Yields hit four-week highs, Fed expected to hike above 5%

NEW YORK, Feb 6 (Reuters) – Benchmark 10-year US Treasury yields hit four-week highs on Monday after a blowout employment number raised expectations that the Federal Reserve’s interest rate hikes will not end with a hard economic landing, and that the US central bank may have more than one more rate increase left.

Employers added 517,000 jobs in January, while the unemployment rate hit 3.4%, its lowest reading for more than 53 years, the government reported on Friday.

Other data on Friday showed that US services industry activity rebounded strongly in January, with new orders recovering and prices paid by businesses for materials continuing to rise at a moderate pace.

“That was a big rebound (in ISM) that took away some of the fears of December weakness,” said Jim Vogel, a senior rate strategist at FHN Financial in Memphis, Tennessee. Meanwhile, investors are looking at the jobs report and, seeing a “nice improvement in January,” have “turned it into inflation that we’re going to see soon,” Vogel said.

Average hourly earnings increased 0.3% last month after gaining 0.4% in December. That lowered the year-on-year increase in wages to 4.4%, the smallest rise since August 2021, from 4.8% in December. But wage growth was revised upward for 2022, suggesting a more moderate pace of cooling than previously thought.

Benchmark 10-year yields rose as high as 3.644%, the highest since Jan. 6, and are up from a low of 3.333% on Thursday before the data. Two-year yields reached 4.468%, also the highest since Jan. 6.

The 10-year yields have fallen from a 15-year high of 4.338% on Oct. 21 on expectations that Fed tightening will lead to a recession this year.

The yield curve between two-year and 10-year notes inverted further to minus 82 basis points, reflecting concerns about an imminent downturn.

EXPECTATIONS REVISED

Traders ramped up bets on rate cuts in the second half of this year after Fed Chairman Jerome Powell seemed unconcerned about loosening financial conditions and cited progress in bringing down inflation after the Fed’s meeting on Wednesday, when it raised rates by another 25 basis points.

But Friday’s data led to a repricing in these expectations. Fed funds futures traders now see rates rising above 5% in May and dropping to only 4.79% by December. On Thursday, traders had expected the rate to peak at 4.88% in June, and then fall to 4.40% by December.

Powell is due to speak on Tuesday, and investors will be watching for any signs that he is adopting a more hawkish outlook after Friday’s data.

Some banks are also readjusting their Fed forecasts in light on last week’s events.

“Chair Powell did not push back against market pricing for near-term monetary policy, nor the recent easing in financial conditions. Despite Powell’s dovish tone, front-end yields finished the week higher after Friday’s surprisingly strong labor market report. Hence, we’re adding an additional 25bp hike to our forecast and now see the Fed funds target range peaking in May at 5-5.25%,” JPMorgan analysts said in a report.

The next major US economic release that may sway Fed policy will be consumer price data for January due on Feb. 14.

An analysis published Monday by the San Francisco Fed, meanwhile, found that US stocks may fall further, and bond yields rise, as the Fed continues its current round of rate hikes in coming months.

The Treasury Department will sell USD 96 billion in coupon-bearing supply this week, including USD 40 billion in three-year notes on Tuesday, USD 35 billion in 10-year notes on Wednesday and USD 21 billion in 30-year bonds on Thursday.

(Reporting by Karen Brettell; Editing by Kevin Liffey and Jonathan Oatis)

Oil rises 1% in choppy trade on China demand hopes

HOUSTON, Feb 6 (Reuters) – Oil prices edged higher in choppy trading on Monday as markets weighed a return in demand from China against supply concerns and fears of slower growth in major economies curbing consumption.

Brent futures for April delivery rose USD 1.05, or 1.3%, to USD 80.99 a barrel, after trading between USD 79.10 and USD 81.25.

West Texas Intermediate crude (WTI) gained 72 cents, or 1%, to USD 74.11 per barrel, after hitting a high of USD 74.41 and a low of USD 72.25.

Prices were buoyed by prospects for China’s recovery after the relaxation of COVID-19 restrictions.

The International Energy Agency (IEA) expects half of this year’s global oil demand growth to come from China, the agency’s chief said on Sunday, adding that jet fuel demand was surging.

Holding back gains however, Friday’s blowout US employment number raised expectations that the Federal Reserve’s rate hikes will not end with a hard economic landing, and that the US central bank may have more than one more rate increase left, which could curb economic growth and lower fuel demand.

The dollar also rose to a three-week high against the euro on Monday. A stronger dollar typically reduces demand for dollar-denominated oil from buyers paying with other currencies.

“You’ve got a strong dollar, you’re in a generally risk-off environment,” said Robert Yawger, executive director of energy futures at Mizuho.

WTI and Brent had slid 3% last Friday after the strong US jobs data.

Supply concerns continued to affect markets as operations at Turkey’s oil terminal in Ceyhan halted after a major earthquake hit the region.

The BTC terminal, which exports Azeri crude oil to international markets, will be closed on Feb. 6-8 while operators assess earthquake damage, a Turkish shipping agent said.

However, a preliminary Reuters poll showed that US crude oil stockpiles likely rose by about 2.2 million last week.

Also, price caps on Russian products took effect on Sunday, with Group of Seven nations, the European Union and Australia agreeing on limits of USD 100 a barrel on diesel and other products that trade at a premium to crude and USD 45 a barrel for products that trade at a discount, such as fuel oil.

(Reporting by Noah Browning; Additional reporting by Sonali Paul in Melbourne and Emily Chow in Singapore; Editing by Marguerita Choy, David Goodman and Kevin Liffey)

Gold up from 1-month lows but stronger dollar, yields check gains

Feb 6 (Reuters) – Gold edged higher on Monday, with investors banking on the precious metal’s safe-haven appeal as concerns about an economic slowdown linger, after a stronger dollar and higher Treasury yields nudged prices to a one-month low.

Spot gold was up 0.2% to USD 1,868.96 per ounce by 2:37 p.m. ET (1937 GMT). Earlier in the session, prices slipped to USD 1,860, their lowest since Jan. 6.

US gold futures settled 0.2% higher at USD 1,879.50.

“Traders will look at gold as a safe-haven asset and buy into it,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Concerns over a slowdown remain and is likely to keep demand for gold on a firm footing this year, analysts said.

The dollar index advanced to an almost month-high, making gold more expensive for buyers holding other currencies.

Benchmark Treasury yields also firmed, likely keeping some investors away from bullion.

Gold prices dropped more than 2% on Friday after data showed US job growth accelerated sharply last month, with focus on speeches by a host of Fed officials this week, including Chairman Jerome Powell.

The Fed last week increased interest rates by a quarter of a percentage point to 4.5%-4.75% after a year of larger hikes, and investors are now pricing in the policy rate peaking at 5.05% in June.

Gold benefits from low interest rates, which reduce the opportunity cost of holding the zero-yield asset.

Spot silver dropped 0.4% to USD 22.26 per ounce, and platinum slipped 0.2% to USD 971.70.

Palladium was down 1.2% to USD 1,604.09 per ounce, after it fell more than 4% earlier to USD 1,556.53, its lowest since mid-December 2021.

“Among platinum group metals, supply disruptions in South Africa due to a deepening energy crisis should help to stabilize prices in the short term,” ANZ wrote in a note.

(Reporting by Seher Dareen in Bengaluru; Additional reporting Arundhati Sarkar and Bharat Govind Gautam; Editing by Shounak Dasgupta, Krishna Chandra Eluri and Shailesh Kuber)

Philippines coast guard chief says boosts South China Sea presence

MANILA, Feb 6 (Reuters) – The Philippine Coast Guard has stepped up its presence in the disputed South China Sea by deploying additional vessels and conducting more sorties and overflights to protect maritime territory and the country’s fishermen, its chief said on Monday.

Beijing’s sweeping claims of sovereignty over the waterway have drawn repeated complaints from Manila, which has ramped up its rhetoric against reported Chinese construction activities and the “swarming” of Chinese vessels in the resource-rich waterway.

“We’re making sure that the presence of coast guard vessels is felt by the fishermen in the area,” Admiral Artemio Abu, Commandant of the Philippines Coast Guard (PCG), said in an interview.

Last month, PCG said it received a report that a Filipino fishing boat was forced by China’s coast guard to leave the Second Thomas Shoal, known locally as Ayungin Shoal, which lies within the country’s exclusive economic zone.

China’s embassy in Manila did not respond when asked for comment about the incident at the time. China claims the reef as its territory.

“We are strengthening our presence,” said Abu. The PCG chief was appointed by former President Rodrigo Duterte, who pursued warmer ties with Beijing, setting aside a longstanding territorial spat, in exchange for investment.

“At a moment’s notice, the coast guard vessels we will be there because they are exclusively and primarily dedicated for that purpose,” said Abu.

The 26,000-strong coast guard has 25 primary ships that can be used for deployment and patrols.

Beijing claims much of the South China Sea, where about USD 3 trillion in ship-borne trade passes annually, with the area becoming a flashpoint for Chinese and US tensions around naval operations.

President Ferdinand Marcos Jr, who succeeded Duterte, has vowed he would not lose an inch of territory to any foreign power, drawing cheers from advocates of a 2016 arbitral ruling invalidating China’s claims in the South China Sea.

Since 2002, the Philippines has filed 200 diplomatic notes and protests against China’s actions in the South China Sea.

Last month, Marcos met Chinese President Xi Jinping and the leaders reaffirmed that their countries would respect each other’s sovereignty and territorial integrity.

But Marcos last week approved a US request for expanded access to Philippine military bases, as Washington seeks to extend its security options as part of efforts to deter what it perceives as China’s aggressive policies in the region.

The Pentagon also said separately the United States and the Philippines had “agreed to restart joint maritime patrols in the South China Sea to help address these challenges.”

PCG’s Abu said the coast guard’s acquisition of more advanced vessels, including a 97-metre (318.24-ft) multi-role response vessel last year, had allowed it to increase the number and duration of trips in the South China Sea.

“We can stay there longer, farther and we can cover a bigger area now,” said Abu.

(Reporting by Karen Lema; Editing by Ed Davies)

Dollar perks up as traders await US jobs numbers

LONDON, Feb 3 (Reuters) – The dollar rose slightly on Friday, sustaining some momentum after jumping in the previous session following a raft of central bank decisions in Europe.

Trading was relatively subdued as markets waited for the latest US employment data later in the day which may shift US Federal Reserve policy.

The dollar picked up against the euro, with the latter down 0.1% to USD 1.09 in early European trading. The euro remained well above the 20-year low of USD 0.953 hit in September, however.

The Federal Open Market Committee on Wednesday raised interest rates by 25 basis points to a range of 4.5% to 4.75%, a softer approach than the previous increase of 50 bps.

The slowdown in the pace and comments from the central bank helped send the dollar tumbling as traders hoped rate hikes might soon end altogether.

It then rallied sharply on Thursday when the European Central Bank raised rates by 50 bps to 2.5%, but suggested that it could be finished after another increase in March, causing the euro to tumble.

“Essentially we have retraced everything before the (Fed)meeting,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

He said relatively weak earnings reports by tech giants Alphabet, Apple and Amazon were causing “a bit of a risk-off mood” in markets that was likely boosting the dollar on Friday.

The dollar index, which tracks the currency against major peers, was up 0.1% to 101.89.

Japan’s yen was slightly higher against the dollar, however, at 128.66 per dollar.

The big event for markets on Friday is the release of US employment – or nonfarm payroll – numbers at 8.30 a.m. ET (1330 GMT).

Analysts polled by Reuters expect the US economy to have added 185,000 jobs in January, a strong showing but down from 223,000 in December. Wages data is also due.

The pound was down 0.18% on Friday to USD 1.22, after tumbling 1.2% on Thursday when the Bank of England raised interest rates but stressed that inflation was showing signs of relenting.

The Australian dollar was 0.35% lower at USD 0.705. Meanwhile, the US dollar was up 0.35% against its Canadian counterpart at C$ 1.336.

Tan said he thinks the US dollar should remain under pressure in the coming weeks, given that the Fed is the central bank closest to pausing interest rate hikes.

“I think that the path of least resistance in the next quarter… is still for dollar weakness, unless we get a big risk-off fright,” he said.

(Reporting by Harry Robertson; Additional reporting by Rae Wee; Editing by Lincoln Feast, Simon Cameron-Moore and Emelia Sithole-Matarise)

China should avoid tightening macro-economic policies prematurely

China should avoid a premature tightening of macro-economic policies as its economy is still not performing at its full potential despite rebounding from COVID-19, International Monetary Fund (IMF) officials said on Friday.

“Key structural reforms should be re-accelerated to lift China’s potential growth,” the officials told reporters at an online news conference accompanying the launch of its annual assessment of the Chinese economy on Friday.

In its report, the IMF commends China for its initial handling of the pandemic, but stresses that the factors that saw economic growth slow significantly in 2022 could hamper economic performance this year unless properly addressed.

China’s ailing real estate sector, shrinking population, slowing productivity growth, and uncertainty surrounding the possibility of new variants of COVID emerging are among the causes for concern listed in the report.

The world’s second-largest economy will expand by 5.2% this year, according to the fund’s latest projections published on Jan. 31, compared with 3% in 2022. That was the worst showing in nearly half a century, excluding the 2.2% expansion when COVID hit in 2020.

China’s economy is “still operating below potential,” according to Thomas Helbling, deputy director for the fund’s Asia and Pacific department, who cautioned that “the support provided in 2022 will expire,” and that the IMF recommends China adopt a “neutral fiscal stance with the composition of spending shifting towards households.”

The State Council, which functions as China’s cabinet, on Jan. 28 vowed to promote consumption recovery as a major driver of the economy.

IMF officials on the call pressed the need for Chinese policymakers to implement wide-ranging structural changes to the economy – such as ensuring a level playing field between private firms and state-owned enterprises – as “without reforms, we currently estimate growth to fall below 4% over the next five years.”

Speaking to the state of the global economy, Helbling told journalists that “the global impact (of China’s re-opening) on inflation should be limited,” adding that although supply chain bottlenecks involving China could persist into 2023 and affect global commodity prices, “on balance, the rebound in China will be a net positive”.

IMF officials are anticipating significant increases in outbound Chinese travel and tourism in 2023, as well as domestic consumption, particularly in catering and other contact-intensive industries that “are still operating well below capacity.”

(Reporting by Joe Cash. Editing by Gerry Doyle)

China’s latest IPO reform unlikely to flood markets with new issuance

SHANGHAI, Feb 3 (Reuters) – China’s move this week to streamline stock market listing rules is unlikely to result in a flood of initial public offerings, bankers say, citing the prospect of state intervention on national security and other grounds that would result in delays.

Beijing published draft rules on Wednesday to broaden its fledgling registration-based IPO system, expand the US-style mechanism to all corners of China’s stock market in a shift designed to speed up listings and corporate fundraising.

Under the new system, China’s stock exchanges will themselves vet IPOs with a focus on information disclosure. Currently, IPOs on China’s blue-chip boards need clearance from the China Securities Regulatory Commission (CSRC) under an approval-based system – one that means long delays and IPO prices capped by the regulators.

The reform was hailed by state media and analysts as a key milestone that would make China’s IPO market more inclusive, transparent, and efficient.

But in reality, bankers say, the IPO process will largely remain at the mercy of authorities, who view stock markets as a tool in a global power struggle and in national rejuvenation: under the new rules, the CRSC’s stated role will be to make sure listings are in line with Beijing’s broad industrial policy.

“Under China’s mechanism, the government dictates the direction of IPOs. Applicants are screened based on national policies,” said Terence Lin, partner of TRSD Capital, a boutique investment bank that helps Chinese companies list in the United States.

More than 30 IPO hopefuls have halted the CSRC registration process, according to public filings, while hundreds have aborted listing plans during the grueling vetting process by the exchanges in the pilot registration-based scheme.

A banker at a major Chinese brokerage, who declined to be named as he was not authorized to speak to the media, said China’s IPO system, though registration-based in form, still requires government approval in essence.

“If a company is neither big enough, nor innovative enough, listing domestically is quite impossible (to get approval),” he said. “Paternalism and politics continue to play a big role” in the new IPO system, he said.

STAR SYSTEM

The registration-based IPO system was first adopted by Shanghai’s STAR Market when the tech-focused board was launched in 2019. Endorsed by President Xi Jinping, STAR was designed to fund tech independence amid escalating tension with the United States.

The new IPO system was later rolled out to the start-up board ChiNext, and the Beijing Stock Exchange. On Wednesday, the CSRC said the reform will be expanded to the main boards in Shanghai and Shenzhen – home to multi-billion-dollar blue-chip China stocks like Kweichow Moutai 600519.SS and Bank of China.

On Thursday, the CSRC made its role explicit. It said that it would strengthen the Chinese Communist Party’s leadership in capital markets, vowing to combine market forces with government roles as it mobilizes the IPO reform.

“This means the CSRC still has the final power in deciding whether the listing hopeful is in the appropriate sector,” said Yi Jiansheng, capital markets lawyer at Jia Yuan Law Offices, writing in a research note on Thursday.

The most glaring example of state intervention even in the registration-based system is the scuppering of Ant Group’s planned USD 37 billion IPO dual-listing in Shanghai and Hong Kong just days before of its scheduled listing in late 2020, bankers say.

“We thought the registration-based IPO mechanism would allow more types of companies to list, and give the market more power,” said another banker at a Chinese brokerage, declining to be named as he was not authorized to speak to the media.

“But as IPO sponsors, we feel on the ground that companies face tighter and tighter regulatory scrutiny, which defies the original purpose of the reform.”

(Reporting by Shanghai newsroom; Editing by Sumeet Chatterjee and Kenneth Maxwell)

Dollar buoyant; markets jubilant as inflation risks unwind

SINGAPORE, Feb 3 (Reuters) – The euro and sterling slipped against the dollar on Friday as markets took a dovish cue from policymakers at the European Central Bank and the Bank of England, who said inflationary pressures in their economies have become more manageable.

Reversing its losses earlier in the week, the greenback strengthened against a basket of currencies, as the US dollar index rose 0.02% to 101.81, to move away from Wednesday’s nine-month low of 100.80.

The pound slid to a more than two-week trough of USD 1.2203 in Asia trade and was last 0.04% lower at USD 1.2219. It had fallen 1.2% in the previous session, its largest daily decline in a month.

The euro edged 0.12% down to USD 1.0897, after tumbling 0.7% on Thursday to move further away from its 10-month peak of USD 1.1034.

On Thursday, the ECB and BoE each raised interest rates by 50 basis points as expected, with the latter signaling the tide was turning in its battle against high inflation.

While the ECB explicitly alluded to at least one more hike of the same magnitude next month and reaffirmed its commitment in battling high inflation, President Christine Lagarde acknowledged the euro zone outlook had become less worrisome for growth and inflation.

“The ECB was a little bit more dovish than markets had previously expected … (while) the Bank of England has given a small hint that they might be close to finishing their tightening cycle,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Remarks from the ECB and the BoE came a day after Federal Reserve Chair Jerome Powell had triggered a heavy sell-off of the dollar by telling a news conference after the Fed’s 25bp rate hike that the “disinflationary” process in the United States appeared to be underway.

Friday’s nonfarm payrolls report will be the next major test of the Fed’s fight against inflation. Signs are still pointing to a tight labor market, with the number of Americans filing new claims for unemployment benefits dropping to a nine-month low last week.

In other currencies, the Aussie fell 0.11% to USD 0.7068, having lost 0.86% on Thursday, while the kiwi gained 0.05% to USD 0.6479.

The comments from policymakers following a slew of central bank meetings this week have markets seizing on signs that interest rates could be close to peaking in most major economies.

“We’re starting to see central banks converging to a pattern now … the major central banks are definitely approaching the end of their tightening cycles,” said CBA’s Kong.

An imminent peak in US rates has provided some relief for the Japanese yen, which last year crumbled under pressure from rising interest rate differentials against Japan’s low interest rate environment.

The yen was last 0.1% higher at 128.54 per dollar and was headed for a weekly gain of 1%, reversing two straight weeks of decline.

Bank of Japan (BOJ) Governor Haruhiko Kuroda said on Friday he expected wages to rise “quite significantly”, but maintained his stance on sticking with the BOJ’s ultra-loose monetary policy to support the economy.

(Reporting by Rae Wee; Editing by Lincoln Feast and Simon Cameron-Moore)

Oil stable as market awaits signs of China demand recovery

SINGAPORE, Feb 3 (Reuters) – Oil prices were little changed on Friday, with major benchmarks headed for their second straight week of losses, as the market awaited further signs of fuel demand recovery in China to offset looming slumps in other major economies.

Brent crude futures dipped 16 cents, or 0.2%, to USD 82.01 a barrel by 0445 GMT, while US West Texas Intermediate (WTI) crude futures slid 17 cents, or 0.2%, to USD 75.71.

So far this week, Brent has dropped more than 5%, extending a 1% loss from the previous week. WTI has also fallen by nearly 5%, after sliding 2% in the prior week.

Mixed signals on fuel demand recovery in China, the world’s top oil importer, have kept a lid prices.

ANZ analysts pointed to a sharp jump in traffic in China’s 15 largest cities following the Lunar New Year holiday, but also noted that Chinese traders had been “relatively absent”.

The prospect of an economic rebound in China after COVID-19 curbs eased has buoyed the oil market so far this year, along with a weaker dollar that makes the commodity cheaper for those holding other currencies.

The dollar has fallen because aggressive interest rate hikes by the US Federal Reserve are no longer expected. Central banks for other major economies, though, are continuing with bigger rate increases even as inflation has eased.

While supported by a weaker greenback, oil’s gains have been limited by the prospect of slow growth in the United States, the world’s biggest oil consumer, and recessions in places including Britain, Europe, Japan and Canada.

“The crude demand outlook needs a clear sign that China’s reopening will be smooth, and that the US economic growth momentum does not deteriorate quickly,” OANDA analyst Edward Moya said in a note.

The US central bank scaled back to a milder rate increase after a year of larger hikes, but policymakers also projected that “ongoing increases” in borrowing costs would be needed.

Upcoming interest rate hikes in 2023 are likely to weigh on the US and European economies, boosting fears of an economic slowdown highly likely to dent global crude oil demand, said Priyanka Sachdeva, market analyst at Phillip Nova.

Investors are also eyeing developments on the Feb. 5 European Union ban on Russian refined products as the EU countries will seek a deal on Friday to set price caps for Russian oil products.

(Reporting by Sonali Paul in Melbourne and Jeslyn Lerh in Singapore; Editing by Jamie Freed and Tom Hogue)

Gold steady, but set for biggest weekly fall since Nov

Feb 3 (Reuters) – Gold prices steadied on Friday after a sharp sell-off in the previous session, as traders digested rate-hike remarks from global central banks, although a firmer dollar kept the metal on track for its first weekly drop in seven.

Spot gold rose 0.2% to USD 1,915.89 per ounce by 0652 GMT, after shedding 2% on Thursday dragged by a stronger dollar and profit-taking. The bullion was down 0.6% so far for the week.

US gold futures were little changed at USD 1,915.20.

“With gold prices delivering a stellar performance of more than 20% over the past three months, some positioning for softer rate-hike bets could already have been at play and having found the much-needed validation from the recent FOMC meeting,” said Yeap Jun Rong, a market analyst at IG.

Some near-term profit-taking is likely, “but for gold prices, a greater conviction for sellers could be a break below the USD 1,895 level, where dip-buyers were seen stepping in this week just before the meeting,” Yeap added.

Bullion has gained about USD 300 since November on expectations of softer rate hikes from the US central bank, as a lower interest rate environment reduces the opportunity cost of holding non-yielding bullion.

Following the Fed’s 25 basis-point rate increase, both the European Central Bank and the Bank of England raised their rates by 50 bps as expected on Thursday.

Global central banks are now laying the groundwork in unison for a pause that, while not yet promised, is coming into view for later this year.

The US dollar, meanwhile, was up 0.1%, keeping a leash on gold prices.

On the data front, investors are now awaiting the monthly US non-farm payrolls due later in the day.

Elsewhere, spot silver rose 0.2% to USD 23.502 per ounce, platinum added 0.5% to USD 1,026.17.

Palladium climbed 1.2% to USD 1,674.17.

(Reporting by Arundhati Sarkar in Bengaluru; editing by Uttaresh.V, Subhranshu Sahu and Eileen Soreng)

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