Economy

(Reuters) – Mario Draghi’s call last week for a revamp of Europe’s tough pro-competition policy rules prompted much speculation that the EU’s next antitrust chief may take a lighter-touch approach to mergers that could yield European industrial “champions”.While that may ultimately depend on the political mood in Brussels and Europe’s national capitals as the bloc’s economy lags behind its global rivals, there is little for now to suggest a more permissive shift, sources and analysts said.If anything, the EU consensus remains intact that policies that uphold competition, keep down prices and ensure a level playing field across the 27 national markets of the EU are one of the few bright spots in the region’s struggling economy.”If you loosen EU competition rules to build huge companies, create European champions, you will get companies that are French, German and Italian. The smaller countries will wonder ‘What’s in it for us?’,” said one senior euro zone official.Certain deals – for example one that helped a green technology player against Chinese competition – could be politically viable, the official said, but added: “If it were to be across the board, then it is a no-go”.The EU’s high-profile antitrust chief Margrethe Vestager, who only last week scored two major wins against Big Tech on tax fairness and anticompetitive practices, will soon hand over to her successor in a new European Commission lineup.Who that is will depend on fraught negotiations between EU Commission chief Ursula von der Leyen and member states to produce a team reflecting the geographic and political balance within the region, as well as gender and other criteria.But any new arrival will be greeted by a near 900-head Directorate General of Competition which, long-time antitrust watchers say, is institutionally imbued with a belief in the economic benefits of strong competition policy.”And a new Competition Commissioner is always dependent on their services,” said Umberto Gambini, partner at the Forward Global business consultancy and a former European Parliament lawmaker specialised in antitrust and state aid matters.HIGH BURDEN OF PROOFIt is far from clear in any case that what Draghi proposed last week would be a radical departure from the current line.In his long-awaited 400-page report, the former European Central Bank noted “there is a question” about whether vigorous competition policy prevented European companies reaching the scale needed to compete with Chinese or American giants.In particular he proposed that future antitrust rulings take more into account factors such as whether a merger might give the new entity more investment clout to innovate.But asked if that meant any Commission acting on his proposals today would likely rubber-stamp the Alstom-Siemens engineering mega-merger it blocked in 2019, he only said “some of the reasons for blocking that merger would not be there”.”Let me be very clear: we start from a common condition … Competition is good. It is good for investment, good for productivity and good for income distribution,” he said.Indeed, the Draghi report put the burden on the merging parties to justify why any “innovation defence” should override other concerns about their link-up – with an especially high bar for companies that are already dominant market players.That reassured supporters of the strong pro-competition policy promoted by Europe and which the Biden administration has sought to take on board with Lina Kahn as chair of the U.S. Federal Trade Commission.”A lot of people in Europe were telling me the (Draghi) report was going to say we needed less competition enforcement … That is not what he said,” Fiona Scott Morton, senior fellow at the EU economic think tank Bruegel said.Instead she pointed to his proposals on new tools to boost antitrust enforcement; to force firms to make their networks and products interoperable with others’; and how to judge risks such as future product shortages in any merger decision.”There are some nice new ideas as well as a doubling-down to make sure we have productivity in the economy and not a bunch of lazy monopolists who charge high prices and don’t deliver,” she said. More

According to CME Group’s (NASDAQ:CME) closely-monitored FedWatch Tool on Monday, the odds that policymakers will roll out a 50-basis point cut, rather than a more traditional 25-basis point drawdown, stood at 59%. Borrowing costs are currently at a 23-year high of 5.25% to 5.5%.Over the weekend, bets between a quarter-point and half-point decrease were equal, in a sign of the rapidly shifting debate around the cuts.Just last week, investors, persuaded by data last week showing slightly hotter-than-anticipated producer and consumer price growth in August, had placed a higher chance on a quarter-point cut. But recent media reports have suggested that the argument for a 50-point reduction remains in play, while former New York Fed President Bill Dudley said the case for such a cut was strong.In a note to clients on Friday, analysts at Citi said the Fed’s decision is still a “close call,” adding that they are expecting a 25-point cut this week, followed by two 50-point decreases at the central bank’s November and December gatherings.However, the Citi analysts flagged that “weak enough” retail sales data on Tuesday “could push the Fed to cut 50 [basis points.]” Month-on-month, economists see retail sales growth contracting by 0.2% in August after expanding by 1.0% in July.Indications of waning activity could spur the Fed to act more aggressively to help prop up the economy. Officials are already weighing stickiness lingering in the recent inflation numbers, as well as figures pointing to a loosening in the American labor market.Fed Chair Jerome Powell said in August that the “time has come” to adjust monetary policy due to possible “downside risks” facing the jobs picture. The outcome of a potential easing cycle could be one of Powell’s lasting legacies, particularly as the Fed attempts to engineer a so-called “soft landing” — or a cooling in once sky-high inflation that does not lead to a meltdown in labor demand and the wider economy — following a period of elevated interest rates.How do you think the Fed will approach its latest rate decision? Have your say in our poll on X. More

Despite Beijing’s policy efforts, major investment banks are increasingly skeptical about China hitting its growth targets for the year.Citi revised its full-year GDP growth forecast for China to 4.7%, down from previous estimates, as August data confirmed weakening momentum. “The demand side is getting more concerning,” Citi analysts wrote, highlighting the slowdown in trade and domestic demand, which they fear could spill over into production.While Citi expects some policy support, including a potential 10-20 basis point rate cut, they don’t see a major pivot from Beijing. Looking ahead, they warn that 2025 could be an even tougher year for China’s nominal growth.Goldman Sachs also lowered its 2024 GDP growth forecast to 4.7%, down from 4.9%, citing disappointing economic activity in August. Year-on-year industrial production growth slowed, and infrastructure investment failed to gain momentum despite record government bond issuance. The bank also highlighted weak retail sales and persistent struggles in the property sector. “We believe the risk that China will miss the ‘around 5%’ full-year GDP growth target is on the rise, and thus the urgency for more demand-side easing measures is also increasing,” said Goldman.Meanwhile, Evercore ISI maintained its 5.0% growth target for China but expressed caution, stating they will only consider lowering it if September data disappoints and Beijing doesn’t ramp up support.The firm’s analysts expect September to be a pivotal month due to the impact of a 300 billion yuan subsidy package and increased infrastructure investment. However, they acknowledged that the stimulus measures could pull demand forward, leading to uncertainty in 2025. “Housing remains mired in crisis with no light at the end of the tunnel,” they added, underscoring the challenges facing Beijing’s efforts to stabilize the economy. More

BCA Research argues that while a 50-bp cut could still be in play, it would likely have been telegraphed by Fed officials ahead of the blackout period. New York Fed President John Williams and Governor Christopher Waller did not indicate a jumbo cut, leaving BCA to expect a 25-bp cut. Despite this, futures markets have increased the probability of a 50-bp reduction to 48%, driven by a Wall Street Journal article and comments from former New York Fed President William Dudley hinting at a “strong case” for a larger move.HSBC echoes the sentiment for a 25-bp cut in September, followed by an additional 50 bps of cuts through 2024. HSBC remains bullish on U.S. Treasuries and maintains a strong outlook for the U.S. dollar, despite anticipating some market volatility around the Fed’s policy path.Bank of America highlights the “unusual uncertainty” around the Fed’s next move. The market is pricing in a 36% chance of a 50-bp cut, but BofA leans towards a 25-bp reduction, noting that the Fed did not signal a larger move before the blackout. BofA also expects Fed Chair Jerome Powell to address labor market risks in his press conference and potentially indicate a willingness to speed up rate cuts if necessary .Barclays expects a 25-bp cut but sees potential for larger cuts if labor market conditions worsen. They project a total of 75 bps in cuts for 2024.Barclays stated: “We expect a dovish FOMC statement that notes further progress on inflation, that the upside risks to inflation have diminished and the downside risks to employment have increased, and that the committee is attentive to the risks of unwelcome weakening of labor market conditions. We expect the statement to indicate that future adjustments will depend on the data, the outlook and the balance of risks.”Finally, JPMorgan stands out with a call for a 50-bp cut, arguing that front-loading the cuts would better position the Fed to address future economic risks. However, they acknowledge that internal FOMC dynamics may push the Fed to take a more conservative 25-bp approach.”What the FOMC will do is less clear, but we’re sticking with our call that they will do the “right” thing and cut 50bp,” wrote JPMorgan. “We expect the median dot for this year will be 100bp lower than the current rate setting of 5-3/8%, guiding to two more 25bp cuts at the last two meetings of the year.” More

The central bank has said its monetary policy must balance above-target inflation, exacerbated by a falling currency, with a cooling economy that now sees low overall growth.Last month the central bank said Norway would keep rates on hold for “some time” to combat inflation, and it is expected to say on Thursday whether this means a cut could come by year-end or would wait until next year.Norges Bank’s most recent forecast, released in June, called for three rate reductions in 2025, each by a quarter percentage point to end the year at 3.75%, with the first of those cuts slated for March at the earliest.The forecast will be updated on Thursday, and a majority of analysts in the Sept. 12-16 poll now expect a cut in December this year followed by four more cuts by the end of 2025 to a policy rate of 3.25%.Market pricing meanwhile predicts as much as seven rate cuts by the end of 2025, brokers said, reflecting expectations of steady rate reductions abroad, including by the U.S. Federal Reserve which will give a policy update on Wednesday.HAWKISH SURPRISE?But some analysts cautioned the weak currency could force Norges bank to hold back to avoid a further inflation-inducing drop against the euro and the dollar.”The market is in for a hawkish surprise, in our view,” Handelsbanken said in a Sept. 12 note to clients, adding that the most likely timing of a cut was in March of next year.”The rate path will be lowered somewhat, but not to the extent that the market is anticipating,” it added.Norway’s core inflation, which strips out changing energy prices and taxes, eased to 3.2% year on year in August, down from 3.3% in July, in line with analysts’ expectations but still well above the central bank’s 2.0% target. More

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LONDON (Reuters) – The Bank for International Settlements has urged top central banks not to squander the interest rate buffers they have rebuilt over the last couple of years by now cutting them again too rapidly. The recommendation from the central bankers’ central bank, as the BIS is known, comes as markets wait to see whether the U.S. Federal Reserve starts its long-awaited rate cutting cycle this week with a quarter-point or larger half-point move.BIS Monetary and Economic Department head Claudio Borio stressed that its message was to all central banks that they needed to maintain some “safety margins” to be able to handle both expected downturns and unexpected future crises. “It would be a pity if this room for manoeuvre was squandered,” Borio told reporters as the BIS published its latest quarterly report on Monday.”The expected is recessions that are bound to come. The unexpected are the types of COVID shocks that we saw. So that is one additional consideration to bear in mind when deciding the pace and how far to go”.The Fed’s widely expected cut this week will be its first in four years, but others, including the European Central Bank and those of Britain, Canada, Switzerland, New Zealand and plenty of emerging market central banks, have already started the process. Markets have been struggling to decipher where rates are likely settle this cycle though given the current uncertainty over the global economy. Borio said that neutral rate, or r* in economic textbook speak, was a “rather blurry concept”. “You only find out where r* star is, when you get there somehow,” he said.CARRY TRADEThe BIS’ report also unpicked August’s steep falls in supersized U.S. tech and world stocks and the dramatic moves when the Bank of Japan’s move towards higher interest rates saw a sudden unwinding of hugely popular yen carry trades.That trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher yields, has underpinned markets for decades.As well as the yen spike, August’s turmoil included the biggest single day drop for Japan’s TOPIX banks index in its 40 year history as well as a major jump in the main global market fear gauge, the Chicago Board Options Exchange’s Volatility Index, or ‘VIX’.Hyun Song Shin, the BIS’ head of research and top economic adviser, said the notional scale of outstanding FX swaps and forwards with the yen on one side – has soared by some 27% since the end of 2021 to $14.2 trillion (1,989 trillion yen).There wasn’t enough information at the moment, however, on how destabilising an unwind of the carry trade could potentially be. “One thing that we will need to do is to have better data on the direction of the trade to get a sense of what the economic purpose of that transaction actually is,” Shin added. “This is something that we’re working on at the moment.” VULNERABILITY The Switzerland-based BIS also flagged financial stability concerns over the use in the life insurance market of offshore reinsurance – insurance for insurers – provided by private equity firms. This type of reinsurance is making the market “increasingly interconnected” and exposing life insurers to riskier assets, the report said, estimating that PE firms’ investment in life insurance has grown nearly sevenfold since 2010, particularly in the United States.The Bank of England has threatened to curb UK life insurers’ use of PE-backed reinsurance, and global regulators are also worried about it. Private equity players “could prove more vulnerable than peers in difficult market conditions”, the BIS warned.(1 Japanese yen = $0.0071) More