Aurelia Butler

Earlier this month, Ukraine announced a preliminary deal with a committee of its main bondholders to restructure its near $20 billion worth of international debt.Prompted by Russia’s 2022 full-scale invasion, it will be its second such rework in a decade following a similar deal after the 2014 invasion of Crimea. A two-year payment moratorium on those bonds expires on Aug. 1.Bondholders still must approve the deal, which they are expected to do, though the technicalities behind it could take weeks.But a short-term default would have a less significant impact on its long-term borrowing prospects than a default with no deal in sight.The proposal would see a 37% nominal haircut on Ukraine’s outstanding international bonds, saving Kyiv $11.4 billion in payments over the next three years – the duration of the country’s programme with the International Monetary Fund, according to government statements. Ukraine also owes a $34 million coupon payment on its 2026 Eurobond due on Aug. 1, with a 10-day grace period. Ukraine’s finance minister Sehriy Marchenko earlier hailed the deal with bondholders. But he also told RBC-Ukraine outlet that the negotiations were not easy, citing “significant differences” in the assessment of the situation Ukraine finds itself in. More

(Reuters) – Benign inflation data and a cooling job market aside, U.S. credit conditions featuring tepid loan demand and stiff terms may also be bolstering confidence among Federal Reserve officials that price pressures are set to ease further, paving the way for interest rate cuts in coming months.U.S. central bankers will have the latest readings from a quarterly survey of bank loan officers in hand as they weigh monetary policy at a rate-setting meeting that wraps up on Wednesday. Although that report won’t be made public until Monday, analysts say other available data suggests it will show the same pattern as in recent quarters: Weakening demand for loans from consumers and businesses alongside tightening credit standards from lenders emblematic of an economy losing steam but not at the kind of accelerating pace that points to an approaching recession.”I think they like where credit conditions are – they like to see this slackening of demand, they like to see that banks have tightened a lot” as borrowing costs have risen, said Warren Kornfeld, a banking credit analyst at Moody’s (NYSE:MCO).The lending survey data Fed officials saw in conjunction with last July’s policy meeting showed conditions then at their most stringent in years – and demand at the weakest – across mostly all categories of credit for households and businesses.Kornfeld said loan demand more recently is still cooling, and credit conditions are tightening, but less sharply than before, meaning conditions are “getting closer to a neutral state,” he said. “It’s all set up at this point in time for a ‘soft landing,'” referring to a scenario in which the Fed tames inflation without triggering a painful recession or sharp rise in unemployment. LOAN GROWTH SLOWDOWNThe Fed’s rate hiking campaign, begun in March of 2022, prompted a rise in lending standards and slowdown in loan growth. Those trends continued even after the central bank’s last rate hike in July of 2023, but with less intensity than before. Other data show that loan growth for most uses has slowed but not reversed course.Meanwhile, demand for loans may actually be on the rise in some parts of the country. “The big picture is a soft landing on the bank credit side as well as the real side: still tight, but not tightening as quickly as before,” said Derek Tang, an economist at forecasting firm LH Meyer. The longer the Fed waits to lower the policy rate, though, the more anxious they will become over possible cracks “because recessions are nonlinear and hard to stop once they start,” he said. The cracks are hard to see so far, particularly on the real-economy side, with unemployment, at 4.1%, higher than it has been since the Fed’s rate hikes began but still low by historical standards, and inflation coming down slowly toward the Fed’s 2% goal.The U.S. household debt delinquency rate rose to 3.2% during the first quarter versus 3.1% in the final three months of last year, New York Fed data shows. That’s below the 4.7% seen at the end of 2019 before the start of the COVID-19 pandemic.Still, credit-card borrowers who have reached their borrowing limits – this group tends to be disproportionately younger and lower-income – have seen a particularly sharp rise in delinquency rates, New York Fed researchers found. “It does seem as though lower-income households are more strained in their personal finances and that will have a ripple effect,” Tang said. “September would not be too late to start easing the policy rate; actual interest rates will start to fall beforehand and this way the Fed can be a bit more sure about inflation before it begins.” More

NEW YORK (Reuters) – Higher debt payments and the possibility of a U.S. recession over the next 10 years could boost U.S. debt levels beyond recent forecasts and weigh on economic growth, an analyst at investment firm DoubleLine said.The U.S. government has expanded deficit spending during economic downturns over the past century, but since 2016 deficits have increased despite continued economic expansion and low unemployment, said Ryan Kimmel, a macro asset allocation analyst at DoubleLine. This raises the risk of deeper debt-funded deficits in case of an economic contraction, he said.”There’s finite demand for available capital out there to fund government debt issuance, and the only way you’re going to entice demand for government bonds is through higher rates,” Kimmel said. “Your interest expense goes up, which requires higher taxes, which then crimps economic growth, which again feeds through into further economic contraction … it’s a vicious spiral.”The warning from DoubleLine, a bond-focused firm managing $92 billion in assets, comes amid rising concerns in the bond market over the U.S. fiscal trajectory ahead of the November presidential election, despite Democrats and Republicans vowing to reduce deficit spending.Rating agency Fitch last year downgraded the country’s debt while Moody’s (NYSE:MCO) lowered its outlook on the U.S. credit rating. The International Monetary Fund last month said the U.S. should curb rising debt levels. DoubleLine’s CEO Jeffrey Gundlach, often dubbed “the bond king,” said in May he anticipates an eventual restructuring of U.S. Treasuries because of the growing debt burden.The nonpartisan Congressional Budget Office last month revised its deficit forecasts to reflect higher spending, but even the latest projections may be too optimistic, Kimmel said in a report this week.The CBO estimated the ratio of debt to gross domestic product (GDP), a key metric of a country’s fiscal health, to climb to over 122% by 2034, up from 99% this year. It projects the average interest rate on outstanding federal debt to remain at around 3.5% for the next 10 years, which is below current Treasury yields above 4% and the Federal Reserve’s policy rate, currently 5.25%-5.5%.In hypothetical scenarios with average interest rates of 4%, 5%, and 6% over the next 10 years, Kimmel calculated debt-to-GDP could spike to 126%, 136% and 147%, respectively, by 2034. Neither CBO’s estimates nor Kimmel’s assume a recession over the next 10 years, which could exacerbate the debt burden.Higher government borrowing would push investors to demand more compensation, lifting borrowing costs in various economic sectors, said Kimmel. Markets had a taste of that in October last year, when so-called bond vigilantes, investors who punish profligate governments by selling their bonds, pushed Treasury prices to 17-year lows.One way to avoid these outcomes would be reducing fiscal deficits by trimming government spending, he said.”While politically challenging, exercising fiscal restraint remains a viable option … A key question is, will politicians act before U.S. debt dynamics unravel into an unsustainable condition for the economy?” More

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The Bank of Japan started the week’s central bank parade earlier Wednesday, raising interest rates and signaling its resolve to unwind a decade of massive monetary stimulus.The Japanese central bank hiked its overnight call rate target to 0.25% from 0-0.1% by a 7-2 vote and laid out a detailed quantitative tightening plan that will reduce monthly bond buying in several stages to around Y3 trillion, half the current rough target, by early 2026.Wednesday’s rate hike comes amid some improvements in Japanese inflation over the past two months, especially as consumer spending improved on stronger wages. This trend furthered the central bank’s forecast that inflation will climb to its 2% annual target sustainably, and that monetary conditions will have to tighten accordingly.In the U.S., by contrast, a benign June inflation report has investors looking for the policymakers to lay the groundwork for a September rate cut.The Federal Reserve concludes its July meeting later Wednesday, and is widely expected to maintain its benchmark overnight interest rate in the current 5.25%-5.50% range, as it has done since last July.Futures are fully priced for a quarter-point easing in September, with a small chance of a reduction of 50 basis points, and have 66 basis points of easing priced in by Christmas.U.S. stock futures rose Wednesday as investors awaited the conclusion of the latest Federal Reserve meeting while parsing through a series of important earnings reports. By 04:10 ET (08:10 GMT), the Dow futures contract was 77 points, or 0.2%, higher, S&P 500 futures climbed 42 points, or 0.8%, and Nasdaq 100 futures rose by 252 points, or 1.3%.The Federal Reserve concludes its two-day policy meeting later in the session, and investors will be looking for clues over the timing and number of rate cuts to expect this year.There are more earnings to digest Wednesday, including from Facebook-parent Meta Platforms (NASDAQ:META) [see below] after the close. Other names set to release numbers include Boeing (NYSE:BA) before the bell, as well as Qualcomm (NASDAQ:QCOM), Etsy (NASDAQ:ETSY) and Carvana (NYSE:CVNA) later on.This is the final session of July, and both the S&P 500 and Nasdaq Composite are on course to end the month lower, with the latter seen losing over 3%.The Dow Jones Industrial Average, on the other hand, is on track to finish the month higher by more than 4%, as the market rotated out of the major tech stocks into companies that are smaller and more cyclically oriented.Microsoft (NASDAQ:MSFT) disappointed with its fourth-quarter update after the close Tuesday, as the tech giant indicated it would spend more money on artificial intelligence infrastructure, even as growth slowed in its cloud business.This offered another sign that the payoff from hefty investments in the technology may take longer than Wall Street had hoped.Microsoft’s cloud business, Azure, which is widely viewed as a barometer for AI demand, grew 29%, marking a slowdown from 31% growth seen in the previous quarter. Additionally, AI-related growth accounted for about 8% of Azure’s total growth, up from 7% in the third quarter. However, this came as Microsoft continued to ramp up investments, with capital spending jumping to $19 billion in the quarter, up from $14 billion in the prior quarter, and nearly double the $10.7 billion seen a year ago. It wasn’t all bad news for the sector though, as Advanced Micro Devices (NASDAQ:AMD) increased its 2024 forecast for artificial intelligence chip sales by $500 million and said supplies would remain tight through 2025.Meta Platforms is the latest of the mega-cap tech giants to release quarterly results this week, with the numbers due after the close Wednesday.Meta, which owns and operates Facebook, Instagram, Threads, and WhatsApp, among other products and services, is expected to report a 20% rise in quarterly revenue, helped by strong ad sales driven by the Olympics and elections in several countries.However, like fellow tech giants Alphabet (NASDAQ:GOOGL) and Microsoft, investors will want to see if the billions it is spending on tech infrastructure to support AI development is starting to yield returns. “We remain positive on Meta and think Reels, Messaging and AI-driven ad improvements are still early, and could lead to positive product surprises and revenue upside,” analysts at BofA Securities said.”With political spend, and potential TikTok ban in 1Q’25, Meta could also see an ad spend benefit in 2H’24.”Crude prices soared Wednesday after the killing of Hamas leader Ismail Haniyeh in Iran ratcheted up tensions in the Middle East, raising the prospects of a wider conflict hitting supplies.By 04:10 ET, the U.S. crude futures (WTI) climbed 1.8% to $76.08 a barrel, while the Brent contract rose 1.7% to $79.38 a barrel.Multiple media reports said that Ismail Haniyeh was killed in an Israeli strike, and could mean a potential escalation in the Israel-Hamas war, which stretched into a ninth month in July. It could also result in a resurgence in tensions between Iran and Israel, after a series of missile strikes between the two earlier this year, and furthered fears of an all-out war in the Middle East, especially after Israel carried out strikes against Lebanon-based, Iran-backed armed group Hezbollah on Tuesday.This news has overshadowed data from the American Petroleum Institute showing on Tuesday that U.S. inventories saw a draw of nearly 4.5 million barrels last week. The reading marked a fifth straight week of draws in U.S. inventories, as fuel demand remained underpinned by the travel-heavy summer season. 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Africa’s second-most populous country secured a four-year, $3.4 billion programme from the International Monetary Fund on Monday, hours after its central bank floated its birr currency, paving the way for its debt overhaul to move forward. The World Bank will provide a grant of $1 billion and another $500 million in a low interest credit line, part of the first ever direct budgetary support facility provided to Ethiopia, the global lender said.”This policy operation supports home-grown reforms that will ultimately help the country transition to a more inclusive economy that allows the private sector to contribute more strongly to growth,” the World Bank said.    The bank plans to “provide around $6 billion in new commitments over the next three fiscal years and support economic reforms through fast-disbursing budget support,” it said. The funding is part of a $10.7 billion financing package by the IMF, World Bank and other creditors, according to Ethiopian officials.The financial support, however, was conditional on the government implementing significant economic reforms, including the liberalisation of the foreign currency market.Ethiopia’s birr was down 3% against the dollar early on Wednesday, trading at 77.13. It was little changed on Tuesday after tumbling 30% on the day it was floated on Monday.Ethiopia sought to restructure its sovereign debt in 2021, under the G20 Common Framework initiative to offer relief to developing nations, but progress was slowed by a civil war in the northern region of Tigray that ended the following year.Ethiopia’s winding debt restructuring mirrors that of Chad and Zambia which completed their debt overhauls under the Common Framework. Ghana, another African country saddled with high debt, is nearing the finish line of its own restructuring under the initiative.Ethiopia’s development partners have welcomed its move to a market-based foreign exchange rate, but some analysts have said the move could drive up inflation and the cost of living, especially for its poorest residents.The country of 126.5 million people also faces a number of other challenges, including the impact of climate change and the post-war reconstruction of Tigray. More