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

By Hideyuki Sano

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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.

STILL TOO LOW

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)

Economy

Biden Sees Progress in Supply Crisis Amid Faster Inflation

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Biden Sees Progress in Supply Crisis Amid Faster Inflation

(Bloomberg) — President Joe Biden said his administration’s work has begun to alleviate supply-chain disruptions and that higher inflation is a “natural byproduct” of the global economy’s recovery from the pandemic.

The president, who’s been assailed by his political opponents over rising prices, again sought to reassure Americans that store shelves will be full for the holiday season and persuade them that his policies would build on the economy’s strong rebound.

“I can’t promise every person will get every gift they want on time. Only Santa Claus can keep that promise,” he said in a speech from the White House. But he noted that executives of large retailers have “reported that their shelves are well stocked and they are ready to meet consumer demand for the holidays.”

The president boasted of his administration’s efforts to relieve crowding at U.S. ports, where unprecedented consumer demand has led to long queues for ships and piles of containers full of goods. By prodding unions and port managers to “step up and cooperate more,” the ports have expanded operations and sped up the movement of goods, he said.

And he pointed to reports this week of accelerating prices in Europe and the U.K., in defense of his administration’s own efforts.

“This is a worldwide challenge, a natural byproduct of a world economy shut down by the pandemic as it comes back to life,” he said. “Even accounting for rising prices, the typical American family has more money in their pocket than they did last year, or the year before that.”

The U.S. consumer price index, a broad survey of inflation, increased 6.2% last month from October 2020, the fastest annual pace since 1990. Companies increasingly have passed along increased shipping and transportation costs to consumers, contributing to increasing prices.

While many economists believe the abnormal inflation is due to unprecedented consumer demand following the pandemic shutdowns, Republicans have blamed Biden and his economic policies.

‘Political Points’

Biden took a swipe at his political opponents, some of whom he said are “rooting” for inflation in the belief it’ll benefit their party in next year’s elections. Florida Senator Rick Scott, a Republican, told the Wall Street Journal that inflation is a “gold mine” for his party.

“I don’t want to speculate on anyone’s motive but it’s always easier to complain about a problem than to try to fix it,” Biden said.

“Imagine rooting for higher costs for American families just to score a few political points,” he said.

He said his $1.75 trillion “Build Back Better” legislation, which is stalled in Congress, would help families contend with inflation by reducing the costs of child and elderly care, “housing, college, health care and prescription drugs.”

“These are the biggest costs that most families face,” he said.

Widespread public anxiety about the economy has forced Biden to repeatedly address the issue in speeches, trips and other events in recent weeks. He’s also sought to cast policies driven by the progressive wing of his party, including federal support for child care, expanded preschool and health insurance premiums, as inflation-fighting.

Biden on Monday held a roundtable with chief executive officers of Walmart (NYSE:) Inc., Best Buy Co (NYSE:)., Food Lion, Samsung (KS:) North America, Qurate Retail Group (NASDAQ:) Inc., Todos Supermarket, Etsy (NASDAQ:) Inc. and CVS Health Corp (NYSE:). The president originally was scheduled to speak publicly about supply chains Monday afternoon but the White House postponed the comments to allow Biden to spend more time with the CEOs.

Despite efforts to ease congestion, long delays continue at the ports of Los Angeles and Long Beach, which combine to handle 40% of the U.S.’s inbound containers. Forty-nine container vessels were anchored off their coasts as of Tuesday, seemingly an improvement from the more than 80 waiting a few weeks ago.

However, much of the decrease stems from a new queuing system for ships that keeps them farther away from the coast and slows their progression across the Pacific Ocean, said James Kipling Louttit of the Marine Exchange of Southern California, a nonprofit involved in maritime traffic.

“All it does is move the parking lot,” he said.

Companies operating at the two California ports — which together are the nation’s busiest — have agreed to eliminate fees for shipping containers picked up at night and on weekends, instead of during peak hours. And one of the world’s biggest ocean carriers is offering as much as $200 per container in incentives for importers to help clear the ports’ backlog by retrieving their goods faster.

The ports have said they’re considering charging fines for containers that sit on the docks for too long, and that the threat of penalties has helped ease bottlenecks.

Biden Promotes Supply-Chain Progress in Meeting With Retailers

 

In an effort to address rising fuel prices in the short term, Biden last week directed Energy Secretary Jennifer Granholm to tap the Strategic Petroleum Reserve, while calling on OPEC+ countries to increase supply longer term. Biden also asked the Federal Trade Commission to investigate possible illegal conduct in U.S. gasoline markets.

“Gas supply companies are paying less and making a lot more. And they do not seem to be passing that on to the consumers at the pump,” he said during remarks on Nov. 23. “Instead, companies are pocketing the difference as profit.”

The White House applied a similar tone in a blog post Monday.

“And with prices for shipping dropping 20% in November, retailers will hopefully be able to begin passing on those savings to consumers soon,” it said.

Polls indicate a majority of voters believe the country is headed in the wrong direction, despite reduced unemployment and growing economic output under Biden.

Many of the supply-chain issues facing the U.S. are largely out of Biden’s control and the White House has acknowledged there isn’t a quick fix.

That includes a global shortage of semiconductors, which continues to cause supply disruptions for cars and electronics. 

The White House supports legislation to encourage domestic research and manufacturing of chips but the measure has been stuck in Congress for months. And even after it passes, the impact would not be felt for years, making it a long-term solution that doesn’t help alleviate the immediate supply crunch.

(Updates with additional remarks beginning in ninth paragraph.)

©2021 Bloomberg L.P.

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Economy

U.S. companies battle rising prices and labor shortages, Fed survey shows

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U.S. companies battle rising prices and labor shortages, Fed survey shows
© Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie

By Lindsay (NYSE:) Dunsmuir and Ann Saphir

(Reuters) – The U.S. economy expanded at a modest-to-moderate pace in October and the first half of November while firms grappled with rising inflation and a scramble to fill jobs amid labor shortages, a survey conducted by the Federal Reserve showed on Wednesday.

“Prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy. There were wide-ranging input cost increases stemming from strong demand for raw materials, logistical challenges, and labor market tightness,” the U.S. central bank said in its latest “Beige Book” report of the economy, which is compiled from anecdotal evidence derived from business contacts nationwide.

The persistence of stubbornly high inflation has already forced the Fed to act to rein it in.

On Tuesday, Fed Chair Jerome Powell told the U.S. Senate Banking Committee that the central bank will consider speeding up the end of its bond-buying program a few months earlier than anticipated on the back of a broadening of price pressures, accelerating economic growth, and strong job gains that have not been matched by an increase in labor supply.

The Fed began reducing its purchases of Treasuries and mortgage-backed securities, introduced to help nurse the economy through the COVID-19 pandemic, earlier this month and was set to taper the $120 billion monthly program completely by next June.

Fed policymakers will weigh a faster timeline at their next meeting on Dec. 14-15 as the central bank seeks to curb its monetary stimulus and lay the stage for a possible liftoff in interest rates next year earlier than anticipated.

Inflation continues to run at more than twice the Fed’s flexible target of 2% annually, and Powell acknowledged in his Senate testimony that it is not expected to ease until the second half of next year.

INCENTIVES FOR WORKERS

Many of the Fed’s 12 districts also reported that businesses were having difficulties filling job openings, leading to a rise in salaries.

Nearly all Fed districts reported robust wage growth. “Hiring struggles and elevated turnover rates led businesses to raise wages and offer other incentives, such as bonuses and more flexible working arrangements,” the report said.

The U.S. unemployment rate currently stands at 4.6% and policymakers increasingly believe that, although there are 3 million fewer people in the labor force than before the COVID-19 pandemic, not all of the shortfall will be made up due to an increase in retirements over the past two years.

Wage inflation shows few signs of abating, with employers in almost every industry competing to lure workers, who have been quitting at record levels. A high quits rate is seen as a sign of confidence as workers leave when they are more secure in their ability to find a new job.

Elsewhere, the Fed said consumer spending rose modestly and that the outlook for overall activity remained positive in most districts, but some noted uncertainty about when supply chain and labor shortages would ease.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Fed’s Williams says Omicron variant may prolong supply-demand imbalances

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Fed's Williams says Omicron variant may prolong supply-demand imbalances
© Reuters. FILE PHOTO: John Williams, Chief Executive Officer of the Federal Reserve Bank of New York, speaks at an event in New York, U.S., November 6, 2019. REUTERS/Carlo Allegri

(Reuters) – The latest COVID-19 variant could extend some of the supply-chain challenges and shortages that have led to higher inflation, and Federal Reserve officials will need to factor that in as they decide how to withdraw their monetary policy support, New York Fed President John Williams said.

“Clearly, it adds a lot of uncertainty to the outlook,” Williams said, referring to the Omicron variant of COVID-19, during an interview with the New York Times that was published on Wednesday.

If the variant leads to continued demand for goods and services that are currently facing shortages, and if it stalls the recovery in other areas, that could lead to a “somewhat slower rebound overall,” Williams said. It might also “increase those inflationary pressures, in those areas that are in high demand,” he added.

Last month, the Fed began reducing its purchases of Treasuries and mortgage-backed securities from $120 billion per month at a pace that would put it on track to complete the wind-down of its bond-buying program by mid-2022.

On Tuesday, Fed Chair Jerome Powell told the U.S. Senate Banking Committee that U.S. central bank policymakers would discuss at their Dec. 14-15 meeting whether to end that program a few months earlier than had been anticipated.

Williams did not say whether he supports speeding up the taper of the asset purchases, but noted that Fed officials will have a lot to weigh at their next policy meeting, including more data on inflation, employment and the economic effects of the Omicron variant.

“The question is: Would it make sense to end those purchases somewhat earlier, by maybe a few months, given how strong the economy is?” Williams said. “That’s a decision, discussion, I expect we’ll have to grapple with.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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