This is an audio transcript of the FT News Briefing podcast episode: ‘Tesla sees a bumpy road ahead

Marc Filippino
Good morning from the Financial Times. Today is Thursday, January 26th, and this is your FT News Briefing.

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Tesla posted record revenues, but says the road ahead isn’t so clear. Canada looks like it could become the first major economy to pause interest rate increases. And we’ll get the latest reading on the US economy. Plus, the FT’s Kate Duguid looked into why money keeps gushing into a super short-term Federal Reserve program.

Kate Duguid
Investors are nervous to put money to work that may be locked up for even like a week.

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

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Tesla reported record revenues of about $24bn for the quarter ending in December. That beat expectations by a hair. But Elon Musk’s electric car company warned of a, quote, “uncertain macroeconomic environment this year”. It cited rising interest rates as a particular challenge. Analysts have been concerned about Tesla’s sales. The company slashed prices earlier this year and yesterday it said it expects to deliver nearly 2mn cars this year. That’s up from last year, but it’s still way off Tesla’s long-term goal.

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Canada’s central bank raised interest rates yesterday for the eighth consecutive time. Bank of Canada governor Tiff Macklem also made this more notable announcement:

Tiff Macklem
We expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken.

Marc Filippino
That pause would make Canada’s central bank the first of the major G10 economies to halt its rate increases. The FT’s international economy news editor Claire Jones says this might give us a sense of what’s to come later this year.

Claire Jones
Overall, I think global central banks are facing a broadly similar set of circumstances. So one of the reasons why the Bank of Canada yesterday was able to pause is that last year it was quite a bit more aggressive than the others in terms of raising interest rates. The Bank of Canada was the only one to raise interest rates by 100 basis points in one shot. We know the ECB and the Bank of England and the Fed did 75. I think the conclusion of that is that although central banks elsewhere are saying they’re gonna stay the course for now, a few months from now, the messages might be echoing those of the Bank of Canada yesterday.

Marc Filippino
Claire, you wrote a column recently saying that central banks should give up on trying to achieve a soft landing. Basically, you can’t fight inflation and avoid a recession. So would the Bank of Canada pausing interest rates be a retreat from its fight on inflation so it can avoid a severe downturn?

Claire Jones
I think this is gonna be a very interesting issue going forward, is if the Bank of Canada sees the, you know, inflation might not fall to this perfect target of 2 per cent, but it may be a little bit higher. But it looks as though the impact of high interest rates on growth, on investment, starts to weigh more on the Canadian economy, that they may think, OK, we have to live with slightly higher inflation in order to not cause a recession. But this is an idea that has been, you know, seen as anathema to central bank policymakers in the past. So whether or not they will be more aggressive and willing to stamp out growth and tolerate recessions and higher unemployment, I think, is one of the big macroeconomic questions for the next 12 months.

Marc Filippino
Claire Jones is the FT’s international economy news editor.

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US economic growth looks likely to have slowed at the end of last year — the latest GDP numbers are due out this morning. A slowdown would show that the Federal Reserve’s aggressive rate hikes are cooling off the economy. Here’s the FT’s US economics editor Colby Smith.

Colby Smith
Well, I think what we’re gonna see in the underlying data is that the economy is slowing on the whole, that consumer spending is weakening. Business activity more broadly is also slowing to a certain extent. And I think what the Fed really wants to see is that they are moving the economy to a more stable footing from one that was red hot with high labour demand, really strong growth more broadly, and one that was helping to fuel high inflation, to an economy that now is running at a more sustainable pace that is cooling off just enough in order to bring inflation down, but not so much that the economy as a whole tips into a recession. Now, it’s still very much an open question as to whether the US can avoid that outcome, but Fed officials remain quite optimistic about that.

Marc Filippino
Right. And that was that soft landing challenge that Claire was just talking about. So what does the Fed do with this GDP number as it’s considering monetary policy when it meets next week, Colby?

Colby Smith
So they take stock of this number, of course, because it does give helpful insights into where the economy was at, you know, at the end of last year. But I think what they’re looking at is more real-time data or the monthly government figures such as inflation, the labour data in the monthly jobs reports in particular, because those show a more immediate view as to where the economy is at the current moment. And what Fed officials have said is they need to see a further slowdown in labour demand, an easing of wage growth in order to feel confident that they have inflation under control now that it appears to have peaked. So ultimately, we’re at a point where they’re just collecting more and more evidence that things are moving in the direction of travel they want them to.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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Now, since we’re talking about the Fed, the US central bank has all sorts of ways to manage interest rates. One mechanism is called the overnight reverse repurchase agreement. Very technical, but it’s basically a way for the Fed to put a floor under yields for short-term debt. This “reverse repo” facility, as it’s called, is used mostly by money market fund managers.

Kate Duguid
So they can put cash at the Federal Reserve in exchange for short-term securities. And they will, they will get that cash back with a 4.3 per cent return the next day.

Marc Filippino
That’s the FT’s Kate Duguid. She’s been looking into a really interesting trend. Up until about a year and a half ago, the super-safe Fed program, kind of like a vault, was barely used — maybe a few billion dollars a day would come in. But then the Fed started buying bonds during the coronavirus pandemic to support the economy. The Fed expanded the program and money started pouring in. The Fed just didn’t expect that to continue for so long.

Kate Duguid
The Fed said very explicitly that they expected usage of RRP to go down as quantitative tightening sort of unfolded. As the Fed shrunk its balance sheet, it would increase the number and the amount of Treasury debt available to investors, right? You have more supply and so the price is lower and the yield is higher. And it just hasn’t. We keep on coming in at this daily number of above 2tn.

Marc Filippino
$2tn a day going into this reverse repo program. To find out what’s going on, Kate spoke to some money market fund managers. Those are the folks who invest in short-term securities and use this Fed program the most. The answer’s pretty straightforward.

Kate Duguid
Because interest rates have been changing so rapidly, because, you know, the Fed is so data-dependent and the data has been changing so quickly. You know, people are nervous. Investors are nervous to put money, money to work that may be locked up for even like a week. You know, these short-term bills that are in the market are pretty short-term, but overnight was just so much safer given all the volatility, all of the uncertainty in the market. The Fed is not . . . Fed officials have said that they’re not worried about this. But this is evidence, right, that quantitative tightening is not happening in exactly the way the Fed had expected.

Marc Filippino
Quantitative tightening, meaning the Fed removing liquidity by selling bonds it bought during the pandemic back into the market. But Kate points out that what’s going on with this reverse repo facility is not a sign of financial market stress.

Kate Duguid
It’s just that there is still so much money in the system after quantitative easing, right? There continues to be a huge amount of cash sloshing around the system, a huge amount of cash with nowhere better to go. And then the second thing is that investors are still pretty nervous, right? That interest rate volatility has been high, as the Fed has sort of rapidly escalated interest rates, and that isn’t over yet. Investors are still kind of sitting on the sidelines, maybe waiting for that entire process to be over.

Marc Filippino
That’s the FT’s US capital markets correspondent Kate Duguid.

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Before we go, we wanna remind you about our listener survey. We wanna hear from you guys. What do you like about our show? What do you think needs more work? If you take this short survey, emphasis on short, you’ll automatically be entered for a chance to win a pair of Bose QuietComfort Earbuds. Just go to FT.com/briefingsurvey. We’ll also have that link in the show notes.

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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.

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