Aurelia Butler

The Congressional Budget Office on Wednesday said the U.S. Treasury Department will exhaust its ability to pay all its bills sometime between July and September, unless the current cap on borrowing is either raised or suspended.Many past debt-limit standoffs have been resolved without significant market fallout but that hasn’t always been the case: a 2011 debt ceiling showdown roiled markets and led to a downgrade Standard & Poor’s.Here is some background about the debt ceiling debate and its impact on markets:** Though months remain for lawmakers to reach an agreement, there are signs stock investors may already be pricing in risk around the debt ceiling debate.According to Goldman Sachs (NYSE:GS), while debt limit debates typically have had “limited” impact on the broad market, stocks exposed to government spending have commonly lagged in the weeks prior to the debt ceiling deadline. A basket of such stocks has trailed the S&P 500 by a median of 5 percentage points in the weeks ahead of the four most recent debt limit deadlines, Goldman said in a note late last month.** This year, the Goldman Sachs government exposure basket has gained only 4.4% as of Tuesday’s close, compared with a 7.7% gain for the S&P 500. Stocks in the basket belong to a range of industries that could be affected by a shutdown, including healthcare, aerospace and defense, professional services, and materials. ** However, 90% of respondents in a Deutsche Bank (ETR:DBKGn) global financial market survey taken late last month said the debt ceiling has no influence or only limited influence on their 2023 outlook. That led Deutsche Bank’s head of global economics and thematic research Jim Reid to note that markets might be caught off guard by major fallout from a debt showdown.** Stocks fell sharply during the debt-ceiling showdown in 2011, which came alongside economic unease in Europe that roiled markets. The S&P 500 sold off about 17% between late July and mid-August of 2011, while the Cboe Market Volatility index spiked above 40.** An October 2013 showdown was less concerning to risk assets but created “temporary dislocations” in the Treasury market, with Treasury bills maturing in the “default” zone trading at a steep discount to nearby securities, according to Deutsche Bank. ** In 2011 and 2013, equities declined in the month leading up to the date the debt ceiling was raised, but then bounced back, according to Brian Levitt, global market strategist at Invesco. The S&P 500 fell 17.2% and 4% in 2011 and 2013 one month ahead of that date, Levitt said in a note. The index rose 28.1% and 21.4% in the ensuing 12 months in those years. More

SINGAPORE (Reuters) – The world’s biggest factory and most populous nation has opened for business after three years, leading to a surge in demand as well as concerns it will add to global inflationary pressures. But economists say investors need not worry too much.China’s swift dismantling of a zero-COVID policy has come as global central banks are saying the fastest rate hikes in a generation will need to go further to rein in rising prices, fuelling worries that pent-up mainland demand will trigger another wave of inflation.Anticipation of a flurry of spending has driven up prices of everything from copper to shares in luxury fashion houses.However, economists see no challenge to global inflation, pointing instead to Chinese President Xi Jinping’s new blueprint for self-sufficiency, broader prosperity and a socialist ideology as checks on big-ticket shopping.The slack in China’s labour markets and Beijing’s growth priorities will also take the edge off inflation, they say.”I don’t think China’s recovery or the reopening will cause any significant global inflation,” said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas (OTC:BNPQY) Asset Management.A recovery is likely to be inwardly focused and unlikely to substantially lift the yuan, reducing the chances of pushing up export prices or driving price rises elsewhere, he added.Worries that Chinese demand could force the U.S. Federal Reserve and other central banks to increase rates further are “overblown”, Lo said. BNP’s portfolio managers are positioning for China’s rebound to boost regional tourism, but not export price rises for manufactured goods.FULL TANKSIn commodity markets too, where China is a price-setter for iron ore and the second-biggest consumer of oil, further sharp price gains due to the reopening are unlikely. Metals markets have already priced in some new demand, with copper futures breaching a $9,000 per tonne level last month for the first time since June. “The old infrastructure spending, basically roads, bridges, airports and ports; China will still build them”, but that kind of spending will not be a priority in the next decade, said Lo, who anticipates only a marginal tailwind for commodities.New kinds of infrastructure spending, such as on technology, is less intensive in terms of bulk commodities, Lo added.China has also benefited from the cheap Russian oil imports, and has stockpiled, curbing oil demand as a source of inflation.There is solace in the near absence of price pressures on the mainland too, given the moderation in economic growth and a rising domestic currency.In 2022, economic growth slumped to one of its worst levels in nearly half a century, at 3.0%.UBS’ APAC Chief Investment Office estimates China’s full-year GDP could potentially reach around 5% this year, but inflation will accelerate “only modestly” to 3%, and J.P. Morgan analysts think it will start to pare back.SUPPLY SIDE A weak labour market will also rein in inflation in China, which has not made the direct stimulus payments that drove hiring and spending in most Western economies.Beijing’s “common prosperity” policy has slashed pay and perks for bankers, while youth unemployment hit a record 20% last year.”There is so much spare capacity in China … it doesn’t feel like you’re going to have a shortage of labour. You don’t have the great resignation like you had in the rest of the world” due to the pandemic, said May Ling Wee, a portfolio manager at Janus Henderson Investors.But inflation could emerge if and when consumers plough their 17.8 trillion yuan of savings into travel and discretionary shopping, analysts cautioned.”The large savings in China can definitely support a recovery of consumption – the question is how much more people are willing to spend,” said Ricky Tang, co-head of client portfolio management at Value Partners Group.Average airfares for flights to and from China in January were more than double 2019 prices, data from ForwardKeys showed, despite there being no immediate surge in travel.It will be “many months” before Chinese tourist crowds arrive in Western airports given curbs on travellers from the mainland, limited flight capacity and high fares, said Olivier Ponti, ForwardKeys’ vice president of insights. “It is also likely that there will be issues with visas and delays renewing passports.”Years spent getting supply chains in order are also helping ease price pressures. Pork production is a case in point.It hit an eight-year high in 2022 and prices fell 10.8% in January. Factory-gate prices are going down, which analysts say raises the prospect of a “Goldilocks” scenario of steady growth without exporting inflation.”I’m very much of the view that (China’s reopening) will be positive for the world in terms of either not being too inflationary, but more widely having deflation in some key new goods and services,” Westpac senior economist Elliot Clarke said. More

NEW YORK (Reuters) – The mutual fund industry is warning the U.S. Securities and Exchange Commission that new proposed rules aimed at better preparing open-end funds to weather distressed market conditions would harm investors saving for retirement.A November proposal from the SEC would require mutual funds, and some exchange-traded funds, to ensure that at least 10% of their net assets are highly liquid. It would also require a hard daily close of 4 p.m. Eastern time for mutual funds, and the use of “swing pricing.” Such pricing, which involves adjusting a fund’s value in line with trading activity so redeeming investors bear the costs of exiting without diluting remaining investors, is an attempt to prevent liquidity issues during market disruptions, such as at the beginning of the pandemic, when many investors tried to exit funds at the same time.SEC Chairman Gary Gensler argued at the time the tweaks would ensure such funds are resilient and protect investors.But industry groups and fund managers criticized the proposal in public comments, describing them as misguided and harmful.”The SEC’s liquidity, swing pricing, and hard close proposal would seriously harm the more than 100 million Americans who use mutual funds to invest for their financial future,” said Eric Pan, chief executive officer of the Investment Company Institute, an industry group.The proposal also does not accurately reflect key characteristics of fixed income investments, many of which rarely trade, said Emmanuel Roman, CEO of PIMCO, which had around $1.74 trillion in assets under management at the end of last year.The plan to require swing pricing presents “overwhelming” operational challenges, said Rick Wurster, president of Charles Schwab (NYSE:SCHW) Corp, and could decrease transparency for investors, who would not know whether it was being applied until after their transaction request.The hard close creates several problems, including for shareholders who own funds through defined contribution plans, which are not able to send in orders by 4 p.m. and may be stuck with the next day’s price for their orders, independent trustees of Fidelity’s equity and high income and fixed income allocation funds said in a letter.The rules could push such plans to move assets to less restrictive financial products, such as collective investment trusts that do not have the same oversight as mutual funds, they said.”This risks reducing protections for investors in general, increasing costs to fund shareholders that remain in registered open-end funds, adversely affecting investor choices and investment outcomes, and generally harming the best interests of tens of millions of fund investors,” they said. More

Painful memories of hyperinflation in the 1990s mean steep price rises are set to endure for longer than many expect in central and eastern Europe, the chief economist of the European Bank for Reconstruction and Development has warned.The lender said in its latest economic forecasts, published on Thursday, that the economies of central Europe and the Baltic states would grow by an average of just 0.6 per cent this year. Growth would also remain weak in eastern Europe, at just 1.6 per cent, and in south east European EU members, at 1.5 per cent.Countries in the region have been among the worst affected by the economic impact of Russia’s invasion of Ukraine, with price rises way above the EU average. High inflation, and central banks’ attempts to combat it with big interest rate increases, have weighed on growth. However, many economists expect inflation to fall sharply this year on the back of the recent slump in global energy costs. While the EBRD does not publish its own inflation estimates, its chief economist Beata Javorcik said many of those forecasts were “optimistic”. The IMF said in October that it expected inflation in all regions covered by the EBRD to decline to 7 per cent by the end of 2023 and by an average of 10 per cent throughout this year. “If you look at previous episodes of [high] inflation, they have taken longer [to dissipate] than what the IMF is expecting,” Javorcik said. She added that the scars left by the economic upheaval of the early 1990s in her native Poland and other former communist countries of the region created the risk of a “self-fulfilling prophecy”. In such a scenario homeowners and farmers would continue to be influenced by fears of lingering inflation, demanding high wage increases and continuing to raise prices. “If you experience hyperinflation in your lifetime, the memory remains with you forever,” she said. Javorcik also questioned the communication skills of the region’s central bankers, which could undermine public trust in officials’ capacity to bring inflation under control. “Interest rates are the main tool in fighting inflation, but the second [most important] tool is communication with the public and influencing expectations.” Since Russia’s attack on Ukraine triggered a surge in energy and food prices a year ago, central and eastern European countries have struggled with inflation at levels not seen since the 1990s. Polish inflation increased to 17.2 per cent in January, from 16.6 per cent in December, according to data published on Wednesday, though the figure was below expectations of a sharper rise. “The odds of inflation falling to single-digit levels by the end of the year have increased substantially,” said Adam Antoniak, economist at ING Bank. However, Antoniak added that in both Hungary and the Czech Republic inflation had recently “surprised to the upside”. Javorcik also said it was unclear how long governments in central and eastern Europe could continue to protect ailing companies. Businesses continue to rely on measures that were introduced to offset the impact of Covid and have since kept the bankruptcy rate in the region significantly below that in western Europe. Should this support be withdrawn, she forecast the disappearance of “firms that were surviving thanks to these emergency measures”. The EBRD’s report covers 36 economies from central and eastern Europe to north Africa to central Asia, which the bank expects to grow on average 2.1 per cent this year, down from its 3 per cent forecast in September and from 2.4 per cent last year. The EBRD expects Russia’s economy to shrink by 3 per cent this year. More

Investors who for months had been banking on the Federal Reserve cutting interest rates this year have been forced to back off those bets after a raft of strong US economic data that suggests persistent inflation. Futures markets at the start of February signalled that the US central bank would reduce interest rates at least two times by the end of the year. This week they suggested roughly equal chances of one rate cut or none at all at the Fed’s monetary policy meetings in 2023. The move in futures shows investors merging closer to the Fed’s own message that it will not lower rates until at least 2024. “The market is coming in line with the Fed,” said Priya Misra, head of global rates strategy at TD Securities. “The Fed is data-dependent, and we have seen better than expected data.”The US on Tuesday reported that consumer prices in January had cooled by less than expected, with housing costs in particular bolstering inflation. On Wednesday came statistics that US retail sales, which include items such as food and petrol, rose 3 per cent last month, well above forecasts of a 1.8 per cent increase. “The data this week has brought a dose of reality to markets,” said Kristina Hooper, chief global market strategist at Invesco US. The data followed a US employment report for January which showed the labour market running hot, adding nearly three times the number of jobs forecast. The strong economic indicators come as the Fed has slowed its pace of monetary tightening, lifting its main policy rate by 0.25 percentage points in February after rises of 0.75 and 0.5 percentage points for most of 2022. Prior to the release of the January jobs report, futures markets pointed to the Fed’s benchmark interest rate peaking at 4.9 per cent in the second quarter before dropping to about 4.4 per cent by the end of the year, implying two interest rate cuts of 0.25 percentage points apiece. On Wednesday, pricing showed that investors expect rate rises in March and May, with a peak in rates at 5.25 per cent, but then a less than 0.25 percentage point cut by the end of 2023, equivalent to a virtual coin flip between one cut or zero. Bets on where rates will stand by the end of 2024 have changed even more significantly, rising from expectations at the start of February of about 2.9 per cent to 3.7 per cent this week. Changes in rate expectations have been accompanied with changing wagers on inflation. The so-called one-year break-even inflation rate, showing where investors believe inflation will be in a year’s time, has risen from 2.1 per cent at the start of February to 2.9 per cent. That all puts the market more in line with the Fed’s own forecasts from December. Surveyed officials saw interest rates ending this year at about 5.1 per cent, and 2024 at about 4.1 per cent. They envisaged inflation at 3.5 per cent by the end of 2023, and 2.5 per cent by the end of 2024, as measured by the personal consumption expenditures price index.“The tone is being set by the payrolls numbers and it has been augmented by the inflation data, which suggests a scenario in which inflation is much stickier,” said Alan Ruskin, chief international strategist at Deutsche Bank. More