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Policymakers say Fed may push interest rates higher, keep them there longer By Reuters

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© Reuters. New York Federal Reserve Chairman John Williams speaks at a ceremony in New York, US, on November 6, 2019. REUTERS / Carlo Allegri / File Photo

Written by Michael S Derby and Ann Saffer

NEW YORK/SAN FRANCISCO (Reuters) – Federal policymakers may need to raise U.S. borrowing costs above the 5.1% peak they set just this week, and keep them there perhaps until 2024 to drive high inflation out of the economy, three of them indicated on Friday.

The hawkish messages, delivered in separate appearances by New York Fed President John Williams, San Francisco Fed President Mary Daley, and Cleveland Fed President Loretta Mester, underscore the US central bank’s determination to do what it takes to ease Price pressures that erode wages and pressure. household budgets, despite what analysts say a million or more jobs could be lost in the process.

It also stands in stark contrast to the expectations expressed in the financial markets. Traders on Friday took bets that the Fed’s policy rate would peak below 5% and the Fed would start cutting interest rates in the second half of 2023 to mitigate what the New York Fed’s internal modeling suggests will be an economic slowdown.

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New York Federal Reserve Chairman Williams said he doesn’t expect a recession, but told Bloomberg TV that “we’ll have to do what’s necessary” to bring inflation back to the Fed’s 2% target, adding that the peak rate “could be higher than we’ve written.”

The Fed raised interest rates this year from nearly zero in March to a range of 4.25%-4.5% in the steepest round of rate hikes since the 1980s, the last time it battled a rapid rise in rates. The Fed’s preferred measure of inflation is currently 6%, three times its target of 2%.

Earlier this week, as policymakers introduced their latest rate hike, they also published forecasts indicating that almost all of them see the need to raise rates further, to at least a 5%-5.25% range, in the coming months.

This sentiment surprised investors who were encouraged earlier in the week by data showing a second month in a row of slowing inflation which some took as a sign that the Fed’s rate hikes were coming to an end.

On Friday, the general stock market index closed down nearly 2% for the week as the Fed’s more hawkish stance eased. Bond traders meanwhile seem pretty convinced that the Fed will indeed beat inflation.

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Federal Reserve policymakers welcomed the recent slowdown in inflation, driven by easing supply chain problems and higher interest rates that are constraining the housing market.

But they also view the strong labor market as a source of persistent price pressure with concern.

American employers add hundreds of thousands of jobs each month and the unemployment rate is as low as 3.7%. Policymakers say workers are in short supply, especially after millions retired early in the pandemic, and wage growth is far beyond what the economy can sustain.

“I don’t quite know why markets are so bullish on inflation,” said Daly of the San Francisco Fed, adding that it may be because markets are pricing in an ideal scenario. She said central bankers were setting policy for what she described as still “upside” risks to the inflation outlook.

Central bankers have become increasingly vocal that lowering inflation will require a slowdown in the labor market and will not attempt to balance interest rate cuts until they are sure they have beaten inflation.

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Over the past several rate hike cycles, the Fed has raised rates and kept them there for an average of 11 months before lowering them.

“I think 11 months is a starting point, which is a reasonable starting point. But I’m willing to do more if more is required,” Daly said, adding that exactly how long will depend on the data. She said her forecast for the rates was in line with the peak rate of 5.1% projected by the majority of her colleagues.

The Fed has indicated its rate hikes are “continued,” and Daly’s comments indicate that it sees interest rates remaining high in the first two months of 2024 — even as the Fed forecasts the unemployment rate will rise to 4.6%, an increase that analysts say could mean Loss of 1.5 million or more jobs.

As of last month, central bank economists viewed the risks of recession versus continued growth as roughly equal, minutes from the November Fed policy meeting show.

Meanwhile, the Federal Reserve Bank of New York said Thursday that its internal economic model sees a 0.3% decline in overall activity next year and steady growth in 2024, with a return to positive growth the following year.

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Federal Reserve policymakers this week projected GDP growth of about half a percent next year.

While not in and of itself a recession, such slow growth means that an unexpected shock could easily lead to an outright contraction for a few quarters, Cleveland Fed’s Mester told Bloomberg.

It identified itself as one of seven of the Fed’s 19 federal policymakers who see rates needing to rise above the 5.1% average in the Fed’s forecast published this week.

In his press conference after the end of the December 13-14 policy meeting, Fed Chair Jerome Powell signaled the challenges that higher unemployment rates could pose, if not necessarily a recession.

“I wish there was a completely painless way to restore price stability,” he said. “No, and that’s the best we can do.”

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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.

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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.

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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.

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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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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.

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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.

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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.

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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.

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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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