Economy

LONDON (Reuters) – The dollar headed for its biggest weekly drop in five months on Friday as the prospect of rate cuts from the Federal Reserve versus a tough line from central banks in Europe on monetary policy fed weekly gains in the euro and the pound. The Bank of Japan is the last of the major central banks to meet this month and the question among traders and investors is whether or not it will signal its intention to ditch its policy of keeping interest rates at rock-bottom next week.In an action-packed week for central banks this week, traders found more clarity on when interest rate cuts were likely after Federal Reserve Chair Jerome Powell said that the tightening of monetary policy is likely over, with a discussion of cuts coming “into view”. The divergence between the Fed and other central banks set the dollar index on track for a near 2% slide this week, its largest weekly loss since mid-July, to around its lowest in four months. It was last up 0.1% at 102.08.Futures markets show investors are now pricing in a 75% chance of a U.S. rate cut in March, according to the CME FedWatch tool. At the start of December, there was around a 40% chance of a cut.Markets expect U.S. rates to fall by 150 basis points by the end of next year, double the Fed’s projections that imply 75 basis points of cuts.The prospect of such a benign rate environment has ignited a rally across risk assets over the past 24 hours, at the expense of the dollar. But the mood may not last, as the U.S. economy is slowing, while inflation is still above target, analysts said.”There was an element of surprise – the extent to which the Fed has gone with giving the market what it wants. Christmas came early,” City Index strategist Fiona Cincotta said.Financial markets are pricing in a steep drop in rates, but not the economic pain that might come from the kind of slowdown in activity that it may take to bring core inflation back to the Fed’s 2% target.”There is potential for some further U.S. dollar weakness, but I think the concern is that if the Fed does let up too quickly, we can get that return in inflation. It’s a scenario we have seen before and it’s going to weigh on investors’ minds – not immediately, as we’re still in the euphoria of the decision,” Cincotta said.DIVERGING VIEWSOn Thursday, the European Central Bank and the Bank of England took a different path to the Fed, pushing back against bets on imminent cuts to interest rates and reiterating their focus on the fight against inflation.Investors are nonetheless still betting heavily on rate cuts from both central banks next year. The ECB has more scope than most to ease, according to Pepperstone strategist Chris Weston, given low growth and a rapid decline in inflation.”However, the pushback from (ECB President) Lagarde and co suggests conjecture on the timing of initial easing – perhaps this is a function that its desirable to keep one’s currency strong to limit imported inflation.”Preliminary readings of business activity in France and Germany on Friday showed an unexpected slowdown in the euro zone’s two largest economies this month, sending the euro down by as much as 0.4% to a session low of $1.0946. It was last at $1.0958, still up 2% this week.Sterling eased 0.1% to $1.276, having surged 1.1% to a four-month high of $1.2793 on Thursday after the BoE’s hawkish tilt.Meanwhile, the Japanese yen strengthened 0.16% to 141.60 per dollar, having risen 0.7% to a four-and-a-half month high of 140.95 on Thursday.The yen is up 2% this week, set for a fifth straight week of gains against the dollar, its longest such stretch since mid-2020. More

BRUSSELS/BUDAPEST (Reuters) -Hungarian Prime Minister Viktor Orban vetoed a major European Union aid package for Ukraine on Friday and warned he could still halt Kyiv’s accession to the bloc after membership talks won EU approval.At a summit in Brussels on Thursday, the European Union’s 26 other national leaders took the historic step of agreeing to start accession negotiations with a country at war, bypassing Orban’s grievances by getting him to leave the room.But, hours later, they could not overcome resistance from Orban, who maintains close ties to Russia, to a revamp of the bloc’s budget to channel 50 billion euros ($55 billion) to Ukraine and provide more cash for other EU priorities such as managing migration.The Kremlin praised Orban’s stance, which spokesman Dmitry Peskov said impressed Moscow, while criticising the EU, saying the decision to open membership talks was a politicised one that could destabilise the bloc.Orban, who has a history of banking on clashes with other EU leaders for electoral benefit at home, told state radio that he blocked the aid package to Ukraine – part of a broader multi-year budget plan – to make sure Hungary gets the funds it wants from the EU budget.”It is a great opportunity for Hungary to make it clear that it must get what it is entitled to. Not half of it, or one-fourth,” he said.The breakthrough on a membership path – which also showed the limits of Orban’s power to bend EU decisions his way – came at a critical time for Ukraine with its counter-offensive against Russian invasion forces having failed to make major gains and with U.S. President Joe Biden so far unable to get a $60 billion package for Kyiv through Congress.Ukrainian President Volodymyr Zelenskiy hailed the approval of membership talks as a victory for Ukraine and Europe.Lithuanian President Gitanas Nauseda said as he arrived for fresh talks on Friday that the decision to start accession talks made him “proud to be European” and was cause to celebrate, even if it was “only the first page of a very long, long process”.’BAD DECISION’?But Orban warned Hungary could still block the talks at any time. “This is a bad decision,” the nationalist leader said. “We can halt this process later on, and if needed we will pull the brakes, and the ultimate decision will be made by Hungarian parliament.”The EU leaders ended talks on the financial package, which requires unanimity, in the early hours of Friday and said they would try again in January, voicing optimism a deal could be clinched then.”I can assure you, Ukraine will not be left without support, there are different ways to do this,” Estonian Prime Minister Kaja Kallas said. “I am pretty confident we will have a solution by January.”Member states could also provide aid individually or strike separate deals.”The message to Ukraine is: we will be there to support you, we just need to figure out a few of the details together,” Belgian Prime Minister Alexander De Croo said. Although membership would likely be many years away, the decision at the Brussels summit took Ukraine a step closer to its long-term strategic goal of anchoring itself in the West and liberating itself from Russia’s orbit.German Chancellor Olaf Scholz played a key role in getting Orban to leave the room to clear the way for a decision, diplomats and officials said.De Croo, reflecting frustration with Orban, said it was time for the Hungarian to pipe down.”If you are part of the decision, you agree with the decision, or afterwards you just have to keep your mouth shut,” he said.EU leaders reconvened on Friday to discuss other topics including the Israel-Hamas war. More

Investors pulled $31 billion from cash in the week, the first week of outflows in eight weeks, and put $25.3 billion into stocks, BofA said in a report released on Friday, citing EFPR data. Inflows to equities in the past eight weeks totalled $74 billion, the most in an eight-week period since March 2022, the report said, describing markets as being “all-in on infallible Fed”. The Federal Reserve held interest rates at its meeting on Wednesday, as expected, but policymakers pencilled in 75 basis points of rate cuts for 2024 as Chair Jerome Powell said the historic tightening of monetary policy was likely over with inflation falling faster than expected. BofA noted that there have only been five occasions in the past 90 years when the Fed has cut rates when core consumer inflation – now 4% – is higher than the unemployment rate – currently 3.7%. Those were in 1942, during the Second World War, and in four recessions between 1969 and 1981. The Fed’s policy decision on Wednesday added major impetus to a global rally in stocks and bonds.MSCI’s world share index is at its highest since April 2022 and set for a weekly gain of 2.7%, its best week since the start of November and on track for its seventh successive weekly gain. Benchmark 10-year U.S. Treasury yields are down 32 basis points on the week, their biggest such fall in more than a year. More

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In its year-end economic bulletin, the central bank said it expected the economy would expand 2.2% in 2025 and 2.0% in 2026.”The Portuguese economy has stagnated in recent quarters and the short-term outlook is uncertain, with downside risks predominating,” the bank said in a statement.The budget deficit is likely to fall to the equivalent to 0.1% of the country’s gross domestic product next year, down from 1.1% expected this year. The economy is being impacted by high interest rates and weakening demand from abroad, along with the dissipation of the momentum associated with the post-pandemic tourism recovery.”The prospects are conditioned by uncertainty of new geopolitical tensions and the national political situation,” it said.Following the resignation of Prime Minister Antonio Costa on Nov. 7, Portugal will hold a snap election on March 10. The caretaker government will not be able to make long-term decisions until a new administration takes office.Many analysts believe that the vote could result in an unstable government, without crucial majority support in parliament.The Central Bank put Portugal’s euro area-harmonised inflation at 2.9% in 2024, down from an expected 5.3% this year. More

DUBLIN (Reuters) -Employment at foreign multinational companies in Ireland fell by 0.3% in the year to end-October in the first annual decline since 2009 as tech layoffs offset jobs growth in every other sector, the state investment agency said on Friday.Ireland is hugely reliant on foreign multinationals, which have almost doubled their workforce in the last decade to make up around 11% of the entire labour market. That number fell to 300,583 from 301,475 in the year to end-October after job losses more than doubled year-on-year to almost 18,000. Those employed in the information and communications services sector fell by 2.9% after a number of big employers including Meta (NASDAQ:META), Accenture (NYSE:ACN) and Stripe laid off Irish staff as part of global cutbacks from late last year.Job growth was recorded in all other sectors and the head of IDA Ireland, the investment agency, said he expected to return to net jobs growth, noting that many of the tech companies that cut jobs are “now turning to growth.””We will be looking to future net gains. We’ve gone through a very turbulent 14, 15 months with the global technology reset. If we continue on the trajectory we’re on, that will inevitably lead to future growth,” Michael Lohan told a news conference.Lohan added that while investment in Ireland continued to face domestic and global challenges, he was optimistic about 2024 with a “reasonably strong” pipeline of potential job announcements.Despite the tech cuts, the IDA still won slightly more new investments in the last 12 months than a year earlier, enabling the creation of almost 19,000 jobs in 2023 and future years. Close to 17,000 jobs were added in the 12 months to October.That was down sharply on the record 32,426 added in 2022 and was the lowest annual total in almost a decade. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK business activity rose at the fastest pace in six months in December, according to a closely watched survey that suggests economic output might not fall in the final quarter.The S&P Global/Cips flash UK PMI composite output index, a measure of the health of the manufacturing and services sectors, unexpectedly rose to 51.7 in December, from 50.7 in November — the fastest rise in private sector business activity since June.A reading above 50 indicates a majority of businesses reporting an expansion.The results exceeded expectations, with economists polled by Reuters forecasting the index would remain broadly unchanged at 50.9.In another sign of tentative optimism, separate data published by the research company GfK on Friday showed that UK consumer confidence rose to a three-month high in December.The PMIs, a more timely indicator of activity than official statistics, suggest that the economy could avoid a contraction in the final quarter of the year. Data published by the Office for National Statistics on Wednesday showed that the UK economy shrank 0.3 per cent between September and October, raising expectations of a contraction across the final quarter; today’s numbers have eased some of those fears.Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The UK economy continues to dodge recession, with growth picking up some momentum at the end of the year to suggest that GDP stagnated over the fourth quarter as a whole.”On Thursday, the Bank of England forecast that the UK economy would stagnate but avoid a contraction in the final three months of the year, a downward revision from its November estimate of a 0.1 per cent expansion.But the central bank kept interest rates at a 15-year high of 5.25 per cent and warned that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”.The PMIs showed that prices of inputs rose at the fastest pace since August, driven by higher price pressures in the services sector, which will be a concern for policymakers. The increase was widely linked to higher salaries and led to another robust increase in output prices. “The stickiness of price pressures will only encourage the Bank of England to double down on its narrative that rates will stay high for longer,” said Alex Kerr, economist at Capital Economics.The increase in the UK PMI index was driven by the services sector, which rose to 52.7 in December from 50.9 in the previous month. Williamson in part attributed the rise to “hopes of lower interest rates in 2024”.Despite cautious comments on rates from policymakers, markets are pricing four cuts by the end of next year. In contrast with services, manufacturing activity decreased for the 10th month running, and at a notably faster pace than in November, with the index dropping to 46.4 from 47.2 in the previous month. Many goods producers reported a slide in output volumes due to overstocked customers.John Glen, Cips chief economist, said: “A revival in the services economy is helping the UK’s private sector end the year on a more positive note. However, the continued struggles in manufacturing add a tone of caution as we look ahead to 2024.” More

COLOMBO (Reuters) – Sri Lanka’s economy grew by 1.6% in the quarter from July to September, official data showed on Friday, as the country claws its way back from its worst financial crisis in more than seven decades following a record fall in foreign exchange reserves.The expansion was the first since the end of 2021, with the upturn driven by a lower base, moderating inflation, a strengthening currency and lower interest rates, Sri Lanka’s Census and Statistics Department said in a statement.Sri Lanka’s agriculture sector grew 3% from a year earlier, with an increase of 0.3% in industrial output, while services grew by 1.3%, the department said. Helped by a $2.9 billion IMF bailout in March, Sri Lanka’s economy began a painful path towards growth. It locked down a second tranche of $337 million this week, although the IMF has warned the island is not yet out of the woods. Sri Lanka’s economy is expected to contract by 3.6% this year, the IMF says, after shrinking 7.8% in 2022.Full-year growth will return next year, with the Sri Lankan economy projected to grow 1.8%, but challenging reforms lie ahead, such as higher taxes, reforms to loss-making state enterprises and a complete restructuring of its foreign debt.The Central Bank of Sri Lanka has slashed interest rates by 650 bps since June to boost growth, in parallel with inflation shrinking to 3.4% in November from a high of 70% last September. “Economic recovery really took root in the last three months of 2023 with stronger recovery in the services and manufacturing segments,” said Dimantha Mathew, head of research at First Capital. “This means growth could be as much as 7%-8% for the fourth quarter,” Mathew added. More