Aurelia Butler

The writer is senior economist at Pictet Asset Management Pity the poor bond investor. After suffering devastating double-digit losses in 2022, the fixed income market remains more fragile than at any point since the subprime mortgage crisis. The Move index — a closely tracked gauge of bonds’ price volatility — recently hit its highest levels in almost 15 years.More worrying still is that the instability has been especially pronounced in US Treasuries, the barometer for world debt markets.In just one week in March this year, the yield on the two-year US government note saw both its steepest daily fall since the 1987 stock market slump and its sharpest one-day spike since 2009. This is not how a defensive asset class is supposed to behave. True, bond markets were bound to hit turbulence given how aggressively central banks have battled to conquer inflation. In the US, borrowing costs have risen at their fastest rate since the 1980s, ratcheting up from near zero to a range of between 5 and 5.25 per cent in as little as 14 months.Yet the violence of the market’s recent moves suggests there is a new dynamic at play. We believe bondholders have become hostage to the growing conflict at the heart of central bank policymaking.At issue is how much longer the US Federal Reserve and its peers can continue to place fighting the war against inflation over and above their other official mandate — preserving financial stability.In our view, the shift in policymakers’ priorities could come sooner than many investors think. Interest rates have already risen to a point where they threaten a debt crunch; it may not be too long before they are cut, triggering a rally in bond markets.That’s the picture that emerges from our analysis of public and private debt trends among each of the world’s major economies. Although the post-Covid economic recovery helped reduce government debt as a proportion of gross domestic product last year, indebtedness relative to economic output remains well above the levels hit in 2020. It is hovering at about 96 per cent of gross domestic product. More concerning, however, is that in many developed countries, the volume of public and private debt is growing at a pace that is unstainable over the long run. To assess a country’s vulnerability to a debt crunch, we compare the current rate of increase in a country’s public and private borrowing as a share of GDP to the long-term historical trend. The greater the upward deviation from the average, the more susceptible a nation is to a debt reckoning. The analysis reveals that the US and eurozone are among the economies that find themselves in a potentially treacherous territory with credit-to-GDP ratios of 268.2 per cent and 254.2 per cent respectively at the end of 2022.According to our calculations, for the US to be able to sustain its debt burden over the long run, borrowing costs would need to decline by some 1.50 percentage points. For the euro zone, the reduction required is even steeper, largely because of Italy’s precarious public finances. We find that interest rates across the single currency bloc are running almost 3 percentage points above where they need to be to avert a credit crunch. Surprisingly, perhaps, Switzerland is also close to the danger threshold with a credit-to-GDP ratio of 315.1 per cent. There, our model shows that it would take only two more modest interest hikes to threaten the country’s debt position over the longer term. None of this suggests central banks are about to suddenly reverse course and begin cutting borrowing costs. But with the world a far more indebted place than it was before the Covid outbreak, policymakers will be more attuned to the risks of increasing rates any further.The European Central Bank admitted as much in its recent bi-annual Financial Stability Review.In the report, the bank warned that the recent tightening in monetary policy had laid bare “faultlines and fragilities” throughout the financial system. It said higher interest rates were beginning to cause strains for governments, businesses and households throughout the region, with property markets looking particularly exposed.The upshot for bond investors, then, is that this period of higher interest rates may not turn out to be the new normal they were bracing for after all. It might soon prove to be an aberration.  More

WELLINGTON (Reuters) -New Zealand’s economy shrank in the first quarter as the central bank’s aggressive hiking of interest rates to a 14-year high hurt businesses and manufacturers, while bad weather hit farms, putting the country into a technical recession. Official data out on Thursday showed gross domestic product (GDP) fell 0.1% in the March quarter, in line with a Reuters poll, and followed a revised 0.7% contraction in the fourth quarter. With two quarters of negative growth, the country is now in a technical recession.Annual growth slowed to 2.2%, Statistics New Zealand data showed. The March 2023 quarter included the initial impacts of Cyclones Hale and Gabrielle and teachers’ strikes.”The adverse weather events caused by the cyclones contributed to falls in horticulture and transport support services, as well as disrupted education services,” said Jason Attewell, economic and environmental insights general manager at Statistics New Zealand.The weakness in the economy will not be seen as a negative by the central bank, which has said it needs economic growth to slow to dampen inflation and inflation expectations. The contraction will likely add to expectations that the cash rate has now peaked, economists say.The Reserve Bank of New Zealand has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 525 basis points since October 2021 to 5.50%. However, it has signaled that it has finished hiking. Before the first-quarter GDP figures were released, the central bank had forecast the country would enter a recession in the second quarter of 2023, while Treasury’s updated forecasts in May expected the country to avoid recession. More

BEIJING (Reuters) – Strikes at Chinese factories have surged to a seven-year high and are expected to become more frequent as weak global demand forces exporters to cut workers’ pay and shut down plants, one rights group and economists say.Exports and factory output in the world’s second-largest economy tumbled in May, as looming downturns force the United States and Europe to pare back orders for goods made in China.Some factories closed or are struggling to pay wages or severance for laid-off workers as a result, according to Chinese labour researchers. That has led to a spike in labour disputes that hurts consumer and business confidence just as it was recovering from three years of COVID-19 curbs, they said.”We believe that the drop in manufacturing orders and that factory closures will continue,” said Aidan Chau, researcher at Hong Kong-based rights group China Labour Bulletin (CLB).”Bosses want to cut costs by simply dumping workers.”CLB recorded over 140 strikes at factories across the country in the first five months of this year, the highest since the 313 recorded during the same period in 2016.The rights group’s data is mostly based on protests reported on social media, some of which CLB has been able to verify through contact with unions or the factories, although not all reports are verified.Many of the strikes are concentrated in China’s manufacturing heartland of Guangdong province and the Yangtze River Delta, and involve exporters, including from garment, shoe and printed circuit board factories, CLB said.In one video referenced in CLB’s mapped log of nationwide strikes, dozens of female workers at Zhong Min Sportswear Goods Shenzhen Ltd. Co. walk out of a factory compound.The video was published on May 24 on Douyin, China’s version of TikTok, and captioned “this boss paid off law enforcement and is cheating workers’ money”.Another video posted by the same user shows a factory manager reading a document denying workers compensation, while workers demand that an independent third party intervene. In another video published on May 26, a handful of workers stand on the roof of Shenzhen cable factory Xin Dian Cable Ltd. Co., holding a banner that says “the boss owes us wages”. Another video published last week shows the company’s workers debating compensation with a company lawyer. “You need to collect workers’ grievances and pass them on,” one female worker says.Reuters verified the location of the videos and photos through matching the signage and building features with street view data, but could not confirm the timing of the protests. Calls to Xin Dian went unanswered. A person picking up the phone at Zhong Min said she could not comment.The Douyin users did not respond to messages from Reuters. Participants in protests are often monitored by security forces.China’s Ministry of Public Security, Ministry of Human Resources, the Shenzhen police and the All-China Federation of Trade Unions – a state-run umbrella organisation for all unions in the country – also did not respond.INSTABILITY RISKSChinese factories, which produce a third of global manufactured goods, form complex supply chains that ultimately rely much more on exports than domestic demand, leading to giant trade surpluses in the $18 trillion economy.Manufacturers make use of a workforce of hundreds of millions of rural migrants, many of whom are on temporary contracts or hired informally, labour activists say.This leaves workers vulnerable to unpaid overtime, impromptu pay cuts, or layoffs without due process or compensation, as factories look to reduce costs. Workers find it hard to win in any conflict. Security forces intervene early to disperse protesters and censors scrub evidence of disputes on social media.Labour unions were central to the Communist Party’s proletariat beginnings but play only a marginal role in modern authoritarian China.However, some analysts say factory strikes could become a political headache for the Party.”Firms are adapting to the reality of overcapacity through pay cuts and layoffs,” said Xu Tianchen, senior China economist at the Economist Intelligence Unit. Job and salary cuts “will not only be detrimental to growth, but could also become a source of instability,” Xu said. More

WASHINGTON (Reuters) -The Federal Reserve left interest rates unchanged on Wednesday but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year, as the U.S. central bank reacted to a stronger-than-expected economy and a slower decline in inflation.In a press conference at the end of the central bank’s latest policy meeting, Fed Chair Jerome Powell described U.S. growth and the job market as holding up better than expected under the weight of the aggressive monetary policy tightening of the past year – likely lengthening the Fed’s fight to lower inflation but also letting it proceed with less economic damage. The pause was out of caution, Powell said, to allow the Fed to gather more information before determining if rates do need to rise again, with the pace of its moves now less important than finding a proper endpoint that slows price increases while minimizing any rise in unemployment. After a year in which many economists and analysts argued recession was imminent and the economy about to crack, under the Fed’s latest quarterly projections “growth estimates moved up a bit, unemployment estimates moved down a bit, inflation estimates moved up,” Powell said. Taken together, the data suggested “more restraint will be necessary than we thought,” Powell said of new projections which showed a uniform shift higher in policymakers’ interest rate outlook for the year. Nine of 18 officials see the benchmark overnight interest rate moving up another half of a percentage point beyond the current 5.00%-5.25% range, while three others feel it needs to go even higher.But Powell also said he felt that the pieces of the inflation puzzle were beginning to fall into place, with the Fed focused on “getting the policy right” as it contemplates what may be its final rate increases before declining inflation allows possible rate cuts next year.”The conditions we need to see … to get inflation down are coming into place,” Powell told reporters, including below-trend growth, a somewhat weaker labor market, and improving supply chains. “But the process of that actually working on inflation is going to take some time.”It was a subtly optimistic message that tempered otherwise hawkish projections that see the policy rate rising higher than market participants anticipated.Subadra Rajappa, head of U.S. rates strategy at Societe Generale (OTC:SCGLY), said she thought that was no mistake, with the Fed now keeping its options open in case further rate increases are needed, but not committed if inflation does decline faster than anticipated.”The ‘dots’ are hawkish, but he did a good job of telling markets not to see it as such,” she said.In fact, investors in contracts tied to the Fed’s policy rate see the central bank delivering only one quarter-percentage-point increase by the end of the year. They see about a 65% chance of a rate hike next month, up only slightly from before this week’s meeting.’LIVE MEETING’Though Powell repeated the Fed’s standard warning about “upside” risks to inflation, the decision to hold steady at this time was also an effort to try to ease the pace of price increases “with the minimum damage” to the job market. The new projections showed the unemployment rate rising by the end of 2023 to 4.1% from the current 3.7%, but that is a significantly smaller increase than the 4.6% jobless rate officials projected in March.”Holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy” before taking another step, the central bank’s rate-setting Federal Open Market Committee (FOMC) said in a unanimous policy statement at the end of its two-day meeting.Powell said that even as officials have not decided what they will do with rates, the July 25-26 gathering is a “live meeting” which could bring another increase.”This looks like a meeting where the Committee was split, everybody got something, and nobody got everything. A dovish decision, a hawkish statement, and very hawkish dots,” wrote economists at the analytics firm of Larry Meyer, a former Fed governor. “Ultimately … though Powell was vague on many points, we see his press conference as relatively dovish.”U.S. stocks fell after the policy decision, but by the end of the day the Nasdaq Composite and the S&P 500 indexes had closed slightly higher. The Dow Jones Industrial Average was off 0.68%.STRONGER ECONOMIC OUTLOOK The Fed’s higher rate outlook coincides with an improved view of the economy and, consequently, slower progress in returning inflation to the central bank’s 2% target. It is currently more than double that.Fed officials at the median more than doubled their outlook for 2023 economic growth to 1%, from 0.4% in the March projections.The core Personal Consumption Expenditures Price Index is seen dropping from the current 4.7% to 3.9% by the end of 2023, compared to a 3.6% year-end rate seen in the March policymaker projections. The policy decision on Wednesday snapped a string of 10 consecutive rate hikes delivered as the Fed responded to the worst outbreak of inflation in 40 years with a matching set of aggressive moves, including four outsized increases of three-quarters of a percentage point last year.The central bank’s policy rate, which influences household and business borrowing costs throughout the economy, rose a full 5 percentage points from the onset of the tightening cycle in March 2022, reaching the highest level since just before the start of the 2007-2009 recession. More