Aurelia Butler

(Reuters) -Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday that the U.S. central bank likely has more interest rate rises ahead amid signs the recent banking sector troubles have been contained.To keep inflation on a sustained downward path to 2% and keep inflation expectations anchored, Mester said she sees monetary policy moving “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.”“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing,” Mester said in a speech before a group of economists in New York.The Fed in late March raised rates by a quarter percentage point, to between 4.75% and 5%. The decision was haunted by banking sector troubles that led policymakers to say that a tightening in financial conditions would likely weigh on economic activity. “I was very comfortable with moving ahead” with the rate rise, given that authorities had taken steps to manage risks coming from banking sector troubles, Mester said in remarks following her speech.At the policy meeting, officials also penciled in a single additional rate rise for this year, as the Fed continues to boost the cost of short-term borrowing in a bid to lower inflation. In her remarks, Mester, who does not have a vote on the policy-setting Federal Open Market Committee this year, said, “My forecast is similar to the modal forecasts of FOMC participants released two weeks ago, although I see somewhat more persistent inflation pressures than the median forecast among participants.” She also pushed back on market views that the Fed will need to cut rates much sooner than central bankers currently expect. “Can I come up with scenarios that would have the Fed cutting rates? Yes. Is it my modal forecast? No.” Mester expressed confidence that banking sector woes should ultimately prove contained. “The U.S. banking system is sound and resilient,” she said. “The stresses experienced in the banking system in March have eased, but the Fed continues to carefully monitor conditions and is prepared to take further steps as necessary to ensure financial stability.” In her remarks, Mester said she expects growth and hiring to slow and inflation pressures to ease. There should be a “meaningful improvement” in inflation with price pressures easing from their current 5% year-over-year increase to 3.75% this year and 2% by 2025, Mester said. She said growth should slow to below-trend levels this year before ticking up next year. Unemployment, now at 3.6%, should rise to between 4.5% and 4.75% by the close of 2023, she said. More

BENGALURU (Reuters) – The U.S. dollar will weaken against most major currencies this year as the interest rate gap with its peers stops widening, putting the currency on the defensive after a multi-year run, according to a Reuters poll of foreign exchange strategists.Despite starting the year on a weak footing, the dollar bounced back sharply in February, gaining nearly 3% for the month, on expectations the U.S. Federal Reserve would take interest rates higher than previously thought.However, the failure of two regional U.S. banks in March forced the Fed to temper those expectations, pushing the greenback to retreat and give back nearly all of its previous month’s gains, a trend likely to persist in the near-to-medium term.While fears over market turmoil related to banks have subsided, hawkish interest rate expectations have not returned, suggesting a run of rapid rate rises may soon end, and with it, the beginning of the end of an historic dollar bull run.Median forecasts in the March 31-April 4 poll of 90 foreign exchange strategists showed the dollar ceding ground to all major currencies in a year.Highlighting the outsized role interest rates play in currency movements, a majority of analysts, 32 of 56, who answered a separate question said rate differentials will drive the dollar the most over the coming month.”Our take on the dollar is that we continue to look for further weakness over the next three to six months. I guess recent developments have been the loss of confidence in the U.S. regional banks, which has increased downside risks to the dollar,” said Lee Hardman, currency economist at MUFG.”The Fed will be very aware of those downside risks to growth going forward. So we kind of agree with the dovish repricing that’s taking place in the U.S. rate markets. We think the Fed is closer to the end of their hiking cycle.”Fed funds futures showed markets were pricing in a rate cut to come as early as September despite inflation still running well over double the Fed’s target. With the dollar’s expected retreat, the European single currency is finding its spot in the sun after briefly crossing below parity on lagging rate expectations in 2022.Up 2.5% this year, the euro was forecast to trade around current levels of $1.09 in the next one to three months and then strengthen another 2% to change hands around $1.12 in 12 months.Despite gaining more than 2.5% in March, the Japanese yen is still down 0.6% for the year. The safe-haven currency, which hit 32-year lows in 2022 again on rate differentials, was forecast to recoup that loss over the forecast horizon.The median view showed the yen gaining nearly 6.0% to trade around 125.00/dollar in 12 months.While the dollar’s weakness was a welcome change for most currencies, especially for emerging market currencies which were forecast to post modest gains from here, the projected upside from current levels was limited.With the dollar remaining defiantly strong against analyst expectations for years, some were reluctant to call for the world’s reserve currency to weaken rapidly. Indeed, the 12-month median view for nearly all of the major currencies surveyed was identical with the March poll.”We are more optimistic than the consensus for the dollar,” said Adam Cole, head of FX strategy at RBC Capital Markets, who described his position as moving from outright bullish over the past two years to something more nuanced. “Our overall bias is that the consensus for big dollar losses is likely to be wrong again,” he said, saying he did not believe the Fed would deliver the steep rate cuts the market is pricing for.That would only happen if a punishing recession were to take hold, a scenario which Cole said “tends to be a dollar positive scenario anyway.”(For other stories from the April Reuters foreign exchange poll:) More

LONDON (Reuters) -U.S. manufacturers reported widespread declines in activity in March, as the sector struggled with excess inventories, persistent inflation, rising interest rates and heightened caution among businesses and consumers.The manufacturing sector is already experiencing something very like a recession and faces a challenging outlook as the central bank maintains pressure on interest rates to counter inflation in the much larger service sector.The Institute for Supply Management’s purchasing managers index slipped to 46.3 (13th percentile for all months since 1980) in March, from 47.7 (17th percentile) in February and 57.1 (81st percentile) a year earlier.The index has pointed to a fall in manufacturing activity for five months in a row, with readings below the 50-point threshold dividing expansion from a contraction since November 2022.It has slipped to levels consistent with the onset of the last four recessions in 2020, 2008, 2001 and 1990, implying the manufacturing sector is experiencing a cyclical slump even if there is still momentum in services.Chartbook: Manufacturing and distillate consumptionActivity looks set to decline even further in the next few months, with the new orders component slipping to 44.3 (6th percentile) in March from 47.0 (11th percentile) in February and 53.8 (38th percentile) a year ago.Slackening activity has begun to filter through into weakening employment demand, until now largely immune, which will translate into job losses as labour hoarding ends.The employment index slumped to 46.9 (19th percentile since 2000) in March from 49.1 (29th percentile) in February and 55.3 (79th percentile) a year earlier.DIESEL DEMAND SLIPSThe full impact of interest rate increases and declining real wages over the last year has yet to filter through to business investment and consumer spending.But the manufacturing and freight downturn is already depressing domestic consumption of diesel and other distillate fuel oils, the most cyclically sensitive part of the petroleum market.Consumption of diesel and other distillate fuel oils has been falling since the second quarter of 2022, in line with the slowdown in manufacturing and freight activity.The volume of distillate fuel oil supplied to the domestic market was down -4.4% in the three months from November to January compared with the same period a year earlier.Consumption is dropping at the fastest rate since recessions in 2020, 2008/09 and 2001, as well as manufacturing-centred mid-cycle slowdowns in 2012 and 2015.The fall in consumption should gradually allow depleted inventories to recover as the year progresses and take some of the heat out of refining margins and diesel prices.Related columns:- U.S. diesel consumption falls as economy slows (March 1, 2023)- U.S. manufacturers flounder amid cost-of-living shock (February 15, 2023)- U.S. manufacturing downturn will cut diesel consumption (January 5, 2023)John Kemp is a Reuters market analyst. The views expressed are his own. More