Economy

LONDON (Reuters) – The dollar index rose to seven-week highs on Friday, as investors prepared for U.S. interest rates to stay higher for longer after a set of strong U.S. economic data. The yen fell after a volatile Asian trading session, with incoming Bank of Japan Governor Kazuo Ueda saying it was appropriate to keep ultra-loose monetary policy. Strong U.S. jobs data and rhetoric from Federal Reserve officials this month about openness to higher rates if needed in the fight against inflation have resulted in the dollar erasing its year-to-date losses.The dollar index – which measures the U.S. currency against six others – was 0.2% higher at 104.80, its highest since Jan. 6. It was set for a fourth-straight weekly gain, having risen 2.5% this month. “The dollar notching its fourth-consecutive week of gains highlights just how far the U-turn in the market narrative has gone as data this week continues to highlight strength in the U.S. economy and its underlying inflation drivers,” Simon Harvey, head of FX Analysis at Monex, said.This will likely be displayed yet again with January’s personal consumption expenditures price index – the Fed’s preferred inflation measure – due at 1330 GMT. But markets will likely wait for more Fed comments and February data for further rate hikes repricing, Harvey added. Investors expect U.S. rates to peak in July at 5.35% and remain above 5% until the end of the year, having walked back expectations of a deep rate cut this year. “We’re in a bit of a wait-and-see pattern in markets, with the dollar holding up firm and momentum largely driving minor moves in major currency pairs,” Harvey said.The euro edged 0.1% lower against the greenback at $1.0583, and sterling slipped 0.27% against the dollar to $1.1985. UEDA, JAPAN INFLATIONIncoming BOJ chief Ueda, who was nominated earlier this month in a surprise move, warned uncertainties regarding Japan’s economic recovery remained “very high”, which would warrant the BOJ maintaining its ultra-loose monetary policy.The yen was volatile, weakening 0.45% to 135.29 per dollar, after touching its highest since Monday in Asian trading hours.”His neutral comments, coming against market’s hawkish expectations and together with the rising global yields, suggest the yen could embark on a weakening trend again once we are past this volatility,” said Charu Chanana, market strategist at Saxo Markets in Singapore.Japan’s core consumer inflation hit a fresh 41-year high in January, putting renewed pressure on the central bank to phase out its massive stimulus programme. More

Germany’s economy shrank more than expected in the fourth quarter according to revised figures, raising doubts over the ability of Europe’s biggest economy to escape recession and recover swiftly from its energy crisis.High inflation drove sharp falls in German consumer spending and investment in buildings and machinery in the final quarter of 2022, the federal statistics office said on Friday, which led to a 0.4 per cent contraction in gross domestic product from the previous quarter. That is the second downgrade in Germany’s latest GDP figures in the past month. Initially Destatis estimated the economy had stagnated, before announcing a 0.2 per cent fall in fourth-quarter output in its flash estimate at the end of January.Economists expect the latest downgrade to have a knock-on effect on overall eurozone growth in the fourth quarter. “Eurozone GDP is very likely to be revised down,” said Franziska Palmas, an economist at research group Capital Economics. The regional figure could be lowered from 0.1 per cent growth to zero or even a slight contraction when updated figures are published on March 8, analysts said. The biggest quarterly decline in the country’s GDP since the start of 2021, coupled with recent upward revisions in German and eurozone estimates for inflation, dealt a blow to hopes that Europe will swiftly rebound from the fallout of Russia’s full-scale invasion of Ukraine one year ago.Recent surveys of businesses and consumers have painted a more upbeat picture of Europe’s economy at the start of this year, however, suggesting it may prove more resilient than expected after a mild winter helped to lower gas prices and avert fears of energy shortages.“Looking ahead, the recent upturn in the surveys is positive, but we doubt that the economy has enough momentum to avoid another fall in first-quarter GDP, and as a result, a technical recession,” said Claus Vistesen, an economist at research group Pantheon Macroeconomics. A recession is defined as two consecutive quarters of falling output.“The numbers do increase the likelihood that Germany will experience a recession,” said Palmas. German investment in construction and equipment, such as machinery and vehicles, fell 2.5 per cent quarter on quarter. The country’s trade surplus was weaker than expected, as exports fell 1 per cent and imports were down 1.3 per cent. However, government spending rose 0.6 per cent.“The continued strong price increases and the ongoing energy crisis weighed on the German economy at the end of the year,” Destatis said, adding that this was “particularly noticeable in private consumer spending”, which fell 1 per cent in the three months to the end of December.Household spending dropped after the government ended some support measures, such as a discount on fuel and a subsidised €9-a-month train ticket, it said, even though Berlin paid most people’s gas bills in December and plans to cap them this year.The figures “show that the sharp rise in energy prices has noticeably slowed down the economy, despite the government’s extensive aid measures”, said Ralph Solveen, an economist at German lender Commerzbank. He added that interest rate rises by the European Central Bank were “likely to have had an impact on the construction sector in particular”.Research group GfK said on Friday that its German consumer confidence index rose to minus 30.5, up from minus 33.8 in the previous month, slightly below economists’ expectations and well below the positive scores of less than two years ago. More

OECD Secretary-General Mathias Cormann said the global economic outlook is “slightly brighter” this year but inflation challenges remain.
“The outlook for the world is slightly brighter at the beginning of 2023 than what we thought it would be just two or three months ago,” he told CNBC’s “Street Signs Asia” on Friday.
The OECD chief highlighted that the U.S. Federal Reserve took “aggressive action last year,” in terms of hiking interest rates to rein in surging price pressures.

People shop near prices displayed in a supermarket on February 13, 2023 in Los Angeles, California. 
Mario Tama | Getty Images News | Getty Images

OECD Secretary-General Mathias Cormann said the global economic outlook is “slightly brighter” this year but inflation challenges remain.
“The outlook for the world is slightly brighter at the beginning of 2023 than what we thought it would be just two or three months ago,” he told CNBC’s “Street Signs Asia” on Friday.

“Indeed, energy and food prices are substantially lower than what they were at their peaks,” noted the OECD chief, ahead of a G-20 financial leaders meeting this week in Bengaluru, India.
Energy prices have fallen significantly because Europe was able to “successfully” diversify its sources of energy, Cormann noted. In addition, a “benign winter” helped to reduce energy demand which kept gas prices low, he said.
In November, the OECD said “Russia’s war of aggression against Ukraine has provoked a massive energy price shock not seen since the 1970s.”
“The global economy is projected to grow well below the outcomes expected before the war – at a modest 3.1% this year [2022], before slowing to 2.2% in 2023 and recovering moderately to a still sub-par 2.7% pace in 2024,” it added.

That report further highlighted Asian emerging-market economies are expected to account for close to three-quarters of global GDP growth in 2023, as Europe and the U.S. slow down sharply.

Inflation risks

Still, inflation risks continue to persist and need to be tackled well, said the OECD chief.
“Inflation is starting to tick down, but we are not on top of the inflation challenge yet. There is more work to be done to tackle inflation and that comes with risks,” noted Cormann. “And these are risks that will need to continue to be managed well over the weeks and months.”
The OECD chief highlighted the U.S. Federal Reserve took “aggressive action last year,” in terms of hiking interest rates to rein in surging price pressures.
Now the Fed continues to fight inflation in “a more steady fashion allowing the data to come through and allowing… the measures that are in the pipeline to take effect,” Cormann noted. “That is what we expect central banks around the world to do, to continue to monitor the data and to continue to adjust the decisions.”

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In early February, the U.S. central bank raised its benchmark interest rate by a quarter percentage point and gave little indication it is nearing the end of this hiking cycle.
Last month, the OECD chief highlighted China’s reopening is “overwhelmingly positive” in the global fight to tackle surging inflation. In early December, Beijing suddenly shifted away from its zero-Covid policy.
“Over the medium to longer term, this is a very much a positive in terms of making sure that the supply chains function more efficiently and more effectively, making sure that demand in China and indeed trade more generally resumes in a more positive pattern,” Cormann told CNBC at the World Economic Forum in Davos, Switzerland.

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When the pandemic threw low-income countries into distress in 2020, China initially appeared to be part of the solution, delivering more debt relief than any other lender to coronavirus-hit countries.No longer. Rather than joining collective efforts to rescue distressed borrowers, its critics say China is now putting its own interests first. That not only challenges the traditional approach to sovereign defaults, but the very foundations of the IMF, World Bank and other multilateral lenders. The full implications of China’s stance are beginning to sink in. Janet Yellen, US Treasury secretary, has made a point of bringing the issue to the meeting of G20 finance ministers in Bengaluru this week, urging Beijing to participate more fully “in meaningful debt treatments for developing countries in distress”.Those remarks follow her visit last month to Zambia which, after defaulting on its debt in 2020, has fallen victim to a sluggish restructuring process, largely blamed by the US on Beijing. Sri Lanka, which defaulted last year, has also not yet received the financing assurances it needs from China to finalise an IMF assistance programme. Other countries that have borrowed heavily from Beijing and western creditors, such as Pakistan and Egypt, are at risk of following the two into default this year. As the list of developing countries in distress grows longer, there is an overriding concern for Washington: that China will insist global lenders such as the IMF and the World Bank join bilateral and commercial creditors in reworking, or forgiving, part of their loans.Critics claim removing so-called “preferred creditor” status would prove disastrous, raising lenders’ cost of funds — and their capacity to provide finance at much lower interest rates than borrowers could get elsewhere. Borrowers in the developing world are also alarmed by any threat to the creditor protection that underpins the triple A credit ratings of the IMF, the World Bank and other development banks. An internal World Bank note signed in November by executive directors representing 100 developing countries — including, bizarrely, China itself — described the bank’s triple A rating as the “very reason” why they have consistently made the lender a preferred creditor when taking out finance. One explanation of the apparent contradiction in Beijing’s position is that there is not just one Chinese creditor. The finance, trade and foreign ministries, the central bank and the national development agency each have different and at times conflicting mandates and priorities.This argument has been employed to explain the slow pace of China’s co-operation with debt workouts in Zambia and elsewhere. Its multiple lenders, in the form of commercial and development banks, operate under different and competing imperatives. Some observers even claim Beijing should be congratulated for what progress it has made in persuading them to act as one.Few observers doubt there is truth to this narrative. Equally, few doubt that when the strategic or economic imperative is strong, Beijing can act decisively.In 2017, the People’s Liberation Army opened its first overseas naval base in Djibouti, on the strait of Bab-el-Mandeb off the Horn of Africa, through which 30 per cent of the world’s shipping passes on its way to and from the Suez Canal. When Chinese loans of an estimated $1.5bn started to go wrong, there was little delay in agreeing revised terms.“When it matters, they get it done,” said Anna Gelpern, a senior fellow at the Peterson Institute for International Economics. But, she added: “They are not invested in the existing institutions, because they were not around when they were created.”Mark Sobel, a former US representative at the IMF, goes further. China knows “full and well” that its demands on preferred creditor status are a non-starter. But it “continues to pursue this argument as another delaying tactic to avoid taking responsibility for its own massive, unsustainable bilateral lending”.With US-China relations at their worst in decades, there is little reason to expect this to change. China watchers think whatever Yellen says in India over the next two days may prove futile. Yu Jie, senior research fellow for China at international affairs think-tank Chatham House, says Beijing will always pursue the best outcome for itself over collective action. “That has always been the way and it will never change.” More

Europe needs to do more to boost supply chain self-sufficiency in renewable energy, the head of French utility Engie has warned, as huge US subsidies help it steal a march in creating an independent green tech industry. Catherine MacGregor, the gas distributor’s chief executive, said it was branching heavily into renewables in Europe as well as the US, where Joe Biden’s $369bn package of tax breaks and incentives was “spurring quite a bit of interest” from the group to pursue hydrogen and battery storage projects. “We were already developing and operating very large renewable projects in the US but we are seeing an acceleration,” McGregor told the Financial Times, adding that a “big chunk” of Engie’s 10 gigawatt battery capacity target by 2030 would be in the US.The US scheme should inspire Europe on several fronts, MacGregor said, including the fact it rewarded not only companies that produce goods domestically but also those that “buy local”.“Europe has to think about protecting or making sure its industry flourishes,” MacGregor said, adding that she would welcome incentives to help more regional suppliers emerge. “From a business standpoint, that is also a way to mitigate my risk — to have local, healthy suppliers.”Europe is heavily reliant on other markets to supply its renewable energy sector. In the solar industry, for example, the bulk of panel manufacturing is concentrated in China. The EU is still working on its policy responses to the IRA and has unveiled proposals that would loosen state aid rules and eliminate red tape to encourage the development of green technologies in the region. But a “Buy European Act”, an idea initially backed by France, does not appear to have momentum among all EU member states. The European Commission will unveil more specific proposals in mid-March. Under MacGregor, who took over as chief executive in early 2021, Engie this week unveiled a new investment push geared towards renewables as well as “green molecules” — the development of cleaner forms of gas such as biofuels. It is boosting spending on new projects to €22bn-€25bn between 2023 and 2025, up from €15bn-€16bn over its 2021-2023 plan, funded in part by a big disposals programme completed since 2021 as the group restructured and sold off some services businesses such as Equans. The group, born out of the 2008 merger of Gaz de France and Suez, plans to more than double its renewables capacity to 80GW by 2030. A quarter of its pipeline is geared towards Europe and almost a third in the US, with the rest spread across regions such as Latin America, Asia and Africa.Even without a fully-fledged “IRA” response in Europe and as the EU gears up for discussions this year over how to reform electricity markets, MacGregor said the region still held attractions. “The sheer amount of renewables that need to be developed in Europe is massive,” MacGregor said. “You need to be very, very local, you need to go and talk to local authorities and citizens . . . for us it’s a competitive advantage.”However, both Europe and the US would also need to invest at scale in areas such as grid infrastructure to help support their push towards electrification, MacGregor said, echoing warnings from other big power groups such as Eon. Engie has replaced its gas bought from Russia’s Gazprom, which before last year’s invasion of Ukraine accounted for 17 per cent of its supplies, with other sources including Norway. Europe was “exiting the winter in a good position” on the gas front, MacGregor said, with encouraging storage levels thanks to clement weather conditions and solidarity in the region.She cautioned that Europe was still exposed to possible strains on its power systems in the months ahead, however, including due to a drought which could affect hydro power production. Engie reported record net profits of €5.2bn for 2022 when stripping out exceptional items, fuelled by soaring gas prices. Its net income was €200mn including impairments, including those linked to the shelved Nord Stream 2 gas pipeline to Russia which it was a lender to, and provisions on its Belgian nuclear operations. More

COMMENTARY: MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE “It seems to be a continuation of the stance taken by (Haruhiko) Kuroda, though I think it’s difficult to tell right now. He’s treading a fine line in the sense of trying to find a way to exit (YCC) without being too disruptive on the dollar/yen direction.””It’s not a surprise that he’s sounded the way he is to get the market not too excited. The market is trying to read the policy bias. However, this may not matter too much, as picking Ueda in itself is a strong signal… that the government may increasingly want a departure from the past policies.””He hasn’t really said all that much as whether he’s for or against the dovish policy.”BACKGROUND:* The government has nominated academic Ueda to head the Bank of Japan as the decade tenure of Governor Haruhiko Kuroda nears its close.* Unlike Kuroda, who arrived with a clear mandate to beat deflation with massive stimulus, Ueda faces the delicate task of phasing out his predecessor’s radical and complicated policy framework without derailing a fragile economic recovery.* Nearly half of Japanese firms say that new leadership at the central bank should revise its negative interest rate policies, while more than a quarter say its price target should be changed, according to a Reuters monthly poll. * As the first post-war BOJ governor to come from academia, Ueda brings a wealth of experience helping guide the Japanese economy through rough waters – including during his time at the central bank’s nine-member board from 1998 to 2005.* Upon approval by parliament, Ueda will assume the top BOJ post on April 9 and chair his first policy-setting meeting on April 27-28. More

TOKYO (Reuters) – Nearly half of Japanese firms say that new leadership at the central bank should revise its negative interest rate policies, while more than a quarter say its price target should be changed, according to a Reuters monthly poll.The government nominated academic Kazuo Ueda to head the Bank of Japan as the decade tenure of Governor Haruhiko Kuroda nears its close. All eyes will be on Ueda when he speaks in parliament on Friday and Monday, looking for hints at how he may unwind the BOJ’s unprecedented monetary easing without throwing financial markets into turmoil. Among nearly 500 major companies polled, 47% said the BOJ should modify policies that allow interest rates to go negative. In the next most common response, 28% said the central bank should revise its 2% inflation target. “A sudden change in monetary policy could be very damaging to both firms and individuals, so it would be good to aim for a soft landing,” said a manager at an information services firm, who commented on condition of anonymity. Only 9% said the BOJ should scrap its yield curve control (YCC) policy, a trading band for bond maturities that has come under increasing attack by speculators. Even so, a majority of companies, 62%, said a normalisation of monetary policy would not have a good or bad impact on their business.Asked to rate Kuroda’s legacy at the central bank, respondents gave him middling to positive grades, overall. On a scale of 0-100, 46% of respondents, the biggest cohort, put Kuroda in the middle quintile of 41-60 points.Kuroda was rated in the top two quintiles by 40% of managers, compared with 14% who put in the bottom ranks. “There are pros and cons,” a manager in the electronics industry said about the Kuroda BOJ. “It certainly supported the economy, but it also led to massive fiscal expansion by the government.”Corporate managers remained pessimistic about the near-term environment, with 80% saying conditions would be “not so good” to “bad” in the next three months, nearly unchanged from the previous survey.The Reuters Corporate Survey, conducted for Reuters by Nikkei Research between Feb. 8-17, canvassed 493 big non-financial Japanese firms, comprised of 246 manufacturers and 247 non-manufacturers. They were polled on condition of anonymity, allowing respondents to speak more freely. More

TOKYO (Reuters) – Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said on Friday it was appropriate to maintain ultra-loose monetary policy as inflation has yet to sustainably and steadily meet the central bank’s 2% target.Ueda said the recent rise in consumer inflation was driven mostly by surging import costs of raw material, rather than strong domestic demand.He also warned that uncertainties regarding Japan’s economic recovery remained “very high,” warranting the BOJ to maintain ultra-loose monetary policy.”It’s standard practice to act pre-emptively to demand-driven inflation, but not respond immediately to supply-driven inflation. Otherwise, the BOJ will be cooling demand, worsening the economy and pushing down prices by tightening monetary policy,” Ueda told the lower house confirmation hearing.”Japan’s trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ’s 2% target,” he said.”It’s true there are various side-effects emerging from the stimulus. But the BOJ’s current policy is a necessary, appropriate means to achieve 2% inflation.”The yen wobbled either side of steady as Ueda spoke and was last about 0.3% stronger at 134.34 per dollar.Earlier this month, the government named the 71-year-old academic as its pick to become next central bank governor in a surprise choice that markets saw as heightening the chance of an end to the unpopular yield curve control (YCC) policy.With inflation exceeding the BOJ’s 2% target, Ueda faces the delicate task of phasing out YCC, which has drawn public criticism for distorting market functions and crushing banks’ margins.Upon approval by parliament, he will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.”It seems to be a continuation of the stance taken by Kuroda, though I think it’s difficult to tell right now,” Moh Siong Sim, currency strategist at Bank Of Singapore, said of Ueda’s comments.”He’s treading a fine line in the sense of trying to find a way to exit (YCC) without being too disruptive on the dollar/yen direction.”The government’s deputy governor nominees – former banking watchdog head Ryozo Himino and BOJ executive Shinichi Uchida – will testify in the afternoon after Ueda.The upper house of parliament will hold the confirmation hearing for Ueda on Monday, and that for the two deputies on Tuesday.The nominations need the approval of both chambers of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both.Under YCC, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around 0% as part of efforts to sustainably achieve its 2% inflation target.Under pressure from rising global interest rates, the BOJ was forced to raise in December the implicit cap for its 10-year yield target to 0.5% from 0.25% – a move that fuelled market expectations of a near-term tweak to YCC. More