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    Mexico's finance ministry says talk of 'technical recession' imprecise

    MEXICO CITY (Reuters) – Mexico’s Deputy Finance Minister Gabriel Yorio said on Friday that talk of a “technical recession” in the country doesn’t take into account coronavirus-related economic volatility and global supply chain issues.Mexico’s economy, the second-largest in Latin America, likely shrank 0.2% in December compared with the same month a year earlier, a preliminary official estimate showed last week, stirring concerns the country may have slipped into a recession in the second half of 2021.Meanwhile, a Reuters survey showed on Friday that Mexico’s economy likely contracted in the last three months of 2021. That would mark a second straight quarter of negative growth, which constitutes a technical recession.”We feel like talk of a technical recession doesn’t really capture the economic dynamics we’re seeing due to the effects of the pandemic and above all else because of the supply shocks the world is facing,” Yorio said in a news conference.Global supply bottlenecks, increased prices for raw materials, and higher costs for ground transportation and sea shipping are weighing on the economy, Yorio added.Some analysts have said the economic stagnation and high inflation that Mexico was experiencing was a recipe for stagflation https://www.reuters.com/business/mexicans-chafe-over-struggling-economy-surging-inflation-2022-01-27.”There has been a lot of talk about stagflation, but we don’t agree that we’re in that situation,” Yorio said. More

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    China warns of risk of military conflict with US over Taiwan

    The Chinese ambassador to Washington has warned that the US and China could end up at war over Taiwan, in stark comments illustrating the rising tensions between the powers over the fate of the island.“If the Taiwanese authorities, emboldened by the United States, keep going down the road for independence, it most likely will involve China and the United States, the two big countries, in a military conflict,” Qin Gang told NPR in his first one-on-one interview since arriving in the US last July.Beijing has often reprimanded the US over its stance on Taiwan, a self-governed country over which China claims sovereignty, but Chinese officials rarely talk directly about war. While Qin warned about possible conflict, he also said China was striving for peaceful unification. In a virtual meeting last November, President Xi Jinping told Joe Biden that anyone advocating for Taiwanese independence was “playing with fire”. The US president said the two leaders must ensure that competition between the powers did not “veer into conflict”.Since Washington switched diplomatic allegiance from Taipei to Beijing in 1979, the US has maintained a “one China” policy under which it recognises Beijing as the sole seat of government in China.The Biden administration has loosened restrictions on American officials meeting their Taiwanese counterparts and offered strong support for Taiwan as it comes under increasing pressure from China. Qin said the Biden administration was hollowing out the “one China” policy and “playing the Taiwan card to contain China”.Zack Cooper, an Asia expert at the American Enterprise Institute, said the Biden administration could view Chinese behaviour as undermining hopes for a peaceful settlement of the Taiwan issue.“Both sides increasingly see the other as endangering the status quo, which is a recipe for danger in coming years,” said Cooper.On Sunday, the Chinese military flew 39 fighter jets and other warplanes into Taiwan’s air defence identification zone (ADIZ), as part of an escalating campaign to both pressure the government in Taipei and train for possible future military action. The US maintains a policy of “strategic ambiguity” under which it does not say if it would defend Taiwan from any Chinese invasion. The policy is designed to both warn Taiwanese officials against declaring independence — which would almost certainly trigger a Chinese attack — and make Beijing think twice about any military action.The FT last week reported that the Chinese navy had established a constant presence between southern Japan and eastern Taiwan for the first time, underscoring the rising military pressure on the island.Bonnie Glaser, a China expert at the German Marshall Fund, said Qin’s comments were not inconsistent with those of other Chinese officials who “are signalling their displeasure with the trajectory of US-Taiwan relations and Taiwan’s policies”.Elbridge Colby, a former top Pentagon official, said it was a “pretty significant signal that Beijing’s new ambassador chose his first sit-down interview to issue a stern warning about Taiwan, and specifically emphasised Beijing’s willingness to use force”.Follow Demetri Sevastopulo on Twitter More

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    U.S. corporate bond spreads widen as investors de-risk on hawkish Fed

    NEW YORK (Reuters) – Investors sold U.S. corporate high-yield and investment-grade bonds on Friday, moving in step with weakness in equity markets and in a sign of risk aversion amid worries about a series of interest rate hikes.The Markit North American High-Yield CDX Index, which tracks the cost to insure high-yield corporate debt and is a proxy for the junk market, fell in price to a low of 105.947%, the lowest since Nov. 2020, as investors sold the contract betting on credit deterioration. That was down around 1 percentage point from Wednesday, when the U.S. Federal Reserve hinted at multiple interest rate increases this year.Spreads on Markit’s North American Investment Grade CDX Index rose to 62.5 basis points, hitting their highest since Nov. 2020, as investors hedged bets on a deterioration in credit quality.Investors pulled out of U.S. corporate bonds in tandem with weakness across the U.S. major stock indexes after the Fed signalled in a policy update this week that an interest rate hike could be coming soon and that it would push forward with policy tightening measures to fight unabated inflation.”People are expecting a bunch of rate hikes, they’re expecting the (Fed) balance sheet runoff to be faster and sooner than people had expected even a couple months ago”, said Ryan O’Malley, a fixed income portfolio manager at Sage Advisory in Austin, Texas.Spreads, which refer to the interest rate premium investors demand to hold corporate debt over safer U.S. Treasury bonds, narrowed last year as government debt yields dropped, driving money into securities with lower credit ratings than Treasuries.”Money has been pushed out to the far ends of the risk spectrum, because you couldn’t get anything out of the front end in Treasuries or investment grade … Now that the tide is kind of going back out, people don’t want to own the riskier stuff anymore”, said O’Malley.The yield spread on the ICE (NYSE:ICE) BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, rose to 346 basis points on Thursday from 325 bps on Wednesday, after the Fed update.Still, while rising spreads are consistent with a decline in risk appetite, some investors expect them to only rise a little due to a still strong economic background.”I don’t think spreads should widen in the corporate sector … corporates are in strong financial positions, they have benefited from two years of easy money,” said Jack McIntyre, a portfolio manager at Brandywine Global.For research firm Capital Economics, unless equity market weakness triggers a broader loss of investor confidence, spreads are likely to rise only marginally in the next few years.”This is underpinned by our view that, while global economic growth will slow, the economic backdrop is still likely to be fairly positive; we are not anticipating anything that would significantly challenge firms’ ability, in general, to service their debts,” it said in a report on Friday. More

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    Argentina strikes breakthrough deal with IMF in $45 billion debt talks

    BUENOS AIRES (Reuters) -Argentina has struck an agreement in principle with the International Monetary Fund over a new $44.5 billion standby deal, both sides said on Friday, a major breakthrough in tense talks to restructure loans the country cannot repay.The South American country has been locked in talks for over a year with the IMF over a new program to revamp debt outstanding from a failed $57 billion loan deal from 2018, the fund’s largest ever. It faced a $700 million payment due Friday.”We had an unpayable debt, which left us without a present and a future. Now we have a reasonable agreement that will allow us to grow and meet our obligations through growth,” President Alberto Fernandez said in an address to the nation.He said the agreement would not limit Argentina’s economic plans or spending, which had been something of a red line for a country emerging from years of recession and the harsh impact of the COVID-19 pandemic.The IMF said in a statement that its staff had reached an “understanding” with the government over key policies that would underpin the final deal, including the path toward fiscal consolidation, which had been a key sticking point in the talks.”IMF staff and the Argentine authorities have reached an understanding on key policies as part of their ongoing discussions of an IMF-supported program,” Luis Cubeddu, mission chief for Argentina, said in a statement.”The agreed fiscal path would gradually and sustainably improve public finances and reduce monetary financing.”The deal would allow for spending increases on infrastructure, science and technology, and would protect targeted social programs, the IMF said, while energy subsidies would be reduced “in a progressive manner”.The two sides will continue their work in the coming weeks towards reaching a staff-level agreement, the IMF added.’JUST THE START’Recent uncertainty over a deal has hammered Argentina’s sovereign bonds, while anti-IMF rhetoric has risen in the grain-producing country, with some protesters on Thursday calling for the government to suspend repayments.The country’s sovereign bonds jumped an average 6% on Friday morning, while stock indices and the freely traded black-market peso all jumped on Friday morning after the news.”It’s far from a perfect deal, but it means the current government will be able to muddle through economically and investors can start to focus on political change in next year’s (presidential) elections,” said Ted Pincus at Switzerland-based fund Mangart Capital.”The IMF seems to have capitulated to political pressure.”Argentina’s Economy Minister Martin Guzman said in a news conference that under the deal the country would target reducing its fiscal deficit to 0.9% by 2024 and gradually end central bank financing to the Treasury.”We hope to reach our deficit objectives with real spending that does not stop the economic recovery and to be able to gradually strengthen tax collection,” Guzman said.He ruled out an abrupt exchange rate devaluation, said the country would seek to have positive real interest rates and bring down rampant inflation currently running at above 50% on an annual basis, which hurts savings and salaries.Argentina and the IMF had been at loggerheads in talks over how quickly Argentina should reduce its fiscal deficit, with the country arguing it needed to be able to maintain spending to preserve the fragile economic growth recovery. Nikhil Sanghani, Latin America economist at Capital Economics, said that the deal — after months of “hardball” tactics — would bring “some relief to international bondholders in the near term”, though many issues remained.”This is just the start of a long journey to fix Argentina’s macroeconomic imbalances, and there is still a lot that could go wrong over the coming years,” he said in a note.^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Argentina’s USD bond prices continue falling (Interactive version) https://tmsnrt.rs/3FzHvdHArgentina: fiscal deficit https://tmsnrt.rs/33TUSsrArgentina’s USD bond prices continue falling https://tmsnrt.rs/3fz89ZsArgentina: fiscal deficit (Interactive version) https://tmsnrt.rs/33S7dNO^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ > More

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    Analysis-Argentina traders cheer IMF breakthrough, caution long road ahead

    LONDON/BUENOS AIRES (Reuters) – Argentina’s breakthrough agreement with the International Monetary Fund for a $44.5 billion new deal should bolster domestic markets in the weeks ahead, investors and analysts said, though the longer-term outlook remains hazy.The South American country said on Friday it had struck a deal with the IMF over a new standby program to replace a failed $57 billion loan from 2018, easing fears of a potential default as major payments come due this year.That will likely bolster bond prices that had sunk into the 20-30 cents on the dollar range over the past year as the talks had dragged, bogged down by disagreements over the speed of fiscal consolidation.”It gives them some breathing room for the next couple of years,” said Peter Kisler, Trium Capital emerging market portfolio manager, who holds Argentine debt. Bonds could “easily go up another 20% if there is a bit more optimism,” he added.”The agreement is not as detailed as we would have liked, so we don’t see prices flying from here, but there was a real risk of a default to the IMF.”Bonds were up some 3 cents on Friday after the government and the IMF announced the agreement, which still needs to be ironed out and approved by Congress and the IMF board.Argentina was facing some $18 billion in payments due to the IMF this year which it said it could not pay after years of economic crises compounded by the COVID-19 pandemic. It restructured over $100 billion in private debts in 2020.(Graphic: Argetina’s bonds had fallen to all-time lows, https://fingfx.thomsonreuters.com/gfx/mkt/byprjxlmzpe/Pasted%20image%201643388344345.png) ‘NO FISCAL EFFORT’The deal “relieves financing needs for the coming years and reduces uncertainty in Argentina’s economy” amid a tentative recovery over the past year, said Eugenio Mari, chief economist at research organization Fundacion Libertad y Progreso. Carlos de Sousa from Vontobel Asset Management forecast the deal clinched by the leftist government would be approved by Congress, where the conservative opposition will likely back it.”I think the opposition will approve it as they don’t want to be seen as the irresponsible ones that vote it down,” he said. “For 2022 and 2023 there is virtually no fiscal effort so Argentina basically got what it wanted.”In a note, Goldman Sachs (NYSE:GS) analyst Alberto Ramos said it remained to be seen how robust the plan would be and whether it would solve Argentina’s economic issues.”Overall, the macro-financial picture shows deep imbalances and widespread distortions rendering a gradual policy adjustment strategy inherently risky,” he wrote.An Argentine stock trader, who asked not to be named, said the market remained tense but the announcement did help give a bit more certainty. He was keen to see the fine print of the final deal and how it was carried out in practice.”The announcement gives some breathing space to the market, but we have to be cautious and see how the agreement is implemented,” he said. More

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    Fed's matchmaker fear: Flatlining economy meets higher interest rates

    WASHINGTON (Reuters) – The Federal Reserve plans to raise interest rates in March on the assumption the U.S. economy will largely steer clear of fallout from the Omicron variant of the coronavirus and keep growing at a healthy clip.What if it doesn’t?With financial markets fast adapting to expectations of an ever-more aggressive Fed battle against inflation, year-end data showed weaker-than-anticipated results for some of the inflation measures the U.S. central bank watches closely, a reminder of how uncertain its ultimate policy path remains.The numbers were still high, with the employment cost index, the broadest measure of labor costs, rising 4% on a year-on-year basis in the fourth quarter, the largest increase since 2001, and the personal consumption expenditures price index jumping 5.8% on a year-on-year basis in December, the biggest annual rise since 1982 and nearly triple the Fed’s 2% inflation target.But the pace of change from the previous periods fell, and even as investors and many analysts continued penciling in more and faster Fed rate increases this year, some added a footnote.The slowdown in employment cost growth, for example, was a “big step in the right direction” for Fed officials who expect price trends to ease on their own, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.Where Fed Chair Jerome Powell and other U.S. central bank officials have emphasized the risk that inflation may prove higher and require them to raise borrowing costs faster then expected, Shepherdson in recent forecasts sketched an opposing view: Of an economy that flatlines because of the coronavirus pandemic in the first three months of 2022, loses jobs in January and February, and produces inflation that is “falling sharply” by the second quarter, just as the Fed is presumably gearing up for its rate increases.That scenario, out of step with investors who expect five rate hikes this year and some forecasters who have gone as high as seven, shows the degree of uncertainty still in play around where the economy is heading and how the Fed will respond.’NO ROAD MAP’An interest rate hike at the Fed’s March 15-16 policy meeting is virtually assured at this point. But even the size of that increase is up in the air as some analysts expect the Fed, rather than the usual quarter-percentage-point rate hike, to opt for a larger half-percentage-point rise to tighten credit faster and demonstrate its seriousness in lowering inflation.Much, however, rides on how the economy, inflation, financial markets and the virus behave in coming weeks. Major U.S. stock indexes were trading higher on Friday, punctuating a week of heavy losses. Earlier in the day, the U.S. Commerce Department reported that consumer spending fell in December, weakness that may have continued into January given the massive outbreak of new coronavirus cases. Consumer sentiment continued to decline at the start of the year, hitting the lowest point in a decade, according to the University of Michigan’s closely watched gauge of American households’ sentiment. Survey director Richard Curtin said the combination of Omicron, high inflation, and the steady dose of news about future Fed rate hikes could trigger a consumer backlash – a possible blow to economic growth on top of what’s already coming through lowered government spending.”The danger is that consumers may overreact to these tiny nudges,” Curtin said.That could help with inflation, at least some of which has been driven by strong demand for goods during the pandemic, but the Fed may be treading a fine line between what’s needed to temper prices and what would be an overreach.”Panic within the Fed’s ranks has begun to set in. The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out,” wrote Diane Swonk, chief economist at Grant Thornton, a professional services firm. “There is no road map for doing this after inflation has surged.”Bond markets on Friday were showing some signs of caution. U.S. Treasury yields fell, and the gap between longer-term and shorter-term securities has narrowed – often taken as a loss of faith in future economic growth, falling inflation, or both.Either way, said Minneapolis Fed President Neel Kashkari, it’s a reason the U.S. central bank may not ultimately need to “slam on the brakes” with aggressive rate increases.Despite the seemingly hawkish positioning of the Fed, Kashkari told NPR on Friday that the aim is not to restrict the recovery but “let our foot off the accelerator just a little bit.” More

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    Canada budget deficit shrinks over first eight months of 2021/22

    The April to November shortfall was C$73.70 billion ($57.75 billion) compared with a C$232.02 billion deficit over the same eight months in 2020/21, the data showed.”As expected, the government’s 2021–22 financial results show a marked improvement compared to the peak of the COVID-19 crisis,” the finance ministry said. “That said, they continue to reflect challenging economic conditions.”April-November revenues grew by 34.3%, led by higher tax revenues and other revenues. Program expenses fell 25.1%, largely on lower emergency transfers to individuals and businesses.On a monthly basis, Canada posted a deficit of C$1.44 billion, compared to a C$15.40 billion deficit in November 2020.($1 = 1.2763 Canadian dollars) More

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    Airlines cancel flights ahead of Nor'easter storm

    CHICAGO (Reuters) – U.S. carriers on Friday canceled thousands of flights through the weekend in anticipation of a winter storm forecast to bring high winds and heavy snow across the Northeast and Mid-Atlantic. The National Weather Service said in an advisory that the Nor’easter would result in dangerous blizzards and make travel “nearly impossible.” Flight-tracking service FlightAware reported about 4,900 U.S. flights were canceled between Friday and Sunday. Delta Air Lines (NYSE:DAL) said it would suspend operations at LaGuardia and John F. Kennedy airports in New York, Newark Liberty airport in New Jersey and Logan airport in Boston from Saturday through Sunday morning. The Atlanta-based carrier canceled 1,290 flights from Friday to Sunday. Customers who would have traveled then were allowed to reschedule to different flights without extra cost.”Delta teams are focused on a safe and orderly restart of operations at these airports and others in the Northeast Sunday afternoon, depending on conditions,” the company said in a statement.Similarly, American Airlines (NASDAQ:AAL) canceled about 1,160 flights as it expects “significant” impact from the storm on its Northeast operations, especially at Logan airport. Affected passengers can rebook flights without change fees.New York-based JetBlue canceled about 500 flights through Sunday including half of its scheduled flights on Saturday.United Airlines has cut 21% of its Saturday flights, according to FlightAware. The storm has added to the challenges facing the airline industry, which is trying to recover from turbulence caused by the Omicron coronavirus variant. An increase in COVID-19 infections among employees has left carriers short staffed, forcing them to cancel flights.Southwest Airlines (NYSE:LUV) Co on Thursday said about 5,000 employees, or roughly 10% of its workforce, had contracted the virus in the first three weeks of January. The company has canceled more than 5,600 flights thus far this month, which is estimated to cost it $50 million in revenue. More