Economy

The US Federal Reserve warned of the potential for financial distress that damages the economy if interest rates rise to levels higher than expected, in a report that underscored the stakes of its drive to control stubborn inflation. The central bank’s latest report on financial stability published on Friday highlighted a constellation of risks including a weaker global economy, “unacceptably high” inflation, and geopolitical turmoil. These currents have magnified volatility in some asset classes. The report arrived two days after the Fed raised benchmark interest rates by 0.75 percentage points for the fourth time in a row, bringing them to a new target range of 3.75 per cent to 4 per cent. As recently as March, rates hovered near zero. The Bank of England also raised rates by 0.75 percentage points on Thursday, with the European Central Bank also opting for a jumbo rate rise last week. The Fed is raising rates in an attempt to cool down an economy marked by persistently high inflation. Should they need to rise more than expected, that “would weaken the debt service capacity of households and businesses and lead to an increase in delinquencies, bankruptcies, and other forms of financial distress”, its financial stability report said. The Fed added this could eventually lead to heightened volatility in markets, strained liquidity and further drops in asset prices, including in housing. “Such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs, with further adverse consequences for asset prices, credit availability, and the economy,” said the report, which is issued twice a year. Lael Brainard, the Fed vice-chair, in a separate statement on Friday, highlighted the volatility that has engulfed some financial markets over the past six months, and underscored that the central bank would be “attentive” to financial stability risks.“Today’s environment of rapid synchronous global monetary policy tightening, elevated inflation, and high uncertainty associated with the pandemic and the war [in Ukraine] raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage,” she said. A rapid string of interest rate rises, followed by the potential of a recession, have ignited fears of an unintended market meltdown, especially given strained liquidity conditions. The Fed said there were signs delinquencies on new home mortgages were creeping up and downgrades in the corporate sector had quickened.However, the Fed noted leverage within the US banking system remained relatively low and large banks were well capitalised to absorb shocks “even during a substantial economic downturn”. Systemically important banks have started to reduce the risk on their balance sheets, the Fed added, and their vulnerability to credit losses appeared “to be moderate”. Banks have struggled to offload risky loans they underwrote over the past year, before financial markets slid in value, holding tens of billions of dollars’ worth in connection to deals including the buyouts of Twitter, software maker Citrix and television rating group Nielsen. This has hampered their ability to lend to other big but lowly-rated businesses. While banks and dealers have profited handsomely through their trading operations this year, bolstered by violent swings in financial markets, the recent chaos in the UK sovereign bond market has raised concerns for policymakers. The sell-off in gilts offered a glimpse into how quickly turmoil in one corner of the market can spread. Volatility stretched to US credit markets as British pension funds sold parts of their portfolios to meet large margin calls. The Fed noted that the volatility stemming from foreign risks, including those tied to China and the war in Ukraine, could “pose risks for institutions that are hedging dollar positions and to market functioning”, as well as present issues for emerging markets that have borrowed in dollars.“Continued or more extreme market volatility could contribute to liquidity strains that play out in unexpected ways,” the Fed wrote. “Structural vulnerabilities” in short-term funding markets could further amplify the problem. More

The Federal Reserve is watching the government bond market and investment funds as rate increases ricochet through finance.The Federal Reserve warned in its twice-annual report on America’s financial stability that the government bond market could be primed for disruption, and cautioned that financial firms that operate outside of traditional banks could increase fragility in the system.Investors have been warning that market conditions are becoming increasingly fraught nine months into the Fed’s fastest rate-increase campaign since the 1980s. While the central bank is determined to push ahead with its effort to slow the economy as it tries to choke off rapid inflation, officials are keeping a careful eye on market conditions. A financial meltdown would make the Fed’s job more difficult — potentially even forcing it to deviate from some of its tightening efforts.Financial stability issues are in focus as central banks around the world raise interest rates in synchrony and other markets around the world — including the government bond market in Britain — offer early warning signs that cracks are beginning to emerge.The Financial Stability Report, released on Friday, delved into widely discussed challenges that have been plaguing Treasury markets and detailed less prominent vulnerabilities. Those included elevated leverage at financial institutions beyond banks, what is often referred to as the “shadow banking” system.The ease of trading Treasury securities, called liquidity, has been strained in recent months, which is making analysts and investors nervous that the market could be primed for disruption. The Fed attributed the decline in liquidity “primarily” to volatility in interest rates and economic uncertainty.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

(Reuters) – Four Federal Reserve policymakers on Friday indicated they would still consider a smaller interest rate hike at their next policy meeting, despite new data showing another month of robust job gains and only small signs of progress in lowering inflation.The United States added 261,000 jobs last month, the Labor Department said in its closely watched employment report, well above the 200,000 gain expected by economists in a Reuters poll. Data for September was revised higher to show 315,000 jobs created instead of the previously reported 263,000, but the unemployment rate ticked up to 3.7% from 3.5%.The jobs numbers show “the labor market remains tight,” Richmond Fed President Thomas Barkin told broadcaster CNBC soon after the release of the data, adding that he nevertheless is ready to act more cautiously on the pace of future rate increases even as he keeps an open mind on the outcome of the next policy meeting in December.”When you get your foot on the brake, you think about steering in a very different way … sometimes you act a little bit more deliberatively, and I’m ready to do that,” Barkin said. “And I think the implication of that is probably a slower rate of pace of rate increases, a longer pace of rate increases and potentially a higher end point.”The U.S. central bank on Wednesday raised rates by 75 basis points for the fourth consecutive meeting, but signaled it hoped to shift to smaller hikes in borrowing costs as soon at its next meeting as it allows time for the economy to absorb the swiftest tightening of monetary policy in 40 years.However, Fed Chair Jerome Powell tempered that message in a news conference after the end of the two-day meeting with a warning that rate increases, while possibly smaller, will persist long enough that rates will ultimately rest higher than policymakers previously thought and that any talk of a pause was “very premature.” The Fed’s key policy rate currently sits in a 3.75%-4.00% range.Separately on Friday, Chicago Fed President Charles Evans and Boston Fed President Susan Collins, a voting member of the rate-setting Federal Open Market Committee this year, also echoed that new mantra.”From here on out, I don’t think it’s front-loading anymore, I think it’s looking for the right level of restrictiveness,” Evans told Reuters in an interview, referring to the U.S. central bank’s string of supersized rate hikes. “Stepping down to a pace that’s not 75 (basis points), giving … a little bit of runway to see more data before you get too far ahead of where you eventually want to be, makes sense to me.” With rates now in restrictive territory, Collins said in a speech to the Brookings Institution, “I believe it is time to shift focus from how rapidly to raise rates, or the pace, to how high,” adding that she suspects the Fed will ultimately have to raise its policy rate higher than the 4.6% level officials penciled in at their meeting in September, but that it’s too soon to say what that level might be. Investors in futures contracts tied to the Fed’s benchmark overnight interest rate dialed up their bets that a 50-basis-point rate hike at the Dec. 13-14 meeting is more likely than another 75-basis-point hike following the employment report, and though traders are still wagering on that rate rising to a 5.00%-5.25% range by March of next year, they have eased off bets of it climbing higher than that level.”The data are still showing strong positive momentum in the labor market, which is not yet showing much adjustment in response to a rapid tightening of monetary policy,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. Graphic: Fed delivers another big hike – https://graphics.reuters.com/USA-FED/dwpkdgydxvm/chart.png DELICATE BALANCING ACTThe Fed is trying to thread the needle by softening the labor market enough to tamp down high job vacancy rates and wage growth, which have helped fuel inflation, without causing a sharp spike in unemployment which would see it having to ease off the throttle sooner than desired. Persistently strong job gains also make it difficult for the central bank to let up, increasing the likelihood it has to lift borrowing costs so much that it upends the economy and triggers a painful recession.Minneapolis Fed President Neel Kashkari, who has previously forecast a higher end point for rates than almost all of his fellow policymakers, told the Associated Press in an interview that the “quite healthy” jobs data showed the Fed still has more work to do and he envisaged revising up where rates need to get to even as he said it is appropriate to consider a slower pace of rate increases.”I had interest rates in September peaking at around 4.9% in the March-April (2023) kind of time frame,” Kashkari said. “Given what I know right now, I would expect to go higher than that. How much higher than that, I don’t know.”The Fed has barely made a dent in bringing down the highest rate of inflation in 40 years, with its preferred measure running at more than three times the central bank’s 2% target. Attention now turns to the release next Thursday of monthly Consumer Price Index data, which will provide a fresh look at the state of the Fed’s inflation battle.Friday’s employment report offered some indications of progress, most notably the slowdown of job gains in some sectors. The household survey portion of the report also showed a sharp fall in employment, while the rise in the unemployment rate suggests loosening in labor market conditions.Annual wage growth also appears to have peaked even as average hourly earnings rose more than expected in October on a monthly basis to the highest reading since July.That gives some weight to a closely watched forward-looking labor costs report last Friday which showed a considerable slowdown in private-sector wage growth in the third quarter, suggesting wage pressures may have peaked.Collins, for one, touched on that data on Friday. “There are some hopeful signs, although not yet clear evidence, that inflation may be beginning to moderate,” she said, adding that the latest monthly jobs reading, while appearing strong, may not be fully in alignment with where the economy now stands. Graphic: Average hourly earnings growth – https://graphics.reuters.com/USA-FED/JOBS/myvmnzoaapr/chart.png But overall pressures remain. Earlier this week, separate government reports showed U.S. job openings unexpectedly rose in September while the number of Americans filing new claims for unemployment benefits unexpectedly fell last week. There are still 1.9 job openings for every unemployed worker. More

British steelmakers have called on the government to follow the EU in closing a loophole in the sanctions regime against Moscow that allows indirect imports of Russian steel from third countries. In March, the UK imposed import tariffs of 35 per cent on all semi-finished steel products from Russia as part of a package of economic sanctions following the full-blown invasion of Ukraine. A month later all imports of finished steel were banned.But despite these measures, Russian steel that is processed in third countries into other steel products is still being imported, according to trade body UK Steel — generating billions of dollars in revenues for Moscow and undercutting domestic producers because it is being sold at cheaper rates. The EU said last month that it would introduce tighter sanctions on Russian steel over the next two years which will shut down this route, but Britain has yet to clamp down on it. Gareth Stace, UK Steel’s director-general, said the government needed to “act swiftly and decisively to close any loopholes which weaken our sanctions on Russia”. He added: “Last month the EU extended its sanctions to cover Russian steel processed in third countries from October 2023 cutting off an important supply route for Russian steel producers. Given the UK’s ability to now act independently on these issues outside the EU, it is frustrating that the UK has not already implemented similar sanction tightening.”One UK industry executive said Russia was pricing at “substantial market discounts” because it was “desperately trying to get rid of basic steel products to third countries . . . So the price in the UK is not competitive. Apart from the economic impact, it feels morally wrong that Russian steel is still in the supply chain in the UK.”Country-of-origin rules mean it is difficult to establish where steel was made once it has been finished. “If basic steel from Russia is finished in a third country, it acquires a new country of origin,” one UK executive said.The UK government did not respond specifically to the industry’s concerns over indirect imports. It said it had “not seen any evidence of illicit Russian steel imports entering the UK market” and that it had moved “faster and further than others, including the EU, in banning imports from Russia”. Until the wider EU ban comes in, some of the main sources of processed steel imported into the UK are from parts of the bloc, including Belgium. Turkey, which has refused to sign up to sanctions against Russia, is another source. Eurofer, the EU steel producers’ group, had wanted the EU to clamp down immediately and criticised the “very long grace periods” it had put in place before the wider ban came into effect.Belgium’s government had pushed back against tightening the EU restrictions. Alexander de Croo, the country’s prime minister, fought to delay the tougher measures because of their impact on two plants in the southern region of Wallonia owned by a subsidiary of Russian steelmaker NLMK. When the new restrictions were announced last month, he warned they could reduce public support for helping Ukraine if they led to heavy job losses.“The question is how we can maintain the solidarity of European countries and our people to continue to support Ukraine,” he said. “Certainly, the military successes achieved by Ukraine help . . . but if the economic cost becomes so high that people lose their jobs, it will become difficult.” Belgium declined to vote for the package, but did not veto it. It was the first time in eight rounds of sanctions that one of the 27 member states had failed to vote in favour. NLMK Belgian Holdings employs 1,200 people in one of the poorest areas of Belgium. It is 49 per cent-owned by Sogepa, the investment fund of the Walloon government. NLMK told the FT it “respect[ed] all sanctions and legislation in place”. More

The president’s recent comments on Social Security, the deficit and economic growth claim credit where it is not always due.WASHINGTON — As President Biden and his administration have told it in recent months, America has the fastest-growing economy in the world, his student debt forgiveness program passed Congress by a vote or two, and Social Security benefits became more generous thanks to his leadership.None of that was accurate.The president, who has long been seen as embellishing the truth, has recently overstated his influence on the economy, or omitted key facts. This week, Mr. Biden praised himself for giving retirees a raise during a speech in Florida.“On my watch, for the first time in 10 years, seniors are getting an increase in their Social Security checks,” he declared. The problem: That increase was the result of an automatic cost-of-living increase prompted by the most rapid inflation in 40 years. Mr. Biden had not done anything to make retirees’ checks bigger — it was just a byproduct of the soaring inflation that the president has vowed to combat.In stops across the country in recent weeks, Mr. Biden has also credited himself with bringing down the federal budget deficit — the gap between what America owes and what it earns.“This year the deficit, under our leadership, is falling by $1.4 trillion,” he said last week in Syracuse, N.Y. “Ladies and gentlemen, the largest ever one-year cut in American history on the deficit.”Left unsaid was the fact that the deficit was so high in the first place because of pandemic relief spending, including a $1.9 trillion economic aid package the president pushed through Congress in 2021 and which was not renewed. Mr. Biden was in effect claiming credit for not passing another round of emergency assistance.White House officials contend that robust tax receipts, which helped reduce the deficit, are largely the result of strong economic growth that was supported by Mr. Biden’s economic policies.The State of the 2022 Midterm ElectionsElection Day is Tuesday, Nov. 8.Biden’s Speech: In a prime-time address, President Biden denounced Republicans who deny the legitimacy of elections, warning that the country’s democratic traditions are on the line.State Supreme Court Races: The traditionally overlooked contests have emerged this year as crucial battlefields in the struggle over the course of American democracy.Democrats’ Mounting Anxiety: Top Democratic officials are openly second-guessing their party’s pitch and tactics, saying Democrats have failed to unite around one central message.Social Security and Medicare: Republicans, eyeing a midterms victory, are floating changes to the safety net programs. Democrats have seized on the proposals to galvanize voters.It is common for presidents to spin economic numbers to improve their pitch to voters. Like many of his predecessors, Mr. Biden has emphasized economic indicators that are favorable to his record, including a low unemployment rate and the record pace of job growth in his first two years in office — a focus intended to win over an American public that remains deeply pessimistic about the economy, according to opinion polls.But as it gets closer to midterm elections that will determine the fate of the rest of Mr. Biden’s legislative agenda, the president’s cheerleading has increasingly grown to include exaggerations or misstatements about the economy and his policy record.White House officials have sometimes been forced to awkwardly correct Mr. Biden’s claims. Other times, they have doubled down on them.Senior administration officials acknowledged that some officials have unintentionally misspoken about the economy on occasion but denied that Mr. Biden or his administration had ever attempted to mislead the public about the economy. They said that his record requires no overstating.“The president’s economic agenda has given us an economy with historic job creation, faster declines in unemployment than prior recoveries, and private sector investments in new industries throughout the country,” Abdullah Hasan, a White House spokesman, said. “Where on occasion we have misspoken, as any human is allowed once in a while, we have acknowledged and corrected or clarified such honest mistakes.”Mr. Biden’s economic exaggerations generally pale in comparison to the tales spun by his predecessor, President Donald J. Trump. The former president, whose lies included insisting that he did not lose the 2020 election and that the Capitol was not attacked by his supporters on Jan. 6, 2021, regularly boasted of “the greatest economy in the history of the world” — a statement not based on any facts. Mr. Trump also said his giant tax cut package paid for itself when it did not, and he relied on outlandish economic growth projections to make his budgets balance.Jason Furman, an economist at Harvard University and a former Obama administration economic adviser, said some of Mr. Biden’s recent contentions appeared to be the types of “leaps of logic” that were common during election seasons. He pointed to the president’s claims of reducing the deficit and overseeing an increase in Social Security payments as examples.“This isn’t like making stuff up,” Mr. Furman said. “It’s just making a rather stretched and peculiar causal argument around true facts.”He added that Mr. Biden’s messaging bore no comparison to the falsehoods Mr. Trump used to tell about America being among the highest-taxed nations in the world, an inaccurate declaration given the far higher tax rates in countries such as France, Denmark and Belgium.“With President Trump, you had flat-out complete factual errors,” Mr. Furman said.Mr. Biden’s pitch has been centered on the notion that he is leading a post-pandemic transition to stable economic growth and that if Republicans take control of Congress, they will look to scale back social safety net programs, shut down the government and weaponize America’s need to borrow money to pay its financial obligations.But as the United States has struggled to contain inflation, the Biden administration has at times resorted to cherry-picking the most favorable data points or leaving out crucial context. In some cases, it has been a matter of presenting graphics that do not tell the whole story.For instance, a White House chart late last year depicted a decline in gas prices over a month as a significant drop. However, the rows of plunging bars showed a decrease of just 10 cents.Inflation has been the most slippery subject, with Biden administration officials often focusing on different measures as they seek silver linings in monthly reports.Cecilia Rouse, the chair of the White House’s Council of Economic Advisers, appeared to misstate the figures in an interview with CNN last month when she was pressed about why “core” inflation, which excludes food and energy prices, was at its highest level in 40 years in September.“So, if one looks month on month, it was actually flat,” Ms. Rouse said.The monthly rate had actually risen by 0.6 percent, a significant increase. The administration said that Ms. Rouse had misspoken and intended to say that core inflation was unchanged for two consecutive months, not that it was zero.Mr. Biden’s comment to Jimmy Kimmel in June about America’s rapid economic growth being the fastest in the world was contradicted by an International Monetary Fund report in July that showed several countries in Europe and Asia were growing faster than the United States this year. The fund predicted at the time that the United States would grow at a sluggish 2.3 percent in 2022 and further downgraded its outlook last month. In this case, the administration said that Mr. Biden was referring to the pace of America’s recovery from the pandemic compared to other major economies.The more recent presidential pronouncement at a forum in October that the student debt relief program passed Congress was perhaps the most head-scratching. It was starkly at odds with the reality that Mr. Biden rolled out the initiative through executive action and that it was being challenged in the courts. A White House official said that Mr. Biden was referring to the passage of the Inflation Reduction Act, which did not include student debt relief.And when Mr. Biden said in September gas prices were averaging below $2.99 a gallon in 41 states and the District of Columbia, they were actually $1 higher. The White House corrected the transcript of his remarks.The Social Security misstep has been portrayed across the spectrum as the biggest blunder.The suggestion by Mr. Biden that the increase in the Social Security cost of living adjustment was a sign of economic health drew bewilderment from Democrats and scorn from Republicans after the White House reinforced the point in a Twitter post from its account on Tuesday.“The only thing the White House can take credit for is the historic inflation that led to the need to increase Social Security payments,” Republicans on the House Ways and Means Committee said in a statement.By Wednesday afternoon, the White House had deleted the tweet.Karine Jean-Pierre, the White House press secretary, tried to explain its removal by saying that the message was lacking crucial information about other ways older Americans were saving money through lower Medicare premiums.“Look, the tweet was not complete,” she said. “Usually when we put out a tweet we post it with context, and it did not have that context.” More

In the past nine months inflation has surged, stock prices have fallen and global growth has stalled. Everyone seems to be hurting — everyone, that is, except oil companies.While the energy crisis sparked by Russia’s invasion of Ukraine has pushed up the cost of fuel, electricity and thousands of other everyday items, fossil fuel producers, and their shareholders, have got richer.Profits at the largest US oil company, ExxonMobil, tripled in the third quarter to a record of nearly $20bn, bringing its earnings for the year to more than $43bn. Shell, Europe’s largest, has made $30bn this year, including $9.5bn in the three months to September. BP is on course for possibly the most profitable year in its history.In response, politicians from Washington to London to Milan have found themselves threatening or enacting the same policy response: windfall taxes.“Their profits are a windfall of war — a windfall from the brutal conflict that is ravaging Ukraine and hurting tens of millions of people around the globe,” US president Joe Biden said this week as he promised increased levies on producers unless they help cut US fuel costs. Rishi Sunak, as UK chancellor, said it was “fiscally responsible” to tax oil and gas producers’ “extraordinary” earnings when he announced an energy profits levy in May. Five months later, Sunak, now prime minister, is considering increasing the levy from 25 per cent to 30 per cent and extending it to 2028.Firefighters work in rubble after a drone attack in Kyiv. The profits of energy companies have soared since Russia’s invasion of Ukraine © Roman Hrytsyna/APIn Europe, the EU introduced a “solidarity contribution” levy of at least 33 per cent of “surplus taxable profits” made by fossil fuel companies. Italy has also introduced a 25 per cent windfall tax on energy company profits, while Spain has proposed a 1.2 per cent additional tax on energy company sales, as well as a 4.8 per cent levy on bank profits. The politics of windfall taxes are simple: few voters object to corporations — particularly oil majors — being squeezed after profiting during hard times. But designing and implementing them is less so, particularly when companies have global earnings and investment in new, greener sources of energy is needed.A recurring themeWindfall taxes are not new. In the first years of the first world war at least 22 countries, including the UK, US, France, Italy and Germany adopted some form of extra tax on “excess” corporate profits. During the second world war, an excess profits tax in the US generated 22 per cent of government tax receipts in 1943, equivalent to 2.2 per cent of gross domestic product, according to the IMF.In the energy industry, government efforts to capture greater tax revenue during periods of high prices are a recurring theme. Many producing countries, such as Australia, Nigeria and Brazil, have tax regimes that include a mechanism to ensure the state gains if prices rise.In the UK, which taxes profits rather than production, the Treasury has regularly tweaked the tax rate over the past 50 years depending on the oil price, explains Graham Kellas, head of fiscal policy research at energy consultancy Wood Mackenzie.“The UK oil and gas tax policy since it began has basically been to keep an eye on what’s happening with prices and adjust the tax rates when you feel that the price level has shifted,” he says.Most recently, then chancellor George Osborne in 2011 raised the supplementary tax rate paid by oil and gas producers from 20 per cent to 32 per cent after oil prices spiked. It was then cut to 10 per cent between 2014 and 2016 as prices fell.Taxing profits rather than production enables the UK to “take more later” and continue to attract investment, but the “ad hoc” rate changes also create uncertainty, says Kellas.So far the energy profits levy in the UK has had a mixed impact. This week, BP, which is the third-largest oil and gas producer in the North Sea, said its UK business expected to pay about $2.5bn in taxes in 2022, including about $800mn under the new levy. Private equity-backed Harbour Energy, which is the UK’s biggest producer, expects to pay $900mn in UK taxes this year, including $400mn under the levy.

US president Joe Biden: ‘The [energy groups’] profits are a windfall of war — a windfall from the brutal conflict that is ravaging Ukraine’ © Jim Watson/AFP/Getty Images

In contrast, Shell, which like BP produces about 120,000 barrels of oil equivalent a day in the UK, has paid no UK taxes at all this year. Investments in new production and costs associated with decommissioning old fields have cancelled out all UK profits, it said. In fact, Shell has paid no taxes on its UK oil and gas production since 2017.Perhaps aware of the poor optics of paying no tax in the UK while returning billions of dollars of record profits to shareholders, outgoing chief executive Ben van Beurden has said his UK-headquartered company is willing to pay more.“[Governments] will be looking at companies like us who benefit from the volatility and the prices that we see, to fund the programmes they are rolling out,” van Beurden said last week after Shell reported the second-highest quarterly profit in its history. “I think we have to accept it and we have to embrace it.”That view, however, is not shared across the industry. While Shell generates profits around the world, many of the producers in the North Sea are more dependent on their UK revenues.“It won’t be the oil majors who will bear the brunt of the impact of unpredictable windfall taxes,” says Iain Pyle, investment director at UK-based asset manager Abrdn, a top 10 shareholder in the North Sea gas group Serica Energy. “Instead, the burden will fall on smaller domestic producers and on local service companies and private contractors,” he says. “These companies and their supply chains are less able to withstand a five-year period of high taxation and cannot simply relocate.”Sam Laidlaw, founder and executive chair of Neptune Energy, which produces about 12 per cent of its oil and gas in the UK, says introducing higher taxes is OK if it is clear why they are being introduced and for how long. The EU’s “solidarity contribution” will only apply to profits made in 2022 or 2023, he says. In contrast, the UK’s energy profits levy applies to the end of 2025 and might be extended to 2028.“We have had one change [in the UK tax regime] already this year, which was introduced at pretty short notice with very limited consultation,” Laidlaw says. “If we have further changes, that really undermines the whole stability question.” What government wantsThere’s a contradiction at the heart of many western governments’ approach to the fossil fuel industry since the start of the crisis. After years of calling on the sector to reduce emissions, policymakers now want companies to boost supply, while still urging the same executives to deliver a long-term transition to greener fuels.Despite a commitment to cut emissions to net zero by 2050, the UK still wants to encourage investment in oil and gas production that it says is necessary for the country to have sufficient sources of energy until it can fully transition to greener forms of power.As a result, the energy profits levy includes a generous “super deduction” for investments in new oil and gas production that rewards companies with an overall 91p tax saving for every £1 they invest.Professor Michael Devereux at the Oxford university Centre for Business Taxation says this has, in effect, created a subsidy for fossil fuel projects that otherwise would not go ahead. “A subsidy could be justified for investment in renewables, but it is much harder to justify for investment in oil and gas,” he says.In the US, a Biden administration that initially talked of curbing new drilling and accelerating a transition from oil has shifted to threatening to penalise companies unless they power up more rigs. “If they don’t, they’re going to pay a higher tax on their excess profits and face other restrictions,” Biden said this week. Ithaca Energy rigs in the North Sea. In the UK, which taxes profits rather than production, the Treasury has regularly tweaked the tax rate over the past 50 yearsYet most analysts see the threat of new federal taxes on US oil company profits as little more than campaign rhetoric ahead of midterm elections next week.An act of Congress would probably be required, which would meet resistance from some Senate Democrats and blanket opposition from the Republicans, who polls suggest will control at least one of the houses of Congress after Tuesday’s vote.State-level interventions are more plausible, particularly if high prices persist, says Kevin Book, managing director at Clearview Energy Partners, a Washington advisory firm.“High prices tend to make governments grabby, and a recession could strain state and local government finances,” he says. “In that context, even some producer states might begin to eye industry profits — potentially leading to a . . . modification of existing incentives, if not new levies.”Sowing the windfallWindfall taxes are often not a guaranteed revenue raiser. Italy’s levy brought in billions less than anticipated, as many energy companies simply refused to pay and brought legal challenges against the government. Protesters burn their energy bills in Rome. Italy’s tax on energy companies only brought in an estimated $2bn, far below expectations © Alberto Pizzoli/AFP/Getty ImagesPart of the challenge for governments is that the eye-popping earnings figures from the likes of BP and Shell, which provoke the most outrage from voters, are global profits and the portion subject to UK tax is much smaller. Convention dictates that countries do not tax foreign profits, which are normally taxed in the jurisdiction where those profits are made. BP reported quarterly earnings of $8.2bn this week but perhaps 10 per cent was generated in the UK, says Kellas at Wood Mackenzie. (BP, like Shell, does not break down its profits by geography.)Murray Auchincloss, BP’s chief financial officer, says that although people are “understandably focused on our global profit levels” at a “difficult time for society”, his company does not shirk its responsibilities to the UK taxpayer. He says that in the UK, $2 out of every $3 the company makes goes to the government. Worldwide, BP paid $5bn in taxes in the third quarter at an average tax rate of 37 per cent, he adds.UK prime minister Rishi Sunak is considering increasing the levy on oil and gas companies from 25% to 30% and extending it to 2028 © Victoria Jones/PAThe rewards are not only going to shareholders, but being invested in the energy transition, he notes. BP plans to spend £18bn in the UK in the next decade, primarily in renewables and technologies such as carbon capture and storage. “I get that governments have a very difficult challenge right now,” he says, “but really we are just focused on trying to invest and pay taxes.”Still, as the social costs of the crisis grow, some are calling for more radical solutions. Dan Neidle, a former tax specialist at Clifford Chance who founded the non-profit Tax Policy Associates, argues that although taxing foreign profits is normally considered “bad manners”, a one-off exception could be made if taxing the domestic profits of UK-headquartered energy companies proves insufficient.It could be done, he says, “if we credibly say it’s a one-off and won’t be repeated”. The risk of companies relocating their headquarters to avoid taxation would be lower than people think, he argues, adding that double taxation treaties could be used to prevent any group paying tax twice on the same profits. “Shell is crying out to be taxed more,” he says.Additional reporting by David Sheppard More

Today’s top storiesThe Kremlin’s “energy terror” has left half a million Kyiv residents without powerFacing thinning ties between China and the west, President Xi Jinping targets greater co-operation with GermanyElon Musk has begun mass job cuts with plans to fire up to half of Twitter’s 7,500 strong workforce in a cost cutting overhaulFor up-to-the-minute news updates, visit our live blogGood evening,Despite high inflation and a historically tight labour market, US employment remains surprisingly resilient. Today’s US non-farm job payrolls reported 261,000 new jobs were added to the economy in October defying expectations for a significant slow down in hiring. This comes after the Federal Reserve decided on a fourth consecutive 0.75 percentage point rate rise on Wednesday leading to a sharp jump in short-term government bond yields.Still, the US unemployment rate increased by 0.2 per cent to 3.7 per cent, just above its pre-pandemic low. The rate of Americans employed or seeking employment failed to improve as it steadied at 62.2 per cent. In response, equities rallied in early trading adding pressure on the Fed to continue its aggressive action to curb inflation. Antoine Bouvet of ING said Friday’s job data was “the icing on the cake” after Fed chair Jay Powell’s “hawkish turn” and high inflation.While the Fed looked for a “soft landing” for the US economy on Thursday, the Bank of England forecast two bleak scenarios for the UK economy. BoE governor Andrew Bailey blamed soaring gas prices fuelled by the invasion of Ukraine. There was sunnier news for EU nations with the employment rate increasing by 0.3 percentage points to 74.8 per cent between the first and the second quarter of the year, according to Eurostat.Elsewhere post-pandemic flexible working is spreading despite the energy crisis driving workers back to the office. For those still WFH, virtual communication can still be shaky. Could “profit for purpose” be a solution? It’s certainly inspiring a new generation of founders with a faith. Meanwhile, poor health has been blamed for over-50s withdrawing from the labour market, but new data indicates that in fact the key driver is people choosing to retire early.For more on your country, our new global inflation tracker maps inflationary pressures around the world.Need to know: the economyRecession looms for the UK as economic activity in the construction sector shrunk at the fastest pace in almost two years in October. UK private wealth portfolios are down by nearly a third.The Bank of England increased interest rates by 0.75 percentage points to 3 per cent on Thursday, matching levels last seen at the tail-end of the 2008 financial crisis. Rates have increased sharply as central bankers look to raise the cost of borrowing to rein in inflation.CPI inflation was 10.1 per cent in September, with projections it will rise to 11 per cent in the final quarter of the year. Figures are lower than expected, with the central bank suggesting it would have risen higher without the UK government’s energy price guarantee.The International Energy Agency sounded the alarm over gas supplies next year, warning European leaders against becoming complacent amid a fall in commodity prices. IEA head Fatih Birol said European efforts to fill storage facilities could be undermined next year by growing demand for liquefied natural gas in a rebounding China.Global latestThe battle to save Japan’s falling yen continues, attempting to defy global markets. But the costs and risks are rising on Tokyo’s trading floors. Our Big Read delves into central bank governor Haruhiko Kuroda’s gamble on a royal flush of macroeconomic outcomes as the solution.A new deal between Tigray and government forces was announced on Wednesday, a huge breakthrough in the two-year Ethiopian civil war. It followed eight days of peace talks between Tigray People’s Liberation Front and the government of Ethiopian prime minister Abiy Ahmed.Ahead of COP27, the UN warned the world was “far off track” of the $340bn developing countries need each year by 2030 to adapt to climate change. It urged rich countries to create a “credible road map” to deliver $40bn in support.The extent of the impact on business from China’s zero-Covid policy was laid bare with Lenovo posting its first sales decline in more than two years. But it has continued to operate its Chinese plants, unlike Foxconn whose staff fled its largest iPhone factory.The grim reality of life under lockdown in China was revealed by FT Shanghai correspondent Thomas Hale, who produced a compelling report about his forced confinement on a secret island quarantine facility. Need to know: businessGlencore were ordered to pay £276.4mn for “endemic” bribery and corruption across their mining and commodities network to secure access to oil in African countries.Amid Big Tech’s economic slump, Amazon said it would pause new hires in its corporate workforce. Meanwhile, Stripe and Lyft added to the staff cull among US tech companies. Beyond Silicon Valley, Deloitte axed half of its UK executive team in a move that cuts female representation.At the height of the UK’s gilt market crisis last month, British supermarket operator J Sainsbury created a £500mn loan facility for its pension scheme to prevent assets being sold at the wrong time.Carmakers BMW and Stellantis posted surging revenues on Thursday despite supply chain issues hampering production. The reverse applied to UK rival Aston Martin, where unfinished vehicles more than doubled quarterly losses and hampered turnround efforts. Science round upA UK-led study has found that magic mushrooms have a “significant” effect on treating depression, paving the way for regulatory approval of psilocybin.Biotech company Verge Genomics has begun one of the first human trials of a drug discovered using artificial intelligence to analyse brain tissue. In the race to vaccinate, China’s CanSino Biologics shares rose as much as 70 per cent in Hong Kong after the use of an inhaled Covid-19 vaccine, claimed to improve protection, was approved in 13 cities across Jiangsu province. Moderna has cut its forecast for Covid-19 vaccine sales, but Pfizer raised its forecast by $2bn.World climate pledges were criticised for over reliance on tree planting and land restoration by the University of Melbourne’s Climate Futures initiative. Meanwhile, the House of Commons public accounts committee found the UK government’s emission data reporting was inconsistent.An FT special report on chemicals and manufacturing looks at the challenges of producing green hydrogen at scale and the pitfalls of green plastic.Get the latest worldwide picture with our vaccine trackerSome good newsResearchers at Imperial College London are trialling an exciting new tiny microscope to improve the detection of breast cancer. The endo-microscope technology could provide real-time images of cells at unprecedented speed.Dr Khushi Vyas of Imperial College told Disrupted Times: “Precision imaging is shaping the future of advanced cancer care. By allowing for fast and precise diagnosis at a cellular-level during cancer surgery, our technology could potentially enhance clinical decision-making leading to more effective cancer surgeries, curbing re-operation rates and improving patient outcomes.”The endo-microscope examines breast tissue in the lab © Imperial College London More

The health-care and social assistance sector enjoyed strong gains, adding 71,100 jobs last month.
Manufacturing posted a strong month after adding 32,000 jobs, boosted by increases in the durable goods industry.

Jobs growth came in better than expected in October thanks in part to strong gains in the manufacturing, health-care, and professional and business services sectors.
Manufacturing jobs increased by 32,000 last month, boosted by gains in the durable goods industry, according to the Labor Department. That advance brought the sector’s average monthly job gain for the year to 37,000, compared with 30,000 per month in 2021.

Some market participants found the increase notable given the sharp slowdown in goods spending in the economy this year, as consumers shift more of their spending to services.
“The manufacturing gain of 32,000 suggest the economy is far from slowing in a meaningful way,” TradeStation Group’s David Russell wrote in a Friday note.
The health-care and social assistance sector also enjoyed strong gains, adding 71,100 jobs last month. By itself, the health-care sector gained 53,000 jobs in October, boosted by growth in ambulatory health-care services, as well as nursing and residential-care facilities.
According to the Labor Department, employment in health care has risen by an average 47,000 per month so far in 2022, outpacing the 9,000 jobs gains posted per month last year.
“People delayed a lot of procedures because of Covid for the last couple of years, so hip replacements and things that were somewhat optional,” said Horizon Investments’ CIO Scott Ladner. “We’re starting to see a surge of those procedures come back.”

Leisure and hospitality employment, meanwhile, continued its upward trend, adding 35,000 jobs in October. Jobs growth in the sector was mainly driven by an increase in accommodation jobs, which added 20,000 last month. Positions in restaurants and drinking establishments remained little changed, up 6,000.
The sector is still down by 1.1 million jobs, or 6.5%, from its pre-pandemic level, according to the Labor Department.
Professional and business services also was a standout sector, adding 39,000 jobs in October.
Several sectors lagged those areas in the October jobs report, however. Financial activities gained just 3,000, as employment in the sector has “changed little” over the past six months, the Labor Department said. Construction added just 1,000 jobs in October.
The retail trade sector was also little changed heading into the holiday season, adding just 7,200 jobs.

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