Economy

(Reuters) – A look at the day ahead in Asian markets.Interest rate decisions and guidance from New Zealand and Thailand, and inflation figures from Australia will be the main events for Asian markets on Wednesday, as a curiously directionless week for risk assets reaches the midway point.While emerging market and Asian equities clocked up decent gains on Tuesday, Wall Street struggled to make much headway despite a seemingly constructive market and economic backdrop.The dollar, Treasury yields, and stock market volatility all fell, and U.S. consumer confidence was higher than expected. Fed Governor Christopher Waller – thought to be close to Fed Chair Jerome Powell’s thinking on policy – also signaled that U.S. interest rates could be cut in the months ahead.The dollar and two-year Treasury yield slid to fresh three-month lows, the 10-year yield hit a two-month low and the VIX volatility index fell back to recent lows last seen before the pandemic. Yet the S&P 500 and Nasdaq ended flat.Perhaps that broad loosening of financial conditions will give Asian markets a bigger boost on Wednesday, although the underperformance of Chinese stocks shows little sign of abating even as the central bank chief pledged to keep monetary policy “accommodative” to provide support to the economy.”The first of the main policy events in the region on Wednesday will be the Reserve Bank of New Zealand’s policy decision. It is widely expected to hold the cash rate at 5.50%, so investors’ interest will lie more in the bank’s guidance.Traders expect up to 50 basis points of easing next year, with the first cut coming in July. That’s about half of what the Fed is expected to do, so it’s no wonder the New Zealand dollar is outperforming – it is up 6.5% in the past month.Thailand’s central bank is also expected to keep rates on hold, at 2.50%, through the middle of 2025. Disappointing third quarter growth and the exchange rate’s 7% appreciation over the last month will have eased any lingering pressure on policymakers to raise rates again.Finally, figures from Australia are expected to show that price pressures cooled in October, with the annual rate of weighted consumer inflation slowing to 5.20% from 5.60%.Reserve Bank of Australia Governor Michele Bullock on Tuesday reaffirmed that monetary policy was restrictive and working to dampen demand, though inflation in the service sector was proving sticker than hoped.The RBA is expected to keep its cash rate on hold at 4.35% next week, although there is around a 10% chance of a quarter point hike, according to futures market pricing.Here are key developments that could provide more direction to markets on Wednesday:- New Zealand interest rate decision- Thailand interest rate decision- Australia inflation (By Jamie McGeever; Editing by) More

WASHINGTON (Reuters) -The U.S. Senate will begin consideration of legislation including aid for Israel and Ukraine as soon as next week, Senate Majority Leader Chuck Schumer said on Tuesday, adding that an aid bill is needed even if there is no agreement with Republicans on funding for border security measures.”I’m going to put them on the floor next week, hopefully with bipartisan support, because that’s the only way you can get it done,” Schumer told a weekly news conference.Biden asked Congress last month to approve $106 billion in national security funding, including aid for Ukraine as it battles a Russian invasion, support for Israel after the Oct. 7 attacks by Hamas militants and money for additional security at the U.S. border with Mexico.But the funding has not been approved, raising concerns that funds for Ukraine in particular might never pass, particularly after the Republican-led House passed a bill including assistance for Israel, but not Ukraine.Senator Patty Murray, who chairs the Senate Appropriations Committee, said the Senate must pass a funding bill that includes security assistance for Ukraine and Israel, humanitarian assistance and funding for U.S. allies in the Indo-Pacific.”We cannot do half our job and essentially tell the world America only stands with some of its allies some of the time,” Murray said.Biden’s request to Congress included $60 billion for Ukraine – about half to replenish U.S. military stockpiles – as well as about $14 billion each for Israel and security at the border with Mexico.Senate Republicans said they would reject a supplemental spending bill if it did not include money for the border.A dramatic increase in the number of undocumented migrants crossing into the southwestern United States has challenged the country’s capacity to detain and process newcomers, posing a political challenge for Biden as he seeks re-election next year.Congress has approved $113 billion for Ukraine since the invasion began in February 2022. That funding could be depleted within a few months. More

Stocks and bonds were buoyed after even inflation-focused Federal Reserve officials suggested that rates may stay steady.Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn.Several Fed officials — including two who often push for higher interest rates — hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Economic growth is cooling, reducing the urgency for additional moves.Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled “Something Appears to Be Giving,” an update on a previous speech that he had titled “Something’s Got to Give.”“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” Mr. Waller said. “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”Michelle Bowman, another Fed governor who also tends to be inflation-focused, said that she saw risks that factors like higher services spending or climbing energy costs could keep inflation elevated. She said that it was still her basic expectation that the Fed would need to raise rates further. Even so, she did not sound dead-set on such a move, noting that policy was not on a “preset course.”“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way,” Ms. Bowman said.Taken together with other recent remarks from Fed officials, the latest comments offer an increasingly clear signal that central bank policymakers may be finished with their campaign to increase interest rates in a bid to slow demand and cool inflation. Interest rates are already set to a range of 5.25 to 5.5 percent. The Fed’s next meeting will take place on Dec. 12-13, and investors are overwhelmingly betting that the central bank will hold rates steady, as policymakers did at their last two meetings.Investors appeared buoyed by the Fed officials’ comments. Higher interest rates raise costs for consumers and companies, typically weighing on markets. The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, fell noticeably on Tuesday morning, extending its drop through the afternoon. Yields fall as prices rise. The move initially provided a tailwind to the stock market, helping lift the S&P 500 from its earlier fall to a gain of 0.4 percent, before the rally eased and the index drifted lower to an eventual rise of 0.1 percent.Fed officials have been nervously watching continued strength in the economy: Gross domestic product expanded at a breakneck 4.9 percent annual rate in the third quarter. The concern has been that continued solid demand will give companies the wherewithal to continue raising prices quickly.But recently, job growth has eased and consumer price inflation has shown meaningful signs of a broad-based slowdown. That is giving policymakers more confidence that their current policy setting is aggressive enough to wrestle price increases fully under control.Still, as both Mr. Waller and Ms. Bowman made clear, Fed officials are not yet ready to definitively declare victory — data could still surprise them. And while a recent run-up in longer-term interest rates had been helping to cool the economy, the move has already begun to reverse as investors predict a gentler Fed policy path.The 10-year Treasury yield, one of the most important interest rates in the world, has fallen drastically in recent weeks after shooting up in previous months, curtailing a sell-off in the stock market and lifting investor optimism. But higher stock prices and cheaper borrowing costs could prevent growth and inflation from slowing as quickly.“The recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job,” Mr. Waller said on Tuesday. More

LONDON (Reuters) – An influential committee of European Union lawmakers voted on Tuesday in favour of a draft law aimed at shifting clearing of euro-denominated derivatives from a post-Brexit London to the bloc.Long a Brexit battleground between London and Brussels, the EU wants better oversight of clearing in euro denominated interest rate swaps bought by EU-based market participants, the bulk of which are cleared by the London Stock Exchange Group (LON:LSEG) in the United Kingdom.The European Parliament’s economic affairs committee voted on Tuesday to approve the draft law that requires EU banks and asset managers to have an “active account” with an EU-based clearing house, in practice Deutsche Boerse (ETR:DB1Gn) in Frankfurt and the Madrid Exchange, for rate swaps.However, the committee said that due to the “novelty of the requirement”, requiring a specific portion of trades to be cleared through the account should only be “phased in gradually”.The European Commission could only impose mandatory volumes after it completes a cost/benefit analysis to assess the impact on financial stability and international competitiveness of EU counterparties, the committee said. EU securities regulator ESMA would also have to become the direct supervisor of clearers based in the EU.”Providing the conditions for clearing members and clients to want to clear with EU CCPs (clearing houses) is the single, most effective and most sustainable way to increase clearing in the EU,” said Danuta Huebner, a centre-right member of the committee who negotiated the compromise among lawmakers.An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes and legal documentation, the committee said.An account must also demonstrate that its functioning would not be affected in the event of a significant and sudden increase in clearing activity, meaning it could cope with extreme market volatility in a crisis.Parliament said it now intended to begin negotiations with EU states, who have joint say on the final text, before Christmas with completion before parliamentary elections next June.Access for UK based clearers such as LSEG and ICE Clear, which clears Euribor futures, is due to expire in June 2025.LSEG CEO David Schwimmer has said he is “optimistic” that clearing in London for EU customers would continue after that date.EU banks have warned that being cut off from global clearing pools in London would put them at a competitive disadvantage to international rivals. More

(Reuters) – The labels “dove” and “hawk” have long been used by central bank watchers to describe the monetary policy leanings of policymakers, with a dove more focused on risks to the labor market and a hawk more focused on the threat of inflation.The topsy-turvy economic environment of the coronavirus pandemic sidelined those differences, turning U.S. Federal Reserve officials at first universally dovish as they sought to provide massive accommodation to a cratering economy, and then, when inflation surged, into hawks who uniformly backed aggressive rate hikes. Now, as Fed policymakers note improvement on inflation and some cooling in the labor market but also stronger-than-expected economic growth, divisions are more evident, and the choices more varied: to raise rates again, skip for now but stay poised for more later, or take an extended pause.All 12 regional Fed presidents discuss and debate monetary policy at Federal Open Market Committee (FOMC) meetings, held eight times a year, but only five cast votes at any given meeting, including the New York Fed president and four others who vote for one year at a time on a rotating schedule.The following chart offers a stab at how officials currently stack up on their outlook for Fed policy and how to balance their goals of stable prices and full employment. The designations are based on comments and published remarks; for more on the thinking that shaped these hawk-dove designations, click on the photos in the graphic.Over time Reuters has shifted policymaker designations based on fresh comments and developing circumstances – for an accounting of how our counts have changed please scroll to the bottom of this story.Dove Dovish Centrist Hawkish Hawk   Patrick John Jerome Michelle Harker, Williams, New Powell, Bowman, Philadelph York Fed Fed Governor, ia Fed President, Chair, permanent President, permanent permanent voter: “My 2023 voter: “Right voter: baseline voter: “A now we need “If it economic decrease to keep this becomes outlook in the restrictive appropria continues policy stance of te to to expect rate is policy in tighten that we not place for policy will need something some time.” further, to that is Oct. 18, 2023 we will increase likely to not the happen in hesitate federal the short to do funds rate term.” so.” Nov. further.” Nov. 8, 9, 2023 Nov. 28, 2023 2023     Raphael Philip Christoph Loretta Bostic, Jefferson, er Mester, Atlanta Vice Chair: Waller, Cleveland Fed “We are in a Governor, Fed President, sensitive permanent President, 2024 period of voter: “I 2024 voter: “I risk am voter: think management, increasin “We’re where we where we have gly going to are now to balance confident have to will be the risk of that see much sufficient not having policy is more ly tightened currently evidence restrictiv enough, well that e to get against the positione inflation us to the risk of d to slow is on that 2% level policy being the timely for too economy path back inflation. restrictive.” and get to 2%.” ” Nov. 3, Oct. 9, 2023 inflation Nov. 16, 2023 back to 2023 2%.” Nov. 28, 2023     Michael Barr, Neel   Vice Chair of Kashkari, Supervision, Minneapol permanent is Fed voter: The President Fed is “at or , 2023 near the voter: peak” of “When interest activity rates.” Nov. continues 17, 2023 to run this hot, that makes me question if policy is as tight as we assume it currently is.” Nov. 7, 2023     Lisa Cook, Lorie   Governor, Logan, permanent Dallas voter:  “I Fed see risks as President two-sided, , 2023 requiring us voter: to balance “We have the risk of seen some not retraceme tightening nt in enough that against the 10-year risk of yield and tightening financial too much.” condition Nov. 16, 2023 s, and so I’ll be watching to see whether that continues and what that means for the implicati ons of policy,” Nov. 7, 2023     Austan Goolsb Thomas   ee, Chicago Barkin, Fed Richmond President, Fed 2023 voter: President “If we hit , 2024 the targets voter: that we “Whether expect to a hit, then we slowdown would be on that path to get settles to 2%, and inflation that’s what I requires call the more from golden path.” us Nov. 17, 2023 remains to be seen.” Nov. 9, 2023     Mary Daly,     San Francisco Fed President, 2024 voter: “We can take our time to do it right.” Nov. 17, 2023     Susan     Collins, Boston Fed President, 2025 voter: The Fed should be “patient and resolute, and I wouldn’t take additional firming off the table.” Nov. 17, 2023 Note: Fed policymakers began raising interest rates in March 2022 to bring down high inflation. Their most recent policy rate hike, to a range of 5.25%-5.5%, was in July.Most policymakers as of September expected one more rate hike by year’s end, but recently many have expressed more confidence that none will be needed. Neither Jeff Schmid, Kansas City Fed’s president since August and a voter in 2025, nor Adriana Kugler, a permanent voter who was confirmed to the Fed Board in September, have yet made any substantive policy remarks. The St. Louis Fed has begun a search to succeed its president, James Bullard, who took a job in academia; the new chief will be a 2025 voter.Below is a Reuters’ count of policymakers in each category, heading into recent Fed meetings.FOMC Date Dove Dovish Centris Hawkish Hawk t Oct/Nov ’23 0 2 7 5 2 Sept ’23 0 4 3 6 3 June ’23 0 3 3 8 3 March ’23 0 2 3 10 2 Dec ’22 0 4 1 12 2 More

Small businesses and risky borrowers face rising costs from the Federal Reserve’s moves, but the biggest companies have avoided taking a hit.The prediction was straightforward: A rapid rise in interest rates orchestrated by the Federal Reserve would confine consumer spending and corporate profits, sharply reducing hiring and cooling a red-hot economy.But it hasn’t worked out quite the way forecasters expected. Inflation has eased, but the biggest companies in the country have avoided the damage of higher interest rates. With earnings picking up again, companies continue to hire, giving the economy and the stock market a boost that few predicted when the Fed began raising interest rates nearly two years ago.There are two key reasons that big business has avoided the hammer of higher rates. In the same way that the average rate on existing household mortgages is still only 3.6 percent — reflecting the millions of owners who bought or refinanced homes at the low-cost terms that prevailed until early last year — leaders in corporate America locked in cheap funding in the bond market before rates began to rise.Also, as the Fed pushed rates above 5 percent, from near zero at the start of 2022, chief financial officers at those businesses began to shuffle surplus cash into investments that generated a higher level of interest income.The combination meant that net interest payments — the money owed on debt, less the income from interest-bearing investments — for American companies plunged to $136.8 billion by the end of September. It was a low not seen since the 1980s, data from the Bureau of Economic Analysis showed.That could soon change.While many small businesses and some risky corporate borrowers have already seen interest costs rise, the biggest companies will face a sharp rise in borrowing costs in the years ahead if interest rates don’t start to decline. That’s because a wave of debt is coming due in the corporate bond and loan markets over the next two years, and firms are likely to have to refinance that borrowing at higher rates.Overall Corporate Debt Interest Payments Have PlummetedAlthough the Fed has rapidly raised interest rates, net interest payments paid by corporations are reaching 40-year lows.

Note: Data consists of interest paid by private enterprises (minus interest income received) as well as rents and royalties paid by private enterprises.Source: Bureau of Economic AnalysisBy The New York TimesThe junk bond market faces a ‘refinancing wall.’Roughly a third of the $1.3 trillion of debt issued by companies in the so-called junk bond market, where the riskiest borrowers finance their operations, comes due in the next three years, according to research from Bank of America.The average “coupon,” or interest rate, on bonds sold by these borrowers is around 6 percent. But it would cost companies closer to 9 percent to borrow today, according to an index run by ICE Data Services.Credit analysts and investors acknowledge that they are uncertain whether the eventual damage will be containable or enough to exacerbate a downturn in the economy. The severity of the impact will largely depend on how long interest rates remain elevated.“I think the question that people who are really worrying about it are asking is: Will this be the straw that breaks the camel’s back?” said Jim Caron, a portfolio manager at Morgan Stanley. “Does this create the collapse?”The good news is that debts coming due by the end of 2024 in the junk bond market constitute only about 8 percent of the outstanding market, according to data compiled by Bloomberg. In essence, less than one-tenth of the collective debt pile needs to be refinanced imminently. But borrowers might feel higher borrowing costs sooner than that: Junk-rated companies typically try to refinance early so they aren’t reliant on investors for financing at the last minute. Either way, the longer rates remain elevated, the more companies will have to absorb higher interest costs.Among the firms most exposed to higher rates are “zombies” — those already unable to generate enough earnings to cover their interest payments. These companies were able to limp along when rates were low, but higher rates could push them into insolvency.Even if the challenge is managed, it can have tangible effects on growth and employment, said Atsi Sheth, managing director of credit strategy at Moody’s.“If we say that the cost of their borrowing to do those things is now a little bit higher than it was two years ago,” Ms. Sheth said, more corporate leaders could decide: “Maybe I’ll hire less people. Maybe I won’t set up that factory. Maybe I’ll cut production by 10 percent. I might close down a factory. I might fire people.”Small businesses have a different set of problems.Some of this potential effect is already evident elsewhere, among the vast majority of companies that do not fund themselves through the machinations of selling bonds or loans to investors in corporate credit markets. These companies — the small, private enterprises that are responsible for roughly half the private-sector employment in the country — are already having to pay much more for debt.They fund their operations using cash from sales, business credit cards and private loans — all of which are generally more expensive options for financing payrolls and operations. Small and medium-size companies with good credit ratings were paying 4 percent for a line of credit from their bankers a couple of years ago, according to the National Federation of Independent Business, a trade group. Now, they’re paying 10 percent interest on short-term loans.Hiring within these firms has slowed, and their credit card balances are higher than they were before the pandemic, even as spending has slowed.“This suggests to us that more small businesses are not paying the full balance and are using credit cards as a source of financing,” analysts at Bank of America said, adding that it points to “financial stress for certain firms,” though it is not yet a widespread problem.Corporate buyouts are also being tested.Carvana renegotiated its debt this year to defer mounting interest costs.Caroline Brehman/EPA, via ShutterstockIn addition to small businesses, some vulnerable privately held companies that do have access to corporate credit markets are already grappling with higher interest costs. Backed by private-equity investors, who typically buy out businesses and load them with debt to extract financial profits, these companies borrow in the leveraged loan market, where borrowing typically comes with a floating interest rate that rises and falls broadly in line with the Fed’s adjustments.Moody’s maintains a list of companies rated B3 negative and below, a very low credit rating reserved for companies in financial distress. Almost 80 percent of the companies on this list are private-equity-backed leveraged buyouts.Some of these borrowers have sought creative ways to extend the terms of their debt, or to avoid paying interest until the economic climate brightens.The used-car seller Carvana — backed by the private-equity giant Apollo Global Management — renegotiated its debt this year to do just that, allowing its management to cut losses in the third quarter, not including the mounting interest costs that it is deferring.Leaders of at-risk companies will be hoping that a serene mix of economic news is on the horizon — with inflation fading substantially as overall economic growth holds steady, allowing Fed officials to end the rate-increase cycle or even cut rates slightly.Some recent research provides a bit of that hope.In September, staff economists at the Federal Reserve Bank of Chicago published a model forecast indicating that “inflation will return to near the Fed’s target by mid-2024” without a major economic contraction. If that comes to pass, lower interest rates for companies in need of fresh funds could be coming to the rescue much sooner than previously expected.Few, at this point, see that as a guarantee, including Ms. Sheth at Moody’s.“Companies had a lot of things going for them that may be running out next year,” she said.Emily Flitter More

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Fed Governor Christopher Waller said Tuesday he is “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”
Waller added that he could see a point where the Fed might start lowering rates if inflation continues to ease over the next three to five months.
Governor Michelle Bowman offered a contrasting view, in which she reiterated her belief that more rate hikes likely will be needed as evolving dynamics keep inflation elevated.

Federal Reserve Governor Christopher Waller said Tuesday he’s growing more confident that policy is in a place now to bring inflation back under control.
There was nothing in Waller’s prepared remarks for a speech in Washington, D.C., that suggests he’s contemplating cutting interest rates, and he noted that inflation currently is still too high. But he pointed out a variety of areas where progress has been made, suggesting the Fed at least won’t need to hike rates further from here.

“While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained,” he said. “But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”
Waller added that he could see a point where the Fed might start lowering rates if inflation continues to ease over the next three to five months.
“It has nothing to do with trying to save the economy. It is consistent with every policy rule,” he said. “There is no reason to say we will keep it really high.”
A subsequent speech Tuesday morning from Governor Michelle Bowman offered a contrasting view, in which she reiterated her belief that more rate hikes likely will be needed as evolving dynamics keep inflation elevated.
The commentary comes two weeks before the rate-setting Federal Open Market Committee’s Dec. 12-13 policy meeting. Markets largely expect the committee to hold its key lending rate steady in a target range between 5.25%-5.5%. But Fed officials have stressed the importance of remaining vigilant on inflation and keeping their options open.

During the central bank’s ongoing battle against inflation, Waller has been one of the more hawkish members, meaning he has favored tighter policy and higher rates. However, he titled his Tuesday speech, “Something Appears to Be Giving,” a contrast to a recent speech titled “Something’s Got to Give.”
“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” he said.
Waller cited a variety of areas where activity is moderating, from retail sales to the labor market to manufacturing. He also noted easing in supply chain pressures that were largely responsible for the initial jump in inflation, but he said that factor can’t be counted on to help bring inflation down further.
“Monetary policy will have to do the work from here on out to get inflation back down to 2 percent,” he said.
Waller noted easing in inflation gauges such as the consumer price index, which was flat in October and “what I want to see.” However, he said there will be multiple other data points in the next weeks that he will be watching closely, including Thursday’s report on inflation as measured by personal consumption expenditures.
Core PCE, which excludes food and energy, is the Fed’s preferred benchmark for measuring longer-term inflation trends. For September, it was up 3.7% from a year ago; economists expect October to show a 3.5% acceleration.
Bowman cited several factors as likely to keep inflation elevated.
She echoed Waller’s point about supply chains and said further improvements in labor force participation could be limited, a situation that could boost pay as businesses struggle to find enough workers. Also, Bowman noted the uncertainty of future productivity gains due to education disruptions from the Covid pandemic.
A switch back to heavy services consumption also could boost inflation, as could some sectors of the economy that are not sensitive to higher rates.
“My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2 percent target in a timely way,” Bowman said.
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