Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said.
Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday.
Monday, December 26, 2011
U.S. Home Prices Probably Fell, Confidence Up
Home prices in 20 U.S. cities probably declined at a slower pace and consumer confidence improved, signs the economy gained strength heading into 2012, economists said before reports this week.
Property values dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a Dec. 27 report from S&P/Case-Shiller. Consumer confidence rose to a five-month high in December and more people signed contracts to buy previously owned homes than a month earlier, other data may show.
Property values dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a Dec. 27 report from S&P/Case-Shiller. Consumer confidence rose to a five-month high in December and more people signed contracts to buy previously owned homes than a month earlier, other data may show.
China May Establish Credit-Rating Companies
China should reduce its reliance on overseas rating companies by encouraging large financial institutions to strengthen their research and make their own judgments, central bank Governor Zhou Xiaochuan said.
The nation is also considering establishing credit-rating companies backed by the government, Zhou said at a financial forum in Beijing today. A copy of his speech transcript was posted on financial news portal hexun.com.
The nation is also considering establishing credit-rating companies backed by the government, Zhou said at a financial forum in Beijing today. A copy of his speech transcript was posted on financial news portal hexun.com.
Noda’s ‘Urgent’ Task Is Tax Rise as Japan Debt Load Swells
Prime Minister Yoshihiko Noda faces escalating pressure to secure support for higher taxes after Japan’s budget plan for the next fiscal year showed a record dependence on borrowing.
The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction.
An aging population and two decades of low growth after an asset bubble burst in the early 1990s have left Japan with debt projected at a record 1 quadrillion yen this year. Noda faces opposition from the public and within his Democratic Party of Japan to boosting sales taxes even as Standard & Poor’s mulls lowering the sovereign rating, already cut in January to AA-.
“The government should hike the consumption tax rate and cut social security spending as soon as possible,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. and a former Bank of Japan official. “This is urgent. We do not have the luxury of losing any more time.”
About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people. The DPJ lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the 5 percent sales tax.
‘Constituents’ Purses’
DPJ lawmakers with weak electoral majorities may be “tempted to vote for their constituents’ purses” by opposing an increase, said Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo.
While Japan’s gross domestic product grew an annualized 5.6 percent in the three months ended September as demand picked up after the March 11 earthquake, the pace will probably slow. The median estimate of 11 economists surveyed by Bloomberg News is for growth of 0.42 percent this quarter. Of the 10 polled this month, five predict GDP will shrink.
Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. (7203) on Dec. 22. Europe’s debt crisis is reducing demand for the nation’s products, while earthquake reconstruction costs will swell spending. The yen traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31.
Sales Tax Plan
Noda’s party will today present a plan for raising the sales tax, lawmaker Shinichiro Furumoto said last week. The ruling coalition plans to raise the rate to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources.
The International Monetary Fund says a gradual increase to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.” Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, advocates boosting the tax to “at least” 20 percent.
‘Not Normal Times’
Former DPJ leader Ichiro Ozawa and Shizuka Kamei, the head of the People’s New Party, a coalition partner, aim to head off the move. Kamei said this month that “we’re not in normal times, and it’s folly to be playing around with the tax system.”
So far, Japan’s debt burden hasn’t impeded the government’s ability to borrow, with 10-year bond yields poised to close below 1 percent for the first year since 2002.
Noda’s spending plan for the year starting April includes a 3.8 trillion yen special account for reconstruction spending.
Besides the consumption tax, a government panel proposes increasing the highest personal income tax rate to 45 percent from 40 percent by the middle of this decade.
“Japan’s government is proposing the right remedies for the country’s fiscal debt problems, but the speed is too slow and we can’t be confident that the measures will actually be implemented,” said Hitoshi Suzuki, a senior researcher of Daiwa Institute of Research in Tokyo.
Tokyo-based Ratings & Investment Information Inc. cut Japan’s rating for the first time on Dec. 21. S&P has a negative outlook for the nation and said last month that a downgrade may be getting closer after insufficient progress in tackling a public debt burden that is the world’s biggest.
Japan’s structural deficit “is completely out of whack because of increasing social security demands and costs,” Schulz of Fujitsu said last week. “If the government remains lazy in terms of hiking the consumption tax rate, it’s just a matter of time before the very obedient Japanese investors are no longer happy to finance the deficit.”
The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction.
An aging population and two decades of low growth after an asset bubble burst in the early 1990s have left Japan with debt projected at a record 1 quadrillion yen this year. Noda faces opposition from the public and within his Democratic Party of Japan to boosting sales taxes even as Standard & Poor’s mulls lowering the sovereign rating, already cut in January to AA-.
“The government should hike the consumption tax rate and cut social security spending as soon as possible,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. and a former Bank of Japan official. “This is urgent. We do not have the luxury of losing any more time.”
About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people. The DPJ lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the 5 percent sales tax.
‘Constituents’ Purses’
DPJ lawmakers with weak electoral majorities may be “tempted to vote for their constituents’ purses” by opposing an increase, said Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo.
While Japan’s gross domestic product grew an annualized 5.6 percent in the three months ended September as demand picked up after the March 11 earthquake, the pace will probably slow. The median estimate of 11 economists surveyed by Bloomberg News is for growth of 0.42 percent this quarter. Of the 10 polled this month, five predict GDP will shrink.
Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. (7203) on Dec. 22. Europe’s debt crisis is reducing demand for the nation’s products, while earthquake reconstruction costs will swell spending. The yen traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31.
Sales Tax Plan
Noda’s party will today present a plan for raising the sales tax, lawmaker Shinichiro Furumoto said last week. The ruling coalition plans to raise the rate to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources.
The International Monetary Fund says a gradual increase to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.” Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, advocates boosting the tax to “at least” 20 percent.
‘Not Normal Times’
Former DPJ leader Ichiro Ozawa and Shizuka Kamei, the head of the People’s New Party, a coalition partner, aim to head off the move. Kamei said this month that “we’re not in normal times, and it’s folly to be playing around with the tax system.”
So far, Japan’s debt burden hasn’t impeded the government’s ability to borrow, with 10-year bond yields poised to close below 1 percent for the first year since 2002.
Noda’s spending plan for the year starting April includes a 3.8 trillion yen special account for reconstruction spending.
Besides the consumption tax, a government panel proposes increasing the highest personal income tax rate to 45 percent from 40 percent by the middle of this decade.
“Japan’s government is proposing the right remedies for the country’s fiscal debt problems, but the speed is too slow and we can’t be confident that the measures will actually be implemented,” said Hitoshi Suzuki, a senior researcher of Daiwa Institute of Research in Tokyo.
Tokyo-based Ratings & Investment Information Inc. cut Japan’s rating for the first time on Dec. 21. S&P has a negative outlook for the nation and said last month that a downgrade may be getting closer after insufficient progress in tackling a public debt burden that is the world’s biggest.
Japan’s structural deficit “is completely out of whack because of increasing social security demands and costs,” Schulz of Fujitsu said last week. “If the government remains lazy in terms of hiking the consumption tax rate, it’s just a matter of time before the very obedient Japanese investors are no longer happy to finance the deficit.”
Traders Double Bets on Israel Rate Cut as Global Slowdown Crimps Exports
Traders doubled bets on Israeli interest rate cuts in the past two weeks, speculating the central bank will act to insulate the economy from a global slump as inflation slowed to a one-year low.
The Bank of Israel may lower the 2.75 percent key rate by 40 basis points over the next 12 months, compared with 21 basis points of cuts priced in on Dec. 8, according to interest-rate swaps, an indicator of investor expectations. Policy makers review borrowing costs today, with 12 out of of 20 economists surveyed by Bloomberg forecasting a 25 basis-point reduction.
“Traders expect the Bank of Israel to act fast and lower rates in coming months before the crisis in Europe, which is expected to further ease local exports and private consumption, deteriorates,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said by telephone. “The central bank has the ammunition to boost growth as inflation has slowed.”
Israeli economic growth has been slowing this year as the debt crisis in Europe, one of the nation’s biggest trading partners, crimps demand for exports such as electronic components. Overseas shipments account for almost 40 percent of Israel’s gross domestic product and the threat of a worsening global slowdown spurred the central bank to cut rates twice in the past three months, joining emerging-market policy makers from Brazil to Indonesia in easing access to funding.
The trade deficit widened in November to a seasonally adjusted $1.64 billion from $1.45 billion the previous month, the statistics office said Dec. 12. It had widened to $1.78 billion in May, the most in at least 16 years, as exports fell.
Room to Cut
A greater-than-expected slowdown in inflation is giving Governor Stanley Fischer more room to lower borrowing costs. Consumer prices rose 2.6 percent in November from a year earlier, Israel’s Central Bureau of Statistics said Dec. 15. Economists had predicted a rate of 2.8 percent, according to the median 10 estimates in a Bloomberg survey.
Before the announcement, 11 out of 15 economists surveyed said the central bank would leave the benchmark interest rate unchanged and four forecast a reduction.
“Core inflation was down, housing prices were down, it was a trend-setting kind of thing,” said Jonathan Katz, a Jerusalem based economist for HSBC Holdings Plc. “I thought Fischer would be on pause. But now I think he could cut.”
The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, has fallen from a high of 357 on May 2 to a low of 157 on Sept. 15. The rate implied inflation of 1.94 percent on Dec. 25.
Worsening Global Outlook
Economists’ 12-month inflation expectations declined to 2.2 percent from 2.3 percent a month earlier, the central bank reported Dec. 19. The government’s target range for inflation is 1 percent to 3 percent.
The central bank last cut its benchmark lending rate in November, lowering it by a quarter point. While Israel passed through the 2008-2009 crisis in “reasonable shape,” the economy is now being affected by the worsening global outlook and the Bank of Israel was justified in switching to a loosening monetary stance, the OECD said Dec. 12.
The Bank of Israel will probably lower its growth forecast of 3.2 percent for 2012 as the European crisis weighs on the global economy, Fischer said Dec. 7. The bank’s new growth prediction will probably be “around” the Organization for Economic Cooperation and Development’s 2.9 percent forecast, he said. The Central Bureau of Statistics said on Nov. 16 economic growth eased to an annualized 3.4 percent in the third quarter from a revised 3.5 percent in the previous three months.
The Bank of Israel may lower the 2.75 percent key rate by 40 basis points over the next 12 months, compared with 21 basis points of cuts priced in on Dec. 8, according to interest-rate swaps, an indicator of investor expectations. Policy makers review borrowing costs today, with 12 out of of 20 economists surveyed by Bloomberg forecasting a 25 basis-point reduction.
“Traders expect the Bank of Israel to act fast and lower rates in coming months before the crisis in Europe, which is expected to further ease local exports and private consumption, deteriorates,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said by telephone. “The central bank has the ammunition to boost growth as inflation has slowed.”
Israeli economic growth has been slowing this year as the debt crisis in Europe, one of the nation’s biggest trading partners, crimps demand for exports such as electronic components. Overseas shipments account for almost 40 percent of Israel’s gross domestic product and the threat of a worsening global slowdown spurred the central bank to cut rates twice in the past three months, joining emerging-market policy makers from Brazil to Indonesia in easing access to funding.
The trade deficit widened in November to a seasonally adjusted $1.64 billion from $1.45 billion the previous month, the statistics office said Dec. 12. It had widened to $1.78 billion in May, the most in at least 16 years, as exports fell.
Room to Cut
A greater-than-expected slowdown in inflation is giving Governor Stanley Fischer more room to lower borrowing costs. Consumer prices rose 2.6 percent in November from a year earlier, Israel’s Central Bureau of Statistics said Dec. 15. Economists had predicted a rate of 2.8 percent, according to the median 10 estimates in a Bloomberg survey.
Before the announcement, 11 out of 15 economists surveyed said the central bank would leave the benchmark interest rate unchanged and four forecast a reduction.
“Core inflation was down, housing prices were down, it was a trend-setting kind of thing,” said Jonathan Katz, a Jerusalem based economist for HSBC Holdings Plc. “I thought Fischer would be on pause. But now I think he could cut.”
The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, has fallen from a high of 357 on May 2 to a low of 157 on Sept. 15. The rate implied inflation of 1.94 percent on Dec. 25.
Worsening Global Outlook
Economists’ 12-month inflation expectations declined to 2.2 percent from 2.3 percent a month earlier, the central bank reported Dec. 19. The government’s target range for inflation is 1 percent to 3 percent.
The central bank last cut its benchmark lending rate in November, lowering it by a quarter point. While Israel passed through the 2008-2009 crisis in “reasonable shape,” the economy is now being affected by the worsening global outlook and the Bank of Israel was justified in switching to a loosening monetary stance, the OECD said Dec. 12.
The Bank of Israel will probably lower its growth forecast of 3.2 percent for 2012 as the European crisis weighs on the global economy, Fischer said Dec. 7. The bank’s new growth prediction will probably be “around” the Organization for Economic Cooperation and Development’s 2.9 percent forecast, he said. The Central Bureau of Statistics said on Nov. 16 economic growth eased to an annualized 3.4 percent in the third quarter from a revised 3.5 percent in the previous three months.
SNB Says Franc Cap Won’t Prevent Job Cuts as Companies Grow Less Confident
The Swiss central bank said companies expect sales to weaken further over the coming months as the global economy falters and the franc hurts export orders.
“Uncertainty about future developments has increased perceptibly,” the Swiss National Bank (SNBN) in Zurich said in its quarterly report today. “The caution being exercised by companies is expressed in their restrained employment and investment plans. Their turnover expectations for the next few months have diminished substantially.”
The SNB, led by Philipp Hildebrand, maintained its franc ceiling of 1.20 versus the euro on Dec. 15 and pledged to take further measures if needed to protect the economy. While a government panel is also looking at ways to weaken the currency, such as capital controls and negative interest rates, the ruling coalition doesn’t plan to implement them, Finance Minister Eveline Widmer-Schlumpf said on Dec. 21.
The SNB reiterated today that it will defend the ceiling with “the utmost determination” and is ready to buy foreign currencies in “unlimited quantities.” The Swiss currency “is still high and should continue to weaken over time,” it said.
The franc, seen as a haven in times of turmoil, traded at 1.2222 against the euro as of 10:35 a.m. in Zurich. It reached a record 1.0075 against the euro on Aug. 9.
Franc Ceiling
“Although the introduction of the minimum exchange rate for the franc against the euro eased the situation for companies and gave them planning security, the exchange rate situation remained a focal point of attention,” the SNB said, citing results of its quarterly survey of companies. “The fragile state of the global economy depressed confidence.”
With the franc eroding earnings just as export demand falters, the Swiss economy is showing increasing signs of slowdown. Manufacturing output dropped for a third month in November and the KOF leading economic indicator fell to the lowest in more than two years.
The Swiss economy will probably stagnate in the current quarter, the central bank said today. Gross domestic product may rise between 1.5 percent and 2 percent this year and 0.5 percent in 2012, it said.
Asked in the survey about the negative impact of franc gains, almost half of companies said they are lowering domestic costs, with 21 percent implementing or considering job cuts. More than 30 percent of companies hurt by the currency are also considering options including relocation.
‘Significantly Negative’
Sixty-three percent of survey participants reported negative effects from the franc’s appreciation, up from 58 percent in the previous quarter, the SNB said. Thirty-nine percent said the impact was significantly negative. Almost two- thirds of exporters reported lower profit margins in export markets, with 47 percent reporting lower sales.
“The level of margins was still a problem” in the fourth quarter, the SNB said. “The main reasons for this situation are the continuing strength of the Swiss franc, increasing prices for some commodities and a weakening in demand. The pressure to optimise costs increased further,” with companies considering measures including “recruitment freezes, investment freezes and the introduction of longer working hours for the same wage.”
The SNB surveyed 228 companies in October and November.
“Uncertainty about future developments has increased perceptibly,” the Swiss National Bank (SNBN) in Zurich said in its quarterly report today. “The caution being exercised by companies is expressed in their restrained employment and investment plans. Their turnover expectations for the next few months have diminished substantially.”
The SNB, led by Philipp Hildebrand, maintained its franc ceiling of 1.20 versus the euro on Dec. 15 and pledged to take further measures if needed to protect the economy. While a government panel is also looking at ways to weaken the currency, such as capital controls and negative interest rates, the ruling coalition doesn’t plan to implement them, Finance Minister Eveline Widmer-Schlumpf said on Dec. 21.
The SNB reiterated today that it will defend the ceiling with “the utmost determination” and is ready to buy foreign currencies in “unlimited quantities.” The Swiss currency “is still high and should continue to weaken over time,” it said.
The franc, seen as a haven in times of turmoil, traded at 1.2222 against the euro as of 10:35 a.m. in Zurich. It reached a record 1.0075 against the euro on Aug. 9.
Franc Ceiling
“Although the introduction of the minimum exchange rate for the franc against the euro eased the situation for companies and gave them planning security, the exchange rate situation remained a focal point of attention,” the SNB said, citing results of its quarterly survey of companies. “The fragile state of the global economy depressed confidence.”
With the franc eroding earnings just as export demand falters, the Swiss economy is showing increasing signs of slowdown. Manufacturing output dropped for a third month in November and the KOF leading economic indicator fell to the lowest in more than two years.
The Swiss economy will probably stagnate in the current quarter, the central bank said today. Gross domestic product may rise between 1.5 percent and 2 percent this year and 0.5 percent in 2012, it said.
Asked in the survey about the negative impact of franc gains, almost half of companies said they are lowering domestic costs, with 21 percent implementing or considering job cuts. More than 30 percent of companies hurt by the currency are also considering options including relocation.
‘Significantly Negative’
Sixty-three percent of survey participants reported negative effects from the franc’s appreciation, up from 58 percent in the previous quarter, the SNB said. Thirty-nine percent said the impact was significantly negative. Almost two- thirds of exporters reported lower profit margins in export markets, with 47 percent reporting lower sales.
“The level of margins was still a problem” in the fourth quarter, the SNB said. “The main reasons for this situation are the continuing strength of the Swiss franc, increasing prices for some commodities and a weakening in demand. The pressure to optimise costs increased further,” with companies considering measures including “recruitment freezes, investment freezes and the introduction of longer working hours for the same wage.”
The SNB surveyed 228 companies in October and November.
Bini Smaghi Says QE Would Be Appropriate Act If Deflation Becomes a Danger
European Central Bank Executive Board member Lorenzo Bini Smaghi said that policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region.
“I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”
Unlike the U.S. Federal Reserve and the Bank of England, the ECB has offset liquidity created by purchases of government bonds so that such operations don’t amount to quantitative easing that stokes inflation. ECB Executive Board member Juergen Stark told Germany’s Die Welt newspaper in an interview published today that the central bank doesn’t “have a mandate” for unlimited purchases of government bonds.
Growth prospects in Europe “have deteriorated” since September, U.K. central bank Governor Mervyn King said yesterday after a risk assessment by European officials. Stark, who resigned in September to protest bond purchases, said while the euro-region economy could shrink at the end of 2011, deflation threats are “significantly lower” than after the collapse of Lehman Brothers Holdings Inc. in 2008.
‘Clear Mandate’
The euro traded at $1.3080 at 8:59 a.m. in Frankfurt, up 0.2 percent on the day. The single currency has depreciated 3.1 percent against the dollar over the past three months as European leaders struggled to contain the region’s debt crisis.
“Central banks are given a clear mandate, to achieve price stability, and the independence to achieve it through the instruments they consider most appropriate,” Bini Smaghi said. “If conditions changed and the need to further increase liquidity emerged, I would see no reason why such an instrument, tailor made for the specific characteristics of the euro area, should not be used.”
The ECB this month cut its benchmark interest rate to 1 percent, and has never followed the Fed or Bank of England in trimming the cost of borrowing below that level. The Frankfurt- based institution has opposed demands to step up government bond purchases to cap borrowing costs in Europe’s peripheral nations.
Deflation Risk
Quantitative easing “is implemented in the U.K. and U.S., where the central banks consider that there are risks of deflation and where the policy rate is constrained by the zero lower bound,” Bini Smaghi said. “This is currently not the case in the euro area because the ECB currently sees no risk of deflation.”
Instead of more bond purchases, the ECB has so far opted to grease the banking system with unlimited liquidity of up to three years, hoping financial institutions will lend the money on to companies and households. The institution loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis.
“The interest in the long-term refinancing operation may be a sign of confidence gradually returning,” Bini Smaghi said. “If this is right, interest rate spreads would be pushed down and create profitable opportunities. It would generate a herd movement in a positive direction.”
‘Misplaced Concept’
Bini Smaghi will take up a position at Harvard University’s Center for International Affairs on Jan. 1. He will also become chairman of Italian utility Snam Trasporto on the same date, the company said yesterday.
Bini Smaghi dismissed calls for the ECB to act as a lender of last resort to distressed governments. “Central banks act as lender of last resort to the financial system,” he said. “The concept of lender of last resort to governments is misplaced.”
Risks of a euro area breakup are “low” if “policy makers and citizens in the euro area are rational,” Bini Smaghi said.
The policy maker said he’s “not sure” if issuing common euro bonds would be the most effective solution to solve the crisis. “I could nevertheless envisage a limited amount of joint and several issuance to finance, for instance, specific projects, pan-European infrastructure or a common bank restructuring fund.”
U.K. Role
Asked whether the Europe Union should continue integration without Britain, Bini Smaghi said that “continental Europe needs the U.K., where the largest financial center is located and where there is the greatest financial market expertise.”
“The U.K. financial system needs access to the continent where most of its clients are,” he said. “There can be no prosperity for either based on beggar-thy-neighbor policies.”
He added that it’s in the interest of the City of London “that the euro succeeds.”
Bini Smaghi criticized rating companies for threatening to downgrade countries that “over the past few months have undertaken the toughest fiscal adjustment program, and thus improved their fundamentals,” while “those that have postponed adjustment, gaining time in particular through easy financing by the central bank, have been considered to be in better shape.”
“I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”
Unlike the U.S. Federal Reserve and the Bank of England, the ECB has offset liquidity created by purchases of government bonds so that such operations don’t amount to quantitative easing that stokes inflation. ECB Executive Board member Juergen Stark told Germany’s Die Welt newspaper in an interview published today that the central bank doesn’t “have a mandate” for unlimited purchases of government bonds.
Growth prospects in Europe “have deteriorated” since September, U.K. central bank Governor Mervyn King said yesterday after a risk assessment by European officials. Stark, who resigned in September to protest bond purchases, said while the euro-region economy could shrink at the end of 2011, deflation threats are “significantly lower” than after the collapse of Lehman Brothers Holdings Inc. in 2008.
‘Clear Mandate’
The euro traded at $1.3080 at 8:59 a.m. in Frankfurt, up 0.2 percent on the day. The single currency has depreciated 3.1 percent against the dollar over the past three months as European leaders struggled to contain the region’s debt crisis.
“Central banks are given a clear mandate, to achieve price stability, and the independence to achieve it through the instruments they consider most appropriate,” Bini Smaghi said. “If conditions changed and the need to further increase liquidity emerged, I would see no reason why such an instrument, tailor made for the specific characteristics of the euro area, should not be used.”
The ECB this month cut its benchmark interest rate to 1 percent, and has never followed the Fed or Bank of England in trimming the cost of borrowing below that level. The Frankfurt- based institution has opposed demands to step up government bond purchases to cap borrowing costs in Europe’s peripheral nations.
Deflation Risk
Quantitative easing “is implemented in the U.K. and U.S., where the central banks consider that there are risks of deflation and where the policy rate is constrained by the zero lower bound,” Bini Smaghi said. “This is currently not the case in the euro area because the ECB currently sees no risk of deflation.”
Instead of more bond purchases, the ECB has so far opted to grease the banking system with unlimited liquidity of up to three years, hoping financial institutions will lend the money on to companies and households. The institution loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis.
“The interest in the long-term refinancing operation may be a sign of confidence gradually returning,” Bini Smaghi said. “If this is right, interest rate spreads would be pushed down and create profitable opportunities. It would generate a herd movement in a positive direction.”
‘Misplaced Concept’
Bini Smaghi will take up a position at Harvard University’s Center for International Affairs on Jan. 1. He will also become chairman of Italian utility Snam Trasporto on the same date, the company said yesterday.
Bini Smaghi dismissed calls for the ECB to act as a lender of last resort to distressed governments. “Central banks act as lender of last resort to the financial system,” he said. “The concept of lender of last resort to governments is misplaced.”
Risks of a euro area breakup are “low” if “policy makers and citizens in the euro area are rational,” Bini Smaghi said.
The policy maker said he’s “not sure” if issuing common euro bonds would be the most effective solution to solve the crisis. “I could nevertheless envisage a limited amount of joint and several issuance to finance, for instance, specific projects, pan-European infrastructure or a common bank restructuring fund.”
U.K. Role
Asked whether the Europe Union should continue integration without Britain, Bini Smaghi said that “continental Europe needs the U.K., where the largest financial center is located and where there is the greatest financial market expertise.”
“The U.K. financial system needs access to the continent where most of its clients are,” he said. “There can be no prosperity for either based on beggar-thy-neighbor policies.”
He added that it’s in the interest of the City of London “that the euro succeeds.”
Bini Smaghi criticized rating companies for threatening to downgrade countries that “over the past few months have undertaken the toughest fiscal adjustment program, and thus improved their fundamentals,” while “those that have postponed adjustment, gaining time in particular through easy financing by the central bank, have been considered to be in better shape.”
French Economy Expanded Less Than Initially Estimated in Third Quarter
The French economy, the euro region’s second largest, grew at a weaker pace than previously estimated in the third quarter as companies cut spending.
Gross domestic product rose 0.3 percent from the second quarter, when it fell 0.1 percent, French statistics institute Insee in Paris said today. It had previously reported a gain of 0.4 percent. In the year, the economy expanded 1.5 percent, down from 1.7 percent in the previous quarter.
The French economy is probably already in recession, with output shrinking this quarter and next, Insee said last week. While French business confidence dropped to the lowest in 1 1/2 years in December and manufacturing contracted, government leaders have refused to use the word recession, saying France is in a “slowdown” or an “air pocket.”
French investment growth slowed to 0.2 percent in the third quarter from 0.6 percent in the previous three months, today’s report showed. Consumer spending increased 0.3 percent after dropping 0.6 percent in the second quarter and exports advanced 0.8 percent, up from 0.7 percent.
The weaker-than-initially-estimated growth in the third quarter was due to revisions to industrial production as well as to new figures on company revenues, Insee said.
Gross domestic product rose 0.3 percent from the second quarter, when it fell 0.1 percent, French statistics institute Insee in Paris said today. It had previously reported a gain of 0.4 percent. In the year, the economy expanded 1.5 percent, down from 1.7 percent in the previous quarter.
The French economy is probably already in recession, with output shrinking this quarter and next, Insee said last week. While French business confidence dropped to the lowest in 1 1/2 years in December and manufacturing contracted, government leaders have refused to use the word recession, saying France is in a “slowdown” or an “air pocket.”
French investment growth slowed to 0.2 percent in the third quarter from 0.6 percent in the previous three months, today’s report showed. Consumer spending increased 0.3 percent after dropping 0.6 percent in the second quarter and exports advanced 0.8 percent, up from 0.7 percent.
The weaker-than-initially-estimated growth in the third quarter was due to revisions to industrial production as well as to new figures on company revenues, Insee said.
Boehner Signs On to Payroll Tax Deal Amid Isolation, Attacks
Deserted by many of his fellow Republicans, U.S. House Speaker John Boehner surrendered to attacks from President Barack Obama and congressional Democrats and agreed to a two-month extension of a payroll tax cut that he derided hours earlier.
The decision kicks the fight over extending the tax cut for 160 million U.S. workers into early next year without resolving deep divides over how to cover the cost through 2012.
Democrats are focused on imposing a new tax on income exceeding $1 million while Republicans want to cut the federal work force and freeze pay for government workers. Republicans also want to attach policies to a payroll tax cut extension -- opposed by Democrats -- such as a rewrite of the unemployment system or weaker rules for industrial emissions.
The deal that Boehner and Senate Majority Leader Harry Reid, a Nevada Democrat, agreed to yesterday includes language that calls on Obama to accelerate approval of the Keystone XL Canadian oil pipeline. Both chambers plan to pass the tax cut deal today by unanimous consent, which means most lawmakers won’t have to return to Washington over the holiday recess.
Boehner could be in a weaker position entering the 2012 negotiations after presiding over the tumult of recent days, in which Senate Republicans opposed Boehner’s stance and some House Republicans had begun to defect as well. The talks next year will unfold in the months ahead of a presidential election, making Boehner’s task more difficult.
No Time for Celebration
“I don’t think it’s a time for celebration,” the Ohio Republican told reporters yesterday. “Our economy is struggling. We’ve got a lot of work ahead of us in the coming year.”
After days of relentless attacks from Democrats and negative headlines in the press, some Republicans were pleased to see Boehner cut his losses.
“The great danger would have been if we continued,” said Representative Tom Cole of Oklahoma. “We made our points. We’ve gotten some modifications.”
The pressure for Boehner to cut a deal was building for days. Republican Senators Olympia Snowe of Maine, Scott Brown of Massachusetts, John McCain of Arizona and Bob Corker of Tennessee, criticized Boehner’s move to reject the bipartisan two-month extension after it passed the Senate on Dec. 17, just two weeks before the tax cut was set to expire.
Isolation in Opposition
Boehner became more isolated in his opposition to the Senate-passed bipartisan bill after the top Republican in the Senate, Mitch McConnell of Kentucky, issued a statement before lunchtime yesterday urging the House to pass the short-term measure.
McConnell said the House should pass a bill that averts “any disruption in the payroll tax holiday or other expiring provisions and allows Congress to work on a solution for the longer extensions.”
That statement “sealed the deal” in ending the standoff, said Brian Gardner, the senior vice president for Washington research at KBW Inc.
Boehner held a conference call with Republicans yesterday. On a similar conference call following the Dec. 17 Senate passage of the two-month extension, rank-and-file Republicans pressed Boehner to oppose the measure. They did so on Dec. 20 as the House rejected the Senate bill 229-193.
Different Tone
House Republicans who participated in yesterday’s call said the tone was much different than after the Senate vote.
“It wasn’t truly a conference call,” Representative Jack Kingston, a Georgia Republican, said. “It wasn’t a solicitation of opinion.”
Though most House Republicans still want a yearlong deal, Kingston said that it was time for the party to move forward.
“This takes the whole thing off the front page and that’s a good thing,” he said.
Some House Republicans said yesterday they don’t think Boehner’s agreement to pass the two-month extension puts him in immediate danger of losing the support of the Republican majority he leads.
Representative Sean Duffy, a freshman Republican from Wisconsin, said Boehner was trying to reflect the views of his colleagues. Duffy said he is pleased that a tax increase will be avoided in January and doesn’t think the saga would hurt Republicans in the 2012 election.
“I think the American public will look at the economy and job growth and the lack thereof,” Duffy said. “I don’t think this is an indicator of what will happen next year.
Provisions Extended
Without congressional action, the payroll tax for employees would rise in January to 6.2 percent from the current 4.2 percent. The tax funds Social Security. The deal also averts an end to emergency unemployment benefits set to expire on Dec. 31 and assures doctors their Medicare reimbursement rates won’t be reduced starting in January.
Michael Feroli, JPMorgan Chase & Co. (JPM)’s New York-based chief U.S. economist, said economic growth would be reduced by 0.5 percentage points in the first quarter and 1.5 percentage points in the second quarter of 2012 if the payroll tax cut and expanded unemployment benefits weren’t continued. If they are extended for the year, he expects growth of 2.5 percent in the first half of the year, he said in a Dec. 16 note to clients.
House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, will introduce the legislation in the House today that will implement the agreement.
Unanimous Consent
The measure will be brought up in the House under unanimous consent to avoid requiring lawmakers to return and could be cleared in the Senate later in the day using the same process.
The legislation includes one difference from the version passed by the Senate. A yearlong payroll tax cut extension would apply to the first $110,100 in wages. To prevent someone from shifting all their income into the first two months of the year, the Senate bill limited the tax break to the first $18,350 a worker earns.
Republicans changed the bill to apply the tax cut to the full $110,100 in wages, according to information provided by Camp’s office. That makes it easier for payroll processors to continue the tax cut if it is extended beyond February.
Workers who earn more than $18,350 during the first two months of the year will pay an additional 2 percentage point tax when they file their returns in 2013.
The bill is HR 3630.
The decision kicks the fight over extending the tax cut for 160 million U.S. workers into early next year without resolving deep divides over how to cover the cost through 2012.
Democrats are focused on imposing a new tax on income exceeding $1 million while Republicans want to cut the federal work force and freeze pay for government workers. Republicans also want to attach policies to a payroll tax cut extension -- opposed by Democrats -- such as a rewrite of the unemployment system or weaker rules for industrial emissions.
The deal that Boehner and Senate Majority Leader Harry Reid, a Nevada Democrat, agreed to yesterday includes language that calls on Obama to accelerate approval of the Keystone XL Canadian oil pipeline. Both chambers plan to pass the tax cut deal today by unanimous consent, which means most lawmakers won’t have to return to Washington over the holiday recess.
Boehner could be in a weaker position entering the 2012 negotiations after presiding over the tumult of recent days, in which Senate Republicans opposed Boehner’s stance and some House Republicans had begun to defect as well. The talks next year will unfold in the months ahead of a presidential election, making Boehner’s task more difficult.
No Time for Celebration
“I don’t think it’s a time for celebration,” the Ohio Republican told reporters yesterday. “Our economy is struggling. We’ve got a lot of work ahead of us in the coming year.”
After days of relentless attacks from Democrats and negative headlines in the press, some Republicans were pleased to see Boehner cut his losses.
“The great danger would have been if we continued,” said Representative Tom Cole of Oklahoma. “We made our points. We’ve gotten some modifications.”
The pressure for Boehner to cut a deal was building for days. Republican Senators Olympia Snowe of Maine, Scott Brown of Massachusetts, John McCain of Arizona and Bob Corker of Tennessee, criticized Boehner’s move to reject the bipartisan two-month extension after it passed the Senate on Dec. 17, just two weeks before the tax cut was set to expire.
Isolation in Opposition
Boehner became more isolated in his opposition to the Senate-passed bipartisan bill after the top Republican in the Senate, Mitch McConnell of Kentucky, issued a statement before lunchtime yesterday urging the House to pass the short-term measure.
McConnell said the House should pass a bill that averts “any disruption in the payroll tax holiday or other expiring provisions and allows Congress to work on a solution for the longer extensions.”
That statement “sealed the deal” in ending the standoff, said Brian Gardner, the senior vice president for Washington research at KBW Inc.
Boehner held a conference call with Republicans yesterday. On a similar conference call following the Dec. 17 Senate passage of the two-month extension, rank-and-file Republicans pressed Boehner to oppose the measure. They did so on Dec. 20 as the House rejected the Senate bill 229-193.
Different Tone
House Republicans who participated in yesterday’s call said the tone was much different than after the Senate vote.
“It wasn’t truly a conference call,” Representative Jack Kingston, a Georgia Republican, said. “It wasn’t a solicitation of opinion.”
Though most House Republicans still want a yearlong deal, Kingston said that it was time for the party to move forward.
“This takes the whole thing off the front page and that’s a good thing,” he said.
Some House Republicans said yesterday they don’t think Boehner’s agreement to pass the two-month extension puts him in immediate danger of losing the support of the Republican majority he leads.
Representative Sean Duffy, a freshman Republican from Wisconsin, said Boehner was trying to reflect the views of his colleagues. Duffy said he is pleased that a tax increase will be avoided in January and doesn’t think the saga would hurt Republicans in the 2012 election.
“I think the American public will look at the economy and job growth and the lack thereof,” Duffy said. “I don’t think this is an indicator of what will happen next year.
Provisions Extended
Without congressional action, the payroll tax for employees would rise in January to 6.2 percent from the current 4.2 percent. The tax funds Social Security. The deal also averts an end to emergency unemployment benefits set to expire on Dec. 31 and assures doctors their Medicare reimbursement rates won’t be reduced starting in January.
Michael Feroli, JPMorgan Chase & Co. (JPM)’s New York-based chief U.S. economist, said economic growth would be reduced by 0.5 percentage points in the first quarter and 1.5 percentage points in the second quarter of 2012 if the payroll tax cut and expanded unemployment benefits weren’t continued. If they are extended for the year, he expects growth of 2.5 percent in the first half of the year, he said in a Dec. 16 note to clients.
House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, will introduce the legislation in the House today that will implement the agreement.
Unanimous Consent
The measure will be brought up in the House under unanimous consent to avoid requiring lawmakers to return and could be cleared in the Senate later in the day using the same process.
The legislation includes one difference from the version passed by the Senate. A yearlong payroll tax cut extension would apply to the first $110,100 in wages. To prevent someone from shifting all their income into the first two months of the year, the Senate bill limited the tax break to the first $18,350 a worker earns.
Republicans changed the bill to apply the tax cut to the full $110,100 in wages, according to information provided by Camp’s office. That makes it easier for payroll processors to continue the tax cut if it is extended beyond February.
Workers who earn more than $18,350 during the first two months of the year will pay an additional 2 percentage point tax when they file their returns in 2013.
The bill is HR 3630.
‘Monti Effect’ Fizzles Before $574 Billion New Year
Prime Minister Mario Monti’s market honeymoon is ending as Italian bond yields approaching 7 percent signal mounting concern his government may struggle to sell 440 billion euros ($574 billion) of debt next year.
Monti took just five weeks in office to push through a 30 billion-euro emergency budget package aimed at taming surging borrowing costs. Investors reacted to the plan’s final approval by the Senate yesterday by driving up the yield on Italy’s 10- year benchmark bond by 12 basis points to 6.91 percent, close to the 7 percent level that prompted Greece, Ireland and Portugal to seek bailouts. It was at 6.94 percent at 10:13 a.m. in Rome.
“The Monti effect has now also been priced in and I think there is a lot of room for disappointment next year,” said Lex Van Dam, who manages $500 million in assets at Hampstead Capital LLC in London.
Italy’s 10-year bond yield reached a euro-era record 7.48 percent on Nov. 9, one week before Monti took over from former Premier Silvio Berlusconi and three months after the European Central Bank started backstopping the nation’s bonds. The yield fell to as low as 6.26 percent on Dec. 6 as investors rewarded Monti, a former European Union commissioner, before giving back those gains the following week with EU policy makers struggling to stamp out the debt crisis.
“To overcome the sovereign debt crisis, it’s vital that everybody look at our debt with confidence,” Monti told upper- house lawmakers yesterday. “It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves.”
Next Week
The Rome-based Treasury will sell 9 billion euros of 179- day bills and as much as 2.5 billion euros of zero 2013 bonds on Dec. 28. The next day Italy will auction four different bonds, including a 10-year security.
Italy, the euro area’s third-largest economy and second most-indebted after Greece, may hold the key to the single currency’s survival. It must repay about 53 billion euros in the first quarter from the region’s total maturing debt of 157 billion euros, according to Swiss lender UBS AG. The nation, with 1.9 trillion euros in debt, owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.
“Paradoxically, the only real lever that Monti has is the weakness of Italian government debt,” said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. “The more yields go up and the specter of a failed auction becomes real, the more he can push for leeway from the parties” that support the government in Parliament.
Structural Reforms
Monti reiterated yesterday that he will turn his attention next to overhauling Italy’s rigid labor market and streamlining the welfare system.
“The structural reforms are regarded by the market as more important than the budget measures,” said Stephen Lewis, chief economist at Monument Securities Ltd. in London. “Because these structural reforms impinge on special interest groups, Monti will face strong opposition, possibly on the streets, but definitely from politicians representing those interests.”
Monti’s plan, which includes a pension overhaul and tax increases including on primary residences, may also push Italy deeper into a recession that the government forecasts will begin in the current quarter.
The economy shrank 0.2 percent in the third quarter from the previous three months, when it grew 0.3 percent, national statistics institute Istat said this week. The government forecasts a shrinking economy in the fourth quarter, 0.6 percent growth in 2011 and a 0.4 percent contraction next year.
Guaranteeing Bonds
The budget plan, Italy’s third round of austerity since June, also introduced rules to allow banks to use bonds guaranteed by Italy as collateral to obtain loans from the European Central Bank. Banks including UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) issued about 40 billion euros in state-backed bonds this week, two people with knowledge of the matter said.
“I think the fact that Italy is now more or less guaranteeing the banking system means that the ratings agencies will come down even harder on its sovereign debt ratings,” said Van Dam, the fund manager.
Standard & Poor’s on Dec. 5 placed 15 euro nations on review for a possible downgrade, including the euro-area’s six AAA rated nations, amid the worsening debt crisis. Italy’s was downgraded by the main ratings companies this fall starting in September when S&P cut it one level to A, citing weak economic- growth prospects.
‘Recessionary’ Measures
Monti’s package, which seeks to help balance the budget in 2013, will cut 0.5 percent from gross domestic product over the next two years while reducing public debt, Bank of Italy Governor Ignazio Visco told Parliament on Dec. 9. Some of the drag on growth may be offset if borrowing costs fall, he said.
“It’s a recessionary budget package, which won’t produce further proceeds for the state and will choke growth, generating the need for a further budget adjustment,” Gianvittore Vaccari, a senator of the opposition Northern League, said yesterday.
The plan’s approval came one day after the International Monetary Fund ended a visit to Rome as part of its monitoring program. The IMF said the team will return next month.
“The IMF-led technical mission in early January could pose a degree of risk, as there is the potential for misinterpretation of its presence,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The bottom line is that Italy is simply too big to fail and too big to be bailed out, and the ECB has no other option but to be more flexible on sovereign debt.”
Monti took just five weeks in office to push through a 30 billion-euro emergency budget package aimed at taming surging borrowing costs. Investors reacted to the plan’s final approval by the Senate yesterday by driving up the yield on Italy’s 10- year benchmark bond by 12 basis points to 6.91 percent, close to the 7 percent level that prompted Greece, Ireland and Portugal to seek bailouts. It was at 6.94 percent at 10:13 a.m. in Rome.
“The Monti effect has now also been priced in and I think there is a lot of room for disappointment next year,” said Lex Van Dam, who manages $500 million in assets at Hampstead Capital LLC in London.
Italy’s 10-year bond yield reached a euro-era record 7.48 percent on Nov. 9, one week before Monti took over from former Premier Silvio Berlusconi and three months after the European Central Bank started backstopping the nation’s bonds. The yield fell to as low as 6.26 percent on Dec. 6 as investors rewarded Monti, a former European Union commissioner, before giving back those gains the following week with EU policy makers struggling to stamp out the debt crisis.
“To overcome the sovereign debt crisis, it’s vital that everybody look at our debt with confidence,” Monti told upper- house lawmakers yesterday. “It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves.”
Next Week
The Rome-based Treasury will sell 9 billion euros of 179- day bills and as much as 2.5 billion euros of zero 2013 bonds on Dec. 28. The next day Italy will auction four different bonds, including a 10-year security.
Italy, the euro area’s third-largest economy and second most-indebted after Greece, may hold the key to the single currency’s survival. It must repay about 53 billion euros in the first quarter from the region’s total maturing debt of 157 billion euros, according to Swiss lender UBS AG. The nation, with 1.9 trillion euros in debt, owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.
“Paradoxically, the only real lever that Monti has is the weakness of Italian government debt,” said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. “The more yields go up and the specter of a failed auction becomes real, the more he can push for leeway from the parties” that support the government in Parliament.
Structural Reforms
Monti reiterated yesterday that he will turn his attention next to overhauling Italy’s rigid labor market and streamlining the welfare system.
“The structural reforms are regarded by the market as more important than the budget measures,” said Stephen Lewis, chief economist at Monument Securities Ltd. in London. “Because these structural reforms impinge on special interest groups, Monti will face strong opposition, possibly on the streets, but definitely from politicians representing those interests.”
Monti’s plan, which includes a pension overhaul and tax increases including on primary residences, may also push Italy deeper into a recession that the government forecasts will begin in the current quarter.
The economy shrank 0.2 percent in the third quarter from the previous three months, when it grew 0.3 percent, national statistics institute Istat said this week. The government forecasts a shrinking economy in the fourth quarter, 0.6 percent growth in 2011 and a 0.4 percent contraction next year.
Guaranteeing Bonds
The budget plan, Italy’s third round of austerity since June, also introduced rules to allow banks to use bonds guaranteed by Italy as collateral to obtain loans from the European Central Bank. Banks including UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) issued about 40 billion euros in state-backed bonds this week, two people with knowledge of the matter said.
“I think the fact that Italy is now more or less guaranteeing the banking system means that the ratings agencies will come down even harder on its sovereign debt ratings,” said Van Dam, the fund manager.
Standard & Poor’s on Dec. 5 placed 15 euro nations on review for a possible downgrade, including the euro-area’s six AAA rated nations, amid the worsening debt crisis. Italy’s was downgraded by the main ratings companies this fall starting in September when S&P cut it one level to A, citing weak economic- growth prospects.
‘Recessionary’ Measures
Monti’s package, which seeks to help balance the budget in 2013, will cut 0.5 percent from gross domestic product over the next two years while reducing public debt, Bank of Italy Governor Ignazio Visco told Parliament on Dec. 9. Some of the drag on growth may be offset if borrowing costs fall, he said.
“It’s a recessionary budget package, which won’t produce further proceeds for the state and will choke growth, generating the need for a further budget adjustment,” Gianvittore Vaccari, a senator of the opposition Northern League, said yesterday.
The plan’s approval came one day after the International Monetary Fund ended a visit to Rome as part of its monitoring program. The IMF said the team will return next month.
“The IMF-led technical mission in early January could pose a degree of risk, as there is the potential for misinterpretation of its presence,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The bottom line is that Italy is simply too big to fail and too big to be bailed out, and the ECB has no other option but to be more flexible on sovereign debt.”
U.K. 10-Year Gilt Yield Declines Below 2% for First Time Amid Debt Crisis
U.K. 10-year gilt yields fell below 2 percent for the first time after reports showed U.K. services output fell the most in six months in October and lenders approved fewer home loans than economists predicted last month.
Two year gilt yields also slid to an all-time low after the Office for National Statistics in London said services, which account for about three quarters of the U.K. economy, shrank 0.7 percent from September. The median prediction of five economists in a Bloomberg News survey was for a fall of 0.1 percent. Lenders granted 34,738 loans to buy homes, down from a revised 35,196 in October, the London-based British Bankers’ Association said in a report today. The pound fell against the euro.
“The data was slightly weak all around,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Gilt yields are falling regardless right now although the market was looking for stronger data to continue the theme of buying sterling.”
The yield on 10-year gilts was one basis point, or 0.01 percentage point, lower at 2.04 percent as of 4:17 p.m. London time, after reaching 1.996 percent, the least since Bloomberg started tracking the data in 1989. The 3.75 percent securities due September 2021 rose 0.090, or 90 pence per 1,000-pound ($1,562) face amount, to 114.990.
Two-year yields were little changed at 0.34 percent, after reaching a record low of 0.292 percent.
U.K. Growth
Gilts have returned 16 percent this year, including reinvested interest, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German government bonds gained 9 percent and U.S. Treasuries have returned 9.5 percent, the indexes show.
Data yesterday showed the U.K. economy grew 0.6 percent in the third quarter, more than previously estimated. Bank of England policy makers have said the pace of expansion is unlikely to be repeated and forecast stagnation in the current three-month period as Europe’s debt crisis dents confidence and curbs demand.
The pound was 0.2 percent weaker at 83.44 pence per euro, paring its advance this week to 0.6 percent. Sterling appreciated to 83.03 pence on Dec. 21, the strongest level since Jan. 12. It declined 0.4 percent to $1.5624 today.
Sterling has advanced 0.7 percent in 2011 against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The dollar is 1.1 percent stronger, while the euro has lost 1.4 percent, the indexes show.
Two year gilt yields also slid to an all-time low after the Office for National Statistics in London said services, which account for about three quarters of the U.K. economy, shrank 0.7 percent from September. The median prediction of five economists in a Bloomberg News survey was for a fall of 0.1 percent. Lenders granted 34,738 loans to buy homes, down from a revised 35,196 in October, the London-based British Bankers’ Association said in a report today. The pound fell against the euro.
“The data was slightly weak all around,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Gilt yields are falling regardless right now although the market was looking for stronger data to continue the theme of buying sterling.”
The yield on 10-year gilts was one basis point, or 0.01 percentage point, lower at 2.04 percent as of 4:17 p.m. London time, after reaching 1.996 percent, the least since Bloomberg started tracking the data in 1989. The 3.75 percent securities due September 2021 rose 0.090, or 90 pence per 1,000-pound ($1,562) face amount, to 114.990.
Two-year yields were little changed at 0.34 percent, after reaching a record low of 0.292 percent.
U.K. Growth
Gilts have returned 16 percent this year, including reinvested interest, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German government bonds gained 9 percent and U.S. Treasuries have returned 9.5 percent, the indexes show.
Data yesterday showed the U.K. economy grew 0.6 percent in the third quarter, more than previously estimated. Bank of England policy makers have said the pace of expansion is unlikely to be repeated and forecast stagnation in the current three-month period as Europe’s debt crisis dents confidence and curbs demand.
The pound was 0.2 percent weaker at 83.44 pence per euro, paring its advance this week to 0.6 percent. Sterling appreciated to 83.03 pence on Dec. 21, the strongest level since Jan. 12. It declined 0.4 percent to $1.5624 today.
Sterling has advanced 0.7 percent in 2011 against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The dollar is 1.1 percent stronger, while the euro has lost 1.4 percent, the indexes show.
Japan Budget’s Dependence on Debt Sales to Rise to Record Next Fiscal Year
Japan’s budget for the year starting April showed the government more dependent than ever on bond sales to fund spending as Prime Minister Yoshihiko Noda struggles to tame the world’s biggest public debt burden.
The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s dependence on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo yesterday showed. Spending will shrink for the first time in six years after the government delayed appropriations for the nation’s pension fund and used supplementary expenditure packages to pay for earthquake reconstruction.
Noda’s first budget may fail to reassure credit-rating companies and analysts monitoring his efforts to control public debt twice the size of annual economic output. The government trimmed 2.6 trillion yen from the package by allocating special bonds to delay pension funding until a planned sales-tax increase boosts revenue.
“The government is trying to maintain surface appearances by playing with the numbers,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “This budget clearly shows Japan’s fiscal situation is worsening.”
Noda will submit the budget bill to parliament next year.
The primary deficit will narrow to 24.1 trillion yen, the Finance Ministry said, equivalent to about 5.1 percent of gross domestic product. Noda aims to post a primary balance, achieved when revenue matches spending, excluding bond sales and interest payments, by 2020.
Tax Revenue
New bond issuance will surpass tax revenue for a fourth year, the government predicts. Receipts from levies have shrunk about a third after peaking at 60.1 trillion yen in 1990.
“It’s very regrettable that bond sales will exceed tax revenues and that debt dependence rose to 49 percent,” Azumi told reporters in Tokyo yesterday. “I think the reliance on bonds to compile budgets is reaching its limit.”
Non-tax revenues including surplus from foreign exchange reserves halved to 3.7 trillion yen. The budget plan includes a 3.8 trillion yen special account for reconstruction spending.
Expenditures in the current fiscal year’s initial budget totaled a record 92.4 trillion yen. The government had planned to cap new bond issuance at 44.3 trillion yen next year.
An aging population and reduced growth since an asset bubble popped in the early 1990s have left the nation with debt projected at a record 1 quadrillion yen this fiscal year. The economy is smaller than a decade ago and remains mired in deflation.
Social-Security Spending
Social-security expenses, which have become 2.5 times more than that of two decades ago, will account for 52 percent of general spending next year.
The Bank of Japan said Dec. 21 that activity in the world’s third-biggest economy is looking “flat,” downgrading its assessment. The government estimated that the economy will shrink 0.1 percent this fiscal year on supply-chain disruptions from the record temblor in March, the strengthening of the yen and the European debt crisis.
Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. (7203) on Dec. 22.
The Japanese currency traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31. The government allocated 21.9 trillion yen for debt servicing costs on the premise that benchmark 10-year yields will remain below 2 percent. Japan’s debt burden hasn’t impeded the government’s ability to borrow, with the 10-year bond yield at 0.97 percent on Dec. 23.
Reconstruction Demand
“Japan will barely grow by the middle of next year,” Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo, said before the budget announcement. “The negative impact of a global slowdown centered on the European debt crisis will probably surpass the positive impact of demand from reconstruction at home.”
In a step unseen since 1947, Japan’s Cabinet has approved a fourth extra budget, to rebuild devastated northeast regions and spur growth. The nation has compiled about 20 trillion yen of the supplementary packages after the March 11 earthquake.
Japan is on “a dangerous path” as the government relies on an increased sales tax that is not certain to be enacted, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.
The ruling coalition plans to raise the sales levy to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources. The Finance Ministry estimates each 1 percentage point increase will reap about 2.5 trillion yen of revenue.
Rating Warning
Noda faces opposition to raising the tax from the public and within his Democratic Party of Japan, even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.
About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people.
The ruling Democratic Party of Japan lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the sales tax. DPJ members including Ichiro Ozawa, a former party leader, are opposed.
Noda’s popularity has fallen since he took office in September, with his approval rating dropping to 32.4 percent this month from 35.5 percent in November, Jiji Press reported Dec. 16.
The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s dependence on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo yesterday showed. Spending will shrink for the first time in six years after the government delayed appropriations for the nation’s pension fund and used supplementary expenditure packages to pay for earthquake reconstruction.
Noda’s first budget may fail to reassure credit-rating companies and analysts monitoring his efforts to control public debt twice the size of annual economic output. The government trimmed 2.6 trillion yen from the package by allocating special bonds to delay pension funding until a planned sales-tax increase boosts revenue.
“The government is trying to maintain surface appearances by playing with the numbers,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “This budget clearly shows Japan’s fiscal situation is worsening.”
Noda will submit the budget bill to parliament next year.
The primary deficit will narrow to 24.1 trillion yen, the Finance Ministry said, equivalent to about 5.1 percent of gross domestic product. Noda aims to post a primary balance, achieved when revenue matches spending, excluding bond sales and interest payments, by 2020.
Tax Revenue
New bond issuance will surpass tax revenue for a fourth year, the government predicts. Receipts from levies have shrunk about a third after peaking at 60.1 trillion yen in 1990.
“It’s very regrettable that bond sales will exceed tax revenues and that debt dependence rose to 49 percent,” Azumi told reporters in Tokyo yesterday. “I think the reliance on bonds to compile budgets is reaching its limit.”
Non-tax revenues including surplus from foreign exchange reserves halved to 3.7 trillion yen. The budget plan includes a 3.8 trillion yen special account for reconstruction spending.
Expenditures in the current fiscal year’s initial budget totaled a record 92.4 trillion yen. The government had planned to cap new bond issuance at 44.3 trillion yen next year.
An aging population and reduced growth since an asset bubble popped in the early 1990s have left the nation with debt projected at a record 1 quadrillion yen this fiscal year. The economy is smaller than a decade ago and remains mired in deflation.
Social-Security Spending
Social-security expenses, which have become 2.5 times more than that of two decades ago, will account for 52 percent of general spending next year.
The Bank of Japan said Dec. 21 that activity in the world’s third-biggest economy is looking “flat,” downgrading its assessment. The government estimated that the economy will shrink 0.1 percent this fiscal year on supply-chain disruptions from the record temblor in March, the strengthening of the yen and the European debt crisis.
Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. (7203) on Dec. 22.
The Japanese currency traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31. The government allocated 21.9 trillion yen for debt servicing costs on the premise that benchmark 10-year yields will remain below 2 percent. Japan’s debt burden hasn’t impeded the government’s ability to borrow, with the 10-year bond yield at 0.97 percent on Dec. 23.
Reconstruction Demand
“Japan will barely grow by the middle of next year,” Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo, said before the budget announcement. “The negative impact of a global slowdown centered on the European debt crisis will probably surpass the positive impact of demand from reconstruction at home.”
In a step unseen since 1947, Japan’s Cabinet has approved a fourth extra budget, to rebuild devastated northeast regions and spur growth. The nation has compiled about 20 trillion yen of the supplementary packages after the March 11 earthquake.
Japan is on “a dangerous path” as the government relies on an increased sales tax that is not certain to be enacted, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.
The ruling coalition plans to raise the sales levy to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources. The Finance Ministry estimates each 1 percentage point increase will reap about 2.5 trillion yen of revenue.
Rating Warning
Noda faces opposition to raising the tax from the public and within his Democratic Party of Japan, even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.
About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people.
The ruling Democratic Party of Japan lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the sales tax. DPJ members including Ichiro Ozawa, a former party leader, are opposed.
Noda’s popularity has fallen since he took office in September, with his approval rating dropping to 32.4 percent this month from 35.5 percent in November, Jiji Press reported Dec. 16.
Japan’s Government to Sell Record 149.7 Trillion Yen Debt in Fiscal 2012
Japan’s government said it will increase bond sales to the market to a record 149.7 trillion yen ($1.9 trillion) in the fiscal year starting April 1.
The amount for investors such as banks and life insurers is 4.8 trillion yen more than 144.9 trillion yen in the initial plan for fiscal 2011. Total debt issuance, including securities to replace maturing debt and so-called zaito bonds sold for government agencies, will increase by 4.6 trillion yen to a record 174.2 trillion yen.
Sales of new financing bonds intended to plug the government’s budget deficit will total 44.2 trillion yen, an amount in line with the government’s pledge to keep it below 44.3 trillion yen.
The Ministry of Finance will enlarge each monthly auction of debt maturing in 10 and 20 years by 100 billion yen from the original plan for this year.
The government in November started to sell an extra 100 billion yen of two- and five-year debt at each auction of the securities, after Prime Minister Yoshihiko Noda approved a 12.1 trillion yen third supplementary budget to fund earthquake reconstruction. It currently sells 2.7 trillion yen in two-year notes and 2.5 trillion yen in five-year notes every month.
FY2012 Initial Plan:
Maturities Amount Total
per Sale Amount
===========================================================
40-year 400 bln yen 1.6 tln yen
30-year 700 bln yen 5.6 tln yen
20-year 1.2 tln yen 14.4 tln yen
10-year 2.3 tln yen 27.6 tln yen
5-year 2.5 tln yen 30.0 tln yen
2-year 2.7 tln yen 32.4 tln yen
1-year TB 2.5 tln yen 30.0 tln yen
6-month TB 900 bln yen 900 bln yen
Bond liquidity sales 600 bln yen 7.2 tln yen
===========================================================
Total Amount: *149.7 tln yen
*The figure is the actual amount that the government plans to sell to investors through auctions between April 1, 2012, and March 31, 2013.
The amount for investors such as banks and life insurers is 4.8 trillion yen more than 144.9 trillion yen in the initial plan for fiscal 2011. Total debt issuance, including securities to replace maturing debt and so-called zaito bonds sold for government agencies, will increase by 4.6 trillion yen to a record 174.2 trillion yen.
Sales of new financing bonds intended to plug the government’s budget deficit will total 44.2 trillion yen, an amount in line with the government’s pledge to keep it below 44.3 trillion yen.
The Ministry of Finance will enlarge each monthly auction of debt maturing in 10 and 20 years by 100 billion yen from the original plan for this year.
The government in November started to sell an extra 100 billion yen of two- and five-year debt at each auction of the securities, after Prime Minister Yoshihiko Noda approved a 12.1 trillion yen third supplementary budget to fund earthquake reconstruction. It currently sells 2.7 trillion yen in two-year notes and 2.5 trillion yen in five-year notes every month.
FY2012 Initial Plan:
Maturities Amount Total
per Sale Amount
===========================================================
40-year 400 bln yen 1.6 tln yen
30-year 700 bln yen 5.6 tln yen
20-year 1.2 tln yen 14.4 tln yen
10-year 2.3 tln yen 27.6 tln yen
5-year 2.5 tln yen 30.0 tln yen
2-year 2.7 tln yen 32.4 tln yen
1-year TB 2.5 tln yen 30.0 tln yen
6-month TB 900 bln yen 900 bln yen
Bond liquidity sales 600 bln yen 7.2 tln yen
===========================================================
Total Amount: *149.7 tln yen
*The figure is the actual amount that the government plans to sell to investors through auctions between April 1, 2012, and March 31, 2013.
U.S. Personal Spending Rises Less Than Forecast
Consumer purchases rose less than forecast in November as a drop in wages encouraged Americans to seek discounted merchandise at the start of the holiday shopping season.
Personal spending climbed 0.1 percent for a second month, while wages and salaries fell 0.1 percent from October, Commerce Department data showed today in Washington. Durable goods orders jumped 3.8 percent in November as a surge in aircraft bookings masked a drop in demand for business equipment.
“The consumer is moderately upbeat but we’re not out of the woods yet,” John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “As the bonus allowance is expiring, we have seen a slight cooling of the orders book for manufacturing, and the slowing in the euro zone seems to be impacting manufacturing on the margin.”
Target Corp. (TGT) is among retailers using holiday promotions as limited job and income gains hold consumers back. While spending this quarter will improve from the previous three months, manufacturing is at risk of cooling as the tax incentive on equipment purchases comes to an end next week and shipments to Europe ease.
Today’s figures cap a week in which some of the data showed the economy picking up. First-time jobless claims fell in the week ended Dec. 17 to the lowest level since April 2008 and the Bloomberg Consumer Comfort Index posted its biggest seven-day gain since January. Real estate may be on the mend as housing starts increased to the highest level since April 2010.
Range of Estimates
A 0.3 percent gain was the median projection in a Bloomberg News survey of 79 economists. Estimates ranged from increases of 0.2 percent to 0.6 percent.
Stocks rose, erasing the 2011 decline for the Standard & Poor’s 500 Index. The S&P 500 climbed 0.9 percent to 1,265.33 at the close in New York.
Europe’s economy is taking a toll on the U.K. services industry. Output in the services that account for about 75 percent of the economy fell 0.7 percent in October, the Office for National Statistics said in London today.
In Asia, Singapore’s industrial production unexpectedly decreased in November for the first time in six months, adding to evidence of a weakening Asian outlook. Manufacturing, which accounts for more than 20 percent of the Singapore economy, dropped 9.6 percent from a year earlier, the Economic Development Board said today.
Spending Forecast
After today’s U.S. figures, Nomura Securities International Inc. economists in New York said in an e-mail that consumer spending would grow at a 3 percent annual rate in the current quarter. Economists at JPMorgan Chase & Co. said consumption was “tracking weaker,” at the lower end of a 2.5 percent to 3 percent forecast range.
The economy grew at a 1.8 percent annual rate from July through September as household purchases expanded at a 1.7 percent pace.
Business investment may slow in the fourth quarter, reflecting a second straight decline in shipments of capital goods excluding aircraft. Deliveries of business equipment excluding military hardware and aircraft dropped 1 percent in November after a 0.8 percent decrease, today’s durable goods report showed.
The drop in U.S. wages in November restrained overall income, which climbed 0.1 percent after a 0.4 percent October gain. Disposable income adjusted for changes in prices and taxes was unchanged in November after a 0.3 percent.
Savings Rate
The savings rate fell to 3.5 percent from 3.6 percent in October.
“In the absence of a significant pickup in income, we won’t see a big boost in spending,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York. “The momentum will slow in the fourth quarter, but the economy is still growing.”
Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.2 percent for a second month.
Target began a three-day “Almost Last Minute Sale” on Dec. 8 with markdowns on such items as Stanley Black & Decker Inc. coffee makers and gift card giveaways. A week earlier, the discount chain held the “Big Toy Event” offering half off a second item.
Americans will be helped by Congress’ decision today to pass a two-month payroll tax cut extension today, eight days before its scheduled expiration.
Tax Cut
House Speaker John Boehner agreed late yesterday to extend the tax cut, capping a month of wrangling that led to a revolt by House Republicans over the bipartisan deal passed by the Senate on Dec. 17 in an 89-10 vote.
Meantime, the housing market may be stabilizing. Purchases of single-family properties increased 1.6 percent to a 315,000 annual pace, figures from the Commerce Department showed today in Washington. The gain pushed the number of new homes on the market to a record low.
At the same time, 2011 may surpass last year as the weakest ever for new-home sales. Demand is on pace to reach 304,000 this year, less than the 323,000 in 2010 that was the lowest since data-keeping began, according to Bloomberg calculations.
Personal spending climbed 0.1 percent for a second month, while wages and salaries fell 0.1 percent from October, Commerce Department data showed today in Washington. Durable goods orders jumped 3.8 percent in November as a surge in aircraft bookings masked a drop in demand for business equipment.
“The consumer is moderately upbeat but we’re not out of the woods yet,” John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “As the bonus allowance is expiring, we have seen a slight cooling of the orders book for manufacturing, and the slowing in the euro zone seems to be impacting manufacturing on the margin.”
Target Corp. (TGT) is among retailers using holiday promotions as limited job and income gains hold consumers back. While spending this quarter will improve from the previous three months, manufacturing is at risk of cooling as the tax incentive on equipment purchases comes to an end next week and shipments to Europe ease.
Today’s figures cap a week in which some of the data showed the economy picking up. First-time jobless claims fell in the week ended Dec. 17 to the lowest level since April 2008 and the Bloomberg Consumer Comfort Index posted its biggest seven-day gain since January. Real estate may be on the mend as housing starts increased to the highest level since April 2010.
Range of Estimates
A 0.3 percent gain was the median projection in a Bloomberg News survey of 79 economists. Estimates ranged from increases of 0.2 percent to 0.6 percent.
Stocks rose, erasing the 2011 decline for the Standard & Poor’s 500 Index. The S&P 500 climbed 0.9 percent to 1,265.33 at the close in New York.
Europe’s economy is taking a toll on the U.K. services industry. Output in the services that account for about 75 percent of the economy fell 0.7 percent in October, the Office for National Statistics said in London today.
In Asia, Singapore’s industrial production unexpectedly decreased in November for the first time in six months, adding to evidence of a weakening Asian outlook. Manufacturing, which accounts for more than 20 percent of the Singapore economy, dropped 9.6 percent from a year earlier, the Economic Development Board said today.
Spending Forecast
After today’s U.S. figures, Nomura Securities International Inc. economists in New York said in an e-mail that consumer spending would grow at a 3 percent annual rate in the current quarter. Economists at JPMorgan Chase & Co. said consumption was “tracking weaker,” at the lower end of a 2.5 percent to 3 percent forecast range.
The economy grew at a 1.8 percent annual rate from July through September as household purchases expanded at a 1.7 percent pace.
Business investment may slow in the fourth quarter, reflecting a second straight decline in shipments of capital goods excluding aircraft. Deliveries of business equipment excluding military hardware and aircraft dropped 1 percent in November after a 0.8 percent decrease, today’s durable goods report showed.
The drop in U.S. wages in November restrained overall income, which climbed 0.1 percent after a 0.4 percent October gain. Disposable income adjusted for changes in prices and taxes was unchanged in November after a 0.3 percent.
Savings Rate
The savings rate fell to 3.5 percent from 3.6 percent in October.
“In the absence of a significant pickup in income, we won’t see a big boost in spending,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York. “The momentum will slow in the fourth quarter, but the economy is still growing.”
Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.2 percent for a second month.
Target began a three-day “Almost Last Minute Sale” on Dec. 8 with markdowns on such items as Stanley Black & Decker Inc. coffee makers and gift card giveaways. A week earlier, the discount chain held the “Big Toy Event” offering half off a second item.
Americans will be helped by Congress’ decision today to pass a two-month payroll tax cut extension today, eight days before its scheduled expiration.
Tax Cut
House Speaker John Boehner agreed late yesterday to extend the tax cut, capping a month of wrangling that led to a revolt by House Republicans over the bipartisan deal passed by the Senate on Dec. 17 in an 89-10 vote.
Meantime, the housing market may be stabilizing. Purchases of single-family properties increased 1.6 percent to a 315,000 annual pace, figures from the Commerce Department showed today in Washington. The gain pushed the number of new homes on the market to a record low.
At the same time, 2011 may surpass last year as the weakest ever for new-home sales. Demand is on pace to reach 304,000 this year, less than the 323,000 in 2010 that was the lowest since data-keeping began, according to Bloomberg calculations.
Russia’s Unexpected Interest-Rate Decrease Signals Concern Over Economy
Russia unexpectedly reduced its benchmark rate, suggesting policy makers see a global economic slump posing greater risks than inflation to the world’s biggest energy exporter.
The refinancing rate was reduced to 8 percent from 8.25 percent, Bank Rossii said in a statement on its website today. The move was forecast by two of 22 economists in a Bloomberg survey. Separately, the difference between the main lending and deposit rates was cut a quarter-point to 1.25 percentage points, the narrowest ever.
Russia joins nations from Brazil to Indonesia that are easing borrowing costs to manage the fallout from a slowdown in China and Europe’s deepening debt crisis. Prime Minister Vladimir Putin, who will run for president next year, is seeking annual expansion of as much as 7 percent while the central bank plans to reduce inflation to at least 5 percent by 2014.
“The central bank noticeably softened the tone of its statement, signaling that it will pay more attention to economic risks going forward,” Dmitry Polevoy, chief economist at ING Groep NV in Moscow, said by telephone today.
The ruble extended gains against the dollar after the announcement and closed 0.5 percent stronger at 31.21 in Moscow. The currency has weakened 6.8 percent against the central bank’s target dollar-euro basket since the end of July.
Investors are betting interest rates will remain unchanged over the next three months, compared with expectations of as much as 21 basis points of increases on Nov. 24, according to forward-rate agreements tracked by Bloomberg.
Ignatiev ‘Surprised’
Central bank Chairman Sergey Ignatiev said yesterday he was “surprised” by the slow inflation even as the ruble’s recent slump may affect price growth next month. Risks to economic expansion “are strengthening” while inflation is at an acceptable level, Alexei Ulyukayev, a central bank first deputy chairman, said last week.
The overnight auction-based repurchase rate, Bank Rossii’s main lending tool, will stay at 5.25 percent and the overnight deposit rate, used to withdraw cash, will increase a quarter- point to 4 percent. Today’s moves are “neutral” to monetary policy, according to Bank Rossii.
Russia’s ruble bonds due 2016 rose, pushing the yield four basis points lower to 8.12 percent, the least since Dec. 16.
Shortage of Rubles
Policy makers also reduced the rate on fixed repurchase and Lombard auctions by 25 basis points, or 0.25 percentage point, to 6.25 percent. While the facilities are less important to banks than the auction-based rates, they have grown in importance because of the shortage of rubles, Polevoy said.
The MosPrime overnight rate, an average of what Moscow’s largest lenders offer to lend to one another, fell to 6.34 percent today after surging yesterday to 6.46 percent, the most since December 2009.
Bank Rossii is giving banks less short-term cash, with overnight repo auctions offering an average of 159 billion rubles ($5.1 billion) so far this month, down from 476 billion rubles in November, according to data compiled by Bloomberg.
That’s helping drive up interbank rates and in turn hurting demand for ruble-denominated bonds, Dmitry Pikin, a bond-fund manager at Moscow-based Gazprombank Asset Management that oversees more than 200 billion rubles of investments, said in a telephone interview yesterday.
Curbing Inflation
The shortage of rubles in the banking system since September will help curb inflation next year, policy makers said in the statement. The government’s decision to delay price increases for utilities to July from January will bring a “substantial slowdown in the annual inflation rate” early next year, according to the statement.
Inflation eased to 6.4 percent from a year earlier as of Dec. 19, down from 6.8 percent in November, the regulator said. Year-to-date price growth was at 6 percent as of that date, the government said this week.
Record-low inflation may help Putin solidify voter support after his ruling United Russia party won less than half of the vote in a Dec. 4 parliamentary poll. Tens of thousands of people joined protests in Moscow after allegations of ballot-box stuffing.
“Inflation risks associated with eased fiscal policy and election populism remain high,” Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said by e-mail.
Russia’s federal budget surplus, which swelled to as much 3.2 percent of economic output in the year through October, will narrow to no more than 0.8 percent for the full year, Finance Minister Anton Siluanov said this week.
Shelter from Europe
Inflation at the lowest since August 2010 is bolstering purchasing power and helping shelter the economy from a slowdown in Europe. GDP may expand 4.5 percent this year and 3.7 percent in 2012, according to the Economy Ministry. Even so, more than half of Russians still see the inflation level as “very high,” a poll showed last month.
Putin told business leaders this week that he wants growth of as much as 7 percent to help turn Russia into one of the world’s five largest economies in five years.
Economic output will grow a “subdued” 3.5 percent next year with “significant downside risks” from Europe’s debt crisis, Juha Kahkonen, the head of the International Monetary Fund’s mission to Russia, said Dec. 8.
Weighing on Investment
“While consumer demand remains strong, supported by growth in public wages, a liquidity shortage and increased political uncertainty are weighing on investment activity and industrial production,” Natalia Novikova and Elina Ribakova, economists at Citigroup Inc. who correctly forecast the refinancing rate cut, said in an e-mailed note. They predicted the repo rate may be reduced “in early 2012.”
Since the auction-based repo rate “is the most relevant policy rate in the current times of tight liquidity conditions, we interpret the decision as an attempt from the central bank to deliver the most cautious of easings possible,” Ivan Tchakarov, chief economist at Renaissance Capital in Moscow, said by e- mail.
In September, Bank Rossii lifted the deposit rate by a quarter point while cutting the overnight auction-based repurchase rate by the same amount. That narrowed the so-called rate corridor in which money-market costs tend to fluctuate to 1.5 percentage points from 2 percentage points. The next rates meeting is planned for the first 10 days of February.
“We believe the ‘true’ easing of monetary policy by cutting the actively used repo rates is imminent,” Vladimir Pantyushin, chief economist at Barclays Capital in Moscow, said in an e-mailed note. “We expect the bank to wait until the end of March to avoid a potential unpleasant inflation surprise on the eve of March 4 presidential elections.”
The refinancing rate was reduced to 8 percent from 8.25 percent, Bank Rossii said in a statement on its website today. The move was forecast by two of 22 economists in a Bloomberg survey. Separately, the difference between the main lending and deposit rates was cut a quarter-point to 1.25 percentage points, the narrowest ever.
Russia joins nations from Brazil to Indonesia that are easing borrowing costs to manage the fallout from a slowdown in China and Europe’s deepening debt crisis. Prime Minister Vladimir Putin, who will run for president next year, is seeking annual expansion of as much as 7 percent while the central bank plans to reduce inflation to at least 5 percent by 2014.
“The central bank noticeably softened the tone of its statement, signaling that it will pay more attention to economic risks going forward,” Dmitry Polevoy, chief economist at ING Groep NV in Moscow, said by telephone today.
The ruble extended gains against the dollar after the announcement and closed 0.5 percent stronger at 31.21 in Moscow. The currency has weakened 6.8 percent against the central bank’s target dollar-euro basket since the end of July.
Investors are betting interest rates will remain unchanged over the next three months, compared with expectations of as much as 21 basis points of increases on Nov. 24, according to forward-rate agreements tracked by Bloomberg.
Ignatiev ‘Surprised’
Central bank Chairman Sergey Ignatiev said yesterday he was “surprised” by the slow inflation even as the ruble’s recent slump may affect price growth next month. Risks to economic expansion “are strengthening” while inflation is at an acceptable level, Alexei Ulyukayev, a central bank first deputy chairman, said last week.
The overnight auction-based repurchase rate, Bank Rossii’s main lending tool, will stay at 5.25 percent and the overnight deposit rate, used to withdraw cash, will increase a quarter- point to 4 percent. Today’s moves are “neutral” to monetary policy, according to Bank Rossii.
Russia’s ruble bonds due 2016 rose, pushing the yield four basis points lower to 8.12 percent, the least since Dec. 16.
Shortage of Rubles
Policy makers also reduced the rate on fixed repurchase and Lombard auctions by 25 basis points, or 0.25 percentage point, to 6.25 percent. While the facilities are less important to banks than the auction-based rates, they have grown in importance because of the shortage of rubles, Polevoy said.
The MosPrime overnight rate, an average of what Moscow’s largest lenders offer to lend to one another, fell to 6.34 percent today after surging yesterday to 6.46 percent, the most since December 2009.
Bank Rossii is giving banks less short-term cash, with overnight repo auctions offering an average of 159 billion rubles ($5.1 billion) so far this month, down from 476 billion rubles in November, according to data compiled by Bloomberg.
That’s helping drive up interbank rates and in turn hurting demand for ruble-denominated bonds, Dmitry Pikin, a bond-fund manager at Moscow-based Gazprombank Asset Management that oversees more than 200 billion rubles of investments, said in a telephone interview yesterday.
Curbing Inflation
The shortage of rubles in the banking system since September will help curb inflation next year, policy makers said in the statement. The government’s decision to delay price increases for utilities to July from January will bring a “substantial slowdown in the annual inflation rate” early next year, according to the statement.
Inflation eased to 6.4 percent from a year earlier as of Dec. 19, down from 6.8 percent in November, the regulator said. Year-to-date price growth was at 6 percent as of that date, the government said this week.
Record-low inflation may help Putin solidify voter support after his ruling United Russia party won less than half of the vote in a Dec. 4 parliamentary poll. Tens of thousands of people joined protests in Moscow after allegations of ballot-box stuffing.
“Inflation risks associated with eased fiscal policy and election populism remain high,” Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said by e-mail.
Russia’s federal budget surplus, which swelled to as much 3.2 percent of economic output in the year through October, will narrow to no more than 0.8 percent for the full year, Finance Minister Anton Siluanov said this week.
Shelter from Europe
Inflation at the lowest since August 2010 is bolstering purchasing power and helping shelter the economy from a slowdown in Europe. GDP may expand 4.5 percent this year and 3.7 percent in 2012, according to the Economy Ministry. Even so, more than half of Russians still see the inflation level as “very high,” a poll showed last month.
Putin told business leaders this week that he wants growth of as much as 7 percent to help turn Russia into one of the world’s five largest economies in five years.
Economic output will grow a “subdued” 3.5 percent next year with “significant downside risks” from Europe’s debt crisis, Juha Kahkonen, the head of the International Monetary Fund’s mission to Russia, said Dec. 8.
Weighing on Investment
“While consumer demand remains strong, supported by growth in public wages, a liquidity shortage and increased political uncertainty are weighing on investment activity and industrial production,” Natalia Novikova and Elina Ribakova, economists at Citigroup Inc. who correctly forecast the refinancing rate cut, said in an e-mailed note. They predicted the repo rate may be reduced “in early 2012.”
Since the auction-based repo rate “is the most relevant policy rate in the current times of tight liquidity conditions, we interpret the decision as an attempt from the central bank to deliver the most cautious of easings possible,” Ivan Tchakarov, chief economist at Renaissance Capital in Moscow, said by e- mail.
In September, Bank Rossii lifted the deposit rate by a quarter point while cutting the overnight auction-based repurchase rate by the same amount. That narrowed the so-called rate corridor in which money-market costs tend to fluctuate to 1.5 percentage points from 2 percentage points. The next rates meeting is planned for the first 10 days of February.
“We believe the ‘true’ easing of monetary policy by cutting the actively used repo rates is imminent,” Vladimir Pantyushin, chief economist at Barclays Capital in Moscow, said in an e-mailed note. “We expect the bank to wait until the end of March to avoid a potential unpleasant inflation surprise on the eve of March 4 presidential elections.”
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