Benchmark Treasury yields may soon hit a key level on the back of rising inflation expectations and concerns over US fiscal spending, according to T Rowe Price.

“The 10-year Treasury yield will test the 5% threshold in the next six months, steepening the yield curve,” according to Arif Husain, chief investment officer of fixed-income, who helps oversee about US$180 billion (RM774.43 billion) of assets at the firm. The fastest path to 5% “would be in the scenario that features shallow Fed rate cuts,” he wrote in a note.

The call stands out against market expectations of lower yields, after the Federal Reserve cut rates for the first time in four years last month. It also underscores the increasing debate in the world’s biggest bond market, following strong economic data that has raised questions about the likely pace of cuts.

Yields on 10-year Treasuries most recently traded at 5% last October, hitting their highest level since 2007 as fears of a prolonged period of high interest rates gripped markets. Turbulent repricing could be on the cards if Husain’s prediction proves accurate, with strategists currently expecting yields to fall to an average 3.67% in the second quarter. 

Husain, a near three-decade market veteran, said ongoing issuance by the Treasury to fund the government deficit is “flooding the market” with new supply. At the same time, the Federal Reserve’s policy of quantitative tightening — an attempt to reduce its balance sheet following years of bond-buying — has removed a key source of demand for government debt.

The yield curve is likely to steepen further because any rises in the yields of short-maturity Treasury bills will be limited by rate cuts, said Husain, who is also T Rowe Price’s head of fixed income.

Deutsche Bank’s private banking arm said last month that 10-year Treasury yields would touch 4.05% by next September, a prediction that took only around a month to prove correct. Blackrock Investment Institute, meanwhile, issued a report last week telling investors to expect yields on longer-term US debt to swing in both directions as new economic data is released.

Cracks are already appearing in the US’s fiscal position, lending credence to Husain’s views. The country’s debt interest-cost burden climbed to its highest level since the 1990s in the financial year that ended in September, but neither former president Donald Trump nor Vice President Kamala Harris has touted reducing the deficit as a key element of their campaign. That has left US government debt a key risk for market participants. 

The most likely scenario for the Federal Reserve is a period of small rate cuts, comparable to its reductions between 1995 and 1998, said Husain. In this scenario, China would inject more stimulus to help its own economy, boosting global growth and creating a clearer outlook for Fed officials.

There are also prospects of a normal easing cycle where the Fed cuts to nearer to the neutral rate, which Husain said is probably around 3%. He also considered a scenario in which the US went into recession, which would spur aggressive cuts. 

“Investors sharing my view that a near-term recession is unlikely should consider positioning for higher long-term Treasury yields,” Husain wrote. 

Source: The edge markets

Europe's data center power consumption is expected to almost triple by 2030 and will require a surge in electricity—supply mostly from low-carbon sources coupled with grid infrastructure upgrades, McKinsey has reported. According to the global business management consultant, total IT load demand for data centers in the European Union, Norway, Switzerland and Britain will hit 35 gigawatts (GW) by 2030, up from 10 GW today.

Europe's data centers are expected to account for ~5% of the continent's total consumption over the next six years compared to around 2% today. McKinsey estimates that Europe will require $250-300 billion in data center infrastructure investment, excluding power generation capacity.

"Meeting (the rise in electricity) demand will require an extensive increase in electricity supply; a notable shift for Europe, where aggregate power demand has remained relatively stagnant since 2007," the McKinsey report said.

But the surge in data center power consumption will not be confined to Europe alone. Last year,  the power sector consulting firm Grid Strategies published a report titled "The Era of Flat Power Demand is Over," which pointed out that United States grid planners--utilities and regional transmission operators (RTOs)--had nearly doubled growth projections in their five-year demand forecasts. For the first time in decades, demand for electricity in the U.S. is projected to grow by as much as 15% over the next decade, driven by the Artificial Intelligence (AI), clean energy, and cryptocurrencies boom.

AI, in particular, is expected to drive a lot of that surge in power demand. According to the Electric Power Research Institute (EPRI), data centers will gobble up as much as 9% of total electricity generated in the United States by the end of the decade, up from ~1.5% currently thanks to the rapid adoption of power-hungry technologies such as generative AI. For some perspective, last year, the U.S. industrial sector energy consumed 1.02 million GWh, good for 26% of U.S. electricity consumption.

Source: OILPRICE

The UK and Australia will work together to pursue their energy transition goals, the prime ministers of the two countries said today.

PMs Keir Starmer and Anthony Albanese did not go into detail about how much money their governments would commit to these goals but mentioned green hydrogen and offshore wind among them.

“This partnership will ... build on our long-standing cooperation on international climate action and shared commitment to reach net zero emissions by 2050,” Australia’s Albanese said in a statement, as quoted by Reuters, speaking on the sidelines of the Commonwealth Heads of Government Meeting that is taking place this week in Samoa.

“The Australia–UK Climate and Energy Partnership will focus on the development and accelerated deployment of renewable energy technologies, such as green hydrogen and offshore wind, to support the economic resilience and decarbonisation goals of both countries,” an official release from the Australian Prime Minister’s office said.

“The partnership will also build upon the two countries’ long-standing cooperation on international climate action, including on renewable energy and climate finance,” the statement also said.

The UK has one of the most ambitious transition schedules in the world, aiming for a complete emission-free grid by 2030. Australia is ramping up its own plans in the area, with green hydrogen considered a big part of the country’s transition. There are currently more green hydrogen projects being developed in Australia than anywhere else. However, several green hydrogen projects were canceled recently, including one of the most ambitious plans by Australia’s mining major Fortescue.

The UK, for its part, is prioritizing wind, solar, and carbon capture as its primary tools for building a net-zero economy. Earlier this week, the Starmer government asked the UK’s grid operator to devise a plan for the accelerated buildout in wind and solar. Such an accelerated buildout is considered critical for the success of the transition.

Source: OILPRICE

Since going on strike last month, Boeing factory workers have repeated one theme from their picket lines: They want their pensions back.

Boeing froze its traditional pension plan as part of concessions that union members narrowly voted to make a decade ago in exchange for keeping production of the company’s airline planes in the Seattle area.

Like other large employers, the aerospace giant argued back then that ballooning pension payments threatened Boeing’s long-term financial stability. But the decision nonetheless has come back to have fiscal repercussions for the company.

The International Association of Machinists and Aerospace Workers announced Wednesday night that 64 percent of its Boeing members voted to reject the company’s latest contract offer and remain on strike. The offer included a 35 percent increase in wage rates over four years for 33,000 striking machinists but no restoration of pension benefits.

The extension of the six-week-old strike plunges Boeing — which is already deeply in debt and lost another $6.2 billion in the third quarter — into more financial danger. The walkout has stopped production of the company’s 737, 767 and 777 jetliners, cutting off a key source of cash that Boeing receives when it delivers new planes.

The company indicated Thursday, however, that bringing pensions back remained a non-starter in future negotiations. Union members were just as adamant

“I feel sorry for the young people,” Charles Fromong, a tool-repair technician who has spent 38 years at Boeing, said at a Seattle union hall after the vote. “I’ve spent my life here, and I’m getting ready to go, but they deserve a pension, and I deserve an increase.”

Source: ARAB

The world economy is set to rely even more heavily on the BRICS group of emerging economies to drive expansion, rather than their wealthier Western peers, according to the International Monetary Fund’s (IMF) latest forecasts. 

Compared with its last round of predictions six months ago, the IMF now expects a bigger share of growth over the next five years to come from powerhouse BRICS economies like China, India, Russia and Brazil, according to forecasts published this week based on purchasing power parity. By contrast, the expected contribution of Group of Seven (G7) members like the US, Germany and Japan was revised down.

China will be the top contributor to global growth over the next five years, with its 22% share bigger than all G7 countries combined, according to Bloomberg calculations using the new IMF forecasts. India is the other global growth juggernaut, expected to add almost 15% of the total through 2029. 

Some of the forecasts for other countries also illustrate how the world economy is becoming more reliant on emerging markets, especially based on the purchasing-power measure that seeks to adjust for prices and tends to give greater weight to poorer but more populous countries over richer ones.  

On that basis, Egypt is expected to add 1.7 percentage points to global growth in the period, the same as Germany and Japan. Vietnam is expected to contribute 1.4 percentage points, equal to France and the UK.

The strong expansion of the US economy over the past 25 years, and especially in the post-pandemic period, makes it by far the biggest contributor to world growth among developed nations. Even so, it hasn’t been able to maintain its share of the world economy in PPP terms, compared with the trajectory of the most populous countries India and China.

The two smallest G7 economies, Canada and Italy, are expected to contribute less than 1% each to world GDP growth over the five-year period — a lower amount than much poorer countries with larger populations such as Bangladesh, Egypt or the Philippines.

Source: The edge markets