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Fed’s Bowman ‘very comfortable’ with November taper, sees inflation risks

By Ann Saphir



Fed's Bowman 'very comfortable' with November taper, sees inflation risks
© Reuters. FILE PHOTO: U.S. Federal Reserve Governor Michelle Bowman gives her first public remarks as a Fed policymaker at an American Bankers Association conference in San Diego, California, U.S., February 11 2019. REUTERS/Ann Saphir/File Photo

By Ann Saphir

(Reuters) – Federal Reserve Governor Michelle Bowman on Wednesday said she would be “very comfortable” with beginning to withdraw some of the U.S. central bank’s crisis-era support for the economy as soon as next month, citing concerns about inflation and asset bubbles.

The Fed’s purchase of Treasuries and mortgage-backed securities has been a centerpiece of its COVID-19 response, credited with staving off a financial crisis by pushing down on borrowing costs and encouraging investment and hiring as the economy reopened.

“I am mindful that the remaining benefits to the economy from our asset purchases are now likely outweighed by the potential costs,” Bowman said in an address to South Dakota State University. “Provided the economy continues to improve as I expect, I am very comfortable at this point with a decision to start to taper our asset purchases before the end of the year and, preferably, as early as at our next meeting in November.”

Last December, with millions of Americans still unable to find jobs, the Fed promised to keep buying $120 billion of bonds each month until the economy had made “substantial further progress” toward full employment and the Fed’s 2% inflation goal.

Last month, Fed Chair Jerome Powell signaled the end of that program was approaching. Inflation, which has been running far above 2% for months, had met the “substantial further progress” test, and the economy was one “decent” jobs report away from meeting that standard on the employment front, he said.

Behind closed doors, Fed policymakers had become more worried about inflation risks and were coalescing around a plan to start pulling back support for the economy before the end of the year.

Last week the Labor Department reported the economy had added 194,000 jobs in September, well below analysts’ expectations but widely seen as enough to satisfy Powell’s “decent” hurdle.

Bowman on Wednesday said she sees progress on jobs but no return to pre-pandemic levels of employment any time soon. Even as businesses offer higher wages and signing bonuses, she said, they are having trouble recruiting employees.

Millions of women and older workers have left the labor force during the pandemic, data shows, and the longer people stay out of work, the harder it will be for them to come back – a problem the Fed’s monetary policies are ill-suited to address, she said.

Meanwhile, rising wages may start to push up on inflation, adding to price pressures from supply-chain bottlenecks that could last longer than previously expected, she said. Rising house prices are hurting lower-income households and bankers have begun voicing concern about potential house-price bubbles, she said.

The Fed’s asset purchases “have essentially served their purpose,” Bowman said, saying that continuing them carries worrisome risks. “In particular, I am concerned that our asset purchases could now be contributing to valuation pressures, especially in housing and equity markets,” adding that maintaining the Fed’s easy monetary policy could now “pose risks to the stability of longer-term inflation expectations.”

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Japanese insurers cautious on foreign govt bonds, shrug off dollar rally

By Hideyuki Sano



Japanese insurers cautious on foreign govt bonds, shrug off dollar rally
© Reuters. FILE PHOTO: A U.S. hundred dollar bill and Japanese 10,000 yen notes are seen in this photo illustration in Tokyo, February 28, 2013. REUTERS/Shohei Miyano/File Photo

By Hideyuki Sano

TOKYO (Reuters) – Japanese insurers are growing increasingly reluctant to buy foreign government bonds without a currency hedge, as they are not expecting the recent dollar rally against the yen to continue for much longer.

Only two out of Japan’s top 10 insurers said they planned to increase foreign bonds without a currency hedge between October and March while the others either planned to reduce their overall holdings or keep them steady, according to insurers’ comments made at press conferences and to Reuters in October.

U.S. dollar bonds make up the bulk of Japanese insurers’ foreign bond holdings.

Many insurers also said they preferred investing in corporate bonds, which offer higher returns than sovereign ones, or in local yen bonds as they seek to meet regulatory requirements.

“We are cautious on unhedged foreign bonds. The yen has already weakened considerably. We are not increasing their holdings when the yen is at current levels,” Hiroyuki Nomura, head of investment planning at Japan Post Insurance told reporters during a news conference on Wednesday.

The dollar hit a four-year high against the Japanese currency at 114.695 yen on Oct. 20, as rising U.S. inflation has fuelled expectations of an earlier-than-expected Federal Reserve rate hike, while the Bank of Japan looks poised to keep interest rates low for some time.

A rising import bill, driven by soaring energy prices, has also weighed on the yen in recent weeks, while the currency has also come under pressure from slowing export growth, as automakers curb production due to supply shortages.

Industry leader Nippon Life expects the dollar to slip back to around 108 yen by March from 114 yen currently, voicing scepticism on rising expectations of a U.S. rate hike next year.

Federal Reserve Chair Jerome Powell said last week the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest rate dial.

Fukoku Life, which had a considerable exposure to the dollar many years ago when it was way below 100 yen, will take out currency hedges on all of its foreign bond investment because it thinks the current dollar level is a bit expensive, said the company’s investment planning manager Yoshiyuki Suzuki.

Japanese life insurers collectively manage 412 trillion yen ($3.61 trillion) of assets and have been big investors in foreign bonds for years.

But they became a net seller of foreign bonds in the financial year to March 2021 for the first time in seven years, after having purchased 20.5 trillion yen in the preceding six years.


Many of Japan’s top insurers said they have limited appetite for foreign government bonds, even with currency hedges, given the low returns on offer.

Ten-year U.S. Treasury yields rose to a six-month high of 1.705% last week on inflation worries but it is still way below the 2-3% range seen between 2017 and 2019.

Instead, most insurers are buying higher-yielding corporate debt, even though the extra return they offer compared with equivalent U.S. government bonds has fallen to near record lows.

The credit spreads in U.S. bond markets have tightened sharply since March last year to historically low levels.

The yield spread on Bank of America (NYSE:)’s investment grade corporate bond index over Treasuries shrank to 1.07% this week, the tightest spread since 2018, compared with a peak of 4.28% in March 2020, at the height of the pandemic-driven market troubles.

“The global low interest rate environment will likely continue, which means investors will have strong needs for yield enhancement. So we feel demand for credit products will remain strong,” said Akifumi Kai, general manager of investment planning at Dai-ichi Life.

Many Japanese insurers also plan to increase yen bonds, in part to meet regulatory requirements before the introduction of new solvency rules in 2025, even though the 10-year JGB yield is stuck near 0% due to the Bank of Japan’s policy to peg it around that level.

($1 = 114.00 yen)

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Equinor Q3 surges on gas and derivatives, boosting share buybacks

By Nerijus Adomaitis and Nora Buli



Equinor Q3 surges on gas and derivatives, boosting share buybacks
© Reuters. FILE PHOTO: Equinor’s flag in Stavanger, Norway December 5, 2019. REUTERS/Ints Kalnins

By Nerijus Adomaitis and Nora Buli

OSLO (Reuters) -Norway’s Equinor posted its strongest quarterly result in nine years on Wednesday, driven by a global energy supply crunch that pushed Europe’s prices to record highs and sent the value of derivative contracts soaring.

The company said it would sharply increase the size of its share buybacks in coming months, while maintaining a quarterly dividend level of $0.18 per share.

Adjusted earnings before tax rose to $9.77 billion in the July-September quarter from $780 million a year ago, exceeding the $8.4 billion predicted in a poll of 25 analysts compiled by Equinor.

“The current unprecedented level and volatility in European gas prices underlines the uncertainty in the market,” Chief Executive Officer Anders Opedal said in a statement.

“Equinor has an important role as a reliable energy provider to Europe and we have taken steps to increase our gas exports to respond to the high demand.”

Norway is western Europe’s largest oil and gas producer, pumping around 4 million barrels of oil equivalent per day. Last year, it supplied 22% of the gas consumed in the European Union, according to Norwegian government data.

Equinor has said it would seek to boost pipeline gas exports to Europe by increasing production from Troll and Oseberg fields, as well as from reducing gas injections normally used to pump oil.

Global gas prices rose sharply in the third quarter, with Europe’s benchmark TTF front-month contract increasing threefold to around 90 euros per megawatt hour (MWh) due to rising demand, below average storage levels and concerns over Russian supply ahead of the winter heating season.

In early October, the gas price spiked again, hitting a record of 155 euros per MWh before easing to 89 euros on Tuesday. The price of North Sea has meanwhile risen 67% this year to trade at a three-year high of $86 per barrel.


Earnings at Equinor’s marketing, midstream and processing (MMP) unit rose to $2.19 billion from $262 million, boosted by derivatives contracts related to European gas, the company said.

Equinor sells most of its gas on a short-term, or spot, basis but also sells a small share based on longer-dated indices. For the latter, MMP has used financial contracts to change the price exposure to benefit from strong spot and front-month pricing.

The mark-to-market gains from such contracts in the third quarter will be followed by losses in the MMP segment when those volumes are delivered under the long-term contracts, Equinor reiterated in its earnings report.

“The decision to take derivative positions has been beneficial to the group but created volatility in this segment,” the company said in reference to the MMP unit.

The one-off nature of the MMP gains should be a note of caution for investors, SpareBank 1 Markets analyst Teodor Sveen-Nilsen said.

“MMP’s profitability is a black box with low visibility,” he wrote in a note to clients.

Still, Equinor’s share price could outperform peers by some 2-4% on Wednesday, the analyst added.


The increased energy cost has led to soaring electricity prices across much of Europe and the world, hitting household as well as companies which have been forced to shut factories as profits eroded, triggering more supply chain shortages.

Equinor plans to buy back shares worth $1 billion during the next three months, up from its previous plan to purchase $300 million worth of shares.

During the previous three months, the company had also planned to buy up to $300 million worth of shares, but ended up spending just $99 million.

Equinor revised its capital spending for 2021 to $8.0 billion from a range of $9 billion to $10 billion seen previously. The average for 2021 and 2022 will still be between $9 billion and $10 billion, however.

It kept its plans to spend around $12 billion per year in 2023 and 2024.

Equinor’s shares have risen 60.6% year-to-date. Trading on the Oslo Bourse is due to resume at 0700 GMT.

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Dollar edges lower, Australian dollar calms after inflation jump

LONDON (Reuters) – The U.S. dollar slipped as European markets opened on Wednesday, while the Australian dollar pared gains, having jumped following surprisingly strong inflation data which raised the possibility of sooner-than-planned rate hikes.



Dollar edges lower, Australian dollar calms after inflation jump
© Reuters. FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration


LONDON (Reuters) – The U.S. dollar slipped as European markets opened on Wednesday, while the Australian dollar pared gains, having jumped following surprisingly strong inflation data which raised the possibility of sooner-than-planned rate hikes.

Currency markets have been generally quiet in recent sessions as investors wait for the U.S. Federal Reserve meeting next week.

Investors are also looking to policy announcements this week from the European, Canadian and Japanese central banks for clues on the outlook for rates amid a backdrop of supply-side driven global inflation pressures.

At 0802 GMT, the was down less than 0.1% at 93.877.

Short-term U.S. Treasury yields spiked overnight as investors bet that inflation would bring forward interest rate rises.

Standard Chartered (OTC:) FX analysts wrote in a client note that they expect currency market risk sentiment to be limited until the Fed next week, where “hawkish risks are still under-priced”.

The Australian dollar was up 0.2% at $0.7513, having reached as high as $0.7536 overnight after data showed that Australian core inflation sped to a six-year high in September, surprising the market. The data prompted a spike in short-term yields.

The Reserve Bank of Australia meets on Tuesday next week and market pricing is at odds with RBA policymakers’ insistence that there will be no rate hikes before 2024.

“The Reserve Bank of Australia (RBA) might be forced into action after all,” wrote Commerzbank (DE:) analyst Antje Praefcke in a note to clients, referring to rising 3-year yields.

“The market is likely to increasingly assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments, which is likely to principally support AUD.”

The U.S. dollar was down around 0.4% against Japan’s yen, with the pair changing hands at 113.745 – still within recent ranges and close to the four-year high of 114.695 the dollar touched against the yen one week ago.

“Short-JPY positions have clearly become a very popular trade among speculators… but it still seems hard to see the yen finding  sustained support at the moment,” wrote ING FX strategists in a client note.

“115.00 in now appears a matter of when, rather than if.”

The Bank of Japan meets on Thursday and is widely expected to downgrade its economic assessment, with markets betting on no rate hike in the foreseeable future.

The Canadian dollar was little changed at $1.2402 ahead of Canada’s central bank policy announcement later in the session.

The central bank is expected to raise its inflation forecast and to largely end stimulus from its pandemic-era bond buying program, starting a countdown of sorts to the first interest rate hike since October 2018

The euro was up around 0.1% at $1.1605. The European Central Bank, which meets on Thursday, is expected to take a dovish stance.

The British pound was down 0.2% against the euro at 84.39 pence per euro. The UK’s budget forecasts will be unveiled later in the session but are not expected to impact the pound.

In cryptocurrencies, bitcoin was down 2% at around $59,114, having been knocked off the all-time high of $67,016.50 it reached last week.

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