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The Fed is set to slow rate hikes, but the signal tightening is far from over

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This week, the Federal Reserve is expected to slow the pace of interest rate hikes, while indicating that it is nowhere near halting its historic campaign to tighten monetary policy in light of persistent inflationary pressures.

After struggling this year to adjust policy fast enough to keep pace with inflation, the Federal Open Market Committee is preparing at its last meeting of 2022 to End A series of increases of 0.75 percentage point started in June. Instead, it would opt for a half-point move, which would raise the federal funds rate to a range of 4.25 percent and 4.5 percent.

The Fed’s message is that a slower pace of rate hikes does not mean that it is less committed to bringing inflation down to 2 percent. Officials on Wednesday will point to more monetary tightening in the coming year, and once again stress the need to keep interest rates at a high level for an extended period.

“You’ll hear them say, ‘It’s not time to relax,’” said Karen Dinan, a former Fed chief of staff who previously served as assistant secretary of the Treasury for economic policy at the Treasury Department. “We’ve seen time and time again that people are very optimistic about what it will take to extract that inflation. “

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Federal Reserve officials will beef up their message on Wednesday with a new set of economic forecasts, which will clarify their individual views on the federal funds rate, economic growth, unemployment and inflation through 2025.

Jay Powell, the president, has already acknowledged that the peak rate of 4.6 per cent set in policy three months ago – the last time the forecast was published – will need to be raised “somewhat higher” due to signs that the economy is maintaining plenty of momentum. . Financial conditions have also deteriorated in recent weeks – risky assets have risen and borrowing costs have receded – undoing the Fed’s already tightening policy.

Now, the FOMC members and other regional heads are likely to show the policy rate topping between 4.75 percent and 5.25 percent and in order to maintain that level throughout 2023 as core inflation remains high at around 3 percent.

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Many Fed watchers expect the “dot graph” of individual interest rate expectations to indicate a majority in favor of the policy rate peaking just above 5 percent, with a group positioned at the so-called final interest rate just below that level.

Calculate the difference nascent divisions between officials about how much more restraint is needed to bring inflation down to where they want it to be.

“The Fed is getting closer to appropriate policy setting in my view, which means we are entering a phase that involves smaller changes and more careful policy calibration,” said Brian Sack, director of global economics for DE Shaw Group. Former senior official of the Federal Reserve.

Some officials, such as Vice President Lyle Brainard and outgoing President Charles Evans of Chicago, have warned that the Fed is overdoing it on monetary tightening, arguing that inflation will decline quickly as supply distortions fade further and home prices expand rapidly. coming down.

Others, like Cleveland Loretta Meester and Governor Christopher Waller, they remain mainly concerned that the Fed is once again underestimating the scale of the inflation problem, particularly with regard to wage pressures from Flexible job market.

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Matthew Luzzetti, chief US economist at Deutsche Bank, warned that a pessimistic outlook for the 2023 interest rate, which he described as a final rate of 4.9 percent, could limit the Fed’s options at a time when it needs to retain as much flexibility as possible. Given an uncertain look.

“A rate of 4.9 percent would suggest that they pause in March, and I don’t think they are very confident that the timing will be,” he said. “Offering a final rate in a slightly higher point scheme would be beneficial from a communications perspective.”

Traders are still in the fed funds futures markets the bet That the Fed will abruptly change course next year and cut rates by December — a view Mark Giannone, who previously worked at the Fed’s regional banks in Dallas and New York, expects officials to counter by delaying forecasting any cuts until 2024.

Any hesitation on this point “runs you at risk of easing financial conditions more quickly than they would like,” warned Giannone, who now works at Barclays.

Powell conceded that higher interest rates and the longer they stay there, the narrower the path to a “soft landing,” where inflation rebounds to 2 percent without a recession.

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Though the president still claims that outcome is plausible — and officials’ projections are expected to reflect the same even as they cut growth estimates and raise their own unemployment forecasts — Fed staffers acknowledged last month that a recession was “almost as likely” as avoiding one. .

at recent days joint survey According to the Financial Times, 85 percent of economists surveyed expect a recession next year. In the event of a downturn, the unemployment rate would exceed 5.5 percent, which is estimated by the majority, much higher than the current level of 3.7 percent.

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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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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.

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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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