Economy

(Reuters) – The closely watched two-year/10-year part of the U.S. Treasury yield curve briefly inverted on Tuesday, which in the past has indicated that a recession could start in one to two years.Other parts of the yield curve, however, including one of the Federal Reserve’s favorite recession indicators – the gap between three-month and 10-year yields – have been steepening and remain a long way from inversion.Here is a roundup of what some market participants think about the yield curve.GOLDMAN SACHS STRATEGISTS, LED BY PRAVEEN KORAPATY “The nominal curve tends to invert more easily in a high inflation environment, and we could see earlier and/or deeper curve inversions this cycle. In such an environment, a deeper nominal curve inversion may be needed to produce the same recession odds in models as seen in more recent business cycles.”ERIN BROWNE, PORTFOLIO MANAGER, MULTI-ASSET STRATEGIES, PIMCO”Historically in very high inflationary environments, like we are in today…looking at real yields and the real yield curve is a better indicator of growth risks. The real yield is still very steep.””The extraordinary amount of QE has lowered term premiums and worsened the flatness of the curve. As a result, this is a very different cycle.”JPMORGAN STRATEGISTS, LED BY MARKO KOLANOVIC“The flat/inverted yield curve was historically a good cycle signal because it would indicate that financing conditions have become highly restrictive, but we do not see this at present. Real rates averaged +200bp at the time of past curve inversions, vs current negative levels, while bank lending standards are still easing.”BRUNO BRAIZINHA, INTEREST RATE STRATEGIST, BANK OF AMERICA“The recent 2s10s curve dynamics reflect recession risks.”“Inversions are a significant mile-marker for late-cycle transitions, with implications for expected returns and covariances across asset classes. Scope for a more hawkish Fed near term likely exacerbates medium-term risks to the outlook.”JONATHAN COHN, RATES TRADING STRATEGIST, CREDIT SUISSE“2s10s…may not be as strong or worrisome of an indicator in the current environment as it has been historically given much of the “weight” on the long-end reflects compressed term premia as opposed to inherent “overtightening” expectations. Nevertheless… it is sensible to price a higher recession probability particularly now that the Fed has gestured toward its higher tolerance for economic weakness in exchange for price stability.”JIM REID, HEAD OF THEMATIC RESEARCH, DEUTSCHE BANK“The Fed have long preferred measures like the spread between the 18m forward 3m yield and the 3m yield….The biggest implication of this is perhaps that the Fed won’t see a 2s10s inversion as a reason to slow down rate hikes.”“I still prefer 2s10s as a lead indicator since we can go back with a successful track record over far more cycles than the Fed’s preferred measure but it’s fair to say the record difference between the measures is now stark and worth debating.”ANSHUL PRADHAN AND SAMUEL EARL, INTEREST RATE STRATEGISTS, BARCLAYS“On the surface, a downward-sloping yield curve simply points to expectations of rate cuts by investors and does not indicate why. Investors might be worried about a recession and expect the Fed to cut rates. Alternatively, they could be expecting the Fed to cut rates in response to falling inflation. Both are plausible explanations, though history suggests the former is more likely.”“Is this time different? We find the usual explanation of low term premium, due to factors such as the Fed’s balance sheet, unsatisfactory…Investors are willing to accept a low term premium when they are worried about downside risks to growth, suggesting that the term premium also contains information about the outlook.”WELLS FARGO MACRO STRATEGISTS, LED BY MIKE SCHUMACHER“The link between curve shape and growth has been weak at best since 2009.”“Why has the yield curve lost its mojo? Heavy bond buying by central banks has caused long-term yields to diverge from economic fundamentals.” More

WASHINGTON (Reuters) -The International Monetary Fund said on Wednesday it has updated its guidance on capital flow restrictions to allow member countries to impose pre-emptive measures to reduce the risks of abrupt capital outflows causing financial crises or deep recessions.The IMF’s institutional view on capital controls was launched in 2012 in the wake of the 2008-2009 financial crisis to allow for capital flow management measures and macroprudential measures in the event of capital surges.Under the new guidance, countries would no longer have to wait until capital flow surges materialize under the new guidance. They could impose such measures to counter a gradual buildup of foreign-currency debt that is not backed by foreign currency reserves or hedges, the IMF said.IMF First Deputy Managing Director Gita Gopinath said the changes were the result of analysis of recent capital controls practices by countries and research into current economic conditions and vulnerabilities.”You want to be able to ensure that you are not building up further financial vulnerabilities – and you can take measures preemptively to prevent that from happening,” Gopinath told reporters in introducing the new guidance.”So that when the environment changes, for instance, like the current environment that we’re in where interest rates could go up very sharply, that you’re able to better insulate your economy,” she added. More

That’s the estimated cost increase the fast-food company might face if it stops buying meat from producers who put pregnant sows in gestation crates, according to two industry experts. For customers, that means adding two half-strips of bacon to a burger could cost more than $2 in Chicago, where McDonald’s is based.Icahn’s pitch to end what he and animal-welfare experts call the inhumane treatment of animals comes at a time when consumers are already grappling with soaring prices for gas and grocery items. The meat industry has been hit particularly hard during the pandemic due to a shortage of U.S. workers, and now the spike in fuel prices is driving higher shipping costs. President Joe Biden has urged Congress to assess whether meat processors are engaging in anticompetitive behavior.“Prices are going up across quick-service restaurants pretty aggressively,” said Mike Halen, an analyst at Bloomberg Intelligence. “I don’t know how much more consumers are going to be willing to accept in terms of price increases right now, especially with prices going up for everything.”McDonald’s raised menu prices about 6% last year in the U.S. More hikes may be on the table as the company expects higher food and paper inflation this year in the U.S., compared with 2021.Billionaire Icahn has nominated two directors to the boards of McDonald’s and grocery giant Kroger (NYSE:KR) Co. as part of his campaign against gestation crates. Back in 2012, McDonald’s said it would require its U.S. pork producers to outline their plans to phase out the use of the stalls, which are too small for pigs to turn around in. The company’s current policy, however, allows for the confinement for about six weeks in early stages of pregnancy. Some members of the pork industry say the crates protect sows’ health.Icahn has urged McDonald’s to require all of its U.S. suppliers to move to “crate-free” pork and to set a specific time frame for doing so. A spokesman for the company declined to comment beyond its statement from February, which said that “the current pork supply in the U.S. would make this type of commitment impossible.”Eliminating the practice entirely would be a tough undertaking for the industry, and for Smithfield Foods Inc., the world’s biggest pork producer. “Any disruption to hog production would certainly have an impact on pork prices,” said Russell Barton, director at commodity researcher Urner Barry. “If you are restricted in the amount of hogs you can produce in a given facility, by giving them more space and things like that, then you are going to ultimately end up with tighter pork supply unless you make it up for it and build more facilities.”At Coleman Natural Foods, which doesn’t use gestation crates at all, farmers are paid as much as 20% more than the commodity price depending on the market, according to Jim Wallace, a senior director in the company’s live-hog operations. Its farmers also don’t use antibiotics or synthetic hormones in raising its pigs.Steve Meyer, a consulting economist for the National Pork Board and the National Pork Producers Council, expects prices could rise around 5% if gestation crates are eliminated. “You’ve got to cover all costs and it all depends on so many factors,” he said.“But to some families, anything higher is important,” Meyer said. “We ought to think about them.”©2022 Bloomberg L.P. More

WASHINGTON (Reuters) – Kansas City Fed president Esther George said she estimates a neutral rate of interest for the U.S. at about 2.5% “as a starting point” of what the Fed should aim for in upcoming rate increases as it assesses what impact it is having on the economy.”We will have to be watching how the economy unfolds to get a sense of where rate policy is getting traction” and how high rates ultimately need to go, George said, arguing that if consumers as anticipated shift spending back towards services they may be less influenced by Fed rate increases. More

“I’d love to see a day where people eventually sell Bitcoin-backed bonds like mortgage-backed securities,” Saylor said in an interview Tuesday after the software maker announced that it was taking a loan to buy more of the digital asset. “The market is not quite ready for that right now. The next best idea was a term loan from a major bank.”That may serve as a warning to El Salvador, which is planning to sell about $1 billion of so-called volcano bonds that will be backed by Bitcoin. While the proposed offering has been the talk of the crypto industry since it was first proposed last year, the nation’s Bitcoin advocating president, Nayib Bukele, has delayed offering the securities. “There’s a lot of talk about the El Salvador Bitcoin bond,” Saylor said. “That’s a hybrid sovereign debt instrument as opposed to a pure Bitcoin-treasury play. That has its own credit risk and has nothing to do with the Bitcoin risk itself entirely.” The $205 million loan, which will be backed by MicroStrategy’s Bitcoin holdings, was the best possible course for shareholders after exploring a slew of financing options, Saylor said. They included issuing Bitcoin-backed bonds, tapping DeFi or decentralized finance tools and loaning out its stash of digital assets. “If it was JPMorgan (NYSE:JPM) and it was their balance sheet at 4% interest, I’d probably do that deal. But if a hedge fund or operation doesn’t have 100 times my balance-sheet, then there’s probably theoretical counterparty risk offsetting nominal yield,” Saylor said. Saylor has effectively turned MicroStrategy shares into a leveraged play on Bitcoin. It owns about $5.9 billion of the cryptocurrency, based on Wednesday’s price of around $47,500.“At every scale anybody can readily use Bitcoin as their fulcrum and leverage is plentifully available to every corporation in the world right now. Municipalities could do it,” he said. “New York can issue $2 billion of debt and buy $2 billion worth of Bitcoin — the Bitcoin is yielding 50% or more, the debt costs 2% or less.” . ©2022 Bloomberg L.P. More

ORLANDO, Fla. (Reuters) – The first quarter was a scary ride for most investors but those who stuck to a conventional ’60-40′ portfolio of stocks and bonds escaped relatively unscathed. Having endured an energy price shock after Russia invaded Ukraine, rising interest rates and U.S. bond market plunge, and wild divergent swings in stocks and commodities, investors will be glad to see the back of the first quarter.But the benchmark, long-term ’60-40′ equity/fixed income investment portfolio held up reasonably well. That’s because most of the pain came on the smaller bond side of the portfolio, and because the remarkable rebound on the larger stocks side late in the quarter significantly reduced overall losses.According to Barry Gilbert at LPL Financial (NASDAQ:LPLA) in Boston, a simple portfolio weighted 60% the S&P 500 and 40% the Bloomberg aggregate U.S. bond index lost around 4% in the January-March period. That was ‘only’ the 19th worst performance out of 185 quarters going back to 1976, when the aggregate bond index was launched. There have been 47 ‘down’ quarters in total, the worst of all in late 2008 when losses topped 11%.The average decline of these ‘down’ quarters is around 4%, roughly where the portfolio will close the current quarter.”The first quarter was a big shock for investors. But if you’re looking at 60-40, it’s not good, but it’s not horrible,” Gilbert said. “We’ve been a little bit spoiled by the long bull market in bonds and sometimes people forget that bonds have risk too.”Gilbert notes that the aggregate index comprising Treasuries, investment grade corporate and mortgage-backed bonds is down around 6%, on track for the third worst quarter since 1976. S&P 500 total returns are down around 2.5%Other cuts of the U.S. bond market show the first quarter was equally bleak historically. The Bank of America (NYSE:BAC) Treasuries index lost 6% and the corporate bond index lost 9%, both the worst in at least 25 years.Q1 Stocks & Bonds Performance https://fingfx.thomsonreuters.com/gfx/mkt/jnvwekjrnvw/Q1totals.pngJoe LaVorgna, chief U.S. economist at Natixis, notes that an index of the two-year Treasury note as measured by its weekly total return compared with a year earlier had its biggest fall ever, even worse than the bond market routs of the early 1980s and 1994. Yields have shot up enough, and it may be time to buy.”A person of courage would get long the long end. The market is pricing in a lot of Fed tightening, probably too much. The slope of the curve gives me confidence that the front end will rally at some point. Perhaps sooner rather than later,” he said.2-Year US Treasury History https://fingfx.thomsonreuters.com/gfx/mkt/zgpomyalopd/NatixisUST.jpgSHAFTS OF LIGHTIf the 60-40 investor is feeling any relief right now it is thanks to the rebound in stocks. As recently as March 15 the S&P 500 was down 14% year-to-date and on March 14 the Nasdaq confirmed a bear market, down 20% from its November peak.The S&P 500 is back to within 5% of the all-time high it struck on January 4.It was a similar picture globally. The MSCI World will end the quarter down around 4%, its worst performance since the pandemic crash two years ago. But it was also down 14% two weeks ago, and of the 47 negative quarters since the late 1980s, there have been 21 larger declines.Valuations have come down and are closer to – although still above – long-term averages, and history suggests that stocks typically rebound after the 10-year U.S. Treasury yield falls below the two-year yield, as briefly occurred on Tuesday.Recession risks are undoubtedly rising and inverted curves across the rates and bond markets confirm that. But imminent contraction is not in the cards, giving investors scope to push equities higher.”Overall we find too much negativity rather than too much complacency in markets, and stay with a pro risk stance in our model portfolio,” JP Morgan strategists wrote on Wednesday. Analysts at UBS note that since 1965 the S&P 500 has returned an average of 8% in the 12 months following an inversion of the 2s/10s part of the U.S. yield curve. Strategists at Truist IAG (LON:ICAG) calculate that the average return is 11%, based on the previous seven inversions going back to 1978.S&P 500 Corrections https://fingfx.thomsonreuters.com/gfx/mkt/byvrjbmdove/SPCORRECT.jpg(The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever) More

COLOMBO (Reuters) – Sri Lankans faced 10-hour power cuts on Wednesday and warnings of longer blackouts on Thursday, as a deepening economic crisis roiled markets and the electricity regulator urged more than a million government employees to work from home to save fuel.The island nation has been unable to pay for fuel shipments because of a foreign exchange shortage, and is poised to seek assistance from the International Monetary Fund (IMF).”We made a request to the government to allow the public sector, which is about 1.3 million employees, to work from home for the next two days so we can manage the fuel and power shortages better,” Janaka Ratnayake, Chairman of the Public Utilities Commission of Sri Lanka, told Reuters.Power cuts would be extended to 13 hours on Thursday, Sri Lanka’s power regulator said in a statement.Amid the country’s worst economic crisis in decades, foreign exchange reserves have fallen by 70% in the past two years and were down to a paltry $2.31 billion as of February, leaving Sri Lanka struggling to import essentials, including food and fuel.The drawn-out power cuts on Wednesday were partly caused by the government’s inability to pay $52 million for a 37,000 tonne diesel shipment that was awaiting offloading, Ratnayake said.”We have no forex to pay,” he said, warning of more power cuts over the next two days. “That is the reality.”‘CAN’T SEE END OF TUNNEL’Sri Lankan shares closed 3.6% lower on Wednesday, after falling more than 7% during the day, prompting the Colombo Stock Exchange to halt trading twice.Udeeshan Jonas, Chief Strategist at equity research firm CAL Research, said the market was responding to a deepening of a crisis set off by badly-timed tax cuts, the coronavirus pandemic and historically weak government finances.”Investors can’t see the end of the tunnel,” he said.To seek a way out of the crisis, Finance Minister Basil Rajapaksa is set to visit Washington in April for talks with the IMF. The Fund’s assessment published on Friday said Sri Lanka was experiencing a combined balance of payments and sovereign debt crisis, and would need a “comprehensive strategy” to make its debt sustainable.If Sri Lanka secures an IMF programme it would be its 17th financial rescue package from the global lender.Harpo Gooneratne, a restaurateur in Sri Lanka’s main city of Colombo, said that even though some of his 10 restaurants had their own generators, the diesel shortage made it difficult to run his business during power cuts.”Its crazy,” he said.The worsening electricity cuts will hit already struggling businesses, especially exporters that have locked in orders and limited capacity to absorb cost increases, said Dhananath Fernando, an analyst at Colombo’s Advocata Institute think tank.”This will further hurt Sri Lanka’s growth and threaten foreign exchange earnings that are crucial to improve reserves, repay debt and pay for essential imports,” Fernando said.Gooneratne said there were 30% fewer customers at his restaurants and they were spending less.”Even when people go out they are cautious about their spending,” he said. “The person who earlier had two beers will now only have one.” More

WASHINGTON (Reuters) -The Biden administration will make available nearly $3.2 billion from the bipartisan infrastructure law to help Americans lower home energy costs, Energy Secretary Jennifer Granholm said on Wednesday.Low-income Americans spend up to 30% of their paychecks on energy. This investment will help them afford improvements to their homes such as switching to better insulation and ventilation, installing energy efficient heating and cooling systems and upgrading lighting and appliances, she said.”The $3.2 billion we are mobilizing today is about 10 times what we spend on retrofitting homes every year,” Granholm said. The efficiency improvements will have an immediate impact of helping families save hundreds to thousands of dollars per year in energy bills, she said.The current government program upgrades 38,000 homes annually. The additional amount will push that to 450,000 homes, she said.The $3.2 billion will be distributed by the Energy Department’s Weatherization Assistance Program, which takes applications from states and tribes and territories for the funding to retrofit low-income homes.In November, President Joe Biden signed into law a $1 trillion infrastructure bill that would create jobs across the country by disbursing billions of dollars to state and local governments to fix crumbling bridges and roads and by expanding broadband internet access to millions of Americans.In 2021, the average nominal retail electricity price paid by U.S. residential electric customers rose at the fastest rate since 2008, increasing 4.3% from 2020 to 13.72 cents per kilowatt hour, according to the U.S. Energy Information Administration https://www.eia.gov/todayinenergy/detail.php?id=51438 (EIA).Prices for most types of energy commodities rose significantly in 2021, including the cost of power generation fuels, especially natural gas, which helped push electricity prices higher, the EIA analysis shows.The United States accounted for about 17% of the world’s primary energy consumption in 2019, the EIA said, but had about 4% of the world’s population. Biden’s public approval rating fell to a new low of 40%, according to a Reuters/Ipsos poll conducted March 21 and 22, a clear warning sign for his Democratic Party as it seeks to retain control of Congress in the Nov. 8 election.The national poll found that 54% of Americans disapprove of his job performance as the country struggles with high inflation and Russia’s invasion of Ukraine has pushed geopolitical concerns to the fore. More