Economy

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.Asian markets are set for a torrid end to the week on Friday as another spike up in U.S. bond yields and the prospect of interest rates being kept higher for longer triggered waves of ‘sell’ orders across all asset classes on Thursday.Investors are once again grappling with the prospect of steep borrowing costs following the release of bumper U.S. private sector jobs data. Friday’s non-farm payrolls report for June could cement the hawkish outlook for U.S. rates and yields.The two-year yield hit its highest since 2007, and the 10-year yield climbed back above 4.00%.The MSCI World share index on Thursday posted its biggest decline since April, while the MSCI Asia ex-Japan index had its biggest fall since February and second biggest this year.There is a sprinkling of economic data from Asia on Friday including the latest snapshots of South Korean trade and Japanese household spending and consumption. But all eyes will be on U.S. bond markets and China.U.S. Treasury Secretary Janet Yellen has arrived in Beijing for a four-day visit during flaring trade tensions between the two economic superpowers. Expectations on both sides for a thaw in icy relations are low.Yellen tweeted the trip is “an opportunity to communicate and avoid miscommunication or misunderstanding,” but that may be all that is achieved. Investors certainly aren’t expecting much more.Investors’ gloomy economic and market view of China darkened further after a downbeat Goldman Sachs (NYSE:GS) report on its banks on Wednesday sparked a widespread selloff in the country’s Hong Kong-listed banking stocks.Goldman downgraded some major Chinese banks over government debt concerns, deepening worries over a sector already suffering from a creaking property market and sluggish economic growth.The Hang Seng Mainland Banks Index tumbled 6.4% on Thursday to a new low for the year, its biggest one-day fall since February 2018. It is down almost 10% this week, also on course for its biggest weekly fall in more than five years.Here are key developments that could provide more direction to markets on Friday:- U.S. Treasury Secretary Janet Yellen in China- Japan household spending (May)- South Korea current account (May) (By Jamie McGeever; Editing by Josie Kao) More

In the week ended July. 5, banks borrowed an average of $3.36 billion each night, up from $3.21B from a week earlier, according to new Fed data released Thursday.Borrowing from the Fed’s Bank Term Funding Program — the new emergency lending program launched following the collapse of Silicon Valley Bank — fell to $101.96B from $103.08B in the prior week.Lending to the Federal Deposit Insurance Corporation, which took over the collapsed Silicon Valley Bank, fell $3.52B to $164.78B.Total lending from the Fed’s three main lending programs fell to $270.09B from $274.58B. More

Lending via the central bank’s discount window stood at $3.4 billion on Wednesday from $3.2 billion on June 28, while “other credit” tied to the wind down of failed banks stood at $164.8 billion from June 28’s $168.3 billion. Bank Term Funding Program lending was $102 billion as of Wednesday, versus $103.1 billion on June 28. Total lending via the three programs stood at $270.2 billion, from $274.7 billion the week before. More

Investors sold stocks and bonds across the world on Thursday as US borrowing costs touched a 16-year high, following strong jobs figures that intensified expectations of further rate rises by the Federal Reserve.Europe’s Stoxx 600 index closed down 2.3 per cent, its biggest one-day drop since March, as the yield on the two-year US Treasury note — which tracks interest rate expectations — reached its highest level since 2007.The moves came after the US gained 497,000 private sector jobs last month — roughly double economists’ expectations and the biggest rise in more than a year — according to data from ADP Research Institute.“The global economy will break eventually, and the higher rates go, the bigger the cracks will be,” said Mike Riddell, a bond fund portfolio manager at Allianz.As the two-year US Treasury hit 5.12 per cent, the benchmark 10-year reached 4.08 per cent, with the sell-off by investors pushing up yields.On Wall Street, the S&P 500 and the tech-heavy Nasdaq Composite both tumbled more than 1 per cent after the data was released, but recovered to each close 0.8 per cent lower.The Vix volatility index, popularly known as “Wall Street’s fear gauge”, jumped to a high of 17.1 as investors fretted that a prolonged period of high borrowing costs could soon weigh on the US economy.London’s FTSE 100 dropped 2.2 per cent, while Hong Kong’s Hang Seng index earlier fell 3 per cent.Two-year German debt yields, a eurozone benchmark, also jumped, rising 0.07 percentage points to 3.36 per cent, while two-year UK Gilts rose 0.19 percentage points to 5.56 per cent, their highest level since 2008. The shifts underscored a growing consensus that the Fed would soon resume rate rises after pausing its tightening campaign in June for the first time in more than a year. Lorie Logan, president of the Dallas Fed, called on Thursday for an immediate resumption of rate rises.“If we lose ground in our effort to restore price stability, we will need to do more later to catch up,” she warned. “We have already had a fair amount of time to see the overall effects of monetary tightening.”The central bank has raised the federal funds rate more than 5 percentage points since early 2022. But according to minutes released this week from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said “additional increases” in the Fed’s benchmark interest rate would be “appropriate”.

The US labour market has remained extraordinarily strong, despite the Fed’s sustained interest rate rises. Thursday’s private sector employment data showed big increases in the hospitality and leisure sectors, as well as in construction and transportation.“This was very, very strong hiring data,” said Ben Jeffery, a US rates strategist at BMO Capital Markets.He added that some wage data “was encouraging for the Fed, but there is nothing in here that would make them hesitant to hike at the end of the month”. In contrast to the ADP figures, the government’s own data on Friday is expected to show that hiring growth slowed in June. Economists polled by Bloomberg have forecast that the labour department will report that the US added 200,000 jobs last month, down from 339,000 in May. However, the median forecast has underestimated jobs data for 14 consecutive months.Additional reporting by Taylor Nicole Rogers and Colby Smith in New York More

NEW YORK (Reuters) – Federal Reserve forecasts released at the June monetary policy meeting laid out an outlook that was more hawkish than what Wall Street’s biggest banks had penciled in ahead of the gathering. According to the June survey of primary dealers, who underwrite Treasury debt auctions, the banks forecast a 5.38% stopping point for the federal funds target rate range, which is lower than the 5.6% that Fed officials ended up penciling in at the gathering. The Fed’s outlook implies another half percentage point increase from the current target of between 5% and 5.25%, which the Fed held steady at the Federal Open Market Committee meeting held on June 13-14. The primary dealer survey was released on Thursday by the New York Fed and was joined by the survey of market participants, most of whom are large money managers. Respondents to that poll were also caught off guard by the Fed outlook and had projected the same Fed stopping point as the primary dealers. Both surveys were done ahead of the FOMC meeting. The primary dealers expect a full percentage point’s worth of rate cuts in 2024, starting in the first quarter of that year, while the market participant survey sees a move down to 4.25%. At the Fed meeting, officials eyed a 4.6% funds rate by the end of next year. The dealers were also polled on their expectations for the drawdown of the Fed’s balance sheet. The Fed has been allowing just under $100 billion per month in Treasury and mortgage debt to mature and not be replaced, complementing a rate rise campaigns that began in March 2022, when short-term rates were at near zero levels. Fed officials have given little guidance about when the central bank would stop the drawdown. The pre-FOMC survey of dealers projected the Fed would stop shedding Treasuries in the second quarter of 2024 but will continue unloading mortgage debt at least into the fourth quarter of 2025, which is as far as the survey sought answers. Dealers in the survey offered a range of views as to why the balance sheet drawdown would stop. Some said it would accompany the start of rate cuts, while others said it would stop when Fed officials determined a recession was likely. Speaking Thursday, Lorie Logan, who managed the Fed’s holdings of cash and securities before becoming the Dallas Fed president last year, said the view shown in past surveys pointing to an end of the drawdown in the second quarter of next year ‘surprised me.” Logan, at an event at Columbia University, said it was likely wrong to think the drawdown would stop just because the Fed was lowering rates. She explained the Fed could be lowering rates simply because inflation was coming down and it was trying to balance monetary policy to that shift. Logan said in her view, the Fed has a long way to go reducing its holdings. The dealer and market surveys also offered projections about the size of the Fed’s reverse repo facility. This tool exists to put a floor underneath short-term rates and has seen very high usage by those eligible to use it. Mainly used by money funds, this tool finally saw inflows fall below $2 trillion per day last month, and they are widely expected to fall further as private market rates become more attractive and the Treasury ramps up issuance. Primary dealers reckon the daily reverse repo inflow will hit $1.119 trillion by the fourth quarter of 2024. More

Payrolls have been growing by hundreds of thousands of jobs a month, totaling nearly 1.6 million in the first five months of 2023 alone.
The consensus estimate is that payrolls rose by another 240,000 in June, and the unemployment rate is projected to nudge lower to 3.6%.
The market will be parsing Friday’s report for additional points that will inform Fed policy. One key will be wages.

A man walks past a “now hiring” sign posted outside of a restaurant in Arlington, Virginia on June 3, 2022.
Olivier Douliery | AFP | Getty Images

The U.S. jobs market is still on fire, no matter how much effort policymakers put into cooling it off.
Despite a series of interest rate hikes aimed specifically at fixing an imbalance between company demand and the supply of workers, payrolls have been growing by hundreds of thousands of jobs a month, totaling nearly 1.6 million in the first five months of 2023 alone.

A Labor Department report Friday is expected to show that the trend continued through June. The Dow Jones consensus estimate is that payrolls rose by another 240,000, and the unemployment rate is projected to nudge lower to 3.6%.
Those waiting for the jobs picture to deteriorate, then, are going to have to continue to be patient.
“The demise of the labor market has been something that has seemed to be just around the corner for the last nine months or so. It keeps ticking in a way that we didn’t think is possible,” said Thomas Simon, an economist at Jefferies. “I think that we are going to get strong numbers [Friday]. But my longer-term stance is that this is basically the last gasp of strength.”
Lately, however, that has proven a familiar refrain.
Much like economists for the past year or so have been expecting the U.S. to tip into recession any day now, they’ve been looking for the labor market to lead the way. The payroll numbers have managed to beat consensus estimates for all but a few months since January 2022 as companies keep hiring and consumers keep spending.

But with the full impact of 10 rate hikes from the Federal Reserve starting to be felt, there’s growing feeling that a reconciliation is coming.
“Combined with the fact that labor force participation rates are essentially where they were for most of these cohorts before the pandemic, it just suggests to me that there aren’t really that many more people to hire,” Simon said.

An ‘overcooked’ jobs picture

Asked to describe the general state of the labor market, Simon called it “overcooked.”
“It’s remarkable how long it has withstood a really high degree of pressure. But I can’t see it going on indefinitely, unless something were to change radically with demographics,” he said.
Recent numbers, though, suggest the jobs picture again could defy expectations.
Payroll processing firm ADP on Thursday reported that private sector companies added a stunning 497,000 jobs in June, more than double the expectation. While ADP has had a spotty track record in aligning with the government’s official count, the tally at the very least suggests possible upside to Friday’s report.
Markets recoiled at the signs of labor strength, selling off Thursday afternoon as expectations rose that the Fed might have to get even more aggressive with rate hikes.
“It’s difficult for the market to digest the possibility that the Fed has more work to do,” said Quincy Krosby, chief global strategist at LPL Financial. “It’s become trite to say that good news is bad news. If you want to put it within the framework that the Fed wants to complete its mission by the end of the year, then this is actually good news for the market.”

Investors didn’t see it that, way, viewing the prospect of higher rates as heightening the chances that the much-predicted recession would become a reality.
Dallas Fed President Lorie Logan gave a speech Thursday morning, saying she expects more work to do on inflation and acknowledging that she was one of the central bankers who would have welcomed a rate hike at the June meeting. The Federal Open Market Committee ultimately voted to take a break from tightening, but officials indicated more rate increases are on the way.

What to look for in the report

The market will be parsing Friday’s report for additional points that will inform Fed policy.
One key will be wages. Average hourly earnings are projected to rise 0.3% on the month and 4.2% from a year ago. That would bring the annual pace down to its lowest since June 2021, a move in the right direction even if still above what the Fed considers consistent with its 2% inflation goal.
The average work week also will be a key metric, having been on a steady but gentle decline since early 2021 to its lowest level since April 2020.
Another point of interest will be any disparity between the survey of establishments, used to determine the headline payrolls number, and the survey of households, which determines the unemployment rate. In May, payrolls increased by 339,000, while the household survey showed a decline of 331,000, due almost completely to a big drop in self employment.
On Wall Street, most economists think the ADP report probably was inflated by seasonal factors, and see more moderate gains Friday.
Goldman Sachs, for instance, said it expects an above-consensus 250,000 gain for June, while Citigroup is looking for a much tamer 170,000, which it still sees as consistent with more rate hikes.
“A too-tight labor market that is inconsistent with 2% price inflation should keep Fed officials raising rates again in July and September,” Citigroup economist Veronica Clark said in a client note.
Another report Thursday indicated that the jobs market could be loosening at least a little. The Labor Department said job openings fell by nearly half a million in May, possibly indicating some relief ahead.
“It’s not great news, but it’s good news,” said Lightcast senior economist Rachel Sederberg. “This is the slow contraction in numbers we wanted – it’s comforting to see.” More

The NewsJob openings fell in May while the number of workers quitting their jobs increased, the Labor Department reported Thursday.There were 9.8 million job openings in May, down from 10.3 million in April, according to the Job Openings and Labor Turnover Survey, known as JOLTS. The report shows that the labor market is maintaining ample opportunities for workers, but that it is losing momentum.“This is a labor market that is moderating, where things are cooling down, but is still hot,” said Nick Bunker, the director of North American economic research at the job search website Indeed.The quits rate, which is often used to gauge a worker’s confidence in the job market, increased in May, particularly in the health care, social assistance and construction industries. A rise in quitting often signals workers’ confidence that they will be able to find other work, often better paying. But fewer workers are quitting their jobs than were doing so last year at the height of what was called the “great resignation.”Layoffs were relatively steady after decreasing in previous months, a sign that employers are hesitant to let go of workers.College students waiting to speak with representatives of tech companies at a job fair in Atlanta.Alex Slitz/Associated PressWhy It Matters: The Fed’s next move on interest rates is unclear.Policymakers at the Federal Reserve have worried about the strength of the labor market as they continue to tackle stubbornly high inflation.The Fed chose to leave interest rates unchanged in its June meeting after 10 consecutive increases. The JOLTS report is one of several factors that will inform the Fed’s next decision on rates.Some economists worry that the Fed will push interest rates too high and set off a recession.But the JOLTS report as well as previous economic temperature checks have led others to believe that a “soft landing” — an outcome in which inflation eases to the Fed’s goal of 2 percent without a recession — is within reach. The biggest question is whether wage growth can continue to cool as workers switch jobs, said Aaron Terrazas, chief economist at the career site Glassdoor.“A tight labor market does not necessarily have to be inflationary,” he said.Background: A cooling labor market retains underlying strength.The labor market has remained resilient amid the Fed’s efforts to slow down the economy but has shown signs of cooling in recent months. Job openings were down for three consecutive months until April.Initial jobless claims during the week that ended Saturday, also released by the Labor Department on Thursday, nudged higher from the week before, though the four-week trend shows initial claims declining.Although job openings are cooling, the reading of 9.8 million in May is high compared with prepandemic levels. In 2019, for example, the monthly totals hovered around seven million.“To some degree, I worry we’ve become desensitized to numbers that were once upon a time eye-popping,” Mr. Terrazas said.What’s Next: The June jobs report comes Friday.The June employment report — another indicator closely watched by the Fed — will be released by the Labor Department on Friday. Economists surveyed by Bloomberg expect the report to show a gain of 225,000, down from the initial reading of 339,000 for May.The unemployment rate jumped to 3.7 percent in May, from 3.4 percent a month earlier. Although still historically low, the rate was the highest since October and exceeded analysts’ expectations.Fed policymakers will hold their next meeting July 25-26. More

Diplomats are nearing an agreement to target net zero emissions from shipping by “close to 2050” after almost two weeks of talks highlighted deep divisions over cleaning up the highly polluting industry.The goal would significantly strengthen existing ambitions set by the UN’s International Maritime Organisation, which has committed to establishing a new target when negotiations between member states conclude this week. But it will also disappoint environmentalists hoping for a concrete commitment to eliminate shipping’s greenhouse gas emissions by mid-century. A firm target to reach net zero by 2050 would align the industry more closely with existing global commitments on limiting climate change.A draft plan seen by the Financial Times on Thursday states that international shipping should “reach net zero GHG emissions by or around, ie close to, 2050”, although it adds that “different national circumstances should be taken into account”. The strategy, which upgrades an existing ambition to halve emissions between 2008 and 2050, is expected to be finalised by Friday.The caveats underline the struggle for developing and wealthier nations to reach a compromise and intensify concerns whether the fuel-intensive sector, which delivers up to 90 per cent of traded goods globally, can make substantial progress on decarbonisation.“There’s a lot of distrust in the room between north and south,” said Faig Abbasov, director of shipping at climate group Transport & Environment, who is present at the IMO talks. “Compromise often reflects the lowest possible denominator. That is the big concern.”Ahead of the IMO talks France rallied 22 allies behind calls to impose a levy on shipping emissions and align the industry with the 2015 Paris Agreement’s aim to limit global warming to 1.5C above pre-industrial levels. But these efforts were countered by China, which urged poorer countries to oppose a flat levy and the “unrealistic” ambitions of wealthy nations, according to a diplomatic note seen by the FT.Abbasov added: “This is pretty much the last strategy for the next decade. This is the moment . . . The UN had the opportunity to set an unambiguous and clear course towards the 1.5C goal but all it came up with is a confusing fudge.” The proposed plan falls short of targets laid out by the UN, which has said global emissions must fall 45 per cent by 2030 and reach net zero by 2050, if the world is to meet ambitions set out in the Paris accord. The draft strategy sets “indicative” targets for shipping, believed to be responsible for almost 3 per cent of greenhouse gases according to the IMO, to cut its emissions “at least 20 per cent” by 2030 and “at least 70 per cent” by 2040.It adds that zero or near-zero alternatives should make up at least 5 per cent of shipping’s energy supply by 2030.Member states have not agreed economic measures to reach the stated ambitions. Some, but not all, developing nations oppose a levy that they fear would impose additional costs on trade. The draft states that such measures should be approved by 2025 before entering into force in 2027.The IMO declined to comment on an “informal document”, adding the final draft will be presented on Friday. More