Markets (Page 59)

TOKYO – Last month, previous US Treasury Secretary Lawrence Summers drew smiles when he said the Federal Reserve’s following actions might be to strengthen, no comfortable, interest rates. Some relationship traders are now laughing.

The likelihood that Fed Chairman Jerome Powell’s staff will immediately start raising borrowing costs is still undetermined. However, almost universally accepted in Asia was the prediction that the US central banks had ease between five and seven days this month.

Given that US prices is stubbornly high, these bets are going wrong. It rose at a 3.4 % rate in April year on year. Though far below the 9.1 % peak in mid- 2022, inflation is still too far away from the Fed’s 2 % target for comfort.

David Solomon, the CEO of Goldman Sachs, stated this week that he doubts the Fed’s plans to cut interest costs in 2024. ” I still do n’t see the data that’s compelling to see we’re going to cut rates here”, he said at a Boston College event.

At the same time, Solomon noted, consistently high inflation is squeezing American homes. He cited recent revenue shortfalls at businesses like McDonald’s Corp. and AutoZone Inc. to support the claim that high costs are hurting usage.

According to Solomon,” If you’re talking to CEOs who are running businesses that actually deal with what I’ll visit the middle of the American market, those businesses have been starting to see change in consumer activities.” ” Inflation is not just minimum. It’s combined, and so everything is more pricey. You’re starting to see the customer, the average American, feel this”.

The Fed, though, wo n’t see these dynamics as a reason to slash borrowing costs significantly, at least not this year. As oil prices rise amid growing unrest in the Middle East, stagnation poses a serious hazard. The risk rises if the US Congress does n’t act boldly to increase productivity and competitiveness.

As JPMorgan Chase CEO Jamie Dimon tells the Wall Street Journal, America “looks more like the 1970s than we’ve seen previously. Things appeared quite red in 1972. They were no red in 1973”.

All this is quickly changing the math for Asiatic politicians.

Nomura Holdings economics write in a word that” we believe that the table to cut costs and the risk of a prolonged easing period have increased in Asia.” Eastern central banks will want to sustain some relative interest-rate difference in the wake of the repeal of the Fed price cuts and the strengthening US dollar landscape, because otherwise they run the risk of weaker currencies and higher imported inflation.

Nobel prize Paul Krugman is as perplexed as someone to predict the future of US provides. ” On interest charges, I am&nbsp, avidly confused”, Krugman tells Bloomberg. Someone who claims to know for certain what the answer to that is deceiving themselves.

The same holds true for the dollar’s path, which Asia predicted would decline in 2024. As Powell extends the “higher for more” time for provides, money continues to move toward the US. This dynamic is robing Asian&nbsp economies of the money needed to support friendship and share markets.

As owners “focus on the equivalent level of interest costs,” HSBC experts write,” Lower-yielding Asian economies are bearing the brunt of the repricing of]US financial plan.”

Last month, Indonesia’s central bank announced a surprise 25 schedule- place rate hike to help a sliding rupiah, raising the standard rate to 6.25 %.

According to Bank Indonesia Governor Perry Warjiyo,” This interest rate increase is meant to protect the stability of the rupee from the effects of worsening global risks.”

Meanwhile, the Malaysian ringgit recently hit&nbsp, 26- years lows, returning to levels not seen since Asia’s 1997- 98 financial crisis. Policymakers in Manila and Bangkok are considering how to lower rates, fearing that the Philippine peso and Thai baht could fall, increasing the risk of capital flight.

Bank of Korea Governor Rhee Chang-yong in Seoul, another country that has been severely affected by the previous Asian financial crisis, warns against excessive won moves and is prepared to “deploy stabilizing measures.”

As more and more traders accept the notion that the Fed is maintaining interest rates steady, the US dollar may continue to rise.

” Policy divergence would likely keep the dollar stronger for longer,” says Kamakshya Trivedi, a strategist at Goldman Sachs, if the Fed continues to hold steady but more jurisdictions choose to go with domestic easing than to wait on the US central bank.

Trivedi notes that central banks in the UK, the Euro area, and Canada are likely to reduce rates starting in May. Christine Lagarde, president of the European Central Bank, signaled that a cut is likely as consumer-price pressures subside.

That’s likely to extend gains in the dollar, which has risen markedly in all of the 10 biggest industrialized nations. So far this year, it’s already up 11 % against the Japanese yen and 2 % against the euro.

Krugman is in great company as he considers the direction the Fed rates will take. Fed officials also appear to be everywhere when it comes to whether rate cuts might occur this year.

For instance, Fed Governor Christopher Waller claims that a rate cut could be made for the time being until the end of 2024 if US data softens over the next three to five months.

According to Waller,” the economy now seems to be progressing more slowly than the Committee anticipated.” I need to see several more months of reliable inflation data before I can confidently support an easing in the stance of monetary policy, even if the labor market is not significantly weakening.

Waller is optimistic that the trend toward 2 % inflation is back on track based on recent consumer price trends. The Fed, he adds, can “probably” rule out hiking rates. However, Waller acknowledges that some senior Fed officials are more willing to repress the economy if necessary.

Asia will undoubtedly stay on the edge as a result. Policymakers have watched Fed policy decisions closely to limit the extent of currency volatility, Trivedi notes, “where macro and potential policy divergence has been more obvious.”

Yet the Fed’s decision to hold rates higher than Asia initially anticipated on January 1 is a significant blow to a region that is at the forefront of Fed policy decisions far and away.

Case in point: People’s Bank of China Governor Pan Gongsheng, who’s been hinting at rate cuts in recent months. Despite a deepening property crisis, despite a gross domestic product increase of 5.3 % in the first three months of 2024, household confidence and retail sales are still weak.

However, Beijing’s economic conditions may influence the PBOC’s ability to cut rates more than what Fed officials do in Washington. An extension of the “higher for longer” yield era will make it harder to cut rates without the dollar losing significantly as Pan’s team appears to understand better than some peers.

The PBOC is reluctant to let the yuan weaken significantly, which is why there are many reasons.

One, it might increase the risk of default for property development companies as a result of it making it harder for property development companies to keep up with offshore bond payments. To increase global confidence in the yuan, it could waste progress made under Chinese leader Xi Jinping’s watch. Three, it could make China an even bigger US election flashpoint in the lead- up to November 5 elections, if that’s possible.

In the interim, Xi is intensifying state-led efforts to increase the number of unsold homes in order to stabilize the property sector.

” The new property measures are unlikely to deal with&nbsp, the full overhang of unsold homes given the PBOC’s&nbsp, new facility’s initial size”, says economist Mansoor Mohi- uddin at Bank of Singapore. ” But the aid is likely to be&nbsp, scaled up if it proves successful”.

According to analysts at UBS Global Wealth Management,” securing adequate funding remains a crucial question, and it is unclear if this will be sufficient to restore consumer confidence and entice buyers back into the market.”

The PBOC may be under pressure to add massive waves of fresh liquidity as Xi’s government fine-tunes its property rescue plan. However, governments like China are also obligated to make more aggressive efforts to rewire growth engines.

The Asia region is still too focused on exports and the dollar for comfort. Even though formal currency pegs are no longer applicable, export-dependent Asia still relies on the dollar’s exchange rate. Here, foreign exchange trends from Seoul to Jakarta smack of déjà vu for many global investors.

A top cause of Asia’s 1997- 98 crisis was a runaway dollar pulling in huge waves of capital from all directions. This dynamic is wreaking new havoc as the world’s largest economy defies recession forecasts year after year in 2024.

The Fed’s reluctance to ease, meanwhile, is increasing the gap in interest rate differentials, causing new strains on Asian central banks. It is making local debt markets more difficult to control thanks to emerging market monetary authorities.

Among the biggest wildcards: how a US national debt approaching$ 35 trillion collides with toxic electoral politics in Washington.

The extreme political polarization that is putting Washington’s credit rating in jeopardizes some of this risk. Last August, when Fitch Ratings yanked away America’s AAA credit score, it cited the polarization behind the January 6, 2021 insurrection among the reasons.

Similar to how President Joe Biden’s Democrats and Republicans who are Donald Trump’s supporters play games with the US debt ceiling. Such bickering might worry Asia less if not for the fact Washington’s debt is&nbsp, twice the size&nbsp, of China’s annual GDP and more than eight times Japan’s.

Another concern is Washington’s sharp mercantilist pivot since 2017. Then, President Trump imposed severe tariffs on global steel and aluminum as well as Chinese goods. When Biden arrived, he left Trump’s trade war in place— and added new layers of China- targeted curbs.

Now, as Trump threatens 60 % tariffs on all Chinese goods, Biden is trying to out- Trump” The Donald” with a 100 % tax on China- made electric&nbsp, vehicles. Xi’s government is threatening retaliation with this trade-tax arms race, which includes tariffs as high as 25 % on imported cars.

Might this tariff one- upmanship further dent faith in US Treasury securities, of which Beijing holds$ 768 billion? Or cause more harm to the US economy than China’s?

” These&nbsp, policies are more likely to hurt than help the lower- and middle- income Americans they purport to benefit”, says economist Kimberly Clausing at the Peterson Institute.

Adds Ryan Sweet, an economist at Oxford Economics:” Most economists view tariffs as a bad idea because they prevent a country from reaping the benefits of specialization, disrupt the movement of goods and services, and lead to a misallocation of resources. Tariffs are frequently implemented, and consumers and producers frequently pay higher prices.

That might result in a lower US demand for Asian goods. Asia also worries about a blunder committed by the Fed. The Fed’s misreading of the intense tensions in credit markets in 2007 only exacerbated the carnage, despite not being the catalyst for the Lehman Brothers crisis. It was too late for Fed rate cuts to contain the financial chaos by the time debt markets were soaring.

Many economists questioned whether more medium-sized lenders might be facing Silicon Valley Bank-like reckonings in recent months as the Fed slowed-walked rate cuts.

Similar concerns are growing about a more severe crisis in commercial real estate, which is a post-pandemic crisis. Joel Pruis, senior director at Cornerstone Advisors, calls it a “perfect storm” of high interest rates amid an “over- concentration” of lending in commercial office space.

Any resulting market chaos will put Asia’s open, trade- reliant economies in harm’s way. And in ways few in the region ever saw coming, never mind the Summers ‘ and Krugman’s of the world.

Follow William Pesek on X at @WilliamPesek

Continue Reading