Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Taiwan Semiconductor Manufacturing Company has notified Chinese chip design companies that it will suspend production of their most advanced artificial intelligence chips, as Washington continues to impede Beijing’s AI ambitions.TSMC, the world’s largest contract chipmaker, told Chinese customers it would no longer manufacture AI chips at advanced process nodes of 7 nanometres or smaller as of this coming Monday, three people familiar with the matter said. Two of the people said any future supplies of such semiconductors by TSMC to Chinese customers would be subject to an approval process likely to involve Washington. TSMC’s tighter rules could reset the ambitions of Chinese technology giants such as Alibaba and Baidu, which have invested heavily in designing semiconductors for their AI clouds, as well as a growing number of AI chip design start-ups that have turned to the Taiwanese group for manufacturing.The US has barred American companies like Nvidia from shipping cutting-edge processors to China and also created an extensive export control system to stop chipmakers worldwide that are using US technology from shipping advanced AI processors to China. There have been reports that a new US rule would ban foundries from making advanced AI chips designed by Chinese firms, according to analysts at investment bank Jefferies. TSMC is rolling out its new policy as the US Commerce Department investigates how cutting-edge chips the group made for a Chinese customer ended up in a Huawei AI device. The Chinese national tech champion is subject to multiple US sanctions and export controls.People familiar with TSMC’s move said its decision was driven by a “combination” of the need to improve internal controls in the wake of that ongoing probe and the next wave of US export controls on chip supplies to China, expected before US President Joe Biden leaves office.“We want to start mitigating before there are solid, structured regulations,” one of the people said.The company is understood to be particularly wary of being targeted as unreliable or uncooperative as Donald Trump is set to become the next US president.This year, Trump accused Taiwan of “stealing” the US chip industry, and suggested TSMC could move its production back home after pocketing billions of dollars in subsidies from Washington for building fabrication plants in the US.A person close to TSMC said its move was “not a show for Trump but definitely designed to underscore that we are the good guys and not acting against US interests”.Being cut off from TSMC could hurt Chinese tech giants that have bet on making their most advanced AI chips in Taiwan. Search giant Baidu, in particular, is aiming to build a full stack of software and hardware to underpin its AI business. Near the centre of those efforts is its Kunlun series of AI chips. Its Kunlun II processor is made by TSMC on its 7-nanometre level of miniaturisation, according to Bernstein Research. “Kunlun chips are now especially well-suited for large model inference and will eventually be suitable for training,” Baidu founder Robin Li told a conference last year. Li added that the group had been effective in cutting costs by designing its own chips. The people briefed on the situation said TSMC’s new rules were clear in targeting AI processors, but it was so far unclear how widely that would be applied to other chips. China has a number of leading start-ups designing AI chips for self-driving, including Hong Kong-listed Horizon Robotics and Black Sesame International Holding. Executives and company materials at both groups have indicated their newest generation of chips would be made by TSMC on the 7-nanometre node.The people close to TSMC said its new restrictions would not have a major impact on its revenue. TSMC’s October revenue increased 29.2 per cent to NT$314bn ($9.8bn), a slight deceleration of growth compared with preceding months.In a statement, TSMC said it was a “law-abiding company and we are committed to complying with all applicable rules and regulations, including applicable export controls”.The news was first reported by Chinese media site ijiwei.com.Nian Liu contributed reporting from Beijing. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the world“The US economy is strong.”“Joe Biden is not getting credit for falling inflation and low unemployment, therefore, partisanship and media bias must be against him.”“The US is outperforming Europe, so America’s incumbent party will do better at the polls.”FT Alphaville spent much of this year trying to dispel these misguided and incomplete narratives: — It’s (still) the economy (and politics) — stupid — Why isn’t Joe Biden getting credit for America’s sturdy jobs market?— How the ‘strong’ US economy feels for poorer Americans, in five charts — America: a healthy or healthcare economy?If you missed those, here’s a quick summary:— America is continental. US GDP, unemployment and inflation data are particularly poor reflections on the economic experiences of households and businesses in different states and counties. For that, one must dig down for local and income-level statistics.— A high-growth, high-spending economy is not necessarily a sign of a healthy economy. Many Americans are spending a high proportion of their money on rent, healthcare, and food, not discretionary items — and fuelled by debt.— “Inflation falling, unemployment low=good” is too simplistic when people feel price-levels (cumulative inflation) and job security (opportunities and real wage growth) more palpably.Frankly, none of this is new. Political fealty, culture wars, and disinformation may all play a part. But, for all those still unconvinced that people’s lived experience of the economy mattered as much as the exit polls and voxpops suggest, here are ten charts we’ve been monitoring all year. 1) A 17-22 per cent rise in the price level across swing states since January 2021 has not gone unnoticed:2) The cheapest US products have seen the fastest increase in price level; implying lower-income households have faced even higher inflation (aka cheapflation):3) The change in price level exceeds the change in wage level across most swing states too:4) Debt delinquencies are also rising faster than the US average in key states:5) A reminder of how Americans spend their money on services. The bulk of household spending is going towards non-discretionary items such as rent and healthcare:6) Some workers have had more luck in the post-pandemic labour market than others. The visible relative performance can impact how individuals feel about whether the economy is working for them:7) Unemployment may still be low, but those on the lowest incomes have grown most worried about losing their job since the start of the year:8) Americans of all income levels seem to be hearing downbeat news concerning government economic policies. Outsiders may see US exceptionalism on their screens, but the realities on the ground are different, and the wealthier can shoulder it better:9) All income groups feel worse off than they did when Biden started his term, although it is more stark for the bottom and middle thirds of earners:10) And finally. The stock market is not the real economy. America’s asset-poor see minimal upside to soaring equity and house prices:Still don’t trust those exit polls? Some content could not load. Check your internet connection or browser settings. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThis article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Ride-share company Lyft jumped 22 per cent yesterday and sportswear maker Under Armour was up 27 per cent. The two companies reported good quarters and upgraded forecasts, after years of uninspiring results. Both are second fiddles to larger competitors Uber and Nike, respectively. Is this an underdog market? Should we expect great things from Pepsi next quarter? Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.The FedIn central banking, boredom is success. Yesterday’s Federal Reserve policy announcement and press conference were, by this measure, successful. A quarter of a percentage point was snipped off the policy rate. Chair Jay Powell said nothing new about how he and his colleagues see the economy. They still think the following: inflation is falling, the economy is sound, and policy is restrictive. And they are still feeling their way towards a neutral rate, which they will only know when they hit it.There was no appreciable market reaction. Well done, everyone.Reporters pressed Powell on what the re-election of Donald Trump, who has made unpleasant noises about the Fed and him in the past, meant for bank policy. Here some non-boring moments managed to slip though. One such moment was the only one-word answer in Powell’s tenure (to the best of Unhedged’s recollection). Would he leave his job before the end of his term, if Trump asked him to? “No.” Next question. Then there was a curt five-worder. Does the president have the ability to fire you or other Fed leaders? “Not permitted under the law.” Noted.Furthermore, Powell made clear that possible changes in policy under a new Trump administration would not be taken into account by Fed policymakers until those policies were enacted: “We don’t guess, we don’t speculate, and we don’t assume.” (Unhedged’s motto: “We guess, we speculate, we assume.” It takes all kinds.)A more paranoid interpreter of Fed statements than Unhedged might wonder if this is strictly true.Powell was asked about the recent rise in long-term interest rates, and whether these higher borrowing costs presented a risk to growth — as he said they did when they were at almost as high a level a year ago, when inflation was still high. The question was clever. The market consensus is the rise in the 10-year Treasury yield is down to “Trumpflation”. The argument is that the next president’s tax, immigration, and tariff policies will increase inflation, and therefore require tighter monetary policy, and increase the deficit, requiring higher compensation to tempt investors to buy the government’s long-term obligations. So the question was about Trump, without mentioning Trump explicitly. Here is part of Powell’s answer:It’s too early to really say where [long rates] settle . . . I will say, though, that it appears that the moves are not principally about higher inflation expectations. They’re really about a sense of more likelihood of stronger growth, and perhaps less in the way of downside risks. So that’s what they’re about. You know, we do take financial conditions into account. If they’re persistent and if they’re material, then we will certainly take them into account in our policy. But I would say we’re not, we’re not at that state right now.In one sense, Powell is quite right. The chart below breaks down the increase in 10-year Treasury yields since they bottomed in late September. The larger part of the increase is accounted for by real interest rates, here proxied by yields on inflation protected Treasuries (Tips), in light blue. Almost 40 per cent of the increase is, however, down to higher break-even inflation (the difference between nominal yields and Tips), in dark blue. Higher inflation expectations are an important part of the picture.Some content could not load. Check your internet connection or browser settings.Yet, the fact that most of the increase is driven by higher real yields does not imply that it is principally about growth expectations. Higher real yields can reflect growth expectations — which draw money away from safe Treasuries and towards riskier assets. But they can also mean investors are demanding more compensation for higher rate volatility in the future — exactly what investors might do if they thought that the US fiscal situation was becoming more perilous. But talking about the latter possibility would draw Powell into a conversation about responding to things that are (at least in the eyes of the market) very much effects of Trump’s expected policies. And Powell has vowed not to talk about expected policies, let alone act on them. Saying the rate increase is about growth lets him off the hook.Powell and his team may be decoding the rise in long rates differently than I am, and may have very good reasons to think it is about growth rather than inflation or the fiscal outlook. The point is not to doubt his sincerity, but to highlight what a delicate balance he will have to strike in the months to come, as the shape of Trump’s policies become clearer — or, worse, do not.One good readEurope’s indispensable nation is in trouble.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereChris Giles on Central Banks — Vital news and views on what central banks are thinking, inflation, interest rates and money. Sign up here More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldIt was Treasury Secretary John Connally who famously quipped in the 1970s that the US dollar was “our currency, but your problem”. Today, investors around the world could just as easily replace “currency” with “interest rate”, “stock market” or “geopolitical strategy”. Donald Trump’s win changes all of these, and more.With US stocks making up over two-thirds of global markets, the impact of a second Trump term on equity portfolios is hard to avoid. While UK investors’ direct equity holdings may skew domestic, most pension holdings are invested globally, and most of these end up in US stocks.Last time Trump was elected US stocks rallied. Much of this was simple maths. Trump campaigned in 2016 on a pledge to slash the corporate tax rate from 35 per cent to 15 per cent. His surprise victory saw stocks reprice to capture the earnings kicker, even if he managed only to cut the rate to 21 per cent.This time round, Trump has again pledged to cut the corporate tax rate to 15 per cent. But market expectations of a Republican win have been higher, and the potential earnings kicker more modest.Still, US stocks have reacted well so far, with returns from smaller companies especially buoyed by promises to deregulate and to stifle international competition by way of substantial tariffs. Furthermore, Trump’s economic agenda involves reducing federal tax revenue by $3tn from 2025 to 2034, according to the non-partisan Tax Foundation, boosting growth. So even without a substantial corporate tax giveaway, this magnitude of overall stimulus looks good for earnings. The risk to a stronger US stock market comes, however, from the bond market.Unlike the stock market, the US bond market has hated the result of the election. Yields of short and long-dated bonds jumped, pushing prices lower. This is because tariffs boost inflation, as do larger budget deficits, and lower immigration, complicating the Federal Reserve’s plan to cut interest rates rapidly through 2025. If Trump succeeds in imposing a universal 20 per cent tariff on all imports and raising the tariff on imports from China to 60 per cent we can expect interest rates to be higher for longer. And without a steady diet of rate cuts, bond valuations will continue to sink. What Trump means for your moneyUK investors and mortgage borrowers are likely to feel the effect of new White House policies. Read hereThis matters to every investor, regardless of their exposure to US bonds. As the global monetary hegemon, US bond yields have huge bearing on how interest rates are set across the globe. At some point higher interest rates could also start to undermine equity valuations, which are historically rich. Indeed, Goldman Sachs was already looking for this richness to unwind, providing investors a return from US stocks of only 3 per cent a year over the next decade.Away from US stocks there’s less for investors to be cheerful about. Tariffs designed to bash the earnings of foreign firms could do just that. Chinese equities were boosted this year by government stimulus, and several analysts speculate that further support will be forthcoming to Chinese firms to offset the expected hit from tariffs. But it’s harder to make a bull case for European stocks out of the election result.The currency impact of Trump’s policies are almost as important as the asset price effects. Economists theorise that US tariffs strengthen the dollar, and markets largely agree. So for a European investor, the buck is likely to bring more bang. Barclays believe the extent of forthcoming appreciation will be in the mid-single digit percentage points.Of course, Trump’s approach to European security, the Middle East and Taiwan have the potential of being significantly more important than tax changes for both markets and the world. There’s just so much we still don’t know.The author is an independent analyst and a contributing editor of the Financial Times More

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Just as president-elect Donald Trump was being voted in on a platform of higher tariffs for China, US businesses were striking deals thousands of miles away at Shanghai’s biggest trade fair.Dynamite, a family-run pet food business with 12 stores in Idaho, signed $1mn in orders from Chinese company Pawberry — part of a stream of agricultural deals between the two countries this week that have so far amounted to $711mn.“Every so often you meet someone in business you just click with — we understand each other,” said Joshua Zamzow, chief executive Dynamite, of his business partner at Pawberry. “He understands his market, and he’s taking the products that fit for the China market and just blowing them up . . . sales have begun to explode.”But for businesses large and small, as election results flowed in from Georgia to Pennsylvania, it soon became clear that the wider relationship between America and China was entering a new era of uncertainty. Trump campaigned on a platform of higher tariffs — 60 per cent on Chinese goods — after a first term in which he launched a trade war that is still raging.Daniel Benefield, left, from Rad Beverage International said he hoped his bourbon products would fly ‘under the radar’ More

TOKYO (Reuters) -Japanese household spending fell in September for the second straight month, government data showed on Friday, as higher prices choked consumers’ appetite in a discouraging sign for the central bank’s plans to hike rates further.Consumer spending fell 1.1% from the year earlier, against the median market forecast for a 2.1% decline. On a seasonally adjusted, month-on-month basis, it fell 1.3%, versus an estimated 0.7% drop. Consumption and wage trends are among key factors the Bank of Japan (BOJ) is watching to gauge the strength of Japan’s economy and decide how soon to raise interest rates.September’s pay data released on Thursday showed inflation-adjusted wages falling for the second straight month despite nominal salary making gains and consumer inflation cooling.The yen’s renewed softening with the election of Donald Trump as the next U.S. president could also hit consumption through higher import prices, although the BOJ could in turn be pressured to raise rates if the yen’s fall accelerates.Japan will release preliminary July-September gross domestic product (GDP) data next Friday. The economy likely slowed sharply on sluggish consumption and capital spending, according to a Reuters poll. To view the data on the website of the Ministry of Internal Affairs and Communications, click here: http://www.stat.go.jp/english/data/kakei/index.html More