Economy

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FRANKFURT (Reuters) – The European Central Bank will raise interest rates again on Thursday and likely reel in a key subsidy to commercial banks, taking another huge step in tightening policy to fight off a historic surge in inflation.Fearing that rapid price growth is becoming entrenched, the ECB has already raised rates at the fastest pace on record, and there is little let-up in sight as unwinding a decade worth of stimulus could take it well into next year and beyond.The ECB is almost certain to raise its 0.75% deposit rate by 75 basis points – for a cumulative 2 percentage-point increase in three meetings – and signal that it is not yet done, even if the size of subsequent moves remains open to debate.But in a potentially more important decision, the bank is also likely to take the first steps in reducing its 8.8 trillion euro balance sheet, bloated by years of debt purchases and ultra cheap loans extended to banks.”The ECB is still in catch-up mode,” BNP Paribas (OTC:BNPQY) said. “We think there is now a comfortable majority for taking rates into restrictive territory.”But the rate decision is likely to be the easy part of Thursday’s meeting.Unlike in September, no policymaker has openly opposed the idea of a 75 basis-point hike on Thursday, and markets have fully priced in such a move, suggesting an easy unanimity, especially since the U.S. Federal Reserve has also hinted at a similar increase.Signalling that future moves will be more difficult, ECB President Christine Lagarde is likely to provide only vague guidance, arguing that more hikes are needed but incoming data and new economic projections in December will be key.While inflation is high and underlying price growth is broadening, the overall picture may be more balanced than in the past as energy prices are falling, a looming recession will dampen price pressure, and there are no signs of a wage-price spiral.The ECB’s rate decision is due out at 1215 GMT, followed by Lagarde’s news conference at 1245 GMT.BALANCE SHEET BATTLEThe real battle is likely to be over how to reduce the ECB’s balance sheet. The most pressing issue is dealing with some 2.1 trillion euros worth of ultra-cheap loans handed out to commercial banks, which are now causing both a political and financial headache.Having borrowed at zero or even negative rates, banks can now simply park this cash back at the ECB for a positive, risk-free return, which rises with each deposit rate hike.”The optics are bad against the backdrop of a historical shock to households’ income, and political pressure cannot be ignored,” Pictet economist Frederik Ducrozet said. “Note that some countries have implemented a windfall tax on bank profits for similar reasons.”The ECB would also be justified on monetary policy grounds to act, as abundant liquidity is keeping interest rates too low – money market rates are still slightly below the central bank’s deposit rate.This is essentially stopping rate hikes from getting fully transmitted to the real economy, so the ECB is likely to decide to change the terms of these so-called Targeted Longer-Term Refinancing Operations, or TLTROs, to encourage banks to repay them early.The bank is likely to decide to change the bank loan terms, but the devil will be in the detail as only imperfect options are available to it.The most controversial would be a simple change in the terms, a move likely to be challenged in court.”Changing the TLTRO terms could hit the ECB’s credibility and would lead to reluctance of banks to ever make use of the TLTROs in the future again,” ING Economist Carsten Brzeski said.The ECB could also create a system of tiering where reserves equalling TLTRO borrowing would be remunerated at lower rates, while it could also set a lower rate applied to excess reserves.An even more controversial discussion for Thursday will be how to wind down the 5 trillion euros worth of debt, mostly government bonds, bought by the ECB. While no decision is likely on this, policymakers are likely to signal that they have started devising plans to wind down a 3.3 trillion euro Asset Purchase Programme by not investing all cash back into the market from maturing bonds.(This story has been refiled to correct time in paragraph 10) More

Only a day earlier, Japanese media had reported the government was set to spend about 25 trillion yen on the stimulus package, aimed at easing the pain from rising energy and other living costs.Some lawmakers from the ruling Liberal Democratic Party objected to the lower estimate citing tougher economic conditions, prompting Prime Minister Fumio Kishida and Finance Minister Shunichi Suzuki to meet on Wednesday evening to review the plan, NHK reported.Japan’s public debt is already the biggest among major economies at twice the size of its economy. The extra spending, which is likely to be finalised on Friday, is expected to be partially funded by additional debt issuance, raising concerns over Japan’s fiscal discipline.Asked about the raised spending estimate and its implications, Suzuki said work was still ongoing to reach a final decision on Friday.”We’re almost there,” he told reporters at the ministry.With his approval ratings plunging, Kishida has been under pressure to take steps to alleviate the blow from rising fuel and food prices, which have been exacerbated by a roughly 30% rise in the dollar against the yen this year.Under the stimulus package, the government will extend a gasoline subsidy to curb rising energy costs for households and businesses until the first half of the next fiscal year, a draft document seen by Reuters showed on Wednesday.It will also include support for rising electricity bills, which will be implemented as early as next January, according to the draft.($1 = 146.3200 yen) More

WASHINGTON (Reuters) -President Joe Biden pledged on Wednesday to crack down on surprise fees consumers are forced to pay on cable bills, hotel rooms and concert tickets, while U.S. financial regulators declared bank fees for bounced checks and overdrafts unfair. “These are junk fees,” President Joe Biden told reporters at the Eisenhower Executive Office Building. “They benefit big corporations. Not consumers. Not working families. And that changes now.”Biden signaled his administration would look at concert tickets, hotels and airfares shortly after the U.S. Consumer Financial Protection Bureau (CFPB) issued guidance that surprise overdraft fees and unexpected depositor fees for bounced checks are likely unlawful. The White House said the move could eliminate billions in banking fees. Overdraft fees can catch consumers off guard when their online accounts still show a positive balance, while some customers may find they owe a fee for depositing a check that they did not know was bad, the CFPB said. The agency said that both fees likely violate the Consumer Financial Protection Act’s prohibition on unfair fees that are unavoidable to consumers. In a fact sheet, the White House noted that bank overdraft and non-sufficient funds fees accounted for an estimated $15.5 billion in revenue for banks in 2019.Pressure by the regulator pushed revenue from such fees down 90% at Bank of America (NYSE:BAC) this summer. Biden added that the Federal Trade Commission had started work on a rule last week to crack down on “unfair and deceptive fees across all industries.”He cited processing fees for concert tickets and resort fees at hotels as two items his administration is examining. “We’re just getting started. There’s tens of billions of dollars and other junk fees across the economy that I’m directing my administration to reduce or eliminate,” Biden said.”We applaud President Biden’s advocacy for fee transparency in every industry, including live event ticketing,” Live Nation Entertainment (NYSE:LYV) Inc said in a statement. “This only works if all ticketing marketplaces go all-in together, so that consumers truly have accurate comparisons as they shop for tickets.” Shares of the company, which owns Ticketmaster, fell 4% on Wednesday.Biden’s remarks follow a meeting the White House Competition Council held last month, in which he ordered federal agencies to take steps to reduce or eliminate hidden fees, charges and add-on costs, which he said were weighing on family budgets.The administration has come under intense pressure to tamp down inflation that has hit four-decade highs. More

(Reuters) – Facebook (NASDAQ:META) parent Meta Platforms Inc on Wednesday forecast a weak holiday quarter and significantly more costs next year, sending shares down nearly 20% as investors voiced skepticism about the company’s pricey metaverse bets.The forecast knocked about $67 billion off Meta’s stock market value in extended trade, adding to the more than half a trillion dollars in value already lost this year.If Meta’s after-hours stock rout is matched in Thursday’s trading session, it will have been its deepest one-day loss since Feb. 2, when the company last issued a dismal forecast.The disappointing outlook comes as Meta is contending with slowing global economic growth, competition from TikTok, privacy changes from Apple (NASDAQ:AAPL), concerns about massive spending on the metaverse and the ever-present threat of regulation.Executives announced plans to consolidate offices and said Meta would keep headcount flat through the end of 2023.Revenue fell 4% in the third quarter ended Sept. 30. That deepened a revenue decline begun the previous quarter, when the company posted a first-ever revenue drop of 0.9%, although it was less steep than the 5.6% decline Wall Street had expected, according to IBES data from Refinitiv. GRAPHIC: Meta’s revenue fell for a second straight quarter https://graphics.reuters.com/METAPLATFORMS-RESULTS/dwvkrbbwbpm/chart.png More troubling was the company’s estimate that fourth-quarter revenue would be in the range of $30 billion to $32.5 billion, mostly under analysts’ estimates of $32.2 billion, according to the Refinitiv data.Meta also forecast that its full-year 2023 total expenses would be $96 billion to $101 billion, significantly higher than a revised estimate for 2022 total expenses of $85 billion to $87 billion.That includes an estimated $2.9 billion in charges over the course of both 2022 and 2023 from the office downsizing.It also forecast that operating losses associated with the Reality Labs unit responsible for its metaverse investments would grow in 2023 and pledged to “pace” investments after that.Total costs for the third quarter came in above estimates at $22.1 billion, compared with $18.6 billion the year prior.’EXPERIMENTAL BETS’Meta is carrying out several overhauls of its apps and ads products to keep its core business pumping out profits, while also investing $10 billion a year in a bet on metaverse hardware and software.Chief Executive Mark Zuckerberg has said he expects the metaverse investments to take about a decade to bear fruit. In the meantime, he has had to freeze hiring, shutter projects and reorganize teams to trim costs.An analyst on the investor call told Zuckerberg investors were worried that the company had taken on “just too many experimental bets” and asked the chief executive why he believed his gambles would pay off.Meta executives defended the spending, saying most of the company’s expenses were still going toward the core business, including investments in more expensive AI-related servers, infrastructure and data centers.Zuckerberg added that he expected the metaverse work to provide returns over time.”I appreciate the patience,” he said. “And I think that those who are patient and invest with us will end up being rewarded.”Zuckerberg said plays of Meta’s TikTok-like short-video product Reels now number more than 140 billion across Facebook and Instagram each day, up 50% from six months ago, and its revenue run rates are now $3 billion annually.He believes Reels is gaining against rival TikTok, he added, with Reels being reshared more than 1 billion times a day.Meta also posted user growth figures roughly in line with expectations, including a year-over-year increase of monthly active users on flagship app Facebook.”The worry for Meta is that this pain is likely to continue into 2023 as cost headwinds remain a real challenge and the strong dollar impacts on overseas earnings,” said Ben Barringer, equity research analyst at Quilter Cheviot.”Given revenues were down at a time when costs have grown significantly, modest user growth and impressions simply isn’t going to bail you out.” Net income in the third quarter fell to $4.40 billion, or $1.64 per share, from $9.19 billion, or $3.22 per share, a year earlier, its worst showing since 2019 and the fourth straight quarter of profit decline.Analysts had expected a profit of $1.86 per share. More

(Reuters) -Australia and New Zealand Banking Group Ltd on Thursday reported a rise in annual cash profit, surpassing market expectations, as its home loans business improved and higher interest rates boosted margins in the second half.ANZ said its home loan application times were back in line with industry peers, following an overhaul to address processing delays that had kept the lender from cashing in on a COVID-driven housing boom. Shares, however, dropped as much as 4.6% to A$24.67 in their worst intraday loss since June, against a broader financial index that was down 1.4%, as the lender also flagged headwinds arising from wage and vendor cost inflation. “Despite higher costs we see upside to consensus FY23 core earnings as the NIM leverage has become more obvious,” analysts at Citi said in a note. The lender also aims to introduce a fully automated digital home loan to further bolster its mortgage loans business, and is planning a pilot programme of a digital home loan in the coming weeks. ANZ’s group net interest margin, a key measure of profitability, grew 10 basis points from the first half to 1.68% in the second half of the year. Runaway inflation has pushed the Australian central bank to pursue its most aggressive tightening cycle in decades, boosting margins for banks that had grappled with record-low interest rates for the past two years.The bank said it expects the environment to be supportive for margins in the first half, although any change from the exit margin is likely to be more modest. Annual cash profit from continuing operations was A$6.52 billion ($4.23 billion), beating a Visible Alpha consensus estimate of A$6.31 billion. The bank proposed a final dividend of 74 Australian cents per share, compared with 72 cents last year.($1 = 1.5408 Australian dollars) More

For more than 20 years, Oliver Betz produced sensors for Chinese engine-makers from his base in Munich. But in recent months, Systec Automotive’s sales to China have collapsed, falling by three-quarters. “Expanding in China is not a topic under consideration. It’s about how we can limit the damage,” said Betz, who says 65 per cent of the company’s exports last year were to the country. He blames the slump on slower growth, Beijing’s zero-Covid strategy and an increasing preference for buying local as Chinese manufacturers catch up with foreign brands. Betz’s experience is becoming increasingly common for Germany’s small and medium-sized enterprises, which, following year after year of surging sales. are finding their relationships with Chinese partners tested. Germany’s Mittelstand companies are, according to Jörg Wuttke, president of the influential trade lobby EU Chamber of Commerce in China, increasingly realising that they cannot rely on Chinese profits as they once did. “It’s a lost love affair,” said Wuttke. The breakdown is threatening to unravel what has become one of the world’s most mutually beneficial trading relationships, in which German companies prospered by selling the machinery to Chinese exporters that enabled them to become the key player in global supply chains. Since the turn of the millennium, China has gone from accounting for just over 1 per cent of German exports to commanding a 7.5 per cent share of sales abroad, making it second only to the US. In 2021, more than €100bn worth of German goods were sold there.

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Thorsten Benner, director of the Global Public Policy Institute in Berlin, described the ties as the main factor in the “golden age of the German economic model”, seen during the latter stages of Angela Merkel’s 16-year reign as chancellor, which ended last year. Alicia García-Herrero, a senior economist at think-tank Bruegel, said the buoyancy of the links between the two export powerhouses had been replaced by a sinking feeling in Berlin as exports slide. “Germany is losing its trade surplus and part of its competitiveness, partially because China has moved so rapidly up the value ladder.”It comes at a sensitive moment for the broader relationship between the two countries. Russia’s invasion of Ukraine has given fuel to German critics of Beijing, who argue the country’s economic ties are trumping foreign policy goals and leading to collaboration with prospective geopolitical rivals. Olaf Scholz, who will fly to Beijing next week for his first meeting with Chinese leaders as German chancellor, is set to unveil his new China strategy next year. He is under pressure from his coalition partners, the Greens and the Free Democrats, to loosen ties and courted controversy when he asked ministries to back an investment from Cosco, a state-owned Chinese shipping conglomerate, in a container terminal at the Port of Hamburg. The deal was approved earlier this week, though Cosco took a smaller-than-planned stake, which will limit its capacity to influence decision-making. “The China strategy will include clear messages on the need to reduce dependencies, and diversify supply chains and trading partners,” said Benner.Berlin has signalled it will offer fewer guarantees to insure companies against political risks in China. Its due diligence law, which comes into force in January and makes larger companies responsible for monitoring human rights violations by their suppliers, could further dissuade German investment in China, which has increasingly become concentrated among carmakers Volkswagen, BMW and Daimler, as well as chemicals giant BASF.

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Responses to atrocities in Xinjiang, China’s western border region where the government has interned more than a million Muslims, have already hit sales. Sportswear manufacturer Adidas suffered Greater China sales declines of 15 per cent in two successive quarters last year after a boycott over the company’s decision not to source cotton from the border region. The war in Ukraine has focused companies’ minds on the risk of sanctions should China invade Taiwan. US-China decoupling has led many companies to already look for alternative suppliers. Just over a third of the members at VDMA, the German machinery association, surveyed in 2021 said the decoupling was prompting a rethink of their business links. Magnetec, a Hesse-based electrical components manufacturer that has operated a factory in China for 13 years, decided against building a second plant in the country because of the risk of sanctions. “When our customers order our products, they give as a precondition that they are not built in China,” said Marc Nicolaudius, Magnetec’s chief executive. Instead, it will expand in Vietnam. Noah Barkin, managing editor at consultancy Rhodium Group, said recent German investment in China had become “more defensive” and was being spent on localising production and supply chains to protect against the risk of tariffs.Competition — fair and otherwise — remains a problem. “Our members know that every technology they bring into China, in a relatively short time, will be part of the Chinese market,” said Ulrich Ackermann, head of foreign trade at the VDMA. “We say, be aware you can be kicked out in a short time.”Ackermann spoke of a German manufacturer of construction machinery, whose state-owned Chinese rival sent machines to customers, free for use for the first year. “How can we compete with that?” Amid this souring atmosphere, Chinese diplomats have pressured industry association leaders to refrain from criticising Beijing. One lobbyist recounts being told by a Chinese government official that its consumers could exert a lot of influence “if western companies don’t behave”.Despite all the tensions, many are not yet ready to give up. “China is a very important market for all of our members,” said Andreas Rade, managing director for government and society at VDA, the German carmakers’ association. “Exit cannot be the answer.”But Barkin said the days of China being a “one-way bet” for German companies were done. “They are not pulling out yet, but they are looking at ways to shield their operations from geopolitical headwinds,” he said. “And some are now preparing for the day when they might have to leave.” More

China’s introduction of trade sanctions on some Australian products in 2020 has resulted in unexpected benefits, with the latest economic statistics showing exports booming for the resource-rich country as it has been forced to shift its focus to other markets.Australia’s trade figures have also been improved by Chinese dependence on critical products, notably iron ore, wool and natural gas. They were spared the punishment of new tariffs, with increased demand boosting their sales.The country’s long record of economic growth had looked vulnerable when China introduced punitive tariffs and controls on an array of Australian imports two years ago, as political tensions between the two countries intensified. The measures, introduced after Australia’s then prime minister Scott Morrison called for an inquiry into the origins of Covid-19, threatened to weaken its economic resilience. Even after the imposition of sanctions, China was the destination for more than 42 per cent of its exports in 2021 compared with only 14 per cent in 2007, as demand for iron ore and other minerals and fossil fuels, as well as consumer goods, grew rapidly, according to the Australian Strategic Policy Institute think-tank. “Australia had not been as dependent on a single market since 1938, when that was the ‘mother country’ of the United Kingdom,” said David Uren, a senior fellow at ASPI. For the first time in its history, it was dealing with a situation where its largest trading partner had become an adversary, he said.At the same time, victims of the sanctions included barley growers supplying the brewers that make Tsingtao beer, beef farmers and the lobster industry. Luxury wine producers, who charged Chinese consumers premium prices, and coal miners, whose product was left stranded on ships off the Chinese coast for months, were also hit.

Two years on, the shift that has taken place is clear. China’s share of Australia’s exports had dropped to 29.5 per cent by August, according to Australian Bureau of Statistics data — the first time it had dipped below the 30 per cent mark since October 2015. China’s share of imports has also dwindled to 26 per cent in the three months to September, compared to 30 per cent in 2021. The drop in the value of exports is partly due to a falling iron ore price — Australia’s biggest export, with Chinese demand for the steelmaking resource boosting the country’s largest companies, including BHP, Rio Tinto and Fortescue. But trade is also brisker with other Asian countries. Excluding Japan, a traditional trade partner for Australia, South Korea, India and other ASEAN countries now account for more than a third of the country’s exports. Australia’s trade surplus in the second quarter hit A$43bn (US$28bn), driven by strong export activity and the booming price of coal. “The sanctions haven’t worked. The Australian economy has remained buoyant, somewhat ironically, on Chinese demand,” said Michael Wesley, deputy vice-chancellor international at the University of Melbourne.“The Chinese economy cannot wean itself off iron ore. It is a bedevilling situation for them,” he said. Australia exported A$175bn worth of iron ore to China in 2021, according to the Lowy Institute.Meanwhile, some Australian companies have been able to maintain exposure to the lucrative Chinese market. Treasury Wine Estates, one of the world’s largest wine producers, was hit hard by the imposition of a 175 per cent tariff on Australian wine that wiped out sales of its luxury Penfolds brand in its most profitable market. Over the next two years, TWE’s sales of Penfolds boomed in Singapore, Hong Kong and Taiwan. Yet it has not given up on mainland China. It has begun exporting French-made Penfolds to China and has now launched a Chinese version of Penfolds, using grapes grown in the Ningxia and Shangri-La provinces.“We’ve said since the day tariffs were put on us that we weren’t walking away,” Tim Ford, chief executive of TWE said, arguing that the trade and political aspects of the Australia-China relationship were “quite divorced”. In another example, Bubs, an infant formula maker based in the Melbourne suburb of Dandenong, has benefited from a massive expansion into China since 2008, where its products have sold well. Its chair Dennis Lim said its product is a ‘staple’, so banning it or applying sanctions would have had ramifications within China. “They might ban lobster, but you can’t ban infant formula,” he said.Don Farrell, Australia’s trade minister, said this month that his government had extended an “olive branch” to China to discuss “trade blockages”, but he added that the dispute had shown that the country had “put all of our eggs in the China basket”. Australia still remains vulnerable to further action by China if geopolitical relations continue to sour. A report by the Lowy Institute pointed to the country’s coal industry relying on Chinese banks for finance. Richard McGregor, senior fellow for East Asia at the Lowy Institute, said Australia’s economic resilience had been encouraging, but its longer-term prospects may be less promising. “Given the enduring geopolitical rivalry between the US and China, and Australia’s position as a strong US ally, Canberra should assume that Beijing will continue punitive trade measures in one form or another,” he said. More