Economy

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TOKYO (Reuters) – The dollar hovered close to a one-week high against major rivals on Friday, after the biggest drop in U.S. jobless claims in close to a year allayed fears of a looming economic downturn.The U.S. currency extended gains against the Japanese yen to a fourth day, buoyed by a spike in Treasury yields following Thursday’s firmer-than-expected employment data, which spurred a paring back in bets for Federal Reserve interest rate cuts this year.The yen and fellow safe-haven currency the Swiss franc languished near one-week lows after Wall Street rallied on the improved macroeconomic outlook, while riskier currencies such as the Australian dollar and sterling remained elevated following strong gains overnight.Markets have endured a turbulent week, triggered in large part by surprisingly soft U.S. payrolls figures a week ago that sent global stocks tumbling on Monday, while demand for the safety of assets such as the yen and the Swissie sent the currencies surging to their highest levels since the start of the year on Monday.The dollar was up 0.27% at 147.66 yen as of 1153 GMT, on course for an advance of around 0.8% this week, despite Monday’s precipitous 1.5% plunge. It was flat at 0.8670 franc, keeping it on track for a 1% weekly advance.Initial claims for state unemployment benefits fell 17,000 to a seasonally adjusted 233,000 for the week ended Aug. 3, the largest drop in about 11 months. Economists polled by Reuters had forecast 240,000 claims for the latest week.The odds of the Federal Reserve cutting interest rates by 50 basis points at its next policy meeting on Sept. 17-18 fell to 54%, from 69% on Wednesday, with a 25 basis point cut now seen as having a 46% probability, according to the CME Group’s (NASDAQ:CME) FedWatch Tool.”Despite the volatility in claims data, especially around this time of year, the data helped allay fears of a more rapid deterioration in the labour market,” said Taylor Nugent, senior markets economist at National Australia Bank (OTC:NABZY).The outsized Wall Street rally, which spurred the flight from the yen and Swiss franc, was “an unusual reaction to a such a volatile weekly print … underscoring the market’s sensitivity to labour market indicators after Friday’s soft payrolls,” he said.The yen had shot higher this month, reaching the strongest since Jan. 2 at 141.675 per dollar on Monday, as an unwinding of short positions snowballed following a surprise rate hike by the Bank of Japan and weakness in U.S. economic indicators. Commodity Futures Trading Commission figures later on Friday will give a clearer indication of whether that unwinding has now run its course.The dollar index, which measures the currency versus the yen, Swissie, euro, sterling and two other peers, was flat at 103.30 following three days of gains. It rose as high as 103.54 at one point overnight for the first time since Aug. 2, but was last trading little changed from a week ago.The euro was little changed at $1.0915, up 0.08% from a week ago. On Monday, the shared currency soared as high as $1.1009 for the first time since Jan. 2.Sterling was steady at $1.2744, after a 0.49% rally overnight that yanked it back from a more than one-month low. However, it remained on course for a 0.42% slide this week, which would be a fourth straight week of declines.The Aussie eased slightly to $0.6584 after earlier touching $0.65925 for the first time since July 24, given additional support from the Reserve Bank of Australia’s hawkish comments a day earlier. It is up 1.24% this week.Leading cryptocurrency bitcoin reached a one-week high of $62,717, and last traded about 3.3% higher at $61,500. For the week, it was up about 4%. More

The article in the Financial News on Friday came after Chinese regulators this week started probing small financial institutions over their trading behaviours as the People’s Bank of China (PBOC) stepped up efforts to cool a sizzling rally in the treasury bond market. The National Association of Financial Market Institutional Investors (NAFMII), an industry body supervised by the PBOC, said late on Wednesday that it would investigate four rural commercial banks over suspected bond market manipulation.NAFMII said on Thursday it found misbehaviour in bond trading by some small financial institutions involving borrowed accounts and had reported some serious rule-breakers to the central bank for punishment.Borrowing, or allowing the use of trading accounts by non-owners in return for a rental fee, “often involves non-compliant money flows and potential transfer of interest,” the Financial News said.It would further distort market prices and could also increase credit risks because account owners cannot control transactions, said the newspaper, seen as a mouthpiece for the central bank. NAFMII in April probed some small financial institutions over trading misbehaviours such as account borrowing, according to the newspaper. Staff of some financial institutions colluded with external players and conducted illegal activities based on expectations that treasury yields will drop, the article said. The central bank has repeatedly warned against reckless buying in a bond rally driven by a dismal economic outlook, worried about a potential bubble that could end up in a Silicon Valley Bank-style crisis. The PBOC also said it aims to maintain an upward sloping yield curve to help provide positive incentives for investment. More

(Reuters) – The Japanese yen has been under pressure in the past few years as markets focused on the wide U.S.-Japan interest rate differentials.The yen lost more than 20% against the dollar since the outset of 2022, prompting several rounds of intervention by Tokyo to prop up the currency in September and October that year. It kept falling despite further intervention in April and May 2024, touching a 38-year low of 161.96 to the dollar on July 3. Japan is suspected to have stepped in again in mid-July to put a floor under the yen.The yen’s downtrend has reversed in recent days, following the Bank of Japan’s July 31 decision to raise interest rates and ahead of an expected loosening of U.S. monetary policy.The BOJ’s hawkish move, along with investors’ concerns about U.S. growth, jolted global stock and bond markets. It triggered an unwinding of the carry trade, whereby investors borrow cheaply in yen to invest in higher-yielding assets. The yen rebounded sharply against the dollar, but remains relatively weak by the standards of the past few decades.The yen’s fluctuations matter because the currency has long provided a cheap source of funding for global investors, even as other central banks raised borrowing costs. BOJ’S SHIFTING INTERVENTION GOALJapanese authorities had historically intervened to prevent the yen from strengthening too much, as a strong yen hurts the export-reliant economy. This trend changed in 2022, when Tokyo stepped in and bought yen to defend its value, after the currency plunged on expectations that the BOJ would keep interest rates ultra-low even as other central banks tightened monetary policy to combat soaring inflation.In both cases, authorities buy or sell yen, usually against the dollar. The Ministry of Finance decides when to step in and the Bank of Japan acts as its agent. The decision is highly political because Japan’s reliance on exports makes the public more sensitive to yen moves than in other countries. With many manufacturers now shifting production overseas, the benefit of a weak yen has diminished. Instead, a weak yen has become a pain for households and retailers by inflating the cost of importing fuel and raw material.Tokyo intervened on April 29 and May 1 this year, according to Ministry of Finance data, to combat the yen’s declines. After the moves failed to reverse the yen’s downtrend, Japanese authorities are suspected by market participants to have intervened again on several occasions in July. Japanese authorities typically do not confirm whether they intervened in the currency market, and say only that they would take appropriate action as needed against excessively volatile foreign exchange moves.WHY DID THE YEN WEAKEN IN RECENT YEARS?Various factors caused the yen’s decline. First, the U.S. Federal Reserve’s aggressive interest rate rises and the BOJ’s slow pace in normalizing monetary policy kept the gap between U.S. and Japanese interest rates large, thereby keeping the yen less attractive compared with the dollar. Second, Japan is now importing more fuel and raw material than in the past, which means companies are converting yen into foreign currencies to make payments. Third, many big Japanese manufacturers that shifted production overseas have reinvested profits abroad, rather than repatriating them. That reduced demand for yen.WHY ISN’T THE BOJ RAISING RATES MORE RAPIDLY?The BOJ ended negative interest rates in March and raised its short-term policy rate again to 0.25% from 0-0.1% in July. Governor Kazuo Ueda has signaled the chance of raising rates again if Japan makes further progress toward meeting the central bank’s 2% inflation target, as it projects.Analysts expect the BOJ to eventually raise interest rates to levels deemed neutral to the economy, around 1% to 1.5% in the next few years. But such a gradual tightening would leave Japanese borrowing costs very low compared with other countries.Japanese policymakers are cautious about raising rates too aggressively for fear of hurting already-weak consumption and threatening a fragile economic recovery. They are also wary of the risk of triggering a sharp rise in long-term interest rates that would increase the cost of funding Japan’s huge public debt.WHAT ARE THE DRAWBACKS OF A WEAK YEN?A weak yen pushes up the cost of importing fuel, food and raw material. That in turn hurts retailers and households through higher living costs. Inflation data shows that the rate of core inflation, which excludes volatile fresh-food prices but includes fuel costs, has been higher than the central bank target for the past 27 months. WHAT ARE THE BENEFITS OF A WEAK YEN?A weak yen, however, is not necessarily all bad for Japan’s economy. The yen’s decline benefited Japanese export firms by inflating the yen-based profits they earned overseas. The increased profits may lead to higher wages and help underpin consumption.A cheaper yen also boosts tourism. The number of overseas visitors to Japan has surged over the past couple of years, giving hotels, department stores and others relief after enduring COVID-19 restrictions.($1 = 146.3100 yen) More

(Reuters) -Federal Reserve policymakers are increasingly confident that inflation is cooling enough to allow interest-rate cuts ahead, and they will take their cues on the size and timing of those rate cuts not from stock-market turmoil but from the economic data.That was the shared message of three U.S. central bankers speaking on Thursday who otherwise had slightly different takes on exactly where the economy stands a week and a day after they decided to hold the policy rate steady but signaled a reduction as soon as next month. A jump in the July U.S. unemployment rate reported on Friday helped spark a global stock market rout that continued into Monday before equities partially recovered, as investors and analysts worried the U.S. was headed for a recession and the Fed would need to react aggressively.”It’s hard to make the case that something has just happened that is monumental on the equity side,” Richmond Federal Reserve Bank President Thomas Barkin said on Thursday, noting major U.S. stock-market indices are still up from the start of the year. More to the point on policy, he said at a virtual event put on by the National Association for Business Economics, is “all the elements of inflation seem to be settling down (and) I’m relatively hopeful based on the conversations I’m having that that’s going to continue.” Those same conversations with business leaders also suggest the cooling in the U.S. labor market is coming from slower hiring rather than a rise in layoffs, he said. “I think you’ve got some time in a healthy economy to figure out whether this is an economy that’s gently moving into a normalizing state that will allow you to, in a steady deliberate way, normalize rates or … is this one where you really do have to lean into it.”  Kansas City Fed President Jeff Schmid, one of the U.S. central bank’s more hawkish policymakers, also took note of the recently roiled financial markets. “Financial conditions can both reveal important information on the trajectory of the economy and can also spillover to impact the real economy,” he said in remarks prepared for delivery to the Kansas Bankers Association’s annual meeting in Colorado Springs, Colorado. “However, the Fed has to remain focused on achieving its dual mandate” of full employment and price stability. On that score, he said, recent “encouraging” data showing inflation around 2.5% gives him more confidence inflation is headed to the Fed’s 2% goal. “If inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy,” he said. Schmid described the economy as resilient, consumer demand as strong, and the labor market as noticeably cooling but still “quite healthy,” and said he views the current policy stance as “not that restrictive.””With the tremendous shocks that the economy has endured so far this decade, I would not want to assume any particular path or endpoint for the policy rate,” he said.Chicago Fed President Austan Goolsbee on Thursday reiterated his view the central bank’s policy is tight, and that to leave borrowing costs where they are even as inflation falls is to make it even tighter, risking harm to the labor market. But like his more hawkish counterparts, Goolsbee said the stock market, and the upcoming presidential election, would not determine Fed policy. “The Fed’s out of the election business. The Fed is in the economic business,” Goolsbee said in an interview on Fox News. “We’re not in the business of responding to the stock market. We’re in the business of maximizing employment and stabilizing prices.” More

At an event in Belo Horizonte, Galipolo said minutes from the July 30-31 meeting of the central bank’s rate-setting committee, known as Copom, made it clear that all policymakers are willing to do whatever it takes to control inflation, including those appointed by rate-hike averse President Luiz Inacio Lula da Silva.Galipolo was appointed by Lula and previously worked as Finance Minister Fernando Haddad’s right hand as his executive-secretary.Copom said in the meeting’s minutes that its members would be open to raising rates if needed, but Galipolo said that this should not be seen as guidance on its next moves. Galipolo said there has been no signal from Copom on what it will decide in future meetings, as the monetary authority is still “totally data-dependent.”Inflation projections in Latin America’s largest economy have been climbing and now stand at 4.12% for 2024 in the central bank’s latest weekly survey of economists.The current scenario is still very “uncomfortable” for the central bank to reach its 3% inflation target, Galipolo said, especially amid global uncertainties, de-anchored inflation expectations and positive surprises in economic growth.Galipolo said he now sees Copom’s risk balance as asymmetric, with upside risks for inflation. He also underscored higher-than-normal market volatility, highlighting the impact on inflation from foreign exchange moves. Still, Galipolo said it would be a mistake to establish a “mechanical” relationship between currency moves and monetary policy.Brazil’s real has fallen nearly 13% so far in 2024, pressured by a strong U.S. dollar and by domestic fiscal concerns. More

(Reuters) – A look at the day ahead in Asian markets. Asia is set for a positive end to a turbulent week on Friday after a rip-roaring U.S. equity rally on Thursday, although Chinese inflation could temper any optimism if the data shows that the world’s second largest economy is still in the clutches of deflation.Wall Street’s resilience was notable given that U.S. bond yields rose again after yet another poorly received Treasury auction, this time 30-year notes. That’s two sales this week that have drawn weak demand, with investors only taking down the paper in return for higher yields.But the Nasdaq clocked its best day in six months and the S&P 500 its best day since November 2022. Broader indices in Asia and tech in particular should grab the baton and run with it on Friday.The MSCI Asia ex-Japan index is currently down 1.6% on the week, China’s blue chip CSI300 index down 1.2%, the Hang Seng tech index down 0.6% and Japan’s Nikkei down 3%. Can they muster a rally strong enough on Friday to close the week in the green?It would represent a remarkable turnaround, especially in Japan where currency- and rates-related volatility earlier in the week triggered some of the biggest stock market moves on record. The U.S. tech shakeout that began on July 11 is losing steam. The broad S&P Information Technology index and ‘FANGS’ index of Big Tech shares both fell around 20% in the three weeks to Aug. 5 but have rebounded as much as 9% from these lows. U.S. tech got a boost on Thursday from Meta Platforms (NASDAQ:META)’ earnings, and tech stocks in Asia could take their cue next week from Taiwanese chipmaker TSMC’s sales figures on Saturday.TSMC, the world’s largest contract chipmaker and major supplier to Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA), on Saturday gives its latest monthly sales update. Sales have been falling in recent months – to T$207.9 billion in June from T$229.6 billion in May, which was down from T$236 billion in April.Indeed, Taiwan’s exports rose less than expected in July as weak demand from China offset record orders from the United States, which underscored the island’s essential role as a supply hub for the booming artificial intelligence (AI) industry.Weak demand from China seems par for the course these days, and continues to keep inflation in check. Figures on Friday are expected to show the annual rate of consumer inflation edged up in July to 0.3% from 0.2%, and the monthly rate climbed to 0.3% from -0.2%. The annual rate of producer deflation is expected to have accelerated slightly to -0.9% from -0.8%.A positive surprise would be welcome – China’s economic data has been consistently undershooting expectations for months. Here are key developments that could provide more direction to Asian markets on Friday:- China inflation (July) – Indonesia retail sales (June)- Malaysia industrial production (June) More