Aurelia Butler

TOKYO (Reuters) – Some Bank of Japan board members said domestic inflation might hold above the central bank’s 2% target, given changes in corporate wage and price-setting behaviours, minutes of their June policy meeting showed on Wednesday.”We cannot rule out the chance we are underestimating the sustainability of inflation in Japan,” one of the nine board members was quoted as saying in the minutes.While some said they expected inflation to slow back below 2% as cost-push factors dissipate, one member said the risk of inflation staying elevated above the level “remained high.” The board agreed on the need to keep ultra-loose policy for the time being given uncertainty on the outlook for inflation, and a lack of clear side-effects of its policy, the minutes showed.At the June 15-16 meeting, the BOJ maintained its ultra-easy monetary policy and dovish guidance pledging to “patiently” sustain stimulus to achieve its price target. More

WELLINGTON (Reuters) -The New Zealand jobless rate hit a two-year high in the June quarter as strong demand for labour was met by a jump in the number of people looking for work, helping keep a lid on wage pressures and thus interest rates.Data released by Statistics New Zealand on Wednesday highlighted that the country’s labour market remains tight but there are signs that is easing with the unemployment rate climbing to 3.6% from 3.4% in the prior quarter.At the same time, the underutilisation rate increased with part-timers looking for more hours.Economists expect the Reserve Bank of New Zealand (RBNZ) to leave its official cash rate (OCR) unchanged later this month at 5.5% and say signs of a little loosening in the drum-tight labour market should provide some comfort for the central bank.”Developments in both the unemployment rate and wages will likely leave the Bank comfortable with the broad story underpinning the projections in the May Monetary Policy Statement,” said Westpac senior economist Darren Gibbs.With the economy in a technical recession, the RBNZ signalled in May it was done with hiking rates for the foreseeable future as it expected employment pressures and inflation to ease.However, the central bank will likely remain concerned about the potential for wage inflation, tracking at 4.3% in the second quarter, to become entrenched, economists say.Statistics New Zealand said the labour force participation rate at 72.4% and the employment rate at 69.8% were both the highest rates recorded since the survey began. New Zealand has experienced strong migration in the past 12 months after reopening its borders following COVID-19, but Statistics New Zealand said recently most of the growth in the working age population had come from those within New Zealand.Following the release of the data there was little market reaction with the two-year swaps [NZDSM3NB2Y=] down 4 basis points at 5.44%, and the New Zealand dollar off slightly at $0.6141. More

(Reuters) -Rating agency Fitch on Tuesday downgraded the U.S. government’s top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution of the debt ceiling crisis two months ago.Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalize the review in the third quarter of this year.With the downgrade, it becomes the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating.The dollar fell across a range of currencies, stock futures ticked down and Treasury futures rose after the announcement. But several investors and analysts said they expected the impact of the downgrade to be limited. Fitch’s move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government’s $31.4 trillion borrowing limit, ending months of political brinkmanship.”In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.U.S. Treasury Secretary Janet Yellen disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data.”The White House had a similar view, saying it “strongly disagrees with this decision”.”It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” said White House press secretary Karine Jean-Pierre.REPUTATIONAL DENTAnalysts said the move shows the depth of harm caused to the United States by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May.”This basically tells you the U.S. government’s spending is a problem,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.Fitch said repeated political standoffs and last-minute resolutions over the debt limit have eroded confidence in fiscal management.Michael Schulman, chief investment officer at Running Point Capital Advisors said the “U.S. overall will be seen as strong but I think it’s a little chink in our armor.” “It is a dent against the U.S. reputation and standing,” said Schulman.Others expressed surprise at the timing, even though Fitch had flagged the possibility.”I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved,” said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington D.C. Still, investors saw limited long-term impact.”I don’t think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fitch took us from AAA to AA+,” said Jason Ware, chief investment officer at Albion Financial Group.Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.”This was unexpected, kind of came from left field,” said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. “As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news.”LIMITED IMPACTIn a previous debt ceiling crisis in 2011, Standard & Poor’s cut the top “AAA” rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation’s fiscal outlook. Its rating is still “AA-plus” – its second highest.After that downgrade, U.S. stocks tumbled and the impact of the rating cut was felt across global stock markets, which were at the time already in the throes of the euro zone financial meltdown. Paradoxically, U.S. Treasuries prices rose because of a flight to quality from equities.In May, Fitch had placed its “AAA” rating of U.S. sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden. A Moody’s (NYSE:MCO) Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.Other analysts had pointed to risks that another downgrade by a major rating agency could affect investment portfolios that hold top-rated securities.Raymond James analyst Ed Mills, however, said on Tuesday he did not anticipate markets to react significantly to the news.”My understanding has been that after the S&P downgrade a lot of these contracts were reworked to say ‘triple-A’ or ‘government-guaranteed’, and so the government guarantee is more important than the Fitch rating,” he said.Others echoed that view.”Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the U.S. economy and markets,” Mohamed El-Erian, President at Queens’ College, said in a LinkedIn post. More

TOKYO (Reuters) – U.S. Treasury yields edged down in Tokyo on Wednesday after ratings agency Fitch lowered the country’s top credit rating.The 10-year Treasury note declined about 3.2 basis points (bps) to 4.015% as of 0017 GMT, retracing part of its 9 bps rise from Tuesday.Fitch overnight downgraded the U.S. government’s rating to AA+ from AAA, citing an expected fiscal deterioration over the next three years as well as a high and growing general government debt burden. It had placed the rating on watch for a possible cut in May.”This will likely spark risk aversion flows as Asian markets re-open,” Tony Sycamore, a markets analyst at IG, wrote in a note to clients.”Risk aversion means lower equities and safe haven buying of currencies such as the Japanese yen and Swiss franc against riskier currencies such as the AUD and NZD as well as buying Treasuries.”Fitch’s announcement comes two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement following months of political brinkmanship, lifting the government’s $31.4 trillion debt ceiling.Treasuries, whose yields fall when prices rise, were ironically also bought when Standard & Poor’s cut the U.S. top ‘AAA’ rating by one notch to ‘AA-plus’ in 2011, in the wake of a previous debt ceiling standoff. More

The downgrade follows a debt ceiling agreement in June that came after months of political brinkmanship and ultimately lifted the government’s $31.4 trillion debt ceiling.”In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.MARKET REACTION: The dollar moved lower against a basket of major currencies after the announcement.S&P 500 futures were recently down 0.4%COMMENTS:STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST, MIZUHO SECURITIES USA, NEW YORK“This is the first of what I think will be additional warnings to the U.S. government that its spending relative to its tax collections is unsustainable. We’ve already pushed to the point where the net interest on the public debt is higher than the ability of the economy to grow, that we can’t grow our way out of it. “This basically tells you is the U.S. government’s spending is a problem. It’s an unsustainable budget situation because the economy can’t even grow its way out of this problem going forward. Therefore, they’re going to have to either tackle it or accept the consequences of potential further additional downgrades.”WENDY EDELBERG, DIRECTOR OF THE HAMILTON PROJECT AT THE BROOKINGS INSTITUTION, WASHINGTON D.C.”I’m surprised by the timing of the downgrade because I don’t understand how they (Fitch) have worse information now, then before the debt ceiling crisis was resolved. Before the debt ceiling crisis was resolved, they had put the U.S. on negative watch list but since then we have got a lot of good news regarding the fiscal outlook.””I’m also puzzled by how the motivation for the downgrade seems to be about the fiscal trajectory, which is all well and good. Unless they think that fiscal trajectory suggests risk of a default, which I don’t think they say, I don’t understand the reason for this.””I think a second downgrade would have mattered more before the debt ceiling deal was reached. That would have had felt reasonably motivated and would have left people much more worried.””The effect of the downgrade is surely negative but we will need to wait for a few times to assess its impact.”JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL GROUP, SALT LAKE CITY, UTAH“The timing, you know, I think it was May that put on negative watch triple-A and then went negative on that. So as far as who expected it today, well if you don’t work at Fitch probably nobody but if you can’t say it’s terribly surprising either given the situation and the fact they put us on negative watch anyway. “So I don’t think the reaction, it should surprise anyone in the markets because we’ve been through this before. Twelve years ago we saw the same thing and you know, that was a buying opportunity. So I don’t think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fiitch took us from AAA to AA+.”MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, STAMFORD, CONNECTICUT “Well, based on the bond market action today, somebody knew, because the Treasury market acted weak for no reason, just economic data, the ISM missed and was soft, the global ISM’s were soft. So, I would say the bond market activity acted as if somebody knew. So, but is it an absolute surprise to me that they did this? Yes.“In August of 2011, when S&P downgraded, US AAA to AA it cost the S&P President his job within about three weeks. So, I mean, it’s definitely a curveball for the tape. Obviously, it would have been a bigger deal if it was Moody’s (NYSE:MCO), but it’s definitely something people have to consider and be aware of.”BERNARD BAUMOHL, MANAGING DIRECTOR AND CHIEF GLOBAL ECONOMIST, THE ECONOMIC OUTLOOK GROUP, PRINCETON, NEW JERSEY“On the whole, this is not going to have a significant impact on investors’ appetite for government debt.”“As we saw when Standard & Poor’s made a similar downgrade, demand on that front was still strong.”MICHAEL SCHULMAN, CHIEF INVESTMENT OFFICER, RUNNING POINT CAPITAL ADVISORS”I have a feeling Treasury markets will overall take it in stride because the US overall will be seen as strong but I think it’s a little chink in our armor.””It is a dent against the US reputation and standing but quite frankly we did go through an actual play a few months ago.””I think this is a move that confirms the nervousness of the market from a couple of months ago.”ANGELO KOURKAFAS, SENIOR INVESTMENT STRATEGIST, EDWARD JONES, ST LOUIS“The timing is definitely surprising.”“I wonder if that potentially is the excuse for a bit of a pullback tomorrow given that we have seen the market has been very tranquil.”“I don’t think necessarily that this fundamentally changes things.””Back (in 2011) we did see a 10% pullback in the markets…but that was very close to the X-date of the debt ceiling, now we are way past that.”“The backdrop for markets is different now.”“Back then that added to the uncertainty around the X-date of the debt ceiling and now we are past that … and back then the economy was on a lot more shakier ground if you will after the financial crisis.”MICHAEL K. FARR, CEO AND FOUNDER, FARR, MILLER & WASHINGTON LLC, WASHINGTON, DC“I hope this is seen as something of a shot across the bow, that it is sobering, and that it is not simply dismissed.”“I feel we have become very complacent by the very concept of debt. We continue to spend more than we make and Fitch is telling us that is not sustainable.”“Right now markets don’t seem to care. That’s not to say this shouldn’t be sobering for everyone.”KEITH LERNER, CO-CHIEF INVESTMENT OFFICER, TRUIST ADVISORY SERVICES, ATLANTA“This was unexpected, kind of came from left field. As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news…”“It’s come out of left field after the market has had a big move and the 10-year has had a big move, so this will be a test for the 10-year which at a critical level approaching 4.10 and the equity market which has had five straight months of gains.”ERIC WINOGRAD, CHIEF ECONOMIST, ALLIANCEBERNSTEIN, NEW YORK”Look, no one is seriously considering the prospect that the U.S. would ever fail to make a payment on its debt. There will continue to be demand for both long-term and short-term Treasuries, and I don’t see this downgrade as a significant signal of any trouble ahead.”QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA”Economists look at the deficit and then assume your currency is going to weaken and soften as the deficit grows. That’s the textbook. As the deficit grows, your currency weakens, and Fitch is putting us in that textbook rationale. The irony is that the US dollar has, in many cases with the deficit, still risen against other currencies.””This is a warning. Economists say that if the U.S. doesn’t get its fiscal house in order, it’s currency is going to weaken, but the currency doesn’t weaken. And what Fitch is essentially saying is, it’s going to happen and the dollar is going to become a casualty.” JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS IN PALM BEACH, FLORIDA”I’m surprised, but I’m not surprised.””The thing about the sovereign debt is, it’s not just the ability to pay, it’s the willingness, and that is creating a problem. Every time we have a negotiation, it’s down to the wire, and it’s frustrating, and it creates unnecessary heartburn.””It’s really the just the troubled negotiations that take place every time we have a debt ceiling or budget negotiation. We’re preparing for another shutdown in the fall. We have to move beyond this.” More

China’s economy defies analogies. Just as its growth over the past four decades was unprecedented, its current difficulties — and it certainly has a problem, if not quite a crisis — are unique. It is not Japan in 1990, Korea in 1997 or the US in 2008. China does not face a financial crisis or a balance sheet recession; indeed, with growth still roughly on course to reach 5 per cent this year, it does not face a recession at all. Nonetheless, the situation is serious. In the past, the Beijing authorities have shown great flexibility and ingenuity to keep growth on track. Now they must do so again.The current situation is characterised by a chronic lack of demand, even as the economy grows. Two statistics illustrate this. One is the consumer price index, which is on the brink of deflation: prices in June were flat year on year and down 0.2 per cent compared with a month earlier. The other is youth unemployment, which reached 21.3 per cent in June. This is clearly an economy where spending is not sufficient to occupy all of the productive resources available. One might call it “recessionary growth”.The danger from here is a deflationary spiral downwards, and the danger is real because no sector in China is well placed to spend more.Consumers are still reeling from last year’s zero-Covid policies, which saw lockdowns in China’s wealthiest cities. Unlike in the US, Japan or Europe, there were no large transfer payments from the government, so the finances of exposed households took a battering. The scarring effect is quiet but profound. Consumers who had only experienced relentless growth have now tasted job insecurity, and found it bitter. With all China’s structural barriers to consumption, such as a weak social security system that prompts saving to self-insure, spending will be slow to recover.Private corporations, by and large, could invest if they wanted to. In a few, favoured sectors — most notably electric vehicles and the green energy supply chain — they are doing so on a massive scale. Elsewhere, things are gloomy. The technology industry is still reeling from the recent crackdown by regulators in the name of “common prosperity”, US export controls and the effective closure of foreign capital markets. Between regulatory uncertainty and subdued consumption, service industries have little motivation to ramp up output. With the authorities reluctant to slash interest rates for fear of capital outflows, animal spirits will stay soggy.Housing and infrastructure investment, the first place Beijing would normally turn for stimulus, are at the centre of concerns about a so-called balance sheet recession, in which a plunge in asset prices leaves households and companies insolvent and determined to pay down debt. China’s overleveraged property developers, symbolised by Evergrande, do fit this story but a broader balance sheet crisis is not how things are unfolding.Property prices have not fallen that far and the system is working hard to stabilise them. With property making up a large share of household wealth, as well as a crucial source of local government revenues, a crash would threaten financial and social stability. It would also create intense pressure for capital outflows. Municipalities in China have extensive tools available, including setting floors on the prices at which developers can sell, so instead of prices falling, transactions have dried up. That creates a serious problem of activity, but not one of default.The other big borrowers are local government financing vehicles, which borrow to invest in local infrastructure. A number of these are struggling to pay their debts and need restructuring, but they are state-owned vehicles, which owe money to state-owned banks, which are financed by the vast savings of Chinese households, which are trapped in the country by capital controls. This will only become an acute crisis if the authorities are careless, and to the extent the problem requires shuffling assets and debts around the system, China should be able to manage.Rather than existing debts, the big issue is the scope for new activity. Ageing and outmigration mean housing demand is essentially sated across large parts of the country. Allowing more building in mega cities such as Beijing, Shanghai and Shenzhen would give new vigour to the sector but bring its own set of uncomfortable and politically destabilising trade-offs. Incremental spending on infrastructure is always an option but it comes with diminishing returns and racks up more debt for the future.That leaves two sources of demand: trade and government spending. China’s current account surplus is already at 2 per cent of gross domestic product, itself an indicator of weak demand at home, and the rest of the world should be on alert for a renewed flow of ultra-competitive Chinese exports — now including high-end products such as electric vehicles. China exporting deflation in this way might help western countries overcome their current issue with inflation, but at a substantial long-term economic cost.Everybody, inside China and out, should instead prefer the final option. China’s central government is one of the least indebted in the world. It has ample scope to transfer cash to households, boost consumption and get the economy moving. Alarmingly, a recent Politburo meeting provided a long list of policies but little sign of hard cash. If China is to sustain its long run of economic success, it is down to Beijing to [email protected] More