Economy

The consumer sentiment index fell to 88.4 in December from 100.7 in November, the lowest since the index hit 86.6 in November 2022, when 159 people were killed in a Halloween crowd crush, the Bank of Korea’s monthly survey of consumers showed. The Composite Consumer Sentiment Index falling below the threshold of 100 means consumers have turned pessimistic over the economy.Thousands of protesters massed on Seoul’s streets as the parliament voted to impeach President Yoon on Dec. 14 over his short-lived declaration of martial law on Dec. 3.Tuesday’s data, the first monthly indicator since the crisis erupted over the martial law decree, shows consumer confidence is fast fraying amid political divisions as constitutional justices are set to weigh up whether to formally remove Yoon.In the days following Yoon’s martial law declaration, the benchmark Kospi plunged while the South Korean won last week hit its weakest level in 15 years. A sub-index on consumer spending outlook dropped by 7 points as “domestic political uncertainties worsened consumption sentiment across travel spending, dining out expenses and durable goods, which declined by 8 points, 6 points and 3 points, respectively,” the BOK said in a statement. Governor Rhee Chang-yong on Dec. 18 also said the political turmoil is weighing on the South Korean economy, and called for more fiscal support and other measures to ensure growth remains intact. More

(Reuters) – It could be a bumpy ride for U.S. corporate bond spreads in 2025, with investors and strategists expecting more market volatility, as the new Trump administration implements a reform agenda that could be inflationary and slow the pace of U.S. interest rate cuts.Corporate credit spreads, the premium over Treasuries that companies pay for debt, widened last week after the Federal Reserve’s December meeting. The Fed cut interest rates by 25 basis points but Chair Jerome Powell expressed caution about further reductions without seeing progress in lowering stubbornly high inflation.The widening of spreads on Thursday followed a rise in Treasury yields after the Fed’s hawkishness.Strategists expect this pressure on spreads to persist as they see demand moderating for corporate bonds, which drove spreads to their tightest in decades this year.”We expect demand to moderate somewhat in 2025 given the expectation for rates to remain elevated,” said BMO credit strategist Daniel Krieter. He expects this moderation in demand, alongside struggling corporate fundamentals and volatility as Trump takes office, to send credit spreads wider in the new year. Krieter expects investment-grade bond spreads to touch a low of 70 bps in the first quarter of 2025, from 82 bps on Friday, and a peak of 105 bps by the end of next year. “A lot of the policy that’s out there right now is inflationary, or is expected to potentially be inflationary. It certainly leans that way,” said Nick Losey, portfolio manager at Barrow Hanley. The uncertainty about the impact of the new administration’s policies on markets is now expected to push companies to bring forward their debt-issuance plans to the first quarter.Some strategists predict investment-grade bond issuance next month to touch between $195 billion and $200 billion, and to set a record, beating $195.6 billion in January 2024.Junk bond issuance in January is expected to range between $16 billion and $30 billion, said one strategist. This compares to $28 billion this past January and $20 billion in January 2023, according to JPMorgan data.”We’re expecting January to be a busy month as long as the secondary market continues to look welcoming towards issuance, which I would argue is still very much the case right now, even with the little hiccup we’ve had the past two days,” said Blair Shwedo, head of public sales and trading at U.S. Bank.Demand for these new bonds will remain robust as returns on corporate bonds could be attractive in 2025 despite potential volatility, said Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management.”The good news is that unlike in awful 2022, the starting yield level for the asset class is high. Even if both Treasury yields rise further and credit spreads widen, you’re still likely to have at worst a flattish total return on a forward-looking 12-month basis,” Skiba said.   More

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OTTAWA, Dec 23 (Reuters) – The Bank of Canada’s decision to cut rates by 50 basis points on Dec 11 was a close call, with some members of the governing council suggesting a smaller reduction, according to minutes released on Friday.The central bank slashed its key policy rate to 3.25% to help address slower growth. Governor Tiff Macklem indicated further cuts would be more gradual, a shift from previous messaging that continuous easing was needed to support growth.The minutes said the discussions had focused on whether a 50 basis point or a 25 basis point cut was more appropriate.”Each member of Governing Council acknowledged that the decision was a close call based on their own assessments of the data and the outlook for growth and inflation,” they said.Those preferring a bold move were concerned about a weaker growth outlook and downside risks to the inflation forecast, even while acknowledging that not all the recent data pointed to the need for a 50 basis point cut.”However, it seemed unlikely that a cut of 50 basis points would take rates lower than they needed to go over the next couple of meetings,” the minutes said. Those preferring a 25 basis point cut noted signs of strength in consumption and housing activity, suggesting the bank could be patient while the full effects of past cuts became clearer.The decision to opt for a larger cut reflected a weaker outlook for growth than forecast in October and the fact monetary policy no longer needed to be clearly restrictive.”Governing Council members also discussed the future path for interest rates. There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the minutes said. “Members agreed that they would likely be considering further reductions in the policy rate at future meetings, and they would take each decision one meeting at a time.” More

WASHINGTON (Reuters) -New orders for key U.S.-manufactured capital goods surged in November amid strong demand for machinery, while new home sales rebounded after being weighed down by hurricanes, offering more signs that the economy is on solid footing as the year ends.But concerns over plans by President-elect Donald Trump’s incoming administration to impose or massively raise tariffs on imports could slow momentum next year, with other data on Monday showing consumer confidence slumping in December. Consumers, however, remained upbeat on the labor market’s prospects.The reports followed on the heels of strong consumer spending data last week. They underscored resilience in the economy that prompted the Federal Reserve last week to project fewer interest rate cuts in 2025.”That strength is consistent with our view that business equipment spending growth will accelerate gently next year,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The continued buildout of AI and spillovers from the boom in new factory construction over the past few years will provide a continued tailwind.”Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.7% after dipping 0.1% in October, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders gaining 0.1%.Other data from the Census Bureau showed new home sales jumped 5.9% to a seasonally adjusted annual rate of 664,000 units in November. But rising mortgage rates, in tandem with the 10-year Treasury yield, pose a challenge next year. Core capital goods orders increased 0.4% year on year. Shipments of core capital goods rose 0.5% after advancing 0.4% in October. Business investment has largely held up despite the U.S. central bank’s aggressive monetary policy tightening in 2022 and 2023 to tame inflation.The Fed last week cut its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range. The central bank has reduced borrowing costs by a full point since it began its easing cycle in September. It forecast only two rate cuts next year, in a nod to the economy’s continued resilience and still-high inflation.In September, Fed officials had forecast four quarter-point rate cuts next year. The shallower rate cut path in the latest projections also reflected uncertainty over policies, including tariffs, mass deportations of immigrants in the country illegally and tax cuts, expected from the Trump administration.STRONG LABOR MARKET VIEWS Consumers have started taking note of the potential negative impact of tariffs on the economy. A survey from the Conference Board on Monday showed 46% of consumers expected tariffs to raise the cost of living. That contributed to the consumer confidence index plunging 8.1 points to 104.7 in December, erasing all the gains following Trump’s Nov. 5 victory.Consumers remained upbeat on the labor market, the main driver of the economy through consumer spending. The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, increased to a seven-month high of 22.2 from 18.4 in November. This measure correlates to the unemployment rate in the Labor Department’s monthly employment report. The unemployment rate is currently at 4.2%.”Consequently, recent readings, along with more stability in continuing claims, suggest the unemployment rate will not rise further in December, and could decline from November’s high-side 4.2% reading,” said Abiel Reinhart, an economist at JPMorgan.Stocks on Wall Street were mixed. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. Orders for machinery jumped 1.0%. Electrical equipment, appliances and components orders increased 0.4%. There were also increases in orders of primary metals. But orders for computers and electronic products fell, as did those for fabricated metal products. Orders for transportation equipment declined 2.9%, pulled down by a 7.0% drop in commercial aircraft orders. Boeing (NYSE:BA) reported on its website that it had received 49 aircraft orders, down from 63 in October. Commercial aircraft shipments declined further, likely weighed down by a seven-week strike at Boeing’s West Coast factories, which halted production of its best-selling 737 MAX as well as 767 and 777 wide-body planes. Boeing has also been dogged by safety concerns.Aircraft accounted for the robust increase in business spending on equipment in the third quarter. While economists expected that the decline in aircraft orders would be a drag on business spending on equipment in the fourth quarter, the hit was likely to be limited by the strong rise in orders for core capital goods. Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, dropped 1.1% after increasing 0.8% in October. The decline mostly reflected the weakness in commercial aircraft orders.”They will be merely unchanged quarter-on-quarter in fourth quarter, if they remain at November’s level in December,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.The Atlanta Fed is forecasting gross domestic product increasing at a 3.1% rate in the fourth quarter. The economy grew at a 3.1% pace in the third quarter. More

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LONDON (Reuters) – Some World Bank staff have criticised an assessment of Ethiopia’s finances conducted with the International Monetary Fund, questioning whether the analysis that underpins the country’s debt restructuring may be “faulty”.In an internal paper seen by Reuters, World Bank consultant Brian Pinto and its chief economist Indermit Gill assess the Debt Sustainability Analysis (DSA), dated July and prepared by the IMF and staff of the International Development Association (IDA), the World Bank’s fund for poorest nations.The authors suggest that based on the DSA, Ethiopia is facing a short-term liquidity crunch, and not a long-term solvency issue, a point of contention between the government and holders of its $1 billion international bond that is in default. “We found that the bondholders have interpreted the DSA correctly, but the DSA itself may be faulty,” Pinto and Gill wrote in the paper from earlier this month. “The disagreements about Ethiopia’s debt sustainability will be repeated as other countries become debt distressed.” Asked about the paper, a World Bank spokesperson said: “We generally don’t comment on internal deliberations between the World Bank and the IMF, or any of our partner institutions.”Ethiopian State Finance Minister Eyob Tekalign told Reuters IMF and World Bank teams had just revisited the DSA as part of the latest review of the Fund’s loan programme and there had been no major change to the position. A spokesperson for the IMF confirmed its staff visited Ethiopia in November for the second review of the Fund’s loan programme, adding that each review includes an update to the DSA, without elaborating on its contents. The spokesperson did not comment on the memo. Pinto and Gill did not respond to a request for comment.Bondholders and Ethiopian officials have been in a tense standoff. At the heart of the debate is whether Ethiopia – as bondholders argue – faces a liquidity crunch, which could be addressed by rescheduling debt, or whether it has longer-term solvency problems that require debt writedowns known as haircuts.The DSA said that some export-related indicators pointed to both liquidity and solvency pressures.In October, Eyob told Reuters that writedowns were unavoidable and the DSA showed a solvency issue. Investors, in rejecting the assessment, have also slammed a government proposal that indicates an 18% haircut. The comments in the paper suggest some World Bank staff sympathise with bondholders’ views. “Based on the July 2024 DSA, Ethiopia should be trying to find ways to lengthen debt maturity and increase exports to address its liquidity problem, not asking bondholders to take a haircut,” Pinto and Gill wrote.FINANCIAL LIFELINEThe report gives credence to years of complaints by the private sector over the DSAs and the levels of debt that countries can manage – and thus what amount lenders must write off when a country defaults.Ethiopia became Africa’s third country to default on its international bonds in as many years in December 2023. Despite the relatively small size of its bond debt – compared with Zambia’s $3 billion and Ghana’s $13 billion – progress on restructuring has been slow and tangled in controversy.IMF funding is often the sole financial lifeline available to countries in a debt crunch, and key to unlocking other financing sources – including World Bank backing – with delays in debt reworks adding yet more pressure on government finances, companies and populations.Pinto and Gill have argued for some time for a change to the Debt Sustainability Framework for low-income nations, designed to inform borrowing decisions by poor countries. The framework requires regular joint World Bank and Fund DSAs which analyse a country’s debt burden and vulnerabilities over the coming decade.”It is hard not to conclude that Bank-Fund DSAs for Ethiopia have not provided accurate information to markets, nor perhaps to the Ethiopian government,” the authors said. More

The Fed slashed interest rates by 25 bps at its latest FOMC meeting this month, aligning with market expectations. This marks the fourth cut since September, bringing the total reduction to 100 basis points and placing the policy target range at 4.25%-4.5%.However, the updated dot plot presented a more hawkish stance than anticipated. The median projection now reflects only 50 basis points of cuts for 2025, a notable shift from the 100 basis points indicated in the September dot plot. The Fed’s outlook suggests that policy adjustments could extend through 2027.Markets reacted negatively to the announcement. Equities fell sharply, bond yields climbed, and the dollar strengthened.During the post-meeting press conference, Fed Chair Jerome Powell conveyed optimism about the state of the economy and the outlook for 2025. Powell acknowledged that economic growth had surpassed the Fed’s recent expectations, while inflation remains above the 2% target. As a result, the central bank intends to adopt a more measured approach to further rate reductions.”Our own views on the economic outlook are similar to the Fed’s, and we therefore have adjusted our rate cut forecast in line with the new dot plot,” UBS senior economist Brian Rose said in a note.The bank now anticipates 25 basis point cuts in both June and September, totaling 50 basis points for 2025, down from previous expectations of quarterly cuts amounting to 100 basis points over the year.While this more cautious approach is currently favored, Rose highlights that “a March rate cut could quickly be back on the table if there is bad news from the labor market early next year.”The Fed’s hawkish stance fueled a rally in the U.S. dollar, with the dollar index briefly surpassing 108. This trend aligns with interest rate movements over the past two years and is expected to persist into 2025.Political factors, including Donald Trump’s upcoming inauguration, are likely to keep the dollar elevated in the near term. Yet, UBS highlights limits to further dollar strength, citing overvaluation, minimal expectations for U.S. monetary easing in 2025, and the market’s focus on the positive aspects of Trump’s policies. Any deviation from these expectations could trigger a dollar pullback.UBS views current dollar rallies as selling opportunities, forecasting EURUSD to return to 1.10 later in 2025. More