Aurelia Butler

MOSCOW (Reuters) -Russia’s central bank held its key interest rate at 7.5% on Friday, but suggested that it may have to hike rates this year as a widening budget deficit, labour shortages and a weaker rouble pose inflationary risks.Governor Elvira Nabiullina told a news conference that the pace of price growth in January was probably the highest since last April.”According to our assessment, the balance of risks has shifted more towards pro-inflationary ones,” she said.Last year, the bank gradually reversed an emergency rate hike to 20% made in late February following Russia’s decision to send tens of thousands of troops into Ukraine and the imposition of wide-ranging Western sanctions in response. It has now held rates steady at 7.5% since the last cut in September. It kept its year-end inflation forecast at 5.0-7.0%, retaining hopes that it can return inflation to its 4% target in 2024. Annual inflation was running at 11.8% as of Feb. 6, it said. “If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase at its upcoming meetings,” the bank said in a statement. It said short-term inflation risks had increased again, including the possibility that external restrictions on the Russian economy’s potential prove stronger than previously thought. The bank now sees its key rate in the 7.0%-9.0% range this year, up from 6.5%-8.5% in the previous forecast. After an estimated GDP contraction of 2.5% last year as Western sanctions took their toll, Russia’s economic outlook for 2023 appears brighter, but labour shortages, falling energy revenues and the widening deficit all pose challenges.”In case of a further budget deficit expansion, pro-inflation risks will rise and tighter monetary policy may be required,” the bank said. It adjusted its 2023 GDP forecast to between growth of 1.0% and a contraction of 1.0%, from a 1.0%-4.0% decline previously. The International Monetary Fund expects the Russian economy to grow 0.3% this year.”As for GDP dynamics, quarterly dynamics are already positive in the third and fourth quarters. If we talk about annual indicators, in our opinion, GDP will move into positive territory in the middle of the year,” Nabiullina said.EYES ON OIL PRICEThe decision came in line with a Reuters poll of analysts, who expected both the more hawkish signal and the hold.The central bank also lowered its assessment of the average Urals oil price for 2023 in light of embargoes on Russian crude and oil products, imposed by Western countries over Russia’s actions in Ukraine, to $55 per barrel from $70.10. That has implications for Russia’s 2023 budget, which is currently based on the $70.10 price. In January, Russia recorded a budget deficit of almost $25 billion, as expenditures soared and revenues slumped. Nabiullina said the bank would monitor the impact on oil prices of Russia’s decision on Friday to cut crude oil production by 500,000 barrels per day from March.The next rate-setting meeting is scheduled for March 17. More

TOKYO (Reuters) – Haruhiko Kuroda leaves a mixed legacy after 10 years running the Bank of Japan (BOJ), achieving prices rises after decades of deflation and anaemic growth but without engineering durable expansion fuelled by domestic demand.Kuroda jolted the conservative BOJ and global markets on taking office in March 2013 by announcing unprecedented purchases of bonds and other assets to stoke 2% inflation in two years.He missed that goal by nearly a decade but immediately reversed a crippling rise in the yen and sent stocks and corporate profits soaring in Japan’s export-reliant economy, arguably the biggest achievement of then-Prime Minister Shinzo Abe’s signature “Abenomics” stimulus.Inflation in the world’s third-biggest economy is now double the BOJ target, but it is driven by rising raw-materials prices and the weaker yen. The task of generating self-sustaining growth with robust wage rises will fall to Kuroda’s successor, academic Kazuo Ueda.Ueda, on the BOJ policy board from 1998 to 2005, played a key role battling Japan’s deflation during the an earlier spell of quantitative easing.Kuroda, a pragmatic career bureaucrat who spent years tussling with the markets over a strong yen as he rose to become Japan’s top financial diplomat, believes effective communication with the public as well as investors can enhance the effect of monetary policy, say people who worked under him or know him well.His idea, they say, with setting the two-year deadline for 2% inflation was that the BOJ could enhance the psychological impact of its stimulus policy by showing its determination to meet the target.Kuroda’s approach was in stark contrast to that of his predecessor, Masaaki Shirakawa, who sealed the 2% target with the government and took then-radical stimulus measures – but undercut them with a message that smacked of bureaucratic caution.’CRITICAL STAGE'”When Kuroda became governor in 2013, I had doubts on whether the BOJ could change policy so radically. But it did by pledging by achieve 2% inflation in two years,” former BOJ board member Goushi Kataoka told Reuters.”The move underscored the BOJ’s determination to end deflation. In this sense, the policy was highly effective,” said Kataoka, who retired in July.But the Kuroda shock began to fade as soon as 2014, when plunging oil prices and a sales tax hike derailed Japan’s turn toward growth and inflation.As its huge bond buying faced limits, the BOJ began its shift in 2016, switching to a policy of trying to control interest rates along the yield curve, the start of a gradual dismantling of Kuroda’s radical experiment.”Until 2014, the BOJ’s policies were successful. At the very least, they ended deflation,” said Columbia University professor Takatoshi Ito, a close associate of Kuroda. “But inflation expectations, or people’s perception on future inflation, didn’t change. The BOJ couldn’t make full use of the benefits of an inflation targeting policy.”In his second five-year term, Kuroda shifted focus toward extending the lifespan of yield curve control (YCC), letting longer-term yields move more freely and compensating banks for the pain from ultra-low rates, including some below zero”When Kuroda’s reflationist narrative didn’t work, the BOJ had little choice but to keep doing YCC,” said former BOJ executive Kazuo Momma. “Abandoning YCC would mean the BOJ was retreating from ultra-loose policy, something unacceptable for Kuroda.”Kuroda now blames Japan’s stubbornly deflationary mindset for delaying the achievement of his inflation target, a logic resembling that of the predecessor he denounced when he took office.What the BOJ’s decade-long effort showed was the challenge of breaking Japan’s “adaptive” inflation expectations, which are strongly affected by underlying price moves and external shocks, BOJ Deputy Governor Masazumi Wakatabe said last week.”We need to create a cycle in which wages and price hikes continue stably and sustainably,” said Wakatabe, a vocal advocate of aggressive monetary easing who retires in March. “In this sense, we’re at a critical stage.” More

Refinitiv Lipper data showed investors exited a net $474 million worth of U.S. equity funds after disposing of $473 million worth of funds in the previous week. GRAPHIC: Fund flows: US equities, bonds and money market funds (https://fingfx.thomsonreuters.com/gfx/mkt/egpbyaeeqvq/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg) U.S. large- and mid-cap equity funds saw outflows of $3.82 billion and $675 million, respectively, but investors purchased $2.16 billion worth of small-cap funds.However, investors accumulated some sector-specific funds, with financials and tech witnessing inflows of $1.22 billion and $430 million, respectively. GRAPHIC: Fund flows: US equity sector funds (https://fingfx.thomsonreuters.com/gfx/mkt/gkplwdkkovb/Fund%20flows%20US%20equity%20sector%20funds.jpg) Meanwhile, U.S. bond funds continued to obtain inflows for the fifth week, amounting to a net $2.39 billion.U.S. general domestic taxable fixed income funds obtained $678 million, while short/intermediate investment-grade funds received $1.98 billion, marking a fifth weekly inflow. But investors drew $2.26 billion out of government bond funds. GRAPHIC: Fund flows: US bond funds (https://fingfx.thomsonreuters.com/gfx/mkt/znvnbkmodvl/Fund%20flows%20US%20bond%20funds.jpg) Meanwhile, investors exited $19.78 billion worth of money market funds, their biggest weekly net selling in seven weeks. More

LONDON (Reuters) – The yen strengthened on Friday with Kazuo Ueda reportedly set to become the next Bank of Japan (BOJ) governor but pared gains after he said the central bank’s monetary policy was appropriate.The Nikkei had earlier reported the government would nominate academic Ueda to the BOJ’s top job, sending the yen surging across the board as markets anticipated a possible earlier end to ultra-loose monetary policy. But in comments streamed online by Nippon TV, Ueda said the central bank’s current easy monetary policy was appropriate and that it should continue, prompting some of the earlier yen strength to be reversed.The dollar sank as much as 1.2% to 129.8 yen and was last down 0.5% at 130.93 yen.The euro and sterling both fell more than 1% against the Japanese currency but were last down around 0.9% and 0.6%, respectively. The Australian dollar slipped 0.7%. The BOJ shocked markets in December when it raised the cap on 10-year government bond yields to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero. Since then, speculation has gathered pace the BOJ could adjust or scrap its yield curve control policy, even though it refrained from any changes at its last meeting.BOJ deputy governor Masayoshi Amamiya had been the front-runner to replace incumbent governor Haruhiko Kuroda, but the Nikkei reported that he had declined the job.”Markets had been expecting Amamiya to come in and pick-up where Kuroda left off,” said Simon Harvey, head of FX analysis at Monex Europe.”The BOJ’s exit from ultra-easy monetary policy is still highly dependent on what happens during the spring wage negotiations, but a new regime could mean there’s no love lost on the ultra-loose policy side,” he added.Japanese Prime Minister Fumio Kishida said they’re planning to present the BOJ governor nominee to parliament on Feb. 14, but did not answer a question on whether Ueda would be put forward.James Malcolm, head of FX strategy at UBS, said Ueda’s prospective nomination should be perceived as a “hawkish” outcome, given Ueda’s previous criticism of the BOJ’s monetary policy as far back as 2016. “I’m surprised that dollar-yen is not at 129 already,” Malcolm said. “Maybe that’s just a result of people not knowing who these characters are. To me, this is as hawkish an outcome as having Mr Yamaguchi in the governor role.” Hirohide Yamaguchi, a former BOJ deputy governor, was also in the running for the top job and has previously been a vocal critic of the BOJ’s stimulus programme. The dollar index, which measures the greenback against six currencies including the yen, was up 0.2% at 103.41. For the week, the index is on track for a 0.4% gain, which would be its second straight positive week and a run it has not had since October.The pound was down 0.1% at $1.2106 after Britain managed to avoid a technical recession, with the economy showing zero growth in the final three months of 2022. The euro fell 0.4% to $1.0697 and was set for a second straight week of losses.Meanwhile, the Norwegian crown strengthened against the euro to 10.893 after Norway’s core inflation rate jumped in January to its highest level on record.”Both Norway and Sweden are in a pretty similar boat, struggling to get domestic inflation pressures under wraps,” Monex Europe’s Harvey said. “That’s going to force them to hike rates, most likely more than they’re comfortable with, and that’s now playing out in the currency markets.” On Thursday, Sweden’s central bank raised its key interest rate by half a percentage point to 3% and forecast further tightening in the coming months to combat inflation and headwinds from a weak currency. More

NEW DELHI/SYDNEY/NEW YORK (Reuters) – Moody’s (NYSE:MCO) downgraded on Friday the ratings outlook for some Adani Group companies, while MSCI said it would cut the weightings of some in its stock indexes, the latest blows for the Indian conglomerate plunged into crisis by a short-seller’s report.New York-based short-seller Hindenburg Research accused the Adani Group in a Jan. 24 report of stock manipulation and improper use of offshore tax havens that it said obscured the extent of Adani family stock ownership in group firms. The conglomerate, which has denied any wrongdoing, has since seen $110 billion wiped off the value of its seven listed firms.The crisis has sparked worries of financial contagion in India and protests in parliament where lawmakers have demanded an investigation. It has also put the spotlight on the dwindling fortunes of 60-year-old billionaire founder Gautam Adani, who was forced to shelve a $2.5 billion stock offering amid the market meltdown.On Friday, Moody’s downgraded its ratings outlook to negative from stable for Adani Green Energy; the Adani Green Energy Restricted Group, which represents some of its other units; and two subsidiaries of Adani Transmission. “These rating actions follow the significant and rapid decline in the market equity values of the Adani Group companies following the recent release of a report from a short-seller highlighting governance concerns in the group,” Moody’s said.MSCI reassessed the size of some Adani companies’ free floats, having determined there was “sufficient uncertainty” surrounding some investors in Adani companies. It embarked on the review after feedback from market participants. In another index action, the S&P BSE IPO index will drop Adani Wilmar, the conglomerate’s consumer goods company, as part of its monthly review, according to a statement from S&P and the Bombay Stock Exchange, which did not explain the rationale behind the move. Shares in the flagship Adani Enterprises closed down 4% on Friday after dropping 11% the previous day, when MSCI flagged the changes. Adani Transmission and Adani Total Gas slid 5% on Friday, while ACC lost 2%. Also on Friday, India’s Supreme Court heard petitions raising concerns about steep investor losses sparked by Hindenburg report’s, and said investors needed to be protected.”The point of concern here is how (to) … protect the interest of investors,” Chief Justice of India, D Y Chandrachud, said. The stock market “is also a place where investment is made by a wide spectrum of middle class,” he added, asking market regulator SEBI to submit the existing regulatory frameworks to the court and explain how investor interests can be safeguarded in future.The court’s remarks come as regulatory scrutiny is increasing on the Adani Group.Reuters reported on Friday, citing sources, that SEBI is investigating Adani Group’s links to some of the investors in the conglomerate’s aborted $2.5 billion share sale.MSCI said that, in addition to the group’s flagship firm Adani Enterprises, it planned to cut index weightings for Adani Total Gas – a venture with France’s TotalEnergies – and Adani Transmission, a power transmission company.It will also reduce the weighting of ACC, a major Indian cement company acquired from Switzerland’s Holcim (SIX:HOLN) last year but which is not one of the Adani group’s main seven listed firms. The four companies had a combined weighting of 0.4% in the MSCI emerging markets index as of Jan. 30. “The lower free float will require passive investors to sell stock to reduce their tracking error with the index,” said Brian Freitas, a Periscope Analytics analyst who publishes on Smartkarma.He estimated there would be around $570 million to sell by passive funds across Adani Enterprises, Adani Total Gas and Adani Transmission on Feb. 28.The changes on MSCI indexes take effect on March 1.Hindenburg founder Nathan Anderson has said MSCI’s review was “validation of our findings”. Adani Group did not respond to a request for comment from Reuters on Friday. (Graphic: Adani Enterprises’ shares plunge after Hindenburg report Adani Enterprises’ shares plunge after Hindenburg report, https://www.reuters.com/graphics/ADANI-INDIA/gdpzqdamwvw/chart.png) More

LONDON/SINGAPORE (Reuters) – Japanese markets reacted with shock on Friday to news that the government had picked academic Kazuo Ueda to be the next central bank governor, but investors quickly snapped up the yen and sold bonds on expectations he will end years of super-easy monetary policy.Whether, when and how the Bank of Japan adjusts its policy stance is one of the major questions facing markets globally this year, and, in a sign of uncertainty about Ueda’s own view, the yen gave back some of its gains after he expressed support for the central bank’s current position.The yen jumped more than 1% and hit 129.8 per dollar after reports from Japan’s Nikkei, Reuters and others that the government will nominate Ueda, a former member of the central bank’s policy board, as the Bank of Japan’s next governor.While Ueda is considered an expert on monetary policy, most analysts said the appointment of the 71-year-old was totally unexpected — he was not even considered a dark horse candidate — and could signal a move to phase out ultra-low interest rates sooner than initially expected.Japanese government bonds (JGBs) fell, with 10-year yields hitting the 0.5% top end of a policy band that is the crux of incumbent Governor Haruhiko Kuroda’s trademark yield-curve-control policy.10 year JGB futures ticked back up a little in the evening in Tokyo and the yen lost some ground to trade around 131 per dollar after Ueda said in comments streamed online by Nippon TV that the central bank’s current easy monetary policy was appropriate and that it should continue.   GRAPHIC: The BOJ’s YCC faces a reckoning (https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/zjvqjwdaqpx/chart.jpg) The surprise news left investors and analysts trying to parse Ueda’s recent commentary. “He’s been not terribly positive on Abenomics from the start. From about 2016, he was saying that it had basically failed and the super large monetary easing was causing problems with the bond market, and these sorts of things,” said James Malcolm, UBS’s London-based head of currency strategy.”I’m surprised that dollar yen is not 129 already. Maybe that’s just a result of people not knowing who these characters are.”Some analysts thought markets were merely reacting to the fact that Deputy Governor Masayoshi Amamiya, who was until Friday viewed as the lead contender for the top job and had helped frame its ultra-loose policy, hadn’t been picked.”There is probably a lack of clarity on Ueda’s policy leanings at the moment, but at least it is clear that Amamiya (who is seen as a dove) is out. That removes one of the headwinds for the yen,” said Christopher Wong, currency strategist at OCBC in Singapore.”The knee-jerk reaction in yen appreciation is more of a reaction to Amamiya being out of the race.”As per government sources, Ryozo Himino, former head of Japan’s banking watchdog, and BOJ executive Shinichi Uchida are being nominated as deputy governors – implying a major change of guard at the BOJ by the time Kuroda steps down in April.The nominations need approval by both houses of parliament, which is a near certainty given the ruling coalition’s solid majority.NEW LOOK, NEW POLICYFor some market participants, the new faces at the BOJ hinted at the need for change in an establishment that has struggled to distance itself from the controversial yield control policy without reputational damage.The BOJ’s increasingly large bond-buying operations have sapped bond markets of liquidity and distorted the yield curve.”This is a surprise move. I think the new team means that they will redesign the BOJ’s monetary policy, not maintain the current policy,” said Takayuki Miyajima, a senior economist at Sony (NYSE:SONY) Financial Group in Tokyo. “That is why the 10-year JGB yield hit 0.5%.”Still, analysts pointed to some of Ueda’s comments in the past that were seen as inconclusive about his leanings: his urge for caution in raising rates, his views that the Federal Reserve had been late with policy tightening in 2022 and his concern for the impact of inflation on Japan’s giant pension fund.”The apparent choice for governor now – Ueda – is somewhat of a wild card for the markets,” said Stuart Cole, head macro economist at Equiti Capital.”So we could yet be in for a volatile ride in the yen if he turns out to be singing from the same hymn sheet as Kuroda.” More