Economy

WASHINGTON (Reuters) – There’s little relief in sight for a host of developing nations from Egypt to Malawi and from Pakistan to Ecuador, all of whom are facing a painful economic squeeze as the costs of servicing debt rise further. Officials from the International Monetary Fund (IMF) and other bodies expect the debt crunch to heap more pressure on these so-called ‘frontier markets’, which are already struggling with the impacts of Russia’s war in Ukraine and the Federal Reserve’s tightening cycle to cool U.S. inflation.Many of these countries are also still wrestling with the effects of the COVID-19 pandemic.Locked out of worldwide debt markets and with China redrafting its role as the lender of choice to many poorer nations, countries are increasingly relying on the help of the IMF to plug financing gaps. “Their fiscal space to deal with all of this is very little,” Gita Gopinath, the IMF’s first deputy managing director, told a seminar on the sidelines of the annual IMF-World Bank Meeting. “We will grapple (with this) for several months to come.” The Washington-based lender has agreed new programmes or augmented existing ones for 18 countries to the tune of $90 billion since Russia invaded Ukraine in February, its managing director Kristalina Georgieva said. Including support since the start of COVID-19, this total rises to $260 billion for 93 countries while another 28 have expressed interest in receiving support.The fund needs to navigate shoring up fragile economies while ensuring often painful economic reforms don’t fall by the wayside. “The IMF is trying to strike balance between conditionality and agility,” said Patrick Curran, senior economist at Tellimer, who is in Washington for the international lender’s meetings. “Countries like Pakistan, Egypt, Lebanon and Sri Lanka can’t simply have the funding without any sort of commitments from the government.”Sri Lanka recently struck a staff level agreement to unlock almost $3 billion, while Zambia got the nod on a $1.3 billion loan programme, a key step to start receiving disbursements. Both countries have defaulted on overseas debt but are also set to rework debt with bilateral lenders, with all eyes set on China as the IMF and G7 economies insist Beijing implement debt relief for poorer nations.Ghana, Egypt, Tunisia and Malawi are all in talks on some type of IMF financing.MORE PAIN TO COME?Rising borrowing costs and risk aversion amid growth woes and soaring inflation have seen the likes of Kenya, Egypt and Ecuador locked out of capital markets. Over a quarter of emerging market sovereign bonds trade at spreads over U.S. Treasuries in excess of 1,000 basis points – a threshold for distinguishing distressed debt, Deutsche Bank (ETR:DBKGn) calculated in a recent report. Such yields make it impossible for countries to tap international capital markets.With major central banks such as the Fed and the European Central Bank still in the early stage of rate hike cycles, pressure on emerging currencies and bond yields would continue at least through mid-next year, said Deutsche Bank’s Michael Spencer, adding the hit from FX depreciations, especially against the dollar, was the “main source of risk to government finances” in developing nations. Investors have yanked $70 billion from emerging market bond funds so far in 2022, according to data from JPMorgan (NYSE:JPM), which pegs year-end outflows at $80 billion.In Washington, discussions were rife as to when creditors might change tack and buy emerging markets bonds again. March could be a turning point, assuming the Fed stops hiking rates after a peak in inflation. For others, it is not that straightforward due to global uncertainty. “It is a world with higher rates, higher inflation, and slower economy,” added the head of sovereign debt of a large New York-based investment fund. More defaults are also in the making, said Elena Duggar, managing director of credit strategy & research at ratings agency Moody’s (NYSE:MCO).”Frontier markets, which are highly reliant on external financing, which have a larger share of foreign currency debt have been most vulnerable,” said Duggar, also in Washington. Countries’ debt burdens have risen. The average public debt to GDP ratio – a key measure of fiscal health – rose to 60% in 2022 from 36% in 2012, the IMF’s most recent Global Financial Stability Report found.Turning to the IMF for financing has been the traditional playbook for smaller, strained countries in times of crisis. A set of new IMF tools should also help funnel more funds to such countries in the short-term. A food shock financing window aims to help countries facing shortages and urgent balance of payment needs, while the Resilience and Sustainability Trust adds financing to help countries deal with climate change, pandemics and other longer-term issuesHowever, IMF funding alone is unlikely to be enough and the strings attached can be hindrance rather than help, said JPMorgan’s Nicolaie Alexandru-Chidesciuc.”But IMF does act as an anchor and allows access to a broader set of funding, even if not from the market,” said Alexandru-Chidesciuc. More

(Reuters) -Morgan Stanley on Friday reported a 30% slump in third-quarter profit, missing analysts’ estimate as a slowdown in global dealmaking hurt the investment bank’s core underwriting business, sending its shares down 3.3% before the bell. The outlook for deals has steadily worsened this year as the U.S. Federal Reserve raised interest rates to tame inflation, clouding the economic growth outlook, while the highs of a record last year drew tough comparisons.”Firm performance was resilient and balanced in an uncertain and difficult environment,” Chairman and Chief Executive James Gorman said, adding its wealth management unit demonstrated scale and stability.Global M&A lost ground for the third straight quarter with volumes in the United States plummeting nearly 63% as the rising cost of debt forced companies to delay big buyouts. Investment banking revenue more than halved to $1.3 billion, with declines across the bank’s advisory, equity and fixed income segments. Companies have also been delaying plans to go public amid depressed investor sentiment due to turmoil in financial markets triggered by the Ukraine war and rapidly rising borrowing costs.For a dealmaking rebound, Chief Financial Officer Sharon Yeshaya told Reuters both cost of capital and valuations need to stabilize.When asked about potential headcount cuts amid the current challenging environment, she said the bank was constantly evaluating its resourcing. Morgan Stanley (NYSE:MS)’s net revenue in the quarter fell 12% to $13 billion. The bank reported a profit of $2.49 billion, or $1.47 per share, for the quarter ended Sept. 30, compared with $3.58 billion, or $1.98 per share, a year earlier.Analysts on average had expected a profit of $1.49 per share and revenues of $13.3 billion, according to Refinitiv IBES data. It was not immediately clear if the reported numbers were comparable with the estimates. Morgan Stanley joins rivals JPMorgan Chase (NYSE:JPM) and Co and Well Fargo & Co which reported similar hits to their quarterly profit on Friday amid uncertain economic conditions that have led banks to build rainy day funds. The investment bank increased its provision for credit losses to $35 million from $24 million a year earlier against the backdrop of rising fears of a recession in the United States.Morgan Stanley’s wealth management business, which tends to generate steady income, was a surprise bright spot, posting a 3% rise in revenue, helped by a 49% jump in net interest income amid rising Federal fund rates. More

In one of the bleakest meetings of the IMF and World Bank since the financial crisis, Sri Mulyani Indrawati, Indonesia’s finance minister and chair of the Group of 20 leading economies, summed up the mood. “The global economic situation has become more and more challenging,” she said in her closing remarks to the gathering of finance ministers and central bank governors in Washington, DC on Thursday. “The world is in a dangerous situation.”Indrawati and others were full of talk of geopolitical disagreements, negative economic spillovers from one country to another, and the unintended side-effects flowing from the IMF’s message that countries should “stay the course” on fighting inflation by raising borrowing costs fast. Kristalina Georgieva, managing director of the IMF, said the world was witnessing a transition from predictability, where interest rates and inflation were low, to instability.“Shock upon shock upon shock,” she said, characterising the situation facing participants. “We have to really work on changing our mindset to be much more precautionary and be prepared for much more uncertainty.”She pleaded with countries “to identify [the] problems and then muster the will to solve them”. There was action on the former, at least. Participants shared the IMF’s view that the global economy was in a tough spot – and that the worst was yet to come. Indeed, many thought the fund’s latest projections of growth of 2.7 per cent next year, downgraded substantially from estimates made during the spring, were still too optimistic. The world economy was heading toward a recession, which would be potentially amplified by financial stability of the sort witnessed during the week in the UK. Inflation would remain uncomfortably high into 2023 too, forcing central banks to keep tightening. “We’re seeing developments and challenges that are either entirely new or are unlike anything that’s been around for at least decades,” said Nathan Sheets, chief economist at US bank Citi. “It is creating stresses and difficulties for policymakers as they devise approaches to be able to achieve their objectives, including inflation, macro stability and financial stability.”A problem globally, almost everyone agreed, was the rapid rise in US interest rates. While the Federal Reserve had aimed to tame soaring domestic prices, the impact on the dollar’s strength was causing difficulties beyond US borders, driving up inflation elsewhere and raising the prospect of market volatility. “What is necessary is a comprehensive understanding of the [cross-border] spillovers of policy,” said Mark Carney, former Bank of England governor. However, the Fed is poised to extend its string of supersized interest rate increases for yet another meeting, after new data published on Thursday showed a worrying acceleration in underlying inflation. It next meets in early November. Economists now consider a fourth consecutive 0.75 percentage point rate rise — which would shift the federal funds rate to a new target range of 3.75 per cent to 4 per cent — a foregone conclusion. The Fed is also expected to keep interest rates at a level that actively restrains the economy for longer than initially expected.Bringing inflation back down to central banks’ longstanding 2 per cent targets will take time, warned Marcelo Carvalho, BNP Paribas global head of economics, and prove hard to do.The general view was that central banks, including the Fed, should continue raising interest rates. However, economists acknowledged that finding the right balance between containing price pressures and destroying demand was fraught with difficulty. Policymakers must proceed with “a lot of hope and heart, because you really don’t know what is going to work”, Sheets said. Some economists think that the action taken by policymakers so far has even been counter-productive. The measures used in combating high inflation, a slowing economy, an energy and food crisis and the lingering effects of Covid-19 have amplified volatility and economic difficulties, according to Mohamed El-Erian, chief economic adviser to Allianz.

Nowhere did this view apply more than in the UK. The shambles that has followed the new government’s “mini” Budget has been the talk of Washington, cited universally as a perfect case study in what can happen if governments are not careful with the co-ordination of fiscal and monetary policy. On Thursday, Kwasi Kwarteng, the UK chancellor, flew home early from the meetings to hold emergency talks with prime minister Liz Truss. The IMF had urged the UK to make modifications quickly. “Don’t prolong the pain,” Georgieva said, while her colleagues at the fund talked in various motoring metaphors about the situation in Britain. The government was flooring the accelerator while the BoE applied the brakes, IMF officials said. Alternatively, they said ministers were steering to the left while the central bank tugged the steering wheel to the right. In both formulations, they implied the UK economic vehicle was heading for a crash. Few felt much sympathy. As ministers prepared to go home after the first in-person meetings since the pandemic started, many connections had been re-established and valuable discussions had been held. But with domestic problems plaguing most of the membership, the usual IMF calls for co-operation went unheeded. Concrete results on global economic management were so thin on the ground that, when asked to name them, Indrawati struggled. One came to mind, however: economic leaders had been “recognising the challenging tasks [ahead] for both fiscal and monetary policy”, she said. More

The rapid rise in US consumer prices showed no signs of abating in September, prompting a see-saw trading session on Wall Street, as investors weighed whether the Federal Reserve would have to become even more aggressive to slow rampant inflation.The consumer price index’s core measure of inflation, which strips out volatile energy and food costs, rose 6.6 per cent on an annual basis last month, faster than the 6.3 per cent rate in August — and its fastest pace in four decades — suggesting underlying inflationary pressures are still accelerating.The increase in the overall CPI last month, including energy and food, rose 8.2 per cent over a year earlier, little changed from the 8.3 per cent annual rise recorded in August.Investors and economists had been looking for signs that the Fed might start to slow the pace of its interest rate rises. But the CPI data released yesterday suggest such a move is not yet on the immediate horizon.Economists say it is also likely to push the US central bank to continue its supersized rate rises beyond its upcoming policy meeting in early November and at least until there is more clear-cut evidence that price pressures are easing.Thanks for reading FirstFT Americas. Here is the rest of today’s news — AbbyFive more stories in the news1. Kwasi Kwarteng leaves Washington early to address UK economic crisis The UK chancellor left IMF meetings last night for London as Prime Minister Liz Truss came under increasing pressure to rip up the government’s “mini” budget. Expectations are mounting in London and in financial markets that Kwarteng will imminently announce a U-turn on the £43bn package of unfunded tax cuts.Delays at US custody bank exacerbated UK pension sell-off Custody lender Northern Trust was overwhelmed by margin calls during the gilt market turmoil, hampering pension funds’ ability to raise cash, according to people involved in the trades.2. January 6 committee votes to subpoena Donald Trump The congressional committee investigating last year’s attack on the US Capitol has voted unanimously to issue a subpoena to former president Donald Trump. The vote is only the seventh time in history Congress has issued a subpoena to a sitting or former president, according to legal historians.3. US dismisses Saudi defence of Opec oil output cuts as ‘spin’ The White House on Thursday dismissed Saudi Arabia’s claims that recent Opec+ production cuts were unrelated to the kingdom’s stance on Russia’s invasion of Ukraine and had been the result of a unanimous decision by the cartel’s members. “The Saudi foreign ministry can try to spin or deflect, but the facts are simple,” said John Kirby, a top spokesperson for the US National Security Council.4. World’s top chip equipment suppliers halt business with China Leading chip equipment suppliers have suspended sales to semiconductor manufacturers in China, as new US export controls disrupt the Chinese tech industry. Lam Research, Applied Materials and KLA Corporation have all taken immediate measures to comply with rules banning the export to China of US semiconductor equipment that cannot be provided by any foreign competitor.5. Twitter says Elon Musk being investigated by US authorities Musk is under investigation by US authorities for “his conduct in connection with the acquisition” of the social media company, Twitter has said. Twitter’s lawyers said they had demanded copies of “substantive correspondence” between Musk and federal authorities over the alleged investigation “months ago”, but his team failed to produce them.The days aheadBank earnings JPMorgan, Morgan Stanley, Citigroup and Wells Fargo will report earnings before the opening bell. The biggest US banks are expected to have collectively set aside about $4.5bn in the third quarter to cover potential bad loans in a sign that they are worried about the US economy. Retail sales US retail sales — including fuel, autos and food spending — are expected to have continued a rebound in September despite sharply rising inflation, though at a slower rate than the previous month. Economists polled by Refinitiv have forecast a 0.2 per cent increase last month compared with August. When stripping out autos, however, retail sales are expected to have declined by 0.1 per cent.Consumer sentiment Consumer sentiment, a leading economic indicator, is expected to have improved slightly in the first half of October as the Federal Reserve has continued aggressively raising interest rates to combat elevated, lingering inflation. Analysts expect a preliminary reading of the University of Michigan consumer sentiment index to rise to 59 for October, up from 58.6 in September. Fedspeak Kansas City Fed president Esther George will discuss the forward view on inflation and the Fed’s rate hikes at a virtual S&P Global leveraged finance chat series. Fed governor Lisa Cook will participate in a separate fireside chat before the National Bankers’ Association, discussing the US economy, minority depository institutions and wealth creation. Christopher Waller, another Fed governor, will speak about central bank digital currency at a Harvard Law School symposium on digital currencies and national security trade-offs.What else we’re readingHousing shortage risks breaking the American dream Rising interest rates are making housing in the US even less affordable. For young buyers a broken market that is stopping them getting on to the housing ladder is a leading indicator for a broken American dream of living a better life than the previous generation, writes the FT editorial board.The metaverse revolution may yet devour Meta Mark Zuckerberg is so in love with the promise of the metaverse that he rebranded his company and bet his business on the idea. But it is still not clear that ordinary people know what it means, and there are good reasons for doubting that Meta will ever “own” the metaverse, writes John Thornhill.Qatar counts down to World Cup In just over a month, Qatar will host the most prestigious event in international football. But the Gulf nation is not known for its tourist attractions, and accommodation and leisure amenities are seen as a particular weakness. Can the wealthy gas nation deliver?Tragic fallout from the politicisation of science in the US Anti-vaccine attitudes are hardly the sole preserve of the American right, but the breadth and depth of politicisation and polarisation in the US far outstrip what we see anywhere else in the developed world, writes John Burn-Murdoch.China’s 20th Communist party congress The party’s 20th congress, which opens in Beijing on Sunday, will unveil a new leadership set to again be headed by Xi Jinping. In doing so, the congress will bring down the curtain on a two-decade period defined by predictable and orderly transitions from one party leader to another. What can we expect from the party congress?Life & ArtsHarvard law professor and conservative scholar Adrian Vermeule’s far-reaching ideas illuminate a growing rift on the right about how to wield power. More

Companies are flocking to the Nevada city, but the rising cost of housing, gas and groceries is making daily life a struggle for many who work there.As an employee at a UPS warehouse outside Reno, Nev., Christina Pixton spends her nights moving thousands of heavy packages on their way to far-flung locales like San Francisco, Phoenix and Chicago.But the warehouse is not air-conditioned, and one night last month, there was no relief outside, either, with smoke from a California wildfire more than 100 miles away causing hazardous air quality. For Ms. Pixton, who has asthma, the irritation to her lungs was the latest challenge she had to learn to navigate in Reno.These are boom times in and around Reno. Warehousing and casinos have long been the city’s main businesses, and the surge in e-commerce since the start of the pandemic has companies snapping up facilities as fast as they can be built.Yet Reno and the surrounding area have also seen the cost of things like housing, gas and groceries rise, making daily existence in this growing metropolis increasingly difficult for many of the people who live here, like Ms. Pixton.Christina Pixton, a UPS worker, and her husband make six figures combined, but struggle with the daily costs of living. While gas prices have fallen to an average of $3.91 a gallon across the United States and $5.34 in Nevada, the average in Reno is $5.75, according to data from AAA. It costs Ms. Pixton $70 to $80 a week to fill up her Toyota Highlander, she said.In the past five years, home prices in the area have risen 70 percent, according to Zillow. That’s good news for homeowners like Ms. Pixton. The typical home in Reno is worth $568,103, up 10.2 percent over the past year. But average rent for a one-bedroom apartment in Reno has increased 10 percent compared with last year and 40 percent from three years ago, according to data from Zumper, which tracks housing data.And while homes and planned communities are being developed where farmland once was, affordable housing has become a much-discussed issue among residents and policymakers. Reno’s City Council approved additional affordable housing projects in March. In neighboring Sparks, Mayor Ed Lawson has pushed for denser development — building up and not just out — and more development on federal lands.Housing developments are popping up all over Reno and the surrounding area.Other changes are affecting the way of life in Reno. By the time Ms. Pixton, 37, wants to go shopping after her shift ends around 11 p.m., stores that were once open are now closed after scaling back their hours during the pandemic. When she does make it to Walmart or Target, she often finds scant offerings on the shelves because of continuing supply chain issues and the fact that the Walmart, one of the few locations for miles, draws people from neighboring cities.In a city whose economy is partly driven by getting goods to people across the country expeditiously, Ms. Pixton is left scrambling to find Uncrustables frozen sandwiches for her two sons and the right brand of dog food for the family’s Labrador retriever.“This isn’t a sustainable pattern,” said Ms. Pixton, whose husband works as a foreman at an HVAC company. “We make six figures, and we’re still stuck in this struggling pattern.”In May 2021, Ms. Pixton received a raise to $19 an hour, up from $16. It was a market-rate adjustment that UPS put in place across the country to stay competitive when hiring and retaining workers.But in January, it went back down to $16. As a union steward, Ms. Pixton found herself telling other workers the bad news. Fifteen people quit that week, she said.“It’s been quite hellish,” Ms. Pixton said. “It was not a completely livable salary, but it was something where we could struggle and not have to get a second job.”A spokesman for UPS said that, starting on Oct. 2, another market-rate adjustment brought hourly pay for part-time workers back to $19 an hour.The area offers plenty of affordable land for warehouses, along with access to an interstate and an international airport.In recent years, e-commerce companies have flooded the market. The Reno-Sparks area, with a population of about half a million, ticks a lot of boxes for companies seeking to expand back-end operations. There’s no state income tax, cheap land is available, there’s access to a main interstate and an international airport, and it’s close to California, whose huge economy and millions of people are significant draws for consumer companies looking to easily connect with their customers.In 2014, when Elon Musk came to Nevada to celebrate the opening of Tesla’s giant Gigafactory warehouse, meant to build batteries for his company’s electric vehicles, he encouraged other executives to follow.“What the people of Nevada have created is a state where you can be very agile, where you can do things quickly and get things done,” Mr. Musk said at the time, standing among the state’s legislators.And follow they did. Chewy, Amazon, Thrive Market and Apple have opened or expanded warehouses in the area over the past decade. Third-party logistics companies like OnTrac and Stord have also propped up new facilities in town.Reno’s highways and back roads are dotted with “Now Hiring” billboards.Reno has just a 0.5 percent vacancy rate for warehouses, according to data from the real estate service firm CBRE. About 8.8 million square feet is under construction in the Reno-Sparks area, according to CBRE, and about 80 percent of it is already leased.“We were a good market on a great trajectory averaging four million square feet, probably going to five,” said Eric Bennett, senior vice president of CBRE, which helps lease space to companies. “The pandemic obviously increased the absorption.”Some of these companies have set up their own distribution channels to get their products where they need to go. Others use UPS. All of them need hundreds of people to complete the strenuous work of moving their goods through the facilities and getting them to consumers.“Now Hiring” billboards dot Reno’s interstate and back roads. A chocolate factory was willing to pay as much as $25 an hour. A sign outside a Petco warehouse says a starting salary could be as high as $22 an hour. Hidden Valley Ranch’s plant says its starting hourly wage is $21, with other benefits including a 401(k), paid time off, and health care with dental and vision. Many retailers like Walmart are also trying to attract seasonal workers.Those opportunities are siphoning off potential UPS workers and creating more manual labor for those who remain, said Ross Kinson, a business agent for the local Teamsters.Ross Kinson, a business agent for the local Teamsters, said the increased competition for workers had left some UPS shifts short staffed.Workers like Ms. Pixton.Like many in Reno, she is a California transplant. She moved from Chico with her now-husband, John, in 2008, when Reno was reeling from the housing crisis. Casinos filed for bankruptcy. New construction ground to a halt. She worked in the medical and fast food industries before turning to warehouses.She started at UPS in 2018, attracted by the health care benefits and pension package, and initially made about $13 an hour. She works part time, usually 28 to 32 hours per week. Even though other companies have offered higher wages, she has stayed at UPS because the health benefits cover her children and her pension will vest in about a year.Ms. Pixton has stayed with UPS because of the health care benefits that cover her sons.When the pandemic hit, she felt the impact of millions of stuck-at-home shoppers buying all kinds of merchandise. Before Covid, about 70,000 packages would flow through her hub on a normal summer evening. During the pandemic summer of 2020, that number rose as high as 240,000, though it’s now around 115,000 to 140,000 packages a night.“We’re handling the most amount of packages of any shift because we are getting all of the inbound local businesses. We’re getting the transfers from Sacramento and Oakland and Salt Lake City,” she said. “We’ll get all inbound stuff from other states and have our outbound stuff as well.”Six people are considered a skeleton crew in her department, but Ms. Pixton said that often only three or four were working.As the holiday season approaches, UPS says it plans to hire about 100,000 workers, and is speeding up the process by eliminating interviews and allowing candidates to apply online. At the hub where Ms. Pixton works, UPS is looking to add 400 workers.UPS plans to add seasonal workers for the holidays and has been advertising on online job boards.The current contract that UPS has with the Teamsters went into place in 2018 and expires in 2023. Mr. Kinson said the union would push to formalize language regarding the market-rate wage adjustment for part-time workers for the next contract.“We’d negotiate on good faith,” a UPS spokesman, Glenn Zaccara, said. “The wages they are receiving is industry-leading.”Reno is known for its casinos, but warehouses have long been an economic engine as well.But in a city like Reno that has seen rapid growth, workers argue that the terms of the contract haven’t kept up with reality.“In this area it’s got to be $19 an hour,” Mr. Kinson said. “It has to be or it won’t work.”Loni Goddard works at Kerala Ayurveda, a wellness company, and rents an apartment in Reno. In 2020, her one-bedroom apartment cost $950 with internet and cable. When she re-signed her lease in April, the rent rose to $1,490 — not including internet and cable.“During the pandemic, everyone was getting temporary raises in Reno,” Ms. Goddard said. “At the beginning of 2022, most or all of the raises disappeared and so did the people.”At her UPS job, Ms. Pixton is bracing for the holiday rush. But, she noted, every day has essentially become peak season, considering how much work there is and how few people there are to do it. And while she wishes that more people would join UPS to alleviate some of her workload, she understands why some look elsewhere for employment.“If you’re making less than what you’re paying in gas,” she said, “what’s the point of going?” More

Yangtze Memory Technologies Corp, the Chinese memory chip producer, has been stockpiling foreign equipment for months in anticipation that the US is preparing to kneecap one of China’s national champions.Four YMTC employees said the company had been preparing for Washington to impose export controls, as US lawmakers urged the Biden administration to punish the state-backed company for allegedly helping the Chinese military and violating trade restrictions by supplying chips to Huawei, the Chinese telecoms company.“We’ve been doing everything possible beforehand to support existing production lines, such as stockpiling all kinds of equipment,” said one senior YMTC engineer.Those concerns materialised on Friday when the US unveiled tough export controls targeting the Chinese chip industry, including YMTC, suggesting the Wuhan-based company could confront more trouble. YMTC has in recent years emerged as a national champion in China’s drive to build a domestic chip industry. President Xi Jinping visited its facilities in 2018 to show support. It boasts Rmb220bn ($30bn) in funding with financial help from Hubei province and a national fund.The new US restrictions hit YMTC by banning the supply of certain American technology needed to produce advanced Nand memory chips.Industry experts said it was unclear how YMTC could sustain its rapid advances. Highlighting the impact of the restrictions, KLA Corp, Lam Research and Applied Materials — three top US semiconductor toolmakers — have halted sales and services to YMTC, according to three YMTC employees.

Chinese president Xi Jinping, left, visits YMTC subsidiary Wuhan Xinxin Semiconductor Manufacturing in 2018, with former Tsinghua Unigroup chair Zhao Weiguo, right, who was detained in 2022 © Xinhua

In another move last Friday that got less attention but could prove even more painful for YMTC, Washington put the chipmaker on its “unverified list”. The registry includes entities for which the US has not been able to conduct end-user checks to verify that American technology is being used for legitimate purposes and not, for example, being diverted for military use.At the same time, the US government implemented a new policy under which addition to the unverified list starts the clock on a 60-day deadline for the end-user checks to be completed. If they are not, the company is highly likely to be added to the “entity list”, which would effectively prevent US companies from providing YMTC with technology for its less advanced chips.“Being added to the unverified list used to be a nuisance. Now it should be terrifying,” said Gregory Allen, a technology expert at Washington-based think-tank CSIS.Kit Conklin, a former US intelligence official and China expert at the Atlantic Council, estimated the chances of YMTC being added to the “entity list” at 99 per cent.“Over the past few years, the Chinese commerce ministry has stonewalled the US commerce department by not allowing end-user checks to take place. It would be a significant policy change by Beijing if they decided to play ball,” said Conklin.Aside from the possibility of being added to the entity list, YMTC faces other serious difficulties.“YMTC can still operate and deliver chips as they have stocked up materials and components,” said Brady Wang, an analyst at research group Counterpoint. “It would be difficult for them to expand production as the new equipment is not available.”One employee said YMTC had enough stock of materials such as wafers and components for equipment repairs to last a year. But that would only be only if “there aren’t any huge issues that can only be fixed by tech staff from foreign companies”. YMTC did not respond to a request for comment. As YMTC has won global market share, it has come under scrutiny in Washington over concerns that it will use Chinese government subsidies to sell chips below market price, putting pressure on non-Chinese rivals such as Micron Technology in the US.YMTC has been careful not to divulge many details about its technological advancements.But one innovation it has pioneered is the use of “Xtacking” technology, which simplifies the manufacturing process for advanced memory chips, giving YMTC a path into the Nand chip market dominated by Samsung and Micron.YMTC’s market share of global Nand production grew from 1 per cent in 2020 to 5 per cent in 2021, according to France-based research company Yole Development. While its market segment is relatively small, YMTC has been courting high-profile clients. Apple told the Financial Times last month that it was considering using YMTC chips in some smartphones.

Apple did not respond to a request for comment about whether it was revising its plans in the wake of the new export controls.Industry insiders said that along with the restrictions, YMTC’s heavy reliance on government support complicated its path to profitability. “YMTC has been making losses and relies heavily on government funding for research and production expansion,” said one Shanghai-based analyst. “The government wants YMTC to seize more market share and make technology breakthroughs, albeit struggling to profit.”The chipmaker also has limited options to respond to Washington. “The US government is attempting to put YMTC’s most advanced Nand production facilities out of business,” said Allen of CSIS in a report this week.“It will be especially difficult for Chinese companies to evade these equipment export controls.” More

Good morning. An absolutely epic swing in stocks yesterday — from a miserable opening after the hot consumer price index report to an exuberant close — left Unhedged as puzzled as everyone else. Short covering? Derivative hedges unwinding? Technical voodoo? We don’t know, but a big equity rally on a day when the futures market priced in another 25 basis points of Fed rate increases was not on our bingo card. If you have a theory, we’re all ears: [email protected] and [email protected]. Inflation is still hotSure, they’re hot, but didn’t we know that already? That’s what Unhedged wondered as we read the latest CPI numbers, which showed falling headline numbers but a searing 0.6 per cent core inflation (ie, ex-food and energy) figure for September. It was a chunky miss for inflation analysts, who collectively had estimated 0.4 per cent core inflation. Some highlights:Inflation remains a services story. Core services prices rose 0.8 per cent in the last month, above the 0.6 per cent August reading.Services inflation is still mainly about shelter, the reliably hot (0.7 per cent in both August and September) category that makes up more than half of core services.Goods disinflation is finally showing up. Falling shipping costs, commodity prices and swelling inventories offered hints this would happen, but any impact on CPI has been subtle. No longer:Medical care (12 per cent of core services) rose unexpectedly, driven by the surging cost of eye appointments. Chances are this will fade. As we’ve written, next month’s inflation report will update the annual insurance data used to price medical services, flipping it to an inflation drag. Transportation services (10 per cent of core services) shot up 1.9 per cent, well above August’s 0.5 per cent. It is hard to know how much this means. The category has been far more volatile, in both directions, since 2020:Little in the report suggests inflation is about to spiral higher. To the contrary, goods deflation tacked on another drag. What’s happening in services is more debatable, but our view is that as services components such as medical care and transportation moderate, inflation will go from a story about services to one about shelter.That raises the question, hotly debated on Thursday, of where shelter inflation is heading. Remember that CPI shelter is calculated from rental data. Doves argue that private rent indices have already turned over, but that CPI lags the rental market by nine months or so. That lag stems from CPI incorporating the full universe of new and existing leases, while private indices look only at new leases. If history repeats, CPI shelter (red line below) should soon start following market rents (grey and blue lines) down. From Nomura:

But there’s another way to look at it, as Adam Ozimek of the Economic Innovation Group pointed out to us. The chart above is of rent growth, but rent levels matter too. Ozimek shared this chart on Twitter showing the widening gulf between private market rents and CPI rents since the coronavirus pandemic:

In the long run, Ozimek has found, CPI rent levels catch up with private market rent levels, but shocks to market rents — like, say, a pandemic — are only reflected in CPI after a delay. He takes that to mean there is momentum now built into shelter CPI, even with rent growth slowing. Methodological issues make estimating how much momentum tricky.Ozimek discourages panic, and Unhedged is not panicked. But we do fear inflation’s descent will be a long slog, and a story chiefly about shelter prices won’t change that. Thursday, in other words, gave the Fed few new reasons to slow down. (Ethan Wu)Gilt market: problem solved?The “mini” Budget mini-crisis may end with a whimper, not a bang, judging by Thursday’s markets. The pound is now stronger than the day before the budget announcement: Thirty-year gilt yields are still much higher than they were before the announcement, but they fell Thursday:And index-linked gilts — a particularly important asset in the current crisis, as pension funds dominate the market for them — only rose a little:Bank of England governor Andrew Bailey can nod at these charts with satisfaction. His ultimatum to markets seems to have pushed pension-fund gilt sellers into the BoE’s bond-buying program and calmed the markets. The bank bought another £4.7bn in gilts yesterday, most of them linkers, and it has one more day of buying left (it says). But of course the relative calm on Thursday was not just the result of Bailey’s toughness. This helped, too: Liz Truss was on Thursday locked in discussions on a major U-turn on the government’s “mini” Budget, prompting a market rally amid expectations that a £43bn package of unfunded tax cuts is unravelling. Government insiders confirmed talks were taking place on whether to unwind parts of chancellor Kwasi Kwarteng’s fiscal statement, with speculation it could involve scrapping a planned £18bn corporation tax cut . . .[a] person close to the government discussions on the “mini” Budget said: “No decisions have been taken.”An LDI pension manager told Unhedged that the mood was “quieter” but that he expected the market to follow the politics. He noted another factor, too. Speculators have taken advantage of the crisis to short long gilts and may want to cover soon, giving the market support over the next few days. The biggest question is whether the pension funds as a group are now out of the woods: if they have sold enough liquid assets to meet margin calls, and have made a start towards resetting their portfolios for higher rates and rate volatility. I don’t know how to estimate how close the funds are, but if the liquidity crisis passes without permanently damaging balance sheets, the pensions could emerge in better shape than before, as Toby Nangle (the guy who saw this mess coming) has just written in Alphaville.The real test for the gilt market will be on Monday, when the BoE is out of the market; markets on Fridays tend to act like Monday will never come. Fingers crossed. One good readGideon Rachman talks to Alexander Gabuev about Vladimir Putin and nuclear weapons. More

For a central bank looking for signs that the worst inflation problem in decades is starting to slowly recede, Thursday’s report on US consumer price growth was about as bad as it gets.While the annual pace was little changed at 8.2 per cent, the index showed another alarming jump on a monthly basis, suggesting underlying inflationary pressures are still accelerating. Stripping out volatile items such as food and energy, the “core” CPI measure was up 6.6 per cent compared with the same time last year.The larger than expected increase leaves the Federal Reserve with little choice but to press ahead with a fourth consecutive 0.75 percentage point increase at its upcoming policy meeting in early November.Economists say it is also likely to push the US central bank to continue its supersized rate rises beyond that point and at least until there is more clear-cut evidence that price pressures are easing.“There is a persistence in inflation that if you are the Fed has got to be deeply worrying,” said Ajay Rajadhyaksha, global chair of research at Barclays. “Most people have felt like we are just about to turn, whether it be on jobs or on inflation, and it doesn’t happen and it doesn’t happen and it doesn’t happen.”Rajadhyaksha projects the Fed will extend its string of 0.75 percentage point rate rises to the end of the year and then slow to a half-point increase at the first meeting of 2023 in early February. That suggests the federal funds rate will peak between 5 per cent and 5.25 per cent, well above the 4.6 per cent level most officials had forecast as recently as September.The latest inflation figures come as a blow to the Biden administration, which has been dogged by Republican attacks over spiralling prices in the run-up to November’s midterm elections.They also come at a tenuous moment for the global economy and financial markets, with the IMF this week warning at its annual gatherings with the World Bank that the “darkest hour” lies ahead. Chief among their concerns is the fallout from one of the fastest global monetary tightening campaigns, which threatens to cause a US dollar funding shock and tip vulnerable emerging and developing economies further into distress.The near implosion of parts of the UK pension industry in the aftermath of the government’s announcement of debt-funded tax cuts — which forced the Bank of England to repeatedly intervene — has also raised concerns that instability could engulf advanced economies.In the face of these threats, some economists and investors had held out hope that the Fed would soften its plans to aggressively raise rates, as it grapples with not only global vulnerabilities but also mounting concern that its efforts to root out inflation will cause significant job losses.“Any hope of a pivot is pretty much wiped out,” said Aneta Markowska, chief financial economist at Jefferies, adding that she also expected the Fed to deliver two more 0.75 percentage point rate rises this year before implementing a half-point increase in February. “It turns out that fixing inflation is harder than they thought and that’s why they are more concerned about getting it wrong.”That was the message delivered in the minutes from the last policy meeting in September, when the central bank lifted its benchmark policy rate to a target range of 3 per cent to 3.25 per cent.Many officials stressed that the costs of doing too little to rein in inflation “likely outweighed” the cost of overdoing it, the record showed, a point emphasised by chair Jay Powell when he recently acknowledged that a painful US recession cannot be ruled out.Even the IMF has adopted that view, with the head of the multilateral lender on Thursday imploring central banks globally to take “decisive action” to contain price pressures.“The reason we are endorsing a strong focus on inflation is because inflation has been quite stubborn and the risks of inflation expectations de-anchoring has become more visible,” Kristalina Georgieva told reporters at a briefing. “We cannot possibly allow inflation to become a runaway train.”Fed officials appear united in their resolve to maintain an aggressive stance as long as necessary to cool the economy, and they have set a very high bar for the economic data required to change course. Rather than set policy solely based on forecasts of future inflation and the labour market, they have said they will wait for realised inflation to begin to slow before backing off.For some economists, that all but guarantees the Fed overdoes it, given that these metrics are lagging indicators and the effects of monetary policy take time to filter across the economy. But for others, that is a risk worth taking at this stage.“This is not only the credibility of the Fed, but it’s [Powell’s] legacy as the Fed chair,” said Diane Swonk, chief economist at KPMG. “It would be better to leave as someone who restored price stability and full employment than [leaving with] a more corrosive bout of inflation and elevated unemployment.” More