By Patricia Zengerle

WASHINGTON (Reuters) -The U.S. Senate passed legislation on Thursday authorizing a record $858 billion in annual defense spending, $45 billion more than proposed by President Joe Biden, and rescinding the military’s COVID vaccine mandate.

Senators supported the National Defense Authorization Act, or NDAA, an annual must-pass bill setting policy for the Pentagon, by an overwhelming 83-11 bipartisan majority.

The no votes came from a mix of liberals who object to the ever-rising military budget and fiscal conservatives who want tighter controls on spending.

With the House of Representatives having passed the measure last week, the NDAA next heads to the White House, where Biden is expected to quickly sign it into law.

The fiscal 2023 NDAA authorizes $858 billion in military spending and includes a 4.6% pay increase for the troops, funding for purchases of weapons, ships and aircraft, and support for Taiwan as it faces aggression from China and for Ukraine as it fights an invasion by Russia.

The vote meant Congress has passed the NDAA every year since 1961.

“This is the most important bill we do every year,” said Senator James Inhofe, the top Republican on the Senate Armed Services Committee, in a statement. This year’s NDAA is named for Inhofe, who is retiring from the Senate.

AID FOR TAIWAN, UKRAINE AND JUDGES

Because it is one of the few major bills that always passes, lawmakers use the NDAA as a vehicle for a range of initiatives.

This year’s measure, which came after months of negotiations between Democrats and Republicans in the House and Senate, includes the State Department authorization and legislation that would allow U.S. Supreme Court justices and federal judges to shield their personal information from being viewed online.

The fiscal 2023 NDAA includes a provision demanded by many Republicans – and opposed by many Democrats – requiring the secretary of defense to rescind a mandate requiring that members of the armed forces be vaccinated against COVID-19.

A bid to amend the bill to award back pay and reinstate troops who refused the vaccine failed.

The bill provides Ukraine at least $800 million in additional security assistance next year and includes a range of provisions to strengthen Taiwan amid tensions with China, including billions of dollars in security assistance and fast-tracked weapons procurement for Taiwan.

Taiwan’s defense ministry expressed its gratitude for the support, saying the planned measures will help the island’s military preparedness and “ensure the freedom, openness, peace and stability of the Indo-Pacific region.”

The bill also authorizes more funds to develop hypersonic weapons, close the Red Hill Bulk Fuel Storage Facility in Hawaii and purchase weapons systems including Lockheed Martin Corp’s F-35 fighter jets and ships made by General Dynamics.

The NDAA is not the final word on spending. Authorization bills create programs, but Congress must pass appropriations bills to give the government legal authority to spend federal money.

A bill to fund the government through Sept. 30, 2023, – the end of the fiscal year – is expected to pass Congress next week.

(Reporting by Patricia Zengerle; Additional reporting by Richard Cowan, and Ben Blanchard in Taipei; Editing by Sandra Maler, Leslie Adler and Edwina Gibbs)

By Alexandra Alper

WASHINGTON (Reuters) -The Biden administration on Thursday added Chinese memory chipmaker YMTC and 21 “major” Chinese players in the artificial intelligence chip sector to a trade blacklist, broadening its crackdown on China’s chip industry.

YMTC, long in the crosshairs of the U.S. government, was added to the list over fears it could divert American technology to previously blacklisted Chinese tech giants Huawei Technologies Co Ltd and Hikvision. The move, laid out in the Federal Register, will bar YMTC’s suppliers from shipping U.S. goods to it without a difficult-to-obtain license.

The 21 Chinese AI chip entities being added to the trade blacklist, which include Cambricon Technologies Corp and CETC, face an even tougher penalty, with the U.S. government effectively blocking their access to technology made anywhere in the world with U.S. equipment.

Another notable name was PXW Semiconductor Manufactory Co, a startup chip fab is backed by the Shenzhen city government and led by an ex-Huawei executive.

As the Chinese government seeks to remove barriers between its military and civilian sectors, “U.S. national security interests require that we act decisively to deny access to advanced technologies,” Assistant Secretary of Commerce for Export Administration Thea Kendler said in a statement.

YMTC, Cambricon, CETC and PXW did not immediately respond to requests for comment. Shares in Cambricon, which was spun out of the government think tank China Academy of Sciences in 2016 and went public four years later, fell 6% upon opening on Friday.

The Chinese embassy in Washington said the United States was engaging in “blatant economic coercion and bullying in the field of technology,” undermining normal business activities between Chinese and American companies and threatening the stability of global supply chains.

“China will resolutely safeguard the lawful rights and interests of Chinese companies and institutions,” it added.

The move builds on sweeping export controls imposed on Beijing in October to slow Beijing’s technological and military advances, including measures to curb China’s access to U.S. chipmaking tools and cut it off from certain chips made anywhere in the world with American equipment.

It also comes as Congress prepares to finalize legislation to bar the U.S. government from buying products that contain semiconductors made by YMTC, Chinese memory chipmaker CXMT or China’s top chip manufacturer, SMIC.

The Commerce Department on Thursday also targeted nine Chinese entities for allegedly seeking to support China’s military modernization, including Shanghai Micro Electronics Equipment Group Co Ltd (SMEE), China’s only lithography company.

SMEE did not immediately respond to a request for comment.

It added Chinese surveillance camera maker Tianjin Tiandi Weiye Technologies for allegedly participating in “China’s campaign of repression, mass arbitrary detention, and high-tech surveillance against Uyghurs.” Tiandi did not immediately respond to a request for comment.

A total of 35 Chinese entities were added to the U.S. trade blacklist, known as the entity list, as well as YMTC’s Japan-based subsidiary.

Thursday’s announcements weren’t all bad news for Beijing. The Biden administration removed a subsidiary of Wuxi Biologics, a company that makes ingredients for AstraZeneca’s COVID-19 vaccine, and 26 other Chinese entities from the so-called unverified list thanks to successful site visits.

Two of the Chinese companies removed from the unverified list – YMTC and SMEE – were added to the entity list.

Reuters reported on Wednesday that such a move was in the works. Reuters also reported earlier this year that U.S officials were able to conduct a site visit at Wuxi Biologics before a different subsidiary of the company was removed from the unverified list in October.

Wuxi did not respond to a request for comment.

Companies are added to the unverified list if the United States cannot complete on-site visits to determine whether they can be trusted to receive sensitive U.S. technology exports, inspections, which in China require approval from the country’s commerce ministry.

Being added to the unverified list forces U.S. suppliers to perform greater due diligence before shipping to the targeted companies.

Commerce Department officials have attributed greater cooperation from Beijing in site checks to a U.S. rule announced in October. Under that rule, if a government prevents U.S. officials from conducting site checks at companies on the unverified list, Washington may add them to the entity list after 60 days.

Under that new policy, the Commerce Department on Thursday removed nine Russian entities from the unverified list and added them to the entity list because the United States has been unable to conduct site visits.

Top Senate Democrat Chuck Schumer heralded the new penalties on YMTC, which Reuters reported was under investigation for allegedly violating U.S. export regulations by supplying chips to Huawei without a license.

“YMTC poses an immediate threat to our national security, so the Biden Administration needed to act swiftly to prevent YMTC from gaining even an inch of a military or economic advantage,” he said in a statement.

(Reporting by Alexandra Alper; Additional reporting by David Shepardson, Doina Chiacu, and Michael Martina; Josh Horwitz in Shanghai; Editing by Chris Sanders, Lincoln Feast Doina Chiacu, Jonathan Oatis and William Mallard)

By Leika Kihara

TOKYO (Reuters) – As Haruhiko Kuroda’s decade helming Japan’s central bank nears an end, more of his senior colleagues are seeing a case to remove the bank’s cap on bond yields, a key but problematic piece of his radical monetary stimulus.

The rare hawkish shift inside the Bank of Japan (BOJ) comes after years of heavy money printing failed to fire up anemic consumer demand and amid growing anger about the impact of ultra-low interest rates on bank lending margins and, more recently, the cost of living.

A dozen people familiar with the BOJ’s thinking say debate over how to remove a controversial cap on bond yields, introduced in 2016 as part of the bank’s yield curve control (YCC) programme, could gather pace next year, provided wages perk up and major economic risks remain contained.

While no detailed discussions of a policy change are under way yet, the preference of many within the BOJ is to completely remove the yield cap altogether, the sources said.

That would be much bolder than what the market currently thinks the BOJ’s next move will be – a widening of the tolerance band around the cap for the 10-year government bond yield.

Any visible shift in BOJ thinking, even if it doesn’t lead to an immediate monetary setting change, could trigger massive selling in Japanese bonds, which would have significant implications for global markets.

“Widening the band will only fuel speculation of a future rate hike and trigger a bond sell-off, rather than help address the side-effects of the yield cap,” one of the sources said, a view echoed by two other sources.

“There’s near consensus within the BOJ that if it were to tweak YCC one day, the best step would be to ditch the cap,” another source said.

The sources spoke on condition of anonymity as they are not authorised to speak publicly.

PUBLIC DISCONTENT

After a tumultuous year for the world’s third-largest economy, Japan’s central bank and its leadership face a critical moment.

Consumer inflation is at a four-decade high and finally above the BOJ’s elusive 2% target – but not because households are cashed up and buying more.

In addition to global supply pressures caused by the Ukraine war and the pandemic, the collapse in the yen has fanned a surge in costs of imported raw materials and ultimately household goods, making Kuroda and his currency-weakening low interest rates targets of public outrage.

“Everything in the supermarket has seen prices rise,” according to 84-year-old pensioner Yoshio Koitabashi, who says he can’t afford to buy a refrigerator, despite saving every penny when shopping for food.

“They aren’t thinking about those who are weak,” he said of the BOJ. “They are doing everything for those who are rich, their friends.”

Japan’s benchmark interest rates are among the world’s lowest and have been for decades.

A recent poll by the daily Mainichi paper showed 55% of respondents said the BOJ should review current monetary easing, far higher than 22% who favoured the status quo.

While Kuroda maintains ultra-low rates are still needed to support a fragile economic recovery, others in the BOJ are starting to drop hints of a possible tweak to YCC.

The BOJ’s pro-stimulus camp, which held sway for most of Kuroda’s time in office, is seen further losing influence when the governor and his dovish deputy Masazumi Wakatabe see their terms end early next year.

That leadership transition would give bureaucrats an opportunity to shift further away from their outgoing chief’s controversial policy.

The assassination of Shinzo Abe in July, who as prime minister appointed Kuroda BOJ governor in 2013 and remained an influential proponent of massive stimulus, also meant a key loss of political support for advocates of expansionist monetary policy.

At the same time, BOJ officials are now preparing the theoretical backbone for a future policy shift, releasing research on whether companies and households are finally shaking their entrenched aversion to price hikes.

“If inflation stays elevated, there is no reason to keep interest rates at current levels,” said one of the sources.

“The BOJ needs more evidence that wages will rise steadily. Once that’s available, the BOJ may see scope to act,” another source said, a view echoed by three more sources.

TREADING CAREFULLY

During his decade in office, Kuroda, in his bid to fire up inflation to 2%, introduced massive asset-buying and YCC, a complicated programme that combined a negative short-term rate target and a 0% cap on the 10-year bond yield.

More recently, the BOJ has quietly unwound some of these measures, by slowing those asset purchases. The next step would be to revert to a policy solely targeting short-term rates, a process that could take years, the sources said.

With Japan’s huge debt pile making an abrupt rate hike too costly, the BOJ will tread cautiously and explain the shift as a gradual move toward a normalisation of extraordinary stimulus – rather than a full-fledged monetary tightening, they said.

But policymakers also know they are running out of time to address the huge costs of the BOJ’s relentless defence of its 0% yield cap, such as diminishing bond market liquidity, crushed bank margins and a crippling yen sell-off.

“A policy tweak isn’t a done deal but if public anger over inflation heightens, the BOJ could feel compelled to act,” said Izuru Kato, chief economist at Totan Research in Tokyo.

HAWKISH HINTS

Already, public discontent is putting the BOJ’s pro-stimulus camp on the backfoot. A reshuffle of the nine-member board in July brought in two newcomers, shifting the balance between the doves and hawks.

In a rare show of discomfort over current policy, former commercial banker and new BOJ board member Naoki Tamura told a recent interview the bank should conduct a review of its massive stimulus.

In his inaugural briefing, Hajime Takata, a former economist who replaced a vocal advocate of heavy money printing, said the BOJ must always think about an exit strategy.

While ruling out the need to ditch the yield cap now, Takata recently said he saw positive developments in wage growth.

The few remaining doves are hedging their bets.

“Trend inflation hasn’t reached 2% yet. But if there’s certainty that level will be met, it won’t be surprising for the BOJ to shift monetary policy,” Asahi Noguchi, who is known as a vocal advocate of aggressive easing, said earlier this month.

There is growing hope that long-stagnant wages will finally start to rise, a necessary condition for a policy change.

Japan’s umbrella labour union has decided to demand a 5% pay hike in next year’s spring wage negotiations, which, coupled with a tightening job market and repeated calls by government to raise wages, is pressuring firms to lift salaries.

While the BOJ won’t pull the trigger yet, it wants to be ready in case conditions for tweaking YCC fall into place, one source said.

In a shift away from its usual focus on economic risks, the board at its October policy meeting debated examining the side-effects of prolonged easing and the impact of a future exit from ultra-low rates, a summary of opinions at the meeting showed.

While dismissing the chance of a near-term tweak, Kuroda left room for a future shift by laying out a framework last month for when the BOJ exits ultra-loose policy.

BOJ staff are producing research on topics considered useful in guiding thinking on future monetary policy moves, just as they did before the shift to YCC in 2016.

One such note, published on Nov. 30, said prices were rising even among industries that once thrived on deflation such as drug stores, which used to offer big discounts.

Takeo Hoshi, a University of Tokyo academic who spoke at one of a series of BOJ workshops last month, said structural changes in Japan’s labour market could push up average wages more than they did previously.

“The BOJ must start worrying about the possibility of inflation accelerating more than expected,” he told Reuters, adding the BOJ may abandon its yield cap as early as next year.

Hoshi is among a group of academics who have regular interactions with BOJ policymakers.

UK LESSONS

With Kuroda’s days at the helm numbered, the task of an exit will be left to a new governor and his or her two deputies, who will be appointed by Prime Minister Fumio Kishida in April and March, respectively.

Unlike in 2013, when Abe hand-picked Kuroda to pull Japan out of deflation with a shock-and-awe approach, Kishida has little to gain by choosing a radical new governor.

The selection process is also complicated by Kishida’s precarious political standing, with his approval ratings rock-bottom after a wave of scandals forced three cabinet ministers to resign.

That means Kishida may instead choose a safe pair of hands to steer Japan cautiously towards an exit, say politicians and government officials close to the administration.

With their deep experience as career central bankers, deputy governor Masayoshi Amamiya and former deputy Hiroshi Nakaso remain top contenders to succeed Kuroda.

While vowing to keep rates low, Amamiya said in July the BOJ must “always” brainstorm ways to exit ultra-loose policy.

Nakaso also warned of the dangers of maintaining crisis-mode stimulus for too long, and laid out his version of an exit plan in a book published in May.

The path towards an exit, however, has plenty of caveats. A worse-than-expected U.S. recession or a huge slump in China’s growth could hit Japan’s economy, crushing the chance of a stimulus withdrawal.

Any step that increases Japan’s already huge debt-servicing cost could also face strong resistance by the government, which needs to fund a scheduled increase in defence spending.

Even if the BOJ were to move, communicating an exit plan would be challenging as just slight hints of a tweak to YCC could ignite a bond sell-off by scaring investors accustomed to the bank’s intervention, analysts say.

Such a reaction was seen in March when the BOJ was forced to pledge unlimited bond buying to defend its yield cap from speculative market attacks.

“The moment markets expect a policy tweak, the BOJ will find it hard to control the 10-year yield,” said Kazuo Momma, a former BOJ executive with experience drafting monetary policy.

“That’s why the BOJ won’t provide advance signals and remove the yield cap in a single step.”

Japan pays one-third of annual expenditures with debt issuance and spends over 20 trillion yen ($147.45 billion) each year to finance public debt that is twice the size of its economy, making even a small rise in long-term borrowing costs catastrophic.

Some policymakers see lessons for Japan from Britain’s market rout in September, when then premier Liz Truss’s plan for unfunded tax cuts triggered a bond sell-off that forced her to resign.

“Everyone understands the BOJ must eventually head for the exit,” said Yasushi Kinoshita, a former top finance ministry bureaucrat considered as a deputy BOJ governor candidate.

“There’s also consensus that the BOJ must move cautiously and steadily. If interest rate control doesn’t go well, there could be huge market turbulence.”

($1 = 135.6400 yen)

(Reporting by Leika Kihara; Additional reporting by Daniel Leussink, Tetsushi Kajimoto, Takahiko Wada and Yoshifumi Takemoto; Editing by Sam Holmes)

SHANGHAI (Reuters) – Foreign investors continued to offload holdings in China’s onshore bonds for a 10th straight month in November, although some market watchers expect the outflow pressure to ease soon.

Foreign holdings of yuan-denominated bonds traded on China’s interbank market stood at 3.33 trillion yuan ($477.3 billion) at end-November, down from 3.38 trillion yuan a month earlier, the central bank’s Shanghai head office said on Thursday.

Overseas institutional investors dumped a net 740 billion yuan worth of Chinese bonds during the 10-month streak of outflows, the longest on record.

A breakdown of the figures showed foreigners sold a net 40.3 billion yuan of interbank yuan bonds in November, up from 34 billion yuan in October, according to data from China Central Depository & Clearing Co (CCDC), the main depository institution for China’s interbank bond market.

A weaker yuan, a stronger dollar and monetary policy divergence between China and other major economies, particularly the United States, which tightened aggressively to tame inflation, were among the key factors discouraging overseas investors from buying Chinese bonds this year, traders and analysts said.

Some investors expect such outflow pressure from China to fade as the U.S. monetary tightening cycle may come to an end soon.

Some market participants believe an expected recession in the world’s largest economy will force the Federal Reserve to loosen monetary policy next year, even as the U.S. central bank projects it will take rates higher than it previously anticipated and keep them there longer to bring down inflation.

“With further narrowing in U.S.-China government bond yields differential recently, especially at the long-end, we think the bond outflow pressure may have eased further in November,” J.P.Morgan said in a note.

The yield gap between China’s benchmark 10-year government bonds and their U.S. counterpart stood at 78 basis points at the end of November after hitting a 15-year high of around 152 basis points earlier last month. The gap has continued to shrink into December, to about 56 basis points as of Friday.

“Upward adjustment in Chinese government bonds yields improves yield differentials which will ultimately attract some foreign inflows back, especially when foreign investor positions are likely light after the hefty outflows this year despite index inclusion,” analysts at OCBC Bank said in a note.

($1 = 6.9766 yuan)

(This story has been corrected to say end-November, not end-October, in paragraph 2)

(Reporting by Winni Zhou and Brenda Goh; Editing by Raissa Kasolowsky, Hugh Lawson and Edmund Klamann)

By Chris Prentice, Xie Yu and Susan Heavey

NEW YORK/HONG KONG/WASHINGTON (Reuters) -The U.S. accounting watchdog on Thursday said it has full access to inspect and investigate firms in China for the first time ever, removing the risk that around 200 Chinese companies could be kicked off U.S. stock exchanges.

The statement from the Public Company Accounting Oversight Board (PCAOB) marks a victory for U.S. regulators and a relief for Chinese firms, including Alibaba, facing delisting amid rocky relations between the world’s largest economies. Washington and Beijing have been locked in a heated trade and technology war.

“For the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” said PCAOB Chair Erica Williams.

“This falls into the category of a game changing view of Chinese companies because the threat of their delisting seems to have been eliminated,” said Art Hogan, chief market strategist at B. Riley Financial.

However, the relief was not seen in Thursday’s trading for U.S.-listed shares of Chinese companies, which were higher amid the news, but gave up gains and some ended sharply lower.

U.S.-traded shares of Ecommerce giants Alibaba, JD.com as well as internet behemoth Baidu were down between 3-5% while music streaming provider Tencent Music was down 3.5%, more than the broader market where the S&P 500 Index was down 2.5%. The iShares MSCI China ETF was down 2.2%.

There were some concerns voiced about what issues the audits might uncover.

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, said the move should take “one of the risks, theoretically off the table of investing in them.”

However any issues uncovered due to the more stringent accounting oversight “could be very bad for the sector, especially if there is then no effort to correct it or come clean,” he said.

In its statement, the PCAOB said it exercised sole discretion to select firms for audit and had selected two, KPMG Huazhen LLP in China and PricewaterhouseCoopers in Hong Kong.

PCAOB staff identified “numerous potential deficiencies” in their inspection work, PCAOB’s Williams said, saying the inspection reports will be finalized and made public next year.

“Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong,” she said.

She declined to specify the types of deficiencies, but said they are in line with those audit inspectors have seen during first-time inspections elsewhere.

PATH TO AUDIT

The PCAOB, which oversees registered public accounting firms around the world, said late last year said that Chinese authorities had prevented the watchdog from completely inspecting and investigating in mainland China and Hong Kong.

Washington and Beijing reached a landmark deal in August to settle a long-running dispute over auditing compliance of U.S.-listed Chinese firms. Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns.

U.S. lawmakers in 2020 agreed to legislation that would oust Chinese companies from U.S. stock exchanges unless they adhere to American auditing standards.

The deal granted PCAOB full access to Chinese audit working papers with no redactions, the right to take testimony from audit company staff in China and sole discretion to select what companies it inspects.

Investors and attorneys have been awaiting news from the PCAOB on whether U.S. inspectors received the access promised.

Sources previously told Reuters U.S. officials had gained “good access” to all the information they requested during the seven-week inspection.

The determination announced on Thursday resets a three-year clock for compliance, said Gary Gensler, the chair of the Securities and Exchange Commission, which oversees the PCAOB.

In a statement, he said: “Chinese authorities will need to give PCAOB “full access for inspections and investigations in 2023 and beyond.”

RENEWED COOPERATION

In separate news on Thursday, the Biden administration added Chinese memory chipmaker YMTC and 21 “major” Chinese players in the artificial intelligence chip industry to a trade blacklist, broadening its crackdown on China’s chip industry.

But in a decision that signals renewed cooperation between Washington and Beijing, the Commerce Department also removed a subsidiary of Wuxi Biologics, a company that makes ingredients for AstraZeneca’s COVID-19 vaccine, and 25 other Chinese entities from the so-called unverified list, thanks to successful site visits.

The United States and China have been seeking to repair ties following an August visit to Taiwan by U.S. House Speaker Nancy Pelosi which produced a new fracture in relations and led China to cancel cooperation with the United States across a range of areas.

Since then, the two countries have gradually restored communications, first with a meeting between U.S. President Joe Biden and Chinese President Xi Jinping, followed by lower-level meetings and a resumption of talks on climate change and other topics.

(Reporting by Xie Yu, Chris Prentice and Susan Heavey, Additional reporting by Bansari Mayur Kamdar, Alex Alper Don Durfee and Chuck Mikolajczak, editing by Megan Davies, Nick Zieminski and Chizu Nomiyama)

By Chuck Mikolajczak

NEW YORK (Reuters) – U.S. stock indexes closed sharply lower on Thursday, with each of the major averages suffering their biggest daily percentage drop in weeks, as fears intensified that the Federal Reserve’s battle against inflation using aggressive interest rate hikes could lead to a recession.

The U.S. central bank hiked rates by 50 basis points (bps) on Wednesday as was widely expected, downsizing from the consecutive 75 bps hikes at its prior four meetings, but Fed Chair Jerome Powell warned recent signs of inflation were not enough to convince Fed the battle against rising prices had been won.

The Fed projected continued rate hikes to above 5% in 2023, a level not seen since a steep economic downturn in 2007.

“It is not just what they did but what they said, and it certainly does seem like they are still worried about inflation and this is not going to be the end of the rate increases,” said Melissa Brown, global head of applied research at Qontigo in New York.

“It really is hard to see what is going to turn things back around until we start seeing more data – which could be earnings, which could be the next inflation print or the Fed statement next year. The good news is it’s almost next year.”

Adding to global recession worries, the Bank of England and the European Central Bank further indicated an extended hiking cycle on Thursday. Most major central banks have followed a rate hike strategy in an attempt to reign in inflation.

The Dow Jones Industrial Average fell 764.13 points, or 2.25%, to 33,202.22; the S&P 500 lost 99.57 points, or 2.49%, to 3,895.75; and the Nasdaq Composite dropped 360.36 points, or 3.23%, to 10,810.53.

The declines marked the biggest one-day percentage drops for the S&P and Nasdaq since Nov. 2, and largest for the Dow since Sept. 13. Each closed at its lowest level since Nov. 9.

Equities have rallied since hitting lows for the year in mid-October, as signs of cooling inflation sparked optimism that the end of the Fed’s rate hike path could be on the horizon. But the rally has fizzled in December as investors see mixed economic data and a resolute Fed as having increased the chances of a recession.

Money market participants expect at least two 25 bps rate hikes next year and borrowing costs to peak at about 4.9% by midyear, before falling to around 4.4% by the end of 2023.

Investors also assessed economic data on Thursday that showed a steeper-than-expected decline in retail sales in November and the number of Americans filing for unemployment benefits falling last week, indicating a tight labor market. The labor market will need to weaken in order to help inflation ease.

All the 11 major S&P 500 sectors were in the red, with communication services and technology stocks falling nearly 4% as the worst performing on the session.

Netflix Inc slumped 8.63% after a media report that the company would let its advertisers take their money back after missing viewership targets.

Nvidia Corp dropped 4.09% after HSBC Global Research began coverage of the chipmaker’s stock with a “reduce” rating.

Volume on U.S. exchanges was 12.15 billion shares, compared with the 10.63 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 4.36-to-1 ratio; on Nasdaq, a 2.81-to-1 ratio favored decliners.

The S&P 500 posted two new 52-week highs and seven new lows; the Nasdaq Composite recorded 66 new highs and 334 new lows.

(Reporting by Chuck Mikolajczak; additional reporting by Caroline Valetkevitch; editing by Jonathan Oatis)

By Jamie McGeever

ORLANDO, Fla. (Reuters) -“Don’t fight the Fed” is one of the most hallowed commandments in financial markets, but for most of this year traders and investors have ignored it.

It turns out that playing some Fed policy turn in 2023, rather than guessing any absolute peak rate itself, would have proven lucrative even in the face of constant Fed pushback about possible easing next year.

Even though 2022 will be one of the worst years on record for a range of assets from stocks to U.S. treasuries to corporate bonds, the damage was largely done in the first five and a half months of the year.

That was when, against a backdrop of surging inflation, the Fed’s original pivot to its most hawkish policy stance in decades took investors by surprise and markets crashed.

But since mid-May, when rates futures markets began to bet outright that the Fed would cut rates in the second half of next year, markets have stabilized. They are today pretty much where they were seven months ago, in some cases even a little higher.

To be clear, traders have not swum completely against the Fed. Rates futures have raised the 2023 implied fed funds terminal rate by 400 bps to around 5% and the Fed has raised its ‘dot plot’ forecasts, in a broadly lockstep move.

But since mid-May the implied 2023 terminal rate has been brought forward to the first half of the year, and rate cuts have been priced into the second half.

The dogged easing wager has remained even as implied futures pricing has accelerated, indicating that markets care more about the Fed pivoting than the actual level of rates.

DAZED…

Seven months ago the S&P 500 was just below 4,000 points, exactly where it closed on Wednesday; the ICE BofA high yield U.S. corporate bond index is now slightly higher; the ICE BofA aggregate Treasury index is down around 2%, and the dollar index is little changed.

Another way of putting it: since May, investors have not believed the Fed would be as hawkish as it says it would be. They have bet that the Fed would ultimately be forced to ditch its ‘higher for longer’ commitment and cut rates next year, and have traded accordingly.

That’s not to say markets would hold up in what is set to be a very sluggish economy next year. But for now a virtuous cycle between investor risk appetite and looser financial conditions is in play, despite the latest policy tightening and promise of more to come.

This suggests the Fed has a credibility or a communications problem. Or both.

“It was difficult for us to follow the logic of changes to the SEP and the Chair’s comments,” Morgan Stanley’s chief U.S. economist Ellen Zentner said, referring to policymaker’s Summary of Economic Projections and Chair Jerome Powell’s press conference.

Analysts at TD Securities were a bit more blunt.

“The market is calling the Fed’s bluff. Powell and co. can harp on a higher terminal and the need to keep it elevated all they want, but the market is trading and is focused on the next (easing) cycle,” they wrote on Wednesday.

…AND CONFUSED

The Fed’s messaging on Wednesday appeared a little confused.

Powell pushed back heavily on the idea that there would be any rate cut next year. Policymakers have raised their 2023 inflation forecast to 3.5%, and the median end-2023 fed funds rate outlook has jumped to 5.1%. All very hawkish.

Yet policymakers’ 2023 economic growth forecast has slumped to 0.5% – it was 2.25% in March – and they now see unemployment topping 4.5%. With inflation clearly cooling – incoming economic data aren’t looking too hot either – you can see why markets are putting the Fed’s hawkishness under intense scrutiny.

Powell’s comments are pushing Wall Street lower on Thursday, but interest rate markets largely have dismissed them and continue to price in more than 50 bps of rate cuts next year.

The battle lines are still drawn.

“The hawks may have come out to play, but markets continue to disobey,” said Investec’s Ellie Henderson, who along with Zentner at Morgan Stanley, expects the Fed to raise rates by only 25 bps in February before cutting in the fourth quarter.

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

(By Jamie McGeever; editing by Diane Craft)

(Reuters) -Former FTX CEO Sam Bankman-Fried has made a bail application before The Bahamas Supreme Court, a source familiar with the matter said on Thursday, after a magistrate judge on Tuesday rejected the former crypto mogul’s request for bail.

Bankman-Fried was remanded to a Bahamas detention center after Chief Magistrate JoyAnn Ferguson-Pratt rejected his request to remain at home while he awaits for a hearing on his extradition to the United States, where he has been charged with financial crimes.

The source, who asked not to be identified, said the application was made on Thursday.

Bahamas broadcaster Eyewitness News on Thursday reported that the Supreme Court would hear the bail application on Jan. 17, without citing sources.

U.S. prosecutors say Bankman-Fried engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.

Bankman-Fried amassed a fortune valued over $20 billion as he rode a cryptocurrency boom to build FTX into one of the world’s largest exchanges before it abruptly collapsed this year.

(Reporting by Jasper Ward in Washington, editing by Deepa Babington)