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The comments mark a dovish shift for Schnabel, seen as the most influential voice in the conservative camp of policymakers, and drove up rate cut expectations on Tuesday as investors now expect the ECB to reverse the steepest increase in interest rates in the bank’s quarter century history. Euro zone inflation tumbled to 2.4% last month, from above 10% a year earlier, after 10 straight rate hikes. That has put the ECB’s 2% inflation target within sight and raised some doubts about policymakers’ warnings that another two years of stubborn price growth may be ahead.Schnabel, who had insisted just a month ago that rate hikes must remain an option because the “last mile” of the inflation fight may be the toughest, said she had shifted stance after three unexpectedly benign inflation readings in a row. “When the facts change, I change my mind. What do you do, sir?” Schnabel said in an interview, repeating a quip often attributed to John Maynard Keynes. “The most recent inflation number has made a further rate increase rather unlikely.”Following Schnabel’s comments, investors were betting on 142 basis points of rate cuts next year, up from 130 basis points a day earlier, with the first move now seen as soon as March.Bond yields also tumbled with German 10-year papers hitting 2.28%, their lowest levels since June, as bets for an ECB policy reversal solidified.Schnabel also warned against guiding markets on interest rate moves too far ahead, given rapidly changing inflation figures that are surprising policymakers on the way down, as they did on the way up. ECB President Christine Lagarde, French central bank chief Francois Villeroy de Galhau and Bank of Greece Governor Yannis Stournaras have all guided for steady rates for the next “few” or “several” quarters, even as markets see a rate cut in the early spring. “We have been surprised many times in both directions,” Schnabel said. “So we should be careful in making statements about something that is going to happen in six months’ time.” Schnabel, a German, is the first of the ECB’s policy hawks to signal a shift in view. Her comments come after Bundesbank Chief Joachim Nagel said the November data did not change his mind and a rate hike was still a possibility. ERR ON THE SIDE OF CAUTIONSchnabel acknowledged the rapid shift in rate cut pricing but pushed back more modestly than some of her colleagues.”Central banks are more cautious and I would argue they have to be more cautious,” she said. “After more than two years of above-target inflation, we need to err on the side of caution.” Overall price growth was always expected to drop quickly through the autumn but the rapid decline in underlying inflation, which strips out volatile food and energy prices, is underpinning the guarded optimism. “This is quite remarkable,” Schnabel said. “The recent inflation print has given me more confidence that we will be able to come back to 2% no later than 2025.”But the inflation fight has not yet been won, she said, with more progress needed on underlying inflation and slower wage growth. The ECB is also awaiting data to see if company profit margins continue to shrink. An uptick in price growth is still coming, Schnabel warned, as some budget subsidies expire and high energy prices get knocked out from year-earlier figures, so the rapid drop may be over for now. “We must not declare victory over inflation prematurely,” she said. “We are on track but we need to remain vigilant.”Schnabel said weak growth as a result of the ECB’s rate hikes is helping the inflation fight but that a deep or prolonged recession is unlikely, with recent survey data supporting expectations for a recovery.Weighing in on a debate about whether the ECB should make an early stop to reinvestments in its 1.7 trillion Pandemic Emergency Purchase Programme, Schnabel argued that purchase volumes were low and markets anticipate an eventual end, so the decision was “not such a big deal”. More

NEW YORK (Reuters) – Major life insurers are accessing cheap funding at record levels from a U.S. government-backed financing system, sapping billions of dollars meant to help increase affordable housing, interviews with industry executives and regulatory disclosures show.When Federal Home Loan Banks (FHLBs) were created in 1932 in the aftermath of the Great Depression to finance firms that offer home loans, insurers were granted access to this system because they provided mortgages. They stopped providing mortgages in the following decades as they became an industry distinct from banking. Starting in 2008, they have been aggressively drawing on FHLBs, arguing they support housing because they invest in residential mortgages and related securities. The extent to which FHLBs finance insurers has not been previously reported. Reuters interviews with more than a dozen industry executives and regulators, a review of regulatory disclosures and data show this borrowing has not been matched by a rise in home loan affordability, with the cost of mortgages soaring to its highest in 23 years. The practice has been lucrative for insurance firms that have locked in billions of dollars in profits by investing the borrowed money in areas such as commercial real estate mortgages and corporate and government bonds. It has been predominantly used by life insurers, because they need to boost their investment returns with cheap funding to meet long-term liabilities. FHLBs typically have a lower cost of borrowing than what is otherwise commercially available, because these banks enjoy an implicit U.S. taxpayer-backed guarantee on their debt. They provide the cheap funding to banks and insurers in exchange for collateral to ensure they get their money back.A spokesperson for the Federal Housing Finance Agency (FHFA), which oversees the FHLBs, declined to comment specifically on insurers tapping FHLBs, but said the regulator was considering implementing new requirements for borrowing from FHLBs to ensure the support of housing and community development. They declined to provide more details.Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a trade association for FHLBs, said the banks have “abided by the will of Congress” to provide liquidity and support affordable housing.BORROWING BILLIONSFHLBs lent a record $137.1 billion to life insurance firms last year, building on a trend that started around 2008, according to the FHLB Office of finance. Yet the industry’s investments in home mortgages have dropped. National Association of Insurance Commissioners (NAIC) data shows that insurance companies have been buying fewer residential-backed mortgage securities (RMBS), which boost liquidity in the home mortgage market, while purchases of commercial-mortgage backed securities (CMBS) have been steady.In 2022, life insurance companies bought $193.1 billion worth of RMBS, down 6% from $205.3 billion in 2021, as soaring inflation soured their appetite to invest more. In contrast, their appetite for CMBS remained steady, with purchases totaling $203.6 billion in 2022, almost flat compared to $204.7 billion in 2021. Lawrence White, an economics professor at New York University who recently co-authored research about FHLBs, said insurers did not need to borrow from FHLBs to invest in mortgages in the first place.”It’s an artifact of the 1930s that insurance companies are part of the FHLB system,” White said. MetLife Inc (NYSE:MET), Equitable Holdings (NYSE:EQH) Inc, TIAA, Corebridge Financial and Brighthouse Financial (NASDAQ:BHF) Inc are among the insurance firms that are prolific users of FHLB funding, their regulatory filings show. MetLife, TIAA, Corebridge, Brighthouse and Equitable declined to comment. JUICING RETURNSCynthia Beaulieu, a managing director and portfolio manager at Conning, which manages $205 billion in assets for investors such as insurance companies, said a majority of her clients use FHLB loans to generate extra returns because “the arbitrage was really attractive.”Life insurers can lock in returns between 85 and 140 basis points by taking FHLB loans and investing the money in pools of loans such as collateralized loan obligations, Wellington Management, a Boston-based investment manager, said on its website in July. A percentage point is 100 basis points. Insurers are entitled to tap FHLB funding. Yet U.S. taxpayers are backstopping the insurance industry’s profits with little to show, said Cornelius Hurley, a lecturer at the Boston University School of Law and a member of the Coalition for FHLB Reform, a group that calls for changes to the FHLB system to address unmet housing needs.”All (insurers) do is they happen to have some government securities and mortgage-backed securities in their investment portfolios. But they don’t provide any public benefit in return for that,” Hurley said. AIDED BY REGULATORSTo be sure, banks have also been stepping up their borrowing from FHLBs to tap cheap funding. An FHFA report published last month showed how some troubled regional banks, including Silicon Valley Bank and First Republic, were using FHLBs as lender of last resort, encouraging risk-taking that hastened their collapse.Insurers’ borrowing from FHLBs picked up in 2008 financial crisis, as those that spread themselves thin with aggressive investments scrambled for cash. Subsequent regulatory changes emboldened insurers to borrow more. The National Association of Insurance Commissioners (NAIC), which sets policy that many state insurance regulators follow, allowed insurers in 2009 to treat FHLB borrowing as “operating leverage” rather than debt, as long as they use the money for investments.This gives insurers more room to saddle themselves with more with debt, because borrowing from FHLBs weighs less on their capital ratios than commercial borrowing, FHLB officials, analysts and economists say. It can also give them a more favorable credit rating, allowing them to borrow more debt at cheaper rates. In 2018, the NAIC again made FHLB borrowing more attractive for insurance companies, by requiring them to hold less money aside for every dollar they borrow from FHLBs.The NAIC declined to comment.The reduced capital charges can more than double insurers’ return on investments from FHLB loans, according to FHLB Chicago. On its website, it gives examples of how insurers can borrow from it to invest in commercial mortgage securities, rather than residential mortgage securities that benefit the housing market directly.Michael Ericson, the president and CEO of FHLB Chicago, said the use of mortgages and mortgage-backed securities as collateral for FHLB loans helps maintain the FHLBs’ nexus to housing finance.Insurers have lobbied to maintain the current arrangement. The American Council of Life Insurers (ACLI) and the Insurance Coalition wrote to the FHFA in letters reviewed by Reuters, arguing that curbing their FHLB borrowing would remove liquidity from the market for mortgages. They did not explain why insurers need FHLB funding to invest in mortgages.ACLI spokesman Jack Dolan said that life insurers’ FHLB borrowings represented a small fraction of the $8.3 trillion in assets held by the industry, and that tapping FHLBs was “part of prudent, long-term risk management strategies.” The Insurance Coalition did not respond to a request for comment. More

MUMBAI (Reuters) – India’s central bank has told peer-to-peer lending platforms to halt certain activities after inspections found rule violations and misleading sales practices, four sources with direct knowledge of the matter said.The Reserve Bank of India, also the country’s banking regulator, conducted inspections of at least 10 lenders in the fast-growing sector between June and September, said the sources, all industry executives. They declined to be identified because discussions with the regulator are not public.They added that some lenders had already begun halting certain services and practices in line with the central bank’s guidance, while failure to comply could risk future penalties or restrictions.The Reserve Bank of India did not respond to a request for comment. The six largest lending platforms, of 24 doing business in India, also did not respond.The regulators found a variety of violations and questionable practices, including improper relending of repaid funds and marketing of products as an alternative to bank deposits, the sources said.India’s regulators have been intensifying their scrutiny of rapidly growing consumer finance services, including peer-to-peer lending, which industry executives estimate is worth 80 billion to 100 billion rupees ($960 million-$1.20 billion) in assets under management.The regulators recently raised capital requirements for lenders, including non-bank financial companies, against personal loans they give out.Peer-to-peer lending, which sidesteps banks and financial institutions by connecting individual lenders with borrowers, has grown to $407 billion globally as of last year, according to a report by Future Market Insight.But several countries including China and Indonesia have in recent years curbed the platforms’ activities following large-scale defaults and consumer complaints.The regulatory inspections found that some Indian peer-to-peer lenders were boosting their transaction volumes by improperly allowing other financial institutions to lend via their platforms, one of the sources said. The source, a senior executive at a peer-to-peer lender, added that the central bank had told lenders to stop marketing their platforms as an alternative to bank deposits, which regulators determined was mis-selling.”RBI has categorically told us not to compare the product with savings or fixed deposits,” the source said.The four sources also said some lenders were automatically relending funds repaid by borrowers without proper authorisation from the lender, also a violation of banking regulations.”There have been certain instances where P2P lenders were not acting in the spirit of the P2P lending guidelines, where the platform is supposed to only act as a marketplace,” said Rohan Lakhaiyar, partner at Grant Thornton Bharat’s financial services risk division.($1 = 83.3786 Indian rupees) More

BERLIN (Reuters) – Nearly half of German companies operating in China are taking measures to reduce the risk of doing business there largely due to growing geopolitical tensions, according to a new survey by the German Chamber of Commerce in China.Firms are building supply chains that are independent of China, shifting some operations away from the country and growing markets elsewhere in Asia, according to the survey of 566 companies conducted between Sept. 5 and Oct. 6.Some 83% of companies cited geopolitical tensions as the main reason for their steps to mitigate risks related to China business, while 45% and 24% respectively put it down to the country’s economic slowdown and greater focus on self-reliance.Other countries are benefiting from this risk mitigation strategy, according to the survey – with 57.5% of companies surveyed saying they would be investing more in India, followed by 37.9% for Vietnam, 30.1% for Thailand, 23.3% for Malaysia and 20.1% for Singapore.The survey comes five months after the government unveiled a strategy toward de-risking Germany’s economic relationship with China, its biggest trade partner and confirms anecdotal evidence reported by Reuters of German firms reducing their dependence on China.Other countries in the West are also promoting greater risk mitigation, amid growing concerns about China’s increasingly assertive attitude toward Taiwan and in the South China seas, as well as its tightening grip over its domestic economy.This in turn is beginning to have an impact on the world’s second-largest economy, with China recording its first-ever quarterly deficit in foreign direct investment in July-September.Still, of the German companies surveyed, some 54% said they wanted to invest further in China – up from 51% last year- to localise production – in effect also potentially shielding it from the repercussions of geopolitical spats, according to economists.That was more than the 44% that said they were pursuing risk mitigation strategies. More

1. Futures inch downU.S. stock futures edged lower on Tuesday after equities on Wall Street started the first full week of trading in December in the red.By 04:58 ET (09:58 GMT), the Dow futures contract had shed 29 points or 0.1%, S&P 500 futures had dipped by 10 points or 0.2%, and Nasdaq 100 futures had fallen by 69 points or 0.4%.The main indices in New York ended the previous session lower, as a decline in shares in megacap tech firms interrupted a surge in equities that saw the benchmark S&P 500 post its highest close so far this year. U.S. Treasury yields, which typically move inversely to prices, also rose, adding to the downward pressure on stocks.Investors seemed to be turning somewhat cautious with the release later in the week of the key monthly U.S. jobs report, which could lead markets to reassess their expectations for a Federal Reserve interest rate reduction early next year. Analysts at ING have also suggested that traders may be “positioning” themselves for potential pushback from Fed Chair Jerome Powell against rate cut bets next week, when the central bank holds its last policy meeting of 2023.2. JOLTS aheadA slew of economic figures this week are set to give color to a picture of the U.S. labor market that will completed by Friday’s much-anticipated nonfarm payrolls report.One of those data points includes the Job Openings and Labor Turnover Survey, a closely-watched gauge of labor demand.Economists predict that the so-called JOLTS report, which is due out later today, will show that job openings in the world’s largest economy slipped to 9.3 million on the final day of October, down from 9.553 million on the last day of the prior month.Resilience in the labor market has helped to bolster hopes that the U.S. economy may be able to avert a recession despite a long-standing campaign of Fed interest rate hikes aimed at cooling red-hot inflation.However, signs of lingering strength in job demand could be interpreted as a possible accelerant to price growth, boosting the case for the Fed to keep policy at restrictive levels for a longer period of time.3. RBA leaves rates unchangedThe Reserve Bank of Australia kept interest rates on hold at 4.35% as anticipated on Tuesday, fueling expectations that it may be bringing its own tightening cycle to an end.But RBA Governor Michele Bullock said in a note that there were still “significant uncertainties” around the outlook on goods inflation. She also noted that while the Australian economy had cooled under high interest rates, it remained largely resilient, possibly presenting more upward pressure on price growth.Meanwhile, Bullock flagged that there is still a “high level of uncertainty” around the outlook for the Chinese economy and the impact of foreign conflicts. Like the Fed and other central banks around the world, the RBA has moved recently to increase borrowing costs, citing a recent uptick in price gains. But with inflationary pressures expected to abate globally, debate is heating up among policymakers over whether it is time to back away from these more hawkish stances.4. Chinese services activity grows at quickest pace in three months in November – Caixin PMIChinese service sector activity grew by more than expected in November, a private survey showed on Tuesday, in a sign that stimulus measures from Beijing may be helping to boost local demand. The Caixin China Services Purchasing Managers Index (PMI) came in at 51.5 in November, above projections for a rise of 50.7. The reading was the highest in three months, although it remained under the long-term average.A figure topping 50 indicates expansion. Services have been a bright spot in China’s broadly sluggish economy this year, somewhat countering weakness in a manufacturing industry reeling from a decline in local and overseas demand. 5. Oil rises amid Middle East tensionsOil prices rose Tuesday as traders gauged ongoing tensions in the Middle East, but gains were tempered by uncertainty surrounding recent OPEC+ production cuts.By 04:57 ET, the U.S. crude futures traded 0.9% higher at $73.73 a barrel, while the Brent contract climbed 0.8% to $78.66 per barrel.Fears of a potential escalation in the Israel-Hamas conflict have grown after the U.S. held Iran responsible for an attack on U.S. vessels in the Red Sea by Houthi forces. But traders remained wary of pricing a significant risk premium into oil over the conflict, given that it has so far had a minimal impact on Middle Eastern oil supplies.The Organization of the Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, agreed to an additional voluntary output reduction of 900,000 barrels per day last week, although analysts told Reuters that markets were skeptical over the impact of the move. More

S&P expects India, currently the world’s fifth-largest economy, to grow at 6.4% this fiscal and estimates growth will pick up to 7% by fiscal 2027. In contrast, it expects China’s growth to slow to 4.6% by 2026 from an estimated 5.4% this year.India’s gross domestic product (GDP) grew a bigger-than-expected 7.6% in the second quarter of fiscal 2024, data showed last week, which prompted several brokerages to raise their full-year estimate.However, S&P, which had raised its forecast even before the latest data, said India’s growth will depend on its successful transition to a manufacturing-dominated economy from a services-dominated one.”A paramount test will be whether India can become the next big global manufacturing hub, an immense opportunity,” S&P said in its Global Credit Outlook 2024 report, dated Dec. 4.While Prime Minister Narendra Modi’s government has been driving domestic manufacturing thorugh the “Make in India” campaign and production-linked incentives (PLIs), the share of manufacturing is still roughly 18% of GDP.In contrast, services account for over half of India’s GDP.S&P said that developing a strong logistics framework is key to becoming a manufacturing hub and that India also needs to “upskill” its workers and increase female participation in the workforce to realize its “demographic dividend.”India has one of the youngest working populations in the world, with nearly 53% of its citizens under the age of 30. More

The capital’s more moderate cost increases were influenced by lower prices for utilities and processed foods, contributing to an inflation rate that fell short of projections. Core inflation figures, which exclude volatile food and energy prices, also reflected a deceleration, rising only 3.6% and showing a trend of gradual easing over recent months.These developments support BOJ Governor Kazuo Ueda’s view that inflationary pressures are likely to continue receding, potentially delaying any imminent changes in monetary policy. The focus remains on wage growth as a key factor in the central bank’s long-term inflation strategy.The BOJ has maintained a cautious stance despite inflation outstripping its target for the 19th consecutive month as of November 24. The central bank attributes the persistent rise to transitional and cost-push factors rather than sustainable demand-driven pressures. Consequently, the BOJ is deferring any policy adjustments until after spring wage data becomes available.In addition, three BOJ members have recently set expectations in media statements, indicating that there will not be a swift shift in policy ahead of upcoming wage negotiations. Despite raising its near-term inflation forecast slightly to an average of 2.8%, the BOJ anticipates a decline to around 1.7% by fiscal year 2025, suggesting an eventual return to below-target levels after an extended period above the target.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More