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- Asian shares crept cautiously higher on Friday as oil cobbled together another session of gains and markets wagered U.S. interest rates would not be rising much this year, if at all. Speculation is also rife the Bank of Japan will have to add yet more stimulus, though many doubt it will come at Friday’s first policy meeting of the year. Sources told Reuters the decision could be a close one but that policymakers were wary of using their diminishing options to counter what they see as factors beyond the BOJ’s control.
- Japanese investors seemed braced for disappointment and the Nikkei lost early gains to trade 0.3 percent lower. MSCI’s broadest index of Asia-Pacific shares outside Japan managed to add 0.3 percent, aided by a tentative bounce in China. The Shanghai benchmark rose 1.6 percent in early action, but remains sharply lower for the week. Economic news disappointed as U.S. durable goods dived 5.1 percent, the biggest decline in 16 months and just the latest indicator to undershoot forecasts. The saving grace for stocks was that debt markets reacted by further lowering the expected path of hikes from the Federal Reserve. Fed fund futures imply a rate of 59 basis points by year end, compared to 90 basis points a month ago.
- In the U.S. Federal Reserve’s arsenal of tools the characterization of economic risks is heavy artillery, used to flag the moments when major events like the 2003 Iraq war or the near crack-up of the euro zone in 2011 make forecasting even trickier than usual. The U.S. central bank has now put the world on notice that the slide in oil prices and sharp slowdown in global growth may rank as one of those very shocks, capable of changing the Fed’s bias from implying a steady set of future rate hikes to one pointing to an extended pause or even a rate cut driven by stubbornly low inflation. It is also a capitulation of sorts, a subtle acknowledgement that events Fed officials have insisted for a year or more would prove of passing importance may be pulling the country toward a new slump. When it raised rates in December, the Fed described risks to the United States as “balanced,” which cleared the way for the hike by positing that the economy was just as likely to outperform the Fed’s expectations as to do worse. In place of that sanguine view, the Fed in its January statement said it was “closely monitoring” global developments to better understand how they may affect the “balance of risks” faced by the United States. Of late those global developments have been routinely negative, depressing U.S. inflation, dragging on the real economy by holding down exports, and, of late, nipping at household wealth by triggering sharp drops in the stock market. But Fed policymakers have now told markets: don’t be too sure, because we aren’t. The change comes after two years of saying the risks to the outlook for inflation and the labor market were nearly balanced, or actually so. The Fed used similar tweaks to the risk assessment language to signal its uncertainty around the start of the 2003 Iraq war, and to note how the rise in global financial stress in 2011 caused by the euro crisis had clouded the U.S. outlook.
- Global benchmark Brent crude futures extended gains on Friday to put them on track for a weekly rise of over 6 percent, boosted by hopes of a deal among oil-producing countries to tackle a growing supply glut. Brent futures rallied as much as 8 percent after Russia said on Thursday that OPEC’s largest producer Saudi Arabia, had proposed oil production cuts of up to 5 percent in what would be the first global deal in over a decade to help clear a glut of crude and prop up sinking prices. Edison Investment Research has also reduced its 2016 oil price forecast to $40 a barrel from $60. The rebound in the oil market lifted share prices on Wall Street and other stock markets in another rollercoaster session. [MKTS/GLOB]