Economy

People have long freaked out about “fiscal dominance”, the idea that major central banks might submit to serving short-term government policy rather than the longer-term interests of the economy as a whole.Perhaps they should actually be worried about “mortgage dominance”, which looks far more likely to force central banks into retreat than any angry finance minister. The UK is a great example. To understand the recent actions and muddled communication of the Bank of England, you need to see it through the prism of mortgages and the precarious state of the UK housing market. The BoE’s wants to tighten policy and sound tough on inflation, but not so tough that mortgage rates go up any more than they have to.Chris Marsh at Exante and Jim Reid at Deutsche Bank have both noted how this looks like mortgage interests de facto dictating policy to some central banks. Here’s a snippet from a note Reid sent out on Tuesday: Last week the Bank of England seemed very nervous about house prices and there was some sense that rather than being in an era of fiscal dominance we might actually be in an era of mortgage dominance. Will extremely high global house prices and the risk that their fall could destabilise economies eventually influence other central banks like the Fed and ultimately loosen their commitment to the inflation fight? It’s going to be an interesting couple of years ahead for global housing.It’s not just the UK either. The central bank of Norway — an under-appreciated global powerhouse, according to one subjective FTAV writer — last week slowed down its pace of rate increases and said it would soon pause the tightening cycle, partly due to worries over real estate.Here’s what Norges Bank governor Ida Wolden Bache told Reuters last week: We do see clear signs of a cooling off on the housing market, and we had expected that the housing prices would decline and now it looks like the drop in September and October has been a bit bigger than what we based our latest monetary policy report on.Even the Bank of Canada — which for a period looked like it was almost showing off in its zeal to raise interest rates — is now saying it might soon take a bit of a break. On a not-unrelated note, RBC has warned that the BoC’s already “massive” interest rate increases would deepen a property market sell-off, which could reach 14 per cent by next year. Dylan Grice at Calderwood Capital thinks this is too optimistic. In the investment firm’s most recent report he wrote that “Canada is a textbook housing bubble, and it is bursting. it will have a painful and consequential fallout.”The issue with “mortgage dominance” goes far beyond the fact that a big chunk of any major economy’s debts will be in mortgages, and that property crashes are economically very painful (the humble home loan has destroyed many more financial systems than any derivative).Mortgage holders tend to be wealthier, and tend to vote. Mortgage rates are therefore uniquely politically sensitive, in a way that other forms of debt are not. Normies don’t actually care what 10-year government bond yields do; they do care about the cost of their mortgage. Idiosyncrasies of mortgage debt help explain why some central banks are now slowing their pace of tightening, while others are still going for it. While Norwegians overwhelmingly borrow in floating rate mortgages, and Brits usually only lock in rates for a few years (if they do at all), Americans are more protected financially by the dominance of their fixed 30-year mortgages. That means that the massive jump in mortgage rates — from about 3 per cent at the start of the year to an average over 7 per cent at pixel time — will take a bit of time to filter in. It also implies that the Fed is going to be able to keep jacking up rates, in spite of the ever-growing list of central banks to blanch and hit the pause button. That said, as DB’s Reid points out, the affordability of US housing has taken a big hit lately with the rise in mortgage costs. More

Despite decelerating from the 8.7% annual rate seen last month, Mexico’s inflation remains well above target and markets forecast a fresh 75 basis-point interest rate hike to 10% this week.Earlier this year, 12-month inflation in Latin America’s second-largest economy had reached levels not seen since late 2000, blowing past the Bank of Mexico’s target of 3% plus or minus 1 percentage point and leading to an aggressive monetary tightening.On a monthly basis, consumer prices in Mexico rose 0.57% in October, according to non-seasonally adjusted figures from statistics agency INEGI.”Headline inflation is probably peaking, and a gradual downtrend likely will soon emerge,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.”But core inflation remains stubbornly sticky. This, and still-rising inflation expectations, will push Banxico to hike this week the main rate by 75 basis points”.The core inflation index, which strips out some volatile food and energy prices, rose 0.63% during October, reaching an annual rate of 8.42%.Economists polled by Reuters had expected headline inflation to come in at 8.46%, while the core index was seen hitting 8.44%. More

SINGAPORE/HONG KONG (Reuters) – The dollar steadied near its weakest in two months against the euro on Wednesday as traders waited on results from U.S. elections and on inflation data this week that will guide expectations for the interest rate outlook.Cryptocurrencies were also top of mind for investors, as they stabilised after tumbling on Tuesday, when nerves about the stability of exchange FTX turned to a rush of withdrawals and ultimately a bailout deal from bigger rival Binance. The euro was little changed at $1.0066, just off the $1.0096 hit overnight, its highest since Sept. 13. The dollar also weakened to 145.17 yen in Asia trade, its lowest level against the Japanese currency this month, and dropped to 0.9823 Swiss francs, its lowest in nearly five weeks. The U.S. currency has been under downward pressure in the last week or so from bets on the Federal Reserve easing back on interest rate rises and on China easing COVID rules and driving growth.The U.S. dollar index, which is heading for its best year in almost four decades, is down about 1% so far this week and hovered at 109.68 on Wednesday.”We all know the dollar will probably turn at some point – when is the big question,” said Bank of Singapore currency analyst Moh Siong Sim.”My view is the pullback is consolidation, rather than the end of the dollar uptrend, and that’s because I think the Fed is still not done with the inflation fight unless the data really gives us comfort that inflation is about to ease off for good.”U.S. CPI data due Thursday will consequently be closely watched, especially after last week’s Federal Reserve meeting caused markets to reposition for an even higher peak in U.S. rates. However, if this rise limits scope for further increases in rate expectations, some analysts are wondering whether even a hotter-than-expected print could send the dollar much higher. “We wouldn’t be surprised to see U.S. dollar selling persist even if we get another upside surprise with CPI. After all, the dollar sold off last month on the back of a stronger CPI print,” said MUFG analysts. They said one factor that could undermine the dollar was “a view that we have in fact finally reached a terminal rate that provides much less reason to believe that U.S. rates can propel the U.S. dollar further higher from here.” Sterling held at $1.1540, while the Australian dollar and New Zealand dollar overnight also climbed to multi week tops against the U.S. dollar before edging off those levels during the Asia session. Early U.S. midterm-election results showed an uncertain picture with Republicans still favoured to win a majority in the House of Representatives though the Senate remained a toss up. Results could take days to emerge, and what they mean for currency markets is uncertain, though divided government has in the past caused equities to rally, which could weigh further on the dollar. Cryptocurrency markets have had a wild few days, and were attempting to find a floor on Wednesday after crypto exchange Binance announced plans to buy rival FTX in a bailout. A surge in withdrawals had left FTX struggling.FTX’s native token was in freefall on Tuesday and bitcoin fell to a two year low of $17,1141. Bitcoin on Wednesday steadied just above $18,000, but FTT fell a further 20%. More

(Reuters) – A Polish firm has delivered Afghani banknotes to Kabul this week after the United States paved the way for the Afghan central bank to make a payment via international banking systems, a member of the bank’s supreme council told Reuters on Wednesday.The payment represents a shift for Afghanistan’s central bank, which has been largely cut off from the international financial system since hardline Islamist Taliban insurgents seized power in the country last year. Some Taliban members are subject to international sanctions.The Afghan central bank held a contract with a Polish company for the printing of its banknotes but had been unable until early July to begin payment.Without access to fresh banknotes for more than a year, Afghanistan’s cash has been deteriorating, with notes torn in shreds or held together with cellotape, exacerbating the impoverished country’s liquidity crisis.”Afghanistan’s markets run primarily on cash, but existing banknotes are crumbling …The Central Bank will be able to replace old and damaged banknotes, and this will improve the Afghan people’s ability to purchase food and other necessary items,” a U.S. State Department spokesperson said.Shah Mehrabi, a member of the Afghan central bank’s supreme council, said assurances to banks and companies by the U.S. Treasury that they would not be prosecuted for allowing a transaction by Afghanistan’s central bank, which has two Taliban members in its leadership, had been instrumental.”These transactions that were facilitated by the Treasury are welcomed by all Afghans,” Mehrabi said.He said the banknotes began arriving on Tuesday. The contract was for notes valued at 10 billion Afghanis, mostly in small denominations. A second contract with a French company had been reached for a similar value.The Taliban say the central bank operates independently but the United States has objected to two Taliban officials holding senior bank positions.Around $3.5 billion in Afghan funds frozen by the United States are being transferred to a trust fund in Switzerland, of which Mehrabi is one of several trustees. Some economists have flagged the risk that additional cash sent to Afghanistan could fuel inflation or be used to fund the Taliban’s budget if not carefully accounted for.The Afghan central bank did not respond to request for comment. A spokesperson for Afghanistan’s finance ministry said that new banknotes would be used solely by the central bank for replacing old notes, not to fund the budget.Mehrabi said that the bank would release its financial statements to ensure the cash was accounted for. He said the bank had agreed to be subject to third party monitoring and the U.S. Treasury had approved of an agency to carry out the monitoring. The U.S. Treasury declined to comment, referring to a letter written in September to the bank’s supreme council that said further steps would be needed for the return of Afghan assets including demonstrating independence and submitting to “a reputable third party monitor”. More

(Reuters) -Meta Platforms Inc said on Wednesday it would cut more than 11,000 jobs, or 13% of its workforce, in one of the year’s biggest layoffs as the Facebook (NASDAQ:META) parent battles soaring costs from its push into the metaverse amid a weak advertising market.The mass layoffs, the first in Meta’s 18-year history, follow thousands of job cuts at other major tech companies including Elon Musk-owned Twitter and Microsoft Corp (NASDAQ:MSFT).The pandemic-led boom that boosted tech companies and their valuations has turned into a bust this year in the face of decades-high inflation and rapidly rising interest rates.”Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I’d expected,” Chief Executive Officer Mark Zuckerberg said in a message to employees.”I got this wrong, and I take responsibility for that.”The company also plans to cut discretionary spending and extend its hiring freeze through the first quarter. But it did not specify the impacted regions or the expected cost savings from the moves.It now expects 2023 expenses of as much as $100 billion, compared with up to $100 billion previously, with more of the resources being focused on areas such as artificial intelligence, ads, business platforms and the metaverse. PRICEY METAVERSE BETWall Street has been losing patience over Zuckerberg’s enormous and experimental bets on his metaverse project, a shared virtual world, with one shareholder recently calling the investments “super-sized and terrifying”.Concerns over the spending spree have wiped off more than two-thirds of Meta’s market value so far this year. But its shares rose 4.5% to $100.80 before the bell on Wednesday.”The market is breathing a sigh of relief that Meta’s management or Zuckerberg specifically seems to be heeding some advice, which is you need to take some of the steam out of the growing expenditure bill,” Hargreaves Lansdown analyst Sophie Lund-Yates said.She, however, added that “it does not quite tally that you’re going to try and increase efficiency at the same time as chasing something as ambitious and as tenuous as the metaverse”.Meta will pay 16 weeks of base pay and two additional weeks for every year of service, as well as all remaining paid time off as part of the severance package, the company said.Impacted employees will also receive their shares that were set to vest on Nov. 15 and healthcare coverage for six months, according to Meta.The company did not disclose the exact charge for the layoffs, but said the figure was included in its previously announced 2022 expense outlook of between $85 billion and $87 billion.Meta had 87,314 employees as of the end of September. More

One of the UK’s biggest housebuilders has revealed that demand is falling rapidly as buyers react to higher mortgage rates and the prospect of a recession.In an update on Wednesday, Taylor Wimpey said that over the past five months it has been selling homes at around half the pace it was in the first half of the year. In another worrying sign for the sector, the number of Taylor Wimpey homebuyers cancelling purchases ahead of completion has jumped by more than 50 per cent. Just under a quarter of purchases have been cancelled in the second half of the year so far, up from 15 per cent in the first half. Taylor Wimpey still anticipates that operating profits for the full year will be in line with previous guidance, at around £930mn, but it is nonetheless bracing for a tough period. “We’re operating in a challenging economic and political backdrop, and the sector is not immune,” said Jenni Daly, the FTSE 100 group’s chief executive. Higher mortgage rates after former chancellor Kwasi Kwarteng’s “mini” Budget in September have left people “re-evaluating their ability to buy” and average sales prices have plateaued after a period of strong growth, she added.The pace of sales could slow further, warned Investec analyst Aynsley Lammin, because people who are completing purchases at the moment would generally have cheaper mortgages that were agreed before the Budget, whereas those starting the process now would have to pay much higher rates.“The key issue will be that if the sales rate remains so slow into the spring selling season then pricing will start to be hit,” he said.Taylor Wimpey is also grappling with build cost inflation of 9-10 per cent. Meanwhile, new levies and the need to meet higher environmental standards in construction could add £4.5bn in annual expenses to the sector, according to the developers’ trade body.Some are hoping for reassurance from the new chancellor, Jeremy Hunt, in his first budget next week. “After the last couple of months, I’d say our customers are concerned about the Budget. Why wouldn’t you wait a couple weeks and see what the chancellor has to offer you?” said Daly. But Lammin said it was unlikely that Hunt’s statement could reverse the rise in mortgage rates, or prevent the economy from tipping into recession. “It’s tough out there. Sales rates have tumbled and we’re in a new market,” he said.Shares in Taylor Wimpey were flat on Wednesday at 98p, and have fallen around 45 per cent in the year to date. More

China’s factory gate prices fell into deflationary territory last month for the first time since 2020 and consumer prices rose less than expected, in further signs of the damping effect of Covid-19 lockdowns on domestic demand.The country’s producer price index, a gauge of prices for goods as they leave factories, which are heavily determined by energy and raw material costs, fell 1.3 per cent in October year on year, its first decline since December 2020.The consumer price index rose 2.1 per cent, missing forecasts of 2.4 per cent.While global economies have grappled with soaring prices over the past year, inflation in China has remained subdued as persistent Covid restrictions intended to eliminate the virus have constrained consumer activity.Authorities have imposed frequent lockdowns and now require almost daily mass testing to contain outbreaks. Nationwide daily cases reported on Wednesday rose to 8,335, spurred by an outbreak in Guangzhou and the highest total in Beijing in five months.The weakness in producer prices was driven in large part by declining global commodity prices compared with last year, economists said. But they added that the data also reflected pressure on demand across the Chinese economy.“Part of the reason oil prices have dropped back since their peak earlier this year is because zero-Covid is keeping transportation demand in China subdued,” said Julian Evans-Pritchard, senior China economist at Capital Economics.The Chinese economy grew 3.9 per cent year on year in the third quarter, well below its full-year growth target of 5.5 per cent, while policymakers are grappling with a real estate crisis that has induced a wave of defaults at overleveraged property developers.Last year, Chinese producer prices rose at the fastest pace in 13 years on the back of higher costs for commodities and raw materials, prompting warnings from the government over the risk of price rises spilling over into consumer prices.While October’s CPI reading fell on an annualised basis, the reading edged 0.1 per cent higher month on month. Evans-Pritchard said this increase was “consistent with muted price pressures”. He also pointed to weakness in domestic demand holding back core inflation — which excludes food and energy — and which rose just 0.6 per cent.

Iris Pang, chief economist for greater China at ING, suggested that even if energy prices rose, there was “no inflation risk” in China as “producers cannot pass increased costs to consumers”.Other recent data from China have painted a picture of economic strain. Profits at industrial groups fell 2.3 per cent in the first nine months of the year, according to figures released last week. Factory and non-manufacturing activity in October also declined month on month, an official purchasing managers’ index survey showed, while exports declined for the first time in more than two years.In contrast to other central banks, and in particular the US Federal Reserve, the People’s Bank of China has over the past year sought to ease monetary policy to support the economy. More

As we’re all too well aware, the screws on UK household budgets are tightening. Double-digit price inflation — in food and drink, energy and borrowing costs — has been compounded by mortgage rate rises. Income growth is trailing far behind, with average monthly pay rising by just over 6 per cent in the year to September. At times like this a reliable income stream can provide valuable extra cash, and in this respect the structure of dividend-paying investment trusts makes them an obvious choice. Unlike open-ended funds, which must pay out 100 per cent of the net income they receive each financial year, investment trusts can opt to hold back up to 15 per cent to add to their revenue reserves. When times get tough, the companies held in trusts’ portfolios may have to reduce or suspend dividends. In 2020, FTSE 100 payouts dropped by 35 per cent. But trusts can draw on their reserves to maintain or even boost payouts to their shareholders. They can also supplement dividend payments by dipping into capital profits. The Association of Investment Companies (AIC) has promoted that message among the investing public, by introducing the idea of dividend heroes — the trusts that have built up the longest track records of reliable payouts. Some 17 dividend heroes have increased their dividends consecutively for more than 20 years. Seven of these have achieved more than 50 years of dividend growth, led by City of London, with 56 years under its belt. A further 28 “next generation” dividend heroes have maintained or increased payouts for between 10 and 20 years.

Dividend ‘heroes’Company nameNumber of consecutive years dividend increasedDividend cover (yrs)Dividend yield %City of London560.465.19Alliance Trust551.352.53Bankers551.372.25Caledonia557.40*1.96Global Smaller Companies Trust521.561.35F&C Investment Trust511.351.52Brunner501.652.26JPMorgan Claverhouse491.124.89Murray Income490.804.74Scottish American480.732.80Source: AIC/Morningstar, data to 31/10/22. *Cover based on retained earnings

There are no guarantees attached to dividend increases, however, and a prolonged recession could undermine trusts’ ability to maintain them. Ben Yearsley, investment director of Shore Financial Planning, also warns there are dangers in the use of capital to fund payouts. “It’s fine dipping into your capital pot for a year; but if there is a prolonged market slump, using capital to pay dividends is like robbing Peter to pay Paul. You are removing the chance to reinvest that capital at potentially low prices.” For trust boards and managers, says Andrew McHattie, an independent investment trust expert, maintaining these dividend records is nonetheless their top priority. “There’s no doubt that the amazing longevity of the dividend heroes’ payout records is a powerful marketing message for the investment trust structure,” he says.Reserves mean the UK’s economic woes pose no imminent threat to these payouts, he believes, and dividends from most portfolio companies are holding up well. “Even if current conditions worsen markedly, these trusts seem very well placed to maintain their status, able to lean on good levels of dividend reserves that have been built back up over the past decade since the banking crisis. One, two or three years of stormy seas can easily be weathered.” 

Next generation ‘dividend heroes’Company nameNumber of consecutive years dividend increasedDividend cover (yrs)Dividend yield %Athelney191.324.87BlackRock Smaller Companies190.962.73Henderson Smaller Companies190.733.20Artemis Alpha Trust181.691.99Murray International170.924.55Henderson Far East Income160.699.83BlackRock Greater Europe151.461.42CQS New City High Yield150.728.72Schroder Oriental Income151.114.54abrdn Asian Income130.705.19Source: AIC/Morningstar, data to 31/10/22.

Dividend hero managers are focused on managing their dividend reserves prudently. “We are careful not to overpay when times are good, and the portfolio is constructed to protect against downside risk. It’s all about consistency,” said Sue Noffke, manager of Schroder Income Growth, at a recent AIC briefing.Martin Connaghan, co-manager of Murray International investment trust, said maintaining the trust’s £63mn dividend reserve is a priority. “We’ve used it six times in the last 17 years, including drawing £10mn in 2020 and £5mn in 2021, but we will top it up again,” he said at the same event.Job Curtis, manager of City of London, concurs that while his whole portfolio is constructed around “companies capable of growing their dividends consistently”, it has tapped reserves in nine of the 31 years he had been fund manager. “My view is that you need to be prudent, retain some income and add to the revenue reserve in the good times so that you have enough in reserve to fund dividend growth during bear markets or recessions.”In this context, dividend cover — defined by the AIC as the number of years that an investment trust’s revenue reserves would cover current shareholder distributions — is a useful indicator of how well fortified trusts are against tough times. However, it doesn’t necessarily tell the whole story. City of London is a good example. Although the dividend cover provided by revenue reserves is less than 0.5, Mick Gilligan, partner at wealth manager Killik & Co, makes the point that is underpinned by equating to 3.7 times the current year’s dividend.Which dividend heroes are currently looking attractive for income seekers? McHattie says: “For high yield it is difficult to look past the real outlier in the sector, Henderson Far East Income, which offers a very high yield of 9.8 per cent.”But most of the bigger yielders are UK equity income trusts. Gilligan picks out City of London and Murray International as value-focused choices that he believes “offer a good yield, are well placed to continue their progressive dividend policy, and look attractive in the current market environment”. In both cases, the board’s chair highlights its commitment to maintaining dividend growth in the latest annual report. A number of longstanding heroes are not particularly high yielders. A number of the great global generalists, including F&C, Brunner, Witan and Scottish Mortgage, are growth-focused and pay less than 2 per cent.If you’re looking for robustness of dividend growth rather than income per se, Gilligan likes Alliance Trust. Both he and McHattie also highlight Caledonia Trust, which pays a regular yield of 2 per cent but also special dividends when it realises profits in companies in its portfolio; last year’s specials boosted total payouts to 6.9 per cent. It’s also on a discount of almost 30 per cent. More