By Mike Dolan

LONDON (Reuters) - With a rosy picture of stock and bond gains next year now the running consensus, forecasters are managing an impressive leap of faith over three main assumptions - soft economic landings, hefty interest rate cuts and above-target inflation.

Too good to be true?

Soft landings - at least in the broadest sense that may include moderate recession - seem a high bar after two years of brutal credit tightening. And yet, a holy grail for policymakers, such an outcome is now the glue that binds the upbeat forecasts and represents majority thinking among investors.

But perhaps the greater epiphany in annual outlooks is the idea that central banks will be easing rates substantially through the year even with inflation still above 2% goals.

Disinflation, but really not of the immaculate sort - as the now-tired jibe runs.

For Europe's biggest asset manager Amundi, for example, U.S. and euro inflation will stay at 2.6% through next year - and remain above 2% in 2025. But it still thinks the Federal Reserve and European Central Bank will chop more than 100 basis points off rates in 2024 regardless.

"Inflation will remain just above targets, but the central banks will tolerate that outcome and start to ease anyway," Amundi chief investment officer Vincent Mortier told reporters.

Deutsche Bank sees U.S. inflation a bit lower at 2.1% next year, but still above target despite a forecast 'mild' recession - and it sees the Fed slashing rates by a whopping 175bps by the end of 2024.

There is of course an intensely-debated and nuanced take on ebbing momentum in core inflation - a sense that post-pandemic supply-side bottlenecks are easing at last and expectations remain sufficiently in check to allow central banks to reverse.

What's more, central banks can dial back borrowing rates but still leave them in relatively 'restrictive' territory above long-term averages for longer, as per their new-found mantra.

And yet long-term market inflation expectations concur with the view that central banks may - quietly perhaps - just agree to live with slightly above-target inflation even as they insist otherwise - in part as a trade off for dodging painful recession.

While relatively well behaved through the recent two-year inflation spike, five and 10-year inflation expectations embedded in the inflation-linked bond markets remain at 2.2-2.3%. Five-year, five-year forward inflation-linked swaps are as high as 2.55%.

The most recent Reuters poll of economists showed all 100 surveyed expect all the main measures of headline and core U.S. inflation to remain above 2% at least until 2025.

And yet, 90% said the Fed was done hiking and almost 60% expected cuts to commence by midyear. In fact, almost a fifth of banks surveyed expect U.S. policy rates to be cut to below 4.0% by next December from the current 5.25-5.50%.

FIGHTING THE FED?

To be sure, Fed policymakers themselves don't see inflation back to target next year either - with their median core PCE gauge projection from the most recent quarterly forecasts at 2.6% through next year and still at 2.3% in 2025.

But neither has the Fed, rhetorically at least, taken another hike off the table yet and is only projecting one quarter-point rate cut at most by the end of 2024.

So what gives? Will almost sacrosanct central bank commitment to getting back to a promised land of 2% or lower inflation just be fudged at the last moment and quietly set aside?

Goldman Sachs' U.S. economist Jan Hatzius trumpets success in supply-side dynamics that will rein central bank hawks, pointing to the fact that job openings have fallen without a significant rise in joblessness - as the so-called 'Beveridge curve' might have suggested - and allowing wage growth to ease back without a major recession.

"Last year's disinflation does indeed have further to run," he said, characterising core inflation rates of 2-2.5% being 'broadly consistent' with targets but also seeing just one quarter point rate cut next year.

"The most novel reason for optimism on growth is that because central banks don't need a recession to bring inflation down, they will try hard to avoid one," Hatzius wrote.

And while Goldman may be one of the more cautious houses on the policy rate view, it's this hoped-for Fed pivot to the second of its mandates - to maximise employment - that likely encourages investors to look through rhetoric on a strict target.

Harking back to the banking crash and recession of 2008, economists David Blanchflower - a former Bank of England policymaker - and Alex Bryson studied the best leading indicators of an oncoming recession and pointed out how Fed policymakers were wide of the mark 15 years ago.

Fed meeting minutes from August 2008 suggested the central bank's next move was likely to be tightening - a month before Lehman Brothers crashed, forcing the Fed to slash rates again to 0.25% from 2% and launch an unprecedented bond buying campaign.

What's more, recent renewed buzz around the so-called 'Sahm Rule' as a real-time U.S. recession indicator is well founded judging by history, Blanchflower and Bryson say, and may be a better guide to a pivot than Fed statements.

Developed by Fed economist Claudia Sahm before the pandemic as a potential rule of thumb for triggering benefit payments, the formula suggests recession is underway when the three-month rolling average of the unemployment rate rises half a point above the low of the prior 12 months.

Right now, it's running as high as 0.33 point - its highest in 2-1/2 years and up from near zero just six months ago.

If the Fed's watching this as closely as markets seem to be now, then next week's November payrolls report may be an even bigger deal than usual and go some way to explaining some of the more aggressive rate cuts being pencilled in for next year.

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

(By Mike Dolan; Editing by Susan Fenton)

SYDNEY (Reuters) - New Zealand's new government will introduce legislation to reform the Reserve Bank of New Zealand's mandate and lift a ban on the sale of cigarettes to future generations within its first 100 days, Prime Minister Christopher Luxon said in a statement on Wednesday.

The centre-right National Party, led by Luxon, returned to power alongside the populist New Zealand First party and libertarian ACT New Zealand after six years of rule by governments led by the left-leaning Labour Party.

Luxon, who was sworn in on Monday, said its 49-point action plan was focused on the economy, easing the cost of living and restoring law and order.

"New Zealanders voted not only for a change of government, but for a change of policies and a change of approach - and our Coalition Government is ready to deliver that change," he said in a statement.

New Zealand's central bank has a dual mandate to target low inflation and full employment but Luxon said last week his government would amend the bank's governing legislation to focus monetary policy solely on price stability.

The coalition will also push ahead with its plans to repeal amendments to the Smokefree Environments and Regulated Products Act 1990, including a world-first ban on the sale of cigarettes to future generations.

By Paul Sandle and Sarah Young

LONDON (Reuters) -Rolls-Royce aims to quadruple profit in the next five years by boosting the performance of its jet engines and bearing down on costs in boss Tufan Erginbilgic's masterplan for Britain's most prestigious engineering company.

Setting out a strategy that has been almost a year in the making, the chief executive said on Tuesday he would deliver up to 2.8 billion pounds ($3.5 billion) in annual operating profit by 2027, four times 2022's outcome and double its guidance for up to 1.4 billion pounds this year.

That would be driven by surge in profit margins at its civil aerospace business to 15-17% from 2.5% last year.

Erginbilgic, a former BP (NYSE:BP) executive who took over in January, said he would tackle Rolls-Royce (OTC:RYCEY)'s inefficiencies by focusing on the widebody plane sector, where it is Airbus's exclusive supplier, business aviation, defence and power systems.

Its electrical-powered aircraft business will be sold in a drive to raise up to 1.5 billion pounds from selling non-core assets, he said, while the company could re-enter the single-aisle jet market through a partnership, leveraging its next-generation UltraFan technology.

The biggest driver of profit will be a step change in margins in an engine business that powers nearly half of long-haul aircraft, including all Airbus A330neo and A350 models and some Boeing (NYSE:BA) 787 planes.

The margin target would bring Rolls-Royce closer to rivals such as General Electric (NYSE:GE), its major competitor in widebodies.

Erginbilgic said it would be achieved by extending the "time on wing" of its engines between maintenance, reducing the costs of manufacturing and repairs, a new pricing strategy and tackling previous low-margin contracts.

The company is planning 300-350 engine deliveries a year, a target Erginbilgic told investors was "totally aligned" with the plans of Airbus and Boeing.

Shares in Rolls-Royce, which have soared 161% in the year to date, reached a four-year high and were trading up 6% by mid-afternoon.

"We are setting compelling and achievable financial targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance," Erginbilgic said.

Agency Partners analyst Nick Cunningham said the targets implied Rolls-Royce was willing to shed revenues in exchange for better profitability.

"If so, that is a deeper culture change from Rolls-Royce's traditional market share optimisation approach of past decades," he said.

Asked if he was willing to sacrifice market share, Tufan said the company had a 55% share of widebody deliveries last year and he expected that level to continue this year, with growth over the next five to 10 years.

"We will capture market share every year, but in a profitable way," he said.

SINGLE-AISLE OPPORTUNITY

Rolls-Royce said it would sell non-core assets from across the group and create partnerships if that would create extra value, including potentially returning to the single-aisle sector split between RTX's Pratt & Witney and CFM International, a joint venture between Safran (EPA:SAF) and GE.

"We don't need to enter narrowbody but it is an opportunity," Erginbilgic told analysts. "With a partnership approach, I believe it can be a profitable place."

Rolls-Royce's finances were hit by problems with its Trent 1000 engine and by the pandemic, which grounded long-haul aircraft and wiped out revenue tied to engine flying hours.

Recovery under Erginbilgic has been rapid, with a five-fold rise in first-half operating profit reported in August, helped by increasing prices for maintaining its engines and tightly managing its cost base.

($1 = 0.7921 pounds)

By Ju-min Park

SEOUL (Reuters) - Once a North Korean experiment in limited capitalism, the Rason Special Economic Zone appears to be the epicentre of the isolated country's growing cooperation with Russia, experts say, including possible shipments of arms for the war in Ukraine.

With apartment blocks and booming markets flooded with imported goods, the Rason SEZ, established in the 1990s on the border with China and Russia, was a dream destination for many North Koreans before tighter sanctions hit and pandemic-era border closings choked off nearly all trade and tourism, two experts who study Rason said.

In recent months, there have been clear signs that the area is poised for a comeback, with ships docking there for the first time since 2018, and satellite imagery suggesting a spike in trade from both the port and a rail line to Russia.

Although China - with its vastly larger economy and deeper historic ties with North Korea - might seem the obvious driver of a recovery in Rason, experts say the country's deepening cooperation with Russia may make a more immediate impact.

"Now that North Korea and Russia are becoming very close against the backdrop of the Ukraine war, Russia might send more tourists to North Korea, which can reinvigorate tourism (in Rason)," said Jeong Eunlee, a North Korea economy expert at South Korea’s government-run Korea Institute for National Unification.

Russia can also sell coal, oil, and flour through Rason, Jeong said, and if more North Korean workers are allowed to cross the border, they can send Russian medicine and other goods home for relatives to sell.

The Russian Federal Customs Service said it had "temporarily suspended the publication of foreign trade statistics".

China accounted for 97% of North Korea's overall trade in 2022, according to South Korea's Korea Trade Investment Promotion Agency (KOTRA).

But Russia resumed oil exports to North Korea in December 2022 and had exported 67,300 barrels of refined petroleum to North Korea by April, United Nations data shows, the first such shipments reported since 2020.

Lee Chan-woo, a North Korea economy expert at Teikyo University in Tokyo, said Russian wood cut by North Korean loggers could be resold to China through Rason, a town of about 200,000 people.

Cho Sung-chan of Hananuri, a South Korean nonprofit that has financed a food-processing factory in Rason, predicted Russian influence there would grow.

"Assuming North Korea and Russia's honeymoon period becomes a long one, North Korea could get Russian support on food, energy and infrastructure through Rason," Cho said.

The two countries discussed expanding trade and testing delivery of meat products next year, Russia's natural resources minister Alexander Kozlov said on his Telegram channel after meeting with North Korean officials in Pyongyang in November.

MILITARY LOGISTICS

Since August, Rason's port has seen visits from Russian ships linked to that country’s military logistics system, according to U.S. and South Korean officials and reports by Western researchers citing satellite imagery.

Those ships are suspected of military supplies from North Korea to Russia, the reports said. The Kremlin has denied such shipments.

From Rason's port, North Korea has sent Russia an estimated 2,000 containers suspected of carrying artillery shells, and possibly short-range missiles, South Korean military officials have told reporters.

Since late 2022, activity has been spotted around Rason's Tumangang station, which has rail links to Russia, said Chung Songhak, a senior researcher at the Korea Institute for Security Strategy who analyses satellite imagery around Rason.

More train carriages were spotted after the Russian defence minister visited Pyongyang in July, Chung said, citing satellite imagery, adding that possible new cargo depots popped up in May.

When leader Kim Jong Un visited Russia in September, he discussed restarting a stalled joint logistics project in Rason, building a new road bridge connecting it with Russia and additional grain supplies, Kozlov said.

'GLOBAL HUB'

Since Kim’s grandfather Kim Il Sung designated Rason a special zone in 1991 after the Soviet Union’s collapse and as China opened further, North Korean officials have tried to attract investment there.

Rason, the oldest and largest of North Korea's 29 economic development zones, has been central to the country's push to attract foreign investment.

It has one of North Korea's first and biggest markets, was the site of the country's first mobile network, and is the only place where North Korea legalised buying and selling homes in 2018, according to experts and North Korea’s government publications.

The other zones have had poor results because of shaky infrastructure and international sanctions, according to South Korea's National Institute for Unification Education.

Abraham Choi, a Korean American pastor who works on religion exchanges with North Korea, said that when he last visited Rason in 2015, he saw both Chinese and Russian tourists.

South Korean media reports said that the Rason border with China had reopened in January 2023 and that trucks were trickling in. Choi said there were no signs yet of large groups of foreign tourists visiting Rason.

Lee of Teikyo University said that whichever outside country helped reinvigorate the special economic zone, it offered a potential bright spot for North Koreans after years of pandemic restrictions.

"Rason took a harder hit than other places in North Korea because it used to be on the front lines of the opening," Lee said. "Now many businesses have collapsed there, but as soon as the border fully reopens, North Koreans might think that the paradise can come back."

LONDON (Reuters) - Three of the world's cornerstone institutions - the International Monetary Fund, the World Bank and the Bank for International Settlements - are to work together for the first time to "tokenise" some of the financial instruments that underpin their global work, a BIS official said on Tuesday.

The trio will also work with Switzerland's central bank which has been pioneering tokenisation, the process of turning conventional assets into uniquely coded "tokens" that can be used in faster new systems.

Their collaboration will initially focus on simple but still paper-based processes such as when richer countries donate into some of the World Bank's funds to support poorer parts of the world.

That original pledge can be in the form of what is known as "promissory note." It is that note that could be tokenised, making it easier to transfer when required.

"We will work together ... to simplify the process for making development money available for emerging and developing economies," BIS official Cecilia Skingsley said at conference hosted by the Atlantic Council think tank in Washington.

She added that tokenisation also opens up the possibility of "encoding policy and regulatory requirements" into a "common protocol" for tackling problems such as international money laundering.

She also touched on the new breed of central bank digital currencies (CBDCs), repeating calls for some global rules and technology standards so they can work across the world and with existing payment systems.

"Questions remain," Skingsley said. "Do these standards need to be implemented early on or else they would be difficult to change later? To what extent do they need to be adapted to ensure they can operate with non-CBDC systems?

The International Monetary Fund (IMF) has stressed the pressing need for a substantial surge in green investments to effectively tackle climate change. In a recent blog post, IMF economists Simon Black, Florence Jaumotte, and Prasad Ananthakrishnan emphasized that annual green investments need to skyrocket from $900 billion in 2020 to $5 trillion by 2030 to realize net-zero emissions by mid-century. This call to action comes as the world anticipates the forthcoming COP28 summit in Dubai.

The IMF pinpointed that emerging and developing countries (EMDEs) are especially in need of financial backing, necessitating $2 trillion annually in green investments—a considerable leap from current figures. The private sector is anticipated to play a crucial role, with predictions suggesting it could furnish up to 90% of this funding due to limited public resources.

Present global policies, as per the IMF, are inadequate in meeting the Paris Agreement benchmarks aimed at alleviating climate change. Although existing technologies could implement more than four-fifths of the necessary emission reductions, attaining net-zero also hinges on innovations that are still under development or have yet to be created.

The IMF's focus on investment aligns with India's ambitious climate objectives, known as the "Panchamrit" pledge, which aims for net-zero emissions by 2070. Ahead of COP28, India's Finance Minister Nirmala Sitharaman has emphasized the importance of definitive actions on climate finance and technology transfer. She particularly underscored the need for clear guidance on funding mechanisms and technological advancements to effectively combat climate change.

A decrease in patent filings for eco-friendly technologies since a peak in 2010 adds another dimension to the challenge, signifying a deceleration in innovation precisely when speed-up is required. The IMF's blog serves as a timely reminder of the financial and technological commitments necessary to address the climate crisis, as global leaders and policymakers prepare for crucial negotiations in Dubai.

The IMF also highlighted investment hurdles like foreign exchange volatility and immature capital markets, calling for policy reforms to facilitate private investments in sustainable projects within EMDEs.

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

By Brigid Riley

TOKYO (Reuters) -The U.S. dollar ticked down to a three-month low against peer currencies on Tuesday after slipping overnight on weaker-than-expected new home sales data, while traders hunkered down on bets that the Federal Reserve could start cutting interest rates in the first half of next year.

U.S. new home sales fell 5.6% to a seasonally adjusted annual rate of 679,000 units in October, data showed, below the 723,000 units expected by economists polled by Reuters and sending Treasury yields into a decline.

The dollar index, a measure of the greenback against a basket of currencies, was last at 103.16, hanging around its lowest since Aug. 31. The dollar was track for a loss of more than 3% in November, its worst performance in a year.

Market expectation that the Fed's rate increase cycle has finally come to an end has also put downward pressure on the greenback. U.S. rate futures showed about a 25% chance that the Fed could begin cutting rates as early as March and increasing to nearly 45% by May, according to the CME FedWatch tool.

"Slowing growth momentum, peak rates, rate cuts next year, and unwinding of long positioning: it's the dynamic feeding a weaker U.S. dollar and driving the entire currency complex," said Kyle Rodda, senior financial market analyst at Capital.com.

"Anything that brings that trend into question will change the outlook; however, the bar for that to happen is high," he added, saying the dollar likely has more room to fall.

Traders are now eyeing U.S. core personal consumption expenditures (PCE) price index - the Fed's preferred measure of inflation - this week for more confirmation that inflation in the world's largest economy is slowing.

PCE tops off a slew of other key economic events this week, including Chinese purchasing managers' index (PMI) data and OPEC+ decision.

After delaying its policy meeting to this Thursday, OPEC+ is looking at deepening oil production cuts, according to an OPEC+ source.

Elsewhere, the Australian dollar briefly touched a near four-month high of $0.6632 against the greenback before easing to $0.6621. Data out Tuesday morning showed that domestic retail sales in October declined from the previous month.

The kiwi also momentarily hit its highest since Aug. 10 at $0.6114 before sliding back down to $0.61015. The Reserve Bank of New Zealand has its monetary policy meeting on Wednesday, where it is expected to keep interest rates steady at 5.50% for the fourth straight time.

Elsewhere, the yen made up some ground on Tuesday in the wake of continued dollar weakening, with dollar/yen inching down around 0.3% to 148.21 yen per greenback.

The Japanese currency may, however, be in for some turbulence depending on the outcome of this week's inflation data from the United States.

"The risk for dollar bears is that U.S. PCE inflation does not come in as soft as hoped," said Matt Simpson, senior market analyst at City Index. "That leaves (dollar/yen) vulnerable to a bounce this week."

By Raphael Satter and Diane Bartz

WASHINGTON (Reuters) - The United States, Britain and more than a dozen other countries on Sunday unveiled what a senior U.S. official described as the first detailed international agreement on how to keep artificial intelligence safe from rogue actors, pushing for companies to create AI systems that are "secure by design."

In a 20-page document unveiled Sunday, the 18 countries agreed that companies designing and using AI need to develop and deploy it in a way that keeps customers and the wider public safe from misuse.

The agreement is non-binding and carries mostly general recommendations such as monitoring AI systems for abuse, protecting data from tampering and vetting software suppliers.

Still, the director of the U.S. Cybersecurity and Infrastructure Security Agency, Jen Easterly, said it was important that so many countries put their names to the idea that AI systems needed to put safety first.

"This is the first time that we have seen an affirmation that these capabilities should not just be about cool features and how quickly we can get them to market or how we can compete to drive down costs," Easterly told Reuters, saying the guidelines represent "an agreement that the most important thing that needs to be done at the design phase is security."

The agreement is the latest in a series of initiatives - few of which carry teeth - by governments around the world to shape the development of AI, whose weight is increasingly being felt in industry and society at large.

In addition to the United States and Britain, the 18 countries that signed on to the new guidelines include Germany, Italy, the Czech Republic, Estonia, Poland, Australia, Chile, Israel, Nigeria and Singapore.

The framework deals with questions of how to keep AI technology from being hijacked by hackers and includes recommendations such as only releasing models after appropriate security testing.

It does not tackle thorny questions around the appropriate uses of AI, or how the data that feeds these models is gathered.

The rise of AI has fed a host of concerns, including the fear that it could be used to disrupt the democratic process, turbocharge fraud, or lead to dramatic job loss, among other harms.

Europe is ahead of the United States on regulations around AI, with lawmakers there drafting AI rules. France, Germany and Italy also recently reached an agreement on how artificial intelligence should be regulated that supports "mandatory self-regulation through codes of conduct" for so-called foundation models of AI, which are designed to produce a broad range of outputs.

The Biden administration has been pressing lawmakers for AI regulation, but a polarized U.S. Congress has made little headway in passing effective regulation.

The White House sought to reduce AI risks to consumers, workers, and minority groups while bolstering national security with a new executive order in October.

By Devayani Sathyan

BENGALURU (Reuters) - The Bank of Korea will hold its key policy rate at 3.50% when it meets on Thursday as inflation remains sticky, according to a Reuters poll which also forecast the first rate cut won't be until the third quarter of 2024.

Although the Bank of Korea (BOK) expected a brief rise in inflation in November the figure came in at nearly twice the central bank's 2.0% target.

Signs of a soft landing in Asia's fourth-largest economy, coupled with a rebound in household debt in one of the most indebted countries in the world, indicate monetary conditions need to remain tight for longer. All 36 economists in the Nov. 21-27 Reuters poll predicted the BOK would leave the base rate at 3.50% on Thursday, its last meeting of the year.

"We expect the Bank of Korea to keep its policy rate at 3.50% at its upcoming meeting. The board is also likely to retain a hawkish bias amid persistent concerns about the upside risks to inflation and household debt growth," noted Krystal Tan, economist at ANZ.

"That said, with policy rate settings already in restrictive territory, the bar for a rate hike is high, considering the risk of exacerbating financial stress."

Median forecasts showed rates staying at 3.50% until mid-2024 and the first 25 basis point rate cut in the third quarter of 2024, one quarter later than predicted in an October poll taken before the last meeting.

Since a May poll, the prediction for the first rate cut has been pushed back from the end of 2023 to the second half of 2024.

Among economists who had a long-term view 85%, or 22 of 26, predicted at least one 25 basis point rate cut by end-September while just 30% expected a cut before July.

That puts the BOK roughly in line with its Southeast Asian peers which were also expected to cut rates by end-September. [ID/INT][PH/INT]

Medians showed rates at 3.00% by the end of 2024.

"We see a high chance that this meeting is their last time making a hawkish-hold decision before shifting to dovish-hold from next year. We see the BOK turning neutral in Q1 2024, dovish in Q2 2024, and cutting in Q3 2024," noted Kathleen Oh, chief Korea economist at Morgan Stanley.

LONDON (Reuters) - Shoppers at British store chains have seen the slowest increase in prices in almost a year and a half but retailers might struggle to keep inflation on its downward path, an industry group said on Tuesday.

The British Retail Consortium said annual shop price inflation dropped to 4.3% in the 12 months to November, its weakest since June 2022 and slower than October's 5.2% rise.

It was the sixth month in a row that the pace of price growth weakened.

Food price inflation fell to 7.8% from 8.8% on the year but rose 0.3% in November from October.

Non-food inflation eased to an annual 2.5% from 3.4%.

BRC Chief Executive Helen Dickinson said there was a risk that the fall in inflation could stall or go into reverse because of rising business rates - a property-based tax - plus new regulations and a jump in the minimum wage.

Britain's broader official consumer price inflation peaked at 11.1% in October 2022 and was 4.6% in October this year.

The Bank of England has paused its run of interest rate increases after 14 consecutive hikes. But Governor Andrew Bailey and other top officials say it is too early to think about cutting borrowing costs.