Economy

The economic impact would result from severe damage to infrastructure in the conflict region and the potential for compromised shipping lanes, Lloyd’s said in a statement.Wars in Ukraine and Gaza have already disturbed shipping routes in the Black Sea and Red Sea.”With more than 80% of the world’s imports and exports – around 11 billion tons of goods – at sea at any given time, the closure of major trade routes due to a geopolitical conflict is one of the greatest threats to the resources needed for a resilient economy,” Lloyd’s said.The possibility of such a geopolitical conflict was a systemic – or low likelihood but high impact – risk, Lloyd’s said.Lloyd’s said it has also researched other potential systemic risks in partnership with the Cambridge Centre for Risk Studies, including cyber attacks and extreme weather events. More

Chinese stocks tumbled on Wednesday, curbing a historic rally after an anticipated fiscal stimulus announcement failed to materialise.The benchmark CSI 300 index closed down 7.1 per cent — its biggest one-day fall since February 2020 — as investors grappled with a lack of clarity around Beijing’s stimulus programme to boost economic growth and markets.Expectations had been mounting that an initial round of monetary easing measures that targeted China’s depressed stock and property markets last month would be followed by fiscal spending to encourage businesses and consumers to spend.After a highly anticipated briefing on Tuesday by China’s state planners offered little further detail, attention is now turning to a finance ministry press conference on Saturday focused on “intensifying countercyclical” adjustments to fiscal policy.What happened on Tuesday?Zheng Shanjie, chair of China’s National Development and Reform Commission, the economic planning agency, promised on Tuesday to accelerate bond issuance to support the economy, front-loading about Rmb200bn ($28bn) from next year’s budget for spending and investment projects.He also hinted at measures to stabilise the property sector, boost capital markets and fuel the “confidence” to achieve China’s economic growth target this year of about 5 per cent.But the announcements left many investors nonplussed. Stock gains on the Hong Kong and Chinese bourses fizzled, with the Hang Seng index suffering its worst single-day fall since October 2008 on Tuesday, while the mainland CSI 300, which had soared more than 33 per cent over the past month, snapped a 10-day winning streak on Wednesday.Did investors misread signs that a bazooka was coming?The NDRC was unlikely to be the vehicle for a major stimulus announcement. A powerful state organ, it is more focused on implementation and oversight than central policy formation.Rory Green, head of China research at TS Lombard, said there might have been an overestimation of Beijing’s immediate plans for broader fiscal stimulus following a late September politburo statement vowing stronger support.He said the monetary stimulus, which was unveiled by the People’s Bank of China, was “pretty underwhelming” and did not reflect a change in approach to “growth by any means”. He added: “I think they’re still in the framework of stabilising rather than re-accelerating.”Xu Zhong, head of China’s interbank market regulatory body and an influential commentator, warned investors on Tuesday not to misread the PBoC’s announcement as evidence of the central bank buying shares.He also raised concerns about leveraged funds buying into stocks, a major feature of China’s 2015 stock market bubble. Many market watchers said Xu’s warning might have helped take the heat out of the market frenzy.Are there signs a fiscal package is on its way?Despite the lack of new detail from the NDRC, many observers remain hopeful that more substantive plans will be unveiled in the coming weeks, with attention coalescing around the upcoming finance ministry briefing.The NDRC on Tuesday said it was “co-ordinating with relevant departments to expand effective investment” and “fully implement and accelerate” the steps outlined by the politburo, a tone HSBC analysts said was “constructive”. They added that another “window for action” beckoned when the National People’s Congress standing committee meets towards the end of October.Goldman Sachs analysts said “any large stimulus package may require joint efforts from many key ministries”, pointing to ad hoc meetings by the finance ministry, housing regulator and politburo, one of the Chinese Communist party’s top leadership groups.CreditSights analysts warned, however, that while it was “too early to rule out any additional fiscal stimulus”, the scale “may fall short of market expectations”.What might a fiscal package look like?Market participants have proposed a wide range of estimates, from as low as Rmb1tn to as high as Rmb10tn.A reasonable base case, according to Citi, is about Rmb3tn this year, composed of Rmb1tn to make up for the shortfall in local government revenue, Rmb1tn for consumption-led growth and Rmb1tn to help recapitalise banks.Green said that while refunding China’s large banks was not “particularly necessary”, it could be a beneficial step if those funds flowed into the country’s stock of thousands of smaller banks, many of which are struggling to cope with a long-running property crisis.Nicholas Yeo, head of Chinese equities at Abrdn, stressed that the critical issue remained “not the lack of credit but the lack of demand”, highlighting that to have any lasting positive impact, any fiscal stimulus needed to result in stronger consumption.Would it be enough to help the Chinese economy?For much of the past four years, investors and Chinese residents have been hoping that the administration of President Xi Jinping will prioritise economic growth. But it remains unclear whether fiscal stimulus can restore confidence after the damage wrought by the pandemic, the property sector meltdown and Xi’s reassertion of party control over the business landscape.Aaditya Mattoo, World Bank chief economist for east Asia and the Pacific, said long-standing structural problems, such as a rapidly ageing population and limited social protection, were compounding the pain of falling property prices and slowing income growth, compelling Chinese households to save rather than spend. Such problems are unlikely to be addressed by the size or scope of the anticipated fiscal stimulus.Beijing’s hesitation to do more, many analysts said, also partly reflects concern over the need to conserve firepower for a bigger stimulus if Donald Trump, who has threatened higher tariffs on Chinese exports, wins the presidency in next month’s US election.“I do think there is some caution around the Trump factor and whether they need to be gauging the risk of a massive trade war starting next year,” Green said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. China’s stock rally has cooled. As we suspected it would, the Chinese government’s near silence about its fiscal stimulus plans has sapped investor enthusiasm. If Beijing does start cutting checks for infrastructure and consumption supports, will the market jump again? Email us: [email protected] and [email protected]. Does inflation explain poor consumer sentiment?Consumer sentiment is better now than it was in the dark days of 2022, but it has been weakening since this spring, and is still at the levels of the great financial crisis. There is a reasonably good explanation for this: consumers are still reeling from inflation. If you plot the University of Michigan consumer sentiment index against CPI inflation, you see a fairly reliable inverse correlation that goes back 70 years. Here I have inverted the scale for CPI to make the relationship easier to see:Some content could not load. Check your internet connection or browser settings.Historical low points in consumer sentiment have also lined up with recessions. Inflation, that is to say, has tended to be stagflation. We can see this by comparing consumer sentiment and the unemployment rate (again, I’ve inverted unemployment here; the midpoints of official recessions are marked by dotted lines):Some content could not load. Check your internet connection or browser settings.There is a curious thing, though. This time around, except for a very brief, very violent recession in spring 2020, the link between sentiment and unemployment has been broken. Unemployment is very low, and sentiment is lousy anyway.What to make of this? One might argue that as inflation moves into the background, sentiment is set to rise further, so long as unemployment stays low. That would bode well for the economy and for markets. But I wonder if, during the pandemic years, something changed regarding how people think and feel about the economy. The packaged food earnings recessionLate last year Unhedged wrote several pieces about how packaged foods stocks had been doing remarkably badly. We struggled to understand what was going wrong:Part of it can be explained idiosyncratically. Several of the S&P food stocks are simply performing badly. Many companies in the group are only generating revenue growth because of price increases; volumes are flattish. But ConAgra, Hormel and Tyson aren’t even managing price increases. Kraft Heinz is getting price, but only at the cost of falling volumes. Both Campbell’s and Smucker’s have made big acquisitions (Rao’s pasta sauce and Hostess snacks, respectively) that investors didn’t seem to like. But these individual failures, it seems to me, don’t quite account for the stomach-churning performance of the group . . . It can’t all be down to the GLP-1 diet drugs.I knew that the food companies had continued to disappoint, but I wasn’t aware of how pervasive the malaise had become until I read several interesting posts on Adam Josephson’s Substack, As the Consumer Turns. Josephson provides this striking list of consumer companies that have cut their sales or earnings targets in the past four month or so:The numerous disappointments are visible in the performance of the S&P 500 Food Products sector, which had managed to keep up with the index in 2022, when defensives stocks were in demand: As Josephson points out, this is out of step with what otherwise looks like a strong economy driven by strong consumer spending.Part of the problem is visible in the macroeconomic data. Here is growth in several categories of real consumer expenditure since the start of the pandemic:Goods consumption growth has trailed services, and was negative for much of 2022. Food and drinks has trailed goods, and has only just returned to positive territory. Why? For goods generally, the problem could be a long echo of the pandemic lockdowns, when we all stayed at home ordering Peletons and air fryers. That was all demand pulled forward from the future, resulting in a slump that is only ending now. But it’s hard to pull forward much demand for food, unless it’s in cans.One possibility is that branded food companies have conceded market power to the big retailers and their house brands. Packaged food companies have less pricing power than they once did, and have had to concede more margin to retailers to move their products. Warren Buffett attributes the weak performance of his investment in Kraft to this phenomenon.The bad performance of food companies has not made their stocks cheap, at least not collectively. The forward price/earnings ratio of the sector, at 16, is historically normal. The bad performance of the stocks is all down to poor earnings growth. Until that changes, there seems little reason to bet on the sector. Was the strong US jobs report anomalous?On Monday, we threw some doubt on September’s job numbers, pointing out that 1) it is likely to be revised down given recent issues with the birth-death model, and 2) 254,000 is not terrific given the increasing size of the labour force. Others have echoed our scepticism. Here are some of their points:Hiring and quits: Claudia Sahm points out that August’s Jolts report showed that the hiring rate fell, reaching a level historically in line with much higher unemployment. Peter Coy adds that quitting rates are also down, at a post-pandemic low. A labour market where employees do not feel comfortable quitting their jobs, either because they fear a downturn or because other companies are not hiring, suggests some underlying weakness, despite banner jobs creation.Temporary workers and hours worked: Paul Ashworth at Capital Economics points out that the steady decline in temporary employment and hours worked is also in line with weaker payroll growth. This is good news on the inflation front, as the economy has plenty of people ready to work more if things start heating up. Average hours worked and the number of temporary employees look like they are coming back in line with their pre-pandemic trends rather than falling below it. Still, as Ashworth says, the rate of change is consistent with a weakening labour market.We are highlighting these arguments not necessarily because we are convinced by them, or because we think the jobs report was terrible. But we do think it is possible that September could have been an anomaly (even as we hope that it wasn’t). (Reiter and Armstrong)One good readIs it stylish to be fit?FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereChris Giles on Central Banks — Vital news and views on what central banks are thinking, inflation, interest rates and money. Sign up here More

The decision was in line with market pricing and most economists’ expectations, with 17 of 28 economists in a Reuters poll having forecast the Reserve Bank of New Zealand (RBNZ) to cut the benchmark rate by half a percentage point. “The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate,” the central bank said in its policy statement. This is the second consecutive meeting in which the central bank has cut the official cash rate. More

The RBNZ cut its official cash rate to 4.75% from 5.25%, in line with market expectations. Wednesday’s cut was driven chiefly by increasing confidence among RBNZ policymakers that consumer price index inflation will fall within the bank’s 1% to 3% target range in the September quarter, the central bank said in a statement. But the central bank also signaled that future rate changes would be dependent on the path of the economy, and that at 4.75%, the official cash rate was “still restrictive.” The RBNZ noted that the New Zealand economy remained weak, and that the labor market was also set to soften in the coming months. Wednesday’s cut is the RBNZ’s second cut this year, as it kickstarted an easing cycle in the face of softening inflation and cooling economic growth. The central bank had cut rates by 25 bps in August, and signaled more potential cuts. But its comments on Wednesday suggested that future rate cuts may not be as certain, with the RBNZ now stepping back to gauge the impact of its rate cuts on the economy.The New Zealand dollar weakened after the cut, with the NZDUSD pair falling nearly 0.5%. More

“It was timely and consistent” with the Fed’s two mandates of attaining 2% inflation and maximum employment, Jefferson said at Davidson College in North Carolina. The Fed’s success in meeting the first mandate by bringing down inflation, he said, allowed the U.S. central bank “to pay increased attention to the other side of the mandate.”Jefferson voted in September with the majority of his colleagues to reduce the Fed’s policy rate, marking a turning point in what had been a two-year battle against inflation that took U.S. borrowing costs to their highest levels in decades. “Our goal over the past two years has been to bring inflation down without causing an undue or unorderly increase in the unemployment rate,” Jefferson said. “And that’s why we held the policy rate at a very high level for an extended period of time, because we wanted to bring inflation down and the labor market was performing very well.” Unemployment, rather than rising as the Fed raised rates as was the case in prior battles with inflation, had held steadily under 4% for most of that time. “The performance of the labor market gave us the headroom, if you will, to keep policy … in restrictive territory for a long period of time,” Jefferson said. But unemployment’s upward drift – it is now 4.1% – and the decline in inflation to nearer to the Fed’s 2% goal made it appropriate to “recalibrate” policy, he said. More

“The FOMC has gained greater confidence that inflation is moving sustainably toward our 2% goal,” Jefferson said, referring to the rate-setting Federal Open Market Committee, of which he is a member. “To maintain the strength of the labor market, my FOMC colleagues and I recalibrated our policy stance last month.” The Fed’s 50-basis-point rate cut at its Sept 17-18 meeting was bigger than many analysts had expected. In remarks prepared for delivery to Davidson College in Davidson, North Carolina, Jefferson explained the reasoning behind the decision in much the same terms that Fed Chair Jerome Powell has done — as a bid to keep the economy healthy, while still fighting inflation. “Economic activity continues to grow at a solid pace. Inflation has eased substantially. The labor market has cooled from its formerly overheated state,” Jefferson said. Inflation by the Fed’s targeted measure, the year-over-year change in the personal consumption expenditures index, was 2.2% in August, “much closer” to the Fed’s 2% goal than two years ago when it was 6.5%, Jefferson said. “I expect that we will continue to make progress toward that goal.”Meanwhile unemployment is at 4.1%, up only a “limited” amount from 3.8% a year ago, Jefferson said. Job growth has slowed, however. “The cooling in the labor market is noticeable,” he said. In language that closely echoed the Fed’s post-meeting statement issued last month, Jefferson said he would watch incoming data, the outlook, and the balance of risks when considering further rate cuts. “My approach to monetary policymaking is to make decisions meeting by meeting,” Jefferson said. “As the economy evolves, I will continue to update my thinking about policy to best promote maximum employment and price stability.” More

LONDON (Reuters) – British business confidence fell in the third quarter as tax worries hit investment, according to a survey of accountants that chimes with similar concerns from other business groups before the new Labour government’s first budget. The Institute of Chartered Accountants in England and Wales said on Wednesday that its quarterly Business Confidence Monitor fell to 14.4 in the three months to September, the first decline in a year and down from 16.7 in the previous quarter.”The findings show that businesses are troubled by the tax burden and increasingly reluctant to invest,” ICAEW chief executive Alan Vallance said.Finance minister Rachel Reeves has warned that taxes will probably have to go up in her Oct. 30 budget after she said she had uncovered a 22 billion pound ($29 billion) hole left in this year’s public finances by the previous Conservative government.The ICAEW said 29% of companies cited the tax burden as a growing challenge, the joint highest in the survey since it started in 2004 and well above the average reading of 16%.A separate survey from the British Chambers of Commerce on Tuesday also showed a decline in business morale due to concern about the impact of the budget on tax levels. The government has ruled out increases to the rates of income tax, corporation tax, value-added tax and National Insurance social security payments. But the ICAEW said businesses were concerned about other tax hikes including lifting capital gains tax. Businesses have already slightly scaled back plans to increase investment. Firms in the ICAEW survey said they planned to increase investment by 1.9% over the next 12 months, down from 2.1% before.Prime Minister Keir Starmer will host an international investment summit on Oct. 14, aimed at boosting foreign direct investment to help improve economic growth – one of his main missions since coming to power in July.”As the UK prepares to host a major investment summit, and speculation mounts ahead of a difficult budget, the chancellor must give companies the certainty and stability they need,” Vallance said.”Reforms to VAT and business rates, alongside public and private investment … could help to achieve this.”($1 = 0.7629 pounds) More