US yields rise, warms to three rate cuts in 2024

NEW YORK, March 25 – Treasury yields were higher on Monday after the auction of USD 66 billion in two-year notes as the market warms to the Federal Reserve’s signaling of three interest rate cuts this year, along with other major central banks easing monetary policy too.

The Swiss National Bank last week cut rates, the first major central bank to do so in a sign policy would be loosened as global growth slows. The Bank of England also signaled a dovish tilt, and the European Central Bank is expected to cut in June.

“The Fed, the ECB, and the Bank of England, they’re probably all going to be cutting rates around mid-year,” said Tom di Galoma, managing director and co-head of rates trading at BTIG, who expects three cuts by the Fed this year.

“Very rarely do you see a central bank go one time. They usually have in their mind that they going to cut more than once,” he said.

Chicago Federal Reserve Bank President Austan Goolsbee said on Monday that at the US central bank’s policy meeting last week he penciled in three rate cuts for this year.

The Fed kept its benchmark overnight lending rate in a range of 5.25%-5.5% at the meeting, while the median estimate for rate reductions that policymakers projected for the year was three.

The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 3.2 basis points to 4.632%, while the yield on benchmark 10-year notes was up 3.7 basis points at 4.255%.

Fed Chair Jerome Powell “effectively dismissed the above-trend inflation prints early in 2024, which just reinforced our June cut call,” said Vail Hartman, US rates strategist at BMO Capital Markets in New York.

BMO also sees cuts in September and December and believes the market is increasingly coming on board with that view after last week’s policy-setting meeting, though inflation data in the months ahead poses a risk, Hartman said.

“Obviously what happens in March, April and May will weigh heavily in the rate cut debate,” he said. “Right now we are firmly in range trading mode.”

The high yield at the Treasury’s auction of two-year notes was 4.595%, and was awarded to 49.2% of bidders. The low yield was 4.470%, but successful bidders only pay the lowest accepted bid price, rather than the price they bid in a Dutch auction.

The market now expects the Fed to cut 80 basis points by December, more than early last week, but about half what Fed funds futures showed earlier this year after Fed policymakers pushed back on the notion of imminent rate cuts.

The Treasury plans to auction USD 67 billion in five-year notes on Tuesday, and USD 43 billion of seven-year notes on Wednesday.

The bond market will close early at 2 p.m. on Thursday for the Easter holiday.

The gap between yields on two- and 10-year Treasury notes, seen as a recession harbinger when short-term securities yield more than longer ones, was at -37.9 basis points. The gap has been negative, or “inverted,” since July 2022.

The yield on the 30-year Treasury bond was up 3.2 basis points to 4.424%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.475%.

The 10-year TIPS breakeven rate was last at 2.341%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Herbert Lash; Editing by Andrea Ricci and Ros Russell)

Gold gains as rate cut bets hold ground in run-up to inflation test

March 25 – Gold prices rose on Monday, driven by expectations of interest rate cuts by the US Federal Reserve this year, even as traders await inflation readings this week for confirmation on the timing of these reductions.

Spot gold gained 0.5% to USD 2,174.51 per ounce as of 1:45 p.m. EDT (1745 GMT), while silver rose 0.2% to USD 24.71.

US gold futures settled 0.8% higher at USD 2,176.4.

The weekly initial jobless claims print is due on Thursday and will be followed by the US core personal consumption expenditure (PCE) price index data on Friday. Market reaction to the PCE data may only be seen next week on account of the Good Friday holiday.

Gold can easily hit the USD 2,300 level or higher in the second quarter, as discretionary traders and exchange-traded fund investors, who so far have not really participated in the rally, come into the market once rate cuts are confirmed, said Bart Melek, head of commodity strategies at TD Securities.

But stronger economic data can prompt a retreat in gold, Melek said.

The dollar also pared some of last week’s gains, making bullion cheaper for overseas buyers.

Gold hit record peaks last week after the Fed reiterated its view of three rate cuts in 2024.

Traders are pricing in a 70% probability of a June rate cut, versus 65% before the Fed’s March policy meet last week.

Lower interest rates tend to make zero-yield gold more appealing.

Gold also continued to draw support from strong central bank buying and safe-haven demand, analysts said.

Among autocatalysts, platinum gained 1.1% to USD 903.59 and palladium climbed 2.3% to USD 1,008.08.

Palladium’s demand from the auto industry will be supported for longer after last week’s new US emissions law changes, which will effectively allow for more catalyzed car sales in coming years, analysts at Heraeus wrote in a note.

(Reporting by Anjana Anil in Bengaluru; Editing by Shilpi Majumdar and Krishna Chandra Eluri)

Goldman Sachs lifts STOXX 600 annual target to 540

March 25 – Goldman Sachs on Monday raised its 2024 year-end target for Europe’s STOXX 600 index to 540 from 510, citing potential improvement in economic growth and monetary policy easing across central banks.

The brokerage’s new target for the pan-European benchmark index implied a nearly 6% upside from Friday’s close of 509.64.

“If economic growth modestly accelerates and central banks embark on a rate-cutting cycle in June, as our economists expect, valuations will rise further,” Lilia Peytavin, portfolio strategist at Goldman Sachs said in a note.

Major central banks such as the U.S. Federal Reserve and the European Central Bank have hinted at probable interest rate cuts in June.

Recent data showed euro zone business activity was within a whisker of returning to growth in March, outperforming expectations, while the U.S. business activity held steady.

The Wall Street brokerage, which previously lifted its index target in mid-February, now estimates the STOXX 600’s valuation can increase about 2.5% this year.

“Equities have probably reached the optimism phase, the last one of the equity cycle, in which multiples tend to rise while profit growth slows,” Peytavin added.

Goldman argued that over the last six months, European equities climbed 12%, and all of this rally has been driven by an improvement in valuations rather than earnings growth.

The STOXX 600 currently trades at about 15 times its one-year forward price-to-earnings (PE) ratio, while the S&P 500 index trades at 26 times its one-year forward PE ratio, according to LSEG data. A lower PE multiple indicates a more attractive investment opportunity.

Goldman, however, warned that rising oil prices could pose a two-sided risk to its forecasts – while they could push back the timing of interest rate cuts, they also provide an ‘upside risk’ to earnings-per-share growth.

The brokerage also lifted on Monday its 2024 target for the UK’s benchmark FTSE 100 index to 8,200 from 7,900.

(Reporting by Siddarth S and Kanchana Chakravarty in Bengaluru; Editing by Shounak Dasgupta and Sherry Jacob-Phillips)

Japan hiked interest rates. Why is the yen falling?

SINGAPORE, March 25 – A week ago Japan raised interest rates for the first time since 2007 in a move that marked a historic shift in monetary policy.

Yet the currency fell. Now Japanese officials are talking of official intervention to prop it up. It traded at 151.86 per dollar on Friday, its weakest this year and within a whisker of levels that drew intervention in 2022. It also made long-term lows versus the euro and Aussie last week.

A weaker yen is a boon for Japanese exporters’ profits but can squeeze households by increasing import costs.

Here’s what’s behind the selling:

SELL THE FACT

News reports, including from Reuters, foreshadowed the Bank of Japan’s landmark exit from negative interest rates in the lead-up to the decision. So did economic conditions, with sharply rising wages suggesting sustainable inflation and less need for subzero rates or policies to cap government bond yields.

“The event was too well anticipated, so the market was just too well priced going into the event,” said Patrick Hu, a G10 currency trader at Citi in Singapore who focuses on the yen.

The yen fell more than 1% the day of the announcement.

CARRY ON

The yen is the lowest-yielding G10 currency, making it ideal for carry trades, in which an investor borrows in a currency with low interest rates and invests the proceeds in a higher-yielding currency.

With the BOJ decision and other central bank “event risks” out of the way last week, investors who had trimmed such trades have been rebuilding their positions. Investors are betting that Japanese rates are not going to be rising quickly from here, effectively extending the life of yen carry trades.

Short-term Japanese rates are held below 0.1% and only about 20 further basis points in hikes are priced this year.

The U.S. Fed funds rate is 5.25-5.5% and a 25 bp cut isn’t fully priced until July. The U.S.-Japan government bond yield gap at the 10-year tenor is almost 350 bps.

FLOW

The rates picture is also keeping big Japanese investors’ cash abroad, where it can earn better returns, depriving the yen of support from repatriation flows. Japanese investors keep about $3 trillion in foreign bonds and yen trades.

Japan Post Bank and Japan Post Insurance, among the largest financial firms, told Reuters their portfolios won’t be radically changing in response to the BOJ’s policy shift.

INTERVENTION RISK

At 151.27 per dollar the currency remains very close to the 151.94 mark that drew intervention in 2022. Markets seem leery of testing the 152 level, though authorities have stressed they aren’t targeting particular levels but rather speculative moves.

“Many seem to think a ‘line in the sand’ against further JPY weakness sits near the 152 area when intervention occurred in late 2022,” said HSBC analysts in a note to clients.

“The current situation is trickier, especially when the U.S. dollar is not in a bubble-like state as in the period of October/November 2022. So, the risk is that Japan’s (finance ministry) tries to intervene to support the yen but with very limited success. This could create heightened uncertainty for the yen and other currencies.”

(Reporting by Tom Westbrook. Editing by Shri Navaratnam)

Oil rises as heightened geopolitical risks exacerbate supply concerns

TOKYO, March 25 – Oil prices rose in Asian trading on Monday on concerns over tighter global supply brought about by escalating conflicts in the Middle East and between Russia and Ukraine, while a shrinking U.S. rig count added to upward price pressure.

Brent crude LCOc1 futures climbed 39 cents, or 0.5%, to USD 85.82 a barrel at 0759 GMT. U.S. crude CLc1 futures gained 40 cents, or 0.5%, to USD 81.03 per barrel.

Both benchmarks fell less than 1% last week versus the previous week. A stronger U.S. dollar, which rose about 1% over the last week, has kept a lid on prices.

“Escalating geopolitical tension, coupled with a rise in attacks on energy facilities in Russia and Ukraine, alongside receding ceasefire hopes in the Middle East, raised concern over global oil supply,” said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

Meanwhile, the U.S. oil rig count fell by one to 509 last week, showed data from energy services firm Baker Hughes, indicating lower future supply.

Moscow launched 57 missiles and drones in the attack that also targeted the capital Kyiv, two days after the largest aerial bombardment of Ukraine’s energy system in more than two years of full-scale war, Kyiv said.

The move followed Ukraine’s recent attacks on Russian oil infrastructure, with at least seven refineries targeted by drones just this month.

“Disruptions to oil refineries in Russia have added pressure on fuel markets, leading to rising demand for available crude oil cargoes,” analysts at ANZ Research said, adding that about 12% of Russia’s total oil processing capacity was impacted.

Indian refineries refusing to take Russian crude carried on PJSC Sovcomflot tankers due to U.S. sanctions was also adding to global market tightness, ANZ said.

In the Middle East, Israeli forces besieged two more Gaza hospitals on Sunday, pinning down medical teams under heavy gunfire, the Palestinian Red Crescent said. Israel said it had captured 480 militants in continued clashes at Gaza’s main Al Shifa hospital.

U.S. Secretary of State Antony Blinken told Israeli Prime Minister Benjamin Netanyahu on Friday that Israel risked global isolation if it attacks the Palestinian city of Rafah in the Gaza Strip.

Elsewhere in the Middle East, U.S. forces engaged six Houthi unmanned aerial vehicles over the southern Red Sea after the group launched four anti-ship ballistic missiles toward a Chinese-owned oil tanker, U.S. Central Command said on Saturday.

(Reporting by Yuka Obayashi in Tokyo and Sudarshan Varadhan in Singapore; Editing by Christopher Cushing, Jamie Freed and David Evans)

Oil settles higher as Russia orders output cuts, geopolitical tensions persist

HOUSTON, March 25 – Oil prices settled higher on Monday as orders from the Russian government to curb oil output, and attacks on energy infrastructure in both Russia and Ukraine offset the United Nation’s demand for a ceasefire in Gaza.

Brent crude futures settled USD 1.32 higher or 1.55%, at USD 86.75 a barrel. US crude futures settled USD 1.32 higher, or 1.64%, at USD 81.95.

Both benchmarks have risen steadily this year, with Brent up nearly 11% and WTI up about 12.5% by Friday’s close, on expectations that interest rates in major economies will come down by the summer, and geopolitical tensions in eastern Europe and the Middle East.

Moscow, meanwhile, has ordered companies to reduce oil output in the second quarter to meet a production target of 9 million barrels per day (bpd) by the end of June, in line with its pledges to the producer group OPEC+, three industry sources said on Monday.

“Russia is committed to the OPEC+ cuts. They are looking beyond the current supply and demand fundamentals and looking at unity with OPEC+, as well as the risk of a bigger price shock further down the road,” said Phil Flynn, analyst at Price Futures Group.

Attacks on Russian energy facilities and Ukrainian energy infrastructure have stoked supply concerns, said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

Another Russian oil refinery had half of its capacity knocked out in a drone attack over the weekend, sources told Reuters. It was the latest casualty from a string of attacks by Ukraine this month that have shuttered 7% of total refining capacity, Reuters calculations show, on top of unrelated maintenance.

Russia attacked Ukrainian generating and transmission facilities last week and over the weekend, causing blackouts in many regions.

Elsewhere, the United Nations Security Council adopted a resolution on Monday demanding an immediate ceasefire between Israel and Palestinian militants Hamas and the release of all hostages after the United States abstained from the vote.

“We will have to see how the U.N. resolution on a ceasefire actually plays out on the ground in Gaza, and whether that would ultimately result in the Houthis stopping their attacks on tanker traffic in the Red Sea,” Andrew Lipow, president of Lipow Oil Associates said.

Yemen-based Houthi rebels have been ramping up attacks on ships traversing the Red Sea in support of Palestinians in Gaza.

A ceasefire could help relieve supply bottlenecks if the Houthis wind down their attacks by allowing vessels to use the Suez Canal rather than taking longer, more costly diversions around the horn of Africa.

(Reporting by Georgina McCartney in Houston, Natalie Grover in London, Yuka Obayashi in Tokyo and Sudarshan Varadhan in Singapore; Editing by David Gregorio, Nia Williams and Ros Russell)

Japan top currency diplomat Kanda says yen weakness doesn’t reflect fundamentals

TOKYO, March 25 – Japan’s top currency diplomat said on Monday that the yen’s current weakness did not reflect fundamentals, in the latest warning about the yen’s “big slide” against the dollar.

“Looking at currencies, the dollar/yen has gone through big fluctuations of 4% over only the past two weeks,” Masato Kanda, the vice finance minister for international affairs, told reporters.

“It has not reflected fundamentals and I feel something strange about it.”

Kanda described the recent yen moves as “speculative.” He said he wouldn’t rule out any measures but stands ready to respond appropriately to the currency’s move which could deal a blow to people’s livelihoods through higher costs of imports.

He added that yen weakness has a negative effect on the economy, adding that he doesn’t have a specific exchange level in mind when asked about defense lines. He has said he has been closely watching currency moves with a sense of urgency.

Japan last intervened in the currency market in October 2022 by heavily buying the yen and selling the dollar when the yen weakening accelerated towards a 32-year-low near 152 yen to the dollar.

It was trading around 151.27 early on Monday morning.

(Reporting by Tetsushi Kajimoto; Writing by Rocky Swift; Editing by Kim Coghill and Chang-Ran Kim)

Central bank sensitive shares face week of data

March 25 – Investors in Asia may favor playing it conservative ahead of a slew of economic indicators in coming days, especially with Japan’s stock market notching consecutive record highs and market closures on Friday for many centers, including Hong Kong.

Japan’s Nikkei 225 was hardly unique last week, extending its rally on Thursday and Friday. While dovish central bank signals emanated from the Federal Reserve, Swiss National Bank and Bank of England, it was the Bank of Japan that kicked off the hectic central bank news cycle by ending its long-held policy of yield curve control and negative interest rate in a signal of confidence in Japan’s economic recovery.

But Wall Street and other exchanges paused on Friday to digest their record runs and Japan could be due for its own moment of consolidation in the coming days.

Japan does get revised January leading indicators on Monday and services PPI data, while Tokyo CPI is due on Thursday. Consumer price inflation data is also due from Malaysia and Singapore on Monday.

YUAN’S SLIDE COULD FURTHER DISRUPT

Of more concern for the region’s currencies is Friday’s sell-off in China’s yuan to a four-month low on the weaker side of the 7.2 per dollar level. It ended the US session at 7.2759 amid growing market expectations that Beijing will have to deliver further monetary easing to shore up economic growth. The yuan swoon hit China’s stock market and pressured the Philippine peso, Indian rupee, Indonesian rupiah, Korean won, and Thai baht.

Meanwhile, Premier Li Qiang on Sunday said China will carefully study issues of market access and cross-border data flows and will soon issue new regulations in these areas.

“We cordially welcome companies from all countries to invest in China and deepen their foothold in China,” Li told an audience of global CEOs and Chinese policymakers.

Profit-taking on Friday capped the advances of stock indexes on Wall Street and in Europe, a day after they notched all-time highs. The S&P 500 closed 0.14% lower and the Nasdaq rose a similar amount.

Switzerland’s surprise rate cut on Thursday cemented the notion that, BOJ aside, developed country central banks would be easing interest rates soon.

That thinking obviously includes the Fed, which on Wednesday left the fed funds rate alone at 5.25% to 5.50% but indicated it was still prepared to lower rates by 75 basis points this year, despite a worrying uptick in US inflation and economic growth solid enough perhaps to dodge a soft landing.

Many markets in Europe and in the US will be closed on Friday, for Good Friday. As it happens, since it’s not a US public holiday, the most important data of the week, the February personal consumption expenditures inflation index, lands when markets are closed. But Asia will be the first market to trade on it the following Monday.

Meanwhile, there is not as much incentive to buy during a holiday-shortened week. Hong Kong’s stock exchanges are also closed but Japan’s are open.

Here are key developments that could provide more direction to markets in the coming week:

– Malaysia CPI (Feb)

– Singapore CPI (Feb)

– Japan revised leading indicators (Jan)

– Japan services PPI (Feb)

(Reporting by Alden Bentley; Editing by Lisa Shumaker)

US yields dip as traders renew bets on Fed rate cuts

March 22 – US Treasury yields dipped on Friday as traders renewed bets that the Federal Reserve would begin cutting interest rates in June, despite recent stronger-than-expected inflation reports.

Yields on benchmark 10-year notes fell to 4.215%, down 5.6 basis points (bps) from their close of 4.271% on Thursday. Yields had approached their February high of 4.354% on Monday.

Two-year yields ticked down to 4.595%, declining 3.7 bps from their Thursday close of 4.632%.

The inversion in the yield curve between two-year and 10-year notes widened by 3.3 bps to minus 38.2.

Market expectations of a June start to at least three rate cuts in 2024 were reinvigorated on Wednesday after Fed Chair Jerome Powell told reporters that inflation’s decline appeared to be tracking the US central bank’s expectations.

Yields rose last week following strong inflation prints for February, including consumer price index and producer price index readings that exceeded forecasts.

The Fed held rates steady on Wednesday and indicated three cuts in borrowing costs are still in sight this year. Powell said despite recent inflation data coming in hotter than expected, the numbers “haven’t really changed the overall story, which is that of inflation moving down gradually, on a somewhat bumpy road.”

A string of corporate earnings reports this week helped strengthen some traders’ convictions about the Fed’s rate-cutting path. Luxury apparel company Lululemon Athletica and restaurant chain Olive Garden, owned by Darden Restaurants, reported on Thursday slowing sales growth in North America in the fourth quarter.

“Some of the reports that have come out from companies show they’re really seeing a lot of weakness with consumers on luxury items and lower incomes,” said Bryce Doty, senior portfolio manager at Sit Investment Associates.

“We’re seeing that across the board … and so I think that has to be partly fueling what’s going on in Treasuries.”

Traders in federal funds futures have increased their bets that the Fed will cut rates in June to 74.5%, according to CME Group’s FedWatch tool.

Markets next week will mainly be focused on the release of the personal consumption expenditures price index for February and weekly initial jobless claims.

“We had that big rally to end last year, and we’ve retraced about half of that now in terms of yield,” said Kevin Flanagan, head of fixed income strategy at WisdomTree.

“If you were to continue to see economic inflation and labor market numbers that we’ve gotten over the first two months of the year continue, I wouldn’t be surprised if the 10-year challenges that 4.30% to 4.35% mark.”

(Reporting by Matt Tracy; Editing by Paul Simao and Josie Kao)

Gold pulls back from record peak as dollar gains

March 22 – Gold dipped on Friday as the dollar strengthened, but was on track for a weekly gain after rallying to a record high in the previous session in the wake of the US Federal Reserve’s rate cut plans.

Spot gold was down 0.9% at USD 2,160.63 per ounce as of 2:13 p.m. EDT (1813 GMT), and was up 0.2% for the week. Prices hit a record high on Thursday after the Federal Reserve indicated it still intended to cut rates three times this year.

US gold futures settled 1.1% lower at USD 2,160.

The dollar hit its highest in more than a month, making gold more expensive for other currency holders.

But “as long as we have lower real rates, continued central bank buying along with retail demand and political hedging, the depth of the correction (in gold) is limited,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Gold would need to stay above support around USD 2,150-USD 2,145 to continue its bullish momentum, Streible added.

Traders are pricing in a 76% probability of a US rate cut in June, according to the CME FedWatch Tool, up from 65% before the rate decision.

Lower interest rates reduce the opportunity cost of holding non-yielding gold.

Investment flows into gold hit their highest in almost a year in the week to Wednesday, Bank of America Global Research said.

However, “the set-up in gold has deteriorated, with CTAs now ‘max long’, macro traders positioned in line with rates market pricing, and Shanghai traders paring back their purchases following their epic buying activity over the last months,” TD Securities said in a note.

In physical markets, jewelry stores in India wore a deserted look this week as record prices hammered appetite, but China still saw steady demand.

Silver fell 0.6% to USD 24.62 per ounce, platinum eased 1.6% to USD 893.92 and palladium lost 1.9% to USD 991.26. All three were on track for a weekly fall.

(Reporting by Anjana Anil in Bengaluru; editing by Christina Fincher)

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