Connect with us

Economic

As the Fed plans to “raise and hold,” new projections may show the cost by Reuters

Avatar

Published

on


© Reuters. FILE PHOTO: An eagle graces the facade of the US Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo

Written by Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve’s new forecasts, released later this month, along with an expected half-point rate hike, may show that the central bank’s target interest rate is heading toward levels last seen on the eve of the 2007 financial crisis. It will also reveal policymakers’ best guess about the implications of a flexible labor market so far.

A stronger-than-expected US employment report for November showed businesses added 263,000 workers, with hourly wages rising at an annualized rate of 5.1% and the size of the workforce itself shrinking – all signs of a labor market that is both tight and accelerating. The Fed hopes it will start to cool off.

Combined with only a modest drop in inflation so far, new projections from the Fed’s 19 policymakers are likely to show rates continuing to rise and to remain high through 2023, contradicting current market expectations for a rate cut by the end of next year.

Advertisement

“The Fed has told us that it will take a prolonged period of restrictive policy to raise unemployment and lower wage growth, and today’s data provides further evidence of that effect,” Jefferies economist Thomas Simmons wrote. “This does not take the Fed off course for a widely expected rate hike of 50 (bps) at the next meeting…and gives us greater confidence in our projection that the final rate will exceed 5% next year.”

The last time interest rates were above 5% was from June 2006 to July 2007, at the start of the 2007-to-2009 financial crisis and recession, when the federal funds rate peaked at around 5.25%.

The updated forecast released after the FOMC meeting on December 13-14 will be a fresh opportunity for officials to show how they expect their “hold and hold” strategy to play out in relation to the final policy rate level. Growth, inflation and unemployment have advanced in particular.

The meeting will culminate in a volatile year that has seen the central bank respond to the fastest spread of inflation since the 1980s with the fastest increase in interest rates since then to offset it. The backlash has sent shock waves through the financial system that at one point wiped nearly $12 trillion off the value of the US stock market and recently pushed mortgage rates to 7% for a population accustomed to cheap money.

Stock markets recently rallied and rallied sharply this week when Fed Chair Jerome Powell said, in what was likely his last public statement before the meeting, that the Fed was prepared to slow down from a series of four consecutive rate hikes by three-quarters of a point in its favour. than expected increase by half a point.

Advertisement

It would have been an inappropriate outcome for the Fed chief who wants to keep financial conditions tight and keep public expectations firmly focused on the inflation battle.

But Powell has also been vocal about the trade-off. Even if the central bank starts moving at half a point or a quarter point in the coming months, the interest rate is heading higher toward an unspecified “appropriately constrained” stopping point, and officials intend to leave it there “for some time.”

Fed officials from San Francisco Fed President Mary Daley to Bank of St. Louis President James Bullard, who are often on opposite sides of recent policy debates, have discussed interest rates that could rise above 5% next year.

Bloating ‘too loud’

In a lengthy talk at the Brookings Institution this week, Powell outlined what could be a long transition for the United States to a world of slowly declining inflation, high interest rates, and a potentially chronic shortage of workers.

Advertisement

To slow the pace of price increases, he said, it was clear that energy had to be drained from a labor market where the demand for workers remains far greater than the number of people willing to take jobs — an imbalance in US demographics and immigration policy, magnified by the pandemic.

Embedded in the new economic outlook summary will be estimates of the extent of losses Fed officials feel will be paid in terms of rising unemployment and slowing growth as its policies begin to take their toll.

Powell said he still sees a “reasonable” path to a “soft” landing, with only modest job losses.

But the adjustment is not coming quickly yet.

Data released Thursday showed the Fed’s preferred measure of inflation was 6% in October, down from September’s 6.3% rate, the lowest this year but still three times the Fed’s target of 2%.

Advertisement

Employment data released on Friday showed little evidence of change there, too.

The economy has been adding an average of 392,000 jobs per month this year. Although the pace eased to 277,000 from August through November, this is still higher than the 183,000 monthly additions in the decade prior to the pandemic.

Expectations are far from reality

The Fed’s forecasts during the year raced to catch up with reality. As of last December, officials expected the interest rate to end in 2022 at just 0.9%, with the preferred measure of inflation falling to 2.6%. The highest expectation for individual federal funds was just 1.1%.

This was less than fourfold: with the expected half-point increase at the next meeting, the general policy rate would end up in a range of 4.25% to 4.5%.

Advertisement

Powell this week acknowledged the difficulty of predicting in an environment still reeling from the pandemic and its aftereffects.

But there is also little choice as the central bank ends its reckless push to raise interest rates “in front” with a larger rate hike and begins, as Powell described it, to “feel” the way to a stopping point.

As of September, the Fed narrative still includes a benign outcome of continued growth, a steady progression in inflation, and a rise in the unemployment rate less than a percentage point, to 4.4% at the end of next year from the current 3.7% — what some have referred to as “inflation.” Taher” comes at a small cost to the real economy.

It saw the federal funds rate finish 2023 at 4.6%.

It should be “somewhat higher,” Powell said, and the November jobs data may push it another notch. Upcoming projections will show that the final destination may be on the way to supply, and give a better assessment of whether the labor market is able to outpace it.

Advertisement

Jason Furman, former White House Council of Economic Advisers chairman, wrote on Twitter that the average earnings data from November, along with revisions for prior months, “consist with about 5% inflation.” “I was letting myself have more hope for a soft landing, but that has pretty much dashed that hope.”

Source link

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published.

Economic

We need to pay more attention to skewed economic signals

Avatar

Published

on

By

The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

Advertisement

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

Advertisement

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

Advertisement

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

Source link

Advertisement
Continue Reading

Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

Avatar

Published

on

By


© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Advertisement

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

Advertisement

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

Source link

Advertisement

Continue Reading

Economic

German automakers point to easing supply chain problems

Avatar

Published

on

By

Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

Advertisement

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Advertisement

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

Source link

Advertisement

Continue Reading
Advertisement

Trending