Economy

(Reuters) – A look at the day ahead in Asian markets.The trading and investment climate across Asia may be a little choppy on Tuesday, with any enthusiasm fostered by China’s latest steps to shore up its markets offset by another surge in U.S. bond yields and slide in U.S. rate cut expectations. The Asia and Pacific economic calendar sees the release of Japanese household spending figures, consumer inflation from the Philippines and Taiwan, and the big one: the latest interest rate decision and guidance from the Reserve Bank of Australia (RBA).The Australian dollar will no doubt be buffeted by RBA Governor Michele Bullock, as currencies, stocks and bonds across the region continue to feel the heat from swings in U.S. Treasuries and the dollar.After Friday’s sizzling U.S. jobs report and Federal Reserve Chair Jerome Powell’s latest signal that rates will not be cut in March, Treasury yields and the dollar are on a tear. The 10-year yield is up 30 basis points since Friday, its biggest two-day rise since June 2022, and the two-year yield is up 25 bps, effectively a quarter-point rate hike. Fed rate cut expectations this year have slumped to 115 bps from around 160 bps a few weeks ago, and the dollar is at an 11-week high.Tightening financial conditions at this pace is rarely good news for emerging markets.Asian stocks fell broadly on Monday even though China rose after Beijing unveiled some support measures for distressed property developers and the country’s securities regulator tightened scrutiny of margin loans and short selling. The RBA, meanwhile, is expected to leave its cash rate at a 12-year high of 4.35%, according to a Reuters poll of economists, and hold it there at least until end-September. Inflation is coming down – it hit a two-year low of 4.1% late last year – but is still well above the central bank’s 2%-3% target range. The RBA was one of the last central banks to join the global tightening cycle, so could be one of the last to fully pivot.Money market pricing is a little more dovish, in that traders have a quarter-point rate cut fully priced for August. On the other hand, only 45 basis points of cuts are expected by the end of this year, the least of all G10 central banks, with the exception of Japan’s, which is poised to raise rates.The Australian dollar is at its lowest since mid-November, but could also be drawing some support from the RBA’s perceived ‘hawkish’ stance relative to other G10 central banks. Having fallen around 1.3% in the last six months, it has held up better than sterling (-1.7%), the euro (-2.4%), Japanese yen (-4.5%) or the Swiss franc (-5%).Here are key developments that could provide more direction to markets on Tuesday: – Australia interest rate decision – Philippines inflation (January)- Japan household spending (December) (By Jamie McGeever; Editing by Bill Berkrot) More

TOKYO (Reuters) – The Bank of Japan is laying the groundwork to end negative interest rates by April and overhaul other parts of its ultra-loose monetary framework, sources say, but is likely to go slow on any subsequent policy tightening amid lingering risks.The clearest hint of a change to date came from a summary of debate at the BOJ’s January meeting released last week, where some policymakers called for an immediate policy shift including one who said now was a “golden opportunity” to phase out stimulus.At the meeting, the BOJ kept ultra-low rates intact but said the likelihood for sustainably achieving its 2% inflation target was heightening, signalling a growing conviction that conditions for phasing out its massive stimulus were falling into place.”If we get further evidence that a positive wage-inflation cycle will heighten, we’ll examine the feasibility of continuing with the various steps we are taking under our massive stimulus programme,” Governor Kazuo Ueda told a post-meeting briefing.”We think we can avoid any big discontinuity” upon ending negative rates, he said, suggesting the BOJ will go slow in any subsequent rate hikes.While Ueda did not pre-commit to a specific timing of an exit, the hawkish comments led many investors to bet on an end to negative rates either in March or April.”Piecing together its communication so far, it’s fair to say the BOJ has its eyes set on April as the preferred timing of an exit,” a source familiar with its thinking.”Markets have correctly received the BOJ’s message,” another source said on heightening expectations of a near-term end to negative rates.Upon ending negative rates, the BOJ will abandon all or most of its bond yield control, but pledge to keep buying enough bonds to prevent an abrupt spike in yields, the sources say.The BOJ may also discontinue its risky asset purchases, but hold off selling its holdings any time soon, they say.”When negative rates end, other parts of the framework will come under review,” a third source said. All the sources spoke on condition of anonymity due to the sensitivity of the matter.DATA RISKSSince taking the helm in April 2023, Governor Kazuo Ueda has moved toward dismantling his predecessor’s radical stimulus beginning with a tweak to its controversial yield curve control (YCC) policy that caps long-term rates around 0%.Discussions of an exit began to intensify in December when, for the first time, some in the nine-member board said the BOJ could afford to keep monetary conditions accommodative even after ending negative rates, according to the meeting’s minutes.The hawkish communication tilt in January reflects a growing optimism within the BOJ over this year’s wage outlook and a steady rise in service prices, the sources said.The policy decisions in the next few months will rely heavily on data that support this optimism, including the BOJ’s quarterly tankan survey and key annual wage talks in March between big employers and workers.Companies this year are seen matching or beating last year’s bumper pay increases, the biggest in three decades.But the BOJ’s exit strategy is not without risk with a recent batch of weak data highlighting the fragile state of Japan’s recovery.After shrinking an annualised 2.9% in July-September last year, the world’s third-largest economy likely grew just 1.4% in October-December as consumption and capital expenditure barely grew, according to a Reuters poll.Factory output rose a less-than-expected 1.8% in December and manufacturers project a 6.2% plunge in January due in part to production suspensions at a Toyota Motor (NYSE:TM) unit.After peaking at 4.2% in January last year, core inflation has slowed to hit 2.3% in December. Many analysts expect inflation to slide below the BOJ’s 2% target later this year.While the slowdown in inflation is due mostly to the fading impact of higher raw material costs, the weakening price pressure could weigh on long-term inflation expectations and discourage firms from hiking wages next year, some analysts say.Additionally, although big firms are expected to offer sizable wage increases this year, their smaller counterparts may struggle to match them as rising raw material costs squeeze margins.”Japan’s economy and prices actually aren’t that strong,” a fourth source said. “In the end, the decision on the timing is pretty much data-dependent.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A senior Bank of England official on Monday said it was a question of when and not if the central bank started reducing interest rates as a “reward” for continued declines in inflation, as policymakers lay the ground for easing policy this year.Huw Pill, BoE chief economist, said key gauges of price pressures were not yet at a level that would permit the central bank’s Monetary Policy Committee to start easing policy, but he did not need to see underlying inflation hit its 2 per cent target to begin lowering rates.Pill was speaking in an online question and answer session after the MPC last week held the BoE key rate at 5.25 per cent.BoE governor Andrew Bailey signalled on Thursday that the central bank was ready to start easing policy, but not until it had more evidence that inflation was heading in the right direction.“Lower interest rates are a reward to the economy for better inflation performance,” Pill said. “It is the focus on when, rather than if, I think, that has been what the governor has tried to focus on.”The BoE has homed in on the labour market and services price growth as its key areas of focus as it seeks to determine whether inflation is on course to durably settle near its 2 per cent target. Headline consumer price inflation stands at 4 per cent, well below peaks of more than 10 per cent, but other indicators remain too high for comfort. Pill said there were some early signs of improvement across a range of inflation indicators, although this information was still too tentative for the BoE to act.But he added the central bank did not need to see underlying inflation actually fall to 2 per cent before it cuts its key rate, because policy would still be “restrictive” even after a slight reduction in borrowing costs.The OECD on Monday said the UK faces the highest rate of inflation in the G7 this year and next, underscoring the work that still lies ahead for the BoE as it seeks to bear down on price growth. It forecast UK inflation would be 2.8 per cent in 2024 and 2.4 per cent in 2025, adding it expected the BoE to be in a position to lower interest rates in the third quarter of this year. The BoE’s job of assessing the labour market has been hampered by uncertainty over key official data produced by the Office for National Statistics. The ONS on Monday admitted publication of figures based on its “transformed” labour force survey would be pushed back six months from the previously expected date of March, meaning the BoE will continue to lack crucial insights on unemployment. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our FirstFT newsletter. Sign up to our Asia, Europe/Africa or Americas edition to get it sent straight to your inbox every weekday morningGood morning. We start today in South Korea, where Samsung chair Lee Jae-yong was acquitted of stock manipulation and accounting fraud charges in connection with a controversial merger almost a decade ago.The Seoul Central District Court ruled yesterday that prosecutors had failed to prove a 2015 merger between two Samsung subsidiaries was conducted in order to secure Lee’s control of the conglomerate. Lee, the grandson of Samsung founder Lee Byung-chul, has long maintained that the merger was “normal business activity”.The ruling was welcomed by the Korea Chamber of Commerce and Industry but strongly criticised by Korean advocates of improved corporate governance, for whom the merger remained an example of minority shareholders losing out to the controlling families of conglomerates.“The ruling will free Lee of legal risks, but I am at a loss for words in terms of the country’s economic justice,” said Park Ju-geun, head of corporate research group Leaders Index. “This goes totally against all previous court rulings on the merger.” Here’s more on the surprising verdict.And here’s what I’m keeping tabs on today:Monetary policy: The Reserve Bank of Australia announces its interest rate decision.Economic data: The EU releases December retail sales figures while January factory orders data is due from Germany.Companies: BP, Mitsubishi, Nintendo, Snap, Spotify, Toyota and UBS are among those reporting results.Five more top stories1. Chinese-Australian writer Yang Hengjun has been handed a suspended death sentence in China five years after being detained on espionage charges. Australia’s foreign minister said the government was “appalled” by the decision and summoned the Chinese ambassador in Canberra to express its concerns. Here’s what the sentence could mean for Australian-Chinese relations. 2. The US will restrict visas for abusers of commercial spyware, including those selling the encryption-busting malware. The visa ban is the latest move by the Biden administration to rein in a sprawling, multibillion-dollar industry that has been tied to the repression of dissidents around the world. US base attacked: A drone attack on a military base housing US troops in Syria has killed at least six allied Syrian fighters, the first major attack since Washington launched retaliatory strikes against Iran-aligned militias accused of targeting its forces in the region.3. Novo Nordisk has agreed to acquire three manufacturing sites for $11bn, as the Danish drugmaker races to expand production of the weight loss drugs whose runaway success has sent the company’s valuation beyond $500bn. The group last week reported record sales for 2023, but warned that supply chain bottlenecks were hampering its ability to meet the surging demand for its anti-obesity drugs Ozempic and Wegovy.4. Pakistan’s leading political dynasties are poised to retake control of the government in elections this week after authorities crushed the party of jailed ex-prime minister Imran Khan, sparking some of the worst turmoil in the country’s recent history. Analysts warned that the pre-election manoeuvring amounted to some of the most overt manipulation of Pakistan’s politics by the army in years. Read our preview of Thursday’s election.5. Hong Kong’s government expressed its “extreme disappointment” after Argentine football star Lionel Messi angered fans by sitting out a long-anticipated exhibition match in the Chinese territory. Many of the more than 38,000 people who attended Sunday’s game between Inter Miami and Hong Kong XI chanted, “Refund! Refund!”, after Messi stayed on the bench. Hong Kong’s government had pinned its hopes on the event to help boost the territory’s appeal.The Big ReadFrom noodle joints to pharmacies, Micro Connect has financed more than 10,000 small stores in 270 cities across China in return for a fixed percentage of their revenue every day. In the process, the new enterprise has built up a wealth of real-time, unfiltered data on how Chinese consumers are spending their money, drawing praise from economists sceptical of official statistics. As well as being a gold mine for data, the company has turned those streams of repayments into tradable financial instruments — but critics say the risks are high.We’re also reading . . . War in Ukraine: At Donald Trump’s behest, Republicans in Congress are blocking US military aid for Ukraine. The consequences could be disastrous, writes Gideon Rachman.Delaware vs Musk: The billionaire’s threat to move Tesla’s legal home has revived debate over the dominance of the small, mid-Atlantic state and its courts over corporate America. Private equity: The industry has evolved in the past three decades and cannot be caricatured homogenously as short-termist, debt-addicted asset-strippers, writes Patrick Jenkins.Chart of the dayA rapid fall in US inflation has opened the way for interest rate cuts within months, the OECD said in its interim outlook, but it warned that Britain would suffer from the G7’s fastest price growth. Meanwhile, the OECD left its outlook for Chinese growth unchanged, forecasting an expansion of 4.7 per cent this year and 4.2 per cent in 2025.Take a break from the newsWhat makes Elton John tick? An upcoming auction of watches worn by the Rocket Man opens a portal into his passions. The musician in London, 1973 More

Previously the central bank’s deputy governor, Karahan’s resume features years spent in prominent American institutions and companies.
With Turkey’s inflation at 65%, the 42-year-old economist has his work cut out for him.
Investors and economists say continuity in monetary policy priorities will engender confidence in Turkey’s new central bank chief.

Newly appointed Governor of Turkish Central Bank, Fatih Karahan is seen in Ankara, Turkey on February 04, 2024. 
Emin Sansar | Anadolu | Getty Images

Turkey’s newly appointed central bank governor, Fatih Karahan, has his work cut out for him, after being named to the job by presidential decree over the weekend following the sudden resignation of his predecessor, Hafize Gaye Erkan.
Previously the central bank’s deputy governor, Karahan’s resume features years spent in prominent American institutions and companies. He received both a master’s degree and doctorate in economics at the University of Pennsylvania, spent nearly a decade as an economist at the Federal Reserve Bank of New York, worked as a part-time lecturer at Columbia University and New York University, and served as a senior economist at Amazon.

It is hoped that the 42-year-old economist’s experience will serve him well as he heads the institution working to tackle the eye-watering inflation and cost-of-living crisis that has hit Turkey’s population of 85 million. The country’s currency, the lira, is down 38% against the dollar year to date and has lost more than 80% of its value against the greenback over the last five years. 
Turkey’s consumer price index print came out Monday showing a roughly 65% increase year on year for the month of January. Its central bank has made eight consecutive interest rate hikes since May 2023 — for a cumulative 3,650 basis points — in an effort to rein in soaring inflation. The latest rate increase, on Jan. 25, raised Turkey’s key interest rate by 250 basis points to 45%, though its leaders signaled at the time that the hiking cycle was at its end.
While painful for the country, investors and economists say that the rate hikes have been necessary and that continuity in monetary policy priorities will engender confidence in the new central bank chief.
In his statement posted to the Turkish central bank’s website Sunday, Karahan stressed “price stability” as his team’s main priority, vowing to “ensure disinflation” and “maintain the necessary monetary tightness until inflation falls to levels consistent with our target.”

“All eyes now focus on new central bank governor Fatih Karahan,” Liam Peach, senior emerging markets economist at London-based Capital Economics, wrote in a note Monday. “As things stand, continuity in monetary policy looks set to continue.”

Wolfango Piccoli, co-president at advisory firm Teneo, agreed.
“Like Erkan, Karahan is not a monetary economist, but is nevertheless regarded as a credible choice,” Piccoli wrote in an analysis for the firm.
“Unlike recent gubernatorial changes, Erkan’s departure will not result in a dramatic shift in policy stance,” he said, adding that the central bank could still “adopt a more hawkish tone in terms of forward guidance to support Karahan in his new role.”

Unorthodox policy

Piccoli noted that Turkey’s monetary policy still ultimately remains at the mercy of Turkish President Recep Tayyip Erdogan, who spooked investors for years by stifling the central bank’s independence and preventing it from raising interest rates despite runaway inflation that at one point topped 85%.
The more conventional policy approach that began under Erkan and Turkish Finance Minister Mehmet Simsek, also appointed last year, followed several years of unorthodox policy. Erdogan has previously decried interest rates as “the mother of all evil” even as consumer prices soared and the lira plunged.

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.
Anadolu Agency | Anadolu Agency | Getty Images

“Regardless of Karahan’s stature and the backing provided by Treasury and Finance Minister Mehmet Simsek, Erdogan remains the ultimate decision-maker,” Piccoli said.
“As long as the president stays supportive of the (gradual) turn to orthodoxy that he endorsed after the 2023 elections, the identity of the governor is almost irrelevant as the TCMB has weak (if any) institutional independence.”
Karahan “will still have to operate within the boundaries of a central bank that is neither independent nor staffed by adequate professionals,” Piccoli added. CNBC has reached out to the Turkish central bank for comment.
Investor confidence in Turkey improved over the roughly eight-month tenure of Erkan, who became Turkey’s first-ever female central bank governor in June 2023. She tendered her resignation on Friday in a surprise announcement, saying the decision was due to a “reputation assassination” campaign and the need to protect her family.
Erkan, like Karahan, also has a resume featuring elite American institutions; she has a Ph.D. in financial engineering from Princeton and degrees from both Harvard and Stanford’s business schools, and later worked at Goldman Sachs and First Republic Bank, the latter for which she served as co-CEO. She also was on the board of directors for Tiffany & Co., and was appointed director of Marsh McLennan, a professional services company and Fortune 500 firm. More

Higher shipping costs due to the Red Sea crisis could add 5 percentage points to OECD member import costs, the Paris-based group said Monday.
Clare Lombardelli, chief economist at the OECD, told CNBC that recent data on inflation has nonetheless been encouraging, and shipping-driven inflation pressures remain a risk rather than its base case.
Tiemen Meester, chief operating officer at Dubai-based logistics firm DP World, said the current situation was in a “steady state” and that cargo flows were catching up, but networks had already adjusted.

Elevated shipping costs as a result of ongoing tensions in the Red Sea could impede the global fight against inflation, the Organisation for Economic Co-operation and Development said Monday.
The Paris-based group estimates that the recent 100% rise in seaborne freight rates could increase import price inflation across its 38 member countries by nearly 5 percentage points if they persist.

That could add 0.4 percentage points to overall price rises after a year, the OECD said in its latest economic outlook.
In late 2023, major shipping firms began diverting their vessels away from Egypt’s Suez Canal, the quickest trade route between Europe and Asia, due to a spate of attacks by Iran-backed Houthi militants based in Yemen. Tensions remain high, with the navies of countries including the United States involved in the conflict.

A cargo ship travels on the Suez Canal in Ismailia Province, Egypt, Jan. 13, 2024. 
Ahmed Gomaa | Xinhua News Agency | Getty Images

Ships are taking the longer Cape of Good Hope route around the southern coast of Africa, which increases journey times by between 30% and 50%, taking capacity out of the global market.
However, the OECD also notes that the shipping industry had excess capacity last year, a result of new container ships being ordered, which should moderate cost pressures.
Clare Lombardelli, chief economist at the OECD, told CNBC on Monday that a sustained increase in inflation as a result of the latest crisis is a risk, but not the group’s base case.

“It’s something we’re watching closely … we have seen an increase in shipping prices, if that were to continue for for an extended period, then that would feed through into consumer price inflation. But at the moment, we don’t anticipate that to be the case,” Lombardelli said.
According to Tiemen Meester, chief operating officer at Dubai-based logistics firm DP World, European imports are presenting the biggest challenge and have seen significant delays to cargo that was already en route.
“Unfortunately, there’s higher cost in the inefficiencies in the network, so ultimately, the rates are going up. But it’s actually nowhere near to where they were at their peaks during Covid … How that costs will find its way to the consumer, we’ll have to see,” Meester told CNBC, describing it as a “short-term problem.”
“I think kind of where we are now is a steady state, because the networks have adjusted and cargo is flowing, bookings are taking, it just takes more time,” he added.

The OECD’s Lombardelli said that overall there has been positive data among its members in recent months showing inflation coming down consistently. This will help rebuild real incomes and support consumption, she said.
The OECD’s 38 members include the United States, United Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan and South Korea.
Its latest outlook hiked its economic growth forecast for the U.S. by 0.6 percentage points from its previous November estimate, to 2.1% for this year. Its euro zone outlook was lowered by 0.3 percentage points, to 0.6%, while its U.K. outlook was flat at 0.7%.
“We’ve seen positive news in the U.S., we’re seeing inflation coming down now, but we’re not seeing a big cost in terms of the labor market there,” Lombardelli told CNBC.
“Growth is looking stronger, and inflation is coming down. So you’ll see a rebuilding of real incomes there in the U.S., and that will support consumption growth.”
Europe has been hit harder by an energy price shock, the impact of inflation on real incomes and consumption, and its greater dependence on bank-based financing amid tighter montary policy, she said.
In the medium-term, the OECD expects a greater drag on growth from its aging workforce.
The OECD nonetheless sees the European Central Bank as being in a position to cut interest rates in the second half of the year if current trends continue, Lombardelli said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Turkey’s devastating earthquakes one year ago horrified the nation. The disaster brought a shake-up in economic policy as well. Soaring annual price inflation, over 50 per cent, forced President Recep Tayyip Erdoğan to deal with the inflationary scourge — embracing economic orthodoxy in the form of higher interest rates.The hope is that this policy lasts longer than its executor. Central bank chief Hafize Gaye Erkan resigned over the weekend after just eight months, in which she had won the confidence of international investors in Turkey’s overhaul. Former deputy governor Fatih Karahan becomes the sixth governor in four years.Bad news? Maybe not. Investors care little for the revolving door policy at the central bank. Policy fluctuations only amplified the growing unease about the country’s current account deficits. On Monday, the local equity market shrugged off the news, while the lira — considering its volatile history — had a modest decline. Her quick replacement by the government helps, as did the choice. Karahan has status with investors. His CV includes stints as an economist at the US Federal Reserve, teaching at Columbia University and even time in the private sector with Amazon. More importantly, Erdoğan still trusts his finance minister Mehmet Şimşek with putting the brakes on Turkey’s rollercoaster, hyperinflationary economy. Şimşek probably had a hand in choosing both Erkan and Karahan.In the three months before Erkan’s first big interest rate rise in late August, the lira had already dropped 24 per cent versus the dollar. That pace has since moderated, falling 11 per cent since then. Losing Şimşek would probably have caused a bigger ruction with foreign investors. On a trailing basis, they have poured a historically high $2bn into Turkish stocks since the more hawkish policy began, according to data from local investment advisory UNLU & Co. Year to date the broad market index has jumped almost 14 per cent in dollar terms. That beats developed or emerging markets. One popular sector is banks, including Yapı Kredi and Garanti (owned by Spain’s BBVA). Inflation hurts bank profitability. Capping it attracts buyers. This group, which had trailed the broader market since 2017, has found new life since the summer. What is needed now is for the new governor to hang around, fighting hyperinflation. Frankly, low double-digit percentage price growth will do. His first test is the central bank’s quarterly report on the economy later this week. The bank has targeted 36 per cent inflation for 2024, well below the 64 per cent seen in December. Stick to that and perhaps then he can slow that revolving door in front of his office. Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline More

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