Economy

Barkin pointed out the importance of the first quarter’s price adjustments in determining the future direction of monetary policy. Federal Reserve officials are of the view that the current lending rates, which have reached a range of 5.25% to 5.5%, represent a peak. They are contemplating three rate cuts throughout the year, aiming for a “soft landing” of the economy. This approach seeks to maintain subdued growth and declining inflation while avoiding significant job losses.The anticipation of these potential rate cuts is based on the premise that the economy will continue to demonstrate positive signs, such as a normalization of the labor market and inflation rates nearing the Fed’s desired levels. This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

Hiring has throttled back from 2021 and 2022, but last year’s growth was still impressive by longer-term standards.The U.S. labor market ended 2023 with a bang, gaining more jobs than experts had expected and buoying hopes that the economy can settle into a solid, sustainable level of growth rather than fall into a recession.Employers added 216,000 jobs in December on a seasonally adjusted basis, the Labor Department reported on Friday. The unemployment rate was unchanged at 3.7 percent.Although hiring has slowed in recent months, layoffs remain near record lows. The durability of both hiring and wage gains is all the more remarkable in light of the Federal Reserve’s aggressive series of interest rate increases in the past couple of years. But a range of analysts warns that the coast is not yet clear and says the effects of those higher rates will take time to filter through business activity.“The real test for the labor market begins now, and so far it is passing the test,” said Daniel Altman, the chief economist at Instawork, a digital platform that connects employers with job seekers.Financial commentary in the past year has been dominated by dueling narratives about the economy. Most economists warned that the Fed’s driving up borrowing costs at a historically rapid pace would send the economy into a downturn. Heading into 2023, over 90 percent of chief executives surveyed by the Conference Board said they were expecting a recession. And many leading analysts thought that price increases could soften only if workers experienced significant job losses.But the resilience of the overall economy and consumer spending has so far defied that outlook: In June 2022, inflation was roughly 9 percent. Inflation has since tumbled to 3 percent while the unemployment rate has been largely unmoved.The economy gained 2.7 million jobs in 2023.Annual change in jobs More

LINTHICUM, Md. (Reuters) -Continued strong U.S. job growth and a low unemployment rate shows the Federal Reserve is not yet at the point where its efforts to control inflation risk a direct tradeoff with the central bank’s other goal of maintaining maximum employment, Richmond Fed President Thomas Barkin said on Friday.”Getting inflation under control is critically important and at this point we are still at 3.7% unemployment and 216,000 jobs added,” per month, Barkin said, referring to the results of the newly-released December jobs survey. “We’re still at a point where inflation is over our target and unemployment is arguably at or below,” levels consistent with maximum employment, Barkin said in comments to reporters following a presentation to the Maryland Bankers Association.At the Fed’s December 12-13 meeting some policymakers said they thought current high interest rates could soon put the Fed in the position of having to choose between further progress lowering inflation or a markedly higher unemployment rate. “I don’t think we’ve gotten to that…quite yet,” Barkin said, “but you can see it out there.” As it stands, he said he felt a so-called “soft landing,” with inflation controlled without the sort of large rise in unemployment that has followed many periods of tight monetary policy, was “increasingly conceivable.” Balancing the need for further downward pressure on inflation against the possible risks of a sharper-than-expected economic slowdown will be key to the Fed’s coming debate over when to lower the benchmark interest rate from the current 5.25% to 5.5% range that has been in place since July.At their December meeting a majority of Fed officials projected the policy rate would need to fall by three quarters of a percentage point over the course of the year, an outlook that gives no guidance on when that process might start. Investors expect rate cuts beginning in March, with a deeper reduction of around 1.5 percentage points over the year than Fed officials project.Barkin did not comment on his own rate outlook, but said that at this point he is still building “conviction” that inflation will in fact return to the 2% target.While one important measure of inflation is, on a six month basis, already below 2%, Barkin said he remained concerned about how much recent progress on inflation has depended on weaker prices for goods, while inflation for housing and in some service industries remains above target.”You’ve got this goods deflationary cycle which is masking a continued inflationary cycle on services and shelter. That doesn’t have to be a bad thing. You can get to 2% in lots of ways,” Barkin said. “My metric is conviction…I don’t have any objection conceptually to toggling rates back toward normal levels as you build increasing conviction and confidence that inflation is on a convincing path back to your target.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors’ hopes for a strong year for US Treasuries have been boosted by signals that the Federal Reserve could soon slow the wind-down of its balance sheet.In the minutes of the central bank’s December meeting, published this week, some officials suggested the Fed review its policy of shrinking its balance sheet, known as “quantitative tightening”.A pivot from the Fed, as it considers cutting rates from their current 22-year high of 5.25-5.5 per cent, could bolster Treasuries’ prices and reduce volatility in a market that has been unsettled by a deluge of supply. The central bank has in recent years been the biggest buyer of US government debt.“This is a tailwind for the bond market. It should help us,” said Bob Michele, chief investment officer and head of the global FICC group at JPMorgan Asset Management. The end of QT would remove “a concern for investors who are sitting in cash, wondering if they should come into the bond market”.After pumping trillions into the financial system to stabilise the economy at the start of the coronavirus pandemic, the Fed began slimming its balance sheet from $9tn in May 2022 to help contain the worst surge in inflation since the 1980s.Since ending its bond purchases, the size of its holdings of official sector debt has fallen to $7.2bn. Now, with price pressures seemingly under control — and rate cuts looming — the text of the minutes show some policymakers want a discussion on the circumstances under which those QT plans can be revised.“This seems like a first step towards ending QT,” said Joseph Abate, a strategist at Barclays. The nascent signs of a debate come as the Treasury department has borrowed more to cover a widening budget deficit, which stands at $1.7tn. The surge of US government bond issuance in the second half of 2023 helped drive Treasury yields to their highest levels in more than a decade, and waning demand from big banks and foreign investors was expected to worsen the effects this year.“This will bring down the volatility of the rates market,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “One of the risks this year was the big auctions that Treasury had to execute on. When you have to do such big auctions when the Fed is doing QT, you have risks. This lowers some of [those] risks.”An end to QT would reduce the amount of debt Treasury needs to issue to private investors this year. Excluding Treasury bill issuance — the short-term debt that matures in anywhere from a few days to a year — issuance this year is expected to be $1.8tn if QT ends in June, versus $2.1tn if it ends in December, according to estimates from Meghan Swiber, a US rates strategist at Bank of America. A New York Fed survey of Treasury dealers published on Thursday suggested that, as of December, big banks had been expecting the Fed to end QT in the fourth quarter of 2024. Following the publication of the minutes, some investors, including Michele, now expect the run-off to end by summer. Other Fed watchers are more cautious about expecting a decision so fast. A shift in QT policy comes as central bank officials have indicated they are likely to make three quarter-point rate cuts this year, calling time on a series of rate rises aimed at tackling soaring inflation.“There’s a desire to avoid any sort of liquidity stress at a point when the Fed is going to be pivoting from what has been a historic tightening cycle,” said Gregory Daco, chief economist at EY. “We know that these pivot points tend to be a sensitive time for markets.” Officials have previously said that the Fed would determine when to end QT by assessing the level of reserves in the financial system — as well as a range of money market indicators, such as the spread between private lenders’ funding costs and official interest rates. The Fed currently rolls off up to $60bn in Treasuries and $35bn in mortgage-backed securities each month. “Talk of QT is quite premature,” said Drew Matus, chief market strategist at MetLife Investment Management. “The balance sheet remains bloated relative to [gross domestic product]. You need to shrink it so that, if there’s another downturn at some point, you can restart quantitative easing.” QT’s end would likely be gradual, with the Fed expected to increase the portion of the debt holdings it reinvests over several months. That process could be doubly beneficial for Treasuries, as the Fed is likely to reinvest both its maturing Treasury bonds, and its maturing mortgage-backed securities into the Treasury market, said Swiber. That’s because the Fed has said that it is ultimately interested in having only Treasury debt on its balance sheet. An early end to QT may also ward off fears of a repeat of the 2019 crisis in the repo market, when the Fed last tightened its balance sheet. Then, rates in short-term funding markets jumped after a sudden drop in reserves, ultimately forcing the Fed to intervene in the market. While reserves are still ample and there are not clear signs of stress in the market, overnight funding rates have been creeping higher. “This points to a Fed that wants to err on the side of caution,” said Mike de Pass, global head of rates trading at Citadel Securities. “It’s also important to remember how poorly it ended last time.” More

(Reuters) – U.S. corporate bond market issuance is projected to slow next week from a hectic start to the year after economic data sent mixed signals on Friday but tempered expectations of an interest rate cut in March.The first week of 2024 saw nearly $59 billion in high-grade bond issuance, beating forecasts of $50 billion to $55 billion. The rush was led by top-rated companies aiming to take advantage of relatively lower borrowing costs due to a tightening of credit spreads, the premium charged over Treasuries, and decline in Treasury yields at the end of 2023.They were met with strong demand as investors aimed to lock in yields that may not be available if the Federal Reserve starts to cut U.S. interest rates later this year.But economic data releases on Friday sent mixed signals and led to sharp moves in Treasury yields. Yields hit three-week highs early in the trading session and then nosedived, taking the 10-year Treasury back below 4%.The volatility in yields and release of bank earnings next week could limit supply for new bonds.”Next week is going to be pretty light, pretty moderate in comparison,” said Guy Lebas, chief fixed income strategist at asset manager Janney Capital Management. Bond syndicate desks expect $35 billion on average in issuance next week, according to Informa Global Markets.As such, these desks expect a steady flow of new bond issuance in January as borrowing costs were still lower than the fourth quarter of 2023.Investment-grade index yields averaged 5.3% on Jan. 4 compared to 5.88% in the fourth quarter, according to ICE BAML data.Dan Krieter, director of U.S. investment grade strategy at BMO, noted companies would save nearly 85 basis points now compared to October and November when yields averaged 6.13%.  Investors are still attracted to high-grade bonds, as seen in $5 billion that flowed into related funds and ETFs for the week ended Jan. 3, according to a BoFA Global research note.That was higher than $3.15 billion the prior week and the biggest weekly inflow since July. More

A second banking source with knowledge of the Thursday evening meeting said the government spoke “of its intention” of swapping local debt maturing in 2024 for notes maturing in 2025 and through 2027, in a peso amount that could reach the equivalent of $71 billion. The source said no specific amounts were discussed for the debt management.”There wasn’t and isn’t a concrete proposal. The economic program was presented and there was an exchange of ideas regarding liability management,” the ministry source said. Earlier on Friday, Bloomberg News reported on the debt swap, saying the government could issue new peso bonds in February to swap for the 2024 maturities.A third banking source said the recently appointed Argentine government has been exploring several options to clear their short-term external liabilities. “It is part of the economic adjustment along with negotiations with the IMF and passage of important reforms,” the source said.Argentina and the International Monetary Fund were due to begin meetings on Friday to discuss a delayed review of their $44 billion program. More

NEW YORK (Reuters) – A potential ending to the Federal Reserve’s balance sheet reduction measures this year bolsters the case for Treasuries to extend their 2023 rally, investors said, though many believe factors such as fiscal concerns could counterbalance gains. Minutes from the Fed’s Dec. 12-13 policy meeting, released earlier this week, showed some officials are already discussing what it would take to end the shrinkage of the central bank’s cash and bond holdings.That process, known as quantitative tightening, has seen the Fed’s balance sheet contract by nearly $100 billion per month as it allows Treasury and mortgage bonds it owns to mature and not be replaced. In doing so, it has reduced its balance sheet by just over $1 trillion, to $7.764 trillion on Dec. 27, complementing the aggressive rate increases it started in early 2022.Some market participants said perceptions that an end to quantitative tightening was approaching could be another positive factor for bond markets in a year during which the Fed is expected to cut interest rates after a tightening cycle that saw them rise 525 basis points. Yields on the benchmark 10-year Treasury, which move inversely to prices, have plunged over 100 basis points from 16-year highs hit in October on anticipation of rate cuts. That reversal spared bond markets for what could have been an unprecedented third straight year of declines.Still, factors such as widening fiscal deficits – estimated to hit $20 trillion in the coming decade – and possibly lower demand for U.S. Treasuries from large foreign buyers are likely to keep bond prices from rising too far, market participants said.”The slowing down of quantitative tightening is a positive, but I think the deficit situation is worse,” said Vishal Khanduja, co-head of broad markets fixed income at Morgan Stanley Investment Management.Meanwhile, timing the end of QT could be difficult, as it may not necessarily coincide with reductions in interest rates.Analysts at Deutsche Bank said on Thursday the Fed may end QT as early as June if it starts cutting interest rates in response to a possible recession – an economic scenario the bank’s strategists forecast for this year. On the other hand, the Fed could extend QT into next year if the economy experiences a so-called soft landing, where inflation cools and growth remains resilient, the bank said. A more conservative view came from so-called primary dealers. Wall Street’s biggest banks – surveyed before the Fed’s Dec. 12-13 meeting – predicted policymakers would end balance sheet reduction in December 2024, later than they had previously forecast. The results of the survey were released on Thursday. Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said the Fed’s balance sheet measures are likely to continue running in parallel with changes in interest rates. However, economic data such as Friday’s better-than-expected jobs report argue against balance sheet reduction in the near term, he added.While an unwind of quantitative tightening could provide a measure of support for bonds, “quantitative policy is a piece of the puzzle, but frankly not as big of a piece as is often considered,” he said. More

For close to a century, Toyota prided itself on its ability to constantly trim the costs of making its complex, highly engineered vehicles. But when Takero Kato, the head of the Toyota division tasked with building electric vehicles, travelled through China in 2018 he was shocked by what he found. “For the first time, I came face to face with the competitiveness of Chinese components,” he told the company’s internal newspaper, Toyota Times, in November. “Laying eyes on equipment that I had never seen in Japan and their state of the art manufacturing, I was struck by a sense of crisis,” he recalled. “We’re in trouble!”Kato was right to worry. Last year China overtook Japan as the world’s biggest auto exporter, with data from Shanghai-based advisory firm Automobility showing Chinese auto exports have nearly quintupled since 2020 to approach 5mn last year.In the final quarter of 2023 BYD, the Shenzhen-based company backed by Warren Buffett’s Berkshire Hathaway group, outsold Tesla for the first time, sending a powerful warning signal to the global auto industry. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.BYD’s sales come mostly from the domestic market, which it dominates. But the group is one of several Chinese EV makers turning their sights to foreign shores. China’s entrants — from publicly listed BYD to state-owned Chery — plan to use new regional operations in places like Hungary and Mexico to enter western markets with cheaper electric models, securing their global dominance and challenging storied incumbents such as General Motors, Ford and Volkswagen. “No one can match BYD on price. Period,” says Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights. “Boardrooms in America, Europe, Korea and Japan are in a state of shock.”While the US government has responded with a slew of subsidies to encourage domestic manufacturing, the prospect of millions of low-cost, high-tech cars made by Chinese companies hitting European shores poses a dilemma for lawmakers there.A flood of cheap Chinese car imports could be disastrous for Europe’s incumbent carmakers, with the EU already considering import tariffs to limit the damage. BYD electric cars waiting to be loaded on a ship at a Chinese port. BYD exported nearly 250,000 cars last year More