Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.At the end of September there was a big spike in the Secured Overnight Financing Rate. This may already be putting you to sleep but it’s potentially a big deal, so please stick around. SOFR was created to replace Libor (R.I.P.). It measures the cost of borrowing cash overnight, collateralised with US Treasuries, using actual transactions as opposed to Libor’s more manipulation-prone vibes. You can think of it as a proxy of how tight money is at any given time.Here you can see how SOFR generally traded around the central point of the Federal Reserve’s interest rate corridor, and fell when the Fed cut rates by 50 basis points in September. But on the last day of the month, it suddenly spiked. This is natural, to an extent. There’s often a bit of money tightness around the end of the quarters, and especially the end of the year, as banks are keen to look as lean as possible heading into reporting dates. So SOFR (and other measures of funding costs) will often spike a little around then.But this was FAR bigger than normal. Here is the same chart but showing the end-of-2023 spike, and little dimples at the end of the first and second quarters.Indeed, Bank of America’s Mark Cabana estimates that this was the single-biggest SOFR spike since Covid-19 wracked markets in early 2020, and points out it happened on record trading volumes.Cabana says he was initially too hasty in dismissing the spike as driven by a short-term collateral shortage and unusually large amounts of window-dressing by banks. In a note published yesterday, he admits to overlooking something potentially more ominous: reserves seeping out of the banking system.We have long believed funding markets are determined by 3 key fundamentals: cash, collateral, & dealer sheet capacity. We attributed last week’s funding spike to the latter 2 factors. We overlooked extent of cash drain in contributing to the pressure. The increased sensitivity of cash to SOFR hints of LCLOR. LCLOR stands for “lowest comfortable level of reserves”, and might require a bit more explanation.Back in ye olde times (pre 2008), the Fed set rates by managing the amount of reserves sloshing around the US monetary system. But since 2008 that has been impossible due to the amount of money pumped in through various quantitative easing programmes. That has forced the Fed to use new tools — like interest on overnight reserves — to manage rates in what economists call the “abundant reserve regime”.But the Fed has now been engaging in reverse-QE — or “quantitative tightening” — by shrinking its balance sheet sharply since 2022. The goal is not to get the balance sheet back to pre-2008 levels. The US economy and financial system is far larger than it was then, and the new monetary tools have worked well.The Fed just wants to get from an “abundant” reserve regime to an “ample” or “comfortable” one. The problem is that no one really knows exactly when that happens. As Cabana writes (with FT Alphaville’s emphasis in bold below): Like the macro neutral rate, LCLOR is only observed near to or after it is reached. We have long believed LCLOR is around $3-3.25tn given (1) bank willingness to compete for large time deposits (2) reserve / GDP metrics. Recent funding vol supports this.A similar dynamic was seen in ‘19. At that time, the correlation of changes in reserves to SOFR-IORB turned similarly negative. The sensitivity of SOFR to reserves correlation signalled nearing LCLOR. We sense a similar dynamic is present today.Unfortunately, when reserve levels drop to uncomfortable levels, we tend to find out very quickly, in unpleasant ways.Cabana’s mention of 2019 is a reference to a repo market crisis in September that year, when the Fed missed growing hints of tightness in money markets. Eventually it forced the Federal Reserve to inject billions of dollars back into the system to prevent a broader calamity. MainFT wrote a superb explainer of the event, which you can read here.In other words, the recent SOFR spike could be a hint that we are approaching or already in uncomfortable reserve levels, which could cause a repeat of the September 2019 repo ructions if the Fed doesn’t act preemptively to soothe stresses. Here are Cabana’s conclusions (his emphasis):Repo is heart of markets. EKG measures heart rate & rhythm. Repo EKG flags shift. Cash drain has supported spike in repo. Fed should take repo pulse & sense shift. If Fed too late to diagnose, ‘19 repeat. Bottom line: stay short spreads w/Fed behind on diagnosis. More

Amazon’s delivery system depends on third-party companies. But labor regulators have challenged that model, possibly opening the way for unionization.Vans marked with Amazon’s arrow logo have become ubiquitous on residential streets, a symbol of the nearly instantaneous delivery that has transformed online shopping.But behind the wheel, that image of high-tech efficiency is being overshadowed by drivers’ complaints about working conditions. Recent federal labor rulings could pave the way for unionization in the company’s last-mile delivery network and change how it does business.Hundreds of thousands of drivers who deliver Amazon packages don’t work directly for the e-commerce giant; instead, they’re employed by third-party logistics companies, called delivery service partners. Last year, Amazon ended a contract with a delivery company in Palmdale, Calif., after drivers started organizing with the Teamsters union.A regional director for the National Labor Relations Board in Los Angeles issued the first formal complaint last week targeting the company’s delivery model, arguing in the Palmdale case that Amazon is a joint employer of the drivers and, as such, must bargain with the union.Last month, another N.L.R.B. regional director issued a preliminary finding that Amazon is a joint employer of drivers in Atlanta seeking to unionize with the Teamsters, and that it must be held liable for unlawfully discouraging unionization.Amazon contracts over 3,000 delivery service partners, which determine pay, schedules and work conditions for drivers, the company said.By Christopher Smith For The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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WASHINGTON (Reuters) – Republican presidential candidate Donald Trump has pledged to lower taxes on U.S. citizens living abroad, in his latest attempt to lure voters before the Nov. 5 election in which he is locked in a tight race with Democratic Vice President Kamala Harris.WHY IT’S IMPORTANTBoth Trump and Harris have in recent weeks made economic pledges to woo voters. Harris has said she will aim to pass a middle class tax cut, while Trump has advocated cutting taxes on overtime pay. Both candidates have supported eliminating taxes on tips.KEY QUOTE”I support ending the double taxation of overseas Americans,” Trump said in a statement from his campaign. The Wall Street Journal was the first to report Trump’s plans. The statement offered no specific details on how he would go about this policy.CONTEXTAmericans living or traveling outside the United States are required to file income tax returns, estate tax returns, and gift tax returns and “pay estimated tax in the same way as those residing in the United States,” according to the U.S. Internal Revenue Service.The U.S. has tax treaties with a number of foreign countries that already allow reduced rates and exemptions. Americans abroad do not have to pay U.S. taxes on their first $126,500 in earned income and are eligible for some foreign tax credits, according to the IRS.Claiming the foreign tax credit can let individuals effectively reduce their U.S. tax liability and avoid double taxation on the same income earned internationally.BY THE NUMBERSAbout 4.4 million U.S. citizens lived abroad as of 2022, according to data from the Federal Voting Assistance Program. About 2.8 million of those were eligible to vote in their former states. More

The People’s Bank of China (PBOC) said eligible securities firms, fund companies and insurers can apply to join the swap scheme, which gives them easier access to funding to buy stocks.The announcement came after Chinese stocks tumbled on Wednesday following a blistering rally, as previous investor enthusiasm about Beijing’s plans to revive the economy waned.The PBOC first announced the scheme on Sept. 24 as part of a broad package of policies to stimulate the economy and boost capital markets.Under the swap facility, eligible securities firms, fund companies and insurers can use their assets including bonds, stock ETFs and holdings in constituents of the CSI 300 Index as collateral in exchange for highly liquid assets such as treasury bonds and central bank bills. The initial scale of the swap program is set at 500 billion yuan, and can be expanded in the future. ($1 = 7.0800 Chinese yuan) More

TOKYO (Reuters) – The U.S. dollar traded near a two-month peak against major peers on Thursday as markets grew more confident about a patient approach from the Federal Reserve to further monetary easing, even as a key inflation report loomed later in the day.The dollar index, which measures the currency against six key rivals, was steady after climbing to the highest since Aug. 16 overnight, as traders further pared bets for U.S. interest rate cuts this year in the wake of last week’s unexpectedly strong payrolls data.September’s consumer price index (CPI), due at 1230 GMT, is likely to show core inflation holding steady at a 3.2% year-on-year clip, according to economists polled by Reuters.The euro languished near its lowest since Aug. 13, while against the yen, the dollar hovered close to its strongest level since Aug. 15.The “U.S. exceptionalism trade” has reignited on the back of the spate of strong jobs data recently, said Kyle Rodda, senior financial markets analyst at Capital.com, with minutes from the Fed’s latest meeting – released overnight – confirming the central bank’s focus on keeping the labour market healthy.”The U.S. dollar is regaining supremacy, … mostly because of continued U.S. economic outperformance”, Rodda said.At the same time, “an upside surprise in U.S. CPI could force the Fed to doubt its confidence about the path for inflation.”San Francisco Fed President Mary Daly said late Wednesday that she was less concerned now about resurgent inflation than about hurting the labor market.Traders lay 80% odds on the Fed cutting rates by a quarter point at its next policy decision on Nov. 7, versus 20% probability of no change, according to the CME Group’s (NASDAQ:CME) FedWatch Tool. A day earlier, the probability of a cut stood at 85%.The dollar index was little changed at 102.86 as of 0024 GMT, sticking close to Wednesday’s high of 102.93.The greenback eased 0.18% to 149.035 yen, but was not far from the overnight peak of 146.365.The euro was flat at $1.0939 following its dip to $1.0936 in the previous session.Australia’s dollar (AUD=D3 > slipped 0.07% to $0.6714, edging back towards its low of $0.6708 from Wednesday, the weakest level since Sept. 16, after a stimulus announcement by top trading partner China’s state planner fell flat.China’s finance ministry is due to hold a news conference on fiscal policy on Saturday. New Zealand’s dollar added 0.07% to $0.6067, trying to put some distance from the low of $0.6053 from Wednesday, when the central bank cut rates by a half point and hinted at further easing ahead, triggering a sharp slide in the currency. More

Milei vetoed a bill last month that would have updated public university funding in line with Argentina’s triple-digit inflation rate, one of the world’s highest. Thousands of people have since demonstrated against his cuts to education and healthcare.Lawmakers voted 160 in favor of the university funding law with 84 against and 5 abstentions, falling six votes short of the two-thirds majority of those present needed to reverse the president’s veto.Milei’s far-right party makes up only a small minority in Congress, but it has formed alliances with conservative lawmakers to prevent the opposition from gathering the two-thirds needed to ratify the law.”What we saw today was a power struggle,” conservative PRO party lawmaker Alejandro Finocchiaro told reporters. “If the presidential veto did not pass, it would have been a very bad sign for markets.”Milei argues that the law would jeopardize a fiscal balance he has promoted to tackle a long-running economic crisis, and has pledged to veto anything that threatens it. Argentina’s health, pension and education spending have been the hardest hit by Milei’s public cuts. The law vetoed by Milei would have adjusted public education budgets due to inflation. University salaries have lost around 40% of their purchasing power due to inflation.Under Milei’s austerity drive, high inflation has started to slow but Argentina is deep in recession and poverty rates have surged over 50%.But opposition to the president’s spending cuts, especially to education funding, still retains impassioned supporters.”The right to public education defines our nation,” opposition center-left UCR party lawmaker Facundo Manes said during the veto debate. “Education is the best economic policy of the 21st century, which is why we will not give up defending it.” More