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Economic

Now comes the hard part

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Ajay Rajadyaksha is Global Head of Research at Barclays.

Looming on the horizon is the final Fed meeting of the year, and all the talk is about the so-called “AxisYesterday is softer inflation data It only fueled chatter.

Certainly, the Federal Reserve will almost certainly scale back its rate hikes when it announces its decision later today. From there, it should be a hop, skip and jump to price cuts. At least, that’s what the bond market thinks — Fed funds futures are now priced at three-quarters of a point into next year.

Not so fast.

The Fed has moved exceptionally quickly this year. But she could hardly fail to do so, given the economic background. It is not difficult to tighten monetary policy aggressively when headline inflation is close to 8 percent, when wage growth is twice as hot as it was with the same pre-Covid unemployment rate, and even when the White House supports a more hawkish policy.

Next year will be a completely different game, with much tougher decisions.

For one thing, US inflation has peaked and will continue to fall next year. Yesterday’s print CPI It was another brick in that wall. High rates hit activity through long and variable delays. Because the surges were so fast, they didn’t have time to affect large parts of the United States. That will change in 2023.

For example, the year 2022 saw a severe tightening in the US labor markets. But layoffs will begin as the economy slows. Economists, on average, expect the unemployment rate to rise to 4.8 percent by the first quarter of 2024, from 3.7 percent today. That means a million and a half fewer jobs created, and several months of negative payroll printouts.

However, the Fed’s average “point” for the end of 2023 is 4.6 percent and is likely to go above this week. The Fed believes the “neutral” federal funds rate is 2.5 percent, yet it plans to keep rates above 2 percent. above This stable situation is amid recession and the loss of millions of jobs.

There is a reason for that, of course. The Fed is concerned that the labor market is still too hot and wages are too saturated to return to an inflation rate of 2 percent. For example, the labor cost index (one of the preferred measures of wages) is now at a rate of 5 percent per annum; It was 2.7 percent in December 2019 and has never risen above 3 percent in the decade before Covid.

Other metrics, such as the Federal Reserve Bank of Atlanta wage tracker and average hourly earnings, all run at 6-6.5 percent. And since wages fuel service prices – which account for 70 per cent of the US inflation basket – the Fed feels the path to 2 per cent inflation lies through a sharp slowdown in wage growth.

That will likely require job losses, and lots of them.

The central bank can hardly say this publicly, but the high unemployment rate and therefore the slowdown in income is now something to behold. policy objective. This is why, when said job losses begin, it is difficult for the Federal Reserve to rush to the rescue by cutting interest rates quickly.

Holding on firmly will not be easy. Already, senators like Elizabeth Warren, Sherrod Brown, and John Hickenlooper have urged the Fed to calm down. Next year, if job losses start and then intensify, there will be an ever-increasing drumbeat about the Fed’s “war on workers” and massive pressure on the central bank to cut interest rates.

The problem is that this could mean that wages and core inflation are not slowing enough, setting the stage for a permanent loss of inflationary credibility for the Fed.

Then there is one final scenario to consider. Even if the US unemployment rate increases by 1 percent next year, it will still be 4.7 percent. From a historical point of view, this is low. In fact, it wasn’t so long ago that the Federal Reserve believed that “full employment” required an unemployment rate of 5 percent or higher.

In other words, there is a possibility that the unemployment rate will rise sharply in the next year, but not to levels that will materially slow wage growth. This will be the worst of all situations.

The Fed may then face the daunting task of getting ahead — say, a year from now — even with layoffs and politicians crying themselves hoarse for cuts. This is not the Fed’s baseline forecast, nor is it mine. But it is not an entirely implausible scenario and would put the central bank in a very difficult position.

After a cycle of frantic price hikes, the officials at the Eccles Building are no doubt hopeful that the heavy lifting is over and that they can look forward to their well-deserved holiday vacation. They should be enjoying themselves. Because next year may be a more difficult year.

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Economic

We need to pay more attention to skewed economic signals

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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.

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.

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.

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.

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Economic

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

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© 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.

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.

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.

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German automakers point to easing supply chain problems

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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.

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.

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.

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