Reuters News - U.S. Fed frets over strong dollar, global woes: minutes

U.S. Federal Reserve Chair Janet Yellen (L) and Treasury Secretary Jack Lew (R) confer after a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington October 6, 2014.

CREDIT: REUTERS/JONATHAN ERNST

(Reuters) - Federal Reserve officials want to tie an interest-rate rise to U.S. economic progress, but the minutes of their last policy meeting show they are struggling with how to come to grips with the dual threats of a stronger dollar and a global slowdown.

The minutes expressed concern the rising dollar could slow a needed rebound in inflation. They also highlighted economic turmoil in Europe and Asia, another factor behind the bank's keeping policy accommodation in place for the near future.

The minutes of the Sept. 16-17 meeting, released on Wednesday after the usual three-week lag, revealed concern the financial markets are slightly out of sync with the Fed, and that dropping the current policy guidance could send unintended signals.

In response, investors bid up U.S. stocks .SPX and bonds US10YT=RR, betting the Fed is in no rush to tighten after years of monetary stimulus. The U.S. dollar .DXY, which has risen in the last 12 weeks, hit a two-week low.

"The Fed is becoming increasingly focused on the potential impact of the stronger dollar on the domestic economy at a time when the global growth momentum is beginning to slow, and the uncertainties this is adding to the economic outlook," said Millan Mulraine, deputy head of research and strategy at TD Securities.

Debate within the Fed heated up over how to adopt a more "data-dependent" policy guidance.

Several policymakers fretted the current guidance that rates will not rise for a "considerable time" after October gave the false impression the stimulus would last a long while. Others worried a change could trip up financial markets and hurt the economy through higher borrowing costs.

The change would "likely present communication challenges" and "caution will be needed to avoid sending unintended signals about the Committee’s policy outlook," the minutes said.

The extent of the debate suggests the committee could move as soon as its meeting on Oct. 28-29 to change its description of when it might begin lifting rates from near zero, where they have been since late 2008.

DELICATE DANCE

The minutes also showed concern from a "couple" of participants that the strengthening dollar could hurt the economy and cause longer-term inflation expectations to move slightly lower.

Since the meeting, Fed officials have increasingly flagged the dollar's rise as hindering a rebound. While unemployment dropped to 5.9 percent in September, inflation measures have eased and the International Monetary Fund slashed its global economic growth forecasts on Tuesday.

Some officials cited disappointing growth and inflation in the euro zone, while several said "slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk," the minutes show.

In response, investors bet on a later start to tightening.

"The deceleration of inflation from the spring and the rising strength of the dollar are noteworthy, and may mean the Fed may raise rates later than expected," said Anthony Valeri, investment strategist at LPL Financial.

U.S. 2015 short-term interest rate futures rose to contract highs on Wednesday, suggesting traders saw less than a 50 percent chance of a rate rise in July next year, according to CME Group's FedWatch.

Both Fed and Wall Street economists expect a rate rise to come around the middle of next year, but the central bankers expect tightening to be more aggressive than believed by the private sector.

The Fed acknowledged the market seems behind in this regard and suggested it could complicate matters when the time comes to raise rates.

(Reporting by Michael Flaherty and Jonathan Spicer; Editing by Tim Ahmann, James Dalgleish, Meredith Mazzilli and Andre Grenon)

Bloomberg News - Europe Sacrifices a Generation With 17-Year Unemployment Impasse

Photographer: David Ramos Vidal/Bloomberg

An employment office in Barcelona, Spain.

Seventeen years after their first jobs summit European Union leaders are divided on how to create employment and a fifth of young people are still out of work.

At a meeting in Milan today Italian Prime Minister Matteo Renzi plans to tout the new labor laws he’s pushing through. French President Francois Hollande will argue for more spending, a proposal German Chancellor Angela Merkelintends to reject. Britain’s prime ministerDavid Cameron isn’t coming.

Their lack of progress may increase the frustration of European Central Bank President Mario Draghi who has faced down internal dissent to deploy unprecedented monetary easing. He’s calling on the politicians to do their bit now and loosen the continent’s rigid labor markets even if that means facing the ire of protected workers.

“An entire generation is being sacrificed in countries such as Spain,” Ludovic Subran, chief economist at credit insurer Euler Hermes said in an interview. “That has a real impact on productivity in the long run.”

The 18-nation euro area is still struggling to heal its debt-crisis scars, five years after Greecerevealed that its deficit was more than twice its forecast, forcing it into two bailouts. Across the bloc, growth has ground to a halt and inflation is at its lowest for five years.

When EU leaders met in Luxembourg in November 1997, the soon-to-be-born euro zone’s unemployment rate was about 11 percent. Jean-Claude Juncker, then prime minister of the host country, now president designate of the European Commission, promised a mix of free-market solutions and government plans would mean a “new start” for young people. Today the jobless rate is 11.5 percent.

Youth Unemployment

The Milan summit will focus on youth unemployment, which afflicts 21.6 percent of people under 25 across Europe, according to Eurostat. Even this number is almost identical to 1997, when it stood at 21.7 percent.

The leaders “need to discuss meaningful job creation,” Subran said. “It’s about avoiding the neither-nor situation of people being out of both work and school. This means providing jobs in the short term and training to improve skills and employability in the long term.”

In February 2013, the EU allotted 6 billion euros ($7.6 billion) for youth-employment initiatives between 2014 and 2020, with the bulk of the spending in the first two years. The centerpiece of the initiative is a “Youth Guarantee” that anyone under 25 should have either a job, apprenticeship, or training program within four months of leaving formal education or becoming unemployed.

Sharing Funds

The initiative focuses on regions with over 25 percent youth unemployment, which is the whole ofSpain, Greece, and Portugal, all but the north-east of Italy, about half of France, and a few regions of eastern Germany.

France adopted its 620 million-euro allotment of the plan in June and Italy’s 1.1 billion euro program was approved by the European Commission in July. Spain’s share of the program is 1.9 billion euros, augmented by EU structural funds.

While France plans to push in Milan for the initiative to be expanded and for the money to be spent faster, Germany is opposed to discussing new spending until already allotted sums have been spent. Instead, Merkel’s government has stressed liberalization of labor markets as the best path to create jobs. France and Italy argue they are already taking steps to loosen their labor markets and those efforts won’t work without a background of growth.

Senate Vote

Labor ministers will meet over lunch before heads of government join them in the early afternoon. A final press conference is planned for about 6 p.m.

Renzi met representatives of both employers’ and workers’ unions yesterday to discuss an overhaul of the country’s labor code, which will be put to a vote in the Senate today. The proposed rules, opposed by some lawmakers from Renzi’s Democratic Party, aim at making firing easier while providing a new system of income support for those who lose their job.

European employment did improve after 1997, with the unemployment rate bottoming between 2007 and 2008 at 7 percent, and 15.7 percent for young people, as a credit bubble boosted growth in Spain and Greece. It ballooned during the subsequent financial crisis.

“I’m worried how the euro zone has detached itself from rest of the world economy,” French Prime Minister Manuel Valls told business leaders in London Oct. 6. “If there is no strategy to support growth at the euro zone, we will be in even greater trouble.”

To contact the reporter on this story: Gregory Viscusi in Milan at gviscusi@bloomberg.net

BBC News - Bank of England set to protect savings of up to £1m

Savings of up to £1m are to be protected under new proposals from the Bank of England aimed at avoiding a Northern Rock style run on a bank.

The new rules are due to come into force in July 2015

Only money temporarily deposited in a bank, because of a house sale or an inheritance, for example, will be protected for a period of six months.

Under current rules a maximum of £85,000 is protected.

The new rules are due to come into force by July next year.

The Bank of England's Prudential Regulation Authority (PRA) is bringing in the changes to comply with a a European directive.

The PRA is also planning to create a "seamless" process of transferring accounts from a failed bank to a new account provider, so that even if a bank goes bust customers will be able to withdraw their money as usual within 24 hours.

PRA chief executive Andrew Baily said the regulations would help to ensure "a stable financial system".

"These proposals will allow customers to have continuous access to the money in their bank account," he added.

The changes aim to prevent the chaos at the start of the financial crisis, when customers queued outside Northern Rock to withdraw their money, triggering the first run on a British bank in over a hundred years.

The plans come as part of a wider reform of the financial sector aimed at ensuring retail customers' deposits are protected and kept separate from banks' investment arms by the start of 2019.

On Monday, the Bank of England said "ring-fenced" banks would need a separate chief executive and chairman.

It said financial institutions would need to submit their plans, detailing the legal and operating structure of their planned ring-fenced banks, by the end of the year.

Reuters News - Euro zone sentiment falls in Oct to lowest level since May 2013

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange October 6, 2014.

CREDIT: REUTERS/REMOTE/STRINGER

(Reuters) - Sentiment in the euro zone dropped for a third consecutive month in October, hitting its lowest level since May 2013, suggesting the single currency bloc will fall into recession, a survey by Sentix showed on Monday.

Sentix research group's index tracking morale among investors in the euro zone tumbled to -13.7 in October from -9.8 the previous month. That undershot the consensus forecast in a Reuters poll for a reading of -11.5.

"While expectations were only just below the zero-mark in September, they are now clearly in negative territory and that means a technical recession in the euro zone - two consecutive quarters of contraction - is ever more likely," Sentix said in a statement.

"It's conspicuous that neither the European Central Bank's rhetoric nor its measures were able to drive up investors' expectations of the economy this month," Sentix added.

Last week the ECB laid out plans to buy rebundled packets of debt within weeks to shore up the flagging euro zone economy and its president said the bank would do more if needed.

A sub-index of expectations for the euro zone's economy fell to -7.3 in October, its lowest level in two years, after a reading of -2.5 in September.

Investors' perception of the current euro zone situation dropped to its weakest level since August 2013.

An index tracking Germany plunged to its lowest level since September 2012, with Sentix saying investors seemed to be increasingly concerned about economic risks such as tensions over Ukraine and other crises abroad as well as the U.S. Federal Reserve's tighter monetary policy.

(Reporting by Michelle Martin; Editing by Alexandra Hudson)

Bloomberg News - Greek Ambition to Exit Bailout Meets Draghi Roadblock

Photographer: Kostas Tsironis

Greek Prime Minister Antonis Samaras.

Antonis Samaras’s ambition to driveGreece out of its rescue program is running into a roadblock.

The country’s prime minister might be thwarted by conditions for the European Central Bank’s asset-purchase program, as detailed by President Mario Draghi. Policy makers meeting in Naples yesterday were resolute that Greece should stay under economic surveillance to be eligible, according to a euro-zone central-bank official involved in the negotiations. The official asked not to be named, as talks are private.

Draghi pledged to buy asset-backed securities and covered bonds for at least two years, and said that Greece and Cyprus must be subject to bailout programs to ensure their inclusion because their credit ratings are below investment grade. That creates a further hurdle for Samaras beyond convincing investors that the country is good for its debts.

“This statement, ‘no program, no purchases’ from Draghi, is a direct warning to Samaras against an early exit from the bailout” said Andreas Koutras, an investment manager at SteppenWolf Capital LLC. “Bottom line is that Greek banks should find more buyers for these securities, as the ECB won’t buy new issues on its own. Even though the ECB has lowered its standards, Greek banks won’t benefit as much.”

The four largest Greek lenders held about $20 billion of covered bonds, according to Bloomberg data, representing almost 5 percent of the industry’s liabilities, Bloomberg Intelligence analysts Tomasz Noetzel and Kapilan Theiventhirampillai wrote in a note yesterday.

Increased Liquidity

Citigroup Inc. (C) said in a note that Greece’s banks and the debt-stricken country’s economy would benefit from ECB’s purchases. Liquidity in the Greek system would improve, which might lead to more lending for the economy, Citigroup said.

These potential benefits may not be realized if Greece exits its rescue program. Draghi said yesterday that he wants to be “as inclusive as possible, but with prudence” as he set out the caveat that the ECB will buy securities in countries with credit ratings below BBB- only if they are subject to bailout conditions.

While the ECB wants Greece to remain under some form of surveillance, the country’s government may choose what kind of supervision that will be, the euro-zone central bank official said.

Emboldened by the country’s return to the bond market after a four-year exile, Samaras has said that Greece will not ask for a new bailout once the current euro-area backed program runs out in December. He also said Greece may forgo remaining disbursements from the International Monetary Fund in 2015 and 2016.

The bailout loans, which have kept Greece afloat since 2010, were attached to strict conditions of belt tightening that triggered a social backlash and exacerbated a recession that left more than a quarter of the workforce without a job.

To contact the reporter on this story: Nikos Chrysoloras in Athens atnchrysoloras@bloomberg.net

BBC News - US dollar rally 'has years to go'

The US dollar continued its rally on Wednesday, hovering near a four-year high against major currencies.

The US dollar has been gaining ground against major currencies

In early trading, it rose over 110 yen for the first time in six years and was close to a two-year high against the euro at $1.25.

Analysts say the dollar rally shows no signs of ending as sharp losses mount for other currencies.

"We think the dollar rally has another two years to go at least," said Chris Turner, global head of strategy at ING.

"It's come a long way, pretty quickly. I think a 5% advance over the next six months is very achievable," Mr Turner added, referring to the US dollar index, which measures the dollar against a basket of major currencies.

The US dollar index is up nearly 9% since the beginning of May, being driven by expectations that the US Federal Reserve will raise interest rates as the US economy recovers. Meanwhile, growth fears in Europe, China and Japan are likely to lead central banks to loosen monetary policy, putting pressure on their currencies.

"As we get closer to the Fed beginning to tighten policy and the ECB [European Central Bank] still being particular to easing policy, we think the bias is still towards dollar gains," said Adam Cole, head of currency strategy at RBC Capital Markets.

Last month, the US central bank confirmed that it would end its massive bond-buying programme in October, which has been helping the US economy recover from the financial crisis of 2008-09.

Currencies hardest hit

The major currencies that would continue to face the biggest headwinds from the US dollar's rise in the next 12 months will probably be the euro and the Japanese yen, according to analysts.

"Old-world currencies like the euro and the yen, they're going to suffer the sharpest losses against the dollar probably in the next 12 months," Mr Turner said.

The euro saw its biggest fall in more than two years in September, losing nearly 4% against the dollar, and has been hit by recent weak manufacturing reports from the region, along with data on Tuesday that showed cooling inflation in the eurozone.

However, Mr Cole from RBC sees it as more of a story of the dollar's strength than of the weakness of other currencies.

"It's simply been dollar up against every single developed market and emerging market currency," Mr Cole said. " The US dollar continues to stay strong through 2015."

Bloomberg News - Japan’s Firms Plan Spending Boost as Sentiment Improves

Photographer: Kiyoshi Ota/Bloomberg

The Tankan index of big manufacturers rose to 13 in September from 12 in June, the Bank of Japan said today, above a median estimate of 10 in a Bloomberg News survey of economists.

Japanese companies indicated they may boost investment by the most since 2007 as sentiment among big manufacturers unexpectedly improved, providing encouragement for Prime Minister Shinzo Abe’s revitalization effort.

Large companies see capitalexpenditure rising 8.6 percent in the year through March, according to the Bank of Japan’s Tankan survey released in Tokyo today. The big manufacturer sentiment index rose to 13 in September from 12 in June, above a median estimate of 10 in a Bloomberg News survey of economists.

Corporate leaders delivering on their plans is vital to Japan weathering a sales-tax increase in April that precipitated the economy’s biggestcontraction in five years. The challenge for Abe is to ensure that large companies which have also invested heavily overseas follow through on domestic investment and deploy near-record cash as he tries to rein in the world’s heaviest debt burden.

“Corporate sentiment is surprisingly solid,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “With the Tankan, the BOJ must be seeing no need to bolster stimulus at this point.”

Abe’s administration has indicated it’s ready to increase stimulus to help the economy withstand any further increase in the levy. He’s set to decide by the end of the year whether to raise the levy to 10 percent after it was raised to 8 percent in April.

Yen Forecast

Large manufacturers based their business plans on the assumption the yen would average 100.73 per dollar in the current fiscal year, today’s report showed.

The currency traded at 109.91 per dollar at 2:13 p.m. in Tokyo after weakening above 110 yen for the first time since August 2008. The Topix index of shares slipped 0.3 percent.

The report showed some signs of weakness. Sentiment among large non-manufacturers and small manufacturers deteriorated from the previous Tankan survey.

“The deterioration in big non-manufacturers sentiment is a better gauge for domestic economic conditions,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “Even so, the level of their sentiment remains relatively high, signaling that they still have expectations for a rebound.”

Investment Overseas

Capital expenditure in Japan remains below a 2007 peak, and machinery orders, a leading indicator of investment, have underscored strength in demand from overseas.

Orders excluding electrical power generation and ships fell 10 percent in April-June from the previous three months after four quarters of growth, according to the Cabinet Office. Those from overseas jumped 42 percent in the same period, and were worth 1.7 times core domestic orders.

Panasonic Corp. (6752) has agreed to build a lithium-ion battery factory to supply Tesla Motors Inc. (TSLA), with potential sites in Arizona, California, Nevada, New Mexico and Texas.

Central Japan Railway Co. (9022), operator of the world’s busiest high-speed line, is ramping up investment by 11 percent to 326 billion yen ($3 billion) this fiscal year, as it boosts spending on its plan to build a 500 kilometers (311 miles) per hour magnetic levitation train link. Toyota Motor Corp. (7203) is planning to increase capital spending by just 1.9 percent to 500 billion yen this fiscal year, as it cuts back on investments in Asia, according to the company’s financial statements.

Labor Market

Today’s data also underlined tightness in the labor market that Governor Haruhiko Kuroda is counting on to push up wages, fueling economic growth. Most companies across all industries reported a shortage of workers, according to the survey.

A virtuous cycle in the economy is “firmly working” as income and employment conditions improve, BOJ Governor Haruhiko Kuroda said on Sept. 18. He said Japan is on track to meet the central bank’s 2 percent inflation target, which excludes the effects of a higher sales tax.

The jobless rate fell to a three-month low of 3.5 percent in August, data showed yesterday. The job-to-applicant ratio held at a 22-year high of 1.10, meaning there were 1.1 jobs for every seeker.

Labor cash earnings -- which includes base pay, overtime and bonuses -- increased 1.4 percent from a year earlier, the sixth straight rise.

Even so, the growth in pay was outpaced by inflation of 3.3 percent, squeezing households’ finances. A labor shortage could also drag on the economy, said Hiroshi Shiraishi, senior economist at BNP Paribas SA in Tokyo.

“The economy is hitting the ceiling of supply and that’s likely to constrain Japan’s growth in the future,” said Shiraishi.

The Tankan survey of 10,369 companies was conducted from Aug. 27 to Sept. 30.

(An earlier version of this story was corrected to change the year in the headline.)

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net