Aurelia Butler

US jobs growth is expected to have moderated in February from the previous month’s breakneck pace, but remain elevated enough to keep pressure on the Federal Reserve to reconsider bigger interest rate increases.The world’s largest economy is forecast to have added 225,000 jobs last month, less than half of January’s whopping 517,000, but still well above what US central bank officials consider in line with easing price pressures. Those gains would lead to the unemployment rate hitting a multi-decade low of 3.4 per cent.Wage growth, meanwhile, is forecast to have again increased 0.3 per cent from January, matching the previous monthly uptick in average hourly earnings. On a year-over-year basis, it is set to have jumped 4.7 per cent.February’s report, due to be released by the Bureau of Labor Statistics at 8:30am Eastern Time, is one of the most consequential data releases ahead of the Fed’s next policy meeting on March 21-22.In congressional testimonies this week Fed chair Jay Powell said the central bank would be scrutinising the report — alongside inflation and retail sales figures, among others, due next week — in order to determine whether to resume more aggressive rate rises after a deluge of unexpectedly strong data.“They’re going to be very important in our assessment of the higher readings that we have very recently received and of the overall direction of the economy and of our progress in bringing inflation down,” he said on Wednesday, of the data, stressing that no decision had yet been made. Powell added that “the ultimate level of interest rates is likely to be higher than previously anticipated”.

In February, the Fed called time on jumbo rate rises and delivered a more traditional quarter-point increase, having repeatedly moved in half-point and three-quarter point intervals last year. At the time Powell justified the smaller rate rise by arguing that it would “better allow” officials to track progress in their goal to tame inflation and said the “disinflationary process” was under way.But persistent labour market tightness and renewed consumer strength since then have upended expectations about the path forward for policy. Any inkling that January’s data was not a one-off will probably prompt the Fed to opt for the larger increase, economists warn.According to the CME Group, the odds of a half-point rate rise at this month’s meeting stand at nearly 70 per cent. More

US energy secretary Jennifer Granholm sought to ease clean energy trade tensions with the EU, saying the Biden administration was seeking to build supply chains with “countries whose values we share”. The US and EU were in talks about a free trade-style deal around clean technology, she said, which could soothe European anxieties that the US’s $369bn in new subsidies for low-carbon energy would suck capital across the Atlantic. “That’s one of the discussions that I know the administration is having,” Granholm told the Financial Times in an interview in Houston on Thursday. She added: “We don’t want to see any trade rivalry. And we’re in discussion with our EU counterparts about how to make sure we can do this in a way that lifts all.” Granholm’s comments came hours after the EU relaxed state aid measures, allowing member states to match subsidies if there is a risk of investment being diverted from the bloc.The US’s Inflation Reduction Act, passed last year, includes $369bn worth of tax credits, loans and grants designed to stimulate clean technology investment and meet President Joe Biden’s goal of halving US carbon emissions by 2030.But the scale of subsidies has prompted fears of a new trade war, with President Emmanuel Macron of France warning that the IRA threatened to “fragment the west”.Europeans have also been alarmed by what they perceive to be an aggressive push by US states to lure investment from the EU, including hefty subsidies for companies moving manufacturing to the country. Last month, John Podesta, the Biden administration official in charge of implementing the IRA law, said in an interview with the FT that the US would make “no apologies” for prioritising American jobs as it tried to take control of global clean energy supply chains. On Friday, Biden and Ursula von der Leyen, the European Commission president, are expected to discuss co-operation over the critical mineral supply chain at a White House meeting.

Granholm said the US was seeking to build a “backbone” of manufacturing to reverse decades of deindustrialisation and break dependence on China. But allies would not be excluded.“We want to ‘friend-shore’ some of that — we want to have a supply chain that is robust with our allies and with countries whose values we share.“This is another reason why we’re having those discussions with our allies to make sure that we are able to proceed apace and still build up that backbone.” While the IRA has already brought an influx of projects and spending commitments, some clean tech developers have warned that the effort to eliminate China from supply chains will slow down deployment.Solar installations in the US in 2022 fell for the first time since 2018 after investigations into tariff-dodging and seizures of products linked to forced labour in China curtailed the supply of modules.China also dominates processing of lithium that will be needed as the US tries to electrify its transportation system with battery-powered cars. The US may still need to import lithium by 2030, Granholm conceded, “but not from China . . . at least the goal is not to do it”.Additional reporting by Amanda Chu in New York More

Are you a baby or do you wear big-boy pants? When it comes to our money, our guardians aren’t sure. On one hand, governments force us via the tax system to put some pennies aside throughout our working lives. We cannot be trusted not to blow them on sweets.On the other hand, in the UK for example, we can withdraw a whole quarter of our pensions tax free at age 55 — three decades before most of us die. Book that cruise! We can also use the money to play with dangerous 300 per cent inversely geared emerging market ETFs.Regulators are confused, too. Back when I wrote research for banks, I had to ensure my content was comprehensible even to retail clients who could barely read. Meanwhile, kids everywhere were allowed to tip their entire piggy banks into crypto.I was pondering this recently as ex-colleagues were discussing inflation-protected bond funds on our WhatsApp group. You can hardly get more grown-up (or sad). Yet we struggled to understand much of the small print. What hope do inexperienced savers have?It’s a good time to ask as global inflation remains elevated. British readers also have until the end of the month to invest their annual Isa allowance. Should we all be spending our lunch money on inflation-protected bonds?One might have asked this in 2021, too. Inflation fears were building. Geopolitical ones ditto. Low-risk government bonds surely made sense, particularly if you could shield the coupons and principal from losses in real terms.Indeed, Treasury inflation-protected securities (Tips) — or index-linked gilts in the UK — were being sold as the risk-free asset of choice. In the US, almost double the money poured into Tips funds in the first three quarters of 2021 than the year before, according to Lipper data.In the UK, meanwhile, so-called “linker” funds had attracted almost half a billion pounds of additional net assets through 2021, reckons Morningstar. By the second half of the year, Google searches for index-linked bonds were twice as high as usual.What happened next? Tips lost between 10 and 30 per cent of their value over 2022, depending on the securities they held. UK index-linked funds did even worse. You could hear the wailing. It’s so unfair! Inflation went up, just as we thought it would!This was no mis-selling. But I’ll bet my horse that in a rush to hedge against rising consumer prices, investors paid way more attention to the term “inflation-protected” in the name of these funds than the word “bond”. Therein lies the problem. Tips and the like are essentially two things at once. They do indeed help protect against inflation by adjusting the money that investors get back when the bond expires. Coupons are similarly tweaked.

Stuart Kirk’s holdings, Mar 10 2023Vanguard FTSE 100 ETFBlackRock Sterling Liquidity FundBlackRock World ex UK Equity IndexiShares MSCI EM Asia ETFVanguard FTSE Japan ETFTotalAssets under management (£)126,807113,999115,76350,57752,807459,953Weighting27%25%25%11%11%Any trades by Stuart Kirk will not take place within 30 days of being discussed in this column

But they are still bonds. Which means prices fall when yields go up because coupon payments are fixed (notwithstanding the inflation adjustment). Therefore, if there is a big rise in interest rates, the yield the bond offers is less attractive and the whole caboodle falls in value.In other words, these bonds are exposed to moves in real interest rates, which last year skyrocketed. UK funds are especially sensitive because they tend to own bonds which don’t mature for up to 20 years, more than double the average duration of Tips funds.It is these long maturities which make inflation-protected bonds so attractive to pensions and insurers, who need to cover liabilities far into the future. But remember that the main adjustment for inflation happens when these bonds redeem. This means that, in the short term, the protection doesn’t help much.The trouble is that inflation expectations are discounted in prices immediately. Which is why funds with long durations were hammered last year. Everyone feared that central banks had left it too late to bring prices back under control.What now? These things have fallen a lot. The way I look at them is to first ask whether I’m willing to lose my shirt with a punt on interest rates. (If not, as it happens, there are products out there called “break-even” inflation funds. These allow me to make a call on inflation without the rate risk.)

I digress — and there are better inflation hedges out there anyway. But that’s another column. So the next question is: how much do rates need to rise before I lose money? To answer this, compare the yield on a protected fund with an equivalent non-protected one.If they both have a duration of say, 10 years, and the gap is 3 per cent, this “break-even rate” suggests the market is pricing in 3 per cent annual inflation to 2033. In other words, you are forgoing 3 per cent of yield to be fully reimbursed when the bond expires.Buy the protected fund if you think inflation will be more than 3 per cent. If you think lower, pick the vanilla fund. This assumes all else is equal. It won’t be. Thus you must also decide if real interest rates are heading up or down. Are rates going to rise or fall more or less than inflation will rise or fall?I am a cynical sod when it comes to central banks. My money is on them bottling it and thus real rates are probably near their peak. Despite Jay Powell’s hawkish testimony this week, Wall Street will put pressure on the Federal Reserve not to raise rates too much — as it always does.And in the UK, where we’re still considered babies when it comes to housing, a risk in my view is that the Bank of England folds in the face of weaker property prices and won’t increase rates enough. I think you’ll see some inflation-protected bonds in my portfolio soon. The author is a former portfolio manager. Email: [email protected]; Twitter: @stuartkirk__ More

Investors expect the European Central Bank to accelerate the shrinking of its balance sheet this summer, testing their appetite for eurozone sovereign debt as cash-strapped governments also turn to markets to raise funds.The shift by the ECB to tighten its policy stance is likely to drive up government borrowing costs in more heavily indebted southern European countries once “investor fatigue” from more bonds flooding the market sets in, some analysts warned.This month the ECB started to reduce its bond holdings by not replacing €15bn of the securities that mature each month in its asset purchase programme, which makes up two-thirds of the almost €5tn of assets it has purchased under its longstanding policy of quantitative easing. Debt markets were unperturbed by the Frankfurt-based institution starting to reduce its bond holdings this month.But eurozone governments issued about €100bn of extra debt — above that needed to refinance maturing bonds — in January and again in February, according to Camille de Courcel, head of strategy for G10 Rates Europe at French bank BNP Paribas. “We have this very strong supply [of new debt] and we think there will be some kind of indigestion in the market and then we could see some underperformance,” she said.Overall borrowing costs for eurozone governments have risen sharply in the past year as the ECB has reduced its bond purchases and raised interest rates. But the difference, or spread, between the cost of borrowing for heavily indebted countries in Europe’s periphery, such as Italy, and those of safer “core” countries such as Germany has narrowed in the past six months.Since Giorgia Meloni’s election as head of Italy’s rightwing government, she has surprised investors by taking a relatively cautious approach to public spending, calming anxiety about the country’s high debt levels. “Meloni is more fiscally prudent than initially thought,” said Ludovic Subran, chief economist at German insurer Allianz. Italy’s 10-year bond yield was 4.42 per cent on Wednesday, close to its highest level for almost a decade. The spread with its German equivalent, however, was just below 1.8 percentage points — after falling from levels above 2.5 points last year.This seems an anomaly to some economists, who expected rising interest rates to cause the spread between riskier assets and less risky ones to rise. “The stability in peripheral spreads in the face of the fastest monetary tightening cycle ever, and re-pricing of the terminal rate higher, looks puzzling,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.However, analysts said higher yields on longer-term Italian government bonds were attracting more investors, helping to compress spreads. Piet Haines Christiansen, director of fixed-income research at Danske Bank, said this had started to “attract a certain investor base that has been absent in the past many years during the low interest rate environment”. For example, Rabobank researchers calculated that asset managers, insurers, pension funds and households “stepped up” to absorb €30bn of Italian sovereign debt sold by banks and foreign investors around the time of last October’s election.“Italy is the one we’re watching fairly closely,” said Michael Metcalfe, head of macro strategy at State Street, adding that private sector investor demand for Italian government debt had held up well. “Is confidence beginning to wobble? We’re not really seeing anything,” Metcalfe said. “The [ECB policy] tightening we’ve had has been well flagged, so markets have had time to adjust. But it’s worth being cautious. Quantitative tightening will be a long process.”But others still think Italy’s borrowing costs are still likely to rise. Sophia Oertmann, an analyst at DZ Bank, calculated that to avoid a “vicious circle” of rising debt and borrowing costs Italy needs to return to a primary budget surplus — excluding interest costs — something it has not done since 2019. Without this “a psychological tipping point would then also be reached”, she said, pointing to rating agencies updating their scores for Italy in April and May as a possible “catalyst”.Encouraged by the smooth start to shrinking the ECB’s bond portfolio, some of its governing council members, such as Bundesbank president Joachim Nagel, have called for the central bank to speed up the quantitative tightening process when this is reviewed in July. Others, such as Austria’s central bank head Robert Holzmann, have even said it should bring forward from the end of next year the start of a reduction in its separate €1.7tn portfolio of bonds bought under an emergency scheme launched during the coronavirus pandemic. To go even faster, the ECB could sell bonds before they mature, but most analysts think this is unlikely as it would crystallise big losses.

Konstantin Veit, a portfolio manager at bond investor Pimco, said he expected the ECB to stop replacing all maturing bonds in the APP from July, which would increase the monthly reduction in its holdings to €25bn. “The main consequence is increased government bond supply to the market,” said Veit. Normally, he said, such a shift “probably doesn’t matter that much, and higher yields typically makes fixed income more attractive”. However, this could change in a political or economic crisis, in which case “the market might take a closer look at supply dynamics.”Most investors think the private sector has enough capacity to mop up the extra supply of bonds this year, but only if inflation declines roughly in line with expectations.“Last year the ECB helped reduce net bond supply, this year the ECB will add to it, likely taking the net bond supply to over €700bn, from something around €150bn last year,” said Derek Halpenny, head of research for global markets at MUFG. “If inflation were to prove notably higher than expected that could create problems.” More

The swap exchanges old debt for new bonds maturing in 2024 and 2025, according to an economy ministry statement Thursday.”In this way, the uncertainty about the debt maturities of the coming months is cleared up, helping to preserve the sustainability of the Treasury debt,” the ministry said.Argentina had initially hoped to swap around half of its total debt due, an official source told Reuters on the condition of anonymity earlier this week.”Between banks, insurers and companies, the (swap) volume would be between 3 and 3.5 trillion pesos (around $17 billion),” they said, adding that swapping “anything above 50% will already be a great achievement.”The swap, first announced Monday, prompted global rating agency S&P to slash Argentina’s local currency rating to ‘SD/SD’ (selective default) from ‘CCC-/C’ Thursday. It also downgraded Argentina’s national rating to ‘SD’ from ‘raCCC+’.Argentine stocks and bonds also fell Thursday as investment funds flocked for the exit following news of the debt swap, which aims to ease market uncertainty in an election year and amid a stalling economy.Though the debt swap is technically voluntary rather than a forced restructuring, the agency – and indeed the markets – still appear to view it as a distressed event.This is Argentina’s third bond swap since August 2022.Argentina also still has an eye-watering estimated $170 billion of local debt due, given the swap only pushes back the payment deadline.Meanwhile, a historic drought in Argentina has squeezed the economy, which is already battling an expected annual inflation rate of some 100%.Economy Minister Sergio Massa recently described the swap as “giving predictability” to the market to improve access to credit.The opposition led by the “Juntos por el Cambio” coalition have criticized the latest measure since the new maturities will need to be handled by the incoming government following the October elections. More

(Reuters) – SVB Financial Group scrambled on Thursday to reassure its venture capital clients their money was safe after a capital raise led to its stock collapsing 60% and contributed to wiping out over $80 billion in value from bank shares.The lender on Wednesday launched a $1.75 billion share sale to shore up its balance sheet and navigate declining deposits from startups struggling for funds amid increased spending.The shares posted their biggest loss since the bank’s 1988 IPO as it warned that venture capital funding could remain constrained in the near term, while Chief Executive Greg Becker said cash burn by clients increased in February. The stock collapsed to its lowest level since 2016, and after the market closed shares slid another 26% in extended trade.Becker has been calling clients to assure them their money with the bank is safe, according to two people familiar with the matter. Some startups have been advising their founders to pull out their money from SVB as a precautionary measure, the sources added. One San Francisco-based startup told Reuters they successfully wired all their funds out of SVB on Thursday afternoon, and the funds had appeared in their other bank account as a “pending” incoming wire by 4 pm Pacific Time on Thursday.However, the Information publication reported the bank told four clients that transfers could be delayed. SVB did not immediately respond to a request for comment. GRAPHIC: SVB Financial’s stock slumps as investors fear bank run (https://fingfx.thomsonreuters.com/gfx/mkt/zgpobnxeavd/Pasted%20image%201678405360777.png) A crucial lender for early-stage businesses, SVB is the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022.”While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker said in a letter to investors.The funding winter is a fallout of a relentless increase in borrowing costs by the Federal Reserve over the last year as well as elevated inflation. The SVB turmoil raised investors’ concerns about broader risks in the sector.Shares of First Republic, a San Francisco-based bank, sank more than 16.5% after hitting the lowest level since October 2020, becoming the second-biggest decliner in the S&P 500 index. Zion Bancorp dropped more than 12% and the SPDR S&P regional banking ETF slid 8% after hitting its lowest point since January 2021.Major U.S. banks were also hit, with Wells Fargo (NYSE:WFC) & Co down 6%, JPMorgan Chase & Co (NYSE:JPM) down 5.4%, Bank of America Corp (NYSE:BAC) 6% lower and Citigroup Inc (NYSE:C) 4% lower. Thursday’s slump evaporated over $80 billion in stock market value from the 18 banks making up the S&P 500 banks index, including a $22 billion drop in the value of JPMorgan.In a separate deal, SVB said private equity firm General Atlantic will buy $500 million worth of its shares.Meanwhile, ratings agency Moody’s (NYSE:MCO) downgraded the bank’s long-term local currency bank deposit.Natalie Trevithick, head of investment grade credit strategy at investment adviser Payden & Rygel, said the bank’s bonds were not doing as poorly as the equity.”Future performance is going to be news dependent but I don’t expect them to properly recover in the near term. It’s not quite cheap enough for a lot of buy-the-dip people to come back in,” Trevithick said.Despite the latest concerns, analysts at brokerage firm Wedbush Securities said the bank had received significant proceeds from selling securities and raising capital.”We do not believe that SIVB is in a liquidity crisis,” Wedbush analyst David Chiaverini said in a report, referring to the company’s trading symbol.California-based SVB has sold $21 billion of its securities portfolio, which would result in an after-tax loss of $1.8 billion in the first quarter. Funds raised from the sale will be re-invested in shorter-term debt and the bank will double its term borrowing to $30 billion.”We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients,” Becker said.”When we see a return to balance between venture investment and cash burn – we will be well positioned to accelerate growth and profitability,” he said, noting SVB is “well capitalized.”The bank also forecast a “mid-thirties” percentage decline in net interest income this year, larger than the “high teens” drop it forecast seven weeks earlier.Bank stocks remained under pressure from “risk-off sentiment” and questions about systemic risks to the industry, said John Luke Tyner, a fixed income analyst at Aptus Capital Advisors. More

WASHINGTON (Reuters) – U.S. President Joe Biden on Thursday delivered a budget proposal that includes a robust spending agenda, higher taxes on the wealthy and plans to reduce the deficit, a document that forms the blueprint for his expected 2024 re-election bid.Here is reaction to Biden’s budget proposal to Congress for the 2024 fiscal year:U.S. House Budget Committee Chair Jodey Arrington, Republican from Texas: “His policies have led to 40-year record inflation, soaring interest rates and the prospect of a sustained economic recession. Unfortunately, Biden’s latest budget is more of the same bloated bureaucracy at the expense of working families, while sticking our grandchildren with the bill.” U.S. House Democratic Leader Hakeem Jeffries: “The Biden budget plan protects Social Security, strengthens Medicare and invests in our children. House Republicans continue to hide their extreme plans from the American people.” U.S. House Speaker Kevin McCarthy, House Majority Leader Steve Scalise, House Majority Whip Tom Emmer and Republican Conference Chair Elise Stefanik in a joint statement: “President Joe Biden’s budget is a reckless proposal doubling down on the same Far Left spending policies that have led to record inflation and our current debt crisis.” Republican U.S. House Member Ben Cline of Virginia on Fox Business: “I think his budget in the Republican House of Representatives is going to be about as popular as Pete Buttigieg in East Palestine, Ohio. I don’t think it’s going to get a, well, very good reception. His tax increases are dead on arrival. We’re working on a budget that is going to get rid of the woke and weaponized government that Joe Biden has been pushing for years now.” U.S. Senate Majority Leader Chuck Schumer: “The president’s budget is set to be a bold, optimistic, and serious proposal for strengthening our economy and creating opportunities to climb into the middle class, as well as helping people stay there once they get in the middle class.” Congressional Progressive Caucus Chair Pramila Jayapal: “This budget would advance priorities progressives have been pushing for years, and continue the unfinished work from the president’s 2022 agenda. ….. There are also a few places where we need to do better, and ensure record levels of funding come alongside real accountability, particularly for immigration and defense.” Republican U.S. Senator Chuck Grassley of Iowa: “Even with near-record revenues, President Biden wants to raise taxes on every segment of America. Under his plan, the government’s bite out of the economy would be the largest since World War II. And despite all that, he’s somehow managed to continue adding to our national debt at a breakneck speed. It’s an unserious proposal, and will be treated as such by both parties in Congress.” Josh Bivens, Economic Policy Institute, director of research: “If there’s a quibble on the tax side, it’s that it doesn’t ask enough of plenty of American households who could afford to pay more.” U.S. Chamber Of Commerce Executive Vice President Neil Bradley: “The administration’s proposed budget is a recipe for economic and fiscal disaster. Nearly $2 trillion in spending increases would result in an economy where one out of every four dollars is government spending. An unprecedented $5 trillion in tax increases would hit businesses of all sizes and lead to lower wages for working Americans.”U.S. Senate Armed Services Committee Chair Jack Reed, Democrat from Rhode Island, on Biden’s $886 billion in proposed national defense spending: “This topline request serves as a useful starting point.” U.S. House Armed Services Committee Chair Mike Rogers (NYSE:ROG), Republican from Alabama: “A budget that proposes to increase non-defense spending at more than twice the rate of defense is absurd. The president’s incredibly misplaced priorities send all the wrong messages to our adversaries.” More

TOKYO (Reuters) -The Bank of Japan (BOJ) is set to maintain ultra-low interest rates on Friday and hold off on making major changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.The meeting will be the last one to be chaired by Governor Haruhiko Kuroda, who leaves behind a mixed legacy with his massive stimulus praised for pulling the economy out of deflation – but straining bank profits and distorting market function with prolonged low interest rates.With inflation exceeding its 2% target, the BOJ has been forced to ramp up bond buying to defend a 0.5% cap set for the 10-year bond yield – at the cost of distorting the shape of the yield curve and causing dysfunction in the bond market.U.S. Federal Reserve Chair Jerome Powell’s comments on Tuesday signaling the need for bigger-than-expected rate hikes also point to the likelihood Japanese yields will remain under upward pressure.Many analysts thus see the days of yield curve control (YCC) numbered, though recent BOJ policymakers’ speeches underscore their preference to hold off on big policy changes at least until Kuroda’s successor, Kazuo Ueda, takes the helm in April.”Under Ueda’s new leadership team, the BOJ will keep monetary conditions accommodative but tweak (YCC) to mitigate its side-effects,” said Mari Iwashita, chief market economist at Daiwa Securities.”After conducting an examination of its policy framework, the BOJ will either abandon the 10-year yield target or shift to one targeting a shorter duration,” she said.At the two-day meeting ending on Friday, the BOJ is set to maintain its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.Some market players bet the BOJ could widen the band set around the 10-year yield target, allowing the yield to rise up to 0.75%, from the current 0.5%, as early as Friday.But many analysts polled by Reuters expect any tweak in YCC to happen after Ueda takes over as new governor.Kuroda has repeatedly said consumer inflation, now running at double the pace of the BOJ’s 2% target, will begin to slow as the effect of past spikes in fuel and raw material prices fades.Data released on Friday showed Japan’s wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, heightening the chance the rise in consumer inflation will start to moderate in coming months.The upper house of parliament on Friday approved the government’s appointment of Ueda and his two new deputies, Shinichi Uchida and Ryozo Himino, finalising the confirmation of the new BOJ leadership.Ueda will chair his first policy meeting on April 27-28, when the board will produce closely watched, fresh quarterly growth and price forecasts extending through fiscal 2025. More