Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyThere is virtually no doubt that the Federal Reserve will initiate an interest rate-cutting cycle next Wednesday. Indeed, recent data has supported the view that the central bank would have been better off doing so in July, at the prior meeting of the policy-setting Federal Open Market Committee.Yet the sure expectation of next week’s rate cut comes with considerable analytical uncertainty about the endpoint for rates, the journey to that destination, the impact on the economy and for international spillovers. This uncertainty could easily catch bond investors off guard if liquidity conditions fail to loosen significantly.While US economic growth has repeatedly proved to be much more robust than many had expected, the potential for continued “economic exceptionalism” must be weighed against the intensifying pressures felt by lower-income households. Many have exhausted their pandemic savings and incurred more debt, including maxing out their credit card. There is no agreement on whether this weakness will remain concentrated at the bottom end of the income ladder or migrate up.And American exceptionalism is just one of the rugs that have been pulled from under the once-comforting anchors in analysing the US economy. The economy has also been robbed of the stabilising effects of unifying policy frameworks.What was a long-term embrace of the “Washington Consensus” — the road to sustained economic prosperity involves deregulation, fiscal prudence and liberalisation — has given way to the expansion of industrial policy, persistent fiscal imbalances, and the weaponisation of trade tariffs and investment sanctions. Internationally, the consensus on ever-closer integration of goods, tech and finance has had to cede to a fragmentation process that is now part of a much bigger gradual rewiring of the global economy.At the same time, the influence of the Fed’s forward policy guidance, another traditional analytical anchor, has been eroded by a mindset of excessive data dependency — this started to affect policymakers after the central bank’s big 2021 mistake of characterising inflation as transitory. The resulting volatility in the consensus view on markets, which has been moving back and forth like “narrative table tennis”, has fuelled a misalignment between the central bank and markets on basic policy influences.Top Fed officials emphasise the continued relevance of both parts of the central bank’s dual mandate: to promote price stability and maximum employment. But markets have shifted violently in the past few weeks to price the Fed as a single mandate central bank, with a focus that has now pivoted from battling inflation to minimising any further labour market weakness.At the same time, there is no agreement on how policy formulation should be affected by risk mitigation considerations typically associated with periods of economic uncertainty. Finally, there are many views on how and when senior Fed officials will transition from their excessive data dependency to a more forward-leaning view of policy.While such uncertainties relate mainly to the inputs of interest rate decision-making, they have consequential effects on outcomes in three key areas: the terminal interest rate where policy is neither restrictive nor stimulative of the economy and the journey there; the extent to which rate cuts will translate into a bigger non-inflationary growth impetus for the economy; and the degree to which the Fed’s cutting cycle will open the door for an aggressive global cycle that also includes emerging countries.This complicated analytical landscape is not reflected in how the US fixed income markets, which serve as global benchmarks, are pricing expectations for Fed policy. Government bonds markets are signalling high recession risk, looking for the Fed to lower rates by 0.50 percentage points next week or shortly thereafter, and to cut by a total of 2 points in the next 12 months. Yet credit markets are priced confidently for a soft landing.These asset pricing inconsistencies can be resolved in an orderly manner as long as a significant further loosening of financial conditions, including sideline cash being put to work, offsets substantial bond issuance from the government and the ongoing contraction of the Fed’s balance sheet known as quantitative tightening. The power of this was evident on Wednesday by the reversal of the large 0.10 percentage point rise in the two-year US yield caused by a slightly hotter monthly reading for core inflation. Yet this “technical” influence is a poor substitute for the restoration of growth and policy anchors. It is also an inherently volatile one. More

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TOKYO (Reuters) – Investors on Friday ratcheted up bets for a super-sized Federal Reserve interest rate cut next week, after media reports suggested the decision would be a closer call for officials than previously thought.Traders raised bets back to 39% for a 50-basis point reduction on Sept. 18, according to LSEG data, from about 28% before articles in the Financial Times and Wall Street Journal appeared.”This is yet another twist in the (Fed rate cut) debate,” said Tony Sycamore, an analyst at IG, noting the tug-of-war being played out in bond futures and the dollar-yen rate in particular.”Everybody thought we were back on track for 25 basis points, and now 50 is suddenly back on the table.”The dollar dropped 0.42% to 141.22 yen as of 0020 GMT, heading back towards Wednesday’s low at 140.71, the weakest level this year.The dollar index, which measures the currency against the yen and five other major rivals, dropped to a one-week trough.Gold hovered just below Thursday’s all-time high of $2,560.01, last changing hands at $2,558.55.Equities were mixed though, with Japan’s Nikkei losing 0.7% under the weight of a stronger yen, while South Korea’s Kospi edged marginally lower. Australia’s benchmark climbed 0.75%. Chinese markets had yet to open.Japan, mainland China and South Korea are all heading into long weekends, with Tokyo back on Tuesday, China on Wednesday and South Korea not until Thursday.U.S. stock futures pointed up slightly following gains on Thursday in the cash indexes. S&P 500 futures were 0.1% higher.Crude oil continued to climb following gains of around 2% overnight as producers assessed the impact on output in the Gulf of Mexico after Hurricane Francine tore through offshore oil-producing areas.U.S. West Texas Intermediate crude futures rose 0.5% to $69.32 per barrel, building on Thursday’s 2.5% rally. Brent crude futures added 0.4% to $72.26, after a 1.9% jump in the previous session. More

Holiday retail sales are likely to rise between 2.3% and 3.3% in the November 2024-January 2025 period, totaling up to $1.59 trillion, data report said, from a 4.3% growth to $1.54 trillion last year.Sales grew 3.1% in 2018.WHY IT’S IMPORTANTHoliday season sales generally account for more than half of U.S. retailers’ annual revenue.A shorter season this year – with only 27 days between Thanksgiving and Christmas – has pushed retailers into launching higher promotional discounts earlier in the season.CONTEXTConsumers across all income brackets have been hit by lower personal savings, which dipped to about 3.4% in the recent months, compared to an average of 3.8% in June this year, according to the report.Customers are expected to begin bargain hunting early, looking for additional discounts across categories including groceries and homegoods, as they tighten their purse strings.BY THE NUMBERSDeloitte expects e-commerce sales to rise in the 7%-9% range in the 2024 holiday season, totaling up to $294 billion, compared with the 10.1% increase to $270 billion last year.In-store sales are expected to rise between 1.3% and 2.1% to up to $1.3 trillion in the upcoming holiday season, compared to a rise of 3.1% to $1.27 trillion, a year ago.KEY QUOTES”Rising credit card debt and the possibility that many consumers have exhausted their pandemic-era savings will likely weigh on sales growth this season compared to the previous one,” said Michael Jeschke, leader of Deloitte Consulting’s Retail & Consumer Products.”Our forecast indicates that e-commerce sales will remain strong as consumers continue to take advantage of online deals to maximize their spending.” More

(Reuters) -Republican U.S. presidential candidate Donald Trump said on Thursday that he will end all taxes on overtime pay as part of a wider tax cut package, if he is elected in the Nov. 5 election.”As part of our additional tax cuts, we will end all taxes on overtime,” Trump said in remarks at a rally in Tucson, Arizona. “Your overtime hours will be tax-free.”Trump, who faces Democratic Vice President Kamala Harris in what polls show to be a tight race, has previously said he would seek legislation to end the taxation of tips to aid service workers. Harris has made a similar pledge.”He is desperate and scrambling and saying whatever it takes to try to trick people into voting for him,” a Harris campaign spokesperson said in response to Trump’s proposal on Thursday. At a campaign event this month with union workers, Harris accused Trump of “blocking” overtime from millions of workers during his 2017-2021 presidency.In 2019, the Trump administration issued a rule increasing the eligibility of overtime pay to 1.3 million additional U.S. workers, replacing a more generous proposal that had been introduced by President Barack Obama, Trump’s Democratic predecessor.The Trump administration raised the salary level for exemption from overtime pay to $35,568 a year, up from the long-standing $23,660 threshold. Workers’ rights groups criticized the move, saying it covered far fewer workers than the scheme introduced under Obama.Under Obama, the Labor Department proposed raising the threshold to more than $47,000, which would have made nearly 5 million more workers eligible for overtime. That rule was later struck down in court.Overtime pay at these income levels overwhelmingly benefits blue-collar workers, such as fast-food workers, nurses, store assistants and other low-income employees.”The people who work overtime are among the hardest working citizens in our country and for too long no one in Washington has been looking out for them,” Trump said on Thursday.Under Labor Department rules, eligible workers must be paid at least time-and-a-half for hours worked above 40 hours in a single work-week.As of last month, American factory workers in non-supervisory roles put in an average of 3.7 hours of overtime a week, data from the Bureau of Labor Statistics shows. Not taxing overtime would result in less government revenue, at a time when Trump’s plan to permanently extend the tax cuts he passed as president would expand the U.S. deficit by $3.5 trillion through 2033, according to the non-partisan Congressional Budget Office. The U.S. budget deficit in the first 11 months of this fiscal year is $1.9 trillion.It’s unclear how much revenue the government receives from taxes on overtime pay.Trump’s proposal would be a first for the federal government. Alabama this year became the first state to exclude overtime wages for hourly workers from state taxes as a temporary measure that won legislative support in part to help employers fill jobs in a tight labor market. The exemption is for 18 months only. More

(Reuters) – A tight U.S. presidential election race has unnerved investors in emerging markets, who fear a return of former President Donald Trump to the White House could hurt emerging markets just as they were poised to shine.The prospect of lower interest rates in the United States has brightened the outlook for EM assets, which have lagged their developed peers in the last few years.But analysts are now concerned that under a second Trump presidency trade barriers could be buttressed, spurring a rebound in inflation and thereby interest rates, lifting the dollar and eventually weighing on emerging markets again.”Normally this would be a good macro backdrop for emerging markets: resilient growth, continued disinflation and a weak dollar,” Arun Sai, senior multiasset strategist at Pictet Asset Management, told the Reuters Global Markets Forum (GMF).”But we have two issues to contend with,” Sai said – China remains a drag on the global economy, and then there is the threat of stronger tariffs and disruptions to world trade.”EM will bear the brunt,” he said.Trump has said he would consider 60% tariffs on Chinese exports, a move Barclays’ economists estimate could knock two percentage points off China’s GDP in the first 12 months.For other U.S. trading partners, a far lower 10% universal tariff has been proposed.Such tariff levels could slash U.S.-China bilateral trade by 70% and lead to hundreds of billions of dollars’ worth of trade being eliminated or redirected, Oxford Economics noted.Investors have found it difficult to say when China’s economy will turn the corner, Straits Investment Management CEO Manish Bhargava said.”EM risk should come with a premium, but that’s not happening … India is good but expensive, China is cheap but has its own problems.”In their first face-to-face debate, Democratic candidate Kamala Harris likened Trump’s tariff plan to a sales tax on the middle class. Nonetheless her campaign supports Biden-era tariffs, even signalling “targeted and strategic tariffs” in the future.”A Harris administration would likely keep using tariffs too, but she would prefer to use them along with other tools like investment in clean energy sectors,” said Rachel Ziemba, founder of advisory firm Ziemba Insights.SILVER LININGTrump’s new proposed tariffs could be set lower than the threatened levels, for China and other trading partners, noted Mark Haefele, CIO of UBS Global Wealth Management.On the other hand, Washington’s push for “friendshoring” – replacing China’s role in supply chains with friendly nations – could boost U.S.-aligned EMs.India and key Southeast Asian economies such as Indonesia and Malaysia could benefit if supply chain diversification accelerates again, Haefele said.”India is the best structural story in EM based on four pillars,” Malcolm Dorson, senior portfolio manager and head of EM strategy at Global X ETFs told GMF.Working in India’s favour are attractive demographics, the potential for long-term growth, a market-friendly government, and “being in the right place at the right time” to benefit from the China+1 trade, Dorson said.(Join GMF on LSEG Messenger for live interviews: ) More

LONDON (Reuters) – Interest rate cuts from major central banks are well underway, with the European Central Bank on Thursday delivering its second quarter-point cut of the year.Half of the 10 big developed market central banks tracked by Reuters have now started easing policy, and the U.S. Federal Reserve is likely to join the club next week.Here’s where major rate setters stand and what traders expect next. 1/ SWITZERLAND The Swiss National Bank, the first among Western peers to lower borrowing costs in March, cut rates again in June to 1.25%. It has signaled it intends to keep going. Futures markets view another cut on Sept. 26 as certain, with 28% odds of a 50 basis point (bps) move, after annual inflation dropped to 1.1% in August. Outgoing SNB chair Thomas Jordan believes a stronger franc threatens exports. 2/ CANADAThe Bank of Canada implemented its third consecutive cut on Sept. 4 to 4.25% and another 25 bps reduction in October is almost fully priced. Canada’s economy is slack, strong population growth has helped lift unemployment to 6.6% and the BoC has mused about inflation undershooting its 2% target. 3/ SWEDENSweden’s Riksbank, which started cutting rates in May after its successive hikes crushed inflation but weakened the economy, is tipped to lower borrowing costs by at least another 25 bps on Sept. 25.Swedish rates stand at 3.5% but annual inflation has steadied at below the Riksbank’s 2% target. 4/ EURO ZONE The ECB cut rates again on Thursday as euro zone inflation slows and the economy falters. It provided almost no clues about its next step, even as investors bet on steady policy easing in the months ahead.Money markets priced in roughly 40 bps of further easing by year-end and a roughly 42% chance of another 25 bps cut in October.5/ BRITAINThe Bank of England is expected to keep benchmark borrowing costs at 5% on Sept. 19, following its first cut of this cycle in August. Stubborn services inflation suggests the BoE will ease more slowly than the Fed and the ECB. Markets price just one more quarter point cut in 2024, probably in November. 6/ NEW ZEALAND A convention for quarterly instead of monthly GDP and inflation data has baffled New Zealand’s central bank and domestic market watchers. The Reserve Bank of New Zealand in August cut rates for the first time this cycle to 5.25%, a year earlier than its own projections had stated. Markets forecast another quarter point drop in October. 7/ UNITED STATES The next Fed rate decision is on Sept. 18 and markets are gripped by the prospect of the first U.S. rate cut since 2020.Policymaker comments signal a cut is coming without suggesting one is needed because the economy is teetering on recession. Money markets reckon a 25 bps reduction next week is more likely than a bigger 50 bps cut after data on Wednesday showed some stickiness in underlying inflation.Traders price roughly 100 bps of easing by year-end while economists polled by Reuters forecast 75 bps worth.8/ NORWAYNorway’s central bank, which meets next week, is in the hawkish camp.It left rates on hold at a 16-year high of 4.5% in August and said a tight stance would likely be needed for “some time” to curb inflation, still running above the bank’s 2% target.Markets only fully price in a first rate cut in December, meaning Norway’s easing cycle will likely start well after peers.9/ AUSTRALIA The Reserve Bank of Australia has held rates at 4.35% since last November and believes inflation is still sticky, although data suggests the economy is struggling.Markets do not see more than 50% odds of a rate cut until December. 10/ JAPAN The Bank of Japan is the outlier, raising rates twice this year as inflation rises.Its July rate increase caught markets off guard, exacerbating a sell-off in Japan’s stocks and a surge in the yen. The BoJ says it will tread carefully to ensure volatile markets do not hurt businesses. It is expected to leave rates unchanged at 0.25% next week. Markets and economists anticipate another increase by year-end. More