Economy

LONDON (Reuters) -Global shares extended gains on Friday to erase nearly all of their losses from a big sell-off earlier in the week, with investors betting on the U.S. economy avoiding a hard landing as Fed policymakers signalled rate cuts as soon as September.Wall Street stock index futures were about 0.3% firmer, with no major U.S. data expected on Friday as nerves calmed following a volatile week that saw a mass unwinding of currency carry trades in response to the Bank of Japan’s surprise rate hike late last month.Reassurance from Federal Reserve policymakers that they were more confident that inflation is cooling enough to cut rates, along with a bigger-than-expected fall in U.S. jobless claims data on Thursday, underpinned the recovery in stocks.Oil prices headed for weekly gains of around 3% as fears of a widening Middle East conflict persisted, while the dollar hovered close to a one-week high.The MSCI All Country stock index, was up 0.3% at 784.4 points, recovering much of the ground lost during the week. The benchmark is 5.7% below its lifetime high of 832.35 reached on July 12, though still up 7.5% for the year.In Europe, the STOXX index of 600 companies was up 0.6%, with the loss for the week all but erased.In a sign of calmer nerves, the VIX index, also known as Wall Street’s ‘fear gauge’, tumbled nearly 2%, a far cry from its record one-day spike on Monday.Divergent central bank interest rate moves, a repricing of recession probability in the United States, thinner liquidity in August accentuating volatility, and Middle East tensions all combined to put the brakes on a months-long winning streak in stocks to record-highs, analysts said.”We are still in the month of August, so we can still have some volatility,” said Marie de Leyssac, portfolio manager at Edmond de Rothschild Asset Management.Investors will continue to study employment data, keep an eye on the Bank of Japan, and particularly on the annual meeting of global central bankers hosted by the Kansas City Fed in Jackson Hole later this month, she said.”This year I think it is a really important meeting because we will have more insight into what (Federal Reserve Chair) Jerome Powell sees for the future, and maybe more insight on the path to lower rates,” de Leyssac said.Before then, investors will scrutinise next week’s U.S. consumer prices and retail sales figures for fresh evidence on chances of the economy escaping a hard landing.NIKKEI RECOVERSJapan’s Nikkei stocks benchmark closed 0.6% higher, erasing most of the losses since a 12.4% crash on Monday.The Nikkei has managed to claw back most of its losses after a brutal sell-off on Monday due to recession worries and the unwinding of investments funded by a soft yen, finishing the week with a comparatively tame 2.5% decline.The yen also veered from negative to positive through the session, last trading at 147.060 per dollar.MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.65%, more than reversing the drop from Thursday. For the week, it has reversed earlier losses to be largely flat. “The prospect of better-than-feared U.S. growth and a weaker yen constrain the fundamental and technical risks that inspired the extreme volatility experienced at the start of the week,” said Kyle Rodda, a senior financial market analyst at Capital.com. Some Federal Reserve officials said they were increasingly confident that inflation is cooling enough to allow interest-rate cuts ahead, but not because of the recent market rout.The U.S. dollar gained as markets gave up bets on an emergency rate cut from the Fed, and is set for a 0.4% gain on yen this week, despite Monday’s precipitous 1.5% plunge. [FRX/]Bond yields have climbed this week with safe-havens in less demand, but began easing as confidence returned to markets. U.S. 10-year yields were at 3.957%. Two-year yields were trading at 4.0385%.Brent crude futures were trading up 0.4% at $79.47 a barrel, and up more than 3% for the week, while U.S. West Texas Intermediate crude advanced 0.4% to $76.50, and also up over 3% for the week. Gold prices were a touch firmer at $2,427 an ounce, and heading for a drop on the week. More

China’s Consumer Price Index (CPI) and Producer Price Index (PPI) for July showed slight improvements over forecasts. CPI rose 0.5% YoY, surpassing expectations (Citi/Mkt: 0.4/0.3% YoY) and reaching the highest level since April 2023, excluding Chinese New Year months. “The headline number could seemingly offer some relief for China’s soft domestic demand, yet the breakdown appears less encouraging,” the analysts said.Sequentially, CPI increased 0.5% MoM, reflecting a high reading if CNY months are excluded. Despite this, the breakdown reveals less favorable trends:The Producer Price Index (PPI) also beat expectations, remaining at -0.8% YoY (Citi/Mkt: -1.1/-0.9% YoY) with a sequential change of -0.2% MoM. However, the small beat might be short-lived due to expected commodity price softening into August. Key sectoral performances include:Despite the small beats in inflation data, Citi Research argues that these figures may not adequately address persistent deflationary pressures. Supply-side factors, such as food price fluctuations and seasonal travel demand, have driven recent CPI improvements, but core inflation remains weak and PPI faces ongoing challenges from overcapacity and insufficient demand.Citi maintains its annual inflation forecasts at 0.6% YoY for CPI and -1.4% YoY for PPI, with a negative GDP deflator expected for the year.  More

Net profits at commercial banks grew 0.4% year on year to 1.3 trillion yuan ($181.3 billion) in the first quarter of this year and their capital adequacy ratio at the end of June was 15.53%, the regulator added.($1 = 7.1699 Chinese yuan renminbi) More

The Wall Street bank has previously maintained that the Federal Reserve would likely halt balance sheet reduction before reserves reach the “somewhat above” ample level, particularly in the event of a recession.Last year, during the July 2023 press conference, Fed Chair Powell mentioned that in “a world where things are okay” and the Fed is merely normalizing rates lower, balance sheet reduction could continue even as policy rates decrease.However, this narrative could change “if there is a material weakening in the labor market and activity,” Citi economists note.With the latest jobs report revealing more labor market weakness than anticipated by most economists and the Fed, it has become more probable that the policymakers might signal at the September meeting that the end of balance sheet reduction is nearing, potentially by December.“If activity and labor market data deteriorate further in coming weeks, a sooner end of the balance sheet could be signaled at the September meeting but an abrupt end in September would not be our base case unless acute liquidity issues arise,” economists continued.”We do not expect any major liquidity pressures in the coming months with reserves still at abundant levels, reverse repo balances still ~ $290bln and the standing repo facility serving as a backstop.”In the week ending July 31, the Fed’s balance sheet saw a reduction of approximately $27 billion, with $10 billion in Treasuries and $14 billion in mortgage-backed securities rolling off.On the liability side, the Treasury’s cash account (TGA) surged to $854 billion on July 31 due to month-end settlements but has since fallen to $759 billion. The Treasury has indicated that the TGA will reach around $850 billion by the end of September, decreasing to $700 billion by year-end as the debt limit suspension ends.Reverse repo (RRP) balances have remained more persistent than expected, despite rising SOFR rates, likely due to intermediation and counterparty limit issues. Because of this and strong TGA liquidity, bank reserves fell to $3.178 trillion from $3.276 trillion during the same week. More

In comments reported by Reuters, Schmid said in remarks prepared for delivery to the Kansas Bankers Association’s annual meeting in Colorado Springs, Colorado, that this paves the way for a reduction in the Fed’s interest rate.Schmid stated: “Given the multi-decade shock to inflation that we have experienced, we should be looking for the worst in the data rather than the best.”He is said to have added that prices may fluctuate and the Fed requires “longer periods” to ensure the path of inflation..”However, if inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy,” he commented.The latest inflation data shows that inflation is at around 2.5%, although the Fed’s goal is 2%, leading Schmid to state that the Fed is “close, but we are still not quite there.”Last week, the Fed decided to keep the policy rate within the 5.25%-5.50% range, where it has remained for over a year. However, it hinted at a possible reduction in borrowing costs next month, citing a more balanced outlook on inflation and employment risks.Following the policy decision, a weak jobs report a couple of days later sparked fears in financial markets that the Fed will need to respond aggressively to cushion the economy from recession.Schmid pushed back on that view, describing the economy as resilient, consumer demand strong, and the labor market as noticeably cooling but still “quite healthy” when indicators beyond the rise in the unemployment rate are considered.Given these conditions, he stated that the Fed’s current policy stance “is not overly restrictive.” Additionally, he mentioned that in order to see further declines in inflation, the labor market must cool down even more.”This story could change if conditions were to weaken considerably more,” Schmid reportedly added. However, overall, he signaled that he remains on wait-and-watch mode as the “path of policy will be determined by the data and the strength of the economy.”Schmid reportedly stated: “With the tremendous shocks that the economy has endured so far this decade, I would not want to assume any particular path or endpoint for the policy rate.” More

NEW YORK (Reuters) – A week of wild market swings has investors looking ahead to inflation data, corporate earnings and presidential polls for signals that could soothe a recent outbreak of turbulence in U.S. stocks.Following months of placid trading, U.S. stock volatility has surged this month as a run of alarming data coincided with the unwinding of a massive, yen-fueled carry trade to deal equities their worst selloff of the year. The S&P 500 is still down around 6% from a record high set last month, even after making up ground in a series of rallies after Monday’s crushing selloff. At issue for many investors is the trajectory of the U.S. economy. After months of betting on an economic soft landing, investors rushed to price in the risk of a more severe downturn, following weaker-than-expected manufacturing and employment data last week. “Everybody is now worried about the economy,” said Bob Kalman, a portfolio manager at Miramar Capital. “We are moving away from the greed portion of the program and now the market is facing the fear of significant geopolitical risks, a hotly contested election and volatility that is not going away.”Though stocks have rallied in recent days, traders believe it will be a while before calm returns to markets. Indeed, the historical behavior of the Cboe Volatility Index – which saw its biggest one-day jump ever on Monday – shows that surges of volatility usually take months to dissipate.Known as Wall Street’s fear gauge, the index measures demand for options protection from market swings. When it closes above 35 – an elevated level that it topped on Monday – the index has taken 170 sessions on average to return to 17.6, its long-term median and a level associated with far less extreme investor anxiety, a Reuters analysis showed.One potential flashpoint will be when the U.S. reports consumer price data on Wednesday. Signs that inflation is dropping too steeply could bolster fears that the Federal Reserve has sent the economy into a tailspin by leaving interest rates elevated for too long, contributing to market turbulence. For now, futures markets are pricing in a 55% chance the central bank will bring down benchmark interest rates by 50 basis points in September, at its next policy meeting, compared with a roughly 5% chance seen a month ago.“Slower payroll growth reinforces that U.S. economic risks are becoming more two-sided as inflation cools and activity slows,” said Oscar Munoz, chief U.S. macro strategist at TD Securities, in a recent note.Corporate earnings, meanwhile, have been neither strong enough nor weak enough to give the market direction, said Charles Lemonides, head of hedge fund ValueWorks LLC. Overall, companies in the S&P 500 have reported second-quarter results that are 4.1% above expectations, in line with the long-term average of 4.2% above expectations, according to LSEG data.Walmart (NYSE:WMT) and Home Depot (NYSE:HD) are among companies reporting earnings next week, with their results seen as offering a snapshot on how U.S. consumers are holding up after months of elevated interest rates. The end of the month brings earnings from chip giant Nvidia (NASDAQ:NVDA), whose shares are up around 110% this year even after a recent selloff. The Fed’s annual Jackson Hole gathering, set for Aug. 22-24, will give policymakers another chance to fine tune their monetary policy message before their September meeting.Lemonides believes the recent volatility is a healthy correction during an otherwise strong bull market, and he initiated a position in Amazon.com (NASDAQ:AMZN) to take advantage of its weakness.The U.S. presidential race is also likely to ramp up uncertainty. Democrat Kamala Harris leads Republican Donald Trump 42% to 37% in the race for the Nov. 5 presidential election, according to an Ipsos poll published on Thursday. Harris, the vice president, entered the race on July 21 when President Joe Biden folded his campaign following a disastrous debate performance on June 27 against Trump.With nearly three months until the Nov. 5 vote, investors are braced for plenty of additional twists and turns in an election year that has already been one of the most dramatic in recent memory. “While early events suggested a clearer picture of US Presidential and Congressional outcomes, more recent events have again thrown the outcome into doubt,” analysts at JPMorgan wrote.Chris Marangi, co-chief investment officer of value at Gabelli Funds, believes the election will add to market volatility. At the same time, expected rate cuts in September could boost a rotation into areas of the market that have lagged in a year that has been dominated by Big Tech, he said.“We expect increased volatility into the election but the underlying rotation to continue as lower rates offset economic weakness,” he said. More

This article is an onsite version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning. Today we’re covering:One of the largest wildfires in California’s historyHow Microsoft spread its bets beyond OpenAIThe Bank of Mexico’s rate cutBut first, US equities had their strongest gain yesterday since 2022, after figures from the US labour department showed initial state unemployment claims, a proxy for lay-offs, were lower than expected in July.The fall in unemployment claims helped to assuage investors’ fears that the world’s largest economy was heading into a downturn. The upbeat data has reverberated across global financial markets this morning, with Asian and European indices having clawed back the bulk of their losses since Monday’s sell-off.Last week’s jobs report, showing fewer jobs added to the US economy than expected, had sent markets into a tailspin this week. Vix, an indicator of stock market volatility, peaked on Monday. And analysts had begun debating whether the Federal Reserve was moving too slowly to cut rates.“I think it’s going to take time for markets to normalise,” Kristina Hooper, chief global market strategist at Invesco told the FT. “But we have to ask ourselves what triggered that sell-off, and I think it was irrational. I don’t think it’s telling us that we have a big recession coming,” she said.Bargain buys: Big investors such as BlackRock and UBS are among those hunting for cheap stocks after Monday’s sell-off, focusing on megacap tech groups.US politics: Recent market volatility is a warning to Kamala Harris that her campaign cannot count on a rebounding economy ahead of November’s election.Here’s what I’m keeping tabs on today and over the weekend:Economic data: Brazil publishes inflation data for July. Canada publishes employment data. Results: Bridgestone, Hargreaves Lansdown and RTL report.Paris Olympics: The Games will hold medal ceremonies for athletes beaten by competitors later revealed to have been doping, ahead of the closing ceremony on Sunday. How well did you keep up with the news this week? Take our quiz.Five more top stories1. US President Joe Biden, alongside the leaders of Egypt and Qatar, has made an urgent push to conclude ceasefire talks and a hostage deal between Israel and Hamas, setting August 15 as the date at which negotiations must resume. 2. Perplexity AI has increased its monthly revenues and usage seven-fold since the start of the year, after closing a new $250mn round of funding. The AI-powered search engine answered roughly 250mn queries last month, compared with 500mn queries for the whole of 2023.3. One of the largest wildfires in California’s history, so far covering 450,000 acres, has burnt through swaths of forest earmarked for conservation under carbon credit plans backed by companies including oil refining and power groups.4. Mexico’s central bank cut its benchmark interest rate by 25 basis points yesterday, warning that the recent turmoil in global financial markets had hit the country on top of the prolonged “weakness” in the economy since the end of last year.5. Coca-Cola is selling €1bn of new debt that it may use to help pay potential charges arising from a dispute with the US Internal Revenue Service, in which it could owe $16bn. The proceeds will add to the $7bn of fresh borrowing by the company this year.The Big Read© FT montage/BloombergMicrosoft chief Satya Nadella’s bet on OpenAI in July 2019, long before its flagship ChatGPT became a household name, has since created one of the industry’s most successful partnerships. Last year, a quashed coup against co-founder Sam Altman only served to remind investors of how central the start-up had become to the tech giant’s artificial intelligence ambitions. But since the crisis, Nadella has been working to execute an AI strategy independent of the start-up. We’re also reading . . . Latin American development: Deep policy fatigue in the US is hampering development in Central and South America, Adam Tooze writes.Flipping burgers: Research on entry-level McDonald’s workers is shedding new light on questions surrounding low-wage pay and inequality, writes Soumaya Keynes.Big Tech verdict: Branding Google a monopoly opens the door for change, John Thornhill writes.Chart of the dayThe US’s trucking industry has begun to show signs of life after one of the deepest downturns in its history. Demand has picked up recently even as prices remain suppressed by excess fleet capacity, soaring fixed costs and increased competition for limited freight loads.Take a break from the news The FT’s Simon Kuper explains why Olympic medals are usually a signal that a country is doing important things right, far beyond sport.© Harry HaysomAdditional contributions from Benjamin Wilhelm and Tee ZhuoThank you for reading and remember you can add FirstFT to myFT. 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