Economy

OTTAWA, Dec 23 (Reuters) – The Bank of Canada’s decision to cut rates by 50 basis points on Dec 11 was a close call, with some members of the governing council suggesting a smaller reduction, according to minutes released on Friday.The central bank slashed its key policy rate to 3.25% to help address slower growth. Governor Tiff Macklem indicated further cuts would be more gradual, a shift from previous messaging that continuous easing was needed to support growth.The minutes said the discussions had focused on whether a 50 basis point or a 25 basis point cut was more appropriate.”Each member of Governing Council acknowledged that the decision was a close call based on their own assessments of the data and the outlook for growth and inflation,” they said.Those preferring a bold move were concerned about a weaker growth outlook and downside risks to the inflation forecast, even while acknowledging that not all the recent data pointed to the need for a 50 basis point cut.”However, it seemed unlikely that a cut of 50 basis points would take rates lower than they needed to go over the next couple of meetings,” the minutes said. Those preferring a 25 basis point cut noted signs of strength in consumption and housing activity, suggesting the bank could be patient while the full effects of past cuts became clearer.The decision to opt for a larger cut reflected a weaker outlook for growth than forecast in October and the fact monetary policy no longer needed to be clearly restrictive.”Governing Council members also discussed the future path for interest rates. There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the minutes said. “Members agreed that they would likely be considering further reductions in the policy rate at future meetings, and they would take each decision one meeting at a time.” More

WASHINGTON (Reuters) -New orders for key U.S.-manufactured capital goods surged in November amid strong demand for machinery, while new home sales rebounded after being weighed down by hurricanes, offering more signs that the economy is on solid footing as the year ends.But concerns over plans by President-elect Donald Trump’s incoming administration to impose or massively raise tariffs on imports could slow momentum next year, with other data on Monday showing consumer confidence slumping in December. Consumers, however, remained upbeat on the labor market’s prospects.The reports followed on the heels of strong consumer spending data last week. They underscored resilience in the economy that prompted the Federal Reserve last week to project fewer interest rate cuts in 2025.”That strength is consistent with our view that business equipment spending growth will accelerate gently next year,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The continued buildout of AI and spillovers from the boom in new factory construction over the past few years will provide a continued tailwind.”Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.7% after dipping 0.1% in October, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders gaining 0.1%.Other data from the Census Bureau showed new home sales jumped 5.9% to a seasonally adjusted annual rate of 664,000 units in November. But rising mortgage rates, in tandem with the 10-year Treasury yield, pose a challenge next year. Core capital goods orders increased 0.4% year on year. Shipments of core capital goods rose 0.5% after advancing 0.4% in October. Business investment has largely held up despite the U.S. central bank’s aggressive monetary policy tightening in 2022 and 2023 to tame inflation.The Fed last week cut its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range. The central bank has reduced borrowing costs by a full point since it began its easing cycle in September. It forecast only two rate cuts next year, in a nod to the economy’s continued resilience and still-high inflation.In September, Fed officials had forecast four quarter-point rate cuts next year. The shallower rate cut path in the latest projections also reflected uncertainty over policies, including tariffs, mass deportations of immigrants in the country illegally and tax cuts, expected from the Trump administration.STRONG LABOR MARKET VIEWS Consumers have started taking note of the potential negative impact of tariffs on the economy. A survey from the Conference Board on Monday showed 46% of consumers expected tariffs to raise the cost of living. That contributed to the consumer confidence index plunging 8.1 points to 104.7 in December, erasing all the gains following Trump’s Nov. 5 victory.Consumers remained upbeat on the labor market, the main driver of the economy through consumer spending. The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, increased to a seven-month high of 22.2 from 18.4 in November. This measure correlates to the unemployment rate in the Labor Department’s monthly employment report. The unemployment rate is currently at 4.2%.”Consequently, recent readings, along with more stability in continuing claims, suggest the unemployment rate will not rise further in December, and could decline from November’s high-side 4.2% reading,” said Abiel Reinhart, an economist at JPMorgan.Stocks on Wall Street were mixed. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. Orders for machinery jumped 1.0%. Electrical equipment, appliances and components orders increased 0.4%. There were also increases in orders of primary metals. But orders for computers and electronic products fell, as did those for fabricated metal products. Orders for transportation equipment declined 2.9%, pulled down by a 7.0% drop in commercial aircraft orders. Boeing (NYSE:BA) reported on its website that it had received 49 aircraft orders, down from 63 in October. Commercial aircraft shipments declined further, likely weighed down by a seven-week strike at Boeing’s West Coast factories, which halted production of its best-selling 737 MAX as well as 767 and 777 wide-body planes. Boeing has also been dogged by safety concerns.Aircraft accounted for the robust increase in business spending on equipment in the third quarter. While economists expected that the decline in aircraft orders would be a drag on business spending on equipment in the fourth quarter, the hit was likely to be limited by the strong rise in orders for core capital goods. Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, dropped 1.1% after increasing 0.8% in October. The decline mostly reflected the weakness in commercial aircraft orders.”They will be merely unchanged quarter-on-quarter in fourth quarter, if they remain at November’s level in December,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.The Atlanta Fed is forecasting gross domestic product increasing at a 3.1% rate in the fourth quarter. The economy grew at a 3.1% pace in the third quarter. More

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LONDON (Reuters) – Some World Bank staff have criticised an assessment of Ethiopia’s finances conducted with the International Monetary Fund, questioning whether the analysis that underpins the country’s debt restructuring may be “faulty”.In an internal paper seen by Reuters, World Bank consultant Brian Pinto and its chief economist Indermit Gill assess the Debt Sustainability Analysis (DSA), dated July and prepared by the IMF and staff of the International Development Association (IDA), the World Bank’s fund for poorest nations.The authors suggest that based on the DSA, Ethiopia is facing a short-term liquidity crunch, and not a long-term solvency issue, a point of contention between the government and holders of its $1 billion international bond that is in default. “We found that the bondholders have interpreted the DSA correctly, but the DSA itself may be faulty,” Pinto and Gill wrote in the paper from earlier this month. “The disagreements about Ethiopia’s debt sustainability will be repeated as other countries become debt distressed.” Asked about the paper, a World Bank spokesperson said: “We generally don’t comment on internal deliberations between the World Bank and the IMF, or any of our partner institutions.”Ethiopian State Finance Minister Eyob Tekalign told Reuters IMF and World Bank teams had just revisited the DSA as part of the latest review of the Fund’s loan programme and there had been no major change to the position. A spokesperson for the IMF confirmed its staff visited Ethiopia in November for the second review of the Fund’s loan programme, adding that each review includes an update to the DSA, without elaborating on its contents. The spokesperson did not comment on the memo. Pinto and Gill did not respond to a request for comment.Bondholders and Ethiopian officials have been in a tense standoff. At the heart of the debate is whether Ethiopia – as bondholders argue – faces a liquidity crunch, which could be addressed by rescheduling debt, or whether it has longer-term solvency problems that require debt writedowns known as haircuts.The DSA said that some export-related indicators pointed to both liquidity and solvency pressures.In October, Eyob told Reuters that writedowns were unavoidable and the DSA showed a solvency issue. Investors, in rejecting the assessment, have also slammed a government proposal that indicates an 18% haircut. The comments in the paper suggest some World Bank staff sympathise with bondholders’ views. “Based on the July 2024 DSA, Ethiopia should be trying to find ways to lengthen debt maturity and increase exports to address its liquidity problem, not asking bondholders to take a haircut,” Pinto and Gill wrote.FINANCIAL LIFELINEThe report gives credence to years of complaints by the private sector over the DSAs and the levels of debt that countries can manage – and thus what amount lenders must write off when a country defaults.Ethiopia became Africa’s third country to default on its international bonds in as many years in December 2023. Despite the relatively small size of its bond debt – compared with Zambia’s $3 billion and Ghana’s $13 billion – progress on restructuring has been slow and tangled in controversy.IMF funding is often the sole financial lifeline available to countries in a debt crunch, and key to unlocking other financing sources – including World Bank backing – with delays in debt reworks adding yet more pressure on government finances, companies and populations.Pinto and Gill have argued for some time for a change to the Debt Sustainability Framework for low-income nations, designed to inform borrowing decisions by poor countries. The framework requires regular joint World Bank and Fund DSAs which analyse a country’s debt burden and vulnerabilities over the coming decade.”It is hard not to conclude that Bank-Fund DSAs for Ethiopia have not provided accurate information to markets, nor perhaps to the Ethiopian government,” the authors said. More

The Fed slashed interest rates by 25 bps at its latest FOMC meeting this month, aligning with market expectations. This marks the fourth cut since September, bringing the total reduction to 100 basis points and placing the policy target range at 4.25%-4.5%.However, the updated dot plot presented a more hawkish stance than anticipated. The median projection now reflects only 50 basis points of cuts for 2025, a notable shift from the 100 basis points indicated in the September dot plot. The Fed’s outlook suggests that policy adjustments could extend through 2027.Markets reacted negatively to the announcement. Equities fell sharply, bond yields climbed, and the dollar strengthened.During the post-meeting press conference, Fed Chair Jerome Powell conveyed optimism about the state of the economy and the outlook for 2025. Powell acknowledged that economic growth had surpassed the Fed’s recent expectations, while inflation remains above the 2% target. As a result, the central bank intends to adopt a more measured approach to further rate reductions.”Our own views on the economic outlook are similar to the Fed’s, and we therefore have adjusted our rate cut forecast in line with the new dot plot,” UBS senior economist Brian Rose said in a note.The bank now anticipates 25 basis point cuts in both June and September, totaling 50 basis points for 2025, down from previous expectations of quarterly cuts amounting to 100 basis points over the year.While this more cautious approach is currently favored, Rose highlights that “a March rate cut could quickly be back on the table if there is bad news from the labor market early next year.”The Fed’s hawkish stance fueled a rally in the U.S. dollar, with the dollar index briefly surpassing 108. This trend aligns with interest rate movements over the past two years and is expected to persist into 2025.Political factors, including Donald Trump’s upcoming inauguration, are likely to keep the dollar elevated in the near term. Yet, UBS highlights limits to further dollar strength, citing overvaluation, minimal expectations for U.S. monetary easing in 2025, and the market’s focus on the positive aspects of Trump’s policies. Any deviation from these expectations could trigger a dollar pullback.UBS views current dollar rallies as selling opportunities, forecasting EURUSD to return to 1.10 later in 2025. More

NEW YORK (Reuters) – For many people, financial resolutions might be lighthearted fodder for small talk at holiday parties.Not for Cynthia Luna. She is deadly serious about them.The financial planner from Waxahachie, Texas sends all her clients New Year’s cards with their resolutions written down in black and white. If you stray, prepare to hear about it.“The right way is to use baby steps and make them achievable and encouraging – because you don’t want to fail at your financial resolutions,” says Luna, a principal at Moonshot Financial Group. Financial resolutions start the new year on the right foot. In fact, 65% of Americans are drawing them up for 2025, according to a new study from money manager Fidelity Investments.The winning responses are classic: Save more money (43%), pay down debt (37%) and spend less (31%).But for one of the only times in the history of Fidelity’s 16-year survey, people looking to save money are favoring short-term goals over long-term ones, by 55% to 45%.That indicates people do not really have the luxury of thinking 20 or 30 years off and are instead focusing on right now – paying the rent or mortgage, buying gas, covering monthly utility bills and putting food on the table.“This will be a year of living practically,” says Rita Assaf, vice president of retirement products at Fidelity, who analyzed the findings. “Short-term savings goals are just more of a priority right now. People are very concerned about the day-to-day.”Millennials are the most determined generation in setting financial resolutions, with 74% of them making money goals for the New Year. That compares to 70% of Gen Z, 67% of Gen X and only 52% of Baby Boomers.There is an art to making financial resolutions, though. To nudge you in the direction of success, here are a few key pointers from financial professionals:GO SMALLYou may have heard the career advice, ‘Go big!’ But when it comes to financial resolutions, the smarter path is the exact opposite – go small.Think too vague and grandiose – you want to be a multimillionaire, maybe – and you will likely fall short, be depressed about your failing, and drop your goals altogether.Instead, focus on tiny, daily, concrete steps that will eventually get you where you want to go.“Have as few goals as possible, the fewer the better,” says Thomas Scanlon, a financial advisor with Raymond (NS:RYMD) James in Manchester, Connecticut. “Start small: If all you can do is put an extra $100 a month towards your credit card balance, do it.”AUTOMATION IS YOUR FRIENDOne problem with resolutions is that they tend to rely on the human will, and the human will is fallible.Your resolution is to not be tempted by those shopping discounts you love? Good luck with that because sooner or later, you will probably fail. In the Fidelity survey, 37% of people admitted they busted out on last year’s resolutions.The smart thing is to take choice out of your own hands whenever possible, so your will does not even come into play. Automate your monthly retirement plan contribution. Automate your bill payments. If you get a raise, automate saving a percentage of that, too.“I am a big fan of automation,” says W. Michael Lofley, a financial planner in Stuart, Florida. “The less you have to think about your financial resolutions, the easier it is to stick to them. It’s ‘Set it and forget it.’ ”REVISIT AS NEEDEDA New Year’s resolution is a snapshot in time, of what your goals are right now. Can those goals change in a month, or three months, or six months? Of course.There is no shame in revisiting your resolutions occasionally and changing them, if necessary. It does not necessarily mean you have ‘failed’; it means that different priorities have emerged, and that is okay.“I usually suggest people revisit those goals quarterly, or even more often if it helps you,” says Fidelity’s Assaf. “You never know what is going to arise throughout the year, and if something happens, it is perfectly fine to revise your resolutions.” More

LONDON (Reuters) – Euro zone bond yields ticked up to their highest level in around a month on Monday before dipping slightly as investors continued to try to gauge the outlook for central bank rate cuts in 2025.The Federal Reserve last week put upward pressure on U.S. government bond yields, which set the tone for other markets around the world, when policymakers said they now expect to cut rates twice in 2025, down from a previous estimate of four cuts.Germany’s 10-year bond yield, the benchmark for the euro zone, rose to 2.32% on Monday, around the highest level since Nov. 22. It was last up 1.6 basis points (bps) at 2.302%. Yields move inversely to prices.Trading volumes were lower due to traders being off over the holiday season, potentially accentuating price moves.European Central Bank (ECB) President Christine Lagarde said the euro zone was getting “very close” to reaching the central bank’s medium-term inflation goal, according to an interview published by the Financial Times on Monday.The ECB cut rates for a fourth time to 3% this month but euro zone bond yields rose after Lagarde struck a slightly tougher tone than expected, saying the fight against inflation was not over.Lagarde told the FT that although headline inflation was at 2.2%, services inflation remained at 3.9% and “is not budging much”.Irish central bank chief Gabriel Makhlouf also warned that elements of services inflation in the euro zone were concerning, the paper said.Germany’s two-year bond yield, which is sensitive to ECB rate expectations, was last flat at 2.041%.Italy’s 10-year yield was higher by 2 bps at 3.469%, and the gap between Italian and German yields stood at 117 bps.Investors face an uncertain 2025, with U.S. President-elect Donald Trump’s policies a wild card. Money market pricing on Monday showed investors expect around 115 bps of rate cuts from the ECB next year, little changed from Friday. More

NEW YORK (Reuters) – U.S. investors are preparing for a swathe of changes in 2025, from tariffs and deregulation to tax policy, that will ripple through markets as President-elect Donald Trump returns to the White House, putting the focus on whether the U.S. economy can continue to outperform.The changing of the guard in Washington has big implications for how stocks, bonds and currencies fare in the new year and may require investors to rejig portfolios. Forecasts call for another buoyant year for stocks, the dollar to maintain its recent strength over the coming months and Treasury yields to march higher.  Here is a chart-based overview of key market themes and segments that investors are closely monitoring:U.S. EXCEPTIONALISMInvestors largely expect U.S. economic exceptionalism to persist in the new year, as robust consumer spending and a resilient labor market put U.S. growth on a firmer footing than that of many of its developed market peers. The U.S. economy is expected to find further support from any potential tax reform, including a reduction in the corporate tax rate. Such tax cuts – which would need to pass Congress – could support company earnings and sentiment on stocks.In contrast, although the euro-zone economy grew faster than anticipated in the third quarter, its outlook remains weak due to potential large tariffs from the Trump administration, escalating trade tensions with China and low consumer confidence.”We do expect U.S. growth to outperform the rest of the world in 2025, on the back of potentially favorable monetary and fiscal policy,” said Sonu Varghese, global macro strategist at Carson Group.THE FEDFront and center for investors in 2025 is how rapidly or deeply the U.S. Federal Reserve can cut rates. The Fed cut rates in December, continuing reductions after a period of aggressive rate hikes, but indicated it would slow the pace of further cuts.Stocks have been buoyed by expectations of easier monetary policy. But with benchmark Treasury yields rising sharply after the Fed meeting, the rate outlook threatens to undermine the momentum for stocks. KING DOLLAR   Dollar bears have taken a battering this year and most FX market strategists forecast continued strength for the greenback. Many of the factors that powered a 7% gain for the currency against a basket of peers this year, including relatively robust U.S. economic growth and rising Treasury yields, are expected to continue supporting the dollar.Trump’s tariffs and protectionist trade policies are also likely to bolster the buck. Prospects of heightened inflation could also hinder the Fed from keeping up with interest-rate cuts, even as other central banks proceed with cuts, further lifting the dollar.Getting the dollar’s trajectory right is crucial for investors, given the currency’s central role in global finance.A strong dollar could weigh on the outlook for U.S. multinationals as well as complicate other central banks’ efforts to fight inflation as it makes their currencies cheaper.”Another year of spectacular gains in the dollar might break something in the global economy – but with major uncertainties clouding the horizon and another round of American exceptionalism largely priced in, further outperformance could be difficult to achieve,” said Karl Schamotta, chief market strategist at payments company Corpay.VOLATILITY WATCHInvestors got a taste on Wednesday of how quickly market stability can shift to turmoil. U.S. stocks fell sharply after the Federal Reserve projected fewer interest-rate cuts than expected and as concerns grew about a potential partial government shutdown.Global financial markets may extend generally tranquil trading conditions into the new year but analysts warn that a volatility shock is overdue.Analysts at BofA Global Research said they do not expect a repeat of the record-low stock-market volatility levels set in 2017, the beginning of Trump’s first term. FX markets could be in for higher volatility next year as the twin forces of tariffs and central-bank actions come to bear.”The shock absorber in financial markets is going to be foreign exchange next year,” said Fredrik Repton, senior portfolio manager with the global fixed income and currency management teams at Neuberger Berman.CRYPTO FEVERThe speculative fever that gripped bitcoin and crypto-related stocks in 2024 is unlikely to abate in the new year, strategists said.”2024 was a banner year for speculation, which had morphed into a self-fulfilling frenzy in recent weeks,” Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).While these trades have sometimes run into trouble, most recently after the Fed’s December meeting, investors have been willing to buy the dip.”When something has been working for so many people for so long, they are loath to give it up,” Sosnick said.And work the trades have. Bitcoin hit a record high above $100,000 in December on expectations that Trump’s election will usher in a friendly regulatory environment for cryptocurrencies. Crypto-related stocks have also been on a tear, with software company and bitcoin stockpiler MicroStrategy leading the charge with a more than 400% rise for the year. More