Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is founder of Satori Insights and former global markets strategist at CitiThe recent squeeze lower in bond yields has done little to lessen the angst over chronic fiscal deficits. The US’s last remaining major AAA rating has been put on negative outlook. There has been much worry about a potential doom loop with burgeoning deficits forcing governments to borrow more, in turn spurring them to raise rates to draw buyers. But what might seem a statement of the obvious — that increased borrowing makes for higher bond yields — turns out to be at odds with the historical record. Higher government debt levels in advanced economies have almost always been associated with lower bond yields, not higher. This finding is not confined to the US: it holds in Germany, Italy, Japan, the UK, Switzerland and Australia back to the 1880s.Even when we look at fiscal deficits, arguably a fairer test of the impact of the actual process of borrowing, the picture remains deeply counterintuitive. On either annual or longer-term changes, with and without lags, for every occasion where it looks like increased borrowing may have driven yields higher, there is at least one where the relationship looks more like the opposite.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.We see three reasons — two empirical, one theoretical — why this phenomenon has held historically and is likely to hold in future. The first is financial repression, where governments and central banks force down yields. During eras of particularly high debt, governments famously make use of every tool at their disposal, from quantitative easing to accounting regulations to capital controls, to help minimise their funding costs. But the relationship of higher debt and lower bond yields holds even in jurisdictions and periods when financial repression was not widespread. And the impact of QE in particular in holding down bond yields is less straightforward than is sometimes argued. Likewise for the perceived impact of the reverse process — quantitative tightening — in driving yields up.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.A second, more powerful, argument is that invoked amid some acrimony by US treasury secretary Janet Yellen. Economic strength and future rate expectations, not deficits, are the primary drivers of bond yields. Indeed, the correlation between yields and deficits tends to be negative: deficits and debt usually fall during periods of economic growth when bond yields are rising, and rise during recessions when yields are falling. Heavy supply does cause government bonds to become cheaper relative to interest-rate swaps but this is very different from driving yield levels.The third reason why large deficits are not associated with high bond yields is that, contrary to intuition, most borrowing is much closer at a system level to being self-funding than is widely recognised.You don’t need to work in an investment bank’s syndicate department to see the intrinsic logic in the statement that “someone needs to buy” each bond issue. Usually this involves a private investor withdrawing deposits from their bank account. But take a moment to consider the process as a whole. Provided the proceeds from the bond sale are at some point spent in the real economy, they produce an increase in bank deposits which exactly offsets the amount the private investor drew down for the purchase. Total bank deposits — or narrow money — are left unchanged.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Stranger still is the impact on broad money, or credit. When an actor levers up, the system as a whole gains assets as well as liabilities. The process of borrowing therefore itself creates “money”, at least in the broad sense of total credit, from nothing. This applies not only when borrowing is funded by bank lending — a process made familiar by a Bank of England paper — but even when funded by the bond market. It is also why aggregate borrowing correlates better with asset prices than with bond yields.None of this condones unlimited deficit spending. As Liz Truss’s UK government all too clearly showed, there is a point where deficits come to matter, and do have the intuitive effect of sending yields spiking higher. But just as increases in corporate defaults tend to be sparked less by looming debt maturities and more by collapses in earnings, so fiscal crises in bond markets tend to be driven less by the inevitability of compounding interest payments and more by sudden collapses in credibility, currency runs and imported inflation. Even more so than economics, finance is a non-linear subject. The long-term unsustainable can in the short term often prove surprisingly investable. More

The small town of Keith in the north-east of Scotland used to be famous for being home to the country’s “oldest working distillery”, which dates back to 1786.But now it is also becoming known as a hub for Scotland’s growing wind industry, with a sprawling new electricity substation set to handle power generated by the Moray West wind farm, 50 miles out in the North Sea.However, while foreign investors have poured billions into wind power in the area, many in Keith complain that it is bypassing the local community. “[We need] tangible benefit other than a pound sign on a spreadsheet for a company down south,” said Marc Macrae, a Conservative member of Moray council, where Keith is situated. “That’s the thing that frustrates people in Moray, when they see these things being built and lorries going past. It is just flowing through [and] not helping us.”You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Green energy has made an outsized contribution to foreign direct investment flows into the UK, reaching an estimated $101bn in 2022, according to an analysis of data from fDi Markets, an FT-owned company that tracks cross-border greenfield investments. The data showed that more than two-thirds of this — over $72bn — was channelled into renewable projects, with the lion’s share in Scotland.However, renewable projects accounted for less than 3,800 jobs of the nearly 80,000 generated by FDI across the UK last year, according to government data. Adam Morrison, UK country manager for Ocean Winds, developer of Moray West, said the group was conscious of the pressures to demonstrate long-term job opportunities More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.As prices surged, some pointed the finger at profiteers. Cue a heated debate, which along with inflation has mercifully now cooled. With the benefit of time and data, what have we learnt about “greedflation”?Naysayers maintain that it is enough to point to the pandemic, the war in Ukraine and government support if we want to explain price increases. We don’t need a story about villainous monopolists amassing power, then suddenly gouging unsuspecting customers. But it’s a bit more constructive to try to understand what the more careful greedflationists were arguing — which is not that the mismatch between demand and supply was irrelevant to inflation, but that corporate power helped to embed it.For example, Isabella Weber and Evan Wasner of the University of Massachusetts Amherst suggest that supply chain bottlenecks crimp competition by leaving some firms unable to service demand. Those who can get inputs then hoick up prices. And when people understand inflation is generally high, they spend less effort on bargain hunting. That means firms find it easier to try it on.The quest for evidence supporting this theory has had mixed success. Explorations of the national accounts show something happening. Jonathan Haskel of the Bank of England calculated in May that rising “unit capital costs” contributed about two-thirds of economy-wide inflation (not just consumer prices) over 2022 in the UK and the eurozone, and about a quarter in the US. But he warned that such capital costs include more than pure profits.A note from September by Bernardino Palazzo of the Federal Reserve board found that American profits as measured in the national accounts were boosted by plunging interest rate costs during the pandemic, as well as government support for businesses. That muddies any other analysis of whether market power mattered.Profits in the national accounts are distinct from those described for investors in corporate accounts. A new note from the Bank of England studies those in the UK and eurozone and finds that yes, profits rose a lot in nominal terms. But so did costs. And so they conclude that other than in oil, gas and mining, profits up to 2022 behaved pretty normally.Accounting profits can be pushed around by all sorts of things. The measure of companies squeezing consumers that economists usually prefer is different, and defined as the mark-up charged over marginal cost. If inflation was driven by companies exercising market power, one might expect to see a correlation between price increases and rising mark-ups. Awkwardly, mark-ups have been moving all over the place. A study from the Bank of Italy estimated that in Germany they were constant in industry and manufacturing in 2022, but rose in construction, retail, accommodation and transport. In Italy, they returned to pre-pandemic levels pretty quickly. Another from the IMF studying the eurozone concluded that “limited available data does not point to a widespread increase in mark-ups”.A paper by Christopher Conlon of New York University and Nathan Miller, Tsolmon Otgon and Yi Yao of Georgetown University found no correlation between mark-ups and price increases between 2018 and the third quarter of 2022 in the US. A different study from the Kansas City Fed found that mark-ups in the US surged in 2021 but then dipped during the first two quarters of 2022 despite high inflation. That looks like companies raising prices in anticipation of their future costs going up, not price gouging.The riposte to this assortment of correlations and trends is that they are not really a test of whether market power matters. If companies can defend their profit margins in the face of rising costs, that could still be a sign they are exercising power. Absence of evidence is not the same as evidence of absence.There are some interesting efforts to go further. A working paper published in October compares industries and countries within the eurozone, and finds that those with more pre-pandemic pricing power and facing high demand did find it particularly easy to raise prices amid the supply chain disruption. These powerful companies also found it easier to raise prices once inflation expectations were elevated, even if they didn’t face any supply bottlenecks at all.This sort of result speaks to the better (boring) version of the greedflation story, which is that in trying to maximise profits some companies helped a cost shock to propagate through the system. Something to watch, not dismiss out of hand. [email protected] More

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SINGAPORE (Reuters) – The yen was on track for its best week against the dollar in four months on Friday on the prospect of a narrowing U.S.-Japan rate differential, with bets that the Federal Reserve is done raising rates leaving the greenback headed for a weekly loss.A slew of weaker-than-expected U.S. economic data released this week, led by a slowdown in inflation, has reinforced market expectations that the Fed has reached the end of its aggressive monetary tightening cycle, with focus now on when the first rate cuts could begin.Market pricing shows just a 0.3% chance of another rate hike in December, as compared to a roughly 15% chance a week ago, with a 35% chance that the U.S. central bank could begin easing monetary conditions as early as next March, according to the CME FedWatch tool.That’s led to a decline in U.S. Treasury yields alongside a fall in the dollar, which was on track to lose nearly 0.6% on the yen for the week, its worst weekly performance since July.Against the greenback, the euro and sterling were likewise eyeing a weekly jump of more than 1.5% each, while the dollar index was on track to lose 1.3%.The euro steadied at $1.0851, while sterling last bought $1.2412.”The market reaction to the (U.S.) CPI was very substantial given that the inflation miss was only quite small, and that’s a bad sign for the dollar going forward,” said Sean Callow, a senior currency strategist at Westpac.”It might set up a narrative whereby the markets start talking about the FOMC statement in December as not only being rates on hold but… that they might go to a more neutral stance.”Separate data released this week showed U.S. retail sales fell for the first time in seven months in October, while signs of a cooling U.S. labour market continue to build as the number of Americans filing new claims for unemployment benefits increased to a three-month high last week.The Japanese yen last stood at 150.72 per dollar, remaining on the weaker side of the 150 threshold and not far from Monday’s one-year low of 151.92 per dollar.Despite a possible peak in U.S. rates and even as insiders believe the Bank of Japan (BOJ) is priming markets for an end to negative interest rates, the wide gap between Japan’s ultra-low rates and those in the United States continues to keep the yen under pressure.”I think (the BOJ) is still going to err on the cautious side. It’s our house view that they don’t touch policy settings for many, many months, so deep into next year,” said Callow.”If that’s the case, then yes, the U.S. dollar will probably have less yield appeal, but we don’t think it’s enough to really turn the tide — the gap is just still so wide.”Elsewhere, the Australian and New Zealand dollars were likewise eyeing weekly gains of 1.7% and 1.3%, respectively, helped by the slide in the greenback.The Aussie was last 0.08% lower at $0.6466, having showed little reaction to upbeat Australian jobs data released in the previous session.The kiwi fell 0.14% to $0.5963. More

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said on Friday the central bank will “patiently” maintain ultra-loose monetary policy as sustained achievement of its 2% inflation target is not yet in sight.Ueda said Japan’s economy was recovering moderately with consumption and capital expenditure continuing to increase.However, the BOJ does not have enough conviction yet that inflation will sustainably and stably achieve its 2% target, he said.”Trend inflation is likely to gradually accelerate toward our 2% inflation target through fiscal 2025. But this needs to be accompanied by a positive wage-inflation cycle. Uncertainty on whether Japan will see such positive wage-inflation cycle is high,” he told parliament.With inflation exceeding the BOJ’s 2% target for more than a year, the central bank is under pressure to phase out its massive stimulus programme that is blamed for causing persistent yen falls and pushing up the cost of imports.But Japan’s economy contracted in July-September, snapping two straight quarters of expansion on soft consumption and exports, complicating the central bank’s efforts to gradually phase out its stimulus. More

President Emmanuel Macron’s government needs to bring down France’s public spending – the highest in the world relative to the size of the economy – to keep its deficit reduction commitments on track.The 2024 budget bill currently going through parliament includes plans for 16 billion euros ($17.35 billion) in savings, most of it from phasing out temporary power and gas price caps. Prime Minister Elisabeth Borne told ministers on Thursday they needed to identify an additional 12 billion euros in savings from 2025 as part of a regular spending review process, government sources said.Various public funds that support businesses and spending on medical care were singled out with other targets to be defined in further meetings, they added.Public financial support of the corporate sector currently costs 110 billion euros annually though a range of cash handouts and tax breaks.”We’re expecting proposals to cut or reduce aid that is considered to be the least efficient or positive or the most redundant,” one of the sources said.The government also wants to rein in fast-growing health spending by taking a hard look at the some 80,000 medical products that are currently partly subsidised at cost of 16 billion euros a year, a second source said.France has committed to its EU partners to cut its public sector budget deficit from 4.9% of economic output this year to an EU limit of 3% in 2027, which its own public audit office says lacks ambition.($1 = 0.9223 euros) More

(Reuters) -A top U.S. banking regulator faced mounting pressure on Thursday over his handling of allegations of sexual misconduct among agency staff and accounts of his own past conduct, with Republican lawmakers calling for his resignation and vowing to conduct a thorough probe.The calls followed a Wall Street Journal report earlier this week that said the U.S. Federal Deposit Insurance Corporation had failed to eradicate widespread harassment in its workforce.In congressional testimony this week, FDIC Chair Martin Gruenberg said he found the reports personally troubling and vowed to take corrective action, adding that the agency had successfully acted on recommendations from an internal watchdog in 2020 but that more work remained to be done.Gruenberg did not respond to requests for comment.In a statement, Senator Sherrod Brown, the Democratic chair of the Senate Banking Committee, said reports of misconduct were “extremely concerning” and called on the FDIC’s inspector general to investigate.He was echoed by influential Democratic Senator Elizabeth Warren, a financial reform advocate, who said later Thursday she also supported a full review of alleged workplace misconduct.The inspector general’s office did not respond to a request for comment. Meanwhile, Tim Scott, the top Republican on the Banking Committee, said Gruenberg should “seriously consider” whether he was fit to lead the agency.In statements and social media posts, Republican Senators John Kennedy and Thom Tillis, both committee members, as well as Joni Ernst, called on Gruenberg to resign.Under FDIC bylaws, Vice Chair Travis Hill, a Republican, would replace Gruenberg should he vacate his position.The resignation calls came after a turbulent day in which the FDIC abruptly canceled a board meeting, at which it had been due to consider adopting a special fee to replenish its deposit insurance fund, minutes after the meeting had been due to start. Hours later, the FDIC’s Republican board members called on Gruenberg and FDIC General Counsel Harrel Pettway to recuse themselves from a pending internal investigation into the agency’s handling of staff misconduct allegations.The Wall Street Journal on Monday reported allegations of sexual misconduct among staff between 2010 and 2022 at agency outposts nationwide, citing interviews with more than 20 women who had quit.In follow-up reporting on Thursday, the newspaper said Gruenberg had himself earned a reputation for bullying and had played a role in high-level decisions in which people accused of sexism, harassment and racial discrimination faced scant consequences.The FDIC did not respond to a request for comment on Thursday afternoon, but told the Journal it took the matter very seriously and that an outside law firm would conduct an internal review.Earlier on Thursday, Patrick McHenry, the Republican chair of the House Financial Services Committee, announced his committee would conduct a “rigorous investigation, including hearings, oversight and transcribed interviews.”McHenry also said Gruenberg had “initially misled” the committee during testimony on Wednesday, at first claiming he had not been the subject of an investigation to his workplace conduct before acknowledging that he had.Late Thursday, the FDIC announced it had adopted the “special assessment” fee, with some minor modifications from an original May proposal. The fee, to be paid by banks over two years, is intended to recoup an estimated $16.3 billion loss from the March failures of Silicon Valley Bank and Signature Bank (OTC:SBNY). More