Finance

Central bankers are entering the final stretch of their quest to defeat inflation. Rich-world prices are rising by 5.4% year on year, down from a peak of 10.7% in October 2022. Although it is impressive progress, the last part of the quest—getting inflation from 5.4% to central banks’ targets of around 2%—could be the hardest. That is because labour markets are not co-operating.image: The EconomistNot long ago employers wanted to hire many more workers than they could find, resulting in an unprecedented surge in unfilled vacancies (see chart 1). In 2022-23 global Google searches related to “labour shortage” jumped to their highest ever level. With plenty of other options, workers asked their bosses for big pay rises. Year-on-year wage growth across the rich world doubled from its pre-covid rate to close to 5% (see chart 2), adding to companies’ costs and in turn encouraging them to raise the prices they charged consumers.image: The EconomistTo get inflation under control, wage growth therefore had to come back down. Given weak productivity growth across the world, a 2% inflation target is probably achievable only if nominal wages grow by 3% a year or less. Central bankers hoped that by raising interest rates they would cause demand for labour to fall—ideally bringing down wage inflation without wrecking people’s livelihoods.The first part of the plan has worked. Demand for labour (ie, filled jobs plus unfilled vacancies) is now only 0.4% higher than the supply of workers in the rich world, down from a peak of 1.6%. Searches for “labour shortage” have fallen by a third. Almost everywhere you are now less likely to see “help wanted” signs.Lower demand for labour has also caused surprisingly little damage to people’s employment prospects. We estimate that, in the past year, falling vacancies have accounted for the entire decline in labour demand across the rich world. Over the same period the number of people actually in work has grown. The unemployment rate across the rich world remains below 5%. Some countries are even beating records. In Italy the share of working-age people in a job recently hit an all-time high—the country has swapped la dolce vita for la laboriosa vita.But despite falling labour demand, there is less evidence of the final part of the plan: lower wage inflation. Although American pay growth is down from more than 5.5% year on year to around 4.5%, that is probably still too high for the Federal Reserve’s 2% inflation target. And elsewhere there is little evidence of progress. In recent quarters wage growth across the rich world has hovered at around 5% year on year. British wage growth is more than 6%. “Very early indications for January show negotiated pay deals slowing only modestly,” reported analysts at JPMorgan Chase, a bank, last week. Euro-area pay is growing similarly fast.Is high wage growth, and thus above-target inflation, now baked into the economic cake? Some evidence suggests it is—especially in Europe. Spanish workers, for instance, have used their extra bargaining power to change their contracts, such that the share of workers whose pay is indexed to the inflation rate has risen from 16% in 2014-21 to 45% last year. A recent study by the OECD, a club of mostly rich countries, on Belgium worries about “more persistent inflation due to wage indexation”.More generous wage agreements today could lead to higher inflation tomorrow, leading in turn to even more generous wage agreements. Across the rich world strikes have become much more common, as workers seek higher wages. Last year America lost almost 17m working days to stoppages, more than in the previous ten years combined. Britain has also seen a surge in industrial action. On January 30th Aslef, a union for train drivers, is expected to begin a series of walkouts. Germany’s train drivers began their own strike on January 24th.There is, however, a more optimistic interpretation of these developments. Just as in 2021-22, when wages took a while to accelerate after labour demand rose, so today they could take time to lose speed. After all, companies and workers renegotiate wages infrequently—often annually—meaning that workers may only slowly realise that they have less bargaining power than before. Estimates for America published by Goldman Sachs, another bank, indicate that it can take a year or so for declines in labour demand to show up as lower wage growth—suggesting that the final stretch of disinflation will be annoyingly slow, but will pass. ■ More

China may have trouble attracting investors again this year.
ETF Action’s Mike Akins sees challenges tied to the country’s ability to generate stock market returns.

“It’s kind of the old cliché. Fool me once, shame on you. Fool me twice, shame on me,” the firm’s founding partner told CNBC’s ETF Edge this week. “You’ve got this situation where China’s economy expanded. The stock market went nowhere. It’s been very volatile. There’s been periods where it’s gone way up but also come way down.”
According to Atkins, emerging market ex-China products are among the largest inflows ETF Action is seeing.
“You’ve got a whole new issue that you have to think about when going to that market,” he said. “Is it investible from a standpoint of total return? Or is it really a growth story in the economy alone and not in the actual return of the stock market?”
Franklin Templeton Investments’ David Mann cites another issue for investor hesitancy.
“The geopolitical factor with China is certainly on everyone’s mind,” said Mann, the firm’s global head of product and capital markets. “China was down last year. It is down again this year. Investors are probably looking a lot at the political side.”
The Hang Seng Index is down more than 6% this year and almost 30% over the past 52 weeks.

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Small cap stocks may be on the cusp of a turnaround.
According to Fairlead Strategies market technician Katie Stockton, the Russell 2000’s underperformance so far this year is likely a near-term setback.

“We’re kind of convinced that we’ll see small caps do better. Maybe they don’t outperform strongly. But a better year for them after what was a very difficult year for them because breadth was so weak, ” the firm’s founder and managing partner told CNBC’s “Fast Money” on Wednesday.
So far this year, the Russell 2000 is off two percent. Meanwhile, the S&P 500, Dow and Nasdaq 100 have hit new all-time highs.
Stockton believes the Russell 2000’s decline has shaken investors’ confidence in small caps.

‘Short-term oversold condition’

“We want to sort of re-instill that confidence because we’ve seen an initial reaction to a short-term oversold condition — that’s IWM or the Russell 2000 ETF,” she said. “With that, we have improvement in relative performance: Long-term downside momentum versus the S&P 500 has improved.”

Arrows pointing outwards

The Russell 2000 is coming off a strong fourth quarter. It rallied by almost 14% in that period.

“For IWM, we saw a pretty major trading range breakout in Q4,” Stockton said. “It’s something that we had anticipated because there were some positive divergences in momentum as it had gone sideways with a ton of volatility.”
CNBC’s Anna Gleason contributed to this article.

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The owner of Louis Vuitton, Moët & Chandon and Hennessy on Thursday night reported sales of 86.15 billion euros ($93.46 billion) for the full year, exceeding consensus forecasts.

Bernard Arnault, Chairman and CEO of LVMH Moet Hennessy Louis Vuitton, speaks during a press conference to present the 2023 annual results of LVMH in Paris, France, January 25, 2024. 
Benoit Tessier | Reuters

LVMH shares jumped more than 12% on Friday morning, after the world’s largest luxury group posted higher-than-expected sales for 2023 and raised its annual dividend.
The owner of Louis Vuitton, Moët & Chandon and Hennessy, as well as brands including Givenchy, Bulgari and Sephora, on Thursday night reported sales amounting to 86.15 billion euros ($93.34 billion) for 2023, exceeding consensus forecasts and equating to 13% organic growth from the previous year.

Organic revenue was up 10% in the fourth quarter.
The result was boosted in particular by 14% annual growth in the critical fashion and leather goods sector, along with 11% growth in perfumes and cosmetics. Wines and spirits meanwhile posted a 4% decline.
“Our performance in 2023 illustrates the exceptional appeal of our Maisons and their ability to spark desire, despite a year affected by economic and geopolitical challenges,” Bernard Arnault, chairman and CEO of LVMH, said in a statement.
“While remaining vigilant in the current context, we enter 2024 with confidence, backed by our highly desirable brands and our agile teams.”
After a boom during the pandemic, the luxury sector endured a rough end to 2023 as challenging geopolitical and macroeconomic conditions weighed on consumer spending, particularly in the U.S. and China.

LVMH in April 2023 became the first European company to surpass $500 billion in market value, but a share price decline over the last six months allowed it to be eclipsed as Europe’s largest company by Danish pharmaceutical giant Novo Nordisk.
British luxury brand Burberry earlier this month issued a profit warning in response to slowing demand, as the balloon in high-end spending that peaked during the pandemic loses air. At the time, the news sent Burberry shares plunging and dragged down the wider sector.
Yet luxury stocks broadly advanced on Thursday as investors took heart from LVMH’s reassuring results. Burberry’s own shares were up 1.7% Friday morning.
Javier Gonzalez Lastra, portfolio manager of the Tema Luxury ETF, told CNBC on Thursday that investors are trying to gauge where the bottom of the earnings cycle revision is for the luxury sector. He predicted that earnings are “likely to get tougher” through the first half of 2024 because of last year’s unusually high annual comparisons.
Arnault, however, is pinning some hope on LVMH’s partnership with the Paris 2024 Olympics, which he said “provides a new opportunity to reinforce our global leadership position in luxury goods and promote France’s reputation for excellence around the world. More

China and the U.S. are working toward creating a more stable and predictable environment for businesses, Chinese Commerce Minister Wang Wentao said Friday.
Since U.S. Commerce Secretary Gina Raimondo’s visit to China last summer, the two countries have agreed to hold regular meetings at the ministerial level and below.
U.S. and other foreign businesses in China have long complained of challenges to doing business in the Asian country, such as unequal treatment versus local players.

The flags of China, U.S. and the Chinese Communist Party are displayed in a flag stall at the Yiwu Wholesale Market in Yiwu, Zhejiang province, China, May 10, 2019.
Aly Song | Reuters

BEIJING — China and the U.S. are working toward creating a more stable and predictable environment for businesses, Chinese Commerce Minister Wang Wentao said Friday.
Since U.S. Commerce Secretary Gina Raimondo’s visit to China last summer, the two countries have agreed to hold regular meetings at the ministerial level and below. Wang and Raimondo had a call earlier this month.

That communication “strives to create a good environment for the two countries’ economic and trade cooperation, especially in stabilizing business expectations,” Wang said in Mandarin at a press conference, translated by CNBC.
He did not mention U.S. tech restrictions, but said sanctions bring business uncertainty and “greatly increase” compliance costs.
In the last two years, the Biden administration has issued export controls that limit the ability of Chinese companies to buy advanced tech such as high-end semiconductors from U.S. businesses. Washington has said it’s a way to keep China’s military from accessing cutting-edge tech, while maintaining areas of cooperation.

“We always believe that the common interests of China and the U.S. in economy and trade are far greater than their differences,” Wang said.
U.S. and other foreign businesses in China have long complained of challenges to doing business in the Asian country, such as unequal treatment of foreign companies compared to local players. More recently, international businesses have said Beijing’s vague rules around data transfer out of the country make operations difficult.

In the fall, the Cyberspace Administration of China (CAC) issued new draft rules that said no government oversight is needed for data exports if regulators haven’t stipulated that it qualifies as “important.” The move was widely seen as an improvement for foreign businesses, but no official policy has yet followed.
When asked Friday for an update on data rules, Wang only said the “primary ministry is stepping up efforts to release them.”
He said China has acted on a 24-point plan released last summer for supporting foreign businesses in the country — with implementation or progress on “more than 60%” of the measures. Wang also said the ministry has set up regular channels for foreign businesses to share feedback.
When Raimondo visited China last year, she called for more action to improve predictability for U.S. businesses in China. Referring to the 24-point plan, she had said: “Any one of those could be addressed as a way to show action.”

Growing international challenges

China’s economic growth has slowed from the double-digit pace of prior decades to a 5.2% increase in 2023. Growth is expected to slow further this year.
Wang told reporters Friday that this year, the international trade situation would be “even more complex and severe,” pointing to factors such as increased geopolitical tensions.
Foreign direct investment fell by 8% to 1.13 trillion yuan ($160 billion) in 2023, the lowest level in three years, according to Ministry of Commerce data. It did not specify how much the U.S. invested in China, while noting France and the U.K. saw the largest increases in such investment last year.

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China has sought to bolster foreign investment in the country.
At World Economic Forum’s annual conference in Davos, Switzerland, earlier this month, Chinese Premier Li Qiang gave a speech that portrayed China as an opportunity instead of a risk.
“Davos is littered with CEOs who have stories of intellectual property ripped off, agreements summarily changed, arbitrary legal judgments in favor of local competitors, and more,” Ian Bremmer, founder and president of the Eurasia Group, said in a note Monday.
“But I was also impressed by the breadth of CEOs — across a wide degree of sectors (finance, healthcare, insurance, manufacturing, technology, luxury goods, transition energy and more) who told me stories not just of increased access over the past months, but also new business terms, licenses and partnerships that they were legitimately enthusiastic about,” Bremmer said.
He said that “almost every Fortune 500 CEO with a business in China” that he met there was planning to travel more to China this year compared to last year.
“Even at 2-3% growth, a change in political impulse from the world’s second largest economy with large scale industrial infrastructure and a massive consumer base isn’t to be ignored.” More

JPMorgan Chase changed or expanded the roles of several executives considered frontrunners to eventually succeed CEO Jamie Dimon.
Jennifer Piepszak, co-head of JPMorgan’s giant consumer bank, will now became co-head of the firm’s commercial and investment bank along with Troy Rohrbaugh, a veteran leader of the bank’s trading operations.
Piepszak’s former partner, Marianne Lake, will transition from consumer banking co-head to being its sole CEO, JPMorgan said.

Jamie Dimon, President & CEO,Chairman & CEO JPMorgan Chase, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 17th, 2024.
Adam Galici | CNBC

JPMorgan Chase on Thursday said several executives considered frontrunners to one day take over for CEO Jamie Dimon had new or expanded roles.
Jennifer Piepszak, co-head of JPMorgan’s giant consumer bank, will now became co-head of the firm’s commercial and investment bank along with Troy Rohrbaugh, a veteran leader of the bank’s trading operations.

Piepszak’s former partner, Marianne Lake, will transition from consumer banking co-head to being its sole CEO, JPMorgan said. The business includes some of the country’s largest operations in retail banking, credit cards and small business lending.
The moves should give Piepszak and Lake more experience as the long-running succession race atop the nation’s largest bank drags on. When they were made co-heads of consumer banking in 2021, Piepszak and Lake were considered favorites to eventually succeed Dimon, who is now 67 years old. That year, the bank’s board gave Dimon a special bonus to retain his services for a “significant number of years.”
It wasn’t clear if there is a frontrunner for the job after the latest set of changes, or if Dimon intends to leave anytime soon.
The running joke within JPMorgan is that for Dimon, considered the top banker of his generation, retirement is always five years away. Over the years, several of his deputies have moved on to lead other organizations after losing patience that the top job would ever become available.
Rohrbaugh and global payments chief Takis Georgakopoulos round out the short list of potential successors along with Lake and Piepszak, who have both served as CFO before their current assignments, said a person with knowledge of the bank’s planning.
As part of the changes, the bank’s new commercial and investment bank run by Piepszak and Rohrbaugh now includes operations that had been a separate division run by Doug Petno. And Daniel Pinto, who had been CEO of the corporate and investment bank for a decade, relinquishes that title while remaining the bank’s president and chief operating officer. More

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European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.

The ECB on Thursday held interest rates steady for the third meeting in a row. The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation.
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Each year the 193 member states of the United Nations General Assembly vote on dozens of resolutions, earnestly setting the world to rights. Last month, for example, they voted in favour of reducing space threats, eradicating rural poverty and combating dust storms, among other things. The votes count for little. The assembly’s resolutions are not legally binding. Its budgetary powers are small. And it has as many military divisions as the pope.But for scholars of international relations, these votes have long provided a handy, quantitative measure of the geopolitical alignments between countries. More recently, economists have also turned to them. Owing to the trade war between America and China, Russia’s invasion of Ukraine, the conflict in Gaza and recent blockades in the Red Sea, geopolitics has become impossible for dismal scientists to ignore. Although their models of trade and investment typically give pride of place to the economic size of countries and the geographic distance between them, they are now considering “geopolitical distance” as well.image: The EconomistThe latest such study was published this month by the McKinsey Global Institute, a think-tank attached to the consultancy of the same name. By analysing countries’ votes on 201 of the higher-profile resolutions between 2005 and 2022, McKinsey was able to plot countries’ geopolitical stances on a scale from zero to ten. America stands at one end of the spectrum, labelled zero. At the other end is Iran at ten. In between are countries like Britain at 0.3, Brazil at 5 and China at 9.6.The authors use this measure to provide a new perspective on each country’s trade. As well as measuring the average geographical distance that a country’s trade must travel, they also calculate the geopolitical distance it must traverse. In a hypothetical world in which half of Iran’s trade was with America and half with Brazil, its trade would cover a geopolitical distance of 7.5.Their results are illuminating. European countries trade mostly with one another. As a consequence, their trade for the most part flows to their friends and neighbours. Things are rather less comfortable for Australia, however. It must trade with countries that are both geopolitically and geographically remote.America is somewhere in between. Thanks in part to its continental size, it has few prosperous neighbours. Less than 5% of global GDP is generated by countries within 5,000km of America, as McKinsey points out. Its trade travels almost 7,200km on average, compared with 6,600km for China’s trade and a global average of less than 5,200km. Yet in the diplomatic realm, the world is not so far away. The geopolitical distance America’s trade must cover is only a little above the global average. It is far shorter than the diplomatic distances bridged by China. Indeed, China’s trade covers a greater geopolitical gap than that of any of the other 150 countries in McKinsey’s data, bar Nicaragua, which resents America, but is doomed to do business with it.The study finds some early evidence of “friendshoring”. Since 2017, America has managed to shorten the geopolitical distance covered by its trade by 10%, on McKinsey’s scale. It has, for example, sharply curtailed imports from China, although some of the goods it now buys from other countries, such as Vietnam, are full of Chinese parts and components. China has also reduced the geopolitical distance of its trade by 4%, although that has required it to trade with countries farther afield geographically.Yet the report identifies several limits to this trend. Much of the trade countries carry out with ideological rivals is trade of necessity: alternative suppliers are not easy to find. McKinsey looks at what it calls “concentrated” products, where three or fewer countries account for the lion’s share of global exports. This kind of product accounts for a disproportionate share of the trade that spans long geopolitical distances. Australia, for example, dominates exports of iron ore to China. Likewise China dominates exports of batteries made from neodymium, a “rare-earth” metal.The attempt to reduce geopolitical dangers may also increase other supply-chain risks. Friendshoring will give countries a narrower range of trading partners, obliging them to put their eggs in fewer baskets. McKinsey calculates that if tariffs and other barriers cut the geopolitical distance of global trade by about a quarter, the concentration of imports would increase by 13% on average.For countries in the middle of the geopolitical spectrum, friendshoring has little appeal. They cannot afford to limit their trade to other fence-sitters, because their combined economic clout is still too small. Countries that score between 2.5 and 7.5 on McKinsey’s scale—a list that includes rising economies such as Brazil, India and Mexico—account for just one-fifth of global trade. To avoid falling between two stools, they must seek to trade across the geopolitical spectrum, just as they do now.Friendshoring has limits for China as well. There are simply not enough big economies in its geopolitical orbit to compensate for reduced trade with unfriendly Western trading partners. For China, then, friendshoring is more about replacing rivals and antagonists with more neutral parties among the non-aligned world, such as in Central Asia and the Middle East.Check mateIn studying how trade might contort itself along geopolitical lines, the McKinsey study assumes that the lines themselves remain fixed. But as the report freely admits, that might not be the case. The invasion of Ukraine and the conflict between Israel and Gaza is already causing new divisions and allegiances. It is conceivable that non-aligned countries might move closer to China politically, as China embraces them economically. Certainly, by spurning Chinese trade and investment, the West would give China added incentive to ingratiate itself with the rest of the world. After all, there are two ways to shorten the geopolitical distance of trade: trade more with friends or make more friends to trade with. ■Read more from Free exchange, our column on economics:What economists have learnt from the post-pandemic business cycle (Jan 17th)Has Team Transitory really won America’s inflation debate? (Jan 10th)Robert Solow was an intellectual giant (Jan 4th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More