Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of Japan is widely expected to maintain interest rates below zero next week but investors will be hunting for crucial hints on its next policy move.BoJ governor Kazuo Ueda faces the tricky task of communicating future policy clearly to financial markets after its two-day meeting ends on Tuesday, especially since any change in his inflation outlook is likely to trigger a sharp move in the yen. Earlier this month, Ueda warned of an “even more challenging year” ahead for policy management, sending the yen to a four-month high of ¥141.6 per dollar. His comments raised expectations that the BoJ would soon scrap its policy of holding interest rates below zero, although most major brokerages are not forecasting a policy revision until early next year or the spring.Economists say the BoJ is expected to tread carefully, having not raised short-term interest rates since the summer of 2006. Before ending its negative interest rate policy, the BoJ is first likely to change its forward guidance on interest rates or provide signals on policy change.“There will be no surprise end to negative interest rates,” said Kazuo Momma, the former head of monetary policy at the BoJ who is now executive economist at Mizuho Research Institute, adding that he expects an end to negative interest rates in April. Kana IngakiWhen will UK inflation data allow the Bank of England to cut rates?Investors will be focused on UK inflation data on Wednesday for signs of how much the Bank of England could cut interest rates next year.Economists polled by Reuters forecast that the headline rate of price growth will ease to 4.4 per cent in November from 4.6 per cent in the previous month.Core inflation, which strips out the more volatile food and energy prices, is expected to slow to 5.5 per cent from 5.7 per cent in the previous month.A sharper or more widespread decline in inflation could prompt markets to price in more rate cuts by the BoE. As of Friday, markets were pricing in a 107 basis point fall in interest rates by the end of December next year for the BoE, 111 basis points for the European Central Bank and 148 basis points for the US Federal Reserve. The BoE is particularly concerned about services sector inflation, which in the UK eased to 6.6 per cent in October, still much higher than the 4 per cent in the eurozone and the 5.2 per cent in the US. In the minutes of the BoE’s monetary policy decision on Thursday, in which the bank held interest rates unchanged at a 15-year high of 5.25 per cent, it noted that services price inflation “had remained elevated”, despite the fall in the headline rate.Sandra Horsfield, economist at investment bank Investec, forecasts that headline inflation will slow to 4.3 per cent in November, helped by lower energy and food inflation.She also expects some easing in core inflation to 5.5 per cent but noted that for the BoE “the downtrend trend in inflation is likely to be perceived as too gradual to allow for rate cuts in the very near term, especially considering the jobs market still looks reasonably robust.“We continue to expect a first move down in interest rates only in August 2024,” she said. Valentina RomeiWill the Fed’s preferred measure of inflation show price growth is cooling?The core personal consumption expenditures index, the US Federal Reserve’s preferred measure of inflation, is expected to show that price rises cooled last month.Year-over-year core PCE — which strips out the volatile food and energy sectors and which is most closely watched by the Fed — is expected to come in at 3.4 per cent, according to economists polled by Bloomberg, down from 3.5 per cent in October. Core PCE has fallen dramatically from a peak of 5.6 per cent last February, but remains above the Fed’s 2 per cent target. Evidence of slowing core inflation may lead investors to increase bets that the Fed will cut interest rates next year. At the bank’s meeting this week chair Jay Powell signalled that the Fed has finished raising interest rates this cycle. That suggests that officials are now more concerned with the risks of overtightening policy — and sending the economy into a recession — than the risks that inflation will accelerate again. Following this week’s meeting — which was accompanied by the Fed’s “dot plot” showing officials currently believe that interest rates may be cut three times next year — traders added to bets on cuts next year, pricing in as many as six by the end of the year. Also released Friday will be personal income and expenditure data. Although holiday shopping typically boosts personal spending in November and December, Bloomberg forecasts show that personal spending is expected to be flat from the prior month at 0.2 per cent. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Washington has raised concerns with Mexico over an imminent wave of Chinese investment into the country, as three of China’s largest electric-vehicle makers prepare to build factories south of the US border.MG, BYD and Chery, known in Mexico as Chirey, have all been speaking to officials in Mexico to find sites this year, according to several people with knowledge of the talks. Another Chinese company is planning to build a $12bn battery plant, one person said.The investment push, which could give producers in China a valuable foothold in the region, puts Latin America’s second-largest economy in the middle of the US-China trade war. US officials have raised questions about Chinese investment more broadly in meetings with Mexican counterparts, three people said. Mexican officials acknowledged they had to be cautious when considering Chinese investments because of the risks of upsetting the US.Mexico, the world’s seventh-largest carmaking nation, is one of the countries best placed to benefit from an upheaval in global supply chains caused by disruptions in the Covid-19 pandemic and the US-China trade war. It offers cheaper labour, a broad-based car supply chain and access to the North American free trade deal USMCA. “The interest of Chinese companies in the Mexican market has grown exponentially,” said Francisco Bautista of EY Latin America, which is working with four Chinese electric vehicle companies looking to locate production in Mexico.The US is vying with China for supremacy in electric vehicle manufacturing and launched stringent curbs to exclude electric vehicles, batteries and other components and resources made by Chinese companies from its supply chain through the Inflation Reduction Act. President Joe Biden’s administration is concerned that Chinese carmakers will be able to sidestep the measures by building cars in Mexico, outshining global rivals with technologically advanced models that are more competitively priced. Top members of the Republican-led House Select Committee on China wrote in a recent letter they were worried Chinese companies would use Mexico as a “back door” into their market.China is the world’s largest producer of electric vehicles and their batteries, with its carmakers increasingly exporting low-cost models around the world as they face overcapacity in domestic factories. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.MG, owned by state car giant SAIC, plans to build a $1.5bn-$2bn factory in Mexico, while BYD is working on a factory investment worth hundreds of millions in its first phase, said one source familiar with the talks. Last month, BYD met ministers from at least four Mexican states including Edomex and Yucatán at a reception in Mexico City about an electric vehicle factory, said a former state official. Nuevo León’s governor said BYD was planning a factory there, although the company said no final decision had been taken. SAIC, BYD and Chery did not respond to requests for comment.Chinese carmakers have experienced astronomical growth in Mexico in recent years, accounting for nearly a fifth of sales, up from virtually zero six years ago.The US has said it is not trying to block Chinese investments in Mexico. But Janet Yellen, US Treasury secretary, recently stressed the need to apply trade rules properly, including a recent US agreement with Mexico to strengthen its foreign investment screening. Mexico is heavily dependent on the US, where more than two-thirds of its exports go and 37mn people of Mexican origin live and work, sending back almost $60bn a year in remittances. Asked whether the investment screening agreement could harm Mexico-China business relations, Finance Minister Rogelio Ramírez de la O was blunt.“Our trade and financial relationship with the US is completely dominant,” he said while sitting next to Yellen in the National Palace. “It’s not a great priority to dedicate time to countries other than the US.”This year Mexico became the US’s largest trading partner, with Biden pushing for greater economic integration in North America, particularly in green industries.Mexico is covered by the IRA’s consumer tax credit to speed up the deployment of electric vehicles. But that required models to be made in North America and source materials and components from countries with US free trade agreements. No parts can come from China or other “foreign entities of concern”, adding to US trade barriers that have already dissuaded some new Chinese brands from focusing on the market.Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights, said Chinese companies were “realistic” that anti-China sentiment in Washington threatened to block access to the Biden administration’s generous EV subsidies. “It is clear to them there is a target on their chest,” Dunne said.Additional reporting by Peter Campbell in London More

ISTANBUL (Reuters) – Abu Dhabi is set to buy a stake in a key Turkish port, according to four sources aware of the deal, in a further sign of a rapprochement between the once bitter geopolitical rivals.Under the potential agreement, state-controlled group AD Ports Group would invest in an entity to be established by the Turkey Wealth Fund to run the Aegean coast port of Izmir, said two of the sources. The sources requested anonymity to discuss details of the deal that has yet to be finalized. The size of the stake was not immediately clear but one of the sources said the deal could be valued at about $500 million. The port, owned by Turkey’s sovereign wealth fund, is an important gateway that is in need of new investment.An official for the Turkey Wealth Fund declined to comment. AD Ports didn’t immediately respond to a request for comment while ADQ, the emirate’s sovereign wealth fund and majority owner of the ports group, wasn’t available for comment. The planned transaction comes as Turkey’s government seeks foreign investment to accelerate its U-turn away from years of unorthodox economic policies that had sent inflation soaring and the currency plunging.Ports play a key role in the strategic shift in global manufacturing. Weaknesses in supply chains exposed by the COVID 19 pandemic and heightened geopolitical tensions are spurring a shake-up as companies seek to bring production closer to the point of sales.Meanwhile, Turkey hopes that an aggressive rate-hiking cycle launched in June will draw back foreign investors after years of exodus, including foreign direct investment (FDI). Some Western investors are starting to tip-toe back in to markets.Turkey’s Erdogan met with UAE president Sheikh Mohamed bin Zayed Al Nahyan on the sidelines of the COP28 U.N. climate summit held in Dubai earlier this month. ADQ is chaired by National Security Adviser Sheikh Tahnoun bin Zayed Al Nahyan, a brother of Sheikh Mohamed.Turkey and the UAE began to repair ties two years ago following a bitter rivalry that was in a large part driven by ideological difference which saw the regional powers back opposing sides across the Middle East and North Africa.UAE officials have since said they see huge investment opportunities in Turkey, including in energy and logistics. The Dubai state-owned port operating giant DP World bought a majority stake in a Turkish port earlier this year.The UAE and Turkey signed a free trade agreement in May that was meant to make investment easier.The two countries agreed a series of deals worth more than $50 billion in July as the Turkish president visited Gulf states in a bid to revive the economy. More

Federal Reserve Chair Jerome Powell said last week that interest-rate increases were likely over in the United States and lower rates were coming into view but central banks have stuck to plans to keep policy tight well into next year. Seven sources told Reuters the European Central Bank would need to see how inflation and other data pan out between now and, at the earliest, its March 7 meeting before considering the kind of “dovish” pivot the Fed performed.”One thing I’ve learned is that one must not try to make predictions on the coming months – it’s nearly impossible. That said, at this stage I am still not convinced that inflation is really under control,” Ermotti told Swiss newspaper Le Matin Dimanche when asked about the economic outlook.”The trend seems favourable but we must see if it continues. If inflation approaches the 2% targets in all major economies, central banks’ policies could loosen a bit. In this environment, it is very important to remain agile,” he added.UBS has said it will slash 3,000 jobs in Switzerland to cut costs following its takeover of Credit Suisse – the biggest bank merger since the global financial crisis, orchestrated by the Swiss state to avert Credit Suisse’s collapse.”We will do our best, based on a principle of meritocracy. Use retirements, early retirements, natural departures. Three thousand people at Credit Suisse did not commit errors, no doubt far fewer,” Ermotti said. “In fact, the hardest part will be making these choices, firing people who are in no way responsible for what happened,” he added. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This week’s rally in global bond markets has shattered investors’ months-long assumption that interest rates in the US and elsewhere will remain higher for longer.The benchmark 10-year US Treasury yield, seen as a proxy for borrowing costs around the world, fell below 4 per cent for the first time since August. The policy-sensitive two-year yield, which closely tracks rate expectations, slipped to its lowest point since May. Other government bond markets have also undergone a dramatic about-turn in recent days, with Germany’s 10-year Bund yield sliding to its lowest level in nine months as its price shot higher. The sharp moves came after the Federal Reserve gave its clearest indication yet that it would not raise borrowing costs again, and signalled that it expected three quarter-point cuts in 2024. Fed chair Jay Powell noted that the benchmark rate was “likely at or near its peak for this tightening cycle”.“Higher for longer is dead,” said Kristina Hooper, chief global markets strategist at Invesco. “Powell wrote the epitaph [this week].”As recently as early November, markets had been bracing for an extended period of elevated borrowing costs as central banks continued their battle to tame inflation.In recent weeks, signs of a cooling economy and softer price growth data had helped to ease those concerns — lifting bond and stock markets. But the Fed’s closely watched “dot plot” projections on Wednesday were seen by many as the most official sign yet that “higher for longer” was over.By Friday, markets were reflecting investors’ expectations of six US interest rate cuts in 2024 — beginning as soon as March. Those predictions would take borrowing costs in the world’s biggest economy from a current range of 5.25 to 5.5 per cent down to roughly 3.9 per cent.“A dovish pivot from the Fed is a full-speed ahead signal for the bond market,” said Bob Michele, chief investment officer and head of the global fixed income, currency and commodities group at JPMorgan Asset Management. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.While New York Fed president John Williams said on Friday that talk of rate cuts as soon as March was “premature”, his note of caution was not enough to halt the rally.The upbeat narrative also persisted in Europe and the UK — where inflation has been far more stubborn than in the US — even as European Central Bank president Christine Lagarde and Bank of England governor Andrew Bailey pushed back against the prospect of imminent rate cuts.Buoyant investor sentiment also lifted stock markets this week, with Wall Street’s S&P 500 closing out its seventh straight week of gains and edging closer to a fresh record high.Some strategists noted that US inflation was still far from the Fed’s long-term target of 2 per cent — meaning that rates are unlikely to come down rapidly. The US headline consumer price index reading for November came in at 3.1 per cent — down from October’s figure of 3.2 per cent, and in line with consensus forecasts.But for Michael Kushma, chief investment officer of broad markets fixed income at Morgan Stanley, “the Fed has switched its focus from inflation to growth”. If the Fed is satisfied with waiting for price growth to return to 2 per cent, he added, “there’s no reason to have too weak an economy in 2024. The Fed has decided that inflation is behaving, so off to the races we go”.The sharp drop in government bond yields this week has also translated into much lower debt funding costs for corporate borrowers. The average bond yield for junk-rated US companies has fallen to less than 8 per cent, according to an Ice BofA index, around levels last seen in February — with Thursday marking its biggest daily drop in 13 months.The spread or premium paid by risky borrowers over the US government also narrowed by a sizeable 0.33 percentage points on Thursday to 3.47 percentage points.Concerns have intensified this year that some of the lowest-rated companies on both sides of the Atlantic will struggle to refinance their debt in an environment of much higher funding costs, potentially sparking an uptick in defaults. Junk-rated US companies alone are staring down a $1.87tn maturity wall over the next five years, according to Moody’s.But “even though we haven’t seen one rate cut yet . . . There has been a significant easing in financial conditions that is giving companies breathing room,” said Invesco’s Hooper.The prospect of cuts has more pronounced implications for floating-rate loan issuers than for fixed-coupon bond issuers, said Andrzej Skiba, head of Bluebay US fixed income at RBC Gam. “Unlike in US high-yield bonds where it’s a marginal positive, in the leveraged loan space and private credit [space], it could make the difference between a company getting into trouble and not.”Still, he noted that a further slowing of the US economy could start to weigh on corporate profits. More

Lilia Lemoine, a former IT specialist and cosplay enthusiast, recalls making models of the Argentine central bank for Javier Milei to destroy in a theatre performance.“I used to joke that we were doing voodoo magic on the central bank to close it down,” Lemoine said in an interview of their collaboration five years ago. “That’s why we made it as realistic as possible.”Now their days of smashing model central banks are over. Lemoine sits in Argentina’s congress as a newly elected lawmaker for Milei’s party, and Milei himself became president a week ago at a time of deep economic crisis.The 53-year-old political novice — whose previous guises have included tantric sex guru, mystic, fanatical dog lover, ultra-libertarian, maverick intellectual and soccer player — has undergone a dramatic shift in image since the campaign, dressing soberly and speaking in serious, statesmanlike terms.Following his improbable election victory over Argentina’s long-ruling Peronist movement, Milei’s government unveiled a mainstream economic plan of spending cuts and tax rises on Tuesday to balance the budget.Lilia Lemoine, 43, a native of Buenos Aires, is now an elected lawmaker for Javier Milei’s party More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors are widely expecting the Bank of Japan to hold off on lifting negative interest rates on Tuesday, but governor Kazuo Ueda is likely to map out more clearly its monetary policy plans following last week’s US Federal Reserve pivot towards easing.Clear signals on the BoJ’s next move or changes in its inflation outlook could cause major shifts in global financial markets, particularly in light of recent volatility in the yen exchange rate.With the Japanese economy contracting more sharply than expected and amid uncertainty about the sustainability of rising wages, the BoJ is not expected to change interest rates at its final meeting of 2023.The Fed surprised markets on Wednesday by signalling it would cut interest rates next year, prompting warnings from the European Central Bank and the Bank of England that it was too soon for them to let down their guard against high inflation.Unlike the Fed, ECB or BoE, the Japanese central bank faces a wholly different challenge of turning what is currently relatively tame inflation into a permanent end to deflation. Institutional investors in Tokyo said they expected Ueda to maintain negative interest rates on Tuesday. Kazuo Momma, an economist at Mizuho Research & Technologies and a former head of monetary policy at the BoJ, said there was “no reason” for it to “rush to raise rates”.“From here, I think the BoJ — in the same way as the Fed and the ECB — will proceed with a high degree of transparency so that markets can sufficiently price in the direction of its monetary policy,” Momma said.He said he expected the BoJ to end negative interest rates in April and make small hikes to short-term rates later in 2024 if it can confirm a continuing trend of rising wages.Ueda warned earlier this month of an “even more challenging year” ahead for policy management, briefly raising expectations the BoJ would soon scrap its policy of holding interest rates below zero and sending the yen to a then four-month high of ¥141.6 to the dollar.The yen subsequently fell, but strengthened again after the Fed pivot. JPMorgan FX strategist Benjamin Shatil said the yen’s rise reflected the difficulties investors were having simultaneously pricing likely moves next year by both the Fed and BoJ.Previously investors thought Fed cuts would mean the US economy was starting to slow and the BoJ would not raise rates at a time of such economic uncertainty.“The underlying narrative has been that if the Fed starts cutting, the BoJ cannot really hike. But then you get a situation like now where there are roughly 30-40 basis points of BoJ hikes and 100-150 basis points of Fed cuts being priced into the market,” Shatil said.Economists said the BoJ was unlikely to try to surprise markets when it eventually ends its negative interest rate policy. Japan has not raised short-term interest rates since the summer of 2006.A shock strategy is not necessary since the BoJ effectively scrapped its policy of keeping a hard cap on the yields of 10-year Japanese government bonds when it revised its so-called yield curve control policy in October. Investors will be watching closely for any hints Ueda might give on Tuesday on the timing of a policy change or any change to his outlook on inflation.Japan’s core consumer price inflation has been exceeding the BoJ’s 2 per cent target since April 2022, but BoJ officials and economists expect inflation to come down next year.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.“We suspect that the BoJ will hint at the upcoming policy revision by including in its statement that it will assess and confirm the virtuous cycle between wages and prices by the January meeting,” Kentaro Koyama, chief Japan economist at Deutsche Bank, wrote in a report. Some investors, however, say the BoJ should immediately end a negative interest rate policy that has adverse side effects on markets and financial institutions.“The first thing the BoJ should do is to abolish excessive monetary policy — its yield curve control and negative interest rates — as soon as possible,” said Naruhisa Nakagawa, founder of hedge fund Caygan Capital. But Nakagawa said it would be difficult for the BoJ to consecutively raise short-term interest rates in the future. Maintaining 2 per cent inflation would be tough unless Japan saw a pick-up in rents and other services that make up a large part of the country’s consumer prices, he said. More

Japan will allow greater access for Indonesian products including by removing tariffs on processed fishery items and the two countries will improve relations in the banking sector, Minister Retno Marsudi said in a statement.Both sides are looking for the amended Indonesia-Japan Economic Partnership Agreement (IJEPA) to be implemented by the first quarter of 2024, though it still needs to be formally signed and ratified by their respective parliaments after legal checks, she added.Retno’s statement came after Indonesian President Joko Widodo held a bilateral meeting with Japanese Prime Minister Fumio Kishida on the sidelines of a Tokyo summit marking 50 years of ties between Japan and the Association of Southeast Asian Nations (ASEAN).Indonesia’s trade ministry previously said Jakarta had asked Tokyo to eliminate tariffs on its canned tuna exports during the negotiations, which were intended to build on the IJEPA first signed in 2007.Jokowi, as the Indonesian president is popularly known, in his meeting with Kishida also highlighted the importance of Jakarta and Tokyo’s agreement on critical minerals as Indonesia tries to position itself as an important player in the global electric vehicle (EV) battery supply chain, Retno said.Japan has also provided Indonesia’s coastguard with a patrol vessel worth 9 billion yen ($63 million) to help Indonesia increase its maritime capacity, she said.Earlier on Saturday, Japan and Malaysia signed a security assistance deal including a grant of 400 million yen to boost Malaysia’s maritime security, as Asian nations seek to counter an increasingly assertive China.Jokowi and Kishida also discussed the conflict in Gaza and the Indonesian president reiterated his support for a permanent ceasefire and sustainable humanitarian aid.($1 = 142.1500 yen) More