Economy

Officials are likely to keep interest rates unchanged at the conclusion of their January meeting. Here’s a look at what might come next.Federal Reserve officials will conclude their two-day meeting on Wednesday, and they are widely expected to keep interest rates steady at a two-decade high when they release their policy decision at 2 p.m.But investors are likely to closely watch the meeting — particularly Chair Jerome H. Powell’s 2:30 p.m. news conference — for hints of when policymakers might begin to lower interest rates. The Fed has held its policy rate in a range of 5.25 to 5.5 percent since July, and officials projected in December that they might lower borrowing costs by three-quarters of a percentage point over the course of 2024.But both the timing and the magnitude of those rate cuts remain uncertain. On the one hand, inflation has come down more swiftly than many economists had expected in recent months. On the other, economic growth is proving stronger than anticipated, which could give companies the wherewithal to keep raising prices into the future.Here’s what to know about this meeting.The Fed’s statement could change.The Fed’s post-meeting policy statement has suggested that officials will watch economic data “in determining the extent of any additional policy firming that may be appropriate.” Now that further rate increases are looking less and less likely, that language may be in for a tweak.Powell has a delicate balancing act.Fed officials do not want to keep interest rates so high for so long that they squeeze the economy too much and tip it into a recession. On the other hand, they do not want to cut rates too much too early, allowing the economy to accelerate and risking a renewed pickup in inflation. Mr. Powell could talk about how officials will try to strike that balance.Growth vs. inflation will be critical.A lot of what comes next will hinge on which numbers Mr. Powell and his colleagues decide to focus on — growth or inflation — and investors might get a hint at that this week. Growth and consumer spending are both faster than many economists had expected. But the Fed’s preferred inflation gauge is also below 3 percent for the first time since early 2021, even after stripping out food and fuel costs, which can fluctuate from month to month.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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In 2020-2021, as the spectre of inflation grew closer, money flooded into TIPS ETFs. Here’s a chart showing the approximate cumulative flows into the two largest whole-of-market TIPS ETFs.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.We can’t be sure, but it seems reasonable to infer that this was because people reckoned TIPS might … protect them against inflation?This is not the most absurd investment thesis we’ve come across. In fact, here is what the US Treasury’s direct-to-retail bond portal has to say about Treasury Inflation Protected Securities (TIPS):“As the name implies, TIPS are set up to protect you against inflation.”It’s a lovely notion, but, come 2022, TIPS did not protect you against inflation. Holders lost a ton of money in both nominal and real terms. If you squint, you can make out that the TIPS market performed a tiny-teeny bit better than the nominal US Treasury market. But dropping close to 20% in the inflation-adjusted value of your capital was maybe not plan A of the $30bn of money that rushed into TIPS ETFs.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Now that the damage has been done, folks are ditching TIPs. This gives us an excuse to explain these weird instruments and why supposedly inflation-proofed bonds were an awful hedge against inflation. If this strikes you as a bit Captain Hindsight, check out what we wrote in FTMain back in 2017 precisely on this point.How TIPS workMechanically, TIPS follow the so-called ‘Canadian model’ of inflation-linked bonds: 🧐 Principal is linked to an index ratio which zips up (and sometimes down) depending on a linear interpolation of monthly inflation reads (with a 3mth lag) for the life of the bond;😎 Coupon is a fixed percentage of principal;🤓 Principal is repaid at whatever is higher of par and the inflation-indexed ratio.It all gets a bit fiddly once you really get into the weeds. But unless you’re trading or pricing TIPS in size, or with leverage, we probably don’t need to go there. Zooming out, there are maybe two really important things you need to know about TIPS: real yields and break-even inflation rates.First up, TIPS — just like conventional US Treasuries — have a yield, and the yield is just a mathsy way of expressing the bond price. There’s a reason why yields [say it with us]…In the case of TIPS we call this the ‘real yield’ because it’s the yield you can lock in over and above inflation if you hold the bond to maturity.The chart below shows the conventional 10-year US Treasury yield in red and the 10-year TIPS real yield in blue. You can see that in mid-2021 the real yield got all the way down to -1.2 per cent. Buying 10-year TIPS at that point you would lock in returns of whatever inflation might average 2021-2031 minus 1.2 per cent per annum over the course of ten years. (This is different from getting a return of inflation minus 1.2 per cent in year one, then making the call as to whether to also take inflation minus 1.2 per cent in year two, etc.) The chart shows this blue line bouncing higher in 2022, and yields up = prices down = rubbish returns in 2022.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Second, TIPS real yields are almost always lower than conventional bond yields. The difference between the yields of an inflation-linked bond and a conventional bond that both mature around the same time is called the ‘break-even inflation rate’. Why are TIPS yields almost always lower? Because the TIPS principal and coupons are indexed upwards when inflation is positive. This is awesome — way better than boring old fixed rate US Treasuries. How much better? The world’s money-weighted answer is given in the form of a price (and hence yield). The (shaded) gap between conventional US Treasury yields (red line) and TIPS real yields (blue line) is a measure of TIPS’ relative attractiveness versus conventional US Treasuries. Mathematically, it’s the average inflation rate that would equate the total returns of TIPS and conventionals over the bonds’ lives.Bond folk love peering at break-even inflation rates. We’ve reproduced some in a clickable chart below for the bond-curious. Rather than endlessly pontificating over what market expectations of inflation really truly are, they allow you to just read out a number. You can even use whizzy maths to strip out the current business cycle, build a forward inflation rate yield curve and infer long-term structural inflation expectations (or, just use the hack of doubling the ten-year break-even number and subtracting from this the five-year break-even to get to a pretty good approximation of the five-year five-year forward inflation rate beloved of macro wonks). So much to talk about at parties!You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Views you can useFundamentally, the break-even inflation rate confers an investment view on anyone in possession of an inflation view. Reckon that inflation will average 5% over the next five years? If the five-year break-even inflation rate is only 2.3% buy TIPS! Right?Almost. But no.Your inflation view does not (other than in special cases) give you an outright investment view as to the likely absolute performance of TIPS. It only gives you an investment view as to the long-term prospects for relative performance between conventional US Treasuries and TIPS. This is the kind of investment view that helps you make friends only with other ‘special’ people. To build a view around absolute performance of TIPS, you’ve got to focus entirely on the real yield: forget the break-even!Putting all this wisdom into a handy 2×2 matrix format, the Central Bank of Malta summarises the price sensitivity of conventional (aka nominal) and inflation-linked bonds to moves in yields and breakevens as follows. The (+) and (-) denote positive and negative absolute price changes, and the (+/-) denotes a positive or negative absolute price change depending on whether real yields move more than break-evens. (Eg, if real yields rise by 100 bps but break-evens fall by 80 bps, nominal yields will rise by 20 bps meaning that nominal bond prices will fall, but nominals will outperform TIPS.)You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The aftermathIt’s quite possible that $30 billion of ETF flows didn’t get confused by any of this. If, for example, you had a view back in mid-2021 that inflation would turn out higher than break-evens, and that real yields would also stay negative, TIPS made a lot of sense.It’s actually quite easy to paint such a scenario. Let’s say that inflation takes hold but the Fed is persistently too slow in raising rates, maybe because it looks through short-term supply shocks that keep on coming one after the other, or maybe because the economy goes all stagflationary and, when pressed, the Fed prioritises supporting demand rather than crushing inflation — and this drags on and on.Whatever. It didn’t work out.Instead, when inflation rose the Fed increased rates. This pushed nominal yields higher and — given that the rate hikes sent the message that the Fed’s intermediate goal of delivering price stability was pretty much intact — it also steadied break-evens, meaning that real yields were pulled higher, pushing prices lower and delivering negative returns despite the tailwind from principal and coupon inflation indexation.Would short-maturity TIPS have been a better inflation hedge? This would’ve been our guess. Short-dated bonds have a lower price sensitivity to yield movements but their principal and coupons still benefit from full inflation-indexation.Looking at flows into and out of the two largest short-dated TIPS ETFs, maybe $20 billion of money had this idea? Sadly, these 0-5 year US TIPS lost almost 9% in real terms in 2022. Which is to say they didn’t really work out for their holders either.How does the story end?Around $30 billion has fled the four largest TIPS ETFs since peaking at the end of 2021. But real yields are much higher today than they were, and break-evens are middling compared to their long-run history. As such, the absolute return outlook for the remaining $20 billion cumulative net inflows into the largest ETFs looks much better than it did at the end of 2021. Paradoxically, this is because the kind of inflationary threat that may well have attracted inflows looks like it has ebbed away.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser. More

The price data would be a welcome relief for the Reserve Bank of Australia as it prepares to deliver its first policy decision of the year next Tuesday. Futures rallied to imply around a 64% probability of a first rate cut in June, up from 54% before the data. A quarter-point cut was now more than fully priced for August and the total easing for 2024 moved to 48 basis points, from 42 basis points.Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 0.6% in the fourth quarter, under market forecasts for a 0.8% increase. The annual pace of CPI inflation slowed to 4.1%, from 5.4%, and was well below the peak of 7.8% in December 2022. More encouragingly, the CPI rose 3.4% year-on-year in the month of December, down sharply from 4.3% in November and down more than two percentage points in three months. A closely watched measure of core inflation, the trimmed mean, rose 0.8% in the fourth quarter, under forecasts of a 0.9% increase. The annual pace slowed to 4.2%, from 5.2%.The Australian dollar eased 0.3% to $0.6585 after the data, while three year bond futures extended earlier gains to 96.37, the highest level in two weeks. The RBA has already raised interest rates by 425 basis points to a 12-year high of 4.35% since May 2022 to tame runaway prices. It also left the door open to further tightening if necessary to meet its annual inflation target of 2-3%.The central bank had expected inflation to ease to 4.5% by December and to return to its target band in late 2025. The central bank will provide updated forecasts next TuesdayThe economy has evolved largely as the RBA had expected over the past two months, with the labour market loosening, consumer spending soft amid costs of living pressures and goods disinflation continuing. However, the overseas landscape has changed drastically. With inflation abroad falling rapidly, markets are betting the Federal Reserve and European Central Bank would be soon cutting interest rates. They see the first rate cut from the Fed in May and first easing from the ECB in April. More

TOKYO (Reuters) -Bank of Japan policymakers discussed in January the likelihood of a near-term exit from negative interest rates and possible scenarios for phasing out the bank’s massive stimulus programme, a summary of opinions at the meeting showed on Wednesday.The summary highlights a growing view within the board that conditions were falling in place to soon pull short-term interest rates out of negative territory, which would be Japan’s first interest rate hike since 2007.”It seems that conditions for policy revision, including the termination of our negative interest rate policy, are being met,” one member was quoted as saying in the summary.Another opinion called for the BOJ to end negative rates “at an appropriate timing,” as delaying the decision for too long could require subsequent interest rate hikes to be rapid, the summary showed.The BOJ should also end purchases of risky assets such as exchange-traded funds (ETF) once sustainable achievement of its 2% inflation target comes into sight, a third opinion showed.Under its massive stimulus programme, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around 0%. It also buys government bonds and risky assets as part of efforts to reflate growth and achieve its 2% inflation target.With inflation having exceeded the BOJ’s target for well over a year, many market players expect the central bank to end negative rates either in March or April.At the January 22-23 meeting, the BOJ maintained ultra-loose policy but its governor Kazuo Ueda signalled the bank’s growing conviction that conditions for phasing out stimulus were falling into place. He also said the BOJ will likely keep monetary conditions ultra-loose even after ending negative rates.In a sign the board was already brainstorming ideas on how to dismantle the BOJ’s complex stimulus framework, one member said the bank should first revise measures with the largest side-effects, without specifying what they were.When debating an end to bond yield control and negative rates, the BOJ must also examine the fate of a pledge to keep increasing the pace of money printing “until inflation stably exceeds 2%,” another opinion showed.”Since achievement of our price goal has become more likely, it’s necessary to start full-fledged discussions on an exit,” one member said.Japan remained a dovish outlier among major central banks that tightened monetary policy aggressively last year to combat soaring inflation.If the BOJ were to raise short-term rates this year, it could coincide with possible interest rate cuts by the U.S. Federal Reserve and the European Central Bank.Some analysts warned the BOJ risks triggering a sharp yen rebound and hurting its export-reliant economy, by swimming against the global tide toward lower borrowing costs.”Now is the golden opportunity” to change policy as “shifts in overseas central banks’ monetary policies could reduce the BOJ’s policy flexibility,” one opinion said, a sign the BOJ was mindful of the fallout from its counterparts’ rate cut timing.The summary of opinions does not disclose the identity of the board member who made the comments. More

SYDNEY (Reuters) – Australia’s prudential regulator said on Wednesday it will review how sections of the A$2.5 trillion ($1.7 trillion) pension fund sector value unlisted assets and that it is already working with several funds whose practices need to improve.As part of its supervision priorities for the next six months, the Australian Prudential Regulation Authority said it will conduct a “deep dive review” into valuation practices at a number of large and mid-sized pension funds.The unnamed funds have material holdings of unlisted assets, a broad category which can range from office towers to private loans. The review will also look at how those funds manage liquidity.Reuters reported last week the regulator had already asked funds to provide information for the review. Two of Australia’s largest pension funds, AustralianSuper and Aware Super, said they had received requests.Chair John Lonsdale said the regulator was already working with funds which needed to improve, separate from the review.”We want to push into it,” he said on a call with reporters. “What we’re saying to regulated entities … we want you to value appropriately, we want you to monitor, we want you to report it and we want it to be accurate.”While APRA on Wednesday gave few details about the review, a private letter sent to the industry in November and seen by Reuters showed it included liquidity risks associated with exposure to unlisted assets like commercial property, private equity and credit.Unlisted assets, whether wind farms and warehouses or private company shares, are popular in the pension sector and holdings can reach as high as 40% of all assets in some funds.APRA has long been concerned about how the sector prices these assets which rarely trade. A 2021 review found revaluation frameworks were “typically inadequate”. New standards were introduced last July, including quarterly asset valuations.($1 = 1.5186 Australian dollars) More

SINGAPORE (Reuters) – The dollar headed for its biggest monthly gain since September and the yen for its sharpest drop in nearly a year on Wednesday, as traders waited on a U.S. rates decision to round out January.The dollar has gained 2% against a basket of major currencies this month as markets dialled back expectations on the speed and scale of rate cuts in the face of strong U.S. economic data and pushback from central bankers.In Japan, meanwhile, tepid wage growth and cooling inflation dulled expectations for hikes, driving the yen down more than 4% on the dollar in January, its largest fall since Feb. 2023.The dollar was steady at $1.0844 per euro and a touch weaker at 147.23 yen early in the Asia day, with a summary showing discussion of ending negative interest rates at the Bank of Japan’s January meeting helping support the yen.The dollar index last sat at 103.36. Sterling hovered at $1.2698. [GBP/]Later, the Federal Reserve is expected to hold U.S. interest rates steady but flag cuts are coming by dropping language indicating it is weighing further hikes.Interest rate futures price a roughly 43% chance of a Fed rate cut in March, down from 73% at the start of the year.”The market reaction to the (Fed) meeting and its spillover onto most asset markets is likely to be largely captured by the impact on the probability of a rate cut at the March meeting,” said Deutsche Bank’s chief international strategist Alan Ruskin.The pricing tends to influence the euro/dollar rate, he noted, with a 50-50 probability consistent with the euro at $1.087. “A 100% probability of a rate cut would point to euro/dollar at $1.1080, while a rate cut that is fully ruled out for March would point the way to euro/dollar at $1.0660,” he said.Ahead of the Fed, purchasing managers index surveys are due in China and European inflation figures are expected. Australian inflation came in marginally below economist forecasts, reinforcing bets the central bank is done hiking.The Aussie slipped 0.2% to $0.6588. The New Zealand dollar was steady at $0.6133. [AUD/]Expectations of interest rate cuts in China have driven a strong rally in the bond market this month while the yuan has been squeezed by flight from China’s crumbling equity markets.The Chinese currency was steady at 7.1887 in offshore trade on Wednesday, down 0.9% for the month.========================================================Currency bid prices at 0037 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0846 $1.0845 +0.00% -1.74% +1.0847 +1.0843 Dollar/Yen 147.3650 147.6100 -0.16% +0.00% +147.5500 +147.2050 Euro/Yen 159.82 160.07 -0.16% +2.71% +160.0700 +159.6500 Dollar/Swiss 0.8618 0.8619 -0.01% +2.40% +0.8619 +0.8618 Sterling/Dollar 1.2695 1.2701 -0.04% -0.24% +1.2700 +1.2695 Dollar/Canadian 1.3399 1.3398 +0.02% +0.00% +1.3402 +1.3395 Aussie/Dollar 0.6587 0.6603 -0.23% -3.38% +0.6603 +0.6583 NZ Dollar/Dollar 0.6132 0.6136 -0.07% -2.96% +0.6136 +0.6124 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More