Economy

The early 2024 shake out continued on Wall Street, after having spilled over into Asian trade on Wednesday, and marks a potential headwind for Japanese shares when they reopen on Thursday. The Nikkei rose 28% in 2023, biggest yearly gain in a decade, ending it less than 1.0% shy of a 33-year high set in November. Tokyo markets have been shut for a public holiday and will reopen Thursday. But other Asian stock markets extended a global sell-off on Wednesday, while their currencies mainly fell against the dollar. MSCI’s broadest index of Asia-Pacific shares outside Japan was down almost 1.5% after a 1.0% drop on Tuesday in a sluggish start to 2024. The index rose 4.6% in 2023.Data wise, there is nothing big on the docket until Friday’s U.S. payrolls number. Wednesday’s U.S. release of the minutes from the December Federal Open Market Committee meeting barely moved the markets. It looks unlikely to have any spill over into Thursday’s trade, confirming that policymakers were on the cusp of easing this year, and saw the battle against runaway inflation as all but won. “While acknowledging inflation pressures have diminished, they still have to move more carefully to ensure orchestrate the soft-landing that everyone has bought into,” Charlie Ripley, Senior Investment Strategist for Allianz (ETR:ALVG) Investment Management in Minneapolis, said in a client note. CPI data next week will show whether they are on base. But for percolating market incentives, the mid-month start of U.S. Q4 earnings release period could help determine whether the S&P 500 takes a run at setting a record high it fell just short of marking last week. Fourth quarter S&P 500 earnings are forecast to rise 5.2%, which is lower than the 11% growth estimate from Oct. 1, according to LSEG data. For 2024 year-over-year earnings are expected to rise 11.1%.The S&P 500 was down 0.6% in late afternoon trade and the Nasdaq was off more than 1.0%, with big tech and chip stocks leading the way. The dollar rose to a two-week high against the yen and ended up about 0.9%. Versus the yuan, it rose to its highest price since Dec. 13. Here are key developments that could provide more direction to markets on Thursday:- US ADP National Employment (December) More

Total bankruptcy filings – encompassing commercial and personal insolvencies – rose to 445,186 last year from 378,390 in 2022, according to data from bankruptcy data provider Epiq AACER.Commercial Chapter 11 business reorganization filings shot up by 72% to 6,569 from 3,819 the year before, the report said. Consumer filings rose 18% to 419,55 from 356,911 in 2022.For the final month of the year, total filings dipped to 34,447 from 37,860 in November, though they were up 16% from a year earlier.Bankruptcy case counts are expected to keep climbing in 2024, though there is still some distance to go to top the 757,816 bankruptcies filed in 2019, the year before the pandemic struck.”As anticipated, we saw new filings in 2023 increase momentum over 2022 with a significant number of commercial filers leading the expected increase and normalization back to pre-pandemic bankruptcy volumes,” said Michael Hunter, vice president of Epiq AACER. “We expect the increase in number of consumer and commercial filers seeking bankruptcy protection to continue in 2024 given the runoff of pandemic stimulus, increased cost of funds, higher interest rates, rising delinquency rates, and near historic levels of household debt.”Household debt did, in fact, stand at a record high $17.3 trillion at the end of the third quarter, according to data from the New York Federal Reserve. Delinquency rates are also edging higher, that data showed, but they also remain below rates from just before the pandemic.Financial conditions for businesses and households have tightened significantly over the last two years thanks to the Fed’s aggressive interest rate hikes to contain inflation. Rates on mortgage loans, for instance, in the second half of last year shot to their highest since the start of the century.That said, borrowing costs and overall finiancial conditions eased over the course of the fourth quarter of 2023 after the Fed signaled it was coming to the end of its rate-hike cycle, and last month Fed officials themselves indicated they expect to be cutting rates this year. More

Most Federal Reserve officials wanted to keep borrowing costs high “for some time”, according to minutes of their meeting in December, adding to doubts that the US central bank is poised to begin cutting interest rates as early as March. While officials expressed optimism that the Fed was quelling inflation, they were also careful not to commit to any immediate loosening of monetary policy, according to a record of the meeting published on Wednesday. Rate-setters “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the [Federal Open Market] Committee’s objective”, the minutes showed. Rate-setters surprised markets in December by indicating they expected the bank to make three quarter-point cuts over the course of 2024. While officials still viewed rates as “as likely at or near [their] peak”, they also saw “an unusually elevated degree of uncertainty” in this year’s economic outlook.The account highlights the challenges facing the Fed as it tries to call time on a campaign of aggressive rate rises, without renouncing its commitment to keeping price pressures under control and risking damage to its inflation-fighting credentials. “They’re not willing to say ‘we’ve won’,” said David Kelly, chief global strategist at JPMorgan Asset Management, referring to the Fed’s battle against inflation. The central bank’s officials appeared from the minutes to be a “rather gloomy, worried bunch”, he added. Jeremy Schwartz, economist at Nomura, said the minutes showed “a lack of conviction” among Fed officials that they had conquered inflation. “That seems out of line with the early and rapid pace of cuts the market is currently pricing in.”Despite their caution, policymakers acknowledged the outlook for inflation was “moving toward greater balance”. An earlier reference from previous minutes to inflation remaining “unacceptably high” was removed. Investors appeared unsurprised by the account in the Federal Open Market Committee minutes. Yields on the US government’s benchmark 10-year bond were 0.04 percentage points lower at 3.91 per cent on Wednesday afternoon in New York, while the policy-sensitive two-year yield was flat at 4.32 per cent. Bond yields rise as their prices fall.In equity markets, the S&P 500 maintained an earlier decline to trade 0.6 per cent lower on the day. The technology-heavy Nasdaq Composite index was down 1 per cent.Futures markets continued to price in roughly six interest rate cuts for 2024 as a whole, despite the Fed’s official “dot plot” projections indicating just three cuts.The publication of the minutes comes as Fed watchers continue to debate when the bank will begin lowering borrowing costs in 2024 and how deeply it will cut rates through the year. “So long as the economy remains strong, or solid, they will, I think, remain on the sidelines,” said Kelly. “A first cut in June is my reading of their summary of economic projections.”The dovish tone of the December meeting and chair Jay Powell’s comments immediately after it led many investors to bet that cuts could start as soon as the vote in mid-March. FOMC officials have warned since the meeting that a move to slash rates was far from a done deal, however. “The pushback from Fed officials has been somewhat tepid. Nobody has come out and said ‘we won’t cut in March’. But the suggestion that the market pricing is a little bit aggressive is out there,” said Andrew Hollenhorst, economist at Citi. “And that’s consistent with what we’ve seen in the minutes today.” On Wednesday, Richmond Fed president Thomas Barkin, a voting member of the FOMC this year, warned that the quest to beat back inflation was not complete, saying that some companies did not yet “want to back down from raising prices until their customers or competitors force their hands”. “If that’s the case, I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over,” he said, adding that a soft landing was “increasingly conceivable” but “in no way inevitable”. Barkin’s comments pushed yields on 10-year Treasuries above 4 per cent for the first time since the December meeting, although the move had largely reversed by midday in New York. Bond prices have started 2024 on the back foot following a strong year-end rally that pushed the benchmark 10-year yield as low as 3.78 per cent last week, spurred by the Fed’s unexpectedly dovish tone at the meeting.On Wednesday, federal data showing that job openings in November fell to the lowest level in more than two years offered some evidence of cooling in the labour market, bolstering expectations of rate cuts. December’s decision from the central bank left the federal funds rate at 5.25 per cent to 5.5 per cent — a 22-year high. The return of double-digit inflation to the US for the first time in decades dented the Fed’s reputation, prompting policymakers to resort to a series of four successive 75 basis point rises in interest rates. In total, the Fed raised rates by 525 basis points over 2022 and 2023. However, price pressures declined sharply during the second half of last year and the Fed has not raised rates since July. The resilience of the US economy last year, as inflation fell despite strong growth and low unemployment, has raised hopes of a soft landing. The FOMC’s December projections showed most officials expected rates would end 2024 between 4.5 per cent and 4.75 per cent. Most officials expect rates to fall farther in 2025, ending the year between 3.5 per cent and 3.75 per cent. Those dot-plot projections are built on the core Personal Consumption Expenditures index falling to 2.4 per cent this year and 2.2 per cent in 2025, before hitting the central bank’s 2 per cent goal in 2026. Unemployment is expected to tick up only slightly, from 3.8 per cent now to 4.1 per cent. Additional reporting by Jennifer Hughes in New York More

The Job Openings and Labor Turnover Survey showed employment listings nudged lower to 8.79 million, about in line with the Dow Jones estimate for 8.8 million and the lowest level since March 2021.
The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level that had been prevalent in 2022.
Also, the ISM manufacturing report for December registered a reading of 47.4, slightly better than expectations but still in contraction.

A job seeker visits a Job News USA career fair in Louisville, Kentucky, on June 23, 2021. A new Kentucky law cuts the maximum duration of unemployment benefits by more than half, to 12 weeks, during periods of low unemployment.
Luke Sharrett | Bloomberg | Getty Images

Demand for workers fell to its lowest level in more than 2½ years in November while hirings and layoffs both moved lower, the Labor Department reported Wednesday.
The department’s Job Openings and Labor Turnover Survey showed employment listings nudged lower to 8.79 million, about in line with the Dow Jones estimate for 8.8 million and the lowest since March 2021. Openings fell by 62,000, though the rate of vacancies as a measure of employment was unchanged at 5.3%.

In addition to the modest move lower in openings, hiring fell by 363,000, moving the rate down to 3.5%, a 0.2 percentage point decline. Layoffs dropped by 116,000, with the rate holding steady at 1%. A report last month from the Labor Department showed a net increase in nonfarm payrolls of 199,000 in November. A report Friday is expected to show growth of 170,000.
The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level that had been prevalent in 2022. Companies had faced a severe supply-demand mismatch in the period after the Covid pandemic began, a situation that has made gradual progress back to a more normalized state.
Job openings fell by 128,000 for transportation, warehousing and utilities and were off 97,000 in leisure and hospitality. Wholesale trade saw an increase of 63,000 and financial activities grew by 38,000.
Federal Reserve officials watch the JOLTS report for evidence of labor slack. The historically tight labor market had helped push inflation higher, hitting a more than 40-year peak in mid-2022 that also has slowly begun to recede. Policymakers in December indicated they are likely to begin a gradual reduction in interest rates this year if inflation continues to come down.
“Today’s JOLTS data is another signal that the Fed is delivering a soft landing,” said Ron Temple, chief market strategist at Lazard. “Today’s report is good news for American workers and the economy, but it also suggests to me that the Fed is unlikely to cut rates as aggressively in 2024, as markets currently indicate, given the risk of reigniting inflationary pressures.”

A separate report Wednesday showed that the U.S. manufacturing sector is still in contraction.
The ISM manufacturing report for December registered a reading of 47.4, representing the percentage of workers reporting expansion. Anything below 50 indicates contraction. The index was up 0.7 point from November and was slightly better than the 47.2 estimate from Dow Jones.
Employment, however, was a relative bright spot in the report, rising to 48.1, a 2.3-point monthly increase. Order backlogs jumped 6 points to 45.3 and new export orders rose to 49.9, a 3.9-point acceleration. There also was some positive inflation news as the prices sub-index decreased to 45.2, down 4.7 points.
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NEW YORK (Reuters) – Some Federal Reserve officials are ready to talk about what it would take for the central bank to stop the ongoing shrinkage of its massive holdings of cash and bonds, opening the door to a notable shift in central bank monetary policy, according to meeting minutes for the Fed’s Dec. 12-13 policy meeting, released on Wednesday. At the gathering last month, “several participants remarked that the Committee’s balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves,” the minutes said. “These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public,” the Fed document said. The policymakers were taking on a process that has complemented the Fed’s aggressive rate hike cycle, and that is its ongoing contraction of just shy of $100 billion per month in the overall size of its balance sheet. The Fed is allowing Treasury and mortgage bonds it owns to mature and not be replaced, and in doing so, it has reduced its balance sheet by just over $1 trillion, to $7.764 trillion on Dec. 27. The Fed bought bonds aggressively through the start of the coronavirus pandemic to help stabilize financial markets and stimulate growth, causing its balance sheet to surge from $4.3 trillion at the start of March 2020 to a peak of just shy of $9 trillion in the summer of 2022. Taking liquidity back out is part of its process of returning monetary policy to a normal footing.Fed officials are trying to reduce liquidity to a level that will still allow them to retain firm control over short-term rates, but they have thus far provided little guidance about timetables and desired levels of liquidity. But with Fed rate hikes almost certainly over and rate cuts on the market’s mind, the minutes show at least some Fed officials are also ready to talk about ending the balance sheet drawdown many refer to as quantitative tightening, or QT. Many in markets have been eying the second or third quarter this year as an end point for the wind down. More

The Fed will hold its next policy meeting on Jan. 30-31, and while the central bank is expected to maintain its policy rate in the current 5.25%-5.50% range, data in the meantime could bring the prospects of rate cuts into better focus. This year begins with a rush of major readings on the jobs market, consumer spending and inflation. Here is a guide to some of the numbers shaping the policy debate:JOB OPENINGS (Released Jan. 3, next release Jan. 30):Fed Chair Jerome Powell keeps a close eye on the U.S. Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person who is without a job but looking for one. The ratio had been falling steadily towards its pre-pandemic level, but in November remained close to 1.4-to-1, still above the 1.2-to-1 level seen before the health crisis. Other aspects of the survey, like the quits rate, have edged back to pre-pandemic levels. INFLATION (PCE released Dec. 22; next release CPI, Jan. 11):Annual inflation by the Fed’s preferred personal consumption expenditures price index fell to 2.6% in November and prices on a monthly basis declined for the first time since April 2020. The “core” index excluding food and energy prices also declined to 3.2%, the lowest that key gauge of trend inflation has been since April 2021.Fed officials at their final policy meeting of 2023 forecast continued improvement in both measures this year. Another measure, the consumer price index (CPI), declined to 3.1% on a year-on-year basis in November while the core rate held steady at 4.0%. Annualized measures of the monthly rate over the last few months, however, show these gauges continuing to decline.RETAIL SALES (Released Dec. 14; next release Jan. 17):Retail sales rose 0.3% in November, another in the series of “upside surprises” the economy delivered over the course of 2023. The “core” sales reading, which strips out gasoline, autos, building materials and food services, and more closely aligns with estimates of economic growth, also outpaced forecasts to come in at 0.4%, in the latest sign of the resilience of the U.S. consumer. On a trend basis, consumer spending rates are slowing in a way the Fed is hoping to see as it watches for signs the aggressive rate hikes it has delivered have begun to trim overall demand for goods and services.EMPLOYMENT (Released Dec. 8, next release Jan. 5):Job growth in November jumped to 199,000 from 150,000 in the prior month and the unemployment rate fell to 3.7% from 3.9%. Even with the end of labor strikes involving about 40,000 workers, the latest employment report showed continued steady job gains. Alongside improved labor supply, with the number of available workers up more than half a million for the month, the report is consistent with the Fed’s view of an economy that can continue growing while inflation also ebbs.The pace of annual wage growth also continued a slow decline, though the reported 4.0% annual pace remains higher than many Fed officials feel is consistent with price stability. More

Central bankers wanted to signal that interest rates were likely at or near their peak while keeping their options open, December minutes showed.Federal Reserve officials wanted to use their final policy statement of 2023 to signal that interest rates might be at their peak even as they left the door open to future rate increases, minutes from their December meeting showed.The notes, released on Wednesday, explained why officials tweaked a key sentence in that statement — adding “any” to the phrase pledging that officials would work to gauge “the extent of any additional policy firming that may be appropriate.” The point was to relay the judgment that policy “was likely now at or near its peak” as inflation moderated and higher interest rates seemed to be working as planned.Federal Reserve officials left interest rates unchanged in their Dec. 13 policy decision and forecast that they would cut borrowing costs three times in 2024. Both the meeting itself — and the fresh minutes describing the Fed’s thinking — have suggested that the central bank is shifting toward the next phase in its fight against rapid inflation.“Several participants remarked that the Committee’s past policy actions were having their intended effect of helping to slow the growth of aggregate demand and cool labor market conditions,” the minutes said at another point. Given that, “they expected the Committee’s restrictive policy stance to continue to soften household and business spending, helping to promote further reductions in inflation over the next few years.”The Fed raised interest rates rapidly starting in March 2022, hoping to slow down economic growth by making it more expensive for households and businesses to borrow money. The economy has remained surprisingly resilient in the face of those moves, which pushed interest rates to their highest level in 22 years.But inflation has cooled sharply since mid-2023, with the Fed’s preferred measure of price increases climbing 2.6 percent in the year through November. While that is still faster than the central bank’s 2 percent inflation goal, it is much more moderate than the 2022 peak, which was higher than 7 percent. That has allowed the Fed to pivot away from rate increases.Officials had previously expected to make one final quarter-point move in 2023, which they ultimately skipped. Now, Wall Street is focused on when they will begin to cut interest rates, and how quickly they will bring them down. While rates are currently set to a range of 5.25 to 5.5 percent, investors are betting that they could fall to 3.75 to 4 percent by the end of 2024, based on the market pricing before the minutes were released. Many expect rate reductions to begin as soon as March.But Fed officials have suggested that they may need to keep interest rates at least high enough to weigh on growth for some time. Much of the recent progress has come as supply chain snarls have cleared up, but further slowing may require a pronounced economic cool-down.“Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress in reducing inflation may need to come mainly from further softening in product and labor demand, with restrictive monetary policy continuing to play a central role,” the minutes said.Other parts of the economy are showing signs of slowing. While growth and consumption have remained surprisingly solid, hiring has pulled back. Job openings fell in November to the lowest level since early 2021, data released Wednesday showed.Some Fed officials “remarked that their contacts reported larger applicant pools for vacancies, and some participants highlighted that the ratio of vacancies to unemployed workers had declined to a value only modestly above its level just before the pandemic,” the minutes noted.Fed officials also discussed their balance sheet of bond holdings, which they amassed during the pandemic and have been shrinking by allowing securities to expire without reinvesting them. Policymakers will need to stop shrinking their holdings at some point, and several officials “suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Over two years have passed since more than 135 countries signed up to the idea of a global minimum corporate tax rate for big multinationals. This week, a critical mass of several dozen countries, including many of the world’s largest economies, has begun to apply the new rules. Even though the US and China are not among them, this is a big step forward in ending the “race to the bottom” on corporate taxation, and the disruption to fair global commerce caused by tax havens. It also provides a potential model for other initiatives to be adopted by coalitions of the willing.From January 1, countries including all of the EU, the UK, Australia, South Korea, Japan, Canada and Norway are applying an effective tax rate of at least 15 per cent on profits of multinational companies with annual revenues exceeding €750mn. Several countries long viewed as havens by international business are taking part, including Ireland, Luxembourg, the Netherlands, Switzerland and Barbados.A series of interlocking rules, expanding over time, means that if a big company is taxed below the global minimum in one country, other countries can charge a top-up tax levy — so neither the tax haven nor the company benefits from the lower rate. That creates a robust incentive for non-participating nations to join up, or watch other countries collect tax at their expense. The OECD, the driving force behind the initiative, estimates it will increase global annual tax revenues by up to $220bn, or 9 per cent — vital extra proceeds for governments struggling to fund ever-expanding needs from public services to defence.It is highly regrettable that the world’s two largest economies have not introduced legislation to implement a deal that both backed in 2021. The Biden administration, whose treasury secretary Janet Yellen was a vocal proponent, has not been able to get the plan through Congress. Many Republicans are staunchly opposed. Some business lobbies warn that the way some important US tax credits, such as for R&D, operate could reduce companies’ effective tax rate under the international rules and make them liable to top-up demands abroad. But many tax experts believe even a future Republican administration would ultimately be more likely to adapt US rules to the reality of the global convention — in a broader review of tax legislation due in the next couple of years — than to completely blow it up.The initiative’s smart design also lessens the impact of America and China’s absence. It shows it is possible to incentivise good behaviour without unanimous agreement. That suggests similar coalitions may be able to make progress in other areas, such as carbon border adjustments, where global consensus is hard to secure.There are wrinkles. Previously low-tax jurisdictions such as Ireland that raise their rate will initially receive revenue windfalls — though offset, over time, by the loss of their tax advantage. Such countries may be tempted to lure multinationals in other ways, such as through permitted tax breaks or subsidies, which will require clear and careful policing.Most of the gains from the initiative, moreover, will go to advanced economies. The other half of what was a two-pillar deal — getting multinationals to pay more tax in countries where they have sales and profits but little physical presence — would benefit the developing world more. Although the OECD published a text of the multilateral convention in October, progress here has been slower — and since many of the multinationals in question are western, it would need to be ratified by EU countries and the US Congress to be fully effective. But if the global corporate taxation system is to become fit for the 21st century then this initiative, too, needs to move from agreement in principle to finally being implemented. More