Aurelia Butler

The writer is president of Yardeni Research and author of Fed Watching for Fun & ProfitMost Fed watchers seem to spend more time criticising the US Federal Reserve than watching it. It’s easy to do. Anyone can play the game and attacking the Fed is like shooting at sitting ducks: officials at the central bank can’t respond directly given their public role.Recently, Fed chair Jay Powell has been skewered by his critics for claiming that the federal funds rate was now at “neutral” at his July 27 press conference just after the policy-setting Federal Open Market Committee had voted unanimously to raise its benchmark federal funds rate range by 0.75 percentage points to 2.25 to 2.50 per cent.His suggestion that the Fed is on the borderline of restrictive territory and therefore closer to being done tightening was well received by both bond and stock investors, but not by the Fed’s critics.Former Federal Reserve Bank of New York president William Dudley said on Wednesday that, given the level of uncertainty, “I’d be a bit more sceptical” in saying policymakers had reached neutral. Two days later, former treasury secretary Lawrence Summers was more critical. He accused Powell of engaging in “wishful thinking” similar to the Fed’s delusion last year that inflation would be transitory. He accused Powell of saying things “that, to be blunt, were analytically indefensible”. He added, “There is no conceivable way that a 2.5 per cent interest rate, in an economy inflating like this, is anywhere near neutral.”In fact, there is a conceivable way that Powell might be right after all. The Fed’s critics are ignoring that the central bank has been more hawkish in words and deeds than the European Central Bank and the Bank of Japan. Both of their official interest rates are still at or near zero. As a result, the value of the dollar has soared by 10 per cent this year. In my opinion, that is equivalent to at least a 50-basis-point rise in the federal funds rate. Furthermore, the Fed has just started its quantitative tightening programme to unwind its massive asset purchases to support markets and the economy in recent years.During June through August, the Fed will reduce its balance sheet by running off maturing securities, which will drop its holdings of Treasury securities by $30bn a month and its holdings of government agency debt and mortgage-backed securities by $17.5bn a month. So that’s a decline of $142.5bn over those first three months of QT.Starting in September, the runoff will be set at $60bn for Treasury holdings and $35bn for agency debt and MBS. That’s $95bn a month, or $1.14tn through August 2023. There’s no amount set or termination date specified for QT.

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In my opinion, QT is equivalent to at least a 0.50 percentage point increase in the federal funds rate too. Furthermore, in the December 2021 minutes of the FOMC, released on January 5 of this year, investors learned that “some participants” on the committee favoured getting out of the mortgage financing business entirely. That would happen by swapping the Fed’s MBS for Treasuries in addition to letting them run off as they matured under QT. This would have further increased the supply of MBS for the market to absorb adding upward pressure on mortgage rates relative to Treasuries. No wonder that the 30-year mortgage rate jumped from 3.30 per cent at the start of this year to a high of 6.00 per cent on July 15, and 5.46 per cent currently.I conclude that the peak in the federal funds rate during the current monetary tightening cycle will be lower than otherwise because the combination of QT and the strong dollar are equivalent to at least a 1 percentage point increase in the federal funds rate.In addition, the extraordinary jump in both short-term and long-term interest rates in the fixed income markets has already accomplished much of the tightening for the Fed. In my opinion, the markets have already discounted a peak federal funds rate of 3 to 3.25 per cent — which is where it soon will be assuming that the Fed raises the rate by 0.75 percentage points again at the end of September as widely expected.By the way, on October 1 2020, Dudley, when he was at the Fed, justified a second round of quantitative easing amounting to $500bn of securities purchases saying that it was equivalent to a 0.50 to 0.75 percentage point cut in the federal funds rate.The Fed undoubtedly has some estimates from its in-house models on the equivalent rate rises represented by the strong dollar and QT. If so, they should share that information with the public. More

KUALA LUMPUR (Reuters) – Malaysian former Prime Minister Najib Razak starts his final attempt on Monday to set aside his conviction in a corruption case linked to the multi-billion dollar 1MDB financial scandal.The country’s highest court has scheduled hearings through Aug. 26 to hear Najib’s appeal of his convictions for criminal breach of trust, abuse of power and money laundering over the alleged theft of $4.5 billion from 1Malaysia Development Berhad (1MDB), a state fund he co-founded as premier in 2009.At least six countries have launched investigations into 1MDB, a global scandal that has implicated high-level officials and major financial institutions.Prosecutors say more than $1 billion in 1MDB funds made its way into Najib’s personal accounts. Najib, 69, who has pleaded not guilty to dozens of charges, was sentenced in July 2020 in the first of several trials to 12 years in jail and a $50 million fine for illegally receiving about $10 million from SRC International, a former 1MDB unit. The conviction was upheld by an appeals court last year.In addition to appealing that verdict, Najib is asking the Federal Court to introduce fresh evidence to nullify the trial, accusing the trial judge of a conflict of interest, documents filed ahead of Monday’s hearing showed. Najib, who was voted out in 2018, has been free on bail pending the appeal. If the verdict is upheld, he would likely begin his sentence immediately, according to a prosecutor. Malaysian law allows for a review of Federal Court decisions, but such applications are rarely successful. The appeal comes ahead of national elections that are expected to be called before a September 2023 deadline. An acquittal could spark a political comeback for Najib, who told Reuters last year he had not ruled out seeking re-election to parliament.While he remains a popular figure and active lawmaker, Najib is barred from contesting elections unless his conviction is overturned or he receives a royal pardon. More

TOKYO (Reuters) -SoftBank Group Corp’s decision to sell down its Alibaba (NYSE:BABA) Group Holding stake for a $34 billion gain may be aimed at bolstering its finances, but it also underlines how CEO Masayoshi Son has cooled on China tech.Son was formerly one of the sector’s biggest cheerleaders and Alibaba is his most famous bet, immensely profitable and for his fans, symbolic of his foresight and investing acumen. Amid a sharp market downturn, however, Son will reduce his conglomerate’s stake in Alibaba to 14.6% from 23.7% by settling prepaid forward contracts, although the Chinese firm remains SoftBank’s largest asset.”It seems like they’re saying ‘we think the outlook for China tech is pretty poor so we’re going to get in front of that’,” said Redex Research analyst Kirk Boodry. A rough ride for Chinese tech companies after a regulatory crackdown that started in late 2020 has been exacerbated by tensions between Washington and Beijing. Alibaba has been added to the U.S. Securities and Exchange Commission’s delisting watchlist as a result of a dispute over auditing compliance issues for U.S.-listed Chinese firms. Murky prospects for the Chinese economy as Beijing pursues a zero-COVID policy that has led to stringent lockdowns have also not helped. Since the regulatory crackdown, Alibaba’s shares have fallen by more than two thirds to value the company at $250 billion.”We have to watch (Chinese) government policy with caution and not be reckless,” Son told shareholders in June. Son’s pullback contrasts with earlier optimism towards China tech that saw him pour $12 billion into ride-hailer Didi through the first $100 billion Vision Fund, which also made outsized investments in Uber (NYSE:UBER) and office space firm WeWork.Didi angered Chinese regulators by pushing ahead with a New York initial public offering and is now traded over-the-counter after delisting. SoftBank was forced to cut the valuation and, after a series of high profile reversals, Son reduced the size of individual investments made through a smaller second fund.As of end-June, SoftBank had booked a $9.3 billion gross investment loss on Didi. SoftBank’s other Chinese bets include Full Truck Alliance and JD (NASDAQ:JD) Logistics. The conglomerate is also the top shareholder in AI firm SenseTime, which has been blacklisted by Washington over human rights concerns. Sensetime shares fell by almost half at the expiry of a lock-up period in late June.This week, SoftBank announced it had exited KE Holdings, which operates Chinese property platform Beike, at an average price per share of $23.89 compared to a cost price of $12.91.The conglomerate has pledged to preserve cash and cut costs as it booked a $50 billion loss at its Vision Fund investment arm in the six months to end-June.TikTok operator ByteDance is also an investment and has been highlighted as one of eight assets in the first Vision fund with potential upside. The Beijing-headquartered company, which has received scrutiny in the West over its management of user data, does not currently have a timeline for its much-anticipated IPO, Reuters reported previously.Alibaba “is the only ‘representative mega-win’ investment in the portfolio for now,” Quiddity Advisors analyst Travis Lundy wrote in a note on Smartkarma. Without it SoftBank is “less interesting because very little of the portfolio now reflects any sort of “special sauce” of forward-thinking investment,” he wrote. For now, however, using capital to buy SoftBank’s own shares is a priority for Son. The company has announced a 400 billion yen ($3 billion) share buyback in addition to the current 1 trillion yen programme which is due to expire in November. SoftBank shares closed up 5.6% on Friday, the first trading day after the Alibaba deal was announced late on Wednesday. The conglomerate’s shares have gained 3.2% year to date. ($1 = 133.2000 yen) More

LONDON (Reuters) – The Bank of England will deliver another bumper 50 basis points (bps) increase to borrowing costs next month but then slow the pace to a more regular 25 basis point rise in November before pausing, a Reuters poll forecast.Earlier this month the Bank, the first amongst its major peers to start unwinding ultra-loose COVID-19 policy, raised interest rates by 50 basis points – the most in 27 years – in its attempt to contain inflation likely to climb into double digits.More than half of the economists polled by Reuters Aug. 9-12 – 30 of 51 – said the BoE would take Bank Rate to 2.25% on Sept. 15 by adding 50 basis points. The other 21 suggested a more modest 25 basis point lift to 2.00%. The expected hefty increase comes despite official data showing the economy contracted 0.1% last quarter and the central bank saying the country was likely to enter a recession later this year and not emerge from it until early 2024.”With growth slowing, it is tempting to assume the BoE will be thinking of hitting the brakes – and could even be cutting rates within the next year. But for now at least, the UK’s problems are supply and inflation driven: allowing inflation to rise even further risks only making the situation worse,” said Elizabeth Martins at HSBC.A large majority of those polled said the Bank would slow the pace in November to 25 basis points. For the December meeting, 18 economists said the Bank would add another 25 basis points while 25 said it would pause.The median forecast suggested borrowing costs would end the year at 2.50%, where they would stay until a cut in 2024.That is despite the threat of recession, with the median forecast of one within a year at 60% and within two years at 75%. However, quarterly median forecasts only depicted very weak or no growth as economists picked different timings for when it would happen.”We expect a recession in 2022/23 to be driven by high inflation, with a contraction in real consumer spending at its epicentre,” said Ruth Gregory at Capital Economics. “But with household and corporate balance sheets still relatively healthy, we suspect the recession will be mild by historical standards.”Growth was pegged to average 3.5% this year and 0.2% next.The Bank’s mandate is to have inflation at 2% and according to the poll it will reach 11.4% in the fourth quarter, higher than the 10.2% predicted last month, before slowing although it wasn’t expected to be at target across the forecast horizon.The BoE has said it would peak at 13.3% in October, the highest since 1980.Soaring inflation largely driven by rising energy costs, alongside issues surrounding Britain’s departure from the European Union and disrupted supply chains exacerbated by Russia’s invasion of Ukraine, has led to a cost-of-living crisis.Frontrunner to be the next prime minister, Liz Truss, has said she favours tax cuts over direct handouts to help households while her rival, Rishi Sunak, said on Friday every household would get savings of around 200 pounds ($242) on their energy bills with a tax reduction.Yet analysts at a consultancy firm forecast the energy price cap could hit a whopping 5,038 pounds a year in April 2023 due to soaring energy prices across Europe, up 150% from already elevated current levels.When asked what would best help households, 14 of 16 economists who answered an extra question said subsidised fuel bills, while only two said tax cuts. “Well-targeted subsidies provide a better answer to help those who need them most. The problem with a wholesale approach to tax cuts is that they are often regressive and not paid by the most vulnerable such as pensioners,” said Michal Stelmach at KPMG.(For other stories from the Reuters global economic poll:)($1 = 0.8248 pounds) More

SYDNEY (Reuters) – Asian shares inched higher on Monday with investors anxious to see if Wall Street can sustain its rally as hopes U.S. inflation has peaked will be tested by likely hawkish commentary from the Federal Reserve this week.”The FOMC Minutes on Wednesday should reinforce the hawkish tones from recent Fed speakers of being nowhere near being done on rates and inflation,” warned Tapas Strickland, a director of economics at NAB.Markets are still implying around a 50% chance the Fed will hike by 75 basis points in September and that rates will rise to around 3.50-3.75% by the end of the year.Hopes for a soft economic landing will also get a health check from U.S. retail sales data that is expected to show a sharp slowdown in spending in July.There is also a risk earnings from major retailers, including Walmart (NYSE:WMT) and Target (NYSE:TGT), could be laced with warnings about a downturn in demand.Asian markets have to navigate data on China’s retail sales and industrial output for July due later on Monday, which should show some pick up as coronavirus rules were relaxed.However, figures already out showed new bank lending in China tumbled more than expected in July.Geopolitical risks also remain high with a delegation of U.S. lawmakers in Taiwan for a two-day trip.Early Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan firmed 0.1%, having bounced 0.9% last week.Japan’s Nikkei edged up 0.5% as data showed the economy grew an annualised 2.2% in the second quarter, a touch under estimates.S&P 500 futures and Nasdaq futures were both down around 0.2%. The S&P index is almost 17% above its mid-June lows and only 11% from all-time highs amid bets the worst of inflation is past, at least in the United States.PEAK INFLATION”The leading indicators we observe provide support for moderation with easing supply pressures, weakening demand, collapsing money supply, declining prices and falling expectations,” said analysts at BofA.”Key components of headline inflation, including food and energy are also at an inflection point. Both Wall Street and Main Street now expect inflation to moderate.”The bond market still seems to doubt the Fed can manufacture a soft landing, with the yield curve still deeply inverted. Two-year yields at 3.26% are 42 basis points above those for 10-year notes.Those yields have underpinned the U.S. dollar, though it did slip 0.8% against a basket of currencies last week as risk sentiment improved.The euro was holding at $1.0259, having bounced 0.8% last week, though it shied away from resistance around $1.0368. Against the yen, the dollar steadied at 133.36 after losing 1% last week. [USD/]”Our sense remains that the dollar rally will resume before too long,” argued Jonas Goltermann, a senior economist at Capital Economics.”It will take a lot more good news on inflation before the Fed changes tack. The minutes from the last FOMC meeting and the Jackson Hole conference may well push back further against the notion that the Fed is ‘pivoting’.”The pullback in the dollar provided something of a reprieve for gold which was up at $1,799 an ounce, having gained 1% last week. [GOL/]Oil prices eased early on Monday with traders cautious in case progress was made on a possible European-brokered nuclear deal with Iran. [O/R]Brent slipped 43 cents to $97.72, while U.S. crude fell 36 cents to $91.73 per barrel. More

BEIJING (Reuters) -New bank lending in China tumbled more than expected in July while broad credit growth slowed, as fresh COVID flare-ups, worries about jobs and a deepening property crisis made companies and consumers wary of taking on more debt.Chinese banks extended 679 billion yuan ($101 billion) in new yuan loans in July, less than a quarter of June’s amount and falling short of analysts’ expectations, data released by the People’s Bank of China (PBOC) on Friday showed.”Credit growth dropped back last month, with property market jitters weighing on bank lending,” Capital Economics said in a note. “It may continue to disappoint in the near-term given that sentiment among homebuyers is likely to stay weak and government borrowing is on course to slow.”Analysts polled by Reuters had predicted new yuan loans would fall to 1.10 trillion yuan in July, versus 2.81 trillion the previous month and 1.08 trillion a year earlier.Household loans, including mortgages, fell to 121.7 billion yuan in July from 848.2 billion in June, while corporate loans slid to 287.7 billion yuan from 2.21 trillion.China’s economy slowed sharply in the second quarter as widespread lockdowns hammered demand and business activity, while the property market has lurched from crisis to crisis.China’s top leaders recently signalled they were prepared to miss the government growth target of around 5.5% for 2022, which analysts said had been looking increasingly unattainable. The PBOC reiterated it would step up implementation of its prudent monetary policy and keep liquidity reasonably ample, while closely monitoring domestic and external inflation changes, it said in its policy report.But few China watchers now expect cuts in benchmark lending rates, which could raise the risk of capital flight as other major central banks sharply raise rates to battle surging inflation.STALLED PROJECTS In the real estate market, a growing number of homebuyers have threatened to stop repaying mortgages on hundreds of stalled projects. While regulators have urged banks to help provide funds to fill developers’ funding gap, confidence in the sector remains fragile.Data firm China Beige Book International, which conducts monthly surveys of more than 1,000 firms, said there was a clear drop in credit demand in July from manufacturing and services firms, with a slight increase in retail, which it attributed largely to fears of more lockdowns.Some analysts point to a recent glut of liquidity in interbank money markets as a further sign of weaker credit demand.Broad M2 money supply grew 12% in July from a year earlier, the central bank data showed, above estimates of 11.4% in the Reuters poll. Outstanding yuan loans grew 11% compared with 11.2% growth in June. Analysts had expected growth unchanged from June.Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 10.7% in July from 10.8% in June. TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.In July, TSF dipped to 756.1 billion yuan from 5.17 trillion in June. Analysts polled by Reuters had expected July TSF of 1.30 trillion yuan.Local governments issued a net 3.41 trillion yuan in special bonds in the first six months – part of the 2022 special bond quota of 3.65 trillion, finance ministry data showed, as authorities sought to quicken infrastructure spending.Sources have told Reuters that China plans to bring forward some 2023 local special bond quotas to the fourth quarter. More

Since May, the Reserve Bank of Australia (RBA) has increased its key cash rate by 175 basis points which the country’s “Big Four” lenders have passed on to their customers in full.Australia’s third largest lender said CET1 capital ratio, a measure of spare cash, fell to 10.75% at the end of June from 11.3% at end of March.Westpac said its total assets with exposure of default at the end of the quarter were A$1.213 trillion, compared to A$1.184 trillion at the end of March. The lender did not disclose a profit figure for the quarter, but said that cash earnings were partly offset by higher deductions for capitalized software and other regulatory deductions.Last week, larger rival Commonwealth Bank of Australia (OTC:CMWAY) warned that spiralling cost-of-living pressures had begun to hit consumer confidence, while National Australia Bank (OTC:NABZY) issued yet another warning on increasing costs. More