Aurelia Butler

NEW YORK (Reuters) – A closely watched part of the U.S. Treasury yield curve inverted again on Tuesday, as investors continue to price in the chance that the Federal Reserve’s aggressive move to bring down inflation will push the economy into recession.Yields on two-year Treasuries briefly rose above those of 10-year Treasuries for the third time this year, a phenomenon known as a yield curve inversion that has in the past preceded U.S. recessions. It comes amid a chorus of growth warnings on Wall Street, as a Fed intent on bringing inflation down from more than 40-year highs sets the course for aggressive monetary policy tightening that investors fear will also hurt U.S. growth.Here is a quick primer on what a steep, flat or inverted yield curve means, how it has predicted recession, and what it might be signaling now. WHAT SHOULD THE CURVE LOOK LIKE? The U.S. Treasury finances federal government budget obligations by issuing various forms of debt. The $23 trillion Treasury market includes bills that mature in one month to one year, two- to 10-year notes, and 20- and 30-year bonds. The yield curve, which plots the return on all Treasury securities, typically slopes upward as the payout increases with the duration. Yields move inversely to prices. A steepening curve typically signals expectations for stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean investors expect near-term rate hikes and are pessimistic about economic growth. WHAT DOES AN INVERTED CURVE MEAN? Investors watch parts of the yield curve as recession indicators, primarily the spread between three-month Treasury bills and 10-year notes, and the two- to 10-year (2/10) segment.On Tuesday, yields on two-year Treasuries rose as high as 2.95%, while the 10-year stood at 2.94%. The two-year, five-year part of the curve also inverted for the first time since February 2020.The inversions suggest that while investors expect higher short-term rates, they may be growing nervous about the Fed’s ability to control inflation without hurting growth, even though policymakers say they are confident in achieving a so-called “soft landing” for the economy.The Fed has already raised rates by 150 basis points this year, including a jumbo-sized, 75 basis point increase last month.The two- to 10-year segment of the yield curve inverted in late March for the first time since 2019 and again in June.[L1N2Y01UQ]The U.S. curve has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the San Francisco Fed. It offered a false signal just once in that time. That research focused on a slightly different part of the curve, between one- and 10-year yields.Anu Gaggar, Global Investment Strategist for Commonwealth Financial Network, found that the 2/10 spread has inverted 28 times since 1900. In 22 of these instances, a recession followed, she said in June.For the last six recessions, a recession on average began six to 36 months after the curve inverted, she said.Before March, the last time the 2/10 part of the curve inverted was in 2019. The following year, the United States entered a recession, which was caused by the pandemic. WHAT DOES THIS MEAN FOR THE REAL WORLD? While rate increases can be a weapon against inflation, they can also slow economic growth by raising borrowing costs for everything from mortgages to car loans. The yield curve also affects consumers and business. When short-term rates increase, U.S. banks raise benchmark rates for a wide range of consumer and commercial loans, including small business loans and credit cards, making borrowing more costly for consumers. Mortgage rates also rise. When the yield curve steepens, banks can borrow at lower rates and lend at higher rates. When the curve is flatter their margins are squeezed, which may deter lending. More

Britain has negotiated free trade agreements with Australia and New Zealand, and is in negotiations for trade deals with Canada, India and Mexico.The International Trade Committee said the deal with Australia saw significant concessions given without Britain securing all possible benefits in return.”The government must level with the public – this trade deal will not have the transformative effects ministers would like to claim,” chair of the committee Angus MacNeil, a Scottish National Party (SNP) lawmaker, said.”As the first wholly new trade deal since Brexit, this agreement sets a precedent for the future. It is vital that the government learns from this experience and negotiates harder next time around to maximise gains and minimise losses for all economic sectors and parts of the UK.”The committee said farmers were concerned that the lifting of almost all tariffs on agricultural imports came with insufficient protections for the sector, while the benefits for customers were unlikely to be noticeable.Trade minister Anne-Marie Trevelyan will appear in front of the committee to face questions on the deal on Wednesday, after pulling out of an appearance last week due to a clash with an announcement on steel tariffs.The committee said it had to publish its appraisal of the Australia trade deal before hearing from Trevelyan because of the limited time allowed for parliamentary scrutiny of the deal. Although parliament cannot block the ratification of the trade deal, it said it would call for a vote to delay its implementation if the government refused to extend the scrutiny period.The government said the trade deal did not compromise Britain’s environmental or food safety standards. More

Boris Johnson’s much-lauded trade deal with Australia will cut the price of an imported bottle of a wine only by “a couple of pence”, according to a critical report by MPs, which urged the prime minister not to oversell the benefits of such agreements.The international trade select committee said on Wednesday that while tariff reductions on processed food and drink could benefit consumers, they were unlikely to make a “noticeable difference” at supermarket checkouts.Meanwhile, the deal would allow tariff-free food from Australia to be sold into Britain without meeting core UK food production standards related, for example, to pesticide use. Johnson hailed the agreement with Canberra in June 2021 as the UK’s first big post-Brexit trade deal, with greater freedoms for Britons to work and travel in Australia and various tariffs cut on a range of goods.But the trade committee called for a full assessment of winners and losers across all economic sectors and nations of the UK from trade deals, highlighting the concerns of British farmers about a lack of protections in some agreements.Lifting almost all tariffs on agricultural imports was a significant change that could set an “important precedent” for deals with other leading food-exporting nations, the report said. “While the government has sought to cushion negative impacts on the UK agriculture sector with phase-in arrangements, the committee notes farmers’ concerns that these protections are not adequate,” it added.UK agri-food producers have complained that the deal increases access for food produced in ways that would be illegal in the UK — for example, by using pesticides banned by the London government.The committee said it was disappointed that the government had ignored recommendations from its food adviser, Henry Dimbleby, and the independent Trade and Agriculture Commission, that liberalisation of agri-food should be conditional on other countries meeting core UK food production standards.The issue of farmers becoming exposed to unfair competition from abroad was raised in by-elections in Tiverton and Honiton and North Shropshire, where the Conservatives lost to the Liberal Democrats.The MPs also pointed out that the government has failed to secure protection for UK food and drink brands such as Melton Mowbray pork pies, Welsh lamb and Scotch whisky.“As a result, it remains legal in Australia to impersonate these products. With such large concessions being given to Australian agricultural imports, the MPs argue this protection for UK exports should have been an easy win,” the report said.The government’s own impact assessment shows an increase in gross domestic product of just 0.08 per cent as a result of the deal. By contrast, the hit to GDP from leaving the EU has been estimated at 4 per cent by the official Office for Budget Responsibility. Angus MacNeil, a Scottish National party MP and chair of the trade committee, urged the government to “level with the public” that the deal would not have the transformative effects which ministers would like to claim.“We have also found multiple examples where the government’s flat-footed negotiating has led to significant concessions being given to the Australians without securing all possible benefits in return,” said MacNeil. “It is vital that the government learns from this experience and negotiates harder next time around to maximise gains and minimise losses for all economic sectors and parts of the UK,” he added.

Sarah Williams from the Greener UK coalition of environmental charities said the report “shows the inadequacy of the government’s current approach to trade”, adding: “The UK is rushing into deals with huge consequences for the environment and public health, but without a clear strategy or adequate provisions for scrutiny.”The Department for International Trade said the trade deal with Australia would “unlock £10.4 billion of additional bilateral trade” and “support economic growth in every part of the UK”. “We have always said that we will not compromise the UK’s high environmental, animal welfare or food safety standards,” it added. More

The writer is head of Japan FX Strategy at JPMorganThe Japanese yen has been an unexpected casualty of a global lurch towards higher interest rates. The currency is down about 15 per cent against the dollar this year, and relative to a broader basket of currencies, the yen is tracking lows not seen since the 1970s. Currency traders in Tokyo are quick to highlight the proximate cause for the yen’s slide as a simple story of monetary policy divergence: high US yields, low Japan yields. While the US Federal Reserve has embarked on what looks set to be its fastest pace of monetary policy tightening since the 1990s, the Bank of Japan has been resolute in its defence of sustained policy easing.Governor Haruhiko Kuroda’s argument has been as straightforward as it has been unwavering. Low Japanese inflation does not necessitate a rise in domestic interest rates on anywhere near the scale of the Fed — at least not yet. With yields pinned down by a central bank that already owns half of the government bond market, the yen has found itself as the principal release valve for a widening gap between US and Japanese interest rates.As currency weakness accelerates, so is the chorus of contrarian recommendations to buy the yen becoming louder. What better than a cheap haven currency to hedge against an increasingly uncertain global outlook? And this is where the debate lies. The yen is certainly weak. But is it also cheap?Investors should be wary of arguments that imply the yen is grossly undervalued. These fail to take into account structural changes in Japan’s economy that have fundamentally altered the trading backdrop for the yen. By far the most important of these is a multiyear shift in Japan’s import and export balance.

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Japan registered its second-widest monthly trade deficit on record in May, partly because of surging energy and commodity imports. But the economy’s long-term flip from trade surplus towards deficits reflects broader forces at work. A decade of Japanese corporate offshoring of factories has knocked the wind out of exports.Not all that long ago Japan provided the template of high-tech export-led growth to its neighbouring economies — the Asian Tigers. But Japan now imports more electronics goods from the rest of Asia than it exports back to the region. Put simply, Japan Inc needs more foreign currency to pay for imports than it earns via exports: a fundamentally negative dynamic for the yen.Equally, investors should be sceptical of claims that the yen is a reliable hedge against rising market volatility. Major US equity indices are already in bear market territory. And yet the yen has traded materially weaker.The yen’s failure to live up to its haven credentials thus far is partly because of a decline in the popularity of the yen “carry trade” — using the currency to fund purchases of higher-yielding assets elsewhere. Faced with a plethora of low-to-negative yielding currencies over the past decade, traders simply have not borrowed the yen on anywhere near the same scale as they did before the financial crisis. BoJ data suggest that foreign banks’ yen borrowing from their Tokyo subsidiaries — a measure of foreign demand for funding in the currency — is barely 40 per cent of its pre-financial crisis peak.

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The financial crisis prompted a rush to dump risky assets, catalysing a rapid unwinding of yen-funded trades, and fuelling a stellar 19 per cent move higher in the currency against the dollar through early 2008. Now, in times of market stress, there is no longer a rush to buy back the yen to “cover” positions.What can save the yen? Currency intervention is certainly not the answer, because yen weakness reflects fundamental forces, not speculative activity. A capitulation from the BoJ to allow domestic government bond yields to rise would narrow the differential between the US and Japan interest rates. This would provide the yen with a short-term tailwind, as would signs of a peak in US yields. A reopening of Japanese borders to tourists would also help.But rather than signalling a long-term inflection for the Japanese currency, these factors suggest its volatility will remain high. A return to a sustainable period of yen appreciation will ultimately require a fundamental shift in the composition of Japanese trade flows. A restart of idle nuclear power plants that would reduce energy import demand could be one driver, perhaps; longer-term, a re-onshoring of factories back to Japan, undoubtedly, would paint a rosier picture for the currency. But these would also need significant policy shifts that transcend pure economic considerations. More

TOKYO (Reuters) – The rising cost of living is turning into a thorny political issue ahead of Japan’s upper house election this weekend, as opposition parties peg blame for recent price hikes on Prime Minister Fumio Kishida’s policies.While Kishida’s ruling coalition is set to win a majority, public discontent over inflation may undermine efforts to strengthen his grip on power and phase out the legacy of his predecessors’ economic policies.Already, rising prices are taking a toll on the strong popularity Kishida had enjoyed since taking office in October, with a poll by public broadcaster NHK on July 4 showing his approval rating at 54%, down from 59% three weeks earlier.Fuka Sato, a 28-year-old stylist working at a magazine publisher, says she will vote for an opposition party for the first time in her life.”I feel extremely insecure about the future,” said Sato, who says she eats out less often and gave up buying fruit because it became too expensive.Soaring commodity costs, fuelled by Russia’s invasion of Ukraine, pushed Japan’s consumer inflation above the Bank of Japan’s 2% target for the first time in seven years.While the rate of inflation is still modest by global comparisons, it has shocked a population that has not experienced steady inflation for decades and hasn’t seen wages rise enough to compensate for the cost of living.Households, restaurants and schools have had to adjust their food purchases just to cope.Opposition politicians have used the label “Kishida inflation” in their criticisms of the government’s response to price pressures.Tabloids and blogs are full of features on how households can mitigate the pain from rising prices, a new development in a country where deflation, not inflation, had long been the economy’s enemy No. 1.For now, Kishida’s victory seems solid thanks in part to a weak and fragmented opposition.He has set a low bar for himself, saying the ruling coalition, which comprises his Liberal Democratic Party (LDP) and junior partner Komeito, aims to secure a majority in the election.To achieve this, the ruling camp needs to win at least 55 of the 125 seats up for re-election.”It’s true voters are concerned about inflation and rising costs of living, and that they feel the government’s response has been far from enough,” said veteran political analyst Atsuo Ito.”That said, many voters have not reached a point where they would vote for the opposition to punish Kishida.”The bite from inflation, however, may dash Kishida’s hopes of achieving a more ambitious goal for the LDP to win an absolute majority. That requires winning 69 seats – no easy feat with an opinion poll on Monday showing the LDP landing about 60.”The LDP will win but the victory will be less impressive than initially hoped, given Kishida’s sliding approval rates blamed on inflation,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.”After the election, he’ll probably seek to win political points with steps to combat inflation and curb fuel costs, such as by moving faster toward restarting nuclear power plants.”NO RESPITEWhile the upper house elections are unlikely to immediately affect policy, Kishida’s performance this weekend will be important for his own political fortunes.Kishida belongs to a smaller LDP faction and needs the political capital upper house gains would deliver to fend off rivals such as former prime minister Shinzo Abe, who belongs to a bigger faction.For now, Kishida is likely to maintain current policies that support growth with legacy “Abenomics” stimulus, notably big spending and ultra-low interest rates.But going forward, he may seek to differentiate his policies from Abe’s.”He has adopted Abenomics as the party’s current economic orthodoxy, but at heart he is more of a fiscal hawk,” said James Brady, a vice president analysing Japan at U.S. advisory firm Teneo.”Kishida is not inclined to phase out Abenomics in the short term, but won’t want to continue down that free-spending, debt-ballooning path in the medium-to-longer term.”So far, Kishida has pledged to use fiscal spending to cushion the inflation blow, such as gasoline subsidies, which analysts say are unsustainable for a country saddled with a huge public debt.A better way to soothe public anxiety would be to convince companies to raise wages to help households deal with rising costs, and boost productivity, analysts say.However, these remain longer-term objectives that have also eluded past administrations.”Ideally, the focus for Kishida’s post-election should be on adapting Japan to a post-COVID world such as through digitalisation and flexible working styles,” said Yuri Okina, chairperson of Japan Research Institute, a think tank.”But the situation surrounding the economy is very difficult due to rising prices and a weak yen…Inflation is a huge problem for Japan. It’s something that affects everyone.” More