Gross says Fed move may be 'too little too late' amid turmoil

Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act. 

PHOTO: BLOOMBERG

SEP 2, 20158:16 PM

[NEW YORK] Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act.

"The 'too late' refers to the fact that they may have missed their window of opportunity in early 2015, and the 'too little' speaks to my concept of a new neutral policy rate which should be closer to 2 per cent nominal, but now cannot be approached without spooking markets," Mr Gross wrote in an investment outlook Wednesday for Denver-based Janus Capital Group Inc.

Policy makers will gather in Washington Sept 16-17 to consider raising rates for the first time since 2006. Federal Reserve Bank of Boston President Eric Rosengren said on Tuesday that uncertainty over inflation and global growth justifies a modest pace of interest-rate increases, regardless of when the central bank begins tightening.

Futures traders are betting the Fed will push back a rate increase. Odds of an increase in September have fallen to 34 per cent from 40 per cent at the end of July, according to data compiled by Bloomberg. October's probability is about 46 per cent and December's is 60 per cent.

The Fed "seems intent on raising" the federal funds rate "if only to prove that they can begin the journey to 'normalization,'" Mr Gross wrote. "They should, but their September meeting language must be so careful, that 'one and done' represents an increasing possibility -- at least for the next six months."

Mr Gross, 71, joined Janus almost a year ago after leaving Pacific Investment Management Co, where he once ran the world's biggest mutual fund. He now manages the US$1.5 billion Janus Global Unconstrained Bond Fund. The fund lost 1.9 per cent this year through Aug 31, putting it ahead of 46 per cent of peers, according to data compiled by Bloomberg.

Mr Gross, who previously forecast that the Federal Reserve would raise US interest rates this month by 25 basis points, reiterated a previous warning that the extremely low interest rates of the past years risk distorting capitalism. The only way to fix the economy would be for governments worldwide to start investing to create demand.

Recent market volatility is "but one sign that something may be amiss in the global economy itself - China notwithstanding," he wrote.

With global policies discouraging economic expansion, investors should lean on cash or "near cash" instruments such as short-term corporate bonds. He quoted Will Rogers amid the Great Depression, who said he was more concerned about the return of his money rather than the return on it.

"In the long run though, the return of your money will likely not pay for college, health care or retirement liabilities," Mr Gross wrote. "Finance-based capitalism with its zero-bound interest rates has now produced global imbalances that impair productive growth and with it the chances for 'old normal' prosperity."

BLOOMBER
G

Asia doing "pretty well" despite China slowdown: IMF chief

SEP 2, 20158:35 PM

[JAKARTA] International Monetary Fund chief Christine Lagarde said on Wednesday Asian economies were doing "pretty well" despite the volatility created by China's slowdown and unease on global financial markets.

A fresh round of volatility shook Asian and European stocks on Wednesday, as further evidence of slowing growth in China's economy overshadowed global markets.

Financial markets have gyrated recently on the China concerns, with emerging economies and their currencies taking a beating.

Ms Lagarde, in Jakarta for a two-day visit, said the recent turmoil highlighted the "extraordinary gains" made by Asian economies but warned further volatility was on the horizon.

"Now the situation is changing yet again, and we are all feeling the impact of China's rebalancing and moving to a revised business model," she told a conference.

"What has been demonstrated in the last few weeks is how much Asia is at the core of global economy, and how much disruptions occurring in one market in Asia can actually spill over to the rest of the world."

China wants future growth to be driven more by domestic demand than by investment and exports, as in the past.

Later, Ms Lagarde said the IMF was talking to China about its transition to a more market-determined economy, including the internationalisation of its currency - a "significant" process which she hoped could be "managed in an orderly fashion".

Slower growth in major economies like China and Japan, lower commodity prices and the prospect of higher interest rates in the United States would continue to weigh on emerging markets across the region, the IMF chief added.

To tackle the bumpy road ahead, she suggested policymakers consider reining in excessive credit growth, adopt tighter fiscal policies, use the exchange rate as a "shock absorber", maintain adequate foreign exchange reserves and bolster regulatory oversight of the financial sector.

Despite external pressures and the slower pace of expansion in Asia, Ms Lagarde said that "this whole region, in the world, is doing pretty well", and would continue to be a key source of global growth.

Ms Lagarde this week added her voice to private-sector economists who have cut their world growth estimates, conceding growth would likely be weaker than the 3.3 per cent estimate the IMF published just two months ago.

AFP

    
 

China central bank sets reserve requirements for all FX derivatives: document

China's central bank will require reserves to be set aside for purchases of all currency derivatives from October, according to a document seen by Reuters, as Beijing moves to make it more expensive to bet on further depreciation of the yuan. 

PHOTO: REUTERS

SEP 2, 20156:37 PM

[HONG KONG] China's central bank will require reserves to be set aside for purchases of all currency derivatives from October, according to a document seen by Reuters, as Beijing moves to make it more expensive to bet on further depreciation of the yuan.

The move expands the scope of a similar document, seen Tuesday, in which the central bank said it will require banks to hold reserves on behalf of clients' trading of currency forwards, in a move seen curbing speculation and volatility after the Aug 11 shock devaluation of the currency.

According to the People's Bank of China document seen on Wednesday, reserve ratios will be set at 20 per cent of the nominal value of forwards and swap contracts, and fixed at 10 per cent of the nominal value of principal for options.

"People were thinking about alternatives to circumvent the reserve requirement to bet on yuan depreciation after yesterday's policy was out. But it's clear now that it is impossible to do so," said a Hong Kong-based trader who saw the PBOC document on Wednesday.

The PBOC declined to comment when contacted by Reuters.

Surprised by the global reaction to its currency devaluation, Beijing has gone all out to try to cushion the impact.

The PBOC has set a slew of strong daily trading midpoints for the yuan, increased how frequently it has state banks sell dollars to support the currency and has conducted rare intervention in derivative markets.

Some traders believe such high-frequency intervention in the spot market and the coming requirements in derivative trading mark a step backward for China's currency reforms.

Another concern is what Beijing's end-game is, given that efforts to hold up the yuan so far have required it to drain the country's massive foreign exchange reserves.

If this latest move reduces depreciation pressure, it will also reduce the need for the PBOC to sell foreign currency to buy yuan. But it is not a riskless strategy, as in the past overactive interventions have caused transaction volumes to tank, damaging enthusiasm for holding yuan among international investors.

"Repeated intervention to maintain the currency's stability is at odds with the 'more flexible exchange rate mechanism' the central bank announced just three weeks ago," wrote Chen Long of Gavekal Dragonomics in a research note on Wednesday.

"This contradiction casts doubt over the PBOC's intentions: whether it is serious about moving to a more flexible currency regime, or whether it has simply re-imposed a de facto peg at a different level against the US dollar."

The yuan weakened 2.6 per cent in August, its worst month on record. This raised concerns a weakening yuan could provoke capital flight even as China's wider economy stumbles. Offshore markets have been pricing the yuan at a discount to the onshore version.

In late trade on Wednesday, the spread between the onshore yuan and offshore spot widened to about 1,000 pips, the highest level since September 2011, implying foreign investors are pricing in deeper depreciation to come.

Beijing has said it sees no reason for further yuan weakness, with a PBOC official giving Reuters a rare interview in which he defended China's decision and said it should not be blamed for the global stock rout around the same time.

In a related development, China's State Administration of Foreign Exchange (SAFE) issued new rules on Wednesday relaxing restrictions on multinational companies' management of their foreign currency-denominated debt in China, allowing them to pool debt from all their subsidiaries for central management.

Analysts see the moves as also relieving downward pressure on the yuan by encouraging companies to sell off their foreign currency.

REUTERS

    
 

China, South Korea agree to seek summit with Japan by November

China and South Korea agreed to seek a three-way summit with Japan in late October or early November in a step toward easing tensions in the region. 

PHOTO: BLOOMBERG

SEP 2, 20159:12 PM

[SEOUL] China and South Korea agreed to seek a three-way summit with Japan in late October or early November in a step toward easing tensions in the region.

Chinese President Xi Jinping and South Korean President Park Geun Hye agreed trilateral cooperation would contribute to peace and prosperity in the region when the two leaders met in Beijing for talks on Wednesday, the presidential office in Seoul said in a statement on its website. The summit would take place in South Korea, it said.

The foreign ministers of China, Japan and South Korea agreed in March to hold the summit "at the earliest convenient time."

Mr Park, Mr Xi and Japanese Prime Minister Shinzo Abe have never met together.

Mr Park and Mr Xi in recent months have signaled a willingness to put behind acrimony over Japan's wartime past to permit the first three-way summit in three years.

Mr Park said last month that it was time for relations with Japan to move forward "based on the right historical recognition" after Mr Abe said Japan inflicted "immeasurable damage and suffering" across Asia, in his statement marking the 70th anniversary of Japan's surrender in World War II.

A three-way summit may ease tensions related to territorial disputes and invigorate talks on a free-trade deal between the countries, which account for a fifth of the world economy. The three are also members of six-nation talks aimed at dismantling North Korea's nuclear arms programs.

BLOOMBERG

    
 

US private sector adds 190,000 jobs in August: ADP

US private employers added 190,000 jobs in August, short of economists' expectations, a report by a payrolls processor showed on Wednesday.

PHOTO: NYT

SEP 2, 20158:38 PM

[NEW YORK] US private employers added 190,000 jobs in August, short of economists' expectations, a report by a payrolls processor showed on Wednesday.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 201,000 jobs.

Private payroll gains in July were revised down to 177,000 from an originally reported 185,000 increase.

The report is jointly developed with Moody's Analytics.

The ADP figures come ahead of the US Labour Department's more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

Economists polled by Reuters are looking for total US employment to have grown by 220,000 jobs in August, a modest climb from July's 215,000 figure. The unemployment rate is forecast to tick down to 5.2 per cent from the 5.3 per cent in July.

REUTERS

    
 

Autos lift US factory goods orders in July

New orders for US factory goods rose for a second straight month in July on strong demand for automobiles, which could help to keep manufacturing supported as it deals with a strong dollar and softening global demand. 

PHOTO: BLOOMBERG

SEP 2, 201510:13 PM

[WASHINGTON] New orders for US factory goods rose for a second straight month in July on strong demand for automobiles, which could help to keep manufacturing supported as it deals with a strong dollar and softening global demand.

The Commerce Department said on Wednesday new orders for manufactured goods increased 0.4 per cent after an upwardly revised 2.2 per cent rise in June.

Factory activity has been hobbled by a strong dollar and spending cuts in the energy sector after last year's sharp plunge in crude oil prices. Tepid global demand is also hurting manufacturing, which accounts for about 12 per cent of the domestic economy.

A report on Tuesday showed the manufacturing industry braked to a more than two-year low in August, with some economists blaming the slowdown on the recent global stock market sell-off.

Economists polled by Reuters had forecast factory orders rising 0.9 per cent in July after a previously reported 1.8 per cent increase in June.

The dollar has gained 16.8 per cent against the currencies of the United States' main trading partners since June 2014, which has undercut export growth and weighed on the profits of multinationals.

Orders for transportation equipment rose 5.5 per cent in July as bookings for motor vehicles and parts increased 4.0 per cent, the largest gain in a year. Orders for automobiles are likely to remain strong after sales surged in August.

In July, there were increases in orders for machinery, electrical equipment, appliances and components, and computers and electronic products.

The Commerce Department also said orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 2.1 per cent instead of the 2.2 per cent rise reported last month.

Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the gross domestic product report, increased 0.6 per cent in July, unchanged from last month's estimate.

Inventories of factory goods slipped 0.1 per cent after three straight months of gains. That left the inventories-to-shipments ratio at a lofty 1.35, unchanged from June.

That suggests manufacturers might be sitting on a pile of unwanted goods, which could hurt production and weigh on growth in the coming quarters. Unfilled orders at factories rose 0.2 per cent, increasing for a second straight month.

REUTERS

    
 

Update: US private payrolls rise steadily; productivity revised up

US private employers maintained a solid pace of hiring in August despite recent global financial market turmoil, suggesting that labour market momentum likely remains strong enough for the Federal Reserve to consider an interest rate hike this year. 

PHOTO: AFP

SEP 2, 201510:41 PM

[WASHINGTON] US private employers maintained a solid pace of hiring in August despite recent global financial market turmoil, suggesting that labour market momentum likely remains strong enough for the Federal Reserve to consider an interest rate hike this year.

The ADP National Employment Report on Wednesday showed private payrolls increased 190,000 last month. While that was below economists' expectations for a gain of 201,000 jobs, it was a step-up from the 177,000 positions created in July.

"Job growth remains strong and broad-based, except in the energy industry, which continues to shed jobs," said Mark Zandi, chief economist of Moody's Analytics in West Chester, Pennsylvania.

The ADP report, which is jointly developed with Moody's Analytics, was published ahead of the government's more comprehensive employment report to be released on Friday.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 220,000 jobs in August after rising 215,000 in July. There is, however, a risk of a weaker number as the first print of August payrolls has tended to be weaker in the last several years before being revised higher.

But some economists were encouraged by the ADP report, which showed job gains in all sectors, except in the energy industry.

"ADP does not show the same initial under-reporting bias in the initial release of the August data as payroll data from the (government) appear to display," said John Ryding, chief economist at RDQ Economics in New York.

"This apparent consistent trend in ADP payroll gains would reassure us that the trend in employment was little changed in August in the event that payroll growth drops noticeably below 200,000 in Friday's report."

The unemployment rate is forecast to tick down to 5.2 per cent from 5.3 per cent in July. The August employment report would be released less than two weeks before the Fed's Sept 16-17 policy meeting.

The chances of an interest rate hike this month have been diminished by a global stock market sell-off in the wake of poor economic data from China. In addition, US factory activity slowed to a more than two-year low in August, with some economists citing the financial markets turbulence as a factor.

However, Fed Vice Chairman Stanley Fischer told CNBC last week it was too early to decide whether the stock market rout had made a rate hike this month less compelling.

Prices for US Treasury debt were trading lower, while the dollar was at session highs.

"Outside of manufacturing, the domestic activity data is very strong," said Paul Ashworth, chief US economist at Capital Economics in Toronto. "But Fed officials are clearly worried about an economic slowdown in China, commodity prices are lower, and there is little evidence of any marked pick-up in either wage growth or core inflation."

In a second report, the Labour Department said nonfarm productivity increased at its strongest pace in 1-1/2 years in the second quarter, keeping wage inflation subdued for now.

The government revised productivity to show it rising at a 3.3 per cent annual rate, the quickest since the fourth quarter of 2013, instead of the 1.3 per cent pace reported last month.

Economists had forecast productivity, which measures hourly output per worker, being revised up to a 2.8 per cent annual growth pace. Productivity contracted at a 1.1 per cent rate in the first quarter.

The government last week revised second-quarter gross domestic product to show GDP expanding at a 3.7 per cent annual pace instead of the 2.3 per cent rate it had initially estimated.

But the trend in productivity remains weak. Productivity rose 0.7 per cent from a year ago instead of the 0.3 per cent increase reported last month.

Growth in productivity is an important determinant of the economy's non-inflationary speed limit.

Though the second-quarter bounce back is dampening wage pressure for now, the weak trend in productivity suggests the economy's growth potential could be lower than the 1.5 per cent to 2.0 per cent pace that economists have been estimating.

That would imply the spare capacity in the economy is being squeezed out more quickly than thought and that inflation pressures may take hold a little bit faster than had been anticipated.

Unit labour costs, the price of labour per single unit of output, fell at a 1.4 per cent rate in the second quarter, rather than increasing at a 0.5 per cent rate as previously reported.

Unit labour costs rose 1.7 per cent compared to the second quarter of 2014. They increased at a 2.6 per cent rate in the first quarter.

A third report from the Commerce Department showed new orders for U.S. factory goods rose for a second straight month in July on strong demand for automobiles, which could help to keep manufacturing supported as it deals with the buoyant dollar and softening global demand.

REUTERS

    

Ringgit falls with bonds as oil-price slump weighs on finances

Malaysia's ringgit fell the most in more than a week and bonds dropped as a slump in Brent crude prices clouds the outlook for government finances in the oil-exporting nation. 

PHOTO: REUTERS

SEP 2, 20151:20 PM

[KUALA LUMPUR] Malaysia's ringgit fell the most in more than a week and bonds dropped as a slump in Brent crude prices clouds the outlook for government finances in the oil-exporting nation.

Brent decreased 1.9 per cent after falling 8.5 per cent on Tuesday in its biggest decline since 2011 before US stockpiles data. The price of the commodity has halved in the past year, cutting Malaysia's export earnings and contributing to a 25 per cent slide in the ringgit. The FTSE Bursa Malaysia KLCI Index of stocks remained lower even as other Asian equities bounced back from an earlier selloff as China's Shanghai Composite Index reversed losses.

An overnight drop in emerging-market currencies and a retreat in Brent "should see Asia falling back in line with the rest of the world where risk appetite remains impaired," said Nizam Idris, the Singapore-based head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. "Oil has been volatile." The ringgit weakened 1.3 per cent to 4.2177 a dollar as of 12:56 pm in Kuala Lumpur, the steepest decline in Asia, according to prices from local banks compiled by Bloomberg. It reached a 17-year low of 4.2990 on Aug 26. The FTSE Bursa Malaysia KLCI Index was down 0.8 per cent.

A report Tuesday showing China's official gauge of manufacturing fell to a three-year low last month fueled further concern that growth in Malaysia's biggest export market is slowing. Data on Friday may show overseas shipments from the Southeast Asian nation increased 3.2 per cent in July from a year earlier, slowing from 5 per cent the previous month, according to the median estimate in a Bloomberg survey
.

Temasek-backed driller amends bonds second time amid oil rout

Temasek Holdings logo at the office at The Atrium@Orchard. Integradora de Servicios Petroleros Oro Negro, a Mexican oil-rig operator partly owned by Singapore's Temasek Holdings Pte, is again amending bond covenants as it struggles to win new contracts. 

PHOTO: ST FILE

SEP 2, 20151:06 PM

[MEXICO CITY] Integradora de Servicios Petroleros Oro Negro, a Mexican oil-rig operator partly owned by Singapore's Temasek Holdings Pte, is again amending bond covenants as it struggles to win new contracts.

Noteholders agreed at a meeting Tuesday on changes to the company's US$175 million of securities that come due in December, for a second time this year. Oro Negro failed to revalue its newest rig by an Aug 31 deadline as it tries to lease the asset to state-owned Petroleos Mexicanos by year-end, according to a statement.

Oil explorers are cutting back spending after crude prices slid below US$40 a barrel in August. In response, Pemex has separately cut the daily lease rates on existing rigs it chartered from operators including Oro Negro and Seadrill Ltd in the Gulf of Mexico.

Investors allowed Oro Negro to push back certain obligations to the end of September, while also giving it until then to comply with a minimum asset coverage ratio of 120 per cent, according to a statement from Nordic Trustee ASA. The approval came after creditors opposed some company requests last month, including a plan to pay the bond coupon in kind.

Oro Negro's 11 per cent 2015 notes have dropped to 75.38 cents on the dollar after being sold at 97 cents last November, according to Bloomberg-compiled prices.

The rig operator in April hired advisers to find "strategic alternatives" for the business whose investors included Mexican private equity firm Axis Group, Temasek and US private equity firm Ares Management, according to data on its website.

BLOOMBERG

    
 

Seoul: Shares, won fall in volatile trade in risk-off mood

Seoul shares and the won fell in volatile trade by midday on Wednesday as investors worried about slowing global growth following soft US and Chinese manufacturing activity surveys. 

PHOTO: REUTERS

SEP 2, 201511:36 AM

[SEOUL] Seoul shares and the won fell in volatile trade by midday on Wednesday as investors worried about slowing global growth following soft US and Chinese manufacturing activity surveys.

The Korea Composite Stock Price Index (KOSPI) was down 0.5 per cent at 1,904.56 points as of 0229 GMT. It slid as much as 1.6 per cent to 1,883.50 points right after markets opened. Losers outnumbered gainers by 3.7 to 1. "Concerns over the global economy and the timing of the Fed's rate hike, rather than expectation, dominated the local stock markets," said Cho Byung-hyun, a stock analyst at Yuanta Securities.

Mr Cho noted the KOSPI may fluctuate around 1,850 to 1,950 points at least ahead of a meeting of the Federal Reserve Open Market Committee later in the month.

Foreigners were set to be net sellers for a 20th consecutive session, offloading a net 53.5 billion won (S$64.1 million) worth of shares in the main board by midday.

Meanwhile, car makers bolstered the market, with bellwether Hyundai Motor Co Ltd up 2.7 per cent and Kia Motors Corp rising 2.1 per cent.

Lee Sang-hyun, an analyst at IBK Securities, said Hyundai Motor's sales data the previous day showing smaller declines in China sales and expectations both companies would improve sales in the world's second-largest economy underpinned their shares.

Refinery and chemical shares underperformed the broad market after oil prices slumped overnight.

SK Innovation Co Ltd fell 2.3 per cent, S-Oil Corp slid 3.3 per cent and Lotte Chemical Corp dropped 4 per cent.

On the currency market, the won eased 0.6 per cent to 1,179.0 per dollar from the previous close of 1,171.8. "Investors are avoiding betting on riskier assets, while still watching stock markets in China," said Yuna Park, a foreign-exchange analyst at Dongbu Securities.

Ms Park added that local exporters' demand to buy won for settlement appeared around 1,180.

September futures on three-year treasury bonds were up 0.06 points at 109.51.

REUTERS