Economy

The downgrade in Hong Kong’s outlook reflects an assessment of tight political, institutional, economic and financial links between Hong Kong and China, Moody’s (NYSE:MCO) said.Hong Kong dismissed the decision on those grounds.”We disagree with its decision to change Hong Kong’s credit outlook to “negative,” it said, adding that the ties with China were “a source of strength for long-term development.” The ratings agency affirmed Hong Kong’s Aa3 ratings, reflecting credit strengths such as a wealthy and competitive economy, fiscal and external buffers and a track record of effective monetary and fiscal policy. Following imposition of a National Security Law in 2020 and changes to Hong Kong’s electoral system, Moody’s said it “expects further erosion of the (city’s) autonomy of political, institutional and economic decisions to continue incrementally”.It said a weakening trend in mainland China would affect Hong Kong’s economy, while “weaker growth in Hong Kong could erode the government’s fiscal buffers.” The ratings agency separately also lowered the outlook on Macau to negative from stable.Last month, Hong Kong’s government revised down the full-year economic growth forecast to 3.2% from an earlier estimate of a 4.0% to 5.0% range. More

Consumer spending is being financed by credit cards where interest is “over the top, out of control, off the hook right now,” economist Carl Weinberg told CNBC.
Weinberg sees a retrenchment in spending in the new year, as debt burdens rise — though probably not enough to push the U.S. economy into a recession.
Monica Defend, head of the Amundi Investment Institute, said she sees a coming pullback in consumer spending as sufficient to trigger a recession in the first half.

The U.S. economy should be able to avoid a recession next year — but a sharp pullback in consumer spending is among the biggest risks of that occurrence, according to economist Carl Weinberg.
“Consumers are just waking up to the fact that they’re financing their spending by running up their credit cards, and that the interest on those credit cards is over the top, out of control, off the hook right now,” the chief economist of High Frequency Economics told CNBC’s “Squawk Box Europe” on Wednesday.

“That’s going to lead to, I think, a retrenchment in consumer spending, as we get into the new year.”
Weinberg’s base case assumes a slowdown in growth, rather than a recession.
“But the risk is, and I agree it’s a nontrivial risk, that consumers get into trouble,” Weinberg said, noting figures from the New York Federal Reserve showing a rise in delinquencies on credit cards.
“Real incomes have just started coming back again, and not by nearly enough to cover some of the increases in the debt burdens that we’re seeing. So credit to the household sector, consumer credit cards, that’s where the downside risk is. That’s where the risk to this Goldilocks forecast is, and I’m watching it.”
A “Goldilocks” scenario is one in which an economy is growing enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.

A U.S. recession in the first half of next year is the base case for Monica Defend, head of the Amundi Investment Institute.
“Financing and financial conditions, eventually, will start to bite the U.S. consumer that is progressively depleting the excess savings that have been … protected during 2023,” Defend said Wednesday on “Squawk Box Europe.”
“Consumption will slow down, we’re seeing the labor market progressively cooling, and this is going to continue. And therefore, we do expect a technical recession in the United States first and second quarter.”
Many strategists see the U.S. as having achieved a “soft landing” for its economy through interest rate hikes. They nevertheless remain cautious on the outlook for 2024, as they warn of the delayed and unpredictable impacts of higher rates.
U.S. growth has stayed strong this year, as other major economies — including the euro zone and U.K. — have stagnated.
Investment stimulus delivered by initiatives such as the Inflation Reduction Act will not be enough to overcome the slowdown in consumption, Defend said Wednesday.
“During the pandemic, there has been substantial transfers from the government into households and, therefore, consumers. If you look at saving rates, it has been really peaking, but now is pointing south quite remarkably,” she said.
“Because of this and the excess savings actually depleting, we don’t think that the U.S. consumer will be able to stand and to maintain the same levels it had over the last two years.” More

The brokerage anticipates consecutive 50 bps cuts in April and June next year, followed by 25 bps cuts each in September and December.Data this week showed euro zone inflation tumbled to 2.4% in November, coming well below expectations for the third consecutive month. The ECB’s leading hawk Isabel Schnabel in an interview with Reuters this week took further hikes off the table, prompting traders to bring forward bets of the first rate cut to March next year. They now expect 140 basis points’ worth of easing by December. “We expect the ECB to keep the guidance that maintaining restrictive rates for sufficiently long will bring inflation back to target in a timely manner,” said Deutsche Bank economists led by Mark Wall. More

The central bank, which meets for the last time this year on Dec. 14, kept interest rates steady at 6.5% at its meeting in November after an off-cycle 25-basis point hike on Oct. 26, amid worries that inflation could spiral out of control.”Hawkish means we could either pause or we could hike on December 14,” Bangko Sentral ng Pilipinas Governor Eli Remolona told reporters.Even as inflation rose at its slowest pace in 20 months in November, at 4.1% versus the previous month’s 4.9%, the central bank said on Tuesday there was a need to keep monetary policy “sufficiently tight until a sustained downtrend” was evident.Barring supply shocks, Remolona said, inflation could return to the central bank’s 2%-4% target by December, and remain below 3% in the early part of 2024. Remolona said the central bank will not lower banks’ reserve requirement ratio, currently at 9.5%, while it is still hawkish. More

LONDON (Reuters) -British businesses and households are coping with the climb in interest rates so far but the process of adjustment is far from over and banks must also prepare for changes to the way they fund themselves, the Bank of England said.The BoE said the overall risk environment was challenging in the face of China’s economic problems, the risk of broader conflict in the Middle East and high public debt levels.There were also questions about the rise of artificial intelligence, the BoE said in its half-yearly Financial Stability Report.”Rates are likely to need to remain at these levels for an extended period to bring inflation back to target on a sustained basis,” BoE Governor Andrew Bailey told reporters.”The full effect of higher interest rates is yet to come through. Therefore we remain vigilant to financial stability risks that might arise.”The BoE said stronger-than-expected wage and income growth since its last review in July had reduced some of the strain on households which have been hit by high inflation and rise in taxes as well as higher borrowing costs.”Nevertheless, household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments,” the BoE’s Financial Policy Committee said.Businesses had also been broadly resilient to higher rates and weak growth, “but the full impact of higher financing costs has not yet passed through to all borrowers,” it said.The British central bank, worried about the long-lasting impact of last year’s surge in inflation, raised interest rates at 14 meetings in a row between December 2021 and August this year to a 15-year high of 5.25%, where they have sat since.BoE officials acknowledge signs of a slowdown in the economy but say they are not thinking about cutting rates because of signs that inflation pressure will stay strong.However, British financial markets have stepped up bets on an early rate cut by the BoE in the past couple of days, following a similar shift in expectations for the European Central Bank and U.S. Federal Reserve, and now see a first quarter-point cut in May or June next year. HIGHER FINANCING COSTSThe BoE urged banks to plan ahead for potential challenges in the way that they fund themselves, given a switch in deposits from normal current accounts to fixed-term, higher-interest savings which cost them more.”The UK banking system is well capitalised and has high levels of liquidity,” the BoE said, adding that net interest margins have probably peaked but profitability was expected to remain robust.However, the run on U.S. lender Silicon Valley Bank this year highlighted how lenders could be hit with sudden surges in withdrawals and the prospect of digital currencies also had implications for the stability of deposits at lenders.Risks flagged by the BoE included upheaval in China’s real estate market which could worsen, and tensions in the Middle East which could push up oil prices and hurt economic growth.It also reiterated its concern that high public debt levels in major economies could hurt Britain’s financial stability if markets turned more fearful about government bonds.Outflows from funds invested in risky corporate debt and increased short and long positioning by hedge funds and asset managers in U.S. Treasuries could fuel further market volatility, the BoE said.The central bank said it would monitor in 2024 the risks posed by the rise of artificial intelligence.Deputy Governor Sam Woods said the BoE was looking closely at the growing use of AI by financial firms.While specific regulations that target AI may not be the best way forward, financial firms using it had to understand properly what they were doing.The BoE said that among corporate borrowers, firms in wholesale trade, real estate and construction and those which were energy-intensive faced higher risks than their peers.As for households with mortgages, higher borrowing costs had impacted just over half of borrowers and the share of income spent on mortgage servicing was due to climb from 6.8% earlier this year to almost 9% by late 2026, although that would be lower than after past financial shocks. More

Battery makers in the EU are being offered €3bn in subsidies as the bloc attempts to catch up with China by jump-starting the electric vehicle industry.The European Commission proposed the sum on Wednesday as part of a prospective deal with the UK to postpone the introduction of tariffs due to hit electric vehicles traded between the two from January 1.Maroš Šefčovič, commission vice-president, said: “By providing legal certainty on the applicable rules and unprecedented financial support to European producers of sustainable batteries, we will bolster the competitive edge of our industry, with a strong value chain for batteries and electric vehicles.”The €3bn will come from the EU’s Innovation Fund, which gets money from sales of carbon emission permits, and be available until the end of 2026. It would be conditioned on the efficiency and sustainability of the batteries.The EU also wants the UK to commit to a clause excluding another extension in three years’ time. An EU official said: “We want to preserve that market access, make sure that we have a very strong position globally and also in our largest export market as China is indeed increasing its market share and it is doing so increasingly through unfair practices.” The EU has opened an anti-subsidy investigation into Chinese producers that will take several months, and could result in punitive tariffs on Chinese EV imports.  “The problem we face right now is that we don’t have batteries or we don’t have enough chemicals,” the official said, adding: “We want these batteries to be built in Europe or in the UK. But we’re not there yet.” Swedish battery maker Northvolt welcomed the announcement. “If used correctly, this mechanism could further fuel the race towards creating more sustainable and circular batteries, giving Europe a competitive edge while also moving towards realising the goals of the Paris agreement.”Under the post-Brexit Trade and Cooperation Agreement (TCA) between the EU and the UK, 10 per cent tariffs would have begun on January 1.Under complicated rules of origin, the value of parts required to be made in the UK or EU to avoid tariffs would have risen to 45 per cent on January 1. Since batteries account for 30-40 per cent of a car’s value, it in effect ruled out using power units produced outside the region.European carmakers had warned that the tariffs would heap excessive costs on to the industry, with losses of up to €4.3bn and cuts in production of almost 500,000 electric vehicles between 2024-27.Two European diplomats said the battery subsidy was necessary to get French agreement to the delay in imposing tariffs, which requires a treaty change. France had warned that the delay risked creating a precedent that could be exploited by London to argue for other changes to the deal.A qualified majority of the 27 member states must now agree to the proposal, but with Germany and about 20 other governments in favour, officials believe that is a foregone conclusion.Under the terms of the TCA, the UK can challenge state aid given to EU industries. London has offered £500mn to Tata to build a battery plant but parliamentarians warned last week that the country remained critically short of battery manufacturing capacity. A UK government official said that chancellor Jeremy Hunt had announced billions of pounds of support for manufacturing in last month’s Autumn Statement, including for electric car production, adding that the Europeans were playing “catch up” with Britain.Additional reporting by Jim Pickard and Richard Milne More

“There is at least a 50-50 chance, if not better,” one of the sources said on Wednesday. This contrasted with the pessimism of EU officials, who consider a deal on EU fiscal rules to be unlikely this year because the differences between countries on the pace needed to consolidate public finances are too big. EU finance ministers are to discuss changes to the rules on Friday, aiming to agree on a joint position that would then be negotiated with the European Parliament early in 2024.There have been very intensive talks between Paris and Berlin over the past weeks, the sources said. “An agreement on EU fiscal rules won’t fail due to disagreement between France and Germany,” a source said.The rules have been suspended since 2020 but are to be reinstated from 2024, and EU governments want to update them before they kick in again.A new compromise proposed by the Spanish presidency on the preventive arm of the Stability and Growth Pact has been positively received by Germany but the country still sees a huge challenge in the corrective arm, with ongoing discussion regarding the reference value.Berlin also wants the new rules to say governments must aim for budget deficits well below 3%, creating a buffer to cover unexpected events. This would further limit the room for fiscal manoeuvre for national governments.A red line for Germany is that interest costs should not be deducted in deficit procedures when reducing structural balances, finance ministry sources said on Wednesday.”We are going there with the firm intention of reaching an agreement, but of course an agreement is not at any price,” one of the sources said. EU officials said a delay in a deal until early next year would not have much impact on euro zone fiscal policy in 2024 because draft budgets for next year have been constructed on existing Commission recommendations. More

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