Economy

Jerome Powell, Fed Chair, noted the time lag in realizing the effects of monetary tightening and refrained from discussing prospective rate hikes. Despite these inflation issues, the U.S. economy demonstrated resilience with a 4.9% Q3 real GDP growth rate, bolstered by increased consumer spending backed by strong employment and wage growth.Concerns about an economic slowdown are rising as long-term U.S. interest rates reached a 16-year peak of 5% in October, alongside increasing Treasury yields. Uncertainty over U.S. consumer spending also looms due to the resumption of student loan repayments following COVID-19 pandemic suspensions.David Kohl, Chief Economist at Julius Baer, forecasts that the Fed will keep interest rates unchanged until Q3 2024 due to this robust economic growth and reduced inflation. Kohl highlighted that higher bond yields and weaker equity markets have tightened financial conditions, leading to questions about whether the current monetary policy stance is restrictive enough.In response to the global economic climate, other central banks have also held their interest rates steady. The UAE’s base rate for overnight deposit facility remains at 5.4%, while Qatar has also kept its interest rates unchanged following the Fed’s decision. Similarly, the European Central Bank has kept its policy rate steady for the first time since June last year, while the Bank of Japan continues with its monetary easing approach.Despite these measures, mounting interest rates in Europe have induced economic downturns, as evidenced by a 0.4% reduction in the eurozone’s real GDP. Despite this, Kohl expects that softening growth and lower inflation will convince the Federal Open Market Committee (FOMC) that further policy tightening is unnecessary.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

The fallout would be particularly hard for landlords already struggling with piling debt and companies scaling back their office footprint.For years, landlords around the world clamored to get WeWork into their office buildings, a love affair that made the co-working company the largest corporate tenant in New York and London.Now, WeWork is perhaps days away from a bankruptcy filing — and its demise could not come at a worse time for office landlords.With fewer employees going into the office since the pandemic, companies have slashed the amount of space they lease, causing one of the worst crunches in decades in commercial real estate.Many landlords have accepted lower rents from WeWork in recent years to keep it afloat, but its bankruptcy would be an enormous blow. The pain would be centered on landlords that have leased a large proportion of their space to the company, particularly in New York, and are struggling to make payments on the debt tied to their buildings. Some landlords might quickly accept lower rents from WeWork as part of a bankruptcy reorganization and keep doing business with any new entity that emerges, but others might have to fight in court to get anything.“If you look at a lot of the vacancy in New York City, you will find that a fair amount of that was space that was leased to WeWork — and there will be even more abandoned after a bankruptcy,” said Anthony E. Malkin, the chief executive of the company that owns the Empire State Building and an early skeptic of WeWork.WeWork, despite its efforts to cut costs, still had an empire of 777 locations in 39 countries at the end of June, compared with 764 locations in 38 countries nearly two years earlier. On Friday, its website listed 47 locations in New York, where at the end of March it leased 6.9 million square feet of office space, equivalent to more than 60 percent of all co-working space, according to Savills, a real estate services firm. In London, WeWork listed 38 locations.Speculation of a possible bankruptcy filing intensified in August when WeWork warned that it might not be in business much longer. Its shares have fallen 90 percent since then.Last month, WeWork said it would miss interest payments totaling $95 million. After a 30-day grace period, the company reached a deal with creditors for a seven-day forbearance, which expires Tuesday.A WeWork office space in London. The city has 38 WeWork locations.Tolga Akmen/Agence France-Presse — Getty ImagesIn New York, where a fifth of office space is unleased or being offered for the sublet, the highest amount in decades, the fallout from a WeWork bankruptcy would be felt most in older office buildings in Midtown and downtown Manhattan. Nearly two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings, according to the real estate advisory firm Avison Young.“We believe the value of Class B and Class C buildings will probably be 55 percent less than they were prior to the pandemic,” said Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School who has been tracking the decline in office building valuations. “These are the buildings that are struggling the most and will have a tough time with a WeWork bankruptcy.”Owners of these older buildings were thrilled a few years ago to lease entire floors — or even entire buildings — to WeWork, but they now find themselves under siege. In cases where WeWork has stopped paying rent on the leases, landlords have been unable to make debt payments on buildings that are being valued sharply lower than they were a few years ago.That’s the quandary facing Walter & Samuels, a real estate firm that has WeWork as a tenant in five of its office buildings in New York. At one, 315 West 36th Street, a small edifice built in 1926 in Manhattan’s garment district, WeWork leased about 90 percent of the space and stopped paying rent earlier this year, according to Morningstar Credit. Walter & Samuels stopped making payments on a $77 million loan on the building, Morningstar said.The loan’s special servicer said the appraised value of the building had fallen to $42 million, down from $127 million when the loan was made five years ago, and the servicer is moving to foreclose, according to Morningstar.Executives at Walter & Samuels did not respond to emails seeking comment.WeWork occupies nearly all of the office space at 980 Avenue of the Americas, a mixed-use development owned by the Vanbarton Group. Joey Chilelli, a managing director at the company, said the firm could consider a range of options for the space if WeWork vacated, including turning it into residences.“We have tried to do everything we could earlier this year when they went to every landlord and asked for rent reductions and concessions,” Mr. Chilelli said. “If they are able to reduce their footprint, it will hurt the office market again.”A WeWork bankruptcy would be felt most in older office buildings in Midtown and downtown Manhattan.Hilary Swift for The New York TimesMichael Emory, the founder of Allied, a real estate investment trust that operates office buildings in Canada’s largest cities, said his company walked away from a potential deal with WeWork in Toronto in 2015 because there were drawbacks for Allied. But he said he had watched other developers, particularly in New York, lease space to the company, believing that co-working providers would occupy a large percentage of office space for years.Also, Mr. Emory said, WeWork focused on landlords that were eager to fill up their office buildings and then sell them based on the new occupancy and rental income.A bankruptcy filing “will be very consequential for the New York market,” he said.WeWork declined to comment for this article.At its peak, when investors were feverishly bullish about the company and the vision of Adam Neumann, its eccentric co-founder, WeWork was valued at $47 billion. Its model was to rent office space, spruce it up and charge its customers — established companies, start-ups and individuals — to use the space for as long as they needed it.The flexibility of using a WeWork space — and its community vibe: “Our mission is to elevate the world’s consciousness,” the company declared — was supposed to attract businesses away from stodgy offices that tied tenants down with yearslong leases.But the economics of WeWork’s business were always upside down: What the company took in from customers was not enough to cover the cost of renting and operating its locations. It kept growing anyway, and from the end of 2017, it lost a staggering $15 billion. After WeWork withdrew an initial public offering in 2019, its largest outside investor — the Japanese conglomerate SoftBank — provided a lifeline with a multibillion-dollar takeover.Before that debacle, WeWork had ardent fans in the commercial real estate world who believed the company was pioneering an exciting new service.“We know these folks, we know them well,” Steven Roth, the chief executive of Vornado Realty Trust, one of the largest office landlords in New York, said in 2017. “We think what they’re doing is unbelievably impressive.”Mr. Roth declined to comment for this article. Vornado leased space to WeWork in a building in Manhattan and another in Washington, and they teamed up outside Washington to introduce WeLive residences, one of WeWork’s much-hyped but failed subsidiaries, including the for-profit private school WeGrow.Vornado no longer has WeWork as a tenant. In 2019, after questions about WeWork’s financial health mounted in the industry, Vornado’s chief financial officer said the company had limited its exposure to WeWork.The president of BXP, a part owner of an office development in the Brooklyn Navy Yard, said WeWork had stopped paying rent there.Karsten Moran for The New York TimesJLL, a real estate services firm, once predicted that co-working firms would be leasing 30 percent of all office space in the United States by the end of this decade. Such predictions did not seem outlandish just before the pandemic, when WeWork and other co-working providers accounted for 15 percent of both new and renewed leases signed in New York, according to JLL, up from 2 percent in 2010. Co-working providers accounted for less than 1 percent of all leases signed in New York last year, JLL said.And some landlords believed they would be somewhat insulated from problems at WeWork.“WeWork is out there taking on these start-ups en masse, realizing that some will stay, some will go,” Raymond A. Ritchey, an executive at BXP, formerly known as Boston Properties, said in 2014. “But they tend to be taking that risk as opposed to the landlord on a direct basis.”BXP is a part owner of a shiplike office development in the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since it opened in 2019 but was struggling to fill its space. At the end of last year, BXP was leasing nearly 500,000 square feet of space to WeWork across its portfolio.Douglas T. Linde, the president of BXP, said Thursday on an investor call that WeWork had stopped paying rent at two of its locations, including Dock 72. “We don’t expect WeWork to exit all the assets,” he said, “nor do we expect them to remain in place in the current footprint.”Some landlords might be able to get other co-working companies to take over WeWork’s spaces, or operate their own version, avoiding a situation in which their buildings appear desolate. But they are unlikely to take in the revenue they were initially getting from WeWork, which did end up going public, in 2021, by merging with a special-purpose acquisition company.Mr. Malkin, the Empire State Building landlord, said he had always doubted WeWork’s business model. Also, he never wanted WeWork in his company’s buildings because, he said, it packed too many people into its spaces, causing overuse of elevators and toilets.“Why would you want to do business with these people?” Mr. Malkin said. More

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Investors are warning governments to expect much higher borrowing costs over the coming years, in a shift that will pinch public finances and constrain states’ ability to respond to crises.Despite a recent rally, government bond prices have dropped hard on both sides of the Atlantic this year, in part reflecting a growing acceptance that interest rates will need to stay high for the long haul to dampen inflation. In addition, investors are struggling to digest governments’ much bigger debt issuance plans without central banks stepping in to hoover up supply. The result is much higher bond yields that tie governments in to large regular interest payments when they take on fresh debt. In 2018, the interest bill for G7 countries stood at $905bn a year, according to credit rating agency S&P. By 2026 it will be $1.5tn.“Investors have always worried about government debt and it’s never been a problem, but this time it feels like it’s for real,” said Jim Leaviss, chief investment officer of public fixed income at M&G Investments. Higher for longerThis is the second in a series of articles about the impact of high interest rates across businesses, governments and economies around the globe. Part 1: Private equity takes a hitPart 2: Government finances and the impact on marketsPart 3: Reverberations in the corporate worldPart 4: The consequences for asset management and emerging markets“We’re not just worried about the amount of government borrowing for normal stuff like healthcare spending and pensions,” he said. Instead, he is worried about “structural” issues such as the size of debt interest payments, the impact of central banks shrinking their own bond holdings and the huge 31 per cent slice of US government bonds that will need to be refinanced next year.The yield on benchmark US Treasuries has risen by about 3 percentage points in the past two years to roughly 4.5 per cent, and last month it rose above 5 per cent. Economists surveyed by Bloomberg now expect those 10-year bonds will yield about 4.5 per cent at the end of 2025, up from previous expectations of 3.5 per cent at the beginning of July.Elevated debt levels were at the forefront of conversations at the annual IMF and World Bank meetings in Marrakech last month, with the head of fiscal affairs at the Fund, Vitor Gaspar, telling the Financial Times that rising debt servicing costs for governments would be a “persistent trend” over the medium term and have a “lasting effect”.Over decades, investors and governments have become accustomed to a fairly reliable pattern in interest rates. Typically, central banks push them up to hose down inflation, but quickly cut them again when economies slow down. Now, it is becoming increasingly clear that a return to the post-2008 era of interest rates close to zero per cent is unlikely. The longer-term outlook for rates is highly contested, but factors that could keep them up include high levels of public borrowing including huge investment in projects such as the green transition and infrastructure.In addition, central banks are no longer stepping in to keep borrowing costs down by buying bonds in quantitative easing programmes; instead they are reducing the size of their balance sheets through quantitative tightening. “We are basically transitioning from markets that were engineered by central banks through QE to markets that are less engineered by central banks because they are now doing QT, and at the same time there’s a lot more fiscal activism so there’s a lot more issuance and the market needs to absorb that,” said Guillermo Felices, global investment strategist at PGIM Fixed Income. “We have left that era [of zero rates] behind us,” said Stephen Millard, a deputy director of the National Institute of Economic and Social Research in London. The IMF says global public debt is on course to approach 100 per cent of gross domestic product by the end of the current decade. Among the biggest drivers is the US, where the government deficit is on track to exceed 8 per cent of the country’s GDP this year. “Something must give to balance the fiscal equation,” the IMF warned about global debts. “Policy ambitions may be scaled down or political red lines on taxation moved if financial stability is to prevail.”The US, which has the highest central bank rate in the G7 and a low revenue base compared with its higher-tax peers, is on course for a dramatic surge in debt servicing costs. Bill Foster, senior vice-president at rating agency Moody’s, estimates that US interest expenses as a proportion of government revenue will jump from under 10 per cent in 2022 to 27 per cent by 2033.The expected jump in interest payments is more acute in the US than in some other countries because of the amount of Treasury bonds that will need to be rolled over in 2024, which is likely to lead to significantly higher government interest payments. Congressional Budget Office forecasts suggest that net interest spending will be close to half of America’s overall deficit by 2026. Investors doubt whether the US can grow its way to a lower debt burden. Economic growth forecasts for next year are anaemic at just 1.5 per cent, whereas benchmark inflation-adjusted yields stand at close to 2.2 per cent. “That is essentially telling you that there might be a problem going forward if interest rates stay this high,” said Felices. “If the market smells that fiscal sustainability is under threat then they will push governments to some sort of adjustment . . . by demanding a higher risk premium to own their debt,” he added. Smoke rises during the bombardment of the Gaza strip: the US House of Representatives has approved legislation to provide $14bn in new aid to Israel More

NEW YORK (Reuters) -Hopes that a rout in Treasuries has run its course are tempting some investors back into the U.S. stock market after a months-long selloff.The relationship between stocks and bonds has been a tight one in recent months, with equities falling as Treasury yields climbed to 16-year highs. Higher yields offer investment competition to stocks while also raising the cost of capital for companies and households.Over much of the last week, however, that dynamic has reversed, following news of smaller than expected U.S. government borrowing and signs that the Federal Reserve is nearing the end of its rate hiking cycle.Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, are down about 35 basis points from 16-year highs hit in October. Meanwhile, the S&P 500 surged 5.9% in the past week, its biggest gain since November 2022. The index is off around 5% from its July peak, though up nearly 14% year-to-date.”The stability in rates is helping other asset classes find a footing,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. “If equities move higher you may find investors starting to feel as if they need to chase performance through the end of the year.” Draho expects the S&P 500 to trade between 4,200 and 4,600 until investors determine whether the economy will be able to avoid a recession. The index was recently around 4,365.Other factors may also be working in stocks’ favor. Exposure to equities among active money managers stands near its lowest level since October 2022, according to an index compiled by the National Association of Active Investment Managers – a compelling sign for contrarian investors who seek to buy when pessimism rises. Aggregate equity positioning tracked by Deutsche Bank fell to a five-month low earlier in the week, the firm’s strategists said in a Friday note, helping fuel a powerful bounce when investors rushed back into the market.At the same time, the last two months of the year have tended to be a strong stretch for stocks, with the S&P 500 rising an average of 3%, according to data from CFRA Research. The best two weeks of the year for the index, during which it has risen an average of 2.2% – kicked off on Oct. 22, according to data from Carson Investment Research. “We had an extremely oversold market in the midst of a strong economy, and the Fed coming out a little more dovish was the kindling we needed for a rally,” said Ryan Detrick, chief market strategist at Carson Investment Research, who believes the current rebound in stocks will take them past their July high.Bullish sentiment received another boost on Friday from U.S. employment data, which showed a slight gain in the unemployment rate and smallest wage increase in 2-1/2 years, suggesting that the labor market is cooling, bolstering the case for the Fed to stay its hand. The S&P 500 closed up 0.9% on the day.Of course, plenty of investors remain hesitant to return to stocks just yet. Technology bellwether Apple Inc (NASDAQ:AAPL) on Thursday was the latest of the market’s massive technology and growth stocks to offer an underwhelming outlook. The iPhone maker gave a holiday sales forecast that was below Wall Street estimates. At least 14 analysts cut their price targets for the stock, according to LSEG data. Still, analysts expect earnings growth of 5.7% for S&P 500 companies in the third quarter, with over 81% of the 403 companies in the benchmark index that have reported profits so far having beaten estimates, per LSEG data.At the same time, betting on reversals in Treasuries has been a losing proposition for most of the year, during which rebounds in the U.S. government bond market have been followed by deeper selloffs. The 10-year Treasury yield is up around 125 basis points from its low for the year. Some investors also worry that the so-called Goldilocks economy suggested by Friday’s jobs report may not last. Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, believes that while signs of softer than expected growth are boosting stocks and bonds for now, they may eventually stir recession worries.”Eventually ‘good’ moderation may turn into a debate of whether the economy and labor markets are weakening too much,” he said. More

“I think that product needs a close look and I think it’ll get a close look,” Senior Deputy Governor Carolyn Rogers (NYSE:ROG) said in an interview with Bloomberg News on Friday. “I think you’ll see the industry reflect on how much they want to offer that product,” she addedMany variable rate mortgages in Canada require borrowers to make regular payments in fixed amounts. So when interest rates rise, a greater share of the payment goes toward paying interest on the loan rather than paying down the principal, resulting in the amortization period being extended.The rapid pace of interest-rate hikes by the Bank of Canada since last year has pushed some mortgages into negative amortization, which occurs when interest on a loan exceeds the fixed payment on the principle — resulting in borrowers adding to the principle on their loans.”It is concerning. You don’t want a big portfolio of negative amortizing mortgages,” Rogers said. “It’s not good for the banks and it’s not good for the mortgage holders.”On monetary policy, Rogers said, “A rate hike is on the table until we are really confident that we are clearly on our way” toward lowering core inflation toward target.The latest inflation data, for September, showed some progress on the central bank’s favored measures of underlying price pressures, but they remained far above the 2% inflation target.Money markets see little chance of further tightening by the BoC and have moved to price in a rate cut by June. More

(Reuters) – Elliott Investment Management, one of the world’s biggest hedge fund firms, on Friday sued the U.S. Securities and Exchange Commission to obtain more information about rule proposals that could affect how activist firms like Elliott do business.In a complaint filed on Thursday in the Washington, D.C. federal court, the firm founded by billionaire Paul Singer accused the SEC of failing to hand over records that it believes could shine light on its rulemaking process.At issue are proposed rules that would, among other things, require greater disclosures of large security-based swap positions.Some investors use swaps as a means to build stakes in companies without tipping off others, which could make investing too costly. Elliott said that while some rule changes have been made, “key” portions remain under review.”The SEC is unlawfully withholding … information to which Elliott is entitled and for which no valid disclosure exemption applies or has been properly asserted,” Elliott said.The SEC did not immediately respond to requests for comment on Friday. Elliott declined additional comment. Bloomberg News reported earlier about the lawsuit.Last month, the SEC said it would give activist hedge funds and other investors just five business days, down from 10 days, to reveal when they have bought more than 5% of a company’s stock.In June, the regulator strengthened rules intended to prevent anyone in the security-based swaps market from manipulating prices.Founded in 1977, Elliott managed about $59.2 billion of assets as of June 30. It is based in West Palm Beach, Florida. Singer’s net worth is $6.1 billion, according to Forbes magazine.The case is Elliott Investment Management LP v SEC, U.S. District Court, District of Columbia, No. 23-03290. More

Freeland made her remarks at a press conference after a phone call with regional finance ministers to discuss the issue.Alberta Finance Minister Nate Horner later on Friday said the province would not leave fellow Canadians without a stable pension and its associated benefits. “For the past several weeks, Alberta has been having an open discussion about the possibility of establishing an Alberta Pension Plan that will benefit our seniors and workers,” he said. “This will only happen if Albertans vote to do so in a referendum.”Alberta, a right-leaning province, has had a tense relationship with Prime Minister Justin Trudeau’s three consecutive Liberal-led governments since he took power in 2015.Alberta Premier Danielle Smith’s United Conservative Party (UCP) government has launched a consultation process to ask whether the oil-rich province should consider an exit from the CPP, which manages C$575 billion ($415 billion) on behalf of more than 21 million contributors and beneficiaries across Canada.Smith has said she plans to follow the consultation with a possible referendum in 2025. The Alberta government late on Thursday said in a statement that proposed legislation would guarantee the same or lower contribution rates as the CPP and the same or better benefits. The so-called Alberta Pension Protection Act would require Albertans to vote in favor of a pension plan for the province during a public referendum before the provincial government would seek to withdraw assets, the statement said.Freeland, a key member of Trudeau’s government, has asked the chief actuary to provide an estimate of the asset transfer that would be required if Alberta left the CPP based on a “reasonable interpretation” of the legislation governing the pension program. But when asked whether she found it realistic that Alberta was entitled to 53% of CPP assets in 2027, according to a study commissioned by the Alberta government, Freeland said she did not. Freeland also cautioned that the Alberta government would be required to negotiate how Canadians could live and work anywhere in Canada without jeopardizing their retirement.”Alberta would need to negotiate complex time-consuming portability agreements with the CPP and with the Quebec Pension Plan,” she said. The province of Quebec already has its own pension scheme.Trudeau and opposition Conservative Party leader Pierre Poilievre are against Alberta’s plan. More