Economy

BESSEMER CITY, North Carolina (Reuters) – U.S. Treasury Secretary Janet Yellen said on Thursday she believes the U.S. economy does not need further drastic monetary policy tightening to stamp out inflationary expectations and was on track to achieve a “soft landing” with strong employment.Yellen told reporters after a speech at a lithium processing plant in North Carolina that in the past, the Federal Reserve sometimes had to tighten monetary policy so much to prevent inflation from becoming ingrained in the economy that it caused recessions.”We don’t need that now,” Yellen said. “I believe the signs are very good that we will achieve this soft landing with unemployment stabilizing more or less we’re where it is in this general vicinity, and growth slowing to a sustainable level. I think that’s what we’re in the middle of.”She said that “inflation has now come way down,” with high prices for some goods, such as eggs, returning to pre-pandemic levels “And now wage gains are really translating into more real income. So my hope is that Americans gradually will see that things are getting better,” Yellen said. More

The briefers will include Director of National Intelligence Avril Haines, Secretary of State Antony Blinken, Secretary of Defense Lloyd Austin, Chairman of the Joint Chiefs of Staff General C.Q. Brown and U.S. Agency for International Development Deputy Administrator Isobel Coleman.Biden asked Congress last month to approve $106 billion in national security funding, including aid for Ukraine as it battles a Russian invasion, support for Israel after the Oct. 7 attacks by Hamas militants and money for additional security at the U.S. border with Mexico.But the funding has not been approved, raising concerns that funds for Ukraine in particular might never pass, particularly after the Republican-led House passed a bill including assistance for Israel, but not Ukraine. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Opec+ members have agreed to make additional voluntary cuts to oil production in 2024 in an increasingly fraught attempt to bolster the market, but crude prices fell due to signs of ongoing strains in the group.Saudi Arabia pledged to extend an existing voluntary cut of 1mn barrels a day until the end of the first quarter while Russia said it would deepen its existing voluntary export reduction to 500,000 b/d from 300,000 b/d, as the group looks to offset a stuttering global economy and rising supplies from rival producers.But in an unusual step Opec officials said additional voluntary cuts, designed to take the total reduction above 2mn b/d or about 2 per cent of world supply, would be announced by individual members in due course rather than the secretariat.The uncertainty fed into growing market anxiety that strains are emerging in the Opec+ coalition more than a year after it started cutting production, with only a limited effect so far on prices.The Opec+ meeting had first been delayed from Sunday as members wrangled over production targets and was moved online rather than have ministers meet face to face in Vienna at Opec’s headquarters.Brent crude, the international oil benchmark, initially rallied on news of the cuts but then reversed to trade down on the day, with the contract for delivery in February losing more than 2 per cent to trade near $80 a barrel, well below the $98 a barrel year-high hit in September.US benchmark West Texas Intermediate fell 2.5 per cent to $76 a barrel.Traders said that the market was losing confidence in the ability of Opec+ to keep bolstering a price buffeted by expectations of relatively tepid demand growth next year and rising alternative supplies.But analysts said that if all the cuts were made, supplies would tighten significantly in the first quarter of next year.“The market is going to test Opec+ and whether $80 a barrel is really a floor they can defend,” said Raad Alkadiri of Eurasia Group. “The cuts being billed as ‘voluntary’ undermines the psychological impact for the market a little, but if the full cut is realised, its impact on the market should not be discounted.”Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, who normally enjoys his prominent role at big Opec meetings, shunned the opportunity to hold a press conference to explain the group’s strategy.The extension of the kingdom’s voluntary 1mn b/d cut was announced by Saudi Arabia’s state press agency.But it was followed by a number of other pledges from members, including the UAE’s state news agency saying it would voluntarily cut by 163,000 b/d in the first quarter, while Iraq and Kuwait said they would cut by 211,000 b/d and 135,000 b/d respectively. Oman, Algeria and Kazakhstan also pledged additional reductions.Amrita Sen at Energy Aspects said that while Opec+ had “failed to inspire confidence in the market”, if it followed through on the pledged supply curbs, the market would start to tighten.The oil cartel is trying to bolster prices that have slipped in recent months while tensions in the Middle East are being heightened by the Israel-Hamas war.Saudi Arabia needs an oil price of closer to $100 a barrel to fund the ambitious economic reform programme of Crown Prince Mohammed bin Salman, but has at times faced pushback from the White House, worried about the effects on inflation. A White House official said on Thursday after the Opec announcement that President Joe Biden was “focused on [fuel] prices for American consumers, which have been coming down steadily”.People close to the powerful Gulf members have ruled out the possibility of an embargo similar to the measures taken by the cartel during the 1973 Yom Kippur war. But the Financial Times reported this month that Opec countries might be looking to send a signal over the US’s backing for Israel amid the high level of destruction in Gaza. The delay to the meeting from Sunday was partly motivated by talks with African members, including Angola and Nigeria, which have pushed back against attempts to curb their output as they attempt to revive their oil sectors after years of under-investment and mismanagement.Opec said Angola, Nigeria and Congo had all had their production baselines — the level from which production quotas are calculated — lowered. No sub Saharan African members offered additional voluntary cuts.Additional reporting by Tom Wilson in London and James Politi in Washington More

(Reuters) -Federal Reserve policymakers signaled on Thursday that the U.S. central bank’s interest rate hikes are likely over, but left the door open to further monetary policy tightening should progress on inflation stall, and pushed back on market expectations for a quick pivot to rate cuts.Fresh data shows price pressures are easing and the labor market is gradually cooling, evidence that the slowdown the Fed has tried to engineer with its rate hikes to date is underway.Tighter financial and credit conditions after the Fed raised its policy rate 5.25 percentage points in the last 20 months should help bring inflation down further, New York Fed Bank President John Williams said on Thursday, noting that improvements in supply chains are also easing price pressures.In balancing the risks of too-high inflation and a weaker economy, “and based on what I know now, my assessment is that we are at, or near, the peak level of the target range of the federal funds rate,” Williams said. The personal consumption expenditures (PCE) price index rose 3% in October from a year ago, moderating from a three-month string of 3.4% readings though still above the Fed’s 2% target, and more Americans applied for unemployment benefits last week, government reports showed on Thursday. Still, the unemployment rate at last read was 3.9%, only a few tenths of a percentage point above where it was when the Fed first began raising rates in March 2022. The government’s employment report for the current month will be released next Friday. U.S. Treasury Secretary Janet Yellen said on Thursday she believes the U.S. economy does not need further drastic monetary policy tightening to prevent inflation from becoming ingrained and was on track to achieve a “soft landing” with strong employment.UNCERTAIN PATHTraders have been betting heavily that the Fed will keep its overnight benchmark interest rate steady in the 5.25%-5.50% range for the next several months. But they also expect rate cuts to start in May, with further reductions taking the policy into the 4.00%-4.25% range by the end of 2024 – a view that Williams made plain he does not share. “I’m not losing too much sleep” over the market’s view “because there’s a lot of uncertainty about the future path of policy,” Williams said. Models suggest the stance of Fed policy is the most restrictive it has been in 25 years, and it will probably need to stay restrictive for “quite some time,” Williams said.Williams said he expects inflation to end this year at 3%, and ebb to 2.25% in 2024, as economic growth slows to 1.25% and the unemployment rate rises to 4.25%.”If price pressures and imbalances persist more than I expect, additional policy firming may be needed,” Williams said.San Francisco Fed President Mary Daly struck a similar tone in remarks to the German newspaper Borsen-Zeitung in an interview published on Thursday, noting her “base case” does not call for any further rate hikes, though it is “too early to know” if the Fed is finished with the rate increases.”I’m not thinking about rate cuts at all right now,” Daly said. “I’m thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability.”The policymakers spoke before a customary blackout period when they refrain from public comment ahead of a rate-setting meeting. The Fed will hold its next policy meeting on Dec. 12-13. Fed Chair Jerome Powell is expected to get a final word in on Friday, when he is due to speak at Spelman College in Atlanta. Trader bets on Fed rate cuts starting in the first half of 2024 gained steam this week after Fed Governor Christopher Waller, an influential and usually hawkish policymaker, suggested rates cuts by then could be needed to keep policy from becoming overly restrictive in the face of easing inflation. Daly and Williams were more cautious. Data has previously indicated progress that revisions or a change in momentum later erased, and both policymakers on Thursday emphasized the uncertainty of the current outlook.”We still think the Fed will not want to be head-faked again, preferring to see further progress in key policy variables before declaring mission accomplished,” TD Securities strategist Oscar Munoz wrote. More

The Personal Consumption Expenditures price index continued to cool and consumer spending was moderate, good news for the Federal Reserve.A closely watched measure of inflation showed continued signs of fading in October, encouraging news for the Federal Reserve as officials try to gauge whether they need to take further action in order to fully stamp out rapid price increases.The Personal Consumption Expenditures inflation measure, which the Fed cites when it says it aims for 2 percent inflation on average over time, climbed by 3 percent in the year through October. That was down from 3.4 percent the previous month, and was in line with economist forecasts. Compared with the previous month, prices were flat.After volatile food and fuel prices were stripped out for a clearer look at underlying price pressures, inflation climbed 3.5 percent over the year. That was down from 3.7 percent previously.The latest evidence that price increases are slowing came alongside other positive news for Fed officials: Consumers are spending less robustly. A measure of personal consumption climbed 0.2 percent from September, a slight slowdown from the previous month.The report could offer important insights to Fed officials as they prepare for their final meeting of 2023, which takes place Dec. 12-13. While investors widely expect policymakers to leave borrowing costs unchanged at the meeting, central bankers will release a fresh set of economic projections that could hint at their plans for future policy. Jerome H. Powell, the Fed chair, will also deliver a news conference.“They’re going to want to still stay cautious about declaring ‘Mission Accomplished’ too soon,” said Omair Sharif, founder of Inflation Insights. Still, “we’ve had a string of really good readings.”Policymakers have been closely watching how both inflation and consumer spending shape up as they assess how to proceed. They have already raised interest rates to a range of 5.25 to 5.5 percent, the highest level in more than two decades. Given that, many officials have signaled that it may be time to stop and watch how policy plays out.John C. Williams, the president of the Federal Reserve Bank of New York, hinted in a speech on Thursday that he expected inflation to moderate enough for the Fed to be done raising interest rates now, though officials could raise interest rates more if the data surprised them.“If price pressures and imbalances persist more than I expect, additional policy firming may be needed,” Mr. Williams said. He reiterated his assessment that the Fed is “at, or near, the peak level of the target range of the federal funds rate.”The economy has been more resilient to those higher borrowing costs than many expected, which is one reason that the Fed has maintained a wary stance. If strong demand gives companies the ability to keep raising prices without losing customers, it could be harder to fully vanquish inflation.That said, recent signs that consumers and companies are finally turning more cautious have been welcome at the Fed.“I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand,” Christopher Waller, one Fed governor, said this week. He added that “inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained.”Mr. Sharif noted that the talk on Wall Street had coalesced around when the first interest rate decrease might come, and the Fed’s coming economic projections should offer insight. Some of Mr. Waller’s remarks this week fueled speculation that cuts could come on the early side next year.But “you don’t want to get too far ahead of your skis, for now,” Mr. Sharif said, noting that the data has gotten better in the past before worsening again. He doesn’t think that the Fed will want to start to talk about rate cuts too forcefully until it has data for late 2023 and early 2024 in hand.“I just think they’re going to want to stay a little bit cautious right now,” he said. More

LONDON (Reuters) – A big disconnect between financial markets and central banks has just got deeper, with traders ramping up their bets on interest rate cuts in the United States and Europe as evidence grows that inflationary pressures are fast abating. Money markets are now pricing in over 100 basis points apiece of rate cuts from the U.S. Federal Reserve and European Central Bank next year, and have this week shifted the expected timing of their first moves firmly forward into the first half of 2024.It’s not hard to see why traders are ready to leave behind the most aggressive rate-hiking cycle in decades. Euro zone inflation tumbled far more than expected in November, data on Thursday showed, a challenge to the ECB’s narrative of stubborn price growth.In the United States, the Fed’s preferred inflation measure, the core PCE price index, eased in October.For much of this year central banks have successfully pushed back against rate cut bets.But this week’s price action suggests that task could get harder as investors question whether the mantra of higher rates for longer can hold if inflation keeps easing quickly.”Is the Fed going to pivot from their hawkish statements that they are adamantly focused on inflation and need to kill it?” said Nate Thooft, global CIO for the multi-asset solutions team for Manulife Investment Management. “I believe the Fed will act rationally and begin to cut rates by the end of next year, but we can’t rule out the scenario that the Fed is not going to cut rates and just let the ramifications of recession do what they do.” SHIFT NEARING Markets now fully price in a 25 basis point U.S. rate cut in May, having seen a 65% chance earlier this week. Just a few weeks ago, a first cut was seen in June.Bets for a March cut have also shot up, with traders pricing in nearly a 50% chance, versus 35% earlier this week.That creates a headache for policymakers, as the speed of the bond and stock rally prompted by those changed expectations loosens the financing conditions they have been trying to tighten by raising rates. U.S. Treasury yields are down more than 50 bps in November, the biggest monthly fall in over a decade.A Goldman Sachs U.S. financial conditions index has eased 90 bps over the last month to its loosest since early September.The bank has in the past shown a 100-bps loosening boosts growth by one percentage point in the coming year.But for many, the fast fall in inflation means central bankers may shift closer to market thinking, as they did in 2021-2022 when investors challenged their “transitory” inflation view as price pressures surged. Comments this week from U.S. Federal Reserve policymaker Christopher Waller, a hawkish and influential Fed voice, that he was increasingly confident inflation would return to its 2% target, has fuelled rate-cut bets.In early November, Bank of England chief economist Huw Pill said mid-2024 might be time for cuts, a view also expressed by Greek central banker Yannis Stournaras. “There are now committee members in all three (banks) willing to talk about rate cuts next year,” said Chris Jeffery, head of rates and inflation strategy at LGIM.”Previously we’d had a stone wall of: higher for longer Table Mountain, rates need to stay in restrictive territory.” Some analysts, like Deutsche Bank’s, are forecasting even swifter cuts than markets. “Central banks will probably pivot quicker than people think, and probably harder, and inflation (trends) basically give them the opportunity to do that,” said Dario Perkins, managing director of global macro at TS Lombard.Traders now fully price a 25 bps ECB rate cut in April. In late October, they expected a first cut in July. Thursday’s data showed euro zone inflation dropped to 2.4% in November from 2.9% in October, nearing the ECB’s 2% target. Simon Harvey, head of FX analysis at Monex Europe, said recent weak data suggested that euro area monetary policy is too tight and has induced a recession. “The ECB should begin to ease policy as soon as April 2024, with risks that a more sinister downturn in growth could warrant a rate cut as soon as March,” he said. More

NEW YORK (Reuters) – Bond investors are pricing in imminent Federal Reserve interest rate cuts by the first half of next year, as signs of slowing U.S. economic growth and easing inflation became more evident.While a weakening growth outlook is likely an important factor in keeping the U.S. central bank from raising rates, progress on the inflation front could determine when it will pivot toward monetary policy easing.The release on Thursday of the latest U.S. personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, could mark another step closer to that looming policy shift.The PCE price index was unchanged in October after climbing 0.4% in September. In the 12 months through October, it rose 3.0%, the smallest year-on-year gain since March 2021 and a sharp drop from the 3.4% reading in September.”The Fed is on hold, and (this report) gives them more comfort in staying on hold. What they’re doing is working,” said Robert Pavlik, senior portfolio manager, Dakota Wealth Management in Fairfield, Connecticut. “The data is trending in the direction that the Fed wants to see,” Pavlik said. “A 25- to 50 basis-point cut before the end of the summer 2024 would make sense as the economy slows down, for the Fed to fine tune how their policy tools are working.”Traders’ confidence was reinforced earlier this week when Fed Governor Christopher Waller, a hawkish policymaker, flagged a possible rate cut in the months ahead.Markets will be looking to Fed Chair Jerome Powell’s remarks on Friday at Spelman College in Atlanta to see whether he doubles down on Waller’s comments or pushes back. Here is how Fed policy expectations are playing out in different corners of the bond and money markets:FED FUNDS FUTURESFederal funds futures are the most straightforward measure of determining of where traders believe the U.S. central bank’s benchmark overnight interest rate will be in the future. That market has priced in about a 45% chance of a rate cut at the March 19-20, 2024 meeting, rising to about a 75% probability at the April 30-May 1 meeting, the CME FedWatch Tool showed on Thursday. Overall, the rates market sees a roughly 100 basis points (bps) of cuts by the end of 2024, according to LSEG data.YIELD CURVEThe current yield curve measuring the gap between yields on U.S. two-year and 10-year Treasury notes has narrowed its inversion for the past several weeks. An inversion of this part of the curve is viewed by many as a reliable signal that a recession is likely to follow in one to two years.But the yield curve has been reducing its inversion as investors start to price in the end of the Fed’s tightening cycle. It was last at minus 38.50 bps.Market participants referred to the yield curve’s move in the last few weeks as a “bull steepener,” a scenario in which short-term yields are falling faster than long-term ones. This often happens when the Fed is expected to cut interest rates, analysts said.SOFR FUTURESBond investors also look to the Secured Overnight Financing Rate (SOFR) futures to gauge expectations of Fed rate moves. The March 2024 SOFR futures have priced in a 50% chance of a 25 basis-point cut at the March meeting.The June 2024 SOFR futures have priced at least one Fed cut, while the probability of two 25-basis-point rate reductions was at 76%.SOFR, a measure of the cost of borrowing cash overnight, replaced the prior benchmark rate, Libor, on June 30 after a rate-fixing scandal by bankers at several major financial institutions came to light in 2012. It’s now the backbone of U.S. corporate borrowing.OIS FORWARDSThe overnight index swap (OIS) forwards market, another corner of the fixed income market that shows traders’ rate expectations, is also pricing in rate cuts starting in March. An OIS transaction involves exchanging an overnight rate such as the federal funds rate for a fixed one. For instance, in a U.S. two-year OIS transaction, one party receives a fixed two-year rate in exchange for paying the fed funds rate daily over the next two years.The three-month by six-month OIS forward is factoring more than a 40% chance of a 25-basis-point cut by the Fed’s March meeting, LSEG data showed. The longer-dated six-month by nine-month OIS showed 100% odds of at least one rate cut by June, while the chances of two rate cuts by the middle of next year are at 78%. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.On paper, it is one of the world’s great opportunities. Wary of China, the US is hunting for reliable alternatives nearer home to locate low-cost factories. Across the border lies Mexico, a land of low-cost labour and abundant possibility, with preferential trade access and tax breaks under the Biden administration’s green energy programme. Is this a match made in heaven?Recent headlines might encourage that impression. In July, Mexico passed China as the biggest source of imports into the US. Foreign direct investment into Mexico hit a record $32.9bn in the first nine months of this year. Industrial parks near the American border are filling up. Tesla has announced plans for a $5bn “gigafactory” in Mexico.Moving US manufacturing to Mexico is nothing new. The process began with the North American Free Trade Agreement in 1994, which spurred a wave of investment into assembling cars, trucks and televisions. Mexico’s exports to the US were above those of China in the 1990s, but lost the crown as Chinese imports rocketed. This year’s change owes more to sharply declining Chinese imports than to booming Mexican exports.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Foreign investment into Mexico has grown, particularly this year. But last year Brazil performed far more strongly, attracting 41 per cent of all FDI into Latin America and the Caribbean against Mexico’s 17 per cent. (Brazil’s economy is about a third bigger than Mexico’s). Industrial parks near the US border are filling up, though this partly reflects a lack of suitable land rather than a widespread boom. Tesla has delayed construction of its Mexican factory, which in any case would not strictly meet the definition of nearshoring as it would complement, rather than substitute, its giant plant in China.In July, the peso hit its highest level against the dollar since 2015 but analysts credit this to tempting opportunities in Mexico’s money markets, rather than to racy fundamentals: Mexican interest rates are more than double those of the US. The IMF forecasts Mexican economic growth this year of 3.2 per cent — healthy but hardly the tempo of a booming economy.Businesses operating in Mexico say some nearshoring is happening, but only a fraction of what could occur with the right government policies. Here the figure of Andrés Manuel López Obrador, the quixotic leftwing president, looms large. López Obrador is a nationalist with an instinctive suspicion of business and a nostalgia for the state-directed economy of his youth.One of his first acts was to scrap Mexico’s investment promotion agency, arguing that it was unnecessary. As he poured billions of dollars into a new oil refinery, the president attacked foreign companies investing in renewable energy and promoted state-generated electricity instead, which comes mainly from fossil fuels. The result is a shortage of the green electricity vital to attract new factories.Water shortages are another constraint. López Obrador cancelled a mostly built $1.4bn US brewery project in the arid north on these grounds; his penchant for decision-making on the hoof also led him to send in troops to seize a privatised railway line, which he needed for a pet infrastructure project.Security, or the lack of it, also worries business. US officials have said swaths of Mexican territory are controlled by drug cartels, rather than the government.Mexico should make the most of a historic chance to win nearshoring business. For that, it needs a government that understands what policies are needed. López Obrador has largely been squandering the opportunity.  More