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The bond market indicates that the Federal Reserve is standing firm in its battle against inflation

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The gap between short- and long-term borrowing costs in the United States has reached its widest point since 1981, a sign that investors expect the Federal Reserve to stay the course in its battle to tame inflation, even as recession fears mount.

the two years treasury On Wednesday, the yield traded at 4.2 percent, while the 10-year yield settled at 3.4 percent, bringing the difference between them to 0.84 percentage points. This pattern, known as the “inversion” of the yield curve, has preceded every US economic downturn in the past 50 years.

The deepening of the reversal comes after last week’s report showed that American economy Job additions continued at a strong pace in November, and a significant survey indicated that activity in the broad service sector continues to grow rapidly.

While the data paints an optimistic picture of the state of the economy, some investors worry that it will also be encouraging feed it To continue to push interest rates higher next year, after moving them from near zero to a range of 3.75-4 percent so far in 2022. Higher borrowing costs, in turn, are expected to add pressure on the economy, potentially lead to stagnation.

The market was betting that the Federal Reserve would have to slow down. “We’ve learned in the last year that the market has been wrong time and time again on this assumption,” said Edward El-Husseini, senior analyst at Columbia Threadneedle.

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Shifts in the US bond market also show that investors are moving more in line with what the Fed said it expects for next year. Although the yield curve has been flat throughout the year, it has rebounded from its lows in late November and last week investors began pricing in two interest rate cuts by the end of 2023, both of which point to a backsliding in monetary policy.

This gap was between the Fed and the market particularly clear After President Jay Powell’s speech last week In which he indicated that although the US central bank will slow down the pace of interest rate increases at its December meeting, it will do so to allow interest rates to stay higher for a longer period. Markets focused on the first lot, not the second.

After the release of the US jobs report on Friday, the intense movement in the yield curve collapsed, although interest rate cuts next year are still priced in. Futures markets currently suggest the “final” Fed rate, or peak for this cycle, will be around 5 percent in May, from expectations as low as 4 percent in September.

“The [November] The payroll report reminded us that the labor market remains in a very good place, and we expect to see that reflected in a higher final rate in points,” said Ben Jeffrey, US pricing analyst at BMO Capital Markets, referring to the Fed’s quarterly survey of officials on where Economics and Monetary Policy in the Years Ahead – Also known as a “dot chart.” The next dot chart will be released at the Federal Reserve meeting in December.

The primary signal that a yield curve inversion sends is that investors believe that the Fed’s increases in short-term interest rates will succeed in slowing inflation sharply. Then the magnitude of that reversal reflects both the dramatic pace of interest rate increases, and the fact that the Fed has held onto that pace even as investors shifted their inflation and growth expectations.

“We think the shape of the yield curve is a measure of how much monetary policy can tighten, and the market clearly believes that tightening will continue for some time,” said Mark Cabana, head of US interest rate strategy at the bank. from America.

Credit Suisse’s Jonathan Cohn added that the deep inversion of the yield curve indicates that investors believe the Fed is committed to “moderating inflation even if it has to sacrifice forward-looking growth or stagnation.”

in December Exploratory study Conducted by the Global Markets Initiative at the University of Chicago Booth School of Business in partnership with the Financial Times, 85 percent of economists said they expect the National Bureau of Economic Research — the arbiter of a US recession — to announce one within the next year.

Although the yield curve has been a reliable predictor of a recession, information conveyed on the depth and extent of the reversal is up for debate.

“An inverted yield curve is actually a fairly good signal of a recession, without providing information about its depth or severity,” said Jay Lepas, chief fixed-income strategist at Janney Montgomery Scott.

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“In this case, the inversion probably tells us more about inflation and the direction of inflation risks than it does about the depths or severity of a recession.”

While strategists like LeBas argue that the degree of inversion of the yield curve may not directly predict the extent of the upcoming recession, the current deepening could have broader ramifications if it leads to changes in investor behavior.

“The most important aspect of the yield curve is what it does to risk,” said Gregory Peters, chief investment officer for fixed income at PGIM. “It’s a self-reinforcing mechanism.”


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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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