BBC News - Australia's central bank cuts rates to historic low

The Reserve Bank of Australia (RBA) has cut its key interest rate by 25 basis points to an all-time low of 2%.

The cut could take some of the recent strength out of the Australia dollar

Rising property prices in Australia's biggest city, Sydney, a strong currency and a drop in iron ore prices are among the reasons for the cut.

The cut is the second this year, following a previous 25 basis point cut in February.

The RBA's move follows similar action from central banks in China, Canada, Singapore, Korea and India.

Australia's central bank has been under pressure to cut its lending rates

A rising Australian dollar had also been cause for concern. The currency started to fall against the US dollar on the RBA's announcement.

'Right thing'

"The RBA has done the right thing," said economist Shane Oliver from AMP Capital.

"Sure, surging Sydney house prices are a concern but interest rates need to be set for the national 'average', not just one city," he said.

"And the 'average' is telling us Australia needs lower interest rates: growth is sub par, the business investment outlook is poor, national income is getting hit hard by the falling iron ore price and house price gains outside of Sydney are soft."

The RBA's move also follows worrying official trade numbers released on Tuesday which showed the country's trade deficit had missed expectations in March.

The Australian Bureau of Statistics (ABS) said the deficit had narrowed by a seasonally adjusted 18% to 1.32bn Australian dollars ($1.03bn).

Analysts said the numbers were due in part to falling iron ore and coal exports.

Iron pressure

Australia's central bank had been under pressure to cut its lending rates further this year, particularly amid worrying iron ore prices - which recently fell to decade lows - together with a recent strengthening of the local currency.

Iron ore is Australia's most valuable export and the plummeting prices - attributed to a supply glut and waning demand from China, a key buyer of the product - have been hurting miners' profits, as well as government tax revenue.

Australian Treasurer Joe Hockey said last month that the government would face a multi-billion dollar revenue loss due to a plunge in the price of iron ore.

The government will deliver its 2015-16 budget papers on 12 May and has said it remains committed to achieving a budget surplus.

Analysts said the RBA's move to cut its lending rates would help further lower the Australian dollar, which would in turn help commodity producers exporting products priced in US dollars.

"Further depreciation seems both likely and necessary," RBA Governor Glenn Stevens said, "particularly given the significant declines in key commodity prices."

In March, Australia said its economy grew 2.5% in the fourth quarter of 2014 from a year earlier, marking its slowest pace of annual growth last year.

The economy grew 0.5% in the October to December period from the last quarter, when quarterly growth was 0.4%.

Bloomberg News - China Insuring $16 Trillion Deposits Means More Bond Risk-Reward

While Premier Li Keqiang is pushing to reduce the role of the government in financial markets, he must ensure those reforms don’t lead to financial contagion that worsen economic growth already the weakest since 1990. Photographer: Tomohiro Ohsumi/Bloomberg

China started an insurance system for its more than 100 trillion yuan ($16 trillion) of bank deposits on May 1 and the bond market is already preparing for the next step: the end of interest rate controls.

Banks, which hold the majority of corporate bonds in the world’s second-biggest economy, are currently limited to paying 30 percent more than a benchmark deposit rate. That cap is very likely to be done away with this year, central bank Governor Zhou Xiaochuan saidMarch 12.

While Premier Li Keqiang is pushing to reduce the role of the government in financial markets, he must ensure those reforms don’t lead to financial contagion that worsen economic growth already the weakest since 1990. China had two landmark debt failures in April when Baoding Tianwei Group Co. became the first state-owned firm to renege on onshore notes and Kaisa Group Holdings Ltd. became the first property developer to default on dollar-denominated securities.

“The deposit insurance system is part of the government’s preparation for more credit defaults,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s third-biggest listed brokerage. “Interest-rate liberalization may have a big impact on the bond market as banks’ borrowing costs can’t fall, which will in turn prevent bond yields from declining in the coming two to three years because banks are the biggest bond investors.”

Here are some questions bond investors are asking:

1. How do the reforms fit into the government’s strategy of allowing market forces to play a greater role in the bond market?

China’s total government, corporate and household debt load as of mid-2014 was $28 trillion, according to McKinsey & Co. That’s equal to 282 percent of the country’s total annual economic output. While authorities will allow failures at companies like Tianwei, they must ensure the number of firms reneging on obligations doesn’t spread rapidly.

China on Dec. 19 set up China Trust Protection Co., a fund to support troubled trust firms, as repayment risks accumulated in the 13 trillion yuan industry, according to the official Xinhua News Agency. The China Securities Regulatory Commission said in January corporate bonds rated less than the top grade can’t be sold to individual investors with less than three million yuan in financial assets.

The CSRC’s stricter requirements are also part of preparations for more defaults, along with the establishment of the deposit insurance system, according to Haitong Securities’ Li. “After the launch of the deposit insurance mechanism, we may see defaults or bankruptcies of smaller banks within five years,” he said.

2. As deposit rates are eventually allowed to go up, how will that affect bond yields?

The introduction of deposit insurance to shield savers was among policy makers’ prerequisites for freeing up interest rates, a long-term goal that can be traced back to 1993 when the Communist Party drafted a market-oriented reform blueprint.

The central bank will probably adjust benchmark rates as it implements further reforms, with the ultimate effect of letting the market better gauge risk so that more creditworthy companies pay less for funds, according to Chen Kang, a Shanghai-based analyst at SWS Research Ltd., a unit of Shenwan Hongyuan Group Co.

“Chinese banks are likely to face higher deposit rates and therefore could invest in higher yielding assets, such as high-yield bonds,” Kang said. “But in reality, the People’s Bank of China is likely to lower rates to smooth the transition, so banks may not in the end have to pay higher deposits. Together with other factors, including additional PBOC rate cuts, eventually we’ll see lower risk free rates and higher risk premiums, which is a sign of a maturing bond market.”

3. How will these reforms affect the bond-buying behavior of banks?

More than 90 percent of notes in China are traded on the interbank market, making lenders the dominant investors in corporate debt. In making bond investments, they draw on local-currency deposits that totaled 122 trillion yuan as of February.

As lower-tier banks have smaller loan businesses, any increase in deposits due to the assurances brought by the insurance program may flow into bond purchases, according to Standard & Poor’s.

“After the deposit insurance scheme becomes effective, small city or rural banks may have less pressure to acquire deposits through aggressive pricing because depositors may feel comfortable in putting their money in those banks given the insurance,” said Qiang Liao, a banking analyst at S&P in Beijing. “Together with their limited competitiveness in the loan market, this could mean those banks will have to allocate more funds in bond investments, especially in high-yield bonds.”

4. Would bankruptcy of a small bank trigger systemic fallout?

The failure of a small rural bank in a remote city that has very little business with other financial institutions wouldn’t trigger systematic risk, according to Moody’s Investors Service.

“The Chinese government can use deposit insurance to support small depositors without bailing out the bank,” said Christine Kuo, a Hong Kong-based senior credit officer at Moody’s. “On the other hand, if the bank has very extensive interbank businesses, that can cause contagion.”

The yield on AA rated corporate bonds in China due in 10 years has dropped 21 basis points this year to 6.45 percent.

Small banks may have to pay more when they sell bonds or when they borrow money from other financial institutions, she said.

“Credit risk premium for small banks will be increasing because other financial institutions understand the failing for small banks is increasing,” Kuo said. “When they deal with such banks, they would require higher interest rates.”

Reuters News - U.S. economy stumbles in first quarter as weather, low energy prices weigh

Containers await departure as crews load and unload consumer products at the Port of New Orleans along the Mississippi River in New Orleans, Louisiana June 23, 2010.

REUTERS/SEAN GARDNER

(Reuters) - U.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer spending and energy companies struggling with low prices slashed spending.

Gross domestic product expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.

A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said.

While there are signs the economy is pulling out of the soft patch, the lack of a vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until late this year to start hiking interest rates.

The recovery is the slowest on record and the economy has yet to experience annual growth in excess of 2.5 percent.

"The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a September move holds but even that has become tenuous."

Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors."

The dollar hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond sell-off, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.

Economists had expected the economy to expand at a 1.0 percent rate. The sharp growth slowdown is probably not a true reflection of the economy's health, given the role of temporary factors such as the weather and the ports dispute.

"The extent and depth of the weakness in today's GDP report, sets the U.S. up for another disappointing though somewhat better GDP report in the second quarter. We are not ready to throw in the towel for the year," said Scott Anderson, chief economist at Bank of the West in San Francisco.

HIBERNATING CONSUMERS

The economy has had a jerky recovery from the 2007-2009 financial crisis, with the first quarter marking only the latest setback. The government did not quantify the impact of the weather, the strong dollar, lower energy prices and the ports disruptions on growth last quarter.

Economists, however, estimate unusually cold weather in February chopped off as much as half a percentage point, with the port disruptions shaving off a further 0.3 percentage point.

The weather impact was evident in weakness in consumer spending. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.9 percent rate. That was the slowest in a year and followed a brisk 4.4 percent pace in the fourth quarter.

The sharp moderation in consumer spending came even though households enjoyed huge savings from a big drop in gasoline prices. Consumers boosted their savings to $727.8 billion from $603.4 billion in the fourth quarter, which should provide a tailwind for future consumer spending.

Construction also took a hit, while lower energy prices, which have cut into domestic oil production, undermined business investment.

Spending on nonresidential structures, which includes oil exploration and well drilling, tumbled at a 23.1 percent rate. That was the fastest pace of decline in four years and the first contraction since the first quarter of 2013.

The decline was driven by mining exploration, shafts and wells investment, which plunged at a 48.7 percent pace.

Nonresidential structures lopped off 0.75 percentage point from growth.

Schlumberger (SLB.N), the world's No. 1 oil-field services provider, has slashed its capital spending plans for this year by about $500 million to $2.5 billion, while competitor Halliburton (HAL.N) cut its by about 15 percent to $2.8 billion.

Economists believe the bulk of the spending cuts were front-loaded into the first quarter, and they expect they will present less of a drag on growth in the April-June quarter.

"The weakness in business investment in response to the oil price shock may be transitory, but we continue to have doubts that the next leg of faster investment will kick in if GDP growth, especially consumer demand, does not improve significantly," said Dana Peterson, an economist at Citigroup in New York.

The dollar, which gained 4.5 percent against the currencies of the United States' main trade partners in the first quarter, weighed on trade, as did the West Coast ports dispute. Trade subtracted 1.25 percentage points from first-quarter growth.

There was a surprise increase in inventory accumulation, which added 0.74 percentage point to GDP growth.

Inventories increased $110.3 billion, the largest gain since the third quarter of 2010 and one that suggests inventories will weigh on growth in the second quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Bloomberg News - Strong Franc Brings Bonanza to Swiss Shoppers Seeking Bargains

Fourteen weeks after the Swiss National Bank abolished its cap on the franc, shoppers are cashing in.

"I collect rare comics and often order them online as they are hard to find in stores," Raphael Gut, a 40-year-old web designer, said as he left a post office in central Zurich. "When the euro plunged, I was able to bid more in the auction for a piece I wanted for a long time."

Gut and his fellow consumers are reaping the benefits of a 15 percent jump in the Swiss currency against the euro this year that has added to the appeal of shopping in neighboring Austria, Germany, France and Italy, where prices are significantly lower. That's undermining domestic demand, one of the main pillars of Swiss output in recent years.

Retail sales declined the most in more than a decade in February, and the pace of economic growth this year is set to be half of what it was in 2014. Data on Wednesday showed that while in March the UBS Consumption Indicator recovered further from a two-year low, "a continued decline in retailer sentiment has cast a shadow on the outlook for private consumption." The KOF Leading Indicator on Thursday is expected to stay near the weakest level since 2011.

The central bank's Jan. 15 decision to give up its ceiling on the franc of 1.20 per euro means Swiss consumer prices are falling, as the stronger currency keeps down the cost of imports but makes exports less competitive. The SNB foresees prices falling 1.1 percent in 2015, with the annual inflation rate not turning positive again until 2017.

"Switzerland is a small, open economy and the shock of the franc's appreciation won't fully be offset," said David Marmet, an economist at Zuercher Kantonalbank in Zurich. Still, "domestic demand will benefit from cheaper imports," he said.

Anecdotal evidence indicates the Swiss have taken advantage of their new spending power and are scooping up wares across the border.

"After the euro dropped I went for two big shopping sprees'' in the German town of Konstanz, said Sabrina Rohr, 22, who works in retail in Switzerland. "I've never done that before."

Customs office data in Loerrach, on the German border to Switzerland, shows that the number of  export forms, which allow shoppers to reclaim value-added tax on goods they're bringing back into Switzerland, increased 27 percent in the first quarter from a year earlier.

Online shopping appears to be getting a boost too. The Swiss post office has seen the number of packages from abroad rise 10 percent this year, according to Oliver Flueeler, a spokesman for Die Schweizerische Post AG. To meet demand, the company may increase capacity, he said.

To discourage patrons from shopping elsewhere, local businesses in Switzerland are adjusting pricing. Signs announcing exchange-rate discounts hang prominently in several storefronts in central Zurich.

"Purchasing power is gaining" because of the strong currency, said Roland Klaeger, an economist at Raiffeisen Schweiz in Zurich. "It won't be that consumption can totally offset the export weakness," he said. "But immigration and low interest rates are also a demand support."

As for insurance company employee Vera Moser, 24, the better exchange rate means she's traveling more, including an impromptu visit to friends in Berlin.

"When it comes to bigger sums like holidays one can actually benefit from the strong franc," she said. "I think I wouldn't have booked a flight so spontaneously if it were more expensive."

Even so, not everyone is participating in the shopping bonanza. With companies, particularly in the manufacturing sector, seeing their profit margin eroded due to the stronger currency and extending employee's working hours to compensate, some in Switzerland are specifically trying to support domestic producers.

"I hardly ever buy stuff online," said Judith Egloff, a 56-year-old biologist. "Given the current market conditions for local stores, it's even more important to buy directly from them."

BBC News - China overtakes France in vineyards

China has become the second-largest wine-growing area in the world after Spain, pushing France into third place.

The International Organisation of Vine and Wine (IOVW) said China now had 799,000 hectares (1.97 million acres) of land devoted to wine growing,

That compared with 1.02 million hectares for the biggest wine-growing area of Spain.

But France remained the biggest producer of wine, producing 46.7 million hectolitres (mhl).

France also made the most from selling wine abroad, raking in more than €7.7bn.

The United States remains the biggest consumer of wine as at 30.7mhl - 13% of all global wine produced last year - followed by France and Italy.

Global wine consumption overall fell in 2014 by 2.4mhl to 240mhl.

China has rapidly emerged as a major player in viniculture, accounting for 11% of the territory given over to vineyards last year, up from 4% in 2000.

The biggest importers of wine were Germany, the UK and the US with total global trade valued at €26bn, the IOVW added.

Reuters News - Asian central banks to ease further, but effects may be muted: Reuters poll

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014.

REUTERS/PETAR KUJUNDZIC

(Reuters) - Emerging Asian central banks are expected to cut interest rates again in the coming months, but economists polled by Reuters are doubtful the moves will significantly boost growth or inflation.

The findings echo results from earlier this week in Reuters surveys of more than 250 economists in Europe and North America who also expect more easing.

But the polls there showed only modest upgrades to growth estimates and a still depressed outlook on inflation.[ECILT/WRAP]

Twenty-seven central banks around the world have eased monetary policy in some manner or other so far this year.

The Reuters surveys across Asia, which bring the total number of forecasters polled above 300 globally this week, found nearly all central banks in the region, with a few exceptions such as New Zealand and South Korea, were set to ease policy again.

The People's Bank of China will probably loosen policy most in the region and is expected to cut both of its two key interest rates by end-June and lower banks' reserve requirement ratio again soon afterward. [ECILT/CN]

The PBOC cut its benchmark lending rate by 25 basis points last month, followed by an aggressive one-percentage-point cut in banks' reserve requirement ratio over the weekend.

The Reserve Bank of India, which has already cut rates twice outside regular meetings since January, will probably do so once more ahead of its June meeting and lower its benchmark repo rate again before the end of this year. [ECILT/IN]

"There is growing realization that demand-supportive and anti-deflationary measures need to be undertaken expeditiously, preferably in the first (half) of the year," wrote Michael Spencer, Asia Pacific research head at Deutsche Bank.

But whether those steps will work remain in doubt.

Median estimates for growth and inflation across all emerging Asian economies, and even Japan, have been downgraded from a survey three months ago.

That suggests further stimulus will probably not work as well as policymakers and investors hope.

"In China, we maintain our view that there are rising risks of a mini-hard landing in 2015, as policy easing has not happened as quickly and aggressively as we had expected," Spencer added in the note.

China's gross domestic product is expected to expand at a steady 7 percent in the next four quarters, unchanged from where it is currently and implying growth will stay stuck at a six-year low for a long time.

A mix of poor factory activity, rapidly cooling inflation, a weak property market and uneven export demand has buffeted China's economy.

Beijing has been pumping trillions of yuan into the banking system to re-engineer its economy, shifting to one led by consumption rather than exports and investment. But weak loan demand has dented those efforts.

Tokyo has had an even tougher battle. The Bank of Japan has been conducting some form of quantitative easing since the late 1990s with a short interruption, but on the whole that has done little to boost growth or lift inflation. [ECILT/JP]

Economists surveyed expect Australia and South Korea to report slightly slower growth this year and next compared with the January poll.

India's economy is predicted to grow 7.4 percent this fiscal year and 7.8 percent next, but even that is based on expectations for two more rate cuts from the RBI this year.

The International Monetary Fund expects India's growth rates to be the fastest for any economy in the world.

Inflation is forecast to cool this year throughout Asia, notably in Australia and New Zealand as economists expect inflation rates of less than 2 percent.

Disinflation fears have crept in globally since the turn of the year after a slump of more than 50 percent in oil prices started cutting inflation in economies that import oil.

Although inflation is expected to be weak even in the United States, economists see the Federal Reserve raising interest rates this year. But those rate hikes are expected to be more gradual compared with forecasts in previous polls. [ECILT/US]

(For other stories from the global poll see)

(Polling by Shaloo Shrivastava and Sarmista Sen in Bengaluru and bureaus across Asia; Editing by Jacqueline Wong)

Bloomberg News - Greece Buys Six Weeks’ Space With Transfer of City Funds

Greek officials expect an order that local governments transfer funds to the central bank will keep the country afloat until the end of May as European policy makers turn up the heat on Prime Minister Alexis Tsipras.

Municipalities’ reserves are estimated at about 1.5 billion euros ($1.6 billion), according to a person familiar with the matter, who spoke on condition of anonymity. Officials in Athens ruled out also seizing pension funds and the cash reserves of state companies because there wasn’t a need and the move would unnecessarily fuel anxiety, the person said.

With bailout talks stalled, access to cash is becoming increasingly critical. Resistance at the European Central Bank to further aiding the country’s stricken lenders is growing and the ECB is studying measures to rein in emergency funding for Greek banks, people with knowledge of the discussions said.

“A bigger effort by the Greek side is needed so that we can close the topic in the interest of both sides,” European Commission President Jean-Claude Juncker said in Vienna. “The intensity of the talks has increased in the past 4-5 days but not to the extent that they are ripe enough to come to a quick conclusion.”

Tsipras may meet with German Chancellor Angela Merkel on the sidelines of a European Union summit in Brussels on April 23, a Greek government official said Tuesday.

Extraordinary Meeting

Although a final accord is unlikely at a meeting of euro-area finance ministers in Latvia on Friday, another extraordinary meeting could be called at the end of April if needed.

“The sooner they come up with some kind of an agreement the better, but so far Europe has never missed the opportunity to miss an opportunity,” Standard Chartered Bank Global Chief Economist Marios Maratheftis said in a Bloomberg TV interview.

Since Tsipras assumed office in January, Greece has been using up its cash reserves to meet its obligations.

Greek lenders are mostly locked out of regular ECB cash tenders and instead have access to about 74 billion euros of emergency liquidity assistance from their own central bank -- an amount that has been reviewed weekly by the ECB.

Greek bank bonds, including those of National Bank of Greece SA fell to records. National Bank’s 750 million euros of 4.375 percent bonds due April 2019 fell 0.8 cent on the euro to 54.35 cents, according to data compiled by Bloomberg. Piraeus Bank SA’s 5 percent notes due March 2017 fell for an eighth day to 60.73 cents in the longest losing streak since October, the data show.

Credit-default swaps insuring $10 million of Greek debt for five years rose to $5.5 million in advance and $100,000 annually, according to CMA. That signals an 87 percent probability of default, up from 84 percent yesterday.

The country is facing about 1 billion euros in International Monetary Fund loan repayments in the first two weeks of May and while it hasn’t drawn any funds from its bailout loan since August 2014, the government won’t miss any of those payments, the person said.