Unhedged’s Rob Armstrong on a puzzling US economy

This is an audio transcript of the FT News Briefing podcast episode: ‘Unhedged’s Rob Armstrong on a puzzling US economy’

Marc Filippino
Good morning from the Financial Times. Today is Monday, February 6th, and this is your FT News Briefing.

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A powerful conservative network says it won’t back Donald Trump. And European banks are getting a boost from rising interest rates. But first, we’ll chat with the FT’s Rob Armstrong about the puzzle that is the US economy right now.

Robert Armstrong
Well, I’m confused and I think everybody is.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Financial markets start the week off with a bit of a head-scratcher. The question is, what is going on with the US economy? Is it cooling? Is it still going strong? Investors have been acting like it’s slowing and they’ve piled into stocks and bonds, thinking that the Federal Reserve will pause or even cut interest rates. Markets even surged after last week’s rate rise from the Fed. Then we got this report on Friday saying jobs growth is going strong. To puzzle over all this, I’m joined by the FT’s US financial commentator, Rob Armstrong. Hey, Rob.

Robert Armstrong
Hi, how are you?

Marc Filippino
So, Rob, this latest jobs report from January shows that the US actually added a half a million new jobs. And I got to tell you, this surprised everyone, especially because we’ve been hearing a lot about tech lay-offs, tens of thousands of jobs being lost in this sector alone. Now how do you square these mixed messages?

Robert Armstrong
You’ve mentioned already two pieces of what is turning into a real economic puzzle. So we have all these bits of the economy that don’t seem to agree. So we have Big Tech saying they are seeing less demand from their customers. But for example, the credit card companies who reported earnings also last week, in the week before, all said they’re seeing no change in the spending habits of their customers. Just to look at other bits of the puzzle, housing is weak, retail sales are weak, the manufacturing sector looks soft. And then we have this great strong jobs report. It’s like, which pieces of data do you focus on? It’s a very tricky situation.

Marc Filippino
Yeah, I mean, there’s been a real sense among a lot of investors that the economy is slowing and that the Federal Reserve is gonna stop raising interest rates or even cut rates at some point. So how are markets now taking this latest jobs data, which might incentivise the Fed to keep tightening monetary policy instead of loosening it?

Robert Armstrong
Well, I was surprised by how firm markets were. We’ve had an absolutely wild rally for about a month, especially in the highest risk stocks on Wall Street. Your kind of profitless tech kind of stocks. And, you know, risky names in general have rallied strongly. The market overall has rallied. And I expected when I saw this jobs report that it would really put the scare into everyone, but the market took it OK. The market, in fact, is another one of these signals that’s hard to fit into the puzzle. Again, not agreeing with a lot of the other pieces of data that we’re seeing.

Marc Filippino
So, Rob, this is a lot to consider. What do you make of all this?

Robert Armstrong
Well, I’m confused and I think everybody is. So I don’t think we have the answer, but we have some parts of an answer. One, there’s clearly a big split between goods and services in the American economy right now. When we were all locked up during the pandemic, we all bought air fryers and exercise bikes. And now that we’re free again, we have too much of that stuff sitting around the house and we’re spending all our money on services, right? So it makes sense that the stuff part of the economy might be weak, whereas the activities side of the economy might be stronger. Another thing is that, look, the Fed has increased rates here. That is designed to hit the rate-sensitive parts of the economy. So when the Fed has gone from a policy rate of zero to a policy rate of four and three quarters, it makes sense that, for example, the housing part of the economy would be weak. And then finally, I think a lot of us, whatever the economy is doing, we might have a little bit of pandemic savings left over. And that is, whatever else might be going on in the economy, that might be buoying things a little bit and it might be a different picture when those pandemic savings run out.

Marc Filippino
Rob Armstrong is the FT’s US financial commentator and writes our Unhedged newsletter. Thanks, Rob.

Robert Armstrong
Thank you.

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Marc Filippino
A major US conservative group has signalled it will not back Donald Trump in his next bid for president. Americans for Prosperity is a powerful financial donor network led by billionaire industrialist Charles Koch. And yesterday, its chief executive, Emily Seidel, said: “The best thing for the country would be a president who represents a new chapter.” She added the group would support a candidate “who can win”. This is the latest rift between wealthy conservative backers and the former president. Hedge fund executive Kenneth Griffin and Blackstone chief executive Stephen Schwarzman have also distanced themselves from Trump.

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European banks are in the middle of reporting fourth-quarter earnings. The ones out so far show that the last quarter was a profitable one. Switzerland’s UBS beat expectations. It also reported a boost from client defections from rival Credit Suisse. But we also saw record profits from Italy’s UniCredit and Spain’s Santander.

Owen Walker
It looks like European banks are on to record their highest profit totals since before the financial crisis.

Marc Filippino
That’s our European banking correspondent, Owen Walker.

Owen Walker
And really, the main reason for this is it’s a real sugar rush, really, of rising interest rates. And when that happens, that provides a real boost to banks, because a lot of the ones with retail arms, they, one of their principal areas of income is called net interest income, which is essentially the difference between what they receive from mortgages and corporate loans and consumer loans in interest and what they pay out, which is, tends to be significantly lower in savings accounts.

Marc Filippino
So what are banks doing with these profits?

Owen Walker
What we have seen with some of the banks is that they’re taking these profits and offering quite large payouts to shareholders. So some banks have already had in place quite large buyout programs in place. Others are raising the dividend policies. They’re passing this on to shareholders and their share prices are bolting in response. And, you know, you look at some of these banks and they’re up sort of 40, 50 per cent, 60 per cent even in the last six months. So it doesn’t seem a bit of buoyancy around European banks at the minute.

Marc Filippino
The big event this week is Credit Suisse earnings. This is the bank that’s been struggling with years of scandals and is trying to turn itself around. Analysts are looking for more details on client defections.

Owen Walker
This is their own clients pulling money out in responding to some quite damaging social media rumours about the bank’s financial health. But what would be really interesting is to see whether those outflows continued and whether, you know, the bank itself has said that actually that they have put a stamp on some of those outflows. But there’ll be a lot of eyes on seeing how badly they’ve been affected.

Marc Filippino
That’s the FT’s European banking correspondent, Owen Walker.

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Before we go, did you know that the FT collaborates with leading artists to create stories that draw on contemporary issues? The series is called FT Standpoint, and the latest episode is a mini-drama called Capture. It’s about a couple whose 13-year-old son goes missing.

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Marc Filippino
Their search leads them to a private technology company.

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Marc Filippino
Pretty gripping stuff. But we’re not gonna spoil the ending for you. We’ll have a link in the show notes so you can find out what happens at the end of Capture.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.