Aurelia Butler

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The eurozone economy is stagnating, price growth is slowing and high borrowing costs are squeezing demand for loans, yet the European Central Bank is expected to say this week it needs more time to be sure inflation has been tamed.The ECB’s governing council is set to meet on Thursday as eurozone inflation has fallen from a peak of 10.6 per cent in late 2022 to 2.9 per cent last month. The bank’s target rate is 2 per cent.However, bank-watchers believe the ECB, led by president Christine Lagarde, will still leave monetary policy on hold — with the deposit rate at a record high of 4 per cent and its vast bond portfolio slowly shrinking.Katharine Neiss, a former Bank of England economist now at investor PGIM Fixed Income, said the ECB was inclined towards caution on rate cuts after facing criticism in recent years for underestimating surges in inflation.“Put simply, it’s a case of once bitten, twice shy, and policymakers will want to be sure that the inflation genie has been put firmly back in the bottle,” she said, pointing to the second quarter as the “earliest period in the frame for cuts”.Another reason Lagarde is likely to be cautious about the pace of disinflation is the eurozone’s tight labour market. Unemployment in the euro area is at a record low of 6.4 per cent.Under these conditions, a concern is that workers will demand big pay rises to restore the purchasing power they lost after the largest price surge for a generation. Coupled with falling productivity, this risks pushing up price pressures again as companies try to pass on their higher labour costs.The ECB will be the second major bank to meet on policy since the start of 2024, after the Bank of Japan kept rates in negative territory on Tuesday. The US Federal Reserve and Bank of England meet next week.For now, most eurozone rate-setters appear confident they are on track to bring inflation down to their 2 per cent target by next year. But many want more evidence that upside risks such as strong wage growth are not going to materialise before they are ready to declare victory.Eurozone wages rose 5.3 per cent in the year to the third quarter of 2023, accelerating from 2.2 per cent a year earlier. There are signs this could keep rising, including a union demand in Germany for a €500-per-month wage increase for the country’s almost 1mn construction workers — equivalent to a 21 per cent pay rise for the sector’s lowest-paid majority.Boris Vujčić, governor of the Croatian central bank and one of the newest members of the ECB council, said this month: “We will definitely want to see the first-quarter wage negotiations [to decide] where wages will settle.”Data on first-quarter eurozone wage growth will be published shortly after the ECB’s meeting in April, pointing to the summer as the earliest moment rates could be cut. Philip Lane, ECB chief economist, said recently: “By our June meeting, we will have those important data.”The other upside risk on inflation is the war between Israel and Hamas, and the potential for it to escalate into a wider Middle East conflict that could disrupt energy supplies from the region and send oil and gas prices higher. Attacks by Yemen’s Houthi rebels on ships in the Red Sea have already disrupted global trade, causing many vessels to travel round the southern tip of Africa rather than risk going through the Suez Canal, adding time and cost to goods transport. However, most economists downplay the inflationary impact of the maritime disruption. Mark Wall, chief European economist at Deutsche Bank, said there was “a buffer to absorb rising costs”, thanks to spare capacity in the shipping industry, high inventories, elevated profit margins and weak demand.Oil prices have fallen since the Israel-Hamas conflict started and European natural gas prices have almost halved in the past three months to drop to their lowest level for more than two years.In addition, the eurozone economy is expected to remain weak, with Barclays forecasting that gross domestic product will contract 0.1 per cent in the fourth quarter from the previous three months, helping to cool price pressures.Banks continued to tighten lending standards in the final three months of 2023 and said they expected to squeeze credit supply further at the start of this year, according to an ECB survey of lenders published on Tuesday. They also reported lower borrowing demand from households and businesses, but said they expected a small rebound at the start of 2024.“We do think policymakers recognise that eurozone economic weakness is proving to be extended and likely has more to run in services, even though the manufacturing side may be stabilising at weak levels,” said Krishna Guha, a former Fed official now at US investment bank Evercore ISI. Consumer price growth has undershot ECB forecasts for two months, despite picking up to 2.9 per cent in December. UBS economist Anna Titareva forecast it would slow again to 2.8 per cent in January as “falling goods inflation” more than offset higher services inflation caused by an increase in VAT on German restaurant meals.Investors are betting that faster-than-forecast disinflation will push the ECB to start cutting rates as early as April, with swaps markets pricing in 1.35 percentage points of cuts this year. But a string of ECB policymakers have signalled recently that this looks too optimistic. Lagarde told last week’s World Economic Forum in Davos that a rate cut “is likely” by the summer.While most economists think the ECB will start loosening policy by cutting rates by a quarter of a percentage point, some think being behind the curve could force it to cut by a more aggressive half-point.“A later start with rate cuts would raise the probability that the council would need to catch up with a couple of 50 basis-point moves during the summer,” said Sven Jari Stehn, Goldman Sachs’ chief European economist. More

HANOI (Reuters) -A German business delegation, including top firms for tunnel machines, wind farms and industrial supplies, joined President Frank-Walter Steinmeier in a visit to Vietnam starting on Tuesday, as Berlin strives to reduce its reliance on China.German companies have invested over $3 billion in the Southeast Asian manufacturing hub, led by automotive giant Bosch, according to the German chamber of commerce in Vietnam. During the visit, Steinmeier and German labour minister Hubertus Heil signed a memorandum of understanding with their Vietnamese counterparts on skilled labour mobility to facilitate transfers of Vietnamese workers to Germany.After a meeting with Vietnam’s President Vo Van Thuong, Steinmeier said some of the companies with him “were looking into establishing a presence in the country”.Thuong told reporters he would welcome German investment in renewable energy and infrastructure. Companies in the business mission include Herrenknecht, which dominates the global market for tunnel boring machines. It is already selling tools to build the metro in Ho Chi Minh City, amid Vietnam’s plans to expand its railway and metro systems.Wind farm developer PNE AG is also in the delegation, possibly trying to tap into Vietnam’s planned expansion in offshore wind, despite regulatory delays.Building materials multinational Knauf Gips KG and automotive supplier Tesa are there too. Both already have operations in Vietnam.The visit “underlines Germany’s interest in looking beyond China and diversifying its economic relations,” said Florian Feyerabend, the representative in Vietnam for Germany’s Konrad Adenauer Foundation, a think tank. Steinmeier’s visit was delayed by a year because of a political reshuffle in Vietnam that led early last year to the resignation of its president.Steinmeier’s visit follows a trip to Hanoi by German Chancellor Olaf Scholz in November 2022, then the first by a German leader in more than decade.After meeting leaders in Hanoi, Steinmeier will visit Ho Chi Minh City, the country’s business hub, on Wednesday. More

TORONTO/LONDON (Reuters) – Four of Canada’s biggest pension funds managing nearly C$1 trillion ($742 billion) in assets have begun a major expansion into private credit, moving into an area previously dominated by banks.Canada Pension Plan (CPP) Investments, Ontario Teachers’ Pension Plan (OTPP), Ontario Municipal Employees Retirement System (Omers) and OPTrust told Reuters they intend to increase their exposure to private credit – typically tailored loans to companies underwritten by non-banks.CPP Investments, which manages C$576 billion, will double its overall credit portfolio to around C$115 billion, said Andrew Edgell, who oversees the portfolio, with private credit a key part of the expansion. “Private credit is expanding quickly,” he told Reuters. “With our global team, we expect to almost double our (overall credit) book over the next five years.” CPP Investments manages most of its C$62 billion credit book in-house.Pension plans OTPP and OPTrust told Reuters they saw opportunities to plug gaps left by banks. OPTrust said it expected to grow in private credit in Europe, including in Britain.Banks globally have been squeezed by higher capital requirements, forcing a retreat from some lending.Omers said it sought the kind of opportunities across credit markets, including in private credit, that it had not seen “in many years”. Private credit has become popular among pension schemes and insurers because it offers higher returns than traditional fixed-income products and typically better downside protection than equities.Once a niche asset class, data provider Preqin predicts assets under management will hit $2.8 trillion globally by 2028 from $1.5 trillion in 2022. “Private credit is an attractive product right now, and the structural shift from banks to private lenders continues,” said Nick Jansa, OTPP’s executive managing director for Europe, the Middle East and Africa.Regulators have raised concerns about the sector’s rapid growth as part of a burgeoning ‘shadow banking’ industry, particularly as the spike in borrowing costs and economic weakness mean greater risks of businesses defaulting.The overall non-bank finance sector is worth $218 trillion and accounts for nearly half of financial assets globally, according to the Financial Stability Board.OPTrust, which last year made a “sizeable” increase in its credit exposure from 10% of its assets in 2022, said its credit investments were primarily handled by external managers.”We’re quite confident they (the partners) have the skills and ability to navigate that market,” said David Ross, managing director of OPTrust’s capital markets group.($1 = 1.3452 Canadian dollars) More

1. Futures mutedU.S. stock futures mostly hovered around the flatline on Tuesday, after equities surged in the previous session on hopes for strong upcoming corporate earnings and ongoing enthusiasm around artificial intelligence.By 04:52 ET (09:52 GMT), the contracts for S&P 500 futures, Nasdaq 100 futures, and Dow futures were broadly unchanged.A recent rally in the main averages continued on Monday, with the benchmark S&P 500 in particular jumping to its third-straight positive close for the first time this year. The tech-heavy Nasdaq Composite also rose by 0.3% despite small declines in most of the so-called Magnificent Seven megacap stocks. Meanwhile, the 30-stock Dow Jones Industrial Average climbed above 38,000 for the first time.Stocks had logged a weak start to the year, but have since rebounded, partly due to investor optimism for a “soft landing” for the U.S. economy. In this scenario, elevated interest rates would contribute to a cooling in inflation without sparking a steep slowdown in economic activity.”The thought of a soft landing actually [materializing] against all odds are supporting risk assets in all corners of the market,” analysts at ING said in a note.2. Earnings parade intensifiesThe upbeat sentiment will face a series of tests this week from a fresh batch of corporate earnings and key economic data.Several big-name brands are set to report their latest quarterly results on Tuesday, pharmaceutical giant Johnson & Johnson (NYSE:JNJ), consumer goods behemoth Procter & Gamble (NYSE:PG), and diversified manufacturing conglomerate 3M (NYSE:MMM) before the start of U.S. trading. After the bell, traders will be keeping an eye out for figures from streaming group Netflix (NASDAQ:NFLX) and chipmaker Texas Instruments (NASDAQ:TXN).United Airlines (NASDAQ:UAL) post fourth-quarter adjusted profit per share that topped estimates following its “busiest travel period in history” last month, boosting shares in premarket U.S. trading. Fellow carriers American Airlines (NASDAQ:AAL) and Delta Air Lines (NYSE:DAL) rose in the wake of the numbers.Later in the week, traders will be keeping an eye out for the first reading of U.S. gross domestic product in the final three months of 2023, as well as the Federal Reserve’s preferred gauge of inflation for December.3. SEC says false X post linked to phone number swapThe top U.S. securities regulator said that a false post that appeared to announce its approval of a spot Bitcoin exchange-traded fund came after a bad actor took control of the phone number associated with its account on social media platform X.In a statement on Monday, the Securities and Exchange Commission said it was the victim of a “SIM swap” attack, a technique used to transfer a person’s phone number to another device without authorization. The unauthorized party then reset the password for the X account, the SEC added.”Among other things, law enforcement is currently investigating how the unauthorized party got the carrier to change the SIM for the account and how the party knew which phone number was associated with the account,” the agency noted.The fake post on Jan. 9 said the SEC had given a much-anticipated green light to ETFs tracking the spot price of Bitcoin, sparking a frenzy of trading activity around the world’s most recognizable cryptocurrency. The validity of the statement was denied by the SEC, which formally approved the ETFs a day later.4. BOJ leaves dovish stance unchangedThe Bank of Japan kept interest rates at historical lows on Tuesday and its yield curve control policies unchanged, but slightly lowered its inflation outlook for fiscal 2024.The BOJ left its short-term interest rates at negative 0.1%, and said it will maintain its yield curve control mechanism in allowing 10-year yields to fluctuate in a range of negative 1% to 1%, with a target of 0%. The central bank also offered no changes to its asset purchase programs.In an announcement on Tuesday, the BOJ added that it expects consumer price index (CPI) inflation to keep trending above its 2% annual target through fiscal 2024, and that price growth will only begin easing by the 2025 fiscal year.But a majority of the BOJ’s policy board members slashed their CPI inflation forecasts for fiscal 2024. Median forecasts for core CPI inflation, which excludes fresh food prices, were now at 2.4% during the period, down from the October forecast of 2.8%.5. Oil retreatsOil prices were lower on Tuesday, reversing earlier gains that were driven by a fresh round of strikes by U.S. and British forces on Houthi sites in Yemen.The Iran-backed Houthis, who control the most populous parts of Yemen, have disrupted global shipping through the Red Sea, raising concerns that crude supply to the important Asian market will be impacted. The group has said their attacks are in solidarity with Palestinians as Israel strikes Gaza.By 04:54 ET, the U.S. crude futures traded 0.6% lower at $74.31 a barrel, while the Brent contract slipped 0.6% to $79.59 per barrel.The latest reading of U.S. crude inventories, from the industry body American Petroleum Institute, is due later in the session, and is forecast to fall by about 3 million barrels in the week to Jan. 19.Upgrade your investing with our groundbreaking, AI-powered InvestingPro+ stock picks. Use coupon PROPLUSBIYEARLY to get a limited time discount on our Pro and Pro+ subscription plans. 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The measures, ordered by President Vladimir Putin in an October decree, have been effective, the government said on the Telegram messaging app. They are currently set to expire in April. The controls, which were opposed by the central bank, were brought in as the rouble tumbled past the 100 mark against the dollar. It was trading near 88 to the dollar on Tuesday. “Taking into account the current results in accordance with the president’s decree, the measures will be proposed for extension until the end of 2024,” the government said. The decree requires dozens of undisclosed exporting firms to deposit no less than 80% of foreign currency earned with Russian banks, and then sell at least 90% of those proceeds on the domestic market within two weeks.”It can be noted today that, according to the available data, exporters have generally observed the presidential decree’s requirements,” said First Deputy Prime Minister Andrei Belousov. “This has made it possible to cover the deficit of foreign currency needed by importers to maintain supplies of products to our country.” Assessing the potential impact of the government’s proposal is difficult as details remain scant, said Rosbank analysts, but the news should boost the rouble. “Given the positive shifts in exporters’ activity on the FX market, we assess the impact of the measures on exchange rate expectations as significant,” Rosbank said. The central bank had long warned that currency controls were inefficient and would ultimately be circumvented, but publicly endorsed Putin’s decree in October. Governor Elvira Nabiullina still voiced doubts. Alexander Morozov, head of the bank’s research and forecasting department, in late November said the central bank understood that the measures would last until April 30. The central bank did not immediately respond to a request for comment on the government’s proposal. More

The results of the quarterly Bank Lending Survey are likely to strengthen the ECB’s view that the most brutal increase in interest rates in the euro’s history has now been fully passed on to the real economy and lenders are beginning to anticipate a recovery. The poll showed lenders continued to tighten access to credit in the last quarter of 2023 but fewer banks did so than at any point in the previous two years and than banks themselves had expected three months earlier.Among the euro zone’s four largest economies – Germany, France, Italy and Spain – none saw a net tightening in credit standards for mortgages and only Germany witnessed it for corporate loans.While banks expect to raise the bar for extending loans this quarter, they also see “a small net increase” in the demand for corporate credit and for mortgages for the first time since early 2022, the ECB said.”That’s what the start of a gradual recovery looks like,” Dirk Schumacher, an economist at Natixis, said. “Standards aren’t getting tighter and demand is not shrinking as fast.”Furthermore, while terms and conditions tightened further on consumer credit, they eased for housing loans, the survey showed.In corporate loans, there was “almost no net tightening in services” but this was more than offset by “relatively large net tightening in the commercial real estate, construction and residential real estate sectors”. Banks’ access to funding via money markets, long-term deposits and debt securities improved as markets started expecting rate cuts from the ECB.But short-term retail funding and securitisation tightened slightly. More