Economy

BENGALURU (Reuters) – The U.S. dollar will claw back some of its recent losses over the coming three months on expectations financial markets have again gone too far in pricing in too many Federal Reserve interest rate cuts this year, a Reuters poll of foreign exchange strategists found.After rising about 5% for the year, the greenback lost more than half its gains against a basket of major currencies in recent weeks amid sluggish U.S. economic data fuelling expectations of multiple Fed rate cuts, starting in September.Much of those losses came following weaker-than-expected jobs data on Friday, which encouraged financial markets to project around 120 basis points worth of rate cuts in total from the three remaining Fed meetings this year, compared with 50 basis points just a few weeks ago.Several major banks, including primary dealers who deal directly with the Fed, followed suit in predicting more rate reductions than expected earlier.Yet with policymakers pushing back against speculation that recent weakness in economic data would translate into recession, markets may yet again be forced to temper their rate cut expectations.FX strategists in the monthly Reuters poll, conducted from Aug. 1-6 through recent market turmoil, predicted the euro, currently about $1.10, would fall about 1.4% to $1.08 by end-October, before rising to current levels in six months and then to $1.11 in a year.”Our strong dollar argument has certainly taken a big hit in terms of confidence, but is its strength truly over? That’s not our call,” said Paul Mackel, global head of FX at HSBC. “Our recession indicators are not flashing red. And even if the U.S. economy loses momentum, that usually spells bad news for other economies. The dollar does better in that environment.””Are markets getting carried away? Naturally, I’d say yes, but it’s difficult to stand in front of that speeding train in the very short term because this type of overreaction can persist,” Mackel added. “You need to be very careful when volatility is this high and you’re not used to it coming back so quickly.”MAJOR CUTBACK The Japanese yen, which started its latest upward march against the U.S. dollar after the Bank of Japan raised its overnight call rate to 0.25% on July 31 and announced a major cutback in its asset purchases going forward, hit a seven-month high of 141.7/$ on Aug. 5. It will hold on to its recent gains to trade at 144/$ in a year, the survey showed.Some FX analysts, however, attributed much of those gains to traders unwinding large volumes of carry trades – where investors borrow from economies with low rates to fund investments in higher-yielding assets elsewhere – which sent the Nikkei stock market index down more than 12% on Monday and then back up over 10% on Tuesday.The latest positioning data from the Commodity Futures Trading Commission (CFTC) before recent market volatility also showed speculators had slightly increased their net long bets on the U.S. dollar.Forecasters in previous Reuters polls, who for years have held on to their expectations of a weakening dollar, were split when asked if it was more likely the dollar would trade stronger or weaker than they predicted for the remainder of the year. A slight majority, 32 of 62, said stronger, while 30 said weaker.”Setting recent developments aside for a minute, we’re generally in the soft-landing camp and think once the U.S. economy starts to recouple with the rest of the world’s economies, we’ll see the dollar’s outperformance and more importantly, its overvaluation, start to normalize a bit going forward,” said Alex Cohen, FX strategist at Bank of America.(For other stories from the August Reuters foreign exchange poll click here) More

The move is the latest by Starboard, which disclosed a more than $500 million stake in Autodesk in June and lost a bid to appoint nominees to the company’s board in the run-up to an annual meeting last month.It said Autodesk’s board should “objectively assess” if CEO Andrew Anagnost, who has helmed the software maker for seven years, was the best choice to continue leading the company.Autodesk, which provides 3D design and engineering solutions for several sectors, did not immediately respond to a request for comment.Starboard is also pushing for cost cuts to improve profitability and said Autodesk should ensure executive compensation plan is tied to shareholder value creation.It added the “company must end its practice of setting annual targets for long-term executive compensation plans, a practice which has enabled compensation targets to be set below the multi-year targets that have been presented to investors.”Autodesk’s shares were 1.4% higher in premarket trading after dropping 2.4% on Monday amid a broad market selloff.Last month, Starboard said Autodesk’s management “intentionally” misled investors after the company disclosed an accounting issue earlier this year.Autodesk said in May that to meet free cash flow targets, it continued entering into multi-year, upfront contracts with enterprise customers through 2023 despite previously announcing a transition to annual billings a year earlier.CNBC reported on the latest Starboard move earlier on Tuesday. More

The recent U.S. jobs report showed slower job growth across most sectors, a drop in aggregate hours, and a higher unemployment rate. Despite these signals, the investment bank believes the fundamentals of the U.S. economy remain solid. Key metrics such as domestic final sales, retail sales, and personal income continue to show strength, supporting the view that the economy is not on the brink of recession.“If the Fed had known about this report a week ago, they might have eased in July,” the report notes, but adds that the bond market’s response has already partially fulfilled the Fed’s job, with 10-year yields rallying 40 basis points last week. Both Federal Reserve officials Barkin and Goolsbee have advised against overreacting to the jobs data.The bank also highlights the importance of upcoming data, with two Consumer Price Index (CPI) reports and another payroll report due before the September Federal Open Market Committee (FOMC) meeting. Barclays finds it unlikely that the Fed will make any drastic intra-meeting cuts.“An intra-meeting cut strikes us as highly irregular; short of an imminent financial crisis, it seems very unlikely,” strategists noted.Following the surprisingly weak jobs report, the market has priced in a 50-basis point cut for September, with options indicating a 20% chance of a 75-basis point cut and a 25% chance of 150 basis points in cuts by year-end.However, Barclays holds a different view, expecting the Fed to proceed more cautiously, cutting 25 basis points at each meeting starting in September, totaling 75 basis points by the end of the year.“We don’t expect Fed officials to push back on pricing this week, even if markets now have 128bp in cuts this year,” strategists said. “Rather, we think the Fed will depend on data to do that job; if the economy holds up as we (and it) expect.” More

The company also beat second-quarter profit estimates as consumer spending grew on hopes the U.S. economy would manage a soft landing, escaping a recession despite a tighter monetary policy to curb inflation. Separately, the company’s board approved a new $3 billion share repurchase, which FIS expects to complete by the end of 2024. FIS now expects annual adjusted profit between $5.03 and $5.11 per share, higher than its previous forecast of $4.88 to $4.98 and analysts’ estimate of $4.96, as per LSEG data. It also forecast higher-than-expected third quarter adjusted profit at $1.27 to $1.31 per share, compared with LSEG estimates of $1.26.For the second quarter ended June 30, FIS reported $754 million in adjusted net income from continuing operations, or $1.36 per share, compared with $454 million, or 76 cents per share, a year earlier. Analysts had expected a profit of $1.23 per share. Revenue from the banking solutions business, which offers core processing and transaction processing software to financial institutions, rose 3% from a year earlier to $1.71 billion in the quarter. More

ORLANDO, Florida (Reuters) -“Up the escalator, down the elevator shaft” is a well-worn FX market maxim describing the dollar’s typical moves against the yen. The U.S. currency tends to rise steadily over time, but when it turns, it can plunge rapidly.    It is equally applicable to U.S. interest rates, and describes what we may be about to witness as an unusually large wave of volatility crashes over world markets.Fed rate-hiking cycles are often conducted gradually, at former Fed Chair Alan Greenspan’s famous “measured pace”. But not easing cycles.    History shows that rate cuts are often large, aggressive and reactive because policymakers are forced onto the back foot and into frantically responding to damaging forces spiraling out of control, like recession or severe financial market dislocation.    Or both.Or put another way, the economy practically never enjoys the fabled “soft landing”. Instead, it’s often facing an emergency landing. And that’s because lagging behind is more a feature of Fed policy than a bug.HISTORY LESSON    Chicago Fed President Austan Goolsbee said on Friday it was the central bank’s job to act in a “steady” way. A Fed paper in May titled “Lessons from Past Monetary Easing Cycles” concluded that “successful policy management appears more likely when policymakers act early, more parsimoniously, and preemptively”.    But despite their best intentions, policymakers’ reaction function is rarely steady.Since 1990, the central bank has raised rates 51 times and cut them 46 times. This may seem a little surprising given that inflation was below target for much of that time.    But rate cuts have been more aggressive than hikes, perhaps understandably in light of the dotcom crash, global financial crisis and COVID-19 pandemic. The fed funds rate fell to virtually zero in two of these episodes, and, in one case, it stayed there for almost seven years.    The policy rate has been raised by a quarter of a percentage point 40 times, and by half a percentage point or more 11 times. Until the surge in global inflation after the pandemic and Russia’s invasion of Ukraine, the Fed had raised rates by 75 basis points only once, in November 1994. It did so four times in the most recent hiking cycle.    That compares with 28 quarter-point cuts since 1990 and 18 reductions of 50 bps or more, including seven cuts of 75 bps or more.    There have only been two Fed easing cycles in the last 40 years that could be characterized as smooth and gradual: the early 1990s when most of the 525 bps of cuts were delivered in quarter-point clips, and the mid-1990s when recession was averted with only three quarter-point cuts over eight months.DESIGN FLAW    In many ways, the Fed is a victim of its own strategy. It is a data-driven, consensus-driven decision-making body, so it has to see the hard economic data first before it acts. Given that it often relies on lagging indicators, it will, by definition, almost always be “behind the curve”. Its challenge is to ensure that this lag is as short as possible.    Its other option is not much better. Bob Elliott, CEO at Unlimited Funds and a former executive at Bridgewater, says the Fed’s “fundamental construct” means it is a reactive institution with limited powers of prediction, so it is better to observe than predict.    “The alternative is to manage policy based upon predictions and trying to get ahead of the curve. Evidence suggests the Fed has little to no ability at predicting what is going to happen,” Elliott says.    Others are less charitable, however. They argue that it is absolutely the Fed’s job to be proactive in calibrating policy so that it meets its twin goals of “maximum employment and stable prices” and ensures financial stability.    “It’s dangerous to have ignored all the recession indicators, just as they did in 2008,” says David Blanchflower, professor of economics at Dartmouth College and former Bank of England rate-setter. “They are now playing catch up as the bad data comes in.”UNPRECEDENTEDWill this time be different? When the Fed paper mentioned above was published in May, the rates market was pricing in around 125 bps of Fed easing between then and the end of 2025. But as the paper’s authors noted, “Compared to the historical record, such shallow easing after roughly a year and half from the start of easing would be unprecedented.”May seems like a long time ago. Stock prices and bond yields are tumbling rapidly now, and the VIX volatility index – Wall Street’s “fear index” – is at its highest-ever level except for 2008 and 2020.If history is any guide – rates were slashed to zero in those two instances – we should be looking out for that elevator shaft.(The opinions expressed here are those of the author, a columnist for Reuters)(By Jamie McGeever;Editing by Helen Popper) More

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The economy has repeatedly defied predictions of a downturn since the pandemic recovery began. Now signs of strength contend with shakier readings.The U.S. economy has spent three years defying expectations. It emerged from the pandemic shock more quickly and more powerfully than many experts envisioned. It proved resilient in the face of both inflation and the higher interest rates the Federal Reserve used to combat it. The prospect many forecasters once considered imminent — a recession — looked increasingly like a false alarm.Until now.An unexpectedly weak jobs report on Friday — showing slower hiring in July, and a surprising jump in unemployment — triggered a sell-off in the stock market as investors worried that an economic downturn might be underway after all. By Monday, that decline had turned into a rout, with financial markets tumbling around the world.

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The number of jobs added in July was the second smallest monthly gain in years.
Note: Data is seasonally adjustedSource: Bureau of Labor StatisticsBy The New York Times

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The unemployment rate in July rose to the highest level since October 2021.
Note: Data is seasonally adjustedSource: Bureau of Labor StatisticsBy The New York TimesSome economists said investors were overreacting to one weak but hardly disastrous report, since many indicators show the economy on fundamentally firm footing.But they said there were also reasons to worry. Historically, increases in joblessness like the one in July — the unemployment rate rose to 4.3 percent, the highest since 2021 — have been a reliable indicator of a recession. And even without that precedent, there has been evidence that the labor market is weakening.

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The Sahm Rule indicator suggests a recession might have already begun.
Data is seasonally adjusted and shows the change in the U.S. unemployment rate compared with the low point in the previous 12 months. All calculations based on three-month moving average.Source: Federal Reserve Bank of St. LouisBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

This outlook comes amid speculation about an imminent rate cut in September and fears of an economic downturn based on the SAHM rule.Dovish Fed Reaction: Bank of America highlights a “dovish change in the Fed reaction function,” which has set the stage for a potential rate cut in September. This proactive stance by the Federal Reserve is seen as a mitigating factor against a severe economic downturn.Rate Cuts and Labor Market Dynamics: While the labor market has shown signs of weakening, leading to near-term rate cuts, Bank of America argues that this does not necessarily spell a hard landing. They acknowledge the “suddenness of the ‘crack’ in the labor market” but suggest that the policy response could stabilize the situation without leading to a severe recession.Loan Market Resilience: The analysts discuss the potential impact on the loan market, noting that a rate-cutting cycle might “suppress loans’ overall appeal” but would also “diminish the tail risk from defaults.” They believe that if growth concerns don’t dominate, the loan market could avoid significant underperformance, which would otherwise be driven by increasing credit risk.Investment Grade (IG) Bonds: In a scenario where the economy faces turbulence, BofA says IG bonds are expected to be the “biggest beneficiary” as investors seek safety. The report states, “HY will likely remain moderately impacted,” while IG is poised for gains due to a “flight to quality trade,” especially given its recent underperformance.Overall, Bank of America analysts remain cautiously optimistic, suggesting that while challenges exist, these four factors provide a buffer against a hard landing for the economy. More