Fed indicates more US interest rate hikes to come

The US Federal Reserve has decided against what would have been an 11th consecutive interest rate increase as it measures what the impacts have been from the previous 10.

But the decision by the Federal Open Market Committee (FOMC) to pause its tightening policy this month came with a projection that a further two quarter point increases will follow before the end of the year. The next could be as early as the FOMC’s next scheduled meeting on July 25-26.

The Fed began raising rates in March 2022, about a year after inflation spiked to its highest level since the early 1980s. Those rate hikes have amounted to 5 percentage points on the Fed’s benchmark to a level not seen since 2007. The increases have helped push US 30-year mortgage rates over 7% and also spiked borrowing costs for other consumer items such as auto loans and credit cards.

“We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace,” said Fed Chair Jerome Powell at a news conference following the central bank decision. “We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”

The central bankers said they will take another six weeks to see the impacts of policy moves as the Fed fights an inflation battle that lately has shown some promising if uneven signs. The decision left the Fed’s key borrowing rate in a target range of 5%-5.25%. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the post-meeting statement said.

Although markets had expected rates to remain on hold this month, a surprising aspect of the decision came with the “dot plot” in which the individual members of the FOMC indicate their expectations for rates further out.

The dots moved decidedly upward, pushing the median expectation to a funds rate of 5.6% by the end of 2023. Assuming the committee moves in quarter-point increments, that would imply two more hikes over the remaining four meetings this year. During the press conference, Powell said the FOMC had yet to decide whether a further increase would be needed in July.

Members also moved up their forecasts for future years, now anticipating a fed funds rate of 4.6% in 2024 and 3.4% in 2025, against respective forecasts of 4.3% and 3.1% in March, when the Summary of Economic Projections was last updated.

The future-year readings, though, do imply the Fed will start cutting rates – by a full percentage point in 2024, if this year’s outlook holds. The long-run expectation for the fed funds rate held at 2.5%.

Those changes to the rate outlook occurred as members raised their expectations for US economic growth for 2023, now anticipating a 1% gain in GDP as compared to the 0.4% estimate in March. Officials also were more optimistic about unemployment this year, now seeing a 4.1% rate by year’s end compared with 4.5% in March’s prediction.

Meanwhile the European Central Bank (ECB) has confirmed a further quarter point rate hike. It marks the eighth successive rate rise for the central bank, underlining a struggle across many developed economies to cool price rises amid uneven economic growth.

The latest increase pushes the ECB’s deposit rate, which is paid on commercial bank deposits, to 3.5%. Its main refinancing operations, which is the rate banks pay when they borrow money from the ECB, rose to 4%. Inflation is expected to average 5.4% in 2023, before dropping to 3% in 2024, according to fresh projections from ECB staff.

Earlier, ECB governing council member Gabriel Makhlouf said that it would be a "question of judgement" whether the ECB wouldl need to continue with rate hikes after the summer. Makhlouf also noted that key rates are likely to stay there once they reach the “top of the ladder of increasing interest rates.”

Economists at Crédit Agricole also correctly forecast today's rate hike by the ECB, adding that raising borrowing costs could support the single currency. “We expect a 25 bps rate hike along with indications from the ECB that it expects persisting inflation in the Eurozone and does not believe financial conditions have tightened enough to threaten growth, could spur further front-loading of rate hikes and support the Euro.

“However, we expect the euro to consolidate mainly against currencies with dovish central banks or banks that have signalled the peak of their tightening cycle, such as the Japanese Yen and the New Zealand Dollar,” they note in their report.
 

Japan’s corporates back in favour with investors

Japan’s central bank is expected to keep policy loose when it announces its latest interest rate decision tomorrow

Analysts believe that the Bank of Japan (BoJ) will maintain its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy. Ex-deputy governor Masazumi Wakatabe has already forecast no change in monetary policy this month as “it’s still too early to call that this inflation has been sustainable and stable.”

Although Japan’s core CPI inflation has risen to 4.1%, the highest level recorded in the last four decades, the BoJ has opted not to follow the rate hikes of other central banks. The BoJ’s forecast continues to predict that core inflation will fall below its 2% target by the end of this year.

Governor Kazuo Ueda has also repeatedly signalled his intention to take time before making any major changes to the central bank’s stimulus. Bloomberg reported recently that BoJ officials see little need to change the bank’s control of yields at this month’s meeting due to improved functioning of the Japanese government bond market.

This month has also seen a strong performance by the Tokyo stock market, with The Nikkei 225, the index of Japan’s 225 biggest listed companies, moving above the 33,000-mark to its highest level for 33 years.

Although investor interest has focused on a handful of companies, including Toyota and SoftBank, a wider investor view that Japan is good value compared with stocks in the West has taken hold in recent months and accelerated in the past few weeks.

A decision by the veteran US investor Warren Buffett to increase his exposure to Japan has also helped galvanise interest in the market. Buffett’s Berkshire Hathaway first alighted on five Japanese conglomerate trading houses — Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo — in August 2020. These positions have tripled in value to more than US$17 billion, but Buffett thinks there is more to come, disclosing last month that he has ramped up his positions in Japan. Japanese stocks remain “ridiculously” cheap, he told the Berkshire AGM.

Changing corporate governance is another reason for investor enthusiasm. Japanese corporates, according to reports, are gradually hiring more independent directors, lifting dividends, launching buybacks and generally pushing towards shareholder-friendly reforms.

This has provided for a strong performance by BlackRock’s Japan-focused exchange traded fund (ETF). The iShares MSCI Japan ETF has already attracted US$1 billion this month. The fund — whose top holdings include Toyota Motor Corp., Sony Group Corp., and Mitsubishi UFJ Financial Group Inc. — has gained 8% month to date as the country’s economic outlook improves.

There have been many false dawns for Japanese shares since the stock market peaked at the end of the 1980s, but at least some analysts believe that this time the rally is more substantively underpinned. Japan’s economy, which was sluggish and plagued by inflation for years.

The country’s economy, sluggish and beset by deflation-plagued for years, is picking up steam. After a brief dip into recession in late 2022, Japan’s economy grew an annualised 2.7% in the first quarter of 2023, revised up from the first estimate of 1.6% made last month,

After what turned out to be a false dawn a decade ago, when “Abenomics” first raised hopes of corporate governance reform in Japan, many seem to think better of recent measures by the Tokyo Stock Exchange, which has finalised its market restructuring rules. Among the latest measures was one that directed listed companies to “comply or explain” if they are trading below a price-to-book ratio of one — an indication a company may not be using its capital efficiently.

The exchange warned such companies could face the prospect of delisting as soon as 2026.

“The recent TSE initiative is a game-changing moment, because it’s going to challenge a lot of companies that are trading on less than one-time price-to-book to improve profitability and support their share price,” said Oliver Lee, a Singapore-based client portfolio manager, at Eastspring Investments.
 

Clearstream and fintech Consort1 expand repo market access

Clearstream, Deutsche Börse’s securities transactions settlement service together with repo and securities lending-specialised fintech Consort1, has enabled the placement of secured deposits as tri-party custody agent.

As a result of the collaboration, the wholesale repurchase agreement and securities lending market can now be accessed by local authorities, corporates, fund managers, and other institutions who have not previously had access.

The placement was done in collaboration with Standard Chartered Bank, NatWest, Alpha Group, BankClarity, and Arlingclose, with the UK’s Gloucestershire County Council being among the first UK local authorities to utilise the new service.

Secured deposits offer many benefits, such as opportunities to diversify investment portfolios as well as full collateralisation of the cash deposit with government bonds, corporate bonds, or other securities to mitigate the financial risk during a bank failure. This means, even if the bank were to fail, the cash depositors’ funds would be secured up to the value of collateral held with Clearstream as tri-party custody agent for the depositor.

Marton Szigeti, Head of Collateral, Lending and Liquidity Solutions at Clearstream, stated: “Clearstream’s best-in-class custody solution adds highest liquidity and security for stable cash to help our bank clients better manage their regulatory liquidity requirements. We are delighted to be working closely with the Consort1 team to deliver the benefits of tri-party to a segment of clients that would previously have been excluded from the market.”

Justin Clapham, co-founder and CEO of Channel Islands-based Consort1, stated: “We are proud and truly honoured to be working with Clearstream to bring the repo and collateralised secured deposit service to institutions that have not been able to access this before. Along with our global partners, we are thrilled to be at the forefront of this innovation in the financial industry.”

 

Lithium at centre of EU-Argentina MOU

Argentina’s president and the chief of the European Union (EU) have signed a memorandum of understanding (MoU) to boost cooperation on sustainable raw materials during an event in Buenos Aires.

The agreement, part of a push for more clean energy tie-ups, aims to boost cooperation on climate-friendly infrastructure as well as new research on raw materials, including lithium, an ultra-light electric vehicle (EV) battery metal that governments worldwide are keen to secure supply of.

"Lithium is very important because it is crucial for clean energy technologies,” EU Commission President Ursula von der Leyen told a news conference in Buenos Aires, citing an estimated 12-fold rise in lithium demand in Europe by 2030.

Argentina is the world’s fourth largest producer of lithium and has been attracting significant investment. The country, along with Chile and Bolivia, is in South America’s so-called ‘lithium triangle’, which holds the world’s largest trove of the metal.

Von der Leyen added that Argentina also had big potential for renewable energy, including solar and wind, as well as green hydrogen, a growing sector.

The MoU comes as the EU and South America’s Mercosur bloc push towards finalizing a trade deal, which some leaders hope can be concluded by the end of the year.

“My aim is that we do everything we can so the Mercosur-EU agreement is concluded as soon as possible,” said von der Leyen. “I think the bulk of the work has already been done.”

Argentine President Alberto Fernández said there were some kinks in the deal to iron out, citing issues such as Europe looking to protect its farm sector and stringent environmental clauses that could impact South American producers.

“We ask for a balanced agreement, where we all win,” he said. “Those are the things we have to talk about.”

Bank of America leads renewed appetite for green bonds

Wall Street’s largest lenders are back in the green bond business. Bank of America (BoA) returned to the green bond market last week, ending a seven-month issuance drought for bonds tied to environmental, social and governance (ESG) financing from BoA and its peers.

BoA, the second-largest US bank, has issued about US$15 billion under different ESG debt labels since it first tapped the market in 2013, making it the biggest issuer of the bonds among US corporate and financial issuers, according to Bloomberg data.

By contrast, banks had sold US$8.9 billion of ESG-linked debt during 2022. The drop in issuance has dovetailed with a sharp overall decline in US sales of bonds designed to help companies “do good” as right-wing political pressure backed by Big Oil and other polluting industries increases and investors grow more sceptical about the impact of the bonds on the environment and society.

Banks may be more active in sustainable bond markets denominated in other currencies given the recent scrutiny on ESG in the US, according to Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.

The European green bond market is “arguably deeper, has a more developed sustainable regulatory framework, a dedicated investor base and a less mobilised anti-ESG contingent,” he added. “Issuers will need to be more thoughtful about how they structure these deals [due to] the additional scrutiny of certain structures.”

Banks also have reined in their overall bond issuance, given volatility earlier this year as higher interest rates impacted on markets. Financial institutions account for about 38% of new issuance so far in 2023, down from 55% last year, Bloomberg data shows. None of the sales have been ESG-related, except for BoA’s recent offering.

“Funding levels and spreads haven’t been particularly attractive so—to a degree—banks have been waiting it out,” Elfner said.

The slowdown in ESG sales from the big banks correlates with lower overall issuance, said Arnold Kakuda, senior analyst for the financial sector at Bloomberg Intelligence.

Kakuda predicted in January that sales of ESG and conventional bonds by Wall Street’s biggest banks would drop 33% this year to US$132 billion. This week he said the decline may be even larger given the slow pace of issuance so far in 2023.

The US financial-services industry is being pressed by Republican-controlled states, including Texas and Florida, to stop considering ESG criteria in their decision-making processes. A recent survey found that almost half of North America’s biggest asset managers are concerned that politics around ESG exposes them to legal risks.

Last week, BoA became the latest target of an anti-ESG group, which criticised the company for being too vocal about ESG topics like the climate crisis. The company responded that “responsible growth is how we deliver industry-leading service to our 68 million American consumers, being a great place to work for our employees and supporting communities across the United States while delivering strong returns for our shareholders.”

 

Russia’s Sberbank aims to issue bonds in Chinese yuan

Russia’s dominant lender Sberbank will issue bonds in Chinese yuan (CNY) this year if an opportunity arises and will continue borrowing in roubles (RUB) to drive portfolio growth, the bank’s finance chief told Reuters.

In his first interview since becoming Sberbank’s head of finance last year, Taras Skvortsov said the bank’s yuan deposit portfolio, which has grown 1-1/2 times since the start of the year, was currently more appealing than bond issues, which require active demand, good liquidity and attractive prices.

“So far there is good demand for deposits in yuan, especially from private clients, who are transferring their savings from dollars and euros to deposit in Chinese currency,” he said.

“But the situation is changing and it is possible that a window of opportunity will appear before the end of this year, then we will issue yuan bonds.”

The yuan’s role in Russia’s financial system and transactions has increased sharply since Western sanctions over Moscow’s actions in Ukraine have limited access to dollar and euro markets.

But strict currency controls still limit the yuan’s global reach and Russia’s central bank has warned that the rise of China’s yuan in Russia is not uniform, creating temporary imbalances and difficulties with foreign exchange liquidity.

Russian energy and commodities firms, such as Rusal, Polyus and Rosneft, have led the way in yuan-denominated issues. Russian firms placed bonds worth 1.7 billion yuan ($237.5 million) in May.

Skvortsov said volatility and the small volumes on the market were affecting Sberbank’s plans for now.

UK aircraft manufacturer brings production back home from East Europe

UK plane builder Britten-Norman will reshore its aircraft production after moving manufacturing to Eastern Europe in the late 1960s. The company plans to increase production rates and to repatriate manufacturing to its historic home in Bembridge on the Isle of Wight.

Britten-Norman will invest in new jigs and tooling to create two additional production lines as well as modernising production and decarbonising the site with new sustainable energy initiatives. The company said that the move comes after it announced that its famous light utility aircraft, the Islander, will launch as a zero emissions plane in 2026

Interest has also been sparked by the “introduction of finance and leasing options for the resurgent sub-regional aircraft market”. 

“The project is a great success story for the British aircraft manufacturing industry. I am very proud to be involved in this next chapter at Britten-Norman” said CEO, William Hynett.

A recruitment drive will be held in the coming months from the UK’s Solent Local EnterprisePartnership area. The company is looking for aircraft fitters and technicians, production engineering and supply chain roles. In addition to the ramp up in production, the company will be investing in its supply chain and spare parts stockholdings to support its existing operators. 

Britten-Norman will retain its 34,000 sq ft. facility at Solent Airport Daedalus, home of the final assembly line for the Islander. The plane is known for its multi-use design, which allows it to be converted into executive, commuter, freight and special mission fit options that include air ambulance, parachuting, crop spraying and aerial survey. The company’s second aircraft, Defender, is used for military intelligence, counterterrorism, surveillance, reconnaissance, maritime patrol and special missions.

According to Britten-Norman the company is the UK’s only sovereign commercial aircraft manufacturer. It has built over 1,250 aircraft and has customers in more than 100 countries. 
 

We Soda cancels planned London IPO

We Soda, the world’s largest producer of natural soda ash, has pulled out of a planned listing on the London Stock Exchange (LSE).

Originally announced at the end of last month, the company aimed to raise at least US$800 million through the planned initial public offering (IPO) for its parent Ciner Group, with press reports pointing to a potential valuation for the chemicals firm of up to US$8.5 billion. It would have been the biggest UK listing so far in 2023.

Explaining the cancellation, CEO Alasdair Warren said that “extreme investor caution in London meant that we were unable to arrive at a valuation.”

Commenting on the decision, Susannah Streeter, head of money and markets at financial services firm Hargreaves Lansdown said: “This is fresh blow for London just as confidence in the city as an IPO launch pad appeared to be edging back upwards. Investors are understandably cautious given the nervousness surrounding the UK’s prospects with inflation is still running so hot.

“Gilt yields have soared to levels not seen for 15 years amid expectations the Bank of England will have to fire off fresh rounds of interest rate hikes. The uncertainty ahead is clearly off-putting and companies considering IPOs may continue to set their sights on New York instead.”

 

Stripe expands Lightning cross-border payments to Mexico

Digital payments firm Stripe is expanding its Lightning Network-based cross-border payments service to Mexico, the largest market for remittances from the U.S., which accounts for around 95% of total remittances received by Mexicans from abroad, according to the company.

The service, Send Globally, is available in Mexico from June 14, according to a press release. It runs on the Lightning Network, a second layer payment system for the Bitcoin blockchain designed to provide cheaper and faster transactions than the base network. US dollars sent across the border using the service can be received as pesos in the recipient’s bank account, the release states.

Last week Stripe CEO and co-founder Jack Mallers said the company had ditched third party service providers and moved custody operations in-house. The new service bolsters its presence in Latin America less than a month after it established a headquarters for its global arm in El Salvador and said it expanded to more than 65 countries. 

“Stripe’s expansion to Mexico brings a better alternative to 12 million Mexican Americans,” the release said, underscoring the plight of a growing number of Mexican migrants in the US who are plagued by “high fees, slow settlement, and lack of innovation in incumbent cross-border payments services.”

 

Hong Kong “pressures banks to take on crypto clients”

HSBC and Standard Chartered are among lenders facing pressure from Hong Kong’s banking regulator to take on crypto exchanges as clients, the Financial Times has reported, citing three people with knowledge of the matter.

The UK-based lenders and the Bank of China were questioned by the Hong Kong Monetary Authority (HKMA) last month on why crypto exchanges were not being accepted as clients, according to the report.

The HKMA, in a letter to lenders on April 27, said that diligence on potential customers should not "create undue burden" especially "for those setting up an office in Hong Kong," the FT report said.

Hong Kong's urge for banks to accept crypto clients comes at a time when countries such as the US are doubling down on crypto exchanges, with the US affiliate of Binance halting dollar deposits last week after the Securities and Exchange Commission (SEC) asked a court to freeze its assets.