Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

FLASH PMIs

USA: Output growth slows amid signs of demand weakness

The headline S&P Global Flash US PMI Composite Output Index dropped to 50.9 in April from 52.1 in March. Although continuing to signal an increase in business activity during the month, the latest data indicated only a slight expansion and one that was the softest since December. (…)

Slower increases in activity were recorded across both the manufacturing and services sectors, with rates of growth easing to three- and five-month lows respectively.

Output growth cooled in line with demand weakness as new orders decreased for the first time in six months, albeit dropping only modestly. Falling new business was signalled among manufacturers and service providers alike.

Some service providers suggested that elevated interest rates and high prices had restricted demand during the month. Meanwhile, manufacturers often linked lower new orders to inflationary pressures, weak demand and sufficient stock holdings at customers.

International demand held up slightly better than domestic sales, with new export orders remaining unchanged for the second month running.

Concerns about their ability to secure new orders dampened firms’ confidence in the year-ahead outlook for business activity in April. Business sentiment dipped to a five-month low, down in both manufacturing and services, but remained positive overall amid hopes that market conditions will pick up.

Signs of demand weakness impacted hiring plans at companies in the US at the start of the second quarter. A number of survey respondents indicated that they had held off on backfilling positions following the departure of staff. As a result, employment decreased for the first time since June 2020.

The overall reduction in workforce numbers was centered on services, where employment decreased solidly and to the largest extent since mid-2020. In fact, excluding the opening wave of the COVID-19 pandemic, the decline in services staffing levels in April was the most pronounced since the end of 2009. In contrast, manufacturing employment continued to increase modestly.

The drop in staffing levels partly reflected signs that current capacity was sufficient to handle workloads, with backlogs of work decreasing for the third month running and to a larger degree than in March.

Input prices continued to rise sharply in April, although the pace of inflation eased from the six-month high seen in March. This was in spite of the fastest increase in manufacturing input costs for a year amid rising raw material prices. Service providers often noted higher staff and shipping costs, though reported the second-lowest overall cost increase for three-and-a-half years.

In line with the picture for input costs, output prices increased at a solid but slower rate during April, the pace of inflation cooling again having accelerated to a ten-month high in March. Prices charged inflation was in line with the series long-run average, though still elevated by pre-pandemic standards. Slower charge inflation was seen across both the manufacturing and services sectors.

The S&P Global Flash US Manufacturing PMI posted 49.9 in April to signal broadly unchanged business conditions over the course of the month. The index was down from 51.9 in March and ended a three-month sequence of improving operating conditions.

US manufacturers drew down their stocks of purchases for the second consecutive month in April, and to a solid degree that was the most marked since August last year. Firms made some efforts to limit the pace of depletion, however, raising their purchasing activity slightly following a fall in the previous survey period.

There remained signs of spare capacity in supply chains amid relatively muted demand for inputs. Suppliers’ delivery times shortened for the third month running. Although modest, the latest improvement in vendor performance was more pronounced than that seen in March.

Finally, stocks of finished goods ticked higher following a fall in the previous month. According to respondents, the slight rise in post-production inventories reflected a slowdown in demand which left firms holding unsold goods.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.

“The more challenging business environment prompted companies to cut payroll numbers at a rate not seen since the global financial crisis if the early pandemic lockdown months are excluded.

“The deterioration of demand and cooling of the labor market fed through to lower price pressures, as April saw a welcome easing in rates of increase for selling prices for both goods and services.

“Notably, the drivers of inflation have changed. Manufacturing has now registered the steeper rate of price increases in three of the past four months, with factory cost pressures intensifying in April amid higher raw material and fuel prices, contrasting with the wage-related services-led price pressures seen throughout much of 2023.”

Eurozone recovery gains momentum in April, but price pressures also revived

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, rose from 50.3 in March to 51.4 in April. The latest reading signals a second successive month of rising output after a continual decline over the nine months to February. The April expansion was the strongest since May of last year, though was only modest and well below the pace seen this time last year.

Although service sector output grew for a third successive month, with the rate of increase having gained momentum to register the fastest rise for 11 months, manufacturing output fell across the eurozone for a thirteenth straight month in April to act as a drag on the overall economy. The rate of decline in factory output eased, however, to the weakest for 12 months.

Sector variations were driven by underlying demand conditions. New orders for services rose in April at the fastest pace since May of last year, up for a second straight month, but new orders for manufactured goods fell at an increased rate. The latter have now fallen continually for two years.

By country, Germany notably edged back into growth territory for the first time in ten months as resurgent growth in the service sector was accompanied by a cooling of the manufacturing downturn. France meanwhile reported only a marginal contraction of output, the weakest recorded over the past 11 months, as the first rise in service sector activity since last May helped offset a persistent manufacturing decline. It was the rest of the region which collectively saw the best performance, however, despite growth slowing slightly, as output rose for a fourth consecutive month in April in response to robust growth in the service sector and near-stable manufacturing output.

Employment increased across the eurozone for a fourth month in a row in April after two months of marginal declines at the end of 2023. The rate of net job creation accelerated to the highest since last June. A ten-month high rate of employment growth in the service sector drove the increase, though the pace of headcount reduction in the manufacturing sector also eased to the slowest in seven months. Jobs growth was recorded in France, with the rate of increase reaching a nine-month high, alongside a marginal return to growth in Germany and sustained solid hiring in the rest of the region.

Having briefly lengthened at the start of the year in response to disruptions to Red Sea shipping, manufacturing supplier delivery times shortened for a third successive month in April, improving to the greatest degree since last August. In addition to fewer shipping delays, pressure was taken off supply chains from a further steep reduction in the purchasing of inputs by eurozone manufacturers.

Price pressures intensified slightly in April, remaining elevated by pre-pandemic standards, with higher rates of inflation seen for both input costs and average selling prices.

Average input costs across the goods and service sectors re-accelerated in April after having cooled in March, recording the joint-fastest increase seen over the past year. Although manufacturing input prices continued to fall, helped by improved supply conditions, the decline was the smallest recorded over the past 14 months. The rate of service sector cost inflation meanwhile edged up, albeit remaining below the recent highs seen at the start of the year, with companies often reporting higher wage rates as a key inflation driver alongside greater energy and fuel costs. Especially strong cost growth was seen in the German service sector.

Selling price inflation likewise accelerated in April, reviving from March’s four-month low to run well-above the pre-pandemic long-run average and hint at stubborn inflation pressures. While rates charged by manufacturers fell for a twelfth month in a row, prices levied by service providers rose at an increased rate, continuing to climb at a strong pace by historical standards. Selling price inflation picked up in Germany, France and across the rest of the region, with the latter registering the steepest rate of increase.

Looking ahead, business expectations about the coming 12 months cooled slightly compared to March but was the second-highest recorded over the past 14 months. A pull-back in service sector confidence, to a three-month low, contrasted with improved optimism in the manufacturing sector, where output expectations rose their highest since February of last year. While sentiment nevertheless remained relatively more upbeat in the service sector compared to manufacturing, the gap is now the narrowest for just over two years.

Recent months have seen business confidence improve in response to the expectation of lower interest rates, a moderating cost of living squeeze and signs of recovering household and corporate demand. Manufacturing has also been buoyed by signs of the global inventory cycle starting to become more supportive to demand. However, geopolitical uncertainty and financial market volatility subdued optimism about the year ahead outlook at some firms in April.

Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

THE GOOD PLACE

Here’s my “economic” version of NBC’s The Good Place series:

The series is centered on an afterlife in which economists are sent to “the Good Place” or “the Bad Place” after death. All economists are assigned a numerical score based on their contribution to useful economic forecasts during their life, and only those with the very highest scores are sent to the Good Place, where they enjoy eternal happiness with their every wish granted, guided by an artificial intelligence named Janet; all others experience an eternity of torture in the Bad Place, generally involving numerous deep and extended bear markets.

Ed Yardeni will no doubt end up in The Good Place:

The Federal Open Market Committee can take the rest of the year off. Today, Federal Reserve Bank of New York President John Williams said: “Monetary policy is in a good place.” He said so at the Semafor World Economy Summit in Washington. He added: “We’ve got interest rates in a place that is moving us gradually to our goals, so I definitely don’t feel urgency to cut interest rates.” In other words, the Fed is in no rush to lower interest rates. (…)

Today, the 2-year Treasury note yield was 4.99%, implying one cut in the federal funds rate from a target range of 5.25%-5.50% to 5.00%-5.25% over the next 12 months.

“At this point, based on the data I have so far, given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probable that the next move could be an increase or a decrease,” she said earlier in Dublin.

Williams also said:

• “Of course you never know what’s going to happen. If the data [is] telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that.
• “One of the things we have learned over the past few years is it’s hard to predict the future and we need to adjust our policy stance as appropriate to reach our goals.”

Danish Physicist Neils Bohr (1885-1962) is widely acknowledged as having been the first to divulge that “Prediction is very difficult, especially about the future”. Mark Twain (1835-1910) said the same, so we can assume Bohr said it around 1905. No offense to Mr. Williams but Yogi Berra had also learned that before passing away in 2015.

Rents Are Still Rising and Pumping Up Inflation How quickly price increases will slow to levels acceptable to the Fed is an open question

(…) The rents that apartment tenants pay to renew their leases are still rising. For apartments, renewal rents rose 4.6% in January compared with the same month a year prior, according to the property-data company Yardi Matrix. Two other data companies registered renewal rent increases of about 4% so far this year.

Rent increases for new leases on empty or available apartments, also known as asking rents, are now close to zero for the year and are considered a leading indicator for the rental market. Housing analysts say the large number of new apartments being built in many U.S. cities have helped curb the rate of asking-rent growth.

But renewal rents are proving more stubborn. In Indianapolis, Kansas City, Mo., Orlando, Fla., Miami and San Diego, renewal rents were up more than 7% in January, according to Yardi, a cost increase that is affecting renters’ opinions about the greater economy. (…)

The single-family market, both for sale and rentals, continues to see gains. The median rent for a three-bedroom house is rising faster than wages in more than half of 341 counties analyzed by the property-research firm Attom. 

“The fact that so few homes are available for sale in many markets clearly further helped increase rental demand for landlords and boost their bottom lines,” said Attom Chief Executive Rob Barber in a March report. (…)

Rents Are the Fed’s ‘Biggest Stumbling Block’ in Taming US Inflation Rent increases are taking longer to moderate in the Northeast and Midwest than in the West and South.

(…) Rent dominates the inflation indexes on which the Federal Reserve bases its interest-rate decisions. Hotter-than-expected readings for the category in the first few months of the year are a big reason the central bank is hesitant to cut rates. “Housing is the biggest stumbling block,” says Chicago Fed President Austan Goolsbee. “We thought we basically understood the mechanical, short-run model of how much housing inflation should be coming down. And it hasn’t come down as fast as we thought it was going to have come down at this point.” (…)

In the Northeast and Midwest, rental inflation is not even a quarter of the way back down from the peak to pre-pandemic levels. In the South and the West it’s more than half-way and almost four-fifths of the way there, respectively.

The difference seems to be all about supply. “There’s really strong overlap right now between the markets that are seeing the biggest rent declines and the ones where there’s been the most construction,” says Chris Salviati, a housing economist at the online rental marketplace Apartment List.

New York City and Phoenix perhaps best represent the opposite ends of the spectrum. In the New York metro area, the owners’ equivalent rent component of the consumer price index rose 5.6% in the 12 months through March, a rate not much below last year’s peak of 6.3%. In the 12 months through February 2020, by comparison, it was up only 2.4%.

The addition of rental units in the metro area has lagged far behind that of other major cities, and it’s been at a near standstill since mid‑2022, when a state tax incentive for projects that reserve a portion of apartments for low- and middle-income residents expired. (…)

The city government reported in February that the 2023 rental vacancy rate was 1.4%, the lowest level since at least 1968. (…)

In contrast, the Phoenix metro area is awash in new housing. Rental inflation there was only 3% in the 12 months through March—below pre-pandemic levels—after accelerating to almost 18% in 2022. (…)

“Whatever new-tenant rent index you want to look at, for 18 months in a row we’ve seen market rents that are increasing at or below their pre-pandemic pace,” says Detmeister, who previously was in charge of the inflation-forecasting unit at the Fed’s Board of Governors in Washington. The question, he adds, is “how much of a catch-up still remains for the average rent out there.”

Ernie Tedeschi, who served as the chief economist on President Joe Biden’s Council of Economic Advisers until January, is slightly less optimistic. He notes that supply shortages are a long-standing problem, demand for more space may persist as work-from-home arrangements proliferate, and high interest rates may be lengthening the amount of time it takes for market rents to transmit to average rents. (…)

In truth, the Fed (and group think) missed both ways on rents, underestimating the initial burst and overestimating the subsequent slowdown. Slow learning… and poor research and faulty thinking.

Even Mr. Deitmeister, previously in charge of the inflation-forecasting unit at the Fed’s Board of Governors, has faulty data. The best new-tenant index, Zillow, has been below its pre-pandemic growth rate for less than 9 months on a YoY basis because of the unusually high base effect.

And on a MoM basis, new-tenant rents are now rising 0.42% per month on average (5.0% a.r), up from 0.32% (3.8%) pre-pandemic. For now, 4.5% YoY going forward seems a decent bet vs 4.0% pre-pandemic, in effect contributing little if anything to the Fed’s 2% goal.

That assumes that the 10% gap that developed since 2021 between “market rent” and CPI-Shelter will close with “market rent” chasing the CPI down. Good luck with that.

Acknowledging that, the FOMC should concentrate on supercore services inflation which, as these Gavekal charts show, is nowhere near retreating to its pre-pandemic trends. Wages and energy are to villains there.

• Not only a U.S. problem. Global inflation is much stickier than in the past. (The Daily Shot)

Source: MRB Partners

Prologis Warns of Slowing Industrial Real-Estate Market

Prologis, the world’s largest industrial property company, logged better-than-expected revenue in the latest quarter but warned of a slowdown in warehousing markets in the coming quarters as customers focus on tamping down logistics costs.

The San Francisco-based real-estate giant cut its annual guidance for 2024, in the latest sign that the rapid growth in warehousing demand driven by the pandemic is waning amid broader shifts in consumer spending and tighter inventory controls by retailers and manufacturers.

Prologis Chief Executive Hamid Moghadam said companies are taking a cautious approach to leasing due to high interest rates, an uncertain retail economy and geopolitical turmoil. Other businesses are still expanding in buildings they leased during the pandemic amid red-hot demand for new warehouses.

“It’s a very perplexing environment and one that I haven’t seen before. You have all the indicators of demand, whether it’s top-line GDP or retail sales or e-commerce sales, which are on fire, all pointing in the right direction,” Moghadam said. “But people are not converting that into as much actual leased space.” (…)

The company forecast earnings per share attributable to common shareholders of between $3.15 and $3.35, compared with its prior outlook in the range of $3.20 to $3.45 a share. Core funds from operations attributable to common shareholders was forecast between $5.37 and $5.47 a share, compared with its prior guidance in the range of $5.42 to $5.56 a share.

Moghadam said companies are still in the market for new space, including Amazon.com and Home Depot, two of Prologis’ largest customers.

Amazon CEO Andy Jassy recently said the e-commerce giant plans to double same-day delivery sites, which are smaller than its sprawling distribution centers. Home-improvement retailer Home Depot is adding warehouses aimed at serving its professional contractor customers. (…)

The average warehouse vacancy rate across the U.S. climbed to 5.8% in the first quarter from 5.2% the previous period, according to Cushman.

EU March Car Sales Recorded Biggest Drop in 16 Months

Registrations of new cars in the European Union slipped further than they have in more than a year in March, upset by the Easter holiday and in line with a trend of softening demand.

The bloc’s new-car registrations, which mirror sales, fell 5.2% on year—the largest monthly drop since November 2022, when sales dipped 6.1%, according to the European Automobile Manufacturers’ Association. (…)

Germany’s Volkswagen Group’s sales slipped 9% in March compared with a year prior, while registrations for fellow mass-market manufacturer Stellantis fell 13%, ACEA said. French carmaker Renault Group had 2.1% fewer sales.

Luxury German carmakers Mercedes-Benz Group and BMW Group—who lean on more profitable luxury models—posted drops of 1.7% and 6.7%, respectively.

Registrations fell in each of the EU’s largest economies, led by Germany with a 6.2% decrease, ACEA said.

Fully-electric vehicle registrations slipped 11%, reflecting a global trend. The emissions-free vehicles also ceded some market share to other types of cars, comprising 13% of the bloc’s total registrations compared with 14% in the previous March.

IMF Warns Surge in U.S., China Debt Could Have ‘Profound’ Impact on Global Economy The U.S. and Chinese governments should take action to lower future borrowing, as a surge in their debts threatens to have “profound” effects on the global economy, the International Monetary Fund said.

(…) The Fund projected that U.S. government debt relative to economic output will rise by 70% by 2053, while Chinese debt will more than double by the same year.

The Fund said both countries will lead a rise in global government debt to 98.8% of economic output in 2029 from 93.2% in 2023. The U.K. and Italy are among the other big contributors to that increase. (…)

The IMF expects U.S. government debt to be 133.9% of annual gross domestic product in 2029, up from 122.1% in 2023. And it expects China’s debt to rise to 110.1% of GDP by the same year from 83.6%.

The Fund said there had been “large fiscal slippages” in the U.S. during 2023, with government spending exceeding revenues by 8.8% of GDP, up from 4.1% in the previous year. It expects the budget deficit to exceed 6% over the medium term.

That level of borrowing is slowing progress toward reducing inflation, the Fund said, and may also increase the interest rates paid by other governments.

“Loose US fiscal policy could make the last mile of disinflation harder to achieve while exacerbating the debt burden,” the Fund said. “Further, global interest rate spillovers could contribute to tighter financial conditions, increasing risks elsewhere.” (…)

The IMF estimated that a rise of one percentage point in U.S. yields leads to a matching rise for developing economies and an increase of 90 basis points in other rich countries. (…)

China’s budget deficit fell to 7.1% of GDP in 2023 from 7.5% the previous year, but the IMF projects a steady pickup from this year to 7.9% in 2029. It warned that a slowdown in the world’s second largest economy “exacerbated by unintended fiscal tightening” would likely weaken growth elsewhere, and reduce aid flows that have become a significant source of funding for governments in Africa and Latin America.

An unusually large number of elections is likely to push government borrowing higher this year, the Fund said. It estimates that 88 economies or economic areas are set for significant votes, and that budget deficits tend to be 0.3% of GDP higher in election years than in other years.

“What makes this year different is not only the confluence of elections, but the fact that they will happen amid higher demand for public spending,” the Fund said. “The bias toward higher spending is shared across the political spectrum, indicating substantial challenges in gathering support for consolidation in the years ahead, and particularly in a key election year like 2024.”

BTW, following Jay Powell’s Tuesday statement, many members of the FOMC (which Ed Yardeni dubs the Federal Open Mouth Policy), also offered their revised views:

• Loretta Meister: “At this point, based on the data I have so far, given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probable that the next move could be an increase or a decrease.”

• Thomas Barkin: “And if more increases are what’s necessary to do that I’m comfortable doing that.”

• Austan Goolsbee: “I think it’s far too premature to be talking about rate cuts and premature to be saying — even for the next meeting — are we going to pause? Are we going to raise? Are we going to cut”

• Even John Williams kept that door open as Bloomberg wrote: “When asked about the possibility of raising borrowing costs, Williams said it is not his baseline expectation, but added it’s possible if the economic data warrant it to reach the Fed’s inflation goal.”

Just for fun: having risen 5.5% in 25 months with little if any impact on growth and inflation, where will Fed funds need to be to do the job?

Consider that the environment has changed meaningfully in 2 years:

• Two years ago, everybody assumed that 550bps would be quite enough. Not anymore.
• Two years ago, Treasury yields were below 2%. Now 4.6%.
• Two years ago, Federal debt held by the public was $24B, up from $17.2B in 2019. It is now $27B and rising.
• Two years ago, the Federal budget deficit was $1.4T or 5.5% of GDP. This year it will reach $1.9T or 6.6% of GDP. That’s +500 billion more

The CBO, with its rather naive assumptions:

In combination with high and rising debt, high interest rates are causing federal interest costs to explode. Interest costs in the first half of this Fiscal Year (FY) have already totaled $429 billion and are projected to reach $870 billion for the full year. At this level, interest payments will surpass spending on both defense and Medicare this year and rise to become the second largest line item in the budget.

By next year, interest is projected to reach a record 3.2 percent of Gross Domestic Product (GDP) – compared to 1.5 percent just three years ago – which exceeds the record set back in FY 1991. And by 2051, interest costs are projected to reach 5.9 percent of GDP and become the single largest line item in the federal budget.

This spells trouble for debt sustainability. With long-term nominal economic growth projected to average around 4 percent per year, the interest rate on new debt is now well above the growth rate (R>G). This could lead to a dangerous debt spiral, particularly as rising debt further pushes up interest rates and stifles economic growth. A 1 percentage point increase in interest rates over the Congressional Budget Office’s baseline will add another $2.9 trillion to the debt.

Although most of our national debt was issued when interest rates were low, that debt is rolling over into a high-rate environment and further borrowing continues. Rising Treasury interest rates will put even more pressure on our high and rising debt. (…)

There is also this:

King Dollar Risks Becoming Greenback the Bully The strength of the US currency risks fracturing global trade.

(…) The dollar remains oddly impervious to the US government’s burgeoning debt load, widening deficits or potential political instability accompanying the upcoming presidential election. Amid increased geopolitical concerns it remains the preferred choice for investors to park cash safely at yields of more than 5%, and is also the avenue for speculating on the latest tech craze in US equities.

Fed Chair Jerome Powell has now acknowledged market concern that sticky inflation will stay the central bank’s hand from cutting interest rates. The world could just about handle higher for longer as long as there really is an eventual Fed Funds cut. But if the next move turns out being a hike — which, to be clear, the Fed is absolutely not currently signaling — it would be utterly gut-wrenching. With the BRICS-plus set of countries already diversifying away from the dollar as the default reserve currency, as gold surging to a record indicates, an overly strong dollar could accelerate this process.

It doesn’t really help either that the dollar is also positively correlating with a rising oil price. It’s too much of a stretch to label the greenback a petrocurrency; nonetheless, as US shale-oil explorers have the ability to scale up, crude prices being buoyed by geopolitical tensions will only add to the dollar’s resilience. (…)

US gross domestic product is forecast to grow 2.7% this year, more than twice the rate of Canada, the second-best performer in the Group of Seven. But the staggering bit was the size of the 0.6 percentage point upgrade in the IMF’s estimate of US potential. Meanwhile, other parts of the world are increasingly becoming more dangerous, divided, indebted and unequal. It doesn’t help that excessive domestic US fiscal stimulus is proving toxic for industry everywhere else. It’s unusual for ECB President Christine Lagarde to voice concern about the euro’s value; on Tuesday, she warned that the Governing Council “must be very attentive to FX rate changes.”

The long and sorry list of flailing Asian currencies is perhaps the most concerning consequence of the moves in the foreign exchange market. The Japanese yen can look after itself, as the relative strength of its stock market in recent months attests. There’s plenty of firepower available to the Bank of Japan should it become confident that any prospective Fed change-of-mind on the direction of monetary policy won’t destroy the effect of any intervention. Japan is resource poor, so a weak currency seriously damages its balance of payments; but that’s more than compensated by the concomitant boost to its exports. Nonetheless, the credibility of the Bank of Japan is being tested as the yen approaches 155 to the dollar.

China is also in an invidious position. On Tuesday, it surprisingly lowered its key daily reference rate, which weakened the yuan further to a five-month low to the dollar. South Korea has the worst-performing currency this year, as it’s so highly sensitive to its fellow major Asian competitors; the won is at its weakest since late 2022. It’s prompted some verbal intervention from Finance Minister Choi Sang-mok, who expressed “serious concern.” Governor Rhee Chang-yong said the Bank of Korea is “ready to deploy stabilizing measures.”

China, Japan and Korea are also trapped in a competitive triangle among themselves that exacerbates the repercussions of the rising dollar. As my Bloomberg Opinion colleague John Authers points out, the yen is at its weakest to the yuan for more than 30 years. That elastic can only stretch so far; but the downside risks of a failed support operation are correspondingly larger. If one moves aggressively to bolster its currency then the others will likely be forced to respond accordingly.

The rest of Asia is unavoidably caught in the downdraft, though their relative performance during the pandemic illustrates how much the region has improved its economic management following repeated crises in previous decades. Foreign exchange reserves have been built up, and interest rates raised earlier and higher to keep one step ahead.

The Indonesian rupiah has fallen to the cheapest for four years, forcing the central bank to intervene. The Taiwan dollar is the lowest in eight years, the Malaysian ringgit for 26 years (the central bank has pledged its support) and the Indian rupee is at a record low to the dollar. Considering the Indian economy is expected to grow by 6.8% this year, according to the IMF’s estimates, it illustrates quite how powerful the greenback’s surge is.

The MSCI gauge of emerging-market currencies has hit a new low for the year, but it’s clear Asia is where the most damage is. It’s reassuring that Powell made clear that “we are very, very aware” of the impact of dollar strength, but talk is cheap; being the custodian of the world’s reserve currency comes with a responsibility not to use it to bully your global trading partners.

Mr. Powell may be “very, very aware” but the USD is nowhere in the FOMC’s mandate.

So, what’s going to be restrictive enough?

BlackRock, KKR, Oaktree et al. must have a view on that:

Private Credit Funds Get Moody’s Warning on Problem Loans BlackRock, KKR FS, Oaktree BDCs given negative outlook

Moody’s Ratings this week gave private credit investors greater reason for concern about credit quality in the flourishing $1.7 trillion industry.

The ratings company on Monday reduced its outlook for direct lending funds managed respectively by BlackRock Inc., KKR & Co. alongside FS Investments and Oaktree Capital Management, lowering them to negative from stable. The three publicly traded business development companies, with a combined total of more than $20 billion in assets, each increased the number of loans on non-accrual status, meaning they’re in danger of losing money on those investments.

“We’ve been expecting non-accruals to increase with the jump in interest rates,” said James Morrow, founder and chief executive of Callodine Capital Management, an investor in public BDCs. “Companies will start to fall off the back of the peloton if they were in trouble already.”

While the BDCs retained their Baa3 rating, the lowest rung of investment grade, the change to a negative outlook is the first such move by Moody’s in private credit since 2020. The ratings provider said the three BDCs are managing their liquidity positions well.

Moody’s defines a negative outlook as meaning a company faces the chance of a ratings downgrade in the medium term, commonly seen by market participants as 18 to 24 months. A downgrade would make the funds the only ones in the direct lending industry with a junk rating from Moody’s, potentially increasing the cost at which they can borrow and hurting returns.

For FS KKR Capital Corp. and Oaktree Specialty Lending Corp., the dollar amount of non-accrual loans more than doubled in the fourth quarter, to 6.4% and 4.5% of the portfolio respectively, well outside Moody’s median of about 0.4% for BDC peers at the end of 2023. The FS KKR and Oaktree funds’s shares have dropped since disclosing their deteriorating portfolios in February.

BlackRock TCP Capital Corp. saw a jump in non-accruals to 2.2% from 1.2%, Moody’s said. Its shares have traded down about 9% since the company’s results in February. (…)