Economy

Inflation views tilt the Fed’s way, a bit

Published

3 days ago

May 13, 2022

Inflation views tilt the Fed's way, a bit

© Reuters. FILE PHOTO: The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts

(Reuters) – A week that included a bevy of still-ugly inflation numbers may also have marked a turn in market views of the Federal Reserve, as inflation expectations fell, bond yields moderated, and even consumers stopped ratcheting up their outlook for price increases.

A survey of professional forecasters, meanwhile, seemed to endorse the Fed’s hope it can tame inflation without killing millions of jobs in the process.

Estimates for annual inflation a year from now in the Philadelphia Federal Reserve’s quarterly survey published on Friday dropped to 3% or less, depending on the specific price measure. Meanwhile the consensus view on the unemployment rate in the next two years ticked up to just 3.8% from the current 3.6%, an outcome that would enthuse Fed officials if it plays out.

Policymakers, including Chair Jerome Powell, have been warning U.S. households that the large increases in interest rates they are planning to control the inflation that has soured the national mood are likely to be painful in and of themselves. The Fed raised its benchmark rate by half a percentage point last week and Powell has said increases of the same magnitude are warranted at meetings in the next two months.

“The process of getting inflation down to 2% (the Fed’s target) will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like,” Powell told public radio’s Marketplace on Thursday.

The week’s headline annual inflation readings at the consumer and business production levels eased for the first time in months, offering some hope that consumer price increases that reached 8.5% year-over-year in March may have crested.

While they didn’t slow by nearly as much as expected, investors – rather than further stoking fears of ever-increasing inflation – responded to the upside-surprises by bidding up bond prices and pulling yields from multi-year highs.

On the week, the 10-year Treasury note yield dropped by about 20 basis points, the biggest weekly decline since early March, and the 10-year inflation expectation reflected in Treasury Inflation-Protected Securities hit its lowest since February.

Indeed, a new inflation expectations benchmark measurement from ICE (NYSE:ICE) showed the one-year outlook has now dropped to near 4.5% from 6% in mid-April.

Graphic – ICE inflation expectations index ICE inflation expectations index: https://graphics.reuters.com/USA-FED/INFLATION/akvezxjwrpr/chart.png

About half of the drop in Treasury yields appears to have been driven by the decline in inflation expectations, Piper Sandler’s Head of Global Policy Roberto Perli wrote in a note disentangling that aspect from other factors that contribute to changes in bond yields.

That “is good news for the Fed,” Perli wrote. “(I)f it continues (which is a big if, of course), it might even induce the Fed to be somewhat less forceful in its hiking campaign. However, market inflation expectations are still too high for the Fed to claim victory for now.”

Consumers, meanwhile, appear to believe the price grind will not keep accelerating.

Data out Friday from the University of Michigan’s twice-monthly survey of consumer attitudes showed no upward move in households’ outlooks for inflation one year out for the third months in a row, holding steady at 5.4%. The view over five years was unchanged at 3% for a fourth straight month.

“They are still in the game,” former Fed governor Randall Kroszner said of the Fed’s quest for a so-called “soft landing.”

“Inflation expectations have not become unanchored despite inflation going from a decade where they cannot get to the goal to going to four times it. They have maintained credibility,” said Kroszner, now a professor at the University of Chicago Booth School of Business. “That is a pretty amazing feat.”

Economy

Australia’s Ruling Coalition Pledges Improved Budget in Costings

Published

22 mins ago

May 17, 2022

letizo News

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.

Economy

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

Published

22 mins ago

May 17, 2022

letizo News

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

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:)

Economy

Japan’s Nomura targets up to 90% jump in core pretax income in 3 years

Published

52 mins ago

May 17, 2022

letizo News

Japan's Nomura targets up to 90% jump in core pretax income in 3 years

TOKYO (Reuters) -Nomura Holdings Inc, Japan’s biggest brokerage and investment bank, said on Tuesday it is targetting an up to 90% jump in pretax income in three years as it plans to beef up digital and advisory services.

Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.

That compared to 205.2 billion yen it posted for the year ended in March 2022.

Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.

($1 = 128.9100 yen)