Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every MondayBetter luck next time. The US came away empty-handed from Friday’s summit with the EU after the failure of its attempts to bounce Brussels into its wheeze to keep out Chinese steel by any means possible. The two sides didn’t even get the critical minerals deal which was supposed to be the meeting’s deliverable. In today’s newsletter I look at why the US crusade is faltering and how it’s seemingly always steel causing trade problems. Charted waters is on China’s declining lending to other emerging markets.Get in touch. Email me at [email protected] roots of European resistanceThe US’s bid for a green steel and aluminium club to exclude Chinese imports for their higher carbon emissions, or even a weaker version based on Chinese overcapacity, has stalled for now. The US will continue to suspend rather than eliminate the Trump-era tariffs on EU exports of those two metals while the sides continue to talk. It was all a somewhat predictable outcome from this meeting.The US seems to have been genuinely surprised about EU resistance to their idea, but perhaps there are some things they haven’t grasped.Any deal that exempts the US from the carbon border adjustment mechanism (CBAM) is a staggeringly heavy lift. As far as the EU is concerned, CBAM is the necessary trade counterpart to its cherished emissions trading system. It’s spent a vast amount of time and energy designing and explaining it. Giving one country a pass risks pulling the whole thing down, and certainly making it far harder to defend at the World Trade Organization. Unlike the US, the EU can’t muster the bloc-wide money to do its green transition purely with cash rather than carbon pricing.It’s fortunately much easier for the EU to annoy the steel industry than it is for the US, where that industry wields absurdly outsized power. Pennsylvania and Ohio aren’t just swing states for President Joe Biden and Donald Trump: in 2002 George W Bush notoriously and cynically slapped obviously WTO-illegal tariffs on steel to win the midterms. By contrast, the European Commission and its member state governments don’t need support from IG Metall in the Ruhr valley or campaign contributions from ArcelorMittal to get re-elected or reappointed.Brussels knows it might be facing a President-elect Trump in 13 months’ time. It’s chary about putting a lot of credibility on the line for an agreement that could be torn up in seconds, especially if it means signing up to the general principle that WTO-incompatible clubs are the way to go.Shocked! SHOCKED! It’s steel againQuite honestly, the whole world trading system would be a lot better if the steel industry didn’t exist. Decades of subsidy and global gluts, interminable WTO litigation, endless negotiations at the OECD: it’s a permanent pain.Its political salience is easy enough to understand. Steel is apparently symbolic of industrial virility and often concentrated in one-industry towns, meaning job losses are highly visible. I wasn’t quite nine years old at the time, but I vividly remember the shockwaves when the Shotton steelworks in north Wales, ten miles from my home town, laid off 6,500 workers in a single day.Its economic heft is rather less. An increasingly capital-intensive industry, it doesn’t create many jobs these days. Costlier steel means higher input costs for the rest of manufacturing and construction: there are 80 jobs in downstream steel-using industries for every one in steelmaking. And so here we are. Ridiculously, steel played a massively disproportionate role in creating US disillusionment with the WTO thanks to an interminable dispute over “zeroing”, a particular methodology for constructing antidumping margins much used by the industry. It’s definitely a lucrative job-creation scheme for trade lawyers. Trump’s WTO-hostile USTR, Robert Lighthizer, was a former steel industry attorney who drove a Porsche. (Thinking about it, buying an imported car is grimly appropriate given the role of tariff-inflated steel prices in making US auto production uncompetitive.)In fact, Washington’s proposal to gang up on China is particularly pointless given existing US and EU antidumping and antisubsidy duties on Chinese steel. Simon Evenett and Fernando Martín of the Global Trade Alert project, reliably on hand to deflate policymakers’ windy rhetoric with inconvenient facts, note that China sells less than 7 per cent of its total steel exports (and less than 24 per cent of its aluminium exports) to the EU and US combined. This isn’t enough of a stick to get China to change its emissions intensity.Honestly, can’t we have a separate WTO for steel or import it from Mars or use bamboo in construction instead or something? Whole civilisations can rise and fall in the time it takes to conclude a steel dispute. Enough, already. Let’s have a transatlantic falling-out out over something else.Charted watersAs China’s foreign policy efforts shift further towards more explicitly trying to recruit geopolitical allies, it’s pulling back from its traditional means of spreading influence — funding infrastructure through the Belt and Road Initiative. Whether low and middle-income countries are willing to join China’s gang without even getting roads and airports out of it remains to be seen.Trade linksChina has fired another shot in its export-control arsenal, this time by trying to deprive the US of a vital material for the electric vehicle industry by banning sales of graphite there.Some signs the EU has absorbed the correct lessons of supply chain shortages during the Covid-19 crisis — a plan to stockpile and share medication rather than a wholesale reshoring of production.Economic security experts Abraham Newman and Henry Farrell have a look at the concept (which I wrote about last week) in a very comprehensive piece in Foreign Affairs.The FT’s Martin Sandbu’s Free Lunch newsletter looks at the prospects for Poland’s economy following the change in power after the election.More FT wisdom in the inaugural newsletter on central banking by veteran economics commentator Chris Giles, here looking at the Bank of England’s forecasting and communications.Recommended newsletters for youEurope Express — Your essential guide to what matters in Europe today. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

ORLANDO, Florida (Reuters) -Leveraged funds trading U.S. Treasuries futures have increased their record net short position across the curve, which will do little to soothe growing concerns among regulators about the potential financial stability risks these bets pose.Hedge funds have rapidly built up short positions in U.S. Treasuries futures this year as part of the so-called ‘basis trade’, a leveraged arbitrage play profiting from price differences between cash bonds and futures.The Bank for International Settlements has warned that the huge build-up in speculators’ Treasuries positions “is a financial vulnerability”, and a recent Fed paper said it warrants “diligent monitoring”.The price difference between cash bonds and futures is tiny, but funds make their money from high levels of leverage in the repo market and sheer volume of trade. Commodity Futures Trading Commission (CFTC) data for the week ending October 17 show that leveraged accounts – those funds and speculators more likely to be active in the basis trade – grew across the two-, five- and 10-year space by 250,000 contracts to a total 4.71 million contracts.That is significantly larger than the peak combined net short position from 2019 of just over 4 million contracts.The move was particularly strong at the shorter end of the curve. Leveraged accounts increased net short position in two-year futures by 133,000 contracts to 1.554 million contracts and by 92,000 contracts in the five-year space to 1.753 million.That’s a whisker from the two-year record net short of 1.558 million contracts in 2019, and a fresh record five-year net short. A short position is essentially a wager an asset’s price will fall, and a long position is a bet it will rise. In bonds falling prices indicate higher yields, and vice versa.But funds play Treasuries futures for other reasons, like relative value trades, and this year, the basis trade. These trades appear to be a key factor behind the U.S. bond market’s steep decline in recent months, but by no means the only one. Worries over the U.S. government’s fiscal health, increased debt issuance from Treasury, the Fed’s ongoing ‘quantitative tightening’ program, stronger-than-expected economic growth and a reassessment of the interest rate outlook have all contributed to the extraordinary bond selloff recently.Yields across the curve last week hit their highest levels since 2006-07, and on Thursday the entire Treasury curve from one-month to 30-year yield maturities was within half a basis point of being above 5%. (The opinions expressed here are those of the author, a columnist for Reuters.) More

BENGALURU (Reuters) – The Bank of Canada is probably done raising interest rates and will hold them at 5.00% for at least six months, according to a Reuters poll of economists that found a majority expecting a reduction in the second quarter of 2024 as the economy slows.Up until recent days, the prospect of another quarter-point rate rise on Oct. 25 remained a serious risk, but a report this week showing inflation fell more than expected in September has mostly solidified views that no more is needed for now. The economy is showing signs of strain from 475 basis points of rate hikes since early 2022, likely giving policymakers enough reason to wait and see how much more past rate decisions will crimp demand and an already cooling housing market. In the meantime Canada’s job market remains tight, with explosive payrolls growth in September, which has left BoC Governor Tiff Macklem confident that while the economy is slowing, it is not headed for a serious recession.The risk of a revival in inflation, last measured at 3.8%, has led most to forecast now is not the time for the central bank to strongly signal they are done raising rates. Twenty-nine of 32 economists polled Oct. 13-20 expect no change to the central bank’s 5.00% overnight rate, with the remaining three expecting a 25 basis point hike. “The Bank of Canada’s rate decision next week is going to be a hawkish hold,” said Randall Bartlett, senior director of Canadian economics at Desjardins.”It will recognize the economy has cooled more quickly than it anticipated back in July and inflation in September, particularly core inflation, demonstrated a pace of slowing that provides us with some room for cautious optimism.”While most are confident the central bank is done hiking, a significant minority of economists who answered an additional question, 8 of 18, said the risk of the BoC raising rates at least once more is “high”.With inflation still running at nearly double the BoC’s 2.0% target and not expected to fall that low until at least 2025, the central bank does not yet have leeway for policy easing. Still, a two-thirds majority, 20 of 30, see the BoC cutting its overnight rate at least once before end-June 2024. That is a slightly higher proportion than in a poll published this week on rate expectations for the U.S. Federal Reserve, which is overseeing a stronger economy.The distribution of where economists saw the overnight rate by end-June was split many ways. Seven economists held the median view of 4.75%, 12 see it at 4.50% or lower and 11 expect it to be at 5.00% or 5.25%.The most recent BoC business outlook survey showed the weakest conditions since the COVID-19 pandemic, underscoring worries the economy could be headed for trouble in coming months. Housing market activity has dropped off and house prices are also falling as higher mortgage rates put pressure on households among the most indebted in the world. While most in the latest poll do not expect a major downturn, one-third of economists surveyed had an official recession in their forecasts, defined as two consecutive quarters of contracting economic output. “In our view, monetary policy tightening is only now fully working its way through the economy,” said Tony Stillo, director of Canada economics at Oxford Economics. “Unlike the Bank that predicts a soft landing, we expect Canada has slipped into a recession that will help return inflation back to target by late next year. However, the Bank may choose to err on the side of over-tightening rather than under-tightening.” (For other stories from the Reuters global economic poll:) More

The findings, from an October survey of almost 5,000 people, put Russia’s economic woes in sharp focus and could give the authorities a headache in the run-up to March’s presidential election, in which President Vladimir Putin is likely to extend his more than two decades in power. Record-low unemployment this year is evidence of Russia’s stark labour shortages, while the rouble’s weakness has added to intense inflation pressure. Interest rates, already at 13%, are expected to rise further to tackle inflation seen ending the year at around 7%, well above the Bank of Russia’s 4% target. Asked whether their salary was enough to cover basic spending, without taking into account income from second jobs or investments, just one in five Russians surveyed said yes. “Yes, with difficulty,” replied another 36% of respondents, while 45% said their salary was insufficient. That is up from 25% in 2021 and 39% in 2022, Headhunter’s survey showed. In 2021, before Russia launched what it calls a “special military operation” in Ukraine, 36% of those surveyed felt their salary was sufficient. Of the 45% lacking the money for basic spending, more than half said they were at least 20,000 roubles ($212) short per month.The average monthly nominal wage earned by Russians was 71,419 roubles ($756) in July, Rosstat’s statistics show. Real wages in Russia are currently growing rapidly as defence companies rush to meet government orders. Other industries are struggling not to lose staff, but cannot always compete with salaries. Double-digit inflation in 2022 heaped pain on consumers and although the economy is set to recover this year from a 2.1% drop in gross domestic product (GDP) in 2022, Russia’s long-term prospects are dim, according the the International Monetary Fund (IMF) and some of Russia’s own forecasts. Russia could miss its 2024 budget revenue target and be forced to hike business taxes if the rouble proves stronger than expected and optimistic economic assumptions fall short, analysts say.($1 = 94.4700 roubles) More

Europe’s largest economy suffered a recession at the turn of the year and produced flat growth in the second quarter, so a fresh contraction would mean four straight quarters with negative or flat growth.This likely made Germany one of the weakest performers in the 20-nation euro zone and its vast industrial sector, normally the motor of growth, has been a drag on the entire bloc all year.”External demand for industrial products continued to be weak,” the Bundesbank said. “The increased financing costs also dampened investments and this depressed domestic demand especially in construction.”While employment remains strong, buffering the economy amid an extended period of weakness, the bank said it expected a slow uptick in the jobless rate towards the end of the year.Financing costs have increased sharply over the past year as the European Central Bank lifted interest rates at the fastest pace on record in the hopes of stopping runaway inflation. While interest rate hikes are likely over now, policymakers are preparing public opinion for rates to stay “high for longer”, suggesting that any reversal is likely to be far into the future. Policymakers want to make sure that inflationary pressures are fully extinguished and they need to see underlying inflation coming down towards their 2% target, which may take well into 2025.”The core rate is likely to remain slightly above 4% (in Germany) in the near future, primarily because of the continued strong momentum in service prices,” the Bundesbank added. More

Home buyers, entrepreneurs and public officials are confronting a new reality: If they want to hold off on big purchases or investments until borrowing is less expensive, it’s probably going to be a long wait.Governments are paying more to borrow money for new schools and parks. Developers are struggling to find loans to buy lots and build homes. Companies, forced to refinance debts at sharply higher interest rates, are more likely to lay off employees — especially if they were already operating with little or no profits.Over the past few weeks, investors have realized that even with the Federal Reserve nearing an end to its increases in short-term interest rates, market-based measures of long-term borrowing costs have continued rising. In short, the economy may no longer be able to avoid a sharper slowdown.“It’s a trickle-down effect for everyone,” said Mary Kay Bates, the chief executive of Bank Midwest in Spirit Lake, Iowa.Small banks like Ms. Bates’s are at the epicenter of America’s credit crunch for small businesses. During the pandemic, with the Fed’s benchmark interest rate near zero and consumers piling up savings in bank accounts, she could make loans at 3 to 4 percent. She also put money into safe securities, like government bonds.But when the Fed’s rate started rocketing up, the value of Bank Midwest’s securities portfolio fell — meaning that if Ms. Bates sold the bonds to fund more loans, she would have to take a steep loss. Deposits were also waning, as consumers spent down their savings and moved money into higher-yielding assets.Higher Interest Rates Are Here More

Fried rice is normally a popular choice among diners in Lagos, the economic capital of Nigeria. Yet lately many people have stopped ordering it, says restaurant manager Toni Aladekomo. With the price of the dish shooting up to N4,000 ($5.20) from N1,500 a year ago, it has “stopped being affordable for most”, says Aladekomo, general manager of Grey Matter Social Space, a restaurant in the upmarket business district of Victoria Island. In Nigeria, rice is the most commonly consumed meal — and the bedrock of the national dish jollof rice. But the price of 1kg of the imported grain was up by 46.34 per cent in August compared with the same period last year, according to the most recent data from the country’s statistics agency.While prices have risen across the board as Nigeria grapples with its highest rate of inflation in two decades, the sharp increase in the cost of this everyday staple can be traced to a crackdown by India, the world’s largest rice exporter, in response to fears of a production shortfall and rising domestic prices. It started last year when the government of Prime Minister Narendra Modi imposed export restrictions on broken rice — a cheap variety imported particularly by poorer countries from Bangladesh to Benin — which is still in place. By the end of July, India had banned exports of non-basmati white rice and followed this in August with a minimum sale price for basmati rice and a 20 per cent tariff on parboiled rice, extended until March.“It’s tough when a country that accounts for 40 per cent of global trade slaps a ban on half of what they export, and duties on the other half,” says Joseph Glauber, senior research fellow at food security think-tank International Food Policy Research Institute (IFPRI) and a former chief economist at the US Department of Agriculture.The immediate consequences of the July ban have been panic-buying among consumers in Asia and North America and responsive measures from other governments in major rice-producing nations.Now, with India’s rice harvest under way, net importers are hoping for better than expected yields that could prompt the government to ease restrictions. But an election is looming in the south Asian country and food prices are a red-button issue for Modi. The El Niño weather phenomenon, associated with heat and drought across the Pacific Ocean, also threatens to damage output next year as growing conditions may be too dry.Analysts warn that if India maintains its current restrictions, and other producers follow, the world is on track for a repeat of the 2008 rice crisis, when a contagion of protectionist policies contributed to rice prices tripling in six months, driving inflation across the globe and sparking civil unrest in north Africa, south Asia and the Caribbean.A man eats a breakfast of rice and plantain at a market in Abuja, Nigeria. The price of staple foods has shot up as the country struggles with its highest rate of inflation in two decades More

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