Economy

The marketplace, the sister site of Chinese discount e-commerce platform Pinduoduo (NASDAQ:PDD), ships everything from clothing to electronics and home goods, mainly from Chinese merchants to customers overseas at rock bottom prices. A drop-down menu on Temu’s website confirms Japan is one of the countries it now ships to. Temu and PDD Holdings did not immediately respond to a request for comment on its recent expansion or future plans.Temu’s model has so far proven wildly popular in the West, where many consumers have been battling inflation and a cost-of-living crisis.Since launching in the United States last September, the Boston-headquartered platform has since expanded to 22 other countries, sitting at or near the top of app download charts in many of them.Vion Zhi Voon Yau, head of research at consultancy Momentum Works, described Japan as an “attractive, affluent” market for Temu.”Whether Temu can adapt the same model effectively and navigate (Japan’s) local nuances remains to be seen,” she said. More

Welcome back. Oil prices edged up again yesterday — but barely. Brent settled at $76.65 a barrel, a 0.4 per cent rise on the day for a 2 per cent gain this week — hardly the uptick Opec+ had hoped for when Russia and Saudi Arabia announced more supply cuts on Monday. As David wrote on Tuesday, for all of the group’s efforts, the market doesn’t seem particularly convinced that there’s going to be a shortage of oil anytime soon. On to today’s Energy Source, where America’s energy transition is back in focus.Yesterday, the US greenlit the country’s third offshore wind farm; today President Joe Biden hits a South Carolina solar parts plant to tout the surge in clean energy jobs that has flowed from the landmark Inflation Reduction Act.Yet despite the steady drumbeat of clean energy projects and job announcements emanating from the White House, concerns are increasing about the fallout beyond the country’s shores. In our main item, Amanda digs into fears that the unabashedly ‘made in America’ push of the IRA could harm developing nations as it hoovers up clean energy investments. That is less of an immediate concern for the president as he gears up for a re-election campaign. And as Data Drill shows, domestically, green jobs numbers continue to rise. Thanks for reading — MylesThe US green push risks ‘slowing’ the transition elsewhereAlmost a year since its passage, the impact of the IRA is hard to overstate.The $369bn package is a game-changer for US climate progress, after years as a laggard; it has reinvigorated the country’s industrial base, previously battered by globalisation; and it has sparked a scramble by rich allies to match its largesse with subsidy packages of their own.But for all its benefits, analysts warn developing countries are being left in its wake.“The key concern . . . is how do you attract investment when it appears that low-carbon investment in the United States is so financially attractive?” said Joseph Majkut, director of the energy security and climate change programme at the Center for Strategic and International Studies.When Biden passed the IRA last August, he ushered the world into a new era of carrots-based climate policy. The landmark climate law includes hundreds of billions in tax credits for clean energy development and is a prime example of “Bidenomics”, the latest buzzword for the president’s economic philosophy of using government funding to spur private investment and growth.Some other countries have followed suit. The EU, Canada, and Australia have sought to come up with their own competitive subsidies as they lash out at the US over “protectionism” and cautioned against a “subsidy war”.But as richer countries look to prevent an exodus of businesses to the US, many countries in the developing world lack the financial means to compete with the US’s economic might.Clean energy investments have been stalling in developing countries even before the passage of western subsidies, making up less than 10 per cent of global investment in 2021, according to BloombergNEF.David Scaysbrook, co-founder of Quinbrook Infrastructure Partners, an investment manager, said attempts by even wealthy western countries to compete with IRA tax credits have been “drops in the bucket”.“There’s not another country that can get even close to that in terms of the financial horsepower,” said Scaysbrook, adding that the US is its “number one” investment destination.‘We will all be poisoned at the same level’As well as the immediate draw from the subsidies, the protectionist leanings of the bill (bonuses for developers using US-made materials and requirements for manufacturing to take place domestically or in North America) have created an uneven playing field, some argue, undermining global trade.“More efforts to protect your producers lead to responses, which just increases barriers to trade and the cost for trade,” said Albert Park, chief economist at the Asian Development Bank. “We just think all of that is terrible for the world. You’re going to slow the green transition.”Underlying the IRA’s design is the US intention to move supply chains away from China, the world’s powerhouse for clean energy technologies, and revitalise industrial heartlands at home.David Victor, a senior fellow at Brookings, warned this “green nationalism” among western nations will be dangerous for the energy transition and “Balkanise” global markets.“The rest of the world is concerned that the United States can’t credibly distinguish between its China problems and its pro-America goals,” Victor said. “There’s huge concern that Americans are going to be so obsessed about making American jobs that they’re going to erode the benefits of global trade.”The sheer scale of the IRA also comes amid more calls from the global south for wealthy nations to meet their commitments for climate finance.“We need to invest more in developing countries,” said Kıvanç Zaimler, energy group president of Sabanci Holding, a Turkish industrial conglomerate. “If the US is clean by 2050 and most of the world is still dirty, we will all be poisoned at the same level.”While foreign aid was never a priority for the IRA, there are provisions for the rest of the world to take advantage of its economic opportunity. Its clean vehicle tax credit, for example, allows raw inputs to be sourced from abroad, so long as the country has a trade agreement with the US. Driving down costsEven though many of the manufacturing tax credits require domestic siting, the massive scale up of clean tech could help reduce their costs for global adoption.“It is the responsibility of the US to commercialise these technologies and to make them cost effective for countries around the world to be able to deploy,” Jigar Shah, director of the US Department of Energy’s loan programmes office, told Energy Source in April.Kimberly Clausing, a senior fellow at the Peterson Institute for International Economics, said: “It’s partly a question of whether you want to be the producer, in which case that subsidy is going to put you at a disadvantage. But if you’re just consuming these products, the subsidy part is OK.”That may be so. But in the near-term, insisting on domestic manufacturing will drive up the cost of going green.“The IRA is only a globally positive thing if what it does is drive down the cost of green tech,” said Charles Kenny, a senior fellow at the Center for Global Development.“The more that you burden the IRA with requirements that massively increase the cost of the final product by bringing manufacturing to the United States, the less it will have its climate impact. The more it will be bad for developing countries.” (Amanda Chu)Data DrillStill, whatever the concerns about the international impact, the domestic green jobs boom is continuing apace. The US added 114,000 clean energy jobs last year, according to a new report from the energy department. That marks a 3.9 per cent climb from 2021.California led the charge in absolute numbers, with 13,293 new jobs. The Rustbelt was also among the top states for clean energy job creation, with West Virginia adding 6,975 jobs — a nearly 20 per cent increase year over year. US energy secretary Jennifer Granholm boasted that the numbers showed “the clean energy transition is accelerating, with job growth across every pocket of America”. (Miguel Johnson)Power PointsUS utilities defend gas stoves to head off electrification threatEuropean and Chinese energy groups race to lock in LNG shipments from USBetween hope and hype for Toyota’s ‘solid-state’ EV batteriesEnergy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here. More

JERUSALEM (Reuters) – Israel’s central bank is expected to leave short-term interest rates unchanged next week after an aggressive tightening round aimed at battling persistent inflation, but analysts are split over whether the rate hike cycle has ended.Of the 17 economists polled by Reuters, 13 projected the Bank of Israel would hold its benchmark rate at 4.75% – its highest level since late 2006 – when it announces its decision on Monday at 4 p.m. (1300 GMT).Three others foresee a 25 basis point increase to 5.0%, while one expects a 15 basis point increase to 4.90%.”It is a close call. I wouldn’t be surprised if they pause and hike in September,” said Rafi Gozlan, chief economist at IBI Investment House, who is one of the four expecting a rate hike.Israel’s annual inflation rate eased to 4.6% in May from 5% in April, staying well above its 1-3% annual target.When it began hiking rates in April 2022, the Bank of Israel had initially hoped its front-loading stance would be able to cap its key rate at around 3%. But inflation has remained sticky, partly due to a weaker shekel against the dollar, and it continued to tighten, reaching 10 straight times in May.”The Bank of Israel understands that the interest rate is already high enough and now it is mainly required to leave it like this for a longer time,” said Amir Kahanovich, chief economist for the Excellence Investment House.”The only question is how the weakening of the shekel will affect his decision,” he added, referring to Bank of Israel Governor Amir Yaron and a shekel that remains weak versus the dollar.Still, a number of economists believe the cycle is over and rate cuts will begin early in 2024. Others expect a Federal Reserve-style pause and a resumption in policy tightening in September should the shekel weaken further and keep inflation high. Morgan Stanley (NYSE:MS) economist Alina Slyusarchuk said she sees “inflation pressures persisting in the upcoming months … Growth has also been holding on and the tightness of the labour market persists” with the jobless rate low at 3.6%.In addition to the rates decision, the Bank of Israel will publish its quarterly macroeconomic updates, while Yaron – who has been heavily criticised by some lawmakers for the surge in mortgage rates – is scheduled to hold a press conference on Monday at 4:15 pm (1315 GMT).The central bank currently forecasts Israel’s economic growth will slow to 2.5% in 2023 from 6.5% last year. More

COLOMBO (Reuters) -Sri Lanka cut its key interest rates for the second straight month on Thursday as inflation eased after last year’s devastating economic crisis and the focus returned to reviving growth following a bailout from the International Monetary Fund (IMF).The Central Bank of Sri Lanka (CBSL) cut its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) to 11% and 12%, respectively, from 13% and 14% previously, in line with analysts’ expectations. The 200 basis point (bps) cut followed a 250 bps reduction in June.The island nation plunged into crisis last year as its foreign exchange reserves ran out and food and energy prices spiralled, with protesting mobs forcing the ouster of then president Gotabaya Rajapaksa.The central bank raised rates by a record 950 bps last year to tame surging inflation and by 100 bps on March 3.President Ranil Wickremesinghe took the reins in July and negotiated a $2.9 billion bailout from the IMF in March.”The banking and financial sector is urged to pass on the benefit of this significant easing of monetary policy to individuals and businesses, thereby supporting economic activity to rebound in the period ahead,” CBSL said in a statement.Governor P. Nandalal Weerasinghe said it would not hesitate in taking measures against financial institutions if the normal interest rate structure is not restored soon. Sri Lanka’s key inflation index peaked at 70% year-on-year in September and has come down gradually. It was at 12% in June.Dimantha Mathew, head of research at First Capital, said the CBSL will try and implement a domestic debt restructuring plan (DRP) plan as soon as possible. “Now that they are bringing down rates fast, they will issue very long-term bonds and reduce borrowing costs for the government. Borrowing costs will come down to between 11%-13% as rates will start trending downwards,” he added.DOMESTIC DEBT RESTRUCTURING PLAN IN FOCUSSri Lanka will move forward with its domestic debt revampto shore up confidence among its foreign creditors, Weerasinghe said, adding that the government was also in talks with creditors including Japan, China and India.”We have done our part and it is now up to creditors. We would like to expedite progress and reach an agreement before the first (IMF) review (in September),” he said.Economic activity remained subdued in the second quarter of 2023 but would gradually recover towards late 2023 aided by policy normalisation, improvement in supply conditions, relaxation in import restrictions and better forex liquidity among other factors, the CBSL said.”This recovery is expected to sustain, thereby gradually closing the large negative output gap that exists in the economy and reaching the potential level of economic growth over the medium term.”Analysts expect more rate cuts in coming months to aid aneconomic recovery and reduce borrowing costs for corporates and the government.”It is clear that confidence about the inflation path and foreign inflows is helping CBSL to support the economy via lower rates,” said Thilina Panduwawala, head of research at Frontier Research, who predicted two more 100 bps cuts by the end of the year. More

There is a concept in the social sciences — including economics — that policymakers and those who advise them would do well to bear in mind: observational equivalence. This is when several rival explanations of what is going on are compatible with everything we are able to observe. In such cases, basing policy on a theory that fits the data (until it suddenly doesn’t) runs the risk of some nasty surprises for which we are unprepared if we don’t pay sufficient respect to the possibility that a rival explanation is the correct one.This came to mind as I was following the European Central Bank’s top central bankers’ retreat at Sintra in Portugal last week. It took place at an exquisitely difficult time for central bankers, when overall inflation is falling quite rapidly but remains too high for comfort. Uncertainty was the name of the game at Sintra — uncertainty about how fast inflation will decline, how much effect on economic activity is still to come from the interest rate rises we have already seen, and as a result, what is the right policy to pursue now.Despite acknowledging these deep uncertainties, however, the central bankers were keen to project certainty about their policy. The general message was that inflation is proving persistent, so don’t expect a softening of monetary policy any time soon — indeed, rates may have to go higher and stay there for longer than people expect. Bank of England governor Andrew Bailey, for example, commented: “I’ve always been interested that markets think that the peak will be shortlived in a world [where] we’re dealing with more persistent inflation.”There is a puzzle here. How does rising uncertainty make policymakers more, rather than less, determined? Before Sintra, Adam Tooze analysed how accepting relative ignorance shapes the new logic of inflation-fighting in counter-intuitive ways. Tooze was responding directly to a speech given on June 19 by Isabel Schnabel, an influential member of the ECB’s executive board, in which she argued that “if inflation persistence is uncertain, risk management considerations speak in favour of a tighter monetary policy stance”. The notion that greater uncertainty justifies tighter monetary policy is an argument Schnabel has been developing for some time, and this intellectual work is as good an explanation as any for the stance most central bankers have adopted.Central bankers are now openly distrusting their own forecasts. Schnabel draws on research showing that forecast errors are correlated to suggest that she and her colleagues are more likely to underestimate than overestimate inflationary pressures, since they already did so last year. That is one reason given for redoubling efforts on tight monetary policy. The other is a belief that it is easier to correct a stance that proves excessively tight than to undo the damage of doing too little to push inflation down. But as Tooze argues, whether this is the case surely depends on what the costs of excessive tightening would be. I would add that the whole argument for “robustness” also depends on what precisely the counterfactual to inflation persistence is. Any “relative cost of getting it wrong” analysis hinges on what precisely “getting it wrong” means. Supporters of tightening should therefore give serious consideration to the explanation of inflation that most undermines their position.That account is this: inflation is at present coming down by itself; not because of monetary tightening but because the supply shocks that pushed up prices in the first place have been going into reverse. By also reversing any original deterioration in the terms of trade (the additional external deficit in economies that are net energy importers), that makes it possible to restore initial real wage levels. Monetary tightening, meanwhile, affects real economic activity with a lag and has yet to affect price formation much. So the tightening comes too late to do any good, and will only add to (downward) price instability once inflation has returned to target by itself.Suspend, for the moment, your judgment of whether this is probable; focus on the fact that it is possible. The behaviour of prices is compatible with this explanation. The last big supply-side shock was the big jump in global (and especially European) wholesale energy and food commodity prices from February to June last year. Year-on-year inflation peaked that June in the US, and in October 2022 in the eurozone, in the UK and in the OECD as a whole — all but three of whose members saw inflation fall last month. Wages are still catching up with past inflation rather than leading it.It is true, of course, that “non-core” inflation (prices excluding food and energy) and services inflation (which is more domestically generated) are coming down more slowly than central banks had hoped for. In addition, inflation expectations are a little bit higher than before: in the eurozone surveys find that people at present typically expect inflation at 2.5 per cent three years from now.But this is why observational equivalence matters. As I described a few weeks ago, there is solid analysis that can account for virtually all the behaviour of both US and eurozone inflation as just what the temporary repercussions from sector to sector of a series of large supply shocks would look like. Expectations data, too, fits the possibility that people’s expectations are shaped by the inflation they currently see, so that as headline inflation keeps falling, so will expectations. In the US, inflation expectation estimations that followed current inflation on the way up have followed it in lockstep back down from the peak. The Federal Reserve Bank of Cleveland’s inflation expectations measure is now below or at the 2 per cent target for all time horizons.

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So consider what else would be true if this is in fact the true explanation of events. One implication for central banks is particularly significant: that there was nothing monetary policy could have done to prevent the bursts in inflation of the past two years, and that current monetary policy is contributing nothing to inflation coming back down. This does not mean interest rate rises have no effect, but that the effects will be exclusively harmful, because they will depress the economy — killing income and jobs growth — when inflation has already disappeared. Put simply, if this is the right explanation of the data we see, the only thing central banks are able to do is to make things worse. We can expect several retorts to this reasoning. One is that even if there was nothing central banks could do to reduce inflation in the relevant timeframe, they must still act as if they can in order to prevent expectations from drifting up. But the hypothesis to be addressed is that they cannot even do this (again, in the relevant timeframe, after which it will be counter-productive). Another retort is that even if central banks can’t do anything about a burst of inflation until it has come and gone, they can bring inflation down below target for a while after that — and it would reinforce on-target inflation expectations if people thought any high-inflation period would be followed by a depressed, low-inflation or even deflationary one, courtesy of central banks. But this would be saying that central banks should amplify fluctuations in inflation — quite the opposite, one should think, of pursuing price stability.The case for “getting the job done” in terms of tightening, therefore, has to come down to the improbability of this explanation being correct. But what do you base this on in the case of observational equivalence? Presumably by being actively on the lookout for data that is able to “break the tie” between alternative explanations. (For example, compare the sector-to-sector transmission of both price increases and price falls.) And presumably not by taking for granted the explanation that tightening came too late but is now working, and that the question is simply how much more of the right medicine to apply.An inflation hawk may be tempted to argue that since a central bank’s exclusive job is to ensure stable prices, all this doesn’t matter: it should just do all it can to lower inflation. But this is wrong in the case of central banks that have dual or mixed mandates, including the ECB for which inflation takes absolute priority. For if tightening does not have an effect on the current inflationary episode at all, then the policy should be judged on how it helps — or, rather, how it harms — its secondary mandate of supporting the EU’s other economic policies. Besides, price stability, of course, requires avoiding below-target outcomes as much as above-target ones.Accepting there is nothing you can do is hard for any policymaker. But “do no harm” is also a useful principle. Other readablesThe path to economic security for the EU goes through building a big and growing green-tech market right at home.The Bank for International Settlements has long been at the forefront of imagining how to make the monetary system fit for the future. Its latest report makes an important recommendation for a new type of monetary infrastructure: a “unified ledger” that would allow decentralised “tokens” or digitised financial claims to be connected to one another via central bank digital currencies. As the BIS puts it, this “opens the way for entirely new types of economic arrangement that are impossible today due to incentive and informational frictions”.Toyota has made tantalising promises about its solid-state battery technology; my colleague Leo Lewis kicks the tyres.Ukraine urges other countries to follow the EU’s longer-term funding pledge.Numbers newsUK interest rates are hitting record highs and so it seems is the nominal wage growth that is moderating elsewhere. Unlike other economies, the UK may well be at risk of a price-wage spiral. More

An estimated 60 percent of those leaving prison are unemployed a year later. But after a push for “second-chance hiring,” some programs show promise.The U.S. unemployment rate is hovering near lows unseen since the 1960s. A few months ago, there were roughly two job openings for every unemployed person in the country. Many standard economic models suggest that almost everyone who wants a job has a job.Yet the broad group of Americans with records of imprisonment or arrests — a population disproportionately male and Black — have remarkably high jobless rates. Over 60 percent of those leaving prison are unemployed a year later, seeking work but not finding it.That harsh reality has endured even as the social upheaval after the murder of George Floyd in 2020 gave a boost to a “second-chance hiring” movement in corporate America aimed at hiring candidates with criminal records. And the gap exists even as unemployment for minority groups overall is near record lows.Many states have “ban the box” laws barring initial job applications from asking if candidates have a criminal history. But a prison record can block progress after interviews or background checks — especially for convictions more serious than nonviolent drug offenses, which have undergone a more sympathetic public reappraisal in recent years.For economic policymakers, a persistent demand for labor paired with a persistent lack of work for many former prisoners presents an awkward conundrum: A wide swath of citizens have re-entered society — after a quadrupling of the U.S. incarceration rate over 40 years — but the nation’s economic engine is not sure what to with them.“These are people that are trying to compete in the legal labor market,” said Shawn D. Bushway, an economist and criminologist at the RAND Corporation, who estimates that 64 percent of unemployed men have been arrested and that 46 percent have been convicted. “You can’t say, ‘Well, these people are just lazy’ or ‘These people really don’t really want to work.’”In a research paper, Mr. Bushway and his co-authors found that when former prisoners do land a job, “they earn significantly less than their counterparts without criminal history records, making the middle class ever less reachable for unemployed men” in this cohort.One challenge is a longstanding presumption that people with criminal records are more likely to be difficult, untrustworthy or unreliable employees. DeAnna Hoskins, the president of JustLeadershipUSA, a nonprofit group focused on decreasing incarceration, said she challenged that concern as overblown. Moreover, she said, locking former prisoners out of the job market can foster “survival crime” by people looking to make ends meet.One way shown to stem recidivism — a relapse into criminal behavior — is deepening investments in prison education so former prisoners re-enter society with more demonstrable, valuable skills.According to a RAND analysis, incarcerated people who take part in education programs are 43 percent less likely than others to be incarcerated again, and for every dollar spent on prison education, the government saves $4 to $5 in reimprisonment costs.Last year, a chapter of the White House Council of Economic Advisers’ Economic Report of the President was dedicated, in part, to “substantial evidence of labor force discrimination against formerly incarcerated people.” The Biden administration announced that the Justice and Labor Departments would devote $145 million over two years to job training and re-entry services for federal prisoners.Mr. Bushway pointed to another approach: broader government-sponsored jobs programs for those leaving incarceration. Such programs existed more widely at the federal level before the tough-on-crime movement of the 1980s, providing incentives like wage subsidies for businesses hiring workers with criminal records.But Mr. Bushway and Ms. Hoskins said any consequential changes were likely to need support from and coordination with states and cities. Some small but ambitious efforts are underway.Training and CounselingJabarre Jarrett is a full-time web developer for Persevere, a nonprofit group, and hopes to build enough experience to land a more senior role in the private sector.Whitten Sabbatini for The New York TimesIn May 2016, Jabarre Jarrett of Ripley, Tenn., a small town about 15 miles east of the Mississippi River, got a call from his sister. She told Mr. Jarrett, then 27, that her boyfriend had assaulted her. Frustrated and angry, Mr. Jarrett drove to see her. A verbal altercation with the man, who was armed, turned physical, and Mr. Jarrett, also armed, fatally shot him.Mr. Jarrett pleaded guilty to a manslaughter charge and was given a 12-year sentence. Released in 2021 after his term was reduced for good conduct, he found that he was still paying for his crime, in a literal sense.Housing was hard to get. Mr. Jarrett owed child support. And despite a vibrant labor market, he struggled to piece together a living, finding employers hesitant to offer him full-time work that paid enough to cover his bills.“One night somebody from my past called me, man, and they offered me an opportunity to get back in the game,” he said — with options like “running scams, selling drugs, you name it.”One reason he resisted, Mr. Jarrett said, was his decision a few weeks earlier to sign up for a program called Persevere, out of curiosity.Persevere, a nonprofit group funded by federal grants, private donations and state partnerships, focuses on halting recidivism in part through technical job training, offering software development courses to those recently freed from prison and those within three years of release. It pairs that effort with “wraparound services” — including mentorship, transportation, temporary housing and access to basic necessities — to address financial and mental health needs.For Mr. Jarrett, that network helped solidify a life change. When he got off the phone call with the old friend, he called a mental health counselor at Persevere.“I said, ‘Man, is this real?’” he recalled. “I told him, ‘I got child support, I just lost another job, and somebody offered me an opportunity to make money right now, and I want to turn it down so bad, but I don’t have no hope.’” The counselor talked him through the moment and discussed less risky ways to get through the next months.In September, after his yearlong training period, Mr. Jarrett became a full-time web developer for Persevere itself, making about $55,000 a year — a stroke of luck, he said, until he builds enough experience for a more senior role at a private-sector employer.Persevere is relatively small (active in six states) and rare in its design. Yet its program claims extraordinary success compared with conventional approaches.By many measures, over 60 percent of formerly incarcerated people are arrested or convicted again. Executives at Persevere report recidivism in the single digits among participants who complete its program, with 93 percent placed in jobs and a 85 percent retention rate, defined as still working a year later.“We’re working with regular people who made a very big mistake, so anything that I can do to help them live a fruitful, peaceful, good life is what I want to do,” said Julie Landers, a program manager at Persevere in the Atlanta area.If neither employers nor governments “roll the dice” on the millions sentenced for serious crimes, Ms. Landers argued, “we’re going to get what we’ve always gotten” — cycles of poverty and criminality — “and that’s the definition of insanity.”Pushing for ChangeDant’e Cottingham works full time for EX-incarcerated People Organizing, lobbying local businesses in Wisconsin to warm up to second-chance hiring.Akilah Townsend for The New York TimesDant’e Cottingham got a life sentence at 17 for first-degree intentional homicide in the killing of another man and served 27 years. While in prison, he completed a paralegal program. As a job seeker afterward, he battled the stigma of a criminal record — an obstacle he is trying to help others overcome.While working at a couple of minimum-wage restaurant jobs in Wisconsin after his release last year, he volunteered as an organizer for EXPO — EX-incarcerated People Organizing — a nonprofit group, mainly funded by grants and donations, that aims to “restore formerly incarcerated people to full participation in the life of our communities.”Now he works full time for the group, meeting with local businesses to persuade them to take on people with criminal records. He also works for another group, Project WisHope, as a peer support specialist, using his experience to counsel currently and formerly incarcerated people.It can still feel like a minor victory “just getting somebody an interview,” Mr. Cottingham said, with only two or three companies typically showing preliminary interest in anyone with a serious record.“I run into some doors, but I keep talking, I keep trying, I keep setting up meetings to have the discussion,” he said. “It’s not easy, though.”Ed Hennings, who started a Milwaukee-based trucking company in 2016, sees things from two perspectives: as a formerly imprisoned person and as an employer.Mr. Hennings served 20 years in prison for reckless homicide in a confrontation he and his uncle had with another man. Even though he mostly hires formerly incarcerated men — at least 20 so far — he candidly tells some candidates that he has limited “wiggle room to decipher whether you changed or not.” Still, Mr. Hennings, 51, is quick to add that he has been frustrated by employers that use those circumstances as a blanket excuse.“I understand that it takes a little more work to try to decipher all of that, but I know from hiring people myself that you just have to be on your judgment game,” he said. “There are some people that come home that are just not ready to change — true enough — but there’s a large portion that are ready to change, given the opportunity.”In addition to greater educational opportunities before release, he thinks giving employers incentives like subsidies to do what they otherwise would not may be among the few solutions that stick, even though it is a tough political hurdle.“It’s hard for them not to look at you a certain way and still hard for them to get over that stigma,” Mr. Hennings said. “And that’s part of the conditioning and culture of American society.” More

Good morning. Thanks for the heap of responses to yesterday’s letter. Readers’ views, as you will see below, fit pretty well with the Federal Reserve’s latest meeting minutes, released on Wednesday. Fed staff economists are forecasting “a mild recession starting later this year”, but with a whopper of a caveat. Narrowly avoiding a recession, Fed economists think, is “almost as likely as the mild-recession baseline”. A resigned shrug, in other words, delivered with a side order of optimism. Email us: [email protected] and [email protected]. Readers’ views of the year to comeYesterday we asked readers for views about the economy 12 months from today, by assigning a probability distribution to this matrix:

This was a slightly updated version of a matrix we added a year ago (back then, the X-axis queried the future fed funds rate, not core inflation, but the general thrust was the same). And while opinions are spread quite evenly over the four outcomes, indicating uncertainty, it is notable that over the intervening year, Unhedged’s readers have become less concerned about recession. They put the chances of one at 55 per cent, against our 60 per cent; a year ago we’d both agreed that the odds of a recession were two in three. As for high inflation, readers trimmed their odds from 45 per cent to 40 per cent:Readers have also tempered their fears about the worst-case scenario — stagflation. Readers cut by 10 percentage points the chance of entrenched inflation and a recession in the next 12 months, with opinion significantly more concentrated than last year (ie, there was a lower standard deviation among responses). With inflation’s peak in the rear-view, that makes sense, too.In all, then, respondents have a slightly more benign view of things than they did a year ago (40 came back with a complete set of probabilities that added up to 100 per cent; many others wrote to stump for one outcome or another as most likely). This is not surprising, in that inflation has eased recently while growth has hung in there.Our readers are a bit more optimistic than we are. We defer to their wisdom, and hope that they are right. If you believe in a soft landing, buy (some) small-capsUnhedged has never put high odds on a soft landing, for the simple reason that monetary policy is not surgical. It lowers inflation by hurting growth, and that is a very easy thing to overdo. We still believe that. But as more resilient economic data rolls in, we have to admit that the probability of a soft landing is rising.One vision of soft landing, advanced most notably by Fed governor Christopher Waller, revolves around the Beveridge curve, an economic model tying the job vacancy rate to unemployment. The pandemic transformed the Beveridge curve; as Help Wanted signs went up across the US, the vacancy rate soared. The yellow line below shows the Beveridge curve immediately after the pandemic struck, while the blue line shows the two decades before Covid. Notice that for any given level of unemployment, pandemic-era vacancy rates along the yellow line are higher than the blue baseline (chart from Morgan Stanley):

Waller’s soft-landing idea, illustrated with the green triangles above, is that vacancies might fall with only a modest increase in unemployment. Such a gentle reversion to pre-Covid norms would defy the historical record, but it could happen. The US has a structural labour shortage, and if employers keep gobbling up workers, you can’t have a recession. As Jay Powell put it at his May press conference: “It’s possible that this time is really different. And the reason is, there’s just so much excess demand, really, in the labour market.”To repeat, we are sceptical. Excess labour demand means steady wage growth, which puts a floor under consumption and therefore inflation. Stubborn inflation will egg on the Fed to raise rates higher, bringing down inflation by engineering a recession. But so far, sceptics like us are stuck talking about a scary future, rather than the scary present. The Beveridge curve has moved in the direction of the soft-landing believers. And investors seem newly eager to buy on good economic news. Twice last week, resilient economic data pushed up stocks and tightened investment grade credit spreads. This, points out Yuri Seliger of Bank of America, is unlike the string of strong economic data in February, which saw wider (ie, bearish) IG spreads and falling stocks. The market sees a less painful growth/inflation trade-off than it once did. So for investors on the hunt for a trade, here’s one: small-caps. The case for them starts with valuations. The S&P 500 is expensive no matter how you cut it. But not the humble Russell 2000. Valuations for this small-cap index are better assessed by price/book ratio than standard forward p/e, Goldman Sachs analysts argue in a recent note, pointing out that smaller companies may not be profitable or have reliable analyst earnings forecasts. On a p/b basis, then, the Russell looks reasonably priced:Next, consider the biggest risk to small-caps: the business cycle. Compared to large-caps, small-caps’ weaker balance sheets and more volatile revenues expose them to cyclical vicissitudes. Traditionally, that has meant small-caps sag late into a cycle, when investors flee to quality, and then rebound once recession draws to an end. The chart below shows the ratio between the S&P 500 and Russell 2000, where a rising line means small-cap outperformance. Early cycle is when you want to own the Russell:Small-caps currently labour under a discount driven by recession anxiety. The bet is that if that doesn’t happen, and it turns out we are not late in the cycle after all, the discount should dissipate.Even in a soft landing, there are risks to small-caps. One is that rates stay higher for longer. No recession means no reason to cut rates, and nearly a third of Russell 2000 debt is floating rate (versus 6 per cent for the S&P), notes Goldman. Higher debt costs would pinch small-caps’ thinner margins, denting performance. Another risk is sector composition. Todd Sohn of Strategas points out that “boom or bust biotech” is also over-represented in the Russell, and looks mired in a bust phase. Also, investors might want to think carefully before owning small-cap banks right now, and they make up 7 per cent of the Russell but only 3 per cent of the S&P.Both of these problems could be ameliorated by not buying the whole index — say by picking a basket of low-leverage stocks, avoiding biotech and banks. Sohn suggests tilting towards small-cap industrials, the largest sector in the Russell and one chiefly exposed to growth. (Ethan Wu)One good readFrom the Eurasian department of mutual incomprehension. More

Big asset managers are flocking to Latin American bonds and currencies, attracted by the region’s high interest rates, low inflation and more resilient economies than many had expected. Latin America is home to five of the world’s top eight performing currencies this year, which have benefited from the region’s central banks acting early and decisively by raising rates and keeping them high even as inflation recedes. Total returns of local bonds have also surged ahead of their developed market peers, as chunky inflation-adjusted yields draw the attention of investors. “With every month that passes the real yield is getting bigger and bigger,” said Paul Greer, emerging markets debt and FX portfolio manager at Fidelity. “So more and more investors want to put their money into Latin American currencies for that reason.”Greer, whose portfolio is overweight in local currency bonds in Brazil, Mexico, Colombia, Peru and Uruguay, said that for both government debt and pure currency exposure, Latin America is “the place to be”. An exception, he said, was Argentina, which has been cut off from access to international markets after a debt default and where inflation runs at more than 100 per cent. Latin American central banks took the fastest and most decisive action globally when inflationary pressures picked up in the wake of the coronavirus pandemic, which helped suppress price growth much more quickly than in other regions.But high rates have not choked off economic growth. Brazil and Mexico — the region’s two largest economies by GDP and the most popular among international investors — both outperformed growth forecasts in the first quarter of this year, prompting economists to raise their projections for the end of the year. In Brazil, the poster child for early and aggressive rises, annual inflation is now under 4 per cent, down from more than 13 per cent this time last year, while interest rates have been kept high at 13.75 per cent since August 2022. In Mexico, rates have been held at 11.25 per cent since March with headline inflation falling to 6 per cent in May. “In places like Brazil or Mexico, now you’re talking 6 per cent and 4 per cent real yields, based on where inflation expectations are, which is a really compelling argument to be adding to those currencies,” said Iain Stealey, chief investment officer of global fixed income at JPMorgan Asset Management.“Is it a crowded trade? Has everyone piled into it? I don’t think that’s the case yet,” Stealey said, adding foreign ownership of local emerging market bonds is still low following the pandemic and multi-asset investors “haven’t yet moved into emerging market debt”.Part of the reason investors are being drawn back to Latin America is that market nerves over leftwing governments in Brazil, Chile, Colombia and Peru have been calmed by a lack of congressional majorities that have left them unable to implement many of their policies.And central banks have maintained their independence, ignoring calls from President Luiz Inácio Lula da Silva in Brazil and President Andrés Manuel López Obrador in Mexico to cut interest rates, arguing that it stifles economic growth.“Despite all the bluster from the politicians, it has not impacted central bank decisions,” said Geoffrey Yu, senior foreign exchange strategist at BNY Mellon.Yu said another reason for the success of Latin American currencies and bonds in 2023 was years of foreign investors avoiding the region. “There’s been practically no positioning — so it’s an easy trade. It’s a good time to buy bonds before central banks start cutting rates.”The worry for currency investors now is that the rally will run out of steam as central banks start cutting rates ahead of other regions. Chile is poised to start lowering this month, investors say, followed by Peru and Brazil in August and Colombia and Mexico by the end of the year.Daniel Ivascyn, chief investment officer at Pimco, said: “At these levels we have a little less conviction on the [Mexican] peso, which has had a combination of very strong performance and relatively low volatility.”But he said bonds in Mexico and Brazil “are starting to look interesting” as inflation pulls back and the prospect of rate cuts draws closer. “They understand the cost of being late on inflation. At least the opportunity for more sustained performance is there,” he said.While some investors say the Mexican peso is starting to look overvalued, if central banks cut rates slowly, currencies across the region could continue to perform well. Greer said he is still betting in the major South American currencies because “inflation will continue to fall faster than central banks will dare to cut interest rates”.Mexico in particular has some attractive long-term structural advantages, as key beneficiary of “friendshoring” of US companies out of China to lower-cost, closer labour markets, and a surge in remittances boosted by a tight US labour market. It also has among the most stable finances in the region, boosted by fiscal restraint in response to the pandemic, but is one of the most sensitive emerging markets to any slowing in the US economy. Despite the risks, Jim Cielinski, global head of fixed income at Janus Henderson, said emerging and developing markets in general “look much better positioned in aggregate than their developed market peers”.“We would expect the Mexican peso and Brazilian real to be higher by the end of the year,” he said. More