Economy

It has taken what seem like only slight changes in tone from Christine Lagarde, and the governing council she heads, to convince investors that the European Central Bank is on the verge of a dovish pivot. Markets on Thursday quickly took the ECB president’s acknowledgment in a post-council meeting press conference that the eurozone was likely to be heading for recession — long a foregone conclusion for most economists — to mean that the region’s rate-setters would ease the extent of rate rises. Silvia Dall’Angelo, a senior economist at US fund manager Federated Hermes who now expects the ECB’s rate-hiking cycle to pause after its next vote in December, described the messaging as “more cautious and less hawkish than in previous meetings”.Government borrowing costs fell sharply after Lagarde met the press on Thursday afternoon and by the end of the day the euro was back below parity with the dollar, erasing some of its recent gains. The fierce reaction, however, surprised some of the more hawkish members of the ECB governing council. “I don’t know what this is based on,” said one. “There are still lots of things to worry about inflation. If we keep getting high inflation readings, we will need another strong response.”At first glance, little has changed in the ECB’s policy stance. It lifted its deposit rate by 0.75 percentage points for the second consecutive time and signalled plans for more increases to come, as inflation remained “far too high” at almost five times its 2 per cent target. However, investors are upping their bets on the major central banks soon becoming less aggressive in their efforts to increase rates. Canada’s central bank on Wednesday delivered a smaller-than-expected rate rise of 50 basis points, following a similar move by the Reserve Bank of Australia earlier this month. While the US Federal Reserve is expected to deliver its fourth consecutive 0.75 percentage point increase next Wednesday, US officials are increasingly expected to slow their pace of rate rises after November.For those homing in on dovish changes, the ECB offered plenty of hints of a shift.

The wording of its statements was slightly less aggressive. Instead of saying it would raise rates “over the next several meetings” as it did last month, the central bank only said it expected to “raise rates further”. It is no longer setting out to “dampen demand” but only aiming for “reducing support for demand”. And “substantial progress” has already been made in “withdrawing monetary policy accommodation”.Having pushed back on the idea of a recession last month, this time Lagarde said such a scenario was “looming much more on the horizon”. Apart from a slight easing of supply bottlenecks, resilient labour markets and increased support from governments to deal with high energy prices, “pretty much every other indicator is pointing downwards”, she said, adding that the likelihood of a recession “will be taken into account at our next meeting in December”. Investors widely interpreted these comments as signalling that the ECB’s next rate rise will be reduced to 0.5 percentage points and they now think that, by next September, borrowing costs will be a quarter-point lower than they thought before the ECB made its policy announcement. They even drew comfort from the ECB’s plans to shrink its balance sheet — a major source of support to financial markets after quadrupling in size over the past eight years to €8.8tn. Lagarde said it would discuss how to start reducing its €5tn bond portfolio at the December 15 meeting, while adding that an increase in the cost of its €2.1tn programme of ultra-cheap loans to commercial banks was likely to encourage many to repay them early.These moves represent a further tightening of monetary policy, but investors viewed them as less hawkish than expected and a way for the central bank to raise rates less than it otherwise would.Krishna Guha, vice-chair at US investment bank Evercore ISI, said Lagarde’s announcement that it would begin discussions in December on “the principles” of reducing reinvestments in part of its bond portfolio showed it was “slow-walking the process” of quantitative tightening that many other central banks have already started. The ECB was likely to start the process in the first half of next year, but it “could easily be delayed further depending on economic conditions”, he added.Meanwhile, the ECB’s decision to make its €2.1tn of targeted longer-term refinancing operations (Tltro) less attractive could be “a rate increase through the backdoor”, according to Salomon Fiedler, an economist at German investment bank Berenberg. Tltros were offered to banks at 0.5 percentage points below the ECB’s deposit rate to encourage them to keep lending during the pandemic. Banks can earn a big profit simply by putting the money they borrowed back at the central bank to benefit from its sharply rising deposit rate.But the ECB is stopping this from November 23, after which the rate on the loans will track its deposit rate. Based on past surveys of banks, ECB officials think about €600bn of the loans could be repaid as early as next month. This should boost rates in Europe’s €10tn money markets, which have been weighed down by the ECB’s use of its balance sheet. Many short-term rates are yet to reflect the ECB’s increases, sagging below its deposit rate, now at 1.5 per cent. By releasing the collateral tied up with the loans, Fiedler estimated early repayment by banks could bring money market rates up almost 0.5 percentage points towards the ECB’s higher refinancing rate of 2 per cent.Big banks have grown increasingly concerned about a lack of high-quality liquid assets in Europe’s financial markets and this week the International Capital Market Association, which represents the bond market’s biggest traders, urged the ECB to take action to address this.Andy Hill, senior director at the ICMA, said the change to Tltros announced on Thursday was “mostly positive” because it was likely to free up more collateral and it had already lifted some rates in money markets. More

SINGAPORE (Reuters) – The euro held below parity on Friday as investors eyed a potential slowdown in future rate hikes by the European Central Bank, while the yen was on track for its best week in over two months ahead of a key central bank policy decision.The euro was last 0.05% lower at $0.9960, following a more than 1% slide overnight, after the ECB raised rates by 75 basis points, as expected, but took a more dovish tone on its rate outlook.The central bank dropped a reference to increasing rates “over the next several meetings” that had been in its September statement, which traders took to mean that a series of large rate hikes was nearing an end.”The ECB policy decisions were less hawkish than most had expected. Most of the surprise came, really, from the comments from Christine Lagarde saying that the ECB has already made substantial progress in withdrawing policy stimulus,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).The U.S. dollar index, which measures the greenback against a basket of currencies, with the euro the most heavily weighted, was up 0.06% at 110.62, after gaining nearly 0.8% overnight.”I think the gains in the U.S. dollar mostly reflect the dovish ECB meeting as well as the fall in euro/dollar,” said Kong.The greenback had fallen earlier in the week on hopes of a potential Fed pivot.The yen last bought 146.41 per dollar, and was on track for a nearly 1% weekly gain, its largest since August.The fragile currency has received support from suspected intervention by Japanese authorities to prop up the yen last Friday and on Monday.The Bank of Japan announces its monetary policy decision on Friday, and looks set to maintain its ultra-low interest rates, putting further pressure on the yen as a result of growing interest rate differentials with the rest of the world.”At the moment, I don’t really see any case for a shift in the Bank of Japan’s monetary policy,” said CBA’s Kong.”Watch out for another potential FX intervention in dollar/yen.”Last month, Japan intervened in the foreign exchange market to buy yen for the first time since 1998, just after the BOJ’s decision to stick to its super-loose policy stance.Data on Friday showed that core consumer prices in Japan’s capital, a leading indicator of nationwide figures, rose 3.4% in October from a year earlier, marking the fastest annual pace since 1989.Elsewhere, sterling fell 0.12% to $1.155, but was on track for a 2% weekly gain, on optimism that new British prime minister Rishi Sunak would offer an antidote to the mess left by his predecessor Liz Truss.The Aussie was down 0.09% at $0.64485 while the kiwi edged 0.11% lower to $0.5823, though both looked set to extend a second straight week of gains. More

(Reuters) – In a further sign that large companies may be girding against an imminent recession, U.S. tech giants Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) said this week that customers were taking an axe to cloud and datacenter spending.Cloud services for years has been one of the largest and most dependable sources of growth for some of the biggest tech companies, including during the pandemic as people worked and studied from home. Now investors are looking to see whether there is a glut in capacity that will lead to investment cuts as companies deal with rising costs amid soaring inflation, while interest rate increases have squeezed consumer demand. The strong dollar has been a particular headwind.Growth in Amazon Web Services (AWS), the firm’s lucrative cloud unit serving enterprises, has ticked down consistently in the past four quarters, adjusted for changes in forex. Net sales in the business grew 28% in the July-September period versus 39% a year earlier, the slowest since the fourth quarter of 2020. They fell short of a 31% average analysts’ forecast.Amazon shares slumped 12% after the bell on Thursday after it forecast a slowdown in sales growth for the holiday season, erasing some $140 billion from its market value and capping a week of dismal earnings from global tech firms.”The AWS slowdown is a clear sign that businesses are beginning to trim costs, so this will likely put more of a squeeze on Amazon’s bottom line in the coming quarters,” said Andrew Lipsman, principal analyst at Insider Intelligence.Microsoft’s cloud business Azure, which had supercharged revenue growth at the software giant for years, dropped to 35% growth in the July-September quarter from 50% a year earlier, missing estimates of a 36.5% increase according to Visible Alpha.The company projected another drop in the holiday quarter.Alphabet (NASDAQ:GOOGL)’s Google Cloud revenue grew 38% in the quarter, beating estimates. That was a silver lining in an otherwise gloomy quarter but a far cry from the 45% growth the company posted a year earlier.EUROPE, CHINA DRAGSpeaking broadly about cloud deployments from AWS, Microsoft and Google-parent Alphabet, YipitData research specialist Matt Wegner said: “We really first started to see (a slowdown) in April … and it’s continued. The European region is a source of weakness.”Eurozone inflation is close to 10% and European Central Bank President Christine Lagarde on Thursday acknowledged that the risk of an economic contraction is on the rise due to soaring energy prices and higher interest rates.Intel, which makes chips for data center customers including AWS, said third-quarter revenue from that business slumped 27% and profits were nearly wiped out. The business was hurt partly due to soft demand from Chinese enterprise customers, Intel boss Pat Gelsinger said.The company cut its profit and revenue forecast for the year, reflecting economic uncertainty that Gelsinger said he expected to last into next year and that it was taking time to ramp up sales into datacenters.Cloud services typically help companies save money so budget cuts in this sector could be especially worrying, indicating that companies think cost is king going into tougher times.Businesses usually build out more cloud and datacenter capacity than needed and then wait for it to be absorbed, said Dean McCarron, president of Mercury Research, which tracks chipmakers.”The “build more” happened in 2021 and we’ve been coasting down since then,” said McCarron. He added that he expects Intel’s datacenter weakness to be bottoming soon “though there are larger macroeconomic concerns about how much improvement we might see on the next growth cycle.” More

Yellen, asked in a CNN interview in Cleveland about threats by some Republicans to use the next debt ceiling deadline as leverage for concessions from Biden if they win control of Congress in Nov. 8 elections, said a U.S. debt default “simply cannot be contemplated.””The president and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on U.S. Treasuries, which are the bedrock of global financial markets,” Yellen told CNN. “Defaulting on our debt…would be simply calamitous for the U.S.” More

More than half of the Chinese companies surveyed by a leading US business lobby in Shanghai believe the country’s economic management is deteriorating.The American Chamber of Commerce in Shanghai called for a relaxation of China’s strict zero-Covid policy as it found that around a fifth of the 307 companies it surveyed were pulling back on investment, mostly as a result of coronavirus measures. Although 55 per cent of the businesses remained optimistic over a longer term horizon of a three-to-five year period, this was the lowest level since the survey began in 1999.Chinese officials frequently impose citywide lockdowns that confine people to their homes after just a handful of positive cases. As a result, business activity in Shanghai — China’s financial centre — was severely disrupted for more than two months in the spring, stunting economic growth. China should “pivot to a more sensible approach to managing Covid-19 based on a reasonable balance between public health and the economy”, said Eric Zheng, president of the Shanghai chamber, adding that the measures have “upended business performance expectations”.While three-quarters of the surveyed businesses were profitable in 2021, less than half expected their revenues to grow in 2022, the lowest proportion in a decade. Just 47 per cent thought revenue growth in China would exceed their companies’ growth worldwide.China’s economy grew 3.9 per cent in the third quarter, according to data released on Monday, a week later than expected. The rise is well below Beijing’s already multi-decade-low growth target of 5.5 per cent, and the World Bank anticipates that China will underperform Asian growth this year for the first time since 1990.Business activity has been hit by the dual impact of a property crisis, which erupted a year ago with the default of developer Evergrande, as well as the zero-Covid controls that have been stepped up this year amid the highly infectious omicron variant of the virus.At a time when other large economies have removed the vast majority of Covid prevention measures, PCR testing is an almost daily requirement on public transport or for entering public spaces. The government’s top epidemiologist recently said it could administer 1bn Covid tests a day.

Factories in China have often resorted to so-called “closed loop” systems, where workers do not leave the site in order to continue working under lockdowns. This week, viral videos circulated of workers saying they were unable to access supplies at a factory of Foxconn, which makes Apple iPhones.As well as disrupting domestic activity, the Covid measures have made it difficult for foreign business people to enter the country. This week, the government unveiled measures to make it easier for foreign travellers, and in the summer, hotel quarantine requirements were cut to seven to 10 days from the previous 14-day period.Beijing has declined to provide a timetable for a full reopening and its approach was widely supported in state media in the build-up to last week’s 20th party congress. The US report also highlighted a host of other issues facing foreign business in China, while suggesting the Covid controls were a “temporary” issue.“Hopefully, at some point, this [zero-Covid] will be over, but there are more long-term structural issues,” said Zheng, pointing to domestic competition, geopolitical tensions, and “rising labour costs”. More

TOKYO (Reuters) – The Bank of Japan is set to keep ultra-low interest rates on Friday and remind markets it will remain a dovish outlier among a wave of central banks tightening monetary policy, as global recession fears dampen prospects for a solid economic recovery.Any such decision could drive the yen to fresh 32-year lows by drawing market attention to the widening divergence with U.S. and European central banks, which are eyeing further rate hikes.The European Central Bank raised interest rates again on Thursday, continuing its efforts to prevent rapid price growth from becoming entrenched. The U.S. Federal Reserve will hold its rate-setting meeting next week.In fresh quarterly projections, the BOJ will slightly revise up its price forecasts but still project inflation to slide back below its 2% target next fiscal year as commodity and fuel price rises peak, sources told Reuters.The nine-member board is likely to cut its growth forecasts for this year and next, the sources said, as the fallout from global monetary tightening and China’s sharp slowdown weigh on Japan’s export-reliant economy.The revised projections are likely to reinforce market expectations the BOJ will stay the course in underpinning a fragile recovery with ultra-low interest rates, analysts say.”Fundamentally the BOJ won’t change course anytime soon,” due to the need to stimulate demand, said Hiroyuki Ueno, senior economist at SuMi Trust in Tokyo.”With a recession on the cards in Europe and the U.S., export-oriented Japanese companies are prepared for a fall in corporate earnings,” he said.At the two-day meeting ending on Friday, the BOJ is widely expected to maintain its -0.1% target for short-term interest rates and a pledge to guide the 10-year bond yield around 0%.Investor attention will be focused on Governor Haruhiko Kuroda’s post-meeting briefing for clues on the timing of an eventual exit from the ultra-loose policy.In July, the BOJ forecast core consumer inflation to hit 2.3% in fiscal year ending March 2023 before slowing to 1.4% the following year. It projects the economy to expand 2.4% in the current fiscal year and rise 2.0% in the next.While more modest than other major economies, Japan’s core consumer inflation hit an eight-year high of 3% in September, exceeding the BOJ’s 2% target for six straight months.Core consumer inflation in Japan’s capital Tokyo, considered a leading indicator of nationwide figures, hit a 33-year high of 3.4% in October, data showed on Friday, in a sign of broadening price pressure.Kuroda has stressed the need to maintain ultra-loose policy on the view the recent cost-push inflation will prove temporary.The BOJ’s ultra-easy policy has helped trigger sharp yen declines that inflate the cost of importing already expensive fuel and raw material, prompting the government to intervene in the market to prop up the currency. More

BENGALURU (Reuters) – The Reserve Bank of Australia will raise interest rates by a more modest 25 basis points for a second straight month on Tuesday and is set to do so again in December despite the highest inflation in three decades, a Reuters poll found.This puts the RBA – which kicked off its relatively late starting rate-hiking campaign with four straight 50 bp moves – out of step with its global peers, which are mostly still raising rates in larger increments.Nearly 90% of respondents, 28 of 32, in the Oct. 24-27 Reuters poll said the RBA would hike its benchmark cash rate by 25 bps to 2.85% at its Nov. 1 meeting. The remaining four forecast a 50 bp rise.Policymakers surprised economists and markets earlier this month with the smaller 25 bp hike, saying rates had already risen substantially. But with inflation racing to 7.3% last quarter, the RBA is under considerable pressure to reconsider.”In these circumstances, the RBA will need to move monetary policy into more clearly restrictive territory to ensure inflation returns to target,” noted Alan Oster, group chief economist at NAB.He added that while the strength of inflation meant the board would likely debate the possibility of a 50 bp hike, “we see a 25 bp hike as being slightly more probable given recent communications”.Among major local banks, ANZ, CBA and NAB expect a 25 bp hike on Tuesday, while Westpac predicted a 50 bp rise.Bill Evans, Westpac’s chief economist, in a reasearch note called the surge in inflation a “genuine shock” and said that by not responding firmly the central would risk giving the impression it is “less than fully committed to the inflation task”.One reason for hesitation is the precarious state of Australia’s housing market which is expected to cool rapidly this year and next as rising mortgage rates add to the woes of holders of A$2 trillion ($1.3 trillion) in home loans.More than 90% of poll respondents, 30 of 32, predicted another 25 bp hike at the RBA’s December meeting, with the median forecast showing rates ending the year at 3.10%, the highest since 2012.With inflation not expected to return to the RBA’s target range of 2-3% before the first quarter of 2024, economists have brought forward their rate hike expectations.Just over half, 16 of 31, now expect rates to reach 3.60% or higher by end-June 2023, a quarter point higher than predicted in an October poll.Median forecasts then show rates unchanged until the end of September. More than 40% of economists, 13 of 29, forecast the cash rate to either remain at 3.60% or rise by the end of 2023, including five who expected it to climb to 3.85%. That is broadly in line with market pricing.However, with the U.S. Federal Reserve widely seen going for its fourth consecutive 75 bp rate hike on Nov. 2, some analysts think the RBA may have little choice but to revert to 50 bps next week. “It is hard to see how the RBA can ignore such an outsized miss on inflation,” noted Robert Carnell, regional head of Asia-Pacific research for ING. “This…adds pressure on the RBA to revert to a 50 bp tightening pace.”($1 = 1.5552 Australian dollars) (Reporting and polling by Devayani Sathyan; Editing by Hari Kishan, Ross Finley, Kirsten Donovan) More

(Reuters) -Australia’s Macquarie on Friday forecast stronger short-term income from its commodities trading business, after the unit tapped volatile oil and gas prices to boost profit in the first half, sending its shares higher.Financial conglomerates such as Macquarie have benefited from sharp volatility and supply chain disruptions in commodities markets that began in 2020 and increased this year with Russia’s invasion of Ukraine.The Sydney-based firm’s Commodities and Global Markets (CGM) segment delivered a net profit contribution of about A$2 billion, 15% higher than last year, thanks to more clients hedging against volatile energy markets. The company also raised its interim dividend.That powered the financial conglomerate’s first-half attributable profit to A$2.31 billion ($1.49 billion), above A$2.04 billion reported a year ago and a Refinitiv IBES estimate of A$2.19 billion.It bumped up its interim dividend to A$3 per share from A$2.72 a year earlier.Macquarie’s shares rose up to 3.8% to A$172.81, their highest in over a month, while the broader market fell 0.4%.Chief Executive Officer Shemara Wikramanayake said Macquarie maintains a cautious stance on account of global economic developments, but it “remains well-positioned to deliver superior performance in the medium-term”.Earnings at Macquarie Capital, which runs capital raisings for other businesses, tumbled 12%, however, due to weak market conditions and higher operating expenses.Macquarie warned transaction activity would be substantially lower in the short-term, compared with record levels seen last year, as steep interest rate hikes to tackle inflation have weighed on global economic growth and discouraged companies from tapping public markets for capital. Brokerage Citi said results at MacCap and the asset management business were softer than its estimates and looking ahead, “the market will be more reluctant to capitalise commodities strength.””Ex-CGM, tightening financial conditions look to be impacting the outlook for asset realisations and performance fees, which have been a key driver with commodities of earnings strength in recent years,” Citi said. ($1 = 1.5506 Australian dollars) More