By Howard Schneider

WASHINGTON (Reuters) – It remains uncertain how far interest rates can fall, though the initial reductions made by the U.S. central bank are a vote of confidence that inflation is returning to its 2% target, Kansas City Fed President Jeffrey Schmid said on Tuesday.

“The decision to lower rates is an acknowledgement of the … growing confidence that inflation is on a path to reach the Fed’s 2% objective – a confidence based in part on signs that both labor and product markets have come into better balance in recent months,” Schmid said in remarks prepared for delivery to the Omaha Chamber of Commerce.

He said that while progress back to the 2% target meant it was a proper time to cut rates, it still “remains to be seen how much further interest rates will decline or where they might eventually settle.”

Schmid, who will have a vote on the Fed’s interest rate policy next year, did not comment on whether he would favor a quarter-percentage-point rate cut at the central bank’s Dec. 17-18 meeting.

The bulk of his prepared remarks focused on issues like demographics and productivity that could influence monetary policy over the long run by changing the underlying dynamics of inflation.

But on the more current issue of federal government spending, Schmid said “large fiscal deficits will not be inflationary because the Fed will do its job” to keep inflation at the established 2% target.

That, however, could mean “persistently higher interest rates,” Schmid said, a reason why it was important for the Fed to remain independent in setting monetary policy.

“Political authorities could very well prefer that deficits not lead to higher interest rates, but history has shown that following through on this impulse has often resulted in higher inflation,” he said.

JOHANNESBURG (Reuters) – South Africa will use its G20 presidency to focus on advancing inclusive economic growth, food security and artificial intelligence, President Cyril Ramaphosa said on Tuesday at a summit of the Group of 20 major economies in Brazil.

South Africa takes over the G20 presidency from Brazil at the summit in Rio de Janeiro.

Brazil’s President Luiz Inacio Lula da Silva earlier urged G20 leaders to accelerate their national climate targets, calling on them to reach net zero climate emissions five to 10 years ahead of schedule.

“As South Africa, we undertake to advance the work of the G20 towards achieving greater global economic growth and sustainable development. We will work to ensure that no one is left behind,” Ramaphosa said.

He added: “South Africa’s Presidency will be the first time an African country has presided over the G20. We will use this moment to bring the development priorities of the African Continent and the Global South more firmly onto the agenda of the G20.”

WASHINGTON (Reuters) -U.S. President-elect Donald Trump is expected to pick Wall Street firm Cantor Fitzgerald CEO Howard Lutnick to serve as Commerce secretary, a Punchbowl reporter said in a post on X on Tuesday, without citing any sources.

With Lutnick Trump would be tapping a long-time friend who backs the Republican’s vision to bring manufacturing jobs back to the U.S. and promote the adoption of cryptocurrency.

The Commerce Department oversees a hodgepodge of disparate functions, from regulating ocean navigation to undertaking the census. But its oversight of American export controls has thrust it into the center of the U.S.-China tech war.

As co-chair of Trump’s transition team, Lutnick had been seen for weeks as a possible candidate for a position in the Trump administration.

The Trump transition team did not immediately respond to a request for comment.

Fearing Beijing could weaponize American technology to strengthen its military, both the Trump and Biden administrations have used Commerce Department authorities aggressively to impose a raft of regulations to halt the flow of U.S. and foreign technology to China – with a special emphasis on semiconductors and the equipment used to make them.

The next commerce secretary will be responsible for enforcing a range of rules put in place to hamper China’s development of artificial intelligence and keep some its biggest tech firms, including Huawei Technologies and Semiconductor Manufacturing International, several steps behind their global competition in key technologies.

A native of New York City’s Long Island suburbs with a background in trading and real estate, Lutnick has been one of Trump’s top Wall Street advocates, hosting fundraisers and touting his policies in the media. 

By Haripriya Suresh and Sai Ishwarbharath B

BENGALURU (Reuters) – Donald Trump’s presidency in the United States is going to be “pro-business and pro-growth” and good for the tech services industry, Wipro (NYSE:WIT) Executive Chairman Rishad Premji said at an event in the southern Indian city of Bengaluru on Tuesday.

Indian companies and investors will keep a close eye on Trump’s return to the White House to assess the impact of his policies on the country’s $254 billion IT services industry.

Premji said the conversation on fewer taxes and regulations during Trump’s presidency could be powerful and “bodes well for the business and how customers will spend.”

“The government is very pro-business and pro-growth, which helps all of our customers, which ultimately helps partners here in India and world over,” he said, pointing to the potential corporate tax rate cuts and easier business regulations.

This shift in perspective comes after IT services players underwent consecutive difficult quarters of clients holding back spending, particularly on discretionary projects, due to macroeconomic concerns and inflationary pressures.

Premji noted that IT firms must remain “watchful” about inflationary pressures, particularly in regard to tariffs and how immigration policies evolve.

Stricter U.S. policies on outsourcing and restrictions on H-1B work visas could weigh on India’s IT sector, which relies heavily on the U.S. market, a note by CareEdge Ratings said.

“Indians receive the highest number of work visas from the United States, mainly for the IT sector,” the note added.

The sector also relies on U.S.-based clients for a significant portion of its revenue.

The overall impact of Trump’s second presidency should be “positive” on India’s IT sector, JPMorgan said in a note earlier this month.

“Starting with the positives, extension and deepening of U.S. corporate tax rates could support a bounce-back in enterprise technology spending,” the brokerage said.

By Jamie McGeever

ORLANDO, Florida (Reuters) – Even bulls now admit that U.S. stocks and credit are expensive.

While many argue that the rosy macro outlook will keep the party going into next year, they’re cautious that the inevitable hangover will set in soon thereafter. But not yet.

    Wall Street’s three main indices hit record highs last week, continuing the red-hot rally that began over a year ago. Since the Fed ‘pivoted’ away from raising interest rates in October last year the Nasdaq is up over 50% and the world’s biggest company, Nvidia (NASDAQ:NVDA), has seen its stock price surge 250%.

Remarkably, the S&P 500 is having one of its best calendar years since 1928.

Meanwhile, the yield spreads of investment- and junk-grade corporate debt over Treasuries have shrunk to razor-thin levels. By some measures, they are the narrowest they have ever been.

    There’s no cast-iron way of measuring how much a market is over-valued. But by any reasonable assessment, these are warning signs.

‘REVERSE GOLDILOCKS’

    Analysts at Morgan Stanley (NYSE:MS) still recommend buying U.S. equities and credit over their international peers. But they also note that the ‘bull versus bear case skew’ next year is unusually wide due to the massive uncertainty surrounding the “substance, severity, and sequencing of fiscal, trade, and immigration policies” of the incoming Trump administration.

    Their base case for the S&P 500 is 6500, up around 10% from Monday’s close. But their bull and bear cases call for 24% upside potential and 23% downside risk, respectively, a wide skew indeed.

    Their peers at HSBC also remain ‘constructive’ on risk assets and see further upside potential for Wall Street in 2025, especially in the first half of the year. But they warn that U.S. markets are right at the edge of what they call the ‘Danger Zone’.

    They have constructed an interest rate swaps model that shows what could happen if rates rise above a certain point. If this trigger is tripped – and remains tripped – a ‘reverse Goldilocks’ move beckons, and riskier assets like stocks, credit and emerging market debt come under pressure.

    The trigger for the danger zone in the current model is a 10-year Treasury yield of just under 4.5%, exactly where we are right now.

    “Put simply, if we were to push sustainably above 4.5% … this would very likely create ‘havoc’ across all major asset classes,” they wrote on Monday. “That’s by far the biggest risk to our constructive view right now.”

KEEP DANCING   

    While Wall Street analysts are chasing their optimistic projections with a bit of caution, investors are increasingly becoming straight-up bulls.

    According to the American Association of Individual Investors’ latest survey, bullish sentiment, or expectations that stocks will rise over the next six months, is now elevated at an “unusually high” 49.8%.

    In the decades since the AAII sentiment survey started in 1987, the bullish sentiment reading has only been above the 50% threshold around 10% of the time.

    Asset managers may be reluctant to dampen this enthusiasm. Even if they’re correct that a correction is due, they need to get the timing right. And nailing that is typically due more to luck than any fundamental, technical, historical, mean reversion, or standard deviation analysis.

    That’s because simple FOMO – ‘fear of missing out’ – is a powerful force that can keep the investor optimism merry-go-round spinning longer than it should.

    In investing, being too early usually makes you look like a fool rather than an oracle. So it takes a brave fund manager to advise their clients to reduce exposure to an asset or market that is on a long and significant uptrend.

    “As long as the music is playing, you’ve got to get up and dance,” said former CEO of Citi Charles “Chuck” Prince in July 2007, about the leveraged buyout market as signs of stress began to appear. “We’re still dancing.”

    Today, the music is beginning to sound a little discordant, but investors still seem happy to sing along.

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. single-family homebuilding tumbled in October likely as Hurricanes Helene and Milton depressed activity in the South while permits rose slightly, indicating that an anticipated rebound probably would be muted by higher mortgage rates.

The report from the Commerce Department on Tuesday suggested that residential investment, which includes homebuilding, remained subdued at the start of the fourth quarter after contracting in the last two quarters. The housing market has been battered by higher borrowing costs as the Federal Reserve tightened monetary policy to combat inflation.

“Despite the weather impact on building down in the South, the recession in residential housing construction remains deep in the woods with no daylight seen for buyers facing supply shortages as they hunt for new single-family homes,” said Christopher Rupkey, the chief economist at FWDBONDS. 

“The housing shortage and affordability issues will remain unless there is a big jump in new construction.” 

Single-family housing starts, which account for the bulk of homebuilding, plunged 6.9% to a seasonally adjusted annual rate of 970,000 units last month, the Commerce Department’s Census Bureau said. Data for September was revised higher to show homebuilding rising to a rate of 1.042 million units from the previously reported pace of 1.027 million units.

Single-family starts dropped 10.2% in the densely populated South, large parts of which were devastated by Helene in late September. Milton struck Florida in October. Ground-breaking on single-family housing projects plummeted 28.7% in the Northeast, but increased 4.6% in the Midwest and the West.

Single-family homebuilding slipped 0.5% from a year ago.

Starts for multi-family housing jumped 9.8% to a pace of 326,000 units. Overall housing starts dropped 3.1% to a rate of 1.311 million units. Economists polled by Reuters had forecast housing starts would drop to a rate of 1.330 million units. Starts fell 4.0% from a year ago.  

New single-family construction has regained ground after taking a beating from a resurgence in mortgage rates during the spring. Momentum has, however, been restricted by new housing supply at levels last seen in 2008, hurricanes in the U.S. Southeast as well as still-elevated borrowing costs.

PERMITS RISE SLIGHTLY     

There is a dearth of previously owned homes on the market, especially entry-level properties. Most homeowners have mortgages below 4%, reducing the incentive to move from their houses.

Permits for future construction of single-family housing gained 0.5% to a rate of 968,000 units, the highest level since April. They rose in the Northeast and South, but declined in the Midwest and West. Mortgage rates initially fell as the U.S. central bank started cutting interest rates in September. 

They have, however, erased that decline on strong economic data and concerns that President-elect Donald Trump’s policies, including tariffs on imported goods and mass deportations of migrants, could reignite inflation. 

The yield on the benchmark 10-year U.S. Treasury note has risen to a 5-1/2-month high and remains not too far from that level. Mortgage rates track the 10-year note.

While a National Association of Home Builders survey on Monday showed homebuilder sentiment rose to a seven-month high in November, that was largely due to builders “expressing increasing confidence that Republicans gaining all the levers of power in Washington will result in significant regulatory relief for the industry.”

Multi-family building permits dropped 3.0% to a rate of 393,000 units in October. Building permits as a whole fell 0.6% to a rate of 1.416 million units. They decreased 7.7% from a year ago.

The number of houses approved for construction that were yet to be started dropped 1.1% to 279,000 units last month. 

The single-family homebuilding backlog was unchanged at 143,000 units. The completions rate for that housing segment declined 1.4% to 986,000 units.

Overall housing completions dropped 4.4% to a rate of 1.614 million units. The number of housing units under construction fell 1.9% to a rate of 1.465 million units. 

The inventory of single-family housing under construction was unchanged at a rate of 644,000 units.

OTTAWA (Reuters) – Canada’s annual inflation rate accelerated more than expected to 2.0% in October as gas prices fell less than the previous month, data showed on Tuesday, likely diluting chances of another large rate cut in December.

Analysts polled by Reuters had forecast that the inflation rate would speed up to 1.9% from 1.6% in September. In August, the annual rate was 2%.

On a monthly basis, the consumer price index rose by 0.4% after two consecutive monthly declines, Statistics Canada data showed. The monthly gain also beat market expectations of a 0.3% increase.

While it was the first pick up in the annual inflation rate since June, the rise was broadly in line with central bank forecast for it rise back to its 2% after lower energy prices fueled a quicker than expected slowdown in headline inflation in recent months.

In October, Statistics Canada said a smaller 4% annual drop in gasoline prices compared with September’s 10.7% decrease led to the acceleration. Excluding gasoline, the inflation rate remained at 2.2% for the third straight month.

This was last inflation data to be released ahead of the Bank of Canada’s interest rate announcement on Dec. 11, when money markets see a roughly 60% chance of at least a 25 basis point cut.

The bank has lower its policy rate by 125 basis points over its last four policy setting meetings, including a 50 bp cut in October, when Governor Tiff Macklem said there would be further easing if the economy evolved roughly in line with forecasts.

The bank’s preferred measures of core inflation, CPI-median and CPI-trim, also edged up. CPI-median – or the value at the middle of the set of price changes in a month – increased to 2.5% from 2.3% in September, while CPI-trim – which excludes the most extreme price changes – rose to 2.6% from 2.4%.

Price increases of store-bought food also accelerated to 2.7% in October from 2.4% in September, Statscan said, noting that this was the third consecutive month where grocery price rises outpaced headline inflation.

Services price inflation rate decelerated to 3.6%, the slowest annual pace since January 2022, while goods prices rose by 0.1% after a 1% decline in September.

By Nelson Bocanegra

BOGOTA (Reuters) -Colombia will need a budget adjustment of 56 trillion pesos ($12.7 billion) to comply with its fiscal rule this year, an independent committee of experts said on Tuesday.

The Andean country may also require a budget adjustment of 39 trillion pesos ($8.8 billion) in 2025, a report from the Autonomous Fiscal Rule Committee (CARF) said.

Colombia’s government has already made cuts to its 2024 budget amid fiscal difficulties, and has been weighing further measures, including a possible 33 trillion peso trim.

The finance ministry in June announced a cut worth 20 trillion pesos due to lower than expected income.

The CARF already warned in July that Colombia could need additional adjustments to comply with the fiscal rule in 2024 and 2025 due to possible risks to tax collection goals, despite previous government announcements.

The fiscal rule was created in 2011 to impose policy constraints meant to block deterioration of public finances. To comply with the rule in 2024, the government would have to keep debt at 55.3% of GDP, rising to 56.4% of GDP in 2025.

PARIS (Reuters) – France’s 2025 belt-tightening budget heads to the Senate next week, but few doubt the government will soon be obliged to bypass lawmakers with a risky constitutional measure that rams the legislation through parliament.

With French public finances increasingly out of control, the 2025 budget bill seeks to squeeze 60 billion euros in savings via tax hikes and spending cuts. The aim is to cut the deficit to 5% of economic output next year from over 6% this year. 

Lacking a majority in the deeply divided parliament, Prime Minister Michel Barnier told L’Ouest France newspaper last week that he did not see how the budget could be passed without invoking article 49.3 of the constitution.

The 49.3, famously used by the previous government to push through President Emmanuel Macron’s pension reform against a backdrop of street protests, allows the text to be adopted without a vote – but usually also triggers a no-confidence motion against the government.

Barnier’s weak coalition is propped up by the far-right National Rally (RN), which could join forces with the left to topple his government, making the 49.3 a risky option for him.

So far, Barnier has decided to let parliament go through the movements of reviewing and debating the budget before he calls time in order to give lawmakers the impression he is not riding roughshod over their role as legislators.

But with a vote on the overall budget scheduled for Dec. 12, Barnier’s patience may be wearing thin. 

Below is a run-down on the state of France’s budget negotiations.

WHERE DOES THE BUDGET LEGISLATION STAND?

In an unprecedented move for modern France, a majority of lawmakers in the lower house of parliament rejected the government’s 2025 budget bill last week after leftist lawmakers heavily revised the legislation.

A left-wing alliance, which has the single biggest block of seats but falls far short of a lower house majority, had added 75 billion euros ($79 billion) in new tax hikes to the bill.

Budget Minister Laurent Saint Martin described the additional tax burden as unacceptable “Frankenstein” legislation that would violate the constitution and EU fiscal rules alike.

The rejection means the Senate will begin its review of the government’s original, unamended bill on Monday Nov. 25. ahead of the final vote on Dec. 12.

WHAT WILL HAPPEN NOW?

Senate finance committee chair Claude Raynal has said the upper house, where Barnier’s conservatives have the most seats but fall short of a majority, would likely make fewer changes to the bill than the lower house.

After the senate vote, a panel of lawmakers from both houses will then have to try to agree on a new version of the bill, but with little time for sweeping revisions.

As that version would likely be rejected again in the full lower house, the government will then have little choice but to invoke article 49.3 of the constitution to ram the budget through without a vote.

WHAT ARE THE CONSEQUENCES OF BYPASSING PARLIAMENT?

Left-wing lawmakers in the lower house have said they would then trigger a vote of no-confidence against the government, which could potentially bring it down if it passes.

To survive, Barnier needs the far-right RN to abstain from the vote. While some RN lawmakers have brandished the threat of not cooperating, its head Jordan Bardella has said the decision will depend on whether the final cut of the budget reflects their demands.

The RN will also have to make a political calculation about whether it gains anything from triggering a political crisis as new legislative elections cannot be held before next summer.

Still, a recent request by prosecutors for RN leader Marine Le Pen to face an obligatory five-year ban from politics for her alleged role in embezzlement of EU funds may cause the RN to reassess its loyalty to propping up Barnier’s administration, some analysts have suggested. Le Pen denies the allegations.

($1 = 0.9489 euros)

By Naomi Rovnick and Alun John

LONDON (Reuters) – The euro could fall to the key $1 mark in the next month before rebounding, potentially alongside other Europe assets given how negatively investors view the region, the chief investment office of Europe’s biggest asset manager Amundi said on Tuesday.

U.S. stocks, and the dollar have surged after Donald Trump’s victory in the Presidential election earlier this month, while stocks outside the U.S. have struggled, as investors balance the implications of higher U.S. growth with the implications of possible tariffs.

The euro has been among the biggest victims of the dollar’s surge, falling back to around $1.05, from above $1.08 at the start of November.

“We could even see parity for the euro to the dollar in the next month, but it is very mechanical, there is a lot of demand for dollars linked to the surge in U.S. assets,” said Vincent Mortier, chief investment officer at Amundi, which oversees almost 2.2 trillion euros of client funds.

“But then next year we believe the euro will strengthen again,” he said. Amundi forecasts the common currency at $1.16 by the end of 2025.

The euro last traded below $1 in late 2022.

Mortier said extreme negative sentiment towards Europe also set the region’s stocks up for a sharp rally on good news, similar to that seen in China earlier this year, when hopes of major package of stimulus measures sent investors rushing to snap up unloved stocks.

“Catalysts for a European market recovery would be Germany responding to tariff risks with fiscal stimulus or Russia pulling back from Ukraine”, he said.

Germany is due to hold elections in the coming months after the implosion of its ruling coalition earlier in November. There is a possibility that a new government could reform its constitutionally enshrined debt break, which critics say contributed to its current economic decline.

There was still value in European government bonds, Mortier added, and said Amundi was also buying 10-year U.S. Treasuries in the expectation yields would fall from here, as so-called Trump trades may have run too far, but expected short term volatility in government bond markets.

Mortier said U.S. stock valuations boosted by excitement over artificial intelligence were unusually high and volatility unusually low.

“The last thing you want is to be betting on only five or ten U.S. equity names,” he said. “We need to be very agile.”