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Hindustan Times
7 hours ago
- Business
- Hindustan Times
Take Five: It's TACO time
June 6 - Uncertainty from Washington's tariff tactics remains rife, but investors realise that whatever U.S. President Donald Trump threatens doesn't tend to last long before he delays or backs down, meaning recent volatility has ebbed. This tendency to U-turn, dubbed the TACO trade - "Trump Always Chickens Out" - has caught on but it's also given investors something to bank on so they can focus on upcoming reads on inflation and trade. Here's a look at what's coming up for world markets from Kevin Buckland in Tokyo, Naomi Rovnick and Amanda Cooper in London and Alden Bentley in New York. 1/ TACOS FOR BREAKFAST The high-voltage volatility that shook markets in April and through May has subsided, with investors becoming accustomed to Trump's on-again-off-again approach to anything from tariffs to personal relationships - the meltdown with erstwhile DOGE chief and Tesla Chief Executive Elon Musk being the latest. Wall Street's fear-gauge, the VIX index, has slipped back below the 20-line that many view as a watermark. Since Trump became the 47th president on January 20, the index has topped 20 on 47 occasions. In the five months prior to that, it breached that level 18 times. In the last month, there have been just seven days when the VIX has popped above 20, compared with every day from April 2 "Liberation Day" to early May. If anything, the TACO trade is taking some spice out of the market. 2/ INFLATION HIDE AND SEEK Investors are hoping any rise in Wednesday's May consumer inflation report won't be as severe as feared, given Trump's erratic trade tactics. Recent data shows inflation falling close to the Federal Reserve's 2% target. Price pressures in manufacturing and services sectors are picking up, however. A good gauge of markets' long-term inflation view indicates only moderate concern. The inflation breakeven rate on five-year Treasury Inflation Protected Securities suggests investors believe the rate will average less than 0.3 percentage points above the target for the next five years. The Fed's most recent Beige Book showed economic activity is weakening, while costs and prices are rising across the different regions - a combination policymakers do not want to see. Traders expect the Fed to make no rate change at its June 18 meeting. 3/ A RARE DISPUTE Washington and Beijing's trade spat has brought a familiar issue back to the surface. China has a stranglehold on global supply of so-called rare earths, critical ingredients in almost every high-tech device out there, from cars to cruise missiles. When China cuts off supply, everything withers. The auto industry is feeling it. Suzuki suspended production of the Swift subcompact, weeks after Ford did the same for its Explorer SUV. The White House has blasted Beijing for reneging on tariff rollbacks agreed in Geneva last month, but China is doing the same, lambasting the U.S. over revoked student visas and cutting-edge chip curbs. Chinese trade data on Monday will illuminate what's at stake, while inflation figures that day will show if Beijing's efforts to stoke domestic demand are working. U.S. and Chinese officials are due to meet in London on Monday to discuss trade and defuse the high-stakes dispute. 4/ A NICE BALANCE April trade data for the European Union on June 13 could offer a reasonably clean read on where things stood as Trump's on-off tariffs began to roll out. The EU is firmly in the U.S. president's crosshairs. Trump has said more than once the sole purpose of the EU is to "take advantage" of America, on the grounds that his country boasts a $200 billion trade deficit with the bloc in goods alone, making the EU its second-biggest goods trade partner behind China. EU sales of cars, steel, pharmaceuticals and luxury goods and apparel among other things are big business. Trump on May 23 said he would impose a 50% tariff on all EU imports, only to back down two days later by delaying the duties by a month after a "very nice call" with European Commission President Ursula von der Leyen. 5/ TAX OR OFFEND Britain, often a prime target for bond vigilantes that attack indebted governments for financial mismanagement, has been pushed into these traders' peripheral vision by U.S. budget concerns. The Labour government's first spending review on Wednesday could bring the UK back into the spotlight. Even if finance minister Rachel Reeves manages to slash departmental spending, this will merely highlight how few cost-cutting options she has left, Bank of America says. UK public debt has swelled, leaving Reeves minimal headroom to avoid breaking self-imposed fiscal rules and less able to resist tax hikes. Still, businesses and borrowers still scarred by the gilt market riot after then Prime Minister Liz Truss' 2022 mini-budget may prefer higher taxes if that lowers the odds of bond vigilantes showing up.
Forbes
29-03-2025
- Business
- Forbes
Stagflation Warning Signs Emerge In The U.S. Economy
(Photo by) The U.S. stock market has delivered exceptional performance over the past year. Compared to other developed nations, the U.S. economy has outpaced its peers, driven by relatively strong corporate earnings, elevated government spending, and rising productivity. However, financial markets are beginning to question whether this era of American exceptionalism is coming to an end. A troubling mix of slowing economic growth and rising consumer prices, also known as stagflation, threatens to halt the country's long-standing market outperformance. It's a scenario that both policymakers and investors are eager to avoid. Stagflation is relatively rare because inflation and economic stagnation don't typically occur at the same time. Falling prices usually accompany economic slowdowns, as weaker demand puts downward pressure on inflation. In response, policymakers often turn to stimulative fiscal and monetary measures such as increased government spending or lower interest rates to help jumpstart growth. During periods of stagflation, slowing economic growth and rising consumer prices occur simultaneously. This typically results from supply-side shocks, restrictive trade policies, or poor government decisions that drive prices higher while hurting economic activity. The last major episode of stagflation in the U.S. occurred in the 1970s when oil shocks and policy missteps triggered runaway inflation and a weak economy. A return to a 1970s-style stagflation scenario would be disastrous for investors, yet recent economic indicators suggest a similar pattern may be unfolding. While inflation has eased from its 2022 peaks, it remains stubbornly above the Federal Reserve's 2% target. At the same time, consumer sentiment has dropped sharply, business activity is slowing as companies await clarity on trade policy, and key labor market indicators are beginning to weaken—all signs of a cooling economy. Tariffs are a major contributor to the inflation outlook. According to the Federal Reserve Bank of New York's Survey of Consumer Expectations, as of February 2025, U.S. consumers expect inflation to rise to 3.1% over the next year, the highest level recorded since May 2024. In response to the worsening outlook, investors in Treasury Inflation Protected Securities have pushed two-year breakeven inflation rates to 3.27%, up from 1.50% six months ago. TIPS pricing of 2-year breakeven inflation rate The University of Michigan Consumer Sentiment Index paints an even more concerning picture. The latest report showed a sharp rise in inflation expectations, with the one-year outlook climbing to 4.9%—the highest since November 2022—and the five-year outlook jumping to 3.9%, marking the largest monthly increase since 1993. Unlike the Fed's survey, the Michigan index emphasizes consumers' immediate perceptions of inflation as it relates to personal finances and current economic conditions, making its results more volatile. The most likely driver behind this shift in sentiment is uncertainty surrounding tariffs. New tariffs, including a 25% levy on steel and aluminum imports, along with a broader reciprocal tariff policy are set to be unveiled on April 2. They are expected to raise costs for American businesses, many of which will ultimately pass those costs on to consumers. While the administration hopes these trade measures will stimulate domestic production, the near-term reality is that higher input costs will likely drive higher prices. As inflation remains elevated, economic growth is showing signs of slowing. The University of Michigan's Consumer Sentiment Index fell 11% last month, dropping to its lowest level since 2022. Consumers are growing increasingly concerned about their financial prospects. Sentiment is a key indicator of future spending behavior; when confidence declines, households often scale back discretionary purchases, which can slow overall economic activity. Businesses are already adjusting their expectations in response. For example, Delta Air Lines recently lowered its Q1 2025 earnings forecast, citing weaker consumers and business demand. Similarly, initially optimistic about pro-business policies following November's national election, small businesses are now voicing concerns about future growth amid rising costs and ongoing policy uncertainty. After a brief period of outperformance relative to large-cap stocks, small-cap equities are struggling again. As of March 27, 2025, the iShares Russell 2000 ETF is down 7.19% year-to-date, significantly underperforming the SPDR S&P 500 ETF, which has declined 2.95% over the same period. To make matters worse, there are warning signs that employment growth may be losing steam. The Conference Board's Employment Trends Index, which tracks hiring trends, suggests that momentum in the job market is waning. "The ETI fell in February to its lowest level since October," said Mitchell Barnes from The Conference Board in a press release. "Growing policy uncertainty is beginning to weigh on business and consumer sentiment, with more substantial impacts from federal layoffs and funding disruptions expected in the months ahead," Barnes noted in the release. As the DOGE-related federal layoffs begin to show up in the data and some private businesses respond to the new tariff regime with potential job cuts, consumer spending could take a significant hit, further reinforcing the stagflationary cycle. The prospect of stagflation puts the Federal Reserve in a particularly challenging position. If inflation continues rising, it is possible that the Fed will be forced to tighten monetary policy In that case, the central bank risks making the economic slowdown worse by increasing borrowing costs. On the other hand, if policy is eased too soon to support growth, inflation could accelerate further. The Fed has signaled its continued commitment to bring inflation and inflation expectations under control, but rising tariffs have complicated its approach. In its most recent meeting, which concluded on March 19, Fed officials acknowledged growing economic uncertainty, prompting them to raise their inflation forecast while lowering their growth outlook. 'There is nothing more uncomfortable than a stagflationary environment, where both sides of the mandate start going wrong,' said Chicago Fed President Austan Goolsbee on March 25 on CNBC. 'Higher tariffs raise prices and reduce output—that is a stagflationary impulse,' he added. Financial markets have responded to the rising uncertainty with increased volatility. The S&P 500, which had been approaching record highs, has pulled back by 10% from its peak as investors weigh weakening growth prospects against heightened policy uncertainty. The bond market is also showing signs of strain. Despite expectations of slower growth, bond yields have been climbing as investors demand higher returns to offset rising inflation expectations. For investors, the threat of stagflation presents a challenging environment. Traditional equities may struggle in the face of stagnant growth, while inflation-protected sectors such as commodities and infrastructure could provide some resilience. Historically, gold and other hard assets have performed well during stagflationary periods. Gold's recent surge above $3,000 per ounce likely reflects growing concerns about this risk. Fortunately, stagflation is not inevitable. Avoiding it will require a balanced approach from the Trump administration that addresses inflation without stifling economic growth. Offering greater clarity on trade policy and implementing targeted fiscal adjustments that preserve consumer demand could help mitigate some of the key risks. There is also the possibility that the reciprocal tariff strategy, which matches to U.S. tariffs to levies imposed by other countries, could ultimately lead to lower duties. For example, Bloomberg has reported that the European Commission is drafting a term sheet for a potential agreement with the U.S. that would include reducing EU tariffs, encouraging mutual investment, and easing certain regulations and standards. Such concessions are exactly what the Trump administration is aiming for and could help counter some of the stagflationary pressures currently at play. The effects of federal spending cuts, revamped trade policies, and weakening consumer sentiment will take time to fully work their way through the economy. While markets may be overreacting to the threat of stagflation, the risk remains that policymakers could find themselves trapped, facing rising prices amid a slowing economy. In such a scenario, both stocks and bonds may have more downside. Stagflation is a lose-lose situation—and financial markets know it.
Yahoo
08-03-2025
- Business
- Yahoo
Inflation-Linked Bonds Rebound on Trump Tariffs: Credit Weekly
(Bloomberg) -- Money managers are flocking to bonds that hedge against inflation amid uncertainty about tariffs and their impact on the cost of living. NJ College to Merge With State School After Financial Stress Trump Administration Plans to Eliminate Dozens of Housing Offices Republican Mayor Braces for Tariffs: 'We Didn't Budget for This' Where New York City's Zoning Reform Will Add Housing How Upzoning in Cambridge Broke the YIMBY Mold Federal Reserve Bank of Philadelphia President Patrick Harker warned this past week that risks to the economy are rising, in part due to increasing prices. That fear helped spur the Bloomberg Global Inflation Linked Index, a gauge of investment-grade inflation-linked debt in developed markets, to gain about 5% from Jan. 13 through Thursday's close. US President Donald Trump has asked the public to bear with him as he seeks to overhaul trade policy, describing the economic pain that's expected to come with that as a 'little disturbance.' Policy uncertainty in the wake of tariff announcements has contributed to a negative shift in sentiment across markets, leading to sharp declines in equities, a weakening in the dollar and outflows in Treasuries funds. It's also contributed to falling Treasury yields, which is part of what makes this trade so hard to navigate. But rising inflation is a real possibility now even if many investors are bracing for rate cuts, said Nicolas Trindade, who runs a number of funds at AXA Investment Managers. He expects volatility to increase amid the unpredictable economic strategy. 'The main risk for 2025 is a sharp resurgence in US inflation on the back of tariffs, tax cuts and immigration restrictions that could lead the Fed to open the door to hiking interest rates again,' he said. 'The market is definitely not priced for that.' And looking deeper in bond markets, there are signs that investors are worried about price changes across the economy. Short-term inflation expectations have risen above longer-term ones. Inflation-linked bonds are a 'great option value' in case prices creep back up, Bridgewater Associates Co-Chief Investment Officer Bob Prince wrote in a note this past week. Bank of America Corp. strategist Mark Capleton, meanwhile, expects strong retail interest in shorter-dated Treasury Inflation Protected Securities funds because of the risks from tariffs and other policy uncertainties. The bonds also typically have longer duration, which can help fuel gains if yields fall. The latest rebound follows a tough year. In 2024, the inflation linked bond index fell nearly 4%, the most out of Bloomberg's 20 key fixed-income benchmarks. Trump's request for the nation's backing comes as subprime car owners miss monthly payments at the highest rate in more than 30 years, jobless claims are high by at least one measure, and housing demand faces headwinds from high borrowing costs. Businesses and consumers are already becoming more cautious, with some companies on the west coast pausing investment decisions as they wait for clarity on fiscal and regulatory policy changes. As the Trump administration's plans for tariffs shift regularly, money managers continue to prepare for potential turmoil. Investors have been 'aggressively buying downside protection' with volatility index call volume and S&P 500 put volume buying near record highs, Apollo Global Management Chief Economist Torsten Slok wrote in a note on Friday. Still, corporate credit markets remain largely calm for now. Risk premiums on US high-grade corporate bonds have widened since the end of January, but are below the average of the last decade of about 1.2 percentage points. US leveraged loans have been gaining. Oaktree Capital Management Co-Founder Howard Marks remains positive, writing in a March 6 note that credit is fairly priced in relative terms and offers a better deal than equities even at today's spreads. Week In Review Mars Inc. sold $26 billion of US high-grade bonds to help fund its acquisition of rival foodmaker Kellanova, in the biggest US corporate bond sale of the year. The bond sale had a record final order book, and the note rallied after being sold. Walgreens Boots Alliance Inc. agreed to be purchased by Sycamore Partners for $10 billion, turning one of the oldest, most recognizable US drugstore chains into a private company. Global corporate bond spreads widened for 10 trading sessions in a row through Tuesday's close, signaling that a period of remarkable tranquility may be coming to an end as investors turn defensive amid tariff fears. Bond investors are growing more concerned about the impact of US tariffs on automakers, causing their bond prices to lag behind the broader universe of high-grade bonds. Country Garden Holdings Co. missed a self-imposed target date to reach a deal on its debt restructuring plan, as the defaulted builder struggles to gain support from creditors. Synopsys Inc. sold $10 billion of investment-grade bonds to help fund its $34 billion acquisition of Ansys Inc. Chinese technology firm Baidu Inc. is offering as much as $2 billion in bonds that are exchangeable into the Hong Kong shares of online-travel agency Group Ltd., matching the biggest ever dollar offering in the format by an Asian issuer. Britain's Southern Water Ltd. is trying to fix its finances in an effort to preserve its investment-grade status, safeguard its balance sheet — and avoid the same debt woes as Thames Water. Secured creditors to Altice France initially opposed to the company's restructuring deal have now agreed to sign up to it. Tropicana Brands Group, facing a liquidity crunch as juice sales lag, is considering competing offers for a cash injection from new lenders and holders of its existing debt. City Brewing Co., which makes alcoholic drinks such as White Claw and Pabst Blue Ribbon, is talking to creditors about inking an out-of-court restructuring with lenders taking control of the company. On the Move Former Ares Management Corp. partner Scott Graves has launched Lane42 Investment Partners, a new alternative asset management firm, with $2 billion in capital commitments from Millennium Management. Charlotte Conlan, one of the most well-known figures in Europe's leveraged finance market, is set to retire from BNP Paribas after a 25-year career at the bank. Conlan, who is also chair of the Loan Market Association, is set to retire on March 21. Wellington Management has hired a team of four fund managers from Pacific Investment Management Co. to build a new private real estate credit platform. Ravi Anand will become head of private real estate credit in New York and lead the team, while Zeyu Chen, Michael Chen and Lucas Dias-Lam are also joining. HSBC Holdings Plc's co-head of leveraged and acquisition finance for Asia Pacific, Rachel Watson, is stepping down by the end of March. Ashish Sharma, who shares the co-head position with Watson, will become sole head of the team. Jefferies Financial Group Inc. has hired two senior executives as it seeks to expand its private credit business in Asia. They are Ali Abbas Alam, formerly managing director at Ares Management Corp., to become head of Asia private credit, and Mani Joseph, previously a managing director at Barclays Plc, who joins the private credit and special situations sales business in Asia. --With assistance from Ye Xie and Nishant Kumar. 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