Economy

MUMBAI (Reuters) – U.S. treasury yields have likely peaked, with longer-dated bonds looking attractive as the Federal Reserve is near the end of its hiking cycle, M&G Investments’ Jim Leaviss said.”Unless we get a resurgence in core inflation from where we are now, then it should be the peak in bond yields,” Leaviss, chief investment officer for public fixed income at M&G, told the Reuters Global Markets Forum (GMF).U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside.”10 years, 20 years, really, lot further out the curve … we’ll probably see a bold steepening when people believe that the end is here for the Fed.” Leaviss said.Leaviss said bond markets in the UK have seen more pain compared to the U.S. due to the stark difference in inflation outlook for Britain versus the rest of the world.”The markets have hated the fact that whilst headline inflation has been coming down, as it has everywhere in the world, core inflation rate in the UK has actually been going up,” he said.The Bank of England’s aggressive rate hikes will lead to a slowdown in economic growth and inflation, which could make a “bold case” for a buying opportunity in UK gilt markets, Leaviss said.”The thing that makes me bullish on gilts – but more bearish on activity (and) the outlook for the UK economy – is that once those rate hikes start working … (is) the transmission mechanism through mortgages (and) rents,” he added.Leaviss believes that as more people move to higher fixed-rate mortgages by next year, it will have a significant impact on their spending power that will bring inflation lower, and lead to the BoE cutting interest rates next year.”I’d be surprised if the Bank of England isn’t cutting interest rates next year and maybe cutting relatively aggressively.”(Join GMF, a chat room hosted on Refinitiv Messenger: ) More

(Reuters) -JPMorgan Chase and Wells Fargo (NYSE:WFC) said on Friday they set aside more money for expected losses from commercial real estate loans, in the latest sign that stress is building up in the sector.Lenders’ exposure to commercial real estate has come under growing scrutiny this year, as the sector globally – particularly office buildings – has been pressured by high interest rates and workers continuing to stay at home. Wells Fargo reported higher losses in CRE due to its office loan portfolio. It increased its allowance for credit losses by $949 million.But the bank also said its CRE revenue increased quarter-over-quarter to $1.33 billion, primarily due to higher interest rates and loan balances.”While we haven’t seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out in the market over time,” Wells Fargo CEO Charlie Scharf said.JPMorgan (NYSE:JPM)’s CRE revenue grew to $806 million in the second quarter from $642 million in the first quarter. The bank, which acquired First Republic Bank (OTC:FRCB) in May, reported $1.1 billion in credit loss provisions driven by its office portfolio. While the bank’s office portfolio was “quite small,” JPMorgan CFO Jeremy Barnum told investors that “based on everything we saw this quarter, it felt reasonable to build a little bit there to get to what felt like a comfortable coverage ratio.”The U.S. Federal Reserve’s annual stress tests last month painted a better-than-expected picture of big banks’ CRE exposure, with projected losses in the event of a market crash declining slightly on last year. The majority of office and downtown CRE loans, however, are held by smaller regional and community banks, which are not subject to the same strict capital buffers, the central bank said. Regulators have been keeping a close eye on CRE risk, particularly at banks with the highest ratio of such loans to their total capital, while lenders have been working with customers to try to prevent defaults. “(T)here’s plenty of little structural enhancements you can make to feel better about it, and then there are also in a lot of cases, getting some partial paydowns,” Michael Santomassimo, Wells Fargo’s CFO, told investors Friday.CRE borrowers have struggled with higher refinancing costs as property values declined and interest payments have risen. Some $20 billion of office commercial mortgage-backed securities, which bundle together individual loans, mature in 2023, according to real estate data provider Trepp.The McKinsey Global Institute forecast office property values could decline by $800 billion across nine major U.S. cities over the next seven years, according to a report. Based on a “moderate” scenario, McKinsey predicted demand for office space in 2030 would be 13% lower than in 2019. McKinsey and others have noted San Francisco’s office market has taken the biggest hit, with several major loan defaults in the city so far this year. Even in the Golden State, however, Santomassimo said Wells Fargo has seen successful workouts in its loan portfolio.Almost a third of Wells Fargo’s $33.1 billion in outstanding office CRE loans, or $9.9 billion, were to borrowers in California, according to the bank’s latest results. This was followed by New York and Texas, which have also experienced CRE challenges this year.”So I think it really depends on building, borrower and all the things we sort of talked about in the script, and it’s less focused on just California,” Santomassimo said. More

The NewsThree of the biggest banks in the United States made a cumulative $22.3 billion in profit last quarter, a hefty jump from the same period last year, the lenders reported Friday.The largest bank in the nation, JPMorgan Chase, led the way with $14.5 billion in profit, helped by growth virtually across the board, including increases in lending and credit-card transactions. Wells Fargo pulled in $4.9 billion and Citi earned $2.9 billion in the quarter. All of the earnings were higher than analysts had expected.JPMorgan Chase’s headquarters in New York. The bank made $14.5 billion in profit last quarter.Haruka Sakaguchi for The New York TimesWhy It MattersGiven its size, JPMorgan in particular is a proxy for the banking industry. Jamie Dimon, the bank’s chief executive, has deep political connections, and his prognostications on the economy are scrutinized in some circles as closely as a central banker’s musings.On Friday, Mr. Dimon told analysts that he expected the U.S. economy to experience “a soft landing, mild recession or a hard recession,” though he didn’t put a time frame on the prediction. “Obviously, we shall hope for the best,” he said.In its latest report, the bank listed a litany of risks, including that consumers are burning through their cash buffers and that inflation remains high. Last quarter, JPMorgan lost $900 million on investments in U.S. Treasury bonds and mortgage-backed securities, which have dropped in value as rates have risen — but that was barely a dent in its results.Wells Fargo, one of the nation’s largest mortgage lenders, is watched by analysts for signs of economic stress. The U.S. economy “continues to perform better than many had expected,” said Charles W. Scharf, the bank’s chief executive.The bank said Friday that soured loans in its commercial business had increased, but that its consumer business had held fairly steady, with a slight rise in credit-card defaults offset by a drop in losses on auto loans. Commercial real estate, especially loans on office space, is a pain point, and the bank set aside nearly $1 billion more for losses.Unlike the other banks, Citigroup reported a fall in second-quarter profit, although the decline was not as severe as analysts had predicted. “The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” Citi’s chief executive, Jane Fraser, said in a statement.BackgroundThe three major banks that reported earnings Friday have been all over the news this year, thanks to their prominent role attempting to be a stabilizing force during the spring banking crisis that felled three smaller lenders. JPMorgan bought one of those failed banks, First Republic. In an indication of how troubled that institution had become, JPMorgan said Friday that it was setting aside $1.2 billion to deal with losses in First Republic’s lending portfolio.Analysts still expect the acquisition to prove worthy in the end, thanks to First Republic’s base of wealthy clients and coastal branches, which Friday’s results show are already buoying JPMorgan’s asset and wealth management arms.The U.S. government debt-limit standoff in April and May was also reflected in the banks’ results, with Citi citing anxiety during the negotiations as pushing investment-banking clients to the “sidelines” during the second quarter.What’s NextIn the next week or so, a slew of other banks will report quarterly earnings. Among the most closely watched will be Wednesday’s results from Goldman Sachs, which has hinted publicly of a disappointing stretch, and regional banks like Western Alliance and Comerica, which will be looking to prove they have bounced back from their recent troubles. More

Today’s top storiesWall Street’s reporting season begins. Citigroup’s quarterly profits fell more than a third as it was hit by slower corporate spending, a dearth of deals and a costly round of lay-offs. JPMorgan’s profits were boosted by higher interest rates, as were those of Wells Fargo. BlackRock profits jumped too as assets under management reached $9.4tn.The EU’s energy regulator warned governments against a repeat of emergency energy measures, saying they could increase fossil fuel use and send the wrong signal to investors. The investment chief at one of the world’s top hedge funds warned that the US battle with inflation was far from over. A top Federal Reserve official said two more quarter-point rate rises would be needed this year to bring it under control.For up-to-the-minute news updates, visit our live blogGood evening.Promotional work on the Barbie movie is among the casualties of Hollywood’s first industry-wide shutdown since 1960, with actors’ remuneration for artificial intelligence “digital doubles” one of the key sticking points in talks with studio and streaming bosses.The strike is the most visible sign of discontent so far from workers alarmed at the relentless rise of AI. It follows a week of warnings from US regulators to the OECD and the United Nations about its potential side-effects.The Federal Trade Commission yesterday launched a wide-ranging probe into ChatGPT maker Open AI to examine whether people had been harmed by the chatbot’s creation of false information and to investigate breaches of privacy and data security.The OECD on Tuesday called on its member states to prepare for the negative side-effects from the mass adoption of AI in the workplace. Potential benefits, such as higher job satisfaction and productivity gains, had to be weighed against downsides, particularly for traditionally highly-skilled occupations, it said.Big Tech is moving swiftly to capitalise on developments. Meta, which is racing to catch up with Microsoft-backed OpenAI and Google, yesterday said it would release a commercial version of its AI model, allowing start-ups and businesses to build custom software on top of the technology. The promise of AI has also revitalised venture capital activity in Silicon Valley. In recent weeks, software group Databricks has bought generative AI start-up MosaicML for $1.3bn, Thomson Reuters paid $650mn for legal services AI group Casetext, Robinhood bought credit card start-up X1 for $95mn, and finance automation company Ramp acquired Cohere.io, a start-up with an AI-powered customer support tool. Until now, much of the hype around AI, particularly the generative kind, has focused on fun aspects. For example, you can listen here to how the FT’s music critic used it to create an original fake song in the style of Tom Waits (spoiler alert: it’s pretty bad).For Unesco, the UN’s scientific and cultural organisation, the implications are much darker. It weighed in on Wednesday, arguing that AI-driven neurotechnology, which connects computers with the brain, was advancing so fast that it threatened human rights and needed global regulation. “The promise,” said Gabriela Ramos, assistant director-general for social and human sciences, “may come at a high cost in terms of human rights and fundamental freedoms, if abused. Neurotechnology can affect our identity, autonomy, privacy, sentiments, behaviours and overall wellbeing.”What, I wonder, would Barbie make of all that? Need to know: UK and Europe economyUK public finances are in a “very risky” position, with government debt set to hit 310 per cent of GDP in 50 years, the Office for Budget Responsibility warned. The economy shrank in May as an extra bank holiday suppressed activity, but the fall of 0.1 per cent was less than economists had expected. Prime minister Rishi Sunak backed pay rises for public sector workers of about 6.5 per cent but only after ministers were ordered to find significant savings from their budgets. New research highlights how England’s cities are recovering from the pandemic faster than rural areas.UK estate agents are at their most gloomy since 2009 as surging mortgage rates hit the market, according to a new survey. The housing affordability crunch has made the gap between those with and without parental wealth much worse, says John Burn-Murdoch. The number of homes for rent meanwhile has hit a 14-year low.

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The eurozone trade deficit nearly disappeared in May as falling energy prices reduced the value of imports while car and food exports rebounded.Germany set out plans for a tougher approach to China, focusing on “de-risking” the relationship with its largest trading partner. A parliamentary report in the UK said the government was failing to respond to Chinese spying. Need to know: Global economyChina is struggling to revive its stricken property market but help for developers is not translating into investor confidence or rising sales. The country’s exports in June suffered their biggest year-on-year decline since the start of the pandemic, adding to concerns over economic growth. Here’s our new explainer on why China is on the brink of deflation.The second part of our series on how the US is rewriting the rules of the global economy examines other countries’ attempts to keep up with Washington’s new found love of subsidies.

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Africa editor David Pilling compares the recovery chances of the two biggest economies south of the Sahara. For South Africa, things are likely to get worse before they get better. In Nigeria, there is some hope that things can start to get better first, he writes.Australia picked a new central bank chief after a backlash against its interest rate tightening cycle last year. The first tasks of Michele Bullock, the first female governor of the Reserve Bank of Australia, are to implement a swath of reforms and bring inflation under control.Farm robots are set for a new period of growth as labour costs rise. Their increasing capabilities are making possible a more tailored, plant-by-plant approach to cultivation that can minimise inputs such as water and agrichemicals. Read more in our special report: Sustainable food and agriculture.Need to know: business The US drug regulator approved the country’s first-ever over-the-counter birth control pill, marking a significant development in a nationwide battle over reproductive rights. Opill, made by the Irish-American pharmaceutical group Perrigo, will be available at pharmacies, convenience stores, grocery stores and online.More misery is in store for European air passengers this summer. Staff shortages in air traffic control and congested skies caused by the war in Europe are set to disrupt schedules while London Gatwick airport will be hit by a walkout over pay. Still, global airlines are hoping for a better summer than last year after spending to boost operational resilience. One carrier that’s not too worried is Delta Air Lines, which recorded the highest revenue and earnings in its history and a 65 per cent surge in sales of transatlantic flights. Cathay Pacific is also enjoying a post-pandemic rebound.Cornwall hopes to become a hub in the UK production of lithium, a key component for electric car batteries. Success rests on a handful of developers battling to secure capital.Science round upScientists are edging closer to declaring the Anthropocene epoch, or the point when humanity’s influence on the Earth’s geology became irreversible. Columnist Camilla Cavendish says this is our final warning on climate. The World Health Organization classified aspartame, an artificial sweetener commonly found in fizzy drinks, as “possibly carcinogenic”, sparking the risk of a consumer backlash against industry giants such as PepsiCo and Coca-Cola. Commentator Anjana Ahuja says the deep sea is in danger of turning into an invisible wild west after a UN deadline for finalising regulations over mining in international waters expired without agreement. Countries now have the green light to apply for mining licences in search of minerals linked to the green energy transition. UK MPs called for a pause to protect biodiversity.UK space policy needs stronger leadership and better co-ordination if the country is to thrive in the fast-growing small satellite market, according to a parliamentary report. Efforts to set up western Europe’s first commercial launch facilities had been hampered by poor collaboration between regulators, it said.SaxaVord satellite launch pad in the Shetlands. © SaxaVord/PASomething for the weekendTry your hand at the range of FT Weekend and daily cryptic crosswords.Some good newsThe UN said Aids could be ended by 2030 as it published a new report outlining the path to elimination. More

Few consumers are likely to be familiar with the uses of gallium or germanium. But the chemicals — which are used in solar panels, as well as optical fibres — have acquired newfound fame this month after China announced it would be restricting their export from August 1. The curbs, which seek to preserve Beijing’s “national security and interests”, are a reminder that the west needs to bolster its efforts in the global scramble to secure metals and minerals that are critical for the green transition and new technologies.Demand for vital resources such as lithium, copper, cobalt and nickel is expected to more than double by 2030, as the world rushes to build electric vehicles, wind turbines and solar panels in mushrooming quantities. Investment in developing these raw materials rose by 30 per cent last year to more than $40bn, according to a report this week from the International Energy Agency. Since mining projects take anywhere from seven to 20 years to realise, accelerating extraction is crucial.If all announced projects are delivered on time, the IEA forecasts supply to be sufficient to keep national climate pledges on track by 2030. That may be somewhat comforting — even if it means the world will still be behind on restricting warming to within 1.5C of pre-industrial levels. But it belies three inconvenient truths that the west needs to grapple with quickly.First, China dominates critical mineral extraction and refining to an astonishing degree. Last year, its companies doubled their investment spending, compared with a 25 per cent increase on average for western mining groups such as BHP, Anglo American and Glencore. China also accounts for about 60 per cent of the world’s lithium processing; Elon Musk, chief executive of Tesla, has dubbed lithium-based EV batteries “the new oil”. Beijing has snapped up deals, too, with nations across Africa and Latin America that are rich in critical mineral deposits. As geopolitical tensions mount, China’s potential to weaponise its control of resources, as Russia has done, puts western economies on edge.Second, the west’s mining sector cannot solve critical mineral shortages on its own. Price volatility makes extraction risky; some rare raw materials also suffer from poor price transparency given limited public trading. China’s first-mover advantage in some countries as well as state support means it is competitive even when prices slump. High interest rates do not help either. A push from governments in areas such as price insurance and public-private partnerships, such as France’s recently announced €2bn investment fund, can help to de-risk projects. Diplomatic outreach is just as important. The west will struggle to build ties with extracting nations in the developing world solely with promises to mine in a more environmental and socially responsible way. Sweeteners such as trade deals and support for infrastructure projects also matter. Mineral deposits at home warrant further exploitation. Canada and Australia have an abundance of minerals; even Britain’s unassuming Cornish region has significant amounts of lithium that it is now starting to develop. Yet permitting processes are slow and overcoming so-called “Nimbys” is not easy. Finally, while national initiatives are emerging, co-ordination between western partners is key. Joint financing efforts could help bring scale to projects. Exploration of the seabed, which is largely untapped, also offers huge scope for new rare metal deposits but environmental standards are not yet agreed. Research partnerships are promising, too. For example, sodium — which is more abundant than lithium — was recently found to be effective in energy storage batteries.Over the past decade, the west has woken up to the threat of climate change. Now it needs to wake up to the necessity of securing the materials that power the green transition. More

UK renters are being squeezed by the cost of living crisis, with new official data showing they are five times more likely to struggle financially than outright homeowners.The chances of renters facing financial vulnerability were 4.7 times greater than for those who own their homes without a mortgage, according to a study by the Office for National Statistics released on Friday.The ONS’s criteria for measuring financial vulnerability includes being unable to afford an unexpected but necessary expense of £850, borrowing more than usual, struggling to meet energy bills and not being able to save. David Ainslie, ONS principal analyst, said: “Today’s analysis adds to our work identifying inequalities in society and how certain groups have been more affected by the increased cost of living than others.”The findings come as UK rental prices rose at an annual rate of 5 per cent in May, the fastest since the series began in 2016. As many as four in 10 renters reported difficulty in meeting their rent payments, according to the analysis, which used data from February 8 to May 1. This compared with three in 10 mortgage holders who said they were struggling to afford their payments. Renters were also more likely than mortgage holders to have cut spending on groceries and essentials, run out of food, be behind on energy payments or have a direct debit that they are unable to pay, the study showed. The pain of the cost of living crisis was “feeding into the housing market with mortgage rates soaring and causing knock-on consequences in the private rented sector”, said Paul McGuckin, an analyst at independent consultancy Broadstone.The raised exposure of renters’ to some form of financial vulnerability may reflect that, on average, renters spend 21 per cent of their disposable income on rent, according to the ONS. This is higher than the 16 per cent mortgage holders spend on their mortgages.

In the two weeks to June 9, renters were more likely find their payments had increased than mortgage holders, at 42 per cent and 32 per cent, respectively, separate ONS data included in Friday’s release showed.While interest rates have been climbing since the end of 2021, many fixed-rate mortgage borrowers have so far been insulated from these rises as their contracts have not yet expired. But earlier this week, the Bank of England calculated that 1mn households faced mortgage payment increases of £500 a month or more by the end of 2026, with another 6mn expecting rises up to that amount. More

Middle Britain is braced for an onslaught on its household finances. The Bank of England has projected that 1mn UK households face paying £500 or more extra a month as they roll off fixed-rate mortgage deals between now and 2026. Average mortgage rates have hit a 15-year high, surpassing levels seen in the aftermath of the Truss-Kwarteng “mini”-Budget last year. Lenders are standing by to help struggling borrowers but many hope to budget their way out of trouble by relinquishing luxuries from their low-rates-era lifestyle. Trying to decide what will be cut — and by whom — is complicated further by the British reluctance to talk openly about money, elevating the potential for disagreements at home and within families. Financial tensions within relationships are of course nothing new, but the squeeze on budgets is widening existing faultlines. When I asked people about their budgeting gripes this week, simmering levels of financial resentment were already obvious. Top of the list is wage rage. Wishing a spouse or partner would push for a pay rise or promotion or get a better-paying job is seen as the solution by many (better not tell Bank of England governor Andrew Bailey, who is troubled by UK pay growth hitting a record high). Even so, a higher rate taxpayer would need a gross salary increase of more than £10,000 to fill a £500-a-month hole in their budget. Profligacy is another common moan. Many tell me their own efforts to economise are being undone by a higher spending spouse — men and women complained equally about this, although the sources of tension varied. A linked issue was how to split rising bills if one partner earns more than the other. “Dividing our expenses 50:50 is so unfair when he makes more than double what I do,” said one person (I heartily agree). As pressures grow, so will the need for difficult conversations at home. People tell me they suspect their partners of having secret savings or credit card debts or confess to such concealments, fearing this may weigh on future mortgage refinancing options.It is also notable that mortgage-driven budgeting pain is skewed towards younger generations who have taken on much bigger debts to get on to the property ladder. As first homes are often followed by first babies, rising childcare costs add significantly to the burden.“It feels like a big snowball is rolling down the mountainside towards us, and we’re just braced for it to hit,” says one young couple. Agonisingly, they know their mortgage repayments will jump from £800 to £1,400 a month when their fixed-rate deal ends in November; a timeframe that unfortunately coincides with the arrival of their first child.Older homeowners, by contrast, are more likely to be mortgage free. Plenty will have already helped their adult children to buy a home; offspring unable to balance budgets may approach the Bank of Mum and Dad for a bailout, risking further financial disagreements between siblings or generations. Vicky Reynal, a psychotherapist who specialises in helping people resolve financial problems, notes that conflict often arises from an imbalance somewhere. This could be one sibling receiving more financial help than another; one person within a relationship earning or spending more, or even a power imbalance in financial decision making. Arguments might appear to be about money on the surface, she says, but they’re really about what money has come to symbolise: namely, our desires — and fears — around security, power, control and love. Talking more openly about money is one way of easing the tension. Tamsin Caine, a chartered financial planner at Smart Divorce, works with couples whose relationships with money (and each other) have reached breaking point. “It’s very common for one person to deal with the money in a relationship, but this creates a whole extra layer of fear for the other person when couples divorce,” she says.Of course, the financial pressures are far more acute for singletons. While a partner’s spending habits could be a source of friction, at least you can face the mortgage music together. We might struggle to find the right words, or the right time to confront our money problems when they surface. But the more you do it, the easier it becomes.As challenging as it is to find a good compromise or a better balance, open conversations about money and financial decision-making now will help everyone when interest rates recede.The writer is the FT’s consumer editor and the author of “What They Don’t Teach You About Money”. [email protected] More

The Fed, in line with the major central banks, has hiked lending rates rapidly to curb stubborn inflation, which translated to higher profits for banks that typically thrive in a high-interest rate environment. Banking giants JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) also saw profits climb in the second quarter on the back of higher interest income. State Street said its net interest income climbed 18% in the three months ended June 30 to $691 million. Meanwhile, the broader markets that had slumped in 2022 due to geopolitical turmoil and rate-hike jitters have revived this year as worries around a looming economic slowdown ease. The S&P 500 has risen 17.5% so far in 2023. Assets under custody or administration (AUC/A) at State Street rose 4% in the reported quarter to $39.59 trillion from a year earlier, driven by higher quarter-end equity market levels and client flows, while assets under management climbed 9% to $3.8 trillion. Profit came in at $2.17 per share, beating analysts’ average expectations of $2.10 per share, according to IBES data from Refinitiv. Shares of the custodian bank, however, fell 2.8% in premarket trading as State Street missed revenue estimates. Total revenue climbed 5% to $3.11 billion, below estimates of $3.14 billion amid a drop in servicing, management and FX trading fees. Deposits at the bank fell to $206 billion, down about 2% sequentially and nearly 10% compared to a year earlier. More