Aurelia Butler

TOKYO (Reuters) -The Bank of Japan is likely to keep interest rates ultra-low on Friday, unfazed by a relentless fall in the yen that is boosting import costs and shows little sign of abating while other central banks around the world withdraw monetary stimulus.The yen’s weakness, once welcomed for the boost it gives to the export-reliant economy, has become a source of concern for Japanese policymakers as it inflates already-rising import costs and inflicts pain on households.The deepening dilemma for the central bank was evident last week when BOJ Governor Haruhiko Kuroda faced a storm of criticism on social media for saying that households were becoming more accepting of higher prices.He was forced to retract that comment, and backtracked on Monday from his long-held view that a weak yen was good for the economy.Despite grumbling over the yen’s weakness, however, the BOJ is likely to maintain ultra-low interest rates on the view that hiking rates now would do more harm than good by cooling a fragile economy, said three sources familiar with the central bank’s thinking.”The BOJ does not target exchange rates in guiding monetary policy,” one of the sources said. “What’s important now is to support the economy with ultra-loose policy,” the source said. That view was echoed by the other two sources.At a two-day meeting that ends on Friday, the BOJ is expected to keep unchanged both its -0.1% short-term rate target and its 0% cap for 10-year government bond yields.The BOJ is caught in a fresh conundrum. While core consumer inflation exceeded its 2% target in April for the first time in seven years, the rise is driven mostly by fuel and food costs.Wary that such cost-push inflation will hurt consumption, the BOJ has repeatedly stressed its resolve to keep monetary policy ultra-loose until wage growth intensifies.But the BOJ’s dovish stance has driven down the yen, which weakened to 135.22 per dollar on Monday, the lowest since 1998. That is piling pain onto households by pushing up their cost of living.While the BOJ could raise rates as a last resort if the yen spirals into free-fall, analysts doubt whether such a move could reverse a broad, strong-dollar trend driven by the U.S. Federal Reserve’s aggressive rate hike plans.”It’s clear the BOJ has no intention of tweaking ultra-loose monetary policy any time soon,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities.”But the environment surrounding the BOJ is changing rapidly,” she said. “If the yen slides below 140 or 145 to the dollar, the BOJ may be forced to raise its yield target.” More

The Fed meets on Wednesday following data last week showing that U.S. consumer prices rose at their fastest pace since 1981. Citing a report on Monday in the Wall Street Journal, Goldman Sachs (NYSE:GS) said it expects 75-basis-point increases in June and July, and then a 50-basis point hike in September.Late on Monday, expectations for a 75 basis point hike at the June meeting jumped to 96% from 30% earlier in the day, according to CME’s Fedwatch Tool.. A 75-basis-point hike would be the biggest since 1994.”The May inflation data was so concerning that we think the Fed will react even more aggressively in moving rates ‘expeditiously’,” BNY Mellon (NYSE:BK) strategist John Velis said on Monday. His note forecast a 75-basis-point hike, up from a 50 basis-point prediction. Barclays (LON:BARC) and Jefferies have also forecast a 75-basis-point hike. “U.S. CPI surprised to the upside and continues to show broad and persistent price pressures,” Barclays analysts said in a Sunday note. “We think the Fed probably wants to surprise markets to re-establish its inflation-fighting credentials.”The S&P 500 on Monday ended down more than 20% from its most recent closing high, confirming it was in a bear market. A key part of the Treasury yield curve inverted on fears that big Fed hikes would tip the economy into recession, and yields of benchmark 10-year Treasuries hit their highest levels since 2011. [.N]”The markets are not waiting for Wednesday’s (Fed) meeting, they are going to front run them and that’s what is already happening in the markets today,” said Jim Paulsen, chief investment strategist at the Leuthold Group. Other large investors on Wall Street said that while they do not see a 75-basis-point move as imminent, the probability of such a large rate hike in the next few months are rising.Standard Chartered said that even a 100-basis point hike could not be precluded.’INCESSION’Markets reacted with a sell-off in short-dated Treasuries along with futures tied to the Fed policy rate. Yields on the two-year Treasury note are at their highest since late 2007. [US/]Bets on the U.S. terminal rate – where the Fed funds rate may peak this cycle – continue to rise. On Monday, rates were priced to approach 4% in mid-2023, up almost one percentage point since end-May. Deutsche Bank (ETR:DBKGn) said it now saw rates peaking at 4.125% in mid-2023.In one sign of turmoil in the global fixed-income market, credit default swap indexes measuring the cost of insuring against European corporate bond defaults jumped on Monday to their highest since 2020.U.S. corporate bonds were also pummelled over the economic outlook and companies’ ability to repay their debt.For Rabobank, the risk of “stagflation” – a period of weak growth and high inflation last seen in the 1970s – could give way to the threat of “incession”, a combination of inflation and recession, it said in a research note on Sunday.The shape of the Treasury yield curve inversion, rising high-yield credit spreads, and the underperformance of cyclical stock market sectors, indicated rising concerns on the economic outlook, said Oliver Allen, an economist at Capital Economics.”One interpretation is that investors are veering towards a view that the Fed will need to induce a recession if it is to bring inflation back to target,” he said in a note. More

The provision is part of broadbased legislation to boost U.S. competitiveness with China and also grant $52 billion to chipmakers to expand U.S. operations.”The refined proposal released today has bipartisan, bicameral support and addresses industry concerns, including the scope of prospective activities, industries covered, and the prevention of duplicative authorities,” said U.S. Senators Bob Casey and John Cornyn, and Representatives Rosa DeLauro, Bill Pascrell, Jr., Michael McCaul, Brian Fitzpatrick and Victoria Spartz, in a statement.The initial “outbound investment” proposal had run into opposition on the fear it could reduce companies’ investments abroad, leading some chipmakers to oppose its inclusion in the chips bill being hammered out by Senate and House lawmakers.Democratic Senator Mark Warner told Reuters on Monday the “the clock is ticking” on the broader chips bill and said there were “a lot of conversations” about pivoting to a bill that would only focus on subsidies for plants to make chips, potentially dropping trade provisions and other measures aimed helping the U.S. compete with China in science, business and technology.The outbound investment measure was originally proposed as a standalone bill by Cornyn and Casey, but was later added to the House version of a massive bill that includes the grants for chipmakers and is aimed at countering China’s rise.The draft legislation, which would capture fewer investments than the original version, stirred opposition from critics who said it would harm American competitiveness. The US-China Business Council said about the new draft, “If such government controls were implemented on a unilateral basis, it would only hurt the flexibility and resilience of American companies.”The draft says a new investment committee would engage with allies to coordinate and share information.The legislation is intended to give the U.S. government greater visibility into U.S. investments. It will be mandatory to notify the government of investments that may fall under the new regulations, and the U.S. can use existing authorities to stop investments, or mitigate risk. If no action is taken, the investment can move forward.The concept behind the measure has support within the Biden administration. U.S. President Joe Biden’s national security adviser Jake Sullivan said in July the government was working on new investment screening and considering outbound investment as it seeks to better position the United States for competition in technology.A study by Rhodium said 43% of U.S. foreign direct investment transactions in China over the past two decades could have been subject to screening under the broad categories set out by the original proposal. More

The Federal Reserve is this week set to discuss whether to increase the pace of its monetary tightening in the face of what looks to be worsening inflation. The Federal Open Market Committee convenes on Tuesday for a two-day gathering just days after two economic reports suggested that price pressures have become more relentless than expected. Before the data on Friday — which showed prices jumping another 1 per cent in May from just a month ago and consumers becoming increasingly worried that high inflation will remain a problem for longer — the Fed had signalled it was poised to approve a second consecutive half-point rate increase. It would be the first time since 1994 the US central bank has opted to raise rates by that amount at back-to-back meetings. But another tool also last used in 1994 is now likely to be under consideration: raising rates by 0.75 percentage points.Markets have now fully priced in that outcome, following a report by The Wall Street Journal that suggested officials will this week discuss that possibility.JPMorgan’s chief economist Michael Feroli has raised the bank’s call for the upcoming meeting to a 0.75 percentage point increase. Krishna Guha, vice-chair at Evercore, said it is “not what we think is optimal policy, and, separately, not in our view good for markets”, which were battered on Monday by rising inflation fears. Economists are also grappling with what lies ahead beyond the meeting, as the central bank confronts more inflation shocks that have raised doubts over whether it is moving swiftly enough to address what is already becoming an intractable problem.The central bank has committed to moving “expeditiously” to a neutral setting — one that neither stimulates nor slows down growth — although Fed chair Jay Powell recently conceded that that threshold is “not something we can identify with any precision”. Rather, he vowed to keep pressing ahead until there is “clear and convincing” evidence that inflation is moderating.The central bankers will convey their forecasted policy path in an updated “dot plot” to be released on Wednesday, which maps out individual interest rate projections as part of a broader set of estimates about the economic outlook. In its most recent set of projections, published in March, top officials pencilled in a benchmark policy rate of 1.9 per cent by year-end, and 2.8 per cent in 2023. Policymakers are also due to publish updated forecasts for inflation, growth and unemployment, which are expected to reflect Powell’s recent admission that the moves needed to tame price pressures will lead to “some pain”.Economists had taken issue with March’s estimates, which suggested little movement in the unemployment rate from historically low levels even while policy became significantly tighter. Powell has since acknowledged that the unemployment rate is likely to move up “a few ticks” and that the central bank may only be able to achieve a “softish” landing for the economy — a message Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock, chalked up to: “We can’t go all guns blazing now without some spillover.”Economists had broadly expected the median unemployment rate forecast to reach about 3.8 per cent by 2024, 0.2 percentage points higher than its current level, with officials pegging inflation closer to 5 per cent this year.A more substantive slowdown in gross domestic product growth is also anticipated. That in turn has increased the odds that some policymakers will predict outright rate cuts in 2024, reflecting the belief that the economy will have slowed notably by then.

A recent poll of leading academic economists by the Financial Times showed nearly 70 per cent believe the US economy will tip into a recession next year. Priya Misra, head of global rates strategy at TD Securities, said the Fed is now grappling with a much more difficult problem than just a few months ago. “They have two-sided risks now with growth and inflation,” she said. For Stephanie Aaronson, another former Fed staffer now at the Brookings Institution, the central bank will need substantial luck to avoid a hard landing.“If they don’t get much help on the supply side in terms of relief on energy and food prices . . . and they really have to do a lot more of the work on bringing down inflation themselves, they would not be able to do that with a soft landing.” More