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Economy

U.S. bond funds see biggest weekly outflow in four weeks

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© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange in New York, U.S., March 16, 2020. REUTERS/Lucas Jackson

(Reuters) – U.S. bond funds saw a surge in outflows in the week to May 11 on concerns over higher inflation readings, which cemented expectations of aggressive rate hikes by the Federal Reserve.

According to Refinitiv Lipper data, U.S. bond funds faced capital withdrawals for the 18th straight week, amounting to $10.42 billion, nearly twice the $5.9 billion in disposals in the previous week.

GRAPHIC – Fund flows: US equities bonds and money market funds https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoyzbbpr/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg

The U.S. benchmark 10-year Treasury yield hit a 3-1/2-year high of 3.203% this week on fears over higher inflation levels.

U.S. headline consumer prices rose 8.3% in April year-on-year, beating economists’ forecasts for 8.1%, data showed on Wednesday.

Investors sold U.S. taxable bond funds worth $7.72 billion, about 95% larger withdrawal from a week ago, while municipal funds suffered outflows of $2.76 billion.

U.S. short/intermediate investment-grade funds witnessed net selling of $7.28 billion in the biggest weekly outflow since April 2020. However, U.S. short/intermediate government & treasury funds lured inflows of $2.62 billion.

GRAPHIC: U.S. bond funds https://fingfx.thomsonreuters.com/gfx/mkt/znpnemylovl/Fund%20flows%20US%20bond%20funds.jpg

Meanwhile, investors offloaded U.S. equity funds worth $8.46 billion in a fifth straight weekly outflow.

GRAPHIC: U.S. growth and value funds https://fingfx.thomsonreuters.com/gfx/mkt/movanoxwbpa/Fund%20flows%20US%20growth%20and%20value%20funds.jpg

Selling continued in U.S. growth funds for the seventh straight week, amounting to $4.5 billion. Value funds also posted an outflow, worth $1.99 billion, after a week’s inflow.

Among sector funds, financials, industrials, materials, and tech lost $1.24 billion, $756 million, $677 million, and $468 million, respectively, in outflows.

GRAPHIC: U.S. equity sector funds https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgkrbapb/Fund%20flows%20US%20equity%20sector%20funds.jpg

Meanwhile, U.S. money market funds booked net selling of about $7 billion in their first weekly outflow in three weeks.

Economy

Japan’s Q1 GDP shrinks as Ukraine, cost of living cloud outlook

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© Reuters. FILE PHOTO: Businessmen wearing protective face masks walk on a pedestrian bridge, amid the spread of the coronavirus disease (COVID-19), in a business district in Tokyo, Japan June 24, 2020. REUTERS/Issei Kato

By Daniel Leussink and Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s economy fell for the first time in two quarters in the first three months of the year as COVID-19 curbs hit the service sector and the Ukraine war and surging commodity prices created new headaches for consumers and businesses.

The decline presents a challenge to Prime Minister Fumio Kishida’s drive to achieve growth and wealth distribution under his “new capitalism” agenda, stoking fears of stagflation – a mix of tepid growth and rising inflation.

The world’s No. 3 economy shrank at an annualised rate of 1.0% in January-March from the previous quarter, gross domestic product (GDP) figures showed, versus a 1.8% contraction seen by economists. It translated into a quarterly drop of 0.2%, the Cabinet Office data showed, versus market forecasts for a 0.4% drop.

Private consumption, which makes up more than half of the economy, slightly fell, versus a 0.5% fall expected by economists, the data showed.

The weak reading may pressure Kishida to spend even more with upper house elections pencilled in for July 10, following the 2.7 trillion yen ($20.86 billion) in extra budget spending compiled on Tuesday.

Many analysts expect Japan’s economy to rebound in coming quarters, but the war in Ukraine and a slowdown in the Chinese economy dim the recovery prospects.

Despite easing coronavirus curbs, doubts remain about the V-shaped recovery, while surging energy and food prices boosted by the weak yen could cap domestic demand.

Japan’s export-reliant economy got little help from external demand, with net exports knocking 0.4 percentage point off GDP growth, as the weak yen and surging global commodity prices inflated imports.

That compared with a negative contribution of 0.3 percentage point seen by economists.

Capital spending rose 0.5% versus an expected 0.7% increase, following a 0.4% increase in the previous quarter.

($1 = 129.4400 yen)

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Economy

Fed’s Evans backs ‘front-loaded’ rate hikes, then measured pace

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© Reuters. FILE PHOTO: Chicago Federal Reserve Bank President Charles Evans looks on during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, February 27, 2020. REUTERS/Edgard Garrido

By Dan Burns

(Reuters) – Chicago Federal Reserve Bank President Charles Evans on Tuesday said he supports an initial burst of monetary policy tightening, and then a more “measured” pace of rate hikes to allow time to assess inflation and the impact of higher borrowing costs on the job market.

“I think front-loading is important to speed up the necessary tightening of financial conditions, as well as for demonstrating our commitment to restrain inflation, thus helping to keep inflationary expectations in check,” Evans said in remarks prepared for delivery to Money Marketeers of New York University.

Inflation, running at more than three times the Fed’s 2% target, is “much too high,” Evans said, and the Fed should raise its policy rate “expeditiously” to a neutral range of about 2.25%-2.5%.

Fed policymakers have begun doing so. They raised rates by a bigger-than-usual half-of-a-percentage point earlier this month, to a range of 0.75%-1%, and Fed Chair Jerome Powell signaled at least two more such rate hikes to come. The Fed also plans to start trimming its $9 trillion balance sheet next month.

But Evans’ preference for transitioning to a more “measured pace” – a phrase that in the past has meant quarter-point rate hikes — sounded a bit more dovish than Fed Chair Jerome Powell, who spoke earlier in the day.

The central bank, Powell told the Wall Street Journal on Tuesday, will keep “pushing” on rate hikes until it sees inflation move down in a “clear and convincing way” and will not hesitate to move more aggressively it that does not happen.

Evans said that slowing the pace of rate hikes after an initial front-loading would give the Fed time to check if supply chain kinks ease, and to evaluate inflation dynamics and the impact of higher borrowing costs on what called a “downright tight” labor market.

Unemployment is at 3.6% and job openings are at a record high.

“If we need to, we will be well positioned to respond more aggressively if inflation conditions do not improve sufficiently or, alternatively, to scale back planned adjustments if economic conditions soften in a way that threatens our employment mandate,” Evans said.

With inflation pressures as broad and strong as they are, he said, interest rates may need to rise “somewhat” above neutral to bring down inflation.

Traders are betting on that, with prices in futures contracts tied to the Fed’s policy rate reflecting expectations for an end-of-year policy rate range of 2.75%-3%.

But in Evans’ view that doesn’t mean the Fed will end up triggering a recession, as critics including several former U.S. central bankers have recently warned.

“Given the current strength in aggregate demand, strong demand for workers, and the supply-side improvements that I expect to be coming, I believe a modestly restrictive stance will still be consistent with a growing economy,” Evans said.

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Economy

Australian banks enter tech arms race as rising rates squeeze profit

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4/4

© Reuters. FILE PHOTO: A view of a Commonwealth Bank of Australia branch in Sydney, Australia, April 18, 2018. REUTERS/Edgar Su

2/4

By Byron Kaye

SYDNEY (Reuters) – The 10-minute home loan – at the tap of a smartphone screen – is emerging as the next frontier in Australian banking as rising interest rates quash a pandemic-fuelled property boom, eating into mortgage income and renewing focus on cost-cutting tech.

The Big Four lenders booked blockbuster profit during the COVID-19 pandemic due to a leap of nearly one-third in property prices since 2020, but raging inflation brought a shock rate hike this month and expectations of several more.

That has left banks, which make most of their profit from mortgages, looking to automate every step of the loan process and cut overheads such as staffing and real estate to keep growing profit from what analysts say may be a shrinking pool of money.

So far only Commonwealth Bank of Australia (OTC:CMWAY) (CBA), the biggest lender, has put a speed target on its automation drive. It said a fully digitised loan service that went live on Tuesday could process an application in as little as 10 minutes.

But in earnings updates this month, National Australia Bank (OTC:NABZY) Ltd (NAB), Westpac Banking (NYSE:WBK) Corp and Australia and New Zealand Banking Group Ltd (ANZ) all pointed to automation to offset the impact of a cooling property market.

“They’re incentivised to invest in tech and get up to where CBA is because it drives people online,” said Hugh Dive, chief investment officer at Atlas (NYSE:ATCO) Funds Management, which holds shares of major banks.

“They can improve profit without growing their top line.”

Citi banking analyst Brendan Sproules in a client note said chief executive officers face an “endless battle to transform their 1970s/80s process and systems into the modern digital age”.

“A rising cash rate might just provide the opportunity to accelerate this transformation along faster than we first thought.”

Instead of filling in paper forms and supplying documents, to be verified and analysed by back-office staff, a customer would enter the address of a property they planned to buy plus their bank account login. Their computer or smartphone camera would confirm their identity.

Algorithms figure out the rest, such as employment history and probable purchase price.

A bank employee only steps in if the software picks up discrepancies in the data, people who work on loan automation software said.

Some smaller and online-only lenders already automate mortgage applications but – until now – not the Big Four, which dominate Australia’s A$10 trillion ($7.00 trillion) housing market with three-quarters of loans by value.

“What we’re seeing right now is a lot of optimisation using existing processes, using existing loan origination systems,” said Hessel Verbeek, head of banking strategy at KPMG Australia.

“The room for improvement will include when people actually start to replace some of the key systems.”

Banks have not specified how much money they plan to spend automating mortgage approvals, nor how much they would save.

Of the A$3.6 billion the Big Four invested in the first half of the 2022 financial year, 35% went to “productivity and growth”, versus 32% a year earlier, showed data from KPMG.

NAB, the second-biggest lender, said last week its “investment in customer experience, efficiency and sustainable revenue” rose 46% in October-March from the same period a year earlier, to A$228 million. It said it wants every home loan automated by 2024.

ANZ, which has been losing mortgages for two years as understaffing led to a surge in approval times, said it has only begun work digitising processes.

“There’s no doubt we’ve got some catching up to do,” CEO Shayne Elliott was quoted as saying in The Australian.

SLOW START

Banks were slow to start automating retail products partly because large compliance and risk management overhauls sapped both investment budgets and management attention since regulatory scrutiny dramatically increased in 2018, analysts and industry participants said.

Rebecca Engel, head of Microsoft Corp (NASDAQ:MSFT)’s Australian financial services unit, said there was a “massive increase in investment, deployment, acceptance and trust in technology” by banks in tandem with heightened regulatory attention and higher transaction volume during the pandemic.

“The goal should be higher levels of assurance, higher levels of quality, at a lower cost,” Engel told Reuters.

“That is driven by technology.”

($1 = 1.4282 Australian dollars)

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