Finance

Milton friedman, a Nobel-prizewinning economist, was an early fan of floating currencies. The case for flexible exchange rates, he once pointed out, is the same as the argument for daylight-saving time. In theory, people could start their summer days an hour earlier without any change in the clocks. In practice, it is easier to change the time than to change everyone’s habits. By a similar logic, whenever there is a shortfall in demand for a country’s goods and assets, it is easier to let one price, the exchange rate, drop than it is to cut all of a country’s other prices instead. Friedman made his analogy in the sedate 1950s when exchange rates seldom changed. In today’s more volatile markets, the clocks can be brutal. The yen has fallen by 20% against the dollar this year, the South Korean won by 17% and India’s rupee by 9%. After Kwasi Kwarteng, Britain’s chancellor, unveiled fresh tax cuts on September 23rd, the restless pound fell close to parity with the dollar. It was as wrenching as an alarm in the middle of a dream. In the face of such discomfort, policymakers are often tempted to intervene in the currency markets. Japan’s finance ministry has tried to prop up the yen for the first time since 1998, selling foreign currencies in exchange for its own. The Reserve Bank of India has also acted, selling more than $40bn since the beginning of July by some estimates. South Korea’s finance minister has said the authorities will review “contingency plans” to stop the won falling so fast. Some economists have begun to look up how much Britain has stashed away in its foreign-exchange reserves. (Not a lot.) Friedman thought currency defences were either unnecessary or impossible. If the shortfall in demand was large and lasting, intervention would only delay the inevitable, since the country would run out of foreign-exchange reserves. If the shortfall was small and fleeting, intervention was unnecessary. Instead of buying a temporarily cheapened currency, the government could rely on speculators to do the job, since they would profit whenever the currency regained its footing. Intervention was necessary only if the government was better at spotting a temporary misalignment than financial speculators whose livelihoods depended on it. Early studies of intervention reinforced this scepticism. In 1982 the G7 commissioned a report which concluded that currency intervention had little durable effect. There was unusual consensus among economists that currency intervention was not an “effective or lasting” instrument, as Kathryn Dominguez of the University of Michigan and Jeffrey Frankel of Harvard later pointed out.But more recent work has overturned this consensus, thanks both to theoretical and empirical advances. The longer-term impact of intervention can be hard to discern because central banks do not step into the currency markets at random. They sell foreign reserves when the currency is weakening and buy when it is under pressure to strengthen. And so a naive look at the data might suggest that intervention backfires: reserve sales are associated with a weaker currency, just as firefighters are associated with fires. One response is to look at currency interventions that are bigger or smaller than would be expected. If a blaze attracts more firefighters than it would normally warrant, the extra firefighters will probably be associated with a shorter, better contained conflagration. That is one of several approaches taken by Andrew Filardo of Stanford University, as well as Gaston Gelos and Thomas McGregor of the IMF, in a paper published in June. They concluded that if a currency is undervalued by 10%, sales of foreign-exchange reserves worth about 0.1% of GDP can strengthen it by more than 4%. If the authorities intervene systematically over several quarters, they get additional bang for their buck. The impact is also greater in shallow financial markets. These effects are not limited to the minutes or days after an intervention. They show up even in quarterly data. But the impact is not permanent either. Intervention can narrow the kind of misalignments that occur over a one- to four-year span—it does not seem to influence longer-term swings in the currency. Why does intervention work? One reason is that speculators are not as reliable as Friedman assumed. The outfits that bet on currencies have a limited capacity to bear risk. These limits tighten in times of stress, when financial institutions pull in their horns, reducing the size of bets. In such circumstances, national authorities may be better placed to correct misalignments, even if they are no better at spotting them.Intervention may also work by serving as a signal of policymakers’ resolve. The government should, after all, know better than speculators what the government intends to do. It may be determined to pursue policies consistent with a stronger currency. But it may struggle to convince sceptical investors. Through currency intervention, it can put its (foreign) money where its mouth is. Of the 18 central banks from emerging economies surveyed by the Bank of International Settlements in 2018, nearly three-quarters identified signalling as “often or sometimes important”.The clock is tickingThese results offer little encouragement to Japan or Britain, the two big economies suffering the steepest drop in their exchange rates this year. The Bank of Japan is still committed to capping its government’s bond yields, however high yields rise in other parts of the world. That stance, whatever its virtues, is hardly consistent with a strong yen. And given the size of Britain’s current-account deficit and the pace of its inflation, the diminished pound is not obviously weaker than it should be. Currency intervention can serve as a signal of tighter policies. It cannot substitute for them.To support their currency, Britain’s authorities must either raise interest rates rather faster than planned or reassert budgetary discipline. Mr Kwarteng has said he will clarify his medium-term fiscal plans on November 23rd. If he is to save the pound, he may need to bring forward his fiscal clock. ■Read more from Free Exchange, our column on economics:China’s rulers seem resigned to a slowing economy (Sep 22nd)Richer societies mean fewer babies. Right? (Sep 15th)Europe’s energy market was not built for this crisis (Sep 8th)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

There have been few months in monetary history as consequential as this September. Countries everywhere have tightened the screws on borrowers to smother inflation. But there has been a notable holdout. The Bank of Japan (boj), the pioneer of modern zero-interest rate and bond-buying operations, is standing firm. The country has struggled with low inflation, and even deflation, for decades. Its monetary policy has been designed to make financing conditions for companies and households as easy as possible, in an effort to get them to spend. In 2016 the boj adopted a policy of yield-curve control, which caps 10-year government bond yields at around 0%. This becomes more difficult when the rest of the world is raising interest rates, since the growing spread leads to a weaker currency, as investors seek stronger returns elsewhere.On September 22nd Kuroda Haruhiko, the boj’s governor, reiterated that the bank would hold rates down. This statement, familiar to BOJ-watchers, was followed by something much rarer. The value of the yen fell to its lowest in more than 20 years, leading the Japanese government to intervene in currency markets for the first time since the Asian financial crisis in 1998.The BOJ’s refusal to budge and the government’s intervention in currency markets reflect stark differences between Japan and the rest of the rich world. In contrast to America and Europe, Japan’s economy has still not returned to pre-pandemic output. Japanese consumer prices rose by 2.8% year on year in August, marginally above the BOJ’s 2% target. But that figure may overstate the amount of underlying price pressure. Excluding fresh food and energy costs, prices were up just 1.6% year-on-year, against an average of 7.2% across the oecd club of mostly rich countries.The BOJ has another reason to sit on its hands. Unlike most central banks, which focus on very short-term interest rates, Japan’s yield-curve control necessitates direct intervention in the market, through buying and selling long-dated bonds. It also relies on the widespread belief that the central bank will intervene to maintain the levels it is targeting, which stops traders from buying or selling Japanese government bonds outside the tight band the BOJ sets. Other central banks can simply retrace their steps and cut interest rates if required; once abandoned, yield-curve control would be difficult to resume. The fall in the currency makes imports more expensive in yen: the country’s import bill rose by 50% in August year on year. Kishida Fumio, the prime minister, has announced support including a 50,000 yen ($350) handout for poor families. Kataoka Goushi, an economist until recently on the BOJ policy board, reckons more co-ordination between monetary and fiscal policy will be needed to soften the impact of the weak yen and to reflate Japan’s economy. That could take the form of household tax cuts now, or business-investment incentives in the long run.Outside Japan, there may be unexpected consequences to the weak yen. The country is the world’s largest foreign creditor. Its net international investment position—overseas assets held by Japanese owners, minus Japanese assets held by overseas owners—runs to $3.5trn, far north of China’s $1.9trn. This huge pile is the result of decades of high savings.A weaker currency makes foreign assets worth more when measured in yen. But the gyrating currency also means volatility, making many owners nervous. And the gap in interest rates between Japan and elsewhere makes hedging overseas investments exorbitantly expensive. Perhaps as a result investors have sold 13trn yen in foreign securities so far this year, according to the finance ministry, the most since at least 2005. Thus the falling yen is not only an issue for Japan. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

The federal reserve began raising interest rates to battle inflation in America a full six months ago. But its determination to crush surging prices, whatever the cost to the economy, is only now starting to sink in. The central bank’s latest policy meeting, which ended on September 21st, has been followed by dramatic moves in financial markets across the world. The economic consequences will be a little slower in coming, but no weaker for it. After the meeting, Jerome Powell, the Fed’s chairman, said the central bank was “strongly resolved” to bring down inflation, currently at 8.3%, to its target of 2%. That resolve sent government-bond yields surging and stockmarkets tumbling. Yields on ten-year Treasuries rose by nearly half a percentage point. On September 28th they spiked above 4% for the first time since just after the global financial crisis, before falling a little. Higher rates in America have turbocharged the dollar. The dxy, an index of the greenback against half a dozen major currencies, has risen by nearly 18% this year, and is now at its highest in more than two decades. The flip side of dollar strength has been drama elsewhere. In Britain sterling took a breathtaking dive, aided by the government’s decision to unveil the country’s largest tax cuts since the 1970s. Short-term interest rates rose just as spectacularly. Meanwhile, the euro reached its lowest point against the greenback in two decades on September 26th. Expectations of rate rises by the European Central Bank, as it fights the resulting increase in imported inflation, sent bond yields in the euro area rising, too. In heavily indebted Italy yields on ten-year sovereign bonds are not far off a worrying 5%. Jolting currency movements have led to a spate of interventions. In Japan, where the central bank is fighting an increasingly lonely battle to keep interest rates low, the government intervened to prop up the yen for the first time since the Asian financial crisis in 1998; India’s central bank has also intervened to support the rupee (see Free exchange). China’s central bank is requiring banks to post reserves when selling foreign-exchange derivatives contracts, making it harder to bet against the yuan. The great unknown is the impact of these ructions on a financial system that has changed significantly since the crisis of 2007-09. Financiers and policymakers alike agree that banks are far safer. But weird dysfunctions in less-scrutinised corners of the system cannot be ruled out. One illustration of this came soon after Britain’s gilt markets were battered by the “mini-budget”. Pension funds that had used derivatives to protect themselves against interest-rate risk found themselves pressed to raise cash to meet collateral requirements. They raised that money by fire-selling long-dated gilts, setting off a vicious cycle of sales and higher yields. On September 28th the Bank of England stepped in, saying it would purchase long-dated gilts to restore order. Another worry stems from the roughly $24trn in private-market assets, which have ballooned over the past decade. So far this year these have been marked down by only 11%, reckon analysts at JPMorgan Chase, a bank, far less than the 20% or so decline in listed stocks and bonds. Should markdowns catch up with the public markets, the owners of these assets will take bigger losses. It is unclear precisely who is on the hook. The impact on the world economy, by contrast, is clearer—and it is not good news. Thanks to a natural-gas crisis in Europe and a housing slowdown in China, its prospects were already looking dicey. In forecasts published on September 26th the oecd, a club of mostly rich countries, said that global gdp would rise by just 3% this year, down from the 4.5% it had expected in December. Commodity prices, a barometer of the state of the global economy, have fallen in recent months. The price of a barrel of Brent crude is now in the region of $83-88, levels not seen since Russia invaded Ukraine. The prices of copper and other industrial metals are also down.The latest market volatility will add to the pain. Rising government-bond yields are translating into higher borrowing costs for households and companies. In America the interest rate on a 30-year fixed-rate mortgage has risen to 6.9%, the highest since the financial crisis. In Britain lenders briefly paused some new mortgage lending, owing to volatile interest rates. Yields on riskier high-yield, or “junk”, corporate bonds have more than doubled in America and the euro area, to 9.4% and 7.8% respectively.Europe seems set to suffer the most. The energy crisis has already cast a long pall, with economists pencilling in two to three quarters of negative gdp growth in the euro zone. Annual inflation is already above 9%, and a weaker euro will further push up the cost of imported goods. The European Central Bank, eager to shore up its inflation-fighting credibility, has signalled that it intends to raise rates twice this year in order to keep inflation expectations in check. Doing so will only deepen the recession on the continent. As for America? The world’s largest economy has experienced an enviable boom in recent years, buoyed by fiscal largesse during the covid-19 pandemic. Rising rates are making a dent in the property market, the most interest-sensitive part of the economy. According to the latest Case-Shiller index, published on September 27th, house prices fell by 0.3% in July compared with the previous month, the biggest such decline in a decade.For now, though, there is little sign of a wider slowdown in America. Underlying inflation, at an annual rate of 6.3%, is still considerably higher than the Fed would like. In contrast to the housing market, inflation tends takes a while to react to higher interest rates. And until it comes down, there will be no relief from rate rises. Mr Powell has said he will be looking for “compelling evidence that inflation is moving down”. The rest of the world will be watching just as anxiously. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

“Do not bet on a one-sided appreciation or deprecation of the renminbi exchange rate,” the central bank said in a Chinese statement on its website late Wednesday, according to a CNBC translation.
That’s based on a readout of a speech by vice governor Liu Guoqiang at a video conference meeting on foreign exchange that day.
The renminbi, or the yuan, crossed the 7.2 level against the greenback Wednesday to its weakest since 2008.

The Chinese yuan weakened past the closely-watched 7.2 level against the greenback this week.
Getty Images

BEIJING — The People’s Bank of China has warned against betting on the yuan, after its rapid decline against the U.S. dollar this week.
“Do not bet on a one-sided appreciation or deprecation of the renminbi exchange rate,” the central bank said in a Chinese statement on its website late Wednesday, according to a CNBC translation.

related investing news

That’s based on a readout of a speech by vice governor Liu Guoqiang at a video conference meeting on foreign exchange that day.
The renminbi, or the yuan, crossed the 7.2 level against the greenback Wednesday, falling to its weakest since 2008. The U.S. dollar index, which tracks the dollar against major global currencies, has climbed to two-decade highs as the U.S. Federal Reserve aggressively raised interest rates this year.
The PBOC’s statement, with its requirement for banks to maintain stability in the foreign exchange market, is “verbal guidance against the recent rapid depreciation of the currency,” Goldman Sachs analyst Maggie Wei and a team said in a note.

However, the yuan’s crossing of the 7.2 mark “suggests Chinese policymakers are not necessarily defending a particular level of the exchange rate,” the report said. The “statement from the PBOC might slow the pace of CNY depreciation on the margin.”
The onshore-traded yuan has weakened against the dollar by 1.9% so far this week, according to Wind Information.
The Chinese central bank has made other moves to support the yuan this month, including reducing the amount of foreign currency banks need to hold.

Read more about China from CNBC Pro

WATCH LIVEWATCH IN THE APP More

Ken Griffin, Citadel’s founder and CEO, believes the Federal Reserve has more work to do to bring down inflation even after a series of big rate hikes.
“We should continue on the path that we’re on to ensure that we reanchor inflation expectations,” Griffin said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday.

The billionaire investor said there’s a psychological component to inflation and people in the U.S. shouldn’t start to assume inflation north of 5% is the norm.
“Once you expect it broadly enough, it becomes reality, becomes the table stakes in wage negotiations, for example,” Griffin said. “So it’s important that we don’t let inflation expectations become unanchored.”
The consumer price index increased 8.3% in August year over year, near a 40-year high and coming in above consensus expectation. To tame inflation, the Fed is tightening monetary policy at its most aggressive pace since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time, vowing more hikes to come.
Griffin said he believes the Fed has a difficult job of taming inflation while not slowing down the economy too much. He said there could be a chance for a recession next year.
“Everybody likes to forecast recessions, and there will be one. It’s just a question of when, and frankly, how hard. Is it possible end of ’23 we have a hard landing? Absolutely,” Griffin said.

Citadel is having a stellar year despite the market turmoil and challenging macro environment. Its multistrategy flagship fund Wellington rallied 3.74% last month, bringing its 2022 performance to 25.75%, according to a person familiar with the returns.
On the Bank of England’s intervention in the bond market, Griffin said he’s concerned about the ramifications of diminishing investor confidence. The central bank said it would buy long-dated government bonds in whatever quantities needed to end the chaos caused by the government’s plans to cut taxes. 
“I’m worried about what the loss of confidence in the UK represents. It represents the first time we’ve seen a major developed market, in a very long time, lose confidence from investors,” Griffin said. More

A Biogen facility in Cambridge, Massachusetts.
Brian Snyder | Reuters

Check out the companies making headlines in midday trading.
Apple — Apple shares fell 3.4% on Wednesday following a report that the company is ditching plans to boost new iPhone production. Instead of aiming to increase output by 6 million units in the second half of the year as it had planned, it will shoot for 90 million units, unchanged from the prior year, according to Bloomberg.

Biogen — Shares of the biopharmaceutical company soared 37% following upbeat results from its experimental Alzheimer’s drug study and a slew of upgrades from analysts. Biogen and its Japanese partner Eisai said the drug reduced cognitive decline by 27% and slowed the progression of the disease.
Broadridge — Spruce Point Capital Management issued report containing a strong sell opinion, saying it sees as much as 75% downside risk.
Illumina — The biotech company saw shares climb 8% after Evercore ISI upgraded the stock to outperform from in line, saying it’s bullish on Illumina’s new products as it comes out of a “multi year underperformance” period.
Netflix — Shares of the streaming giant jumped more than 6% after Atlantic Equities upgraded the stock to overweight, saying Netflix’s lower-cost, ad-supported subscriber tier, which it plans to launch in coming months, could boost its share price by 26%.
Thor Industries — Shares jumped 3.4% after the recreational vehicle maker topped profit and revenue expectations in its most recent quarter. Thor said its motorized RV segment saw a 24.5% gain from the prior year.

Ocugen — The drugmaker’s shares soared by about 8% after it came to a licensing agreement with Washington University in St. Louis to develop, commercialize and manufacture its intranasal Covid-19 vaccine.
Canopy Growth — Shares of the cannabis company were up 2.6% on plans to pull back from its retail operations in Canada. Ontario-based Canopy said earlier this year it was extending its timeline for profitability.
DocuSign — Shares of the electronic signature service rose about 5.4% after announcing Wednesday it would shed about 9% of its workforce as part of a restructuring. The company expects to incur costs of as much as $40 million as part of the plan.
Paychex — Shares of the payroll company gained more than 2% after earnings and revenue before the bell beat expectations. It also raised its earnings outlook for the year.
 — CNBC’s Alex Harring, Samantha Subin, Michelle Fox and Sarah Min contributed reporting.

WATCH LIVEWATCH IN THE APP More

“Let’s define busy” read a memo circulated to rookie investment bankers at Donaldson, Lufkin & Jenrette in the mid-1990s. “You are busy if you are working each weekday at least 16 hours and at least 16 hours on the weekend. These are working hours—not travelling, gabbing or eating time. If these are not your hours at the office, you have the capacity to take on more work.”Today’s bankers are more than willing to put in the hours—the problem is they lack the work to fill them. The fee-bonanza caused by cheap money and giddy corporate bosses is long gone. Dealmaking revenues at the largest banks are down by almost half this year, and pipelines are nowhere near full. As revenues normalise, so do attitudes to hiring and firing. Last week Goldman Sachs, an American bank, began its annual cull of between 1% and 5% of staff, for the first time since 2019. An industry-wide hiring binge during the covid-19 pandemic means lay-offs will probably extend well beyond spring-cleaning. Wall Street’s human-resources departments will finally get to do the job they signed up for: sticking it to the salaried rich.First for the chop are the underperformers. Think expensive senior dealmakers with rusty Rolodexes and the occasional knackered junior Excel-jockey. After that, choosing whom to show the door becomes an exercise in predicting where the market is going. “A real danger is over-firing and missing a bounce-back in activity as some banks did after the dotcom crash,” notes Jon Peace, a banking analyst at Credit Suisse. Equity capital markets bankers will find themselves near the top of the hit-list. They are having a rotten year: the number of initial public offerings in America is down nearly 90%. Few firms risk listing their shares while markets roil and chief-executive confidence is touching 40-year lows. Special purpose acquisition companies (SPACs), blank-cheque vehicles which raise money by listing on a stockmarket, are a distant memory. Bankers who made a killing in the frothiest industries and structures are most at risk. Those who have retained even a tangential connection to the real economy will be looking to Frankfurt this week, hoping to convince the higher-ups that the blockbuster listing of Porsche, a carmaker, is a first breath rather than a last gasp for equity issuance. It only takes one deal to save a career.Bankers who toil in service of private-equity funds may overestimate their chances of survival—buy-out volumes have proved resilient and funds have mountains of capital waiting to be deployed. But when the masters of the universe come knocking, it tends to be in search of leverage, not advice. The uncomfortable truth is that big banks now mainly get paid for flogging junk debt, not the heaps of PowerPoint-philosophy they wantonly produce. Bankers involved in the buy-out of Citrix, an American technology firm, are finding this out while offloading debt to the market at an eye-watering loss. Appetite to fund similar deals is waning. Any banker incapable of persuading their boss that private-equity funds will continue to seek their counsel without the draw of billions in financing is in trouble.If the outlook remains gloomy, remember the epigram of the mergers and acquisitions banker: to each problem, a deal. Spin-offs, rather than lay-offs, might be the answer. At scandal-ridden, Paradeplatz-prince Credit Suisse, the investment bank is the worst-performing part. Faced with itchy investors—the firm’s share price is down nearly 60% this year—bosses are cooking up something radical ahead of their results in October. Spinning off the entire investment bank is unlikely, but asset sales of profitable parts of the bank are being considered. Credit Suisse, which has long punched above its weight in lending to risky companies, will learn the true price of its advice if it fully commits to offering a “capital-light, advisory-led” investment bank. In the event that suggestions from the human-resources and investment-banking departments do not turn things around, maybe the folks in marketing have a plan? Turning back the clock might not be a bad idea. Credit Suisse may revive the First Boston brand, the name of the revered American investment bank it acquired in 1990. Names cannot lower interest rates, but there is a part of every banker at boring Barclays and UBS who would love to resurrect the Lehman or Warburg monikers. If they must be shown the door, at least let them leave with a little old-school swagger. More

Billionaire investor Stanley Druckenmiller believes the Federal Reserve’s attempt to quickly unwind the excesses it helped build up for a decade with easy monetary policy will not end well for the U.S. economy.
“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I will be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”

And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said.
Druckenmiller believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.
“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”
The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.
The investor said the Fed made a policy error when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.

“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”
The consumer price index increased 8.3% in August year over year, near a 40-year high and coming in above consensus expectation.
Druckenmiller once managed George Soros’ Quantum Fund and shot to fame after helping make a $10 billion bet against the British pound in 1992. He later oversaw $12 billion as president of Duquesne Capital Management before closing his firm in 2010. 
“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said. More