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LONDON, April 5 (Reuters) - As "fragmentation" of politics and economics becomes the new buzzword for a world that appears to be splintering into blocs, the related costs of the new order are only now being totted up. Corporate rethinking of foreign direct investment (FDI) - bricks-and-mortar developments overseas as well as mergers and acquisitions - would make the hit even scarier. And if FDI fragmentation is defined by a permanent rise in cross-bloc barriers to imported investment inputs, the IMF said developments could cut world output by 2% in the long term. "Fragmentation of the global economy will likely put inflation at a higher structural level, and the cost of capital will likely go up, squeezing low-quality and leveraged companies." Reuters GraphicsBIS chart on global trade as share of GDPBCG projections on world trade to 2031The opinions expressed here are those of the author, a columnist for Reuters.

LONDON, March 31 (Reuters) - Even after a bank shock that could well have changed the whole picture, investors appear reluctant to give up the ghost just yet. The tech-heavy, interest-rate sensitive Nasdaq (.IXIC) is up 14% and even broad European bank stock indices (.SX7P) are still up more than 4% for the year. Pull the lens out as far as it can go and MSCI's all-country index of world stocks (.MIWD00000PUS) is up more than 5%. That U-turn in thinking during the month saw wild swings in the bond and rates markets, where key volatility gauges (.MOVE) hit their highest since the 2008 crash. by Mike Dolan; Editing by Toby Chopra; Twitter: @reutersMikeDOur Standards: The Thomson Reuters Trust Principles.

While money funds are not strictly gauranteed or insured, the 85% invested heavily in government securities put up some stark competition for bank deposits that have lagged central bank policy rate rises over the past 18 months - causing much political ire in countries such as Britain. But, in contrast to money funds, the average rate across all of them, according to the Federal Deposit Insurance Corporation, is still just 0.37%. That's now changing due to safety and insurance fears at smaller banks stateside - as well as the compelling alternative at money funds that appear safer against that backdrop. Of this trillion, half went to government money market funds and the other half to larger banks, they reckoned. Noting that some $7 trillion of U.S. bank deposits remained uninsured, the JPM team concluded: "A FDIC guarantee of all U.S. bank deposits would certainly help, but it might not be enough to completely stop this deposit shift."

Similarly, the U.S. economy and stock markets tend to outperform during booms and draw in overseas investment that lifts demand for dollars. Surely times of great banking and credit stress should boost the greenback? And now we face a bout of severe banking stress alongside stubbornly high inflation that had almost all major central banks raising interest rates again over the past week despite the pretty clear underlying credit stress. JPMorgan's take on the stressed side of the dollar smile last week pointed out that "the underlying macro-financial pathology that necessitates lower yields is the primary determinant of dollar direction". Clearly, the dollar smile is no laughing matter.

Economists who obsess about tightly calibrating the quantity of money in the system balk at QE as a tool. Two weeks of turmoil in mid-sized U.S. banks follow just nine months in which the Fed had been winding down its outsize balance sheet that peaked near $9 trillion during the pandemic. "Illiquidity episodes may force central banks to slow the process of reserve withdrawal. Reuters GraphicsILLIQUIDTY EPISODESThis could become a trap that prevents normalisation of the balance sheet longer term, they said. Better-measured and more forward-looking liquidity regulations, incentives for longer-duration deposits during QE bouts and rethinking stress tests were all options, they wrote.

Even though reading anything with certainty from such volatile prices is difficult right now, the runes of the bond market suggest unfolding banking stress will suppress inflation anyway - regardless of further central bank action. "That would be very much in line with what the central banks want." U.S. equivalents were steadier about 2.5%, but five-year "breakeven" inflation rates from the index-linked market fell to 2.3%. To be fair to central bank policymakers, their own early warning systems - such as the ECB's Composite Indicator of Systemic Stress - don't yet show any more pressure on the system than they did during last year's tightening. Armed with Thursday's trial run from the ECB, the Fed and BoE will now have to make that judgment next week.

LONDON, March 15 (Reuters) - Central banks juggling inflation and financial stability mandates are prompting the wildest swings in bedrock government bonds for over a decade and a surge in volatility that may end up causing problems of its own. "The Fed and other central bankers have lost the luxury of focusing singularly on the fight against inflation," said Manulife Investment Management's Frances Donald. If the history of banking crashes and related credit crunches show them to be deflationary anyway, then many argue a central bank pause now may be the wisest choice. "The Fed is now fighting inflation as well as potential financial contagion," Lombard Odier Chief Investment Officer Stéphane Monier said. The first sign of regional bank stock calm on Tuesday, alongside the sticky core inflation readings for February, prompted a build-back of some bets for one last hike from each central bank.

Based on traditional and long-abandoned fixed policy models, Cleveland Fed researchers reckon policy is already more aggressive than any of those rules suggest. The political and policy appetite for zero interest rates or quantitative easing - which seemed to chase estimates of R-star ever lower over the past decade - is gone. At the same time, real yields above 4% have proven unsustainable historically. Bhatia feels real yields somewhere in the middle is where markets will settle. Given the economy-wide accumulation of debt over recent years, real 10-year yields in a 1.5%-2.0% range probably works.

The biggest question in world finance right now is whether the eye-watering rebound in borrowing rates we've seen over the past month is just another overshoot - or the new reality. G7 2-year yields soarFed, ECB and BoE 'terminal rates' riseWorld economy surprising in 2023LOSING THE PLOTSince the middle of last year, futures markets have consistently priced peak Fed rates below where Fed officials themselves were guiding. But for at least six of the past nine months, futures markets priced a lower terminal rate than the central Fed view. Five-year equivalents have risen sharply too, while long-term euro zone inflation swaps are pricing the highest rates in more than a decade. The outcome is "strongly bimodal", they said, and either a recession hits and rates are cut, or it doesn't and rates go to 6.5%.

And it's little surprise the International Monetary Fund forecast Britain would be the only economy of the G7 to contract this year. But certainly the potential for improved trade relations with the UK's biggest trading partner is clear. Unicredit this month cited estimates that the UK economy would underperform by 5-7% over 10 years if it remains outside the EU single market and customs union. It may even have been a key spur to this week's breakthrough given the frayed geopolitical backdrop. President Joe Biden has long insisted there would be no progress on a U.S. deal with Britain until the Northern Irish conundrum was resolved.

At its latest meeting, the Fed laced its statement and minutes with a rider about cumulative tightening and uncertain lags. The gist of the argument is that the Fed doesn't deliver credit directly to the wider economy - banks and financial markets do. But few seem to doubt that these policy lags have shortened considerably over the decades. Showcasing the study in December, San Francisco Fed chief Mary Daly adopted a more dovish slant on the gap between the funds rate and tightening financial markets. "But investors should remain attentive to the occasional episodic disconnects observed between Fed guidance and some prominent indices of financial conditions," Clarida told clients.

A year from Russia's invasion of Ukraine, fracturing geopolitics seems to be rolling back world trade links and financial interdependence at speed. But global financial conditions - and the strength of the U.S. dollar as a proxy for that - may be playing a bigger part than the more dramatic political narrative lets on. "A stronger dollar tends to go hand in hand with tighter global financial conditions and more subdued supply chain activity." Compensating somewhat for dollar exchange rate strength over the decade were historically low real dollar borrowing rates. There's little doubt that the pandemic and the geopolitics surrounding Ukraine and Taiwan have been major potential disruptions to world trade by themselves.

Two-year Treasury yields hit their highest in three months at 4.65%, now on par with the current Fed policy rate. Morgan Stanley's Matthew Hornbach described the payrolls as a "mood changing" print that's seen markets chase rates higher as if gripped by a sort of reverse FOMO - fear of missing out. Reports circulated last week of swaps and options market activity on the Chicago Mercantile Exchange that bet on market rates touching 6%, or at least hedging against that possibility. If that's true, the battle over the terminal rate may now be overtaken by how long the Fed can keep rates higher to achieve its goals. BofA chart on peak rates from fund manager surveyInflationThe opinions expressed here are those of the author, a columnist for Reuters.

LONDON, Feb 10 (Reuters) - The two investment obsessions of the year so far - artificial intelligence and super-tight labour markets - meet head on. Far from relaxing, should office or home-based workers now fret that we're in for anything but a tight jobs market over the coming years? Morgan Stanley's thematic research team said this week it was inundated with enquiries about generative AI during its recent client visits. Much like the pandemic, fear of automation could have as big an economic impact as its actual spread. US jobs growth by sectorMcKinsey chart on automation worldwideFathom chart on US vs China AIThe opinions expressed here are those of the author, a columnist for Reuters.

Wall Street giant Goldman Sachs - often a market mover with its big macro calls - is a good example. Last month's Bank of America survey of fund managers around the world still had net 68% expecting recession this year. Rates markets reared up to price Fed rates back above 5% and now expect them higher at yearend than they are today. And yet market volatility gauges have stayed peculiarly serene. Bond market volatility (.MOVE) remains well above its 20-year mean - but it has retreated sharply to two-thirds of last year's peaks.

LONDON, Feb 3 (Reuters) - For all intents and purposes, financial markets think the brutal central bank tightening cycle is done. That may seem like a leap of faith after 36 hours in which three major central banks lifted their main policy interest rates yet again - and warned of more to come. Elsewhere, the Bank of Canada already signalled last month that it's pausing its rate rises. Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, reckons "there's little investment value in over-analyzing a central banker's mindset." And if the central banks themselves seemed inclined to allow markets to do their own thing this time around, then it was left to the IMF to act as head teacher.

The Act states the Fed should conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." On that basis, the average core PCE inflation rate since 2010 is exactly 2.0% - even after the recent scare and with the monthly rate ebbing again fast. At 1.25%, real 10-year yields - measured by market inflation expectations rather than prevailing inflation - are far above sub-zero post-pandemic troughs and are also some of the highest in over a decade. And hence the cat and mouse game between Fedspeak and market pricing - rather than a material change to investors' assumption that the Fed is nearly done. U.S. Fed has missed the mark on inflationThe opinions expressed here are those of the author, a columnist for Reuters.

Although Britain saw the same easing of wholesale energy prices, UK industry - by stark contrast - continued to contract this month. More than two thirds of the 42 economists polled by Reuters this month expect another hefty 50 basis point rate rise to 4% next week, while their average 'terminal rate' forecast implies yet another quarter point rise to 4.25% after that. Despite economic funk, the implied peak BoE rate derived from money and swaps markets shows almost another full percentage point of hikes to 4.5% before the Bank calls it quits later this summer. Either way, the eventual outcome leaves the BoE and the pound in something of a half way house. Reuters Graphics Reuters GraphicsUK vs Euro zone economic surprise gapThe opinions expressed here are those of the author, a columnist for Reuters.

As it stands, a frantic Fed tightening campaign that supercharged the buck looks to be nearing an end amid evidence of steady disinflation. Taken in isolation, that would appears to have lopped more than 10% off the buck over the past three months. "Global growth is showing signs of buoyancy, macro and inflation uncertainty are waning, and the dollar is rapidly losing its carry advantage." DXY halves gainsU.S. import price inflation and the dollarReal yields, inflation and the dollarLESS CROWDEDTo what extent investors are already positioned for this ongoing slide is less clear. Policy pushback from the Fed always has the power to check prevailing dollar moves - but the flipside of dollar strength overseas could be even more powerful as European economies and Japan have to cope with volatility in dollar-priced energy and commodities.

And as the worst economic fears recede, global investors are rapidly rethinking historical underweights in euro zone assets. "One of the main sources of downside risk for economic activity in the euro zone is dissipating," said UniCredit economist Edoardo Campanella. Euro zone economic surprisesUnicredit chart on EU gas storageEuro natural gas prices plungeWEIRD WEATHERThat's not to suggest the problem is gone. Although back below 2021's peaks, year ahead natural gas prices in Europe are still three times the average of 15 year up to the pandemic. But there's little doubt Europe at large is weathering the winter storm better than most had imagined only a few months ago.

[1/2] A Brazilian flag is seen through broken glass following the anti-democratic riots, at Planalto Palace, in Brasilia, Brazil, January 10, 2023. What many banks point to is the assumed risk premium already built in to Brazilian real interest rates. But beyond Brazilian markets, the wide global markets calm surrounding the weekend events was equally curious. After all, Brazil is the 12th largest economy in the world and one of the biggest food and raw materials exporters. Among the 10 biggest risks it lists by likelihood is emerging markets political risks that threaten political institutions.

And much like the COVID pandemic, calling the big event wouldn't necessarily have made your year-ahead financial market forecast much better or your bottom lines any fatter. Forecasts are a lifeblood in markets because no one can take a position without at least some conviction about what might happen next. The Federal Reserve's quarterly economic and policy rate projections for three years hence are a case in point. For context, the 4 point error range on unemployment rate forecasts is a difference of almost 6 million jobs and a 4.6 point range on GDP is more than a trillion dollars of output. The European Central Bank is more explicit about what market price assumptions it uses in staff forecasts.

LONDON, Dec 16 (Reuters) - The Bank of England looks like it's being outed as the weakest link. The primary reason was that two of the nine-person MPC voted to end the Bank's rate rise campaign right away as the recession the Bank thinks is already underway will get entrenched next year. But with the median economist forecast for the Bank's terminal rate somewhere around 4.25%, markets still seem aggressively positioned for a hawkish surprise and the pound may be more vulnerable to that revision as the winter progresses. Significantly, the implied Fed terminal rate edged higher to 4.9% after its policy setpiece on Wednesday - even if is still below the 5.1% the Fed indicated. Reuters Graphics Reuters GraphicsReuters GraphicsReuters Graphics Reuters GraphicsThe opinions expressed here are those of the author, a columnist for Reuters.

LONDON, Dec 14 (Reuters) - The Federal Reserve, investment world and wider economy now have a major sequencing problem. With headline annual CPI ebbing to 7.1% last month, and core rates undershooting forecasts too to just 6.0%, most economists seem confident inflation did indeed peak around midyear. Equivalent public readings from New York Fed surveys are on the wane too. Fed Futures See Lower Rates End-23Reuters Graphics Reuters Graphics"TAIL SCENARIO"Sounding something of a klaxon for most asset markets after the CPI number, the peak or terminal Fed funds rate that futures markets implied by May was dragged firmly back below 5%. Apart from verbal guidance, one important signal markets will watch on Wednesday will be the Fed's economic projections that include policy rate assumptions for the year.

LONDON, Dec 9 (Reuters) - With world markets in thrall to the final big three central bank meetings of a tumultuous year next week, the parallel world of fiscal policy takes a back seat. The UK's disastrously botched giveaway budget in September set out for many the limits of what's possible in a world of double-digit inflation. Loosen the public purse strings any further and the commensurate level of interest rates needed to then get inflation back to 2% targets balloons, and risks melting the economy down in other ways. OECD chart on fiscal outlook'BRUTE FORCE'All of which begs the question of whether central banks will have to conduct the inflation fight on their own. And likely severe recessions from historically modest interest rates just force central banks to quickly return to so-called quantitative easing, undermining their own longer-term inflation battle.

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