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LONDON, Aug 2 (Reuters) - The economic picture may not have to change much for the surprise element to disappear for markets - underlining the significance of this summer's sometimes grudging admissions of investment strategy missteps. SURPRISE, SURPRISEExceptional U.S. economic surprisesU.S. surprise gaps the widest in decades, excluding pandemicAlong with market moves themselves and skewed positioning monitors, the simplest take on the unpreparedness of investors can be seen in economic surprise indices. The global surprise index is close to zero, suggesting expectations for the world economy in aggregate are actually coming in on cue. And if that happens, it may just suck the oxygen from the stellar equity outperformance over bonds to date. If true, markets may find the going harder without that element of surprise.

Persons: What's, Schroders, Johanna Kyrklund, hasn't, Kyrklund, Chris Iggo, Mike Dolan Organizations: Federal, Nasdaq, Japan's Nikkei, U.S, Graphics, AXA IM Investment, Reuters, Twitter, Thomson Locations: Europe, Japan, China, U.S

LONDON, July 28 (Reuters) - A reappraisal of the dollar could be the next big "pain trade". Dollar jumps as US 2-year yield premium builds vs G7Net short dollar contracts from CFTCBofA chart on fund managers dollar viewSMILEFor the dollar at least, it starts to look less of a one-way rate bet. For those who favour intra-G7 interest rate differentials for guidance, the picture is not much better for dollar bears. But if "soft landings", disinflation and buoyant markets continue to rule the roost, it may be hard work for the outsize "anti-dollar" bet. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Persons: There's, BoE, What's, it's, Mike Dolan, Alison Williams Organizations: Federal Reserve, Dow Jones, Treasury, Bank of England, gilts, ECB, Reuters Graphics Reuters, Reuters, Twitter, Thomson Locations: U.S, Japan

LONDON, July 26 (Reuters) - Even as fears of a 2023 U.S. recession recede and stock market bears concede defeat, there's scant sign of party mode. After wild swings of output, prices, employment, liquidity and interest rates, firm convictions about the precise onset of "technical" recessions - or even previously reliable gauges of bull and bear markets - have all become a bit suspect. Whether on a domestic or global scale, aggregate views of the economy, or stock market, right now are likely misleading. A bull to bear market and back again in little over 18 months - or so it seems. SP 500 2023 YTD THROUGH JULY 21BLUNTEDChief among the puzzles is the variable impact of sharply higher interest rates on both households and firms.

Persons: Morgan Stanley's, Mike Wilson, Wilson, Morgan Stanley, Andrew Lapthorne, Russell, Mike Dolan Organizations: Reuters Graphics, Barclays, International Monetary Fund, Tuesday, eventual, San Francisco Federal Reserve, Generale, Fed, Reuters, Twitter, Thomson Locations: U.S, midyear

But management of central bank balance sheets could help - even if central bankers are keen to publicly disassociate the process from monetary policy goals per se. But the U.S. central bank can be more comfortable nearing peak rates with inflation much closer to target than Europe's central banks - where future trade-offs may be more tempting. G3 central bank balance sheetsFed share of Treasury marketReuters GraphicsBACKGROUND NOISE? Ramsden laced his comments with caution about not confusing the run-down of the BoE's "asset purchase facility" with its central policy task. And they reckoned an increase in the volume of QT should theoretically lead to higher term premia in euro bond markets.

Persons: Dave Ramsden, BoE, Ramsden, there's, Mike Dolan, Paul Simao Organizations: Federal Reserve, Treasury, Bank of England, European Central Bank, Deutsche Bank, Reuters, Twitter, Thomson Locations: U.S

Like many, they home in on the outsized drop in used-car prices - one of the key aggravators of 'core' inflation that at 4.8% is still well above the now sub-3% headline CPI rate. Pointing to four straight months of ebbing 'trimmed mean' inflation measures of core inflation - which strip out high and low outliers - the Morgan Stanley team doubt June was a bum steer and see core disinflation more "a trend rather than a headfake". Inflation surprisesFed estimates of R* natural interest rateReuters Graphics Reuters GraphicsR-STAR GAZINGOthers doubt the optimism, of course. And it's the latter that homes in on the prospect of an inflation undershoot. Further Fed tightening after this month, then, could well see markets start to consider inflation actually undershooting 2% targets after all - but dragging recession back onto the dashboard to boot.

Persons: it's, Morgan Stanley, Christopher Waller, Guneet Dhingra, Allen Liu, Janet Yellen jived, Mike Dolan Organizations: Federal Reserve, Reuters, Barclays, Global, Bank of America, Treasury, Twitter, Thomson Locations: Ukraine, Intriguingly

LONDON, July 14 (Reuters) - An accelerating dollar slide could be a U.S. gift to its allies by helping them catch up with its impressive disinflation. A dollar slide of this size and speed has typically elicited yelps of pain from U.S. trading partners. Euro zone headline inflation - which peaked about one percentage point above and three months later than the U.S. equivalent last year - was still 2.5 points above it last month. The ECB will likely stay shy of peak Fed rates, but an expected move to 4.0% policy rates by year-end will involve two quarter point hikes after the Fed has stopped. A time-limited dollar drop now may be more benign than a simple reversion to a new 'currency war'.

Persons: Goldman Sachs, Mike Dolan, Josie Kao Organizations: Reserve, Monetary, Sterling, Bank of England, European Central Bank, ECB, Fed, Transatlantic, Reuters, Twitter, Thomson Locations: U.S, Europe, Britain, Swiss

Former BoE policymaker Kate Barker told the Financial Times this weekend that targetted and temporary tax rises on top earners may be the most effective and fairest way to go. "We're asking monetary policy to do all the work," she said. But the political sensitivity of income tax likely dictates the way forward, however cogent the economics. Yet the more general point of fiscal policy helping with the final throes of the inflation battle continues to be made. "Fiscal Policy should remain aligned with monetary policy in the fight against inflation," the Fund concluded.

Persons: BoE policymaker Kate Barker, President Biden, Mike Dolan, Matthew Lewis Organizations: International Monetary Fund, Bank for International, U.S, Bank of, Financial Times, Fed, U.S . Bureau of Labor Statistics, Britain's, National Statistics, Reuters Graphics Reuters, Reuters, Republicans, Twitter, Thomson Locations: Britain, London

LONDON, July 7 (Reuters) - Unsure which way the cookie crumbles from here - investors are being tempted to drop the bond. The broadest measures of government and corporate bonds have just stuck in mud. Two-year government bond yields are soaring. With June U.S. jobs growth going up yet another gear, U.S. Treasury yields hit 16-year highs above 5%, German equivalents hit their highest in 15 years and British gilt yields scaled 2008 peaks. For all but longer-term pension and insurance funds or banks, bonds may be neither fish nor fowl for a while to come.

Persons: hasn't, Stocks, midyear underperformance, Mike Dolan, Josie Kao Organizations: Global, Bloomberg U.S, Treasury, Bank of, JPMorgan, Europe, Reuters, Twitter, Thomson

LONDON, July 5 (Reuters) - Dismissal of this year's much-scorned equity market rally as the frothy preserve of a handful of AI-fuelled stocks may be both misleading and also one of its strengths. Or, put another way, if you remove the top 10 stocks, the other 490 would only have gained 4%. And an eye-popping 75% surge in the high-octane 10-stock FANG+TM index (.NYFANG) - mega cap U.S. digital and tech stocks including Apple, Microsoft, Nvidia and Tesla - underlines that. In short, they're hard to avoid unless you dodge either U.S.-listed companies or equity markets altogether. "While stock market investments may be risky in the short run, when viewed against inflation they have offered far more certainty in the long run," he told clients.

Persons: Russell, Andrew Lapthorne, Japan's, Germany's DAX, Italy's, Duncan Lamont, Lamont, Mike Dolan, Mark Potter Organizations: Nasdaq, Apple, Microsoft, Nvidia, Tesla, H1 Stock, Japan's Nikkei, MIB, McKinsey, Bank, Big Tech, Reuters, Twitter, Thomson Locations: Europe, Japan, U.S, United States

LONDON, June 30 (Reuters) - The economic pain of higher interest rates seems duller than many had braced for only late last year - and subdued household debt burdens may be at least partly responsible. More interest rate sensitive countries with more flexible loan rates - such at Canada, Australia and Sweden - are already turning higher. What's more, the overall impact of higher borrowing rates is partly offset by rising interest rates on savings. And so net of interest income, JPMorgan points out, interest costs are up only 0.2 percentage point of disposable personal income since the start of the Fed hiking cycle early last year. Higher costs are still coming with a lag for many and will drag on the economies further from here.

Persons: Jerome Powell, JPMorgan's Joseph Lupton, Maia Crook, Lupton, Crook, it's, Mike Dolan, Alison Williams Organizations: Federal Reserve, JPMorgan, Reuters, Twitter, Thomson Locations: Canada, Australia, Sweden, Britain, Central

LONDON, June 28 (Reuters) - Western central banks have been warned this week not to quit in the final lap of their monetary tightening campaign - the hard yards households and financial markets may now find exhausting. And yet, desperate for their members not to declare premature victory in getting inflation back to 2% targets or sow an assumption above-target inflation will eventually be tolerated, central bank watchdogs are cheerleading a last push. But that's not in forecasts this time around - with U.S. and UK headline inflation rates not back to target by the end of next year and the euro zone not even by then. 'Last Mile' of disinflationBIS chart on speed of disinflation'UNCOMFORTABLE TRUTHS'And the BIS message was echoed by the International Monetary Fund (IMF) on Monday. "Monetary policy should continue to tighten and then remain in restrictive territory until core inflation is on a clear downward path," she said.

Persons: that's, Gita Gopinath, Christine Lagarde, Lagarde, Jerome Powell's, John Williams, Williams, Joseph Little, Mike Dolan, Mark Potter Organizations: Bank for International Settlements, BIS, for Economic Cooperation, International Monetary Fund, Bank's, IMF, ECB, U.S . Federal Reserve, New York Fed, U.S, Bank of England, Global, HSBC Asset Management, Reuters, Twitter, Thomson Locations: Ukraine, Portugal

With some 1.6 million of those due to re-fix mostly 2-5 year fixed rate deals over the next 18 months - half of those by the end of this year - this super-hike will burn. Two-year fixed mortgage rates have doubled to 6% in just 10 months and were less than 1% two years ago. Fixed-rate deals were only introduced at all in 1989 and the vast majority were floating rates until just eight years ago. As Leaviss points out, five-year inflation expectations in the bond market are still stubbornly one percentage point above the 2% goal. In the end, the BoE has few good choices - but the days of fine tuning the economy with nudges and tweaks may be over.

Persons: BoE, that's, Moyeen, Jim Leaviss, Vivek Paul, Paul, Leaviss, Mike Dolan, Naomi Rovnick, Conor Humphries Organizations: Bank of England, National Institute of Economic, Social Research, Reuters Graphics Reuters, Reuters, Barclays, Bank, Investment, BlackRock Investment Institute, OECD, Twitter, Thomson Locations: United States, Germany

Can that real wage growth persist if the jobs market now loosens with a lag from the swingeing five percentage points of rate hikes in just 15 months? What's more, other surveys have yet to show inflation expectations falling so sharply or lifting confidence. The possibility of a disinflation spur to demand at this juncture may complicate that picture considerably. Importantly, the slower fall in inflation in both Britain and the euro zone means real wage growth remains negative - unlike the latest twist stateside. Bank of America chart on investor survey growth outlookReuters GraphicsThe opinions expressed here are those of the author, a columnist for Reutersby Mike Dolan, Twitter: @reutersMikeD.

Persons: it's, Goldman Sachs, Dom Wilson, Mike Dolan, Alexander Smith Organizations: University of, U.S . Federal Reserve, Bank of America, Bank of, UBS Global Wealth Management, Fed, Reuters, Twitter, Thomson Locations: Michigan, Europe, Britain

It's not even midyear yet, but the full gamut of scenarios has been juggled in just five months. World markets have swung from "hard landing" fears of late 2022 to the "soft landing" hopes of the new year and then even unnerving thoughts of "no landing" at all - just before the banking stress hit of March forced them to return to square one. "The economy is more resilient than the market realizes," BlackRock's Chief Executive Larry Fink said on Wednesday, adding more interest rates rises will be necessary but that he saw no "evidence that we're going to have a hard landing." A "soft landing" typically relates to the ability of the Federal Reserve and other central banks to get inflation back close to 2% targets without crashing the economy into a deep contraction with surging unemployment via extreme rate rises. If correct - and not all agree - the prospect of a sustained return to 2% inflation targets would surely turn off the seatbelt sign.

Persons: Larry Fink, Willem Sels, Simona Mocuta, Mocuta, Mike Dolan, Lisa Shumaker Organizations: Federal Reserve, Reuters Graphics Reuters Graphics, HSBC Global Private Banking, Nasdaq, Street Global Advisors, Reuters Graphics Reuters, Reuters, Twitter, Thomson Locations: U.S, Wall, United States, Europe

LONDON, June 1 (Reuters) - Even if the U.S. dollar's singular dominance as global currency of choice is in fact ebbing, it may not automatically lead to a weaker dollar exchange rate - and could periodically mean the opposite. The big advantage of large dollar reserve holdings alongside wide commercial usage and trade in dollars overseas was clear. But the issue is typically read in markets as a reason to bet on a weakening dollar exchange rate - or even to pump alternatives such as gold or crypto tokens. Of course, that was a global economy riven with fixed dollar exchange rate pegs that supercharged the transmission of Fed policy, most of which have since been dismantled. That may be a world many countries prefer if they are sure of viable alternatives - but may not mean a weaker dollar.

Persons: chomping, Alan Greenspan's, Janet Yellen, Yellen, Mike Dolan, Kirsten Donovan Organizations: Federal, OASIS, Fed, Reuters Graphics Reuters, Reuters, Twitter, Thomson Locations: U.S, United States, Washington, China, Ukraine, Brazil, Russia, India, South Africa, Iran, Venezuela, outflows

To be sure, the April inflation data hit the UK debt market like a thunderbolt. While the headline consumer price inflation rate dropped to 8.7% from 10.1% in March, as energy prices ebbed, that was still far higher than forecast and core inflation rates hit their highest in 31 years at just under 7%. And a chief concern for many households is ongoing annual food price inflation still near 20%. Sterling and real yield spreadsNew UK gilt shock? Using 5-year real yields from the index-linked bond market, that premium jumped almost 40bp this week to its highest since last October.

With a wry nod to the weekend coronation of King Charles, Goldman Sachs' currency team labelled an upgrade of its sterling recommendation from neutral to 'Long (live) Sterling' - nudging a 3-month forecast for sterling 3% stronger to 0.86 per euro. "Headwinds on sterling in 2022 - mostly natural gas prices and the relative stance of BoE policy - have turned to tailwinds." Economic surprise indexes compiled by Citi show incoming UK readouts more positive relative to expectations than at any time since October 2020. But the FTSE 250 is mostly holding its own so far in 2023 as they have both advanced 3%-4%. UK Economic Surprises surge vs rest of the westG3 Terminal RatesFTSE100 vs FTSE250The opinions expressed here are those of the author, a columnist for Reuters.

Both hiked interest rates a quarter point - but only the ECB said more was to come. Without committing to it, the Fed signalled a pause in its 13-month, five percentage point tightening campaign. Money markets do partly agree with Lagarde - seeing one more quarter point rate rise in the pipeline. They now see the so-called terminal ECB rate at 3.5% in September - still a chunky 175 bps below peak Fed rates if you assume that at 5.25%, those have now reached the end of the line. "The extent of policy tightening delivered by the ECB to date is already sufficient to cause a recession," said Fidelity International's Anna Stupnytska.

Unlike much of the past 15 years, euro strength is on the ECB's side as it meets on Thursday. Indeed, ECB President Christine Lagarde and chief economist Philip Lane littered speeches with warning shots about an excessive euro strength when the euro last snarled up to this extent in October 2020. Lagarde's predecessors Mario Draghi and Jean-Claude Trichet similarly weighed in with verbal intervention to cool periodic 10% surges in the trade-weighted euro over its history. Euro strength has built on belated ECB interest rate hikes since July - up some 350 basis points to 3.0% so far and expected to go up at least another 25 bps this week. So should euro strength be finally embraced by ECB as way of slaying the inflation beast?

So far in 2023, this index of what are the leading lights of the U.S. economy is up 36% - six times the year-to-date gains of the S&P 500 index (.SPX). Put another way, this year's rise of these 10 mega tech stocks accounts for pretty much all of the S&P 500 gains. "But given how often the S&P 500 has been used as Exhibit A for overall 'resilience', it's important to acknowledge just how idiosyncratic this macro gauge has been." Are tech stocks overpriced? There are certainly plenty of concerns that these mega stocks may be overbought and just too expensive - even though that concern will hardly be a new worry for these stocks.

And, as it's global liquidity that matters, the bowl is also kept brimming as the Bank of Japan continues to buy government bonds at pace. But a study looking at the U.S. banking shock that led to the failure of Silicon Valley Bank and Signature Bank last month and deposit runs across many regional banks suggests a different angle - a 'deposit glut' from within the richest countries that is increasingly unstable. "In a context of rising wealth inequality and growing corporate savings, an increasing share of bank deposits is uninsured and held by sophisticated agents," Vuillemey wrote. "This implies that these deposits are increasingly fragile, and that deposit insurance schemes ... are slowly losing bite." As illustrated in Technicolor in the SVB run, big uninsured deposits are volatile - sensitive as they are to any hint on the bank's health and moveable at push of a button.

If it is just a lagged statistical quirk, then the huge disparity in March inflation rates - of some 3-5 percentage points with western peers - should narrow sharply by yearend. With an election due next year, that may prove a big factor in any re-convergence of inflation rates if the cost of that is a much deeper economic downturn that rest. The question about Britain as an inflation outlier re-opens the age-old issue about just how that should be priced into sterling. For much of the past 10 years, G7 inflation rates were largely locked together in either their subdued pre-pandemic state or during the wild price spikes since. If UK inflation turns "idiosyncratic" among its peers during the much-vaunted normalization, then currency markets may need to rethink fundamental long-term assumptions about purchasing power, Gallo reckons.

LONDON, April 19 (Reuters) - If a mega Western recession is coming down the pike in the second half of this year, someone should point it out to the junk bond market. The investment herd seems more convinced than ever that recession is on the way amid tightening bank credit after the March bank stress - even if not all the incoming evidence supports that take. More than a third now see the biggest risk ahead as a bank credit crunch and global recession. And that's with junk spreads more than three times higher than quality corporates. U.S. and European junk bond spreads historicallyBank of America survey on investment grade bonds vs junkCOURAGE AND DECOMPRESSIONThere's little doubt than many investors want to steer well clear, for now at least.

MSCI's Europe index, for example, still trades more than a point below its average historic valuation - with the index priced at less than 13 times its 12-month forward earnings. The top sectoral weighting in the STOXX Europe 50, for example, is healthcare - at almost 23%. With British-based stocks the biggest country weighting in the STOXX Europe index at 26%, the other top four sectors in the index include the food, beverages and tobacco grouping, consumer products, industrial goods and energy. The dollar peaked late last year against most European currencies as the Federal Reserve raced to ratchet up interest rates. Some think the slide in the dollar index of some 12% since last September is barely half of the whole move.

The ECB's systemic risk indicator for the United States, for example, has returned to its lowest level in a year. The near $400 billion that dashed for money funds after the Lehman Brothers bust in late 2008 - despite credit fears in some of those funds - had completely retreated by early 2010. The relative interest rate attraction of bills and repos after the steepest Fed rate rises in 40 years should make this year's flows far stickier - unless or until the Fed were to embark on some dramatic rate easing. Either way, there's now no shortage of savings in cash if or when the lights go green. by Mike Dolan, Twitter: @reutersMikeD; Added chart from Andy Bruce; Editing by Sam HolmesOur Standards: The Thomson Reuters Trust Principles.

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