Economy

The writer is a former chief investment strategist at Bridgewater AssociatesThe European Commission’s consumer confidence index could be seen as an economist’s attempt at dark humour — since it was launched in the 1980s, the gauge has always been negative, with fluctuations just reflecting relative shades of gloom.While the commission’s index suggests that eurozone consumers today are only modestly downbeat (with a level of minus 19 points in February compared with minus 29 last September), other reflections of Europe’s macro picture have become positively sunny. Europe’s double-digit equity market returns so far this year are handily outpacing developed-market peers. Meanwhile, economic data has sharply surprised expectations to the upside. Only months ago, most forecasts assumed a 2023 recession. The growing risk today is that investors simply assume these trends will continue. While that’s always possible, the positive macro and market forces are likely to fade as the year progresses. For those investors who have benefited from strong gains this year, it makes sense to consider taking some profits off the table, for at least four reasons.First, the bump in economic activity from China’s reopening after Covid-19 lockdowns is likely to prove a one-off rather than a sustained support for European growth. With Asia now representing more than 20 per cent of Euro Stoxx 600 revenues, according to JPMorgan, and China alone around 10 per cent of overall European exports, it is no surprise that the pent-up Chinese demand is helping European equity sentiment and regional activity. But in contrast to much of the developed world, where a post-pandemic splurge in spending was reinforced by large fiscal transfers, Chinese consumers seem likely to quickly revert to a more cautious stance. They face uncertainty around the critical property sector that is the basis of much Chinese household wealth creation. At the same time, the government remains intent on pursuing policies to support the economy over the longer-term versus short-term “floods” of liquidity-fuelled growth.Second, the monetary backdrop in Europe will be getting significantly tighter at a time when global liquidity is also being withdrawn. A run-off of the European Central Bank’s bond portfolio is set to begin this month. And given growth is resilient and inflation remains multiples above the central bank’s target, there is likely to be a continuation of rate rises to take monetary policy further into restrictive territory. The ECB is “catching up” to the Federal Reserve — with the impact of the tightening ahead to be increasingly felt as 2023 progresses.Third, and part of the ECB’s challenge, will be the direction of natural gas prices, which remains highly uncertain. The region clearly benefited in recent months from milder than expected winter weather and business efforts to limit gas consumption. That has led to high storage levels and influenced a sharp fall in prices. Benchmark wholesale gas prices in late February tipped below €50 per megawatt hour, their lowest level since September 2021 and a fraction of the all-time high of €320 reached last August. Still, prices remain well above prewar long-term averages, and there is a wide cone of possible outcomes for prices this year as countries seek to replenish reserves. Will Russian gas deliveries fall further? How much will China compete for supply? This is not a macro support one should count on.Fourth and finally, Europe — like the US — has a potential fiscal fight in store this year. The region’s stability and growth pact that requires fiscal prudence was suspended in 2020 but is set to come back into force in 2024. There is hope that reform of the fiscal rules could help ease government burdens, especially for more indebted countries such as Italy where the debt-to-GDP ratio has risen to nearly 150 per cent (versus the bloc’s 60 per cent long-term target). For now, though, there are proposals but no agreement. It’s reasonable to expect this to come to a head over the summer (possibly sharing headlines with US debt-ceiling deadlines) so any new framework is resolved in time for year-ahead budgetary discussions. Even with modest reforms and potential economic support from the ECB through its transmission protection bond-buying instrument, probable fiscal belt tightening next year will coincide with higher interest rates and less external growth support from China and the US. That seems highly probable to get many investors in Europe gloomy again. More

SACRAMENTO, Calif. (Reuters) -Record rain and snowfall in recent weeks has eased half of California out of a persistent drought and bolstered the store of mountain snow that the state relies on to provide water during the warm, dry spring and summer.Statewide on Friday there was nearly twice as much snow in the Sierra Nevada Mountains as is typical for March 3, the California Department of Water Resources said. The snow also was dense and wet, meaning that it held nearly 170% of the typical amount of water for this time of year, the agency said.The snowpack is considered California’s largest reservoir, and is vital to fill streams and lakes as it slowly melts.”We could not be more fortunate to have this kind of precipitation after three very punishing years of dry and drought conditions,” said Department of Water Resources Director Karla Nemeth. The record precipitation and accompanying powerful storms in December and February have also dramatically lessened California’s ongoing drought, a team of U.S. government agencies said this week.The U.S. Drought Monitor map released Thursday by the National Oceanic and Atmospheric Administration and cooperating agencies showed that 17% of California was not experiencing any sort of abnormal dryness, while another third was dry but no longer officially in a state of drought.By contrast, just three months ago the entire state was considered to be experiencing drought conditions. California has cycled through four periods of drought since 2000, making less water available to irrigate crops and sustain wildlife along with meeting the needs of the state’s 40 million residents. More

SHANGHAI (Reuters) – Some Chinese companies are holding on to dollar revenues from exports, while others are turning to foreign exchange hedging in anticipation of a fall in the value of the yuan, according to executives, bankers and data analysed by Reuters.Several bankers in China told Reuters that clients are reluctant to convert export receipts, while exchange filings show more than 30 A-share listed companies have signed up to use currency derivatives for risk-hedging so far this year.Central bank data also shows a shift, with dollar deposits at China’s commercial banks, which had declined over the past year, jumping by $34 billion in January to $887.8 billion.The moves are at odds with bank forecasts for a rising yuan in 2023 and broader market expectations that the U.S. dollar will fall this year, and could contribute to yuan weakness.Ms. Zhu, the owner of a Shanghai-based electronic components exporter, said she is setting aside dollars, betting that her management of some $7 million annual inflow of the U.S. currency will prove crucial to the profitability of her company.”I may need to convert some dollars into yuan to make payments to domestic suppliers,” said Zhu, who prefers to go by her last name. “(But) it feels like I should keep some dollars on hand, as the yuan will depreciate further.”Others anticipating a bumpy ride ahead for the Chinese currency include China Southern Airlines.China’s largest carrier by fleet size said in a Feb. 28 stock exchange filing that it planned up to $4 billion worth of currency hedging in 2023 to “smooth out exchange gains and losses”, up from $850 million last year.Such moves are perhaps not surprising given yuan volatility since Beijing suddenly unwound its zero-COVID strategy. The currency hit six-month highs in January, before dropping close to the closely-watched 7 per dollar level.The yuan last traded at 6.9085 to the dollar. In response to faxed questions on the yuan weakening past 7 to the dollar, the People’s Bank of China (PBOC) directed Reuters to comments by its governor Yi Gang who said the level is not a “psychological barrier”.    “Over the past five years, the exchange rate has been volatile, with a volatility rate of about 4%. And such a volatility rate is about the same as major economies,” he said.    “Overall, yuan exchange rate will remain basically stable at reasonable levels,” he added at a March 3. news briefing. ‘BENIGN’The yuan had its worst year in 2022 since China unified market and official exchange rates in 1994, dropping nearly 8% as rising U.S. interest rates diverged from falling Chinese ones, supporting dollar gains.Now the prospect of Chinese tourists using foreign exchange for their trips abroad, fresh concerns that U.S. interest rates might rise further and geopolitical tensions keeping investment flows away from China are all weighing on the currency.”It’s possible to see the yuan go past the 7-mark against the dollar in the near term given the escalating geopolitical tensions between China and the U.S.,” said Tommy Wu, senior China economist at Commerzbank (ETR:CBKG). “Still, the yuan could stabilise somewhat if the upcoming economic data shows continued improvement in the economy.”China on Sunday set a modest target for economic growth this year of around 5% as it kicked off its annual parliamentary gathering. With the economy staging a steady recovery, this could put a floor under the yuan and ultimately attract inflows.While Chinese authorities have stepped in to lend support in the past and have already made it pricier to bet against the yuan, markets do not expect intervention in the near term.”Reaction from the regulator has been benign so far, their tolerance of volatility in the yuan has risen quite a lot since last year,” Becky Liu, head of China strategy at Standard Chartered (OTC:SCBFF) Bank, said.And unlike in 2022, the PBOC does not seem to be using the daily setting of the currency trading band to lend support.”We do not think the central bank will defend 7 as CFETS stays strong at around 100,” said Lemon Zhang, FX strategist at Barclays (LON:BARC), referring to the trade-weighted CFETS index.This gauge of the yuan’s value against its major trading partners is up about 2% this year.Zhang expects the yuan to hold at 7 per dollar until the end of June, before strengthening to 6.7 at the end of the year. Ju Wang, head of Greater China FX and rates strategy at BNP Paribas (OTC:BNPQY), said she still holds short yuan positions against the dollar, although she does not expect significant weakness.($1 = 6.9009 Chinese yuan) More

WASHINGTON (Reuters) – U.S. President Joe Biden plans to unveil his upcoming budget proposal to Congress with unusual fanfare on Thursday, holding a campaign-style event intended to trumpet an economic agenda imperiled by high inflation and Republican debt limit threats.Biden plans to roll out the tax-and-spending plans at a Philadelphia union hall, a venue in a competitive battleground state that will highlight the president’s worker-centric political pitch in the weeks running up to his expected announcement of a 2024 re-election bid.”The President will deliver remarks on his plans to invest in America, continue to lower costs for families, protect and strengthen Social Security and Medicare, reduce the deficit, and more,” the White House said in a statement.The main highlight of the proposal for the 2024 fiscal year is a pledge to cut $2 trillion from the government’s deficit over 10 years, and to extend the life of the Medicare health benefit program by at least two decades.Biden is also planning to revive his plans to raise taxes on billionaires and to fund initiatives like a child tax credit. A proposal to raise payroll taxes on very high-income people is also on the table. But Biden is planning to stand by a 2020 campaign pledge not to raise rates on Americans making less than $400,000 a year.”On March the 9th, I’m going to lay down in detail every single thing, every tax that’s out there that I’m proposing, and no one … making less than $400,000 is going to pay a penny more in taxes,” Biden told an audience in Virginia Beach, Virginia, last week.”I want to make it clear: I’m gonna raise some taxes,” the Democratic president added.Biden, under pressure from Republicans who are threatening not to raise the U.S. debt limit unless he agrees to sharp spending cuts, has challenged Republicans to release their own proposals and to negotiate over those plans rather than over whether the country should raise the debt ceiling and pay its existing bills.An unprecedented U.S. default could halt growth in an economy that rebounded strongly in terms of output and jobs since the COVID-19 pandemic. Prices, too, have risen to levels that are seen as politically damaging, and economists worry that efforts led by the Federal Reserve to tamp down inflation pressures might spark a recession.Biden aides regard union backing as well as success in Pennsylvania as critical to any re-election bid by Biden. Presidential budget roll-outs in other years are done at the White House and with no special events drawing attention to them. The venue for Biden’s remarks and his travel to Philadelphia have not previously been reported.While Republican lawmakers have not yet fully outlined or voted on their spending plans for the coming fiscal year, the White House has nonetheless seized on some past statements and proposals by members of Congress as evidence that they are hell-bent on unraveling federal healthcare and old-age programs popular with voters. Republicans control the House of Representatives while Democrats control the Senate. More

SEOUL (Reuters) – South Korea’s National Pension Service (NPS), manager of the world’s third-largest public pension fund, will collaborate with foreign exchange authorities when needed to help stabilise the market, its chairman told Reuters. Chairman Kim Tae-hyun also said during an interview on Friday with Reuters that re-establishing a currency swap arrangement with South Korea’s central bank which expired at the end of last year could be part of such collaboration.NPS has nearly $700 billion under its management and needs to buy dollars to invest abroad. That sometimes brings criticism for aggravating the situation when a sharp decline in the won causes tension in the market. “Based on last year’s experience, we have prepared measures aimed at easing dollar demand and volatility in the foreign exchange market,” Kim said. The pension fund will cooperate with foreign exchange authorities to deploy the measures in case of excessive volatility, acting according to prearranged plans when the dollar/won exchange rate reaches certain levels, he said. “We have our own target rate for foreign exchange that we can endure,” Kim said. “A predictable and stable foreign exchange rate is also advantageous to us,” he said, adding that cooperation with foreign exchange authorities would be based on achieving good investment returns. Regarding the possible re-launch of the foreign exchange swap arrangement with the Bank of Korea, Kim said it would be “definitely necessary to stabilise the market”, without elaborating. The swap programme, in place for the final three months of last year, allowed the pension fund to use the central bank’s foreign reserves for overseas investments when there was increased volatility in the foreign exchange market. The won in February suffered its worst monthly loss in more than 11 years, weakening by nearly 7% against the dollar and again sparking concerns in the onshore currency market over the demand for dollars outpacing supply. Kim said the fund was enjoying improved investment earnings of around 5% so far this year, after scoring a record 8.22% loss for the whole of 2022. The fund would continue to increase investment in overseas assets and other alternatives for better returns, he said. Kim said he plans to simplify processes for alternative investments and devise a new strategy that allows more flexible management while strengthening partnerships with offshore outsourcing firms. Despite criticism that the relocation of its headquarters to Jeonju, 200 km (125 miles) south of the capital Seoul, has caused difficulties in hiring strong employees and securing resources, Kim said he hopes to attract more investment and offshore-directed companies to set up liaison offices in the city and transform it into an “information hub”. With the fund expected to be depleted by 2055, his top priority is to provide support for the government’s plan to reform the national pension system, he said. This was Kim’s first exclusive interview with any media outlet since his three-year term began last September. More

NEW YORK (Reuters) – Bridgewater Associates has raised at least $800 million in recent months for a new fund strategy, regulatory filings show, an additional offering that comes as the hedge fund manager revamps business after founder Ray Dalio gave up control.Connecticut-based Bridgewater, which manages $145 billion, launched the “Defensive Alpha” strategy in July last year, regulatory filings showed. A source close to Bridgewater said the strategy, which has not been reported previously, is designed to help weather equity bear markets and generate returns negatively correlated to equities, which means the fund’s profits will increase if stocks fall.Two fund vehicles under that strategy’s name had raised $836.4 million from investors since their launches in July, regulatory filings at the end of October show, according to Convergence Inc, a provider of alternative funds data which analyzed Bridgewater’s filings per a Reuters request. Bridgewater declined to comment on the $836.4 million raised.Initially, Bridgewater invited a small set of clients, including seed investors who provide money for new launches, and has now been offering its strategy to more investors, one source familiar with the matter said. There are 10 investors so far, the filings show, according to Convergence.      The new strategy is an addition to other offerings from the 48-year-old hedge fund, best known for its All Weather and Pure Alpha funds. Bridgewater’s most recent launch had been a sustainability focused fund in 2021. Investors have been trying to navigate an uncertain market and economic outlook after central banks suddenly shifted from accommodative monetary policy to aggressive interest rate hikes to fight inflation. The S&P 500 tumbled 19.4% in 2022, while the tech-heavy Nasdaq plummeted 33.1%, the biggest annual percentage decline for both indexes since 2008.In that market last year, Bridgewater’s flagship fund, Pure Alpha gained roughly 9.5% and outperformed global equities indexes. But that came after a much stronger start to the year, and its returns lagged rival macro funds. Pure Alpha actively bets on the direction of various types of securities — including stocks, bonds, commodities and currencies — by predicting macroeconomic trends.The new strategy underscores how Bridgewater is quickly changing under a new generation of investors after Dalio, its founder, gave up control last year. On Wednesday, Chief Executive Nir Bar Dea announced a major overhaul at the hedge fund, including restricting investments in Pure Alpha and plans to launch new products.A strategy like Defensive Alpha could appeal to pension funds, which have portfolios already loaded with bets on stocks and have not found in hedge funds the best protection against equity market downturns, according to one hedge fund investor who declined to be named. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.Asian markets will likely open on the front foot on Monday, following Wall Street’s whoosh higher on Friday, but a raft of Chinese economic data and remarks from U.S. Fed Chair Jerome Powell later in the week could quickly shift sentiment.Monetary policy decisions from Australia and Japan on Wednesday and Friday, respectively, will be market-moving events too. Before that however, investors have a deluge of headlines from China this weekend to digest.The annual session of the National People’s Congress, and reports from the finance ministry and state planner – the National Development and Reform Commission – have outlined Beijing’s broad goals and plans for the year ahead.On the economy, the government said it would aim for growth this year of around 5%, lower than last year’s target of 5.5%. It will also take steps to minimize risks in the property sector, intensify its push to make China self-reliant in tech, and the central bank will provide ‘forceful’ support for economic development.Perhaps most significantly, Beijing said it would boost defence spending by 7.2% – up on last year’s rate of increase and outpacing expected GDP growth – as Premier Li Keqiang called for the armed forces to boost combat preparedness. (Graphic: MSCI Asia ex-Japan – weekly change – https://fingfx.thomsonreuters.com/gfx/mkt/zjvqjydnwpx/ChinaCPI.png) Beijing’s macro, military and geopolitical vision for the next 12 months outlined this weekend comes as investors get more of an insight into how China’s economic reopening is progressing with the release of February trade, inflation, and credit and lending data this week.Inflation figures from South Korea, The Philippines, Thailand and Taiwan this week will be closely watched by investors and policymakers alike. With the Fed seemingly on track to tighten policy further, a renewed rise in the dollar could intensify FX-fueled inflationary pressures in Asia.Attention will turn to Japan later in the week, with the release of fourth-quarter GDP data on Thursday and BOJ’s policy decision on Friday, the last under the governorship of Haruhiko Kuroda. (Graphic: MSCI Asia ex-Japan – weekly change – https://fingfx.thomsonreuters.com/gfx/mkt/klvygnjqgvg/MSCIASIA.png) Asian stocks have generally underperformed their U.S. and global peers in recent weeks, but the underlying question still applies: How long can markets hold up – and volatility stay so low – in the face of soaring U.S. bond yields, rate and inflation expectations?Global bond yields are moving sharply higher too. Something might be about to give.Here are three key developments that could provide more direction to markets on Monday:- China’s National People’s Congress- South Korea inflation (February)- Euro Zone retail sales (January) (By Jamie McGeever; Editing by Diane Craft) More

Christine Lagarde has warned that underlying price pressures will remain “sticky in the short term” and signalled that further interest rate rises from the European Central Bank are very likely as “inflation is a monster that we need to knock on the head”.The ECB was not seeking to “break the economy” with rate increases, Lagarde told Spain’s El Correo, as she appealed for banks to reschedule debt repayments for households struggling to cope with soaring borrowing costs on variable-rate mortgages. “We are making progress, but we still have work to do . . . For the moment, the economy is resilient, employment is robust and unemployment is the lowest it has ever been,” the ECB president said, while urging lenders to consider the “reputational side” of giving big pay rises to executives.Lagarde’s comments are the latest sign that ECB officials are fretting about persistently high inflation and the further rate rises needed to tame it — particularly after core price growth, which excludes energy and food, hit a new record high in the eurozone in February.Eurozone inflation has fallen for four months after hitting a record 10.6 per cent in October, mainly because of decelerating energy prices. However, headline inflation fell less than expected to 8.5 per cent in the year to February and the core measure hit a new high of 5.6 per cent.Marco Valli, chief European economist at Italian bank UniCredit, said the data was “likely to have implications for ECB policy because influential members of the governing council have pretty explicitly linked the future rate trajectory to the evolution of core inflation”.Lagarde said it was “too early to declare victory” in the fight to return inflation to the ECB’s 2 per cent target, even though energy price growth had slowed. She predicted that headline inflation would keep falling, but underlying price growth would remain “too high” in the short term — meaning that the central bank was “very, very likely” to go ahead with a well-flagged, half-percentage point rate rise at its next meeting, on March 16.The ECB has raised rates by 3 percentage points since last summer. Financial markets are pricing in a jump in the bank’s deposit rate to 4 per cent later this year, up from its current level of 2.5 per cent. That would overtake the 2001 peak of 3.75 per cent.There are similar concerns in the US, where high inflation and strong labour market and wage data have raised doubts over whether the Federal Reserve will stick with quarter point rate rises or return to a half-point move at its March 21-22 meeting.In the UK, financial markets are betting that the Bank of England will raise rates further, but its governor Andrew Bailey said last week this assumption may be wrong.Rising interest rates have boosted the profits of commercial European banks by allowing them to increase the interest they charge on loans faster than they increase the rate savers earn on deposits. In countries such as Spain that have a high proportion of variable-rate mortgages, there are fears households could find it hard to cope with the higher cost of borrowing.“I’m sure many banks are prepared to reconsider loan conditions and prepared to spread repayments over time,” said Lagarde. “And not out of charity,” she added, pointing out that it was in lenders’ interests to avoid a rise in bad loans.UniCredit, Italy’s second-largest bank, has proposed lifting the pay of its chief executive Andrea Orcel by 30 per cent to €9.75mn a year, making him one of the highest-paid European bank bosses. “There is obviously a reputational side to those kinds of decisions that bank leaders should be aware of,” said Lagarde. More