Economy

TOKYO (Reuters) -The buoyant dollar slipped a notch on Friday at the end of a holiday-thinned trading week, while the yen hovered near a five-month low as traders chewed over contrasting messaging from a hawkish U.S. Federal Reserve and a cautious Bank of Japan. Traders are betting U.S. rates will remain elevated for longer, sending Treasury yields higher in recent weeks and in turn boosting the dollar against other major currencies. The U.S. dollar index, which measures the greenback against six currencies including the yen, euro and sterling, was down 0.12% on the day at 107.95. It has been in a holding pattern around 108 all week, and was still hovering close to the two-year high of 108.54 it hit last Friday.Fed Chair Jerome Powell said earlier this month that U.S. central bank officials would be “cautious” about further cuts following an as-expected quarter-point rate reduction.For the month, the dollar index is up 2%, bringing year-to-date gains to 6.4%.In contrast, the BOJ has taken a cautious approach to raising borrowing costs amid uncertainty over U.S. president-elect Donald Trump’s economic plans. This has dragged on the yen, which hit its weakest level since July 17 on Thursday at 158.09 per dollar. The Japanese currency got little respite from a fresh warning from the country’s finance minister who said that the government “has been alarmed by foreign exchange developments … and will take appropriate action against excessive moves”.The yen strengthened 0.1% to 157.75 per dollar by 1305 GMT, but still hovered close to Thursday’s low.Japanese officials have intervened in the currency market to prop up the yen this year but it remains on course for a fourth successive annual decline.A summary of opinions from the BOJ’s December policy meeting released on Friday showed some officials becoming more confident about a near-term rate increase, while others remained wary amid uncertainties over the trend for wages and Trump’s policies. BOJ Governor Kazuo Ueda said last week, after the central bank held rates, that it would take “considerable time” to fully gauge the outlook for wages and overseas economies, particularly the United States. Trump’s mooted looser regulation, tax cuts, tariff hikes and tighter immigration policies are seen as both pro-growth and inflationary by economists.The dollar is on track for a 5.3% gain against the yen this month and a 11.8% advance for the year.”Several market participants signal however that the upward trend in dollar/yen may be exaggerated, which increases the risk of a correction,” said Sydbank analysts in a note.”At the same time, Japanese authorities have indicated possible intervention in the event of rapid and sharp rises in dollar/yen.”DECEMBER RETREATOther major currencies attempted to claw back some ground against the dollar.The euro edged up 0.14% to $1.0439, but was still heading for a 1.3% decline for December. Sterling was up 0.28% at $1.2563 and on track for a 1.4% fall for the month.The Chinese yuan was set to round out the week near a 13-month low, at 7.2994 per dollar in the onshore market. The currency has suffered under the threat of additional U.S. tariffs on Chinese goods under Trump.South Korea’s won was down 0.4% at 1,472.5 per dollar after parliament impeached acting President Han Duck-soo, plunging the country deeper into political chaos. The won dropped to its lowest level in about 16 years ahead of the vote. Leading cryptocurrency bitcoin rose 1% to $96,630, but was largely flat on the month after retreating from a record high of 108,379.28 hit on Dec. 17. It has surged about 127% so far this year. More

According to LSEG Lipper data, U.S. equity funds gained inflows for the seventh week in eight weeks, to the tune of $20.56 billion on a net basis following a sharp $49.7 billion worth of net sales in the previous week.Last Friday’s Commerce Department report revealed the PCE price index rose only 0.1% in November, below analyst expectations, reviving hopes for further Federal Reserve rate cuts next year and bolstering U.S. stocks, which also typically benefit from the “Santa Claus Rally” in the final week of the year.Investors, however, focused investments into U.S. large-cap funds, as they pumped a net $31.67 billion into these funds, the highest since Oct. 2, following $20.94 billion worth of net sales in the prior week.Small-cap, mid-cap and multi-cap funds, meanwhile, experienced outflows of $2.95 billion, $1.17 billion and $853 million, respectively.Sectoral equity funds also witnessed a net $2.14 billion worth of outflows with healthcare and consumer discretionary, having $495 million and $476 million in net sales, leading the way.U.S. bond funds experienced their second consecutive week of outflows, with investors withdrawing a net $5.42 billion. Among the segments, U.S. emerging markets debt, short-to-intermediate investment-grade, and municipal debt funds recorded net sales of $924 million, $899 million, and $879 million, respectively.In contrast, short-to-intermediate government & treasury funds bucked the trend, attracting $957 million in inflows. Meanwhile, U.S. money market funds saw substantial interest, drawing a net $41.72 billion, a sharp reversal from the previous week’s $27.31 billion in net sales. More

TOKYO (Reuters) -Core inflation in Japan’s capital accelerated in December while services inflation held steady, data showed on Friday, keeping alive market expectations for a near-term interest rate hike.But factory output fell in November for the first time in three months, suggesting that softening overseas demand was taking a toll on the export-reliant economy.The data will be among factors the Bank of Japan (BOJ) will scrutinise at its next policy meeting on Jan. 23-24, when some analysts expect it to hike short-term interest rates.The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.4% in December from a year earlier, compared with a median market forecast for a 2.5% gain. It followed a 2.2% year-on-year rise in November.Another index that strips away both fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of demand-driven inflation, rose 1.8% in December from a year earlier after increasing 1.9% in November, the data showed.Service-sector prices rose 1.0% in December after a 0.9% gain in November, underscoring the BOJ’s view that sustained wage gains are prodding firms to charge more for services.”There’s a chance higher wages will be passed onto services prices, which is positive for the BOJ in normalising policy,” said Masato Koike, senior economist at Sompo Institute Plus.The Tokyo inflation data, considered a leading indicator of nationwide trends, is closely watched by policymakers for clues on how much progress Japan is making towards durably meeting the BOJ’s 2% inflation target – a prerequisite for more rate hikes.But some analysts saw signs of weakness in Japan’s economy and price momentum that could delay the BOJ’s rate-hike timing.The increase in Tokyo inflation was driven largely by higher utility bills and the price of food like rice, which could weigh on consumption and discourage firms from hiking prices further.Separate data released on Friday showed factory output fell 2.3% in November from the previous month due to shrinking production of chip equipment and automobile, casting doubt on the strength of Japan’s fragile economic recovery.”When stripping away the effect of rising utility bills, there’s no sign of strength in inflation,” said Toru Suehiro, chief economist at Daiwa Securities, who expects the BOJ to hold off on raising rates in January.The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July on the view Japan was making steady progress on meeting its inflation goal.The BOJ has held rates steady since then, including at last week’s meeting. Governor Kazuo Ueda said he preferred to wait for more data to gauge next year’s wage momentum and for clarity on the incoming U.S. administration’s policy before hiking again.All respondents in a Reuters poll published earlier this month expected the BOJ to hike interest rates to 0.5% by March next year. Its decision to keep rates steady this month has heightened market attention on whether a hike would come at its next meeting on Jan. 23-24, or a subsequent rate review on March 18-19. More

TOKYO (Reuters) -Some Bank of Japan policymakers saw conditions falling into place for an imminent rate hike with one predicting a move “in the near future,” a summary of opinions at the bank’s December meeting showed, keeping alive the chance of a January hike.The BOJ kept interest rates steady at 0.25% at this month’s meeting, a move Governor Kazuo Ueda explained as aimed at scrutinising more data on next year’s wage momentum and clarity on the incoming U.S. administration’s economic policies.”There are high uncertainties over the course of discussions on tax and fiscal policy in Japan and over the policy stance of the new U.S. administration taking office at the beginning of 2025,” one member was quoted as saying in the summary in calling for keeping policy steady at the Dec. 18-19 meeting.Another opinion also voiced concern over still-weak profitability of smaller firms in Japan and high uncertainty over the overseas economy, the summary showed on Friday.But others signalled that conditions for raising interest rates were falling into place.While stressing the need to monitor uncertainty over the U.S. economy for now, one member said the BOJ “will likely decide to raise the policy interest rate in the near future,” the summary showed.”While there remain uncertainties regarding overseas economies, Japan’s economy is in a state where the degree of monetary accommodation can be adjusted,” another opinion showed.The BOJ ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signalled a readiness to hike again if wages and prices move as projected.All respondents in a Reuters poll taken earlier this month expected the BOJ to raise rates to 0.50% by end-March. The BOJ next meets for a policy review on Jan. 23-24. More

(Reuters) – The Australian central bank’s rate trajectory and its effect on inflation will decide if Australian bank shares can eke out growth in 2025 after a bumper year that has left valuations stretched, analysts said.The financial sub-index, composed mainly of the country’s biggest lenders, has risen almost 30% this year to mark its best yearly gain since 2009, outpacing an 8% gain in the S&P/ASX 200 benchmark index.The sector’s bumper performance was a result of inflows from superannuation funds and retail investors, who found comfort in the banks’ ability to provide high capital returns in a weak economic environment.Stable earnings performance and strong asset quality have pushed more funds into banks, while the impact of China’s growth prospects on commodity prices saw a revaluation across the materials sector, multiple analysts said.”Given the valuation stretch in the bank sector any fatigue in flow from what has been the dominant driver this year could be a trigger for multiple derate back to more normal valuation levels,” Morgan Stanley (NYSE:MS) analysts said. They added that their model portfolio positioning remains linked to a scenario that can see an ultimate rotation away from Australian banks and broaden into other sectors including resources.The country’s biggest lender Commonwealth Bank of Australia (OTC:CMWAY) jumped 39% and became the most valuable company on the local bourse.CBA last traded at A$155.12 per share, much higher than the average 12-month price target of A$104.37, and has a forward price-to-earnings ratio of 27.55, according to data compiled by LSEG. National Australia Bank (OTC:NABZY) rose nearly 22% this year, Westpac added 42% and ANZ logged a gain of about 11%.The sustenance of this rally would ultimately depend on the Reserve Bank of Australia’s (RBA) rate trajectory.RBA has held interest rates at 4.35% for an entire year now, but opened the door to easing as early as February should data unfold as expected.Markets have since lifted the probability of a February easing to around 50%, while April is fully priced for a quarter-point cut. If inflation remains elevated and short-term rates on hold, asset quality issues and slowing consumer spending may arise, but if rates are cut, investors may find other opportunities across the ASX as other companies may benefit from this inflation and rate relief, Citi analysts said. More

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NEW YORK (Reuters) -The U.S. dollar hit a five-month high against the Japanese yen on Thursday on expectations the greenback would be boosted next year by policies by the incoming Donald Trump administration that are expected to boost growth and lift inflation.Trading volumes were light on Thursday with many traders on holiday after Wednesday’s Christmas holiday and before next week’s New Year holiday.Looser business regulations and tax cuts are expected to help propel U.S. growth next year while analysts say that a clamp-down on illegal immigration and the prospect of new tariffs on trading partners could increase price pressures, and weigh on the economy longer term.That has boosted the dollar against its peers, though there remains a lot of uncertainty over exactly what policies will be introduced and what their impact will be.Rising doubts over how many interest rate cuts the Federal Reserve will be able to undertake next year has added to the dollar rally in the past few weeks.The U.S. central bank last week cut rates by 25 basis points as expected and Fed Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation.Fed policymakers raised their inflation projections for 2025 and cut their interest rate forecast to 50 basis points for the year, from 100 basis points.Money market traders are currently pricing in 38 basis points of cuts next year, implying they see a roughly 50% chance that the Fed will make a second 25 basis point reduction.Data on Thursday showed that the number of Americans filing new applications for jobless benefits dipped to the lowest in a month last week, consistent with a cooling but still-healthy U.S. labor market.U.S. retail sales also rose 3.8% between Nov. 1 and Dec. 24, as intense promotion to drum up sales in what was expected to be a highly competitive holiday season for retailers prompted last-minute shopping among consumers.The dollar index was last up 0.02% at 108.13. It is holding just below a two-year high of 108.54 reached on Friday.The euro rose 0.13% to $1.0418. The single currency fell to $1.03435 on Friday, the lowest since Nov. 22. The greenback gained 0.35% to 157.93 Japanese yen and earlier reached 158.09, the highest since July 17.The Japanese yen has suffered from the wide interest rate differential between the United States and Japan. The Bank of Japan expects the economy to move closer to sustainably achieving the central bank’s 2% inflation target next year, Governor Kazuo Ueda said on Wednesday, suggesting the timing of its next interest rate increase was nearing.In cryptocurrencies bitcoin fell 2.88% to $95,598. More

(Reuters) – Social Security is an earned benefit. You become eligible by paying the payroll tax during your working years, and the amount you get is geared to your wage history – with a glaring exception. Since the 1980s, some public sector workers have seen their earned Social Security benefit amounts cut sharply due to a little-understood rule called the Windfall Elimination Provision (WEP). The logic of the WEP – and its cousin, the Government Pension Offset (GPO) – was inscrutable to all but policy analysts and actuaries. These rules can chop earned benefit amounts by more than half; they have provoked fury over the years from affected workers and repeated lobbying efforts at reform or repeal.Last weekend, Congress responded by repealing the WEP and the GPO with a law dubbed the Social Security Fairness Act. Opponents of the repeal argue that the two rules address alleged overpayments to people who split their careers between jobs covered by Social Security and other work covered by a public sector defined benefit plan.Opponents also argue that repeal will accelerate depletion of Social Security’s trust funds. Some claim it would increase the federal deficit. The truth is that it will not, because Social Security has its own dedicated funding stream separate from the general government budget.Most Americans are in jobs covered by Social Security – the main exception is state and municipal workers who participate in separately funded pension plans. Consequently, the WEP and GPO impacted only about 2.5 million Social Security beneficiaries as of late 2023, according to the Congressional Research Service. That is just 4% of the total beneficiary pool. The  repeal will hasten the insolvency of the Social Security trust funds by about six months, according to the Congressional Budget Office – but that is a problem Congress will need to address separately, anyway.WHY THE WEP?Why would these public sector workers be treated differently from everyone else? The answer begins with the way that Social Security benefits are distributed across wage earners with varying incomes. Social Security’s benefit formula is progressive; workers with low average lifetime earnings get a higher benefit amount compared with their earnings than people who are better-paid. In this system, workers affected by the WEP look as though they earned less over the span of their careers than they actually did – so their unadjusted benefit would be larger than it would be had they worked their entire careers in jobs covered by Social Security. The WEP aims to eliminate the high benefit return these workers get on their Social Security income when they are not really low-income.  “We’ve decided as a society that we should help low-income people in retirement,” said Richard Johnson, director of the program on retirement policy at the Urban Institute. “To Social Security, these people look like they have very low incomes, so the formula gives them an unusually generous benefit for them to account for that.”Some of the language used to defend WEP and GPO really makes no sense. For example, some supporters argue that providing a full Social Security benefit to these workers would constitute “double-dipping,” despite the fact that they are drawing benefits from two entirely separate systems with different funding sources.Even the word “windfall” in the term WEP implies that these workers would otherwise be receiving extra benefits in a way that is not fair. But none of it makes sense to the people impacted by WEP or GPO – for them, it is a simple matter. If you earned the benefit, you should receive it. WEP and GPO now have been repealed. Their elimination will make retirement a little easier for public sector workers such as firefighters, police officers and teachers, most of whom earn modest incomes and pensions – not to mention their spouses and widows. The law calls for the restored benefits to be paid starting with retroactive payments for 2024, although no details are available yet on how that will be handled, or when the retroactive payments will be made. I would have preferred to see this taken care of as part of a broader package of Social Security reforms that address the solvency problem and other flaws in the system. For example, if Congress is really interested in addressing “fairness” – as implied by the name of the WEP/GPO repeal bill – it should swear off any effort to raise Social Security’s full retirement age to 70 to address the program’s looming shortfall, as proposed by many Republicans. That would be unfair to millions of workers who cannot wait that long due to the physical nature of their jobs, health problems or inability to save money for an earlier retirement. Another way to improve fairness: Congress should end its chronic under-funding of the Social Security Administration’s budget, which has created a shameful, enormous backlog of people awaiting decisions on Social Security Disability Insurance claims – delays that can further damage their health and shorten their lifespans. Outside the Social Security system, a more fair retirement security system would expand 401(k) access to all Americans, and rework the tax-deferral features of 401(k) and IRA accounts so that they do not primarily help upper-income households. After all – fair is fair.The opinions expressed here are those of the author, a columnist for Reuters. More