The US economy reported a 4.9% surge in the third quarter of 2023, driven by a doubled federal fiscal deficit due to a 19% decrease in personal income-tax collections. This reduction was influenced by adjustments in tax slabs and decreased capital gains taxes, acting as automatic stabilisers for the economy.

The Congressional Budget Office (CBO) had initially forecasted a gradual decrease in income taxes as a percentage of GDP. However, a sharp drop to pre-Covid levels was observed instead. Political constraints may pose challenges to further deficit expansion unless additional tax reductions are implemented.

Looking ahead, the replication of the fiscal scenario from 2023 appears unlikely. Projections suggest an increase in the debt-to-GDP trajectory, which could result in more bond supply and elevated US government bond yields. These changes could impact borrowing rates and global capital flows.

These financial shifts are being amplified by the Federal Reserve's quantitative tightening (QT), potentially leading to policy inversion and shrinking dollar availability outside the US. Such conditions could have significant effects on the valuation of financial assets globally.

The potential solution to these challenges may involve the Fed restarting its bond purchasing program. However, this action would likely require either an economic recession or a significant disruption in the global financial system. Such events could spark a debate on debt sustainability, affecting 'fair value' multiples and leading to adjustments in financial markets.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

By Wayne Cole

(Reuters) - A look at the day ahead in European and global markets from Wayne Cole.

It's been a day for relief rallies in Asia as investors became increasingly confident the next move in U.S. interest rates will be down, not up. All the major Asian equity markets are higher, as are U.S and European stock futures.

While Federal Reserve Chair Jerome Powell maintained the option of another hike, he sounded less than committed to the idea. Risks were now "more two sided" and almost "balanced", he said in his presser. They were making progress on inflation and, crucially, expectations of inflation "were in a good place".

That was enough for markets to lower the risk of a December rate hike to 22%, and a January move to 28%. Meanwhile, the probability of a rate cut by June next year advanced to almost 70% and futures now imply around 85 basis points of easing for all of 2024.

Powell, of course, played down the chance of cuts but he must know that with inflation steadily cooling real rates are rising. If the Fed does nothing at all, policy will effectively tighten into next year even as the economy is expected to slow, thus adding to the risks of recession.

The Treasury market has played its part by pushing yields up in recent weeks, and duly celebrated by pulling them down again, at least for now. Ten-year yields are off 22 basis points from Wednesday's high of 4.71%, though that remains far above the 4.0% levels held in early August.

The 30-year yields dropped back under 5% helped by relief Treasury's refunding plans included less issuance at the longer end than many had feared.

The dovish mood proved infectious as investors pared back rate risks across much of the developed world. The Dec 2024 EURIBOR future jumped to a five-month high and now implies almost 100 basis points of easing in 2024.

The Bank of England is seen as odds-on to hold rates when it meets later on Thursday, with a near 70% chance its tightening cycle is done and dusted.

For currencies, the drop in Treasury yields pulled the U.S. dollar down modestly, while the improvement in risk sentiment gave a lift to the battered Aussie and kiwi dollars.

The next major hurdle for equities will be results from the $2.7 trillion behemoth Apple (NASDAQ:AAPL) after the bell. The focus will be on iPhone 15 sales and whether a strong start was slowed by cooling demand in China. Guidance for the crucial December quarter holiday season could also help.

Markets will now be hoping the payrolls report on Friday doesn't rain on the party.

Key developments that could influence markets on Thursday:

- Appearances by ECB Board members Edouard Fernandez-Bollo and Isabel Schnabel, and by chief economist Philip Lane

- Interest rate decisions from the Bank of England and Norges Bank

- German reports unemployment data, while U.S. has weekly jobless claims, durable goods orders and auto sales

(By Wayne Cole. Editing by Sam Holmes)

WASHINGTON (Reuters) -U.S. House of Representatives Speaker Mike Johnson said on Wednesday he plans to hold a vote on a standalone Israel aid bill despite a Congressional Budget Office report showing it could increase the federal deficit.

In the first major legislative action under Johnson, House Republicans unveiled their bill on Monday seeking to provide $14.3 billion for Israel by cutting Internal Revenue Service (IRS) funding.

The House could vote on the bill and pass it with Republican support as soon as Thursday. But it is unlikely to become law, as it faces stiff opposition in the Democratic-controlled Senate and the White House has threatened a veto.

Democrats and some Republicans oppose the plan, choosing instead to support Democratic President Joe Biden's request for a $106-billion bill including funding for Ukraine's war effort, increased border security, humanitarian aid and efforts to push back against China in the Indo-Pacific, as well as money for Israel.

Johnson voted against aid to Ukraine before he became speaker, but Republican Senator Josh Hawley said he told a group of senators at a lunch meeting on Wednesday that he does support some money for the Kyiv government, just not combined with Israel aid.

Johnson's office did not immediately respond to a request to verify his remarks.

But Johnson told Fox News in an interview on Wednesday that Ukraine's funding would be linked with border security.

"Those two things are going to be handled together," Johnson said.

The non-partisan Congressional Budget Office (CBO) said on Wednesday that the IRS cuts and the Israel aid in the standalone bill would add nearly $30 billion to the U.S. budget deficit, currently estimated at $1.7 trillion.

Johnson rejected that assessment, telling reporters: "We don't put much credence in what the CBO says."

To become law, any legislation must pass the House, the Senate and be signed into law by Biden.

Democrats accused Johnson's Republicans of wasting time by backing a partisan measure rather than a bill that would pass quickly to address the crisis following the Oct. 7 attack on Israel by Iran-backed Hamas militants from the Gaza Strip.

The top Senate Democrat, Chuck Schumer, said on Tuesday the bill would be dead on arrival in the upper chamber.

The Biden administration said Biden would veto such a bill if it reached his desk, calling it "bad for Israel, for the Middle East region, and for our own national security."

By William Schomberg

LONDON (Reuters) - The Bank of England looks set to hold borrowing costs at a 15-year high on Thursday and signal that it does not plan to cut them anytime soon as it remains locked in a battle against the most elevated inflation rate among the world's rich economies.

Despite strain in the economy that some see as a sign of a recession starting, the BoE is expected to keep Bank Rate at 5.25% for a second meeting in a row after 14 back-to-back increases, a Reuters poll of economists showed last week.

Last week the European Central Bank kept rates unchanged and the U.S. Federal Reserve did the same on Wednesday as they wait to see if the worst inflation outbreak in decades has really been quelled.

The BoE's Monetary Policy Committee is facing an inflation rate more than double that of the euro zone and almost twice the U.S. rate. It voted by only a narrow 5-4 margin in September to halt its run of increases in borrowing costs.

But signs of a slowdown in much of the British economy have become clearer since then and some economists say a recession might already be under way.

Mike Riddell, a senior portfolio manager at Allianz (ETR:ALVG) Global Investors, said the long lags between changes in rates and their impact meant most of the BoE's increases in borrowing costs between late 2021 and August this year was yet to be felt.

"The BoE will most likely therefore be keen to keep all options open, but seems set to wait and observe how much pain the previous hikes have caused before changing rates again in either direction," Riddell said.

SLOW FALL OF INFLATION

BoE Governor Andrew Bailey and other top officials at the central bank have acknowledged that their rate hikes to date are weighing on the economy. But they have also stressed they will not flinch in their task of bringing inflation down.

The BoE - which some economists and politicians criticised for not sounding aggressive enough about quashing the surge in prices early on - has said it is determined to stamp out the long-term inflation risks to the economy, chief among them strong rises in pay growth.

Although inflation has fallen from 11.1% just over a year ago to 6.7% in the most recent data, it remains more than three times the BoE's 2% target.

The central bank said in its last set of economic forecasts in August that inflation would only return to 2% in the second quarter of 2025.

Inflation is expected to resume its fall in October after stalling in September but rising oil and gas prices since the start of the turmoil in the Middle East could slow its fall.

The BoE will publish new forecasts on Thursday.

Most investors believe it is now done with rate hikes and will keep borrowing costs on hold until at least August next year before starting to cut them.

But Bailey and his MPC colleagues are likely to reiterate that they are ready to raise rates higher if needed.

As well the data, the BoE is keeping an eye on political news: Prime Minister Rishi Sunak is under pressure from within his Conservative Party to cut taxes ahead of a national election expected next year.

Sunak and his finance minister Jeremy Hunt have said they cannot offer major sweeteners to voters in a budget update on Nov. 22, given the need to focus on bringing down inflation. Sunak pledged in January to halve inflation this year.

But Hunt is likely to have one more budget statement to deliver in the spring of next year before the election.

The European Central Bank (ECB) recently halted a series of interest rate hikes, marking a strategic shift towards maintaining current borrowing costs. This decision, supported by ECB's Governing Council member Francois Villeroy de Galhau and ECB President Christine Lagarde, aims to control inflation at 2% by 2025.

Today, Villeroy de Galhau reiterated his support for the ECB's decision, emphasizing the importance of a longer-term view for economic stability. In a post on Linkedin, he urged maintaining current rate levels for an extended period to ensure the full effectiveness of monetary policies.

The effectiveness of this policy is evident in the euro area's two-year low inflation rate of 2.9%, excluding food and energy costs. Bank of France Governor Francois Villeroy cited the annual euro zone inflation at 2.9% and an underlying price rise of 4.2% in October as proof of successful policy implementation.

Further underlining this success is the significant decline in consumer-price growth in the euro area's second-largest economy, as emphasized by French Finance Minister Bruno Le Maire. Through sustainment of current borrowing costs and steady interest rates, the ECB aims to maintain economic stability amidst slowing growth.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

LONDON (Reuters) - The number of companies in England and Wales declared insolvent during the three months to the end of September remained close to levels seen after the 2008 financial crisis and was down only slightly from the previous quarter's 14-year high.

The Insolvency Service, a government agency, said the number of insolvencies fell 2% to 6,208 on a seasonally adjusted basis, but was 10% higher than in the same period a year earlier.

Many businesses and households have come under increased pressure from rising interest rates as well as and a jump in the cost of energy and other necessities such as food.

"The last two quarters saw the highest quarterly insolvency numbers since Q2 2009," the Insolvency Service said.

Most of the increase has been driven by a surge in creditors' voluntary liquidations - a form of insolvency where directors and creditors agree to wind up a struggling business, which is now the most common since records began in 1960.

There were also 735 compulsory liquidations, a similar level to before the COVID-19 pandemic but up by 46% on a year earlier. Until the end of March 2022, there were restrictions on courts winding up businesses affected by the pandemic.

The Bank of England raised interest rates 14 times between December 2021 and August 2023, lifting benchmark borrowing costs from 0.1% to 5.25%.

Most economists think the central bank will keep rates on hold on Thursday after its latest rate meeting, but do not expect a rate cut until the second half of next year.

"Escalating interest rates have added to the cost of servicing the already increased debt burden of some firms, made refinancing impossible or punitively expensive for others, and generally made access to funding difficult," said Mark Ford (NYSE:F), a restructuring partner at professional services firm Evelyn Partners.

By Brigid Riley and Kevin Buckland

TOKYO (Reuters) - A day after loosening its grip on long-term interest rates, the Bank of Japan intervened in the government bond market to rein in a jump in yields to fresh decade highs, reminding the market that it should avoid moving too fast.

The 10-year Japanese government bond yield rose 2 basis points (bps) to 0.970% on Wednesday, a level last seen in May 2013, before retreating immediately after the BOJ announced an emergency bond-purchase operation. It stood at 0.955% as of 0605 GMT.

"They've said okay, let's let the market find a new equilibrium - but let's remind the market that about the upper bound, we can intervene," said Claudio Irigoyen, global head of economics at BofA Global Research.

Japan's central bank on Tuesday took another small step away from its decade-long commitment to ultra-easy stimulus by changing the 1% ceiling for the 10-year yield to a reference point rather than a hard cap.

It also removed a pledge to defend the level with offers to buy unlimited amount of bonds, nodding to market forces that have continued to push yields up in line with global moves and domestic inflationary pressures.

There's "a continued sense of caution in the market that we're moving in the direction of policy normalisation," said Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley Securities.

While the 10-year yield's rise was halted by the BOJ's intervention, other parts of the curve continued to climb.

The five-year yield reached 0.485% after the announcement, a level not seen since April 2011.

The 20-year JGB yield touched 1.745% for the first time since July 2013, and the 30-year yield reached 1.91%, a level last seen in May 2013.

The two-year JGB had not traded yet following the intervention, but the yield ticked up to 0.160% earlier in the day for the first time since July 2011.

Yield curve controls are "simplified but effectively dead," said James Malcolm, UBS currency strategist based in London.

"The positive spin is that less overt control should help market function recover."

SYDNEY (Reuters) - Chances of an imminent hike in Australian interest rates grew on Wednesday after data showed house prices rebounding to near record highs and the International Monetary Fund recommended tightening monetary and fiscal policy screws to curb inflation.

Markets responded by pricing in a near-70% chance that the Reserve Bank of Australia (RBA) will raise rates by a quarter point to 4.35% when it meets on Nov. 7, ending four months of keeping rates on hold.

High readings for inflation and consumer spending had already suggested policy might be too loose, and that view was reinforced by a CoreLogic report showing house prices had regained all the ground lost during the RBA's previous 12 rate hikes.

"The turnaround in property prices has been quite remarkable," declared Gareth Aird, head of Australian economics at CBA. "The RBA's 400 basis points of tightening reduced home borrower capacity by 30%, but property prices are now back to their previous peak."

So far this year, values in Sydney, Perth and Brisbane are all up more than 10%, adding billions to household wealth at a time when the RBA would really rather they not be spending.

A separate report from PropTrack foresaw further gains ahead given booming migration, a tight rental market and a supply squeeze as home building lagged far behind population growth.

IMF WEIGHS IN

The IMF also weighed in on Wednesday by arguing tighter monetary and fiscal policy was needed in order to bring inflation back to the RBA's target band of 2-3%.

In its regular review of Australia, the IMF staff noted the resilience of the economy as the jobless rate remained near a 50-year low of 3.6%, while economic output was estimated to be running at 1% above potential.

"Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimize the risk of de-anchoring inflation expectations," they said.

They also called for different levels of government to take a more measured approach to infrastructure investment as massive projects compete for scarce resources and push up costs.

S&P Global Ratings estimates capital expenditure by Australian states and territories will be a record A$320 over the next four years.

"Each project on its own probably doesn't add that much to national inflation," said Martin Foo, lead analyst at S&P Global Ratings. "But the problem is that if you add up all of these projects together, then they are having a significant impact."

The US housing market is potentially on the brink of recession, as mortgage rates near 8%, according to Wells Fargo economists. This situation is largely attributed to the Federal Reserve's aggressive interest-rate hikes since March 2022, a strategy intended to control inflation that is expected to persist until 2024.

The Federal Reserve's policy could result in a decrease in construction and housing activity. The residential sector, which showed signs of improvement in early 2023, is now contracting. Even if mortgage rates drop when the Federal Reserve eases its monetary policy, financing costs might remain high. This could limit new construction and discourage sellers with low mortgage rates from listing their homes.

The average 30-year fixed-rate mortgage has climbed from under 4% to nearly 8%. In the first half of 2023, only 1% of Americans sold their houses. This trend suggests a potential slowdown in the housing market activity.

Various groups have urged Jerome Powell, the Fed's chair, to reconsider the bank's rate-hiking campaign. These groups include the National Association of Realtors, Mortgage Bankers Association, and National Association of Homebuilders. This situation echoes the 1980s when homebuilders from Jackson, MS sent a plea to then-Fed Chair Paul Volcker with the inscription "Help! Help! We Need You. Please Lower Interest Rates."

The current situation underscores a growing concern about the impact of rising interest rates on the housing market. As economists continue to monitor these trends, it remains clear that future decisions by the Federal Reserve will significantly influence the trajectory of the US housing market.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

(Reuters) -Financial markets have got off to a volatile start to the week, after Hamas militants launched an assault on Israel at the weekend, triggering violent conflict that left hundreds dead.

A bond market rout last week and currency gyrations already had financial markets on edge ahead of U.S. inflation numbers and the start of earnings season.

There's plenty to chew over for policymakers meeting at the World Bank/International Monetary Fund annual meeting, while Britain's opposition Labour party - vying for government - will set out its stall ahead of next year's election.

Here's your week ahead in markets from Kevin Buckland in Tokyo, Lewis Krauskopf in New York, Rachel Savage in Johannesburg, and Naomi Rovnick and Dhara Ranasinghe in London.

1/ A JAPANESE INTRIGUE

When all were bowing before king dollar in days gone by, the yen suddenly had other ideas. Following a grind to a new one-year peak above 150 yen on Tuesday, the bottom fell out, and a minute or so later the dollar was bouncing off 147.

    Markets whispered about possible intervention, although many had doubts and the dollar recovered quickly, lacking the shock-and-awe of Japan's move a year ago. Central bank data strongly hints of no official action that day. But the spectre of intervention will likely keep tugging at dollar spikes, maybe all the way until the next central bank decision on Halloween.

Meanwhile, the euro is facing its own ghosts, with resurgent oil prices hurting a deteriorating economy and renewed concerns about Italy's fiscal position raising the risk of a move back towards the psychologically key $1 marker.

2/ HOT, COLD, OR JUST RIGHT?

    With benchmark Treasury yields around 16-year peaks, stakes are high for Thursday's monthly U.S. consumer price index report as investors gauge whether the Fed is likely to hike rates again to ensure inflation keeps cooling.

    August data showed the fastest inflation increase in 14 months as the cost of gasoline surged, though the annual rise in underlying inflation was the smallest in nearly two years. With oil prices around $90 a barrel, energy prices are also in focus.

    A hot report could spur worries that the Fed's rate posture may grow even more hawkish after its 'higher for longer' mantra in September spooked markets. The Fed is broadly expected to hold rates steady at its Oct 31-Nov. 1 meeting, although some traders are betting on another increase.

    3/ BETWEEN A YIELD AND A HARD PLACE

    Reports from major banks kick off third-quarter earnings season for U.S. companies with equity investors eager for a catalysts to revive stocks in the face of surging bond yields.

    JPMorgan, Citigroup and Wells Fargo will post results on Oct. 13 and give a first readout on the fallout from higher rates on issues from loan demand to consumer behaviour.

    Other companies set to report include snacks and beverages giant PepsiCo (NASDAQ:PEP) on Tuesday, Delta Air Lines (NYSE:DAL) on Thursday and insurer UnitedHealth Group (NYSE:UNH) on Oct 13.

    Overall, S&P 500 companies are expected to increase third-quarter earnings by 1.6% compared to the year-ago period, according to LSEG IBES, after earnings dipped 2.8% in the second quarter.

4/ LABOUR TAKES THE STAGE

The UK's governing Conservative party conference was marred by Prime Minister Rishi Sunak's controversial move to downsize plans for a long-awaited high speed railway.

Now it's time for the opposition Labour Party - riding high in opinion polls and having just clinched a clear by-election victory - to take the stage with business and markets looking out for what the potential next government might have to offer.

Asset managers are clamouring for Labour to listen to their ideas for reviving interest in the UK's moribund stock market - and any sign of changing political winds may bring some respite to underperforming equities, analysts said.

Hopes for an economic bounce, however, will be tempered by the UK's high government debt and Labour's vow for prudent budgets with fiscal rules similar to the current government's ones.

5/ MEETING IN MOROCCO

Finance officials and investors from around the globe are heading for the Morrocan city of Marrakech for the World Bank International Monetary Fund annual meetings. The gathering comes at a time when rocketing U.S. government bond yields that have led to a global jump in borrowing costs weigh on hopes that inflation can be lowered without triggering a major crisis.

Policy makers also face deepening global divides and calls from large emerging economies such as China to reform the Bretton Woods global financial architecture almost 80 years after it was established and make it more representative.

Amid these tensions, the IMF and World Bank are trying to boost their lending. Meanwhile, the Group of 20 leading economies' flagship debt restructuring initiative, the Common Framework, will also be in focus as it continues to face intense criticism for delays and a lack of concrete outcomes.

(Graphics by Sumanta Sen, Pasit Kongkunakornkul, Vineet Sachdev and Riddhima Talwanin; compiled by Karin Strohecker; editing by Kim Coghill)