Aurelia Butler

(Reuters) – A look at the day ahead in Asian markets.Asian markets reach the mid-point of the week still sailing in fairly calm waters, although signs that the recent decline in U.S. bond yields and the dollar is losing steam could be about to suck the life out of the recent rally in risk assets too.There is some evidence over the last 24 hours of this playing out – Hong Kong stocks finally posted a down day on Tuesday, and broad Asian and emerging market equity indexes essentially ended the day flat.That may be nothing more than rational profit-taking and position-trimming. The Hang Seng had been on its longest daily winning streak since 2018, and earlier on Tuesday the MSCI Asia ex-Japan and Emerging Market indexes had hit new 15-month and two-year highs, respectively.Japanese markets, meanwhile, are once again dancing to their own tune with the yen back on the slide after last week’s suspected intervention, which has helped lift the Nikkei to its highest since April 15 and close to the 39,000 point mark.There doesn’t appear to be any obvious local catalyst on Wednesday to give markets much impetus one way or the other, with only unemployment and trade figures from the Philippines and trade data from Taiwan on the calendar.The yen and Indonesian rupiah could get a steer from their respective central bank chiefs – Bank of Japan governor Kazuo Ueda speaks at a seminar hosted by Japan’s Yomiuri newspaper, and Bank Indonesia governor Perry Warjiyo addresses the current economic situation in a briefing with the press.With the yen falling back toward 155.00 per dollar, Japan’s top currency diplomat Masato Kanda warned on Tuesday that Tokyo may have to take action against any disorderly, speculative-driven FX moves.    Meanwhile, investors got another reminder on Tuesday – as if they needed one – of frayed Sino-U.S. relations when TikTok and its parent company ByteDance sued in U.S. federal court seeking to block a law signed by President Biden that would force the divestiture of the popular short video app or ban it.This comes the same day Chinese President Xi Jinping left France after a two-day trip during which he offered no major concessions on trade or foreign policy, even as President Emmanuel Macron pressed him on market access.French and Chinese companies concluded some agreements on Monday ranging from energy, finance and transport, but most were agreements to cooperate or renewed commitments to work together. Nothing significant enough to suggest icy trade tensions between China and the West are about to thaw.On the corporate front, Japanese automaker Toyota (NYSE:TM) releases full year 2024 earnings. Analysts are expecting record-breaking results from the world’s top-selling automaker, lifted by demand for hybrids.Other big firms reporting include Mitsubishi and Yamaha.Here are key developments that could provide more direction to markets on Wednesday:- Bank of Japan Governor Ueda speaks- Taiwan trade (April)- Toyota earnings (FY 2024) (Reporting and Writing by Jamie McGeever; Editing by Josie Kao) More

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WASHINGTON (Reuters) -Inflation lodged above the U.S. Federal Reserve’s 2% target could leave policymakers saddled with the difficult choice in coming months of how much risk to take with economic growth and the job market for what may only be modest further improvements in the pace of price increases.Inflation has been largely stalled for the first three months of the year at a rate, roughly 2.7%, that policymakers regard as still too far above their target to declare the job finished, but also so close to it they’ve been reluctant to yet say that further rate increases may be likely.If inflation simply flatlines from here, central bank chief Jerome Powell said at a press conference following last week’s meeting, the Fed could simply wait it out, still confident that the current policy rate of interest is high enough to coax inflation lower.But Minneapolis Fed President Neel Kashkari raised another possibility on Tuesday in a new essay in which he said recent data – from the strength of the housing market to the ongoing strength of demand – suggested that Fed policy may not be as tight as officials suspect, and that inflation may instead be “settling to around a 3% level.”Kashkari’s essay highlights the potential dilemma policymakers face if inflation simply sticks where it is. In other comments on Tuesday Kashkari said he expects the Fed to need to hold rates steady for an “extended period.”Powell and other officials say they will be looking at the “totality” of economic data in making decisions – assessing inflation’s stickiness, for example, in the context of what is happening in the job market and within the economy as a whole, whether public expectations around inflation remain stable or start to shift higher, and whether policymakers feel their own credibility is on the line. The U.S. central bank at its meeting last week kept the benchmark policy rate steady in a range of 5.25% to 5.5%, where it has been since July, with officials generally resetting expectations for a later start and less overall policy easing this year, but also downplaying the likelihood of further rate increases.Updating his policy view in a Monday conversation with reporters, Richmond Fed President Thomas Barkin said that his response to a continued lack of progress on inflation might, for example, hinge on whether overall demand in the economy remained strong or seemed to be weakening.”If demand is vibrant, robust, and the numbers aren’t moving, that’s very different than if demand is weakening or fragile,” he said. “Rates are supposed to influence demand which is supposed to influence inflation. If they are not influencing demand or inflation that’s very different then if they are.”Kashkari’s essay suggested the Fed’s current benchmark rate simply may not be doing enough – at least at this point – and questioned whether policymakers have underestimated the “neutral” rate of interest and therefore expect current policy to have more impact than it will.Residential investment is rebounding, he noted, despite relatively high mortgage interest rates. Like other Fed officials he said he feels weak first-quarter growth in gross domestic product masked strong underlying demand. April job growth fell from the higher numbers seen during the recovery from the pandemic, but remained healthy with an unemployment rate still under 4% as it has been for more than two years.A wrong understanding of how tight policy really is “could explain the constellation of data we are observing,” Kashkari wrote. “The question we now face is whether the disinflationary process is in fact still underway, merely taking longer than expected, or if inflation is instead settling to around a 3% level, suggesting that the (Federal Open Market Committee) has more work to do to achieve our dual mandate goals.”What that “work” entails will reopen an issue policymakers had hoped they’d settled – over how much economic growth may need to be suppressed in order to achieve the 2% goal, whether higher interest rates will be needed to do it, and whether the tradeoffs are worth it to reduce headline inflation a few tenths of a percentage point.Fed officials across the board have been adamant they will return inflation to 2%.But they’ve no particular timetable.The most recent Fed economic projections issued in March see the target reached by the end of 2026, though that could change when new projections are issued at the Fed’s June 11-12 meeting.Those projections will include new guidance on the path of interest rates. While officials downplay the idea rates will need to rise again, a continued stall in inflation at its current level does pose a “challenge” Kashkari said.”With inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is,” Kashkari wrote. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.In March, Phillip Swagel, director of the US Congress’s independent fiscal watchdog, told the Financial Times that America risked a Liz Truss-style market shock with its soaring debt pile. His reference to the former British prime minister’s “mini” Budget in September 2022 — which led to a sudden surge in UK government bond yields and ructions across financial markets — was an attempt to fend off complacency, rather than a warning of imminent implosion.Swagel is right to sound the alarm. America’s debt is on an unsustainable path. The Congressional Budget Office projects America’s debt-to-GDP ratio will surpass its second world war high of 106 per cent by the end of the decade, and keep rising. The total deficit is forecast to average 5.5 per cent of GDP until 2030 — about 2 percentage points higher than the post-1940 mean. Net interest payments, which are currently around 3 per cent of GDP, are expected to keep creeping upward too.Politics is an aggravating factor. Both the Democrats and Republicans heed the importance of fiscal responsibility in theory, but neither is prepared to tighten belts, particularly in an election year. Joe Biden proposed a $7.3tn budget plan for 2025. His presidential rival, Donald Trump, has vowed to renew tax cuts enacted during his time in the White House, which could add another $5tn to the nation’s debt, according to the Committee for a Responsible Federal Budget, a think-tank.America’s growing debt puts upward pressure on its longer-term borrowing costs. Lax fiscal policy can raise inflation expectations and the perceived risk of holding debt for long periods. The hefty pipeline of debt issuance will also need to be absorbed by more price-sensitive investors, with the Fed now engaging in quantitative tightening. Elevated yields raise the cost of borrowing and could undermine economic growth. There is an increased vulnerability to rapid and disruptive movements in US bond markets. This has knock-on effects for credit and financial stability abroad too, since US Treasuries act as a benchmark for pricing debt globally. IMF research suggests that a 1 percentage point spike in US rates led to a 90 basis point rise in other advanced economies’ bond yields, and an increase in emerging markets of 1 percentage point. Restraints on domestic and global growth will only heighten the debt reduction challenge.America’s economic heft gives it substantial leeway. The dollar’s role as the international reserve currency means demand for US debt is ever-present, and AI-driven productivity growth could indeed help lessen its debt problems. But the country’s global influence may foster a dangerous complacency among its politicians. Ignoring the difficult tax and spending decisions needed to put debt on a more sustainable footing keeps the economy on a risky path amid political and economic uncertainty.For instance, another Trump presidency would come with significant unknowns. Reports that his team is drawing up proposals to water down the Fed’s independence are deeply worrying for inflation control. A well-behaved bond market hinges on clarity and confidence in government policy — as Truss could attest. Rising geopolitical instability and risks in financial markets, from private capital to liquidity problems in Treasury markets, are also exposures. Shocks could damp growth and drive harmful spikes in yields, making debt dynamics even worse.Sooner or later policymakers need to engage in bipartisan efforts to think seriously about how America funds itself responsibly. If not, panicked bond traders may force them to. As the IMF chief economist, Pierre-Olivier Gourinchas, said last month: “Something will have to give.” More