Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.When the UK issued its first index-linked gilt in 1981, critics warned that a profligate government could store up problems for future generations.That day might have come. Ahead of the Autumn Statement this week, persistently high inflation is expected to force the Office for Budget Responsibility to raise its March forecast for interest payments alone on these types of bonds by a third to £92bn over the next five years, according to the Institute for Fiscal Studies. This comes on top of the £89bn extra the OBR calculated in March that the government had spent on interest payments on these instruments over the previous two years, equivalent to 3.4 per cent of GDP.The UK now has about a quarter of its debt repayments linked to inflation, more than double the amount of Italy, which has the second highest proportion of any large economy at 12 per cent. “This was the debt that people wanted,” said Lord Terry Burns, who was serving as chief economic adviser to the Treasury when the decision was taken to begin index-linked issuance.Britain started down this path — previously seen as the preserve of crisis-prone emerging economies — more than 40 years ago out of desperation. Emerging from a severe inflation shock in the 1970s, the Treasury was quaking under so-called gilt “strikes” — repeatedly finding itself unable to borrow unless it raised interest rates sharply to lure investors back. The then-Conservative government urgently needed to shore up confidence and establish its inflation-busting credentials. The thinking in the Treasury, led by chancellor Geoffrey Howe, was that investors would be attracted to bonds offering interest payments linked to rising prices because it would remove the incentive for the government to inflate down its debt.Over time, so-called “linkers” became a much bigger part of the UK market than initially intended, as the Treasury became swamped with demand from defined benefit pension schemes eager to buy assets that would match their need to pay members in line with inflation. Britain’s large pensions sector has a higher proportion of these schemes than many other large economies.“People were happy to pay up for them,” said David Page, an economist at Axa Investment Managers and a former official at the UK’s Debt Management Office, arguing that the way the UK regulated pensions “created a demand that couldn’t be fulfilled in other parts of the market”. To an extent, officials took the view that it made sense to issue index-linked debt because there was a natural hedge in higher tax revenues when inflation was high. When Labour came to power in the late 1990s, then chancellor Gordon Brown pursued a policy of ultra-long-term debt issuance by launching 50-year gilts, and ensuring a large chunk of those were indexed was probably necessary to convince investors. Alistair Darling, Brown’s successor, told the Financial Times the Labour government felt vindicated in that approach as it meant that during the financial crisis in 2008 the UK had less debt to roll over than many other European countries.Darling acknowledged “that landscape ha[d] changed dramatically” but added it was “difficult to say” if a surge of inflation was foreseeable.Linkers have been particularly expensive in recent years because they track the flawed retail price index, which has consistently run at least 1 percentage point higher than the consumer price index. RPI peaked at more than 14 per cent last year and is still multiples above target at 6.1 per cent for the year to October.“Things don’t always turn out the way that you want. The fact is that we held long-dated gilts and we were living in a low-interest rate environment and that meant that it was not a concern at the time,” Darling said. But in 2017, after the OBR questioned the level of exposure, the government decided to limit the amount of new linker issuance, which had been running about 25 per cent per year of total new debt in the previous five years. This year, about 11 per cent of the issuance programmes are in index-linked debt. The Debt Management Office has said it has no plans to reduce the proportion of index-linked issuance further but would instead review the situation annually taking into account market conditions. In absolute terms, it still plans to issue more index-linked debt this year than it did in 2022-23. This policy reflects a view shared by economists and officials that the UK’s approach has probably paid off over time, despite the costs incurred as inflation soared. Moreover, debt specialists argue that were the government to reduce the proportion of linker issuance dramatically in response to the high price environment, it would undermine the inflation-fighting credentials that the use of the instrument was meant to establish.They also point out that if inflation is brought back under control, the longer average maturity of linkers — about 18 years compared with 13 years for conventional gilts — would mitigate the extra cost over the lifetime of the bond. “What feels like a painful bout now is just a blip in the 50-year life of one of the really long ones,” a Treasury official said. But it is impossible to prove conclusively whether the UK’s decision to adopt index-linked gilts has paid off, although on balance, John Kay, one of the UK’s leading economists, believes it has. “Over most of the time, inflation has been lower than people expected,” he said. “I suspect looking back since 1981 — the answer is it was cheaper to have issued index-linked gilts.” More

TOKYO (Reuters) – Japan’s Nikkei 225 share average will continue its more-than-28% rally this year into 2024 to reach a three-decade high of 35,000 by end-June, according to analyst estimates in a Reuters poll.All respondents forecast continued earnings growth, despite many also expecting the tailwinds from a weaker yen starting to dissipate with the Bank of Japan approaching the end of super-accomodative stimulus and the Federal Reserve tightening cycle peaking out.The median forecast for the Nikkei’s level in mid-2024 was 35,000, with responses ranging from 31,143 to 39,500, the Reuters poll of 10 stocks strategists taken Nov. 10-20 showed.Japan’s equity benchmark started this week by pushing to its highest level since March 1990 at 33,853.46 following a three-week winning streak.The rally was partly driven by a robust earnings season, as the yen’s drop to a one-year low beyond 150 per dollar during the period boosted exporters’ profit outlooks and as companies passed on higher costs to consumers – something that would have been almost unthinkable pre-pandemic.Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management in Tokyo, pointed to pent-up demand in both business investment and consumer demand, particularly for services, in forecasting the Nikkei to reach 39,500 in June and 40,900 by end-2024 – the most bullish forecasts in the survey.”We are constructive mainly because we are optimistic about nominal GDP growth,” he said. “There is still room for equity prices to reflect the better picture in EPS growth.”At the same time, Kichikawa and other respondents say the yen may have bottomed after pushing to the cusp of 152 per dollar earlier this month, amid expectations the Fed could begin cutting rates around May, while the BOJ may exit negative interest rate policy early next year.That would mean some stagnation for equities in the latter half of next year, with the Nikkei still stuck at 35,000 at year-end, according to the median poll response.IG’s Sydney-based analyst Tony Sycamore is among the most bearish – one of only two forecasters predicting a decline for the benchmark in the latter half of next year, from 35,000 to 33,000.”35,000 looks to be about the level where Nikkei gains line up with the timing of the BOJ getting rid of negative interest rate policy,” Sycamore said.”The Nikkei does still have the support of the BOJ being behind the curve,” he added. “But at some point early next year, they will need to do what needs to be done, and that will not be a great outcome for equities.”(Other stories from the Reuters Q4 global stock markets poll package:) More

SINGAPORE (Reuters) – The dollar was on the defensive and trading by multi-month lows on the euro and a handful of other major currencies on Tuesday, as investors expect U.S. interest rates to fall next year and see that as a signal to sell the dollar in anticipation.Moves were modest in early Asia trade, but the dollar index had dropped below its 200-day moving average on Monday as a rally in the yuan spurred another round of broad weakness.The index, which measures the dollar against a basket of six major currencies, fell 1.9% last week alongside a big rally in U.S. Treasures, and lost a further 0.5% overnight to 103.44.The euro touched a three-month high of $1.0952 on Monday, with a little help from European Central Bank governing member and reliable hawk Pierre Wunsch pushing back against market expectations for rate cuts as soon as April.The yuan also hit a three-month high on the dollar on Monday as the central bank guided it higher. The Australian and New Zealand dollars had followed suit.”The dollar continues to struggle, with the dollar index breaking below 104 on Friday and (now) below 103.5 … as markets decide that the Fed is done,” analysts at ANZ said in a note.”Given how overvalued the (index) is, gravitational (pull)back to fair value is likely to be a strong theme if markets continue to take a relaxed view of where Fed policy is going.”On Monday, one U.S. recession gauge, the Conference Board’s October leading economic indicator showed a decline of 0.8%, its 19th straight monthly fall. The next focus is on Federal Reserve meeting minutes due later on Tuesday.Markets have all but priced out the risk of a further hike in December or next year, and imply a 1-in-4 chance of an easing starting in March. Futures also imply around 90 basis points of cuts for 2024, up from 77 basis points before a benign October U.S. inflation report shook markets.In thin offshore trade on Tuesday morning, the yuan held its gains at 7.1640 per dollar. [CNY/]The Australian dollar was marginally firmer at $0.6561, just below Monday’s three-month high of $0.6564. The New Zealand dollar was steady at $0.6040. [AUD/]Even the yen rallied to a seven-week high of 148.1 per dollar overnight and steadied at 148.3 on Tuesday.The yen has been unloved this year, falling 11.6% on the dollar, as U.S. interest rates have climbed while Japan stuck to ultra-easy policy – opening a wide gap between government bond yields. That it has bounced almost 3% in a week has been eye-catching, especially since positioning data showed yen shorts actually jumped last week.”We’re in a dollar-unfriendly environment and after a long period where it reigned supreme any turn must come with at least temporary volatility,” said Societe Generale (OTC:SCGLY) strategist Kit Juckes in a note pointing out the positioning shifts.”Maybe it all adds up to the euro and sterling bounces running out of steam at some point, while the yen, AUD and NZD carry on for longer,” he said, as shorts get squeezed.The calendar is reasonably bare as the week heads towards the U.S. Thanksgiving holiday on Thursday. Besides the Fed minutes, U.S. housing and Canadian inflation data are due later on Tuesday, as is a speech from ECB President Christine Lagarde.========================================================Currency bid prices at 0000 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0945 $1.0941 +0.04% +2.15% +1.0947 +1.0942 Dollar/Yen 148.3700 148.3200 +0.04% +13.06% +148.3750 +148.2500 Euro/Yen 162.38 162.31 +0.04% +15.74% +162.4000 +162.2300 Dollar/Swiss 0.8844 0.8850 +0.00% -4.29% +0.8847 +0.0000 Sterling/Dollar 1.2508 1.2505 +0.03% +3.44% +1.2510 +1.2505 Dollar/Canadian 1.3726 1.3725 +0.01% +1.31% +1.3726 +1.3724 Aussie/Dollar 0.6560 0.6557 +0.06% -3.75% +0.6564 +0.6551 NZ Dollar/Dollar 0.6039 0.6038 +0.02% -4.89% +0.6041 +0.6036 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.In 2019, the World Bank issued a report that sparked deep consternation among Indonesia’s political elite. In the seismic shift in global manufacturing supply chains sparked by US-China trade tensions, Indonesia had apparently failed to grasp the opportunity. The World Bank noted at the time that of more than 30 Chinese companies that had announced plans in June to August of that year to expand overseas, none planned to do so in Indonesia. Foreign direct investment into Indonesia as a percentage of gross domestic product decreased between 2012 and 2019, compared with rises by its regional peers including Vietnam, Malaysia, the Philippines and Thailand. Most FDI to Indonesia was channelled to non-manufacturing sectors. A frustrated president Joko Widodo sprung into action. The following year he introduced his signature “omnibus law” with sweeping changes to more than 70 labour, tax and other laws to cut red tape and make the country more appealing. Though the law received a fair amount of backlash for eroding worker rights, companies cheered the lowering of corporate tax rates, loosened labour laws and more streamlined business rules.The omnibus law underlined Indonesia’s ambitions to become a more integral part of the international supply chain. The country has a huge domestic market with the world’s fourth largest population, is Asia’s fifth-biggest economy and has an abundance of natural resources. Yet it has long punched below its weight. Under Widodo, who came to power in 2014, many foreign investors hoped for the structural reforms needed to address opaque red tape and often corrupt business interests in the country that have held it back. This “hidden entrance cost” had long made Indonesia a tough sell for many global investors, said Evan Laksmana, a senior fellow at the International Institute for Strategic Studies (IISS) in Singapore. There are also broader structural problems. Power outages, transport failures and inadequate water supply are frequent problems across the Indonesian archipelago — a deterrent for many multinational groups needing reliability to operate factories. Many industries still badly need innovation and more efficient production.A lack of talent is another impediment Widodo has tried to address. Indonesia’s education system needs improving, acknowledges Nadiem Makarim, a tech entrepreneur installed as education minister in 2019 to reform the school system. Literacy and numeracy levels have long lagged behind Indonesian neighbours, Indonesia needs to “start at the lower end of the supply chain and move up slowly before switching to high-end tech manufacturing. If you have no precedent for those industries here, how can you attract them?” Makarim says. Foreign companies still today struggle with a business environment where regulation can change in a matter of days. TikTok owner ByteDance discovered this the hard way in September when it was abruptly forced to suspend its online shopping service in Indonesia. There is also the matter of prohibitive foreign ownership laws, which often require a local business partner. Moreover, projects inexplicably stall and crucial applications can be left unsigned and unapproved for months. All of these issues contribute to the fact that Indonesia is still trailing behind its south-east Asian peers when it comes to exploiting the dramatic rerouting and diversification of global supply chains away from China, especially in high-tech manufacturing. There is cause for optimism. Geopolitics, particularly the US attempts to deepen its ties with Asian governments as a counter to China, are increasingly in Jakarta’s favour. After a bilateral meeting between US president Joe Biden and Widodo in Washington last week, the US said it was considering Indonesia as a partner to create a global semiconductor value chain. Another bright spot is the commodities sector. Indonesia’s record FDI of $22bn last year was dominated by metals and mining. And the country has become a hub for the global electric vehicle supply chain thanks to its abundant reserves of nickel, a key industry need. Ford, Hyundai, Vale and Tsingshan are among the companies building domestic battery and EV manufacturing plants. But as Indonesia heads to a crucial national election early next year, corruption and vested interests remain a major deterrent to business and investment. That is the obvious area that needs to be tackled more forcefully if Indonesia’s huge economy is to realise its potential to leapfrog its [email protected] More

(Reuters) -Zoom Video Communications raised its annual revenue and profit forecasts on Monday, as hybrid work trends and the integration of artificial intelligence technology into its products boosted demand. Platforms including Zoom (NASDAQ:ZM), Microsoft (NASDAQ:MSFT)’s Teams and Cisco (NASDAQ:CSCO)’s Webex became household names during the COVID lockdowns and have enjoyed resilient demand as many businesses shifted to hybrid work models.Zoom now expects annual adjusted profit per share between $4.93 and $4.95, higher than its prior forecast of $4.63 and $4.67. The company lifted its full-year revenue forecast to between $4.506 billion and $4.511 billion, from $4.485 billion to $4.495 billion earlier. “We bolstered Zoom’s all-in-one intelligent collaboration platform with advanced new capabilities like Zoom AI Companion and continued to evolve our customer and employee engagement solutions,” CEO Eric Yuan said.Zoom’s AI Companion, introduced during the third quarter, allows paid users to access features including meeting summaries and catch-ups, as well as email and chat composed prompts. More than 220,000 accounts had enabled it as of Monday. The company’s quarterly free cash flow grew 66.2% to $453.2 million, and Zoom expects $1.34 billion to $1.35 billion for the full year. “Cash flow was the highlight, but also encouraged by traction with Phone and Contact Center… gives us greater confidence that we can see growth re-accelerate in the near term,” RBC analyst Rishi Jaluria said.The Phone segment grew to roughly 7 million paid seats while Contact Center reached about 700 customers as of quarter-end. Zoom’s current-quarter revenue is expected to be between $1.125 billion and $1.130 billion, in line with expectations, according to LSEG data.For the third quarter, revenue grew 3.2% to $1.14 billion, slightly above estimates. It earned $1.29 per share on an adjusted basis, surpassing expectations of $1.09. More

LONDON/TOKYO (Reuters) – Global inflationary forces are finally seeping into Japan’s economy after decades of falling prices, forcing investors to radically rethink their Japan bets as the Bank of Japan considers a major policy shift.International investors, who have long favoured stocks benefiting from Japan’s ageing population or a weakening yen, are tearing up their playbooks to focus on expected higher interest rates, more generous dividends and a revival in consumer spending.The policy switch has been slow in coming but could herald an entirely new way of investing in Japan if a predicted long-term inflation rate of 2% in 2024 really happens. Japanese shoppers who no longer expect prices to keep falling may make big purchases. If the BOJ pulls interest rates above zero for the first time in years, banks’ lending margins could rise. Japanese stock markets have already rallied to around their highest since 1990, with consumer and financial stocks outperforming domestic indexes. On the downside, inflation creates a bleak outlook for Japanese government bonds. “Interest rate policy is undergoing a historic change,” said Shigeka Koda, chief executive of the $500 million Singapore-based hedge fund Four Seasons Asia Investment. “Something new is in the offing.”BANKS UPSTAGE CREMATORIA AND CAKE-MAKING ROBOTSJapan’s ageing demographic has made a Japanese crematorium company one of the top picks for foreign investors, with its shares up almost 700% in five years.Koda’s top positions have included the crematorium operator – Kosaido Holdings – as well as Rheon Automatic Machinery, which sells cake-making robots to help food manufacturers deal with a shrinking workforce.But in August, for the first time in the 17-year history of his fund, Koda picked a Japanese bank, Kyushu Financial, as his largest position, because he believes Japanese interest rates will rise. Steve Donzé, deputy head of investment at Pictet Asset Management in Tokyo, said he had also been buying Japanese bank stocks. For Junichi Inoue, head of Japanese equities at Janus Henderson, consumer businesses with the pricing power to increase revenues and profits by passing higher energy and food costs on to customers were the focus. “I do like convenience stores,” he said. “Margins have really been going up, earnings have been good – positively surprising.” NEW DYNAMIC?Japanese wages, adjusted for inflation, fell in the 18 consecutive months to September. But big employers are expected to agree bumper pay hikes in the spring. “You really need to see services inflation come through in order for inflation to be sticky, and that’s driven by wages,” said, James Halse, portfolio manager at Platinum Asset Management in Sydney.Data out on Friday is expected to show core consumer prices accelerated again in October, staying above target for a 19th straight month. Global fund managers are the most positive on Japanese stocks since March 2018, a Bank of America survey published on Nov. 14 showed. And Warren Buffett is buying.Japan’s Topix index, one of the key indexes on the Tokyo Stock Exchange, has jumped 26% this year, helped by corporate governance reforms. David Hogarty, senior portfolio manager at Dublin-based KBI Global Investors, said he had turned positive on Japan partly because higher inflation would pressure companies to boost dividend payouts. “Typically, if you increase your dividend in inflationary times, people like that,” he said, noting Japan currently has the highest dividend growth globally at about 20% year-on-year.BOND PAINJapanese inflation means bond investors could suffer. Rising inflation reduces the appeal of fixed interest-paying bonds. The BOJ has also long supported the bond market by buying government debt to cap yields and suppress domestic borrowing costs. But investors are cautious about this so-called yield curve control policy ending as the BOJ is forced to tighten monetary policy.Inflation “probably isn’t transitory” for Japan because it had not been in the United States or Europe, said Jon Day, global bond portfolio manager at Newton Investment Management. “And of course the bond market isn’t fully priced for it.” The five-year JGB yield is around 0.35%. Even a long-term inflation rate of 1% in Japan would make that a “terrible return,” Day said. U.S. Treasuries are facing a third year of hefty price falls after aggressive Federal Reserve tightening took rates to 5.25%-5.5%. At minus 0.1%, the BOJ is the only major central bank with negative rates. Grégoire Pesques, CIO for fixed income at Europe’s largest fund manager Amundi, said he holds a short position on the 10-year JGB as he expects yields to rise from around 0.8% currently, as bond prices fall.Rising yields could finally lift a battered yen.The yen, which surged to 133 per dollar in December 2022 when the BOJ hinted it would review yield-curve control, dropped as low as 151.92 last week.”The direction of travel is clear and away from unsustainably easy (monetary) policy,” Pictet’s Donzé said, forecasting “a stronger currency as we move into 2024.” More

BERLIN (Reuters) -German Economy Minister Robert Habeck on Monday criticised sticking to what he called the country’s “inflexible” debt brake and took a swipe at Finance Minister Christian Lindner on prospective subsidy cuts, saying it was “all just talk”. The comments laid bare strains in Chancellor Olaf Scholz’s ruling coalition after a court ruling last week that wiped 60 billion euros ($65 billion) from the federal budget sent the government scrambling for alternative sources of funding. The finance ministry temporarily froze future spending pledges across almost the entire federal budget, a letter by the budget state secretary showed, in a sign of how seriously it was taking the potential fallout to its finances.Two government sources warned that projects in areas key to Germany’s industrial competitiveness were now at risk, including planned chip factories, expansion of the battery supply chain and decarbonisation of steel.The government is considering whether to suspend Germany’s constitutionally enshrined debt brake as a way out of the spending crunch, a source told Reuters, while a leading member of Scholz’s own party also called for such a move. Habeck, from the pro-spending Greens, has warned that the court ruling could severely impact Germany’s ability to support its industry through a green transition and keep jobs and value creation from moving abroad. He has pointed to legislation in other countries, in particular the 2022 Inflation Reduction Act in the United States, as examples of governments helping industry stay competitive. But Lindner, from the fiscally conservative Free Democrats (FDP), is opposed to tax rises and loosening spending rules while the government assesses the extent of the fallout from the ruling during negotiations for next year’s budget. Asked about Lindner’s assertion that the government would have to achieve more with fewer subsidies, Habeck said, “That’s why it’s all just talk. The reality is different.””Where do you want to cut 60 billion in social benefits? That dramatically misses the drama of the situation,” he told Deutschlandfunk radio. Habeck said he was not proposing to abolish Germany’s constitutionally enshrined debt brake, but added that “it is inflexible”. He pointed to the lack of growth in Europe’s largest economy and the challenges of high inflation and energy prices. The finance ministry declined to comment while a government spokesperson said the extent of the issue was still being assessed. Lindner had over the weekend warned there would now be a lack of new government funding to support the economy and infrastructure.”The short-term consequences are hard. In the long term we can gain advantages. We are now being forced to modernize the economy with fewer public subsidies,” he told the Bild am Sonntag newspaper. OPPOSITION RESURGENT The court ruling, which said the government’s move to transfer unused pandemic funds towards climate initiatives and industry support was illegal, has boosted the resurgent opposition CDU/CSU alliance, which brought the lawsuit.Sebastian Brehm, a finance spokesperson for the CSU, criticised what he called Habeck’s “unbearable insults” towards the opposition and the constitutional court. “Because it is not the ruling of the constitutional court or the lawsuit by the CDU and CSU that endanger the economy and jobs,” he said.”Rather, it is the unsound and unconstitutional budget policy of the federal government and the (three-way) coalition. You alone are responsible for the consequences.”The opposition has said the budget for 2024 as it stands was not fit for purpose, but coalition lawmakers have insisted it would be on track to pass by the start of next month. Attention is also now turning to other special off-budget funds that could be under threat of legal challenge, including a 200 billion euro Economic Stabilisation Fund (ESF).”One possibility could be to suspend the debt brake in 2023 … but then not in 2024. But everything is open,” a government source told Reuters. ($1 = 0.9168 euros) More

The ECB broke a streak of 10 consecutive hikes last month by holding rates steady, prompting investors to turn their attention to when rate cuts could come.”There aren’t just peaks and descents: there are also plateaus, where you can experience the effects of altitude and appreciate the view,” said Villeroy, who is the governor of the French central bank.”That’s what we’ll probably be doing for at least the next several meetings and the next few quarters,” he told the Society of Professional Economists in London.The conflict in Gaza and Israel as well as oil market swings were unlikely to derail the fall in inflation, though occasional ups and down could be expected in the next few months, he said.The ECB aims to steer euro zone inflation towards its 2% target by 2025, though Villeroy insisted the number was an average and he was not fixated on hitting 2.0% precisely. Euro zone inflation has fallen quickly in recent months as the economy has slowed, though Villeroy said a recession could be avoided and a “soft landing” seemed more likely.While interest rates were likely to remain at current levels for the immediate future, he said it might be necessary to end bond purchases in the 1.7 trillion euro ($1.85 trillion) Pandemic Emergency Purchase Programme earlier than the current plan for the end of 2024.He added that in future the ECB might need to bring back some form of forward guidance about its interest rate plans, so long as that did not limit its room for manoeuvre too much.”Central banks should be predictable, but not pre-committed,” he said.($1 = 0.9168 euros) More