Aurelia Butler

BEIJING/MANILA (Reuters) -China and the Philippines have agreed to set up a direct communications channel between their foreign ministries on the South China Sea to handle disputes peacefully, they said on Thursday.Their agreement, which contained 14 elements aimed at cooling security tensions and boosting economic cooperation, comes as they strive to mend a relationship hurt after the Philippines won a 2016 arbitral ruling that invalidated China’s expansive claims in the South China Sea.The Philippines has previously raised concerns over reported Chinese construction activities and the “swarming” of its boats by dozens of Chinese vessels in disputed waters of the South China Sea, an area rich in oil, gas and fishery resources.In a joint statement issued after Philippine President Ferdinand Marcos met Chinese President Xi Jinping in Beijing on Wednesday, both leaders reaffirmed that their countries would respect each other’s sovereignty and territorial integrity.The Philippines will pursue an independent foreign policy, and was willing to cooperate for regional peace and the two countries’ national interests, Marcos said in a speech upon arriving back in Manila.”We agreed that maritime issues between the two countries do not comprise the entirety of our relations,” Marcos said, while adding that maritime rivalry remained a “significant concern and priority” for the Philippines and the region.Both sides also agreed to resume talks on oil and gas exploration in the South China Sea and discuss cooperation on areas including solar, wind, electric vehicles and nuclear power.Coastguards from China and the Philippines would also meet “as soon as possible” to discuss “pragmatic cooperation”.Both countries would consider informing each other when firing rockets and cooperate on the retrieval of rocket debris, they said in their joint statement.Last November, when debris from a Chinese rocket fell in the South China Sea, a Chinese coastguard ship stopped a Philippine boat from trying to tow it away.Both countries reaffirmed the importance of peace and stability as well as freedom of navigation and overflight and would hold an annual dialogue on security, they said.On economic cooperation, China agreed to let in more Philippine imports, with the aim for bilateral trade to revert to or surpass pre-pandemic volume.Both sides also promised to boost tourist numbers and flights between their capitals to pre-pandemic level.They also said that both sides would cooperate on vaccine procurement. China is among the world’s top exporters of COVID-19 vaccines.Marcos’s three day visit to China comes as it re-emerges from a self-imposed border shut-down since the pandemic started in 2020, which has disrupted trade and hurt its economy.Both sides also renewed an agreement on the Belt-and-Road Initiative, Xi’s signature strategy on overseas infrastructure investment.Chinese investors have committed $22.8 billion in investment pledges following a business meeting with Marcos, the Philippine press secretary said.The pledges included $13.76 billion for renewable energy, mainly in solar and wind, $7.3 billion for strategic monitoring including electric vehicles and mineral processing, and $1.7 billion for agribusiness.”I assure you that our government is committed to support your business activities,” Marcos told Chinese business executives before his return to Manila. More

LONDON (Reuters) – Europe’s markets suffered an early stumble on Thursday as a firm message from the Fed that it won’t be cutting interest rates any time soon offset optimism around China’s phasing out of COVID restrictions.News that China’s mainland border with Hong Kong will be reopened after three years had sent Asian-Pacific shares outside Japan to a four-month high overnight, but with both the dollar and bond market borrowing costs higher post-Fed, Europe couldn’t keep up.The pan-European STOXX slipped 0.3% after gaining more than 3% in its first three sessions of 2023 and Wall Street futures prices were pointing to a similar fall later. London’s FTSE did manage a small rise as better-than-expected numbers from retail giant Next lifted the entire European sector, but that couldn’t make up for the broader falls in Frankfurt and Paris. [.EU][.N] “Everyone expected a hawkish message and that is what we got,” said MUFG’s Head of Research for Global Markets EMEA, Derek Halpenny. “Really it’s now about payrolls (U.S jobs data) tomorrow,” he added, explaining that the labour market will be a big factor in how high inflation remains this year. “A strong print tomorrow and I think you are going to get a fairly rapid repricing for a 50 bps hikes at the next (Fed) meeting.”Markets are clearly being tugged in different directions though.China has abruptly dropped ultra-strict curbs on travel and activity, fanning hopes that once the infection waves pass, its giant economic motors can start firing again and offset some of the slowdowns being seen in other parts of the world.Thursday’s biggest Asian gains included E-commerce and consumer stocks in Hong Kong thanks to the China mainland border news, which drove the Hang Seng to a six-month high. The yuan also rose about 0.2% to 6.8750 to a four-month high and also supported other currencies such as the Thai baht which, as Thailand is now expected to see a mass return of Chinese holidaymakers, has surged nearly 14% in less than 3 months.”China reopening has a big impact…worldwide,” said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.”There will be hiccups on the way,” Goh said, during an outlook presentation to reporters. “We give it six months adjusting to the process. But we don’t think it’s reversible.”China’s central bank also said overnight it will step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.China has eased an unofficial ban on Australian coal imports in recent days too and the Australian dollar made a three-week high overnight just below $0.69. It last bought $0.6818.Oil rebounded too after posting the biggest two-day loss for the start of a year in three decades driven by worries about the risk of a global recession this year. Brent crude was last up $1.22, or 1.6%, to $79.06 a barrel at 0922 GMT, while U.S. West Texas Intermediate crude futures gained $1.02, or 1.4%, to $73.86.As well as the brighter mood around China an unexpected shutdown of a major U.S. fuel pipeline also lifted prices. [O/R]”This morning’s rebound is due to the shutdown of Line 3 of the Colonial pipeline,” said Tamas Varga of oil broker PVM. “There is no doubt that the prevailing trend is down; it is a bear market,” he added.RATES WARNINGWall Street futures were down 0.3%. Minutes from the Federal Reserve’s December meeting, published on Wednesday, contained a pointed rebuttal against rate cuts bets that traders have priced in for late in the year.Fed committee members noted that “unwarranted easing in financial conditions” would complicate efforts to restore price stability.”Translating Fed speak, this is a warning to markets, that being too optimistic may ironically backfire,” said Vishnu Varathan, Mizuho Bank’s head of economics in Singapore.”That is, insofar that premature rate cut bets drive looser financial conditions, the Fed may have to tighten even more to compensate.”Fed funds futures pricing shows traders think the benchmark U.S. interest rate will peak just below 5% in May or June, before being cut back a little bit in the second half of 2023.Benchmark 10-year Treasury yields – which move inverse to price – were fractionally higher at 3.72% in Europe but still down 11 basis points on the week. Germany’s 10-year government bond yield was last up 3 basis points (bps) at 2.31%. It too though has fallen 25 bps this week after closing out 2022 at its highest level since 2011. [GVD/EUR]Preliminary inflation data from Germany, France and Spain all showed this week that consumer prices rose at a slower pace in December than November, following an easing in energy price rises.In currency markets, the dollar has been wobbly as investors navigate between the Fed’s hawkish tone and the support for riskier currencies driven by China’s reopening.The yen was holding firm at 132.45 per dollar, supported by wagers that Japan’s ultra-easy monetary policy will be finally tightened this year.In Europe, unseasonably warm weather has disappointed skiers but been a boon for a euro basking in falling gas prices. Benchmark Dutch gas prices fell to 14-month lows overnight and the euro was steady at $1.0625. [FRX/] More

(Reuters) -European shares slipped on Thursday, led lower by drugmakers ahead of euro zone inflation data, while minutes from the U.S. Federal Reserve’s December meeting showed the central bank was committed to taming inflation.The pan-European STOXX 600 slipped 0.2% by 0920 GMT, having climbed more than 3% in the first three sessions of 2023.Minutes on Wednesday from the Fed’s December policy meeting showed officials were worried about “misperception” in financial markets that their commitment to fighting inflation was flagging, though they agreed the central bank should slow the pace of its monetary policy tightening.The market was hoping the minutes could be a “blueprint to a pivot,” said Danni Hewson, an analyst at AJ Bell. “What we got out of those Fed minutes was a reality check.”Healthcare stocks dragged, with pharma giants like Novartis AG and Sanofi (NASDAQ:SNY) shedding more than 1% each. “The update from WHO about there not being a new variant coming out of China has made investors think there’s not going to be quite the payday that they had expected,” added Hewson.”Another thing which will be weighing on investors’ minds is inflation and the cost of living crisis because governments and consumers are having to think about where they spend their cash.”China-exposed luxury stocks such as LVMH and Hermes International (OTC:HESAF) fell over 1% each as rising COVID cases in the world’s second-largest economy stoked worries over demand.After a rough 2022, European shares had a strong start to the year, supported by economic data showing a milder-than-expected recession and easing of price pressures in some countries, along with hopes of a post-COVID recovery in China.Investors await producer price data, due at 1000 GMT, for clues on the impact of the European Central Bank’s aggressive tightening to tamp down inflation.British clothing retailer Next jumped 7.8% after reporting better-than-expected fourth-quarter sales and raising its 2022-23 profit forecast.The retail sector led sectoral gains in early trading, rising 2%. Retail stocks were battered last year, posting their worst annual performance since 2008, as rising interest rates and high inflation put pressure on household budgets. German exports unexpectedly fell in November as high inflation and market uncertainty continue to weigh on Europe’s largest economy despite fading supply chain problems.Ryanair gained 5.9% on lifting its profit-after-tax forecast, citing recent pent-up travel demand while warning that COVID and the war in Ukraine could still impact its results. More

The Indian economy grew 8.7% in year ended March 2022, and is expected to grow by 6.8% in the current financial year.A Reserve Bank of India survey of professional forecasters released in December had pegged growth at 6% in 2023/24.”While both exports and imports have slowed over the last few months, the former has slowed more sharply than the latter, indicating a sharper fall in the global growth momentum,” Pranjul Bhandari, chief India and Indonesia economist at HSBC Securities and Capital Markets (India) said in a note to clients.Economists at the brokerage expect domestic demand to remain stronger as compared to global demand, the note said, adding that demand for goods – higher than services demand during the pandemic – has fallen in recent months. “Urban demand has far outstripped rural demand over 2022, but is also moderating since mid-2022, led primarily by goods,” the note added.Rural demand, which has been weak throughout 2022, could tick higher though due to strong sowing during the winter season and moderating rural inflation.Investment activity has been more resilient than consumption-spending in 2022, helped by government capex and rising investment intentions by large corporates, Bhandari said.HSBC further said the changing growth dynamics are likely to have a bearing on upcoming policy events like the Federal budget and central bank’s monetary policy meetings.”Our overall message is that the growth momentum is slowing gradually, but not uniformly,” the economist said. More

Inflation in the US has not “turned the corner yet” and it is too early for the Federal Reserve to declare victory in its fight against soaring prices, a top IMF official has warned. In an interview with the Financial Times Gita Gopinath, the fund’s second-in-command, urged the US central bank to press ahead with rate rises this year despite a recent moderation in headline inflation following one of the most aggressive tightening campaigns in the Fed’s history. “If you see the indicators in the labour market and if you look at very sticky components of inflation like services inflation, I think it’s clear that we haven’t turned the corner yet on inflation,” she said, adding that the fund’s advice to the Fed was to “stay the course”. The comments from the fund’s deputy managing director come after a flurry of data suggested inflation in the US, Europe and other economies might have peaked, as energy prices fall from recent highs and the cost of goods such as home appliances and used cars starts to decline. Chief among Gopinath’s concerns is the continued resilience of the US labour market, which on average is adding roughly 400,000 jobs each month. The unemployment rate still hovers near historic lows and an acute worker shortage has helped to push wage increases to a level that is far too high for the Fed to hit its 2 per cent inflation target.Gopinath said it was “important” for the central bank to “maintain restrictive monetary policy” until there was a “very definite, durable decline in inflation” that was evident in wages and sectors not related to food or energy. Despite fears among some economists and leftwing politicians that the Fed has already raised rates too aggressively, Gopinath said it was “hard” to argue that officials had tightened too much. Gopinath backed the Fed’s benchmark rate rising to about 5 per cent and staying there throughout this year, in an effective endorsement of the latest “dot plot” projections from US central bank officials. Minutes from the Fed’s latest meeting in December, published on Wednesday, showed officials think they must do more to throttle the US economy and stamp out inflation. Policymakers would need to see “substantially more evidence” of easing price pressures before they are confident the situation is under control, according to the account. Her comments come as the global economy contends with multiple shocks, including an escalation of the war in Ukraine and the abrupt end of China’s zero-Covid policy. Gopinath said she expects China’s economy to suffer significantly in the near term as it deals with rising hospitalisation and deaths, and warned the slowdown would have a negative impact on global growth. A rebound is possible later this year, however, as Chinese demand recovers, she added.Kristalina Georgieva, the fund’s managing director, on Sunday said a third of the global economy will be hit by recession this year, including half of the European Union. The IMF will release new growth forecasts this month but Gopinath said it was too soon to comment on the revisions. There is a “very narrow path” for the US to avoid a recession this year, she added. Gopinath said she expects monetary tightening in Europe to stretch on for longer than the Fed’s, as officials grapple with the war-induced energy crisis.“We are looking well into 2024 before we start seeing inflation coming closer to the ECB’s [2 per cent] target,” she said, adding that fiscal support implemented by European governments to tackle the cost of living crisis would prolong the process. “It’s another challenging year for monetary policy, but it’s a different kind of challenge,” Gopinath said. “The last year was about quickly tightening monetary policy and how far to go. Now for lots of countries, the question is how long to stay on hold.” More

The writer is global chief investment officer at Credit SuisseIn keeping with a fine financial industry tradition, this is the time of year for prognostications of the health of the world economy and what to do with the collective wisdom of investors. Trawling through the economic and investment outlooks of the various banks and asset managers, many have noticed an overwhelming consensus for a recession this year in the world’s largest economy. According to this script, a recession in the US in 2023 should lead to a rapid deceleration in inflation thereby allowing the Federal Reserve to stop hiking rates and then — at a later stage — to start cutting rates to get us out of trouble. This script is a familiar one seen in the US recessions of the early 1990s, 2001 and 2008. What invariably follows is a market rally in equities, and investors live again for another cycle.It feels somewhat uncomfortable, however, that both market observers and market participants are presently converging on this rather optimistic assessment, not least because broadly held consensus market views are usually dead wrong. We must be missing something. So, what could go wrong with this script? At what point do we go from “this time it’s the same” to “this time it’s different”?There are powerful reasons for the consensus expectation. Growth has already slowed rapidly. The eurozone and the UK are already in recession and growth in the US has slowed to a trickle. US inflation has peaked and the Fed is adamant in its fight against it, meaning it could decline further. This economic view is also firmly priced in by financial markets. The most visible sign is certainly the deeply inverted yield curve where rates on short-term bonds are higher than for longer maturities. Since the 1960s, this has been a reliable predictor of an impending recession. At the same time, an inverted yield curve is also a reflection of the expectation by market participants that inflation rates are likely to fall and that the central bank will — at some point — cut interest rates to support growth again or calm down market turmoil. The fact that the curve is so deeply inverted right now, therefore, also means that investors expect inflation to normalise quickly and that the Fed might be able to cut rates sooner rather than later. Yet, there are also factors that speak against the current consensus expectation which are worth considering. First, when it comes to growth, a US recession could come significantly later than many expect. The US economy is not as exposed to Fed rate hikes as in the past. Nowadays, homeowners mostly hold fixed-rate mortgages and corporations have used the low interest rates of the past years to finance for the long term.Households and companies will feel the impact of rate hikes with a longer lag than usual. So, while growth is weak already, the fall into an outright recession might be like waiting for Godot. This is in stark contrast to the quick recession/quick recovery pattern that markets seem to expect.Second, when it comes to inflation, it could turn out to be more entrenched than expected. Wage growth inflation in particular seems sticky due to a shortage of skilled workers. The new multipolar world order will enforce structural changes to the economy, such as the need to rebuild reliable supply chains closer to home, which often comes at higher prices. Similarly, the urgent need to decarbonise could exacerbate “greenflation”, that is, rising prices for eco-friendly goods and services. All of this means that inflation rates could decline much more slowly than many of us (including central banks) would like. The Fed may end up in a situation where it will have to keep interest rates up due to inflation — even as a recession starts.This would be negative for equity markets, as the initial market rebound following a recession is often triggered by rate cuts. The Fed “put” — the willingness of the Fed to support markets in times of volatility — would be gone for good and the way out of recession would be fiscal and not monetary.These reasons make the current market consensus very uncomfortable. We risk being in a longer period of poor growth, elevated inflation and weak equity markets than during past slowdowns. Investors would thus be well advised to keep portfolios diversified, including a sensible allocation to fixed income. Alternative investments such as hedge funds or private equity could also be a way to manage portfolio risks. In fact, investors should continue to be cautious into the next year and act like the Fed put is no longer in place. That would mean that this time, it really is different. More

Spain is enjoying a record surge in tax revenue that is unmatched by its European peers after the pandemic forced underground business activity out of the shadows.The country’s net tax revenues hit their highest level since records began from January to November last year, jumping 15.9 per cent from the same period in 2021 and delivering an extra €33bn to the public coffers. The expanded tax haul is especially welcome for Spain given its massive public debt load, but whether it becomes permanent depends on the durability of changes in behaviour inspired by Covid-19. Tax revenues also climbed from 2020 to 2021, increasing by 14.9 per cent or €27bn over the same period, according to data from the country’s tax agency.Putting the figures in perspective, Spain’s Socialist-led government is seeking to raise annual sums of just €3.5bn from windfall taxes on banks and energy companies, coming into force in 2023.One reason for the rise in tax revenue is economic growth, with the government this week estimating that gross domestic product increased by more than 5 per cent in 2022. Another big factor — accounting for half of the increase according to some calculations — is high inflation, a factor present everywhere. But Financial Times research shows that Spain’s proportional gains in 2021 exceeded increases in France, Germany, Italy, Portugal and Greece even when accounting for inflation.

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Economists and finance ministry officials attribute the difference in part to changes in the shadow or grey economy, a murky zone of unregistered activity that spans everything from informal farm workers to plumbers failing to declare cash income and restaurants that pay some wages off the books.Its invisibility has long facilitated tax evasion, to the consternation of governments, but Covid and related economic support policies created new pressures and incentives that revealed underground activity to tax collectors and public statisticians.“People realised during the pandemic that if they had legal contracts and were above the ground, so to speak, then if things got tough they could ask for help from the government,” said Ángel de la Fuente, executive director of Fedea, an economic think-tank.Formalising business and employment meant being able to gain access to Spain’s furlough programmes for workers who were sent home but still received some pay, known as ERTEs. It also opened the door to liquidity support for businesses provided by the government.In October 2022, Jesús Gascón, secretary of state for finance, said: “If you’re not on the radar, you’re not receiving the aid.”Announcing its latest data in late December, the tax agency said higher tax revenue reflected increases in the collection of sales tax, personal income tax and corporate income tax — all of which would show the impact of once underground activity that had become official. It confirmed that the new figures marked a record in a data set that stretches back to 1995.Ignacio de la Torre, chief economist at investment bank Arcano, highlighted a discrepancy in employment figures. According to labour ministry payroll figures that do not include the shadow economy, the number of workers in Spain grew by an annualised 2.6 per cent in the third quarter of 2022. But separate data from the national statistics institute, which is based on surveys and includes underground work, showed there was zero change in employment.“This might be showing that previous workers in the underground economy are now regularised,” he said.Underground transactions — known as “paying in B” in Spain — also declined owing to fears of cash becoming a vector for Covid germs.The pandemic accelerated a trend of consumers using less cash. A European Central Bank study published in December showed that in 2021-22 the amount spent via in-person card transactions overtook purchases in notes and coins for the first time. The decline in cash use was sharpest in southern Europe, with the proportion in Spain down 18 percentage points from 2019.According to a 2018 IMF study, Spain’s shadow economy was equivalent to 17.2 per cent of GDP, a smaller share than in Italy, Greece and most of eastern Europe, but larger than in Portugal and the rest of western Europe.Informal activity in Spain grew in the 1980s and early 1990s after a tightening of tax rules, as the government sought to bring the country into line with European norms following the end of dictatorship and a return to democracy. The largest underground economies are Andalucía and the Canary Islands, two regions where tourism supports many restaurants and bars and grey payments tend to be rife.Although all rises in tax revenue are helpful, the contraction in shadow commerce will not, on its own, cure Spain’s unhealthy fiscal position. Public debt is equal to 116 per cent of GDP, according to the Bank of Spain. Raymond Torres, director for macroeconomic analysis at Funcas, Spain’s savings bank foundation, forecasts that the country’s budget deficit will rise to 4.6 per cent of GDP in 2023 from 4 per cent last year, partly due to rising interest rates.

Torres said Spain could not keep deferring a serious attempt to bring down the deficit, but added that regional and national elections in 2023 meant the government of prime minister Pedro Sánchez was unlikely to confront the challenge.Last week Sánchez unveiled a €10bn set of measures to ease the cost of living crisis. The third such support package of 2022, it included cuts in sales tax, an extension of subsidies for public transport, and a one-off payment of €200 for 4mn households.Torres does not expect an increase in tax revenue this year to match 2021 and 2022. “What we’ve been seeing is an increase in the size of the taxable income base, but not an increase in the rate of income growth.”There is also no guarantee that the advantages of formalised payrolls and digital transactions will endure for all. “There can be relapses in the underground economy. Some activities can go back to being undeclared,” he said. More

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