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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. If Intel is sold — Qualcomm is circling — it will be a blow to the view that tech oligarchs are forever. It took 15 years or so, but the mobile and AI revolutions took a company that had a stranglehold on computer processors and turned it into a second-tier player. What is the parallel scenario that unseats Google, Nvidia, Apple, Microsoft or Meta? And how long does it take? Email us possible futures: robert.armstrong@ft.com and aiden.reiter@ft.com.

Central bank epiphenomenalism

We asked a few weeks ago whether Jay Powell was lucky or good: whether smart Fed policy caused, or merely coincided with, the rapid decline in inflation over the past two years. If you think Powell and the Fed have mostly been lucky — and plenty of economists think they have been — one is tempted to push the scepticism further. What if the central bank rate policy is always a meaningless or near-meaningless sideshow in economies and markets? What if policy rates are (to use the vocabulary of the pretentious philosophy graduate student I was 25 years ago) mostly epiphenomenal — that is, accompanying important changes, rather than causing them?

Today, “heretical” is almost exclusively an honorific people bestow on their own beliefs, to mean “unique and wonderful”. But on Wall Street the view that Fed policy is epiphenomenal is heretical in the old-fashioned sense. If it is true, a lot of what investors, analysts and pundits say, do and believe are just elaborate rituals honouring a deity that doesn’t exist. 

Serious people take this view. Aswath Damodaran of New York University (who will be familiar to Unhedged readers from our interview with him) recently updated his defence of Fed epiphenomenalism on his blog. He argues that:

• The federal funds rate, set by the Fed, is a single, short term rate that does not determine in any significant way the important interest rates — on mortgages, car loans, credit cards, corporate bonds or business loans, and so on. 

• While both the federal funds rate and important interest rates follow the same very long-term trends, over shorter (but nonetheless meaningful) periods, the relationship between changes in the federal funds rates and the “real world” rates is all over the place. Sometimes one rises and then the other falls, or the reverse, or there seems to be no relationship at all. Consider the federal funds rate and the triple-B bond yield, for example. Between the spring of 2004 and the summer of 2006, the Fed rate rose by more than 4 percentage points. Triple B’s moved by less than 1 per cent. The market all but ignored a very aggressive Fed.

• There may be some casual power in Fed signalling: markets might incorporate the belief that the Fed knows something about the economy that others don’t, or that the Fed actually can control interest rates somehow. But outside of crisis situations, these effects are mild. 

• In sum, “the Fed is acting in response to changes in markets rather than driving those actions, and it is thus more follower than leader”. Nominal interest rates have two fundamental drivers, neither of them under central bank control: real rates (which vary with expected economic growth) and expected inflation. For example, rates were not so low during the pre-pandemic decade because the Fed suppressed them, but because growth was weak and there was no inflation in sight.

Damodaran is not alone. Last year, the Financial Times’ own Martin Sandbu, in a piece entitled “What if there is nothing central banks can do about inflation?” argued that

[T]here is solid analysis that can account for virtually all the behaviour of both US and Eurozone inflation as just what the temporary repercussions from sector to sector of a series of large supply shocks would look like . . . [If] this is in fact the true explanation of events . . . there was nothing monetary policy could have done to prevent the bursts in inflation of the past two years, and that current monetary policy is contributing nothing to inflation coming back down.

Sandbu doesn’t go all the way to policy epiphenomenalism. He thinks that rate policy can have effects, but that this time around they will be “exclusively harmful” because they will weaken the economy when inflation is already dead. But it is easy to see how his argument might be extended to other inflationary incidents that followed supply shocks, and perhaps beyond.

Over in The Wall Street Journal, my former colleague Spencer Jakab makes a similar point in the context of the stock market, comparing chair Powell to the Wizard of Oz: 

The great and powerful man behind the central bank curtain, Jay Powell, really can’t do as much as people think to keep their portfolios from shrivelling if the wheels are already starting to come off the economy

He uses the example of the rate cut in 2007, which initially triggered a surge in stock prices, but could not — even when reinforced by many further cuts — stop a recession from starting a few months later. Even in less extreme moments, Jakab argues (citing work by David Kostin, Goldman’s chief US equity strategist) economic momentum, not Fed policy, has been decisive for markets during rate-cutting cycles. Jakab doesn’t go as far as Damodaran, who argues that rate policy is pulling on a lever that is not connected to anything. But his argument points very clearly in that direction.

There is a longer argument to be had about whether central bank epiphenomenalism is true. To prove the case, one would have to describe, and refute, the standard theory of how policy rates control other interest rates. But let’s assume that epiphenominalism is a possibility. The interesting question for investors is: what would you do differently if you know the Fed followed, rather than led, markets and the real economy? 

For one thing, you would be a lot less worried about “Fed mistakes” — specifically Fed over-tightening that leads to recession. Recall that many people, Unhedged among them, were very worried about this in 2022, and were probably underexposed to risk entering the glorious year of 2023 as a result. But if investors had ignored the Fed’s tightening, and looked instead only at the economic fundamentals and company cash flows, might they have stayed bullish instead? 

One good read

On the US balance of payments.

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China’s central bank has unveiled a major package of measures aimed at reviving the country’s flagging economy.

People’s Bank of China (PBOC) Governor Pan Gongsheng announced plans to lower borrowing costs and allow banks to increase their lending.

The move comes after a series of disappointing data has increased expectations in recent months that the world’s second largest economy will miss its own 5% growth target this year.

Stock markets in Asia jumped after Mr Pan’s announcement.

Speaking at a rare news conference alongside officials from two other financial regulators, Mr Pan said the central bank would cut the amount of cash banks have to hold in reserve – known as reserve requirement ratios (RRR).

The RRR will initially be cut by half a percentage point, in a move expected to free up about 1 trillion yuan ($142bn; £106bn).

Mr Pan added that another cut may be made later in the year.

Further measures aimed to boost China’s crisis-hit property market include cutting interest rates for existing mortgages and lowering minimum down payments on all types of homes to 15%.

The country’s real estate industry has been struggling with a sharp downturn since 2021.

Several developers have collapsed, leaving large numbers of unsold homes and unfinished building projects.

The PBOC’s new economic stimulus measures come just days after the US Federal Reserve lowered interest rates for the first time in more than four years with a bigger than usual cut.

In Asia afternoon trading hours, major stock indexes in Shanghai and Hong Kong were more than 3% higher.

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Halloween is still over a month away, but here’s a scary chart of Bloomberg’s US Government Securities Liquidity Index.

The higher the score, the less liquid the $27tn Treasury market is. So according to this index — which is derived from how dispersed Treasury prices are from a smoothed yield curve — the US government bond market is now less liquid than it was at the peak of the March 2020 chaos.

FT Alphaville has been keeping an eye on this measure because it shows a radically different picture from what analysts and officials are saying, and what the headline data seems to indicate. August was the first month in history when the average daily notional of Treasuries being traded went over $1tn, up 37 per cent year-on-year, according to Coalition Greenwich. Treasury futures trading is up by a similar amount.

Which is why this annual check-up of the Treasury market’s liquidity from the New York Federal Reserve is so timely.

The tl;dr is that bid-ask spreads remain modest — and not nearly where they were in March 2020 — while market depth remains reasonable, if subdued after the Fed’s interest rate hikes.

As a result, the estimated price impact of a $100mn Treasury trade is also un-alarming. Big trades make a bigger splash than they used to, but the deterioration seems mostly caused by higher interest rate volatility, which is now coming down a bit.

The author — Michael Fleming, the head of capital markets studies at the NY Fed’s research group — does explore the discrepancy between these measures of liquidity and that shown by the Bloomberg’s index, but mostly shrugs it off:

While the Bloomberg measure has recently risen, it remains far below its peak during the GFC. Moreover, it remained far below its GFC peak in March 2020 even when direct liquidity measures approached GFC levels and the Fed unleashed massive asset purchases to address the dysfunction then roiling the market. It follows that the recent behavior of the Bloomberg index seems less notable when examined in a longer historical context. The reasons behind the disparate performances of the different measures are an interesting area for future research. 

This research should probably focus on the Bloomberg index’s underlying composition. Barclays analysts have previously noted that the Bloomberg index might have been artificially boosted this summer because of the inclusion of some very old 30-year Treasuries, which are for motley reasons trading extremely rich to what the shape of the yield curve would normally indicate.

FTAV has another, admittedly more speculative take. These kinds of price-dispersion-versus-fair-prices indices supposedly measure liquidity conditions because a lot of wonky prices indicate that there’s insufficient capital in the market to take advantage of them.

But this would seem to be a better measure of fragility rather than liquidity?

In other words, Treasury market liquidity might be basically fine and perhaps improving, but the underlying fragility of the market is increasing, as banks devote less and less balance sheet to lubricating it? In which case we won’t really know how healthy it is until the next shock hits.

Further reading:
— The bond market liquidity ‘trilemma’ (FTAV)
— People are worried (again) about bond market liquidity (FTAV)

California’s attorney general is suing ExxonMobil, alleging the oil giant engaged in a “decades-long campaign of deception” about the effectiveness of plastics recycling.

In the civil lawsuit filed on Monday, Attorney General Rob Bonta accused Exxon of contributing to a “deluge” of plastic pollution, while telling Californians that recycling was a fix.

“For decades, ExxonMobil has been deceiving the public to convince us that plastic recycling could solve the plastic waste and pollution crisis when they clearly knew this wasn’t possible,” Bonta said.

In a statement, Exxon blamed California for an inefficient recycling programme.

“For decades, California officials have known their recycling system isn’t effective. They failed to act, and now they seek to blame others. Instead of suing us, they could have worked with us to fix the problem and keep plastic out of landfills,” the company said in a statement.

An Exxon spokesperson added that the company had processed more than 60 million pounds (27 million kilograms) of plastic waste into usable raw materials, “keeping it out of landfills”.

Bonta’s office said the case marks the first time US officials have attempted to hold a gas or oil company accountable for deceptive claims about plastics recycling.

California is seeking an unspecified amount of money that Bonta said could come to as much as “multiple billions of dollars”.

“ExxonMobil lied to further its [record]-breaking profits at the expense of our planet and possibly jeopardising our health,” he said.

Last year, Bonta sued ExxonMobil as well as four other oil giants for compensation over climate change damages.

The most recent lawsuit, filed in San Francisco County Superior Court, comes after a nearly two-year investigation by Bonta’s office into the fossil fuel and petrochemical industries and global plastics pollution.

ExxonMobil is the world’s largest producer of resins used for single-use plastics, according a report by Australia’s Minderoo Foundation.

Bonta alleged that, through its marketing, the company was promoting its “advanced recycling” programme to the public as a solution to plastic waste, while knowing that the company would “never be able to process more than a tiny fraction of the plastic waste it produces”.

The 147-page suit alleges that nearly all of plastic waste processed by the company has been turned into fuel instead of recycled plastic.

The deception violated state nuisance, natural resources, water pollution, false advertisement and unfair competition laws, Bonta said.

The world produces over 400 million tons of plastic each year, but only 9% is recycled, according to a 2022 report from the Organisation for Economic Co-operation and Development.

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China’s central bank has cut its benchmark interest rate as part of a broad set of easing measures to boost the world’s second-largest economy as it risks missing growth targets this year.

People’s Bank of China governor Pan Gongsheng on Tuesday said the short-term seven-day reverse repo rate, the central bank’s main policy rate, would be reduced from 1.7 per cent to 1.5 per cent.

The PBoC will also cut the reserve requirement ratio, the amount lenders must keep in reserves, by 0.5 percentage points, he said, while signalling a further potential cut of 0.25 to 0.5 percentage points this year. The RRR cut would add Rmb1tn ($142bn) in liquidity to the banking system, he said.

In addition to the monetary easing, the PBoC also announced government funding to boost the stock market and aid share buybacks, as well as extra support for China’s stricken property sector.

China’s blue-chip CSI 300 index of Shanghai- and Shenzhen-listed shares rose 2.4 per cent on Tuesday. Hong Kong’s Hang Seng index rose 3.3 per cent, led higher by mainland Chinese companies listed in the territory.

Pan said the measures aimed to “support the stable growth of China’s economy” and “promote a moderate rebound in prices”.

China’s economic growth has decelerated in recent months as a prolonged slowdown in the property sector has weighed on consumer sentiment and curbed spending.

Economists have slashed their growth forecasts to less than the government’s official target of about 5 per cent for 2024 as deflationary forces have proven persistent, with producer prices declining since last year.

Policymakers have turned to exports in the hope that the housing crisis will bottom out, but robust shipments of electric vehicles, batteries and other goods have not been enough to fully offset the weaker domestic economy.

“The Chinese economy is recovering and the monetary policies introduced by our bank this time will help support the real economy, incentivise spending and investment and also provide a stable footing for the exchange rate,” Pan said.

Pan was joined by Li Yunze, director of the new financial sector watchdog, the National Financial Regulatory Administration, and Wu Qing, chair of the markets supervisor, the China Securities Regulatory Commission.

The officials said the government would boost stock market liquidity by allowing brokers, insurance companies and funds to tap central bank facilities to buy stocks. The PBoC will also provide relending facilities for shareholders to conduct buybacks.

“A fresh stimulus push is certainly positive,” said Liu Chang, macro economist at BNP Paribas Asset Management.

But with economic momentum weak heading into the fourth quarter, officials need to act “very quickly in the weeks ahead to implement additional measures if they wish to get to the 5 per cent target”.

“In this regard, we think there is still a worrying lack of urgency behind their words around stimulus,” Liu said.

In other measures, the bank lowered mortgage downpayments for second homes to 15 per cent from 25 per cent. Second properties had been subject to more onerous conditions to curb real estate speculation, previously a focus for President Xi Jinping.

The PBoC also said it would provide better terms for a destocking programme, under which the central bank made Rmb300bn available to local government-owned enterprises to help them buy up unsold inventory from property developers.

But the central bank stopped short of increasing the funds available under the programme, amid signs it was struggling to gain traction.

Economists have said reducing China’s vast stock of unsold housing is crucial to restoring confidence in the economy and reviving domestic consumption.

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