Bond yields in emerging East Asian markets fell between December 31 and mid-February despite the risk of accelerated pace of interest rate hikes in the United States (US), the Asia Bond Monitor of Asian Development Bank (ADB) said.

“Emerging East Asia’s improved growth outlook and strong fundamentals have buffeted the region from risks of possible capital outflows,” said Yasuyuki Sawada, Chief Economist, ADB. “Policies to improve the transparency of financial markets and encourage long-term investment can help countries face future external shocks.”

Amidst solid growth and rising inflation, investors across most of the region have shown increased confidence in emerging East Asian local currency (LCY) government bonds, leading to declining yields. Indonesia’s implementation of sound reforms led it to experience the largest decline in yields over the period. The People’s Republic of China (PRC), meanwhile, saw yields on 2-year and 10-year government bonds rise, as the government introduced new measures to protect against asset and credit risks.

All of the region’s currencies appreciated against the US dollar, except for the Hong Kong dollar and the Philippine peso. Equity markets also rose in the region.

Emerging East Asia’s outstanding local currency bonds reached $10.2 trillion by end-December, with growth moderating on both a quarter-on-quarter and year-on-year basis. Government bonds account for 64.6% of the regional total. The PRC remains the region’s largest bond market, with outstanding bonds standing at $7.1 trillion — or 70% of the region’s total.

The report highlights several risks for the region’s bond markets as the global economy recovers. These include the acceleration of rate hikes by the US Federal Reserve, uncertainty over policies in major developed economies, particularly the US and the eurozone, and the depreciation of the Chinese renminbi, which challenges growth prospects in Asia.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB is celebrating 50 years of development partnership in the region. It is owned by 67 members—48 from the region.

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IFM Correspondent

January 20, 2017: A gauge of UK house prices fell for the first time in five months in December as the supply of properties for sale remained weak and values slumped in London.

The Royal Institution of Chartered Surveyors (RICS) said its index declined to 24 from 29 in November, indicating that a smaller majority of respondents saw price gains. Predicted sales over the next three months also slowed, with only 4 percent more respondents anticipating an increase. However, the year-ahead sales outlook rose slightly.

“A familiar story relating to supply continues to drive both the sales and lettings markets, impacting on activity, prices and rents,” said Simon Rubinsohn, chief economist, RICS. “The latest RICS survey provides further evidence that both price and rent pressures are continuing to spread from the more highly valued to more modestly valued parts of the market, for good or ill.”

Supporting the predicted slow start to 2017, the survey showed that the number of new house buyers rose only marginally in December following much stronger figures for the previous four months.

According to the report, house prices are expected to rise in 2017 with the exception of London where expectations remain relatively subdued.

London was the only area to experience a drop in prices while the North West of England had the strongest price growth.

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Since the election, financial markets and surveys of business and consumer confidence have showed growing optimism about short-term growth prospects of the US economy. But it’s too early to see this optimism in December’s job growth number, which reflects a continuation of a moderate employment growth trend, according to Gad Levanon, Chief Economist, North America, The Conference Board.

As expected, the unemployment rate increased slightly in December following a large drop in November. But in a solid job growth environment, the unemployment rate is clearly trending down.

Over the past 12 months, average hourly earnings grew by 2.9 percent, a new record for this expansion. With the labour market tightening faster than pre-election expectations, wages and prices may accelerate, leading the Fed to raise interest rates faster than the market currently expects.

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Neiman Marcus Group is a luxury department store headquartered in Dallas, Texas. The group decided to withdraw its filing for an IPO after sales plummeted in December, showing a wide loss in the first fiscal quarter.

“The company has determined that it is not in its best interest to proceed with the initial public offering” at this time, according to a filing with the US Securities and Exchange Commission (SEC).

The retailer previously filed to go public in June 2013 before owners TPG and Warburg Pincus sold it to Ares and CPPIB.

The store has reported five straight quarters of declining comparable sales, including a whopping 8% drop last quarter.

Macy’s and Kohl’s also reported slow sales, causing them to cut future forecasts. Macy’s, the largest department-store company, also pushed ahead with a plan this week to shutter 100 stores and eliminate about 10,000 jobs.

Over the last year, there has been a clear shift to online shopping as compared to physical shopping. Consequently, there has been a significant drop in sales in November and December.

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According to Bert Colijin, senior economist, Eurozone, ING, the Italian referendum and subsequent concern about the Italian banking sector has not impacted confidence in the Eurozone and it caused a mere stagnation in sentiment in Italy itself. “Improving order books, strong employment expectations and strengthening assessments of production in recent months outweigh increased political volatility for the moment,” says Colijin.

Inflation is currently trending upwards as the oil price effect has run out, but core price pressures are building. Businesses are indicating that they are now passing on higher input prices to the consumer. The trend remains positive for both industry and services though. If this continues, core inflation could increase somewhat quicker over the coming months, although there is a lag between this survey indicator and price developments. It is therefore more likely to impact core inflation at the end of 2017, coincidentally the time when the current QE program is supposed to end.

Retail sales declined by 0.4% MoM in November but the trend in sales growth remains positive as annual growth is 2.3%. October growth was so strong that a small monthly decline was expected.

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Economists expected claims to fall to 260,000 from the preceding week’s figures. Instead claims dropped to a lower level, although these figures may have been influenced by seasonal fluctuations observed during the Christmas season.

Economists calculate that claims below 300,000 go along with a falling unemployment rate. New claims have averaged over 257,000 for the past month, and haven’t hit the 300,000 mark in 96 weeks, the longest streak since 1970.

As unemployment is already low, at 4.6 percent in November, below the level that Federal Reserve officials generally believe is sustainable. The labour market is considered to be at or near full employment, with the jobless rate at a nine-year low of 4.6 percent.

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Research firm AutoData said that US sales hit an all-time high of 17.55 million vehicles in 2016. The firm also said that December sales came in much stronger than expected, at a pace of 18.4 million vehicles. That figure is well above estimates for about 17.7 million.

Shares of General Motors Co (GM.N) rose 5.5 percent and Ford Motor Co (F.N) stock rose 4.6 percent, far outpacing the wider Dow Jones Industrial Average, which was up only 0.3 percent.

For 2016 sales, Ford reported its best year in a decade while Nissan and Honda said they sold a record number of cars in the US. Toyota and GM bucked the trend, with their total sales in 2016 down from the year earlier.

Light trucks and sport utility vehicles were up 8.3 percent compared to the year-ago period while passenger cars were down 4.7 percent.

The positive increase in auto sales is mainly attributed to strong consumer confidence coupled with low fuel prices. In December, US consumer confidence reached levels not seen in 15 years. Auto sales are an early indicator of consumer spending.

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It said that the next rate move could be in either direction. The last change was a rate cut in August, in the wake of the UK’s vote to leave the EU.

The bank foresees a slightly lower path for inflation, although it is still expected to overshoot the 2% target next year.

The bank also voted to make no change to its bond buying programme, created to stimulate the UK economy after the referendum, which means it will continue to buy and hold £435bn of UK government bonds and £10bn of corporate debt.

The bank predicts improvement in the inflation forecast after seeing the value of the pound and the oil price rise.

“All else equal, this would result in a slightly lower path for inflation than envisaged in the November Inflation Report, though it is still likely to overshoot the target later in 2017 and through 2018,” the bank said. “The global outlook has become more fragile, with risks in China, the euro area and some emerging markets, and an increase in policy uncertainty.”

– See more at: http://www.internationalfinancemagazine.com/article/Bank-of-England-keeps-interest-rate-unchanged.html#sthash.g1C98ANs.dpuf

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December 15, 2016: Investors do not need to accept lower returns because of the US Federal Reserve’s rate raise.

The Fed on December 14 announced a 25bp rate hike at the FOMC meeting. This takes the key Fed funds rate up to a range of 50bp-75bps.

The rate rise is only the first increase this year and just the second since June 2006. It is significant because it gives further weight to the considered argument that the era of very low inflation and interest rates may be ending. And not just in America – the world’s largest economy – but globally too, as the policies pursued by central banks since the financial crash of 2008 come under increasing attack.

And despite the Fed appearing to want to proceed cautiously, and not threaten a constant rise in rates during 2017, many investors believe there are more hikes to come due to the strength of the US economy and the likely policies of a Trump presidency.

Whilst there might be some degree of nervousness about the Fed’s move, and the likely dawning of a new era, investors do not need to accept lower returns.

There will be winners and losers, and those investors who have a good fund manager, who selects the right investments at the right time, will surely profit.

Ensuring proper portfolio diversification will also be essential to taking advantage of the rewarding opportunities and sidestepping the potential risks.

Savvy investors are likely to favor the dollar over other currencies, since higher Fed rates will attract overseas capital into the US and favour those sectors that will most likely benefit from the Trump stimulus and de-regulation that he has promised.

These include US financials – which are also benefiting from the steepening US yield curve – energy and pharma stocks. Japanese and European exporters will benefit from the strong dollar, though investors may want to hedge their euro and yen currency exposure.

It can be expected that they will also seek to avoid emerging markets. Higher US dollar borrowing rates threaten the viability of almost $9 trillion of emerging market corporate debt.  This is because a stronger dollar makes interest and capital repayment more expensive in local currency and because when debt needs to be rolled over, the interest demanded may be much higher.

No matter what the Fed does with interest rates moving forward, investors who are well prepared and properly advised can look to build wealth as we move beyond the era of very low rates and inflation.

Nigel Green is the founder and chief executive of deVere Group

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 IFM Correspondent

December 15, 2016: Citing an improving economy, the US Federal Reserve raised its key interest rate on December 14 for the first time in 2016 by a quarter percentage point. In a statement after a two-day meeting, the Fed said policymakers unanimously agreed to lift the benchmark federal funds rate – the rate banks charge each other for overnight loans — from 0.4% to 0.6%.

The hike is only the second since 2008 despite an unemployment rate that has tumbled from 10% in 2009 to a near-normal 4.6%. “Our decision to raise rates should certainly be understood as reflecting the confidence we have in the progress the economy has made and our judgement that will continue,” Fed Chair Janet Yellen said at a news conference.

Yellen also said that Trump’s blueprint of cutting taxes and beefing up defence expenses may have been a factor for some policy makers in their decision to raise rates. But she added the details of the plan and how much of it Congress will pass are unknown. “We’re operating under a cloud of uncertainty at the moment,” she said.

The move reflects the Fed’s growing confidence that the economy is on a sustainable growth footing — and its judgment that inflation is becoming a bigger danger to the US economy than sluggish growth or another recession.

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