Fed's Daly: Inflation 'Problematic,' Interest Rates to Rise

Summary:

The Fed will not simply act if the economy starts to collapse.

San Francisco Federal Reserve President Mary Daly on Wednesday underscored the U.S. central bank's commitment to curbing inflation with more interest rate hikes, even as she said the Fed will not simply barrel ahead if the economy starts to crack.

"We definitely don't raise rates until something breaks; we actually are forward-looking," Daly told Bloomberg TV in an interview, adding that policymakers don't rely only on models but gather information from business and community leaders to shape their policies. "You are constantly calibrating through this data dependence to risks" of not doing enough to slow the economy, or doing too much.

Right now, she said, the economy is working well, and so are markets.

"We always have the lender-of-last-resort responsibilities, and if market dislocation should come about then we would be prepared to use that, but that's not what I'm seeing right now," she said.

What the Fed does see, she said, is that "inflation is problematic, and we are committed to restoring price stability" by raising rates to limit the demand for goods, services and labor that is fueling inflation.

The Fed is expected to deliver a fourth straight 75-basis-point rate hike when it meets early next month, as it tightens monetary policy more aggressively than it has done since the 1980s to ease price pressures that have stayed higher for longer than policymakers had expected.

Global stock markets have gyrated as investors try to calibrate when the Fed's rate hikes could end. Policymakers like Daly have stuck firmly to their message that the tightening will end only when inflation comes down.

U.S. equities on Wednesday lost ground as fresh economic data showed hiring in the services sector sped up despite the rise in borrowing costs.

Clear Path

The Fed's benchmark overnight interest rate is currently in the 3.00%-3.25% range, and policymakers have signaled they expect it to rise further to 4.6% next year as they address inflation that is, when using the Fed's preferred measure, running at more than three times the central bank's 2% target.

Daly said she hopes the U.S. Labor Department's jobs report for September, due to be released on Friday, will confirm the start of a hiring slowdown that her business contacts have cited. Data earlier this week showed businesses in August posted dramatically fewer job openings, a trend she said her contacts had begun to tell her about months earlier.

Fed's Daly: Inflation 'Problematic,' Interest Rates to Rise_1

Daly also hopes the release next week of the monthly consumer price index report, the most widely followed gauge of U.S. inflation, will show underlying price pressures either stabilizing or falling.

Those data points, she said, will inform her own decision as to the pace of the Fed's rate hikes.

But overall, she emphasized, the "path has been very clear: we are going to raise the rate until we get into restrictive territory, and then we are going to hold it there" until inflation comes down closer to 2%.

Daly said she does not expect that to occur until 2024.

"It really is the idea that you hold for a while so that we can see inflation come back down, and our path hasn't really changed; we haven't pivoted on that and we're resolute at restoring price stability," she said. "We're in a vulnerable position when we have high inflation."

On Wednesday, however, traders of futures tied to short-term interest rates were betting the Fed will have started to ease policy again before the end of next year.

Source: Reuters

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Damon

US stocks bounced off session lows and finished lower after the two-day strong rally as the US economic data, including the US ISM services PMI and ADP non-farm payroll, offered strong prints overnight, sending bond yields higher, with the 10-year US Treasury yield up 11 bps to 3.74%. Despite a jump in rates across the board, Wall Street seems to be digesting another supersized rate hike of 75 basis points by the Fed in November from the first three-day resilient moves. For now, traders may look ahead to the September job number that is due for release on Friday, where a slowdown in hiring may further boost the rebounding optimism. US Stocks Pause Gains as Rates Climb Back, Asian Markets Set to Open Lower_1

US Stocks Pause Gains as Rates Climb Back, Asian Markets Set to Open Lower_1

Dow fell 0.14 %, S&P 500 was down 0.2%, and Nasdaq falls 0.25%. 8 out of 11 sectors in the S&P 500 finished lower, with Utilities and Real Estate leading losses, down 1.92% and 2.38% respectively. Energy outperformed for the third consecutive trading day, up 2.06%.

Tesla's shares fell 3.6% after CEO Elon Musk revived the $44 billion deal to buy Twitter. Musk tweeted that the social media may become an "everything app" after he took it private, a similar magnitude as the Chinese super app, WeChat that owned by the tech giant, Tencent.

Weak September service PMIs in Europe point to an inevitable economic recession in the region, while bond yields surged again. A slew of major European countries, including German, French and Italian reported weaker-than-expected service PMI data, with the Germany data plummeting to 45.0, the lowest since the beginning of the pandemic period. The UK 10-year bond yield jumped back to above 4% from 3.86% a day ago, and the Italian 10-year bond yield swung back to 4.45%.

Asian markets are set to open lower following the US session. ASX futures were down 0.40%. Nikkei 225 futures fell 0.23% and Hang Seng Index futures declined 0.23%. The NZX 50 was flat at the open. The Hang Seng index jumped 6% after returning from the public holiday on Wednesday, which may boost sentiment in the Chinese mainland shares after the golden week holiday next week.

RBNZ raise the Official Cash Rate by 50 basis points to 3.50% for the fifth time in a row. The Reserve Bank of New Zealand stayed hawkish and hinted a larger hike may be on the table in its next meeting. The New Zealand dollar spiked on the announcement before paring gains.

Crude oil prices rose for the third straight trading day amid a decision for a large output cut by OPEC+. The organisation decided to cut production by 2 million per barrel, the most since the pandemic period in 2020.

Source: CMC

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Thomas

At 94 and in declining health, Jean-Marie Le Pen could be taking it easy, reflecting in his gated mansion outside Paris on a life of extreme right-wing combat, active involvement long behind him. Instead, as the movement he created marks its 50th anniversary today, he maintains a keen interest in events that, beyond France and from Italy to Sweden, owe much to his influence.

The father of France's far right can also be considered the grandfather of a broader strand of radical populism – sometimes loosely connected, sometimes less loosely – that has gained an increasingly strong grip in Europe.

Victory in Italy's legislative election for Giorgia Meloni, who angrily rejects charges of fascism but draws inspiration from its practice by the wartime dictator Benito Mussolini, bears witness to the link. Her triumph is the latest manifestation of the far right's ability to turn heads and exploit the concerns of millions.

After the recent election in Sweden, a party with neo-Nazi origins, the Swedish Democrats, seems likely to become the senior partner in a right-wing coalition. Hungary's far-right Viktor Orban is among the models for Ms Meloni's brand of eurosceptic nationalism, albeit mellowed ahead of polling to soothe markets and nerves.

And as distinctions between the conventional and extreme right become blurred, some conservatives in Britain and elsewhere might fit comfortably into such groups.

If there is a thread common to several of these movements with often murky backgrounds, it boils down to this: "That was then. We have changed." It tempts otherwise ailing sections of Europe's right and centre-right to wonder whether embracing such bedfellows might work for them, too.

Horrifying to many, uplifting to some, these breakthroughs arrive late in Jean-Marie Le Pen's life, one dotted with mixed electoral performance and repeated judicial skirmishes over his wilder outbursts. But as well as deriving satisfaction from the growing appeal of his nationalism, he has lived to see the party he co-founded seize 89 seats in the French National Assembly – the largest number of opposition seats, and more than either the traditional Gaullist right or France Unbowed, the main group in the left-green Nupes alliance.

That achievement carries a bittersweet taste for him. In place of its sinister original name, the National Front, the party is now called the National Rally. Under the skilled leadership of his daughter, Marine, it has strived to present a more palatable face, ditching expendable reactionaries who dare to exhibit old-fashioned fascination with Adolf Hitler, collaborationist wartime France and anti-Semitism.

And the fiery old rabble-rouser has been ostracised, excluded from party membership at the instigation of his own daughter as part of her relentless campaign of "dediabolisation", an attempt to stop her party being demonised as undemocratic and anti-republican. The last straw was his stubborn repetition of hideous claims that Nazi death camps were a mere detail of war.

Whether she has truly detoxified a party with racist, even Nazi, connotations and a hatred of Jews, Muslims and black people fixed in its DNA is perhaps of secondary importance; she has undoubtedly succeeded in detoxifying its image. For supporters, any stigma has evaporated.

Her father insists his title of honorary president is "untouchable" even though the role was abolished in 2018. His relations with Marine Le Pen, who gave Emmanuel Macron a minor fright in April's presidential election, increasing her losing share of the vote from 33.9 per cent in 2017 to 41.5, are glacial. There was a time when he could claim that despite her political makeover, there was little of substance to divide them. That has changed. "I am neither in her head nor her heart," he recently conceded to the Sunday newspaper Le Journal du Dimanche.

Marine Le Pen has stood down as the National Rally's president to concentrate on marshalling her unprecedented parliamentary strength as a viable opposition.

In the battle for succession, there are signs that the National Rally of 2022 is uncomfortable at the golden anniversary's reminder of an unsavoury past. Jordan Bardella, the bright young modernist hoping to beat Marine Le Pen's former partner, Louis Aliot, to the post, has talked of treating it more as a celebration of her 10 years as president.

Exactly how the event will be marked remains unclear. If the National Rally of Marine Le Pen shows little appetite for feting 50 years that began with dubious adherents, her father defies advancing years to appear in the mood for a party.

He has spoken of making his home available to a committee responsible for organising some form of commemoration. But a long-term confidant, Lorrain Saint-Affrique, now says that the sheer volume of people wishing to attend has forced cancellation. The party itself has talked only of hosting a modest "symposium", to which Jean-Marie Le Pen does not expect an invitation.

How far, in reality, has Le Penism travelled since the the National Front's 1972 formation? The founding fathers were a bizarrely disparate bunch including at least one trade union leader, wartime resistants and a former communist as well as out-and-out Nazis, holocaust deniers and embittered opponents of Algerian independence. What united them was a belief in an ultra-patriotic white, Catholic France where immigrants – among others – were unwelcome.

Under Marine Le Pen, anyone owning up to racism, anti-Semitism or pro-Nazi sympathies can expect instant expulsion.

In the past, it was hardly unknown for voters interviewed in street "vox pops" to proclaim an attraction to "the extreme right". Now, supporters flinch from the label, though their protestations are mired in inconsistency.

Laure Lavalette, a campaign spokeswoman for Marine Le Pen and part of the National Rally's parliamentary intake, reacted indignantly to the far-right tag in a television discussion before the presidential election. All the same, her political background is the National Front and, briefly, a breakaway offshoot.

Marc-Etienne Lansade, the mayor of a town called Cogolin, has just failed in a legal challenge to an official designation of his ruling group of councillors as extreme right. Yet, he passionately endorsed the botched presidential bid of Eric Zemmour, proudly more right-wing than even Marine Le Pen.

Mr Zemmour was among far-right European figures quick to congratulate Ms Meloni, whose Brothers of Italy party is routinely described at "post-fascist". If he sees himself as the French politician of choice for those suspecting that Marine Le Pen has gone soft, where does that leave her estranged father?

Twenty years after a humiliating defeat to Jacques Chirac made him seem less a threat than a nuisance, he sees continent-wide far right advance as part of a more meaningful legacy. A "new dawn" for Ms Meloni's allies in Spain's Vox party, dark clouds gathered across European skies for a troubled political establishment.

Source: The National News

Risk Warnings and Disclaimers

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King Ten

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks' attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China's "zero-COVID" policy created even more problems for global supply chains. Russia's invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with "friend-shoring" and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a "softish landing" with at least "some pain." Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China's slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year's end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks' efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government's reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do "whatever it takes" to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a "geopolitical depression" and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers' power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here.

Source: ZAWYA

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Thomas

Credit Suisse is at the centre of market turmoil amid rumours the bank could be on the brink of collapse.

Investors have rushed to sell the Zurich-based bank's shares amid concerns about its financial health as it prepares to unveil a costly restructuring plan due later this month.

Speculation that the bank could fail has invoked comparisons with the 2008 collapse of United States's investment bank Lehman Brothers, which precipitated the worst economic crisis since the Great Depression. But economists are cautioning against such parallels due to the significant differences between then and now.

Why is Credit Suisse under scrutiny?

While Credit Suisse's stock price has been declining for months, concerns have been heightened since CEO Ulrich Körner last week sent a memo to employees aimed at reassuring them about the bank's future.

In the memo sent on Friday, Körner cautioned against confusing the "day-to-day stock price" with the bank's "strong capital base and liquidity position", and insisted the upcoming restructuring would ensure the lender's "long-term, sustainable future".

Körner also took aim at "many factually inaccurate statements" being made in the media about the 166-year-old financial institution.

Rather than calm investors, the memo set off renewed anxiety about the bank's standing.

On social media, a number of investors with large followings, including Lark Davis and Graham Stephan, posted comparisons to Lehman Brothers that quickly went viral.

On Monday, Credit Suisse shares plunged as much as 11.5 percent, hitting a record low of $3.64.

At the same time, credit default swaps — a type of investment that serves as insurance against a company defaulting — rose to all-time highs.

One of Europe's largest banks, Credit Suisse's troubles have been some time in the making.

The lender has been embroiled in a raft of scandals in recent years that have battered its image and balance sheet.

The controversies include trading jobs for business in Hong Kong, hiring private detectives to spy on employees, laundering money for a criminal organisation in Bulgaria, and facilitating corrupt loans in Mozambique, over which the bank agreed to pay $475m in fines.

The bank also racked up billions of dollars in losses from the collapse in 2021 of hedge fund Archegos and financial services firm Greensill.

Amid the turmoil, the lender has lost nearly 60 percent of its market value this year alone.

"Credit Suisse has the poor track record that features Archegos and Greensill – so there is not a lot of confidence," Campbell R Harvey, a professor at Duke University's Fuqua School of Business, told Al Jazeera.

"They have had CEO turnover. Further, the CEO's internal letter to employees did not reassure – if you have to explain to employees what is going on, it is a bad sign."

Under the restructuring announced following Körner's appointment in July, Credit Suisse is seeking to shrink its investment bank to focus more on wealth management.

Analysts have estimated that Credit Suisse will need to raise $4-6bn to carry out the restructuring, which could prove challenging as investors see the bank as an increasingly risky bet.

Could Credit Suisse cause a Lehman Brothers-style crash?

Economic analysts generally see that as unlikely.

First of all, despite Credit Suisse's woes, the lender has huge amounts of capital to withstand any losses.

The bank's total assets came to 727 billion Swiss francs ($732.7bn) at the end of the second quarter, about one-fifth of which was held in cash, according to a recent analysis by JPMorgan Chase.

On Monday, Citibank analysts dismissed comparisons to 2008, noting that Credit Suisse's liquidity coverage ratio — the portion of cash and other assets that can be quickly accessed in a crisis — was among the "best in class" at 191 percent.

"I do not think this is a Lehman Brothers. Their tier one ratio is 13.5 percent," Harvey said, referring to the portion of capital made up of core assets, which regulators consider a key marker of financial strength.

The global financial environment has also changed significantly since Lehman Brothers went bankrupt.

Banks are more tightly regulated than in 2008 and have more capital on hand to manage risk.

"Big banks generally are far better capitalised than they were in 2008, and my own view of Lehman has always been that a big part of the problem when Lehman failed stemmed from the fact that everyone was expecting Lehman to be bailed out," David Skeel, a professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.

"US regulators had signalled when Bear Stearns stumbled in March 2008 that they wouldn't let a big bank fail, then surprised the markets by letting Lehman fail. I suspect the Credit Suisse situation won't have knock-on effects, both because of generally high levels of capital and the very different circumstances of 2008."

Holger Schmieding, chief economist at Hamburg-based Berenberg Bank, said that while he could not comment on the health of Credit Suisse, a crisis similar to 2008 was extremely unlikely.

"The risk of a Lehman-style event is close to zero as – whatever the problem with any bank may or may not be – regulators and central banks are far better equipped to nip any such problem in the bud," Schmieding told Al Jazeera.

SOURCE: AL JAZEERA

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Alex

A quarter of a century ago, a major financial crisis ripped through Asia, shaking its economies to the core. Now, the ghost of 1997 is haunting the region again.

Currencies and stock markets in Asia's biggest economies have plunged to lows not seen in decades, as a mighty US dollar, rapid interest rate increase by the US Federal Reserve and a slowdown in China spark capital outflows from the region.

In a new report, a United Nations agency warned that the Fed's actions, along with those of other central banks, risk pushing the global economy into recession.

China, the world's second biggest economy, saw its currency, the yuan, fall to a record low of nearly 7.27 against the dollar last week in international trading.

Despite interventions by China's central bank, the yuan— also known as the renminbi —continues to hover near record lows in the offshore market. So far this year, it has fallen 11% against the dollar, on track for its worst year since 1994, according to data from Refinitiv.

Japan, the world's third biggest economy, has fared even worse. The Japanese yen has tumbled a whopping 26% this year, declining the most among all Asian currencies. In South Asia, the Indian rupee has also slumped to a record low, down 9% versus the greenback for the year.

"The Fed's rapid monetary tightening is sending ripples far and wide," said Frederic Neumann, chief Asia economist at HSBC. "Even Asia, despite its robust macroeconomic fundamentals, is now facing heightened financial market volatility," he added.

As the intense pressure on major Asian currencies continues, some financial analysts are concerned that if the situation is not controlled, it may lead to a financial crisis in the region.

"The strong dollar environment has raised questions about how Asia will be impacted and whether this will precipitate another financial crisis," wrote Morgan Stanley's chief Asia economist Chetan Ahya in research report on Monday.

In the summer of 1997, a massive crisis was triggered in the region by the devaluation of Thailand's currency, the baht. It sent shockwaves throughout Asia, leading to massive capital flight and stock market turbulence. The chaos led to a deep recession in the region, bankrupting companies and toppling governments.

But even as investors worry about a possible repetition, they're not in a full-fledged panic, mainly because Asian economies are in a much better position to defend their currencies than they were back then.

Scrambled to intervene

Governments are already stepping in to stem the bleeding and prevent a rerun of the 1997-1998 meltdown.

Japan's Ministry of Finance disclosed last week that it spent nearly $20 billion in September to slow the yen's decline in its first intervention to prop up the currency since 1998.

India's central bank has used nearly $75 billion so far to ease rupee-dollar volatility, Indian finance Minister Nirmala Sitharaman said at an event last week.

While China hasn't disclosed any figures, the People's Bank of China warned yuan traders last week that they will lose money in the long term if they bet against the currency.

One of the main causes for the crisis 25 years ago was the asset price bubble created by a huge inflow of investment into some Southeast Asian countries in the early 1990s in search of quick returns, otherwise known as "hot money."

On top of that, these nations had huge foreign debt, weak corporate governance, and fixed exchange rates.

When the Fed started raising rates in the mid-1990s to counteract inflation in the United States, the dollar began to rise, hurting exports of Asian countries that had pegged their currencies to the greenback.

As growth slowed sharply in these economies, the bubbles started to burst, triggering huge debt defaults and sending investors fleeing.

The pressure on currencies was so intense that Thailand finally exhausted its reserves defending its dollar peg. Thailand gave up its fixed exchange rate and devalued the baht relative to the dollar, setting off a series of currency devaluations in the region.

Today, as the world heads towards a global recession, some of those same factors are again emerging, including aggressive Fed tightening to contain inflation.

"The external environment [for Asia] has become more challenging in the context of the widespread inflation challenge and the near synchronous and sharp pace of monetary tightening," said Morgan Stanley analysts.

Asia is "better placed" now

This time, Asia has a war chest to fight back.

"I do not expect a repeat of the [1997] Asian Financial Crisis this time," said Khoon Goh, head of Asia research at ANZ Research.

"The underlying macro fundamentals in Asia are better now compared to the mid-1990s," he said, adding that foreign exchange buffers are sufficient to withstand capital outflows and smooth market volatility.

"Importantly, there is not the same buildup of foreign denominated debt in recent years, which was one of the triggers of the Asian Financial Crisis," Goh added.

Policymaking has also improved in important ways, making future crises less likely, said Louis Kuijs, chief Asia economist at S&P Global Ratings.

"Exchange rates have become more flexible, which helps absorbing most of the external pressure," he said. "We don't expect foreign reserves to decline to dangerously low levels any time soon in the major Asian emerging markets," he added.

China and Japan have the world's two biggest foreign exchange reserves, holding $3 trillion and $1.3 trillion respectively. Combined, that is a third of the world's entire foreign exchange reserves pile.

"There's $1.3 trillion of foreign exchange reserves. And you spend just shy of $20 billion. So, I mean, there's a long way to go," said Jesper Koll, executive director of Monex Group Japan. "The Bank of Japan is not going to run out of money."

Unlike in the mid-1990s, the external debt and private sector debt in Asia have remained stable.

"I think Asian countries in general have learned a lesson," said Takuji Okubo, managing director and chief economist at Japan Macro Advisors.

"I can't really think of any … stupid Asian country," he said, adding that countries are more cautious now and have realized that borrowing a "lot in dollar can cause significant problem in a downturn when money start flowing out."

More pain ahead

But, there is still gloom ahead for economies in the region. As US interest rates are forecast to rise further, the dollar is likely to climb higher, slowing growth.

The World Bank recently cut its GDP forecast for the region to 3.2% from 5% for this year. China, in particular, has seen its GDP outlook slashed to 2.8% from 5%.

The outlook is expected to improve in 2023, according to analysts.

"Asia's resilience in the face of the current global storm is partly the result of reform that the Asian Financial Crisis prompted," Neumann from HSBC said.

"In the end, the region's robust fundamentals will see it through these rough seas," he said.

Source: CNN

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Devin

The mechanics of this year's interest rate shock on the investment industry could yet double down demand for long-term bonds in a roundabout and somewhat counterintuitive way.

Britain's idiosyncratic policy puzzles aside, the rigor in British bond markets and pension fund management last week raised questions on whether gigantic pools of retirement funds around the world face something similar - and what the fallout may be.

As MSCI's Head of Portfolio Management Research Andy Sparks noted: "This past week's events in the UK bond market serves as a cautionary note to investors: What happened in the UK could also happen elsewhere."

Most western economies are experiencing rapidly rising interest rates at the moment - with little visibility on inflation persistence due to fractious geopolitics and an energy crunch, and even less transparency on the sums governments may need to borrow to offset the hit to households and businesses.

The pressure on borrowing rates and bond yields has appeared to be one way. The scale of synchronised yield rises across western economies this year has already sunk mixed asset portfolios by more than any year since the World War Two and is now starting to throw up other unexpected ructions to boot.

Even though Britain may be something of an outlier, the British government and Bank of England (BoE) may inadvertently have unearthed otherwise hidden vulnerabilities to sudden spikes in bond yields from here.

And the warnings from this accidental minesweeping could both alert authorities to unforeseen policy risks of excessive credit tightening while rebooting long-standing investment behaviour that steers conservative and highly regulated pension funds away from leveraged positioning.

At the heart of last month's quake in Britain's sovereign debt market of "gilt-edged" bonds was how defined benefit (DB) pension funds had for over a decade widely adopted Liability-driven investment (LDI) strategies - quadrupling to some 1.6 trillion pounds ($1.83 trillion) worth in the 10 years to 2021.

LDI is basically a form of tailored asset management for DB funds to make sure they generate enough cash to meet long-term liabilities - the monthly payouts guaranteed to pensioners.

But their popularity soared mainly as a way to protect funds from the effect of ever lower interest rates - which, by lowering discount rates used to project future returns, had undermined the funding status of many of those DB schemes over time.

By using interest rate swaps and a wider range of derivatives rather than just cash bonds to lock in funding, leveraged LDI strategies were left vulnerable to sudden volatility spikes and margin calls - forcing funds to scramble to raise cash by selling gilts and threatening a "doom loop" of selling the BoE had to intervene to halt.

The BoE has managed to calm the horses for now, helped by a partial government U-turn on one of its tax-slashing measures. UK Quake Could Spur Pension Fund Asset 'Hibernation'_1

UK Quake Could Spur Pension Fund Asset 'Hibernation'_1

'Hibernating' Assets

Yet Britain is far from alone in managing pensions this way.

Although the share of DB pensions - where the funds bear the market risk rather than the pensioners - has declined over the past 20 years, they still account for 46% of the $52 trillion of assets in the seven biggest markets. And LDI strategies have been ubiquitous across these for many years - with those in the United States the elephant in the room once again.

According to the annual global pension study by the Thinking Ahead Institute, which is connected to Wills Towers Watson Investments, Britain held the second biggest pension fund assets in the world last year with $3.86 trillion worth.

But while that's ahead of the other giant pensions countries of Japan, Canada, Australia, the Netherlands and Switzerland, it's just a fraction of the enormous $35 trillion U.S. market.

And while more than 80% of British pension assets are held in DB plans, the much smaller 35% share of U.S. assets in DB funds was still more than $12 trillion.

What's more, those U.S. funds held significantly more in equity than British equivalents - some 50% versus 29% - leaving them more prone to de-risking as funding ratios improved.

And that's been dramatic. Rising discount rates - typically AA-rate corporate bond yields - are transforming the funding status of these DB funds after years of being underwater.

Pensions consulting firm Milliman said last month the aggregate funded ratio of the 100 largest corporate defined benefit pension plans - accounting for more than $1.57 trillion - surged to 106.4% in August due to rising discount rates. They were in deficit as recently as January and had run an almost continuous accounting shortfalls for the preceding 13 years.

Despite prevailing asset price losses, Milliman projected they would hit a surplus of almost 110% for the first time in more than 20 years by 2024.

"This should over time drive continued asset allocation into fixed income as these funds look to more fully hedge the duration of their long-dated liabilities," JPMorgan analysts said recently.

And so if LDI insists on locking in these surpluses by "hibernating" more risky assets such as equities - and the British LDI shock guides more funds away from leverage in doing so - then outright demand for long-duration bonds could go up a gear.

With U.S. budget deficit and new debt projections more favourable than in Europe and limiting new supply of Treasury bonds, the implication for long-dated bond yields may fly in the face of further Fed tightening - or at least partly absorb the ongoing reduction of bonds from the Fed's balance sheet.

The inversion of the yield curve could deepen, with all its recessionary signals and implications.

The fallout for stocks markets, while perhaps flattering long-duration equity valuations, may simply be a further wave of institutional selling to come.