Economy

SINGAPORE (Reuters) – The yen was a tad softer against the dollar in trading thinned by a Japanese holiday on Monday, with market participants still ambivalent about the odds of a big Fed rate cut next month. The respite follows a tumultuous week that began with a massive selloff across currencies and stock markets, driven by worries over the U.S. economy and the Bank of Japan’s hawkishness. Last week ended calmer, with Thursday’s stronger-than-expected U.S. jobs data leading markets to pare bets for Federal Reserve interest rate cuts this year.Still, investors remain unconvinced the Fed can afford to go slow with rate cuts, and their pricing of 100 basis points of easing by year end, as per the CME Group’s (NASDAQ:CME) FedWatch tool, corresponds to a recession scenario. That leaves markets highly vulnerable to data and events, notably U.S. producer and consumer prices numbers due on Tuesday and Wednesday respectively this week, the global central bankers’ meeting at Jackson Hole next week and even earnings from artificial intelligence darling Nvidia (NASDAQ:NVDA) later in the month.”It’s more a case of market squaring up a little bit ahead of the U.S. inflation data,” said Christopher Wong, currency strategist at OCBC Bank in Singapore.The dollar was trading at 146.87 yen, up 0.2% from late U.S. levels on Friday. The euro stood at $1.0918 and the dollar index was flat at 103.18.A week ago, the euro rose as far as $1.1009 for the first time since Jan. 2.The Aussie was barely up at $0.6577 on Monday, while the New Zealand dollar stayed below last week’s three-week high of $0.6035. It was last at $0.6009.The Reserve Bank of New Zealand reviews policy on Wednesday and is expected to keep its key cash rate unchanged at 5.50%.CARRY UNWINDWall Street ended higher last week, with E-mini S&P 500 futures closing nearly unchanged on the week after a precipitous 4.75% decline last Monday, while longer-dated Treasury yields declined.Markets, in particular Japan’s, were rocked last week by an unwinding of the hugely popular yen carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher yields.The violent selloff in the dollar-yen pair between July 3 and Aug. 5, sparked by Japan’s intervention, a Bank of Japan rate rise and then an unwinding of yen-funded carry trades, caused it to fall 20 yen. Leveraged funds’ position on the Japanese yen shrank to the smallest net short stance since February 2023 in the latest week, U.S. Commodity Futures Trading Commission and LSEG data released on Friday showed.The yen reached its strongest level since Jan. 2 at 141.675 per dollar last Monday. It is still down 3.8% versus the dollar so far this year. J.P. Morgan analysts revised their forecast for the yen to 144 per dollar by the second quarter of next year, and said that implied the yen would consolidate in the coming months and they see reason to be optimistic on the dollar’s medium-term prospects.”Carry trades have erased year-to-date gains; we estimate 65-75% of positioning being unwound,” they said in a note on Saturday. Implied volatility on the yen, measured in yen options, has also subsided. Overnight volatility had spiked to as high as 31% on Aug. 6 but is now down to around 5%. More

But die-hard investors say the bull market in government bonds still has legs, citing China’s wobbly economy, deflationary pressures and low investor appetite for riskier assets. “We remain actively bullish,” said a bond fund manager, undeterred by unprecedented government moves to cool the sizzling treasury market and arrest a plunge in yields, which move inversely to prices.”We don’t see a rosy economic picture … and we’re under peer pressure to generate returns,” said the Beijing-based manager who asked to be anonymous due to sensitivity of the topic.Even those who have turned bearish appear half-hearted. Treasury futures investor Wang Hongfei said he chose to be “opportunistic” in the short term, trading quickly in skirmishes as the market tussle with regulators intensifies. China’s central bank has repeatedly warned of potentially destabilising bubble risks as investors chase government bonds and scurry away from volatile stocks and a sinking property market, while banks cut deposit rates. Falling yields also complicate the People’s Bank of China’s (PBOC) efforts to stabilise the weakening yuan.But with the PBOC now turning threats into action to tame bond bulls, authorities have opened a new battle front – following wars of attrition long fought against speculators and unwelcome price moves in the country’s stock and currency markets.Unlike the West, “China’s financial markets, including the bond market, are subject to top-down regulation,” said Ryan Yonk, economist with the American Institute for Economic Research.As the economy sputters, “Chinese officials will face increasing difficulty in maintaining such tightly controlled financial markets, and additional interventions are likely, and may signal the very instability Chinese officials are seeking to avoid.”FIRST SHOTThe first shot was fired last Monday, when China’s long-dated yields hit record lows amid a global rout that drove money into safe havens such as treasuries.State banks were seen selling large amounts of 10-year and 30-year treasuries after treasury futures jumped to record highs. Debt dumping by state banks – confirmed by data and traders – continued throughout the week, mirroring how the central bank uses big banks as agents at times to influence the yuan currency market, traders said.Late on Friday, the central bank said it will gradually increase the purchase and sale of treasury bonds in its open market operations. PBOC Governor Pan Gongsheng was previously head of China’s foreign currency regulator, so “it appears to be the same playbook,” said a Shanghai-based fund manager. In another warning shot to bond buyers, the PBOC ceased providing cash through open market operations on Wednesday for the first time since 2020, contributing to the biggest weekly cash withdrawal in four months in support of yields. Dealing a further blow to market sentiment, China’s interbank watchdog said it would investigate four rural commercial banks for suspected bond market manipulation, and would report several misbehaving financial institutions to the PBOC for penalty. The PBOC did not reply to a Reuters request for comment. ‘SWORD OF DAMOCLES’ To be sure, the flurry of measures have made some investors cautious. Both China’s 10-year and 30-year treasury futures posted their first weekly fall in a month. “Taking all factors into account, it would be prudent to exercise additional caution regarding China duration risk,” Kiyong Seong, lead Asia macro strategist at Societe Generale (OTC:SCGLY) said, referring to the risk of holding long-dated bonds. “While the scale of any selloff in China bonds may not be substantial in the medium and long term due to the fragile growth momentum in China, chasing duration returns in China does not seem appropriate in our view.”Tan Yiming, analyst at Minsheng Securities, wrote in a note: “The sword of Damocles is falling.” But in a so-called “asset famine” environment where high-yielding assets are in short supply, “the bond bull remains alive,” Tan said. The Shanghai-based fund manager said there’s no reason to throw in the towel without seeing clear signs of economic improvement, and his strategy is to “buy on the dip”. “You cannot change market direction using technical tools, just as you cannot change the temperature by adjusting the thermometer,” he said. The PBOC moves could change the tempo of bond price rises, but not the uptrend, he said. “If you hold long enough, you will make money.”However, rising volatility shows the central bank is at least making some progress in giving investors pause for thought. Chun Lai Wu, head of Asia Asset Allocation at UBS Global Wealth Management, cautioned that expected support to Chinese bonds from any monetary easing will likely be offset somewhat by stepped-up government bond issuance.China’s 30-year treasury yield is currently around 2.37%, compared with 3% a year ago.”Over the long term, we could see the … yield drift higher, maybe towards 2.5%, if indeed we see the economic recovery continue and inflation begin to return.” ($1 = 7.1715 Chinese yuan renminbi) More

SYDNEY (Reuters) – Asian stocks got the week off to a quiet start on Monday as a holiday in Japan removed one source of recent volatility, and investors hunkered down for major U.S. and Chinese economic data for an update on global growth prospects.Key for the Federal Reserve will be U.S. consumer prices on Wednesday where economists look for rises of 0.2% in both the headline and core, with the annual core slowing a tick to 3.2%.”That would likely bolster the Fed’s confidence that disinflation is ongoing, allowing for a rate cut in September, but a core run-rate still above target should also speak against a larger 50bp cut or an intra-meeting cut,” said analysts at Barclays in a note.”Moreover, we expect a robust 0.8% m/m increase in headline retail sales, pointing to continued resilience in the engine of the economy, the consumer, on the back of solid income and wealth fundamentals.”As well as July retail sales, there is data on industrial output and housing starts, along with several surveys on regional manufacturing and consumer sentiment.The futures market currently implies a 49% chance of the Fed cutting by 50 basis points in September, though that is down from 100% a week ago when Japanese equities went into free fall.Early Monday, Nikkei futures traded at 35,370 compared to a cash close of 35,025. MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.2%.S&P 500 futures and Nasdaq futures were little changed in thin trading. So far, around 91% of the S&P 500 have reported earnings and 78% of those have beaten the Street.Results from Walmart (NYSE:WMT) and Home Depot (NYSE:HD) this week will offer a snapshot on how U.S. consumers are holding up.China issues figures on retail sales and industrial production on Thursday, which are expected to show the economy continuing to underperform, underlining the need for more stimulus.In currency markets, the dollar edged up 0.2% to 146.92 yen, and away from last week’s deep low of 141.68, while the euro was steady at $1.0915.BofA FX strategist Shusuke Yamada thinks the rush to unwind yen carry trades – borrowing at low rates to buy higher yielding assets – has mostly run its course with speculative yen short positions having fallen by 60%.”Longer-term, structural outflows from corporate foreign direct investment and retail ownership of international equities should drive yen weakness,” he adds, and sees the dollar at 155.00 yen by year-end.Data from the IMM exchange showed net short positions in dollar/yen were down at 11,354 compared to 184,000 in early July. In commodity markets, gold held at $2,420 an ounce, after dipping slightly last week. [GOL/]Oil prices inched up, having bounced 3.5% last week as fears of a widening Middle East conflict threatened supplies. [O/R]Israeli Defense Minister Yoav Gallant spoke on Sunday with U.S. Defense Secretary Lloyd Austin and told him Iran’s military preparations suggest Iran is getting ready for a large-scale attack on Israel.Brent gained 5 cents to $79.71 a barrel, while U.S. crude rose 13 cents to $76.97 per barrel. More

(Reuters) – A look at the day ahead in Asian markets. A week is not just a long time in politics. Seven days ago a huge unwind in the yen carry trade and selloff in megacap U.S. tech triggered a wave of volatility that sent global markets reeling and investors running for the safety of U.S. Treasuries.As the new trading week gets underway in Asia on Monday, that seems a long time ago – many assets have recovered much of these losses, volatility has subsided, and traders have heavily scaled back their rate cut expectations.The question now is whether that momentum can be sustained. Some investors will seize upon lower equity volatility to push up risky assets again; others will be wary of potential aftershocks in any corner of the market, especially in mid-August when liquidity is much thinner than usual. Monday’s Asian calendar is light. Indian consumer price inflation is the main event, leaving markets at the mercy of global forces. If that’s the case, Monday should be relatively calm. Wall Street rose on Friday, meaning the Nasdaq and S&P 500 ended last week essentially flat. Treasury yields fell on Friday but registered their biggest weekly rise in months.Stronger-than-expected U.S. economic data suggesting recession fears are overblown, and a couple of poorly-received U.S. debt auctions, pushed yields higher. No bad thing, perhaps, if you think the previous week’s plunge was excessive.Asian markets’ rebound last week was pretty impressive. After the Nikkei registered its second biggest fall on record and its third largest ever rise in the space of 24 hours, the index ended the week down only 2.5%.Other benchmark indices fared even better – the MSCI Asia ex-Japan and MSCI World index both ended flat, and the MSCI Emerging Market index rose 0.2%.In currencies, U.S. futures market data on Friday showed that hedge funds slashed their net short yen position in the week to Aug. 6 by 62,000 contracts. That is the biggest yen-bullish weekly swing since the Fukushima disaster in February 2011, and third biggest since comparable data started in 1986.If this is representative of the broader FX market, the short yen ‘carry trade’ has been mostly wiped out. Do traders begin shorting the yen and putting on carry trades again, or not?Indian inflation is the main data point in Asia and comes after the Reserve Bank of India last week kept its key interest rate unchanged at 6.50%, dismissing the market turbulence and focusing on getting inflation down to its 4% medium term target.The consensus in a Reuters poll is for annual consumer inflation in July to fall to 3.65% from 5.08% in June. That would be the first time in five years below the RBI’s medium-term target.Here are key developments that could provide more direction to Asian markets on Monday:- India interest rate decision- India industrial production (June)- Germany wholesale inflation (July) More

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WASHINGTON (Reuters) – Republican U.S. vice presidential candidate JD (NASDAQ:JD) Vance on Sunday said he supports Donald Trump’s call for presidents to have a say in Federal Reserve Board policy-making, including interest-rate moves, saying those should be “political” decisions.Vance’s remarks during an interview with CNN’s “State of the Union” program came after Trump on Thursday told reporters: “I feel the president should have at least (a) say in there.”Explaining Trump’s position, Vance said that the former president believes the political leadership in the United States should have more say over the country’s monetary policy.While the president nominates members of the Federal Reserve Board, past administrations largely have maintained that White House meddling in the Fed’s monetary decisions would inject short-term political pressures that could end up hurting the U.S. economy over the long-run.That has not stopped presidents in the past, however, from occasionally grumbling about Fed stances. “I agree with him (Trump). That should fundamentally be a political decision. Agree or disagree, we should have America’s elected leaders having input about the most important decisions that confront our country,” Vance said.Vance said that it would be “a huge change” to veer away from a long-held stance that the Fed should be an independent policy-making institution on monetary policy.During last week’s press conference in Florida, Trump boasted: “I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman.”Trump did not mention that several times over his business career his enterprises have defaulted on interest payments and filed for bankruptcy. Democratic presidential nominee Kamala Harris said on Saturday that she strongly disagreed with Trump’s views on the Fed.”The Fed is an independent entity and as president I would never interfere in the decisions that the Fed makes,” Harris told reporters in Phoenix, Arizona.In March 2022, the Fed began raising interest rates in an effort to tame rising inflation, as the United States was climbing out of the economic shocks of the COVID-19 pandemic.Interest rates set by the central bank can have a direct impact on borrowing costs ranging from home mortgages to credit cards.Wall Street investors have been expecting the Fed to take its first step next month to reverse that course as inflation has been cooling.As of June of this year, the inflation rate was 2.5% by the Fed’s preferred measure, nearing its 2% target, after hitting 7.1% in June 2022. Other measures of inflation have been running higher but are also showing signs of easing. The Trump-Vance remarks come on the heels of a “2025 Presidential Transition Project,” a controversial agenda pushed by some conservatives that recommends vast changes throughout the federal government if Trump wins the Nov. 5 presidential election against Harris.Among its recommendations were: “Appoint a commission to explore the mission of the Federal Reserve, alternatives to the Federal Reserve system, and the nation’s financial regulatory apparatus,” along with other proposals for the Fed.As Democrats have ramped up their attacks on “Project 2025,” Trump has distanced himself from it. More

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At the end of July the Fed kept the policy rate in the same 5.25%-5.50% range it has been for more than a year, but signaled that a rate cut could come as soon as September if inflation continued to cool.”They’ve told people rates probably aren’t going to go up, but if they don’t start taking them down relatively soon, you could dispirit the American consumer,” Moynihan told CBS in an interview.”Once the American consumer really starts going very negative, then it’s hard to get them back.”Moynihan, pressed about Republican candidate Donald Trump’s statement that presidents should have a say over Fed decisions, said people were free to give Federal Reserve Chair Jerome Powell advice and it was then his job to decide what to do.”If you look around the world’s economies and you see where central banks are independent and operate freely, they tend to fare better than the ones that don’t,” he said. More