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FirstFT: Bond market points to Fed standing firm against inflation

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The gulf between short- and long-term US borrowing costs has reached its widest point since 1981, in a sign investors expect the Federal Reserve to stay the course in its battle to tame inflation, even as recession worries mount.

The two-year Treasury yield traded at 4.2 per cent yesterday, while the 10-year yield was lower at 3.4 per cent, pushing the premium for lending to the US government for two years compared to a decade to 0.84 percentage points.

When short-term borrowing costs rise above long-term yields it is known as a yield curve “inversion” and has preceded every US economic downturn of the past 50 years.

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But the signal the bond market is sending of an impending recession contrasts sharply with data from the real economy. Last week’s labour market data surprised economists to the upside as non-farm payrolls rose by 263,000 compared with an expected 200,000. October’s job gains were also revised up.

Data this week on the services sector showed that part of the economy expanded for the 30th month in a row and inflation remains well above the Fed’s 2 per cent target.

The US central bank has raised its main policy rate from near zero to a range of 3.75 to 4 per cent so far this year and many observers are now asking if the pace of those borrowing cost rises will slow.

Wall Street is betting that the US central bank will retreat from the 0.75 percentage point increases of the past four meetings when it gathers next week. The US futures market expects the benchmark rate to reach a peak range of 5 per cent to 5.25 per cent by the middle of 2023.

1. Peru ousts president after ‘attempted coup’ Lawmakers removed Pedro Castillo yesterday after he tried to shut down congress before an impeachment vote. Vice-president Dina Boluarte, who was sworn in as the country’s first female leader, called Castillo’s move an “attempted coup d’état” during a hastily arranged ceremony.

Dina Boluarte

2. Pentagon splits $9bn cloud computing contract among tech giants The Pentagon has split a $9bn contract for cloud computing services among Google, Oracle, Amazon and Microsoft, one year after scrapping a previous contract that was marred by accusations of political interference by the administration of former US president Donald Trump and bogged down by legal challenges. The contract — renamed The Joint Warfighting Cloud Capability from the Joint Enterprise Defense Infrastructure — is to build a large common commercial cloud for the entire Department of Defense.

3. Blackstone chief dismisses concerns over $69bn real estate fund Chief executive Stephen Schwarzman has spoken out for the first time since the investment group restricted withdrawals from the Blackstone Real Estate Income Trust, tying a spate of redemptions to investors facing stress in Asia.

4. Beijing is running out of fever medication China’s capital is running out of medical supplies as citizens rush to combat a rapidly spreading coronavirus outbreak, health workers said, putting stress on limited resources just as authorities lift pandemic restrictions. Clinics designated for Covid-19 patients are quickly filling up, and some hospitals have begun rationing ibuprofen and paracetamol.

5. US fund managers cross Atlantic to buy European oil stocks European oil companies are attracting US investors, who view them as cheap compared with the likes of ExxonMobil and Chevron after an energy stock rally at home. The valuation gap is luring investors who don’t usually invest in Europe, including BlackRock’s $19bn US equity dividend fund.

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The day ahead

Company earnings Sportswear retailer Lululemon is expected to continue to perform well thanks to continued demand for athleisure apparel and customers’ loyalty to its brand. Semiconductor manufacturing company Broadcom, pet goods retailer Chewy, and big box store operator Costco also report earnings.

Economic data New applications for unemployment aid in the US are estimated to have edged up to 230,000 in the week ended December 3, according to economists polled by Refinitiv. Consumer prices in Mexico are expected to have slowed last month, with economists predicting a 7.93 per cent annual rise after an 8.4 per cent increase in the headline figure in October.

Exxon unveils capital spending plans US oil major ExxonMobil is expected to release details of its capital spending and oil production plans through to 2027. Yesterday the company said it was lifting pay for its employees by 10 per cent after profits rose this year and its share price hit a record high.

Wirecard trial Almost 900 days after the German payments company crashed into insolvency, the criminal trial against former chief executive Markus Braun begins today in a high-security courtroom on the outskirts of Munich. Here’s what to expect.

FT Global Boardroom The summit continues today with appearances from Chevron’s chief executive Michael Wirth and Arvind Krishna, the head of IBM. Register here for your free digital pass.

What else we’re reading

The secret lives of MI6’s top female spies Despite having proved themselves during the second world war, women were not regularly recruited as British intelligence officers until the late 1970s. Today, three of the Secret Intelligence Service’s four director-generals are female. For the first time, they reveal why women often make the best spies for our times.

Rupert Murdoch’s dilemma The media baron is known for his anti-elite, low-tax, defence-heavy conservatism, but his political endorsements have proven much more chameleon-like in their pragmatism. Now, he faces one of the trickiest calls of his career, with implications for his influence and his profit machine Fox News: what to do with Donald Trump?

Big cities drive half of global economic growth A small selection of big cities has been the driving force behind more than half of global economic growth this century, according to a McKinsey analysis, even though they make up less than 1 per cent of the world’s landmass.

A map of the world showing that half of the world's economic growth this century came from just 1 per cent of its landmass

‘Worth the wait’: Georgia run-off result cements Democratic Senate gains This week’s result cemented the Democrats’ better than expected performance in November’s midterm elections and strengthened the hand of Chuck Schumer in the upper chamber of Congress. The shift in the Senate will have a significant impact on the Democrats’ ability to advance their policy agenda. Political correspondent Lauren Fedor explains why.

Fosun-owned Lanvin’s future hangs by a thread Chinese billionaire Guo Guangchang’s Fosun acquired a controlling stake in Lanvin in 2018, promising to revive the 133-year-old French fashion house’s fortunes. Now, with Lanvin trailing behind rivals Chanel, Dior and Hermès in the world’s biggest consumer market, Guo plans to take the company public while grappling with a $36bn debt pile.

Thank you to readers who took our poll. Nearly three-quarters of respondents said they would like a four-day work week.

Property

With rising prices pushing France and Switzerland off-limits for many ski-home buyers, demand is growing in Italy’s Courmayeur, where delightful cuisine and quiet pistes add to the appeal.

Courmayeur in Italy’s Aosta Valley

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