Economy

The central bank had kept its benchmark cash rate unchanged at 4.35% during the December 9-10 meeting, and had given scant cues on when it could potentially begin trimming interest rates. The RBA noted that inflation had eased largely in line with its expectations in recent months, although underlying inflation still remained well above the central bank’s 2% to 3% annual target, and is not expected to fall within the target until at least 2026. The RBA minutes showed that policymakers judged that the risk to inflation returning more slowly to its target range had diminished, with a bulk of this notion being driven by weak gross domestic product growth. Private consumption had also slowed, amid weakening wage growth. But on the flip side, strong spending during the Black Friday sales event and resilience in the labor market kept policymakers wary over inflation, as did signs of sticky inflation in international economies. Still, the minutes showed that policymakers acknowledged that if they gained more confidence that inflation was easing in line with their targets, it would be “appropriate to begin relaxing the degree of monetary policy tightness,” marking the first time since its recent rate hike cycle that the RBA has acknowledged the possibility of easing. But until the RBA was able to gain such confidence, it signaled that rates will remain unchanged.Analysts expect the central bank to begin cutting rates only by the second quarter 2025 in a shallow easing cycle.  More

WASHINGTON (Reuters) -The U.S. Federal Reserve said on Monday it was considering major changes to its annual bank “stress tests” in light of recent legal developments, including allowing lenders to provide comment on the models it uses, in a major victory for Wall Street banks.The Fed said it may also allow lenders to provide input on the hypothetical scenarios it uses for the annual bank health checks, and it may also average results over two years to reduce annual volatility in how much capital banks must set aside to absorb potential losses.Created following the 2007-2009 financial crisis, the tests assess whether big lenders could weather an economic shock. They are core to the U.S. capital regime, dictating how much cash lenders must put aside to absorb losses, and how much they can return to shareholders.The Fed said the proposed changes were not designed to affect overall capital requirements, but followed recent court rulings that have significantly changed the framework of administrative law in recent years. “The (Fed) Board analyzed the current stress test in view of the evolving legal landscape and determined to modify the test in important respects to improve its resiliency.” In June, the Supreme Court dealt a major blow to federal regulatory power by overturning a 1984 precedent that had given deference to government agencies in interpreting laws they administer. That precedent arose from a ruling involving oil company Chevron (NYSE:CVX) that had called for judges to defer to reasonable federal agency interpretations of U.S. laws deemed to be ambiguous. While the 2010 Dodd-Frank law passed following the crisis broadly requires the Fed to test banks’ balance sheets, the capital adequacy analysis the Fed performs as part of tests, or the resulting capital it directs lenders to set aside, is not mandated by law. Analysts have said the overturning of Chevron makes the stress tests more vulnerable to litigation.Wall Street banks and their Washington trade groups have been quietly lobbying this year to try to increase the transparency of the stress tests, according to industry sources and public records of meetings industry groups had with the central bank. Those discussions were part of a massive industry effort to water down the so-called Basel Endgame capital hikes, over which Wall Street banks had taken the unusual move of threatening to sue the Fed and the two other federal regulators working on the draft rules. Both the Basel standards and the tests help set bank capital.Banks have in the past been extremely reluctant to sue federal banking regulators, but have grown bolder as conservative-leaning U.S. courts have proved increasingly receptive to industry litigation arguing federal agencies are overstepping their authority.The Bank Policy Institute, an industry trade group that has been a vocal critic of the tests, said in a statement Monday’s announcement was the “first step towards transparency and accountability.” “We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy,” said BPI President and CEO Greg Baer. More

The consumer sentiment index fell to 88.4 in December from 100.7 in November, the lowest since the index hit 86.6 in November 2022, when 159 people were killed in a Halloween crowd crush, the Bank of Korea’s monthly survey of consumers showed. The Composite Consumer Sentiment Index falling below the threshold of 100 means consumers have turned pessimistic over the economy.Thousands of protesters massed on Seoul’s streets as the parliament voted to impeach President Yoon on Dec. 14 over his short-lived declaration of martial law on Dec. 3.Tuesday’s data, the first monthly indicator since the crisis erupted over the martial law decree, shows consumer confidence is fast fraying amid political divisions as constitutional justices are set to weigh up whether to formally remove Yoon.In the days following Yoon’s martial law declaration, the benchmark Kospi plunged while the South Korean won last week hit its weakest level in 15 years. A sub-index on consumer spending outlook dropped by 7 points as “domestic political uncertainties worsened consumption sentiment across travel spending, dining out expenses and durable goods, which declined by 8 points, 6 points and 3 points, respectively,” the BOK said in a statement. Governor Rhee Chang-yong on Dec. 18 also said the political turmoil is weighing on the South Korean economy, and called for more fiscal support and other measures to ensure growth remains intact. More

(Reuters) – It could be a bumpy ride for U.S. corporate bond spreads in 2025, with investors and strategists expecting more market volatility, as the new Trump administration implements a reform agenda that could be inflationary and slow the pace of U.S. interest rate cuts.Corporate credit spreads, the premium over Treasuries that companies pay for debt, widened last week after the Federal Reserve’s December meeting. The Fed cut interest rates by 25 basis points but Chair Jerome Powell expressed caution about further reductions without seeing progress in lowering stubbornly high inflation.The widening of spreads on Thursday followed a rise in Treasury yields after the Fed’s hawkishness.Strategists expect this pressure on spreads to persist as they see demand moderating for corporate bonds, which drove spreads to their tightest in decades this year.”We expect demand to moderate somewhat in 2025 given the expectation for rates to remain elevated,” said BMO credit strategist Daniel Krieter. He expects this moderation in demand, alongside struggling corporate fundamentals and volatility as Trump takes office, to send credit spreads wider in the new year. Krieter expects investment-grade bond spreads to touch a low of 70 bps in the first quarter of 2025, from 82 bps on Friday, and a peak of 105 bps by the end of next year. “A lot of the policy that’s out there right now is inflationary, or is expected to potentially be inflationary. It certainly leans that way,” said Nick Losey, portfolio manager at Barrow Hanley. The uncertainty about the impact of the new administration’s policies on markets is now expected to push companies to bring forward their debt-issuance plans to the first quarter.Some strategists predict investment-grade bond issuance next month to touch between $195 billion and $200 billion, and to set a record, beating $195.6 billion in January 2024.Junk bond issuance in January is expected to range between $16 billion and $30 billion, said one strategist. This compares to $28 billion this past January and $20 billion in January 2023, according to JPMorgan data.”We’re expecting January to be a busy month as long as the secondary market continues to look welcoming towards issuance, which I would argue is still very much the case right now, even with the little hiccup we’ve had the past two days,” said Blair Shwedo, head of public sales and trading at U.S. Bank.Demand for these new bonds will remain robust as returns on corporate bonds could be attractive in 2025 despite potential volatility, said Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management.”The good news is that unlike in awful 2022, the starting yield level for the asset class is high. Even if both Treasury yields rise further and credit spreads widen, you’re still likely to have at worst a flattish total return on a forward-looking 12-month basis,” Skiba said.   More

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OTTAWA, Dec 23 (Reuters) – The Bank of Canada’s decision to cut rates by 50 basis points on Dec 11 was a close call, with some members of the governing council suggesting a smaller reduction, according to minutes released on Friday.The central bank slashed its key policy rate to 3.25% to help address slower growth. Governor Tiff Macklem indicated further cuts would be more gradual, a shift from previous messaging that continuous easing was needed to support growth.The minutes said the discussions had focused on whether a 50 basis point or a 25 basis point cut was more appropriate.”Each member of Governing Council acknowledged that the decision was a close call based on their own assessments of the data and the outlook for growth and inflation,” they said.Those preferring a bold move were concerned about a weaker growth outlook and downside risks to the inflation forecast, even while acknowledging that not all the recent data pointed to the need for a 50 basis point cut.”However, it seemed unlikely that a cut of 50 basis points would take rates lower than they needed to go over the next couple of meetings,” the minutes said. Those preferring a 25 basis point cut noted signs of strength in consumption and housing activity, suggesting the bank could be patient while the full effects of past cuts became clearer.The decision to opt for a larger cut reflected a weaker outlook for growth than forecast in October and the fact monetary policy no longer needed to be clearly restrictive.”Governing Council members also discussed the future path for interest rates. There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the minutes said. “Members agreed that they would likely be considering further reductions in the policy rate at future meetings, and they would take each decision one meeting at a time.” More

WASHINGTON (Reuters) -New orders for key U.S.-manufactured capital goods surged in November amid strong demand for machinery, while new home sales rebounded after being weighed down by hurricanes, offering more signs that the economy is on solid footing as the year ends.But concerns over plans by President-elect Donald Trump’s incoming administration to impose or massively raise tariffs on imports could slow momentum next year, with other data on Monday showing consumer confidence slumping in December. Consumers, however, remained upbeat on the labor market’s prospects.The reports followed on the heels of strong consumer spending data last week. They underscored resilience in the economy that prompted the Federal Reserve last week to project fewer interest rate cuts in 2025.”That strength is consistent with our view that business equipment spending growth will accelerate gently next year,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The continued buildout of AI and spillovers from the boom in new factory construction over the past few years will provide a continued tailwind.”Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.7% after dipping 0.1% in October, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders gaining 0.1%.Other data from the Census Bureau showed new home sales jumped 5.9% to a seasonally adjusted annual rate of 664,000 units in November. But rising mortgage rates, in tandem with the 10-year Treasury yield, pose a challenge next year. Core capital goods orders increased 0.4% year on year. Shipments of core capital goods rose 0.5% after advancing 0.4% in October. Business investment has largely held up despite the U.S. central bank’s aggressive monetary policy tightening in 2022 and 2023 to tame inflation.The Fed last week cut its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range. The central bank has reduced borrowing costs by a full point since it began its easing cycle in September. It forecast only two rate cuts next year, in a nod to the economy’s continued resilience and still-high inflation.In September, Fed officials had forecast four quarter-point rate cuts next year. The shallower rate cut path in the latest projections also reflected uncertainty over policies, including tariffs, mass deportations of immigrants in the country illegally and tax cuts, expected from the Trump administration.STRONG LABOR MARKET VIEWS Consumers have started taking note of the potential negative impact of tariffs on the economy. A survey from the Conference Board on Monday showed 46% of consumers expected tariffs to raise the cost of living. That contributed to the consumer confidence index plunging 8.1 points to 104.7 in December, erasing all the gains following Trump’s Nov. 5 victory.Consumers remained upbeat on the labor market, the main driver of the economy through consumer spending. The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, increased to a seven-month high of 22.2 from 18.4 in November. This measure correlates to the unemployment rate in the Labor Department’s monthly employment report. The unemployment rate is currently at 4.2%.”Consequently, recent readings, along with more stability in continuing claims, suggest the unemployment rate will not rise further in December, and could decline from November’s high-side 4.2% reading,” said Abiel Reinhart, an economist at JPMorgan.Stocks on Wall Street were mixed. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. Orders for machinery jumped 1.0%. Electrical equipment, appliances and components orders increased 0.4%. There were also increases in orders of primary metals. But orders for computers and electronic products fell, as did those for fabricated metal products. Orders for transportation equipment declined 2.9%, pulled down by a 7.0% drop in commercial aircraft orders. Boeing (NYSE:BA) reported on its website that it had received 49 aircraft orders, down from 63 in October. Commercial aircraft shipments declined further, likely weighed down by a seven-week strike at Boeing’s West Coast factories, which halted production of its best-selling 737 MAX as well as 767 and 777 wide-body planes. Boeing has also been dogged by safety concerns.Aircraft accounted for the robust increase in business spending on equipment in the third quarter. While economists expected that the decline in aircraft orders would be a drag on business spending on equipment in the fourth quarter, the hit was likely to be limited by the strong rise in orders for core capital goods. Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, dropped 1.1% after increasing 0.8% in October. The decline mostly reflected the weakness in commercial aircraft orders.”They will be merely unchanged quarter-on-quarter in fourth quarter, if they remain at November’s level in December,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.The Atlanta Fed is forecasting gross domestic product increasing at a 3.1% rate in the fourth quarter. The economy grew at a 3.1% pace in the third quarter. More

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