Economy

Investing.com — Intel tells a tale of woe for the chipmaking segment. The U.S. releases December data for the inflation measure that the Fed really cares about. It will take a big shock to shake expectations of a 25 basis point rate hike next week, though. The Eurozone economy may be reacting more quickly to the ECB’s rate hikes than expected, as loan growth slowed sharply in December. Oil breaks through resistance and the paper wealth of Asia’s richest man is going up in flames after a blistering short report. Here’s what you need to know in financial markets on Friday 27th January.1. PCE prices and personal spending dataAfter a surprisingly strong first reading for fourth-quarter GDP growth, the U.S. will publish the figure the Federal Reserve cares most about at 08:30 ET (GMT 13:30): the core personal consumption expenditures price index for December.Headline inflation, as measured by the consumer price index, may have been declining steadily for the last six months but core PCE inflation has only recently started to trend downward, and the Fed will be eager to see that trend continuing ahead of its policy meeting next week.Analysts expect a modest acceleration to 0.3% in price growth, with a decline to 4.4% in the annual rate from 4.7%. It will take a big deviation to change a consensus view that a 25-basis point hike next week is nailed on. There are also pending home sales data and personal income and spending numbers for December, along with the final reading of the Michigan Consumer Sentiment index.2. Eurozone lending slows as ECB hikesThe European Central Bank’s interest rate hikes are having an effect already. Lending to private-sector companies and households grew at the slowest rate since April 2021 in December, with credit to non-financial corporations slowing particularly sharply.The impact, detailed in the European Central Bank’s monthly monetary data, suggest that 200 basis points of tightening has worked faster on the Eurozone economy than in the past. Whether that will be enough to persuade the bank from raising its key rates by 50 basis points next week is another question. The market is currently pricing in a high chance of two successive 50-bp hikes at the bank’s next meeting.The euro reversed early modest gains on the news but was still down only 0.1% by 06:30 ET.  However, 10-year Eurozone bond yields rose by as much as 10 basis points, amid nervousness that the ECB could trigger a recession that tests the single currency zone’s cohesion.3. Stocks set to open lower; Intel slumps on wide loss, bleak forecastU.S. stock markets are set to open lower later, dragged down by an alarmingly weak set of numbers and guidance from chipmaker Intel (NASDAQ:INTC) late on Thursday. Intel reported a slump in sales a loss that was twice as wide as expected. It also said it will lose money in the current quarter and that global PC shipments will be at the low end of its forecast range this year.By 06:30, Intel was down nearly 10% in premarket, erasing almost all of its 2023 gains.Tech stock futures underperformed on the read across to other chipmakers such as Advanced Micro Devices (NASDAQ:AMD). Nasdaq 100 futures were down 53 points, or 0.4%, while S&P 500 futures were down 0.2% and Dow Jones futures were largely flat.Stocks still look as if they will end the peak week of earnings season higher, having shaken absorbed poor numbers from Intel, Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM), among others to focus on more positive stories such as Tesla (NASDAQ:TSLA) and Chevron (NYSE:CVX).Chevron missed forecasts for its fourth-quarter earnings earlier, but is set to be supported by its $37 billion buyback announcement earlier in the week. Others reporting Friday include American Express (NYSE:AXP), Charter Communications (NASDAQ:CHTR), Colgate-Palmolive (NYSE:CL) and HCA (NYSE:HCA).4. Adani selloff gathers paceThe selloff in stocks controlled directly and indirectly by Gautam Adani deepened in the wake of Hindenburg Research’s short report earlier in the week.Adani, who was Asia’s richest man on paper at the start of the week thanks to the valuation of his portfolio companies, has seen his empire lose $50 billion this week. The flagship holding company Adani Enterprises (NS:ADEL) fell as much as 20% intraday in Mumbai and barely recovered before closing down 18.5%.Adani’s group has said it is exploring legal action against Hindenburg. Investor Bill Ackman by contrast praised the report as “highly credible and extremely well researched.”5. Oil breaks resistance; CFTC positioning data dueCrude oil prices broke through resistance to trade 1.5% higher, amid signs that geopolitical risk premiums may rise again in the near future as Russia responds to European and U.S. decisions to send heavy armor to Ukraine.By 06:45 ET, U.S. crude prices were testing a two-month high, rising 1.6% to $82.30 a barrel, while Brent crude was up 1.6% at $88.83 a barrel.The Commodity Futures Trading Commission will update later on the strength of speculative inflows into crude, at a time when net long positioning is close to its lowest in six years. Baker Hughes will also release its weekly rig count. More

UK chancellor Jeremy Hunt has told small-state Conservative MPs they will have to wait for tax cuts, as the government seeks to head off backbench pressure for cuts this year.In response to calls for tax cuts now from Liz Truss, the former prime minister, and other Tory rightwingers, Hunt said on Friday that “the best tax cut right now is a cut in inflation”.He added that in the long run “we need lower taxes”, but argued this would mean spending restraint by the government. The insistence of the Tory right that tax cuts are needed in April’s Budget has exasperated Hunt and Prime Minister Rishi Sunak, whose strategy is to stabilise the economy and bring inflation under control.“Risk-taking individuals and businesses can only happen when governments provide economic and financial stability,” the chancellor said in a speech at Bloomberg in the City of London, an apparent reference to the implosion of the Truss government’s debt-funded £45bn tax-cutting mini-Budget last year.Hunt said that inflation was still far too high but was nevertheless lower than in 14 EU countries, with interest rates rising more slowly than in Canada or the US.

The chancellor acknowledged that Britain had not returned to its pre-pandemic employment or output levels but emphasised that unemployment was still at its lowest level for half a century. “Our growth was slower in the years after the financial crisis than before it but since 2010, the UK has grown faster than France, Japan and Italy,” he said.Setting out what he said was the ambition “to turn the UK into the world’s next Silicon Valley”, Hunt hailed the success of industries such as offshore wind and technology.“But like any business embracing new opportunities, we should also be straight about our weaknesses,” he added. “Structural issues like poor productivity skills gaps, low business investment, and the overconcentration of wealth in the south-east have led to uneven and lower growth.”In the wake of the controversy about Conservative chair Nadhim Zahawi’s payment of a penalty to settle a tax dispute with HMRC, Hunt initially resisted responding to questions about his own tax affairs.He later said: “I don’t normally comment about my own tax records but I’m chancellor so for the record I have not paid an HMRC fine.” More

Refinitiv Lipper data showed global equity funds obtained $3.23 billion worth of inflows during the week, compared with $5.16 billion worth of net purchases in the previous week.Data released on Thursday showed the U.S. economy grew faster than expected in the fourth quarter. Earlier in the week, a survey showed business activity in the euro zone improved in January, raising hopes the economy is on a better footing than previously feared.European and Asian equity funds received $3.15 billion and $1.36 billion worth of inflows, but investors sold about $1.14 billion worth of U.S. equity funds.Data showed many sectoral funds were out of favour with health care, industrials and financials witnessing disposals of $1.8 billion, $695 million and $687 million, respectively. Meanwhile, global bond funds accumulated a net $11.35 billion worth of inflows in a fourth successive week of net buying.Global short- and medium-term bond funds obtained $1.05 billion, while government bond funds drew $3.53 billion in a 13th straight week of net buying, but investors exited $160 million worth of high yield funds after two weeks of net purchases.Global money market funds suffered $12.25 billion worth of outflows.Among commodity funds, precious metal funds lured $1.19 billion, the biggest weekly inflow in nine months, but energy funds had outflows of $87 million.Data for 24,502 emerging market (EM) funds showed equity funds attracted a net $5.02 billion in a third successive week of net buying, while bond funds obtained a net $3.9 billion worth of inflows. More

New Delhi (Reuters) – India’s federal government is likely to keep its gross market borrowing below 16 trillion rupees ($196 billion) for 2023/24 as it does not want to destabilise the bond market with any negative surprises, two sources close to the deliberations said.”Feedback from the market participants is that a borrowing of 15.5-16 trillion rupees can be absorbed well in the next financial year,” one of the officials told Reuters.The second official said that based on the discussions held so far within the government, the view has emerged that borrowing should be consistent with the market’s expectation. The government has so far raised 12.93 trln rupees up to Jan. 27, which is 91% of the overall gross borrowing target of 14.21 trillion rupees in the 2022/23 fiscal year which ends on March 31.Traders are waiting for the Union budget on Feb. 1, with the government’s fiscal consolidation path and its borrowing calendar for fiscal year 2024 set to be the next market-moving trigger.The federal government’s gross indebtedness has more than doubled in the past four years as Prime Minister Narendra Modi’s government has spent heavily to cushion the economy from the effects of the COVID-19 pandemic and to provide relief to the poor.India’s finance ministry did not immediately reply to an email and a message seeking comments.In a Reuters poll, economists forecast the government will borrow a record 16 trillion Indian rupees in the fiscal year to March 2024 on higher infrastructure spending.The poll also suggested that the government would bring the budget deficit down to 6.0% of GDP in 2023/24. It aims to reach a target of 4.5% by 2025/26.The indebtedness of federal and state governments is equal to 83% of annual gross domestic product (GDP), a ratio higher than that of many other emerging economies. The country’s sovereign credit rating is just a notch above junk level.The International Monetary Fund said last month India needed a more ambitious plan for fiscal consolidation to ensure debt would be sustainable in the medium term. The government says its current plan is already enough for the task.($1 = 81.5010 Indian rupees) More

BENGALURU (Reuters) – U.S. Treasury yields a year from now are forecast to trade sharply lower than the level expected by bond strategists polled by Reuters just one month ago, underscoring how much financial markets have diverged this year from the central bank’s view.While the U.S. economy grew at an annualised 2.9% in the final quarter of last year, it is clearly losing momentum. Market traders and policymakers differ on the severity of the coming downturn, as well as the likely policy response.Bond strategists at JPMorgan (NYSE:JPM) noted recently that the U.S. Treasury market is already priced for a recession and not just for the heightened risks of one.”In the latest rally, Treasuries have diverged further from their underlying drivers…10-year yields appear 30 basis points too low after controlling for the market’s Fed policy, and growth expectations,” they wrote in a recent note. Already off their peaks from late last year and early 2023, major benchmark government bond yields have eased 20-40 basis points since, and more than 50 basis points on the particularly rate-sensitive U.S. two-year Treasury yield. Economists – many from the same banks – broadly expect the Federal Reserve to raise interest rates a few more times before pausing, with no reductions due this year, suggesting that the fall in two-year yields is too early. They also say the risk to their outlook is that rates stay higher for longer, rather than the other way around.Benchmark 10-year U.S. Treasury yields were forecast to rise from 3.50% on Thursday to 3.70% in three months and then drop to 3.60% and 3.25% in six, and 12 months, respectively, in the Jan. 18-27 Reuters poll of 58 strategists.That is about 30 basis points lower on the one-year horizon than a poll published in December.U.S. two-year yields were also expected to drop from around 4.15% presently to 3.52% in a year, more than 40 basis points below the 3.94% forecast from last month’s survey. This would extend one of the longest periods on record where two-year yields have been higher than 10-year ones, a yield curve inversion. Every U.S. recession since 1955 has been preceded by an inverted yield curve.But the Fed has indicated it is not ready to even consider cutting interest rates any time soon. “While markets are currently penciling in the first cut in late 2023, we expect the first cut only in Q1 2024 and look for the curve to stay inverted for longer, as front-end rates remain elevated and the long end continues to price in slowing growth momentum,” said Priya Misra, head of global rates strategy at TD Securities.Sovereign bond yields in the euro zone and Britain, where policymakers also are not done raising rates and are grappling with even higher inflation than in the United States, were predicted to trade lower in a year, too.The poll expected German bund yields to rise from their current 2.25% to around 2.4% in three and six months. They were then forecast to fall back to 2.05% in a year.Gilt yields, last trading around 3.30%, were forecast to rise and peak at 3.45% by end-March and remain near these levels for another three months and then fall to 3.20% by year end. More

Now, the Detroit rivals must convince investors that last year’s profit formula can keep working when costs for EV batteries are rising, high interest rates are cutting consumer purchasing power, and Tesla (NASDAQ:TSLA) Inc is slashing prices. Already there are signs the Detroit automakers are scaling back spending to offset competitive and economic pressure. GM has shelved for now plans to build a fourth EV battery plant in North America. Ford is in talks with German unions to cut thousands of jobs in its European operations and possibly sell a German vehicle assembly plant. In October, it stopped funding autonomous vehicle affiliate Argo AI.GM and Ford both rely on sales of pickup trucks and SUVs in the United States for the bulk of their global profits. This year, both automakers plan to ramp up sales of much less profitable electric vehicles in North America and other markets.The risk to the Detroit automakers’ profitability would be a challenge in the best of times. But now, GM and Ford must factor in forecasts for a slowdown, or even a recession, in the U.S. economy. EV battery raw material costs are rising, but U.S. EV market leader Tesla is cutting prices on its best-selling Model 3 and Model Y vehicles by as much as 20%. The Model Y SUV competes with Ford’s Mustang Mach-E, GM’s Cadillac Lyriq EV, and with combustion SUVs the Detroit automakers sell. Morgan Stanley (NYSE:MS) estimated increased prices added an average of $3 billion a year to Ford’s pre-tax bottom line and was the equivalent of more than 200% of the improvement in the company’s pre-tax profits for 2022.GM, the No. 1 U.S. automaker by sales in 2022, said higher prices added $2.1 billion to pre-tax profits in the third quarter compared to the same quarter in 2021 – equivalent to nearly half of pre-tax profits for the period overall.The company has told investors it will spend $35 billion on electric and automated vehicles between 2020 and 2025. Ford has put its planned EV investments at $50 billion through 2026. “If we are entering a downturn,” Morgan Stanley analyst Adam Jonas said, “what steps can they take to keep investing and remain strong?” More

Jay Newman was a senior portfolio manager at Elliott Management and is author of the finance thriller Undermoney. Benjamin Heller is a portfolio manager at HBK Capital Management, specialising in emerging markets.The world of distressed sovereign debt seems to attract bad ideas like no other, mostly generated by G-20 bureaucrats and the International Monetary Fund. The most recent is the Common Framework for Debt Treatment, which is neither common nor a framework, but, rather, a recapitulation of the ad hoc nature of the process for resolving sovereign defaults. Twenty years ago it was the Sovereign Debt Restructuring Mechanism, a Trojan horse to establish a sovereign bankruptcy court presided over by the IMF, itself a creditor and expert witness. And let’s not forget the Highly Indebted Poor Countries initiative, a program that relieves badly managed, corrupt countries of their obligations without generating growth, strong domestic institutions, or even enduringly clean balance sheets. We also have the IMF and the G-7 to thank for the creeping loosening of collective action clauses, slyly converting them from a tool to facilitate orderly restructuring into a poison pill that renders sovereign debt functionally unenforceable.But the granddaddy of bad ideas is the so-called Brady Plan, a gimmick that — had it not been designed and blessed by the US government — would have landed a lot of people in jail for accounting fraud.Simply put, the Brady Plan packaged up defaulted and distressed junk sovereign debt with long-dated zero-coupon US Treasury bonds. The express purpose — the sole purpose — was to enable otherwise insolvent Western banks to avoid recognising huge losses on their portfolios of developing-country debt. Brady bonds never made any economic sense. But those were the days: when bank regulators did their patriotic duty, turned a blind eye to the deep holes in bank balance sheets and did . . . nothing. Ironically, once the new bonds left bank balance sheets, bondholders and issuers spent much of the late 1990s and early 2000s unwinding collateralised Bradies — and sharing the not inconsiderable gains available from disassembling a structure that both sides found economically inefficient. Now, two experts in complex financial and legal structures, Lee Buchheit and Adam Lerrick, are proposing to recycle the Brady Plan. The FT’s Martin Wolf wrote in January about how the plan offers a potential escape route for “low and lower-middle income countries” that “have taken on too much of the wrong kind of debt.” That’s a fair point. But whether, as he concludes, that “reflects mainly on the lack of good alternatives” is open for debate.There’s plenty of room for scepticism about the mechanics of implementing the template, as FT Alphaville has already pointed out. Not least is that it proposes the creation of the kind of structural complexities that only a quantitatively-minded hedge fund trader could love.To wit: “this proposal will convert the entire debt stock . . . into 25-40 year debt,” which “should reduce the net present value of the debt by more than 50 per cent and place the debt on a sustainable path.” That reduction would be accomplished by offering bondholders a “cash downpayment” funded by new zero-coupon loans from the World Bank and the IMF. Of course, the World Bank “can use derivatives to transform the . . . zero-coupon into a standard . . . floating-rate liability.” Then there’s a so-called Floor of Support Structure that will enable the debtor to magically discharge those new debts at maturity. Hmmm.The template may be impenetrable but at least (like the Brady Plan) its heart is in the right place. Unfortunately, good intentions are not matched by clear purpose. As far as results, there will be a lot of new instruments for well-paid hedge funders and bankers to slice and dice and a lot of new money coursing through the system. How the plan will solve any real problems, though, is a mystery.So many of these “big” ideas are generated by, or on the backs of, the international institutions. Inevitably, they are solutions in search of problems that would be better addressed directly. It’s a cunning bit of intellectual prestidigitation to conflate insolvency with “a debt problem” — as though the debt load landed on the country unbidden like an alien spacecraft. Is the problem just the debt? Or is it the total failure to mobilise fiscal resources? Or poor management of those resources? Failure to create a fertile environment for growth? It is odd to think that — to take a random example of a country where talk is bubbling up about a possible debt restructuring — Nigeria needs a debt write-off, but nothing needs to be done about the fact that the country mobilises 6 per cent of GDP in tax revenue.Another current event is the case of Sri Lanka: the IMF, as ever, is intent upon imposing its own opinion of debt sustainability. It’s past time for creditors to come up with their own benchmarks for sustainability, much in the way bank advisory committees did in the 1980s. Unlike the IMF, private creditors would propose actual standards for fiscal effort and reject sandbagged growth trajectories based on the soft bigotry of low expectations.What never comes up in the myriad conferences on sovereign debt, or in the research and discussions led by the official sector, are the root causes of sovereign debt defaults: corruption, weak governance and domestic institutions, refusal to forego borrowings in foreign currencies, and the failure to prevent defalcation, much less to recover ill-gotten gains.At some level, Buchheit and Lerrick understand that serial defaulters have problems that go beyond the mere existence of debt. The one sensible piece of their proposal calls for structural restraints on borrowers’ ability to re-lever themselves with new borrowing after going through their neo-Brady Rube Goldberg machine. They know better than to put a non-recovering alcoholic next to an unlocked liquor cabinet.Yet, for the official sector, feckless fiscal performance, political mismanagement, and the concomitant sovereign debt problems are more an opportunity than a problem. Problems, after all, are their raison d’être.Countries are most often poor because they are badly governed by a political class intent on collecting rents, not providing honest services. Fancy templates, frameworks, initiatives, and plans ignore root causes of the human misery that results from this misbehaviour. They are misdirection, solve nothing, obscure the underlying problems, and absorb attention that might otherwise be productively directed at solving them. More

The writer is co-head of investment and group chief investment officer at SchrodersThe market misery of 2022 was almost universal, inflicted by a seismic regime shift towards both higher inflation and higher interest rates.Investors faced by tumbling equities couldn’t find the sanctuary in bonds they have grown accustomed to. As the S&P 500 index fell 19 per cent over the year in dollar terms, 10-year Treasuries dropped in virtual lockstep, losing 19 per cent.This made things very difficult for the popular 60/40 portfolio of bond and equities which usually aims to deliver “inflation-plus” levels of returns. A portfolio of 60 per cent US equities and 40 per cent long-term US government bonds would have underperformed inflation by 28 per cent in 2022.The “Fomo” market of earlier this decade, where investors crowded into a small number of evermore expensive growth stocks owing to the fear of missing out, was soundly quashed. The handful of tech behemoths that had previously added so much to index returns were the very ones which dragged the US market down last year. A portfolio of the seven largest US companies in the MSCI USA index from a year ago would have lost investors 40 per cent in 2022. A portfolio of the rest would have lost only 14 per cent.It wasn’t just investors in traditional assets that felt the pain; cryptocurrencies collapsed. Bitcoin fell 65 per cent over the year, while “stable” coins Luna and Terra proved anything but as they plummeted amid a whirl of scandals and failures, most notably at the crypto exchange FTX.So where does this leave investors in 2023? After a decade of zero rates and quantitative easing, investors need to adapt to an environment where structurally higher inflation will require central banks to run a more active monetary policy. For 2023, we expect inflation to be falling and, with the risk of recession, bonds will be a helpful diversifier once more. But given medium-term pressures on inflation, the case for owning bonds now rests more on the yield they offer. This is a change from the past decade when bonds offered little or no yield and diversification was their main appeal, rather than the income they provided.We expect an increased divergence in interest rate cycles across countries and regions. Nations less reliant on external funding and that have showed policy discipline may be rewarded, while others may be punished. There are now more opportunities to invest in different bond markets based on one’s expectations of where rates in those countries are heading.Similarly, companies that have survived as a result of low borrowing costs may soon find themselves struggling against a backdrop of higher rates. It will be essential to assess which companies are able to pass on higher costs to their consumers: those that can’t will see margins come under pressure.Price-to-earnings valuation ratios are likely to be lower and investors will be more focused than ever on the earnings part of that coupling. Elsewhere, with a tense geopolitical environment, commodities are a helpful source of diversification, having fallen by the wayside in the loose money period of quantitative easing.After a prolonged strong period, underlying US profit margins are at record levels. As we’ve seen with the tech sector, cost pressures in the US are now making themselves apparent at a time when revenue growth is clearly starting to slow. Negative operating leverage — where fixed costs comprise a greater portion of a company’s total cost structure while sales simultaneously decrease — is beginning to kick in. Yet Wall Street still expects 4 to 5 per cent earnings growth for the S&P 500 in 2023, which seems optimistic. The rest of the world definitely looks more interesting, especially Asia.China’s economy was far more resilient during the “exit wave” from Covid than had been expected. And with high frequency indicators suggesting that activity has already begun to pick up sharply as the number of Covid infections has subsided, the near-term outlook for the economy is goodThe new market regime is about more than just inflation and interest rates. Structural changes to supply chains, shifts in energy policy and a surge of investment in technology like semiconductors will create opportunities among a new wave of companies. Some of the investment themes that have emerged in the past few years will only strengthen — and new ones will emerge.Last year was significant in ushering in these fundamental changes. 2023 is also likely to be turbulent as these shifts becomes more established in investor psyches. More