US payroll employment surpasses expectations in September
US non-farm payrolls (NFPs) gained 336,000 in September, coming in well ahead of market consensus expectations of a 170,000 increase. It also trended higher than the upwardly revised 227,000 in August. This marks the third consecutive month where the NFP figure exceeded the previous month's. The three-month average, which eliminates some of the month-to-month volatility, also jumped from 163,000 last month to 240,000 in September.
The unemployment rate matched August's 3.8%, while average hourly earnings rose 0.2% in September, slightly under the consensus of 0.3% and again matching the 0.2% of the previous month.
Within the headline payrolls figure, September’s data saw a notable tick-up in private payrolls at 263,000, considerably above the consensus of 160,000. The leisure and hospitality sector was a key contributor to this surprise, adding 96,000 jobs in September, far higher than the 12-month average of 61,000.
“At the Jackson Hole Symposium, Fed Chair Jay Powell said, "evidence that the tightness in the labour market is no longer easing could also call for a monetary policy response,” commented Nathaniel Casey, Investment Strategist at Evelyn Partners. “This stronger than expected labour market report will therefore be of concern to the Fed and likely increases the risk of an additional rate hike in either the November or December FOMC meeting. However, with inflation coming under control, wage growth starting to ease and the rise in yields prompting tighter financial conditions, this could be enough to allow the fed to continue to hold rates steady.”
Goldman Sachs Research ponders if China's economy faces “Japanification”
Even as China's growth sputters, the “Japanification” of the world's second-largest economy is far from certain, according to a report from Goldman Sachs Research.
It wasn't necessarily deteriorating demographics that caused Japan's malaise in the 1990s, but rather the impact of demographic trends and other events on longer-term growth expectations, commented Hui Shan, Goldman Sachs Research's chief China economist.
“Once the demographic and debt overhang backdrop combined with asset bubble burst and policy missteps triggered a sustained downward shift in longer-term growth expectations, households reduced consumption and businesses cut back on investment,” Shan commented. These factors helped reinforce a negative feedback loop of anaemic growth.
China's situation appears even more extreme than Japan's in some respects: Housing prices are more stretched, at 20 times household income in China versus 11 times in Japan in 1990. At the same time, China's property downturn isn't being accentuated by a stock market collapse, as was the case for Japan when plunging share prices severely damaged its banking system. Even as its overall population declines, China will likely continue to enjoy population growth in its urban centres due to its still-low urbanisation rate.
“The key to avoid such a negative feedback loop is to cut off the continued deterioration in longer-term growth expectations,” Shan added. “Policymakers will have to manage the outlook for GDP growth as China transitions from property and infrastructure investment to a new economic engine based on upgraded manufacturing and self-reliance. Meanwhile, China can counter pessimism about the growth outlook by emphasising the importance of economic development, accelerating the restructuring of troubled property developers and local government financing vehicles, and strengthening social safety nets to encourage long-run household consumption.”
BIS and central banks explore embedding compliance in cross-border transactions
The Bank for International Settlements (BIS) and central bank partners have launched Project Mandala, which explores the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a standard protocol for cross-border use cases such as foreign direct investment, borrowing and payments. Disparate policy and regulatory frameworks between different jurisdictions are among the chief obstacles to smooth and efficient cross-border payments. They contribute to the regulatory compliance burden across the payment chain, increase the time for cross-border transactions and introduce uncertainties among stakeholders.
Project Mandala – a proof-of-concept run by BIS Innovation Hub Singapore Centre, the Reserve Bank of Australia, the Bank of Korea, the Central Bank of Malaysia and the Monetary Authority of Singapore, with the collaboration of financial institutions – seeks to ease the policy and regulatory compliance burden by automating compliance procedures, providing real-time transaction monitoring and increasing transparency and visibility around country-specific policies. In doing so, it aims to address key challenges identified during Project Dunbar, which developed an experimental multiple central bank digital currency (mCBDC) platform.
The envisioned compliance-by-design architecture could enable a more efficient cross-border transfer of any digital assets, including CBDCs and tokenised deposits. It could also be the foundational compliance layer for legacy and nascent wholesale or retail payment systems. The measures could include quantifiable and configurable foreign exchange rules, anti-money laundering and countering the financing of terrorism (AML/CFT) measures.
Project Mandala aligns with the Financial Stability Board 2023 priority actions for achieving the G20 targets for enhancing cross-border payments in promoting an efficient legal, regulatory and supervisory environment for cross-border payments while maintaining their safety, security and integrity.
Lack of visibility the top challenge for CFOs as FX market uncertainty bites
With currency shifts continuing to impact company profits significantly, more than half (51%) of respondents to the 2023 inaugural Argentex CFO survey reported that the biggest challenge in managing foreign exchange (FX) risk is a lack of visibility against a backdrop of ongoing market volatility. The survey polled over 500 CFOs, treasurers and financial controllers across the UK, France, Spain, Canada and Australia from businesses with more than £1m foreign currency exposure per year on the challenges they face in managing currency risk.
The lack of visibility, which the survey found to be a critical challenge for respondents, could derive from the fact that nearly 9 out of 10 (89%) of corporations rely on at least two to three different sources to monitor exposures, with around half (48%) admitting they find it a drain on resources to manage various suppliers. In addition, the survey found that crucial measures, such as stress testing FX exposure, are undertaken by only 53% of the respondents, while nearly half (47%) do not undertake any scenario modelling.
Consequently, almost two-thirds (62%) of respondents had to report unbudgeted currency impact on their balance sheet during their last accounting period. This suggests that the ability of financial professionals to manage currency risk effectively continues to be tested, as concerns over central bank divergence and recession risks remain on the horizon.
For hedging strategies, the survey found that most corporations (93%) have a hedging policy in place and deploy more than one instrument when managing their currency exposure to create more certainty. This entails using a blend of forwards (55%), options (40%) and spot (47%) to allow flexibility while also providing an amount of protection against adverse market moves.
US executives forge ahead with technology investments
While financial forecasters continue to signal near-term economic downturns across the globe, research from FIS has found that executives remain committed to investing in innovation to thwart emergent risks.
According to FIS’ Global Innovation Report, 83% of US executives across industries said they have either already been impacted by financial risk or expect to be impacted within the next 12 months. Further, 53% of executives said they face budgeting issues when implementing innovative solutions. However, 95% of respondents still turn to innovation to mitigate macro risks.
The findings suggest that US executives still prefer to combat risk by augmenting their competitiveness through innovation, even in today's challenging economic environment. The most common innovation strategy was technology and systems innovation, cited by 60% of executives. Some 55% of those leaders cited becoming more competitive as the reason to pursue innovation in their technology and systems.
Meanwhile, 53% of surveyed leaders reported that they’re pursuing artificial intelligence (AI) to be more competitive, and 52% are pursuing generative AI tools to be more competitive. A shade under half (49%) reported pursuing embedded finance capabilities to improve their competitiveness, and 49% reported competitiveness as their reason for pursuing open banking capabilities.
“US financial services firms have been leading the charge in adopting innovative technology to enhance security, customer experience and overall competitiveness,” said John Durrant, Banking Solutions President at FIS. “Now, as the findings in this report suggest, business leaders everywhere are shifting from a ‘wait-and-see’ approach to a deliberate investment and experimentation strategy. FIS believes this trend will continue as automation and AI pose unique opportunities to streamline operations and enhance customer service while future-proofing against competitors who are diving into digital head first.”
ABN Amro and Motive Partners form strategic partnership
ABN Amro Bank has announced its strategic partnership with Motive Partners, a private equity firm focusing on venture, growth equity and buyout investments in technology-enabled financial and business services.
Motive Ventures, the early-stage venture arm of Motive Partners, will now manage the ABN Amro Ventures Fund (AAV), consisting of 15 early-stage companies. In addition, ABN Amro will become a significant investor in Motive-managed vehicles.
With funding in the financial services industry declining by 70% between 2021 and 2022 and numerous venture capitalists reducing their investment programmes, Motive Partners and ABN Amro say they are charting a new course. The partnership unites two venture platforms, each with fintech expertise and a dedication to innovation in financial services and venture capital. They aim to strengthen the fintech sector and boost innovation by bringing Motive Partners’ ecosystem and experts to the AAV portfolio and ABN Amro’s broader network.
The strategic partnership is expected to close in Q4 2023, with ABN Amro’s Hugo Bongers and Tim Wanders joining the Motive team before the end of the year.
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