Economy

Government bond yields have soared on the 19-country currency bloc’s periphery since the ECB unveiled plans last Thursday to raise interest rates in July and September to tame painfully high inflation that is at risk of becoming entrenched. The sell-off was exacerbated by the absence of any concrete plan from the ECB to limit this rise in borrowing costs, raising fears that policymakers were too complacent about the situation of more indebted nations like Italy, Spain and Greece. “The Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism,” the ECB said after a rare unscheduled meeting.PEPP is the ECB’s recently-ended pandemic support scheme.”In addition, the Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument,” it added.Italian 10-year yields surged to 4.27% on Tuesday, their highest since early 2014 and 250 basis points more than 10-year German bonds, the euro zone’s benchmark.Markets calmed on Wednesday as news of the ECB’s extraordinary meeting emerged and Italy’s 10-year yield fell to 4%, helping narrow the Italy-Germany spread to 230 basis points.There is no universally accepted level for this spread but Carlo Messina, the CEO of Intesa, Italy’s largest bank, earlier on Wednesday said the country’s economic fundamentals would justify 100 to 150 basis points.The spread on 10-year Spanish bonds meanwhile narrowed to 127 basis points from 135 on Tuesday, while for Greece, the move was to 271 basis points from around 295.ECB President Christine Lagarde is due to speak at 1620 GMT in London in an engagement scheduled earlier. ECB board member Fabio Panetta will also speak at 1315 GMT, though his speech will be about a digital euro. Both are expected to be answering questions. More

Investing.com — The European Central Bank has said it will move to accelerate the completion of a new instrument designed to prevent a disorderly blowout in borrowing costs in weaker eurozone countries.In a statement following an emergency meeting of the ECB’s Governing Council to address the rise in borrowing costs on Wednesday, policymakers vowed to act against risks of this so-called financial “fragmentation.””The pandemic has left lasting vulnerabilities in the euro-area economy which are indeed contributing to the uneven transmission of the normalization of our monetary policy across jurisdictions,” the ECB said in the statement.The announcement comes less than a week after the committee’s last vote, which left some ECB watchers looking for more precise details about how the central bank planned to address fragmentation risks.The ECB also said it would apply “flexibility” when re-investing redemptions from its massive COVID-era bond-buying program to help bolster more indebted members.The Italian and German 10-year bond yields were both down by about 7%, following the ECB’s statement. The closely watched spread between the two benchmarks rose to about 243 basis points as of 09:08 EST (1308 GMT), a rise of 5.02% on the day – but still tighter than levels reached on Tuesday.Meanwhile, the euro pared back earlier gains on Wednesday to remain basically unchanged against the dollar.Looking ahead, ECB President Christine Lagarde is scheduled to speak in London later today, with Reuters reporting that she is expected to take questions. More

Total mortgage application volume was 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index.
“Mortgage rates followed Treasury yields up in response to higher-than-expected inflation and anticipation that the Federal Reserve will need to raise rates at a faster pace,” said Joel Kan, an MBA economist.

Total mortgage application volume was 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. Sharply rising interest rates are decimating refinance volume, and those rates, along with sky-high home prices and a shortage of houses for sale, are hitting demand from potential buyers.
Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.65% from 5.40%, with points rising to 0.71 from 0.60 (including the origination fee) for loans with a 20% down payment. This week they surged even higher, with the average rate hitting 6.28% on Tuesday, according to a daily measure from Mortgage News Daily.

“Mortgage rates followed Treasury yields up in response to higher-than-expected inflation and anticipation that the Federal Reserve will need to raise rates at a faster pace,” said Joel Kan, an MBA economist.
Weekly mortgage application volume rebounded slightly compared with the previous, holiday-adjusted week. Refinance demand rose 4% for the week but was 76% lower than the same week one year ago.
Mortgage applications from homebuyers rose 8% for the week but were 16% lower compared with a year ago.
“Despite the increase in rates, application activity rebounded following the Memorial Day holiday week but remained 0.29 percent below pre-holiday levels,” added Kan.
The housing market is now reeling in a rising interest rate environment. After two years of record-low rates, fueled by the Federal Reserve’s Covid pandemic-induced purchases of mortgage-backed bonds, home prices are overheated and affordability is now in the basement. Major real estate brokerages, Redfin and Compass, both announced layoffs Tuesday.
“Mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive. If falling from $97 per share to $8 doesn’t put a company through heck, I don’t know what does,” wrote Redfin CEO Glenn Kelman on the company’s website.

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BRASILIA (Reuters) – Tax cuts are likely to cost over 110 billion reais ($21.5 billion) in Brazilian tax revenue this year, as President Jair Bolsonaro tries to ease inflation and spur the economy in an election year despite economists’ warnings of blowback in 2023.The estimated revenue loss, calculated by Reuters based on Brazilian Treasury data, includes a new government proposal to lower fuel prices that is still pending approval in Congress.High inflation and an uneven economic recovery are weighing on the popularity of Bolsonaro, who trails former President Luiz Inacio Lula da Silva in the presidential race. As the October election approaches, Bolsonaro’s government has increasingly embraced a patchwork policy of tax breaks. However, more than half the new incentives are set to expire at the end of the year, leading analysts to warn of looming inflationary pressures in early 2023.”We’re going to have this dilemma next year: either we’ll have higher inflation than forecast or we’ll have a worse fiscal outlook than forecast in order to keep the tax exemptions,” said former Treasury Secretary Jeferson Bittencourt, now an economist at ASA Investments. The measures push about 0.9 percentage point of inflation from this year to 2023, he estimated, which would pressure the central bank to keep interest rates higher for longer. Policymakers have hiked interest rates to 12.75% from a 2% record-low in March 2021 and are set to raise them again this week.The Economy Ministry did not reply to a request for comment. “You solve a problem in 2022, but set up a bigger one in 2023,” said XP (NASDAQ:XP) Investimentos economist Tatiana Nogueira.The tax breaks this year range from lower import tariffs and industrial taxes (IPI), and even a special tax regime for soccer clubs. Brazil’s IPI tax is levied on industries that make and import manufactured products, like refrigerators, cars, air conditioners and televisions.More than half of the lost revenue this year is set to come from tax cuts and state subsidies to tamp down soaring fuel prices, expected to cost around 64.8 billion reais, pending further revisions in Congress.In March, Special Treasury and Budget Secretary Esteves Colnago criticized tax breaks on gasoline for benefitting mostly middle- and upper-class families rather than the neediest Brazilians.XP’s Nogueira also warned that part of the savings from such tax breaks are absorbed by the fuel supply chain, with only 60% to 80% of the benefit reaching consumers.Even that cost relief could soon be offset with a price increase from state-run oil firm Petrobras, which has a policy of setting domestic fuel prices in accordance with global market.Petrobras last raised gasoline prices in March. Fuel importer association Abicom estimates they now lag global benchmarks by about 17%.($1 = 5.1148 reais) More

LONDON (Reuters) – A U.N.-backed campaign to drive faster climate action is toughening the minimum standards for companies pledging to cut greenhouse gas emissions, including a requirement for businesses and banks to curb new fossil fuel projects.The updated criteria issued on Wednesday by the ‘Race to Zero’ campaign are important as they will be reflected in the obligations of a range of partner organisations marshalling the climate efforts of various sectors, from banks to insurers and asset managers.The new rules follow a period of consultation between more than 200 independent experts and will affect many of the world’s biggest companies which have already joined such initiatives and publicly committed to reaching net-zero emissions.Under the rules, all members would be explicitly required to phase down and then phase out all unabated fossil fuels, and to do so in a way that ensures a so-called ‘Just Transition’, where the social impacts of the low-energy transition are mitigated.”In practice, this means corporations and investors must restrict the development, financing, and facilitation of new fossil fuel assets, which includes no new coal projects,” the campaign said in a statement. “The exact pathways and timelines naturally differ across regions and sectors.”Members would also, for the first time, be required to align their lobbying and advocacy activities with net-zero by “proactively supporting” climate policies at the sub-national and national level “consistent with the Race to Zero criteria”.The updated rules would apply to any new joiners from June 15, while existing members would have a year to comply.”The clarity these criteria provide, together with strengthened data transparency, will help us identify the progress made and gaps remaining,” Nigel Topping and Mahmoud Mohieldin, High-level Climate Champions for the COP26 & COP27 climate talks, said in a joint statement.”They will clearly show those actors who are truly moving ahead versus those who are trying to find loopholes.”Also on Wednesday, the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of assets managers, banks and insurance firms launched in April 2021, released a draft framework to help firms accelerate their efforts to cut emissions.The guidelines said their plans should finance net-zero technologies, increase support for companies aligned to keeping temperatures to 1.5 degrees Celsius and drive the phase-out of high-emitting assets. Climate campaigners welcomed the updated ‘Race to Zero’ standards, saying they would pressure GFANZ to demand tougher action from members. “GFANZ is going to have to stop waffling on fossil fuels, and will have to insist that its members stop providing financial services to the companies driving the climaticide of coal, oil and gas expansion, while massively increasing their financing of the clean energy transition,” Paddy McCully, senior analyst at Reclaim Finance, said in a statement.(The story corrects GFANZ launch details in paragraph 10) More

TOKYO (Reuters) -The Bank of Japan’s resolve to defend its yield cap faces attack from investors betting the central bank could give in to global market forces, opening up a slim chance for a near-term tweak in its policy.While few expect the bank to make a change on Friday to its policy of yield curve control (YCC), which guides the yield on the 10-year Japanese government bond (JGB) around 0%, sharp falls in the yen currency are making some lawmakers anxious.The falls are driven partly by the central bank’s aggressive efforts to defend an implicit 0.25% cap for the yield target.Five government officials and sources familiar with the central bank’s thinking say the key to its move on Friday could be how far the yen slumps from current 24-year lows to pose a big enough risk warranting a monetary policy response. “Central banks don’t target exchange rates in guiding policy,” one of the sources said. “But the yen has been falling at such a sharp pace it’s hurting the economy, which warrants attention.”A second source echoed that view.”We’re hoping the BOJ will take some sort of step at Friday’s meeting,” a government official told Reuters, speaking on condition of anonymity.”It’s hard to think the BOJ won’t do anything when the U.S. Federal Reserve could be raising rates by 75 basis points.”Prime Minister Fumio Kishida said monetary policy affected not just currency moves but small and medium-sized firms through the cost of borrowing.”While currency move is a huge issue, I expect the BOJ to take various effects into account,” Kishida told a news conference, when asked if the central bank should adjust policy on Friday.Prospects of aggressive U.S. interest rate rises have pushed up long-term interest rates around the world, including Japan, forcing the BOJ to ramp up bond buying to defend its yield cap.’CHALLENGING THE BOJ’The BOJ spent about 3 trillion yen ($22 billion) in buying bonds on Tuesday, following up with additional purchases on Wednesday across the yield curve to defend its cap of 0.25%.Even so, the 10-year JGB futures plunged to levels last seen in 2014, on selling by speculators betting the bank will be forced to adjust its YCC policy.”The JGB futures market collapsed and there was a big gap between futures prices and the actual JGB yield,” said Kentaro Koyama, Japan chief economist at Deutsche Bank (ETR:DBKGn).”Usually, some kind of arbitrage action could solve this disparity. But this kind of arbitrage action is not working well – mainly due to the BOJ’s intervention.”In theory, the BOJ can buy bonds indefinitely to defend the cap with the money it prints, but doing that would accelerate yen falls that inflate the cost of imports and hurt the economy.Markets expect the Fed to deliver a 75-basis-point increase at the Federal Open Market Committee (FOMC) meeting later on Wednesday, which could accelerate yen falls and add pressure on the BOJ.”I remain concerned that the Bank of Japan policy meeting is an underrated risk point this week, perhaps even more so than the FOMC outcome itself,” said Jeffrey Halley, a senior market analyst for Asia Pacific at OANDA.A very hawkish Fed outlook would lift the dollar/yen again and may force the BOJ into lifting the 10-year yield cap slightly, he added.To be sure, there is little reason for the BOJ to modify YCC now, with inflation much lower than in Western countries and the fragile economy still in need of monetary support.Veteran BOJ watcher Naomi Muguruma expects the BOJ to hold fast on Friday but said the bank could raise its yield cap to 0.50% from 0.25% if the government asked for help in arresting sharp falls in the yen.Such an increase in the yield cap would be accompanied by yen-buying intervention by the government.”This is a risk scenario in case yen falls continue, and it’s clear the moves are hurting corporate and household sentiment,” she said.($1=134.7100 yen) More

TOKYO (Reuters) -Japanese Prime Minister Fumio Kishida said on Wednesday he expected the Bank of Japan (BOJ) to stick to a 2% inflation target, when asked about a possibility the central bank may adjust its massive stimulus to stem the yen weakening.”Monetary policies certainly affect currency (moves), but they also have a big impact on the business costs of small and medium-sized firms through interest rates,” Kishida told a news conference.While currencies are a big issue, the BOJ is deciding its monetary policies considering various effects, Kishida said.”The monetary policy specifics are up to the BOJ to decide, the government expects it to keep efforts to maintain the sustainable, stable achievement of the price stability target.”Kishida did not break new ground with his remarks on monetary policy, which he said should be left to the central bank to decide.The BOJ has repeatedly shrugged off any notion of targeting currencies with monetary policy, saying that achieving price stability is its sole objective.Still, the recent sharp yen weakening has stoked worry about surging costs of living through more expensive imports, raising speculation that the central bank may take steps on the weak yen at its policy meeting that ends on Friday.Kishida said the government would launch a taskforce to respond to price rises and boost wages.”Current price hikes have had a large impact on Japanese people’s lives and business activities. The government must take it seriously and carry out measures,” he said. More

European bank stocks and Italian government bonds rallied after the European Central Bank signalled readiness to try to safeguard weaker nations in the bloc from rising debt costs. The Stoxx Europe 600 index added 1.1 per cent, with its banking sub-index gaining 2.9 per cent. Italian bank Intesa Sanpaolo rose 5.5 per cent.The yield on Italy’s 10-year bond, which influences government and consumer borrowing costs in the debt-laden country and has shot up in recent days after the ECB confirmed the end of a bond-buying stimulus programme, fell 0.12 percentage points to just below 4 per cent. Bond yields fall as prices rise. The euro gained 0.7 per cent against the US dollar to $1.049.On Wednesday morning, the central bank’s governing council said it would have an ad hoc meeting to discuss “current market conditions”, sparking hopes of a new mechanism to support Italy and other indebted nations such as Greece. Concerns about weaker nations in the eurozone had intensified since last Thursday when the ECB confirmed, in the face of record inflation, that it stood ready to raise interest rates in its first such move since 2011.But despite Wednesday’s rally, some investors said they did not expect a rapid announcement of any new ECB support mechanism, as they recalled the wrangling between eurozone member states over a hard-fought Greek bailout in 2015.“There’s scepticism that all the ECB governors will get on board,” said Edward Park, chief investment officer at Brooks Macdonald. “I expect today to end with some powerful words but little in terms of concrete action.” Deutsche Bank strategist Jim Reid said: “It may not take much more pressure for the ECB to act but we are still in the dark on how they will.”The gap between Italy and Germany’s 10-year bond yields — a gauge of financial stress in the single currency bloc — moderated to 2.24 percentage points, from more than 2.4 percentage points in the previous session. But it remained close to its widest since the coronavirus-driven tumult of May 2020. Futures trading implied Wall Street’s S&P 500 share index would gain 0.7 per cent ahead of the conclusion of the Federal Reserve’s rate-setting meeting. On Monday, concerns about tighter monetary policy had driven the S&P into a bear market, typically defined as a 20 per cent drop from a recent peak. Economists mostly expect the Fed to raise its main funds rate by 0.75 percentage points, its first move of such a magnitude since 1994, after the annual pace of consumer price inflation hit a four-decade high of 8.6 per cent in May.

Money markets tip the funds rate to climb to more than 3.6 per cent by the end of the year, from a range of 0.75 per cent to 1 per cent currently, as the central bank battles rising fuel and food costs driven by Russia’s invasion of Ukraine. The yield on the 10-year Treasury note, which underpins global debt costs, eased 0.07 percentage points to 3.41 per cent, staying near its highest since 2011 as the outlook for interest rates and inflation remained uncertain. “Bear markets,” said Plurimi Group chief investment officer Patrick Armstrong, “tend to provoke some buying.” He warned, however, that “there are a lot of things that will get worse before they get better”, while US markets could no longer count on “the sort of [monetary] policy decision that turns things around”. More