Economy

Argentina is set to introduce tax and currency measures that will in effect devalue the peso as part of a hard-fought deal with the IMF to release delayed tranches of a $44bn loan programme.Buenos Aires will introduce a new preferential exchange rate for agricultural exports and levies on imports on Monday, according to economy ministry staff.Argentina and the IMF have been locked in negotiations for three months over the country’s failure to abide by the terms of last year’s debt restructuring deal after a record bailout in 2018.The fund says Argentina has fallen short on foreign exchange reserves and cutting the fiscal deficit, and last month delayed a $4bn disbursement. Buenos Aires blames its shortfall on a severe drought that wiped out $20bn of exports this year.Without the cash, Argentina risks defaulting on repayments to the multilateral lender for a previous loan, with about $3.4bn worth of obligations coming due by August 1. That would further destabilise the country’s already fragile economy ahead of presidential elections in October.The IMF and Argentina said in a joint statement on Sunday that they had “agreed the central objectives and parameters” for a staff-level agreement to “consolidate fiscal order and strengthen reserves”, ahead of a revision of the country’s support programme. Two staffers in the economy ministry with knowledge of the talks said the agreement would be finalised on Wednesday or Thursday.Economy minister Sergio Massa said in a television interview on Sunday night that the fund was preparing to release “a very big package of disbursements in August and an additional one in November.” He declined to give exact figures. Analysts have expressed scepticism that the IMF will disburse much more cash than Argentina needs to make its repayments.The peso is down a third against the dollar this year on parallel currency markets, where it trades at about half the official rate.Massa has been reluctant to sharply devalue the peso’s official rate. Analysts said the minister, who is also a presidential candidate for the ruling Peronist coalition, fears the impact of a devaluation on inflation, which has already soared to more than 115 per cent, but his objections have proved a major sticking point in the IMF talks.The new trade-related measures appear to be intended to satisfy the IMF’s demands for a devaluation, said Salvador Vitelli, head of research at the Buenos Aires-based consultancy Romano Group.Under the plan, corn and other crop producers will be offered 340 pesos a dollar to liquidate their stock, compared with the official rate of 268. Tax authorities will also impose a 25 per cent levy on imports of services and a 7.5 per cent duty on goods imports.

But Vitelli warned that the policies might result in price increases. Agricultural and manufacturing lobbies have said the measures will distort markets and raise production costs.While the final deal with the IMF is likely to include more measures, including to reduce the fiscal deficit, the currency and tax tweaks are a far cry from the sweeping macroeconomic changes the IMF seeks in the long run.In its global external sector report published last week, the lender criticised Argentina’s multiple exchange rates and currency controls, which it said “have introduced distortions that discourage trade and foreign investment”.However, the IMF may accept the workarounds “with one eye on the negotiations” with the incoming government, Vitelli added. “I think the fund will make a kind of concession in order to allow Massa to hold the economy together until the elections.” More

The writer is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow at the Center for Financial StabilityThe US Federal Reserve should feel vindicated in its decision to pause rate rises at its policy-setting meeting last month. Alas, it seems poised to raise them again. Forgive the cliché, but this risks snatching defeat out of the jaws of victory. For now, the Fed should stay put and hold rates where they are.Climate change may be leading to stifling temperatures, but US inflation is cooling. The consumer price index rose a mere 3 per cent in June, down sharply from a peak of 9.1 per cent in June 2022. The rate of producer price increases slowed even faster.Stubborn increases in the costs of shelter and services have significantly slowed. And a separate analysis by Morgan Stanley of raw data taken from new leases shows residential rents actually falling in some cases. Meanwhile, the economy remains robust. Unemployment is at 3.6 per cent. June brought with it 200,000 new jobs. These trends provide hope that inflation can be meaningfully reduced if not defeated without choking off the economy, so long as the Fed does not overshoot.Over the past 15 months, the Fed has tightened at a staggering pace. It has lifted rates from near zero to north of 5 per cent. By April, a common measure of money supply, M2, had dropped 4.6 per cent year over year, the biggest decline since the Fed began formally tracking M2 in 1959. The economy needs time to adjust to these seismic shifts in monetary conditions, particularly given that the Fed kept rates near zero for 14 years.The economy seems to be adjusting — so far — but there are several shoes still to drop. Trillions in corporate and commercial real estate have yet to reset to higher rates, but will need to refinance over the next few years. Households still benefit from cash cushions built up during the pandemic, but will be feeling the full bite of higher borrowing costs once those funds are gone. While the labour market remains healthy, private sector job growth has slowed notably.Labour and small business are at particular risk if rapid rate increases cause further banking distress. This in turns adds pressure on regional and community banks. The Fed’s primary focus on raising short-term rates has resulted in “yield curve inversion”, a market aberration where short-term borrowing costs are actually higher than long-term rates. If this persists, it represents an existential threat for smaller banks with profits that depend on their ability to use short-term deposits to make longer-term loans at higher rates.If the Fed does raise rates again — as seems certain at this week’s meeting of the policy-setting Federal Open Market Committee — it could temper the impact by only raising rates on bank reserves, while leaving the rate it pays to money market funds and other non-bank financial intermediaries where it is.Using new tools handed to it by Congress in 2008, the Fed can increase the interest it pays banks on their reserve accounts when it wants to raise rates. This gives banks an incentive to keep their reserves at the Fed unless they can achieve a higher, risk-adjusted return by lending them out. In 2013, without Congressional authorisation, the Fed created an “overnight reverse repo facility” — the functional equivalent of a reserve account for non-bank intermediaries such as money market funds — which pays rates almost as high as those paid on bank reserves. This similarly gives non-banks an incentive to keep money sitting idle at the Fed.While ONRRP was meant to be limited and temporary, it has in fact ballooned into around a $2tn facility, contributing to financial instability by draining deposits from banks. Lowering the yield on ONRRP relative to the Fed’s target rate should cause money market funds to redeploy some capital out of the facility and into investments that meet the credit needs of our economy. This would mute the contractionary impact of another rate rise, while contributing to bank stability as much of that capital would find its way back into bank deposits.The Fed faces difficult choices, but we know further tightening heightens the risk of recession and financial instability. If it does continue to tighten, it should find ways to temper the impact. Just as the Fed misjudged the inflationary risks of its loose money policies, it should not now underestimate the potential impact of the jaw-dropping pace of its tightening. The safest choice is to stay put. More

The Federal Reserve is poised to leave the door open to another interest rate increase after it resumes its monetary tightening campaign this week, as officials debate how much more to throttle economic activity to get inflation under control.The Federal Open Market Committee is widely expected on Wednesday to raise its benchmark rate by another quarter of a percentage point following a reprieve in June. That will increase the federal funds rate to a target range of between 5.25 per cent and 5.5 per cent.Traders in fed funds futures markets believe this will be the final interest rate increase of what has become a historic campaign to squelch stubbornly high inflation. But economists say the Fed is unlikely to signal as much, as it wants to retain the flexibility to further tighten monetary policy should prices fail to ease as much as expected in the coming months.“It’s unlikely that the committee would be willing to communicate that they expect to be on an extended hold,” said Kris Dawsey, head of economic research at DE Shaw, who formerly worked at the New York Fed. “There’s a great deal of scope for them to end up hiking more after the July meeting, if prompted by the data.”Speculation that the Fed could be about to end its string of rate increases follows a recent batch of economic data which has shown a decisive slowdown in the most worryingly persistent portions of inflation, as well as a continued cooling of the labour market.Monthly jobs growth, while still robust, has moderated from last year’s average pace and other signs of demand, including vacancies, continue to trend lower. Consumers are still spending but with less intensity and the monthly pace of “core” inflation, which strips out volatile food and energy costs, has slowed.Christopher Waller, a Fed governor who is one of the most hawkish officials on the FOMC, recently signalled scope for another rate increase as early as the September gathering, but conceded that two more consumer price index reports that show meaningful progress “would suggest maybe stopping”.“It will be difficult to make the argument in the months to come that the backdrop needs any additional policy restriction placed on it,” said Tom Porcelli, chief US economist at PGIM Fixed Income. “In the context of an economy that is slowing down, prudence would demand that the Fed tread carefully here.”Moreover, officials are still grappling with uncertainty about the effect not only of past interest rate increases but also the side effects of the banking turmoil that hit the financial system earlier this year. Midsized lenders have pulled back — albeit to a lesser degree than expected — making access to credit more expensive.To reflect this, Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives, anticipates policymakers will revise lower their individual core inflation forecasts when new projections are released in September.In June, the last time these were published, officials predicted a slower descent this year towards the Fed’s 2 per cent inflation target, with the core personal consumption expenditures price index registering an annual 3.9 per cent pace. That was up from 3.6 per cent, according to estimates in March. Combined with a rosier growth outlook, most officials pencilled in half a percentage point more worth of monetary tightening this year to eventually push the fed funds rate to a peak of between 5.5 per cent and 5.75 per cent.

Coronado expects a large enough decline in the core inflation forecast to compel policymakers to eventually remove the final quarter-point rate rise incorporated into their projections after a July increase, but she warns it is too premature to indicate that.“One element of this strategy is to prevent the market from going crazy with the ‘Fed is done’ euphoria,” she said. “By holding the threat of rate hikes over the market for essentially most of the year, they can keep rate expectations in check.”The Fed has succeeded in convincing market participants that it is not preparing to cut its benchmark rate anytime soon, after struggling to do so for the bulk of the tightening cycle. Traders’ forecasts for reductions are now aligned with officials’ for a 2024 start at the earliest, indicating less fear of an imminent recession that would require an abrupt about-face.Having been wrongfooted in the past by the persistence of price pressures, officials would be even more careful not to take any policy possibilities off the table, said Karen Dynan, a former senior Fed staffer now at Harvard University.One point of concern is a recent bottoming out of house prices after a precipitous drop last year — a resilience that John Williams, president of the New York Fed, admitted had been a “bit of a surprise”. Lorie Logan of the Dallas Fed warned that it could even pose an “upside risk to inflation down the road”.Dynan said officials also need to be braced for additional shocks, including food and energy price rises.“There’s a long way to go to get back to target and that’s something that’s weighing on them heavily,” she said. More

A flow of key data over the past 10 days suggests the UK economy is less of an outlier among its peer countries than previously thought, as figures showed unexpected economic resilience and a sharp decline in inflation. A few weeks ago, Britain was the only large advanced economy not showing a steady downward trend in price growth, despite having the highest inflation rate in the G7. Many analysts expected UK output to contract in the second quarter despite not having yet regained its quarterly pre-pandemic levels. Meanwhile, markets had priced in a Bank of England interest rate rise from the current 5 per cent to 6.5 per cent by the end of the year, in turn driving up mortgage rates and sending the property market into turmoil. However, in June, UK inflation dropped unexpectedly to 7.9 per cent — the lowest rate since March 2022 — and down from 8.7 per cent the previous month.Surprisingly, strong retail sales in June and a better-than-anticipated economic performance in the three months to May led many analysts to forecast a marginal output expansion in the second quarter. “The UK still looks like the international outlier when it comes to inflation and still deserves its label as the ‘stagflation nation’ [but] the economic news of the past month has suggested that the gap is narrowing,” said Paul Dales, economist at Capital Economics. On Monday, the consultancy EY upgraded its UK economic growth forecast for this year to 0.4 per cent from the 0.2 per cent previously estimated, on the back of signs of greater resilience.

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“The UK economy is in a frankly terrible place, but economic data over the past 10 days has offered some welcome encouragement,” said Torsten Bell, chief executive of the Resolution Foundation, a think-tank. UK core inflation, which strips out food and energy prices, fell in June, finally starting to converge with rates in the US and the eurozone, after rising in the opposite direction in the months before. At the same time, the sharp fall in inflation indicated pressure is easing on consumers as well as mortgage holders, with markets now expecting the central bank to raise interest rates — which drive up the cost of borrowing — less rapidly. This, said Kallum Pickering, economist at the Investment Bank Berenberg, “reduces the risk that the BoE will have to force a hard landing to bring inflation under control”.Economists have warned that record high wage growth registered in the three months to May is still a concern with regards to inflation.“The big question is how a fast-cooling labour market brings to an end historically strong wage growth, as it already has in the US and eurozone,” said Bell.However, many analysts expect that will happen soon, in part due to a decline in job inactivity that has kept the UK labour market tighter than in other countries. The latest data showed that job inactivity fell to its lowest rate since the spring of 2020, at the beginning of the Covid pandemic.

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Official data showed that the resilience of the UK’s growth and labour market helped public sector borrowing to fall in June compared with the same month last year. The warmer weather also spurred the third consecutive expansion in retail sales volumes recorded in June.

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Simon Harvey, head of analysis at foreign exchange company Monex, said over the past two weeks, concerns about sticky inflation, wage spirals, rising borrowing costs and falling house prices “have receded considerably”.But despite the encouraging data, the UK continues to perform poorly in international comparisons. In the three months to March, the economy was still 0.5 per cent smaller than in the fourth quarter of 2019, before the pandemic. In contrast, the US economy grew 5.6 per cent and the eurozone 2.2 per cent over the same period.

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Meanwhile, UK headline inflation is still more than twice the 3 per cent of the US and the highest among the G7. While falling, food inflation is still higher than in most richer countries. And markets are still pricing that interest rates will rise more in the UK than in other big economies over the coming months.“Overall, the UK has made some progress in narrowing the gap on inflation,” said Dales. “But the bigger picture is that it still has more of an inflation problem and has had more languid gross domestic product growth in recent years than the US and the eurozone,” he added. More

SYDNEY (Reuters) – The dollar and euro made firm starts on Monday to a week full of central bank meetings, while the yen was struggling as investors expect the Bank of Japan will be the odd one out as policymakers hike rates in Europe and the United States.The Federal Reserve concludes a meeting on Wednesday, followed by the European Central Bank a day later and the Bank of Japan on Friday. The yen had dived on the dollar and crosses last week following a Reuters report that the Bank of Japan was leaning towards keeping its yield curve control policy unchanged, though volatility gauges have spiked as the meeting looms as a risk.The yen was nursing losses at 141.71 to the dollar early on Monday and at 157.58 to the euro, it wasn’t much above last week’s 15-year low at 158.04, nor was it far from last week’s record low on the Swiss franc.The euro held at $1.1128 on Monday. The U.S. dollar index was steady at 101.04. “The last week left markets believing in a soft-landing scenario for the U.S. markets where the (Fed) ends its hikes … and then sees a steady drop in CPI without a recession,” said Bob Savage, head of markets strategy at BNY Mellon (NYSE:BK).”The ECB is also expected to be near the end with the German technical recession easing and growth holding elsewhere. The BOJ is seen talking about change but not doing much.”The yen’s Friday fall helped the dollar to gains on the Australian and New Zealand dollars and they were steady near recent lows early on Monday. The Aussie was testing support at its 200-day moving average at $0.6722.The kiwi, which broke below its 200-dma on Friday, sat at $0.6172. It is under pressure as the central bank believes it is finished hiking rates and export prices have dragged as China’s post-pandemic recovery has disappointed.”As long as dairy prices remain under pressure, the New Zealand dollar is unlikely to thrive,” said ANZ analysts.On the data front, traders will be watching out for Purchasing Manager’s Index figures due across the globe through the trading day on Monday.========================================================Currency bid prices at 0031 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.1131 $1.1124 +0.04% +3.86% +1.1138 +1.1124 Dollar/Yen 141.6650 141.7400 -0.06% +0.00% +141.8000 +141.6550 Euro/Yen 157.68 157.76 -0.05% +12.39% +157.7800 +157.5700 Dollar/Swiss 0.8659 0.8660 +0.01% -6.34% +0.8664 +0.8660 Sterling/Dollar 1.2866 1.2852 +0.08% +6.35% +1.2866 +1.2853 Dollar/Canadian 1.3218 1.3224 -0.04% -2.44% +1.3227 +1.3219 Aussie/Dollar 0.6730 0.6732 -0.04% -1.28% +0.6733 +0.6723 NZ Dollar/Dollar 0.6174 0.6166 +0.11% -2.80% +0.6174 +0.6165 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More

SYDNEY (Reuters) – Asian shares marked time on Monday ahead of an action packed week of earnings and central bank meetings that will likely see higher rates in Europe and the United States, and possibly the end of the tightening cycle in both. Markets are fully priced for quarter point hikes from the Federal Reserve and European Central Bank, so the focus will be on what Fed Chair Jerome Powell and ECB President Christine Lagarde say about the future.”For both, we expect this to mark the last hike in the cycle, though neither Lagarde or Powell is likely to signal that the peak is in, instead retaining hawkish tones and remaining data-dependent,” said John Briggs, an analyst at NatWest Markets.”But activity and inflation data in both regions have softened enough, and likely to soften further, to justify an end of the tightening cycle.” The odd man out will be the Bank of Japan which meets on Friday and is thought likely to keep its super-loose policy intact, but some western banks are speculating on a tweak to its yield curve control stance.Reuters reported last week that BOJ policymakers prefer to scrutinise more data to ensure wages and inflation keep rising before changing policy, though the decision could still be a close call.The report slugged the yen and gave Japan’s Nikkei an early 1.1% gain, while MSCI’s broadest index of Asia-Pacific shares outside Japan was barely changed. China’s Politburo meeting this week could see more stimulus announced, though investors have so far been underwhelmed by Beijing’s actions.HOST OF EARNINGSS&P 500 futures and Nasdaq futures were little changed ahead of a wave of earnings this week.A who’s who of major companies are reporting including Alphabet (NASDAQ:GOOGL), Meta, Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), GE, AT&T (NYSE:T), Boeing (NYSE:BA), Exxon Mobil (NYSE:XOM), McDonald’s (NYSE:MCD), Coca Cola, Ford and GM.The results will have to be good to justify the S&P 500’s earning multiple of 20 and its gains of 19% year-to-date.”We believe recent valuation expansion despite higher rates is reasonable considering the longer-term relationship between rates and equities, the improvement in expected growth, and the high market concentration in stocks benefiting from AI optimism,” wrote analysts at Goldman Sachs (NYSE:GS).”While our baseline forecast assumes a slight contraction in the S&P 500 P/E multiple to 19x by year-end, we believe risks to valuations are tilted to the upside if the multiples of laggards ‘catch up’ or yields fall.”Yields on 10-year Treasuries were steady at 3.85%, still below the recent spike high of 4.094%.The dollar held firm at 141.75 yen, having jumped 1.3% on Friday following the report on the BOJ. The gains lifted the dollar across the board and left the euro at $1.1128 and off its recent top of $1.1276.There was no obvious reaction to news Spain was heading for a hung parliament, though its debt might come under pressure when local markets open.The rise in the dollar pulled gold back to $1,961 an ounce and away from last week’s peak of $1,987. [GOL/]Oil prices ran into profit taking early on Monday having climbed for four straight weeks amid tightening supplies. [O/R]Brent fell 47 cents to $80.60 a barrel, while U.S. crude lost 39 cents to $76.68. More

TOKYO (Reuters) -Japan’s top currency diplomat Masato Kanda said on Monday recent inflation and wage rises were overshooting expectations, suggesting companies were changing practices that had been based on the assumption prices won’t rise much.The central bank is likely to revise up its inflation forecasts at its two-day policy meeting ending on Friday, Kanda told reporters, adding that he was not in a position to comment on specific monetary policy.”It’s become a shared view at home and abroad that changes are seen in Japan’s corporate price- and wage-setting behaviour,” Kanda told reporters.”If you add up data available so far, we’ll probably see an upgrade in the BOJ’s (inflation) forecasts,” he said.Kanda, vice finance minister for international affairs, made the remarks amid simmering market speculation that creeping inflation and robust wage growth will prod the Bank of Japan (BOJ) to tweak its yield control policy this week.On Friday, Kanda told Reuters that “various expectations and speculations are spreading about the possibility of some kind of tweak to monetary policy.”Kanda, who oversees Japan’s currency policy, also warned on Friday Tokyo won’t rule out any option in addressing any excessive volatility in the yen, which has recently renewed its declines against other currencies.Sources have told Reuters the BOJ is leaning toward keeping its yield control policy steady this week, though there is no consensus within the bank.While the board is likely to revise up its core consumer inflation forecast for the year that began in April, those for fiscal 2024 and 2025 will likely remain largely unchanged from current projections, they said.BOJ Governor Kazuo Ueda has said the central bank is focusing on whether recent inflation and wage growth will be sustained next year, and backed more by domestic demand, in deciding whether to tweak yield curve control. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.The week ahead could be pivotal to the financial market landscape for the rest of the year, as the G3 central banks deliver their latest policy decisions and China’s Politburo of the ruling Communist Party meets to discuss the economy. The U.S. Federal Reserve, European Central Bank and Bank of Japan decisions and press conferences all come over the Wednesday-Friday 48-hour period, and China’s Politburo is expected to begin its meet on Friday.If that wasn’t enough, purchasing managers index figures will give the first indications on how economies performed in July. The U.S. earnings season moves up a gear with Meta Platforms, Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) among the big names reporting.Dovish signals from Fed Chair Jerome Powell would probably boost risk appetite and lift global stocks markets. The dollar and U.S. bond yields would likely come under downward pressure too – often bullish triggers for Asian and emerging markets.Investors in Asia have to wait until Friday for the big two set pieces of the week. More than three quarters of economists polled by Reuters expect the BOJ to keep policy unchanged, including its yield control scheme. BOJ Governor Kazuo Ueda has signaled his resolve to maintain massive monetary stimulus, despite inflation persistently outpacing the bank’s 2% target.In a symbolic development last week, Japan’s annual rate of headline consumer inflation rose above comparable U.S. inflation for the first time since 2015. But the BOJ’s deflation battle scars run deep, so investor hopes of and end to super-loose policy are being pushed back further.It’s a different story in China – the economy and markets are badly underperforming, growth forecasts are being slashed, and the big danger is deflation, not inflation.The central bank has been reluctant to ease policy because the already weak yuan could come under even greater selling pressure, so investors are pinning their hopes on a fiscal boost from Beijing. And it will have to be a significant boost.Measures announced on Friday to help boost sales of cars and electronics failed to impress investors, and foreigners are steering clear of China’s financial assets even though they are relatively cheap. But the economic, financial, political and social challenges Beijing faces are such that Chinese stocks can get even cheaper before foreign investors start buying again en masse.Monday’s economic data calendar and potential market-movers in Asia will be the Japanese and Australian PMIs, and the latest inflation figures from Malaysia and Singapore. Malaysian inflation is expected to fall to 2.4% in June – the lowest since April last year – from 2.8% in May. Singapore’s inflation is seen falling to 4.55% – the lowest since February last year – from 5.10%.Here are key developments that could provide more direction to markets on Monday:- Japan PMIs (July)- Australia PMIs (July)- Singapore inflation (June) (By Jamie McGeever; Editing by Diane Craft) More