Economy

(Reuters) – The spreads between both investment-grade and junk-rated corporate bond yields and U.S. Treasuries have fallen to their narrowest level in more than two years, in a sign of overall investor confidence growing.The spread on the ICE BofA U.S. Corporate Index, a commonly used benchmark for high-grade debt, declined to 93 basis points on Thursday, its lowest since November 2021.On the ICE BofA U.S. High Yield Index, a commonly used benchmark for junk bonds, the option adjusted spread dipped to 322 basis points, its lowest since January 2022.These spreads reflect how much extra yield investors demand to hold corporate bonds over Treasury notes and bonds, which are considered the safest financial instruments because there is a near-zero chance of default by the U.S. government.”The additional premium you get over risk-free securities is very slim,” said Anthony Woodside (OTC:WOPEY), head of U.S. fixed income strategy at LGIMA. But, he added, “investors are looking at all-in yields.”Spreads are seen as gauge of market confidence. Strong demand for junk bonds in particular is seen as an optimistic signal, with narrowing spreads indicating investors see financial conditions as healthy and are less worried about corporate default.The junk spread surged to over 1,000 bp in March 2020 as the onset of the COVID-19 pandemic fanned market panic.The High Yield Index itself is near a record high set early this month. Meanwhile, the ICE BofA U.S. Investment Grade corporate bond index fell to a two-month low last week.Market optimism has been driven by a record-breaking Wall Street rally and a surprisingly resilient economy which have lifted Treasury yields this year.In the week to Wednesday, as the S&P 500 hit record highs, investors put $15.2 billion into bonds, including $10.2 billion into investment-grade bond funds, which logged a 16th straight week of inflows, the longest such stretch since October 2021, Bank of America Global Research said on Friday. More

ORLANDO, Florida (Reuters) – “The stock market is not the economy.”    This truism has rarely been more relevant, as the extraordinary boom in a handful of mega tech stocks revs Wall Street up to new all-time highs even as many sectors lag behind and economic growth seems set to decelerate.But at least the United States is still tracking ‘real’ inflation-adjusted economic growth rates of 3% or more – putting nominal growth at well over 5% while annual S&P 500 corporate profit growth through last year topped 10%.    Some excuse then.    But it’s a much bigger puzzle elsewhere. Japan has just recorded a technical recession and Europe’s economy has barely grown at all over the past two years, yet the Nikkei 225 and Stoxx 600 this week smashed their way to the highest levels on record too.Whenever stocks break into rarified territory comparisons with previous peaks are drawn, questions over the durability of the rally mount, and bubbles talk percolates.Such consternation is more acute if the good times on Wall Street are not replicated on Main Street. Yes, U.S. unemployment is historically low and growth was surprisingly strong last year, but few think either will be sustained. Luckily for equity investors, the market seems to have a momentum of its own beyond the ‘real economy.'”A better correlation for markets than the macro picture is how corporate earnings are trending. And they are trending quite healthy,” notes Justin Burgin, director of equity research at Ameriprise Financial (NYSE:AMP). BUFFETT INDICATOROften in such times, metrics like the ‘Buffett Indicator’ are used to highlight the risk that stock prices are poised to come tumbling down from their lofty peaks.This is the eponymous index used by veteran investor Warren Buffett, a ratio of equity market cap relative to gross domestic product, which indicates whether stocks are over- or under-valued. Depending on the market measure used, it shows that the total value of U.S. stocks is currently between one and a half times to nearly twice as high as annual GDP. That’s historically very high.The index is not without its flaws. It sets the value of all goods and services produced in the economy over a year against an equity market cap on any given day – essentially a ‘stock versus flow’ comparison. It doesn’t account for 15 years and trillions of dollars worth of central bank monetary largesse that have juiced asset prices far more than economic activity.However, according to a 2022 paper by Laurens Swinkels, associate professor at Erasmus University in Rotterdam, and Thomas Umlauft at the University of Vienna, it is a “crude, but straight-forward” way of measuring investor sentiment towards stock markets over the ‘real’ economy.Swinkels, who is also executive director of research at Robeco, and Umlauft make the simple point that as more economic resources are deployed in capital markets, “equity prices are being driven up without a commensurate increase in ‘real’ economic activity, and expected returns fall.”But it can be years, up to a decade, before stretched valuations lead to “substantial” losses, they add.”The Buffett Indicator and others are saying you should be concerned at this point in the cycle, although it doesn’t tell you what’s going to happen over the next 6-12 months,” notes Colin Graham, a colleague of Swinkels at Robeco.SWEET SPOTRight now, equities appear to be in a sweet spot – the consensus U.S. 2024 earnings growth forecast is tracking 10%, and America is the unrivaled global tech and artificial intelligence leader. U.S. valuations on aggregate may be high, but are nowhere near the peaks of 1999-2000 or even three years ago. The interest rate horizon is favorable – the next move will likely be lower – and corporate and household balance sheets are in relatively good shape.Valuations are much lower in Europe and still relatively cheap in Japan, where real interest rates will remain deeply negative even after the Bank of Japan ends its ultra-loose policy. What’s more, corporate Japan is also getting a huge boost from the weakest exchange rate and loosest financial conditions in over 30 years. Little wonder so many investors are so bullish on Japan even though the economy is in technical recession.”Our biggest long in equities is Japan,” says Tom Becker, a portfolio manager on the Global Tactical Asset Allocation team in BlackRock (NYSE:BLK)’s Multi-Asset Strategies & Solutions group. “We like the structural story: Japan getting out of the debt/deflation trap, the weak yen is good for earnings, and corporates can raise margins again,” Becker adds.Persistently higher interest rates and bond yields, a sharp rise in unemployment, or a financial shock could quickly turn things sour. But for now, the sweet spot for equities across the developed world looks like it can persist. (The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Andrea Ricci) More

JOHANNESBURG (Reuters) – Nigeria is set for two aggressive interest rate hikes within a little over a month to subdue inflation and boost the naira after a couple of missed monetary policy meetings, a Reuters poll found on Friday.A survey taken in the past week suggests that Nigeria’s monetary policy rate will be hiked 225 basis points to 21.00% on Feb. 27, in Governor Olayemi Cardoso’s first monetary policy meeting since he took office a couple of months ago.There was no clear majority in the sample of 15 analysts, with one expecting a 50 bps hike to 19.25% and one a 1,000 bps increase to 28.75%. That sets the stage for Cardoso to possibly act aggressively, though some doubt authorities have the appetite.”We expect significant policy tightening and the announcement of de facto system-wide tightening measures,” wrote Razia Khan at Standard Chartered (OTC:SCBFF). “We think both steps are needed to attract greater foreign portfolio investment and anchor inflation expectations,” she added.A 175 bps jump to 22.75% is expected in March.Consumer inflation in Africa’s biggest economy quickened for the 13th straight month in January to 29.90%, raising the cost of living to unbearable levels for many in the continent’s most populous nation.The Central Bank of Nigeria (CBN) has not had a policy meeting since July, putting it out of kilter with the rest of the continent’s key central banks that hold meetings almost every second month.”Reassuringly, the CBN has announced that it will hold its first two MPC meetings of the year in quick succession, on February 27 and March 26,” wrote analysts at Barclays. “This suggests to us that it is aware it is well behind the policy curve, and will need to deliver at least two strong doses of policy tightening.”The naira fell to its weakest level at 1,680.5 per dollar on Wednesday in the official spot market amidst a chronic shortage of the U.S. currency.David Omojomolo, Africa economist at Capital Economics, wrote that the latest devaluation may be enough to put the balance of payments on a stable footing, though as things stand the currency has continued to weaken on the parallel market.A poll last month suggested economic growth in Nigeria would be 3.0% this year and 3.7% next. “Nigeria needs to take a leaf out of Kenya or Zambia’s book – and ‘tighten’ monetary policy with rate hikes,” said Charlie Robertson, head of macro strategy at FIM Partners.Stabilising the naira is probably the most pro-growth move the CBN could make, so interest rate hikes would benefit Nigeria more than harm it, he added. More

By comparison, the deficit in the same period a year earlier had been just C$5.54 billion, it said in a statement.Program expenses rose 6.6% on increases across all major categories of spending. Public debt charges jumped by 35.6% largely because of higher interest rates, the ministry said.Year-to-date revenues grew by 2.6%, largely reflecting higher personal income tax revenue and revenue from other taxes and duties.On a monthly basis, Canada posted a deficit of C$4.47 billion in December, compared to a C$1.98 billion deficit in December 2022.($1 = 1.3484 Canadian dollars) More

WASHINGTON (Reuters) – U.S. Federal Reserve officials, facing economic conditions they say lack any clear historical parallel to guide them, continued pushing back this week against a near-term start to interest rate cuts, instead building the case for caution before making a move they are struggling to justify.A run of high-profile speeches on Thursday added emphasis to the previous day’s hawkish readout of January’s policy meeting that bundled together have further shaken investors’ confidence that borrowing costs will fall soon.Coming also on the heels of recent higher-than-expected inflation readings, policymakers put an open-ended formulation around the timing of their first rate cut, with Vice Chair Philip Jefferson saying it was likely but “later this year.”Fed governors Lisa Cook and Christopher Waller later reiterated the now-familiar refrain of needing greater confidence that inflation is on track to return to the Fed’s 2% target before agreeing to rate cuts. Waller spoke of being in “no rush” to cut rates given the latest “hotter-than-expected” readings of employment, economic growth and inflation. Cook, meanwhile, was explicit about her “growing confidence that inflation will continue to ease,” but also said she needed more proof of that before cutting rates.Investors have struggled to stay abreast, but have now pushed back expectations of an initial rate cut to June.”As strong activity data have piled up, Fed officials have become less concerned about the risk of keeping the funds rate too high for too long,” Goldman Sachs economists wrote on Thursday night as they pushed their rate cut call from May to June. DEEPER QUANDARYPolicymakers’ remarks reflect the near consensus at their Jan. 30-31 meeting that, even after a year when inflation declined at a historic pace and by many measures seems set to fall further, the time still wasn’t right to signal the start of rate cuts. “Most participants,” according to meeting minutes, were still focused on the risk that premature rate reductions might allow inflation to rise again and force a damaging policy response to erase it. But the recent commentary also points to a deeper quandary that may be tilting Fed officials toward further delay.The benchmark overnight interest rate has been at 5.25%-5.5% for nearly seven months, still less than the roughly 10-month average rate “hold” in Fed policy cycles since the mid-1990s. Officials know what they gain for each month they wait: More downward pressure on prices through borrowing costs they regard as restrictive, more data to show how inflation is behaving, and more confidence they have the situation under control. For now they neither feel they are paying a price in lost jobs or economic potential for keeping rates where they are nor do they know what they’d gain by cutting them. The economy has held up better than expected in the face of the fastest interest rate increases since the 1980s. If anything that has contributed to uncertainty about whether it reacts to interest rates in the same way it used to – whether financial conditions are, in fact, as restrictive as policymakers believe.One initial argument for rate cuts – that Fed policy should follow inflation lower in order to keep “real” borrowing costs from rising – has now been discounted.Jefferson, asked Thursday why he did not mention the issue as a factor in the rate discussion, said he was only focused on whether supply and demand in the economy appeared to be coming into balance – a view aligned with Fed Chair Jerome Powell’s distaste for unobserved economic parameters, like the “neutral” rate of interest, as a guide to policy.NO RUSHAt his last press conference Powell said the Fed wouldn’t “wait around for the economy to turn down” before cutting interest rates, “because that would be too late.”But there’s been no clear case made yet for what would motivate the start of rate cuts or how they’d be calibrated.Jefferson noted in most cases when the central bank reduces interest rates it is doing so to support a weakening economy, which isn’t the case now.In recent decades the Fed has tackled high inflation, but killed the economy in the process; it has sustained periods of growth with deft rate cuts, but in the absence of excessive price pressures; and it has allowed the unemployment rate to ride along at historically low levels, but that was also because inflation stayed around or even below the 2% target.It has never calibrated rate cuts in the climate policymakers now face: with an inflation surge seemingly controlled but with officials nervous about a rebound; a potentially strong period of purchasing-power recovery underway for workers whose pay is rising faster than prices; and all to the backdrop of a high-stakes presidential election.The situation has left the economics profession all over the map, with some, including a past Fed vice chair, arguing that a rare “soft landing” has already been achieved, others saying the Fed is at risk of letting inflation rekindle with its talk of cuts, and others that the chance of a recession-inducing policy mistake are rising by the month.With no past episode as a guide, Fed officials have started referring to the art and intuition of policymaking, even as they say they remain “data dependent.”Waller was, typically, the most blunt in assessing the situation.”The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative – pick your favorite synonym. Whatever word you pick, they all translate to one idea: What’s the rush?” More

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(Reuters) -The U.S. dollar was on track to record its first weekly fall in 2024 on Friday, as investors took a breather after almost two months of rises built on subsiding expectations for future Federal Reserve rate cuts.The greenback has bounced this year as strong economic data and warnings from Fed officials the inflation fight was not over supported expectations that rate cuts will be pushed out to June or later in the year.Some analysts recently flagged that the dollar retracement in 2024 has been more significant than in U.S. yields, and further strength over the near term was limited.”It’s not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter,” Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research, said.BofA expects the euro to strengthen to 1.15 versus the greenback by the end of the year.”If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year,” he added.The dollar index, which measures the U.S. currency against six others, dropped 0.03% to 103.89 and was set to record its first weekly fall, 0.38%, since the end of December.Some analysts argued that increasing risk-appetite was the main reason behind this week’s dollar correction as the U.S. currency is seen as a safe-haven asset.Global shares capped a record-breaking week after U.S. chipmaker Nvidia (NASDAQ:NVDA)’s blockbuster earnings energised tech stocks.”Once the Nvidia effect has faded, equity markets are left with increasingly stretched valuations as U.S. rates continue to rise,” Francesco Pesole, forex strategist at ING, said.Personal Consumption Expenditures (PCE), the Fed’s favourite inflation gauge, due next week, “should be strong and push rate cut expectations further away,” he added.The euro rose 0.03% to 1.0826 versus the greenback.”The euro zone is slowly healing but is doing so without Germany, and the euro can’t ignore Germany,” said Kit Juckes, macro strategist at Societe Generale (OTC:SCGLY), referring to recent data showing Germany’s economic downturn deepened in February.German business morale improved in February, a survey showed on Friday, though probably not enough to prevent Europe’s biggest economy from slipping into another recession. “Norwegian crown and Swedish crown, or Polish zloty, are a better buy than the euro,” he added.The Swedish crown hit 11.1321 against the euro on Thursday, its highest level since Jan. 2. It was last down 0.13% at 11.161. The Norwegian crown was last down 0.2% to 11.385 against the single currency. YEN WORST PERFORMERThe yen is the worst-performing G10 currency this year, with a 6.3% slide on the dollar. The greenback is the best performer.The Japanese currency headed for a fourth weekly drop as investors chased better yields just about everywhere else, wagering Japan’s rates would stay near zero for some time.For the week, the yen is down 0.8% on the euro, touching its weakest for three months on Thursday at 163.45 per euro. The dollar gained 0.21% versus the Japanese currency in the week to trade at 150.53. Investors can earn interest, or “carry”, by borrowing yen around 0% and buying income-bearing assets in other currencies.”There’s a focus on carry while we’re in a range-bound environment,” said Bank of Singapore strategist Moh Siong Sim, noting that hopes for a yen rally had taken a hit from last week’s data showing an unexpected slide into recession in Japan.With Deutsche Bank’s foreign exchange volatility index collapsing to two-year lows and markets backpedalling on bets for deep rate cuts in the U.S., Europe and Britain – leaving yields elevated – the trade is profitable. “We believe the Bank of Japan (BoJ) will raise rates to zero and stop yield targeting in April. However, this should be already in the price,” said BofA’s Vamvakidis. “For the dollar/yen to weaken, we need the Fed to start cutting rates,” he added. Elsewhere, the flow into higher-yielding currencies helped lift the Australian and New Zealand dollars. China’s yuan has made a steady return since the Lunar New Year holiday break. It barely moved this week at 7.2056 per dollar despite steep cuts to Chinese mortgage rates. More

March futures on the S&P/TSX index were flat at 7:06 a.m. ET (12:06 GMT).The Toronto Stock Exchange’s S&P/TSX composite index ended 0.7% higher at 21,318.08 on Thursday, its highest close since April 15, 2022. The index was boosted by gains in technology and healthcare stocks, after chip designer Nvidia (NASDAQ:NVDA)’s strong quarterly results and forecast. (TO)Wall Street futures also paused for breath on Friday after the benchmark S&P 500 and the Dow Jones Industrial Average hit record closing highs in the previous session. [.N] Fed Governor Christopher Waller said on Thursday U.S. Federal Reserve policymakers should delay interest rate cuts by at least another couple more months. The comments pressured commodity prices, with oil down and set to snap a two-week winning streak. Spot gold and copper prices were pulled down by a stronger dollar. [O/R][GOL/][MET/L] In Canada, investors were poised to keenly monitor upcoming quarterly earnings from banks including Bank of Montreal, Bank of Nova Scotia and the Royal Bank of Canada next week. Financial stocks have the highest weightage on the TSX, constituting about 29.7% of the index, according to LSEG data. In Canadian corporate news, software firm Docebo reported its fourth-quarter results above analysts’ estimates.Oil and gas transporter Pembina Pipeline (NYSE:PBA) reported a higher fourth-quarter profit per share than the previous year. COMMODITIES AT 7:06 a.m. ETGold futures: $2,023.4; +0.1% [GOL/]US crude: $77.33; -1.6% [O/R]Brent crude: $82.42; -1.5% [O/R] More