Aurelia Butler

TOKYO (Reuters) -A panel of academics and business executives on Monday urged the Bank of Japan (BOJ) to make its 2% inflation target a long-term goal instead of one that must be met as soon as possible, in light of the rising cost of prolonged monetary easing.The re-defining of the price target must be made in a new policy accord between the government and the central bank that would replace the one crafted in 2013, the panel said.In the proposal, the panel also called for the need to have interest rates rise more in line with economic fundamentals, and normalise Japan’s bond market function.”The way the BOJ conducts monetary policy must be revamped,” Yuri Okina, a panel member who is considered as among candidates to become the next BOJ deputy governor, told a news conference.”By making 2% inflation a long-term goal, the BOJ can make its monetary policy more flexible,” she said.With rising raw material costs pushing up inflation well above its 2% target, the BOJ has seen its ultra-loose policy come under attack by investors betting it will hike interest rates when Governor Haruhiko Kuroda’s second, five-year term ends in April, and those of his two deputies in March.Nobuyuki Hirano, former president of MUFG Bank and member of the panel, said the BOJ’s yield control policy has become unsustainable, as it is causing big distortions in the yield curve and making the bond market dysfunctional.”Given such distortions, we must correct the BOJ’s policy into one that is more flexible,” Hirano told the news conference. “It’s too dangerous to keep going this way.”In parliament on Monday, Kuroda reiterated the importance of maintaining ultra-loose monetary policy.”Uncertainty regarding Japan’s economy is extremely high. It’s therefore important now to support the economy, and create an environment where companies can raise wages,” he said.”Japan has yet to foresee inflation stably and sustainably achieve our 2% inflation target, backed by wage hikes,” Kuroda said. “As such, we must maintain our 2% inflation target and our ultra-loose monetary policy.”Under strong political pressure to beat deflation, the BOJ signed a policy accord with the government in 2013 and committed to achieving 2% inflation “at the earliest date possible.”With inflation exceeding the BOJ’s target, critics say the current accord has become outdated and is preventing the BOJ from phasing out its massive stimulus programme.Given recent public complaints over rising inflation, Prime Minister Fumio Kishida, who will choose the next BOJ governor, has signalled the chance of revising the policy accord under Kuroda’s successor.The panel consisted of about 100 academics, business executives and labour union officials, including those who are members of key government councils.Kishida delivered a speech at one of the panel’s meetings in October, a sign of the influence its proposals have on the government’s economic policy. More

But the story three of the world’s largest central banks, set to hold their first policy meetings of 2023, tell isn’t that of a “Goldilocks” scenario of a gentle slowdown in growth and a gradual easing in inflation. Here’s a look at the week ahead in markets from Kevin Buckland in Tokyo, Dhara Ranasinghe and Naomi Rovnik in London and Ira Iosebashvili and Lewis Krauskopf in New York.1/WILL THE FED FOLD?Will the Federal Reserve tone down its hawkish rhetoric in the face of cooling inflation or stick to its guns? Investors widely expect a 25-basis point rate increase at the Feb. 1 meeting and for rates to stop short of hitting 5%.Fed officials, however, have indicated they expect the key policy rate to top out at 5.00-5.25% this year.Whatever signals the Fed sends could play an importing role in determining the longevity of the rally so far this year. Dollar bears, meanwhile, will watch for dovish leanings that could further accelerate a decline in the greenback. The currency has tumbled nearly 11% since hitting multi-decade highs last September. 2/ BACK FROM BREAK Chinese markets are back from the week-long Lunar New Year holidays, and will look to pick up where they left off – at a five-month peak for mainland blue chips. The mood should stay bullish after officials said COVID deaths have dropped about 80% from the peak earlier this month, running counter to worries that the New Year travel rush would trigger a fresh wave of infections. Some experts even suggest that the surge in cases after the government abruptly reversed its zero-COVID policies last month has resulted in hyper-speedy herd immunity. The impact of China’s Great Reopening may show up in PMIs next Tuesday, with the services sector bouncing back to expansion. Manufacturing is likely still contracting, but that has a lot to do with the timing of the New Year holiday, and next month should see a strong rebound.3/ YOUR MOVE, ECBThe ECB meets Thursday and is widely tipped to raise rates by 50 bps to 2.5%. Markets care most about what happens next and that’s not clear. Policy hawks are already pushing for more of the same in March. After all, inflation is well above the 2% target as preliminary January data out on Wednesday is likely to show.Futures price in a further 100 bps worth of tightening between now and July. Amundi reckons ECB rates could reach 4%.But the doves are getting louder. Yes, inflation is high but it’s off record peaks, they say. So, caution is needed before pre-commiting to rate hikes beyond February.Markets, whipped around by the differing opinions, will be looking for the ECB to speak with one voice. That, at least, is the hope. 4/THE “A” TEAM The three “A’s” — Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) – three of the top four U.S. companies by market value – all report earnings on Thursday.Over 100 companies in the S&P 500 deliver results as the earnings season gets into full swing. Microsoft (NASDAQ:MSFT), the fourth of the U.S. megacaps, has already reported results. Its cloud business hit Wall Street targets, but it delivered a lacklustre forecast that offered little cheer to the broader tech sector. Tech companies generally are under pressure to grow while cutting costs ahead of a potential recession. S&P 500 earnings are set to have fallen 2.9% from the year-ago period, according to Refinitiv IBES data as of Tuesday. 5/THE END MAY BE NIGH The Bank of England, the first of the major central banks to turn hawkish, is expected to deliver its tenth rate hike since December 2021. Money markets predict the BoE will raise rates by 0.5 percentage points to 4%. Headline inflation moderated in December to 10.5%, but it’s still over five times the Bank’s official target. Deutsche Bank (ETR:DBKGn) analysts say this will be the BoE’s final “forceful” hike. Recent data has shown a sharp contraction in UK business activity and lacklustre Christmas retail sales. Economists polled by Reuters now expect the BoE to stop at 4.25%. But many cited sticky core inflation, which excludes food and energy costs, as the main reason they could be wrong. More

LONDON (Reuters) – The European Central Bank looks set on Thursday to deliver another large interest rate rise to curb inflation. What it does after that is less certain.ECB President Christine Lagarde, speaking in Davos recently, stressed the need for monetary policy to “stay the course.”Investors are keen to get a sense of just how long and how far the central bank will keep hiking rates.”ECB policymakers think they have to kill inflation and will only stop hiking when they a see a big improvement in the inflation outlook,” said Carsten Brzeski, global head of macro at ING.Here are five key questions on the radar for markets.1/ What will the ECB do on Thursday?The ECB raising its deposit rate by 50 basis points (bps) to 2.5% is seen as a done deal, so markets will focus on what Lagarde has to say.Signs of cooling inflation have prompted markets to push down expectations for where rates will peak to around 3.3%. Policymakers have already challenged market moves, and expectations could move back up towards 3.5% if a brighter economic outlook prompts further hawkish messaging.”The ECB needs to be hawkish,” said Eoin Walsh, partner at TwentyFour Asset Management. “I don’t know whether Lagarde will say that market pricing of the terminal rate is too low, but I expect her to reiterate that the ECB will continue to raise rates.” ECB expected to hike again https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/zjvqjebzqpx/chart.png 2/ Will the ECB send any signals about March and beyond?Markets hope so since the outlook beyond Thursday is contentious. Some, including Dutch and Slovak officials, support a big rise in March. Comments from Lagarde suggest she would also back such a move.Policy doves are pushing back as headline inflation comes down. Italy’s Fabio Panetta believes the ECB should not commit to any specific move beyond February.”There were questions recently about why markets don’t understand what the ECB will do next,” said ING’s Brzeski. “Part of the reason is that markets are too optimistic but there’s also a question about the ECB’s own communication chaos and who we should listen to.” ECB’s path to terminal rate https://www.reuters.com/graphics/GLOBAL-MARKETS/myvmogzazvr/chart.png 3/ Are more details on quantitative tightening (QT) likely?The ECB plans to reduce bonds bought under its Asset Purchase Programme (APP) by 15 billion euros on average per month from March to June. UBS expects the ECB to reiterate that the pace of QT after June will be decided later, when some economists expect an acceleration.”The ECB will provide further guidance on the balance sheet rundown, including on how the different APP programs will be handled and importantly also on the planned unwind of cross-country holdings,” said Patrick Saner, head of macro strategy at Swiss Re (OTC:SSREY). Waiting for QT https://tmsnrt.rs/3Y1mO40 https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/zjpqjernzvx/chart.png 4/ How quickly is core inflation likely to come down?That’s not clear and predicting the path of inflation has been tricky.With updated ECB projections not out until March, Lagarde is likely to be pressed on how the ECB views core inflation, which strips out volatile food and energy prices. The ECB targets headline inflation at 2%, but officials are focused on a core measure.January euro zone inflation numbers on Wednesday could prove timely. Headline inflation eased to 9.2% in December, but a core measure also excluding alcohol and tobacco, rose to 5.2% from a 5%. Euro zone inflation off record highs in December 2022 https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/klpygzaxjpg/chart.png 5/ Is the ECB more upbeat on the growth outlook?The ECB’s Mario Centeno reckons recession may be avoided. Business activity made a surprise return to modest growth in January, while JPMorgan (NYSE:JPM) has raised its first-quarter economic growth forecast to 1% from a contraction of 0.5% — echoing a similar move from Goldman Sachs (NYSE:GS).”Yes, the ECB will for sure acknowledge the better domestic and external growth backdrop,” said Swiss Re’s Saner.”This will actually also allow them to make the case that rates need to go higher and stay there for a while, as a stronger demand environment inhibits core disinflation which is what matters most.” Euro zone back to modest growth https://www.reuters.com/graphics/GLOBAL-ECONOMY/PMI/zgpobroqrvd/chart.png More

It probably hasn’t escaped anyone that the world looks a bit less laissez-faire than it used to. Industrial policy is back, in a big way. But what does that actually mean?That’s what the “long-term strategy” research unit at JPMorgan — led by the veteran Jan Loeys — has tried to tackle in their latest report. They reckon the shift towards more industrial policy is “likely to continue in an era of resurgent strategic competition”. That means more measures such as state loans and grants, tax credits, and trade support (tariffs are so passé). Less obviously and Davosy, the report authored by Alexander Wise and Loeys argues that this will be a good thing overall — as long as you live in one of the major economic blocs, or work in a favoured industry. Investors might theatrically gnash their teeth, but it seems they can relax. Here are their main bullet points:— Empirical evidence suggests that it will probably increase aggregate employment, investment, R&D, innovation, and output. There is no evidence of effects on margins, so increases in revenues translate into increases in earnings. Pecuniary benefits also directly raise profits.— In an era of resurgent strategic competition, industrial policies are likely to be pursued competitively by countries. Thus, it is most likely to be effective in countries with large economic mass, fiscal capacity, and effective governance. Competitiveness will be harmed in countries without this capacity.— Based on these criteria, the US, China, and the EU are most likely to effectively pursue industrial policy. However, industrial policy in China is pursued to a large degree through state-owned enterprises, with probable adverse impacts on private enterprise. EM ex-China is unlikely to be able to effectively marshal sufficient resources to compete.— Any global resurgence in industrial policy has implications for strategic asset allocators in several dimensions. It should affect sector allocations, country allocations, and allocations to small versus large caps.— Industrial policy is likely to benefit Information Technology, Industrials, Energy and Basic Materials. This is one motivation for a strategic equity overweight on these sectors in the US and the EU, but an underweight on these sectors in competing EM countries. This is also an argument for a strategic overweight on the US and the EU.— The largest benefits of industrial policy should accrue to small-cap equities, since it can alleviate financial constraints, which more frequently affect smaller companies. Large caps are also more likely to incur costs associated with countervailing duties or market access restrictions.Anyway, if you’re interested in the full report, we’ve uploaded it here. Let us know what you think. More

Leading central banks are due to raise interest rates this week to the highest levels since the financial crisis, stoking anxiety among some investors that this month’s bond market rally underestimates evidence of persistent inflation. Bond prices have rapidly rebounded since the start of the year from last year’s historic sell-off, as markets bet that interest rate rises will slow and, in the case of the US Federal Reserve, even go into reverse. But some investors have doubts. “I think it’s just a matter of the market kind of waking up to what the macro environment really is, as opposed to what they hope it is,” said Monica Erickson, head of investment grade credit at DoubleLine Capital. “[It] is going to be super difficult again for the Fed to . . . get inflation down to that magical 2 per cent number without putting us into a recession.”Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo, said: “The credit markets are effectively pricing in a no-recession outcome. But that’s not the consensus base case that most economists are forecasting.”A Bloomberg index tracking high-grade and junk-rated government and corporate bonds around the world has returned 3.3 per cent so far in 2023, putting it on course for its strongest January since its inception in 1999. Inflows into US and western European corporate bond funds are set for their best January on record, totalling $19.3bn up to January 26, according to EPFR data.The Fed, the European Central Bank and the Bank of England will all hold policy meetings this week. Investors expect the Fed to slow the pace of its monetary tightening to 0.25 percentage points, raising rates to the highest level since September 2007, the start of the global financial crisis. The BoE and the ECB are widely expected to lift rates by half a percentage point to their highest levels since autumn 2008 when Lehman Brothers filed for bankruptcy.There are growing indications that underlying price pressures are proving persistent in the face of these rapid and globally co-ordinated rate rises — and the gap between investor expectations and economic data is widening.Market measures of inflation suggest traders now expect inflation to eventually fall close to the Fed and ECB targets of 2 per cent. But price growth still stands at 6.5 per cent in the US, and 9.2 per cent in the eurozone. Core inflation — which omits volatile food and energy costs and is closely watched by central bankers — remains strong.Consumers and businesses in most advanced economies expect inflation to remain higher than central bank targets in the medium term despite recent declines, surveys show. Policymakers closely watch such indicators, as well as market-based measures of expectations, because they can feed wage demands, fuelling further inflation.“Inflation expectations can be a self-fulfilling prophecy, as higher expectations trigger the inflationary conditions that are envisioned,” said Nathan Sheets, chief economist at US bank Citigroup. Central banks’ concern was “ensuring that inflation expectations don’t ratchet upward from here”.

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Jennifer McKeown, chief global economist at Capital Economics, said that “on almost all measures, inflation expectations are still much higher than their pre-pandemic levels and above the levels that would be consistent with the major banks’ 2 per cent inflation targets”. If central banks keep rates high for a protracted period or raise them by more than investors expect, the bond market rally could unravel.

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Yields on 10-year US Treasuries, a benchmark for borrowing costs across the globe, have slipped to 3.5 per cent from 3.9 per cent at the end of December. That has boosted the appeal of corporate bonds, which typically offer higher returns than their government counterparts.Credit spreads — the premium that investors demand to hold corporate bonds over high-grade government debt — have narrowed since the start of January. The gap in yields between US investment grade debt and Treasury notes has tightened by 0.1 percentage points so far this year.Spreads on lower-rated high-yield bonds have tightened even more, losing almost 0.6 percentage points.“The investment grade market is pretty priced for perfection right now,” said O’Connor. “I worry about the black swan events and the catalysts that could catapult spreads wider from here.”Such concerns have not stopped a wave of cash pouring into bond markets.“There is a lot of money chasing yields,” said Rick Rieder, chief investment officer for fixed income at BlackRock. “In an environment where growth is slowing, where the equity market is not appealing, people are saying — there is an attractive yield and I can lock this rate up.” More