Aurelia Butler

NEW YORK (Reuters) – Bond investors are selectively adding longer-dated maturities to their portfolios on bets the Federal Reserve will delay cutting interest rates and reduce them at a slower pace than in previous easing cycles, starting with a decision to stand pat on rates at this week’s policy meeting. Some portfolio managers taking this view are particularly focusing on intermediate Treasury maturities, such as five-year notes for juicier returns. Longer-duration Treasuries tend to outperform shorter-dated ones in a rate-cutting cycle as U.S. yields fall.With U.S. inflation stubbornly persistent and the labor market still robust, the Fed is widely expected to hold interest rates steady in the 5.25%-5.50% range at the end of its two-day meeting on Wednesday. Fed Chair Jerome Powell is likely to sound cautiously hawkish on the economic outlook, reinforcing expectations that the first rate cut will be delayed to either September or December.For 2024, U.S. rate futures traders are pricing just one 25 basis point rate cut, more likely in December .”We have been in the shallow easing cycle camp for some time. There are structural factors in the economy that’s going to keep inflation above the 2% target more often,” said Matt Eagan, portfolio manager and co-head of the Full Discretion Team, at Loomis, Sayles & Company in Boston.He said investors need to be compensated for inflation seen averaging between 2%-2.5% and an inflation-adjusted rate that is roughly 2% on the long end.Marcelo Carvalho, global head of economics at BNP Paribas (OTC:BNPQY) in London said inflation globally has become more ingrained due to higher public sector investment spending.”Inflation we think probably settles down on average at higher levels in the coming years than before…where we got used to long periods of low inflation and low rates,” Carvalho said.GO FOR THE BELLY The best way to play this scenario is to focus on buying the “belly” of the curve, such as five-year notes, which could provide the best bang for your buck, Loomis Sayles’ Eagan said. This bet is predicated on the fact that with inflation staying above 2%, the Fed’s neutral rate, a level at which policy rates are considered not too easy or too tight, will also be higher.The Fed’s neutral rate is currently at 2.6%. But bond investors such as Loomis Sayles have penciled in a neutral rate of anywhere between 3.5% to 4% which means the Fed won’t be cutting as much.With a higher neutral rate, there’s a floor under Treasury yields, analysts say, particularly for 10-year notes, which are typically bought by investors when the Fed starts cutting rates. With the 10-year yield’s fair value seen at 4.5%, and currently trading at 4.66%, market participants said there’s not much scope for the 10-year yield to fall and therefore returns could be limited.”Once the Fed starts to cut rates, all that rate decline is going to happen on the front end of the curve and the long-end will have much less scope to come down,” Eagan said. In previous U.S. rate-cutting cycles in which the economy saw structurally declining growth and inflation, the policy rate would often fall by several percentage points, analysts said. Once the Fed began to ease, it tended to slash rates aggressively, and investors bought longer-dated Treasuries – the 10s and 30s – to take advantage of the more attractive returns as their yields sank.Clayton Triick, head of portfolio management, Public Strategies, at Angel Oak Capital Advisors in Atlanta, said going back down to a 1.5% to 2.5% fed funds rate would not be reasonable anymore, citing the undeniable backdrop of higher inflation. He sees a neutral rate of between 3.5% and 4.5%.In such an environment, he said there is value in owning, not the long, long end like the 10s and 30s, but fixed-income assets with two- to five-year maturities, echoing Loomis Sayles’ strategy.”It’s very difficult for us to really predict where the long end will go especially given the path of fiscal policy in the United States,” said Triick.”We do not see big changes happening on the fiscal front and so that could mean higher risk premiums, higher term premiums in the yield curve.” More

WASHINGTON (Reuters) -Treasury Secretary Janet Yellen on Tuesday defended a global corporate tax deal against Republicans’ accusations that it would siphon away U.S. revenues and said she was working to carve out an allowance for the U.S. research and development tax credit.During a four-and-a-half-hour hearing before the tax-writing U.S. House Ways and Means Committee, Yellen said that failure by Congress to fully implement the 15% global minimum tax would erode U.S. global leadership and leave American firms vulnerable to top-up taxes imposed by other countries.The so-called Pillar 2 agreement for a 15% global minimum tax, first reached in October 2021 by nearly 140 countries, is aimed at halting a downward spiral of competitive corporate tax cuts by countries to attract investment and the shifting of profits to their jurisdictions by multinational firms.Yellen, who pushed hard for the Organisation for Economic Cooperation and Development (OECD) deal in her first year in office, said the minimum tax was good for the U.S. and “the entire world.””We’ve pushed our allies,” Yellen said. “Now, on the order of 40 countries have adopted it – most major countries – and I think they see it as a failure on our part, not to be willing to adopt it ourselves, and so it does undermine our ability to exhibit leadership with our allies.”But Republican U.S. Representative Kevin Hern, citing Joint Committee on Taxation estimates of potential U.S. revenue losses from adoption of the global minimum tax of up to $122 billion under an adverse scenario, said Republicans would not agree to implementation.Republicans have “made it very clear that Pillar 2 is not going to take place under a Republican-led Ways and Means Committee,” he said. “We’re not going to give away our tax dollars.”Republicans control the tax-and-trade panel by way of a razor-thin majority in the House of Representatives, with future control of the chamber to be determined by the U.S. elections to be held in November. Yellen said that if Congress adopts the minimum tax and China fails to do so, it would be able to collect taxes from Chinese firms operating in the U.S. under an “undertaxed payment rule.”But the opposite could be true if the U.S. fails to adopt the tax and other countries implement it.U.S. firms currently receive generous tax credits for research and development expenses, which in some cases lower their effective tax rate below the 15% global minimum tax rate. Yellen said the Treasury is in talks with other countries to carve out an allowance that would not penalize U.S. firms for these investments.”We are negotiating with other countries right now to try to get favorable treatment for the R&D tax credit and I am hopeful these negotiations will be successful,” she said.Yellen said she would keep the House Ways and Means panel’s members informed on this and on negotiations toward the OECD “Pillar 1” arrangement that covers a redistribution of taxing rights on large, highly profitable companies.Yellen said the tax deal would not hurt U.S. companies’ competitiveness, saying they “did just fine” when the U.S. had the sole global minimum tax of 10.5% and other countries had none. More

(Reuters) – The U.S. Justice Department is moving to make marijuana use a less serious federal crime with a proposal to reclassify the drug as on par with Tylenol with codeine, rather than heroin, according to sources.Here are some ways those changes will affect business. WHAT DOES RESCHEDULING ENTAIL?Under the Controlled Substances Act, marijuana is listed as a schedule one substance, meaning it has a high potential for abuse and no current accepted medical use.The Department of Justice, which oversees the Drug Enforcement Administration, recommended that cannabis be classified as a so-called schedule three drug, with a moderate to low potential for physical and psychological dependence.WHAT COMES NEXT?According to TD Cowen analysts, a review of the proposal by the Office of Management and Budget will probably last until late May or June. Then the proposal would be published in June or July in the Federal Register and a comment period held. DEA then must study the comments, and it also has to hold a hearing before an administrative judge.WHAT WOULD BE THE TAX IMPLICATIONS? One of the biggest benefits for cannabis firms would be that they would no longer be subject to Section 280E of the U.S. federal tax code. That provision prevents businesses dealing in schedule one and two controlled substances from claiming tax credits and deductions for business expenses.The tax change would put close to $3.5 billion of cash back into the sector, which will lower the overall cost of capital for the industry, and spark a flurry of M&A activity, said Katan Associates International founder Seth Yakatan. More

(Reuters) -Artificial intelligence server maker Super Micro Computer (NASDAQ:SMCI) reported third-quarter revenue below estimates on Tuesday, hurt by a shortage of some crucial components and questions over the profitability of a new line of servers.Shares of Super Micro, which have more than tripled in value so far this year, were down 14% in trading after the bell.The San Jose, California-based company, which builds powerful AI servers with chips from Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and others, forecast fourth-quarter revenue above estimates as it expects steady demand. But on an earnings call, analysts peppered the company’s leaders with questions over spending to support the transition to a new generation of Nvidia chips that require liquid cooling and whether those new servers, which will hit the market later this year, will command high enough prices to push up Super Micro’s profit margins. The AI server maker was added to the S&P 500 index last month.Super Micro is banking on its in-house liquid cooling technology for its servers to gain market share in a competitive industry. CEO Charles Liang told analysts the firm had paid a premium to secure supplies to build those liquid-cooled servers quickly in the next few quarters, but said that end customers would pay only a “very minimal premium” for them versus older, air-cooled servers.Inventory at the end of the March quarter stood at $4.12 billion, up from $1.45 billion at the fiscal year ended June 30, 2023.”It hurts our cash flow, but you know what, it doesn’t matter because we need that inventory for Q4 shipments,” Chief Financial Officer David Weigand said. Super Micro aimed to stay in its 14% to 17% gross margin range over the long term, he added, despite some analysts saying the company’s quarterly forecast implied margins below that range.The company expects fourth-quarter revenue of between $5.1 billion and $5.5 billion, compared with average analyst estimates of $4.89 billion, according to LSEG data.”If not limited by some key component shortages, we could have delivered more,” Liang said.The company raised its annual sales forecast to a range of $14.7 billion to $15.1 billion from the previously stated $14.3 billion to $14.7 billion.Super Micro reported an adjusted profit of $6.65 per share in the first quarter, compared with analysts’ estimates of $5.78 per share.Revenue for the quarter ended March 31 stood at $3.85 billion, compared with estimates of $3.95 billion, according to LSEG data.Gross margin for the three-month period was 15.5%, down from 17.6% a year earlier, in line with analyst expectations. More

(Reuters) -Starbucks on Tuesday cut its annual sales forecast after reporting a fall in same-store sales for the first time in nearly three years, as it struggles with weak demand for its coffees in the United States and China, its two biggest markets.Shares of the company slumped 12% on Tuesday in extended trading as the coffee chain also missed estimates for quarterly profit and flagged a hit from geopolitical uncertainties in the Middle East.Starbucks (NASDAQ:SBUX) expects comparable sales growth – both globally and in the U.S. – to be in the range of a low single-digit decline to flat for the full year, down from its previous range of 4% to 6% growth.The second quarter was “challenging”, CFO Rachel Ruggeri said on a post-earnings call.”…Headwinds consistently persisted throughout the quarter leading us to revamp our actions and response plans to both unlock and attract demand,” Ruggeri said.Western brands such as Starbucks and McDonald’s (NYSE:MCD) are also feeling the impact of a boycott campaign in the Middle East and certain other countries over Israel’s military offensive in the Gaza Strip.In the U.S., Starbucks faced decelerating demand as cold weather in January and a choppy macro environment weighed on sales of its pricier beverages. The coffee chain’s second-quarter global comparable sales fell 4%, compared with a 1.44% rise estimated by analysts, according to LSEG data. “We still see the effects of a slower-than-expected recovery, and we see fierce competition among value players in the market,” CEO Laxman Narasimhan said on a post-earnings call Comparable sales fell 11% in China and 3% in the United States.”In the near term we think the company would be well-served to articulate a plan to reinvigorate traffic trends,” said Matthew Goodman, senior analyst at research firm M Science.Data from M Science shows that sales growth decelerated further month-over-month in February and has yet to recover, including in the current quarter. Operating margin in the reported quarter fell 240 basis points to 12.8% as Starbucks grappled with a tough labor market and increased union actions, while boosting investments in promotions to whip up demand. Excluding items, the company earned a profit of 68 cents per share, missing market expectations of 79 cents. More

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The U.S. government says Chinese officials continue to commit genocide and crimes against humanity against Uyghurs and other Muslim minorities in Xinjiang, and rights groups have pressured Western companies there to audit their operations over forced labor concerns. China’s government vehemently denies allegations of abuses. Thea Lee, deputy undersecretary for international affairs at the Labor Department, told a U.S. congressional hearing that Beijing had made it “essentially illegal” to conduct independent human rights audits in Xinjiang.”If it is impossible to do that, then the only responsible thing to do is not to operate in that atmosphere,” Lee told the Congressional-Executive Commission on China, without naming individual companies.China’s embassy in Washington said in an emailed statement that the allegations of forced labor were “nothing but a lie concocted by the U.S. side in an attempt to wantonly suppress Chinese enterprises.”Chinese officials have acknowledged “vocational training centers,” in Xinjiang, but say were intended to curb terrorism, separatism and religious radicalism. They have also said the “Sinicisation” of Islam in the country is inevitable.On Feb. 9, German chemicals giant BASF said it would sell its stakes in two joint ventures in Xinjiang, after rights groups documented abuses including forced labor in detention camps. Volkswagen (ETR:VOWG_p) too has said it was in talks with its joint venture partner in China over the future direction of its business activities in the region.Beijing in 2017 launched a harsh security crackdown in Xinjiang. Some experts say alleged mass internment of Uyghurs peaked in 2018, but that abuses have continued with labor transfers becoming more prominent.Still, China’s government has sought to make Xinjiang a heavy industry hub, and it is important for the processing of aluminum and for producing auto parts, solar components and other goods that make their way into global supply chains. The U.S. Congress has passed laws to pressure China over its Xinjiang policies, including the Uyghur Forced Labor Prevention Act that bars imports from the region. The Department of Labor does not set rules on how U.S. companies can operate in China. Lee said China’s transfer of Uyghur laborers to other parts of the country had been growing, but that it was difficult to verify the extent of the program. “I have not seen an effective way to address the challenges of monitoring the labor transfer program of workers outside of Xinjiang,” Lee said. She said data on Chinese websites is periodically removed, and that there is no free access to workplaces to assess workers’ origins. More