Aurelia Butler

BEIJING (Reuters) -China said on Tuesday it was “fully confident” of achieving its full-year growth target but refrained from introducing stronger fiscal steps, disappointing investors who had banked on more support from policymakers to get the economy back on track.China shares rallied in early trade to two-year highs after the long National Day holiday but quickly lost steam after the state planner did not provide details to sustain market optimism. Hong Kong shares slumped as investors also walked back some of the stimulus excitement.Chairman of the National Development and Reform Commission (NDRC) Zheng Shanjie told a press conference the government planned to issue 200 billion yuan ($28.3 billion) in advance budget spending and investment projects from next year.The country will also quicken fiscal spending and “all sides should keep making efforts more forcefully” to strengthen macroeconomic policies, he added.”The international market is volatile, global trade protectionism has intensified, and uncertain and unstable factors have increased. These will have an adverse impact on my country through trade, investment, finance and other channels,” Zheng said.Investors and economists say more policy support is needed on the fiscal side to sustain the market’s optimism, likely to be issued by the finance ministry. “So far, the NDRC press conference appears to run short on details with regards to stimulus measures. Hopes were raised but the delivery was disappointing,” said Christopher Wong, currency strategist at OCBC.In an effort to reverse the economic downturn, China unveiled before the week-long Golden Week holiday its most aggressive monetary stimuluspackage since the COVID-19 pandemic, coupled with extensive property market support.Premier Li Qiang on Tuesday urged all government departments to support growth and improve policy coordination during a special study session on economic policy held by the cabinet, according to state television.Separately, state television quoted Li as saying China would unveil specific plans for policies that are being studied, and consider reserve policies for next year.MORE SUPPORT NEEDEDAnalysts said it would take time to restore consumer and business confidence and get the economy back on more solid footing. A housing market recovery, in particular, could be a long slog.”We anticipate that the government will arrange 1-3 trillion yuan of additional fiscal support this year and next to boost the real economy, recapitalise banks, and stabilise the property market,” said Yue Su, principal China economist at the Economist Intelligence Unit.”This, along with investments from special long-term bonds planned for next year, is expected to primarily impact 2025’s economic growth.” The Economist Intelligence Unit retains its economic forecast of 4.7% growth for this year and 4.8% growth in 2025, Su said. The government set a growth target of around 5% this year, but economic indicators showed growth momentum has waned since the second quarter, weighing on household spending and business sentiment amid a severe property downturn.A private report by recruiting platform Zhaopin showed that average pay offered by recruiters in China’s 38 major cities fell 2.5% in the third quarter from the second, and down 0.6% from a year earlier.To address insufficient domestic demand, Zheng told reporters that policymakers will focus on enhancing people’s livelihood to stimulate consumption and investment, such as supporting disadvantaged people, consumer goods trade-ins, elderly care and births. No further details were announced.Vice Chairman of the NDRC, Liu Sushe, stated that most of the 6 trillion yuan in government investment this year was allocated to specific projects, with 90% of local government special bonds used for project construction issued by September.The government has issued 1 trillion yuan of ultra-long-term special bonds planned for this year to fund major projects, and more such bonds will be issued next year, Zheng said.At the same press conference, another vice chairman of the NDRC, Zhao Chenxin, said that China’s economic growth had remained “generally stable” over the first three quarters.($1 = 7.0597 Chinese yuan) More

LUXEMBOURG (Reuters) – Hungary will hold up a final deal on a $50 billion G7 loan to Ukraine until after the U.S. presidential election by delaying its decision on the timing of the renewal of EU sanctions against Russia, Hungary’s finance minister said.Washington needs the EU to revise its timeframe for the renewal of sanctions to every three years from the current six months for it to contribute some $20 billion to the G7 loan, matching the European Union’s contribution, EU officials said.The remaining $10 billion would be provided by G7 members Canada, Britain and Japan, who are already on board.The loan, agreed in principle by G7 leaders in June, would be serviced with proceeds generated by some $300 billion of Russian central bank assets frozen in the West after Moscow invaded Ukraine in early 2022.Washington does not want to worry every six months whether the Russian assets backing the loan will remain frozen or not, the officials said.”We believe that this issue, the prolongation of the Russian sanctions, should be decided after the U.S. elections. We have to see in which direction the future U.S. administration is going with this issue,” Finance Minister Mihaly Varga told a news conference.The European Union has said that the proceeds from all the Russian assets frozen in the West can finance a loan of up to 45 billion euros ($49.44 billion). Because most of the assets are in Europe, the EU said it can provide up to 35 billion euros for the G7 loan. That amount would be reduced by the sum the United States would contribute.The issue will be further discussed at the G7 finance ministers meeting in Washington in late October, but Hungary’s decision means that the final contributions of each of the G7 countries will only be decided after the Nov. 5 election.($1 = 0.9102 euros) More

BENGALURU (Reuters) – The European Central Bank (ECB) will cut its deposit rate by 25 basis points on Oct. 17 and again in December, according to more than 90% of economists polled by Reuters who now see a quicker decline in euro zone inflation.Only 12% of economists polled last month had predicted an October cut. But most have swiftly changed their view to cuts in both October and December after September inflation dipped below 2% and some Governing Council members, including ECB President Christine Lagarde, hinted a reduction was coming this month.”The latest developments strengthen our confidence that inflation will return to target in a timely manner,” Lagarde told a European Union parliamentary hearing last week. “We will take that into account in our next monetary policy meeting in October.”For the last six months, economists predicted a total of three 25 basis point reductions in the deposit rate this year but are now expecting four.Over 90% of economists, 70 of 75, said in an Oct. 2-8 Reuters poll they expected the ECB to cut the deposit rate for a second straight meeting by 25 basis points next week, taking it to 3.25%. Just five predicted no change. Last month, only around 12% of economists, or nine of 77, forecast an October cut.The central bank will cut again to 3.00% in December, according to 68 of 75 economists, in line with market pricing.”With fading inflation pressures, both on headline and core, we believe the ECB is going to be able to get back to somewhere near its neutral rate more quickly as it manages the accelerating downside risks to growth,” said James Rossiter, head of global macro strategy at TD Securities.”With growth still below trend next year, this is enough for the ECB to cut steadily from October.”INFLATIONThe ECB doesn’t have a neutral rate estimate, which neither restrains or stimulates the economy, but staff published a paper this year showing a real rate of around zero – or about 2% in nominal terms – when adjusted for inflation.An over-55% majority of economists, 41 of 72, predicted the ECB to cut twice next quarter, to 2.50%. The central bank will lower rates twice more later next year, the poll showed.  That is a swifter path than was expected last month but in line with current market pricing.Inflation in the common currency bloc, which declined to 1.8% last month, will pick up a little and be at the ECB’s 2% target next quarter and stay around there until at least 2027, the poll found. Economists last month expected inflation to be 2% later in 2025.However, core inflation will remain elevated this quarter and average 2.7%, where it was in September, before slowing gradually next year.”The closer the ECB moves its key interest rates to the neutral interest rate… the more vigorously the hawks in the ECB Governing Council are likely to argue against rapid interest rate cuts,” said Marco Wagner, senior economist at Commerzbank (ETR:CBKG).”At the beginning of next year, core inflation is still likely to be around 2.75%, and the continued strong wage increases do not yet suggest that inflation, particularly in services, will slow noticeably in the coming months.”Despite recent PMIs suggesting an economic slowdown the euro zone economy was expected to grow at a decent pace over the coming year.The economy will grow 0.2% this quarter, matching Q2’s rate, and average 0.7% growth this year, the poll showed, before expanding by 1.2% in 2025 and 1.4% in 2026.However, growth in Germany, Europe’s largest economy, stagnated last quarter after contracting 0.1% in Q2 and will expand 0.1% this quarter. It would grow 0.8% and 1.3% in 2025 and 2026, respectively.(Other stories from the Reuters global economic poll) More

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TOKYO (Reuters) – Japan’s new economy minister, Ryosei Akazawa, said on Tuesday the government has trust in the central bank’s decision on how soon to raise interest rates again, amid uncertainty over the new political leadership’s preference for loose monetary policy.BOJ Governor Kazuo Ueda has said the central bank will adjust the degree of monetary support if the economy and prices move in line with its forecast, Akazawa said.The governor also said the BOJ can afford to spend time scrutinising market developments, and that real interest rates remain deeply in negative territory, Akazawa said.”Specific decisions on monetary policy fall under the jurisdiction of the BOJ,” he told a group interview.”We trust the BOJ’s decision on how to adjust the degree of monetary support, in accordance with economic and price developments,” Akazawa told a group interview, brushing aside the view the new administration would push back against the BOJ’s efforts to normalise monetary policy.New Japanese premier Shigeru Ishiba stunned markets last week when he said the economy was not ready for further rate hikes, an apparent about-face from his previous support for the BOJ unwinding decades of extreme monetary stimulus.The surprisingly blunt remarks pushed the yen lower against the dollar and cast fresh doubts over how aggressive the BOJ would be in raising rates.Akazawa said the government’s top priority would be to strengthen the economy, enough so that it does not revert to deflation.”Japan is on the cusp of experiencing a rise in inflation accompanied by solid wage gains, though we’re not there yet” with inflation-adjusted real wage growth still flat, he said.When asked whether the BOJ should not raise rates until the government declares a full end to deflation, or whether it can hike rates moderately as long as the economy keeps recovering, Akazawa said: “It’s the latter.”Akazawa and Finance Minister Katsunobu Kato met with Ueda last week, where they reaffirmed an agreement made in 2013 that commits the government and BOJ to focus on reflating growth and achieving the central bank’s 2% inflation target.The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July on the view Japan was on track to durably meet the bank’s 2% inflation target. More

John Williams, president of the New York Fed, remarked that the “very good” September jobs report signaled the continued strength of the U.S. economy, even as inflation eased after over a year of elevated rates.“The current stance of monetary policy is really well positioned to both hopefully keep maintaining the strength that we have in the economy and the labor market, but also continuing to see that inflation comes back to 2%,” Williams told the Financial Times on Monday.The latest jobs data has alleviated concerns of a recession, which had loomed large over the economy as the Fed raised borrowing costs to combat the worst inflation in decades. The data has also tempered expectations of another half-point cut in November, following September’s initial reduction to 4.75-5%.Williams, a voting member of the Federal Open Market Committee (FOMC) and a close ally of Fed chair Jerome Powell, defended the decision to cut rates in September, saying it was “right in September” and “right today,” as inflation continues to ease and the labor market shows some cooling.“It made sense, as the chair said, to recalibrate policy to a place that is still restrictive and is still putting downward pressure on inflation, but significantly less so,” he noted. “I don’t want to see the economy weaken. I want to maintain the strength that we see in the economy and in the labour market.”When asked about future rate cuts, Williams referred to the Fed’s “dot plot,” which suggests two quarter-point cuts in the remaining meetings of the year, calling it a “very good base case.”Williams emphasized that decisions would be data-dependent, rather than following a predetermined path. He also highlighted that the half-point September cut was not “the rule of how we act in the future.”He reiterated that the goal is to bring rates to a “neutral” setting, where they no longer restrain demand. However, he acknowledged that precise predictions about the final destination of interest rates are challenging.Should inflation decline more rapidly, Williams said it would warrant quicker policy normalization. On the other hand, if inflation were to stall, rate cuts would slow accordingly. More

(Reuters) – The U.S. Federal Reserve is encouraging banks to count on its long-shunned cash backstops in a bid to support its monetary policy and financial stability goals. Its latest efforts may not move the dial much. The Fed’s discount window and the Standing Repo Facility (SRF) are credit backstops where lenders can get cash against collateral such as Treasury bonds. They can also double as monetary policy tools, helping to keep interest rates close to the Fed’s policy rate. But banks have been reluctant to use them, as it can signal they are under stress. In its latest effort to get past these issues, the Fed in August told banks it was OK to count on its backstops as sources of cash in internal liquidity stress tests, exercises that large banks have to do regularly to prove to their examiners that they can quickly get cash when needed. Last month, Michael Barr, the Fed’s regulatory chief, underscored that message, saying liquidity regulations are “supportive of market functioning and the smooth implementation of monetary policy.”Over the past few weeks, I have been asking banking industry experts how effective the Fed’s move might be in achieving those goals. Their overall take: While getting more banks ready to use the Fed facilities would bolster financial stability, it will be hard to get rid of the stigma and may not do much for monetary policy.”Stigma has been around since the 20s. It’s a complicated and significant problem that will require a lot of effort to address,” said Bill Nelson, chief economist at the think-tank Bank Policy Institute. A senior executive at a large bank who requested anonymity to speak candidly said there’s still a difference between what a policy maker wants and what a supervisor will want. “If you were to ever, for whatever reason, access the discount window,” the executive said, “the first call is going to be from your supervisor asking, ‘What’s going on?’”POLICY IMPACTThe other intended impact of the Fed’s moves – helping with its monetary policy objectives — may also be frustrated. One hope behind the move is that allowing banks to rely to some extent on the backstops for liquidity would reduce their demand for reserves, or cash that they park at the central bank.Currently, banks rely heavily on reserves to meet contingent funding requirements in the internal liquidity stress tests. With the Fed’s August clarification, other easily tradable assets such as Treasury securities could become substitutes. If it works as theorized, it could give the Fed more room for quantitative tightening. That’s because the financial system needs a certain level of reserves to function smoothly, and as the Fed shrinks its balance sheet, it takes out reserves. This would be a good time for the plan to work. SRF, which has largely been lying dormant, saw a surge in usage at the of the third quarter, the highest since it was set up in 2021. SRF usage has been one of the indicators the Fed has been watching as it looks for signs that liquidity is getting tighter in the financial system.The bank executive said the Fed’s clarification is unlikely to make a perceptible difference, however. That’s because the largest banks also have other liquidity tests, where they cannot count on the Fed backstops. The banker pointed to the liquidity coverage ratio, which requires that large banks have enough high-quality liquid assets — or assets such as Treasuries that can be easily traded — to meet their cash needs in times of stress. Barr also said in his speech he wants to propose additional changes to liquidity regulations, some of which could lead banks to lower their holdings of Treasuries, the bank executive said. BIG PUSH Where bank regulators have made a bigger dent so far is in addressing financial stability issues. They have been making a concerted push since the bank collapses of March 2023 to get more banks at least ready to use the backstops should they ever need it. Silicon Valley Bank failed in part because it hadn’t done the groundwork needed to borrow from the discount window, leading to delays that proved to be fatal. Barr noted in his speech that since that time, more than $1 trillion in additional collateral had been pledged to the discount window and more banks had signed up for the SRF.BPI’s Nelson said liquidity risk is the result of a market failure. “That’s something that happens when an institution is solvent and has assets that are worth more than its liabilities, but it’s just not able to convert them into liquidity fast enough at low enough cost,” Nelson said. “And in that sense, borrowing from the discount window solves the market failure.”But another bank regulation expert said the central bank’s focus on normalizing discount window access after the March 2023 failures is misplaced, calling instead for greater focus on addressing interest rate risk.”I don’t believe that discount window stigma is what caused those institutions to fail,” said Jill Cetina, a former Dallas Fed official who is now a finance professor at Texas A&M University. “What caused them to fail was the fact that they had excessive levels of interest rate risk and were illiquid.” More