Economy

Headline inflation came in slightly above a market forecast of 5.02%, but is now at its lowest since March 2021.Consumer prices fell 0.10% in June from May, according to non-seasonally adjusted figures, against an expected drop of 0.09%.The closely watched core price index, which strips out some volatile food and energy prices, rose 0.30% during the month.Annual core inflation in May, considered a better gauge of price trends because it excludes some highly volatile items, was 6.89%, forecast had predicted 6.87%.The Bank of Mexico’s governing board said its benchmark interest rate is likely to remain on hold at 11.25% for an “extended period,” minutes from the bank’s last monetary policy meeting showed, as inflation remains “complex.”Mexico’s central bank, also known as Banxico, unanimously held its benchmark interest rate steady at the meeting for a second time, after a nearly two-year rate-hike cycle in which it raised the rate by 725 basis points to combat inflation.Banxico has been repeating the message that rates will need to remain on hold in order to bring inflation down to its 3% target, which most of the bank’s five board members forecast will happen in the fourth quarter of 2024. More

Jobs growth in the US slowed more than expected in June and was revised lower for the previous two months, in a sign the Federal Reserve’s aggressive interest rate rises are beginning to cool the labour market.The US economy added 209,000 new non-farm jobs last month, lower than consensus forecasts of 225,000, though still comfortably above its pre-pandemic average.Growth over April and May was also revised lower by a combined 110,000.The unemployment rate, however, remained near a multi-decade low, falling back to 3.6 per cent after a slight rise in May.Employment and wage growth are significant drivers of inflation, particularly in the services sector. Friday’s numbers will be scrutinised by investors, economists and central bank officials, who are watching for evidence that the Fed’s interest rate rises are beginning to affect the economy.Although headline inflation numbers have started to trend downward, the labour market has proven resilient, with economists underestimating the strength of payrolls growth for 14 consecutive months before Friday’s data.Hourly wage growth rose 4.4 per cent on an annual basis, well above the roughly 3.5 per cent rate that most economists think is consistent with meeting the Fed’s 2 per cent inflation target.The central bank kept interest rates steady at its last policy meeting in June to give officials more time to take stock of the impact of its previous rate rises and the potential effects of recent turmoil in the banking sector.

However, policymakers have made clear that they are not yet done with their monetary tightening campaign, with most officials predicting two more quarter-point rate rises by the end of the year.Futures markets were pricing in an almost 90 per cent chance of a rate increase at the Fed’s next meeting in late July before Friday’s data were released, and economists at Citi predicted that even a much lower headline figure of around 170,000 would be “still easily strong enough for the Fed to raise rates in July”.Separate private sector jobs data published on Thursday reinforced those expectations, driving the yield on two-year Treasury notes to its highest level since 2007.Still, Drew Matus, chief market strategist at MetLife Investment Management, said that “if [officials] were so certain they needed to move again, they would have done it at the last meeting. There has been some element of doubt in their minds about what they’re seeing.”Additional reporting by Colby Smith in Washington More

Here’s a look at the week ahead in markets from Lewis Krauskopf and Nupur Anand in New York, Li Gu in Shanghai, Kevin Buckland in Tokyo, and Naomi Rovnick and Amanda Cooper in London.1/ UNDER PRESSUREMarkets have come around fast to the Fed’s view that instead of being cut anytime soon, rates will remain high for longer. After another brutal bond sell off, focus turns to Wednesday’s U.S. inflation data. Price pressures have been easing but perhaps not fast enough with a July rate hike seen as likely.May CPI data showed the smallest year-on-year increase since March 2021 – but at 4%, that was still well above the Fed’s 2% target. Just like the latest personal consumption expenditures index showed similarly slowing inflation also above the Fed ‘s comfort zone. June meeting minutes showed a united Fed agreed to hold rates steady, buy time and assess whether further hikes would be needed. The answer seems yes. And the most deeply inverted bond yield curve since the 1980s suggests investors bracing for another hike also expect Fed tightening raises recession risks.2/ FIGHTING FIRES    China is fighting a hi-tech trade war with Washington while grappling with a sputtering economy.    After months of tightening of restrictions by the U.S. and key allies on chip-related imports, Beijing hit back in recent days with curbs on chip-making metal exports, and a warning of more to come – just in time for Treasury Secretary Janet Yellen’s visit. Washington has been mulling curbing Chinese companies’ access to cloud-computing services.    Things aren’t looking bright on the economic front either. Monday’s inflation data should show more deflationary pressure at factories and retailers, while Thursday’s trade numbers are expected to see a continued decline in exports – all pointing to lacklustre demand.    Hopes for major Politburo policy support at month-end seem to have faded. Goldman Sachs (NYSE:GS) said that conversations with their local clients showed they now expected to see measures aimed only at easing economic headwinds, rather than generating strong growth.3/ PAUSE AND EFFECTSkips, pauses and pivots dominate monetary policy conversations as persistent inflation has seemingly consigned central-bank forward guidance to the dustbin of history. Increasingly, policymakers say decisions depend on future data, making it harder for traders to formulate a view on the outlook.The Reserve Bank of New Zealand (RBNZ) – one of the first major central banks to start tightening policy – has raised rates by 525 basis points since October 2021 – the most among the G10. In May, it signalled it had finished raising rates, but at its meeting on Wednesday longer-term clarity may remain out of reach with inflation running at 6.7% and the economy in recession.The Bank of Canada, meeting the same day, is in the data-dependent corner, leaving markets split down the middle on whether it will raise or pause. 4/BANK EARNINGSU.S. banking giants sailed through the Fed’s annual health check in late June, highlighting they have enough capital to weather a severe economic downturn. But now it’s time for earnings, with JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) all scheduled to report second quarter earnings on July 14. The picture looks not so rosy with results predicted to be weighed down by sluggish dealmaking and trading revenue while a dearth of investment-banking activity has prompted banks to lay off thousands of employees.Meanwhile, the largest U.S. lenders are expected to keep tightening credit standards given the uncertain economic environment, particularly after bank failures earlier this year. Analysts focus on banks’ lending outlook and how much they set aside in rainy-day funds to cushion losses from souring loans. 5/ TROUBLE IN CREDIT LAND Debt-laden companies are running into trouble. Embattled French retailer Casino, with 3 billion euros ($3.3 billion) of debt maturing in the next two years, has until end-July to agree a restructuring plan. Britain’s Thames Water, with 14 billion pounds of borrowings, faces temporary state ownership if it can’t raise fresh capital. Sweden’s commercial landlord SBB is fighting for survival. In the U.S., junk-rated companies have to refinance almost $1.2 trillion of borrowings by 2026, according to S&P Global (NYSE:SPGI) Ratings. At the same time, the market for collateralised loan obligations – vehicles formed by specialist asset managers that buy about 60% of all junk-rated loans and package them up into bonds – has almost shuddered to a halt. Stock market valuations do not reflect any credit-related worries yet – but that may just be the eye of a storm. More

NEW YORK (Reuters) -Investors are on edge ahead of Friday’s U.S. jobs report after more evidence of economic resilience cemented expectations of higher rates for longer and sent yields to a 16-year high.Unexpected strength in the labor market, which showed private payrolls surged in June, sent the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, to 5.120% on Thursday, the highest since June 2007. Traders in U.S. interest rate futures markets bumped up the probability of another rate increase by the Federal Reserve in November.”It’s counterintuitive, but strong data increases the odds that we will have to go into a recession to break inflation,” said Jack McIntyre, a portfolio manager at Brandywine Global. The S&P 500 Index, fell 0.8% on Thursday, pulling back from a more than 1-year high touched earlier this week.”We are clearly in a phase where strong data is not good for equities,” said McIntyre.Attention now turns to the June jobs numbers on Friday, which could mark another big move for stocks. The S&P 500 has logged an average move of 1.2%, in either direction, on nonfarm payrolls report days, compared with an average move of 0.9% for all days over the past year.According to a Reuters survey of economists, nonfarm payrolls likely increased by 225,000 jobs last month after rising 339,000 in May. The unemployment rate is forecast slipping to 3.6% from 3.7% in May. MOVING MARKETS Economic data has been an outsized mover of markets in recent months as investors parse each new report for clues on the strength of the U.S. economy.Many investors are convinced that a hot report on Friday would force the Fed to resume interest rate hikes, jeopardizing a rally in risk assets that has helped lift the S&P 500 about 15% this year.Federal Reserve Bank of Dallas President Lorie Logan said on Thursday that there was a case for a rate rise at the June policy meeting, in comments that affirmed her view that more rate increases will be needed to cool off a still-strong economy. RECESSION WATCHSo far the U.S. economy has held up better than many investors had expected. Goldman Sachs (NYSE:GS), in early June, lowered its probability for a U.S. recession in the next 12 months to 25% from 35% and said the Federal Reserve will “most likely” hike interest rates by 25 basis points in July.But growth expectations could take a hit if the Fed powers on with its rate hikes.Meanwhile, a closely watched part of the U.S. Treasury yield curve has inverted to its deepest level since 1981, putting a spotlight on what many investors consider a time-honored recession signal. U.S. interest rate futures on Thursday signaled an increased probability of another rate increase by the Federal Reserve in November.The benchmark fed funds futures factored in a 44% chance of a hike in November late on Thursday, compared with about 36% the day before, according to CME’s FedWatch. For next month’s Fed policy meeting, the odds of a 25 basis-point hike were at 92.4%, compared with 90.5% late on Wednesday.If the jobs report comes in hot it would further stamp out any hopes of equities-supporting interest rate cuts. “I don’t think it causes a major, sustained correction in risk assets if we get a hot number tomorrow,” said Aaron Hurd, senior portfolio manager, currency, at State Street (NYSE:STT) Global Advisors.”But I do think the immediate reaction is yields higher, equities lower,” he said. More

Federal Reserve policymakers are debating how much further they need to raise interest rates to ensure that inflation speedily returns to a normal pace, and that calculus is likely to depend heavily on the job market’s strength.Officials will closely watch the employment report on Friday, the last reading on job growth that they will receive before their July 25-26 meeting, for a hint at how much momentum remains in the American economy.Fed officials have been surprised by the economy’s staying power 16 months into their push to slow it down by raising interest rates, which makes borrowing money more expensive. While growth is slower, the housing market has begun to stabilize and the job market has remained abnormally strong with plentiful opportunities and solid pay growth. Fed officials worry that if wage growth remains unusually rapid, it could make it difficult to bring elevated inflation fully back to their 2 percent goal.That resilience — and the stubbornness of quick inflation, particularly for services — is why policymakers expect to continue raising interest rates, which they have already lifted above 5 percent for the first time in about 15 years. Officials have ratcheted up rates in smaller increments this year than last year, and they skipped a rate move at their June meeting for the first time in 11 gatherings. But several policymakers have been clear that even as the pace moderates, they still expect to raise interest rates further.“It can make sense to skip a meeting and move more gradually,” Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, said during a speech this week, while noting that it is important for officials to now follow up by continuing to lift rates.She added that “inflation and the labor market evolving more or less as expected wouldn’t really change the outlook.”Fed officials predicted in June that they would raise interest rates twice more this year — assuming they move in quarter-point increments — and that the labor market would soften, but only slightly. They saw the unemployment rate rising to 4.1 percent from 3.7 percent currently.Investors widely expect Fed officials to raise interest rates at their July meeting, and the strength of the labor market could help to shape the outlook after that. While policymakers will not release new economic projections until September, Wall Street will monitor how policymakers are reacting to economic developments to gauge whether another move this year is likely. More

From movie theaters to military spending, here’s how one of the world’s most important economic relationships stacks up.China and the United States are locked in an increasingly intense rivalry when it comes to national security and economic competition, with American leaders frequently identifying China as their greatest long-term challenger.Yet the world’s two largest economies, which together represent 40 percent of the global output, remain integral partners in many ways. They sell and buy important products from each other, finance each other’s businesses, provide a home to millions of each other’s people, and create apps and movies for audiences in both countries.As Treasury Secretary Janet L. Yellen meets with top Chinese officials in Beijing this week, her challenge will be to navigate this multifaceted relationship, which ranges from conflict to cooperation. Here are some figures that illustrate the links between the two nations.Economic and military powerThe U.S. economy continues to outstrip China’s by dollar value: In 2022, Chinese gross domestic product was $18 trillion, compared with $25.5 trillion for the United States.But China’s population is more than four times America’s. And the economic picture looks different when adjusted for local prices: Based on purchasing power parity, China’s share of world G.D.P. is 18.9 percent, according to the International Monetary Fund, surpassing the United States at 15.4 percent.China has provided more than a trillion dollars for global infrastructure through its Belt and Road Initiative, which analysts see as an effort to project power around the world.The rapid growth and modernization of China’s military have sparked concerns in the United States. China has more naval vessels than the United States and more military personnel, with 2.5 million in 2019.But American armed forces are far better equipped, and the United States still spends more on defense than the next 10 countries combined — $877 billion in 2022, compared with $292 billion in reported spending by China.Trade relationsDespite the rising tensions, trade between the countries remains extremely strong. China is America’s third-largest trading partner, after Canada and Mexico.U.S. imports of goods and services from China hit a record $563.6 billion last year. But the share of U.S. imports that come from China has been falling, a sign of how some businesses are breaking off ties with China.China is also a major export market, with half of all soybeans that the United States sends abroad going to China. The U.S.-China Business Council estimated that U.S. exports to China supported nearly 1.1 million jobs in the United States in 2021.China dominates supply chains for both critical and everyday goods. It is the world’s largest producer of steel, solar panels, electronics, coal, plastics, buttons and car batteries, and it has quadrupled its car exports in just two years, becoming the world’s largest auto exporter through its growing clout in electric vehicles.The United States has steadily expanded sanctions against Chinese companies and organizations because of national security and human rights concerns, placing 721 Chinese companies, organizations and people on an “entity list” that restricts their ability to buy products from the United States, according to the Commerce Department.Financial and corporate tiesChina is one of America’s largest lenders and holds nearly $1 trillion of U.S. debt.Members of the S&P 500 index, which tracks the largest public companies in the United States, generate 7.6 percent of their revenue in mainland China, the biggest source of international sales by far, according to FactSet. The revenue that large U.S. firms derive from China is more than their revenue from the next three countries — Japan, Britain and Germany — combined.But the outlook for American companies doing business in China has turned grimmer. In the American Chamber of Commerce in China’s most recent survey of U.S. companies in China, 56 percent described their business as unprofitable in 2022, with some blaming China’s strict Covid-19 lockdown measures.Also in the survey, 46 percent of American companies thought that U.S.-China relations would deteriorate in 2023, while only 13 percent thought they would improve.Personal and cultural connectionsThe United States is home to nearly 2.4 million Chinese immigrants, making it the top destination for Chinese immigrants worldwide. Chinese immigrants in the United States are more than twice as likely as U.S.-born adults to have a graduate or professional degree.In the 2021-22 school year, 296,000 students from China attended U.S. institutions of higher learning, nearly a third of all international students in the United States.Roughly three in four Chinese Americans experienced racial discrimination in the previous 12 months, and 9 percent were physically intimidated or assaulted, according to a survey by Columbia University and the Committee of 100, a Chinese American leadership organization.Long considered a low-end manufacturer, China has become more of a source for innovation and cultural creation. TikTok, the popular social media app whose parent company is China’s ByteDance, says it has more than 150 million users in the United States.Last year, 20 American movies opened in China, and their box office total was roughly $673 million, according to Comscore. China had more than 80,000 movie screens by late 2021, compared with roughly 39,000 in the United States.Pandemic restrictions have made it much harder to travel between the countries. Air carriers are running only 24 flights a week between the United States and China, compared with about 350 before the pandemic.Sapna Maheshwari and Nicole Sperling contributed reporting. More

Good morning. This morning’s payroll report has the potential to move markets even more than usual. If it is anywhere near as hot as yesterday’s ADP employment report, the pervasive optimism of the past few weeks might get sucked right out of the air. A moderate report could keep the good vibes flowing. Deep breaths, everyone. Email us: [email protected] and [email protected] has changedIn the past week or two, something important seems to have happened in markets. As with any short-term move, the changes could be noise or a temporary byproduct of shifting investor positioning. But it feels more significant than that.The background to the market shift is economic data that has been coming in strong. We’ve discussed last week’s impressive durable goods and gross domestic product numbers. And just yesterday:The ISM services index popped to 54 in June, indicting expansion, up from a neutral 50 in May, and well above forecasts.The quits rate, which had been returning to a its pre-pandemic average of 2.3 per cent, ticked back up to 2.6 per cent.Job openings fell, but at a somewhat reserved pace. They remain more than 40 per cent above 2019 levels. There is lots of labour demand still out there.The ADP private payrolls report showed nearly half a million jobs added in June, suggesting today’s government payrolls data could come in hot too (ADP’s numbers are notoriously noisy, though).The crucial change in markets is in Treasury yields. Since early May, two-year yields have been rising steadily, as investors have slowly accepted the fact that the Federal Reserve will not cut its policy rate any time soon. Neither the debt ceiling set-to nor the meltdown of a few regional banks had an appreciable effect on the economy; inflation had declined but only at a stately pace; financial markets have churned higher, loosening financial conditions. The Fed doesn’t have room to cut.In the past few weeks, the increase in two-year yields has only accelerated. What has changed is that longer-term Treasury yields have started to rise too, and rise very quickly. See how the pink and light blue lines — 10- and 30-year bonds — have hooked up sharply after many weeks of running sideways:The rise in long rates is not surprising in itself. As expectations that the fed funds rate will remain high for longer become entrenched, it becomes harder for long rates to ignore them and stay low. Long rates are just a series of short rates, plus a variable term premium. What is a bit surprising is that this has occurred coincidentally with two other facts: inflation expectations have not risen, and stock prices have.Here is why that combination is surprising. If growth is still robust after 500 basis points of increases in the fed funds rate, the Fed probably is going to have to do quite a bit more tightening to cool the economy. This, presumably, increases the risk they will screw up the timing and tighten too much, causing a recession. But the rising stock market says this is not going to happen.Alternatively, maybe the Fed has overestimated how tight their policy is — maybe the inflation-neutral rate of interest is higher than the Fed thinks — and therefore will fail to tighten policy enough, allowing inflation to persist. But low and stable inflation break-evens are telling you that’s not going to happen, either. Break-even inflation rates (Treasury yields minus inflation-indexed Treasury yields) have been moving more or less sideways for two years. The recent increase in interest rates is therefore mostly an increase in real interest rates.The recent fast rise in long-term real rates is the concrete manifestation of the belief that the Fed will eventually pull off a soft landing — lower inflation without recession. This belief used to be abstract, a number in a probability matrix or a chart in a paper by a Fed official. As of this month, it’s a concrete fact, inscribed in market prices.Has the market become too optimistic? Yesterday’s trading featured rising rates and — for a change — falling stock prices. That combination suggests second thoughts, a twinge of fear about Fed-induced recession. And second thoughts are in order. Short term real interest rates are now higher than they have been since the great financial crisis:The chart above is enough to make a person doubt how long the good news on growth will continue — or wonder if monetary policy is no longer as effective as it was. [Armstrong and Wu]One good readFifteen years ago, the last time two-year interest rates were this high, Unhedged friend and rival John Authers wrote this analysis with another friend, Mike Mackenzie. Parts of it proved unpleasantly prescient about the crisis that was then less than a year away. Does it have lessons for today? We sure hope not. More

Six more women have alleged that financier Crispin Odey sexually assaulted or harassed them, expanding the timeline of his alleged abuse across five decades and raising further questions as to the extent his behaviour was tolerated by senior colleagues.The women came forward after the Financial Times last month published the accounts of 13 women who said they had been abused by Odey. Since that article, the hedge fund manager has been ousted from Odey Asset Management and the UK’s Financial Conduct Authority has come under scrutiny over its handling of a long-running probe into the firm.The six women include two former receptionists and an intern at Odey Asset Management, with the earliest of the new allegations dating back to 1985 when an interior designer, then 26, said she was violently assaulted at Odey’s home in London.The new accounts have been corroborated through documents seen by the FT as well as through interviews with friends and family members the women confided in. Odey’s lawyers previously told the FT that he strenuously disputed the first set of allegations.Odey and Odey Asset Management did not respond to requests for comment regarding the new allegations.Here’s what else I’m keeping tabs on today and over the weekend:Canada employment: Economists forecast that Canada’s economy added 20,000 jobs in June, following a decrease of 17,300 jobs in May. The unemployment rate is expected to have risen to 5.3 per cent, up from 5.1 per cent.US employment data: Non-farm payroll figures for June are expected today after data on Thursday did little to dispel the notion the US labour market remains in solid shape. Economists expect the US economy to have added 225,000 jobs in June, down from 339,000 in May. The unemployment rate in June is forecast to have slightly decreased to 3.6 per cent, down from 3.7 per cent in May.Biden in Europe: US president Joe Biden is due to start a two-day visit to the UK on Sunday, which will include meetings with Prime Minister Rishi Sunak and King Charles III, before he travels to Lithuania for a Nato summit.Companies: Hydrogen company Thyssenkrupp Nucera makes its stock market debut in Frankfurt today, while Liontrust Asset Management shareholders vote on its acquisition of Swiss rival GAM.Five more top stories1. US borrowing costs touched a 16-year high yesterday, prompting a global sell-off in stocks and bonds. Europe’s Stoxx 600 index closed down 2.3 per cent, its biggest one-day drop since March, as strong jobs data in the US intensified expectations of further interest rate increases by the Federal Reserve. Read the full story.2. Twitter has threatened to sue Meta over Threads, alleging it stole the company’s trade secrets when creating the new rival social media app. Meta chief Mark Zuckerberg said yesterday that more than 30mn people had signed up less than 24 hours after Threads’ launch. Here’s what Twitter’s lawyer wrote in a letter to Zuckerberg.Opinion: It feels like 2006 all over again, writes Tim Bradshaw. A new social network has set the internet alight with chatter about the possibilities.3. Brazil’s tax reform has won approval in the lower house of Congress. The legislation, which will amend the constitution, now faces two more votes in the Senate. Finance minister Fernando Haddad said: “After decades, we passed a tax reform. It seemed impossible. It was worth fighting for.”4. Treasury secretary Janet Yellen defended US companies against Chinese pressure during her trip to Beijing, saying “I am communicating the concerns that I’ve heard from the US business community.”5. A top Federal Reserve official has signalled her support for a July interest rate rise to tame the US’s ‘hot’ economy. Dallas Fed president Lorie Logan has called on the central bank to resume raising rates after forgoing an increase last month. Read the full story.How well did you keep up with the news this week? Take our quiz. The Big Read

An artisanal miner holds a cobalt stone at a mine near Kolwezi, Democratic Republic of Congo © Junior Kannah/AFP/Getty Images

Cobalt, the silver metal so abundant in the Democratic Republic of Congo that miners can dig it out with basic tools, is essential for the world’s clean energy transition. Demand is expected to triple by 2035, mainly for electric-vehicle batteries. But the small-scale miners fuelling this transition through “artisanal mining” — a name that belies a rudimentary and hazardous practice — face extreme danger and exploitation.We’re also reading . . . Wagner fallout: The Kremlin’s relatively lenient approach to Yevgeny Prigozhin reflects its weakness and has turned Russia “into a banana republic”, says one former official.Wellness packages for tech founders: Venture capital firm Balderton is to provide nutrition, sleep and mental health advice to entrepreneurs at risk of burnout, writes Tim Bradshaw.Stars on LinkedIn: Emma Jacobs asks why celebrities such as Ryan Reynolds are joining a site known for its humblebraggers and “thought leaders”.Chart of the dayThe riots in France, sparked by the death of a teenager of North African descent shot dead by police during a traffic stop, show just how entrenched inequalities have become between immigrants and those born in the country, writes chief data reporter John Burn-Murdoch. Despite claims that France is race-blind, the data tells a different story.Take a break from the newsFind out how a patents expert, a music professor and a software engineer set about cracking a 445-year-old code to reveal the secrets of Mary Queen of Scots.

Mary Stuart — ‘famously tall, auburn-haired, impeccably dressed and dangerously Roman Catholic’ © Royal Collection Trust / © His Majesty King Charles III, 2023 / Bridgeman Images

Additional contributions by Tee Zhuo More