Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Normal people see rising wages as a source of cheer. But to Scrooge-like central bankers, bumper pay packets are a cause for concern. The OECD expects that in 2023 remuneration per employee in Britain will grow by more than 7 per cent, compared with 5.5 per cent in the eurozone (excluding Latvia, Lithuania and Croatia) and 3.7 per cent in America. How worrying is this really?Wages can rise for lots of reasons. The obvious one is that they are part of the general upward drift in prices, which is normally about 2 per cent a year. The best one is that workers are being rewarded for higher productivity. That could support growth of perhaps another 1-1.5 percentage points.Other sources of real wage strength might include falling import prices. (Intuitively, foreigners wanting to sell us cheaper stuff is nice and can make us better off.) Or employees might bargain for a bigger share of the economic pie, crimping companies’ profit margins. Relying on either to deliver wage gains forever is risky, though, since foreigners are fickle and eventually profits will run out.A final set of pay drivers will attract the economic slur “unsustainable”. Central bankers frown on the dynamic of employers bidding up pay simply to secure scarce workers. They also frown on workers demanding higher wages to cover the rising cost of imports, which their bosses don’t want to absorb either. (Intuitively, if foreigners whack up their prices, someone has to suffer.) Above all, they fear “second-round effects”, where higher wages feed back to higher prices, pushing inflation above 2 per cent. In an extreme case that could cause a wage-price spiral.It’s tricky to decipher what all that means for inflation today. In America, the eurozone and Britain, real remuneration per employee has fallen over the past couple of years. But it is unclear exactly how much of that is the inescapable effect of real shocks such as higher import prices or lower productivity, and how much is only temporary as wages catch up with prices at the expense of profits.Over the medium term, central bankers do seem sure that nominal wage growth will have to be lower if they are to meet their inflation targets. Reassuringly, nominal pay growth seems to have peaked, and in America it may not have to drop very much further. Still, rate-setters are struggling to relax.The basic fear is that although tight labour markets were not the source of the original inflation, they could interfere with the job of getting wages and prices back on a sustainable path. This year the economists Ben Bernanke and Olivier Blanchard estimated that in America the “catch-up” effect of workers trying to maintain their real income in the face of a shock to prices was pretty weak. But after the initial inflation shock faded, a high ratio of vacancies to the unemployed had a lingering effect on workers’ ability to bid up pay.A related warning comes from economists at Goldman Sachs, who warned of a historical interaction between high inflation and tight labour markets in pushing up wage growth. That suggests that as inflation first falls, wage growth should plunge too without much of a deterioration in the health of the labour market. But once inflation is at less extreme levels, getting wages down as well will require something more draconian.In the eurozone the good news is that import prices have fallen recently. The ECB has also spotted signs of firms absorbing higher wages into their profit margins. Both should support some real wage growth after its recent decline. But productivity has disappointed. In a speech on November 2, the ECB’s Isabel Schnabel warned about “labour hoarding”, whereby companies might hang on to workers, pushing up labour costs and inflation.Policymakers at the Bank of England are probably feeling most tense. A recent study by Jonathan Haskel and others replicated the analysis of Messrs Bernanke and Blanchard, and found that Britain’s wage growth seemed to be stickier than in America. Recent annual wage growth of almost 8 per cent has been even stronger than most expected — and than the bank’s standard models predicted.The good news is that there is a path to something more sustainable. The OECD forecasts that while nominal wage growth will fall in each of Britain, the eurozone and America, inflation will fall faster. That means some recovery in real pay per employee over the next couple of years, in line with other episodes that have started with high wage growth and inflation. Fret, by all means. But there is still a chance of a happy ending. [email protected] More

Of all my mother’s oft-repeated sayings, the one I was most dubious about was “it’s an ill wind that blows nobody any good”. It means something like: “The neighbour’s tree may have fallen in the gale, but at least our garden will get more sun now!”In recent years, UK investors have been exposed to several ill winds — not least inflation and its side effects. Many will look at their investments and savings and feel bruised. The cost of living has risen by more than 20 per cent over the past three years — not good for those sitting on a lot of cash.And for those fully invested? If you include dividends, investors in the MSCI World global equity index have seen markets rise by around 30 per cent over the past three years — more than the cost of living. In the UK the FTSE All-Share index is up just 14 per cent, but dividends should take that to around 23 per cent — underlining how important they can be. Not so well off are those in what were supposed to be the safe havens of UK gilts. The iShares UK Gilts ETF is down 30 per cent over three years; its index-linked sibling is down 35 per cent. In other words, these investments have at least halved in real terms.The winds of inflation are probably now subsiding. The consumer price index was up 4.7 per cent in the year to October 2023, but that was better than the 11 per cent recorded a year earlier. Be prepared for the wind-chill to last a bit longer, though. Inflation has a nasty habit of sticking around, especially as people expect their wages to rise to help them cope with the higher cost of living — and the companies agreeing to higher wages then raise the prices of their goods and services.Factor in, too, the likelihood of periodic rises associated with unplanned events — like the Opec countries deliberately cutting oil production to raise energy prices or poor harvests fuelling higher grain prices.Look for returns above inflationThe best bargains are often to be found in debris. If you have no cash, you may need to rebalance your portfolio to pick up these bargains. US technology stocks have withstood the storms of the year well, but expectations and valuations now seem full. Briefly, if artificial intelligence significantly increases their profits, there could be more upside — but better opportunities may be found elsewhere if extra income comes through more slowly than expected.This might make anyone holding an S&P 500 index fund nervous. The “Magnificent Seven” technology companies — Apple, Alphabet (Google), Amazon, Meta, Microsoft, Nvidia and Tesla — now make up about 29 per cent of its value (and around 18 per cent of the MSCI World Index). These stocks tend to rise and fall together. Both indices therefore seem quite unbalanced. Neither offers the diversification I want in these uncertain economic conditions.While technology stocks have hogged the headlines this year, other areas of the equity world have been forgotten — or deserted. Many fund managers have pointed out how cheap UK equities look compared with US equities. This is a market that has been battered since 2016. The average price-to-earnings ratio for US equities is around 16 times for next year. The UK market is closer to 10 times and offers double the dividend yield — 4 per cent.Blame the Brexit storm and ensuing political mayhem if you like. But I think the bulk of this difference in performance can be explained by composition. The UK has few technology companies; tech companies tend to have high price-to-earnings ratios and offer lower yields.UK growth stocks — of which there are few — are usually similarly priced to overseas equivalents. Not today. The ratio of the share price to earnings is a crude valuation measure as earnings figures are quoted differently in each country, but it is a useful starting point for comparisons. According to Bloomberg, accounting software developer Sage Group is on 32 times earnings. Its US equivalent, Intuit, trades on 35 times earnings (maybe 37 times after adjustments I would make, but a pretty similar valuation).The power of dividendsTo my mind, more interesting opportunities lie in lower-growth UK companies that have solid longstanding businesses and a history of coping well with inflation. Many large UK companies pay a dividend yield well in excess of the 5 per cent you can now hunt down in a decent cash savings account.A word of caution: no dividend is guaranteed, and some companies offering high dividends today look stretched to sustain them. Look up Vodafone and you are likely to find it pays a 10 per cent dividend yield, but that assumes they can maintain the dividend. If you check earnings per share vs dividend per share and roughly how much debt costs have gone up (there is lots of debt in Vodafone) you might quickly conclude that this dividend will get cut. This is not a forecast; it is a risk.Large property companies and the miners are perhaps better bets. These are supported by tangible assets — the opposite of technology companies, which live on intangible assets. The rental income of property companies has much in common with bonds — steady over long periods — but unlike bonds, property companies can raise the rent when a new lease is agreed, so rental income tends to adjust for inflation.Like bonds, property shares have performed poorly over the past few years, especially as investors have worried about rising interest costs and that work from home might threaten office demand forever. Land Securities’ shares, which I hold, touched nearly £10 before the pandemic and now lie at just over £6.The share price in the long term has support from the sale value of the company’s properties, less the debts to be paid — called “net tangible assets per share”. Before the pandemic this value peaked at £14 a share, but it has been marked down below £9 in the recent figures — reflecting higher interest rates.Working from home has affected many property companies, but a large part of Land Securities’ portfolio is the recently redeveloped London area of Victoria, which reports 100 per cent occupancy. The company has managed debt levels well. It can afford to reconfigure properties to suit changing needs while smaller companies struggle to re-let older space.Land Securities shares trade at £6.28, which represents a 30 per cent discount to the written-down value of the portfolio, even after you have adjusted for any debt. Little account is taken in these numbers for properties in development that might have significant value when complete. The rent from its properties supports a dividend yield of over six per cent, and the management team works to improve properties so it can raise rates ahead of inflation over the long term.Mum may have had a point about ill winds after all. The hurricane that has blown through the property market has hurt many existing shareholders, but this unloved area could do my portfolio some good.Simon Edelsten is a former fund manager More

By Satoshi SugiyamaTOKYO (Reuters) -Japan’s economy fell faster than initially estimated in the third quarter, revised data showed on Friday, complicating the central bank’s efforts to phase out its accommodative monetary policy.Consumer and business spending both shrank, driving down third-quarter gross domestic product (GDP). Separate data showed real wages and household spending kept falling in October, as prolonged inflation discouraged shoppers.”Weakness in personal consumption is likely to continue for the foreseeable future, as real disposable income is likely to extend its decline, which is seen as a factor in sluggish consumption,” said Kota Suzuki, an economist at Daiwa Securities.The economy lost an annualised 2.9% in July-September, the revised Cabinet Office data showed, more than a previously estimated 2.1% contraction and market forecasts for a revised 2.0% decline.Capital expenditure fell 0.4%, which compared with a preliminary 0.6% decease and a median market forecast for a 0.5% fall.Private consumption, which makes up more than half of the economy, fell 0.2% in July-September, versus a mostly flat change in the initial estimate.External demand shaved 0.1 percentage point off real GDP, compared with the preliminary reading of 0.1 point, as service imports outgrew auto exports.Separate data showed inflation-adjusted real wages dropped 2.3% year-on-year in October to mark a 19th straight month of decline, although slower than the 2.9% fall in September, according to the labour ministry.Although nominal salaries rose 1.5%, inflation of more than 3% wiped off the wage growth in real terms, a gauge of consumers’ purchasing power. With income stagnant, household spending decreased 2.5% in October from a year earlier, falling for eight months in a row, an internal affairs ministry data showed. The Bank of Japan has stressed it needs to maintain ultra-low interest rates until sustainable inflation of 2% along with wage hikes comes into view. Next year’s wage outlook would be crucial for determining whether prices were on the right track, governor Kazuo Ueda said on Thursday. More

SINGAPORE (Reuters) – The yen extended its towering rally on Friday and marched toward its best week against the dollar in nearly five months, as traders ramped up expectations that the end of Japan’s ultra-low interest rates was closing in.The broad strength from the yen kept a lid on the dollar, which stayed on the defensive ahead of the closely-watched U.S. nonfarm payrolls report due later on Friday.Bank of Japan (BOJ) governor Kazuo Ueda said on Thursday the central bank had several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory, and had on the same day met with Prime Minister Fumio Kishida.Markets took those comments as the clearest sign yet that the BOJ could soon phase out its ultra-loose monetary policy and catapulted the yen to multi-month highs against its major peers.Against the dollar, the yen was last steady at 144.30, after having surged over 2% in the previous session and striking a four-month high of 141.60.The yen had, as recently as a month ago, fallen to a one-year low of 151.92 per dollar, coming under pressure as a result of growing interest rate differentials with the United States.That kept traders on edge over potential intervention from Japanese authorities to prop up the currency as it had done last year.The Japanese currency similarly stood near Thursday’s four-month peak on the euro, and was last at 155.67 per euro.The Aussie meanwhile last bought 95 yen, retracing some of its losses from the previous session where it fell nearly 2%.Attention now turns to the BOJ’s upcoming two-day monetary policy meeting on Dec. 18.”Obviously, the markets got very excited,” said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) (NAB). “But I think a lot of us have felt that we were going to have some sort of more meaningful policy change this year, and we’ve been disappointed. So I’m a bit reluctant to jump on the bandwagon and say that (a change) is going to happen on the 19th.”But obviously, there’s no smoke without fire… So I guess the market is understandably taking the view that the December meeting is live now.”ALL EYES ON PAYROLLSIn the broader market, the dollar largely drifted sideways, with currency moves outside of the yen subdued ahead of Friday’s U.S. jobs data.The euro steadied at $1.0792 though was eyeing a weekly decline of more than 0.8%, while sterling last bought $1.2589 and was similarly headed for a weekly fall of nearly 1%.The U.S. dollar index slipped 0.05% to 103.63, though was on track to gain 0.4% for the week. That would snap three straight weeks of declines, as the greenback attempts to stem losses from its heavy selloff in November.”I’m more interested in seeing what happens with the unemployment rate and what happens with average earnings than the nonfarm payrolls numbers,” said NAB’s Attrill.”Obviously, if we get a big shock on the payrolls – a big downside or upside surprise – the markets’ initial reaction will be governed by that.”Elsewhere, the Australian dollar slipped 0.05% to $0.6599.In China, the offshore yuan edged 0.1% higher to 7.1560 per dollar.Data on Thursday showed the country’s exports grew for the first time in six months in November, though imports unexpectedly shrunk.Concerns over the country’s growth outlook continue to mount, with investor sentiment still fragile on the back of an uneven post-COVID recovery in the world’s second-largest economy.Moody’s (NYSE:MCO) had, earlier this week, slapped a downgrade warning on China’s credit rating, and followed up a day later with cuts to its outlook on Hong Kong, Macau and swathes of China’s state-owned firms and banks.”Moody’s downgrade of China’s rating outlook was motivated by concern over China’s rising debt levels and possible need to bailout local state-owned enterprises,” said William Xin, fixed income portfolio manager at M&G Investments, though he said the move had “failed to consider” Chinese policymakers’ emphasis on reducing debt over the years. More

SYDNEY (Reuters) -Australia’s Santos Ltd shares jumped nearly 11% in early trade on Friday to their highest level in five weeks after it said it was in talks with larger rival Woodside (OTC:WOPEY) Energy for a potential A$80 billion ($52 billion) merger.Santos and Woodside after market hours on Thursday confirmed speculation they were in preliminary talks to create a major oil and gas company, with assets in Australia, Alaska, the Gulf of Mexico, Papua New Guinea, Senegal and Trinidad and Tobago. Santos shares jumped 10.8% to A$7.57 in early trade, their highest level since Nov. 3, while Woodside Energy shares slipped 1.3% to A$29.59 in early trade, with investors wary of the merger economics and potential competition hurdles.A deal would extend the recent consolidation in the Australian oil and gas sector. Woodside just last year combined with BHP Group’s (NYSE:BHP.AX) oil and gas business, while Santos acquired Oil Search (OTC:OISHY) in 2021.”Effectively the market is shrinking from four to one in the space of 18 months, that is a dramatic consolidation,” said Tim Buckley, a director at think tank Climate Energy Finance.”It’s a dramatic concentration of control. But I would emphasize it’s coming from a point of weakness. It’s coming from a point of ongoing massive underperformance.”Ahead of Thursday’s announcement, Woodside shares were down 15% and Santos shares were down 4% so far this year, against a 2% gain in the S&P/ASX200 index.Analysts say a potential tie up with Woodside would prompt close scrutiny from the Australian Competition and Consumer Commission (ACCC).”While we would expect the ACCC to look at the impact on domestic gas supply, the state with the biggest overlap is in Western Australia, where the merged company would supply about 35% of the domestic market,” said Jarden analyst Nik Burns.”We don’t see similar issues in the east coast gas market.”The ACCC said on Thursday it would consider if a public merger review into the impact on competition was required if the deal goes ahead.The regulator has taken an increasingly tough stance on mergers in sectors where competition is already highly concentrated.UBS analysts estimate a merged Woodside and Santos could create up to $300 million in synergies a year but it was likely some domestic asset divestments could be needed to appease the competition regulator.”If assets must be disposed but the market will only pay well below book value, it could weigh on merger economics,” UBS analyst Tom Allen said in a note.($1 = 1.5154 Australian dollars) More

LONDON (Reuters) – Starting salaries for newly appointed employees in Britain rose at the slowest pace since March 2021 last month, according to industry data that offered some comfort to the Bank of England in its fight against inflation pressures.The Recruitment and Employment Confederation monthly survey has pointed towards a cooling in Britain’s hot hiring market for much of this year although it has been slow to translate into broader official labour force data.The BoE is keeping a close watch on labour market trends as it fears shortages of workers and skills mismatches since Brexit and the COVID-19 pandemic will make it hard to return inflation – currently 4.6% – to its 2% target.The BoE is expected to keep interest rates at a 15-year high next week and restate that it is not close to cutting them.Official data showed average pay excluding bonuses grew at an annual rate of 7.7% in the third quarter of 2023, only just off a previous record high.By contrast, the REC survey showed a marked slowdown in the growth of starting salaries and pay rates for temporary staff in November. The latter increased at the weakest pace since February 2021.”Businesses want to plan for the year ahead, but the prospect of faltering UK economic growth means the certainty they need isn’t there. This is now impacting starting salaries,” said Claire Warnes, a partner at KPMG which sponsors the survey.The BoE predicts Britain’s economy will record zero growth in 2024 and other forecasting bodies are not much more optimistic.REC said job vacancies fell last month for only the second time since February 2021 while the number of job seekers rose by the most since December 2020. Recruiters were “widely linking this to redundancies and workers concerned about their current job security”, it added.The survey was based on responses from 400 recruitment agencies collected from Nov. 9 to Nov. 24. More

NEW YORK (Reuters) -A U.S. market rally in equities and bonds in November led global hedge funds to post their best monthly performance since January, although it caused losses to bearish macro strategies, data provider Hedge Fund Research (HFR) said on Thursday.Overall, the hedge fund industry posted gains of 2.2% in November and is up 4.35% in the year, HFR said.”Hedge fund performance jumped in November as economic data showed a welcome decline in inflation, resulting in falling bond yields, and surging equity and cryptocurrency markets, as investors positioned for the conclusion of the Federal Reserve interest rate increasing cycle,” the data provider said in a statement.Equity hedge funds led the industry performance among all four strategies tracked by HFR and rose 4.1% in November. Still, they lagged the S&P 500, which had its biggest monthly rise in over a year last month, up 8.9%.Event-driven hedge funds, which bet on merger activity and activist campaigns, rose 3.6% last month. They are the year’s best-performing category, with gains of 6.4%.Relative value hedge funds, which explore asset price dispersion, rose 1.5% in the month, with 5.6% in gains in the year. Surprised by the markets rally, macro hedge funds were the sole strategy to post losses in November, down 1.6% in the month and 1.8% year-to-date.”Macro strategies declined in November as interest rates and commodities fell while risk tolerance increased,” said HFR. Computer-driven or systematic trading strategies focused on macro trends led the losses. More

NEW YORK (Reuters) -Mercon Coffee Group, one of the world’s largest coffee traders, has filed for bankruptcy protection in the U.S. due to what it defined as “exceptionally challenging operating environment,” according to a document seen by Reuters.Mercon, which has operations in all the major producing regions including Brazil, Vietnam and Central America, said in a letter sent to clients that problems in recent years such as the logistical disruption during the pandemic, frost and drought in Brazil, price volatility, and rising interest rates all combined to hurt the company’s financial situation.In the letter, signed by Mercon’s Chief Executive Oscar Sevilla, the company said lenders have elected “not to extend credit agreements, resulting in extremely tight working capital conditions.”Court documents from the U.S. Bankruptcy Court for the Southern District of New York show Mercon and its affiliates in several countries have a total debt of $363 million. Among the largest creditors are several banks in the countries where Mercon operates, but also trade companies in Brazil, Central America and the United States. Rumors of financial problems at the coffee trader, which has sales operations in Europe, Asia and the United States, circulated among some market participants in the last hours.The comments followed news from Nicaragua that the country’s largest coffee exporter, CISA Exportadora, had closed doors. CISA was a subsidiary of Mercon. In a statement, Nicaragua’s government said it was aware of CISA’s suspension of operations and bankruptcy, which it added was “not just occurring in Nicaragua” and was “foreign” to the country’s current economic situation.The government said it was working with the coffee sector, as well as with foreign countries, to ensure the sale and export of Nicaraguan coffee.”We are doing everything in accordance with our laws and constitution that we need to do to ensure that CISA Exportadora meets its business and financial commitments,” it said.One broker, who asked not to be named due to the sensitivity of the issue, told Reuters that Mercon was in a difficult financial situation after failing to extend credit lines for its trading operations, particularly with Dutch bank Rabobank.Rabobank confirmed Mercon was a client, but declined to comment further on the situation.Mercon said in the letter that it will work with clients to “ensure a seamless process concerning open contracts.”A Mercon source said the company had stocks and will continue to operate under bankruptcy protection, moving coffee from its warehouses and shipping it to buyers. More