the boards of the Federal Home Loan Mortgage Corporation and Man Group, roles the St. Louis Fed said he will give up. He has a PhD in economics from the University of Pennsylvania and holds master’s and bachelor’s degrees in economics from the London School of Economics and Political Science. Born in Bogota, Colombia, Musalem is a U.S. citizen.”As an experienced economist, former Federal Reserve leader, collaborator and communicator, he comes with the exceptional technical expertise and leadership abilities needed to contribute to effective policymaking and advance a large organization in service to the public,” St. Louis Fed Director Carolyn Chism Hardy said in a press release. Hardy, who is president and CEO of Chism Hardy Investments, LLC, helmed the regional bank’s presidential search committee. INTO THE FIREThe incoming St. Louis Fed chief has big shoes to fill. Bullard was an active voice on monetary policy and economic issues, and at points his comments were among the most market-moving of all U.S. central bank officials. Musalem will begin his first voting role on the rate-setting Federal Open Market Committee next year. In his final stretch at the St. Louis Fed, Bullard was an early supporter of dialing back on the central bank’s pandemic-era stimulus after amid a surge in inflation, a path the central bank eventually embraced in an aggressive fashion. Musalem will arrive as the Fed has almost certainly ended its rate hiking campaign following a sizable moderation in inflation pressures. While financial markets are already betting on Fed rate cuts this year, policymakers are eyeing what they see as an uncertain outlook and are still debating how long they’ll need to keep the central bank’s benchmark overnight interest rate in the current 5.25%-5.50% range to ensure inflation returns to the 2% target. Fed officials also are contemplating the ongoing drawdown of the central bank’s $7.764 trillion balance sheet. The Fed is allowing nearly $100 billion in Treasury bonds and mortgage-backed securities that it holds to expire each month and has shaved more than $1 trillion from its holdings since they peaked at nearly $9 trillion in 2022. With rate hikes likely done and liquidity being drained from the financial system, the Fed is widely expected to stop the drawdown later this year, although policymakers have yet to give much guidance except to acknowledge planning may start soon.LEADERSHIP CHALLENGEThe 12 regional Fed banks are quasi-private institutions technically owned by member banks and operating under the oversight of the Fed’s Board of Governors in Washington. The regional banks collect local economic information, help oversee regulated financial institutions, and contribute to making monetary policy decisions. The regional Fed banks have long faced criticism for the opacity of their leadership selection processes. Unlike Fed governors or the head of the U.S. central bank, who are named by the president and confirmed by the U.S. Senate, there’s generally little public knowledge of who is in the running for regional Fed leadership slots. The central bank’s in-house watchdog said in a recent report that it will be looking at the process for selecting regional bank leaders, noting that “consideration of diversity and inclusion” will be included.The Fed in recent years has also faced considerable outside pressure to diversify its top leadership ranks. At the regional level, Atlanta Fed President Raphael Bostic became the first African American to head one of the Fed banks in 2017, with Boston Fed President Susan Collins becoming the second in 2022. More

St. Louis Fed names Alberto G. Musalem as new president.
Source: St. Louis Federal Reserve

Economist Alberto Musalem was named the next president and CEO of the Federal Reserve Bank of St. Louis on Thursday.
Musalem, 55, will start on April 2. He succeeds James Bullard, who joined Purdue University last August. The St. Louis Fed representative is an alternate member of the rate-setting Federal Open Market Committee and will vote in 2025. St. Louis Fed First Vice President Kathy O’Neill has been holding the position in the interim.

“Alberto will be an outstanding president and CEO of the St. Louis Fed,” said St. Louis Fed director Carolyn Chism Hardy, president and CEO of Chism Hardy Investments and deputy chair of the bank’s search committee.
Hardy cited Musalem’s experience as an economist and in financial markets as well as his extensive background with the Fed.
In his most recent work, he served as co-chief investment officer and was co-founder of Evince Asset Management. Before that, he was executive vice president and senior advisor to the New York Fed.
In addition, he has financial market experience at Tudor Investment Corp., working with the firm’s founder, Wall Street titan Paul Tudor Jones.
“Alberto is a mission-focused leader, and I am confident he will work tirelessly to promote a healthy economy for all in representing the diverse views of the constituents across the Fed’s Eighth District,” Hardy said.

Musalem comes to the St. Louis Fed at a time when the central bank is at what appears to be an important policy pivot, away from inflation-fighting interest rate hikes and toward a normalization of policy and likely rate cuts ahead. However, the trajectory of how that will happen is uncertain as Fed officials have vowed to be data dependent and are holding open the possibility that rates may need to go up more if the inflation data moves the other way.
“I am deeply honored to serve as the next president of the St. Louis Fed and grateful for the opportunity to promote a strong, resilient and inclusive economy,” Musalem said.
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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China’s BYD overtaking Tesla as the world’s best-selling brand of electric vehicles is one of the most eye-catching headlines of the first week of 2024. But it is just one of the green milestones that China has recently achieved. More important for the world’s environment was the news late last month that China’s share of renewable energy capacity — mostly solar, wind and hydro — reached about 50 per cent of its total generation capacity in 2023. Renewables’ installed capacity surpassed that of coal power for the first time, according to Xinhua, China’s official news agency.China’s advances in deploying clean tech should be applauded, even if it is continuing to expand its use of fossil fuels such as coal. The country remains the world’s biggest emitter of carbon dioxide, a greenhouse gas implicated in global warming, accounting for 31 per cent of global emissions in 2022 — more than double America’s 13.6 per cent. Its progress towards a green transformation is therefore of vital importance.Key insights lurk among the detail. One is that new renewable energy was more profitable than relying on coal and gas for 14 Chinese electricity generators researched by Rystad Energy, a consultancy. While China’s renewables installation in its early days was pushed by state policy, it now seems increasingly to be driven by the profit motive.Another revelation is that China’s state-owned enterprises, often seen as lumbering giants, are helping to accelerate the adoption of clean tech. Such SOEs, which contribute the lion’s share of China’s gross domestic product, have the resources and backing to develop at scale some of the biggest solar and wind plants, even in remote areas.These dynamics, coupled with a clear political imperative, provide some reason for optimism. China is on track to shatter its target of installing 1,200GW of solar and wind energy capacity by 2030 five years ahead of schedule, says Global Energy Monitor, an industry publication.Several international experts also forecast that Beijing’s target of reaching peak CO₂ emissions by 2030 will probably be achieved ahead of schedule. If this happens, it may embolden China’s voice in climate negotiations. Already, “environmental responsibility” is part of a Global Civilisation Initiative unveiled by Xi Jinping, China’s leader, last year as part of Beijing’s vision for an alternative world order to challenge that of the US-led west.Indeed, as leaders in solar, wind and EV technologies, Chinese companies harbour considerable ambitions to capture overseas markets in the developing world as well as in the west. The European Commission said last year that China’s share of EVs sold in Europe had risen to 8 per cent and could reach 15 per cent in 2025, noting that its vehicles undercut EU-made rivals on price.Partly as a consequence, western resistance is rising. Brussels launched an investigation last year into whether to impose punitive tariffs on Chinese EV imports. Ursula von der Leyen, European Commission president, complained that prices were “kept artificially low by huge state subsidies”. Similar concerns surround Chinese solar and wind technology exports.For the west, China’s growing prowess in clean tech represents a dilemma. The US and European countries risk becoming overly reliant on a strategic rival for some key renewable technologies. To avoid this, rather than engaging in knee-jerk protectionism, they need to do more to nurture their own green sectors through incentives, faster planning procedures and investment in infrastructure. But when it comes to climate change, Beijing’s green advances should be seen as positive for China, and for the world. Climate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More