Economy

LONDON/FRANKFURT (Reuters) – Germany is working to frustrate a possible takeover of one of its biggest banks by an Italian rival, a stance that pits Berlin against Rome and Europe’s regulators, several people familiar with government and regulators’ thinking told Reuters. Berlin was taken aback by UniCredit’s swoop to build a large stake in state-backed Commerzbank (ETR:CBKG), a move the Italian bank says could lead to a merger. Officials are now bracing for a potential hostile bid that could tie Berlin’s fortunes to those of Italy, whose debt load dwarfs Germany’s. Combining the banks poses a potential threat to financial stability, they say, as UniCredit owns tens of billions of euros of Italian government bonds. Several people in the German government are now pinning their hopes on a regulatory review by the country’s supervisor BaFin, and are lobbying the regulator against a deal.One key argument is that Berlin might end up footing the bill if UniCredit were to be dragged into an Italian debt crisis.BaFin, which plays a critical role in whether UniCredit can try to gain control of Commerzbank, has started to analyse UniCredit’s request to allow it to build its roughly 9.9% shareholding to almost 30%.The watchdog will make a proposal to the European Central Bank, the lenders’ regulator, which has the final say, based on a handful of criteria such as the financial strength of the buyer and the reputation of managers.While Rome cautiously supports the deal, Berlin hopes its concerns may thwart or at least delay the approval of UniCredit’s plan by the ECB. BaFin has a delicate balancing act. While it is duty-bound to handle UniCredit’s application even-handedly, it must also take into account the concerns of the German government, as the agency reports to the finance ministry. Several sources with knowledge of the ECB’s thinking, said there was widespread disagreement with Germany’s opposition, although the country remains influential and can count on powerful figures within the institution.The ECB has said large, European banks can better support the economy and compete with bigger rivals in the United States. Even though the 20 countries of the euro zone share a currency, banking remains mostly national. For the ECB, its handling of UniCredit’s interest in Commerzbank, balancing the interests of two of the bloc’s biggest countries, will be one of its biggest tests since becoming the region’s main watchdog a decade ago.”BaFin and the European Central Bank work closely together,” said a spokesperson for BaFin, adding that BaFin had a “right to recommend” to the ECB whether a deal should be approved, leaving the final say with the ECB. “This procedure makes an important contribution to financial stability,” he said.A spokesperson for the ECB said it was in “constant interaction” with national authorities on such matters, describing decisions as “collaborative”.The ECB’s chief supervisor Claudia Buch said recently the institution would do “anything” to remove hurdles to cross-border bank mergers, after president Christine Lagarde described such deals as “desirable”.Italy’s Treasury, Germany’s finance ministry, Commerzbank, and UniCredit declined to comment.HAZARDBaFin has a seat on the ECB’s supervisory board along with authorities from the 20 other countries that form the banking union plus a smattering of ECB representatives. The ECB has roughly 90 days to review the case.At the heart of Germany’s concern is UniCredit’s 40 billion euros ($44 billion) of Italian government bonds.This is seen as a potential risk because Italy is heavily indebted. Commerzbank, which is smaller and financially weaker than UniCredit, also has billions of euros of Italian bonds. If Italy were to run into trouble after a merger, officials fear Germany might have to step in. But some ECB officials see a solution. Commerzbank could became a subsidiary within UniCredit, with clear plans on how to deal with it separately in a crisis.In the sovereign debt crisis of the early 2010s, some European countries had to bail out their banks, which were also weakened by their sovereign, illustrating how intertwined they were in a crisis that nearly brought down the euro. Berlin’s reaction signals a lack of faith in the European architecture put in place to prevent a repeat of the 2010-11 debt crisis, as well as a deep-seated scepticism over Italy.The German government believes UniCredit’s move on Commerzbank was aggressive and expect a hostile bid within months, three sources familiar with government thinking told Reuters.People close to the government also said trust between Berlin and UniCredit CEO Andrea Orcel had nearly collapsed.They pointed to Orcel’s surprise move on Commerzbank, including using derivatives that give him an option to get more shares, despite earlier suggesting he was acting in line with Berlin’s wishes.Orcel recently told an audience he had spoken repeatedly with stakeholders in Commerzbank and was keen to reopen dialogue.Two of the people with knowledge of the government’s thinking said Berlin and Commerzbank’s working assumption was that UniCredit could try to buy the bank within months.($1 = 0.9151 euros) More

The producer price index was flat for the month and up 1.8% from a year ago. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1%.
Excluding food and energy, the PPI rose 0.2%, meeting expectations.
A 0.2% decline in final demand goods prices offset a 0.2% increase in services.

A measure of wholesale prices showed no change in September, pointing to a continued easing in inflation, the Labor Department reported Friday.
The producer price index, which measures what producers get for their goods and services, was flat for the month and up 1.8% from a year ago. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1% after August’s increase of 0.2%.

Excluding food and energy, the PPI rose 0.2%, meeting expectations.
The report comes a day after the Labor Department reported that the consumer price index, a more widely followed inflation measure that shows what consumers actually pay for goods and services, had an increase of 0.2% for the month and 2.4% from a year ago.
Markets showed little reaction to the data, with stock market futures pointing slightly higher on Wall Street while Treasury yields rose on longer-duration securities.
Together, the releases indicate that inflation is off its blistering pace that peaked more than two years ago but still mostly holds above the Federal Reserve’s 2% target.
Within the PPI, a 0.2% decline in final demand goods prices offset a 0.2% increase in services. Excluding trade services from core PPI, the index increased 0.1%.

A 3% jump in deposit services costs pushed the services index higher, while professional and commercial equipment wholesaling prices tumbled 6.3%.
On the goods side, a 2.7% slide in final demand in energy was the main factor in the decrease. Similarly, the index for gasoline fell 5.6%, holding back gains on the goods index. Diesel fuel prices plunged 17.6%.
Fed officials in recent days have expressed confidence that inflation is heading back to target even though some aspects, such as shelter, food and vehicle costs, have held stubbornly higher. Minutes from the September central bank meeting indicated policymakers were divided over the decision to slash the Fed’s benchmark interest rate by half a percentage point.
Most officials say they expect to continue to cut as long as the data indicates. Markets anticipate the Fed to lower by a quarter percentage point at each of its two remaining meetings this year.

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Shares of the Swedish company fell 3.8% in premarket trading.Polestar (NASDAQ:PSNY), which is majority owned by China’s Geely, has been grappling with weakening demand for its vehicles owing to factors such as high interest rates, prompting consumers to pivot to cheaper hybrid cars.Polestar recently went through a major reshuffle where it replaced its CEO, head of design, board chair, and appointed a new CFO.New CEO Michael Lohscheller, in his first public statement since taking over on October 1, said on Friday that he saw a great foundation to build upon and that it was conducting a review of its strategy and operations.The company said it will provide an update on business and strategy along with its full third-quarter financials on January 16.Polestar said it expects revenue for the full year to be similar to last year owing to the difficult market conditions and the import duties which have hit the automotive industry. In 2023, the company recorded revenue of $2.38 billion.Polestar also reaffirmed its target of achieving break-even cash flow by the end of next year, but at a lower volume than previously targeted.The company handed over 11,900 vehicles in the third quarter compared with 13,900 vehicles a year ago.The levy of U.S. and European tariffs on Chinese imports has pressured Polestar to grow its production base in the United States and away from China where it currently makes most of its vehicles.The company said in August that it reached its target of achieving $1.3 billion in external funding.On Friday it said due to the current market conditions and the anticipated performance, it was engaged in constructive dialogue with its club loan lenders, who remain supportive of its loan covenants. More

The forecasts are below those of the Italian government, which officially forecasts growth of 1.0% this year and 1.2% in 2025.Under the central bank’s previous projections the euro zone’s third-largest economy was seen growing by 0.8% both this year and next. The forecasts are not adjusted for the number of days worked each year, in line with the methodology used by the government, the European Union and other bodies for international comparisons.If adjusted for the number of days worked, the Bank of Italy said in its quarterly bulletin that growth this year would be just 0.6%, accelerating to 1.0% next year.Last month national statistics institute ISTAT revised down Italy’s 2023 growth rate to 0.7% from 0.9%, and Economy Minister Giancarlo Giorgetti told parliament this week that this year’s government goal of 1% now looked difficult to reach.That echoed comments made the day before by the Bank of Italy and Rome’s parliamentary budget watchdog. Rome’s average EU-harmonised inflation rate should come in this year at 1.1%, the central bank said, unchanged from its July projection.The central bank saw the inflation rate rising to 1.6% in 2025, against its previous estimate of 1.5%.The bank said its estimates were based on information available up to October 4, and therefore incorporated ISTAT’s latest revisions. More

OTTAWA (Reuters) – Canada’s economy added a net 46,700 jobs in September, more than forecast, while the jobless rate unexpectedly decreased for the first time in 8 months to 6.5%, data showed on Friday.Analysts polled by Reuters had forecast a net gain of 27,000 jobs and that the unemployment rate would rise to 6.7% from 6.6% in August.The job additions were in full-time work, which recorded its largest gain since May 2022 and more than offset a decline in part-time jobs, Statistics Canada data showed.The healthy jobs data could assuage some concerns about growing slack in Canada’s labor market and may weaken the case for larger-than-usual rate cuts by the central bank.The central bank has lowered its policy rate by 25 basis points at each of its last three meetings, and it is expected to cut rates once more at its next announcement on Oct. 23. Financial markets are fully pricing in another 25 basis point rate cut next week and odds for a super-sized 50 basis point rate cut dropped to 36% after the jobs data from 53% earlier.The Canadian dollar reversed early morning losses after the release of the jobs data and was trading 0.01% firmer to 1.3738 to the U.S. dollar, or 72.79 U.S. cents. Bond yield on the two-year government bond was up 5.4 basis points to 3.316%.The wholesale and retail trade, the information, culture and recreation and the professional, scientific and technical services sectors contributed the most to the gains. The decline in the unemployment rate in September was driven by youth, whose unemployment rate fell by 1 percentage point to 13.5%, Statscan said.The average hourly wage growth for permanent employees slowed to an annual rate of 4.5% from 4.9% in August. The closely-watched wage growth rate was the slowest since the 3.9% recorded in June 2023.The Bank of Canada has flagged weakness in the labor market among main points of concern in its effort to juggle the impact of opposing forces on inflation – the persistently high cost of shelter and services, and a weakening economy and rising unemployment.In September, immigration-fueled population growth continued to outpace jobs growth, with the proportion of the population which was employed falling 0.1 percentage points to 60.7%. The participation rate also fell to 64.9% from 65.1% in August, the third decline in four months.Employment in the goods sector decreased by a net 3,600 jobs, while the services sector gained a net 50,200 jobs. More

(Reuters) – Markets are tentatively optimistic France’s budget may eventually pass through its fractured parliament, but remain sceptical about how quickly the country can tidy up its finances just as rating reviews kick off later on Friday. France’s government outlined plans for 60 billion euros ($66 billion) of spending cuts and tax rises on Thursday in a belt-tightening budget to rein in a deficit it expects to exceed 6% of GDP this year.The budget’s blueprint was well flagged, so the yield premium France’s bonds pay over top-rated Germany was steady at around 77 basis points on Friday and French stocks traded in line with peers.”They will probably get it approved. But the path to get it approved is likely to be bumpy,” said Danske Bank chief analyst Jens Peter Sorensen, expecting volatility as parliament debates the budget.The budget squeeze, equivalent to two percent of national output, has to be carefully calibrated to placate opposition parties, who could band together to topple Prime Minister Michel Barnier’s government with a no-confidence motion.This uncertainty has left the French/German bond spread near the peak of around 85 bps it hit over the summer – the highest since the euro zone debt crisis – when a snap election heightened concern around France’s creaky finances.So, passing the budget and improving state finances are crucial for France to restore investor confidence and avoid further credit rating downgrades.BLURRY PICTURECiti and Goldman Sachs said on Friday the budget would likely pass, with the government probably using special powers to bypass a parliamentary vote.The key issue, investors said, was how Marine Le Pen’s far-right National Rally party, which helped the government survive a no-confidence vote this week, would react.Before Thursday’s budget details were announced, Le Pen said she wanted to give Barnier a chance, but set out red lines, including the need for tax rises to be offset by increased spending power for lower and middle classes.Far-right lawmaker Jean-Philippe Tanguy called the budget proposal a “horror gallery” on Friday, lamenting its “fiscal injustice” and saying it would bring no durable improvement in the nation’s finances. Some investors, however, reckon France’s far right has little reason to torpedo the budget, given the possibility of fresh parliamentary elections next year.”Their incentive is to do everything they can to just try and seem more credible, more responsible in the eyes of the electorate,” said Chris Jeffery, head of macro strategy at Legal & General Investment Management, which turned overweight French bonds in recent weeks. The bigger question for markets remains whether France can curb its deficit as quickly as outlined.The government expects to bring down France’s budget deficit from 6.1% of output this year to 5% next. Markets reckon that’s too optimistic and Citi, for example, expects a 5.4% deficit next year. Barnier has said he is open to lawmakers tweaking the budget provided they don’t go too far, and still needs to add some measures.”The most important part, how they can really reduce expenditure, this is not clear enough today,” said Candriam’s chief investment officer Nicolas Forest.Even a proposal to save 4 billion euros by postponing pension indexation to inflation for just half a year triggered an outcry. Tax increases are also a sticking point within the government, highlighting the challenges.Headwinds to growth from the belt-tightening measures add to the risks, investors say. And some economists argue the plan is more reliant on revenue increases than the government has officially suggested, adding to caution as revenues fell far short of expectations this year.France’s national fiscal watchdog has also said next year’s deficit target looks “fragile” and is based on optimistic economic assumptions.RATINGS PRESSURE Further credit rating downgrades remain a risk given France’s deficit targets remain higher than agencies expected. Fitch reviews its AA- rating for France later on Friday. Rabobank said a downgrade was likely.Moody’s (NYSE:MCO), with its higher Aa2 France rating, reports on Oct. 25. France was downgraded by rival S&P in May to AA-.Yet agencies are less likely to take action amid the budget process and markets already price in lower ratings, investors said.France’s bonds pay a higher yield than Spain’s even though its ratings are 2-5 notches higher. “With the budgetary issues France is facing, it is becoming semi-periphery, it is at risk of losing its status as a core country in the euro area,” said Christian Kopf, Union Investment’s head of fixed income and FX. For longer-term reform prospects, the question remains how long Barnier’s government, which envisions the deficit reaching the EU’s 3% limit in 2029, will last.”We are not sure that this government will stay more than 10 or 11 months. So what is the credibility of this government to talk about the deficit in five years?” said Candriam’s Forest.($1 = 0.9134 euros) More

(Reuters) -Wells Fargo’s profit beat analysts’ expectations in the third quarter as it set aside less than expected to cover souring loans and predicted its interest income would improve,sending shares 3% higher before the bell on Friday.The bank, however, forecast a bigger-than-expected 9% drop in 2024 interest income on Friday following the U.S. Federal Reserve’s jumbo-sized rate cut in September. This compares with Wall Street expectations of an 8.4% decline.Wells Fargo’s net interest income could actually benefit from rate cuts because it will pay out less to clients to hang on to their deposits, its CFO Michael Santomassimo said during a media call.The fourth quarter NII will be in line with the third-quarter, which could be seen as the beginning of a trough of NII, he said.Santomassimo said rates are coming down on certificates of deposit, promotional savings instruments and on most interest-rate sensitive deposits in its commercial banking business.”As we continue to see rate cuts, those trends will continue, and that’ll be a net positive for NII as we look forward,” he said.The fourth-largest U.S. lender reported third-quarter earnings per share of $1.52, compared with expectations of $1.28, according to data from LSEG. Wells Fargo’s net interest income — or the difference between what it earns on loans and pays out for deposits — dropped 11% to $11.69 billion in the quarter. Analysts on average had predicted $11.87 billion, according to estimates compiled by LSEG. “Our risk and control work remains our top priority,” said Chief Executive Officer Charlie Scharf. “Credit performance was consistent with our expectations, commercial loan demand remained tepid, we saw growth in deposit balances in all of our businesses.” Banks’ interest income, which had benefited in recent years as the Fed raised interest rates, is expected to keep declining for the rest of 2024.The U.S. central bank last month lowered its benchmark policy rate for the first time since 2020, cutting it by 50 basis points. Policymakers have projected another half of a percentage point reduction by the end of this year. The rate cut was followed by top banks lowering prime lending rates, which will likely shrink their interest income. Banks have also tightened lending standards this year.Santomassimo said consumer activity and spending remained quite strong.Wells Fargo’s revenue declined 2% to $20.37 billion in the third quarter. The bank’s loans to borrowers fell to $910.3 billion versus $943.2 billion a year earlier.Loan demand has been subdued as higher interest rates deterred commercial and consumer borrowers. At the same time, banks have had to compete for deposits by paying clients more. Wells Fargo set aside $1.07 billion in provisions to cover souring loans. That compared with $1.20 billion a year earlier.Santomassimo said office remains the area of concern in the commercial real estate sector and expects additional losses in the segment over time.JPMorgan Chase (NYSE:JPM)’s profit dropped in the third quarter as a bigger provision for potential loan defaults offset gains from investment banking, the bank said on Friday.Executives at top lenders have said that U.S. consumers remain resilient despite pockets of stress and higher loan delinquencies among lower-income households. Wells Fargo is also reportedly doubling down on efforts to lift a $1.95 trillion asset cap imposed by the Federal Reserve that prevents the bank from growing until regulators deem it has fixed problems dating back to the 2016 fake accounts scandal.In September, a U.S. banking regulator found its safeguards against money laundering and other illegal transactions were too lax and restricted its ability to expand in risky businesses.The asset cap curtails Wells Fargo’s ability to take in more deposits and expand its trading business, two potential growth areas for the bank, CEO Scharf said earlier this year.It still has eight regulatory punishments, called consent orders, that it is working to address. More

According to LSEG data, investors sold a net $342 million worth of U.S. equity funds during the week following a net $30.86 billion worth of purchases in the previous week.Investors pared back expectations on future Fed rate cuts last week following a stronger-than-expected U.S. nonfarm payrolls report for the last month.The benchmark 10-year U.S. Treasury yield reached a 2-1/2 month high of 4.12% on Thursday, tempering earnings expectations for large-cap growth stocks.Investors divested U.S. large-cap funds of a net $4.25 billion, in contrast to $35.47 billion in net purchases, a week ago. They also ditched mid-cap funds of $919 million but scooped up multi-cap and small-cap funds of $197 million and $118 million, respectively.Sectoral equity funds, however, witnessed inflows worth $730 million, with tech, and metals and mining drawing a notable $639 million and $251 million, respectively.U.S. bond funds, meanwhile, garnered a 19th weekly inflow in a row, valued at about $3.37 billion on a net basis.Short-to-intermediate investment-grade funds attracted a significant $1.5 billion, the fourth consecutive weekly inflow. U.S. investors also bought general domestic taxable and loan participation funds worth a net $1.06 billion and $682 million, respectively.At the same time, money market funds saw a net $2.54 billion worth of investments, the third successive weekly net purchase. More