Economy

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. The stock market has decided (for now) that a 50bp cut was the right choice. The S&P 500 hit a record high yesterday. But these things take more than one day to shake out. Stay tuned as the news digests. We’re taking a brief break on Monday. Rob is doing a triathlon this weekend, while Aiden frantically looks for housing. We’ll be back in your inbox on Tuesday. Wish us luck: [email protected] and [email protected]. Immigration and the US labour marketDuring the Fed’s post-cut press conference on Wednesday, when asked about the current level of job creation, chair Jay Powell said this:It depends on the inflows. If you are having millions of people come into the labour force, and you are creating 100,000 jobs, you’re going to see unemployment go up. It really depends on what is the trend underlying the volatility of people coming into the country. We understand there has been quite an influx [of migrants coming] across the borders, and that has been one of the things that has allowed the unemployment rate to rise.Powell is broadly right — if the labour force grows because of high immigration, and there is not a commensurate increase in employment, unemployment goes up. But he’s being imprecise. Immigration is difficult to measure. Illegal immigration, by nature, is not well documented. The employer and household surveys used to gauge the labour force do not include immigration status. This all makes it difficult for the Fed, and everyone else, to quantify the impact of immigration on employment. Certainly, US immigration has been historically high recently. In 2019, the Congressional Budget Office estimated that there would be 1mn new migrants, on net, in 2023; in 2023, it revised that number to 3.3mn. The change was driven in large part by a surge in migrants without legal worker status, but also from an increase in asylum seekers and refugees who were given work permits while they await court hearings.That surge has significantly increased the US labour force, as Powell suggested. But the new migrants are also working and being included in employment surveys. So immigration impacts both the numerator and the denominator in the unemployment rate equation. Some estimates suggest that higher unemployment among the migrant population is increasing the overall unemployment rate, but “those effects, given the size of the labour force, are modest — it is most likely only increasing the unemployment rate in the half-tenths”, said Wendy Edelberg of the Brookings Institution, formerly of the Fed and the CBO. Immigration makes it particularly hard to estimate the break-even level of job growth, the number of jobs the US economy needs to create each month to avoid a rise in unemployment. Before the pandemic, population projections from the CBO, the Bureau of Labor Statistics and the Social Security Administration had the break-even job growth at around 100,000. But with the surge in migration and the growth of the labour force, that number is closer to 230,000, according to estimates from Brookings.That has several implications. In 2023, people were positing that the job market was overheating, with an average of 251,000 new jobs added per month. That worry was probably overhyped, given high immigration. But it also means that the current labour market, which added 89,000 jobs in August and 104,000 in July, may be much worse than it appears. The Fed may be alert to this, and it may help explain the decision to make a jumbo 50bps rate cut. The surge in migration was also one of the reasons why the Fed was able to bring inflation back to target. With more workers to throw at a heating- up economy, companies were able to keep meeting high demand. And they were able to do so without increasing competition for labour, which would have increased wage inflation. According to Claudia Sahm of New Century Advisors, the uptick in migration is a problem, but ultimately “a good problem to have”:We have had labour shortages in recent years, and also an ageing population. Immigrants were extremely important in this cycle, helping [the Fed] get inflation down without causing a recession. Solving a labour shortage with more labour is always the way to go.It also may be why we have seen an increase in unemployment in the absence of a recession. New migrants not only grow the labour force, but they also increase aggregate demand for goods and services. From David Doyle at the Macquarie Group:We think we have been in a unique period, in the sense that you have had a more substantial rise in the unemployment rate than you would typically have to hit a recession. When there is a rise in unemployment, with low labour force growth and low immigration, that is indicative that we are having lay-offs and heading for a recession. But when [a rising unemployment rate] is accompanied by strong labour force growth, the economy is still able to expand.Recent data from the US Customs and Border Protection suggests that the level of migration is starting to decline. But the fact remains that we are likely far below break-even job growth. If job creation does not increase in the coming months, the Fed may have to cut rates more aggressively than it currently projects, or tolerate a higher unemployment rate than it has in the past. (Reiter)One good readParanoia.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

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The one-year loan prime rate (LPR) was kept at 3.35%, while the five-year LPR was unchanged at 3.85%.In a Reuters survey of 39 market participants conducted this week, 27, or 69%, of all respondents expected both rates to be trimmed. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.China surprised markets by cutting major short and long-term interest rates in July, its first such broad move in almost a year, signalling policymakers’ intent to strengthen economic growth. More

The PBOC kept its one-year LPR at 3.35%, while the five-year LPR, which is used to determine mortgage rates, was left unchanged at 3.85%. The PBOC had last cut the rate in July, as it sought to further loosen economic conditions in the country and foster growth. Both LPR rates remained squarely in record-low territory.The central bank is expected to cut the rate further in the coming months, especially as a string of recent economic readings showed little improvement in China. The country is grappling with persistent deflation and sluggish private consumption. The LPR is determined by the PBOC based on considerations from 18 designated commercial banks, and is used as a benchmark for lending rates in the country. The five-year rate is closely tied to China’s property market, which has been struggling with nearly four years of slowing sales and an extended cash crunch. More

SYDNEY (Reuters) – The yen remained under pressure on Friday as investors wagered the Bank of Japan (BOJ) would wrap up a policy meeting sounding cautious on further tightening, while the U.S. dollar had its own problems as markets priced in more rapid U.S. rate cuts.It has been a tough week for the yen, with the euro gaining 2.2% to 159.46 as speculators booked profit on recent long yen positions.The euro also firmed to $1.1160, up 0.8% for the week and within striking distance of the August peak of $1.1201. A break there would target a July 2023 top of $1.1275.The dollar was up 1.4% for the week at 142.84 yen, though off an overnight high of 143.95. Resistance was at 144,20, while support lay at the recent trough of 139.58.The BOJ is widely expected to hold its policy interest rate at 0.25% later on Friday and maintain its view the economy will recover moderately as rising wages underpin consumption.Data on consumer prices out on Friday showed core inflation ticked up to 2.8% in August, while overall inflation hit 3.0%.Samara Hammoud, a currency strategist at CBA, noted Japan’s real rate remained deeply negative at about -2.5%, while the BOJ estimated neutral to be in a range of -1% to 0.5%.”As such, there is scope to further raise the policy rate while keeping financial conditions accommodative,” she said. “Our base case remains for the BOJ to next raise rates by 25bp in October, though the risk leans towards a later hike.””The recent financial market ructions and the upcoming Liberal Democratic Party election may make the BOJ more cautious about raising.”The BOJ’s policy statements can sometimes be rather opaque, so investors will be focused on any hints from Governor Kazuo Ueda on the timing and pace of tightening at his post-meeting news conference.DOLLAR DECLINEMuch of the rest of the world is heading in the other direction, with markets expecting China’s central bank to trim its longer-term prime rates by 5-10 basis points on Friday.China has also been hinting at other stimulus measures, enabled in part by the U.S. Federal Reserve’s aggressive easing which shoved the dollar to a 16-month low on the yuan.Markets imply a 40% chance the Fed will cut by another 50 basis points in November and have 73 basis points priced in by year-end. Rates are seen at 2.85% by the end of 2025, which is now thought to be the Fed’s estimate of neutral.That dovish outlook has bolstered hopes for continued U.S. economic growth and sparked a major rally in risk assets. Currencies leveraged to global growth and commodity prices also benefited, with the Aussie topping $0.6800.The U.S. dollar index was stuck at 100.69 and just above a one-year low.Sterling was another gainer after the Bank of England kept rates unchanged on Thursday, while its governor said it had to be “careful not to cut too fast or by too much”.The pound was up 1.1% for the week so far at $1.3276, having hit its highest since March 2022. More

“It really is a political move. Most people thought it was going to be half of that number, which probably would have been the right thing to do,” Trump said in an interview with Newsmax.The Federal Reserve on Wednesday kicked off what is expected to be a series of interest rate cuts with an unusually large half-percentage-point reduction.Trump said last month that U.S. presidents should have a say over decisions made by the Federal Reserve.The Fed chair and the other six members of its board of governors are nominated by the president, subject to confirmation by the Senate. The Fed enjoys substantial operational independence to make policy decisions that wield tremendous influence over the direction of the world’s largest economy and global asset markets. More

TOKYO (Reuters) -The Bank of Japan is set to keep monetary policy steady on Friday, but signal its confidence that solid wage growth and consumption will allow the central bank to raise interest rates again in coming months.Such hawkish communication would contrast with many other central banks that are now shifting to a rate-cut cycle, including the U.S. Federal Reserve, which delivered an oversized reduction in borrowing costs on Wednesday.The divergence may cause more turbulence in markets with expectations of narrowing U.S.-Japan interest rate differentials already helping the yen rebound to around 143 versus the dollar, off the nearly three-decade low of 161.99 hit in early July.Markets are focusing on any hints from Governor Kazuo Ueda on the timing and pace of future rate hikes at his post-meeting news conference.”Having just raised rates in July, the BOJ will likely prefer to scrutinise market developments for the time being,” said former BOJ official Nobuyasu Atago.”It’s natural to think the next rate hike will come in December” so the BOJ can gauge the impact of the Fed’s rate cut as well as political events such as Japan’s ruling party leadership race and the U.S. presidential election, he said.At a two-day policy meeting concluding on Friday, the BOJ is widely expected to keep short-term interest rates steady at 0.25%, and maintain its view the economy will continue to recover moderately as rising wages underpin consumption.A majority of economists polled by Reuters expect the BOJ to raise rates again this year with most betting on a December hike. None in the poll projected a rate increase this month.The BOJ ended negative interest rates in March and hiked short-term rates to 0.25% in July, in a landmark shift away from a decade-long stimulus programme aimed at firing up inflation.Governor Ueda has stressed the BOJ’s readiness to raise rates further if inflation remains on track to durably hit its 2% target, as the board currently projects.Core consumer inflation hit 2.8% in August to accelerate for the fourth straight month, data showed on Friday, keeping alive expectations for further interest rate hikes.The chance to check data against its projections more carefully would come at the BOJ’s Oct. 30-31 meeting, when the board will conduct a quarterly review of its forecasts.Japan’s economy expanded an annualised 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising living costs will dent consumption.But soft demand in China, slowing U.S. growth and the yen’s recent rebound cloud the outlook for the export-reliant country.Market volatility remains a key concern for BOJ policymakers after the July rate hike and hawkish remarks from Ueda triggered a yen spike and sharp falls in equity prices.Several BOJ policymakers have called for scrutinising market moves in setting policy. But they also reiterated the bank’s readiness to keep raising rates, with one hawkish board member saying short-term rates must eventually go up to around 1%. More

BENGALURU (Reuters) – Australia’s central bank will keep its key policy interest rate unchanged on Tuesday and for the rest of the year amid elevated price pressures, according to economists polled by Reuters, with most expecting the first reduction early next year.Inflation slowed to 3.5% in July but was still above the Reserve Bank of Australia’s 2%-3% target range. Along with a strong job market, that leaves little to no room for policymakers to cut rates next week.The RBA is set to lag well behind other major central banks that have already begun cutting, including the Reserve Bank of New Zealand, Bank of England, Bank of Canada, and the U.S. Federal Reserve, which cut by 50 basis points on Wednesday.All 45 economists surveyed Sept. 12-19 expected the RBA to keep its official cash rate on hold at 4.35% at the conclusion of its two-day meeting on Tuesday. A strong majority, 40 of 44, predicted rates would remain unchanged through end-year, while interest rate futures were pricing in a slightly greater than 50% probability of a rate cut by then.”There is no possibility of the RBA easing at this meeting,” said Robert Carnell, regional head of research, Asia-Pacific, at ING.”The risk is slightly to the upside: the RBA never really tightened rates that much to bring the economy slow enough to get inflation under control, and I think that’s a question that has yet to be answered,” he said. Among major local banks, ANZ, NAB, and Westpac predict rates will stay unchanged this year, while CBA expects one cut before year-end.Major domestic banks contacted after the Fed’s rate decision on Wednesday did not change their views. “We don’t think the Fed’s decision to ease by 50bps will directly influence the RBA’s decision,” said Catherine Birch, senior economist at ANZ.”We expect it (the RBA) will retain much of the hawkish language of the August meeting.” The RBA was expected to start its easing cycle next year with 25 basis point cuts in Q1, Q2, and Q3, followed by a pause, bringing the cash rate to 3.60% in the last quarter of 2025.(Other stories from the Reuters global economic poll) More