Aurelia Butler

WASHINGTON (Reuters) – It took a stock market crash, a housing crash and a pandemic to kill the last three U.S. economic expansions.But of all the risks facing a resilient economy right now, the Federal Reserve may top the list, as U.S. central bankers debate when to lower the restrictive interest rates used to beat inflation that now seems to be in steady decline.Fed officials have signaled a coming pivot towards lower rates sometime this year to avoid pushing too hard on an economy that is outperforming expectations but which many analysts worry has become too dependent on spending by households that are showing signs of stress and on job growth in a narrow set of industries that masks otherwise-stalled hiring.With annualized inflation running beneath the Fed’s 2% target for seven months, some formulas referred to by officials are pointing to rate cuts sooner than later. Economists, meanwhile, have begun noting the risks of the Fed either falling behind a possible slowdown or of failing to account for the chance the economy may be able to sustain faster growth and more employment than thought without a new surge in prices.”There is still risk out there that there is a short and shallow recession” in the coming year, said Dana Peterson, the chief economist of the Conference Board. CEOs who participated in a recent survey by the business group continued to cite recession as a top risk for the year, while the board’s Leading Economic Index also points in that direction. Some recent growth drivers, including government spending and business investment, will almost certainly ebb, Peterson said. “What’s left? The consumer.” In an environment where wage growth eases, pandemic-era savings get exhausted, and businesses that have hoarded workers realize labor shortages are easing, Peterson said: “Do we think consumer spending is going to slow? Yes.”DEPENDENT ON CONFLICTING DATA The Fed is expected to hold its benchmark overnight interest rate steady in the 5.25%-5.50% for the fourth time since July at the end of a two-day policy meeting on Wednesday. Of more note would be any signal in the Fed’s policy statement or from Fed Chair Jerome Powell in a post-meeting press conference about the timing and pace of future rate cuts.The economy’s persistent strength in the face of “restrictive” monetary policy has struck a nerve. The S&P 500 index touched a record high last week, consumer sentiment is rebounding, President Joe Biden’s administration has hailed the progress, and usually prudent central bankers have edged close to declaring that they have nailed the hoped-for “soft landing” in which high inflation is tamed without triggering a painful recession or huge job losses. It has also begged the question: What’s everyone missing?”Data-dependent” policymakers say they are proceeding with caution, but the numbers have offered more conundrum than clarity, and in fact challenged some of the Fed’s basic premises.At the start of 2023 Powell said household “pain” in the form of rising joblessness and much slower wage growth would be needed to curb high inflation. Even as that dour outlook was dropped, policymakers said a convincing “disinflation” would require a period of growth below the economy’s potential, a hard-to-estimate concept the Fed considers to be about 1.8% annually over the long run but which might vary over shorter periods.Yet inflation has fallen even though the unemployment rate has remained little changed for two years – it was 3.7% in December – and as the economy continues to grow faster than the rate estimated as inflationary. Output expanded in the fourth quarter at a 3.3% annual pace even as inflation slowed. The Fed’s preferred inflation measure, the personal consumption expenditures price index, rose at just a 1.9% percent annualized rate from June through December.’AS GOOD AS IT GETS,’ THEN WHAT? Fed Governor Christopher Waller framed the situation earlier this month as being “almost as good as it gets” for a central banker. “But will it last?,” he asked.The current expansion’s durability, remarkable already for restoring the massive job losses seen at the start of the coronavirus pandemic in 2020 and then some, will depend in part on how the Fed’s coming policy turn plays out.The possibilities range from a delayed impact of monetary tightening that still brings “pain” to the job market, perhaps unnecessarily given the path of inflation, to a quite opposite situation in which improvements in productivity and supply dynamics convince the Fed it can lower interest rates even if growth remains strong.By one Fed measure, the financial conditions shaped by monetary policy are lopping about half of a percentage point annually from growth that officials already expect to slow to about 1.4% this year.The issue now is whether the Fed can scale expected interest rate cuts to keep even that pace of growth on track given what could be developing weaknesses in the economy – from rising credit usage and defaults among households to the health of banks with loans made against devalued commercial properties.Fed officials are adamant they won’t outstay their welcome with interest rates that remain too high for too long. Still, for now they say they see a greater error in easing prematurely and risking a resurgence of inflation, a mistake the Fed made in the 1970s and one that Powell has pledged not to repeat, than in keeping rates where they are a bit longer.The Fed is already bucking history with the possible approach of a “soft landing” from inflation that spiked to a 40-year high in 2022, as the pandemic’s influence on global supply chains, consumer spending patterns, and hiring practices drove an economic reordering that is still underway. Since the late 1980s, as inflation and changes in the Fed’s policy rate both became less volatile, the U.S. central bank has only gotten through one rate hiking cycle without a significant increase in the unemployment rate: 1994-1996. Doing so required a judgment, which Powell may also face, that inflation pressures were contained despite ongoing growth.MOVING TOO SLOW?Until rates fall this time, the jury remains out.Luke Tilley, the chief economist at Wilmington Trust Investment Advisors, thinks the economy will skirt recession, but doesn’t rule out Powell making the opposite mistake of the 1970s-era Fed and leaving policy tighter than needed, with the real hit from two years of large rate increases still to come.”If we are going to have a recession, that cake is baked. The lagged impact of rate hikes will hit harder than we expect,” he said. Inflation seems set to slow faster than the Fed anticipates, and with rate cuts perhaps not starting until June, “I think they’ll still have rates too high at the end of the year.” More

Strong US growth looks set to bolster the conviction of Federal Reserve officials that they can afford to take their time on cutting rates. Jay Powell and the rest of the voting members of the Federal Open Market Committee will almost certainly leave benchmark interest rates unchanged at a 23-year high of 5.25-5.5 per cent at Wednesday’s vote on monetary policy. With the decision in little doubt, the big question is to what degree Powell will hint at cuts in the months to come. Around 50 per cent of investors are still pricing in a move at the next-but-one policy vote. But many economists think the Fed will stand pat until late spring or early summer. Those betting on a cut later in the year point to the health of the US economy as one of the reasons why rate-setters can avoid the risk of prematurely calling time on the worst spell of price pressures for a generation — only to see inflation then bounce back. Gross domestic product grew at an annualised rate of 3.3 per cent during the fourth quarter — a strong finish to a year that many economists thought would mark a fall into recession for the US economy. Instead, growth was 3.1 per cent for the year as a whole — the best performance of any major advanced economy. “There’s just nothing in the data since the start of the year to signal the economy is in danger,” said Krishna Guha, a former Fed official who is now at Evercore ISI. “If you’re a policymaker, you have a tonne of choice on when to go. And starting later plays to this desire to confirm that everything is on track to durably return inflation to 2 per cent.” The clearest sign of rate-setters’ softly-softly approach came from Christopher Waller earlier this month. The Fed governor is confident the US central bank is within “striking distance” of hitting its 2 per cent inflation target, after a sharp fall in price pressures over the second half of 2023. However, strong growth and a tight labour market meant that officials did not have to act fast. “I see no reason to move as quickly or cut as rapidly as in the past,” Waller said. Seth Carpenter, an economist at Morgan Stanley who believes the first cut will come in June, thinks that behind some predictions of early cuts lies a belief the US economy could soon tank. “Some people do still think that there will be a recession in 2024,” Carpenter said. “Others think that inflation is now entirely under control.” “We expect a soft landing, but we’re not in an entirely different place to markets,” he added. “If we’re wrong on June, I expect it will be because cuts are going to be earlier, not later, than our baseline.” Fed-watchers think that, barring an economic disaster, rate-setters will want to signal a meeting in advance that cuts are on the way. “I would expect that, if they’re planning on March, then we would get a pretty clear hint of that from Powell in January,” said Guha, who forecasts May or June as the most likely timing for the first cut. Some believe that may be tough for Powell to do as soon as next week. They point to a rise in CPI from 3.1 per cent in November to 3.4 per cent last month. However, the measure the Fed is watching most closely, core PCE inflation, fell to an annual rate of 2.9 per cent in December. The Fed chair could be reluctant to definitively rule out a cut on March 20. Before that meeting, officials will have two more readings of non-farm payrolls, the key indicator of the health of the US jobs market, as well as a PCE inflation report for January and two CPI prints. They will also be able to look at data revisions that will reveal the degree to which seasonal adjustments affected the rise in CPI inflation in December.“The flow of data is going to be super important,” Carpenter said.Also likely to be up for discussion is whether to slow quantitative tightening. At the moment, the US central bank runs off up to $60bn in US Treasuries and $35bn in other government securities a month. However, the minutes of the December vote noted that some on the committee believe that pace should soon be rethought. Money market funds’ sharp drop in the usage of a facility to buy and sell Treasuries from the central bank, known as overnight reverse repurchase agreements — or ON RRP — could mark the beginning of the end of a period of abundant liquidity, they said. Since then, Lorie Logan, president of the Dallas Fed and former head of the New York Fed’s markets team, has noted that slowing the pace of QT could lessen the chances of spikes in funding costs. Avoiding those spikes would enable the Fed to carry on shrinking its balance sheet uninterrupted for longer. Nate Wuerffel, a former head of domestic markets at the New York Fed and now at BNY Mellon, said sharp spikes in funding costs during earlier episodes of QT in 2019 would drive officials to make a decision sooner rather than later. “There’s this notion of slowing and then stopping [the run-off of assets] well in advance of reserves falling from abundant to ample levels,” Wuerffel said. “Policymakers are talking about this because some of them have really deep memories of the 2019 experience and they want to give the banking system time to adjust to lower levels of reserves.” Wuerffel added: “They know there are limits to what the data can tell us about how money markets are going to behave.” More

The ECB kept its key rate unchanged at a record high 4% last Thursday but sounded confident that inflation was coming under control, fuelling already widespread bets in the market that policy easing could start in early spring.All policymakers agreed that inflation trends were promising but drew different conclusions, with some making the case for earlier action while others argued for continued patience until they had further confirmation that inflation was under control. “The next move will be a cut, and it is within our reach,” ECB policymaker Peter Kazimir said in a blog post. “I am confident that the exact timing, whether in April or June, is secondary to the decision’s impact. “The latter seems more probable, but I will not jump to premature conclusions about the timing,” Kazimir, Slovakia’s central bank chief said.Mario Centeno, Portugal’s central bank governor, meanwhile said he preferred to act sooner rather than later because that would allow the ECB to be more gradual. “We can react later and more strongly, or sooner and more gradually,” Centeno told Reuters in an interview. “I am completely in favour of gradualism scenarios, because we have to give economic agents time to adapt to our decisions,” Centeno, a policy dove and former head of the Eurogroup finance ministers grouping, said.Although the two views appear quite different, the gap in actual policy terms is small. Few if any expect a rate cut in March and June seems uncontroversial, so the actual debate is whether the ECB should cut in April or wait until its next meeting in June.Given that monetary policy works with a 12- to 18-month lag, a six week deviation in the first move is likely to have a negligible impact on the real economy. Still, investors now see 140 basis points worth of interest rate cuts this year and see a close to 100% chance of the first move coming in April. On the conservatives’ side, Kazimir argued that cutting too soon is a greater risk because jumping the gun could derail disinflation and actually prolong the period of tight monetary policy. Klaas Knot, the influential Dutch central bank chief, also appeared to back a more patient approach, arguing that some pieces of the inflation puzzle are not yet in place.”We now have a credible prospect that inflation will return to 2% in 2025. The only piece that’s missing is the conviction that wage growth will adapt to that lower inflation”, Knot told Dutch TV on Sunday.Centeno, meanwhile, said there is already a lot of evidence that inflation is falling sustainably and waiting for first quarter wage data due out in May was not as imperative as some policymakers argue. “Data-dependent is not (being) wage-data dependent… we don’t need to wait for May wage data to get an idea about the inflation trajectory,” he saidLuis de Guindos, the ECB’s Vice President, also speaking on Monday, kept a more neutral approach, arguing that a cut will come sooner or later and there was growing optimism about overall inflation and underlying price trends. “(There is) good news regarding inflation developments and this will sooner or later be reflected in (our) monetary policy,” De Guindos told Spanish radio RNE. More

1. Futures mixedU.S. stock futures hovered around both sides of the flatline on Monday, as traders geared up for a week of key corporate earnings and central bank decisions.By 05:07 ET (10:07 GMT), the Dow futures contract had shed 55 points or 0.1%, S&P 500 futures had dipped by 3 points or 0.1%, and Nasdaq 100 futures had added 19 points or 0.1%.A solid start to the new year for the main averages on Wall Street will likely face a stern exam in the coming days. Investors will be parsing through numbers from some of America’s largest businesses and digesting influential commentary from the Federal Reserve, both of which may help clarify the outlook for the broader economy (see below).The S&P 500 dipped by 0.1% on Friday, leaving the benchmark index near all-time highs, a move that reflects market hopes that inflation may be cooling without a meltdown in growth — a scenario commonly referred to as a “soft landing.” The tech-heavy Nasdaq Composite also fell by 0.4% to end the prior trading week, while the 30-stock Dow Jones Industrial Average gained 0.2%.2. Big-name earnings aheadA parade of high-profile and possibly market-moving results are due out from a string of companies this week, including many of the so-called “Magnificent Seven” stocks that have powered a recent surge in equities.On Tuesday, Microsoft will report after the bell, only days after the tech giant’s market capitalization surpassed $3 trillion. Google-parent Alphabet (NASDAQ:GOOGL), which like Microsoft has been a beneficiary of a wave of hype around artificial intelligence, will also unveil its latest numbers following the close of markets.Wednesday will feature semiconductor manufacturer Qualcomm (NASDAQ:QCOM), with investors on the lookout for the San Diego-based group’s view of the year ahead for chipmaking. Quarterly figures are also due from Boeing (NYSE:BA), the embattled planemaker who has come under fresh scrutiny following a dangerous mid-flight blowout on one of its 737 Max 9 models earlier this month, as well as Novo Nordisk (NYSE:NVO), the Danish drugmaker behind the popular weight loss medication Wegovy.More megacap tech firms are set to step into the limelight on Thursday, including iPhone-maker Apple, e-commerce behemoth Amazon and Facebook-owner Meta Platforms (NASDAQ:META).3. Fed decision in focusMarkets will also be keeping their eye on the Federal Reserve, as the world’s most influential central bank holds its latest two-day policy meeting.Fed officials are tipped to keep interest rates on hold at more than two-decade highs following the gathering on Wednesday, placing extra focus on any comments regarding the outlook for borrowing costs in the near term.In December, the Fed signaled that it could reduce rates six times this year, fueling hopes for a cut as early as March. But several policymakers have moved to temper these expectations, indicating that worries remain that a rapid loosening in financial conditions could reignite cooling inflationary pressures.A stronger-than-expected advance estimate of fourth-quarter U.S. growth last week also bolstered the case for the Fed to hold off on lowering rates any time soon. Meanwhile, economists expect January nonfarm payrolls on Friday to show ongoing resilience in the U.S. labor market — although the Fed will not be able to factor this particular piece of data into its latest projections.How the Fed sees price gains and economic activity evolving in 2024 will likely influence bets over the timing of the first cut. According to Investing.com’s Fed Rate Monitor Tool, there is an almost 50% chance the bank will roll it out in May.4. China Evergrande ordered to liquidateChina Evergrande has been ordered to be wound up by a Hong Kong court after the world’s most indebted property developer failed to secure a restructuring agreement with its creditors.The group, which has over $300 billion in total liabilities, has been attempting to secure the deal for more than two years in the wake of a bond repayment and a series of court hearings.But Justice Linda Chan on Monday appointed management consultancy Alvarez & Marsal to liquidate Evergrande, arguing that the move will provide some certainty to creditors. “It is time for the court to say enough is enough,” Chan said in the morning court session, Reuters reported.Evergrande’s Chief Executive Siu Shawn told Chinese media that the decision will not impact the operations of its onshore and offshore units. But analysts have flagged that the liquidation process could be complicated and lengthy, as well as damaging to already downbeat sentiment around the state of China’s property market.Shares in Evergrande slumped by just under 21% after the announcement.5. Crude volatile amid Middle East turmoilOil prices were choppy on Monday, as traders fretted over increased disruptions to supply in the Middle East following a drone attack on U.S. forces in Jordan over the weekend.By 05:08 ET, the U.S. crude futures contract traded 0.4% lower at $77.73 a barrel, while the Brent contract fell 0.3% to $82.68 per barrel. Both contracts had risen earlier in the day.The attack, which U.S. President Joe Biden said was carried out by Iran-backed militants, resulted in the death of three American service members. It was the first deadly strike against U.S. forces since the Israel-Hamas war erupted.Iran has denied involvement in the attack, but it does raise concerns over a more direct confrontation between the two countries, potentially resulting in regional energy supply disruptions in the oil-rich Middle East. More

(Reuters) – China Evergrande (HK:3333) on Monday acknowledged a Hong Kong court’s decision ordering the liquidation of the world’s most indebted property developer after it failed to offer a concrete restructuring plan more than two years after defaulting on a bond payment.The liquidation of China Evergrande, which currently has more than $300 billion of total liabilities, will likely send ripples through China’s dwindling financial markets as policymakers struggle to contain a deepening crisis. More