Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a former chief investment strategist at Bridgewater AssociatesThe final, surprisingly dovish US monetary policy meeting of 2023 reinforced the consensus expectation of a soft landing for the country’s economy in the year ahead. That Goldilocks scenario, with inflation falling towards the Federal Reserve’s 2 per cent target without material damage to the labour market, would be a historical exception and there is a lot riding on it. Take US equities: investors now discount that the Fed is able to cut rates by nearly 1.5 percentage point, starting as early as March, helping to drive double-digit earnings growth next year in S&P 500 companies.Anytime everyone in the proverbial markets boat leans to one side, it’s time to look over the other railing for what could sink you. The list of potential catalysts for corrections in the coming year is daunting. It includes significant, sudden policy shifts around key elections; contagion from conflicts around the world; and unexpected setbacks related to technology. Given the challenge of trying to understand and quantify such a broad swath of risks, one must prioritise. In the case of the US soft landing, there are at least four questions to start with. The answers will clearly influence the coming year’s market performance.Consumption is question number one, given its dominant role driving US growth. In this case, a “just right” moderation in spending is needed. A rapid cooling in consumption that leads worried businesses to cut jobs would undermine incomes and create a self-reinforcing negative loop, weighing on earnings. Any Fed easing of monetary policy in response may not immediately go beyond what is already priced into markets.Consumer demand that runs too hot could pose a risk as well. We could still see that, given the wealthy are enjoying excess savings and rising asset values. Strong consumption would help corporate revenues but could also keep service-sector wages elevated, slowing disinflation. In turn, that would probably lead the Fed to ease later and more gradually than is discounted. Higher-for-longer borrowing costs would restrain returns across a host of assets and keep debt-financing risks in focus both for the private sector and government.The second question is how the US labour market normalises. Even if a Goldilocks moderation in consumer activity unfolds, a soft landing also requires wage disinflation without large job losses. One path is the supply of workers: after labour participation collapsed in early 2020, it has been gradually recovering.Another path to so-called immaculate wage disinflation is a reduction in competition for available workers. Rather than letting workers go and risking staff shortages if the economy holds up, companies could choose to slow hiring and cut open positions. Such a trend is under way: job openings have declined from a 2022 peak of more than 12mn to 8.7mn in October.Apart from jobs and consumption, another force that will affect the chances of a soft landing is commodities. Recent years have illustrated the outsized influence that commodity price changes can have on broader inflation. Research by the Dallas Federal Reserve estimated that 37 per cent of the variability in one-year inflation expectations and nearly 55 per cent of variability in headline Personal Consumption Expenditures inflation could be explained by petrol shocks during the pandemic period studied. But forecasting 2024 energy and food prices is inherently difficult, thanks in part to factors such as weather and geopolitics. A final, often overlooked question lies outside the US, in China. Beijing’s economic challenges and policy responses have thus far helped the Fed. China has launched multiple rounds of monetary and fiscal stimulus. To date, those actions have increased supply more than demand, adding to Chinese deflation risks. This has also contributed to deflation in US import prices on a year-on-year basis throughout 2023, following large price increases in 2021-22. Some 16.5 per cent of total US imports last year came from China. And US import prices from China fell 2.9 per cent year on year in November. US soft-landing enthusiasts may hope that Chinese demand doesn’t recover too much, too quickly. Chicago Fed president Austan Goolsbee noted in November that driving inflation down as much as the US is doing now without a big recession, has “basically never happened” before. Answers to these four questions will help determine if today’s extreme market confidence in something rarely seen in history is well founded.  More

TOKYO (Reuters) -Japan’s government will raise its long-term interest rate estimate, used to compile the state budget, to 1.9% for the next fiscal year from the current year’s 1.1%, two people with knowledge of the matter told Reuters.The higher estimate reflects rising government bond yields on expectations of a near-term exit from ultra-loose monetary policy, and pushes up the government’s debt-financing cost, said the people, who declined to be identified as they were not authorised to speak with media.Finance ministry officials were not available immediately for comment. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK pay deals are running at levels that will incline the Bank of England to keep interest rates high for longer than other central banks, as employers prepare for a big rise in the wage floor in the new year.   Two sets of data released on Wednesday show there has been no change in the generosity of recent pay awards by large employers as the main wage bargaining season approaches. Meanwhile, they expect to make only slightly lower awards in 2024.Figures published by the research group XpertHR showed that the median basic pay award remained steady at 6 per cent in the three months to November — a level not sustained for more than 30 years.A second research group, IDR, published the findings of a poll showing that a quarter of large, private sector employers expect their main pay rise for staff in 2024 will be at least 5 per cent, with almost half planning to award pay increases between 4 per cent and 4.99 per cent.Younger workers are set to benefit from a bumper increase in the UK’s minimum wage. The main hourly rate for adults is set to rise by 9.8 per cent next April but analysis by the Resolution Foundation think-tank, published on Wednesday, highlights the large numbers who will receive a 15 per cent rise for 18- 20-year-olds and a 21 per cent boost for 16- to 17-year-olds.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 figures show the extent to which pay pressures are still bubbling in the UK economy, even as inflation starts to fall and stagnating output makes companies less eager to hire.This is the main reason why BoE rate-setters took a more hawkish line than their European and US counterparts last week, making it clear they needed to see more evidence of inflationary pressures easing before they could consider cutting interest rates from their 16-year high of 5.25 per cent.Ben Broadbent, a BoE deputy governor, said on Monday that while wage growth had fallen from a summer peak of 8.5 per cent on official measures, contradictory data meant the central bank would want to see a “more protracted and clearer decline” before concluding things were on a downward path. Sarah Breeden, the newest member of the BoE’s Monetary Policy Committee, took a similar line in a speech on Tuesday, saying that on most measures wage growth was “several percentage points” above the level consistent with 2 per cent inflation, given the current weakness in UK productivity growth.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Official data points to a sharp recent slowdown in private sector pay growth, offset by bumper pay awards in the public sector. Breedon said she would be alert to any signs “that the loosening in the labour market is accelerating, and wage growth is falling more sharply than expected”.But there was little sign of that in the figures published on Wednesday.Sheila Attwood, content manager at XpertHR, said that despite a deteriorating economy and loosening labour market, employers had “indicated that there may only be a small drop-off” in pay awards in 2024, with the “going rate” likely to edge down to about 5 per cent.“Although the coming trend in pay awards is likely to be down on the past year, on the whole they are likely to remain higher than they were prior to 2023,” said Zoe Woolacott, a senior researcher at IDR.While affordability was employers’ main concern while setting pay, four-fifths told IDR that pressure to offer competitive salaries was a critical factor, with a significant minority affected by the rising minimum wage.  The surveys are important because official pay data has been unusually volatile in recent months, and alternatives, such as the Recruitment & Employment Confederation’s monthly survey, reflect the salaries offered to new hires rather than basic pay awards for people staying in their jobs.Some of the biggest recent pay awards have been in the public sector — including a 6.5 per cent increase for schoolteachers and a 7 per cent rise for police officers. Ongoing strike action by junior doctors, and the threat of strikes elsewhere, could boost pay further in coming months.  Jennifer McKeown, chief global economist at consultancy Capital Economics, said unions had recently secured double-digit pay deals in many advanced economies — benefiting US actors and auto workers, Italian metal workers, German public sector workers and Canadian port workers.   But in most cases, these increases would be spread over several years, with the biggest gains coming up front and smaller increases pencilled in for the future.However, “the UK is possibly an exception”, McKeown said. She noted that pay deals were not only still “worryingly high” but were also negotiated for one year only. Because of this, she added, “we cannot draw the same comfort about the future pace of pay growth that we can for several other advanced economies”. More

(Reuters) – Further progress on beating back inflation will be the decisive factor in any Federal Reserve decision next year to reduce interest rates, Chicago Federal Reserve Bank President Austan Goolsbee said on Tuesday.”If inflation continues to come down to target, then the Fed can reconsider how restrictive it wants to be,” Goolsbee said in an interview on Fox News. The stock market, which surged after Fed Chair Jerome Powell last week signaled that rate hikes are likely over and rate cuts may be next, “got a little ahead of themselves” with “euphoria” over the thought of Fed interest-rate cuts, Goolsbee said, adding that the U.S. central bank won’t be “bullied” by markets. The decision is also “not about politics,” he said, responding to the suggestion that the Fed would cut rates to help President Joe Biden’s reelection prospects.  More

It is estimated the reform, including the amnesty, will generate more than $830 million and stimulate the ailing economy.Noboa took office last month promising to improve economic conditions, especially for youth, amid surging crime in the Andean country.The reform was approved by 107 legislators out of 135 present in the session, with minor changes that the 36-year-old president can now approve or reject.”We will once again have order and the resources to combat lawlessness,” said Noboa in a statement after the vote.The new tax incentives, mostly in the form of income tax discounts, will apply to companies that hire workers aged 18-29 for a minimum of one year.Last week, Noboa told Reuters in an interview that he expects the incentives to cut youth unemployment by at least 10 percentage from its current rate which exceeds 50%.The tax amnesty offers a waiver on interest due on outstanding tax debts, as well as fines. It does not allow officials like the wealthy Noboa, their relatives or lawmakers to file for the benefit.The business of Noboa’s father, banana magnate Alvaro Noboa, owes more than $89 million in delinquent taxes, according to Ecuador’s tax authority.In addition to the amnesty, the reform includes monthly income tax payments for the largest taxpayers, as well as a refund on sales taxes paid for purchases of construction materials and some real estate developments, in a bid to attract more private investment. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.British businesses that export to the EU are facing mounting costs three years after Brexit as a result of emerging regulatory challenges including new carbon taxes, VAT changes and additional border controls, the British Chambers of Commerce has warned.In an assessment of trading conditions with the bloc three years after the EU-UK Trade and Cooperation Agreement came into force, the trade body warned that businesses were becoming mired in so much red tape from new EU rules that it was easier for many to trade with more distant countries than with Europe.BCC director-general Shevaun Haviland warned that looming rule changes would have “big repercussions” for business that the government must not ignore if it wanted to deliver growth.“We need to take a smart but flexible approach to how we handle these alterations to keep their impact to a minimum,” she said. “If we want to get businesses growing then we need to boost our exports, and the EU is our number one market. That’s a reality that should not be ignored by our political parties.” The worst-hit sectors are agrifood, chemicals and advanced manufacturing, which, having already adapted to post-Brexit customs changes, are now facing reporting requirements on their supply chains, carbon emissions and plastic packaging usage. The EU decision to start phasing in a carbon border tax regime from October 2023 was already hitting businesses, which were required to provide data on carbon usage to EU importers, with taxes being imposed from January 2026, the report said.UK companies were having to adopt “processes for weekly, and in some cases daily, monitoring of gas usage”, to provide the information related to the reporting requirements, it added.The BCC, which represents 50,000 mostly smaller British businesses, urged the government to seek simplifications to the reporting process and then to legally merge the EU and UK carbon pricing schemes in order to avoid such border bureaucracy. It cited a July 2023 membership survey that found that almost two-thirds of UK exporters said trading with the EU was more difficult than a year ago — compared with only one-fifth of exporters to the rest of the world.In the agrifood sector, the UK continues to have worse access to the EU than countries such as New Zealand, with the BCC backing a plan by the opposition Labour party for Brussels and the UK to agree a veterinary agreement to remove barriers to trade. The report said UK agrifood businesses had “paid the price through delays, wastage of food and higher costs as a result” with some companies entirely abandoning trade with EU customers.Mark Fane, the chief executive of Crocus, an online garden retailer that employs 250 people with a turnover of £30mn said that business had recently been forced to give up a £10,000 export order to Ireland after falling foul of EU rules on soil types.“It’s death by a thousand cuts. We tried every which way to export the order but hit barrier after barrier. If you’re a big company, you grind your way through it, but it just gets to the stage where you can’t be bothered any more,” he said.Fane added that the business was now focused on the UK market and propagating plants locally, but was still supplying non-EU clients. “It has to be a bit ridiculous that we can supply the Middle East but not southern Ireland,” he said.The BCC listed a range of other measures to improve trade, including seeking simplified VAT arrangements for small businesses, closer regulatory alignment in sectors such as chemicals and improved mobility arrangements for service professionals.Mike Martin, the group director at T L Dallas, an independent insurance broker in Bradford with 160 employees, said the firm had been affected by rules that required insurers to establish inside the EU in order to serve clients there.“It is very limiting for us. Before, if we had a client open an office in Germany, we could passport into Germany and look after them, but now it is illegal for us to advise, so that favours the big firms that have EU subsidiaries,” he said.Martin added that many of his clients were also battling Brexit. “The businesses we service are typically small independents, so they’ve withdrawn from exporting and we’re finding that for some it has completely put them off trading overseas,” he said.The Department for Business and Trade said: “In the year to June, we exported over £360bn worth of goods and services to the EU, an increase of 17.1 per cent in current prices on the previous 12 months.”It added that the UK economy had grown faster than Germany and France since leaving the EU, but acknowledged that there were “some issues”. It also said it was “working closely with the EU on solutions, including changes to the Border Operating Model and the introduction of a Single Trade Window, that will make it easier for UK businesses to trade”. More

In a statement, the central bank said its board believes that bringing inflation in the world’s largest copper producing nation to its 3% target will require further cuts in the monetary policy rate.”The size and timing of the cuts will take into account the evolution of the macroeconomic scenario and its implications for inflation,” the bank said in a statement, noting that while inflation has declined last month still exceeded forecasts.Chile’s November inflation hit 0.7% while economists polled by Reuters had forecast just 0.2%. 12-month inflation continued to slide, reaching 4.8% – its lowest level since August 2021.In the statement, the central bank maintained its expectation that the rate of rising consumer prices should converge to the target in the second half of 2024, though core inflation will likely get there in the first half of next year.Since its last monetary policy meeting, it said, the peso has appreciated and long-term interest rates have fallen “significantly”.The interest rate reduction was larger than the 50-basis-point cut estimated in a central bank poll last week by traders, who also forecast the benchmark rate would reach 5.0% within 12 months. More

(Reuters) – A look at the day ahead in Asian markets.A ‘Santa rally’ is in full swing across global stocks, with the Bank of Japan’s dovish tilt on Tuesday adding fuel to a fire already burning nicely after the Federal Reserve indicated last week that U.S. interest rates could be cut early next year.Even Chinese stocks got in on the act, snapping a four-day losing streak, and Beijing is where investor attention in Asia turns on Wednesday as the People’s Bank of China prepares to deliver its latest policy decision.If anything, however, the PBOC will spoil the party. It is widely expected to leave its one- and five-year loan prime rates unchanged at 3.45% and 4.20%, respectively, according to all 28 economists surveyed in a Reuters poll.Beijing is under increasing pressure to significantly ease monetary or fiscal policy – or both – to heal the sickly property sector, kick-start growth and pull the economy out of deflation.But that probably won’t come until some time next year, and although investors are fully anticipating no action on Wednesday, it will be another reminder of China’s policy predicament, economic travails and market vulnerabilities.Japanese markets, on the other hand, got a shot in the arm after the BOJ doused speculation that its landmark move away from negative interest rates is imminent.The benchmark Nikkei 225 index jumped 1.4% and is now within 2% of November’s 33-year high; the yield on 10-year Japanese Government Bonds fell more than six basis points, one of its steepest daily declines this year; and the yen fell for a third day against the dollar, this time by 0.75%.The yen’s losses against the euro were particularly steep, while the risk-sensitive Australian and New Zealand dollars were among the biggest gainers against the U.S. dollar on Tuesday, both sitting around their highest in nearly five months.The BOJ’s relatively dovish tilt boosted the positive risk appetite already coursing through global markets. Despite some push back from Fed officials, investors are still betting on as much as 150 basis points of rate cuts next year.After the Dow Jones Industrials index ventured into uncharted territory last week, the tech-heavy Nasdaq followed suit on Tuesday, rising to a new peak just shy of 15,000 points, while the S&P 500 got within 1% of a new record high also.The U.S. ‘FAANG’ index of mega tech stocks rose for a ninth straight day on Tuesday and, remarkably, has almost doubled in value this year. Perhaps this will give the Hang Seng tech index a much-needed boost on Wednesday.But while the MSCI World index on Tuesday hit its highest since April last year too, the MSCI Asia index continued to underperform.Here are key developments that could provide more direction to markets on Wednesday:- China central bank policy decision- Japan trade (November)- Australia leading indicators (November) (By Jamie McGeever; Editing by Josie Kao) More