Aurelia Butler

VIENNA (Reuters) – The European Central Bank could start cutting interest rates in June as inflation may fall quicker than expected but should not get too far ahead of its U.S. counterpart, as that diminishes the potency of easing, Austrian policymaker Robert Holzmann said.Euro area inflation has tumbled over the past year and economic growth stalled, shifting the debate to just how quickly and how far the ECB should move in reversing a record string of rate hikes. “April is not on my radar,” Holzmann told Reuters in an interview. “In June we will have more information.””If the data allows it, a decision will be made,” he said. “I don’t have an in-principle objection to easing in June, but I’d like to see the data first and I want to stay data-dependent.” Holzmann is considered by some to be the single most conservative member of the ECB’s 26-member Governing Council, often batting back rate-cut talk, so his cautious nod to a June easing suggests a growing consensus for a move already raised by several others.But he warned that if the U.S. Federal Reserve does not cut rates in June, the market reaction to the policy divergence would negate much of the benefit of an ECB cut, so the central bank should be careful in going it alone.”If by June the data shows a strongly based environment for a cut, a week before the Fed makes its own decision, then quite likely we’ll do it, hoping that the Fed comes along,” Holzmann said during the interview in his office in Vienna. “If it doesn’t come along, then it may reduce the economic impact of our move.”WAGE-GROWTH RISKBut even after a cut in the deposit rate, which now stands at a record high 4%, interest rates will continue to restrict growth and the ECB would have to go much lower before hitting a neutral level. Holzmann, who has already said he would not seek a new term when his mandate expires in August 2025, argued that with inflation at 2% and productivity expanding by 1%, a 3% deposit rate could be a “good target”. However, this greatly depended on whether the 20-nation euro zone can overcome its recent productivity dip. “If the productivity gap towards the U.S. is as wide as now, then even 3% may be too tight,” Holzmann argued.Markets see the deposit rate coming down to 2% over the longer term, but policymakers have so far steered clear of discussing the issue of where the easing could end.Part of Holzmann’s growing acceptance of policy easing lies in an increasingly benign inflation outlook and economic weakness, with the euro zone currently skirting a recession for the sixth straight quarter. He said inflation could fall quicker than the ECB projected last month because commodity prices are relatively benign and goods inflation is falling, mostly due to cheap imports from China. Holzmann even seemed to downplay concerns about relatively quick wage growth, a key argument for many in waiting a bit longer before a policy easing. “Wages are definitely a risk with respect to inflation, but we’ve also seen that enterprises, if their price setting power is decreased, will have to accept lower prices,” Holzmann said.The euro area is also at a competitive disadvantage due to higher energy prices and trade restrictions on much of its eastern flank, so it also faces more muted growth prospects than many others. More

Citi had recently upgraded its GDP growth forecast for China to 5%- bringing it in line with Beijing’s outlook, and said in a note this week that recent positive purchasing managers index data from the country reinforced this view.Citi analysts also forecast some improvements in upcoming economic readings for March, including trade data, industrial production, fixed capital expenditure and lending activity. Official PMI data showed last week that China’s manufacturing sector returned to growth in March, while non-manufacturing activity picked up. This data was complemented by private PMI surveys showing improvements in both manufacturing and services activity. “We expect GDP growth to hit 5.1%YoY in 24Q1E, well on track to the ~5% growth target this year. The monthly indicators could continue to show the entrenched dual-tracked pattern,” Citi analysts wrote in a note. Still, they noted that export growth could turn negative in March due to a higher base for comparison from the prior year. But overseas demand is expected to have improved, especially as recent PMI data showed an improvement in export orders. Citi analysts said they expected social financing to pick up in March from the prior month, but that the improvement would likely be middling. But on the other hand, headwinds from the property market are expected to continue, while China’s deflationary trend is widely expected to persist. While the Lunar New Year holiday helped spur some consumer spending in the January-February period, this boost is likely to have run out in March, especially amid softer food prices.Producer price inflation is also expected to remain largely in contraction, Citi analysts said. While China’s economy showed some signs of improvement so far in 2024, it still has a long road back to pre-COVID growth levels. Government reluctance towards rolling out more stimulus measures has also left investors clamoring for more.  More

VIENNA (Reuters) – The European Central Bank needs to stop subsidizing commercial banks and should cut interest payments on the piles of cash lenders got from the central bank on the cheap, Austrian central bank Governor Robert Holzmann said.Commercial banks are sitting on 3.2 trillion euros worth of excess liquidity, parking this at the ECB at a 4% rate, pushing the ECB and many of the euro zone’s national central banks deep into the red. “There’s no monetary policy reason why we should offer this subsidy,” said Holzmann, who also sits on the ECB’s 26-member Governing Council. “It’s not acceptable that the current structure puts major burden on the financial outcomes of central banks,” Holzmann told Reuters in an interview. “We cannot run deficits without an end in sight, it can’t be the case.”At the core of the issue is the ECB’s large scale money printing operation, also known as quantitative easing, which was the hallmark of its stimulus efforts over the past decade.The ECB printed trillions of euros to buy government bonds in the hope that abundant and cheap credit would rekindle economic growth and push inflation back up to 2%. When interest rates were negative, this had little cost to the ECB but it must now pay a 4% interest rate on the funds it handed to lenders and this expense far outweighs any income. Since it will take years for the bond pile to shrink, the payments are likely to remain a long-term expense and some central banks could burn through most if not all profit reserves.Partly as a response, the ECB last year decided to require banks to keep 1% of excess reserves at the central bank unremunerated.Some policymakers, including Bundesbank President Joachim Nagel, pushed for a higher ratio, but failed to garner support, even as the German central bank had a net interest income of negative 13.9 billion euros in 2023. Holzmann said he was not ready to give up this fight and wanted to cut payments to banks.”For me, the discussion is certainly not settled,” he said, arguing that unremunerated reserves should be between 5% and 10%. “For me, it’s a way of a clawback,” Holzmann said. More

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(Reuters) – Intel (NASDAQ:INTC) on Tuesday disclosed deepening operating losses for its foundry business, a blow to the chipmaker as it tries to regain a technology lead it lost in recent years to Taiwan Semiconductor Manufacturing.Intel said the manufacturing unit had $7 billion in operating losses for 2023, a steeper loss than the $5.2 billion in operating losses the year before. The unit had revenue of $18.9 billion for 2023, down 31% from $27.49 billion the year before.Intel shares were down 4.3% after the documents were filed with the U.S. Securities and Exchange Commission (SEC).During a presentation for investors, Chief Executive Pat Gelsinger said 2024 would be the year of worst operating losses for the company’s chipmaking business and that it expects to break even on an operating basis by about 2027.Gelsinger said the foundry business was weighed down by bad decisions, including one year ago against using extreme ultraviolet (EUV) machines from Dutch firm ASML (AS:ASML). While those machines can cost more than $150 million, they are more cost-effective than earlier chip making tools.Partially as a result of the missteps, Intel has outsourced about 30% of the total number of wafers to external contract manufacturers such as TSMC, Gelsinger said. It aims to bring that number down to roughly 20%.Intel has now switched over to using EUV tools, which will cover more and more production needs as older machines are phased out. “In the post EUV era, we see that we’re very competitive now on price, performance (and) back to leadership,” Gelsinger said. “And in the pre-EUV era we carried a lot of costs and (were) uncompetitive.”Intel plans to spend $100 billion on building or expanding chip factories in four U.S. states. Its business turnaround plan depends on persuading outside companies to use its manufacturing services.As part of that plan, Intel told investors it would start reporting the results of its manufacturing operations as a standalone unit. The company has been investing heavily to catch up to its primary chipmaking rivals, TSMC and Samsung Electronics Co Ltd (KS:005930) . (This story has been corrected to change the 2022 revenue figure for Intel Foundry to $27.49 billion in paragraph 2) More