Economy

“The U.S. real estate sector is actually pretty sophisticated,” Mensah said at the World Government Summit in Dubai. “It’s had its booms and busts. I suspect some of those assets will need recapitalisation, or they may need restructuring. But the market is pretty efficient.” “I don’t see anything systemic – famous last words – in that sector,” he added. A sell-off in regional U.S. bank stocks triggered by New York Community Bancorp (NYSE:NYCB) this month has brought exposure to commercial real estate in focus for analysts and investors.The industry has grappled with looming losses on commercial real estate loan books since early 2023, as the sector faced financing difficulties amid high interest rates and lower office occupancy due to widespread adoption of remote work.U.S. Treasury Secretary Janet Yellen said last week she was concerned about looming commercial real estate stresses on banks and property owners, adding that she believed the situation is manageable with assistance from bank regulators. More

Here’s your week ahead primer in world markets from Rae Wee in Singapore, Ira Iosebashvili in New York, and Amanda Cooper, Naomi Rovnick and Alexander Marrow in London. 1/ NOT YET For traders trying to bet on the timing of a first U.S. rate cut, life has not been made easy by an outperforming economy that could fuel a much-feared inflationary rebound.January’s stellar jobs number was just one sign that the U.S. economy is exceeding expectations. Its unexpected strength has fueled caution at the Federal Reserve, which has poured cold water on expectations of a March rate cut, lifting Treasury yields and the dollar.So, attention falls on Tuesday’s January inflation data. Any signs that price pressures are gaining momentum again could push rate cut bets further into the future. Economists polled by Reuters expect a 0.2% rise in consumer prices on a monthly basis, after December’s 0.3% increase. 2/ TOP DOLLARAn exceptional U.S. economy means an exceptional dollar. As 2023 ended, market-watchers were certain the U.S. currency was headed one way this year, south, with traders expecting as many as six Fed rate cuts in 2024. Now, powered by blockbuster jobs growth, a flourishing services sector, cooling inflation, a bottoming-out in lending conditions and a roaring stock market, just four are fully priced in. The dollar is at three-month highs, leaving competitor currencies, whose central banks are juggling slowing inflation and slowing growth, in the dust. Not a single G10 currency is in positive territory against the dollar so far this year. Investors are still not holding a net bullish position in the dollar either, suggesting that, if the gap between the U.S. economy and the rest of the world keeps widening, the greenback could get a fresh tailwind. 3/ NOT SO HASTY The Bank of England has held back from calling time on high rates. UK jobs data may see it fall further behind the more dovish U.S. Fed and European Central Bank. Recent revisions to labour data from November showed that the UK’s unemployment rate was running lower than previously thought. This, according to researchers at Pantheon Macroeconomics, means that UK jobless figures out Feb. 13 could undershoot the BoE’s 4.3% estimate. UK inflation figures on Feb. 14 could further complicate the monetary policy outlook. The BoE reckons inflation will return to its 2% target this year but has warned it could rise again in the third quarter. Money markets have pushed out the timing of a first BoE rate cut to June from May. Pantheon sees UK rates at 4.5% by December from 5.25% now, but warns “the risks that initial cut comes later are rising.” 4/ JOKOWI’S LEGACY Indonesians head to the polls on Wednesday to elect the next leader of the world’s third-largest democracy as Joko Widodo gets ready to step down as president after a decade in power. Three candidates are in the race to succeed Jokowi, as the popular president is known, and polls suggest Defence Minister Prabowo Subianto is the candidate to beat.Jokowi, not allowed to seek re-election after two terms, leaves behind a legacy of policies that have helped the trillion-dollar G20 economy thrive: from massive infrastructure projects to social welfare programmes.Yet, it’s not all smooth sailing. Rule changes allowing Jokowi’s son to run with Prabowo has sowed cabinet discontent and speculation that the widely-respected finance minister could quit.Indonesian markets, which have been resilient in the face of global rate hikes, are rattled. The rupiah has slumped almost 2% so far this year. 5/ TAKE A BREAK It may be time to take a break for Russia’s central bank at its Feb. 16 meeting. Policymakers have hiked rates by 850 bps to 16% since July to tackle inflation fanned by labour shortages, rouble weakness and high budget spending.With President Vladimir Putin seeking re-election in March, just over two years after the invasion of Ukraine unleashed sanctions and severed Russia from the global financial fabric, the central bank faces the daunting task of zapping inflation without adding to borrowing costs for consumers and businesses. It is also at odds with the Kremlin over the benefit of extending capital controls that have supported the rouble since October and opposes a push for an extension, but will likely be overruled. Russian internet firm Yandex (NASDAQ:YNDX)’s Dutch holding company meanwhile just announced a $5.2-billion cash and shares deal to hand over Yandex’s Russian business to domestic buyers. (Graphics by Vineet Sachdev, Kripa Jayaram, Prinz Magtulis, Riddhima Talwani and Sumanta Sen; Compiled by Dhara Ranasinghe; Editing by Christian Schmollinger) More

ORLANDO, Florida (Reuters) -An engine of world growth for 20 years, the largest consumer of commodities and world’s number two economy has somehow slipped into “alternative investment” buckets for many global investors. China’s property bust and increasingly interventionist government, along with deepening geopolitical fissures with the United States, have dramatically dimmed its allure as a destination for international capital.China may not yet be “uninvestable”, as U.S. Commerce Secretary Gina Raimondo suggested U.S. companies believe, but many investors are recategorizing their reduced exposure – in some cases to alternative investment.”Alts” are typically assets outside the traditional stocks, bonds and cash buckets, like hedge funds, real estate and private equity. They are often riskier but potentially more lucrative bets, and are attractive for their diversification and hedging qualities.Crucially, they are non-correlated with traditional assets. This is where many investors see Chinese stocks and bonds now – a non-correlated, idiosyncratic play, effectively a hedge against their core bets.That was the anecdotal evidence garnered from investors, asset managers and allocators on the sidelines of the recent “Hedge Fund Week” conferences in Miami. It is also supported by global capital flows trends.One fund manager said he may put 5-10% of his portfolio in Chinese stocks but is fully prepared to lose it. A hedge fund manager overseeing billions of dollars of assets said he likes China’s “idiosyncrasies” and diversification qualities but noted that his investors’ money is mostly offshore, not onshore.Alex Lennard, fund manager at Ruffer, admitted that the economic climate in China is “clearly awful” but his firm is putting money there, essentially as a hedge. “It’s a small part of our portfolio, about 4%, but it does provide an offset to some of the other market ‘certainties’ that exist,” Lennard said. It’s worth noting that they are relative optimists on China. The wider consensus is far gloomier.OUTFLOWS, OUTFLOWS, OUTFLOWS According to Morningstar Direct, U.S. equity funds’ average asset-weighted exposure to Chinese stocks in December last year was 1.38%, down from 2.17% three years earlier, while their average equal-weighted exposure is down to 3.5% from 4.13%.U.S. emerging market funds’ allocation to China as a share of total EM exposure declined to 20.6% from 28.6% on an asset-weighted basis, and to 20% from 26% on an equal-weighted basis. It is a similar pattern across global emerging market funds. The China portion as a share of their overall EM equity allocation has fallen to 19.5% from 27.1% on an asset-weighted basis and to 21% from 25.5% on an equal-weighted basis, according to Morningstar Data.Demand for Chinese bonds should be stronger though, right? China is included in the $1.2 trillion benchmark JP Morgan EMBI Global Diversified bond index, and there is now an in-built demand for Chinese bonds from the yuan’s emergence in recent years as an alternative international reserve currency. But China’s share of the $12 trillion global FX reserves pie has slipped to a four-year low of 2.37%, and has never been higher than 2.83%, according to the International Monetary Fund.Figures from the Institute of International Finance show outflows from Chinese debt portfolios for seven straight months and only three monthly inflows in the last two years. Emerging market ex-China debt funds, meanwhile, have attracted inflows for the past seven months and in January drew in $47.3 billion, the most since October 2022 and one of the highest on record.Whichever way you slice it, investors of all stripes are taking chips off the Chinese table. BURST OPTIMISMThis is not how many thought it would pan out. A Greenwich Associates survey of institutional money managers in 2020 showed that pension funds and endowments had 3-5% allocations to China and only 5% of North American institutions had any dedicated exposure to Chinese stocks.Nearly a quarter of respondents said they planned to increase or significantly increase their dedicated allocation to Chinese equities in the next three to five years.Liang Yin, investment director at Willis Towers Watson (NASDAQ:WTW), wrote in November that year that investors should consider raising their allocation to China to around 20% over the next decade.But Beijing’s closer alignment with Moscow, fraying relations with Washington, and a strengthening interventionist hand in business and markets at home have scared a lot of horses.The findings of a recent survey by the Official Monetary and Financial Institutions Forum of 22 public pension and sovereign wealth funds managing $4.3 trillion in assets were startling – not one had a positive outlook for China’s economy or saw higher relative returns there. (The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever;Editing by Kylie MacLellan) More

Germany’s economy has been struggling and the latest data has provided little hope for improvement.
Economists say the worst may soon be over, but are still not hopeful about economic growth in 2024 and suggest the country may enter a technical recession this year.
Headwinds include a slowdown of global trade, higher energy prices, and national and international political uncertainty.

Federal Chancellor Olaf Scholz (SPD, r-l), Robert Habeck (Alliance 90/The Greens), Federal Minister for Economic Affairs and Climate Protection, and Christian Lindner (FDP), Federal Minister of Finance, follow the debate at the start of the budget week.
Michael Kappeler | Picture Alliance | Getty Images

Good news has been sparse for the German economy. And the latest economic data has not done much to change this.
A few key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the “sick man of Europe” resurface.

“The data confirm that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.
Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.
Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.
But this growth “is not much reason for comfort,” Franziska Palmas, senior Europe economist at Capital Economics told CNBC, explaining that it is thanks to several large-scale orders, which tend to be volatile. “Orders excluding large-scale orders actually fell to a post-pandemic low,” she added.
For 2023 overall in comparison to the previous year, factory orders were down 5.9%.

While this “hard” data from December does not yet suggest recovery is in sight, the most recent Purchasing Managers’ Index report indicates that the worst may be over soon in the manufacturing sector, Schmieding said.

“Although at 45.5 still below the 50 line that divides growth from contraction, it edged up to an 11-month high,” he noted.
Even so, economic growth is unlikely to be imminent, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, told CNBC.
“We are still nowhere near the kind of activity in the German industry that we saw pre-pandemic,” he explained. “We still expect a modest contraction in Q1, but it’s likely to be less severe than 23Q4,” van Harn said. He is then anticipating growth to pick up slightly, but sees full-year growth as being flat.
Others are even more pessimistic about the German economy.
“We stick to our forecast that the German economy will shrink by 0.3% in 2024 as a whole,” Commerzbank Chief Economist Jörg Krämer told CNBC.
This would be broadly in line with how Germany’s economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.
This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.
“Companies simply have too much to digest — global rate hikes, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explained, addressing reasons for the downturn.
Some of these headwinds may also play a key role when it comes to weakening export figures, Rabobank’s van Harn pointed out. Factors like cheap energy from Russia, strong demand from China and surging global trade buoyed Germany’s exports for decades, “but are now faltering,” he said.
Looking beyond the purely economical, national and international politics could also be a risk for the country’s economy, the experts say.

Germany’s coalition government has been under pressure after going through a budget crisis following a decision from the constitutional court that the re-allocation of unused debt taken on during the pandemic to current budget plans is unlawful.
This left a 60-billion-euro hole in the coalition’s budget plans, and as the funds were allocated for years to come, the crisis is likely to rear its head again at the end of the year when 2025 budget planning begins.
Voter satisfaction with the government is also low, with the opposition CDU party currently leading in the polls and being followed in second place by Germany’s far-right party, the AfD. Support for the latter has however declined in recent weeks amid protests against the far-right sweeping the country, with hundreds of thousands of Germans taking to the streets.
Elsewhere, the U.S. election could make things more difficult as well, Schmieding suggested.
“Trade war threats by Trump could be a significant negative for Germany,” he said – however this of course depends on the outcome of the election, and may not unfold in full force until 2025, he noted. More

As markets boost their bets on interest rate cuts this year, investors are heavily focused on exactly how low borrowing costs will ultimately fall as the inflationary menace retreats. Central banks including the Federal Reserve and European Central Bank will be influenced by an elusive and controversial concept: the so-called neutral rate of interest — the borrowing rate that keeps economies growing steadily, with full employment and inflation around 2 per cent. After falling to rock-bottom levels before the pandemic, the neutral rate has, by some measures, edged up more recently. This could suggest official rates will not head as low as their pre-pandemic levels, even as inflation eases.  “Whether you are a bank or business or government or household, I don’t think you should expect interest rates to go back to pre-Covid levels, so there’s an adjustment to come,” said Bank of Canada governor Tiff Macklem, speaking before his central bank’s recent policy decision. “There are a number of things suggesting that the neutral rate could be higher.”Why is the neutral rate so important? The neutral rate is not directly set by central banks, and they cannot reliably observe where it is. But for many economists the inflation-adjusted neutral rate — known by a range of other labels including the natural or equilibrium rate or R-star — is a valuable guiding light. If the official interest rate sits above it, central bankers consider policy to be restricting economic activity; below it, policy is deemed to be expansionary. The neutral rate’s value is highly contested, however. There is no consensus on a single model for estimating its level or future direction. Some central bankers are therefore wary of giving it undue weight. The rate can be valuable when seen in the “rear-view mirror” to assess an economy’s past performance, said Bert Colijn, a senior economist at ING bank, but it is less helpful as a guide for future policy decisions. “The reality is that it is very difficult to determine where it is,” he said. “It is constantly moving.” What level is the neutral rate? The lower neutral rates of recent decades were driven by a range of long-term factors, including subdued productivity growth, a glut of savings swilling around the world and an ageing population that boosted the stockpiles of cash stored away for retirement. One widely used estimate, from the New York Fed, points to a multi-decades-long decline in inflation-adjusted neutral rates in both the US and euro area that shows no sign of reversing. This put R-star in the US at the third quarter of last year at 0.9 per cent before inflation — a big fall from levels approaching 4 per cent at the start of the millennium. Canada’s inflation-adjusted neutral rate was 1.5 per cent and the eurozone’s was -0.7 per cent, according to their model. Other methodologies for estimating the neutral rate point to similar declines.Some economists see signs that the R-star has risen. Megan Greene, an external member of the Bank of England’s Monetary Policy Committee, argued in November that the neutral rate might have edged up in the medium term as a result of rising public debt and increased investment in areas such as the green transition. Where do things stand in the US? While Fed officials acknowledge that, at a 23-year high of 5.25-5.5 per cent, their benchmark federal funds target rate is way into restrictive territory, that does not mean they are willing to use assessments of the neutral rate to guide policy decisions. Instead, they are led more by what current data tells them about the balance between consumer price pressures and the labour market. But official Fed projections suggest that some rate-setters believe the neutral rate is creeping up. Directly before the pandemic, the so-called “central tendency” estimates for the longer-run federal funds target range lay between 2.4 per cent and 2.8 per cent, implying policymakers believed R-star lay between 0.4 per cent and 0.8 per cent when taking into account the Fed’s 2 per cent inflation goal. But the most recent projections show a range between 2.5 per cent and 3 per cent, or 0.5 per cent and 1 per cent for R-star. Raphael Bostic, president of the Atlanta Fed, is one such official. “My sense is that the neutral rate has increased to somewhere between 2.5 to 3 per cent” including 2 per cent inflation, he said. “We’re actually having arguments about that in the [Atlanta Fed] building.” What about the eurozone? Most economists agree the neutral rate for the eurozone fell in the decade after the 2008 financial crisis, as governments, businesses and households reduced debt levels, while population growth slowed and productivity declined. This forced the ECB to cut rates into negative territory to fight off deflation. The big question is whether the 20-country bloc will become mired in the same trap of low growth and low inflation again.“Those factors that were also weighing on R-star — lower birth rates and lower productivity — have not abated,” said Jens Eisenschmidt, a former ECB economist now at Morgan Stanley. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.However, ECB executive board member Isabel Schnabel told the Financial Times this month: “There are good reasons to believe that the global R-star is going to move up relative to the post-financial crisis period.” She predicted that higher investment to tackle climate change, increased defence spending, the fragmentation of the global trading system and higher government debt would all push up the neutral rate of interest.Schnabel said uncertainty over R-star meant that once the ECB started to cut rates it should “proceed cautiously in small steps” and “may even need to pause on the way down if inflation proves sticky”. ECB officials published a paper this week outlining how the median of the various measures of the neutral rate that it tracks had risen 0.3 percentage points since before the pandemic hit in 2020. But they said the estimates “still signal risks” that the ECB policy rate may need to fall back towards or even below zero in future, warning that inferences about movements in R-star remain subject to “high uncertainty”. ING’s Colijn said that while the neutral rate was “attractive conceptually, it is very difficult to actually use as an anchor for monetary policy”. More

(Reuters) -Australia’s ANZ Group said on Monday its first-quarter group revenue was in line with the quarterly average of first-half fiscal 2023 revenue, driven by its institutional division’s markets business, lifting shares to their highest in 22 months. Shares of the Melbourne-listed lender rose nearly 1% to A$27.93, as of 2320 GMT, to hit their highest levels since April 21, 2022; as against the broader benchmark’s 0.3% drop. Surging demand for its institutional banking services pushed Australia’s fourth-biggest lender to post a record annual profit last year, as it benefited from a payments platform that processes big cross-border transactions. “The institutional division’s markets business had a good start to the year with revenues a little better than the first-half FY23 average of A$575 million ($374.73 million),” the company said in a statement on Monday.It also added that its lending growth across its Australian retail and consumer franchises were robust, fueled by customer deposits, and is continuing to boost Australian home loan book profits. ANZ Group added A$8 billion in customer deposits across its retail and commercial divisions in Australia, even as its institutional deposits fell by A$3 billion. The bank’s first-quarter revenue was in line with the quarterly average of the previous fiscal year’s first half of A$5.26 billion, the company said in a limited quarterly update that did not provide a profit number.”1Q24 group revenue was in line with the 1H23 quarterly average and consequently slightly better than we expected,” analysts from Citi said in a client note. “This will be received as an in-line disclosure given the share price rally into the result and generally benign financials,” the analysts said. The bank’s common equity tier 1 ratio, however, fell to 13.1% at the end of December 2023, compared with 13.3% at the end of last September.($1 = 1.5344 Australian dollars) More

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