Year-end view for Fed policy rate rises again as recession risks remain – Reuters poll

By Prerana Bhat and Indradip Ghosh

BENGALURU (Reuters) – The U.S. Federal Reserve will lift interest rates higher by the end of this year than anticipated just a month ago, keeping alive already-significant risks of a recession, a Reuters poll of economists found.

While U.S. inflation, running at a four-decade high, may have peaked in March, the Fed’s 2% target is still far out of reach as disruptions to global supply chains continue to keep price rises elevated.

The May 12-18 Reuters poll showed a near-unanimous set of forecasts for a 50-basis-point hike in the fed funds rate, currently set at 0.75%-1.00%, at the June policy meeting following a similar move earlier this month. One forecaster anticipated a hike of 75 basis points.

The Fed is expected to hike by another 50 basis points in July, according to 54 of 89 economists, before slowing to 25- basis-point hikes for the remaining meetings this year. But 18 respondents predicted another half-percentage-point rise in September too.

A majority of poll respondents now expect the fed funds rate to be at 2.50%-2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75%-3.00%.

That would bring it above the “neutral” level that neither stimulates nor restricts activity, estimated at around 2.4%.

“The pressing goal is to bring policy rates to neutral, before stepping back to judge the impact,” Sal Guatieri, senior economist at BMO, wrote in a note.

“The Fed can only hope that inflation pressure stemming from high commodity prices and the pandemic’s impact on labor and material supplies will reverse soon.”

Fed Chair Jerome Powell on Tuesday reiterated that the U.S. central bank would ratchet up interest rates as high as needed, possibly above the neutral level.

Nearly 75% of respondents to an additional question in the poll – 29 of 40 – said the Fed’s rate hike path was more likely to be faster over the coming months than slower.

Inflation, as measured by the Consumer Price Index (CPI), was forecast to average 7.1% this year, and remain above the central bank’s target until 2024 at least.

The New York Fed’s latest global supply chain pressure gauge rose in April after four months of declines, suggesting those price pressures remain very much alive, as did a recent Reuters analysis.

Meanwhile the poll showed a median 40% probability of a U.S. recession over the next two years, with a one-in-four chance of that happening in the coming year. Those probabilities were steady compared with the last survey.

What hasn’t remained steady is sentiment in financial markets. The Standard & Poor’s 500 equities index appears to be on the cusp of a bear market, down close to 20% from its peak near the start of the year.

The U.S. economy, which contracted for the first time since 2020 in the January-March period, was expected to rebound to an annualized growth rate of 2.9% in the second quarter. But forecasts were in a significantly wide range of 1.0%-6.9%.

GDP growth was predicted to average 2.8% this year before moderating to only 2.1% and 1.9% in 2023 and 2024, respectively, down from the 3.3%, 2.2% and 2.0% predicted last month.

Forecasts for the unemployment rate remained optimistic, averaging 3.5% this year and next, before picking up to 3.7% in 2024.

But more than 80% of respondents to an additional question – 28 of 34 – said that over the coming two years it was more likely that unemployment would be higher than they currently expected than lower.

“The only realistic way to break the wage-price spiral is to push up the unemployment rate. If the Fed does not do this by accident, they will have to do it by design,” said Philip Marey, senior U.S. strategist at Rabobank.

“A recession is the inevitable outcome.”

(For other stories from the Reuters global economic poll:)

(Reporting by Prerana Bhat and Indradip Ghosh; Polling by Vijayalakshmi Srinivasan and Shrutee Sarkar; Editing by Ross Finley and Paul Simao)

World stocks slide as growth fears persist, safe-havens gain

By Herbert Lash

NEW YORK (Reuters) – Global equities fell further on Thursday, unable to sustain a late rally on Wall Street, as investors dumped stocks on fears of sluggish growth and bought safe-haven assets such as government debt and the Swiss franc.

Supply chain woes continued to fuel inflation and growth concerns as Cisco Systems Inc warned of persistent component shortages, knocking its shares down 13.7%. The plunge made it the latest big name stock this week to post its largest decline in more than a decade.

Data showed factory output in the U.S. Mid-Atlantic region decelerated far more than expected in May with the business outlook for the six months ahead the weakest in more than 13 years, a regional Federal Reserve bank survey said.

Some megacap growth stocks that have underperformed this year posted gains but the rally fizzled. The Dow Jones Industrial Average fell 0.75%, the S&P 500 lost 0.58% and the Nasdaq Composite dropped 0.26%.

Big slides for Walmart on Tuesday and Target on Wednesday have demoralized investors who wonder about rising costs across the supply chain, said Michael James, managing director of equity trading at Wedbush Securities.

“You got a pretty severe shock to the system for portfolio managers with the combination of those two,” James said. “That type of damage is hard to repair, piled on top of the extremely challenging year that technology investors have had,” he said.

But James said there are those view market as being extremely oversold and “you’re due for some kind of a bounce.”

Traders are looking for a catalyst that will turn the market around as a near-term bottom approaches, said Rick Meckler, president of hedge fund LibertyView Capital Management LLC.

But, “there’s probably still enough fear among investors to see a few more downdrafts,” he said.

Cash hoarding has reached the highest level since September 2001, indicating strong bearish sentiment, according to Louise Dudley, a portfolio manager at Federated Hermes Ltd.

Goldman Sachs estimates a 35% probability of a U.S. recession in the next two years, while Morgan Stanley sees a 25% chance of one in the next 12 months.

U.S. spot power and natural gas prices soared to their highest in over a year in some U.S. regions as Americans cranked up air conditioners during a spring heatwave.

MSCI’s gauge of stocks across the globe fell 0.65% and the pan-European STOXX 600 index lost 1.37%.

The S&P 500 is down about 18% from its record close on Jan. 3, and MSCI’s index has fallen the same since peaking on Jan. 4.

GRAPHIC: S&P 500 bear markets (https://fingfx.thomsonreuters.com/gfx/mkt/egpbkwmlgvq/Pasted%20image%201652990180837.png)

Germany’s 10-year bond yield fell below 1% and U.S. Treasury yields fell as more soft U.S. economic data stirred worries the Federal Reserve’s aggressive monetary tightening could hurt the global economy.

The yield on 10-year Treasury notes fell 3.8 basis points to 2.846%, after hitting a three-week low of 2.772%.

The dollar fell across the board, pulling back further from a two-decade high, as most other major currencies drew buyers.

The dollar index fell 0.896%, with the euro up 1.11% to $1.0582. The Japanese yen strengthened 0.35% to 127.79 per dollar.

The Swiss franc gained after Swiss National Bank president Thomas Jordan signaled on Wednesday the SNB was ready to act if inflation pressures continued.

GRAPHIC: Worst start to a year for world stocks (https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdrjdve/Pasted%20image%201652952015101.png)

Central banks have been walking a tightrope, trying to regain control of decades-high inflation without causing painful recessions.

“We will have to discuss what we can do together in our respective areas of responsibility to avoid stagflation scenarios,” German finance minister Christian Lindner said as he arrived for a two-day meeting of top central bankers near Bonn.

Oil prices rebounded from two days of losses in a volatile session, bolstered by weakness in the dollar and expectations that China could ease some lockdown restrictions that could boost demand.

U.S. crude futures rose $2.62 to settle at $112.21 a barrel. Brent settled up $2.93 at $112.04 a barrel.

U.S. gold futures settled up 1.4% at $1,841.20 an ounce, as a weaker dollar and Treasury yields burnished bullion’s safe-haven appeal.

(Reporting by Herbert Lash, additional reporting by Marc Jones in London, Francesco Canepa in Koenigswinter, Germany, Stella Qiu in Beijing and Alun John in Hong Kong; Editing by Bernadette Baum, David Gregorio and Richard Pullin)

Dollar drops as yen, Swiss franc draw safe-haven flows

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar slipped across the board on Thursday, falling to a 2-week low, extending its pullback from a two-decade high, as most major currencies battered by the greenback’s advance this year drew buyers.

With volatility on the rise in global financial markets, the dollar logged sharp declines against the Japanese yen and the Swiss franc, which tend to attract investors in times of market stress or risk.

But the dollar also fared poorly against riskier currencies, including the Australian and the New Zealand dollar, as deep year-to-dates losses for these currencies attracted some buyers.

“Investors have perhaps just had enough of the USD and are looking to diversify risk – especially as broader USD support from rising U.S. yields appears to have maxed out,” said Shaun Osborne, chief currency strategist at Scotia Bank.

The U.S. Dollar Currency Index, which tracks the greenback against six major currencies, was down 1.0% at 102.79, its lowest since May 5. That puts the index on pace for one of only six instances over the past five years when it logged a 1-day loss of 1% or more.

The index hit a near two-decade high last week as a hawkish Federal Reserve and growing worries about the state of the global economy helped lift the U.S. currency. The index is up 7.5% for the year.

On Thursday, the dollar slipped to a 3-week low against the yen and a 2-week low against the Swiss franc.

Analysts, however, warned against reading too much into the dollar’s retreat.

“Yes, the dollar is broadly lower today despite risk-off conditions in the cross-asset space, but does this mean the dollar’s haven status is starting to weaken? Most probably not,” said Simon Harvey, head of FX Analysis at Monex Europe.

The Swiss franc was supported against the dollar and the euro after Swiss National Bank president Thomas Jordan signaled on Wednesday the SNB was ready to act if inflation pressures continue.

The euro rose to a more than 1-week high against the dollar, as investors priced in the chance of an aggressive near-term tightening path by the European Central Bank.

Britain’s pound rose 1.2% against the dollar on Thursday, but remained close to the 2-year low touched last week as soaring inflation combined with a murky growth outlook capped gains.

Meanwhile, bitcoin rose 4.7% and was last trading at $30,039.31, continuing to try to shake off the weakness that has engulfed cryptocurrencies in recent days.

(Reporting by Saqib Iqbal Ahmed;Editing by Alison Williams and Will Dunham)

G7 backs debt relief efforts for Sri Lanka – draft communique

KOENIGSWINTER, Germany (Reuters) -The Group of Seven economic powers support efforts to provide debt relief for Sri Lanka, G7 finance chiefs said on Thursday in a draft communique from a meeting in Germany after the country defaulted on its sovereign debt.

The once-booming island country has suspended debt payments as it grapples with its worst economic crisis since it won independence in 1948, facing shortages of essential goods that have triggered social unrest.

G7 countries said in their statement they were committed to finding long-term solutions for the Indian Ocean nation and urged it to “negotiate constructively” with the International Monetary Fund on a potential loan programme.

“The G7 stands ready to support the Paris Club’s efforts, in line with its principles, to address the need for a debt treatment for Sri Lanka,” they said, referring to the group of mostly rich creditor nations.

The draft statement, which is to be finalised before the end the G7 finance ministers’ meeting on Friday, also called on other big creditor nations not in the Paris Club to coordinate with the group and urged them to provide debt relief on comparable terms.

G7 finance chiefs also singled out China, which has become a major creditor to low-income countries, to actively contribute to debt relief for such countries.

Chad, Ethiopia and Zambia have so far sought debt relief under a new G20 common framework, but progress has so far been slow with some officials accusing China of dragging its feet.

(Reporting by Leigh Thomas, Editing by Angus MacSwan and Nick Zieminski)

Russian to ease restrictions on cash FX, apart from U.S dollars, euros

(Reuters) – Russia’s central bank said on Thursday banks would be allowed to sell citizens foreign currency without any restrictions from May 20, with the exception of U.S. dollars and euros.

Restrictions on dollars and euros, which allow citizens to buy only those dollars and euros that arrived in banks after April 9, will remain in place until Sept. 9, the central bank said.

(Reporting by Reuters; Editing by Angus MacSwan)

Moody’s sees ‘tough terrain’ ahead for emerging economies as Russia-Ukraine war extends

By Jorgelina do Rosario

LONDON (Reuters) – Emerging economies will face a “tough terrain” for the next few quarters due to the Russia-Ukraine war, Atsi Sheth, global head of strategy and research for Moody’s Investors Service, said on Thursday.

While the overall picture is gloomy, commodity exporters will face better outcomes than other countries or companies, she added.

The ratings agency forecasts in a report that nearly 30% of rated non-financial companies in emerging markets would face “heightened credit risks” in a worst-case scenario in which Russia’s invasion of Ukraine triggers a global recession and liquidity squeeze, including a suspension of energy trade between Europe and Russia.

“Companies that serve consumers are likely to suffer a little bit more because their wallets are going to be constrained by inflation,” Sheth said at a conference.

Asian firms are more highly exposed due to supply chain disruptions and limited access to funding while Latin American corporates are less exposed, the Moody’s research found.

In a less severe scenario, where commodity shocks, higher inflation and interest rates crimp global growth in 2023, some 8% of emerging market firms would face heightened credit risk, it found.

Automotive manufacturing is one sector that may continue to suffer from supply chain disruptions.

On the sovereign level, Sheth added that the credit agency was closely monitoring elections in emerging economies this year, as demand for change amid economic and financial hardship could lead to political change.

Colombia has first-round presidential elections on May 29, while Brazil heads to the polls in October.

Credit risk increases when a democratic government changes to an authoritarian one, and vice versa. Moody’s calculated that in 25% of such cases there are associated defaults on the country’s government bonds.

“That’s how social risk becomes a credit risk”, she said.

Countries that have stuck with credible monetary policy aimed at fighting inflation throughout the pandemic and the Russia-Ukraine war will face less financial risk in the medium-term, Sheth added.

“Take a look at Turkey – the markets are sort of punishing (it),” Sheth said.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Hugh Lawson)

Urgent to tighten policy further, says Swedish central bank’s Floden

STOCKHOLM (Reuters) – Sweden has an urgent need for further policy tightening so that the central bank does not have to take even tougher measures further ahead, Deputy Governor Martin Floden said on Thursday.

“It is urgent to hike rates once or several times,” Floden said. “Partly, because inflation now is high and we don’t want it to become entrenched and the longer we wait, potentially the more we need to react,” Floden said.

A second reason was to gauge how the economy reacts to rate hikes, which have been very uncommon in recent years, he said.

(Reporting by Simon Johnson; Editing by Angus MacSwan)

G7 to meet climate finance support goal next year – draft

KOENIGSWINTER, Germany (Reuters) – The Group of Seven economic powers expect to meet a climate change financing goal for developing countries by next year, G7 finance chiefs said in a draft communique from a meeting in Germany.

“We are strongly committed to achieving the collective climate finance mobilisation goal of 100 billion US dollars per year from a wide variety of sources through to 2025 to address the needs of developing countries… We expect this goal will be met in 2023,” said the draft to be finalised before the meeting ends on Friday.

(Reporting by Leigh Thomas; Editing by Angus MacSwan)

South African central bank governor’s comments on rate decision

JOHANNESBURG (Reuters) – Below are some quotes from South African Reserve Bank Governor Lesetja Kganyago on Thursday as he announced the central bank’s decision to raise benchmark repo rate by 50 basis points to 4.75%.

INFLATION

“As a result of higher global food prices, local food price inflation is also revised up and is now expected to be 6.6% in 2022 (up from 6.1%), and 5.6% in 2023 (up from 5.1%). Food price inflation is forecast to ease to 4.2% in 2024 (down from 4.4%).”

“The Bank’s forecast of headline inflation for this year is revised higher to 5.9% (from 5.8%), primarily due to the higher food and fuel prices.”

“Core inflation is forecast lower at 3.9% in 2022 (down from 4.2%) due to lower services price inflation.”

ECONOMIC GROWTH

“The economy is expected to grow by 1.7% in 2022, revised down from 2.0% at the time of the March meeting. This is due to a combination of short-term factors, including the flooding in Kwa-Zulu Natal and the continued electricity supply constraints.”

“The economy is forecast to expand by 1.9% in both 2023 and 2024. At these rates, growth remains well above a low rate of potential, impacted by loadshedding, infrastructure and policy constraints.”

“Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced.”

DECISION

“Against this backdrop, the MPC decided to increase the repurchase rate by 50 basis points to 4.75% per year, with effect from the 20 of May 2022. Four members of the Committee preferred the announced increase and one member preferred a 25 basis point rise in the repo rate.”

“The implied policy rate path of the QPM, given the inflation forecast, indicates gradual normalisation through to 2024. As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.”

(Reporting by Olivia Kumwenda-Mtambo, Alexander Winning and Promit Mukherjee; Editing by James Macharia Chege)

Brazil’s Guedes says 10% tax on dividends could be approved this year

BRASILIA (Reuters) – Brazil Economy Minister Paulo Guedes said a small tax reform may be approved by Congress this year that would include a 10% tax on dividends, which are currently exempt.

Guedes, speaking at an event hosted by financial start-up Traders Club, said the reform would also create a tax debt renegotiation program and lower corporate income tax but at a lower level than previously targeted by the government.

The reform would be more limited than a proposal approved in the Lower House last year but not voted on in the Senate. That proposal set a 15% tax on company dividends.

The minister said that if the current center-right coalition prevails in elections this year, it would be “natural” for him to stay in the federal government for a potential second term of President Jair Bolsonaro, who is seeking re-election in October.

According to Guedes, the coalition is advancing and the Congress is becoming more reformist.

“The band seems to be playing well,” he said.

(Reporting by Marcela Ayres; editing by Jonathan Oatis and Mark Porter)

Sri Lanka fuel shortage set to ease; police clash with protesters

By Uditha Jayasinghe and Devjyot Ghoshal

COLOMBO (Reuters) -Sri Lanka’s central bank has secured foreign exchange to pay for fuel and cooking gas shipments that will ease crippling shortages, its governor said on Thursday, but police fired tear gas and water canon to push back student protesters.

Most of Sri Lanka’s petrol stations have run dry as the island nation battles its most devastating economic crisis since independence in 1948. At some pumps in the commercial capital, Colombo, dozens of people stood in lines holding plastic jerry cans, as troops in combat gear and armed with assault rifles patrolled the streets. Traffic was extremely light.

Residents said most people were staying at home because of the lack of transport.

Hundreds of students carrying black flags marched on Colombo’s central Fort area, chanting slogans against the government. Police fired repeated rounds of tear gas and water canon to push them back, according to a Reuters witness.

Central bank Governor P. Nandalal Weerasinghe told a news conference adequate dollars had been released to pay for fuel and cooking gas shipments, utilising in part $130 million received from the World Bank and remittances from Sri Lankans working overseas.

He was speaking after the central bank held interest rates steady at a policy meeting, citing a massive 7 percentage point increase in April that it said was working its way through the system.

The country was more politically and economically stable, Weerasinghe said, adding that he would stay on in his post. He told reporters on May 11 he would resign in two weeks in the absence of political stability as any steps the bank took to address the economic crisis would not be successful amid turmoil.

Opposition parliamentarian Ranil Wickremesinghe was named prime minister last week and he has made four cabinet appointments. However, he has yet to name a finance minister.

Inflation could rise further to a staggering 40% in the next couple of months but it was being driven largely by supply-side pressures and measures by the bank and government were already reining in demand-side inflation, the central bank governor added.

Inflation hit 29.8% in April with food prices up 46.6% year-on-year.

Sri Lanka’s economic crisis has come from the confluence of the COVID-19 pandemic battering the tourism-reliant economy, rising oil prices and populist tax cuts by the government of President Gotabaya Rajapaksa and his brother, Mahinda, who resigned as prime minister last week.

Other factors have included heavily subsidised domestic prices of fuel and a decision to ban the import of chemical fertilisers, which devastated the agriculture sector.

“This is an economy that hasn’t actually fully recovered from the pandemic yet,” said Christian De Guzman, senior vice president sovereign risk at Moody’s. “Tourism, which is one of their engines of growth, hasn’t come back.”

TEST SUPPORT

Sri Lanka is also officially now in default on its sovereign debt as a so-called grace period to make some already-overdue bond interest payments expired on Wednesday.

Weerasinghe said plans for a debt restructuring were almost finalised and he would be submitting a proposal to the cabinet soon.

“We are in pre-emptive default,” he said. “Our position is very clear, until there is a debt restructure, we cannot repay.”

The central bank said energy and utility prices needed to be urgently revised, and analysts said the prime minister’s ability to push reforms through parliament and overcome public anger would be crucial.

“They need to bring in critical reforms and other measures to parliament to test their support and see if they really have consensus and stability,” said Shehan Cooray, head of research at Acuity Stockbrokers in Colombo.

He added, however, that the situation had taken a turn for the better. “Given that there was a point where it was even difficult to find a governor, the fact that he has decided to remain is a good thing,” Cooray said.

A spokesperson for the International Monetary Fund said on Thursday the fund was monitoring developments very closely and that a virtual mission to Sri Lanka was expected to conclude technical talks on a potential loan program to country on May 24.

Wickremesinghe, speaking in parliament, said the government was working to release six fuel shipments that had arrived at Colombo’s port.

“There are two petrol shipments among them but this will not end the shortages,” he said, adding that supplies had been locked in only until mid-June.

“Our aim now is to reduce the lines and find a way to start a fuel reserve so even if a couple of shipments are missed there is fuel available.”

However, there is considerable opposition to him. Protesters agitating for the removal of the Rajapaksa brothers say he is their stooge.

(Additional reporting by Swati Bhat, David Lawder and Jorgelina do Rosario; Writing by Raju Gopalakrishnan; Editing by Robert Birsel and Chizu Nomiyama)

Sterling at two-week high, wins respite from growth fears for now

By Lucy Raitano

LONDON (Reuters) -Sterling climbed to a two-week high against a weaker dollar on Thursday, winning a respite for now from the soaring inflation and murky growth outlook that has weighed on sentiment towards the British currency.

In another volatile day of trading, sterling touched its highest level since May 5 at $1.25130, and was last up 1.1%.

Having fallen sharply on Wednesday, the pound bounced back – a move analysts attributed to a broadly-weak dollar.

It had hit the $1.25 level earlier this week before tumbling on Wednesday after data showed UK inflation rising to a 40-year record high and growing concerns this would slow growth sharply.

“The key debate we’re having, and the Bank of England is having, is to what extent should they be responding to the pick-up in inflation and to what extent the rise in inflation is putting downward pressure on future growth, so limiting the need to tighten policy,” said RBC Capital Markets chief currency strategist Adam Cole.

“We’re kind of on a bit of a knife edge at the moment over which one dominates.”

Strong labour market data earlier this week had boosted expectations that the Bank of England would have to further increase interest rates, while other data showed that inflation is now running at 9% — well above the BoE’s 2% target.

“Volatility in the pound has increased because of the signals that we have received from the Bank of England, it has a very divided committee with some arguing for larger rate hikes and some who are concerned about the economic outlook,” said Mikael Olai Milhøj, chief analyst at Danske Bank.

Potential changes to the Northern Ireland protocol and the risk of a trade war with the European Union also pose a Brexit-related risk for sterling.

“It is a risk to my forecast in the sense that if tensions start to intensify more than what we are seeing right now, it’s something that would weigh on the pound, and we could see investors pricing in a higher Brexit risk premium,” said Milhøj.

The pound was 0.3% higher against the euro at 84.61 pence.

News that British Prime Minister Boris Johnson has escaped further fines following a police investigation into COVID-19 lockdown parties at Johnson’s Downing Street office had little immediate impact on sterling, with focus on the economic outlook.

British April retail sales data on Friday was expected to provide fresh direction.

“The more critical question is what the consumer confidence and retail sales data shows tomorrow, as we get to see how consumers responded to rising prices and the squeeze on incomes that resulted from it,” said RBC Capital Markets’ Cole.

(Reporting by Lucy Raitano; editing by Dhara Ranasinghe and Susan Fenton)

Marketmind: Which earnings to the rescue?

A look at the day ahead from Danilo Masoni.

Traders have sold the latest rally, and savagely, tipping world equities back on the brink of confirming a bear market pattern. And the fear behind the rout is that the support which strong earnings have provided so far against pressure from rising rates is starting to dwindle.

Big-box retailers on Wall Street showed the world how painful inflation and supply chain problems can be, while adding to concerns that the American consumer who powers the world’s top economy might not be in as strong shape as thought. That sent investors rushing for the exit.

The S&P 500 fell 4% in its biggest drop since June 2020 as retail giant Target tanked 25% after warning of a bigger margin hit due to rising fuel and freight costs. The day before rival Walmart trimmed its profit forecast.

The sour mood spilled over to Asia and Europe too looks set to extend Wednesday’s losses, although the safe-haven dollar eased and riskier currencies like the Aussie jumped as Shanghai set out plans to end a COVID lockdown.

Meantime, early signs of “capitulation” among retail traders have emerged, according to Vanda Research, which cited put option trading near record highs and Charles Schwab net assets suffering outflows for the first time since 2020.

Against this backdrop energy and commodities feature amongst the rare safe harbours. Brent crude is rising 1% back above $110, and Europe’s energy index struck a fresh three-year high on Wednesday, escaping the stock market battering.

Key developments that should provide more direction to markets on Thursday:

* Japan’s exports extended double-digit gains for a thirdstraight month in April. * Speaker’s corner: BoE’s head of Financial MarketsInfrastructure, Christina Segal-Knowles, ECB Vice-president Luisde Guindos * Central bank meetings: South Africa, Egypt, Philippines * U.S. initial jobless claims/Philly Fed index * US 10-year TIPS auction * Earnings: Generali, Investec, Royal Mail, Kohl’s

(The story refiles to fix chart.)

(Reporting by Danilo Masoni)

South Africa hikes rates as it steps up inflation fight

By Alexander Winning and Olivia Kumwenda-Mtambo

JOHANNESBURG (Reuters) -South Africa’s central bank on Thursday increased its main lending rate by the largest margin in more than six years as it stepped up efforts to fight inflation, sending the rand higher.

The decision was in line with a Reuters poll published last week.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee increased the repo rate by 50 basis points to 4.75%. The committee was split 4-1, with four members opting for the 50 bps hike and one preferring a 25 bps move.

The rand hit a two-week high against the dollar after the decision was announced.

“Headline inflation has increased well above the mid-point of the inflation target band, and is forecast to breach the target range in the second quarter,” Governor Lesetja Kganyago told a news conference.

He said headline inflation was expected to return closer to the mid-point in the fourth quarter of 2024, later than forecast at the March policy meeting.

Thursday’s decision marks the fourth time in a row that the SARB has raised rates, with the previous three moves 25 bps increments.

The SARB had early this year sought to stress that its policy trajectory would be gradual to combat inflation risks while also continuing to support households and companies in the wake of the COVID-19 pandemic.

But since then higher-than-expected global inflation has pushed major central banks to accelerate their normalisation paths, tightening global financial conditions.

“The market had priced in 50 bps, and the SARB delivered – with their anti-inflation credentials intact,” said Razia Khan, chief Africa and Middle East economist at Standard Chartered. “The rand liked this tightening, which means that for the SARB, it delivered pretty instantly.”

Earlier this month the U.S. Federal Reserve raised rates by 50 bps and signalled similar moves at upcoming policy meetings.

The SARB now forecasts headline inflation this year of 5.9% from 5.8% seen in March. It sees 2022 economic growth of 1.7%, versus 2.0% forecast previously.

Consumer inflation was running at 5.9% in annual terms in April and March, near the top of the central bank’s 3%-6% target range, driven by higher fuel and food prices linked to the war in Ukraine.

(Additional reporting by Promit Mukherjee; Editing by James Macharia Chege and Alison Williams)

Russian rouble firms past 62 vs dollar as tax payments loom

(Reuters) – The Russian rouble firmed past 62 against the dollar on Thursday, propped up by capital controls as well as looming tax payments that usually require extra conversion of foreign currency to roubles to meet local liabilities.

The rouble has become the best-performing currency this year despite a full-scale economic crisis, artificially supported by controls that Russia imposed in late February to shield its financial sector after it sent tens of thousands of troops into Ukraine.

At 1320 GMT, the rouble gained more than 2% to 62.08 to the dollar on the Moscow Exchange, briefly hitting 61.72, its strongest since early 2020.

Against the euro, the rouble firmed more than 3% to 64.46 after a fleeting move to 61.1075 at the market opening, which was likely caused by a trading error and became the rouble’s strongest point since April 2017.

“Given that commodity prices remain high, the rouble firming could continue to 60 (to the dollar) and maybe further by the end of the second quarter,” said Anton Strouchenevsky, chief economist at SberCIB Investment Research.

“But as imports are likely to stabilise in the third quarter and the central bank can ease capital controls, the rouble is likely to stabilise above the 70 mark to the dollar in the fourth quarter.”

The rouble is steered by the requirement for export-focused companies to convert 80% of their revenues, while demand for dollars and euros is limited by capital controls and a drop in imports due to disrupted logistics in the aftermath of sanctions.

On the bond market, yields on 10-year OFZ treasury bonds inched lower to 10.24% from levels around 10.30% seen earlier this week.

Yields, which move inversely with bond prices, are expected to go further down as the central bank is set to cut its key rate this year to prop up the economy and as inflation slows thanks to the firming rouble.

The central bank is likely to cut its key rate by 100-200 basis points from 14% at its next board meeting in June, said Dmitry Polevoy, head of investment at LockoInvest.

For the first time in many weeks, annual inflation slowed, to 17.69% as of May 13 from 17.77% a week earlier, while the weekly inflation reading slipped to 0.12%, well below the 2.22% reading seen in early March days after Russia started what it calls “a special military operation” in Ukraine.

Stock indexes were mixed. The dollar-denominated RTS index was 1.7% higher at 1,232.7 points. The rouble-based MOEX Russian index shed 0.6% to 2,430.0 points.

For Russian equities guide see

For Russian treasury bonds see

(Reporting by Reuters; Editing by Nick Macfie and Bernadette Baum)

Thailand has no need to follow Fed’s tightening -central bank chief

By Kitiphong Thaichareon and Orathai Sriring

BANGKOK (Reuters) – Thailand has no need to raise interest rates following the Federal Reserve’s hikes in U.S. rates as domestic factors and the economic recovery will be the main issues determining policy, the central bank chief said on Thursday.

The country’s external position remains strong with low foreign debt and high international reserves, Bank of Thailand Governor Sethaput Suthiwartnarueput told reporters on the sideline of a business seminar.

Capital movements had not been a problem yet, he said.

However, the BOT will closely monitor baht volatility which has been driven by external factors, including the Fed’s rate trend, as it may impact smaller businesses, Sethaput said.

He declined to say whether the BOT had intervened over the baht that has been trading at its weakest level in almost five years against the dollar.

The BOT has left its benchmark rate at a record low of 0.50% since May 2020. It will next review policy on June 8 and most analysts expect no imminent change.

At the seminar, Finance Minister Arkhom Termpittayapaisith said fiscal and monetary policies were still working in step to support the economy.

Sethaput said the BOT would ensure no disruptions to the economic recovery, which has been slow and uneven, with the vital tourism sector still lagging.

The task ahead for the BOT “is to do whatever it takes to make the recovery uninterrupted and take off as smoothly as possible,” he said.

Despite higher prices, there was no risk of stagflation since the economy is still growing, likely by more than 2% this year, helped by exports and tourism, Sethaput said.

He sees the number of foreign tourists topping a previous forecast of 5-6 million this year, versus nearly 40 million in 2019.

Last month, Sethaput told Reuters tourism might not return to pre-pandemic levels until 2026 and the BOT would focus on supporting growth, even as surging global prices force its peers to increase interest rates.

The BOT is also due to review its 2022 growth forecast, currently at 3.2%, at the rate meeting. Sethaput said the state planning agency’s growth outlook of 2.5-3.5% this year was close to the BOT’s estimate.

(Reporting by Orathai Sriring, Kitiphong Thaichareon, Satawasin Staporncharnchai and Panarat Thepgumpanat; Editing by Ed Davies)

As ECB pares back stimulus, investors alert for fragmentation risk

By Dhara Ranasinghe

LONDON (Reuters) – As the European Central Bank races towards the stimulus exit to tame record-high inflation, angst about whether it can contain stress in weaker economies is creeping back into corners of bond markets.

For sure, indicators of stress are comfortably below peaks seen at the height of the 2020 COVID-19 crisis, and nowhere near levels of the 2011-2012 euro zone debt crisis. Cohesion is stronger after the pandemic and war in Ukraine, while an 800 billion euro recovery fund supports the bloc and France last month re-elected a pro-European president.

Yet with inflation at 7.5%, ECB bond-buying stimulus will end soon — challenging weaker southern European states and putting fragmentation risks back in focus as their government borrowing costs versus safer Germany shoot higher.

“It is something I worry about,” said DZ Bank rates strategist Christian Lenk. “The million dollar question is where are bond spreads too wide that the ECB intervenes.”

Here’s a look at what stress indicators show.

1/ CANARY, COALMINE

If the premium investors demand to hold bonds from lower-rated states rises too far above top-rated Germany, the ECB’s ability to transmit monetary policy effectively is challenged. So-called fragmentation risk could heighten economic instability.

At 200 basis points (bps), highly-indebted Italy’s 10-year bond yield gap over Germany is below peaks of more than 300 bps hit in March 2020 and 2018, when a new populist Italian government clashed with the European Union over budget policy.

But it is near the widest levels since May 2020 after widening 65 bps this year. Talk of ECB measures to contain spreads has grown; ING says markets could test the ECB’s resolve by pushing Italy’s spread to 250 bps.

Graphic:Italy’s 10-year bond yield gap over Germany- https://fingfx.thomsonreuters.com/gfx/mkt/byprjdlrgpe/BTPspread1805.PNG

A blowout in this spread prompted the ECB to launch its emergency stimulus scheme in March 2020, as a pandemic-induced financial rout raised fears about the currency bloc’s viability.

2/ INSURANCE POLICY

The cost of insuring against a debt default in southern Europe has risen recently to the highest since 2020, although credit default swaps (CDS) sit below previous peaks.

Graphic:CDS in southern Europe creeping higher again- https://fingfx.thomsonreuters.com/gfx/mkt/akvezrqmkpr/CDS1805.PNG

Another gauge of fragmentation risk is the spread between CDS contracts issued under trade body International Swaps and Derivatives Association’s (ISDA) 2003 definition and those issued under its 2014 guidelines. The latter includes guidance on redenomination risk and carries a premium.

The gap between two such Italian CDS contracts is roughly 64 bps, around the widest since April 2020, Rabobank said.

Rabobank’s head of rates strategy Richard McGuire notes the spread was double current levels in 2018. “From an historical perspective this gives investors cause to be alert rather than alarmed,” he added.

Graphic:Italy 2003 CDS vs Italy 2014 CDS- https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdlkgve/ITCDSVSCDS.PNG

3/ LIFE AFTER 2013

How investors trade bonds issued before and after 2013 is also worth watching.

That year, regulators said European government bond contracts should contain collective action clauses (CACs), meaning majority bondholder approval is needed for a restructuring including a change in the currency of payment.

UniCredit estimates that roughly 415 billion euros of Italian bonds are not covered by CACs.

An Italian bond issued in 2008, before the CAC ruling and maturing next year, has risen 72 bps this year. A one-year Italian bond issued in 2022 and maturing 2023, is up a similar amount.

If the 2022 bond outperforms its non-CAC peer, that would suggest fragmentation worries are returning.

(Reporting by Dhara Ranasinghe; Additional reporting by Alessia Pe in Milan; Editing by Toby Chopra)

South Africa Mulls Digital Rand, Expects Crypto Regulation in 2023

Key Insights:

  • South African Reserve Bank deputy governor says digital rand is a few years away.
  • The South African CBDC could cut the high cost of cross-border payments for banks.
  • The central bank readies for crypto regulations in 2023.

Cryptocurrency is gaining traction in South Africa after the government made it clear that it is taking cryptos very seriously. The South African Treasury announced further crypto regulations in the Budget Review 2022.

Last month, the South African Reserve Bank (SARB) concluded technical proof-of-concept for a wholesale central bank digital currency (CBDC) settlement system. Dubbed Project Khokha 2 (PK2), this marks the second phase of CBDC launched in 2018.

Additionally, SA is also a part of Project Dunbar, a CBDC initiative for international settlements, along with the central banks of Australia, Malaysia, and Singapore.

Digital rand is a few years away

In March, the central bank said that a digital rand is being explored as a way to improve international banking. The SARB deputy governor Kuben Naidoo has now given a possible timeline for a roll-out.

In his interview with Reuters Wednesday, Naidoo said that a digital rand or a CBDC would turn up in a few years. He noted that the digital rand would work to reduce the high cost of cross-border payments for banks.

It remains a nightmare for South Africans who initiate money remittance from SA to other countries. This is because, according to a World Bank report in 2021, South Africa remains the costliest G20 country to send remittances from. Naidoo said,

“We’re still learning, we’re still experimenting [CBDCs].”

However, he did not mention how long it would take for the central bank to fully implement a digital rand.

Crypto regulations coming to South Africa

The deputy governor further said that regulation of crypto assets is soon coming into force. He suggested that the government regulation of cryptos such as bitcoin (BTC), and ether (ETH), might come to light in the next nine to fifteen months or in 2023.

The South African Reserve Bank is concerned about the possibility of criminal activities associated with cryptos. The bank believes that a proper crypto regulation would prevent theft, money laundering, and undermining of monetary policy. Naidoo noted,

“If crypto assets were to become a very ubiquitous currency, you could undermine the authority of the central bank.”

Additionally, South Africa’s Financial Sector Conduct Authority (FSCA) said in December 2021 that it is preparing a regulatory framework for cryptos to protect vulnerable members of its society.

The regulator said that it is exploring ways to establish rules on how the trading of crypto assets should be conducted. The watchdog said that it would unveil the regulations this year.

The role of cryptocurrencies is rapidly increasing in the African continent. Notably, Chainalysis ranks Kenya, South Africa, and Nigeria among the top-10 countries for cryptocurrency use.

Last October, Nigeria debuted Africa’s first central bank digital currency, dubbed eNaira. The digital naira promised to make financial transactions “easier and seamless” for the entire population.

Daily FX trading volumes reach $1.86 trln in April, up 5% – CLS

LONDON (Reuters) – Average daily foreign exchange trading volumes in April hit $1.86 trillion, 5% higher than a year earlier as volatility shot higher and investors bought and sold more in spot and forward markets, CLS said on Thursday.

CLS, a major settler of trades in FX markets, said in a statement that turnover was driven by a 14% rise in spot trading and a 27% increase in forwards activity, although swap volumes were flat on 2021 levels.

A series of recent central bank interest rate rises and concern about the economic fallout from the war in Ukraine have pushed FX volatility higher, which typically encourages more trading activity. April volumes were down 12.5% from March levels, however, CLS said.

(Reporting by Tommy Reggiori Wilkes; editing by Dhara Ranasinghe)

U.S. crypto lobbyists in push to contain fallout from stablecoin meltdown

By Hannah Lang

WASHINGTON (Reuters) – The cryptocurrency industry is scrambling to respond to U.S. lawmakers’ concerns about stablecoins following the collapse of TerraUSD, which wiped billions off the cryptocurrency market.

The Blockchain Association and the Chamber of Digital Commerce, which represent some of the most influential crypto companies, say they have been fielding a flurry of questions from Capitol Hill since TerraUSD, known as “UST,” broke its peg last week and crashed 90%.

Stablecoins are cryptocurrencies that try to maintain a constant exchange rate with fiat currencies. The $163 billion space is dominated by tokens that are pegged to the U.S. dollar, like Tether and USD Coin, by holding reserves in traditional dollar assets. Some stablecoins, like UST, however, use a complex algorithmic process to create the peg.

Capitol Hill lawmakers have been quizzing lobbyists on the structure of UST, seeking to determine whether its collapse was preventable and if other stablecoins could suffer the same fate.

Lobbyists are urging lawmakers not to crack down too hard on the gamut of stablecoins.

“The one thing we’ve been cautioning to the Hill is that we don’t want to accidentally throw the baby out with the bathwater, because stablecoins we think are a really critical piece of the crypto ecosystem going forward,” said Kristin Smith, executive director of the Blockchain Association.

As the cryptocurrency market has exploded, reaching $3 trillion in November, the scrutiny of policymakers has increased.

In response, the crypto industry has beefed up its presence in Washington, spending $9 million on lobbying in 2021, according to Public Citizen. The Blockchain Association and Chamber of Digital Commerce spent $900,000 and $426,663, respectively, while crypto giants Coinbase Global Inc and Ripple Labs forked out $1.5 million and $1.1 million respectively.

REGULATORY GRAY AREA

The industry’s growing influence will be tested as it tries to contain the fallout from the UST and broader crypto market crash, which shrank from $1.98 trillion to $1.3 trillion in just six weeks due to investor fears over rising interest rates.

There are currently a handful of draft stablecoin bills floating around Congress. While analysts say the chances of Congress passing any of those this year is slim with lawmakers focused on the midterm elections, recent crypto market gyrations have caused many lawmakers to take notice.

“There are a lot of people in Congress that are interested in coming up with a regulatory framework to prevent something like this from happening again,” said Smith.

Cryptocurrencies fall into a regulatory gray area.

President Joe Biden’s administration has largely focused on rules for dollar-backed stablecoins. A November Treasury Department-led report recommended Congress regulate stablecoin issuers like insured depository institutions, but it did not cover algorithmic stablecoins.

Lobbyists have had to quickly change tack and educate lawmakers on the differences, they say.

“All of the recent legislative proposals have been fiat-backed,” said Cody Carbone, policy director at the Chamber of Digital Commerce. “We thought we did pretty well in educating because we stayed within that scope, and now we’re going to have to broaden that.”

While the group’s members do not currently operate algorithmic stablecoins, the chamber is crafting talking points to explain how they work, said Carbone.

Regulators have warned that U.S.-dollar stablecoins could be susceptible to runs if users lose confidence, a fear that appeared to partially play out last week: after UST broke its peg, Tether, the largest stablecoin, briefly broke its peg too.

“This is essentially a call to action, because not all monies are created equal, and what one believes to be stable may actually not be stable,” said Jonathan Dharmapalan, CEO of eCurrency, a digital currency technology provider.

While the Blockchain Association’s Smith agreed legislation was not imminent, the UST problem “certainly heightens that need,” she said.

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