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Economy

Asian shares trim losses, while dollar firms on Powell’s rate pain warning

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© Reuters. FILE PHOTO: A man holding an umbrella looks at an electronic stock quotation board outside a brokerage in Tokyo April 7, 2015. REUTERS/Issei Kato

By Andrew Galbraith

SHANGHAI (Reuters) – Asian shares found some footing after a volatile session for U.S. equities, but the dollar remained at 20-year highs and global stocks near 18-month lows on worries about persistently high inflation and tightening central banks.

Those worries ultimately overcame hopes on Wall Street that high inflation might be peaking, pushing the S&P 500 close to confirming a bear market on Thursday, at nearly 20% off its January all-time high.

In an interview later in the day, U.S. Federal Reserve Chair Jerome Powell said that the battle to control inflation would “include some pain”. And he repeated his expectation of half-percentage-point interest rate rises at each of the Fed’s next two policy meetings, while pledging that “we’re prepared to do more”.

But after fears of the impact of central bank tightening led to sharp losses a day earlier, Asian shares bounced early in the trading day.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 1.15%, trimming its losses for the week to around 3.5%.

Australian shares were up 1.56%, while Japan’s Nikkei stock index jumped 2.62%.

In China, the blue-chip CSI300 index was up 0.92% and Hong Kong’s Hang Seng rose 1.8%.

“We had some pretty big moves yesterday, and when you see those big moves it’s only natural to get some retracement, especially since it’s Friday heading into the weekend. There’s not really a new narrative that’s come through, ” said Matt Simpson, senior market analyst at City Index.

“I think there comes that point where you run out of sellers. I’m not really certain that this is going to be a buying rally at the moment, possibly a short-covering rally ahead of the weekend.”

The moves higher in equities were mirrored in slipping U.S. Treasuries, with the benchmark U.S. 10-year yield edging up to 2.8931% from a close of 2.817% on Thursday.

The policy-sensitive 2-year yield was at 2.6023%, up from a close of 2.522%.

“Within the shape of the U.S. Treasury curve we are not seeing any particularly fresh recession/slowdown signal, just the same consistent marked slowing earmarked for H2 2023,” Alan Ruskin, macro strategist at Deutsche Bank (ETR:DBKGn), said in a note.

The U.S. dollar nevertheless remained firm near 20-year highs, with the dollar index, which tracks it against a basket of currencies of other major trading partners, at 104.8.

The yen was at 129.02 per dollar, softening from a two-week peak of 127.5 hit overnight. The European single currency edged down a hair to $1.0376.

In commodities markets, oil prices were higher but still set for their first weekly loss in three weeks, hit by concerns over inflation and China’s COVID lockdowns slowing global growth.

U.S. crude ticked up 1.34% to $107.55 a barrel, and global benchrmark Brent crude was up 1.51% at $109.07 per barrel.

Spot gold, which has been hit by the soaring dollar, was up 0.15% at $1,824.49 per ounce, not far from a three-month low.

Economy

Dollar knocked from 20-year high; yuan slide pauses

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© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee

By Tom Westbrook

SINGAPORE (Reuters) – The dollar fought for a footing on Tuesday and the tumbling Chinese yuan found a floor as investors trimmed bets on whether U.S. interest rate rises will drive further dollar gains.

The greenback has edged from a two-decade high this week and was a touch softer across the board in early Asia trade, while U.S. bond yields have pulled back slightly as traders reckon aggressive near-term hikes will drag on longer-run U.S. growth.

The euro rose about 0.1% on the dollar to $1.0446 and the Australian and New Zealand dollars lifted about 0.1% and are off multi-year lows.

China’s yuan was steady at 6.7953 per dollar in offshore trade, and seems to be finding a base after sliding more than 6% in a month. [CNY/]

Hopes for an end to Shanghai’s strict COVID-19 lockdown has offset poor April economic data and traders are also encouraged by more signs of policy support.

China cut mortgage rates for first-home buyers over the weekend and on Monday, sources told Reuters that authorities had asked some financially healthy property developers to sell bonds in order to help boost market sentiment.

“Dollar/CNH has been a big driver of G10 currencies,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne, referring to offshore yuan. He added that a pause in its slide as well as a calming of markets’ volatility generally has paused dollar gains, for now.

“A lot has been priced in and we’re not getting any new news from Fed officials,” he said. “I think people are just taking some of that money off the table at the moment.”

Sterling has bounced about 1.5% from a two-year hold and was steady at $1.2328 on Tuesday. The yen held at 129.115 and is holding above a two-decade trough.

The U.S. dollar index dipped marginally to 104.100 and is about 0.8% below Friday’s 20-year peak of 105.100.

Global interest rate expectations are also growing more hawkish.

The gap between 10-year German and U.S. real yields has narrowed by more than 30 basis points this month and central banks in Britain and Australia have raised rates.

Minutes from the Reserve Bank of Australia’s May meeting are due later in the day as are public appearances from several Federal Reserve officials, including Chairman Jerome Powell at 1800 GMT.

The Australian dollar last bought $0.6976 and the New Zealand dollar $0.6309.

========================================================

Currency bid prices at 0116 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0442 $1.0435 +0.07% -8.15% +1.0455 +1.0429

Dollar/Yen

129.1150 129.0800 +0.12% +12.35% +129.2800 +128.9550

Euro/Yen

134.81 134.71 +0.07% +3.45% +135.1300 +134.5000

Dollar/Swiss

1.0018 1.0027 -0.10% +9.81% +1.0022 +1.0013

Sterling/Dollar

1.2326 1.2321 +0.05% -8.85% +1.2337 +1.2321

Dollar/Canadian

1.2836 1.2848 -0.09% +1.53% +1.2853 +1.2829

Aussie/Dollar

0.6981 0.6972 +0.15% -3.95% +0.6990 +0.6968

NZ

Dollar/Dollar 0.6312 0.6309 +0.01% -7.82% +0.6323 +0.6308

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

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Economy

Australia’s Ruling Coalition Pledges Improved Budget in Costings

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© Reuters. Australia’s Ruling Coalition Pledges Improved Budget in Costings

(Bloomberg) — Australia’s ruling Liberal-National coalition said it will narrow the budget deficit by about A$1 billion ($700 million) via cuts to the bureaucracy as it announced costings for its election policies.

Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.

“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”

The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.

Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending. 

©2022 Bloomberg L.P.

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Economy

ECB to hike deposit rate 25 bps in July, ditch negative rates by end-September: Reuters poll

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© Reuters. FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

By Swathi Nair

BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.

With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.

The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.

Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.

Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.

Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.

An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.

“There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).

“This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.

The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves.

Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US]

However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.

The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.

On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.

The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.

Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.

Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.

Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.

It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.

Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.

Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.

“While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.

“Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.

(For other stories from the Reuters global economic poll:)

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