Economy

European stocks rallied on Wednesday morning after investors grew optimistic that the US Federal Reserve would not need to raise its benchmark interest rate more than expected.Equities in Europe followed late gains overnight in the US after remarks from the US central bank’s chair Jay Powell that were less hawkish than some traders had anticipated.Powell was responding to Friday’s job’s report, which showed higher growth than economists had forecast and had led to a sell-off in US stocks and bonds. US markets reacted to his comments, with the S&P 500 closing 1.3 per cent higher.The European benchmark Stoxx 600 was up 0.9 per cent and Germany’s Dax was 0.7 per cent higher. The FTSE 100 gained 0.8 per cent to hit a record intraday high.However US futures lost ground, with contracts tracking the blue-chip S&P 500 down 0.3 per cent and the tech-heavy Nasdaq off 0.2 per cent in pre-market trading.“Europe has a natural correlation with the United States, so when sentiment there improves it drives sentiment across European markets,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe. “Our assessment is that stock markets are starting to realise that policy tightening is not necessarily crippling the economy. Markets are learning to live with higher rates, a profound change from last year.”The dollar index, a measure of the US currency’s strength against a basket of six peers, fell 0.3 per cent. The euro strengthened against the greenback, up 0.2 per cent to $1.07.Yields on 10-year German government bonds rose 0.04 percentage points to 2.34 per cent and 0.03 percentage points on the 10-year French equivalent to 2.79 per cent. Separately, the European Central Bank said it would cut the maximum rate it paid on government deposits to encourage investors to put their money in the market.At The Economic Club in Washington, DC, Powell stressed the need for further rate rises to cool the economy. Addressing the jobs data, he said it “shows you why we think this will be a process that takes a significant period of time . . . the labour market is extraordinarily strong”.“The process has a long way to go and further interest rate increases will probably be needed,” said Toby Sturgeon, Global Head of Fiduciary Investment Services at Zedra, a wealth planning company. “With so much volatility in all markets, we will watch closely the changes in the coming weeks.”In Asia, the Hang Seng index was closed flat, down less than 0.1 per cent, while the Chinese CSI 300 fell 0.4 per cent.On commodities markets Brent crude, the international benchmark, rose 0.9 per cent while its US counterpart, WTI, was 0.8 per cent higher. More

AP Møller-Maersk has forecast a plunge in profits this year and a probable contraction in global trade as the pandemic-driven boom in container shipping comes to an abrupt end.The world’s second-largest container shipping group said on Wednesday that underlying operating profits this year would be $2bn-$5bn, down from the record $31bn it made last year. It made $5.1bn in the fourth quarter of last year alone, even as freight rates, which had rocketed as the pandemic disrupted global supply chains, normalised.“We are seeing this correction happen. It creates a few new challenges. First and foremost though, it’s a return to normal . . . What we see more than [a change in] GDP is an inventory correction,” Vincent Clerc, Maersk’s new chief executive, told the Financial Times.Clerc said that customers, who include most of the world’s largest retailers, had over-ordered during the congestion of recent years. “When this congestion goes away, you get more goods, your warehouses are full, your inventory is high,” he added.The first non-Dane to head Maersk and only in the role since January 1, Clerc faces a tricky challenge: presenting record results for 2022 and a steep drop in profits and demand this year.Maersk said it expected global container demand to be between minus 2.5 per cent and plus 0.5 per cent this year. Shares in Maersk fell 4 per cent in early trading on Wednesday.“It’s a message about balance. There is no painting the world like everything is going to be fine and easy. Delivering those results is extraordinary . . . We are heading now into a different world, and there is no time for the team to lean back and say: thank God, we are going back to normal,” Clerc said.Revenues in 2022 increased by a third to $82bn while operating profit rose by 57 per cent to $31bn.The Danish group largely refrained from ordering new ships during the boom years unlike many rivals, especially Mediterranean Shipping Company, the secretive Swiss company run by a former Maersk executive which last year overtook it as the world’s biggest container shipping line by volume.Some analysts believe the industry is in danger of returning to the pattern of boom and bust that dominated before the past decade of consolidation.

“Capital discipline across the industry remains evasive. Capacity investments is ahead of what we foresee for demand growth,” Clerc added.This year is likely to be mixed for Maersk’s different businesses. Its land-based logistics and port terminals units should see improving profits in the second half, Clerc said. But its main container shipping business would see strong profits in the first quarter because of the number of long-term contracts employed, which would then fall throughout the year as the drop in freight rates feeds through. It would be a “pretty sharp adjustment”, he added.Clerc, who has been at Maersk for a quarter of a century, most recently as head of container shipping and logistics, said he would stick to Maersk’s strategy of bulking up its logistics business and focus on solving customers’ supply chain problems.Although Maersk is forecasting a sharp drop in profitability compared with last year, operating profits of $2bn-$5bn would be better than what it delivered in 2017-19 as well as possibly 2020’s $4.2bn. More

Good morning. Fed chair Jay Powell spoke yesterday, and basically said the same thing as he did at the press conference last week — that is, if the strong economic data keeps coming, more tightening will be in order. The market took this as dovish, which makes some sense. Powell had an opportunity, in the face of strong markets, to strike a more hawkish note. He declined to do so. Have another interpretation? Email us: [email protected] and [email protected] Fed as threat to financial stabilityA lot of people don’t like the Fed. Write an FT article about any imperfect feature of the financial system, you are likely to get a comment saying “it’s the Fed’s fault”. The Fed, according to its detractors, has suppressed interest rates, printed cash, distorted asset prices, encouraged malinvestment, worsened inequality, and increased the odds of a market crash. The source of these arguments at times undermines their credibility. They are frequently (though not exclusively) made by underperforming value investors, bears who shorted the long bull market, gold bugs, and assorted other malcontents. This does not make the arguments wrong, though. It is useful, then, when the case against the Fed is framed intelligently by a very reputable voice. Dennis Kelleher and Phillip Basil, of Better Markets, did just that in a report last month, “Federal Reserve Policies and Systemic Instability.” I encourage everyone to read it, if only to crystallise views about Fed policy works. A brief summary of the arguments: Since 2008, Fed rate and balance sheet policy has decoupled asset prices from risk, and encouraged both companies and households to use a dangerous amount of debt. Very low rates mean investors have been “strongly incentivised if not forced into riskier assets, leading to mispriced risk and a build-up of debt” Comparing the decade after the great financial crisis to the decade before, the growth in US debt held by the public was nearly 500 per cent larger, the growth in nonfinancial corporate loans and debt securities was about 90 per cent larger, and the growth in consumer credit — excluding mortgages — was roughly 30 per cent larger.Proof that the central bank had pushed too much liquidity into the market with quantitative easing can be found in the Fed’s own reverse repo operations. “The Fed was pumping trillions of dollars into financial markets and limiting the supply of safe assets on one side of the market and siphoning out trillions of dollars from financial markets through its RRP facility on the other side.”All this created a market excessively dependent on easy money, as the 2013 taper tantrum and the Fed being forced to ease policy in mid-2019 demonstrate.Reversing these bad policies in the face of inflation risks recession, corporate defaults, stress in the Treasury market, and a cracked housing market. The Fed may overreact to these stresses, too — perpetuating the cycle of error.This charge sheet is not crazy. But it attributes too much power to monetary policy. Central banks do have direct control over the very shortest interest rates. Their influence on long rates — the ones that really matter — is real, too, but is usually indirect, contingent, changeable, and depends on mass psychology (the Bank of Japan’s experiment in direct control over long yields is something of a special case). It may be true that easy money is a necessary condition for an asset bubble, but it is not a sufficient one.There is case to be made that the Fed follows long rates, rather than long rates following the Fed. A very strong version of this argument was recently made by Aswath Damodaran of NYU. He writes:If the question is why interest rates rose a lot in 2022, and if your answer to that question is the Fed, you have, in my view, lost the script. I know that in the last decade, it has become fashionable to attribute powers to the Fed that it does not have and view it as the ultimate arbiter of rates. That view has never made sense, because central banking power over rates is at the margin, and the key fundamental drivers of rates are expected inflation and real growth.He offers this long-term chart of real GDP growth, inflation, and 10-year yields:

“It was the combination of low inflation and anaemic growth that was at the heart of low rates,” he writes, “though the Fed did influence rates at the margin, perhaps pushing them down below their intrinsic levels with its machinations.” You can quibble with Damodaran’s own account of rates (especially the link between rates and real growth), but the point is that you can’t just assert that Fed policy determined the last decade of very low rates.We have argued — and still believe — that the quantitative easing, by increasing liquidity in markets, drives asset prices up, through the portfolio balance channel. But, just like rates, market liquidity is determined by a number of factors. Foreign central banks play a role, as do demographics and wealth inequality. Still, the basic point remains: the Fed was too loose, and now we have a heavy debt burden, expensive assets, and inflation. But remember the reason that the Fed went for loose policy all those years: demand was weak. And there is a very strong, perhaps unanswerable, case that the Fed was a year late to raising rates and tapering asset purchases. But do Kelleher and Basil think that the Fed was too accommodative in, say, 2011-14? Why?One final point. So far — somewhat to Unhedged’s surprise — the return to a neutral policy stance is going pretty well. Asset prices are down and home sales are falling, but after the run they have had, that seems healthy. Unemployment is lower than ever. The Kelleher/Basil argument will look a lot stronger if we get a proper market crash or a deep recession. What the Fed might think about financial conditionsThe Fed wants to tighten financial conditions to root out inflation. Markets just want an excuse to rally. But markets have a big role in determining financial conditions. This leaves the Fed with less-than-ideal options: tighten monetary policy still further, to whip markets into line, or accept watered-down monetary policy transmission for a while. Asked about this Fed/markets gap last week, Powell seemed remarkably chill about it all. He’s “not particularly concerned” about “short-term moves” in financial conditions because they simply reflect markets’ dovish opinion of inflation falling quickly. His is not a ludicrous view. Still, one wonders if there’s more to what Powell, and the Fed, is thinking.A new research note from the San Francisco Fed might hold a clue. The authors, Simon Kwan and Louis Liu, look at a measure of policy tightness called the “real funds rate gap”. This is the difference between the fed funds rate and the Fed’s estimate of the neutral rate (ie, the theoretical interest rate that neither stokes nor suppresses inflation) after both are adjusted for inflation. The bigger the gap, the tighter policy is; the smaller, the more accommodative. Estimates for this cycle’s rate gap (January 2022 to May 2023 below) come partly from the Fed’s latest set of economic projections.The exercise reveals just how much more dramatic recent monetary tightening looks compared to tightening cycles in the past:

In this cycle, real rates moved way up (rightmost green bar) from a very low baseline (rightmost blue bar) as inflation ran hot. If the Fed’s projections roughly bear out, it will be the most drastic real funds rate gap change — that is, the most screeching tightening cycle — in the postwar era.This will matter to financial conditions. In the past, Kwan and Liu find that a highly negative rate gap (ie, highly accommodative policy) at the start of a tightening cycle is followed by widening yield spreads and falling stock prices. But based on how vastly negative this cycle’s initial rate gap was, stocks haven’t fallen and spreads haven’t expanded nearly as much as history would suggest they should. Much tighter financial conditions may lie ahead:When we use this historical relationship to evaluate stock prices at the large negative funds rate gap, stock prices are projected to decline further. The historical relationship between the funds rate gap and bond spreads also calls for more tightening in the bond market . . . past experiences indicate that more tightening of financial conditions could follow.If you’re at the helm of the Fed, this is reason enough for forbearance. Monetary tightening is only part way through; financial markets could catch up fast, and violently. Recent “short-term moves” in markets just might not be worth sweating. (Ethan Wu)One good readRIP to this Australian Shepherd. Good dog! More

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REDMOND, Wash. (Reuters) -Microsoft Corp is revamping its Bing search engine and Edge Web browser with artificial intelligence, the company said on Tuesday, signaling its ambition to retake the lead in consumer technology markets where it has fallen behind.The maker of the Windows operating system is staking its future on AI through billions of dollars of investment as it directly challenges Alphabet (NASDAQ:GOOGL) Inc’s Google, which for years has outpaced Microsoft (NASDAQ:MSFT) in search and browser technology.Now, Microsoft is rolling out an intelligent chatbot to live alongside Bing’s search results, putting AI that can summarize web pages, synthesize disparate sources, even compose emails and translate them into more consumers’ hands. Microsoft expects every percentage point of share it gains will bring in another $2 billion in search advertising revenue.Working with the startup OpenAI, Microsoft is aiming to leapfrog its Silicon Valley rival and potentially claim vast returns from tools generally that speed up content creation, automating tasks, if not jobs themselves. That would affect products for business, such as the cloud-computing and collaboration tools Microsoft sells, as well as the consumer internet.”This technology is going to reshape pretty much every software category,” Microsoft Chief Executive Satya Nadella told reporters in a briefing at the company’s headquarters in Redmond, Washington.The company’s share of search so far is about an estimated tenth of the market. Still, many investors see new technology as a win for all players. Microsoft’s stock closed 4.2% higher on Tuesday, while Alphabet gained 4.6%. The power of so-called generative AI that can create virtually any text or image dawned on the public last year with the release of ChatGPT, the chatbot sensation from OpenAI. Its human-like responses to any prompt have given people new ways to think about the possibilities of marketing, writing term papers or disseminating news, or how to query information online.Microsoft’s new Bing search engine is live in limited preview on desktop computers and will be available for mobile devices in coming weeks. The company hopes user feedback will improve its AI, which Microsoft officials said may still produce factually inaccurate information known as a hallucination. It meanwhile has pursued work to safeguard against misuse of its tech.Underpinning the new Bing is what Microsoft is calling the Prometheus model – OpenAI’s most powerful technology informed as needed by real-time web data from Bing. That means Bing’s chatbot can brief consumers on current events, a step beyond ChatGPT’s answers that currently are limited to data as of 2021.Jordi Ribas, Microsoft’s corporate vice president for search and AI, told Reuters the tech advances his team witnessed last summer emboldened the company to move ahead with an AI-infused Bing.Microsoft’s chief financial officer also said OpenAI’s “new, next-generation” technology is powering its search engine, though officials declined to specify if this entailed the startup’s highly anticipated upgrade known as GPT-4.FROM BUSINESS TO CONSUMERMicrosoft is aiming to market OpenAI’s technology, including ChatGPT, to its cloud customers and add the same power to its entire suite of products, not just search.In the near term, Gartner (NYSE:IT) analyst Jason Wong said Microsoft’s “partnership with OpenAI is more relevant for its business customers.” Still, he said, it could offer “disruptive opportunities” in consumer businesses as well. “Except for gaming, Microsoft has not been a leader in key consumer technologies, such as search, mobile and social media,” he added.Google has taken note of Microsoft’s challenge nonetheless. On Monday it unveiled a chatbot of its own called Bard, while it is planning to release its own AI in search that can synthesize material when no simple answer exists online.Microsoft’s decision to update its Edge browser will likewise intensify competition with Google’s Chrome competitor. However, the Redmond-based company expects to roll out the updated Bing to other browsers eventually.The rivalry in search is now among the technology industry’s biggest, as OpenAI sets up Microsoft to expand its 9% share at Google’s expense, said Daniel Ives, an analyst with Wedbush Securities.For the quarter ended Dec. 31, Alphabet reported $42.6 billion in Google Search and other revenue, while Microsoft posted $3.2 billion from search and news advertising.PRACTICAL USESMicrosoft executives said the new Bing would change how people find information on the internet.A chatbot for instance can help users refine queries more easily and give more relevant, up-to-date results.The AI-driven search engine would be able to give clear answers in plain language, synthesizing what Bing found on the web and in its own data vaults, rather than simply spitting out links to websites. Queries on current events would draw more from live data on the internet.At the news briefing with reporters, Microsoft Consumer Chief Marketing Officer Yusuf Mehdi demonstrated how the AI-enhanced search engine also could make shopping easier. He showed how Bing could estimate, for example, whether a certain type of seat could fit in the back of a car by pulling together web data on one’s vehicle dimensions and on the shopping product in question.Within the Edge browser, Bing’s AI can present takeaways of financial results or other web pages as well, aiming to save readers from having to make sense of a long or complicated document, Microsoft said. It can suggest computer code, too.Behind these efforts is Microsoft’s plan to invest in supercomputer development and cloud support so OpenAI can release still more sophisticated technology and aim at the level of machine intelligence dreamed up in science fiction.Already, results of this collaboration are manifesting beyond search. Last week Microsoft announced the startup’s AI will generate meeting notes in Teams, its collaboration software, as well as suggest email replies to vendors using its Viva Sales subscription. More

TOKYO (Reuters) – Japan’s current account surplus fell sharply in December after a record rise the prior month, finance ministry data showed on Wednesday, highlighting the impact of persistent trade deficits and a weak yen on the country’s once-solid balance of payments. The current account surplus stood at 33.4 billion yen ($255.51 million) in December, down steeply from a surplus of 1.8 trillion yen the previous month that was driven by income gains from securities investments and hefty Japanese investments overseas.The latest figure also undershot economists’ median estimates for 98.4 billion yen surplus in a Reuters poll.Japan’s current account surpluses have long been regarded as a sign of export might and a source of confidence in the safe-haven yen, but the account has occasionally fallen into the red on a monthly basis in recent years partly as a weaker yen has boosted the costs of imports.The primary income surplus, which includes direct investments, and interest payments and dividends from past investments overseas, hit 1.8 trillion yen, making it the largest amount for the month of December since comparable data became available in 1985.For the whole of 2022, the current account surplus fell the most on record — by 10.1 trillion yen from the previous year — to reach 11.4 trillion yen. A weak yen and rises in energy prices took their toll, resulting in record trade deficits, although this shortfall was offset by a record amount of primary income gains.Some analysts worry that a dwindling current account surplus could put further downward pressure on the Japanese yen over coming quarters. The yen is down nearly 20% against the dollar so far this year.($1 = 132.2500 yen) More

WASHINGTON (Reuters) -France and Germany’s economy ministers found a willingness in Washington to engage with Europe’s concerns over subsidies for green technologies under the U.S. Inflation Reduction Act, but emerged with few specifics from meetings with top officials there.European capitals worry that the act, designed to shelter U.S. companies from the impact of price rises as well as subsidize investments in new green technologies, will undermine their firms’ competitiveness in the giant North American market.German Economy Minister Robert Habeck and his French counterpart, Bruno Le Maire, said after a meeting with U.S. Treasury Secretary Janet Yellen that they agreed there had to be transparency on the specific subsidies so that the European Union could match them if necessary.”It’s a process, and in a process you go step by step,” Le Maire told reporters. Earlier, Habeck said there was no rush to reach a solution on the question of access to key raw materials.The symbolic trip by the duo in charge of Europe’s two largest economies was designed to highlight the matter’s importance, Habeck added.At stake is Europe’s competitiveness in future industries such as electric vehicles and battery manufacturing, together with access to the raw materials that go into them.After meetings with Yellen, Commerce Secretary Gina Raimondo and White House officials, Habeck and Le Maire emerged with few specifics other than pledges to be clear about their competing green subsidies.While Canadian and Mexican companies are eligible to benefit from many of its provisions, the act does not help European competitors.Noting the agreement on both sides on the need for transparency on subsidies, Habeck said, “We will (create) a technical group to make this transparency work.” “You cannot have any fair competition if there is not full transparency on the level of public subsidies and public tax credits that are granted to private companies,” added Le Maire.Among the meeting’s achievements, Habeck listed a commitment to have the U.S.-EU Trade and Technology Council (TTC) develop common standards for green goods and an agreement to explore creating a “critical minerals” club to help both sides of the Atlantic reduce dependence on China for minerals in batteries.U.S. RESPONSESReadouts from U.S. officials were less specific about the outcomes and signaled no major concessions. The U.S. Treasury said Yellen discussed both the U.S. and European clean energy subsidy plans, “stressing the need to stimulate innovation and technology development and deployment on both sides of the Atlantic” to meet climate goals.The Commerce Department said Raimondo noted in the meetings that the “IRA is a key tool for the United States and is the most significant U.S. climate legislation to date.” But Commerce said she applauded the TTC’s work to promote transparency for U.S. and EU semiconductor subsidies and support supply chains. Some U.S. lawmakers say opening the act’s tax credits up to European rivals would lessen the competitive advantages they would confer on U.S. companies and limit U.S. investments. More

The White House has embraced signs that the economy is strong. For the Fed, that strength could prolong its fight against inflation.WASHINGTON — Jerome H. Powell, the chair of the Federal Reserve, underscored that the central bank has more work to do when it comes to slowing the economy and that officials remain determined to wrestle rapid inflation under control, even if that means pushing rates higher than expected.Mr. Powell, speaking on Tuesday in a question-and-answer session at the Economic Club of Washington, D.C., called a recent slowdown in price increases “the very early stages of disinflation.” He added that the process of getting inflation back to normal was likely to be bumpy.“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed; that’s not the base case,” Mr. Powell said. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”The Fed chair’s comments came hours before President Biden delivered the annual State of the Union address, which offered a contrasting tone.Democrats are embracing a historically strong economy with super-low unemployment and rapid wage growth, cheering a report last week that showed employers added more than half a million jobs in January. But Fed officials have met the news with more caution. The central bank is supposed to foster both full employment and stable inflation, and policymakers have been concerned that the strength of today’s job market could make it harder for them to return wage and price increases to historically normal levels.Mr. Powell said that the Fed had not expected the jobs report to be so strong, and that the robustness reinforced why the process of lowering inflation “takes a significant period of time.”While he said it was good that the disinflation so far had not come at the expense of the labor market, he also underscored that further interest rate moves would be appropriate and that borrowing costs would need to remain high for some time. And he embraced how markets have adjusted in the wake of the strong hiring numbers: Investors had previously expected the Fed to stop adjusting policy very soon, but now see rate increases in both March and May.The biggest inflation challenge facing the Fed is in the services sector of the economy, which includes restaurants, travel and health care.Jim Wilson/The New York Times“We anticipate that ongoing rate increases will be appropriate,” Mr. Powell said. He said that in the wake of the jobs report, financial conditions were “more well aligned” with that view than they had been previously.To try to slow the economy and choke off inflation, policymakers raised interest rates from near zero early last year to more than 4.5 percent at their last meeting, the quickest pace of adjustment in decades. Higher borrowing costs weigh on demand by making it more expensive to fund big purchases or business expansions. That in turn tempers hiring and wage growth, with further cools the economy. Inflation F.A.Q.Card 1 of 5What is inflation? More