FirstFT: Bond market points to Fed standing firm against inflation

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 stood at 3.4 per cent, bringing the difference between the two to 0.84 percentage points. The pattern, known as a yield curve “inversion”, has preceded every US economic downturn of the past 50 years.

The deepening of the inversion comes after a report last week showing the US economy continued adding jobs at a robust pace in November and an important survey indicating activity in the vast services sector is continuing to grow rapidly.

While the data paint an upbeat picture of the state of the economy, some investors are worried that it will also encourage the Fed to keep pushing interest rates higher next year, after taking them from near zero to a range of 3.75 to 4 per cent so far in 2022.

Higher borrowing costs, in turn, are expected to heap pressure on the economy and potentially trigger a recession.

Five more stories in the news

1. Peru ousts president after ‘attempted coup’ Lawmakers removed President Pedro Castillo after he tried to shut down congress before an impeachment vote yesterday. 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.

2. 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.

3. Western officials blame Turkey for oil disruption At least 22 crude tankers have been stopped in Turkish waters due to rules that bar ships transporting Russian crude from accessing European maritime insurance unless the oil is sold for $60 a barrel or less. But western officials said the vessels, most loaded with oil from Kazakhstan, should be allowed to pass.

4. Norway’s $1.3tn oil fund vows more aggressive ESG stance The world’s largest sovereign wealth fund will become a more vocal shareholder and plans to vote against companies that fail to set a net zero target, overpay their top leaders or do not have sufficiently diverse boards, its chief executive, Nicolai Tangen, told the Financial Times’ Global Boardroom event.

5. Veronica Ryan wins 2022 Turner Prize The UK’s best-known contemporary art award goes to Veronica Ryan, an artist who created the first permanent public artwork to commemorate the Windrush generation of people who arrived as immigrants to the UK from Caribbean countries between 1948 and 1971.

The day ahead

Economic data The UK’s Office for National Statistics releases data on economic activity and social change, while KPMG and the Recruitment and Employment Confederation deliver their monthly jobs survey.

Corporate results Costco Wholesale and Lululemon Athletica release quarterly figures, while DS Smith has half-year numbers. Balfour Beatty and British American Tobacco release trading updates.

Latvia bans TV Rain An exiled Russian news channel goes offline after Latvia withdrew its broadcast licence this week, accusing its journalists of violating laws and supporting Vladimir Putin’s invasion of Ukraine.

Join the FT’s top journalists in conversation with leaders in business and government at our Global Boardroom event, which runs through Friday. 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.

The mysterious disappearance of Kiwi shoe polish Kiwi shoe polish, once ubiquitous in the UK, is increasingly difficult to find as brand owner SC Johnson sees “a rise in casual shoes that don’t require formal polishing and an overall decrease in consumers polishing their shoes”, the company said. Carl Wilkinson wonders if it is a sign of a nation losing its shine.

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.

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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.