Era of stagnation will make ECB cut inflation target: UBS

A grim outlook for growth in Europe over coming decades could lead the European Central Bank to lower its target for inflation as early as next year, economists from the Swiss financial group UBS said on Wednesday. 

PHOTO: REUTERS

JAN 14, 20167:20 AM

[LONDON] A grim outlook for growth in Europe over coming decades could lead the European Central Bank to lower its target for inflation as early as next year, economists from the Swiss financial group UBS said on Wednesday.

In a report on the economic and institutional outlook for Europe until 2050, UBS's chief investment office also calculated the European Union would need to admit 1.8 million immigrants to match the workforce expansion that has helped the US economy grow over the past decade.

With Europe's population otherwise set to shrink, only mass immigration or a huge programme of productivity-focused reforms will raise euro zone growth rates much above 1 per cent over the next 30 years, it said. "It will be very difficult to get out of this cycle of low growth," the office's head of European macroeconomics, Ricardo Garcia, told a briefing on the report.

"Downward pressure on inflation is also likely and will make it harder for central banks to achieve their targets. That's why the ECB will sooner or later have to reduce its inflation target."

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Euro zone inflation is close to zero, even though the ECB has cut interest rates into negative territory and bought billions in bonds to pump money into the economy.

The UBS report follows talk among bankers about whether the ECB will have to rethink its inflation target of close to but less than 2 per cent ECB policymakers have insisted on the importance of sticking to the existing goal. But the outlook for growth means doing so could force the bank to take on increasingly risky investments and bad debt that would eventually fall on Germany and other creditor nations, Mr Garcia said.

That would lead them to seek a lower target, which the euro zone's southern periphery would probably oppose because it would mean less action to support growth.

A compromise would probably commit the richer states to redistributive economic policies within the EU in exchange for a tighter rein on monetary policy.

In an email later to Reuters, Mr Garcia said: "The first opportunity (to cut the target) should be in 2017 or 2018. Growth has to be good, inflation at least at the target. It could also be combined with treaty change, but this would move it to the next decade. "The level would be 1 or 1.5 per cent."

REUTERS

    
 

EU opens debate on China trade status; US neutral

That status would make it harder for Europe to impose anti-dumping duties on Chinese goods sold at knock-down prices, changing the criteria for determining a fair price. 

PHOTO: REUTERS

JAN 14, 20167:17 AM

[BRUSSELS] The European Commission will consult industry and its trade partners in response to Beijing's demand that trade barriers against it be relaxed, opening a politically charged debate on Wednesday that will shape future ties with China.

The European Union's 28 commissioners discussed for the first time the issue of granting China "market economy status"from December, which Beijing says is its right 15 years after it joined the World Trade Organisation.

That status would make it harder for Europe to impose anti-dumping duties on Chinese goods sold at knock-down prices, changing the criteria for determining a fair price. "This issue has to be looked at from all important angles given the subject's importance for international trade and also for the EU's economy," Commission Vice-President Frans Timmermans said after the commissioners' meeting.

"If there are measures to be taken related to this issue then, of course, these individual measures will have to be assessed for impact. Those are the rules, but I can't say yet what those measures will be."

In a statement, the Commission said any decision would have an impact on the European economy, but gave no details. The EU is China's biggest trade partner, and China is second only to the United States for the EU. Chinese imports to the EU were worth 302 billion euros (S$472.5 billion) in 2014, more than triple their level at the start of the century.

The EU executive, which handles trade issues on behalf of EU governments, said it would fully involve European industry and liaise closely with its biggest trade partners on the issue, acknowledging that would take some time. The bloc is now in a third year of talks with the United States on a free-trade deal.

US Trade Representative Michael Froman said Washington was consulting with Brussels on the matter but that any change in China's European trade status was ultimately up to the EU. "On the market economy status, we are not encouraging the EU to take any particular position. We've not made any decision ourselves on any particular position," Mr Froman told a trade forum held by the Wilson Center, a Washington think tank.

Mr Froman said US officials were interested in learning more about the EU's perspective on China's evolution toward a market economy.

JOB LOSSES

The bloc's decision will be taken with EU governments and the European Parliament. Officials have told Reuters one compromise might be to agree on temporary protection against cheaper Chinese exports to protect EU industry.

The steel industry in particular has been a fierce opponent of any loosening of trade barriers against China. The industry association Eurofer, which has lodged a series of complaints against China, said Chinese steel production over capacity was some 400 million tonnes, more than twice the total EU steel production of 170 million tonnes.

Chinese steel imports into the EU have doubled in the past 18 months, with prices falling by 40 per cent, it said.

Aegis Europe, a group of about 30 European manufacturing sectors, including metals, chemicals, ceramics and textiles, said Beijing's aggressively export-led economy encouraged its enterprises to dump on foreign markets.

Granting market economy status to China would have a huge negative impact on European industry, it said, citing a study saying that to do so would put 1.7 million to 3.5 million European jobs at risk.

REUTERS

    
 

Return of oil slump haunts Najib in Malaysia budget deja vu

Malaysian Prime Minister Najib Razak's fiscal targets are under siege for a second year as an oil rout forces a reassessment of public spending plans to keep the Malaysian budget from being busted. 

PHOTO: REUTERS

JAN 14, 20167:32 AM

[KUALA LUMPUR] Malaysian Prime Minister Najib Razak's fiscal targets are under siege for a second year as an oil rout forces a reassessment of public spending plans to keep the Malaysian budget from being busted.

The budget gap may be as high as 4 per cent of gross domestic product compared with a target of 3.1 per cent if there are no changes to current expenditure plans, according to analyst estimates compiled by Bloomberg. Mr Najib will announce cuts to operating expenditure and revisions in growth forecasts on Jan 28, a finance ministry official said Wednesday.

The start of 2016 is shaping out to be a continuation of turmoil that plagued Malaysia last year when foreign investors unloaded US$7 billion of equities and bonds. 

Any deterioration in the deficit puts Malaysia at greater risk in the event of another exodus of capital from emerging markets, which began the year jolted by China.

"If the amount of money you take in is significantly dependent on something as volatile as oil, it is hard to sleep soundly," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. "As revenue shortfall from oil grows and grows, there is only one way to go: cut expenditures more and more" if the deficit target is sacrosanct, he said.

Economists say spending cuts would weigh on expansion, with Malaysia exporters also facing headwinds from a China slowdown and a weakening yuan. The ringgit is among the worst performers in Asia as crude dropped to a 12-year low and uncertainty over China rattles global markets.

Malaysia as Asia's only major net oil exporter risks losing RM300 million (S$99 million) for every US$1 per barrel drop, according to government estimates. Moody's Investors Service cut its positive outlook on the sovereign this week, while state oil company Petroliam Nasional Bhd said crude could average US$30 a barrel this year.

Mr Najib's plan to balance the budget by 2020 has resulted in subsidy cuts, a new consumption levy and higher taxes on the wealthy. Those efforts have been undermined by lower commodity prices while a weaker global economy has hurt exports.

Economists are divided on whether the premier will choose to cut development or operating expenditure, or revise the deficit target. In 2015, he reduced operating spending and changed the deficit target to 3.2 per cent of GDP from 3 per cent.

'OPTIMISTIC' PROJECTIONS

"Malaysia faces a year of reckoning," said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. "Revenue projections are overly optimistic, particularly oil- related revenue and corporate tax revenue. Companies will face much tougher business conditions this year."

Mr Najib last week reiterated a commitment to cut the deficit even with oil trading close to 40 per cent below the budget assumption of US$48 a barrel. The pledge to fiscal discipline is needed to bolster investor confidence, said Krystal Tan of Capital Economics Ltd.

"Failure to do so could leave Malaysia facing ratings downgrades and vulnerable to negative turns in investor sentiment, especially given the high level of foreign ownership of Malaysian government debt," she said.

Measures to cut spending will include the government studying the privatization of projects, the finance ministry's top bureaucrat Mohd Irwan Serigar Abdullah said Wednesday.

The tax collection authority and customs department are also reported to be looking at ways to maximise revenue as Mr Najib faces constraints in introducing new measures to boost government coffers.

"He has expended considerable political capital to push through the goods and services tax, raise toll fees, and cut government expenditure for 2016," said Chia Shuhui, an Asia analyst at BMI Research in Singapore. "Najib might decide to trim development expenditure instead, which could result in a slowing of the government's planned development projects aimed at laying the foundation for future growth."

BLOOMBERG

    
 

Money leaving emerging markets faster than ever amid China slump

Investors pulled more money from emerging markets in the three months through December than ever before as investors dumped riskier assets in China amid concern the country's currency will weaken further, according to Capital Economics Ltd. 

PHOTO: BLOOMBERG

JAN 14, 20167:36 AM

[NEW YORK] Investors pulled more money from emerging markets in the three months through December than ever before as investors dumped riskier assets in China amid concern the country's currency will weaken further, according to Capital Economics Ltd.

Capital outflows from developing nations reached US$270 billion last quarter, exceeding withdrawals during the financial crisis of 2008, led by an exodus from China as investors pulled a record US$159 billion from the country just in December, Capital Economics' economist William Jackson said in a report.

Excluding outflows from the world's second-largest economy, emerging markets would have seen inflows in the quarter, he said.

"This appears to reflect a growing skepticism in the markets that the People's Bank can keep the renminbi steady," Mr Jackson said in the note, which was published Wednesday. "Given the fresh sell-off in EM financial markets and growing concerns about the level of the renminbi, it seems highly likely that total capital outflows will have increased" in January, he said.

Investor skepticism increased last year as a surprise devaluation of China's yuan roiled global markets and triggered a US$5 trillion rout in the nation's equity markets, casting doubt on the government's ability to contain the selloff and support growth.

Chinese leaders have since then stepped up efforts to restrict capital outflows and prop up share prices despite pledges to give markets greater sway and allow money to flow freely across the nation's borders within five years. The yuan traded in the mainland market declined 4.4 per cent in 2015, the most since 1994.

Outflows from emerging markets rose to a record US$113 billion in December, Capital Economics said.

Over 2015, investors pulled US$770 billion from developing nations, compared with US$230 billion a year earlier.

BLOOMBERG

    
 

China may slow Fed's interest rate rises: Fed officials

Headwinds from China and the world's commodity markets may once again be upending the US Federal Reserve's plans less than a month into its first-in-a-decade tightening cycle. 

PHOTO: REUTERS

JAN 14, 20167:09 AM

[BOSTON] Headwinds from China and the world's commodity markets may once again be upending the US Federal Reserve's plans less than a month into its first-in-a-decade tightening cycle.

The rout in China's stock market, weak oil prices and other factors are "furthering the concern that global growth has slowed significantly," Boston Fed President Eric Rosengren said on Wednesday.

Mr Rosengren, who votes on the Fed's rate-setting committee this year, also said a second hike will face a strict test as the Fed looks for tangible evidence that US growth will be "at or above potential" and inflation is moving back up toward the Fed's 2 per cent target.

Chicago Fed chief Charles Evans, who like Mr Rosengren is one of the central bank's most dovish policymakers, expressed similar concerns. "It's something that's got to make you nervous," he said of the drag slower growth in China could have on economies like the United States that don't do much direct trade.

Mr Evans also said he was nervous about inflation expectations not being as firmly anchored as a year ago, and added it could be midyear before the Fed has a good picture of the inflation outlook.

When the Fed raised rates by a quarter point in December, policymakers in general forecast four further rate hikes this year.

But since then a marked drop in China's stock market and the yuan, a stubbornly strong dollar and a further decline in oil prices to near 12-year lows have presented a recurrence of challenges the Fed hoped it had left behind last autumn.

The Fed delayed an initial interest rate rise last September when a market sell-off in China triggered a fall in US stocks.

US equity markets, buffeted by renewed volatility, largely looked past last Friday's stellar jobs report. The Commerce Department will also likely report later this month that domestic growth in the fourth quarter slowed, which could further add to jitters.

Investors currently think the Fed will raise rates again in April, according to an analysis of fed funds futures contracts compiled by the CME Group.

On Monday, Atlanta Fed president Dennis Lockhart said he did not think there would be enough new data to make a decision on a second hike until at least April, in part because of China's effect on US equity markets.

Mr Lockhart also said he wanted "hard evidence" on a rise in inflation.

Robert Kaplan, the Dallas Fed's new president, on Monday cautioned that four interest-rate hikes are "not baked into the cake" given global stock market volatility set off by fears over a cooling Chinese economy.

While Mr Kaplan thought there might be enough economic data to hand by March to decide whether to raise rates again, "there's no substitute for time in assessing economic data as it unfolds," he said.

The Fed upgraded language in its December policy statement to reflect its desire to see more certainty inflation would trend upwards. Any slowing in domestic growth would hamper this.

The Fed holds the first of its scheduled eight policy meetings this year on Jan 26-27.

REUTERS

    
 

US: Wall St plunge kills hopes of global markets turnaround

PHOTO: AFP

JAN 14, 20166:45 AM

[NEW YORK] A heavy selloff on Wall Street on Wednesday cut short a two-day rally and smothered hopes of a sustained turnaround on battered global markets.

There was no clear catalyst for the plunge, which saw the Dow Jones Industrial Average of blue chips sink 2.2 per cent and the Nasdaq Composite lose 3.4 per cent.

The losses came after the weekly US oil stockpiles report showed another surge in fuel stocks, cutting short a rally in crude prices and sending Brent crude below US$30 a barrel for the first time since April 2004.

Analysts said the report suggested slow demand growth for energy in the United States, a possible sign of slower economic activity overall.

Supporting that view was the Federal Reserve's Beige Book survey of regional economic conditions, which was somewhat less buoyant than December's, though not at all downbeat.

Michael James at Wedbush Securities said the market was reading economic weakness, and not just excess supply, into the weak crude prices.

"Oil is a key determinant of economic strength," he said. "A majority of traders are using the lack of increased demand for oil as a read-through for global growth in general."

The US selloff hit all sectors but utilities. Tech shares fell 2.8 per cent and biotech 5.4 per cent. Amazon sank 5.8 per cent and Twitter 4.8 per cent.

Financials slid 2.6 per cent, with Goldman Sachs down 4.1 per cent; transports were hit with a 3.7 per cent decline despite fuel prices having plunged.

Earlier, European shares pushed mostly higher on an encouraging improvement in Chinese trade data, and despite another 2.4 per cent fall in Shanghai stocks.

China's yuan remained stable for a third straight session, supporting hopes for calming in the country's markets.

The euro was slightly higher on the dollar, at US$1.0874, while the greenback slipped slightly to 117.72 yen. The pound dropped to US$1.4403.

Sheraz Mian, of Zacks Investment Research, sounded a note of caution despite the upbeat China trade data.

"Today's data notwithstanding, China's status as a source of market uncertainty isn't going away anytime soon.

"The country's manufacturing and trade sectors have clearly lost momentum, which has been weighing on overall GDP growth data," he said.

But ratings agency Standard & Poor's said Wednesday it believed concern about China was overplayed, arguing that it saw the outlook for emerging-market countries hit by the collapsing oil prices of greater concern.

"We are much more worried about the prospects for emerging countries outside of China, and in particular raw material-producing countries," S&P economist Jean-Michel Six told reporters in Paris.

AFP

    
 

Brent below US$30 a barrel as US oil stockpiles grow

Brent crude oil fell below US$30 a barrel for the first time in nearly 12 years on Wednesday as an increase in US crude and fuel inventories added to the global oversupply. 

PHOTO: BLOOMBERG

JAN 14, 20166:57 AM

[NEW YORK] Brent crude oil fell below US$30 a barrel for the first time in nearly 12 years on Wednesday as an increase in US crude and fuel inventories added to the global oversupply.

In London, Brent North Sea crude for February, the European benchmark for oil, fell 55 cents to US$30.31 a barrel, its lowest level since February 2004 and below the WTI price.

Earlier Brent sank to US$29.96, its lowest level since April 2004.

US benchmark West Texas Intermediate (WTI) for delivery in February pared earlier gains to close up a scant four cents at US$30.48 a barrel on the New York Mercantile Exchange.

The US government's weekly inventories report on Wednesday snapped attempts by the benchmark contracts to rebound.

The report showed a build in US commercial crude-oil stockpiles of 200,000 barrels in the week ending January 8.

More significant was an 8.2 million barrel surge in gasoline inventories, and a 6.1 million barrel surge in distillate stocks, suggesting very sluggish consumption in the country.

The report painted "a very bearish picture" of the market, said Bob Yawger, director of the futures division of Mizuho Securities USA.

"Crude oil numbers... are only 7.6 million (barrels) below their all-time record of 490.1 million," he said.

Mr Yawger also noted that crude-oil storage at the key Cushing hub was at an all-time record and nearing the terminal's maximum capacity, while gasoline's increase by 19 million barrels in the past two weeks was the biggest two-week build in history.

The looming return of Iranian oil exports to the market after Iran meets the conditions of its nuclear deal with major powers hung over sentiment.

The Iranian government predicted Wednesday that the final implementation of Iran's nuclear program deal is expected by Sunday. US and European officials have said it could be just days away.

"There's increased chatter about new Iranian barrels coming to the market very quickly as the IAEA (International Atomic Energy Agency) supposedly is going to verify over the weekend that Iranians have done enough to verify their side of the sanction deals," Mr Yawger said.

AFP

    
 

US economic growth hampered by dollar, energy prices: Federal Reserve

JAN 14, 20167:05 AM

[WASHINGTON] The US economy continued to show mixed signals from late November to early January, with improvements in the labour market and consumer spending offset by the drag of a strong dollar and low energy prices, the Federal Reserve said on Wednesday.

US economic activity expanded in nine of the country's 12 districts, the Fed said in its Beige Book report of anecdotal information on business activity collected from contacts nationwide.

The Boston Fed described economic activity as upbeat, while the New York and Kansas City districts described it as essentially flat. Most others described activity as modest.

Half the US central bank's districts said the outlook for future economic growth remained mostly positive.

But while the labour market continued to improve and most districts reported "slight to moderate" growth in consumer spending, other sectors showed further strain.

Most manufacturing sectors weakened and "several districts reported the strong dollar's negative impact on demand," the Fed said.

Contacts in the Philadelphia and San Francisco districts also cited weak global demand as contributing to declines.

Elsewhere, most areas of the energy sector "struggled further" as oil and gas prices continued to drop.

The Cleveland and Kansas districts reported that warmer-than-usual temperatures "increased already abundant inventories of oil and gas and kept downward pressure on already low energy prices."

The Fed raised interest rates last month by a quarter percentage point from near zero, the first hike in almost a decade.

On the whole, Fed policymakers see a further four quarter-point increases in 2016 but have made clear that would depend on incoming data and a tangible move in inflation toward the Fed's 2 per cent target.

The report showed little sign the wage pressures that started to tick up in October and November were becoming sustained.

Nearly all districts said overall price pressures were minimal, and just two districts reported an acceleration in wage gains. "Wage pressures remained relatively subdued," the Fed noted.

The Beige Book was compiled by the Philadelphia Fed with information collected on or before Jan 4, 2016.

REUTER