Economy

Investing.com — China’s economy grew at the fastest rate in eight months in February, gaining momentum after the end of COVID-19-related lockdowns, according to new business surveys. Tesla is expected to confirm plans for a $5 billion plant in Mexico. Arconic surges after reports of talks with private equity giant Apollo and maybe others over a possible buyout. The pound weakens and the euro rises after contrasting messages from top central bankers, and oil comes off a one-week high after fresh signs of weaker demand in the U.S. Here’s what you need to know in financial markets on Wednesday, 1st March.1. Chinese assets, metals rise as China PMIs show reopening bounce; ISM PMI dueThe yuan rallied by 1% after key business surveys showed the Chinese economy expanded at its fastest pace in eight months in February.Both the official and the Caixin manufacturing purchasing managers indices rose markedly from January to be well above the 50 level that typically indicates growth. The official manufacturing PMI, which largely tracks the bigger, state-owned enterprises, hit its highest level in more than a decade.The news gave a boost to industrial metals prices, which rose by between 1-2%.The numbers came on the same day that the U.S. Institute for Supply Management publishes its manufacturing PMI for February, which is expected to show U.S. activity contracting, albeit by less than in January.2. Tesla set to outline plans for first Mexican plantTesla (NASDAQ:TSLA) is set to unveil plans for its first factory in Mexico as part of a big Investor Day presentation.Mexico’s leftist President Andrés Manuel López Obrador indicated at a news conference on Tuesday that the two sides had settled differences over the company’s plans for a plant at Monterrey in northern Mexico, which centered around Tesla’s intensive use of water in a region that doesn’t have much of the stuff.Analysts expect the investment volume to be around $5B. The burden for Tesla will (yet again) be reduced by U.S. federal government subsidies, this time under the Inflation Reduction Act, whose provisions extend to the U.S.’s southern neighbor.Elsewhere in the auto industry, Rivian (NASDAQ:RIVN) stock fell over 9% in premarket after the EV maker reported another big loss and fell short of expectations for its fourth quarter sales. General Motors (NYSE:GM), meanwhile, is reportedly set to cut another 500 executive jobs as part of its ongoing cost-cutting.3. Stocks set to open higher; Arconic surges on buyout talkU.S. stock markets are set to open modestly higher after edging lower on Tuesday in response to another set of generally weak U.S. economic data.By 06:30 ET, Dow Jones futures were up 68 points or 0.2%, while S&P 500 futures were up 0.3% and Nasdaq 100 futures were up 0.6%.Tesla aside, stocks likely to be in focus later include Monster Beverage (NASDAQ:MNST), whose earnings fell short of expectations late on Tuesday, and Arconic (NYSE:ARNC), which rose sharply on Tuesday after The Wall Street Journal reported is in talks to sell itself to Apollo Global Management (NYSE:APO). The news adds to signs of a thawing of the M&A market, which was frozen late last year as banks struggled to offload large amounts of unsold buyout debt.4. Pound sags, euro firm as Bailey and Nagel send mixed messages on further rate hikesThe pound fell after Bank of England Governor Andrew Bailey appeared to play down expectations of more aggressive interest rate increases later this year. As with the euro and dollar, some better-than-expected economic data at the start of the year – including strong consumer credit data for January published earlier Wednesday – have prompted a repricing of interest rate expectations for the sterling.However, Bailey said in a speech that “nothing is decided” despite acknowledging ongoing issues with labor market tightness – and despite figures released on Tuesday that showed food prices rose over 17% on the year in January.In Germany, Bundesbank chief Joachim Nagel was decidedly less nuanced, saying it would be a serious mistake to stop the European Central Bank’s rate hike cycle too early. Preliminary data showed German inflation again coming in above expectations in February, while unemployment rose by less than forecast.5. Oil dips on another big rise in U.S. inventoriesCrude oil prices were broadly lower, with another big build in U.S. inventories prevailing over the supportive effect of the Chinese PMI data.American Petroleum Institute data late on Tuesday showed another 6.2 million rise in U.S. crude stocks last week, well above expectations and skewing the market toward an upside surprise when the government publishes its data at 10:30 ET.Analysts noted that the Chinese reopening story has been broadly priced in, by contrast.By 06:45 ET, U.S. crude futures were down 0.9% at $76.33 a barrel, while Brent crude was down 0.6% at $82.91 a barrel. More

“I believe that going forward we could consider slowing the pace of rate adjustments, as it is already very close to the appropriate level to consolidate a de-inflationary process,” he said in a podcast interview with Grupo Financiero Banorte.”We predict that Mexican economic activity will continue to grow,” he added, despite restrictive monetary policy and a global slowdown which he said appears less pronounced than first forecast. Mexico’s president has highlighted the importance of finding an equilibrium between combating inflation and allowing economic growth.Mejia said though easing inflation was taking longer than predicted, he still expects it to meet the central bank’s target in the fourth quarter of 2024, adding that the persistently high core component remains the country’s main inflationary challenge.Annual headline inflation in the first half of February stood at 7.76%, while the core index, which strips out some volatile food and energy prices, reached 8.38% – well past the central bank’s target of 3%, plus or minus one percentage point.Mejia’s stance is in line with most of the central bank’s board members, who according to recent minutes from a meeting, are considering a more moderate rate hike at the next monetary policy meeting scheduled for March 30.Mejia was confirmed as the central bank’s newest board member last month, when he pledged transparency and independence and said tackling inflation would be a priority in his role.”I came to the bank at a time when the global economic environment presents many challenges, particularly the inflationary outlook,” he told Banorte. “However, I believe that central banks have the right tools at their disposal.” More

(Reuters) – TikTok said on Wednesday it is developing a tool that will allow parents to prevent their teens from viewing content containing certain words or hashtags on the short-form video app, as the embattled company looks to shore up its public image.TikTok, owned by Chinese tech company ByteDance, is facing renewed scrutiny worldwide over its proximity to the Chinese government and protection of user data. The app, wildly popular among younger users, has been banned from government-owned phones in the United States, Canada and other countries due to security concerns.Like other social media apps, TikTok has also faced criticism for not doing enough to shield teens from inappropriate content. Development of the parental control feature is in the early stages and the app will consult with parenting, youth and civil society organizations to design the tool, TikTok said in a blog post. It also announced new features to help users limit the amount of time they spend on the app. Accounts belonging to users under 18 will automatically have a time limit of one hour per day, TikTok said. If teens choose to remove the daily limit and scroll TikTok for more than 100 minutes per day, the app will display a prompt encouraging them to set time limits.Parents will now also be able to set custom time limits for their teens’ TikTok usage depending on the day of the week, the company said. More

LONDON (Reuters) -An influential group of British lawmakers have questioned whether banks are making excessive profits without passing the benefit of Bank of England interest rate rises to savers, in a series of letters to bank bosses sent on Wednesday.The Treasury Committee noted profit margins at the four biggest British banks – Lloyds Banking Group (LON:LLOY), NatWest, HSBC and Barclays (LON:BARC) – increased in 2022 earnings published last month, while some also bumped up boardroom pay. “While consumers are always advised to shop around for the best deals, it is difficult to avoid the conclusion that our biggest banks are taking advantage of their most loyal customers to increase profits and CEO pay,” said Harriett Baldwin, chair of the committee.The committee has asked the four banks to justify why they offer less than 1% interest on easy access savings accounts, despite the Bank of England benchmark rate rising to 4%.Top executives from the lenders were already hauled before the committee last month to answer criticism they were too slow to pass on the benefits of central bank rate hikes to savers.The executives said at the time they had started to pass on higher rates, including on fixed-term products, and that profitability was recovering after years of low margins.Lenders are also facing calls from campaigners for a windfall tax on their profits, as in the energy sector, at a time when millions of their customers are struggling with a cost-of-living crisis.Banks reported robust profits for 2022 in earnings last month, but warned margins could already have peaked as competition steps up. Analysts have questioned whether political pressure could have been a factor in banks outlining cautious guidance on their future earnings potential. More

Andrew Bailey has signalled that financial markets have been wrong in their growing belief over the past month that the Bank of England will need to impose many more interest rate rises to bring inflation under control. Speaking at a cost of living conference in London on Wednesday, the BoE governor said the central bank still had no presumption that it would raise interest rates further from the current 4 per cent level. While financial markets now expect rates to rise to 4.75 per cent by the end of 2023, up from an expectation of a peak of 4.25 per cent at the start of February, Bailey said he had not seen anything in the data to justify the change in outlook.“My reading of the evidence since our February meeting — the data we have had for economic activity, the labour market and inflation — is that the economy is evolving much as we expected it to,” said Bailey. “Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise ‘slightly’ in both cases.”The market interest rate on 10-year government bonds dipped after Bailey’s speech but did not return to the level at the close of trading on Tuesday. The government’s borrowing costs over 10 years remained at 3.87 per cent, up from 3.32 per cent a month ago. Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said that “markets need to price in a higher chance of no-change in bank rate” following the governor’s speech.Bailey’s caution about persistent inflationary pressures contrasts with financial markets globally, which have taken evidence of more persistent core inflation in the US and Europe alongside less evidence of a likely UK economic contraction as a signal that central banks will need to raise interest rates further. With little news since the BoE raised interest rates by half a percentage point to 4 per cent at the start of February, Bailey warned people not to expect the bank’s core message on inflation to change.“At this stage, I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more,” he said. “Some further increase in bank rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.”Growing market expectations of a rise in interest rates over the past month have also been unwelcome news for chancellor Jeremy Hunt as he prepares for his first Budget on March 15. Market expectations of rates feed directly into five-year forecasts of the cost of servicing government debt from the Office for Budget Responsibility, the fiscal watchdog, which are no longer much lower than the rates used in November’s Autumn Statement. The BoE still expects the rate of inflation to fall rapidly this year even though the level of prices will stay much higher, with the decline speeding up in April when energy bills are forecast to rise a lot less than they did last year. Bailey said the smaller rises would not relieve households of cost of living difficulties because prices themselves had not come down. As a result, he added, the BoE had to “monitor carefully” how the very sharp interest rate rise to 4 per cent over the past 15 months is “working its way through the economy to the prices faced by consumers”.“We need to calibrate monetary policy with great care to return inflation to target sustainably,” said Bailey, although he added that if inflation appeared to be more persistent, the BoE would need to lift rates further. “If we do too little with interest rates now, we will only have to do more later on. The experience of the 1970s taught us that important lesson.” More

(Reuters) – The Republican-led U.S. House of Representatives voted on Tuesday to block a Biden administration rule allowing employee retirement plans to consider environmental, social and corporate governance (ESG) factors when selecting investments. President Joe Biden has promised to veto the bill if it passes the Senate, but Republican-led states and the oil industry are also challenging the rule in federal court in Texas.WHAT DOES THE NEW RULE DO?The U.S. Department of Labor rule, which took effect Jan. 30, lifts barriers to ESG investing imposed by the Trump administration. A 2020 regulation had required retirement plans to consider only financial factors in selecting investments. The new rule sets guidelines for ESG investing, including requiring that socially conscious investments are still financially sound. The Labor Department said the Trump-era rule, which was criticized by business groups and the financial industry, failed to account for the positive impact that ESG investing can have on long-term returns. The new rule covers plans that collectively invest $12 trillion on behalf of 150 million Americans. WHAT ARE THE CLAIMS IN THE LAWSUIT?The January lawsuit by 25 Republican-led states, an oil drilling company and an oil and gas trade group claims the rule violates the U.S. law regulating employee benefit plans by failing to protect retirement assets. They claim that allowing ESG investing will jeopardize the retirement savings of millions of people and lower state tax revenue. The states also say the Labor Department failed to justify its departure from the Trump-era regulation, in violation of the federal law governing rulemaking.ARE BUSINESS GROUPS OPPOSED TO THE RULE?The Biden administration rule has divided the business community. Sectors that stand to lose investments, including the oil and gas industry, oppose it while many other businesses have voiced support for efforts to make ESG investing easier. Some major business groups including the U.S. Chamber of Commerce, the country’s largest business lobby, opposed the Trump administration’s strict limits on ESG investing but have had a tepid response to the new rule. The Chamber last year said the Biden administration rule was largely unnecessary because it imposes the same standard that retirement plans have applied for decades in deciding whether investments are prudent. IS THE RULE VULNERABLE TO LEGAL CHALLENGES?The states challenging the rule could face an uphill battle in showing it violates the employee benefits law, lawyers said, noting the rule does not force retirement plans to consider ESG factors and still requires plans to put financial considerations ahead of social issues.The case has been assigned to U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, a conservative Trump appointee whose courthouse has become a favored destination for Republicans challenging items on the Biden administration’s agenda. Any appeals will be heard by the New Orleans-based 5th U.S. Circuit Court of Appeals, considered among the most conservative federal appeals courts, and then possibly, the U.S. Supreme Court, which has been skeptical of agencies’ attempts to set broad policy through rulemaking. WHAT ARE THE NEXT STEPS IN THE CASE?The states on Feb. 24 moved to temporarily block the rule pending the outcome of the lawsuit. The administration has moved to transfer the case to a different court, accusing the states of improperly judge shopping by filing in Amarillo, where Kacsmaryk is the only judge. Any rulings by Kacsmaryk on those issues are likely to be appealed by the losing side, which could delay the case for months or longer. WHAT OTHER ESG RULES COULD BE CHALLENGED?The U.S. Securities and Exchange Commission (SEC) has proposed various rules aimed at increasing transparency related to ESG investing. The SEC is expected to finalize a rule soon that would require investment advisors and companies marketing ESG-focused funds to specify which factors drive investment strategies. A separate proposal would require companies to report on items such as greenhouse gas emissions, climate goals, and management of climate-related risks.Republicans have criticized these efforts, saying in public comments they go beyond the SEC’s authority to regulate securities. Previewing potential legal challenges, many states that are suing over the Labor Department rule said in comments last year the SEC proposals would be burdensome to businesses and unconstitutional. More

Good morning, and welcome to the new look FirstFT.Today we start with a warning from some of Wall Street’s largest financial services companies that a backlash against sustainable investing is posing a material risk to their financial prospects.And what role did the 1970s BBC political comedy Yes Minister have to play in breaking the deadlock over Northern Ireland? Scroll down for our behind-the-scenes read on the secret talks that led to the Windsor deal.Here’s what to keep tabs on today:Economic data: Manufacturing will be in the spotlight with the release of the Institute for Supply Management’s purchasing managers’ index. Separately, S&P releases its final reading of manufacturing PMI for February.Results: Discount retailers Kohl’s and Dollar Tree report earnings as well as fashion stores Abercrombie & Fitch and American Eagle Outfitters. And as activists circle software group Salesforce it will update investors.Tesla investor day: The electric-car maker is expected to provide more details of a plan to build a factory in the northern Mexican city of Monterrey at an investor day in Austin, Texas. What do you think of our new look today? Let us know at [email protected]’s top news1. A dozen large fund managers including BlackRock, Blackstone and KKR, highlighted disputes in their annual reports over environmental, social and governance investing. They warned the backlash against sustainable investing is now a material risk.2. Chinese factory activity expanded at its fastest pace in more than a decade in February. The data, published today by China’s National Bureau of Statistics, is an early indication of the country’s recovery following the end of strict Covid restrictions in December. 3. Goldman Sachs chief David Solomon admitted mistakes in an ill-fated foray into consumer banking and raised the possibility of selling parts of the business at an investor day that failed to lift the cloud over the US bank. Read the full story on the “strategic alternatives” Solomon is now exploring.4. The Supreme Court’s conservative judges cast doubt on Joe Biden’s $400bn student loan relief programme. They questioned whether the president had the power to wipe student debt, a flagship policy of the Biden administration. Here’s more on yesterday’s oral arguments.5. EXCLUSIVE: Jaguar Land Rover’s owner is demanding more than £500mn for a battery factory to be built in England over Spain and has given UK ministers “weeks” to pledge financial support. Here’s why Tata Motors’ ultimatum could be pivotal for the future of Britain’s car industry.The Big Read© FT montage/dpaCentral banks do not face a wage-price spiral yet, but the worry is that a year of rocketing prices may have triggered a lasting change in the expectations and behaviour of workers, employers and consumers. This could lead to something better described as “wage-price persistence”.We’re also reading . . . 2024 presidential election: A new campaign-style video, a memoir and a gruelling travel schedule have heightened expectations that Ron DeSantis will soon launch his bid for the Republican party’s nomination in 2024.Secret talks: It took four months of diplomacy to reach a deal over Northern Ireland. Here’s how trust was painstakingly rebuilt between the EU and UK. Mansion for sale: The Holme, set in four acres of London’s Regent’s Park, may become the UK capital’s most expensive house ever sold. Chart of the dayVladimir Putin could reasonably conclude that he has time on his side and Ukraine will not get the resources it needs to win the war, writes Martin Wolf. The west has to prove he is wrong, and sooner rather than later.

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Good morning. Goldman Sachs’ investor day yesterday failed to produce much excitement. The most interesting thing about Goldman is that it just isn’t that interesting any more, and its best strategic option is becoming still less interesting. That tells you something important about how the finance industry has changed. Email us: [email protected] and [email protected]. The housing recession, and the plain old recessionWe check in on the housing market every few months, for a couple of reasons. Because something like two-thirds of Americans have a big chunk of their net worth tied up in the housing market, it tells you something about how a lot of people feel, financially — a feeling that factors into the performance of all other markets. Second, because the housing market is rate sensitive, the market tells you something about the transmission of monetary policy into the real economy, a crucial issue at the moment. The housing market story always begins with mortgage rates, which have changed direction lately, following inflation expectations back up; see the blue line, below. This mirrors, in part, the increase in 10-year Treasury yields. But notice also the pink line, which is the spread between Treasury yields and mortgage rates. That spread, as Jack Macdowell of the residential credit specialist Palisades Group pointed out to us, is 130 bps higher than usual. This reflects expected rate volatility. When mortgage lenders think rates might move quickly, they build a buffer into their pricing:When rates rise, housing affordability declines. Here, from Capital Economics’ Sam Hall, is a chart of US mortgage payments as a proportion of incomes. Houses were last this unaffordable in the mid-1980s.

Renting looks much more affordable by comparison (chart from Goldman, which calculates affordability slightly differently): 

Higher rates are creating not a price crash, as one might expect, but a frozen market. Measured by the Zillow home value index, prices are off their August peak but are only down a modest 1 per cent:Prices may be stable, but transactions are down, as both supply and demand feel the chill. On the demand side, mortgage rate sticker shock is scaring off would-be homebuyers, dragging down new mortgage applications. This year’s shortlived dip in rates did give applications a bump, but it hasn’t lasted:The dearth of willing buyers at current prices means that existing homes for sale just aren’t getting sold. Inventory is sitting around longer. The median single-family house listed on Zillow is more than two months old, the longest since early 2020. Contrast the rising stock of existing homes for sale — which accounts for about 90 per cent of home sales — against how many are actually being sold. The amount of existing homes on the market is back at pre-coronavirus pandemic levels (chart from Goldman):

Yet existing home sales (grey line below) are languishing at a fraction of 2019 levels. The chart below from Renaissance Macro shows both existing and pending home sales (pending tends to lead existing). Though pending home sales did jump in January, that probably reflects the fall in mortgage rates, which has reverted. Put together, existing home sales look a bit stuck:

The story is as much about supply as demand. High mortgage rates, which follow very low ones, create a lock-in effect. Homeowners (including one Rob Armstrong) cling on for dear life to their sub-3 per cent fixed-rate mortgages. It would take a lot to make them move. This limits how much of the existing home stock will come to market. A strong labour market also means few distressed sellers trying to dump their houses at a discount. Unless the economy craters (could happen!) the existing home market could be frozen for a while.We should acknowledge here that the new homes market looks healthier. New homes sales are rising and, thanks to the pandemic building boom, more supply is coming online. Homebuilders, for their part, have no choice but to move inventory, and fast. According to Rick Palacios of John Burns Real Estate Consulting, they’ve cut prices, and those with mortgage lending offshoots are offering lower rates to get people in houses. Homebuilders may well steal market share as from the existing home market.But, again, new homes only make up about 10 per cent of the market, probably too small to make a difference. As Goldman’s Vinay Viswanathan wrote recently:Record-low homeowner vacancy rates have essentially depleted housing inventory and materially tightened supply. On net, this implies a muted impact from completions on the current supply/demand balance of housing and, ultimately, prices. Even if every single home under construction was completed and listed on the market immediately, the months’ supply of homes (the ratio of inventory to annual sales) would still be below historic averages.So, what unfreezes the US housing market? Well, the easiest thaw would come from falling interest rates, which would restore affordability and help buyers and sellers meet in the middle. Another reason to hope the deflation fairy will appear soon, wand a-waving. But that might not happen, or happen soon.How about a decline in prices? When rates first began to rise, the consensus among housing pundits (as far as we could make it out) was that while price increases would slow or stop, a price decline was unlikely. The argument was that substantial price declines are driven by forced sellers, and there won’t be many of these this time around, because there are so few adjustable-rate mortgages now (less than 8 per cent of the total), and because mortgage credit quality has improved since the financial crisis.Now that rates have run as far as they have, more observers foresee only a smallish decrease in prices — 10 per cent or so down from the peak. This makes sense, provided we don’t get another big leg up in rates (a possibility we would not rule out). Supply is limited, and then there is the lock-in effect. This ain’t 2008. But even if rates remain high, at some point the outlook for the economy should become a little clearer, and expected rate volatility should stabilise. At that point, the Treasury/mortgage rate spread should head back towards normal, supporting affordability. In combination with a modest decline in prices, this could cause a partial market thaw. What does all this portend for the wider economy? There are two questions here. The first is simply how much lower housing activity drags on the economy. The second is more complicated: is housing just the part of the economy hit by higher rates first, with other parts of the economy following in time?On the first question, Dhaval Joshi of BCA Research argues that the current housing recession will pull fixed investment in residential real estate down from about 4 per cent to 2 per cent of GDP, with something more than half of the damage already done. If that is right, lack of housing activity will be a perceptible, but not huge, drag on GDP. Joshi’s argument is that housing investment is quite cyclical, but reverts towards a level corresponding to the number of households in the country. We overshot that level the pandemic boom, and are now set to undershoot. His chart:

The question of whether the housing recession is just the first step in a rates-driven slump is harder. Joshi argues that since 1970, housing recessions (defined as a 1 per cent decline in housing investment’s contribution to GDP) have always been followed by general recessions. Housing is the “canary in the coal mine”, he says: it won’t drag us into recession, but it shows what high rates will do to the rest of the economy sooner or later. We tend to agree. Other sectors of the economy are less sensitive to rates than housing. But if the economy is not cooling on its own — and it doesn’t look like it is — the Fed will have no choice but to tighten policy until what has happened in real estate happens elsewhere. (Armstrong & Wu)One good readThat infamous slap seems to be helping Chris Rock’s career. Good for him! More