Economy

SINGAPORE (Reuters) – The yen dipped slightly on Monday as the Bank of Japan (BOJ) kicked off its two-day monetary policy meeting, with traders nervously awaiting a decision on whether the dovish central bank could finally unwind its ultra-loose monetary settings.In the broader market, currencies started the week on a cautious note after large swings last week mainly driven by a slew of central bank meetings, which included rate decisions from the Federal Reserve, the European Central Bank (ECB) and the Bank of England (BoE).The yen fell 0.2% to 142.41 per dollar in early Asian trade, reversing some of the nearly 2% gain it made last week on the back of the dollar’s decline.The Japanese currency has had a volatile few weeks as markets struggle to get a grip on how soon the BOJ could phase out its negative interest rate policy, with comments from Governor Kazuo Ueda earlier this month initially sparking a huge rally in the yen.That was later reversed on news that a policy shift was unlikely to come as early as December, and investors now await Tuesday’s BOJ decision for further clarity on the bank’s rate outlook.”The meeting will be relevant and important in terms of what the BOJ does, and there are some in the market that still expect that maybe there’s a surprise,” said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY).”We tend to lean to the idea that they’re still on wait-and-see mode… for more evidence, in particular the labour market and wages growth are rising towards the 2% level, at the minimum.”The best case scenario would be for the bank to set the stage for things to come in 2024, conditional on these economic outcomes being delivered.”Against the euro, the yen edged 0.1% lower to 155.11. The Australian dollar rose 0.13% to 95.45 yen.RATE CUTS LOOM?Elsewhere, the dollar stood not too far from four-month lows on the British pound and nearly five-month lows on the Australian and New Zealand dollars hit last week, after Fed officials hinted at rate cuts next year.Sterling last bought $1.2678, while the kiwi rose 0.19% to $0.6219.The greenback, which has for most of 2022 and 2023, drawn support from a slew of aggressive rate hikes from the Fed and expectations of higher-for-longer rates, tumbled roughly 1.3% against a basket of currencies last week in the wake of the Fed’s policy meeting.The dollar index was last 0.05% lower at 102.57.”The Fed has officially opened the door to the next cycle of rate cuts,” said Franck Dixmier, global chief investment officer for fixed income at Allianz (ETR:ALVG) Global Investors.”While the Fed may have been criticised for taking too long to raise rates, it clearly has no intention of wasting any time in lowering them.”The ECB and BoE likewise kept interest rates steady at their respective policy meetings last week, though unlike the Fed, both pushed back against expectations of imminent rate cuts.”(ECB President) Christine Lagarde has made it clear that rate cuts weren’t on the table, marking a stark contrast to the Fed’s approach, which remains intensely focused on the growth risks associated with maintaining higher rates for an extended period,” said Monica Defend, head of Amundi Investment Institute.”This divergence is particularly notable given the euro zone’s recent weaker economic performance and more rapid disinflation compared to the U.S. Meanwhile, the (BoE) maintains a cautious stance, showing no indication of deviating from its ‘higher-for-longer’ policy.”The euro was last 0.07% higher at $1.0900, helped by a weaker dollar, though the single currency continues to be weighed by a darkening growth outlook in the euro zone.Data last week showed the downturn in the bloc’s business activity surprisingly deepened in December, indicating its economy is almost certainly in recession. More

SYDNEY (Reuters) – Asia stocks got off to a cautious start on Monday in a week where Japan’s central bank might edge further away from its uber-easy policies, while a key reading on U.S. inflation is expected to underpin market pricing of interest rate cuts there.The Bank of Japan (BOJ) meets Tuesday amid much chatter that it is considering how and when to move away from negative interest rates. None of the analysts polled by Reuters expected a definitive move at this meeting, but policy makers might start laying the groundwork for an eventual shift. April was favoured by 17 of 28 economists as the kick-off for negative rates to be scrapped, making the BOJ one of the few central banks in the world actually tightening.”Since the last meeting in October, 10-year JGB yields have fallen and the yen has appreciated, giving the BOJ little incentive to revise policy at this stage,” said Barclays economist Christian Keller.”We think the BOJ will wait to confirm the result of the ‘shunto’ wage negotiations next spring, before moving in April.”Japan’s Nikkei slipped 0.8% in early trade, weighed in part by a firm yen. MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.2%.South Korea’s main index was flat, showing no obvious reaction to reports North Korea had fired a ballistic missile off its east coast.S&P 500 futures inched up 0.1%, while Nasdaq futures were near flat.Over in the United States, a reading on core personal consumption expenditure (PCE) index is forecast by analysts to rise 0.2% in November with the annual inflation rate slowing to its lowest since mid-2021 at 3.4%.Analysts suspect the balance of risk is on the downside and a rise of 0.1% for the month would see the six-month annualised pace of inflation slow to just 2.1% and almost at the Federal Reserve’s target of 2%.Markets reckon the slowdown in inflation means the Fed will have to ease policy just to stop real rates from rising, and are wagering on early and aggressive action.New York Fed President John Williams did try to rain on the parade on Friday by saying there was no talk of easing by policy makers, but markets were disinclined to listen.MARCH MADNESSTwo-year Treasury yields ticked up only slightly in response, and still ended the week down a steep 28 basis points at the lowest close since mid-May.Yields on 10-year notes stood at 3.93%, having dived 33 basis points last week in the biggest weekly fall since early 2020. Fed fund futures imply a 70% chance of a rate cut as early as March, while May has 39 basis points (bp) of easing priced in. The market also implies at least 140 basis points of cuts for all of 2024. “We now forecast three consecutive 25bp cuts in March, May, and June, followed by a slower pace of one cut per quarter until reaching a terminal rate of 3.25-3.5%, 25bp lower than we previously expected,” wrote analysts at Goldman Sachs in a client note.”This implies five cuts in 2024 and three more cuts in 2025.”If correct, such easing would allow some Asian central banks to ease earlier, with Goldman bringing forward cuts in India, Taiwan, Indonesia and Philippines.The investment bank also raised its forecast for the S&P 500 which it now sees ending 2024 at 5,100, while decelerating inflation and Fed easing would keep real yields low and support a price-to-earnings multiple greater than 19.The market’s dovish outlook for U.S. rates saw the dollar slip 1.3% against a basket of currencies last week, though the Fed is hardly alone in the rate-cutting stakes.Markets imply around 150 basis points of easing by the European Central Bank next year, and 113 basis points of cuts from the Bank of England.That outlook restrained the euro at $1.0894, having pulled back from a top of $1.1004 on Friday. The dollar was looking more vulnerable against the yen at 142.40, having slid 1.9% last week.The drop in the dollar and yields should be positive for gold at $2,016 an ounce, though that was short of its recent all-time peak of $2,135.40. [GOL/]Oil prices were trying to steady after hitting a five-month low last week amid doubts all OPEC+ producers will stick with caps on output. [O/R] Brent nudged up 72 cents to $77.27 a barrel, while U.S. crude rose 68 cents to $72.11 per barrel. More

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(Reuters) – A look at the day ahead in Asian markets.Asia kicks off the last full trading week of 2023 on Monday, with the U.S. Federal Reserve-fueled surge in risk appetite from last week losing steam and investors gearing up for the last major central bank meeting of the year from Japan.The Bank of Japan’s policy decision on Tuesday is the main event in Asia this week, and investors also have rate decisions from the People’s Bank of China and Bank Indonesia, Reserve Bank of Australia meeting minutes, and Japanese consumer price inflation to navigate.Investor sentiment appears to be mixed. The MSCI Asia ex-Japan index last week rose 3% for its best week since July, outperforming the MSCI World index, which rose 2.6%. Still, the MSCI World is up seven weeks in a row, a winning streak not seen for six years. Interest rate futures markets are pricing in 150 basis points of rate cuts from the Fed next year, despite pushback from some Fed officials. The recent slide in bond yields and the dollar could continue to support risk assets this week.But the rally in stocks and bonds has been pretty remarkable, and with the holiday season fast approaching investors may be tempted to reduce exposure and take profit.Especially with the BOJ decision and guidance on Tuesday. None of the 28 economists in a Reuters poll predicted any changes to policy at this meeting, but six reckon the BOJ will start dismantling ultra-loose conditions in January.Over 80% of economists expect the BOJ to ditch negative interest rates by the end of next year. This might be a stretch, given the BOJ’s ability to surprise and the fact that 12 months is a very long time. Whenever the BOJ does start raising rates, however, it will be moving against the global tide – markets expect the Fed, European Central Bank, Bank of England and several other major central banks to be cutting rates to some extent next year.One central bank leaning towards easing policy rather than tightening is the PBOC, which is battling against deflation and sub-par growth. But there appears to be no clear appetite from the Beijing to significantly ease policy. China’s CSI 300 index of blue chip stocks fell 1.7% last week, its fifth consecutive weekly loss. The index is down 4.4% in December, on track for a fifth monthly loss in a row for the first time since the index was launched in December, 2004.Economic indicators last week showed that key November data were weaker than expected and the pace of deflation accelerated. As a result, China’s economic surprises index has now slipped into negative territory and is at its lowest since mid-October.Here are key developments that could provide more direction to markets on Monday:- Indonesia trade (November)- Australia business sentiment (November)- Germany Ifo business sentiment index (December) (By Jamie McGeever; Editing by Deepa Babington) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Michael Gove, communities secretary, will on Monday announce a 6.5 per cent increase in funding for local councils in England, but the rise is unlikely to quell fears of a wave of de facto town hall bankruptcies.Gove will announce a provisional package worth more than £64bn with extra support for social care and housing, according to multiple government officials, but it will fall short of the help demanded by councils.The squeeze on council budgets is a political problem for Rishi Sunak’s government, with concerns about cuts to local services expected to loom large next year, ahead of a general election.Gove this month admitted he was “concerned” at warnings from the Local Government Association this month that one in five councils were heading for the rocks this or next year as a result of lack of government funding.Although he told MPs that this estimate “was the top of the scale”, he acknowledged: “It is certainly the case that local government faces significant funding pressures.”Councils have been hit by increasing costs and sharply rising wages with acute pressure on social care and the provision of special educational needs, prompting warnings that essential services will be hit.Gove is urging the Treasury to provide more cash to avoid a crunch in local services in an election year, according to people briefed on the discussions, ahead of a final settlement in February. “We recognise the financial situation we are in, but Michael will always push for the maximum he can,” said one government insider. A Treasury official said conversations with Gove’s department were “ongoing”.The number of local authorities forced to issue “Section 114 notices”, where a council signals its inability to fulfil a legal duty to balance the books, has risen sharply in recent years. As many as nine councils have issued notices since 2018, including Birmingham, Nottingham and Woking this year. An LGA survey found that almost 20 per cent of senior council executives thought it was “very or fairly likely” they would have to issue a Section 114 order this or next year.The 6.5 per cent provisional settlement for 2024/25 was described by Gove’s team as “above inflation”; the October inflation rate was 4.6 per cent but the September figure, used as a reference point for uprating benefits, was 6.7 per cent. This year councils received a 9.4 per cent increase in funding.A government source said: “Councils will understandably always want more resources, but this £64bn funding package provides certainty for councils to deliver vital public services and value for money for taxpayers.”Local council budgets were squeezed hard during the post-financial crash “austerity” period overseen by former chancellor George Osborne. The pandemic and high inflation have since driven many town halls to the brink.Gove told the Commons levelling up committee that local councils that had issued Section 114 orders had seen “failures of leadership, management and governance and taken unmerited risks”.But he admitted: “It may be the case in the future that there are some local authorities that have been relatively well managed so far that will face particularly acute pressures.”Clive Betts, Labour chair of the committee, said that councils across England “are facing very severe financial and service pressures”.Meanwhile Gove will use the discussions over the final local government settlement to put financial pressure on councils not to adopt “four-day working weeks” on full pay.Gove’s department announced in October it did not support any trial by local councils of a four-day week concept, where employees have their hours reduced by 20 per cent with no loss of pay.Liberal Democrat-led South Cambridgeshire is running an extended trial of the idea. Proponents said it boosts staff morale, work-life balance and productivity and helps recruitment in a tight labour market.Gove’s allies said the idea was bad for local service delivery, did not deliver value for money and should be stopped. More

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