Gold begins new year restrained by stronger dollar

Jan 2 – Gold entered 2024 under pressure from a jump in the US dollar, but held its ground on expectations the Federal Reserve will cut interest rates this year and rising concerns over attacks on shipping in the Red Sea.

Spot gold steadied at USD 2,061.59 per ounce on Tuesday by 2:30 p.m. ET (1930 GMT) after rising as much as 0.8% earlier in the session. US gold futures slipped 0.1% to USD 2,070.30.

The dollar index rose 0.8% on track for its biggest daily gain since July, supported by higher US yields, making dollar-priced bullion more expensive for overseas buyers.

But the possibility of escalation in the Red Sea kept gold prices supported, said Daniel Pavilonis, senior market strategist at RJO Futures.

Gold prices surged 13% in 2023 in their first annual rise since 2020 and are forecast to reach record highs in 2024, as lower interest rates reduce the opportunity cost of holding non-yielding bullion.

“As we saw how much of a lift the price of gold obtained from expectations of rate cuts in 2023, we could well see significant gains in 2024 when central banks actually start loosening their policies,” said Fawad Razaqzada, market analyst at City Index, adding that the actual timing and extent of the rate cuts will depend on incoming data.

This week, market attention is on the minutes, scheduled for Thursday, of the last Fed meeting. Data on US job openings and December non-farm payrolls, both due on Friday, will also be closely followed.

Silver fell 0.5% to USD 23.64 per ounce while platinum was down 0.5% to USD 982.18.

Palladium slipped 2.2% to USD 1,074.62, its lowest since Dec. 14.

“The outlook for palladium demand partly hinges on the pace of the energy transition, particularly growth in EV demand, as higher battery electric vehicle growth is negative for palladium demand,” HSBC said in a note.

(Reporting by Sherin Elizabeth Varghese in Bengaluru; additional reporting by Deep Vakil; Editing by Alexander Smith, Emelia Sithole-Matarise, and Sriraj Kalluvila)

For investors, 2024 is year of transition to a new economic order

Jan 2 – Investors appear convinced that major Western central banks are close to a much-awaited pivot, from raising interest rates to cutting them. Markets rallied as a result, but 2024 could hold surprises as the world adjusts to an economic order where money is not cheap.

Global stocks rallied and top government bond yields fell in recent weeks, despite central bankers cautioning against pivot bets. In the United States, for example, investors are now effectively positioned for the Federal Reserve guiding the economy to a perfect landing, bringing down inflation without triggering a recession.

The market’s conviction comes after the US economy surprised people with its resilience. That was cushioned in part by consumers’ pandemic savings and America’s attractiveness as a safe port for investments in an increasingly chaotic world. They could be right — a well-known economist and former Fed official earlier this year argued the Fed has managed soft landings more often than is generally believed.

But many investors and executives think the probability is low. The pandemic-era savings are getting depleted and storm clouds are gathering, especially with what’s shaping to be contentious US elections.

Investors are betting that the Fed could cut rates by as much as 1.5% by the end of 2024, but that would still leave policy rates at close to 4%, higher than where it has been for most of the past two decades. At that level, monetary policy will still be a drag on growth, as it would be above the so-called neutral rate at which the economy neither expands nor contracts.

Add to that a host of other risks to the outlook in 2024 — two major wars, heightened geopolitical tensions that have put globalization firmly in reverse, and elections in several countries that could radically change the world order in unexpected ways.

WHY IT MATTERS

Interest rates underpin everything, from economic growth to the price of financial assets and how much it costs to borrow to buy a car or a house.

Higher rates make riskier assets, such as technology stocks and cryptocurrencies less attractive, as investors can earn a decent return without having to take on much risk.

With money harder to come by, riskier bets can fail and bubbles burst, leading to events such as the US regional banking crisis last March. As businesses struggle, they retrench. People lose jobs and new ones get scarce.

WHAT IT MEANS FOR 2O24

While the Fed and other banks have been raising rates for well over a year, the world is yet to complete the transition from the time when money was free to a period when it no longer is. 2024 is likely to be the year when the effects of that transition manifest more clearly.

That means companies – and in some cases, entire countries — will have to restructure their debt liabilities, as they can no longer afford to pay interest. Some of that is already visible in emerging market debt negotiations and rising bankruptcies of companies. US corporate bankruptcy filings hit the highest since 2020. More are likely on the horizon.

In the economy, sectors such as commercial real estate, where some office markets have been hit hard by new ways of working post-pandemic, will see more pain. More landlords will likely have to revalue their portfolios and give up the keys to buildings, with losses flowing through to banks and investors as is happening now with insolvent European property company Signa.

For consumers, while savings would yield more, higher borrowing costs will require an adjustment. Many US adults have only known low interest rates for their 30-year mortgages, for example. They’d need to come to terms with rates that are more than twice as high and make the math work for their budgets.

Bottomline: investors’ convictions will likely get tested, as everyone will have to figure out how to live with higher interest rates.

(Reporting by Paritosh Bansal; Editing by Anna Driver)

US fintechs push into fixed-income trading as retail investor interest grows

Jan 2 – US financial technology companies that popularized amateur stock trading are pushing into fixed income in a bid to capitalize upon growing retail investor interest sparked by soaring yields in 2023.

Online brokerage Public, wealth management platform Wealthfront and fintech software company Apex Fintech Solutions are among the firms launching new products that aim to make it easier and more affordable for individual investors to gain exposure to fixed-income products like Treasuries and corporate bonds.

Market participants say there is little guarantee that bonds – long seen as a more staid part of the financial universe – will generate the same level of investor enthusiasm as stocks, whose wild swings in recent years minted a generation of online traders.

Nevertheless, the development is another example of how two-decade-high Federal Reserve interest rates are changing the investment landscape and sparking more retail interest in fixed-income products, which have historically been more cumbersome and expensive for amateur investors to trade.

Even as the Fed eyes rate cuts this year, fintechs believe they have an opportunity to transform retail bond investing with features the industry used to popularize stock trading, such as low-cost products, financial education tools, easy-to-use apps and fractionalized shares. Public and Apex are also offering fractionalized bond products, similar to the fractionalized stock shares offered by many online brokerages.

“When you try and do anything in the bond or fixed-income world … it looks and feels 25 years old. We just haven’t, as an industry, invested in that, and I think we are starting to see the fintech world catch up,” said Stephen Sikes, chief operating officer at Public.

The New York-based broker-dealer in December announced it would begin offering customers the ability to invest in USD 100 slices of Treasury and corporate bonds. It plans to add municipal bonds this year and eventually lower that minimum to USD 10. Sikes said Public’s Treasury account was its most successful product in 2023, as measured by investor flows.

Although retail investors have long been able to purchase Treasury bills directly from the Treasury Department or a retail brokerage, the process is cumbersome and often requires a minimum investment of anywhere from USD 1,000 to USD 10,000.

While bond-focused ETFs are readily available, experts note that some investors might prefer to purchase individual bonds in order to lock in yields and gain tax efficiencies.

Apex, which provides software to fintech companies, is also rolling out a new product that allows retail investors to buy portions of corporate bonds and treasuries. Trading platform Webull is among the clients exploring using the new feature, Apex said.

“Do I think it’s going to take over the equity side in terms of the velocity of people interacting? No, I don’t. But I do think this is just a natural next step,” said Bill Capuzzi, CEO of Apex.

‘THE CATALYST’

The benchmark 10-year Treasury note yield breached 5% in October for the first time since July 2007, making bonds more competitive with stocks.

Yields have retreated since then as investors bet the Fed will cut rates in 2024, but they are still elevated on a historical basis. For example, a six-month Treasury now yields around 5.25% – a far higher payout than the government-backed securities offered over much of the last decade-and-a-half.

“This is probably the catalyst that the market needed to finally improve” bond products, said Kevin McPartland, head of market structure and technology research at Coalition Greenwich.

Individuals buying Treasury bills through the Treasury Department’s TreasuryDirect site purchased USD 319.75 billion of the notes auctioned by the US government from June 1 through Nov. 30, 2023, up from USD 144.96 billion during the same period in 2022, Treasury data shows.

“We’re pretty excited about fixed income,” said Wealthfront CEO David Fortunato. “It’s a huge hurdle to overcome to be able to invest in bonds in the recommended way using the tools that exist today.”

Wealthfront last year introduced automated portfolios that personalize a mix of bond ETFs to a customer’s individual tax situation.

Of course, many have historically viewed bonds as less exciting than stocks – though the goals of equity and fixed-income investors can differ. The total return for the S&P 500 since 2000 is about 412%. By contrast, the total return for the Morningstar US Core Bond TR USD index, which tracks US dollar-denominated securities with maturities greater than one year, has been around 160% in that period.

“Even though bonds are more interesting now than they were in 2021, they still don’t move like stocks do,” said McPartland, of Coalition Greenwich.

Retail investors’ love for fixed income may also be tested if interest rates fall and yields become less attractive, said Robert Siegel, a venture investor and lecturer at the Stanford Graduate School of Business.

The Fed has penciled in three rate cuts for 2024, while investors are pricing in substantially more.

“As (fintech) platforms become more mainstream, they will need to adjust for various economic cycles to offer the product solutions that customers will want,” Siegel added.

(Reporting by Hannah Lang in Washington; Editing by Michelle Price, Ira Iosebashvili, and Matthew Lewis)

Oil prices settle lower to start 2024 as supply concerns ease

HOUSTON, Jan 2 – Oil prices closed the first trading session of 2024 lower as expectations for interest rate cuts waned and on easing concerns that tensions in the Red Sea will disrupt supplies.

Brent crude settled at USD 75.89, down by USD 1.15 or 1.5%. US West Texas Intermediate crude settled at USD 70.38 a barrel, down by USD 1.27 or 1.8%.

Prices fell as investors tempered expectations about interest-rate cuts in 2024. Lower interest rates reduce consumer borrowing costs, which can boost economic growth and oil demand.

The dollar also strengthened on Tuesday, while stock prices slipped, further pressuring oil lower. A stronger dollar makes oil more expensive for investors holding other currencies.

Oil prices had climbed around USD 2 in earlier trading following attacks on vessels in the Red Sea by Houthi rebels over the weekend, and the reported arrival of an Iranian warship on Monday.

“The market is correcting itself in so far as there have been no supply disruptions and they think it is unlikely that the Iranian warship will engage with American warships,” said Andrew Lipow, president of Lipow Oil Associates.

“Clearly, the oil market will move higher if shots are fired,” Lipow added.

On Sunday, US helicopters repelled an attack by Iran-backed Houthi forces on a container vessel operated by Danish shipper Maersk in the Red Sea. On Monday, an Iranian warship had entered the Red Sea, according to the semi-official Tasnim news agency.

Denmark’s Maersk and German rival Hapag-Lloyd said their container ships would keep avoiding the Red Sea route that gives access to the Suez Canal.

A wider conflict could close crucial waterways for oil transportation.

A Reuters survey of economists and analysts predicted Brent crude would average USD 82.56 a barrel this year, up slightly from the 2023 average of USD 82.17, with weak global growth expected to cap demand. Geopolitical tensions, however, could support prices.

In China, investor expectations of economic stimulus measures rose after manufacturing activity shrank in December for a third month, government data showed on Sunday.

Any such stimulus could boost oil demand and support crude prices.

Separately, OPEC+ plans to hold a meeting of its Joint Ministerial Monitoring Committee (JMMC) in early February, though an exact date has not been decided, three sources from the alliance said.

(Reporting by Georgina McCartney in Houston and Noah Browning in London; Additional reporting by Florence Tan and Sudarshan Varadhan; Editing by David Gregorio, Nick Macfie, and Nick Zieminski)

History shows strong 2023 could keep US stocks on path for 2024 gains

NEW YORK, Dec 29 – The US stock market’s hefty gains in 2023 could provide a lift for equities next year, if history is any guide.

The S&P 500 ended the year on Friday with an annual gain of just over 24%. The benchmark index also stood near its first record closing high in about two years.

Market strategists who track historical trends say that such a strong annual performance for stocks has often carried over into the following year, a phenomenon they attribute to factors including momentum and solid fundamentals.

“What we continue to come back to is solid gains for next year,” said Adam Turnquist, chief technical strategist at LPL Financial. “Maybe we will have a little bit of short-term pain but the long-term gain is definitely there when we look at the data.”

Stocks built up a head of steam in 2023, with the S&P 500 up 11% in the fourth quarter alone. This could translate to strength in the new year.

Data from LPL Research going back to 1950 showed that years following a gain of 20% or more have seen the S&P 500 rise an average of 10%. That compares to an average 9.3% annual return. Such years are also more frequently positive, with the market ending the year up 80% of the time, versus 73% overall.

“Momentum begets momentum,” Turnquist said. “I also believe themes that are capable of driving a market up (at least) 20% are typically durable trends persisting beyond a calendar year.”

LPL Research has a 2024 year-end target range for the S&P 500 of 4,850 to 4,950, but the firm sees potential upside above 5,000 if lower interest rates support higher valuations, companies achieve double-digit earnings growth and the US economy avoids recession. The index was last at 4,769.83.

Investor hopes for an economic soft landing will get an early test next Friday, with the release of the monthly US employment report.

Ryan Detrick, chief market strategist at Carson Group, notes that stocks have seen strong gains after rebounding from steep drawdowns. Since 1950, there have been six times when the S&P 500 rebounded by at least 10% after falling 10% or more the previous year. Each time the index’s bounce continued for a second year, returning an average of 11.7%, Detrick’s data showed. The S&P 500 tumbled over 19% in 2022.

Detrick noted the data as part of a recent commentary on why 2024 “should be a good one for the bulls.”

Reaching a record high could be another bullish sign for stocks. Since 1928, there have been 14 instances of a gap of at least one year between S&P 500 all-time highs, according to Ed Clissold, chief US strategist at Ned Davis Research. The S&P 500 went on to rise an average of 14% a year after a new high was reached, rising 13 of 14 times, according to Clissold.

Further tests of the market’s strength will arrive quickly. US companies start to report fourth-quarter results in the next couple of weeks with investors anticipating a much stronger year for profit growth in 2024 after a tepid 3.1% increase in 2023 earnings, according to the latest LSEG estimates.

Investors are also awaiting the conclusion of the Fed’s first monetary policy meeting of the year in late January for insight into whether policymakers hew to the dovish pivot they signaled in late December, penciling in 75 basis points of rate cuts for 2024.

Indeed, signs the economy is starting to wobble following the 525 basis points in Fed rate hikes since 2022 could hinder momentum for stocks. By the same token, accelerating inflation in 2024 could delay expected rate cuts, putting the market’s soft-landing hopes on hold.

“History is a great guide, but never gospel, and I think we have to acknowledge that,” said Sam Stovall, chief investment strategist at CFRA.

However, the data Stovall looks at foreshadows a solid 2024, including history regarding presidential election years. The S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%, according to Stovall.

“Basically, all of the indicators that I look at point to a positive year,” Stovall said.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)

Gold sits above USD 2,000 on track for best year since 2020

Dec 29 – Gold prices held steady on Friday as they headed towards the end of their best year since 2020 at levels comfortably above USD 2,000 an ounce, buoyed by hopes the US Federal Reserve could cut interest rates as early as March.

Spot gold was at USD 2,064.34 per ounce by 2:10 p.m. ET (1910 GMT), little changed from the previous session. US gold futures settled 0.6% lower at USD 2,071.80.

Bullion has so far risen 13% in a year that saw prices swing between lows near USD 1,800 and a record high of USD 2,135.40.

“The ship is moving towards calmer waters, so to speak – a lower rate environment, which means a lower dollar, and so gold should do better,” Marex analyst Edward Meir said.

Gold investors anticipate record-high prices next year, when the fundamentals of a dovish pivot in US interest rates, continued geopolitical risk, and central bank buying are expected to support the market.

“To see higher levels, we need to see stronger demand from investors, such as a pickup in ETF inflows. For that weaker US economic data and lower inflation is needed, so that the Fed sounds more dovish,” UBS analyst Giovanni Staunovo said.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion and weigh on the dollar.

The dollar index was headed for a 2% decline in 2023, while benchmark 10-year Treasury yields languished near their lowest levels since July.

“The rest of the precious metals complex hasn’t shared in gold’s good fortune and gold prices are quite elevated, given the nominal level of interest rates,” said Tai Wong, a New York-based independent metals trader.

Spot silver fell 0.5% to USD 23.82 per ounce, looking set for a 0.6% yearly decline.

Platinum fell 1.2% to USD 990.75, while palladium dropped 2.7% to USD 1,102.54. Both autocatalytic metals were on track to end the year lower, with palladium down 38% – its biggest drop since 2008.

The palladium market is in a surplus next year and not in a sweet spot for the future due to the shift to electric vehicles, which don’t need the metal, Meir said.

(Reporting by Deep Vakil, Hissay Ongmu Bhutia, and Swati Verma in Bengaluru; Editing by Barbara Lewis, Pooja Desai, and Jan Harvey)

Global equity funds draw robust inflows on rate cut hopes

Dec 29 – Global equity funds attracted substantial inflows in the week through Dec. 27 as data showed US inflation cooled further in November, cementing expectations that the Federal Reserve would cut interest rates in March next year.

The MSCI All-World index surged to 3184.32 on Thursday, its highest since January 13, 2022 amid market optimism over the prospects of rate cuts.

According to LSEG data, global equity funds received a net USD 16.01 billion during the week, logging their most significant weekly net purchase since March 22.

Investors poured about USD 14.57 billion into US equity funds, the biggest amount since June 14. European and Asian funds, however, faced outflows of roughly USD 1 billion and USD 182 million, respectively.

Global bond funds, meanwhile, received USD 1.07 billion in inflows after two successive weeks of outflows.

Investors purchased USD 2.62 billion worth of global corporate bond funds in contrast to disposals of about USD 3.9 billion in the prior week. High yield funds also secured inflows, worth about USD 679 million but government bond funds had outflows of USD 265 million.

Meanwhile, global money market funds attracted USD 9.12 billion, their first weekly inflow in three weeks.

Among the commodities segment, precious metal funds attracted about USD 111 million as inflows extended into a fourth successive week. Energy funds also attracted about USD 36 million in net buying.

Data covering 29,066 emerging markets funds showed equity funds secured USD 1.94 billion worth of inflows, breaking a 19-week-long selling streak. EM bond funds, however, had USD 1.33 billion worth of outflows.

(Reporting by Gaurav Dogra in Bengaluru; Editing by Chizu Nomiyama)

Oil prices to end year 10% down, traders expect a better 2024

SINGAPORE, Dec 29 – Oil prices are set to end 2023 about 10% lower, the first annual decline in two years, after geopolitical concerns, production cuts and global measures to rein in inflation triggered wild fluctuations in prices.

Brent crude futures were up 48 cents, or 0.6%, at USD 77.63 a barrel at 0523 GMT on Friday, the last trading day of 2023, while the US West Texas Intermediate (WTI) crude futures were trading 37 cents, or 0.5% higher, at USD 72.14.

On Friday, oil prices stabilised after falling 3% the previous day as more shipping firms prepared to transit the Red Sea route. Major firms had stopped using Red Sea routes after Yemen’s Houthi militant group began targeting vessels.

Still, both benchmarks are on track to close at the lowest year-end levels since 2020, when the pandemic battered demand and sent prices nosediving.

Production cuts by the OPEC+ have proved insufficient to prop up prices, with the benchmarks declining nearly 20% from their highest level this year.

Oil’s weak year-end performance contrasts with global equities, which are on track to end 2023 higher.

The MSCI equity index, which tracks shares in 47 countries, is up about 20% from the beginning of the year, as investors ramp up bets on rapid-fire rate cuts from the US Federal Reserve next year.

In the currency market, the dollar was rooted on the back foot and headed for a 2% decline this year after two years of strong gains.

The expected interest rate cuts, which could reduce consumer borrowing costs in major consuming regions, and a weaker dollar, which makes oil less expensive for foreign purchasers, could boost demand in 2024, industry officials say.

A Reuters survey of 30 economists and analysts forecasts Brent crude to average USD 84.43 a barrel in 2024, compared with an average of around USD 80 a barrel this year and the highs of over USD 100 in 2022 after Russia’s invasion of Ukraine.

(Reporting by Sudarshan Varadhan; editing by Miral Fahmy)

Oil prices shed 10% in 2023 as supply, demand concerns weigh

NEW YORK, Dec 29 – Crude futures lost over 10% in 2023 in a tumultuous year of trading marked by geopolitical turmoil and concerns about the oil output levels of major producers around the world.

Brent crude on Friday, the last trading day of the year, settled at USD 77.04 a barrel, down 11 cents or 0.14%. US West Texas Intermediate crude settled at USD 71.65 a barrel, down 12 cents or 0.17%.

Both contracts slipped more than 10% in 2023 to close out the year at their lowest year-end levels since 2020.

Brent had climbed 10% and WTI by 7% last year, supported by supply concerns following Russia’s invasion of Ukraine.

A Reuters survey of 34 economists and analysts forecast Brent crude will average USD 82.56 in 2024, down from November’s USD 84.43 consensus, as they expect weak global growth to cap demand. Ongoing geopolitical tensions could provide support to prices.

Analysts have also questioned whether the Organization of the Petroleum Exporting Countries and allies, or OPEC+, will be able to commit to the supply cuts they have pledged to prop up prices.

OPEC+ is currently cutting output by around 6 million barrels per day, representing about 6% of global supply.

OPEC is facing weakening demand for its crude in the first half of 2024 just as its global market share declines to the lowest level since the pandemic on output cuts and Angola’s exit from the group.

Meanwhile, the war in the Middle East prompted jitters about potential supply disruptions in the final few months of 2023 that are expected to last into 2024.

“We are going to see continued volatility as we go into 2024 with the geopolitical events and the fear that the conflict could spread throughout the region,” said Andrew Lipow, president of Lipow Oil Associates.

This month, attacks by Yemen’s Houthi militant group on shipping vessels transiting the Red Sea route forced major firms to reroute their shipments.

Although certain companies are preparing to resume movements through the Suez Canal, some crude oil and refined product tankers are still opting for the longer route around Africa to avoid potential conflicts in the region.

Geopolitical tensions in the Middle East escalated on the last day of 2023 as Israel intensified its attacks in southern Gaza, putting upward pressure on prices.

Data released on Friday by the US Energy Information Administration (EIA) that showed strong oil demand in October offered some support to prices in intra-day trading, said UBS analyst Giovanni Staunovo.

Total US oil demand rose 3.4% in October versus the prior year, the report said.

US crude oil output fell slightly in October to 13.248 million barrels per day, after it set monthly records in August and September.

Energy firms this week added oil and natural gas rigs for the first time in three weeks, energy services firm Baker Hughes said in a report on Friday, indicating output could rise in the future.

For the year, however, the rig count was down by 157 after gaining by 193 in 2022 and 235 in 2021.

(Additional reporting by Ahmad Ghaddar, Noah Browning, and Sudarshan Varadhan; Editing by Jason Neely, Mark Potter, and Chris Reese)

Higher forever? Markets see few rate cuts after 2024

Dec 29 – Borrowers looking for relief from higher interest rates may be set for disappointment with financial markets indicating rates will stay elevated for years to come.

However much they fall in 2024, pricing in money markets highlights a view that the decade of near-zero interest rates prevailing after the great financial crisis is unlikely to return while inflationary pressures and government spending stay high.

That risks further pain for many public and private borrowers who locked in past lower rates and have yet to feel the full impact of the record-paced central bank hikes of the last two years.

Traders have in recent weeks doubled down on bets for steep rate cuts next year, encouraged by slowing inflation and a dovish shift from the US Federal Reserve.

Expectations that rates will drop at least 1.5 percentage points in the United States and Europe have boosted bond and equity markets.

But while the Fed is expected to cut its key rate to around 3.75% by the end of 2024, it will only fall to around 3% by the end of 2026, then rise back to around 3.5% thereafter, money market pricing suggests.

That is in stark contrast to rates staying near zero for most of the decade following the global financial crisis, only gradually rising to 2.25%-2.50% in 2018.

European Central Bank rates are seen at roughly 2% by end-2026, from 4% currently – a reduction but hardly a sign of any return to the unorthodox experiment with negative rates seen from 2014 to 2022.

“It’s just normalizing policy. It’s not going into easy monetary policy,” Mike Riddell, senior portfolio manager at Allianz Global Investors, said.

Such expectations are consistent with a scenario where the so-called ‘neutral’ interest rate, which neither stimulates nor slows economic growth, has risen since before the COVID-19 pandemic, economists say.

The U.S. economy so far avoiding a recession many expected in the face of aggressive policy tightening has also supported that argument.

Higher inflation risks on the back of geopolitical tensions and reshoring, looser fiscal policy and potential improvements in productivity from the likes of AI are among factors that may be lifting the neutral rate, often dubbed ‘R-star’.

Some notion of the neutral rate, though impossible to determine in real time, is key to understanding an economy’s growth potential and a central bank’s decision on how much to reduce rates going forward.

Whether the neutral rate has moved is subject to much debate and not everyone is convinced it has risen.

Crucially, market expectations are higher than the Fed’s 2.5% estimate for long-term interest rates, though several policymakers have put it above 3%.

In the euro area, ECB policymakers point to a neutral rate of around 1.5%-2%.

“I’m skeptical that there’s been much of a change in R- star,” former Fed economist Idanna Appio, now portfolio manager at First Eagle Investment Management, said.

Appio is puzzled why markets are pricing in continued high rates while many measures of inflation expectations suggest it should return to central banks’ targets. It’s too early to call a rise in productivity, she added.

Gauging where rates will head in the coming years is far from easy and markets can get things wrong.

But their expectations warrant caution for borrowers, who are accustomed to and still benefiting from the low rates of recent years.

“It means that corporates will need to refinance at reasonably to sometimes significantly higher rates than what they had in the books over the last five years,” Patrick Saner, head of macro strategy at Swiss Re, said.

“In this context, the higher rates environment actually matters quite a lot, particularly when it comes to corporate planning.”

(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe and Andrew Heavens)

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